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                                                                    EXHIBIT 10.2

                             COMMTOUCH SOFTWARE LTD.

                                    THE 1999
                         SECTION 3(i) SHARE OPTION PLAN

1.      NAME

        This share option plan, as amended from time to time, shall be known as
        the CommTouch Software Ltd. 1999 Section 3(i) Share Option Plan (the
        "OPTION PLAN").

2.      PURPOSE OF THE OPTION PLAN

        The Option Plan is intended as an incentive to retain in the employ of
        CommTouch Software Ltd. (the "COMPANY") or a Subsidiary of the Company
        which now exists or hereafter is organized or acquired by the Company,
        persons of training, experience, and ability, to attract new directors,
        employees, consultants and contractors, whose services are considered
        valuable, to encourage the sense of proprietorship of such persons, and
        to stimulate the active interest of such persons in the development and
        financial success of the Company by providing them with opportunities to
        purchase shares in the Company (the "OPTIONS"), pursuant to this Option
        Plan approved by the Board of Directors of the Company (the "BOARD").

        The term "PARENT" shall mean for the purposes of the Option Agreement
        and the Option Plan: any company (other than the Company) in an unbroken
        chain of companies ending with the Company if, at the time of granting
        an Option, each of the companies (other than the Company), owns stock
        possessing fifty percent (50%) or more of total combined voting power of
        all classes of stock in one of the other companies in such chain.

        The term "SUBSIDIARY" shall mean for the purposes of the Plan: any
        company (other than the Company) in an unbroken chain of companies
        beginning with the Company if, at the time of granting an option, each
        of the companies other than the last company in the unbroken chain owns
        stock possessing fifty percent (50%) or more of the total combined
        voting power of all classes of stock in one of the other companies in
        such chains.

3.      ADMINISTRATION OF THE OPTION PLAN

        The Board or a share option committee appointed and maintained by the
        Board for such purpose (the "COMMITTEE") shall have the power to
        administer the Option Plan. Notwithstanding the above, the Board shall
        automatically have a residual authority if no Committee shall be
        constituted or if such Committee shall cease to operate for any reason

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        whatsoever.

        The Committee shall consist of such number of members (not less than two
        (2) in number) as may be fixed by the Board. The Committee shall select
        one of its members as its chairman (the "CHAIRMAN"( and shall hold its
        meetings at such times and places as the Chairman shall determine. The
        Committee shall keep records of its meetings and shall make such rules
        and regulations for the conduct of its business as it shall deem
        advisable.

        Any member of such Committee shall be eligible to receive Options under
        the Option Plan while serving on the Committee, unless otherwise
        specified herein.

     The Committee shall have full power and authority to:

        3.1  Designate participants.

        3.2  Determine the terms and provisions of respective Option agreements
             (which need not be identical) including, but not limited to, the
             number of shares in the Company to be covered by each Option,
             provisions concerning the time or times when and the extent to
             which the Options may be exercised and the nature and duration of
             restrictions as to transferability or restrictions constituting
             substantial risk of forfeiture.

        3.3  Accelerate the right of an Optionee to exercise, in whole or in
             part, any previously granted Option.

        3.4  Interpret the provisions and supervise the administration of the
             Option Plan;

        3.5  Determine the Fair Market Value (as defined below) of the Shares
             (as defined below).

        3.6  Determine any other matter which is necessary or desirable for, or
             incidental to administration of the Option Plan.

        The Committee shall have the authority to grant, in its discretion, to
        the holder of an outstanding Option, in exchange for the surrender and
        cancellation of such Option, a new Option having a purchase price equal
        to, lower than or higher than the purchase price provided in the Option
        so surrendered and canceled, and containing such other terms and
        conditions as the Committee may prescribe in accordance with the
        provisions of the Option Plan.

        All decisions and selections made by the Board or the Committee pursuant
        to the provisions of this Option Plan shall be made by a majority of its
        members except that no member of the Board or the Committee shall vote
        on, or be counted for quorum purposes, with respect to any proposed
        action of the Board or the Committee relating to any Option to be
        granted to that member. Any decision reduced to writing and signed by a
        majority of the members who

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        are authorized to make such decision shall be fully effective as if it
        had been made by a majority at a meeting duly held.

        The interpretation and construction by the Committee of any provision of
        the Option Plan or of any Option thereunder shall be final and
        conclusive unless otherwise determined by the Board.

        Subject to the Company's decision, each member of the Board or the
        Committee shall be indemnified and held harmless by the Company against
        any cost or expense (including counsel fees) reasonably incurred by him,
        or any liability (including any sum paid in settlement of a claim with
        the approval of the Company) arising out of any act or omission to act
        in connection with the Option Plan unless arising out of such member's
        own fraud or bad faith, to the extent permitted by applicable law. Such
        indemnification shall be in addition to any rights of indemnification
        the member may have as a director or otherwise under the Company's
        Articles of Association, any agreement, any vote of shareholders or
        disinterested directors, insurance policy or otherwise.

     "FAIR MARKET VALUE" shall mean in the Plan, as of any date, the value of a
     Share determined as follows:

     (i)   If the Shares are listed on any established stock exchange or a
           national market system, including without limitation the Nasdaq
           National Market system, or The Nasdaq SmallCap Market of the Nasdaq
           Stock Market, the Fair Market Value shall be the closing sales price
           for such Shares (or the closing bid, if no sales were reported), as
           quoted on such exchange or system for the last market trading day
           prior to time of determination, as reported in the Wall Street
           Journal, or such other source as the Administrator deems reliable.

     (ii)  If the Shares are regularly quoted by a recognized securities dealer
           but selling prices are not reported, the Fair Market Value shall be
           the mean between the high bid and low asked prices for the Shares on
           the last market trading day prior to the day of determination, or;

     (iii) In the absence of an established market for the Shares, the Fair
           Market Value thereof shall be determined in good faith by the
           Committee.

4.      DESIGNATION OF PARTICIPANTS

        The persons eligible for participation in this Option Plan as recipients
        of Options may include any employees, directors and consultants of the
        Company, or a Subsidiary of the Company or a company or a Parent or a
        subsidiary company of such company issuing or assuming the Options in a
        transaction described in Section 9.1 of this Option Plan (the foregoing
        collectively, the "GROUP"). The grant of an Option hereunder shall
        neither entitle the recipient thereof to participate nor disqualify him
        from participating in any other grant

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        of Options pursuant to this Option Plan or any other option or stock
        plan of the Company or any of its affiliates.

        Anything in the Option Plan to the contrary notwithstanding, all grants
        of Options to directors and office holders ("NOSEI MISRA" - as such term
        is defined in the Companies Ordinance (New Version), 1983 (the
        "COMPANIES ORDINANCE")) shall be authorized and implemented only in
        accordance with the provisions of the Companies Ordinance, as in effect
        from time to time.

5.      TRUSTEE

        The Options which shall be granted to employees consultants and
        contractors of the Group or any Shares (as defined below) issued upon
        exercise of such Options and/or other shares received subsequently
        following any realization of rights, shall be issued to a Trustee
        nominated by the Committee) the "TRUSTEE" (and held for the benefit of
        the Optionees from the date of grant.

        Anything to the contrary notwithstanding, the Trustee shall not release
        any Options and/or any Shares issued upon exercise of Options, prior to
        the full payment of the Optionee's tax liabilities arising from Options
        which were granted to him and/or any Shares issued upon exercise of such
        Options.

        Upon receipt of the Option, the Optionee will sign an undertaking to
        exempt the Trustee from any liability in respect of any action or
        decision duly taken and bona fide executed in relation with the Option
        Plan, or any Option or Share granted to him thereunder.

6.      SHARES RESERVED FOR THE OPTION PLAN; RESTRICTION THEREON

        6.1    The Company has reserved 250,000 authorized but unissued Ordinary
               Shares nominal value NIS 1.00 per share, of the Company (the
               "SHARES"), for purposes of the Option Plan (subject to adjustment
               as set forth in paragraph 9 below), the 1996 CommTouch Software,
               Inc. Stock Option Plan and Israeli Option Agreements previously
               issued to Israeli employees. Any of such Shares which may remain
               unissued and which are not subject to outstanding Options at the
               termination of the Option Plan shall cease to be reserved for the
               purpose of the Option Plan, but until termination of the Option
               Plan the Company shall at all times reserve sufficient number of
               Shares to meet the requirements of the Option Plan. Should any
               Option for any reason expire or be canceled prior to its exercise
               or relinquishment in full, the Shares subject to such Option may
               again be subjected to an Option under the Option Plan.

        6.2    An optionee who purchased Shares hereunder upon exercise of
               Options shall have no voting rights as a shareholder (in any and
               all matters whatsoever) until the consummation of an initial
               public offering of the Company's securities (an "IPO"). Until an
               IPO, such Shares shall be voted by a proxy pursuant to the
               directions of the Board, such proxy to be to the person or
               persons designated by the Board. All Shares issued upon exercise
               of the Options shall entitle the holder thereof to receive
               dividends and other distributions thereon.

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7.      VESTING

        Unless Exhibit B to the Option Agreement provides otherwise, one-fourth
        (1/4) of the Options shall vest (i.e., Options shall become exercisable)
        at the end of the first year of an Optionee's continuous services or
        employment with the group, and one-thirty-sixth (1/36) of the remaining
        Options shall vest per month of such continuous employment over the next
        thirty-six months (the "VESTING DATES").

8.      OPTION PRICE

        8.1    The purchase price of each Share subject to an Option or any
               portion thereof shall be determined by the Committee in its sole
               and absolute discretion in accordance with applicable law,
               subject to any guidelines as may be determined by the Board from
               time to time.

        8.2    The Option price shall be payable upon the exercise of the Option
               in a form satisfactory to the Committee, including without
               limitation, by cash or check. The Committee shall have the
               authority to postpone the date of payment on such terms as it may
               determine.

9.      ADJUSTMENTS

        Upon the occurrence of any of the following described events, the
        Optionee's rights to purchase Shares under the Option Plan shall be
        adjusted as hereafter provided:

        9.1    In the event of a merger of the Company with or into another
               corporation, or the sale of substantially all of the assets of
               the Company while unexercised Options remain outstanding under
               the Option Plan the successor corporation or a Parent or
               subsidiary of such successor corporation or the purchasing
               corporation may assume the unexercised Options outstanding under
               the Option Plan or may substitute for the Shares subject to the
               unexercised portions of such outstanding Options an appropriate
               number of shares of each class of shares or other securities of
               the successor or purchasing corporation or cash or property which
               were distributed to the shareholders of the Company in respect of
               such shares. In the event of substitution of shares or securities
               appropriate adjustments shall be made to the purchase price per
               share to reflect such action, all as will be determined by the
               Committee whose determination shall be final. In the event that
               the successor or purchasing corporation does not agree to assume
               or substitute as described in this Section 9.1, the Options shall
               terminate as of the date of the closing of the above merger or
               sale, as applicable.

        9.2    In the event of the proposed liquidation or dissolution of the
               Company, the Company shall notify the Optionee at least fifteen
               (15) days prior to such proposed action. To

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               the extent not previously exercised, the Options shall terminate
               immediately prior to the consummation of such proposed action.

        9.3    If the outstanding shares of the Company shall at any time be
               changed or exchanged by declaration of a stock dividend, stock
               split, combination or exchange of shares, recapitalization, or
               any other like event by or of the Company, and as often as the
               same shall occur, then the number, class and kind of Shares
               subject to this Option Plan or subject to any Options therefore
               granted, and the Option prices, shall be appropriately and
               equitably adjusted so as to maintain the proportionate number of
               Shares without changing the aggregate Option price, provided,
               however, that no adjustment shall be made by reason of the
               distribution of subscription rights on outstanding shares. Upon
               the occurrence of any of the foregoing, the class and aggregate
               number of Shares issuable pursuant to this Option Plan (as set
               forth in Section 6 hereof), in respect of which Options have not
               yet been exercised, shall be appropriately adjusted, all as may
               be determined by the Board who's determination shall be final.

        9.4    Anything herein to the contrary notwithstanding, if prior to the
               completion of an IPO, all or substantially all of the shares of
               the Company are to be sold, or upon a merger or reorganization or
               the like, the shares of the Company, or any class thereof, are to
               be exchanged for securities of another Company, then in such
               event, each Optionee shall be obliged to sell or exchange, as the
               case may be, the shares such Optionee purchased under the Option
               Plan, in accordance with the instructions then issued by the
               Board whose determination shall be final.

10.     TERM AND EXERCISE OF OPTIONS

        10.1   The Options shall be exercised by the Optionee by giving written
               notice to the Company, in such form and method as may be
               determined by the Company and the Trustee, which exercise shall
               be effective upon receipt of such notice by the Company at its
               principal office. The notice shall specify the number of Shares
               with respect to which Options are being exercised.

        10.2   Each Option granted under this Option Plan shall be exercisable
               following the exercise dates and for the number of Shares as
               shall be provided in EXHIBIT B to the Option Agreement. However
               no Option shall be exercisable after the Expiration Date, as
               defined for each Optionee in his Option Agreement.

        10.3   Options granted under the Option Plan shall not be transferable
               by Optionees other than by will or laws of descent and
               distribution, and during an Optionee's lifetime shall be
               exercisable only by that Optionee.

        10.4   The Options may be exercised by the Optionee in whole at any time
               or in part from time to time, to the extent that the Options
               become vested, prior to the Expiration

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               Date, and provided that, subject to the provisions of Section
               10.6 below, the Optionee is an employee, a consultant or a
               contractor of the Group at all times during the period beginning
               with the granting of the Option and ending upon the date of
               exercise.

        10.5   Subject to the provisions of Section 10.6 below, in the event of
               termination of the Optionee's employment or services with the
               Group, all Options granted to the Optionee will immediately
               expire. A notice of termination of employment or services shall
               be deemed to constitute termination of employment or services
               with Group.

        10.6   Notwithstanding anything to the contrary previously stated, an
               Option may be exercised after the date of termination of the
               Optionee's services or employment with the Group during an
               additional period of time beyond the date of such termination,
               but only with respect to the number of Options already vested
               according to the Vesting Dates, if:

               10.6.1 termination is without Cause, in which event any Options
                      still in force and unexpired may be exercised within a
                      period of 90 (ninety) days from the date of such
                      termination.

               10.6.2 termination is the result of death or disability of the
                      Optionee, in which event any Options still in force and
                      unexpired may be exercised within a period of 90 (ninety)
                      days from the date of termination.

               10.6.3 prior to the date of such termination, the Committee shall
                      authorize an extension of the terms of all or part of the
                      Options beyond the date of such termination for a period
                      not to exceed the period during which the Options by their
                      terms would otherwise have been exercisable.

                      The term "CAUSE" shall mean any action, omission or state
                      of affairs related to the Optionee which the Committee or
                      the Boards decides, in its sole discretion, is against the
                      interests of the Company.

        10.7   To avoid doubt, the holders of Options shall not have any of the
               rights or privileges of shareholders of the Company in respect of
               any Shares purchasable upon the exercise of any part of an
               Option, nor shall they be deemed to be a class of shareholders or
               creditors of the Company for purpose of the operation of section
               233 of the Companies Ordinance or any successor to such section,
               until registration of the Optionee as holder of such Shares in
               the Company's register of members.

        10.8   Any form of Option Agreement authorized by this Option Plan may
               contain such other provisions as the Committee may, from time to
               time, deem advisable. Without limiting the foregoing, the
               Committee may, with the consent of the Optionee, from time to
               time cancel all or any portion of any Option then subject to
               exercise, and the

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               Company's obligation in respect of such Option may be discharged
               by (i) payment to the Optionee of an amount in cash equal to the
               excess, if any, of the Fair Market Value of the Shares at the
               date of such cancellation subject to the portion of the Option so
               canceled over the aggregate purchase price of such Shares, (ii)
               the issuance or transfer to the Optionee of Shares of the Company
               with a Fair Market Value at the date of such transfer equal to
               any such excess, or (iii) a combination of cash and shares with a
               combined value equal to any such excess, all as determined by the
               Committee in its sole discretion.

11.     DIVIDENDS

        With respect to all Shares (but not unexercised Options) issued upon the
        exercise of Options purchased by the Optionee and held by the Trustee,
        the Optionee shall be entitled to receive dividends in accordance with
        the quantity of such Shares, and subject to any applicable taxation on
        distribution of dividends. During the period in which Shares issued to
        the Trustee on behalf of a Optionee are held by the Trustee, the cash
        dividends paid with respect thereto shall be paid directly to the
        Optionee.

12.     ASSIGNABILITY AND SALE OF OPTIONS

        No Option, purchasable hereunder, whether fully paid or not, shall be
        assignable, transferable or given as collateral or any right with
        respect to them given to any third party whatsoever, and during the
        lifetime of the Optionee each and all of such Optionee's rights to
        purchase Shares hereunder shall be exercisable only by the Optionee.

        As long as the Shares are held by the Trustee in favor of the Optionee,
        then all rights the Optionee possesses over the Shares are personal, can
        not be transferred, assigned, pledged or mortgaged, other than by will
        or laws of descent and distribution.

13.     TERM OF THE OPTION PLAN

        The Option Plan shall be effective as of the day it was adopted by the
        Board and shall terminate at the end of 60 months from such day of
        adoption.

14.     AMENDMENTS OR TERMINATION

        The Board may, at any time and from time to time, subject to the written
        consent of the Trustee, amend, alter or discontinue the Option Plan,
        except that no amendment or alteration shall be made which would impair
        the rights of the holder of any Option therefore granted, without his
        consent.

15.     GOVERNMENT REGULATIONS

        The Option Plan, and the granting and exercise of Options hereunder, and
        the obligation of the Company to sell and deliver Shares under such
        Options, shall be subject to all applicable laws, rules, and
        regulations, whether of the State of Israel or of the United States or
        any other State having jurisdiction over the Company and the Optionee,
        including the registration of the Shares under the United States
        Securities Act of 1933, and to such approvals by any governmental
        agencies or national securities exchanges as may be required.

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16.     CONTINUANCE OF EMPLOYMENT OR HIRED SERVICES

        Neither the Option Plan nor the Option Agreement with the Optionee shall
        impose any obligation on the Group, to continue any Optionee in its
        employ or the hiring by the Group of the Optionee's services, and
        nothing in this Option Plan or in any Option granted pursuant thereto
        shall confer upon any Optionee any right to continue in the employ or
        service of the Group or restrict the right of the Group to terminate
        such service or employment at any time.

17.     GOVERNING LAW & JURISDICTION

        This Option Plan shall be governed by and construed and enforced in
        accordance with the laws of the State of Israel applicable to contracts
        made and to be performed therein, without giving effect to the
        principles of conflict of laws. The competent courts of Tel-Aviv, Israel
        shall have sole jurisdiction in any matters pertaining to this Option
        Plan.

18.     TAX CONSEQUENCES

        Any tax consequences arising from the grant or exercise of any Option,
        from the payment for Shares covered thereby or from any other event or
        act (of the Company, the Trustee or the Optionee), hereunder, shall be
        borne solely by the Optionee. The Company and/or the Trustee shall
        withhold taxes according to the requirements under the applicable laws,
        rules, and regulations, including withholding taxes at source.
        Furthermore, the Optionee shall agree to indemnify the Company and the
        Trustee and hold them harmless against and from any and all liability
        for any such tax or interest or penalty thereon, including without
        limitation, liabilities relating to the necessity to withhold, or to
        have withheld, any such tax from any payment made to the Optionee. The
        Committee and/or the Trustee shall not be required to release any Share
        certificate to an Optionee until all required payments have been fully
        made.

19.     NON-EXCLUSIVITY OF THE OPTION PLAN

        The adoption of the Option Plan by the Board shall not be construed as
        amending, modifying or rescinding any previously approved incentive
        arrangements or as creating any limitations on the power of the Board to
        adopt such other incentive arrangements as it may deem desirable,
        including, without limitation, the granting of stock options otherwise
        than under the Option Plan or under the Share Option Agreements
        previously issued to Israeli employees, and such arrangements may be
        either applicable generally or only in specific cases.

20.     MULTIPLE AGREEMENTS

        The terms of each Option may differ from other Options granted under
        this Option Plan at the same time, or at any other time. The Committee
        may also grant more than one Option to a given Optionee during the term
        of this Option Plan, either in addition to, or in substitution for, one
        or more Options previously granted to that Optionee.

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                        EXHIBIT B TO THE OPTION AGREEMENT

                               TERMS OF THE OPTION

1.      NAME OF THE OPTIONEE:
                                        ----------------------------------------

2.      NUMBER OF OPTIONS GRANTED:
                                        ----------------------------------------

3.      PRICE PER SHARE:
                                        ----------------------------------------

4.      EXPIRATION DATE:
                                        ----------------------------------------

5.      DATE OF GRANT:
                                        ----------------------------------------

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                        EXHIBIT C TO THE OPTION AGREEMENT

                                      PROXY

Mr.____________ and Mr.______________, or any of them, with power of
substitution in each, are hereby authorized to represent the undersigned at any
and all general meetings of CommTouch Software Ltd. (the "Company") (including
general meetings convened for the purpose of adopting extraordinary resolutions)
and to vote thereat on any and all matters the same number of Ordinary Shares of
the Company as the undersigned would be entitled to vote if then personally
present.

-------------------------------                   ------------------------------
            NAME                                               DATE

                        ---------------------------------
                                    SIGNATURE

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                                                                    EXHIBIT 10.3

                             COMMTOUCH SOFTWARE LTD.

                        1999 EMPLOYEE STOCK PURCHASE PLAN

<PAGE>   2

                                TABLE OF CONTENTS

<TABLE>
<CAPTION>
                                                                 Page
                                                                 ----
<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>

<PAGE>   3

                             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

<PAGE>   4
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

                                       2
<PAGE>   5

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.

                                       3
<PAGE>   6

         (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

                                       4
<PAGE>   7
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.

                                       5
<PAGE>   8

         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

                                       6
<PAGE>   9
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.

                                       7
<PAGE>   10

         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.

                                       8

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