================================================================================

                       SECURITIES AND EXCHANGE COMMISSION
                             WASHINGTON, D.C. 20549

                                 AMENDMENT NO. 1
                                       ON
                                   FORM 10-Q\A
                                       TO
                                    FORM 10-Q

               QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF
                       THE SECURITIES EXCHANGE ACT OF 1934

FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 2003 COMMISSION FILE NUMBER 0-19771

          -----------------------------------------------------------

                          DATA SYSTEMS & SOFTWARE INC.
               (Exact name of registrant as specified in charter)

                  --------------------------------------------

                     DELAWARE                               22-2786081
          (State or other jurisdiction of                 (I.R.S. employer
          incorporation or organization)                identification no.)

         200 ROUTE 17, MAHWAH, NEW JERSEY                      07430
     (Address of principal executive offices)                (Zip code)

                                 (201) 529-2026
               Registrant's telephone number, including area code

                       ----------------------------------

         Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.

               | | Yes                                   | X | No


         Indicate by check mark whether the registrant is an accelerated filer
(as defined in Rule 12b-2 of the Act).

               | | Yes                                   | X | No




      Number of shares outstanding of the registrant's common stock, as of
                          November 10, 2003: 7,902,025

================================================================================


<PAGE>

                                EXPLANATORY NOTE

              This Amendment No. 1 on Form 10-Q/A amends our Quarterly Report on
Form 10-Q for the  quarterly  period ended  September 30, 2003 as filed by us on
November 14, 2003. This Amendment  deletes the  introduction to Item 1 of Part I
of  the  Form  10-Q  as  originally  filed  which  disclosed  that,  due  to the
resignation  of  our  previous  auditor,  the  interim  consolidated   financial
statements had not been reviewed as required by Rule 10-01(d) of Regulation S-X.
The  consolidated  financial  statements  included in this Amendment No. 1 fully
comply with Rule 10-01(d).

              The interim financial  statements  included in this Amendment No.1
have been restated from those included in the Form 10-Q as originally filed. The
changes  relate  primarily  to our  accounting  for  our  investment  in and our
recording  of our share of the losses of Comverge,  Inc. The primary  changes in
our results and financial  position are as follows:  (1) a $1.0 million decrease
in equity losses from  unconsolidated  subsidiary and a $1.1 million decrease in
net loss  resulting  in a $0.4  decrease in basic and diluted net loss per share
for the nine months ended  September  30, 2003;  (2) a $2.2 million  decrease in
investment  in  affiliated  company  and total  assets;  and (3) a $3.3  million
decrease  in  additional  paid-in-capital.   Changes  to  reflect  the  restated
financial information have been made to Management's  Discussion and Analysis in
Item 2 of Part I. This  Amendment  No.1 also includes the items of the Form 10-Q
that are not being amended.

              Except as noted above, this Amendment No.1 on Form 10-Q/A does not
purport to provide a general  update or  discussion of any  developments  at the
Company after the date of the original filing of the 10-Q.


<PAGE>

================================================================================

                  DATA SYSTEMS & SOFTWARE INC. AND SUBSIDIARIES


                                TABLE OF CONTENTS

PART I.    FINANCIAL INFORMATION
<TABLE>
<CAPTION>
<S>        <C>                                                                                                     <C>
Item 1.    Unaudited Consolidated Financial Statements

           Consolidated Balance Sheets
                  as of December 31, 2002 and September 30, 2003..............................................      1

           Consolidated Statements of Operations
                  for the nine and three month periods ended September 30, 2002 and 2003......................      2

           Consolidated Statement of Changes in Shareholders' Equity
                  for the nine month period ended  September 30, 2003.........................................      3

           Consolidated Statements of Cash Flows
                  for the nine month periods ended September 30, 2002 and 2003................................      4

           Notes to Consolidated Financial Statements.........................................................      6

Item 2.    Management's Discussion and Analysis of Financial Condition
                  and Results of Operations...................................................................     15

Item 3.    Quantitative and Qualitative Disclosures about Market Risk.........................................     22

Item 4.    Controls and Procedures............................................................................     22


PART II.   OTHER INFORMATION

Item 6.    Exhibits and Reports on Form 8-K...................................................................     23

SIGNATURES        ............................................................................................     24
</TABLE>


Certain statements contained in this report are forward-looking in nature. These
statements  are  generally  identified  by the  inclusion of phrases such as "we
expect",  "we  anticipate",  "we  believe",  "we  estimate" and other phrases of
similar meaning. Whether such statements ultimately prove to be accurate depends
upon a variety of factors that may affect our business and  operations.  Many of
these  factors are  described in our most recent  Annual  Report on Form 10-K as
filed with Securities and Exchange Commission.


<PAGE>

                  DATA SYSTEMS & SOFTWARE INC. AND SUBSIDIARIES
                           CONSOLIDATED BALANCE SHEETS
                      (in thousands, except per share data)


<TABLE>
<CAPTION>
                                                                                                            AS OF
                                                                                     AS OF               SEPTEMBER 30,
                                  ASSETS                                       DECEMBER 31, 2002             2003
                                                                              -------------------    --------------------
Current assets:                                                                                              (unaudited)
                                                                                                              (restated)
<S>  <C>                                                                      <C>                    <C>
     Cash and cash equivalents...............................................             $1,150                    $707
     Restricted cash.........................................................                241                   1,741
     Accounts receivable, net................................................             12,267                   5,656
     Inventory...............................................................              2,217                      55
     Other current assets....................................................              1,443                     693
                                                                              -------------------    --------------------
         Total current assets................................................             17,318                   8,852
                                                                              -------------------    --------------------
Investment in Comverge, net..................................................                  -                     359
Property and equipment, net..................................................              1,972                     790
Goodwill                                                                                   4,929                   4,430
Other intangible assets, net.................................................                404                     131
Long-term deposits - restricted..............................................              5,700                       -
Other assets.................................................................                599                     859
Prepaid employee termination benefits........................................              2,425                   2,313
                                                                              -------------------    --------------------
         Total assets........................................................            $33,347                 $17,734
                                                                              ===================    ====================

                   LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
     Short-term debt and current maturities of long-term debt, net...........             $2,531                  $1,681
     Convertible note, net...................................................              1,224                      --
     Trade accounts payable..................................................              5,185                   2,118
     Accrued payroll, payroll taxes and social benefits......................              2,211                   1,290
     Other current liabilities...............................................              3,411                   2,717
                                                                              -------------------    --------------------
         Total current liabilities...........................................             14,473                   7,806
                                                                              -------------------    --------------------
Long-term liabilities:
     Long-term debt..........................................................              6,278                     529
     Other liabilities.......................................................                477                     279
     Liability for employee termination benefits.............................              3,364                   3,247
                                                                              -------------------    --------------------
            Total long-term liabilities......................................             10,119                   4,055
                                                                              -------------------    --------------------
Minority interests...........................................................              1,609                   1,492
                                                                              -------------------    --------------------
Shareholders' equity:
     Common stock - $0.01 par value per share:
         Authorized - 20,000 shares;
         Issued - 8,162 and 8,750 shares as of December 31, 2002
          and September 30, 2003, respectively...............................                 82                      87
     Additional paid-in capital..............................................             37,687                  39,637
     Warrants................................................................                364                     461
     Deferred compensation...................................................                 (7)                     (2)
     Accumulated deficit.....................................................            (26,787)                (31,887)
Treasury stock, at cost - 846 and 848 shares as of December 31, 2002 and
         September 30, 2003, respectively....................................             (3,913)                 (3,915)
       Stockholder's note....................................................               (298)                     --
                                                                              -------------------    --------------------
         Total shareholders' equity..........................................              7,128                   4,381
                                                                              -------------------    --------------------
         Total liabilities and shareholders' equity..........................            $33,305                 $17,734
                                                                              ===================    ====================
</TABLE>


              The accompanying notes are an integral part of these
                       consolidated financial statements.


                                      - 1 -
<PAGE>

                  DATA SYSTEMS & SOFTWARE INC. AND SUBSIDIARIES
                CONSOLIDATED STATEMENTS OF OPERATIONS (unaudited)
                      (in thousands, except per share data)


<TABLE>
<CAPTION>
                                                                   NINE MONTHS ENDED                 THREE MONTHS ENDED
                                                                     SEPTEMBER 30,                      SEPTEMBER 30,
                                                              ----------------------------      ---------------------------
                                                                 2002            2003               2002           2003
                                                              -----------    -------------      ------------    -----------
                                                                              (restated)                         (restated)
<S>  <C>                                                      <C>            <C>                <C>             <C>
Sales:
     Products................................................    $24,868          $16,900            $7,207         $3,779
     Services................................................      8,915            7,478             3,069          2,341
     Projects................................................      3,077            2,459               993            564
                                                              -----------    -------------      ------------    -----------
                                                                  36,860           26,837            11,269          6,684
                                                              -----------    -------------      ------------    -----------
Cost of sales:
     Products................................................     19,749           13,951             5,698          3,202
     Services................................................      6,636            5,236             2,267          1,678
     Projects................................................      2,542            2,087               941            601
                                                              -----------    -------------      ------------    -----------
                                                                  28,927           21,274             8,906          5,481
                                                              -----------    -------------      ------------    -----------

     Gross profit............................................      7,933            5,563             2,363          1,203
Operating expenses:
     Research and development expenses.......................      1,266              153               256             --
     Selling, general and administrative expenses............     12,675            8,394             3,923          1,984
     Impairment of goodwill..................................      2,760               --             2,760             --
                                                              -----------    -------------      ------------    -----------
          Total operating expenses                                16,701            8,547             6,939          1,984
                                                              -----------    -------------      ------------    -----------
Operating loss...............................................     (8,768)          (2,984)           (4,576)          (781)
Interest income..............................................        203               42                57             15
Interest expense.............................................       (743)            (721)             (450)           (71)
Other income (expense), net..................................        148             (408)                56          (243)
                                                              -----------    -------------      ------------    -----------
Losses before taxes on income                                     (9,160)          (4,071)           (4,913)        (1,080)
Taxes on income..............................................         64                7                 7            (27)
                                                              -----------    -------------      ------------    -----------
Loss from operations of the Company and its
     consolidated subsidiaries ..............................     (9,224)          (4,078)           (4,920)        (1,053)
Minority interests...........................................        852              139               649             35
Equity loss in Comverge......................................         --           (1,161)               --           (611)
                                                              -----------    -------------      ------------    -----------
     Net loss................................................    $(8,372)         $(5,100)          $(4,271)       $(1,629)
                                                              ===========    =============      ============    ===========
Basic and diluted net loss per share:
     Net loss per share......................................     $(1.14)          $(0.66)           $(0.58)        $(0.21)
                                                              ===========    =============      ============    ===========
Weighted average number of shares
     outstanding - basic and diluted.........................      7,353            7,680             7,353          7,894
                                                              ===========    =============      ============    ===========
</TABLE>


              The accompanying notes are an integral part of these
                       consolidated financial statements.


                                      - 2 -
<PAGE>


                  DATA SYSTEMS & SOFTWARE INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CHANGES IN SHAREHOLDERS' EQUITY (unaudited) (restated)
                      Nine months ended September 30, 2003
                                 (in thousands)


<TABLE>
<CAPTION>
                                           Additional
                        Number    Common    Paid-In                  Deferred      Accumulated   Treasury   Stockholder's
                      of Shares    Stock    Capital    Warrants    Compensation      Deficit       Stock        Note        Total
                      ---------- --------- ----------  --------   ---------------  -----------  ----------  ------------- ----------
<S>                   <C>        <C>       <C>             <C>    <C>                 <C>       <C>         <C>           <C>
Balances as of
   December 31, 2002      8,162      $  82   $37,687       $ 364            $ (7)     $(26,787)  $(3,913)         $(298)   $7,128

Amortization of
  deferred
  compensation               --         --        --          --               5            --        --             --         5

Issuance of shares
  as compensation            50         --        50          --              --            --        --             --        50

Exercise of options          11         --        17          --              --            --        --             --        17

Issuance of shares
  in lieu of debt
  repayment                 127          1       239          --              --            --        --             --       240

Conversion of line
  of credit, net of
  professional fees         400          4       559          --              --            --        --             --       563

Warrants issued for
  professional
  services                   --         --        --          97              --            --        --             --        97

Purchase of treasury
  shares                     --         --        --          --              --            --       (2)             --        (2)

Write-off of
  stockholder's note         --         --        --          --              --            --        --            298       298

Equity from issuance
  of shares by
  Comverge Inc.              --         --     1,085          --              --            --        --             --     1,085

Net loss                     --         --        --          --              --        (5,100)       --             --    (5,100)
                      ---------- --------- ---------- ----------- --------------- ------------- ----------  ------------- ----------
Balances as of
   September 30, 2003     8,750      $  87   $39,637       $ 461           $  (2)     $(31,887)  $(3,915)           $ --   $4,381
                      ========== ========= ========== =========== =============== ============= ==========  ============= ==========
</TABLE>


              The accompanying notes are an integral part of these
                       consolidated financial statements.


                                      - 3 -
<PAGE>

                  DATA SYSTEMS & SOFTWARE INC. AND SUBSIDIARIES
                CONSOLIDATED STATEMENTS OF CASH FLOWS (unaudited)
                                 (in thousands)


<TABLE>
<CAPTION>
                                                                                                   NINE MONTHS ENDED
                                                                                                     SEPTEMBER 30,
                                                                                            ------------------------------
                                                                                               2002              2003
                                                                                            -----------       ------------
                                                                                                              (restated)
<S>  <C> <C>                                                                                <C>               <C>
Cash flows provided by (used in) operating activities:
     Net loss..........................................................................       $(8,372)           $(5,100)
     Adjustments to reconcile net loss to net cash used in operating
         activities - Appendix:                                                                 2,996              4,913
                                                                                            -----------       ------------
         Net cash used in operating activities.........................................        (5,376)              (187)
                                                                                            -----------       ------------
Cash flows (used in) provided by investing activities:
     Restricted cash...................................................................            --              4,200
     Proceeds from sale and maturity of debt securities................................         1,519                 --
     Proceeds from sale of property and equipment......................................            --                 11
     Investment in debt securities.....................................................          (154)                --
     Acquisitions of property and equipment............................................          (344)              (193)
     Funding of termination benefits...................................................           425               (243)
     Acquisition of intangible assets..................................................            (8)                --
     Business disposition - see Schedule A.............................................            --               (200)
     Investment in equity method investee..............................................            --             (3,527)
                                                                                            -----------       ------------
         Net cash provided by investing activities.....................................         1,438                248
                                                                                            -----------       ------------
Cash flows (used in) provided by financing activities:
     Short-term debt, net..............................................................          (863)              (503)
     Proceeds from issuance of convertible note........................................         2,000                 --
     Borrowings of long-term debt......................................................           646                441
     Repayments of long-term debt......................................................           (69)              (479)
     Convertible note issuance costs...................................................          (167)                --
     Investment in subsidiary by minority interest.....................................            --                 22
     Exercise of options...............................................................            --                 17
     Purchase of treasury stock........................................................            --                 (2)
                                                                                            -----------       ------------
         Net cash provided by (used in) financing activities...........................         1,547               (504)
                                                                                            -----------       ------------
Net decrease in cash and cash equivalents..............................................        (2,391)              (443)
Cash and cash equivalents at beginning of period.......................................         4,025              1,150
                                                                                            -----------       ------------
Cash and cash equivalents at end of period.............................................        $1,634               $707
                                                                                            ===========       ============
Supplemental cash flow information:
     Cash paid during period for interest..............................................          $332               $308
                                                                                            ===========       ============
     Cash paid during period for income taxes..........................................           $92               $106
                                                                                            ===========       ============
Non-cash investing and financing activities:
     Issuance of common stock in lieu of debt repayment...............................             --               $803
     Increase in investment in Comverge from issuance of preferred and common stock
      credited to additional paid-in capital..........................................             --             $1,085
     Accounts payable incurred in investment of Comverge..............................             --                $17
     Accounts payable incurred in acquisition of fixed assets.........................            $50                 --
     Value of beneficial conversion feature and related warrants on
        issuance of convertible note..................................................           $692                 --
     Adjustment of goodwill and intangible assets.....................................            $48                 --
     Increase in deferred tax liability associated with adjustment of
        intangible assets.............................................................            $17                 --
</TABLE>


              The accompanying notes are an integral part of these
                       consolidated financial statements.


                                     - 4 -
<PAGE>

                  DATA SYSTEMS & SOFTWARE INC. AND SUBSIDIARIES
          CONSOLIDATED STATEMENTS OF CASH FLOWS - APPENDIX (unaudited)
                             (dollars in thousands)


<TABLE>
<CAPTION>
                                                                                                 NINE MONTHS ENDED
                                                                                                   SEPTEMBER 30,
                                                                                            ----------------------------
                                                                                               2002             2003
                                                                                            -----------       ----------
                                                                                                              (restated)
   <S>   <C>                                                                                <C>               <C>
   Adjustments to reconcile net loss to net cash used in operating activities:
     Depreciation and amortization.....................................................        $   938          $   447
     Allowance for doubtful accounts...................................................             --               54
     Stock and stock option compensation...............................................             22               55
     Accretion of discount on convertible note and amortization of
         related costs and warrants.............................................                   355              493
     Minority interest and write-off of minority interest balance......................           (892)            (139)
     Equity loss in Comverge...........................................................             --            1,161
     Unrealized gain on debt securities................................................            (10)              --
     Impairment of goodwill and acquired software......................................          3,000               --
     Settlement of payable to contract settlement......................................           (189)              --
     Loss on write-off of stockholder's note...........................................             --              298
     Restricted cash...................................................................           (842)              --
     (Decrease) increase in liability for employee termination benefits................           (416)             283
     Exchange adjustment on long-term debt.............................................            (29)              49
     Loss on disposition of property and equipment.....................................             15                3
     Deferred taxes....................................................................              7             (166)
     Change in operating assets and liabilities:
         Decrease in accounts receivable and other current assets......................          2,542            4,379
         (Decrease) increase in inventory..............................................         (2,567)             326
         Increase (decrease) in other assets...........................................            105             (101)
         Increase (decrease) in accounts payable and other liabilities.................            957           (2,229)
                                                                                            -----------       ----------
         Total.........................................................................        $ 2,996          $ 4,913
                                                                                            -----------       ----------



   A. Assets/liabilities disposed of in disposition of Comverge:
         Current assets...................................................................                      $ 4,634
         Property, equipment and other assets.............................................                        1,190
         Goodwill ........................................................................                          499
         Intangibles......................................................................                          214
         Short-term debt..................................................................                       (3,880)
         Current liabilities..............................................................                       (2,340)
         Other liabilities................................................................                         (517)
         Cash Investment in Comverge......................................................                       (3,327)
                                                                                                              ----------
                                                                                                                $(3,527)
                                                                                                              ==========
</TABLE>


              The accompanying notes are an integral part of these
                       consolidated financial statements.


                                      - 5 -


<PAGE>

                  DATA SYSTEMS & SOFTWARE INC. AND SUBSIDIARIES
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (unaudited)
                      (in thousands, except per share data)

NOTE 1: BASIS OF PRESENTATION

       The  accompanying  unaudited  condensed  interim  consolidated  financial
statements  of Data  Systems & Software  Inc.  ("DSSI")  and  subsidiaries  (the
"Company") have been prepared in accordance with accounting principles generally
accepted in the United States of America for interim  financial  information and
with the instructions to Article 10 of Regulation S-X. Accordingly,  they do not
include all of the information and footnotes  required by accounting  principles
generally  accepted in the United  States of America for  complete  consolidated
financial statements.  In the opinion of management,  all adjustments considered
necessary for a fair presentation have been included.  Operating results for the
nine-month period ended September 30, 2003 are not necessarily indicative of the
results  that may be  expected  for the year ending  December  31,  2003.  These
unaudited condensed interim consolidated  financial statements should be read in
conjunction with the  consolidated  financial  statements and footnotes  thereto
included in the Company's Annual Report on Form 10-K for the year ended December
31,  2002.  Certain  reclassifications  have  been made to the  Company's  prior
period's  consolidated  financial  statements to conform to the current period's
consolidated financial statement presentation.

These condensed  consolidated  interim unaudited financial  statements have been
restated following the determination that no change of DSSI interest in Comverge
has occurred  following  issuance of Comverge's  preferred  stock,  and that the
issuance of 877,000 of Comverge's  common stock in connection  with its purchase
of 6D at April 2003  resulted a combined  decrease of $3,269 in gain  previously
recorded in DSSI Additional paid-in capital. In addition DSSI determined that it
is no longer committed to fund Comverge and due to the Company's negative common
stock investment in Comverge it should cease to record equity losses against its
common  investment  and will  continue  to  record  equity  losses  against  its
preferred investment in Comverge.

The effect of the  restatement  on the  Company's net loss and basic and diluted
loss per share for the nine month and three month  periods  ended  September 30,
2003, is shown below:


                                        NINE MONTHS              THREE MONTHS
                                           ENDED                     ENDED
                                        -----------              ------------
                                                  SEPTEMBER 30, 2003
                                        --------------------------------------

          Net loss - as reported          (6,153)                   (1,731)
          Effect of restatement            1,053                       102
                                          ------                    ------
             Net loss - as restated       (5,100)                   (1,629)
                                          ======                    ======


       Basic and diluted net loss per
             share - as reported           (0.80)                    (0.22)
             Effect of restatement          0.14                      0.01
                                          ------                    ------
       Basic and diluted net loss per
             share - as reported           (0.66)                    (0.21)
                                          ======                    ======

NOTE 2: FINANCING OF OPERATIONS

         As of September  30, 2003,  the Company had working  capital of $1,046,
including  $707 in  unrestricted  cash and cash  equivalents.  Net cash  used in
operating activities in the first nine months of 2003 was $187. The net loss for
the period of $5,100  included a non-cash  expenses  and losses of $1,240 and an
equity loss in Comverge of $1,161.  The  primary  source of the  Company's  cash
provided  by  operating  activities  during  the first  nine  months of 2003 was
collections of trade accounts  receivables and other current assets in excess of
reductions in accounts  payable and other  liabilities of $2,150,  net. Net cash
provided  by  investing  activities  was $248,  primarily  from the  release  of
previously  restricted cash of $4,200, of which $3,327 was invested in Comverge.
Net cash used in financing  activities of $504 was primarily due to net payments
of debt of $541.

         The working  capital of $1,046 at September 30, 2003 included  negative
working capital of $89 in the Company's majority owned Israeli subsidiary, dsIT.
Due to Israeli  tax and  company  law  constraints,  as well as the  significant
minority  interest in dsIT,  positive working capital and cash flows from dsIT's
operations  in  past  periods  were  not  readily   available  to  finance  U.S.
activities.

         dsIT is utilizing approximately $1,213 of its $1,576 lines of credit as
of September 30, 2003. dsIT's lines of credit are denominated in NIS and bear an
average interest rate of the Israeli prime rate plus 0.9% per annum. The Israeli
prime rate fluctuates and on September 30, 2003 was 7.9%.  Since April 2003, the
Company's formerly consolidated subsidiary,  Comverge, Inc. (Comverge) completed
private  equity  financings  totaling  approximately  $18,600 (see Note 3). As a
result of the financing, Comverge no longer requires additional funding from the
Company.  As part of the  agreements  related to the private  equity  financing,
Comverge  received a new $6,500 credit  facility,  which  included a $1,500 term
loan secured by a $1,500  restricted  deposit of DSSI.  Comverge is obligated to
prepay the term loan and facilitate the release of the Company's  $1,500 deposit
over the six months commencing  December 31, 2003, subject to certain conditions
(see Note 3). The Company  believes  that the proceeds of the  financing and new
credit arrangements  provide sufficient  financing for Comverge to independently
fund its activities.

         As of October 31, 2003, the Company's wholly-owned US operations (i.e.,
excluding dsIT and Comverge) had an aggregate of $740 in  unrestricted  cash and
cash equivalents, reflecting a $292 decrease from the balance as of December 31,
2002.

         The  Company  believes  it has  sufficient  liquidity  to  finance  its
US-based operating activities and its corporate activities for at least the next
12 months.  The Company  intends to finance these  activities from cash on hand,
including the freeing up of the restricted  deposit pledged to secure Comverge's
term loan, and operating cash flows.


                                      - 6 -
<PAGE>


                  DATA SYSTEMS & SOFTWARE INC. AND SUBSIDIARIES
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (unaudited)
                      (in thousands, except per share data)

NOTE 3: COMVERGE EQUITY FINANCING TRANSACTIONS

       On April 7,  2003,  the  Company  and its  then  consolidated  subsidiary
Comverge signed and closed on a definitive agreement with a syndicate of venture
capital  firms raising an aggregate of $13,000 in capital  funding.  The Company
purchased  $3,250 of Series A Convertible  Preferred Stock issued by Comverge in
the equity  financing and incurred  transaction  costs of an  additional  $94. A
syndicate of venture  capital  firms  purchased  $7,750 of Series A  Convertible
Preferred  Stock  issued  by  Comverge,  and one  member of the  syndicate  also
purchased  $2,000 of Series A-1  Convertible  Preferred  Stock of  Comverge.  In
connection with the transaction, the Company converted to equity in Comverge the
balance of the intercompany loans of $9,673.

       The purchaser of the Series A-1 Preferred  Stock was granted a put option
exercisable  in April 2004 and Comverge  received a right to call all the Series
A-1  Preferred  Stock for $2,000,  at anytime on or before  April 18,  2004.  In
September 2003,  Comverge completed an agreement raising an additional $2,000 in
capital funding in exchange for additional Series A Convertible  Preferred Stock
issued by Comverge.  Comverge  utilized these funds to repurchase the Series A-1
Convertible Preferred Stock previously issued by Comverge.

       The Series A  Convertible  Preferred  Stock has  priority  over  Comverge
common stock for dividends and liquidations (which includes a sale of Comverge).
Additionally,  the  Preferred  Stock  has  anti-dilution  protection  for  stock
issuances  by  Comverge  below  the per  share  purchase  price of the  Series A
Preferred Stock (subject to customary exceptions such as employee stock options)
as well as approval rights for major corporate  transactions,  stock  issuances,
declaration or payment of dividends,  changing corporate  governance  documents,
liquidation or dissolution of Comverge and other corporate  matters.  Each share
of the Preferred Stock is convertible into one share of Comverge common stock at
any time at the  holder's  option,  or, at  Comverge's  option,  upon an initial
public offering with gross proceeds of at least $30,000 and an offering price of
at least $10.40 per share.  The Preferred Stock votes on an "as converted" basis
with the common stock.

       Under Comverge's Amended and Restated  Certificate of Incorporation,  the
holders  of  Comverge  common  stock  have the  right  to elect  two of the five
directors on Comverge's  Board.  Certain preferred  shareholders  other than the
Company have the right to elect the other three directors.  Pursuant to a voting
agreement,  one of the directors  elected by the holders of the Comverge  common
stock must be the Chief  Executive  Officer  (CEO) of  Comverge.  The  Company's
chairman and CEO and Comverge's CEO were elected as the initial directors by the
Comverge common stockholders.

       In  connection  with  Comverge's  April  equity  financing  transactions,
Comverge   acquired  Sixth  Dimension,   Inc.  ("6D")  in  a  purchase  business
combination,  valued  at  approximately  $1,052,  in  exchange  for  877,000  of
Comverge's common shares. Some of the venture capital participants in Comverge's
equity  financing  transaction  were  the  principal  owners  in 6D prior to the
acquisition.  6D is an early stage Internet-based  software company,  whose iNET
product enables a broad range of energy services  including:  upstream  facility
metering,  monitoring, and control;  performance-based  operations and proactive
maintenance;  economic demand response and active load  curtailment;  aggregated
distributed  generation;  power  reliability and quality  monitoring;  and other
real-time  capital  equipment  analysis using a low-cost,  robust,  software for
service  delivery.   The  acquisition  adds  to  Comverge's   product  offering,
technology  for upstream  monitoring & control of capital  assets,  by combining
6D's  real-time,   internet-based,  data  warehousing  iNET  software  with  the
analytical  and  metering   capabilities   of  Comverge's   PowerCAMP   software
applications.  In connection with this transaction,  as a result of our dilution
and a new valuation of the exchanged  common stock of Comverge at  approximately
$509,  we  recorded  an increase  of $1,085 to our common  stock  investment  in
Comverge.     The    increase    was    recorded    as    an    adjustment    to
additional-paid-in-capital.

       Following  Comverge's  April 2003 equity  transaction,  the Company  held
approximately  50.6%  of  the  outstanding  capital  voting  stock  of  Comverge
(approximately   76%  of  Comverge's  common  stock  and  approximately  26%  of
Comverge's  Preferred  Stock).  As a result of the April 2003  transaction,  the
Company is no longer obligated to fund Comverge. Additionally, subsequent to the
April  equity  transaction,  the  Company has a negative  investment  balance in
Comverge's common stock of $1,824. As the Company is no longer committed to fund
Comverge,  the Company  has ceased to record  equity  losses  against its common
stock investment. The Company's negative common investment will only be adjusted
upon  disposition of the Company's  common stock  investment or when the Company
realizes equity income from Comverge in excess of any accumulated  equity losses
recorded on its Preferred Stock investment.

       Also in connection with the equity financing in April, Comverge secured a
$6,500 credit  facility with a leading  financial  institution.  Comverge's  new
credit  facility  includes a $1,500 term loan  secured by a Company  pledge of a
$1,500  restricted  deposit at Comverge's  new lender,  and a revolving  line of
credit of up to $5,000  secured by the assets of  Comverge.  Comverge  agreed to
make certain  prepayments  of the $1,500 term loan and the new lender  agreed to
the release of amounts equal to such payments from the pledge  account,  subject
to  Comverge's  compliance  with certain  financial  and other  covenants in its
agreement  with  the  lender.  Such  covenants  have  been  subsequently  either
fulfilled or waived.

       Based on the total capital raised (some of which occurred after September
30,  2003),  and the  redemption  of the put,  the  prepayments  by Comverge and
release of the pledge  account,  are to be made in two  payments of $750 each on
December 31, 2003 and June 30, 2004.

       Subsequent to the third quarter,  in October 2003,  Comverge completed an
agreement  raising an  additional  $5,600 in capital  funding  in  exchange  for
additional Series A Convertible Preferred Stock issued by Comverge.

       The  Company  entered  into  various  agreements  with  Comverge  and the
syndicate of venture  capital  investors.  These  agreements  provide for, among
other things,  restrictions on the transfer of the Company's  shares of Series A
Preferred Stock and Comverge common stock,  the voting of the Company's Series A
Preferred  Stock and  Comverge  common  stock,  the  Company's  right to receive
quarterly and annual financial reports from Comverge and registration rights for
the Company's Series A Preferred Stock and Comverge common stock.

       Until  December  31,  2003,  the Company has the option to purchase  from
Comverge up to $1,500 of Series A-2 Convertible  Preferred  Stock. The amount of
Series A-2  Preferred  Stock that the Company may purchase from Comverge will be
limited to the number of shares that could be purchased by the principal balance
of the $1,500 term loan as of the date the Company  gives  notice of  exercising
the Series A-2  option.  The Series A-2  Preferred  Stock has the same  purchase
price as the Series A-1 Preferred  Stock. The Series A-2 Preferred Stock has the
same  rights as the  Series A and the  Series A-1  Preferred  Stock,  except the
Series A-2 Preferred Stock is junior in priority in liquidation  (which includes
the sale of Comverge) to both the Series A and Series A-1 Preferred Stock.


                                      - 7 -
<PAGE>


         At September 30, 2003,  following  Comverge's April equity transaction,
the Company owned approximately 49.6% of the outstanding capital voting stock of
Comverge,   comprised  of   approximately   25%  of  the  Preferred   Stock  and
approximately  76% of Comverge's  common  stock.  As a result of the last equity
transaction  in October  2003,  the  Company  owned  approximately  40.9% of the
outstanding capital voting stock of Comverge,  comprised of approximately 17% of
the Preferred Stock and approximately 76% of Comverge's common stock.


                                      - 8 -
<PAGE>

                  DATA SYSTEMS & SOFTWARE INC. AND SUBSIDIARIES
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (unaudited)
                      (in thousands, except per share data)

NOTE 4: EQUITY INVESTMENT IN COMVERGE

       As a result  of the  private  equity  financing  transactions  and  other
agreements described in Note 3, Comverge is no longer a controlled subsidiary of
the Company.  Thus,  effective April 1, 2003, the Company no longer consolidates
Comverge's  balance  sheet and  results  of  operations,  and  accounts  for its
investment in Comverge under the equity method.  The Company's  Preferred  Stock
investment of $3,344  (which was primarily  financed by the release of $3,000 of
previously  restricted  cash) has been reduced by equity  losses in Comverge for
the period of April 1, 2003 to September 30, 2003 of $1,161.

         Summary  unaudited  financial  information for Comverge as of September
30, 2003 and for the period from April 1 to September 30, 2003 is as follows:


<TABLE>
<CAPTION>
                                                                                                         As of
                                                                                                   September 30, 2003
                                                                                                   -------------------
      <S>           <C>                                                                            <C>
      FINANCIAL POSITION
      Current assets                                                                                        $10,862
      Property, plant, and equipment, net                                                                     1,831
      Intangible and other assets, net                                                                        1,624
                                                                                                   -------------------
                    Total assets                                                                            $14,317
                                                                                                   ===================

      Current liabilities                                                                                    $3,346
      Long-term debt                                                                                          3,918
      Other non-current liabilities                                                                             191
                                                                                                   -------------------
                    Total liabilities                                                                         7,455
      Shareholders' equity                                                                                    6,862
                                                                                                   -------------------
                    Total liabilities and shareholder's equity                                              $14,317
                                                                                                   ===================

                                                                                                        Period from
                                                                                                       April 1, 2003
                                                                                                             to
RESULTS OF OPERATIONS                                                                               September 30, 2003
                                                                                                   -------------------
      Sales                                                                                                  $7,319
      Operating loss                                                                                        $(4,134)
      Net loss                                                                                              $(4,468)
</TABLE>


         The activity in the Company's  investments  in Comverge  during the six
months ended September 30, 2003 is as follows:

<TABLE>
<CAPTION>
      <S>   <C>                                                                                    <C>
      Investment in Comverge common stock
         Conversion of inter-company balances to equity                                                     $ 9,673
         Accumulated deficit at March 31, 2003                                                              (12,582)
         Adjustment of the Company's investment from dilution of common shares                                1,085
                                                                                                   -------------------
            Total investment in Comverge common stock                                                        (1,824)

      Investment in Comverge preferred stock
         Cash paid for preferred stock of Comverge                                                            3,250
         Transaction costs                                                                                       94
                                                                                                   -------------------
         Investment balance prior to equity loss                                                              3,344

         Equity (preferred) loss in Comverge - April 1 to September 30, 2003                                 (1,161)
                                                                                                   -------------------
            Total investment in Comverge preferred stock                                                      2,183
                                                                                                   -------------------
      Investment in Comverge, net                                                                             $ 359
                                                                                                   ===================
</TABLE>

         As a  result  of  Comverge's  net  loss  during  the six  months  ended
September  30,  2003 the  Company  recorded  an  equity  loss of  $1,161,  which
represents  26% of  Comverge's  losses  against the  Company's  Preferred  Stock
investment.


                                      - 9 -
<PAGE>

                  DATA SYSTEMS & SOFTWARE INC. AND SUBSIDIARIES
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (unaudited)
                      (in thousands, except per share data)

NOTE 5: INVENTORY

         Inventory consists of the following:         As of            As of
                                                   December 31,    September 30,
                                                      2002             2003
                                                      ----             ----
         Raw materials, spare parts and supplies     $1,396            $23
         Work-in-process                                161              -
         Finished goods and merchandise                 660             32
                                                     ------            ---

                                                     $2,217            $55
                                                     ======            ===

NOTE 6--GOODWILL AND OTHER INTANGIBLE ASSETS

    The table below presents the carrying amount of goodwill, by segment.  There
were no acquisitions  or impairments of goodwill  recorded during the nine-month
period ended September 30, 2003.


<TABLE>
<CAPTION>
                                                                        Software          Energy
                                                                     Consulting and    Intelligence
                                                                       Development       Solutions          Total
                                                                    ----------------  ---------------  ---------------
         <S>                                                        <C>               <C>              <C>
         Segment balances as of December 31, 2002                            $4,430            $ 499           $4,929
         Deconsolidation of Comverge investment (See
           Notes 3 and 4)                                                        --             (499)            (499)
                                                                    ----------------  ---------------  ---------------
         Segment balances as of September 30, 2003                           $4,430            $  --           $4,430
                                                                    ================  ===============  ===============
</TABLE>


         The  following  table  presents  certain   information   regarding  the
Company's  amortizable  intangible  assets as of September 30, 2003 and December
31, 2002. All intangibles assets are being amortized over their estimated useful
lives, with no estimated residual values.


<TABLE>
<CAPTION>
                                                                                  As of September 30, 2003
                                                                      -------------------------------------------------
                                               Weighted average          Gross                                Net
                                                 amortization           carrying       Accumulated         carrying
                                                    period               amount        amortization         amount
                                           ------------------------   -------------  -----------------   --------------
         <S>                                              <C>                <C>                <C>              <C>
         Amortizing intangible assets:
             Software licenses                            4.5 yrs            $260               $129             $131
                                                                             ====               ====             ====
</TABLE>


<TABLE>
<CAPTION>
                                                                                  As of December 31, 2002
                                                                      -------------------------------------------------
                                               Weighted average          Gross                                Net
                                                 amortization           carrying       Accumulated         carrying
                                                    period               amount        amortization         amount
                                           ------------------------   -------------  -----------------   --------------
         <S>                                             <C>          <C>            <C>                 <C>
         Amortizing intangible assets:
             Licenses                                     5.0 yrs            $568               $563             $  5
             Patents                                     15.0 yrs             288                 70              218
             Software licenses                            4.5 yrs             260                 79              181
                                                                      -------------  -----------------   --------------

                       Total                                               $1,116               $712             $404
                                                                      =============  =================   ==============
</TABLE>


                                     - 10 -
<PAGE>

                  DATA SYSTEMS & SOFTWARE INC. AND SUBSIDIARIES
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (unaudited)
                      (in thousands, except per share data)

         Amortization  in respect of  license,  patents  and  software  licenses
intangible amounted to $304 and $59 for the nine months ended September 30, 2002
and 2003,  respectively  (2002  includes  amortization  of $108 with  respect to
acquired backlog which was fully amortized in 2002).

         Estimated  amortization expense for the remainder of 2003 is $17 and as
follows with respect to intangible assets for each of the next five years:

                YEAR ENDED SEPTEMBER 30,
                ------------------------
                          2004                                  $41
                          2005                                   32
                          2006                                   32
                          2007                                   22
                          2008                                    4
                                                         -----------
                                                               $131
                                                         ===========

NOTE 7: WARRANTY PROVISION

         The  Company   generally   warrants   its  products   against   certain
manufacturing  and other  defects.  These  product  warranties  are provided for
specific periods of time and/or usage of the product  depending on the nature of
the product,  the geographic location of its sale and other factors. The accrued
product  warranty costs are based  primarily on historical  experience of actual
warranty claims as well as current information on repair costs.

         The following table provides the changes in the Company's provision for
product warranties for the nine-month periods ended September 30, 2002 and 2003:

                                                               Nine months ended
                                                                 September 30,
                                                               -----------------
                                                                2002       2003
                                                               ------     ------

   Warranty provision at beginning of the period                $302        $52
   Accruals for warranties issued during the period               85         23
   Warranty settlements made during the period                  (300)       (23)
   Other - deconsolidation of Comverge (see Notes 3 and 4)        --        (52)
                                                               ------     ------

   Warranty provision at the end of the period                   $87        $--
                                                               ======     ======

         The Company's product license and services agreements include a limited
indemnification  provision  for  claims  from  third  parties  relating  to  the
Company's intellectual property included in the Company's products and projects.
Such  indemnification  provisions  are accounted for when amounts of liabilities
are probable and  estimable.  The  indemnification  is generally  limited to the
amount  paid by the  customer  and to date there have not been  material  claims
under  such  indemnification  provisions.  At  this  time,  the  Company  cannot
reasonably estimate future potential indemnifications, if any.


                                     - 11 -
<PAGE>

                  DATA SYSTEMS & SOFTWARE INC. AND SUBSIDIARIES
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (unaudited)
                      (in thousands, except per share data)

NOTE 8: STOCK-BASED COMPENSATION

         Statement  of  Financial   Accounting   Standards   ("SFAS")  No.  123,
"Accounting for Stock Based Compensation"  permits companies to (i) recognize as
expense  the fair value of  stock-based  awards,  or (ii)  continue to apply the
provisions of Accounting  Principles Board Opinion No. 25, "Accounting for Stock
Issued to Employees"  and related  interpretations  ("APB 25"),  and provide pro
forma net income and earnings per share  disclosures  for employee  stock option
grants  as if the  fair-value-based  method  defined  in SFAS  No.  123 had been
applied. The Company continues to apply the provisions of APB 25 and provide the
pro forma  disclosures  in  accordance  with the  provisions  of SFAS No. 123 as
amended to its Stock Option and  Incentive  Plan.  Under APB 25, the Company has
recorded minimal stock-based employee and director  compensation cost associated
with its  stock  option  plan,  as all  options  granted  under  the plan had an
exercise price equal to the market value of the  underlying  common stock on the
date of grant.

         The following table illustrates the effect on net loss and net loss per
share as if the Company had applied  the fair value  recognition  provisions  of
SFAS No. 123 to its stock option plan:


<TABLE>
<CAPTION>
                                                           THREE MONTHS ENDED                 NINE MONTHS ENDED
                                                           ------------------                 -----------------
                                                              SEPTEMBER 30,                     SEPTEMBER 30,
                                                              ------------                      -------------
                                                         2002             2003               2002           2003
                                                         ----             ----               ----           ----
                                                                       (restated)                        (restated)
    <S>                                               <C>               <C>                <C>            <C>
    Net loss as reported.............................     $(4,271)        $(1,629)           $(8,372)       $(5,100)
    Plus: Stock-based employee and director
           compensation expense included in
           reported net loss.........................           2               2                  5             55
    Less: Total stock-based employee compensation
           expense determined under fair value
           based method for all awards...............         394               2              1,089            186
                                                      -------------     -----------        -----------    -----------
    Pro forma net loss...............................     $(4,663)        $(1,629)           $(9,456)       $(5,231)
                                                      =============     ===========        ===========    ===========

       Net loss per share:
          Basic and diluted - as reported............      $(0.58)         $(0.21)            $(0.95)        $(0.66)
                                                      =============     ===========        ===========    ===========
          Basic and diluted - pro forma..............      $(0.63)         $(0.21)            $(1.36)        $(0.68)
                                                      =============     ===========        ===========    ===========
</TABLE>

         The pro forma  information  in the above table also gives effect to the
application  of  SFAS  No.  123 on  the  share  option  plans  of the  Company's
subsidiaries  (The  application  of SFAS No. 123 with  respect  to  Comverge  is
included  only for the nine month period ended  September 30, 2002 and the first
three  months of 2003 until the  Company's  deconsolidation  of its  interest in
Comverge - see Notes 3 and 4).

NOTE 9: WARRANTS

         On  February  25,  2003,  the  Company  engaged a  third-party  for the
purposes of providing  investor  awareness and business  advisory services for a
period of one year. The Company pays a monthly  advisory fee,  totaling $90 over
the period of the agreement.  In addition,  the Company  granted the third-party
common  stock  purchase  warrants  for the  purchase  of  120,000  shares of the
Company's  common  stock  (60,000  at $2.00 per  share  and  60,000 at $2.50 per
share).  The warrants became fully vested on May 26, 2003 and expire on February
25, 2005. The Company used the  Black-Scholes  valuation  method to estimate the
fair value of the  warrants,  using a risk free  interest  rate of 1.75%,  their
contractual  life of two  years,  an annual  volatility  of 88% and no  expected
dividends.  The  Company  estimated  the  fair  value  of  the  warrants  to  be
approximately $97, which has been charged to selling, general and administrative
expense.


                                     - 12 -
<PAGE>

                  DATA SYSTEMS & SOFTWARE INC. AND SUBSIDIARIES
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (unaudited)
                      (in thousands except per share data)

NOTE 10: SEGMENT INFORMATION


<TABLE>
<CAPTION>
                                                      SOFTWARE        ENERGY
                                                   CONSULTING AND  INTELLIGENCE   COMPUTER
                                                     DEVELOPMENT   SOLUTIONS(**)  HARDWARE    OTHER (*)       TOTAL
                                                     -----------   -------------  --------    ---------       -----
<S>                                                      <C>            <C>        <C>             <C>       <C>
Nine months ended September 30, 2003 (restated):
   Revenues from external customers                       $9,138         $4,700    $12,974          $25      $26,837
   Intersegment revenues                                       -            284         20           --          304
   Segment gross profit                                    1,949          1,313      2,276           25        5,563
   Segment loss                                             (493)        (2,772)      (247)         (17)      (3,529)

Nine months ended September 30, 2002:
   Revenues from external customers                      $10,636        $12,683    $13,415         $126      $36,860
   Intersegment revenues                                      72            870         73           --        1,015
   Segment gross profit                                    1,704          3,918      2,260           51        7,933
   Segment income (loss)***                               (3,553)        (2,465)        36           (2)      (5,984)

Three months ended September 30, 2003 (restated):
   Revenues from external customers                       $2,827             --     $3,856           $1       $6,684
   Intersegment revenues                                      --             --         --           --           --
   Segment gross profit                                      549             --        653            1        1,203
   Segment loss                                              (28)          (909)      (156)         (11)      (1,104)

Three months ended September 30, 2002:
   Revenues from external customers                       $3,339         $3,259     $4,638          $33      $11,269
   Intersegment revenues                                      53            391         27           --          471
   Segment gross profit                                      412          1,144        801            6        2,363
   Segment income (loss)***                               (2,862)          (597)        61           (7)      (3,405)
</TABLE>

---------------
  (*)    Represents  the  operations of a VAR software  operation in Israel that
         did not meet the quantitative thresholds of SFAS No. 131.

  (**)   Operating  results  of  Comverge  (the  Energy  Intelligence  Solutions
         segment) are no longer  consolidated  beginning  the second  quarter of
         2003 - see Note 4. Segment loss for the nine ended  September  30, 2003
         includes consolidated losses of $1,313 during the period from January 1
         to March 31, 2003,  equity losses of $1,161 on the Company's  preferred
         investment  in  Comverge  and other  expense of $298,  relating  to the
         write-off of a  stockholder's  note from segment CEO.  Segment loss for
         the three months ended  September  30, 2003 include  equity  losses off
         $611 on the  Company's  preferred  investment  in  Comverge  and  other
         expense of $298, relating to the write-off of a stockholder's note from
         segment CEO.

  (***)  Segment loss for the nine and three month periods  ended  September 30,
         2002 in the  software  consulting  and  development  segment  include a
         charge of $3,000 for  impairment  of goodwill  and  acquired  software,
         reduced by $528 for minority interests.


                                     - 13 -
<PAGE>

RECONCILIATION OF SEGMENT LOSS TO CONSOLIDATED NET LOSS


<TABLE>
<CAPTION>
                                                                 Nine months ended             Three months ended
                                                                   September 30,                  September 30,
                                                             ---------------------------    --------------------------
                                                                2002            2003           2002           2003
                                                                ----            ----           ----           ----
                                                                             (restated)                    (restated)
<S>                                                          <C>             <C>            <C>             <C>
Total loss for reportable segments                             $(5,982)        $(3,512)       $(3,398)       $(1,093)
Other operational segment loss                                      (2)            (17)            (7)           (11)
                                                             -----------     -----------    -----------     ----------
Total operating loss                                            (5,984)         (3,529)        (3,405)        (1,104)
Net loss of corporate headquarters*                             (2,388)         (1,571)          (866)          (525)
                                                             -----------     -----------    -----------     ----------
Total consolidated net loss                                    $(8,372)        $(5,100)       $(4,271)       $(1,629)
                                                             ===========     ===========    ===========     ==========
</TABLE>

(*)  Net loss of corporate  headquarters  for the nine and  three  months  ended
     September 30, 2002 includes $311 and $256  of  interest  expense related to
     the amortization of the fair value of the beneficial conversion feature and
     related warrants at the issuance of the convertible note in June of 2002.


                                      -14-
<PAGE>

                          DATA SYSTEMS & SOFTWARE INC.
                     MANAGEMENT'S DISCUSSION AND ANALYSIS OF
                  FINANCIAL CONDITION AND RESULTS OF OPERATIONS


ITEM 2.  MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
         RESULTS OF OPERATIONS

         The following  discussion  includes statements that are forward-looking
in nature.  Whether such statements ultimately prove to be accurate depends upon
a variety of factors  that may affect our business  and  operations.  Certain of
these factors are  discussed  below under  "Factors  That May  Influence  Future
Results" and in "Item 1.  Description  of Business - Factors That May  Influence
Future  Results" in our Annual  Report on Form 10-K for the year ended  December
31, 2002, (the "2002 10-K").

OVERVIEW AND TREND INFORMATION

         We  operate  in three  reportable  segments:  software  consulting  and
development,  energy  intelligence  solutions,  and computer hardware.  As we no
longer have control over Comverge (see Notes 3 and 4 to the unaudited  condensed
interim consolidated financial statements), effective the second quarter of 2003
we account for our  investment  in  Comverge on the equity  method and no longer
consolidate  Comverge's  balances and operating  activity into our  consolidated
balance sheet and statement of operations. The following analysis should be read
together  with the  segment  information  provided  in Note 10 to our  unaudited
financial statements included in this report.

         SOFTWARE CONSULTING AND DEVELOPMENT

         Segment  revenues  continued to decrease in the third  quarter of 2003.
The decrease  resulted  primarily  from the  continued  general  weakness in the
global hi-tech markets and in the software  consulting and development market in
particular.  We currently do not see the market  improving and, while increasing
our marketing efforts,  we are constantly  implementing cost cutting measures so
as to prevent this activity from incurring  losses,  until the market  improves.
These  measures are what caused the  segment's  gross profit and segment loss in
2003 periods to improve on those of the 2002 periods.

         In June 2003 Clalit Health  Services,  Israel's  largest HMO and one of
the largest HMOs in the world,  awarded our dsIT subsidiary,  together with Yael
Software,  a $4 million contract,  of which dsIT's portion is approximately 50%.
The contract includes the development and  implementation of a new Customer Care
and Billing system,  based entirely on dsIT's  e-asyBillTM  billing system.  The
system is to be  implemented  over a one-year  period and  includes a seven-year
maintenance  contract. In the future, we expect that this product, our OncoProTM
product and sonar technology  systems will have increased impact on our results,
offsetting  the  continued  deterioration  in the  software  consulting  market.
Revenues from this contract are expected to begin in the fourth quarter of 2003.

         In addition,  dsIT has been successful in bidding together with Databit
(from our Computer  Hardware  segment) for certain  Israeli  Ministry of Defense
(MoD) contracts and we expect this cooperation to produce increased  revenues in
the future.

         ENERGY INTELLIGENCE SOLUTIONS

         On April 7, 2003 Comverge signed and closed on an agreement (see Note 3
to our unaudited consolidated financial statements) for private equity financing
in the amount of $13.0 million. We invested $3.25 million, and $9.75 million was
invested by a group of leading energy venture capital investors, in exchange for
Series A Convertible  Preferred Stock of Comverge.  In September 2003,  Comverge
signed and closed another agreement with two other venture capital firms raising
an additional $2.0 million in capital funding in exchange for additional  Series
A  Convertible  Preferred  Stock  issued by Comverge,  utilizing  these funds to
repurchase  the Series A-1  Convertible  Preferred  Stock  previously  issued by
Comverge.  Subsequent to the third quarter, in October 2003, Comverge signed and
closed on its last  agreement  with two other  venture  capital firms raising an
additional $5.6 million in capital  funding in exchange for additional  Series A
Convertible Preferred Stock issued by Comverge,  completing this round of equity
investment, totaling $18.6 million.


                                     - 15 -
<PAGE>

         Comverge's  operating  results for the period  from  January 1, 2003 to
March 31,  2003 have been  consolidated  and are  included  in our  consolidated
statements  of  operations.  Our share of Comverge's  operating  results for the
period from April 1, 2003 to September  30, 2003  (effective  April 1, 2003) are
reflected  as  equity  loss  in  Comverge  in  our  consolidated  statements  of
operations.

         Towards the end of the first  quarter and through the third  quarter of
2003,  Comverge  devoted  significant  attention to the capital  raising process
mentioned  above.  In addition,  during this period,  Comverge  signed its first
major,  long-term Virtual Peaking  Capacity(TM)  contract to provide significant
peak load  reduction to  PacifiCorp,  a subsidiary of Scottish  Power.  Although
little  revenue was recognized  with respect to this  contract,  we expect it to
have a positive  effect on revenues in future  periods.  Comverge and Gulf Power
have agreed in principle to modify their long-term  agreement for the deployment
of  Maingate  gateway  systems,   temporarily  delaying  shipments.   This  will
significantly  reduce  revenues from this contract in the short term, but is not
expected to negatively  impact  operating  results at Comverge.  Over the longer
term, the  modifications  are expected to improve this project's  profitability,
due to product improvements and reductions in component costs.

         COMPUTER HARDWARE

         Sales in the third quarter of 2003  continued to be below  expectations
and below the level of sales  achieved  in the first  quarter of this  year.  We
expect  computer  hardware  sales to  improve  in the  coming  quarters  and are
beginning  to see signs of such  improvement.  To offset  the  weakness  in this
market, and diversify our revenue base, we have initiated efforts towards adding
more value added software  products and services,  which we hope to leverage off
the expertise of our existing sales force and customer base.  These  activities,
together with continuing joint marketing  efforts with dsIT for Israeli Ministry
of Defense projects, are intended to reduce Databit's dependency on the computer
hardware markets in the future.

         CORPORATE

         With the completion of Comverge's  venture  financing over the last few
months,  we do not need to fund  Comverge  and no longer have  control  over its
activities.  Mr. George  Morgenstern,  has informed our Board that he intends to
retire from  full-time  employment  as of  December  31, 2003 and to remain as a
consultant to us as called for in his employment agreement and has agreed within
this  construct  to make  himself  available  to fill any position the Board may
desire. In light of our reduced involvement at Comverge, the capable independent
management  in  place  at our  dsIT  and  Databit  subsidiaries  and  our  CEO's
retirement, we continue to evaluate our corporate activities and structure. This
evaluation includes exploration of restructuring and/or acquisitions or mergers.
We expect to continue  this process  during the next few months,  completing  it
before year-end.


                                     - 16 -
<PAGE>

RESULTS OF OPERATIONS

These condensed  consolidated  interim unaudited financial  statements have been
restated following the determination that no change of DSSI interest in Comverge
has occurred  following  issuance of Comverge's  preferred  stock,  and that the
issuance of 877,000 of Comverge's  common stock in connection  with its purchase
of 6D at April 2003  resulted a combined  decrease of $3,269 in gain  previously
recorded in DSSI Additional paid-in capital. In addition DSSI determined that it
is no longer committed to fund Comverge and due to the Company's negative common
stock investment in Comverge it should cease to record equity losses against its
common  investment  and will  continue  to  record  equity  losses  against  its
preferred investment in Comverge.

The effect of the  restatement  on the  Company's net loss and basic and diluted
loss per share for the nine month and three month  periods  ended  September 30,
2003, is shown below:


                                        NINE MONTHS              THREE MONTHS
                                           ENDED                     ENDED
                                        -----------              ------------
                                                  SEPTEMBER 30, 2003
                                        --------------------------------------

          Net loss - as reported          (6,153)                   (1,731)
          Effect of restatement            1,053                       102
                                          ------                    ------
             Net loss - as restated       (5,100)                   (1,629)
                                          ======                    ======


       Basic and diluted net loss per
             share - as reported           (0.80)                    (0.22)
             Effect of restatement          0.14                      0.01
                                          ------                    ------
       Basic and diluted net loss per
             share - as reported           (0.66)                    (0.21)
                                          ======                    ======

      The  following  table sets forth certain  information  with respect to our
consolidated results of operations for the three and nine months ended September
30, 2002 and 2003, including the percentage of total revenues during each period
attributable to selected components of the operations statement data and for the
period-to-period percentage changes in such components.  Being that starting the
second  quarter  of 2003  we do not  fully  consolidate  Comverge's  results  of
operations,  but rather  include  them on an equity  basis,  the  results of the
periods presented are not fully comparable.


<TABLE>
<CAPTION>
                                Nine months ended September 30,              Three months ended September 30,
                          --------------------------------------------  ------------------------------------------
                                2002              2003         Change         2002              2003       Change
                          ----------------  ----------------- --------  ----------------   --------------- -------
                                               (restated)                                    (restated)
                                     % of              % of    % of                % of              % of   % of
                           ($,000)   sales   ($,000)   sales    2002     ($,000)   sales    ($,000)  sales   2002
                          --------  ------  --------- ------- --------  --------- ------   -------- ------ -------
<S>                       <C>       <C>     <C>       <C>     <C>       <C>       <C>      <C>      <C>    <C>
Sales                     $36,860    100%    $26,837    100%    (27)%    $11,269   100%     $6,684   100%    (41)%

Cost of sales              28,927     78      21,274     79     (26)       8,906    79       5,481    82     (38)
                          --------  ------  --------- -------           --------- ------   -------- ------
   Gross profit             7,933     22       5,563     21     (30)       2,363    21       1,203    18     (49)

R&D expenses                1,266      3         153      1     (88)         256     2          --    --    (100)

SG&A expenses              12,675     34       8,394     31     (34)       3,923    35       1,984    30     (49)

Impairment of goodwill      2,760      7          --     --    (100)       2,760    24          --    --    (100)
                          --------  ------  --------- -------           --------- ------   -------- ------
   Operating loss          (8,768)   (24)     (2,984)   (11)    (66)      (4,576)  (41)       (781)  (12)    (82)

Interest expense, net        (540)    (1)       (679)    (3)     26         (393)   (3)        (56)   (1)    (86)

Other income (loss), net      148      0        (408)    (2)   (376)          56     0        (243)   (4)   (534)

Minority interests            852      2         139      1     (84)         649     6          35     1     (95)

Equity loss in Comverge        --     --      (1,161)    (4)                  --    --        (611)   (9)
                          --------  ------  --------- -------           --------- ------   -------- ------
   Loss before provision
     for income taxes      (8,308)   (23)     (5,193)   (19)    (37)      (4,264)  (38)     (1,656)  (25)    (61)
Provision (benefit) for
income taxes                   64      0           7      0     (92)           7     0         (27)   (0)   (514)
                          --------  ------  --------- -------           --------- ------   -------- ------
   Net loss               $(8,372)   (23)%   $(5,100)   (19)%   (39)     $(4,271)  (38)%   $(1,629)  (24)%   (62)
                          ========  ======  ========= =======           ========= ======   ======== ======
</TABLE>

         SALES.  Sales in the third  quarter  and first nine months of 2003 were
$6.7 million and $26.8  million,  compared to $11.3 million and $36.9 million in
the  same  periods  of  2002,   respectively.   The  decreases   were  primarily
attributable to not consolidating  Comverge sales starting the second quarter of
2003.

         Comverge sales in the first quarter of 2003,  third quarter of 2002 and
first nine months of 2002 were $4.7  million,  $3.3  million and $12.7  million,
respectively.

         Sales in the computer  hardware  segment in the third quarter and first
nine months of 2003 were $3.9 million and $13.0  million,  decreasing by 17% and
3%, from sales of $4.6 million and $13.4  million,  in the same periods of 2002,
respectively. The decrease was attributable to the increased competition and the
continued decline in the hardware market during the second and third quarters of
2003.
         Software  consulting and  development  sales were $2.8 million and $9.1
million  in the third  quarter  and  first  nine  months of 2003,  respectively,
compared to $3.3  million and $10.6  million in the same  periods of 2002.  This
decrease  was  primarily  attributable  to the decrease in  consulting  revenues
resulting from the continued  general weakness in the global hi-tech markets and
in the software consulting and development market in particular.

         GROSS  PROFIT.  Gross  profit in the third  quarter  and the first nine
months of 2003 was $1.2 million and $5.6 million, respectively, compared to $2.4
million and $7.9 million in the same periods of 2002.  The decreases were almost
entirely attributable to not consolidating  Comverge's gross profit starting the
second  quarter  of 2003.  The  gross  profit  margin in the  computer  hardware
segment, slightly increased to 18% in the first nine-months of 2003, compared to
17% in the same period of 2002.  However, in the third quarters of both 2003 and
2002,  the gross profit  margin was stable at 17%. As a result of our  continued
effort to improve the cost structure of the software  consulting and development
segment, gross profit margins increased to 21% and 19%, in the first nine months
and third  quarter of 2003,  respectively,  compared  to 16% and 12% in the same
periods  of  2002.  In  addition,  in  the  third  quarter  of  2002,  we  had a
non-recurring expense of $240,000 for the write down of acquired software.


                                     - 17 -
<PAGE>

         RESEARCH AND DEVELOPMENT EXPENSES ("R&D"). The decrease in R&D expenses
in each  2003  period,  as  compared  to the  comparable  periods  in 2002,  was
primarily  attributable to not consolidating  Comverge's R&D starting the second
quarter of 2003, although R&D in our software consulting and development segment
has ceased as well.

         SELLING,  GENERAL AND ADMINISTRATIVE  EXPENSES  ("SG&A").  In the third
quarter and first nine months of 2003,  SG&A  decreased to $2.0 million and $8.4
million,  respectively,  from $3.9 million and $12.7 million in the same periods
of 2002. The decrease was primarily attributable to not consolidating Comverge's
SG&A,  which was $2.9 million and $1.6 million in the second and third  quarters
of  2002,  respectively.  However,  corporate  SG&A  and  SG&A  in the  software
consulting  and  development  segment  continued  to  decrease  as  well,  as we
continued to reduce our overhead.

         IMPAIRMENT  OF  GOODWILL.  With  the  acquisition  of Endan by our dsIT
subsidiary in December 2001, we recognized goodwill and acquired software valued
at a total of $6.4 million.  This value was supported by third party  valuations
prepared at the time of the acquisition, based on sales and business projections
made at that  time.  Since  then,  the  hi-tech  market in  general  and that of
software  consulting  in  particular  continued  to  deteriorate.  We have  made
concerted  efforts to offset  this  negative  trend with cost  cutting  measures
already implemented.  As we looked forward in September 2002 to the coming year,
the expense recorded reflected our reassessment of the values then recorded with
respect to the entire software  consulting and development segment to reflecting
our sales projections then, based on the same valuation models then employed. We
are confident that the cost cutting  measures  already  implemented will provide
for breakeven and even positive  performance in the coming quarters,  justifying
the remaining goodwill and value attached to this segment.

         INTEREST EXPENSE, NET. Prior to the investment recently secured for our
energy  intelligence   solution  segment,  we  raised  capital  through  issuing
convertible  debentures and utilized lines of credit to finance our  activities.
We incurred  finance  expenses in connection  with the capital raised  including
interest and amortization of non-cash costs associated with the convertible debt
and warrants  issued.  Although the interest  associated with the utilization of
lines of credit is expected to continue at the current level,  the  amortization
expenses are expected to decrease over the coming  quarters.  Of the $721,000 of
interest  expense  incurred  during the first nine months of 2003,  $396,000 was
related to the accretion of discounts and the  amortization  of related costs in
connection with convertible debt and warrants.

         OTHER  INCOME  (EXPENSE),   NET.  We  had  previously  entered  into  a
restricted  stock  purchase  agreement  with the CEO of our energy  intelligence
solutions  segment  subsidiary.  Pursuant  to this  agreement,  we issued to the
segment CEO 50,000 shares of our common stock.  The common stock was paid for by
assigning and endorsing to us a 6% subordinated note, due April 15, 2010, in the
principal  amount of  $297,500.  The note was  issued by Philip  Services  Corp.
(NasdaqNM:  PSCD) in favor  of the  segment  CEO  under a trust  indenture  with
Wilmington  Trust  Company.  PSCD  has  recently  filed  for  bankruptcy  and we
therefore wrote-off this note to other loss in the third quarter of 2003.

         EQUITY LOSS IN COMVERGE.  The equity loss in 2003 was from our formerly
consolidated  subsidiary,  Comverge,  whose  results we account for on an equity
basis  starting  the  second  quarter  of  2003  (see  Note 4 of  our  unaudited
consolidated Financial Statements).  The equity loss for the three and six-month
periods  ended  September  30,  2003 is based on our  share of  Comverge's  $2.3
million and $4.5  million of net losses,  respectively.  Comverge has common and
preferred  shares,  issued to its  investors,  including  DSSI, and our share of
Comverge's  losses is calculated  based on the percentage of our preferred share
investment. Because our common share investment is currently negative, we do not
record equity  losses on our common stock  investment.  As a result,  during the
third  quarter of 2003 and for the period from April 1, 2003 to September 30, we
recorded  equity  losses  of  $0.6  million  and  $1.2  million,   respectively.
Comverge's  increased  losses  in the  third  quarter  of 2003  of $2.3  million
compared  to  $0.6  million  in  the  third  quarter  of  2002,   was  primarily
attributable  to a decrease in sales,  particularly  those related to Comverge's
Gulf Power contract,  where shipments have been suspended.  In addition, SG&A in
Comverge has  increased  primarily  due to increased  advertising  and marketing
expenses, particularly those related to marketing and advertising its new Utah -
PacifiCorp program.


                                     - 18 -
<PAGE>

LIQUIDITY AND CAPITAL RESOURCES

            As of September  30, 2003,  we had working  capital of $1.0 million,
including  $707,000 in unrestricted cash and cash equivalents.  Net cash used in
operating activities in the first nine months of 2003 was $187,000. The net loss
for the period of $5.1  million  included  non-cash  expenses and losses of $1.2
million and an equity loss from Comverge of $1.2 million). The primary source of
our cash provided by operating  activities  during the first nine months of 2003
was collections of trade accounts receivables and other current assets in excess
of reductions in accounts payable and other liabilities,  of $2.2 million,  net.
Net cash  provided by investing  activities  was  $248,000,  primarily  from the
release of previously restricted cash of $4.2 million, of which $3.3 million was
invested in  Comverge.  Net cash used in  financing  activities  of $504,000 was
primarily due to net payments of debt of $541,000.

            The working capital of $1.0 million at September 30, 2003,  included
negative  working  capital of $89,000 in our majority owned Israeli  subsidiary,
dsIT. Due to Israeli tax and company law constraints, as well as the significant
minority  interest in dsIT,  positive working capital and cash flows from dsIT's
operations are not readily available to finance U.S. activities.

            dsIT is  utilizing  approximately  $1.2  million of its $1.6 million
lines of credit as of September 30, 2003. dsIT's lines of credit are denominated
in NIS and bearing an average  interest rate of the Israeli prime rate plus 0.9%
per annum. The Israeli prime rate fluctuates and on September 30, 2003 was 7.9%.
We believe dsIT will have  sufficient  liquidity to finance its activities  from
cash flow from its own operations and available lines of credit over the next 12
months.

            Since April 2003, our formerly  consolidated  subsidiary,  Comverge,
signed and  closed a number of private  equity  financing  transactions  raising
approximately $18.6 million (see Note 3 of our unaudited  Consolidated Financial
Statements).  As a result,  Comverge no longer requires  additional funding from
us. As part of the agreement for the private equity financing, Comverge received
a new $6.5  million  credit  facility,  which  included a $1.5 million term loan
secured by a $1.5 million  restricted  deposit of DSSI at Comverge's new lender.
Comverge has agreed to prepay the term loan and permit  release our $1.5 million
deposit over the 12 months  commencing  December  31,  2003,  subject to certain
conditions (see Note 3 of our unaudited Consolidated  Financial Statements).  We
believe that the proceeds of the financing and new credit  arrangements  provide
sufficient financing for Comverge to independently fund its activities.

            As of  October  31,  2003  our  wholly  owned US  operations  (i.e.,
excluding dsIT and Comverge) had an aggregate of $740,000 in  unrestricted  cash
and cash  equivalents,  reflecting  a $780,000  increase  from the balance as of
December 31, 2002.

           We believe we have  sufficient  liquidity  to  finance  our  US-based
operating  activities and corporate  activities for at least the next 12 months.
We intend to  finance  these  activities  from cash on hand and  operating  cash
flows.


                                     - 19 -
<PAGE>

CONTRACTUAL OBLIGATIONS AND COMMITMENTS

         Our  contractual  obligations  and  commitments  at September 30, 2003,
excluding certain severance arrangements described below,  principally including
obligations  associated  with  our  outstanding  indebtedness,   future  minimum
operating lease obligations and contractual  obligations to our CEO for payments
for his post-retirement consulting services to us, are as set forth in the table
below.


<TABLE>
<CAPTION>
                                                              Cash Payments Due During Year Ending September 30,
                                                          -----------------------------------------------------------
                                                                            (amounts in thousands)
                                                                            ----------------------
                                                             Total        2004      2005      2006      After 2006
                                                             -----        ----      ----      ----      ----------
<S>                                                          <C>         <C>       <C>        <C>            <C>
      Long-term debt related to Israeli operations           $  997      $  468    $  285     $ 181          $  63
      Guarantees                                                558         558        --        --             --
      Operating leases                                        3,362       1,206     1,027       353            776
      Consulting agreement with CEO                           1,572       1,572        --        --             --
                                                             ------      ------    ------     -----          -----
      Total contractual cash obligations                     $6,489      $3,804    $1,312     $ 534          $ 839
                                                             ======      ======    ======     =====          =====
</TABLE>

         We expect to finance these  contractual  commitments  from cash on hand
and cash generated from operations.

         Previously,  we  accrued  a loss  for  contingent  performance  of bank
guarantees.  Our remaining  commitment under these guarantees is $0.6 million at
September 30 2003. We have collateralized a portion of these guarantees by means
of a deposit  of $0.2  million as of  September  30,  2003.  The  obligation  is
presented  as a current  liability,  though it is  uncertain  as to when  actual
payment will be made.


         Under  Israeli  law and  labor  agreements,  dsIT is  required  to make
severance payments to dismissed employees and to employees leaving employment in
certain other  circumstances.  The  obligation  for  severance pay benefits,  as
determined by the Israeli Severance Pay Law, is based upon length of service and
last salary.  These  obligations are  substantially  covered by regular deposits
with recognized severance pay and pension funds and by the purchase of insurance
policies.  As of September 30, 2003, we had a total of $3.2 million in potential
severance obligations,  of which approximately $2.3 million was funded with cash
held by insurance  companies and  approximately  $0.9 million was unfunded.  The
entire $3.2 million was accrued for as of September 30, 2003.

         We are obligated to pay our Chief  Executive  Officer  consulting  fees
over a  seven-year  period upon his  retirement  on  December  31,  2003.  It is
currently  contemplated those payments will begin on January 1, 2004. During the
first four years of the consulting  period,  we will be obligated to pay the CEO
50% of his salary in effect at the time of  termination  and 25% of that  salary
during the last three years of the consulting  period,  plus  contributions to a
non-qualified  defined  contribution   retirement  plan  equal  to  25%  of  the
consulting  fee and benefits  similar to those  received as an employee.  At the
start of the consulting period,  which is expected to begin on January 31, 2004,
we are also  required  to fund  amounts  payable  to the CEO for the term of the
consulting period, by the purchase of an annuity or similar investment  product.
The CEO has  agreed to forgo this  funding  for as long as there is no change in
control in DSSI, as defined in his employment  agreement.  The CEO`s base salary
for 2003 (including cost of living adjustments through the beginning of 2003) is
$474,000.   We  also  have  obligations  under  various   agreements  and  other
arrangements  with  officers  and other  employees  with  respect  to  severance
arrangements and multiyear employment agreements as described below.

         Under an employment agreement with the Chief Financial Officer, we also
have  obligations  to pay severance  upon  termination of his employment for any
reason other than for cause. Under this agreement, we must pay him (i) an amount
equal to 150% of his last  month's  salary  multiplied  by the  number  of years
(including  partial years) that the CFO worked for us, plus (ii) an amount equal
to six times his last month's salary. The severance  obligation would be reduced
by the amount  contributed by us to certain  Israeli pension and severance funds
pursuant to the CFO`s  employment  agreement.  As of  September  30,  2003,  the
unfunded portion of such severance obligation was $36,000.


                                     - 20 -
<PAGE>

         We also have arrangements under an employment  agreement with the Chief
Executive Officer of dsIT to pay severance under certain  circumstances.  If his
employment  agreement is  terminated  by him or by our company for reasons other
than for  cause,  we must pay him an  amount  equal to his last  month's  salary
multiplied by the number of years  (including  partial years) that he worked for
Endan and  dsIT.  Our  severance  obligation  would be  reduced  by the  amounts
contributed by us to certain Israeli pension and severance funds pursuant to his
employment  agreement.  As of September 30, 2003,  the unfunded  portion of such
severance obligation was approximately $33,000.

PAYMENTS TO RELATED PARTIES

         We paid an individual as a  vice-president  (and director in 2002), who
is the son of our Chief Executive Officer,  approximately  $188,000 and $212,000
for the nine months ended  September  30, 2002 and 2003,  respectively.  We also
have  engaged   certain  of  our  directors  and  former   directors  to  render
professional  services  to us.  One of our  former  directors,  who is also  the
son-in-law of our Chief  Executive  Officer,  is principal of a law firm that we
engage to  perform  legal  services  for us. We paid to this firm legal fees and
out-of-pocket disbursements (which included fees and expenses of special counsel
hired on our behalf) of approximately  $580,000 and $306,000 for the nine months
ended September 30, 2002 and 2003,  respectively.  We also previously engaged an
asset  management firm controlled by one of our directors (who resigned in April
2003). This firm provided  discretionary asset management services to us, and in
the nine months ended  September  30, 2002, we paid it fees of $12,000 for asset
management.  The  engagement  with the asset  management  firm was terminated in
September 2002. The chief executive officer of the Company's Israeli  subsidiary
has a loan,  originally made by a company that subsidiary  acquired in 2001. The
loan balance and accrued interest at December 31, 2002 and at September 30, 2003
was $48,000 and $52,000, respectively. The loan has no defined maturity date, is
denominated  in NIS, is linked to the Index and bears  interest at 4% per annum;
the  increase in the loan  balance over the nine month period is entirely due to
the linkage and interest accrual.

           The Company's  Comverge  subsidiary has made loans of $10,000 each to
both our Chief Executive Officer and Chief Financial  Officer.  The loans had an
initial  maturity  date of  January  3, 2002 and were  extended  at that time to
mature on January  3, 2004.  The loans  bear  interest  at 4.25% per annum.  The
balance of each of the loans and  accrued  interest  at  December  31,  2002 and
September 30, 2003 was $12,500 and $13,000, respectively.

RECENTLY ISSUED ACCOUNTING PRONOUNCEMENT

            In May 2003, the Financial  Accounting Standards Board (FASB) issued
Statement of Financial  Accounting  Standards  (SFAS) No. 150,  "Accounting  for
Certain  Instruments with  Characteristics of Both Liabilities and Equity" (SFAS
150). The statement  establishes standards on the classification and measurement
of certain financial  instruments with  characteristics  of both liabilities and
equity and requires that such  instruments  be classified  as  liabilities.  The
standard is effective for financial  instruments  entered into or modified after
May 31, 2003,  and is otherwise  effective at the beginning of the first interim
period  beginning  after  September  15,  2003.  Adoption of the standard is not
expected to have an impact on the Company's  consolidated  financial position or
results of operations.


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<PAGE>

ITEM 3.    QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

            In the normal course of business,  we are exposed to fluctuations in
Israeli  interest rates on amounts  outstanding on our line of credit and a term
loan used to finance our Israeli  operations.  As of September  30,  2003,  $1.2
million  was  outstanding  on  our  line  of  credit  and we  had  $1.0  million
outstanding  under the term loan. Of our $1.0 million term loan (which is from a
bank  located in Israel and is  denominated  in NIS),  $130,000 is linked to the
Israeli consumer price index and $0.9 million is unlinked.

            Additionally,  our monetary assets and liabilities (net liability of
approximately  $1.3  million) in Israel are exposed to  fluctuations  in foreign
currency exchange rates.  During the second quarter,  we recorded exchange gains
of  $53,000  due to a 3.0%  appreciation  of the NIS in  relation  to the dollar
during the period.  Since the end of the third  quarter  until October 31, 2003,
the dollar has strengthened in relation to the NIS by 1.1%.

            We do not employ specific strategies,  such as the use of derivative
instruments or hedging, to manage our interest rate or foreign currency exchange
rate exposures.

IMPACT OF INFLATION AND CURRENCY FLUCTUATIONS

            A majority of our sales are  denominated  in dollars.  The remaining
portion  is  primarily  denominated  in NIS,  linked to the  dollar.  Such sales
transactions  are  negotiated in dollars;  however,  for the  convenience of the
customer they are settled in NIS.  These  transaction  amounts are linked to the
dollar  between the date the  transactions  are entered into until the date they
are  effected  and billed.  From the time these  transactions  are  effected and
billed,  through the date of  settlement,  amounts are primarily  unlinked.  The
majority of our expenses in Israel are in NIS,  while a portion is in dollars or
dollar-linked NIS.

            The  dollar  cost  of our  operations  in  Israel  may be  adversely
affected  in the future by a  revaluation  of the NIS in relation to the dollar,
should it be  significantly  different from the rate of inflation.  In the first
nine  months of 2003 the  appreciation  of the NIS  against the dollar was 6.2%,
whereas during the first nine months of 2002 the  devaluation of the NIS against
the dollar was 7.9%. During the period from October 1 to October 31, 2003, there
was a  devaluation  of the NIS  against  the  dollar of 1.1%.  In the first nine
months of 2003,  the rate of  deflation  in Israel was 1.5% whereas in the first
nine months of 2002, the rate of inflation was 7.0%.

            As of September 30, 2003,  virtually all of our monetary  assets and
liabilities  that were not  denominated  in  dollars or  dollar-linked  NIS were
denominated in NIS, and the net amount of such monetary  assets and  liabilities
was not material.  In the event that in the future we have material net monetary
assets or liabilities  that are not denominated in  dollar-linked  NIS, such net
assets or liabilities would be subject to the risk of currency fluctuations.

ITEM 4.    CONTROLS AND PROCEDURES

EVALUATION OF CONTROLS AND PROCEDURES

         As of the end of the period  covered by this report,  we carried out an
evaluation,  under the supervision and with the participation of our management,
including the Chief Executive  Officer and the Chief Financial  Officer,  of the
design and operation of our disclosure  controls and  procedures.  Based on this
evaluation,  our Chief Executive  Officer and Chief Financial  Officer concluded
that our  disclosure  controls  and  procedures  are  effective  for  gathering,
analyzing  and  disclosing  the  information  we are required to disclose in the
reports  we file  under the  Securities  Exchange  Act of 1934,  within the time
periods specified in the SEC's rules and forms.

CHANGES IN CONTROLS AND PROCEDURES

         During the period  covered by this report,  we did not have any changes
to our internal controls over financial reporting that have materially affected,
or that are reasonably likely to materially  affect,  our internal controls over
financial reporting.


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<PAGE>

                           PART II - OTHER INFORMATION



ITEM 6.   EXHIBITS AND REPORTS ON FORM 8-K

           (a)  Exhibits

                31.1     Certification  of Chief Executive  Officer  pursuant to
                         Section 302 of Sarbanes-Oxley Act of 2002.

                31.2     Certification  of Chief Financial  Officer  pursuant to
                         Section 302 of Sarbanes-Oxley Act of 2002.

                32.1     Certification  of Chief Executive  Officer  pursuant to
                         Section 906 of Sarbanes-Oxley Act of 2002.

                32.2     Certification  of Chief Financial  Officer  pursuant to
                         Section 906 of Sarbanes-Oxley Act of 2002.

           (b)  Reports on Form 8-K

                Report on Form 8-K,  dated August 18, 2003,  filed on August 19,
                2003, relating to the announcement of our results for the second
                quarter and six months ended June 30, of 2003.


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<PAGE>

                                   SIGNATURES

         Pursuant to the  requirements  of the Securities  Exchange Act of 1934,
the  Registrant  has duly caused this Amendment No. 1 to be signed on its behalf
by its Principal Financial Officer thereunto duly authorized.


                                  DATA SYSTEMS & SOFTWARE INC.

Dated:  March 30, 2004

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


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