----

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**SECURITIES        AND EXCHANGE COMMISSION**

**WASHINGTON,        D.C. 20549**

**FORM        10-Q**

**QUARTERLY        REPORT PURSUANT TO SECTION 13 OR 15(D) OF**

**THE        SECURITIES EXCHANGE ACT OF 1934**

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**DATA        SYSTEMS & SOFTWARE INC.**

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|  **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**

** **

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**DATA        SYSTEMS & SOFTWARE INC. AND SUBSIDIARIES**

**TABLE        OF CONTENTS**

| **PART                    I.****Financial Information** |                                                                                                   |
|---------------------------------------------------------|--------------------------------------------------------------------------------------------------------|
|                                                    |                                                                                                   |   |
| Item 1.                                                 | Unaudited                    Consolidated Financial Statements                                         |   |
|                                                    |                                                                                                   |   |
|                                                    | Consolidated                    Balance Sheets                                                         |   |
|                                                    | as                    of December 31, 2004 and June 30, 2005                                           | 1 |
|                                                    |                                                                                                   |   |
|                                                    | Consolidated                    Statements of Operations and Comprehensive Loss                        |   |
|                                                    | for                    the six and three month periods ended June 30, 2004 and                    2005 | 2 |
|                                                    |                                                                                                   |   |
|                                                    | Consolidated                    Statement of Changes in Shareholders’ Equity                     |   |
|                                                    | for                    the six month period ended June 30, 2005                                        | 3 |
|                                                    |                                                                                                   |   |
|                                                    | Consolidated                    Statements of Cash Flows                                               |   |
|                                                    | for                    the six month periods ended June 30, 2004 and 2005                              | 4 |
|                                                    |                                                                                                   |   |
|                                                    | Notes                    to Consolidated Financial Statements                                          | 6 |
|                                                    |                                                                                                   |   |
| Item                    2.                              | Management’s                      Discussion and Analysis of Financial Condition                 |   |
|                                                    | and                      Results of Operations                                                         | 11 |
|                                                    |                                                                                                   |   |
| Item                    3.                              | Quantitative                    and Qualitative Disclosures about Market Risk                          | 15 |
|                                                    |                                                                                                   |   |
| Item                    4.                              | Controls                    and Procedures                                                             | 15 |
|                                                    |                                                                                                   |   |
| **PART                    II. Other Information**       |                                                                                                   |
|                                                    |                                                                                                   |   |
| Item                    1.                              | Legal                    Proceedings                                                                   | 16 |
|                                                    |                                                                                                   |   |
| Item                    6.                              | Exhibits                                                                                               | 16 |
|                                                    |                                                                                                   |
| **Signatures**                                          | 17                                                                                                     |

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**DATA        SYSTEMS & SOFTWARE INC. AND SUBSIDIARIES**

**Consolidated        Balance Sheets**

| **ASSETS**                                                                                                                                          |   |   | **As                      of****December                      31, 2004**  |   |   | **As                      of****June                      30,****2005**  |   |
|-----------------------------------------------------------------------------------------------------------------------------------------------------|--------|--------|--------------------------------------------------------------------------------|--------|--------|-------------------------------------------------------------------------------|--------|
| Current                      assets:                                                                                                                |   |   |                                                                           |   |   | (unaudited)                                                              |   |
| Cash                      and cash equivalents                                                                                                 |   | $      | 685                                                                            |   | $      | 265                                                                           |   |
| Short-term                      bank deposits                                                                                                  |   |   | 72                                                                             |   |   | --                                                                            |   |
| Restricted                      cash                                                                                                           |   |   | 354                                                                            |   |   | 352                                                                           |   |
| Accounts                      receivable, net                                                                                                  |   |   | 6,069                                                                          |   |   | 6,021                                                                         |   |
| Unbilled                      work-in-process                                                                                                  |   |   | 533                                                                            |   |   | 588                                                                           |   |
| Inventory                                                                                                                                      |   |   | 61                                                                             |   |   | 63                                                                            |   |
| Other                      current assets                                                                                                      |   |   | 540                                                                            |   |   | 610                                                                           |   |
| Total                      current assets                                                                                                      |   |   | 8,314                                                                          |   |   | 7,899                                                                         |   |
| Property                      and equipment, net                                                                                                    |   |   | 649                                                                            |   |   | 598                                                                           |   |
| Other                      assets                                                                                                                   |   |   | 737                                                                            |   |   | 730                                                                           |   |
| Funds                      in respect of employee termination benefits                                                                              |   |   | 2,836                                                                          |   |   | 2,748                                                                         |   |
| Goodwill                                                                                                                                            |   |   | 4,408                                                                          |   |   | 4,151                                                                         |   |
| Other                      intangible assets, net                                                                                                   |   |   | 81                                                                             |   |   | 61                                                                            |   |
| Total                      assets                                                                                                              |   | $      | 17,025                                                                         |   | $      | 16,187                                                                        |   |
| **LIABILITIES                      AND SHAREHOLDERS’ EQUITY**                                                                                 |   |   |                                                                           |   |   |                                                                          |   |
| Current                      liabilities:                                                                                                           |   |   |                                                                           |   |   |                                                                          |   |
| Short-term                      bank credit                                                                                                    |   | $      | 729                                                                            |   | $      | 858                                                                           |   |
| Current                      maturities of long-term debt                                                                                      |   |   | 466                                                                            |   |   | 401                                                                           |   |
| Related                      Party - Note payable                                                                                              |   |   | --                                                                             |   |   | 100                                                                           |   |
| Trade                      accounts payable                                                                                                    |   |   | 2,283                                                                          |   |   | 2,147                                                                         |   |
| Accrued                      payroll, payroll taxes and social benefits                                                                        |   |   | 1,735                                                                          |   |   | 1,715                                                                         |   |
| Other                      current liabilities                                                                                                 |   |   | 2,227                                                                          |   |   | 2,326                                                                         |   |
| Total                      current liabilities                                                                                                 |   |   | 7,440                                                                          |   |   | 7,547                                                                         |   |
| Long-term                      liabilities:                                                                                                         |   |   |                                                                           |   |   |                                                                          |   |
| Investment                      in Comverge, net                                                                                               |   |   | 1,444                                                                          |   |   | 1,824                                                                         |   |
| Long-term                      debt                                                                                                            |   |   | 201                                                                            |   |   | 166                                                                           |   |
| Liability                      for employee termination benefits                                                                               |   |   | 4,279                                                                          |   |   | 4,270                                                                         |   |
| Other                      liabilities                                                                                                         |   |   | 65                                                                             |   |   | 21                                                                            |   |
| Total                      long-term liabilities                                                                                               |   |   | 5,989                                                                          |   |   | 6,281                                                                         |   |
| Minority                      interests                                                                                                        |   |   | 1,471                                                                          |   |   | 1,437                                                                         |   |
| Shareholders’                      equity:                                                                                                    |   |   |                                                                           |   |   |                                                                          |   |
| Common                      stock - $0.01 par value per share:                                                                                      |   |   |                                                                           |   |   |                                                                          |   |
| Authorized                      - 20,000,000 shares; Issued - 8,937,395 shares atDecember                      31, 2004 and June 30, 2005      |   |   | 88                                                                             |   |   | 88                                                                            |   |
| Additional                      paid-in capital                                                                                                |   |   | 39,733                                                                         |   |   | 39,733                                                                        |   |
| Warrants                                                                                                                                       |   |   | 461                                                                            |   |   | 461                                                                           |   |
| Deferred                      compensation                                                                                                     |   |   | (59                                                                            | )      |   | (47                                                                           | )      |
| Accumulated                      deficit                                                                                                       |   |   | (34,290                                                                        | )      |   | (35,303                                                                       | )      |
| Treasury                      stock, at cost -820,704 shares at December 31, 2004 and June                      30,                      2005  |   |   | (3,791                                                                         | )      |   | (3,791                                                                        | )      |
| Accumulated                      other comprehensive loss                                                                                      |   |   | (17                                                                            | )      |   | (219                                                                          | )      |
| Total                      shareholders’ equity                                                                                          |   |   | 2,125                                                                          |   |   | 922                                                                           |   |
| Total                      liabilities and shareholders’ equity                                                                          |   | $      | 17,025                                                                         |   | $      | 16,187                                                                        |   |

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**DATA        SYSTEMS & SOFTWARE INC. AND SUBSIDIARIES**

**Consolidated        Statements of Operations and Comprehensive Loss **

|                                                                                                                   |   | **Six                  months ended****June                  30,** |   | **Three                  months ended****June                  30,** |   |
|------------------------------------------------------------------------------------------------------------------------|--------|--------------------------------------------------------------------|--------|----------------------------------------------------------------------|--------|
|                                                                                                                   |   | **2004**                                                           |   | **2005**                                                             |   | **2004** |   | **2005** |   |
| Sales:                                                                                                                 |   |                                                               |   |                                                                 |   |   |   |   |   |
| Products                                                                                                          |   | $                                                                  | 8,156  |                                                                 | $      | 9,053 |   | $ | 4,123 |   | $ | 3,925 |   |
| Services                                                                                                          |   |                                                               | 4,927  |                                                                 |   | 4,947 |   |   | 2,467 |   |   | 2,359 |   |
| Projects                                                                                                          |   |                                                               | 1,472  |                                                                 |   | 1,657 |   |   | 710 |   |   | 814 |   |
| Total                  sales                                                                                           |   |                                                               | 14,555 |                                                                 |   | 15,657 |   |   | 7,300 |   |   | 7,098 |   |
| Cost                  of sales:                                                                                        |   |                                                               |   |                                                                 |   |   |   |   |   |   |   |   |   |
| Products                                                                                                          |   |                                                               | 6,914  |                                                                 |   | 7,422 |   |   | 3,549 |   |   | 3,237 |   |
| Services                                                                                                          |   |                                                               | 3,379  |                                                                 |   | 3,855 |   |   | 1,684 |   |   | 1,871 |   |
| Projects                                                                                                          |   |                                                               | 1,186  |                                                                 |   | 1,143 |   |   | 541 |   |   | 603 |   |
| Total                  cost of sales                                                                                   |   |                                                               | 11,479 |                                                                 |   | 12,420 |   |   | 5,774 |   |   | 5,711 |   |
| Gross                  profit                                                                                     |   |                                                               | 3,076  |                                                                 |   | 3,237 |   |   | 1,526 |   |   | 1,387 |   |
| Operating                  expenses:                                                                                   |   |                                                               |   |                                                                 |   |   |   |   |   |   |   |   |   |
| Research                  and development expenses                                                                |   |                                                               | --     |                                                                 |   | 26 |   |   | -- |   |   | 17 |   |
| Selling,                  marketing, general and administrative expenses                                          |   |                                                               | 3,328  |                                                                 |   | 3,614 |   |   | 1,498 |   |   | 1,722 |   |
| Total                  operating expenses                                                                              |   |                                                               | 3,328  |                                                                 |   | 3,640 |   |   | 1,498 |   |   | 1,739 |   |
| Operating                  income (loss)                                                                          |   |                                                               | (252   | )                                                                    |   | (403 | ) |   | 28 |   |   | (352 | ) |
| Interest                  income                                                                                  |   |                                                               | 77     |                                                                 |   | 4 |   |   | 75 |   |   | 2 |   |
| Interest                  expense                                                                                 |   |                                                               | (86    | )                                                                    |   | (98 | ) |   | (29 | ) |   | (43 | ) |
| Other                  income, net                                                                                |   |                                                               | 237    |                                                                 |   | 60 |   |   | 136 |   |   | 55 |   |
| Income                  (loss) before taxes on income                                                        |   |                                                               | (24    | )                                                                    |   | (437 | ) |   | 210 |   |   | (338 | ) |
| Taxes                  on income                                                                                  |   |                                                               | (20    | )                                                                    |   | 137 |   |   | (13 | ) |   | 40 |   |
| Income                  (loss) from operations of the Company and its consolidated                  subsidiaries  |   |                                                               | (4     | )                                                                    |   | (574 | ) |   | 223 |   |   | (378 | ) |
| Share                  of losses in Comverge                                                                      |   |                                                               | (684   | )                                                                    |   | (380 | ) |   | (331 | ) |   | (179 | ) |
| Minority                  interests                                                                               |   |                                                               | (48    | )                                                                    |   | (59 | ) |   | (33 | ) |   | (17 | ) |
| Net                  loss from continuing operations                                                                   |   |                                                               | (736   | )                                                                    |   | (1,013 | ) |   | (141 | ) |   | (574 | ) |
| Net                  income from discontinued operations, net                  of tax                             |   |                                                               | 348    |                                                                 |   | -- |   |   | 348 |   |   | -- |   |
| Net                  income (loss)                                                                                |   |                                                               | (388   | )                                                                    |   | (1,013 | ) |   | 207 |   |   | (574 | ) |
| Other                  comprehensive income (loss), net of tax:                                                        |   |                                                               |   |                                                                 |   |   |   |   |   |   |   |   |   |
| Differences                  from translation of financial statements of subsidiaries                             |   |                                                               | (170   | )                                                                    |   | (202 | ) |   | 26 |   |   | (161 | ) |
| Comprehensive                  income (loss)                                                                      |   | $                                                                  | (558   | )                                                                    | $      | (1,215 | ) | $ | 233 |   | $ | (735 | ) |
| Basic                  and diluted net income (loss) per share:                                                        |   |                                                               |   |                                                                 |   |   |   |   |   |   |   |   |   |
| Loss                  per share from continuing operations                                                        |   | $                                                                  | (0.09  | )                                                                    | $      | (0.12 | ) | $ | (0.01 | ) | $ | (0.07 | ) |
| Discontinued                  operations                                                                          |   |                                                               | 0.04   |                                                                 |   | -- |   |   | 0.04 |   |   | -- |   |
| Basic                  and diluted net income (loss) per share                                                    |   | $                                                                  | (0.05  | )                                                                    | $      | (0.12 | ) | $ | 0.03 |   | $ | (0.07 | ) |
| Weighted                  average number of shares outstanding:                                                        |   |                                                               |   |                                                                 |   |   |   |   |   |   |   |   |   |
| Basic                  and diluted                                                                                |   |                                                               | 7,918  |                                                                 |   | 8,117 |   |   | 7,922 |   |   | 8,117 |   |

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**DATA SYSTEMS & SOFTWARE INC. AND      SUBSIDIARIES**
**Consolidated        Statement of Changes in Shareholders’ Equity **

|                                                                                    | Number of Shares |   | Common                    Stock |   | AdditionalPaid-InCapital |   | Warrants                 |   | Stock-Based                    Deferred                    Compensation |   | Accumulated                    Deficit |   | Treasury                    Stock |   | Accumulated                    Other                    Comprehensive                    Loss |   | Total   |
|-----------------------------------------------------------------------------------------|----------------------------|--------|---------------------------------|--------|--------------------------|--------|--------------------------|--------|-------------------------------------------------------------------------|--------|----------------------------------------|--------|-----------------------------------|--------|-----------------------------------------------------------------------------------------------|--------|---------|
|                                                                                    |                       |   |                            |   |                     |   |                     |   |                                                                    |   |                                   |   |                              |   |                                                                                          |   |    |
| Balances                    as of December                    31, 2004 (audited)        | 8,937                      |   | $                    88         |   | $39,733                  |   | $                    461 |   | $(59)                                                                   |   | $(34,290)                              |   | $(3,791)                          |   | $                    (17)                                                                     |   | $2,125  |
|                                                                                    |                       |   |                            |   |                     |   |                     |   |                                                                    |   |                                   |   |                              |   |                                                                                          |   |    |
| Amortization                    of stock-based deferred compensation                    |                       | -      | -                               |   | -                        |   | -                        |   | 12                                                                      |   | -                                      |   | -                                 |   | -                                                                                             |   | 12      |
|                                                                                    |                       |   |                            |   |                     |   |                     |   |                                                                    |   |                                   |   |                              |   |                                                                                          |   |    |
| Net                    loss                                                             | -                          |   | -                               |   | -                        |   | -                        |   | -                                                                       |   | (1,013)                                |   | -                                 |   | -                                                                                             |   | (1,013) |
|                                                                                    |                       |   |                            |   |                     |   |                     |   |                                                                    |   |                                   |   |                              |   |                                                                                          |   |    |
| Differences                    from translation of financial statements of subsidiaries | -                          |   | -                               |   | -                        |   | -                        |   | -                                                                       |   | -                                      |   | -                                 |   | (202)                                                                                         |   | (202)   |
|                                                                                    |                       |   |                            |   |                     |   |                     |   |                                                                    |   |                                   |   |                              |   |                                                                                          |   |    |
| Balances                    as ofJune                    30, 2005                       | 8,937                      |   | $                    88         |   | $39,733                  |   | $                    461 |   | $(47)                                                                   |   | $(35,303)                              |   | $(3,791)                          |   | $(219)                                                                                        |   | $922    |

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**DATA SYSTEMS & SOFTWARE INC. AND      SUBSIDIARIES**
**Consolidated        Statements of Cash Flows **

|                                                                                                                                                      |   | **Six                  months ended June 30,** |   |
|-----------------------------------------------------------------------------------------------------------------------------------------------------------|--------|------------------------------------------------|--------|
|                                                                                                                                                      |   | **2004**                                       |   | **2005** |   |
|                                                                                                                                                      |   |                                           |   |   |   |
| Cash                  flows used in operating activities:                                                                                                 |   |                                           |   |   |   |
| Net                  loss                                                                                                                            |   | $                                              | (388   | ) | $ | (1,013 | ) |
| Adjustments                  to reconcile net loss to net cash provided by (used in) operating                  activities                  - Appendix A: |   |                                           | 251    |   |   | 364 |   |
| Net                  cash used in operating activities                                                                                               |   |                                           | (137   | ) |   | (649 | ) |
| Cash                  flows provided by (used in) investing activities:                                                                                   |   |                                           |   |   |   |   |   |
| Restricted                  cash                                                                                                                     |   |                                           | 6      |   |   | 2 |   |
| Utilization                  of employee termination benefits                                                                                        |   |                                           | 122    |   |   | 157 |   |
| Amounts                  funded for employee termination benefits                                                                                    |   |                                           | (324   | ) |   | (69 | ) |
| Maturity                  of short-term deposits                                                                                                     |   |                                           | --     |   |   | 72 |   |
| Proceeds                  from sale of property and equipment                                                                                        |   |                                           | 30     |   |   | 23 |   |
| Acquisitions                  of property and equipment                                                                                              |   |                                           | (54    | ) |   | (117 | ) |
| Net                  cash provided by (used in) investing activities                                                                                 |   |                                           | (220   | ) |   | 68 |   |
| Cash                  flows provided by (used in) financing activities:                                                                                   |   |                                           |   |   |   |   |   |
| Short-term                  debt borrowings (repayments), net                                                                                        |   |                                           | (71    | ) |   | 129 |   |
| Proceeds                  from note payable to a related party                                                                                       |   |                                           | --     |   |   | 350 |   |
| Repayment                  of note payable to a related party                                                                                        |   |                                           | --     |   |   | (250 | ) |
| Proceeds                  from long-term debt                                                                                                        |   |                                           | --     |   |   | 90 |   |
| Repayments                  of long-term debt                                                                                                        |   |                                           | (323   | ) |   | (158 | ) |
| Exercise                  of options                                                                                                                 |   |                                           | 35     |   |   | -- |   |
| Net                  cash provided by (used in) financing activities                                                                                 |   |                                           | (359   | ) |   | 161 |   |
| Net                  (decrease) increase in cash and cash equivalents                                                                                |   |                                           | (716   | ) |   | (420 | ) |
| Cash                  and cash equivalents at beginning of period                                                                                    |   |                                           | 1,213  |   |   | 685 |   |
| Cash                  and cash equivalents at end of period                                                                                          |   | $                                              | 497    |   | $ | 265 |   |
| Supplemental                  cash flow information:                                                                                                      |   |                                           |   |   |   |   |   |
| Cash                  paid during period for interest                                                                                                |   | $                                              | 78     |   | $ | 64 |   |
| Cash                  paid during period for income taxes                                                                                            |   | $                                              | 23     |   | $ | 17 |   |
| Non-cash                  investing and financing activities:                                                                                             |   |                                           |   |   |   |   |   |
| Adjustment                  of treasury stock and additional paid-in-capital with respect to                  options                  exercised     |   | $                                              | 83     |   |   | - |   |

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**DATA        SYSTEMS & SOFTWARE INC. AND SUBSIDIARIES**

**Consolidated        Statements of Cash Flows - Appendix A **

|                                                                                                                                                             |   | **Six                  months ended June 30,** |   |
|------------------------------------------------------------------------------------------------------------------------------------------------------------------|--------|------------------------------------------------|--------|
|                                                                                                                                                             |   | **2004**                                       |   | **2005** |   |
|                                                                                                                                                             |   |                                           |   |   |   |
| Adjustments                  to reconcile net loss to net cash (used in) provided by operating                  activities:                                      |   |                                           |   |   |   |
| Depreciation                  and amortization                                                                                                              |   |                                           | 122    |   |   | 128 |   |
| Minority                  interests                                                                                                                         |   |                                           | 48     |   |   | 59 |   |
| Share                  in losses of Comverge                                                                                                                |   |                                           | 684    |   |   | 380 |   |
| Deferred                  taxes                                                                                                                             |   |                                           | (38    | ) |   | 7 |   |
| Increase                  (decrease) in liability for employee termination benefits                                                                         |   |                                           | 335    |   |   | (9 | ) |
| Gain                  on disposition of property and equipment                                                                                              |   |                                           | (4     | ) |   | (2 | ) |
| Amortization                  of deferred compensation                                                                                                      |   |                                           | --     |   |   | 12 |   |
| Other                                                                                                                                                       |   |                                           | (34    | ) |   | (31 | ) |
| Change                  in operating assets and liabilities:                                                                                                     |   |                                           |   |   |   |   |   |
| Decrease                  (increase) in accounts receivable, unbilled work-in-process and                  other                  current and other assets  |   |                                           | 674    |   |   | (77 | ) |
| (Decrease)                  increase in inventory                                                                                                           |   |                                           | (42    | ) |   | (2 | ) |
| Decrease                  in accounts payable and other liabilities                                                                                         |   |                                           | (1,494 | ) |   | (101 | ) |
| Total                                                                                                                                                       |   | $                                              | 251    |   | $ | 364 |   |

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**DATA        SYSTEMS & SOFTWARE INC. AND SUBSIDIARIES**

**Notes        to Consolidated Financial Statements **

**Note        1: Basis of Presentation**

** **

**Note        2: Financing of Operations**

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**DATA        SYSTEMS & SOFTWARE INC. AND SUBSIDIARIES**

**Notes        to Consolidated Financial Statements **

**Note        3: Investment in Comverge**

|  **Results                  of Operations** |   |  Six                  months endedJune                  30, 2005 |   |  Three                  months endedJune                  30, 2005 |   |
|--------------------------------------------------|--------|-----------------------------------------------------------------------|--------|-------------------------------------------------------------------------|--------|
|                                             |   |                                                                  |   |                                                                    |   |   |   |
| Sales                                            |   | $                                                                     | 7,834  |                                                                    | $      | 3,933 |   |
| Gross                  profit                    |   |                                                                  | 3,309  |                                                                    |   | 1,673 |   |
| Net                  loss                        |   |                                                                  | (6,115 | )                                                                       |   | (3,134 | ) |

|                                              |   | Comverge                  common stock |   | Comverge                  preferred stock |   | Net                  investment in Comverge |   |
|---------------------------------------------------|--------|----------------------------------------|--------|-------------------------------------------|--------|---------------------------------------------|--------|
|                                              |   |                                   |   |                                      |   |                                        |   |   |   |   |
| Balances                  as of December 31, 2004 |   | $                                      | (1,824 | )                                         | $      | 380                                         |   | $ | (1,444 | ) |
| Equity                  loss in Comverge          |   |                                   | --     |                                      |   | (380                                        | )      |   | (380 | ) |
| Balances                  as of June 30, 2005     |   | $                                      | (1,824 | )                                         | $      | --                                          |   | $ | (1,824 | ) |

**Note        4--Goodwill and Other Intangible Assets**

**Note        5: Warranty Provision**

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**DATA SYSTEMS & SOFTWARE INC. AND SUBSIDIARIES**
**Notes        to Consolidated Financial Statements **

**Note        6: **
**Stock-Based        Compensation**

|                                                                                                                                                                   |   | Six                    months ended June 30, |   | Three                    months ended June 30, |    |
|------------------------------------------------------------------------------------------------------------------------------------------------------------------------|--------|----------------------------------------------|--------|------------------------------------------------|---------|
|                                                                                                                                                                   |   | 2004                                         |   | 2005                                           |    | 2004 |   | 2005 |   |
| Net                    income (loss) as reported                                                                                                                       |   | $                                       | (388   | )                                              | $  | (1,013 | ) | $ | 207 |   | $  | (574 | ) |
| Plus:                    Stock-based employee and director compensation expense included                    in                    reported net loss                    |   |                                         | -      |                                           |    | 12 |   |   | - |   |   | 6 |   |
| Less:                    Total stock-based employee compensation expense determined under                    fair                    value based method for all awards |   |                                         | 61     |                                           |    | 162 |   |   | 46 |   |   | 81 |   |
| Pro                    forma net income (loss)                                                                                                                         |   | $                                       | (449   | )                                              | $  | (1,163 | ) | $ | 161 |   | $  | (649 | ) |
| Net                    income (loss) per share:                                                                                                                        |   |                                         |   |                                           |    |   |   |   |   |   |   |   |   |
| Basic                    and diluted – as reported                                                                                                               |   | $                                       | (0.05  | )                                              | $  | (0.12 | ) | $ | 0.03 |   | $  | (0.07 | ) |
| Basic                    and diluted – pro forma                                                                                                                 |   | $                                       | (0.06  | )                                              | $  | (0.14 | ) | $ | 0.02 |   | $  | (0.08 | ) |

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**DATA        SYSTEMS & SOFTWARE INC. AND        SUBSIDIARIES**

**Notes        to Consolidated Financial Statements **

**Note        7: Segment Information**

|                                                     |   | **Software****Consulting                  and****Development** |   |  **Computer****Hardware** |    | **Other****(*)** |   |  **Total** |   |
|----------------------------------------------------------|--------|----------------------------------------------------------------|--------|--------------------------------|---------|------------------|--------|-----------------|--------|
| Six                  months ended June 30, 2005:         |   |                                                           |   |                           |    |             |   |            |   |
| Revenues                  from external customers        |   | $                                                              | 6,490  |                           | $       | 9,146            |   | $               | 21     |   | $ | 15,657 |   |
| Intersegment                  revenues                   |   |                                                           | -      |                           |    | 15               |   |            | -      |   |   | 15 |   |
| Segment                  gross profit                    |   |                                                           | 1,540  |                           |    | 1,676            |   |            | 21     |   |   | 3,237 |   |
| Segment                  income                          |   |                                                           | 63     |                           |    | 85               |   |            | 16     |   |   | 164 |   |
|  Six                  months ended June 30, 2004:   |   |                                                           |   |                           |    |             |   |            |   |   |   |   |   |
| Revenues                  from external customers        |   | $                                                              | 5,764  |                           | $       | 8,766            |   | $               | 25     |   | $ | 14,555 |   |
| Intersegment                  revenues                   |   |                                                           | -      |                           |    | -                |   |            | -      |   |   | - |   |
| Segment                  gross profit                    |   |                                                           | 1,258  |                           |    | 1,793            |   |            | 25     |   |   | 3,076 |   |
| Segment                  income                          |   |                                                           | 185    |                           |    | 291              |   |            | 7      |   |   | 483 |   |
|  Three                  months ended June 30, 2005: |   |                                                           |   |                           |    |             |   |            |   |   |   |   |   |
| Revenues                  from external customers        |   | $                                                         | 3,116  |                           | $  | 3,965            |   | $          | 17     |   | $  | 7,098 |   |
| Intersegment                  revenues                   |   |                                                           | -      |                           |    | 5                |   |            | -      |   |   | 5 |   |
| Segment                  gross profit                    |   |                                                           | 667    |                           |    | 703              |   |            | 17     |   |   | 1,387 |   |
| Segment                  income (loss)                   |   |                                                           | (4     | )                              |    | (53              | )      |            | 14     |   |   | (43 | ) |
|  Three                  months ended June 30, 2004: |   |                                                           |   |                           |    |             |   |            |   |   |   |   |   |
| Revenues                  from external customers        |   | $                                                              | 2,854  |                           | $       | 4,427            |   | $               | 19     |   | $ | 7,300 |   |
| Intersegment                  revenues                   |   |                                                           | -      |                           |    | -                |   |            | -      |   |   | - |   |
| Segment                  gross profit                    |   |                                                           | 664    |                           |    | 843              |   |            | 19     |   |   | 1,526 |   |
| Segment                  income                          |   |                                                           | 122    |                           |    | 93               |   |            | 10     |   |   | 225 |   |

**Reconciliation        of Segment Loss to Consolidated Net Loss**

|                                                         |   | Six                  months ended June                  30, |   | Three                  months ended June                  30, |   |
|--------------------------------------------------------------|--------|-------------------------------------------------------------|--------|--------------------------------------------------------------------|--------|
|                                                         |   |                                                        | 2004   |                                                               |   | 2005 |   |   | 2004 |   |   | 2005 |   |
| Total                  income (loss) for reportable segments |   | $                                                           | 476    |                                                               | $      | 148 |   | $ | 215 |   | $ | (57 | ) |
| Other                  operational segment income            |   |                                                        | 7      |                                                               |   | 16 |   |   | 10 |   |   | 14 |   |
| Total                  operating income (loss)               |   |                                                        | 483    |                                                               |   | 164 |   |   | 225 |   |   | (43 | ) |
| Net                  loss of corporate headquarters          |   |                                                        | (535   | )                                                                  |   | (797 | ) |   | (35 | ) |   | (352 | ) |
| Share                  of losses in Comverge                 |   |                                                        | (684   | )                                                                  |   | (380 | ) |   | (331 | ) |   | (179 | ) |
| Discontinued                  operations income              |   |                                                        | 348    |                                                               |   | - |   |   | 348 |   |   | - |   |
| Total                  consolidated net income (loss)        |   | $                                                           | (388   | )                                                                  | $      | (1,013 | ) | $ | 207 |   | $ | (574 | ) |

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**DATA        SYSTEMS & SOFTWARE INC. AND SUBSIDIARIES**

**Notes        to Consolidated Financial Statements **

**(in        thousands except per share data)**

**Note        8: Subsequent Event**

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**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**

**Overview        and Trend Information**

*Software        Consulting and Development*

| -   | Diver                  Detection Sonar (DDS); |
|---------------|-----------------------------------------------|

| -   | Mobile                  Acoustic Range (MAR); |
|---------------|-----------------------------------------------|

| -   | Harbor                  Surveillance System (HSS); and |
|---------------|--------------------------------------------------------|

| -   | Generic                  sonar simulator solutions, sonar system upgrades and underwater                  navigation                  systems. |
|---------------|------------------------------------------------------------------------------------------------------------------------------------------------|

| -   | OncoProTM,                    a cutting edge solution that integrating patient data with medical                    knowledge bases, and enabling simplified management of daily                    ward                    functions and creation of complex protocols,                    and; |
|---------------|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

| -   | EasyBill,                      a customer care and billing system for small and midsize                      companies. |
|---------------|-------------------------------------------------------------------------------------------------------------------------|

*Computer        Hardware Sales*

*Energy        Intelligence Solutions *

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*Corporate*

**Results        of Operations**

|                                                                                                             |   |  Six                  months ended June 30, |    |  Three                  months ended June 30, |   |
|------------------------------------------------------------------------------------------------------------------|--------|--------------------------------------------------|---------|----------------------------------------------------|--------|
|                                                                                                             |   |  2004                                       |    |  2005                                         |   |  Change |   |  2004 |   |  2005 |   |  Change |   |
|                                                                                                             |   |                                             | ($,000) |                                               |   | %                  of sales |   |   | ($,000) |   |   | %                  of sales |   |   | %                  of 2004 |   |   | ($,000) |   |   | %                  of sales |   |   | ($,000) |   |   | %                  of sales |   |   | %                  of 2004 |   |
| Sales                                                                                                            |   | $                                                | 14,555  |                                               |   | *100* | *%* | $ | 15,657 |   |   | *100* | *%* |   | *8* | *%* | $ | 7,300 |   |   | *100* | *%* | $ | 7,098 |   |   | *100* | *%* |   | *(3* | *)%* |
| Cost                  of sales                                                                                   |   |                                             | 11,479  |                                               |   | *79* |   |   | 12,420 |   |   | *79* |   |   | *8* |   |   | 5,774 |   |   | *79* |   |   | 5,711 |   |   | *80* |   |   | *(1* | *)* |
| Gross                  profit                                                                                    |   |                                             | 3,076   |                                               |   | *21* |   |   | 3,237 |   |   | *21* |   |   | *5* |   |   | 1,526 |   |   | *21* |   |   | 1,387 |   |   | *20* |   |   | *(9* | *)* |
| R&D                  expenses                                                                                |   |                                             | -       |                                               |   | *0* |   |   | 26 |   |   | *0* |   |   |   |   |   | - |   |   | *0* |   |   | 17 |   |   | *0* |   |   |   |   |
| SMG&A                  expenses                                                                              |   |                                             | 3,328   |                                               |   | *23* |   |   | 3,614 |   |   | *23* |   |   | *9* |   |   | 1,498 |   |   | *21* |   |   | 1,722 |   |   | *24* |   |   | *15* |   |
| Operating                  income (loss)                                                                         |   |                                             | (252    | )                                                  |   | *(2* | *)* |   | (403 | ) |   | *(3* | *)* |   | *60* |   |   | 28 |   |   | *1* |   |   | (352 | ) |   | *(5* | *)* |   | *(1,357* | *)* |
| Interest                  expense, net                                                                           |   |                                             | (9      | )                                                  |   | *0* |   |   | (94 | ) |   | *(1* | *)* |   | *944* |   |   | 46 |   |   | *1* |   |   | (41 | ) |   | *(1* | *)* |   | *(189* | *)* |
| Other                  income, net                                                                               |   |                                             | 237     |                                               |   | *2* |   |   | 60 |   |   | *0* |   |   | *(75* | *)* |   | 136 |   |   | *2* |   |   | 55 |   |   | *1* |   |   | *(60* | *)* |
| Income                  (loss) before taxes on income                                                            |   |                                             | (24     | )                                                  |   | *0* |   |   | (437 | ) |   | *(3* | *)* |   | *1,721* |   |   | 210 |   |   | *3* |   |   | (338 | ) |   | *(5* | *)* |   | *(261* | *)* |
| Taxes                  on income                                                                                 |   |                                             | (20     | )                                                  |   | *0* |   |   | 137 |   |   | *1* |   |   | *(785* | *)* |   | (13 | ) |   | *0* |   |   | 40 |   |   | *1* |   |   | *(408* | *)* |
| Income                  (loss) from operations of the Company and its consolidated                  subsidiaries |   |                                             | (4      | )                                                  |   | *0* |   |   | (574 | ) |   | *(4* | *)* |   |   |   |   | 223 |   |   | *3* |   |   | (378 | ) |   | *(5* | *)* |   | *(270* | *)* |
| Share                  in losses of Comverge                                                                     |   |                                             | (684    | )                                                  |   | *(5* | *)* |   | (380 | ) |   | *(2* | *)* |   | *(44* | *)* |   | (331 | ) |   | *(5* | *)* |   | (179 | ) |   | *(3* | *)* |   | *(46* | *)* |
| Minority                  interests                                                                              |   |                                             | (48     | )                                                  |   | *0* |   |   | (59 | ) |   | *0* |   |   | *23* |   |   | (33 | ) |   | *0* |   |   | (17 | ) |   | *0* |   |   | *(48* | *)* |
| Net                  loss from continuing operations                                                             |   |                                             | (736    | )                                                  |   | *(5* | *)* |   | (1,013 | ) |   | *(6* | *)* |   | *38* |   |   | (141 | ) |   | *(2* | *)* |   | (574 | ) |   | *(8* | *)* |   | *307* |   |
| Net                  income from discontinued operations, net of tax                                             |   |                                             | 348     |                                               |   | *2* |   |   | - |   |   | *-* |   |   | *(100* | *)* |   | 348 |   |   | *5* |   |   | - |   |   | *-* |   |   | *(100* | *)* |
| Net                  income (loss)                                                                               |   | $                                                | (388    | )                                                  |   | *(3* | *)* | $ | (1,013 | ) |   | *(6* | *)* |   | *161* |   | $ | 207 |   |   | *3* | *%* | $ | (574 | ) |   | *(8* | *)* |   | *(377* | *)* |

*Sales.*

----

*Gross        profit.*

*Selling,        marketing, general and administrative expenses (“SMG&A”). *

*Share        of losses in Comverge. *

*Other        income. *

**Liquidity        and Capital Resources**
** **

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**Contractual        Obligations and Commitments**

|                                                                                                                                              |   | Cash                      Payments Due During Year Ending June 30, |   |
|---------------------------------------------------------------------------------------------------------------------------------------------------|--------|--------------------------------------------------------------------|--------|
|                                                                                                                                              |   | (amounts                      in thousands)                        |   |
| Contractual                      Obligations                                                                                                      |   | Total                                                              |   | 2006 |   | 2007-2008 |   | 2009-2010 |   | 2011                      and thereafter |   |
| Long-term                      debt                                                                                                               |   | $                                                                  | 567    |   | $ | 401 |   | $ | 138 |   | $ | 28 |   | $ | -- |   |
| Contingent                      performance of bank guarantees (1)                                                                                |   |                                                               | 410    |   |   | 410 |   |   | -- |   |   | -- |   |   | -- |   |
| Operating                      leases                                                                                                             |   |                                                               | 2,999  |   |   | 1,130 |   |   | 1,471 |   |   | 398 |   |   | -- |   |
| Potential                      severance obligations to Israeli employees (2)                                                                     |   |                                                               | 4,270  |   |   | 2 |   |   | 70 |   |   | 29 |   |   | 4,169 |   |
| Consulting                      agreement with CEO (3)                                                                                            |   |                                                               | 1,500  |   |   | 300 |   |   | 600 |   |   | 375 |   |   | 225 |   |
| Purchase                      commitments                                                                                                         |   |                                                               | --     |   |   | -- |   |   | -- |   |   | -- |   |   | -- |   |
| Other                      long-term liabilities reflected on the balance sheet in accordance                      with                      GAAP |   |                                                               | --     |   |   | -- |   |   | -- |   |   | -- |   |   | -- |   |
| Total                      contractual cash obligations                                                                                           |   | $                                                                  | 9,746  |   | $ | 2,243 |   | $ | 2,279 |   | $ | 830 |   | $ | 4,394 |   |

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**Item        3.**
**        Quantitative and Qualitative Disclosures About Market Risk**

**Item        4.**
**        Controls and Procedures**

**Evaluation        of Controls and Procedures **

**Changes        in Controls and Procedures**

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**PART        II - Other information**

**Item        1. Legal Proceedings**

**Item        6. Exhibits**

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

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

|   |   |   |
|--------|--------|--------|

|   | 99.1 | Certification                    of Chief Executive Officer pursuant to Section 906 of the Sarbanes-Oxley                    Act of 2002. |
|--------|------|-------------------------------------------------------------------------------------------------------------------------------------------|

|   |   |   |
|--------|--------|--------|

|   | 99.2  | Certification                    of Chief Financial Officer pursuant to Section 906 of the Sarbanes-Oxley                    Act of 2002. |
|--------|------------|-------------------------------------------------------------------------------------------------------------------------------------------|

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**SIGNATURES**

|                                   |                                                                             |                                    |
|----------------------------------------|----------------------------------------------------------------------------------|-----------------------------------------|
|                                   | **DATA                  SYSTEMS & SOFTWARE INC.**                            |
|                              |                                                                        |                               |
| Date:                  August 15, 2005 | By:                                                                    | /s/ Yacov                  Kaufman |
|                                   | Yacov                  Kaufman                                                   |
|                                   | Vice                    President and Chief Financial                    Officer |

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