RESTRICTED STOCK AWARD AGREEMENT

            This RESTRICTED STOCK AWARD AGREEMENT,  dated as of August 19, 2004,
is made by and between DATA SYSTEMS & SOFTWARE INC., a Delaware corporation (the
"Company"), and Shlomie Morgenstern (the "Grantee").

                              Preliminary Statement

            Pursuant to Section 8 of the Company's 1994 Stock Incentive Plan, as
amended to date (the "Plan") and Section  5(f)(i) of the  Employment  Agreement,
dated as of  January  1, 2004 and  executed  on August  19,  2004,  between  the
Grantee,  Databit Inc. (a wholly-owned subsidiary of the Company ("Databit") and
the Company (the "Employment Agreement"),  the Board of Directors of the Company
(the "Board") has  authorized  the granting to the Grantee of 195,000  shares of
the  Company's  Restricted  Stock  (as  defined  in the  Plan),  subject  to the
restrictions,  terms and  conditions  set forth  herein,  in the Plan and in the
Employment Agreement.  The parties hereto desire to enter into this Agreement in
order to set forth the terms of such grant.

            Accordingly, the parties hereto agree as follows:

            1. Award of Shares. Subject to the Plan and the terms and conditions
of this Agreement and the Employment Agreement, the Company hereby grants to the
Grantee 195,000 shares of Restricted Stock (the "Award").

            2. Plan Governs Terms of Award. The Award is subject in all respects
to the terms and conditions of the Employment  Agreement and the Plan. A copy of
the Plan is available from the Secretary of the Company.

            3. Vesting of Shares.  Subject to Paragraphs 4, 5 and 8 hereof,  the
Grantee's ownership of the Restricted Shares shall vest as follows:

            (a)   100,000  Restricted  Shares  shall vest as of the date  hereof
                  immediately  upon  the  execution  of  this  Agreement  by the
                  Company and the Grantee;

            (b)   31,666 Restricted Shares shall vest on August 18, 2006;

            (c)   31,667 Restricted Shares shall vest on August 18, 2007; and

            (d)   31,667 Restricted Shares shall vest on August 18, 2008 ("Final
                  Vesting Date").

            4. Forfeiture of Restricted Stock. Subject to the further provisions
of this Agreement, if at any time prior to the Final Vesting Date, the Grantee's
employment  with Databit  terminates for "Cause" (as defined in Section 7 of the
Employment  Agreement),  the Grantee shall forfeit all of the unvested shares of
Restricted Stock granted hereby,  and shall repay any dividends  previously paid
to the Grantee with respect to such unvested shares.
<PAGE>

            5.  Acceleration  of Vesting of Restricted  Stock. In the event that
the Grantee's employment with Databit is terminated (i) pursuant to Section 6 of
the  Employment  Agreement,  or (ii)  upon  the  non-renewal  of the  Employment
Agreement (whether after the Initial Term or any Renewal Term (as each such term
is defined in the Employment Agreement)), then all unvested shares of Restricted
Stock shall immediately vest upon such termination. Anything in this Paragraph 5
and the  Employment  Agreement  to the  contrary  notwithstanding,  all unvested
shares of  Restricted  Stock shall  immediately  vest upon the  occurrence  of a
Change of Control (as defined in Section 6(c) of the  Employment  Agreement)  of
the Company or Databit.

            6. Taxes.  To the extent that the Award is subject to Federal income
tax and as permitted  under  applicable  law,  pursuant to Section  12(e) of the
Plan, the Grantee may elect to satisfy his withholding  obligation by forfeiture
of a portion of the Award or surrender of previously owned shares.

            7. Voting;  Dividends.  The Grantee  shall have the same rights with
respect to the Restricted  Stock as holders of unrestricted  Common Stock of the
Company as to voting.  The Grantee  shall be eligible  to receive  dividends  or
other distributions,  when and if declared or paid by the Company, on all of the
shares granted  hereby,  regardless of vesting,  on the same basis as holders of
unrestricted Common Stock;  provided that the Grantee shall be required to repay
or return any  distributions  with  respect to any  Restricted  Stock  forfeited
pursuant to Paragraph 4 hereof.

            8. Other Acceleration of Vesting.  Notwithstanding the provisions of
paragraphs 4 and 5 hereof,  the Board shall have the authority to accelerate the
vesting of any or all of the shares of Restricted  Stock granted hereby upon the
occurrence of circumstances determined by the Board, in its sole discretion,  to
warrant such acceleration.

            9.  Restriction  on  Transfer.  This  Award may not be  assigned  or
transferred except (i) by will or the law of descent and distribution or (ii) if
the transferee or assignee acknowledges in writing that he or she is taking such
shares subject to the restrictions described herein.

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      IN WITNESS WHEREOF,  the parties hereto have executed this Agreement as of
the date and year first above written.

                                      DATA SYSTEMS & SOFTWARE INC.


                                      By /s/ Yacov Kaufman
                                        ----------------------------------------
                                        Yacov Kaufman
                                        Vice President and
                                        Chief Financial Officer

                                      GRANTEE:

                                      /s/ Shlomie Morgenstern
                                      ------------------------------------------
                                      Shlomie Morgenstern


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