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

**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**

| FOR                  THE QUARTERLY PERIOD ENDED SEPTEMBER 30,                  2005 | COMMISSION                  FILE NUMBER                  0-19771 |
|-------------------------------------------------------------------------------------|------------------------------------------------------------------|

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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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| |X|                Yes | |_|                No |
|------------------------|-----------------------|

| |_|                Yes | |X|                No |
|------------------------|-----------------------|

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

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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 September 30,                      2005                                                                               | 1 |
|                                                                                                                                                |                                                                                                                                                                                               |   |
|                                                                                                                                                | Consolidated                      Statements of Operations and Comprehensive Loss for the nine                      and three                      month periods ended September 30, 2004 and 2005 | 2 |
|                                                                                                                                                |                                                                                                                                                                                               |   |
|                                                                                                                                                | Consolidated                      Statement of Changes in Shareholders’ Equity for the nine month period                      ended September 30, 2005                                       | 3 |
|                                                                                                                                                |                                                                                                                                                                                               |   |
|                                                                                                                                                | Consolidated                      Statements of Cash Flows for the nine month periods ended September                      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                                  | 16                                                                                                                                                                                                 |
|                                                                                                                                                |                                                                                                                                                                                               |
| Item                      4.  Controls                      and Procedures                                                                     | 16                                                                                                                                                                                                 |
|                                                                                                                                                |                                                                                                                                                                                               |   |
| **PART                    II. Other Information**                                                                                                   |                                                                                                                                                                                               |
|                                                                                                                                                |                                                                                                                                                                                               |
| Item                      1.  Legal                      Proceedings                                                                           | 17                                                                                                                                                                                                 |
|                                                                                                                                                |                                                                                                                                                                                               |
| Item                      6.  Exhibits                                                                                                         | 17                                                                                                                                                                                                 |
|                                                                                                                                                |                                                                                                                                                                                               |
| **Signatures**                                                                                                                                      | 18                                                                                                                                                                                                 |
|                                                                                                                                                |                                                                                                                                                                                               |   |

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

**Consolidated      Balance Sheets**

| **ASSETS**                                                                                                                               |   | **As                of December 31, 2004** |    | **As                of****September                30,****2005** |   |
|------------------------------------------------------------------------------------------------------------------------------------------|--------|--------------------------------------------|---------|------------------------------------------------------------------|--------|
| Current                assets:                                                                                                           |   |                                       |    | (unaudited)                                                      |   |
| Cash                and cash equivalents                                                                                            |   | $                                          | 685     |                                                             | $      | 674 |   |
| Short-term                bank deposits                                                                                             |   |                                       | 72      |                                                             |   | -- |   |
| Restricted                cash                                                                                                      |   |                                       | 354     |                                                             |   | 924 |   |
| Accounts                receivable, net                                                                                             |   |                                       | 6,069   |                                                             |   | 4,960 |   |
| Unbilled                work-in-process                                                                                             |   |                                       | 533     |                                                             |   | 487 |   |
| Inventory                                                                                                                           |   |                                       | 61      |                                                             |   | 92 |   |
| Other                current assets                                                                                                 |   |                                       | 540     |                                                             |   | 978 |   |
| Total                current assets                                                                                                 |   |                                       | 8,314   |                                                             |   | 8,115 |   |
| Property                and equipment, net                                                                                               |   |                                       | 649     |                                                             |   | 572 |   |
| Other                assets                                                                                                              |   |                                       | 737     |                                                             |   | 373 |   |
| Funds                in respect of employee termination benefits                                                                         |   |                                       | 2,836   |                                                             |   | 1,406 |   |
| Restricted                cash - non-current                                                                                             |   |                                       | --      |                                                             |   | 1,125 |   |
| Goodwill                                                                                                                                 |   |                                       | 4,408   |                                                             |   | 129 |   |
| Other                intangible assets, net                                                                                              |   |                                       | 81      |                                                             |   | 58 |   |
| Total                assets                                                                                                         |   | $                                          | 17,025  |                                                             | $      | 11,778 |   |
| **LIABILITIES                AND SHAREHOLDERS’ EQUITY**                                                                            |   |                                       |    |                                                             |   |   |   |
| Current                liabilities:                                                                                                      |   |                                       |    |                                                             |   |   |   |
| Short-term                bank credit                                                                                               |   | $                                          | 729     |                                                             | $      | 210 |   |
| Current                maturities of long-term debt                                                                                 |   |                                       | 466     |                                                             |   | 163 |   |
| Trade                accounts payable                                                                                               |   |                                       | 2,283   |                                                             |   | 2,299 |   |
| Accrued                payroll, payroll taxes and social benefits                                                                   |   |                                       | 1,735   |                                                             |   | 922 |   |
| Other                current liabilities                                                                                            |   |                                       | 2,227   |                                                             |   | 2,912 |   |
| Total                current liabilities                                                                                            |   |                                       | 7,440   |                                                             |   | 6,506 |   |
| Long-term                liabilities:                                                                                                    |   |                                       |    |                                                             |   |   |   |
| Investment                in Comverge, net                                                                                          |   |                                       | 1,444   |                                                             |   | 1,824 |   |
| Long-term                debt                                                                                                       |   |                                       | 201     |                                                             |   | 119 |   |
| Liability                for employee termination benefits                                                                          |   |                                       | 4,279   |                                                             |   | 2,288 |   |
| Other                liabilities                                                                                                    |   |                                       | 65      |                                                             |   | 18 |   |
| Total                long-term liabilities                                                                                          |   |                                       | 5,989   |                                                             |   | 4,249 |   |
| Minority                interests                                                                                                   |   |                                       | 1,471   |                                                             |   | -- |   |
| Shareholders’                equity:                                                                                               |   |                                       |    |                                                             |   |   |   |
| Common                stock - $0.01 par value per share:                                                                                 |   |                                       |    |                                                             |   |   |   |
| Authorized                - 20,000,000 shares; Issued - 8,937,395 shares atDecember                31, 2004 and September 30, 2005  |   |                                       | 88      |                                                             |   | 88 |   |
| Additional                paid-in capital                                                                                           |   |                                       | 39,733  |                                                             |   | 39,733 |   |
| Warrants                                                                                                                            |   |                                       | 461     |                                                             |   | 461 |   |
| Deferred                compensation                                                                                                |   |                                       | (59     | )                                                                |   | (42 | ) |
| Accumulated                deficit                                                                                                  |   |                                       | (34,290 | )                                                                |   | (35,428 | ) |
| Treasury                stock, at cost -820,704 shares at December 31, 2004 and September                30,                2005    |   |                                       | (3,791  | )                                                                |   | (3,791 | ) |
| Accumulated                other comprehensive income (loss)                                                                        |   |                                       | (17     | )                                                                |   | 2 |   |
| Total                shareholders’ equity                                                                                     |   |                                       | 2,125   |                                                             |   | 1,023 |   |
| Total                liabilities and shareholders’ equity                                                                     |   | $                                          | 17,025  |                                                             | $      | 11,778 |   |

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

**Consolidated      Statements of Operations and Comprehensive Loss **

|                                                                                                      |   | **Nine                months ended****September                30,** |   | **Three                months ended****September                30,** |   |
|-----------------------------------------------------------------------------------------------------------|--------|----------------------------------------------------------------------|--------|-----------------------------------------------------------------------|--------|
|                                                                                                      |   | **2004**                                                             |   | **2005**                                                              |   | **2004** |   | **2005** |   |
| Sales:                                                                                                    |   |                                                                 |   |                                                                  |   |   |   |   |   |
| Products                                                                                             |   | $                                                                    | 13,157 |                                                                  | $      | 13,479 |   | $ | 4,764 |   | $ | 4,426 |   |
| Projects                and services                                                                 |   |                                                                 | 2,753  |                                                                  |   | 3,148 |   |   | 745 |   |   | 847 |   |
| Total                sales                                                                                |   |                                                                 | 15,910 |                                                                  |   | 16,627 |   |   | 5,509 |   |   | 5,273 |   |
| Cost                of sales:                                                                             |   |                                                                 |   |                                                                  |   |   |   |   |   |   |   |   |   |
| Products                                                                                             |   |                                                                 | 10,801 |                                                                  |   | 11,065 |   |   | 3,887 |   |   | 3,643 |   |
| Projects                and services                                                                 |   |                                                                 | 1,936  |                                                                  |   | 2,267 |   |   | 642 |   |   | 657 |   |
| Total                cost of sales                                                                        |   |                                                                 | 12,737 |                                                                  |   | 13,332 |   |   | 4,529 |   |   | 4,300 |   |
| Gross                profit                                                                          |   |                                                                 | 3,173  |                                                                  |   | 3,295 |   |   | 980 |   |   | 973 |   |
| Operating                expenses:                                                                        |   |                                                                 |   |                                                                  |   |   |   |   |   |   |   |   |   |
| Research                and development expenses                                                     |   |                                                                 | --     |                                                                  |   | 42 |   |   | -- |   |   | 16 |   |
| Selling,                marketing, general and administrative expenses                               |   |                                                                 | 5,333  |                                                                  |   | 5,298 |   |   | 2,112 |   |   | 1,764 |   |
| Total                operating expenses                                                                   |   |                                                                 | 5,333  |                                                                  |   | 5,340 |   |   | 2,112 |   |   | 1,780 |   |
| Operating                loss                                                                        |   |                                                                 | (2,160 | )                                                                     |   | (2,045 | ) |   | (1,132 | ) |   | (807 | ) |
| Interest                income                                                                       |   |                                                                 | 68     |                                                                  |   | 10 |   |   | -- |   |   | 7 |   |
| Interest                expense                                                                      |   |                                                                 | (82    | )                                                                     |   | (81 | ) |   | (25 | ) |   | (28 | ) |
| Other                income, net                                                                     |   |                                                                 | 232    |                                                                  |   | 38 |   |   | 6 |   |   | (23 | ) |
| Loss                before taxes on income                                                      |   |                                                                 | (1,942 | )                                                                     |   | (2,078 | ) |   | (1,151 | ) |   | (851 | ) |
| Taxes                on income                                                                       |   |                                                                 | (3     | )                                                                     |   | 340 |   |   | 30 |   |   | 331 |   |
| Loss                from operations of the Company and its consolidated                subsidiaries  |   |                                                                 | (1,939 | )                                                                     |   | (2,418 | ) |   | (1,181 | ) |   | (1,182 | ) |
| Share                of losses in Comverge                                                           |   |                                                                 | (1,066 | )                                                                     |   | (380 | ) |   | (382 | ) |   | -- |   |
| Gain                on sale of shares of Comverge                                                    |   |                                                                 | 705    |                                                                  |   | -- |   |   | 705 |   |   | -- |   |
| Minority                interests                                                                    |   |                                                                 | (59    | )                                                                     |   | (73 | ) |   | (11 | ) |   | (14 | ) |
| Net                loss from continuing operations                                                        |   |                                                                 | (2,359 | )                                                                     |   | (2,871 | ) |   | (869 | ) |   | (1,196 | ) |
| Net                income from discontinued operations, net of tax                                   |   |                                                                 | 1,499  |                                                                  |   | 818 |   |   | 397 |   |   | 154 |   |
| Gain                on sale of discontinued operations, net of tax                                   |   |                                                                 | --     |                                                                  |   | 915 |   |   | -- |   |   | 915 |   |
| Net                loss                                                                              |   |                                                                 | (860   | )                                                                     |   | (1,138 | ) |   | (472 | ) |   | (127 | ) |
| Other                comprehensive income (loss), net of tax:                                             |   |                                                                 |   |                                                                  |   |   |   |   |   |   |   |   |   |
| Differences                from translation of financial statements of subsidiaries                  |   |                                                                 | (159   | )                                                                     |   | 19 |   |   | 11 |   |   | 204 |   |
| Comprehensive                income (loss)                                                           |   | $                                                                    | (1,019 | )                                                                     | $      | (1,119 | ) | $ | (461 | ) | $ | 77 |   |
| Basic                and diluted net income (loss) per share:                                             |   |                                                                 |   |                                                                  |   |   |   |   |   |   |   |   |   |
| Loss                per share from continuing operations                                             |   | $                                                                    | (0.30  | )                                                                     | $      | (0.35 | ) | $ | (0.11 | ) | $ | (0.15 | ) |
| Discontinued                operations                                                               |   |                                                                 | 0.19   |                                                                  |   | 0.10 |   |   | 0.05 |   |   | 0.02 |   |
| Gain                on sale of discontinued operations                                               |   |                                                                 | --     |                                                                  |   | 0.11 |   |   | -- |   |   | 0.11 |   |
| Basic                and diluted net income (loss) per share                                         |   | $                                                                    | (0.11  | )                                                                     | $      | (0.14 | ) | $ | (0.06 | ) | $ | (0.02 | ) |
| Weighted                average number of shares outstanding:                                             |   |                                                                 |   |                                                                  |   |   |   |   |   |   |   |   |   |
| Basic                and diluted                                                                     |   |                                                                 | 7,927  |                                                                  |   | 8,117 |   |   | 7,936 |   |   | 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                    |   |                            | -      |                        |   | -                        |   |     | -      |                                             |   | -                                  |   |                          | 17     |                                                |   | -       |   |   | - |   |   | - |   |   | 17 |   |
|                                                                                |   |                            |   |                        |   |                     |   |     |   |                                             |   |                               |   |                          |   |                                                |   |    |   |   |   |   |   |   |   |   |   |   |
| Net                loss                                                             |   |                            | -      |                        |   | -                        |   |     | -      |                                             |   | -                                  |   |                          | -      |                                                |   | (1,138  | )      |   | - |   |   | - |   |   | (1,138 | ) |
|                                                                                |   |                            |   |                        |   |                     |   |     |   |                                             |   |                               |   |                          |   |                                                |   |    |   |   |   |   |   |   |   |   |   |   |
| Differences                from translation of financial statements of subsidiaries |   |                            | -      |                        |   | -                        |   |     | -      |                                             |   | -                                  |   |                          | -      |                                                |   | -       |   |   | - |   |   | 19 |   |   | 19 |   |
|                                                                                |   |                            |   |                        |   |                     |   |     |   |                                             |   |                               |   |                          |   |                                                |   |    |   |   |   |   |   |   |   |   |   |   |
| Balances                as ofSeptember                30, 2005                      |   |                            | 8,937  |                        | $      | 88                       |   | $        | 39,733 |                                             | $      | 461                                |   | $                             | (42    | )                                                   | $      | (35,428 | )      | $ | (3,791 | ) | $ | 2 |   | $ | 1,023 |   |

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

**Consolidated      Statements of Cash Flows **

|                                                                                                                                 |   | **Nine                months ended September 30,** |   |
|--------------------------------------------------------------------------------------------------------------------------------------|--------|----------------------------------------------------|--------|
|                                                                                                                                 |   | **2004**                                           |   | **2005** |   |
|  Cash                flows used in operating activities:                                                                        |   |                                               |   |   |   |
| Net                loss                                                                                                         |   | $                                                  | (860   | ) | $ | (1,138 | ) |
| Adjustments                to reconcile net loss to net cash provided by (used in) operating                activities - Appendix A: |   |                                               | 318    |   |   | (199 | ) |
| Net                cash used in operating activities                                                                            |   |                                               | (542   | ) |   | (1,337 | ) |
| Cash                flows provided by (used in) investing activities:                                                                |   |                                               |   |   |   |   |   |
| Restricted                cash (current and non-current)                                                                        |   |                                               | --     |   |   | (1,426 | ) |
| Amounts                funded for employee termination benefits                                                                 |   |                                               | (257   | ) |   | (46 | ) |
| Maturity                of short-term deposits                                                                                  |   |                                               |   |   |   | 72 |   |
| Proceeds                from sale of Comverge shares                                                                            |   |                                               | 975    |   |   | -- |   |
| Proceeds                from sale of property and equipment                                                                     |   |                                               | 52     |   |   | 122 |   |
| Acquisitions                of property and equipment                                                                           |   |                                               | (99    | ) |   | (183 | ) |
| Business                disposition - Appendix B                                                                                |   |                                               | --     |   |   | 2,927 |   |
| Net                cash provided by investing activities                                                                        |   |                                               | 671    |   |   | 1,466 |   |
| Cash                flows provided by (used in) financing activities:                                                                |   |                                               |   |   |   |   |   |
| Short-term                debt borrowings (repayments), net                                                                     |   |                                               | --     |   |   | 182 |   |
| Proceeds                from note payable to a related party                                                                    |   |                                               | --     |   |   | 425 |   |
| Repayment                of note payable to a related party                                                                     |   |                                               | --     |   |   | (425 | ) |
| Proceeds                from long-term debt                                                                                     |   |                                               | --     |   |   | 90 |   |
| Repayments                of long-term debt                                                                                     |   |                                               | (481   | ) |   | (412 | ) |
| Exercise                of options                                                                                              |   |                                               | 35     |   |   | -- |   |
| Net                cash used in financing activities                                                                            |   |                                               | (446   | ) |   | (140 | ) |
| Net                decrease in cash and cash equivalents                                                                        |   |                                               | (317   | ) |   | (11 | ) |
| Cash                and cash equivalents at beginning of period                                                                 |   |                                               | 1,213  |   |   | 685 |   |
| Cash                and cash equivalents at end of period                                                                       |   | $                                                  | 896    |   | $ | 674 |   |
| Supplemental                cash flow information:                                                                                   |   |                                               |   |   |   |   |   |
| Cash                paid during period for interest                                                                             |   | $                                                  | 113    |   | $ | 127 |   |
| Cash                paid during period for income taxes                                                                         |   | $                                                  | 35     |   | $ | 41 |   |

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

**Consolidated      Statements of Cash Flows **

|                                                                                                                                            |   | **Nine                months ended September 30,** |   |
|-------------------------------------------------------------------------------------------------------------------------------------------------|--------|----------------------------------------------------|--------|
|                                                                                                                                            |   | **2004**                                           |   | **2005** |   |
| **Appendix                A**                                                                                                                   |   |                                               |   |   |   |
| Adjustments                to reconcile net loss to net cash (used in) provided by operating                activities:                         |   |                                               |   |   |   |
| Depreciation                and amortization                                                                                               |   | $                                                  | 177    |   | $ | 198 |   |
| Minority                interests                                                                                                          |   |                                               | 59     |   |   | 73 |   |
| Share                in losses of Comverge                                                                                                 |   |                                               | 1,066  |   |   | 380 |   |
| Change                in deferred taxes                                                                                                    |   |                                               | (9     | ) |   | 311 |   |
| Increase                in liability for employee termination benefits                                                                     |   |                                               | 367    |   |   | 49 |   |
| Gain                on disposition of property and equipment                                                                               |   |                                               | (4     | ) |   | (33 | ) |
| Gain                on sale of dsIT Technologies                                                                                           |   |                                               | --     |   |   | (915 | ) |
| Gain                on sale of Comverge shares                                                                                             |   |                                               | (705   | ) |   | -- |   |
| Stock                and stock-based compensation                                                                                          |   |                                               | 75     |   |   | 17 |   |
| Other                                                                                                                                      |   |                                               | (33    | ) |   | (62 | ) |
| Change                in operating assets and liabilities, net of effect of                disposition:                                         |   |                                               |   |   |   |   |   |
| Increase                in accounts receivable, unbilled work-in-process and other current                and                other assets  |   |                                               | 658    |   |   | 164 |   |
| (Decrease)                increase in inventory                                                                                            |   |                                               | 1      |   |   | (31 | ) |
| Decrease                in accounts payable and other liabilities                                                                          |   |                                               | (1,334 | ) |   | (350 | ) |
| Total                                                                                                                                      |   | $                                                  | 318    |   | $ | (199 | ) |

| **Appendix                B**                                                      |   |   |   |
|------------------------------------------------------------------------------------|--------|--------|--------|
| Assets/liabilities                disposed of in disposition of dsIT Technologies: |   |   |   |
| Current                assets                                                 |   | $      | 679    |   |
| Non-current                assets                                             |   |   | 1,134  |   |
| Goodwill                                                                      |   |   | 4,301  |   |
| Short-term                debt                                                |   |   | (701   | ) |
| Current                liabilities                                            |   |   | (327   | ) |
| Other                liabilities                                              |   |   | (1,455 | ) |
| Minority                interests                                             |   |   | (1,552 | ) |
| Unpaid                transaction costs in disposition of dsIT Technologies   |   |   | (67    | ) |
| Gain                on the sale of dsIT Technologies                          |   |   | 915    |   |
| Net                cash provided by business disposition                      |   | $      | 2,927  |   |

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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: Discontinued Operations**

|                                                                                |   | Nine                  months endedSeptember                  30, |   | Three                  months endedSeptember 30, |   |
|-------------------------------------------------------------------------------------|--------|------------------------------------------------------------------|--------|--------------------------------------------------|--------|
|                                                                                |   | 2004                                                             |   | 2005                                             |   | 2004 |   | 2005 |   |
| Sales                                                                          |   | $                                                                | 6,127  |                                             | $      | 5,219 |   | $ | 1,973 |   | $ | 916 |   |
| Cost                  of sales                                                 |   |                                                             | 4,768  |                                             |   | 4,111 |   |   | 1,497 |   |   | 723 |   |
| Gross                  profit                                                  |   |                                                             | 1,359  |                                             |   | 1,109 |   |   | 476 |   |   | 193 |   |
| Income                  from operations                                        |   |                                                             | 1,196  |                                             |   | 1,022 |   |   | 420 |   |   | 186 |   |
| Interest                  expense, net                                         |   |                                                             | 32     |                                             |   | 59 |   |   | 12 |   |   | 19 |   |
| Net                  income from discontinued operations, net of income taxes  |   | $                                                                | 1,151  |                                             | $      | 818 |   | $ | 397 |   | $ | 154 |   |

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

**Notes      to Consolidated Financial Statements **

**Note      4: Investment in Comverge**

| **Results                of Operations** |   | Nine                months ended  |   | Three                months ended |   |
|------------------------------------------|--------|-----------------------------------|--------|-----------------------------------|--------|
|                                     |   | September                30, 2005 |   |
| Sales                                    |   | $                                 | 13,214 |                              | $      | 5,380 |   |
| Gross                profit              |   |                              | 5,468  |                              |   | 2,159 |   |
| Net                loss                  |   |                              | (8,934 | )                                 |   | (2,819 | ) |

|                                             |   | Common                stock |   | 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 September 30, 2005 |   | $                           | (1,824 | )                              | $      | --                                        |   | $ | (1,824 | ) |

**Note      5--Goodwill and Other Intangible Assets**

**Note      6: Warranty Provision**

----

**Note      7: **
**Stock-Based      Compensation**

|                                                                                                                                                                                                 |   | Nine                            months ended September                            30, |   | Three                            months endedSeptember 30, |   |
|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|--------|---------------------------------------------------------------------------------------|--------|------------------------------------------------------------|--------|
|                                                                                                                                                                                                 |   | 2004                                                                                  |   | 2005                                                       |   | 2004 |   | 2005 |   |
| Net                            income (loss) as reported                                                                                                                                        |   | $                                                                                     | (860   | )                                                          | $      | (1,138 | ) | $ | (472 | ) | $ | (127 | ) |
| Plus:                            Stock-based employee and director compensation expense                            included in                            reported net loss                     |   |                                                                                  | 75     |                                                       |   | 17 |   |   | 75 |   |   | 5 |   |
| Less:                            Total stock-based employee compensation expense determined                            under fair                            value based method for all awards  |   |                                                                                  | 136    |                                                       |   | 242 |   |   | 75 |   |   | 80 |   |
| Pro                            forma net income (loss)                                                                                                                                          |   | $                                                                                     | (921   | )                                                          | $      | (1,363 | ) | $ | (472 | ) | $ | (202 | ) |
| Net                            income (loss) per share:                                                                                                                                              |   |                                                                                  |        |                                                       |   |  |   |   |  |   |   |  |   |
| Basic                            and diluted - as reported                                                                                                                                      |   | $                                                                                     | (0.11  | )                                                          | $      | (0.14 | ) | $ | (0.06 | ) | $ | (0.02 | ) |
| Basic                            and diluted - pro forma                                                                                                                                        |   | $                                                                                     | (0.12  | )                                                          | $      | (0.17 | ) | $ | (0.06 | ) | $ | (0.02 | ) |
|                                                                                                                                                                                                 |   |                                                                                  |        |                                                       |   |  |   |   |  |   |   |  |   |

----

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

**Notes      to Consolidated Financial Statements **

**Note      8: Segment Information**

|                                                  |   | **Software                Consulting and****Development** |   |  **Computer****Hardware** |   | **Other****(*)** |   |  **Total** |   |
|-------------------------------------------------------|--------|-----------------------------------------------------------|--------|--------------------------------|--------|------------------|--------|-----------------|--------|
| Nine                months ended September 30, 2005:  |   |                                                      |   |                           |   |             |   |            |   |
| Revenues                from external customers       |   | $                                                         | 2,966  |                           | $      | 13,637           |   | $               | 24     |   | $ | 16,627 |   |
| Intersegment                revenues                  |   |                                                      | --     |                           |   | 15               |   |            | --     |   |   | 15 |   |
| Segment                gross profit                   |   |                                                      | 774    |                           |   | 2,497            |   |            | 24     |   |   | 3,295 |   |
| Segment                income (loss)                  |   |                                                      | (1,400 | )                              |   | 118              |   |            | 17     |   |   | (1,265 | ) |
| Nine                months ended September 30, 2004:  |   |                                                      |   |                           |   |             |   |            |   |   |   |   |   |
| Revenues                from external customers       |   | $                                                         | 2,549  |                           | $      | 13,335           |   | $               | 26     |   | $ | 15,910 |   |
| Intersegment                revenues                  |   |                                                      | --     |                           |   | --               |   |            | --     |   |   | -- |   |
| Segment                gross profit                   |   |                                                      | 697    |                           |   | 2,450            |   |            | 26     |   |   | 3,173 |   |
| Segment                income (loss)                  |   |                                                      | (943   | )                              |   | 231              |   |            | 6      |   |   | (706 | ) |
| Three                months ended September 30, 2005: |   |                                                      |   |                           |   |             |   |            |   |   |   |   |   |
| Revenues                from external customers       |   | $                                                         | 779    |                           | $      | 4,491            |   | $               | 3      |   | $ | 5,273 |   |
| Intersegment                revenues                  |   |                                                      | --     |                           |   | --               |   |            | --     |   |   | -- |   |
| Segment                gross profit                   |   |                                                      | 149    |                           |   | 821              |   |            | 3      |   |   | 973 |   |
| Segment                income (loss)                  |   |                                                      | (799   | )                              |   | 33               |   |            | 1      |   |   | (765 | ) |
| Three                months ended September 30, 2004: |   |                                                      |   |                           |   |             |   |            |   |   |   |   |   |
| Revenues                from external customers       |   | $                                                         | 702    |                           | $      | 4,806            |   | $               | 1      |   | $ | 5,509 |   |
| Intersegment                revenues                  |   |                                                      | --     |                           |   | --               |   |            | --     |   |   | -- |   |
| Segment                gross profit                   |   |                                                      | 86     |                           |   | 893              |   |            | 1      |   |   | 980 |   |
| Segment                loss                           |   |                                                      | (374   | )                              |   | (60              | )      |            | (1     | ) |   | (435 | ) |

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

|                                                   |   | Nine                months ended September                30, |   | Three                months ended September                30, |   |
|--------------------------------------------------------|--------|---------------------------------------------------------------|--------|----------------------------------------------------------------|--------|
|                                                   |   | 2004                                                          |   | 2005                                                           |   | 2004 |   | 2005 |   |
| Total                loss for reportable segments      |   | $                                                             | (712   | )                                                              | $      | (1,282 | ) | $ | (434 | ) | $ | (766 | ) |
| Other                operational segment income (loss) |   |                                                          | 6      |                                                           |   | 17 |   |   | (1 | ) |   | 1 |   |
| Total                operating loss                    |   |                                                          | (706   | )                                                              |   | (1,265 | ) |   | (435 | ) |   | (765 | ) |
| Net                loss of corporate headquarters      |   |                                                          | (1,292 | )                                                              |   | (1,226 | ) |   | (773 | ) |   | (431 | ) |
| Share                of losses in Comverge             |   |                                                          | (1,066 | )                                                              |   | (380 | ) |   | (382 | ) |   | -- |   |
| Gain                on sale of shares of Comverge      |   |                                                          | 705    |                                                           |   | -- |   |   | 705 |   |   | -- |   |
| Gain                on sale of discontinued operations |   |                                                          | --     |                                                           |   | 915 |   |   | -- |   |   | 915 |   |
| Discontinued                operations income          |   |                                                          | 1,499  |                                                           |   | 818 |   |   | 413 |   |   | 154 |   |
| Total                consolidated net income (loss)    |   | $                                                             | (860   | )                                                              | $      | (1,138 | ) | $ | (472 | ) | $ | (127 | ) |

----

** **
**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 for chemotherapy treatment, 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 *

*Corporate*

----

**Results      of Operations**

|                                                                                                |   | Nine                months ended September 30, |   | Three                months ended September 30, |   |
|-----------------------------------------------------------------------------------------------------|--------|------------------------------------------------|--------|-------------------------------------------------|--------|
|                                                                                                |   | 2004                                           |   | 2005                                            |   | Change |   | 2004 |   | 2005 |   | Change |   |
|                                                                                                |   | ($,000)                                        |   | %                of sales                       |   | ($,000) |   | %                of sales |   | %                from 2004 |   | ($,000) |   | %                of sales |   | ($,000) |   | %                of sales |   | %                from 2004 |   |
| Sales                                                                                               |   | $                                              | 15,910 |                                            |   | *100* | *%* | $ | 16,627 |   |   | *100* | *%* |   | *5* | *%* | $ | 5,509 |   |   | *100* |   |   | 5,273 |   |   | *100* |   |   | *(4* | *)%* |
| Cost                of sales                                                                        |   |                                           | 12,737 |                                            |   | *80* |   |   | 13,332 |   |   | *80* |   |   | *5* |   |   | 4,529 |   |   | *82* |   |   | 4,300 |   |   | *82* |   |   | *(5* | *)* |
| Gross                profit                                                                         |   |                                           | 3,173  |                                            |   | *20* |   |   | 3,295 |   |   | *20* |   |   | *4* |   |   | 980 |   |   | *18* |   |   | 973 |   |   | *18* |   |   | *(1* | *)* |
| R&D                expenses                                                                     |   |                                           | --     |                                            |   | *--* |   |   | 42 |   |   | *0* |   |   |   |   |   | -- |   |   | *--* |   |   | 16 |   |   | *0* |   |   |   |   |
| SMG&A                expenses                                                                   |   |                                           | 5,333  |                                            |   | *34* |   |   | 5,298 |   |   | *32* |   |   | *(1* | *)* |   | 2,112 |   |   | *38* |   |   | 1,764 |   |   | *33* |   |   | *(16* | *)* |
| Operating                loss                                                                       |   |                                           | (2,160 | )                                               |   | *(14* | *)* |   | (2,045 | ) |   | *(12* | *)* |   | *(5* | *)* |   | (1,132 | ) |   | *(21* | *)* |   | (807 | ) |   | *(15* | *)* |   | *(29* | *)* |
| Interest                expense, net                                                                |   |                                           | (14    | )                                               |   | *0* |   |   | (71 | ) |   | *0* |   |   | *407* |   |   | (25 | ) |   | *0* |   |   | (21 | ) |   | *0* |   |   | *(16* | *)* |
| Other                income, net                                                                    |   |                                           | 232    |                                            |   | *1* |   |   | 38 |   |   | *0* |   |   | *(84* | *)* |   | 6 |   |   | *0* |   |   | (23 | ) |   | *0* |   |   | *(483* | *)* |
| Loss                before taxes on income                                                          |   |                                           | (1,942 | )                                               |   | *(12* | *)* |   | (2,078 | ) |   | *(12* | *)* |   | *7* |   |   | (1,151 | ) |   | *(21* | *)* |   | (851 | ) |   | *(16* | *)* |   | *(26* | *)* |
| Taxes                on income                                                                      |   |                                           | (3     | )                                               |   | *0* |   |   | 340 |   |   | *2* |   |   |   |   |   | 30 |   |   | *1* |   |   | 331 |   |   | *6* |   |   |   |   |
| Loss                from operations of the Company and its consolidated                subsidiaries |   |                                           | (1,939 | )                                               |   | *(12* | *)* |   | (2,418 | ) |   | *(15* | *)* |   | *25* |   |   | (1,181 | ) |   | *(21* | *)* |   | (1,182 | ) |   | *(22* | *)* |   | *0* |   |
| Gain                on sale of shares of Comverge                                                   |   |                                           | 705    |                                            |   | *4* |   |   | -- |   |   | *--* |   |   |   |   |   | 705 |   |   | *13* |   |   | -- |   |   | *--* |   |   |   |   |
| Share                in losses of Comverge                                                          |   |                                           | (1,066 | )                                               |   | *(7* | *)* |   | (380 | ) |   | *(2* | *)* |   | *(64* | *)* |   | (382 | ) |   | *(7* | *)* |   | -- |   |   | *--* |   |   |   |   |
| Minority                interests                                                                   |   |                                           | (59    | )                                               |   | *0* |   |   | (73 | ) |   | *0* |   |   | *24* |   |   | (11 | ) |   | *0* |   |   | (14 | ) |   | *0* |   |   | *27* |   |
| Net                loss from continuing operations                                                  |   |                                           | (2,359 | )                                               |   | *(15* | *)* |   | (2,871 | ) |   | *(17* | *)* |   | *22* |   |   | (869 | ) |   | *(16* | *)* |   | (1,196 | ) |   | *(23* | *)* |   | *38* |   |
| Gain                on sale of discontinued operations, net of tax                                  |   |                                           | --     |                                            |   | *--* |   |   | 915 |   |   | *6* |   |   |   |   |   | -- |   |   | *--* |   |   | 915 |   |   | *17* |   |   |   |   |
| Net                income from discontinued operations, net of tax                                  |   |                                           | 1,499  |                                            |   | *9* |   |   | 818 |   |   | *5* |   |   | *(45* | *)* |   | 397 |   |   | *7* |   |   | 154 |   |   | *3* |   |   | *(61* | *)* |
| Net                income (loss)                                                                    |   | $                                              | (860   | )                                               |   | *(5* | *)%* | $ | (1,138 | ) |   | *(7* | *)%* |   | *32* | *%* | $ | (472 | ) |   | *(9* | *)%* | $ | (127 | ) |   | *(2* | *)%* |   | *(73* | *)%* |

*Sales.*

*Gross      profit.*

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

----

*Taxes      on Income. *

*Share      of losses in Comverge. *
* *

*Gain      on sale of shares in Comverge*

*Gain      on sale of discontinued operations, net of tax. *

*Net      income from discontinued operations, net of tax. *

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

----

**Contractual      Obligations and Commitments**

|                                                                                                                                  |   | Cash                  Payments Due During Year Ending September 30, |   |
|---------------------------------------------------------------------------------------------------------------------------------------|--------|---------------------------------------------------------------------|--------|
|                                                                                                                                  |   | (amounts                  in thousands)                             |   |
| Contractual                  Obligations                                                                                              |   | Total                                                               |   | 2006 |   | 2007-2008 |   | 2009-2010 |   | 2011                  and thereafter |   |
| Long-term                  debt                                                                                                       |   | $                                                                   | 208    |   | $ | 147 |   | $ | 61 |   | $ | -- |   | $ | -- |   |
| Contingent                  performance of bank guarantees (1)                                                                        |   |                                                                | 410    |   |   | 410 |   |   | -- |   |   | -- |   |   | -- |   |
| Operating                  leases                                                                                                     |   |                                                                | 2,142  |   |   | 776 |   |   | 1,073 |   |   | 293 |   |   | -- |   |
| Potential                  severance obligations to Israeli employees (2)                                                             |   |                                                                | 2,871  |   |   | 584 |   |   | 70 |   |   | 29 |   |   | 2,188 |   |
| Consulting                  agreement with CEO (3)                                                                                    |   |                                                                | 1,425  |   |   | 1,425 |   |   | -- |   |   | -- |   |   | -- |   |
| Purchase                  commitments                                                                                                 |   |                                                                | --     |   |   | -- |   |   | -- |   |   | -- |   |   | -- |   |
| Other                  long-term liabilities reflected on the balance sheet in accordance                  with                  GAAP |   |                                                                | --     |   |   | -- |   |   | -- |   |   | -- |   |   | -- |   |
| Total                  contractual cash obligations                                                                                   |   | $                                                                   | 7,056  |   | $ | 3,342 |   | $ | 1,204 |   | $ | 322 |   | $ | 2,188 |   |

----

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

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

**Evaluation      of Controls and Procedures **

**Changes          in Controls and Procedures**

----

**PART      II - Other information**

**Item      1. Legal Proceedings**

**Item      6. Exhibits**

|   | 4.1 | Warrant                  Certificate of Endan IT Solutions Ltd. (filed as Exhibit 99.2 to                  the                  Current Report on Form 8-K, dated August 18, 2005, filed with the                  U.S.                  Securities and Exchange Commission on August 24, 2005 (the “August 18,                  2004 Form 8-K”), and incorporated herein by                  reference). |
|--------|-----|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   | 10.1 | Share                Purchase Agreement by and among Data Systems & Software Inc., Kardan                Communication Ltd., Neuwirth Investments Ltd., Meir Givon, dsIT                Technologies Ltd. and Taldor Computer Systems (1986) Ltd. dated as                of July                27, 2005 (filed as Exhibit 99.1 to the August 18, 2004 Form 8-K,                and                incorporated herein by reference). |
|--------|------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   | 10.2 | Unconditional                Guaranty of Endan IT Solutions Ltd. dated as of July 26, 2005 (filed                as                Exhibit 99.3 to the August 18, 2004 Form 8-K, and incorporated herein                by                reference) |
|--------|------|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   | 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. |
|--------|------|-----------------------------------------------------------------------------------------------------------------------------------------------|

----

**SIGNATURES**

|                                    |                                                                                  |                                  |
|-----------------------------------------|---------------------------------------------------------------------------------------|---------------------------------------|
| Dated:                November 17, 2005 | **DATA                SYSTEMS & SOFTWARE INC.**                                   |
|                               |                                                                             |                             |
|                                    | By:                                                                         | /s/ Yacov                Kaufman |
|                                    | Yacov                KaufmanVice President and Chief Financial                Officer |
|                                    |                                                                                  |

----