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

                       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 JUNE 30, 2004 COMMISSION FILE NUMBER 0-19771

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

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

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


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

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

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

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

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

                              |X| Yes               |_| No

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

                              | | Yes               |X| No

      Number of shares  outstanding  of the  registrant's  common  stock,  as of
August 10, 2004: 7,921,691

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

<PAGE>

                  DATA SYSTEMS & SOFTWARE INC. AND SUBSIDIARIES


                                TABLE OF CONTENTS

<TABLE>
<S>                                                                                          <C>
PART I.  FINANCIAL INFORMATION

Item 1. Unaudited Consolidated Financial Statements

             Consolidated Balance Sheets
                     as of December 31, 2003 and June 30, 2004..............................   1

             Consolidated Statements of Operations and Comprehensive Loss
                     for the six and three month periods ended June 30, 2003 and 2004.......   2

             Consolidated Statement of Changes in Shareholders' Equity
                     for the six month period ended  June 30, 2004..........................   3

             Consolidated Statements of Cash Flows
                     for the six month periods ended June 30, 2003 and 2004.................   4

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

Item 2.  Management's Discussion and Analysis of Financial Condition
                      and Results of Operations.............................................  14

Item 3.  Quantitative and Qualitative Disclosures about Market Risk.........................  20

Item 4.  Controls and Procedures............................................................  20


PART II. OTHER INFORMATION

Item 6.  Exhibits and Reports on Form 8-K...................................................  21

SIGNATURES  ................................................................................  22
</TABLE>



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


<PAGE>

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

<TABLE>
<CAPTION>
                                                                                                           AS OF
                                                                                  AS OF DECEMBER          JUNE 30,
                                         ASSETS                                      31, 2003               2004
                                                                                ----------------       ---------------
<S>                                                                                     <C>                   <C>
Current assets:                                                                                           (unaudited)
      Cash and cash equivalents.................................................         $1,213                  $497
      Restricted cash...........................................................            241                   235
      Accounts receivable, net..................................................          7,053                 6,197
      Inventory.................................................................             88                   130
      Other current assets......................................................            661                   861
                                                                                ----------------       ---------------
           Total current assets.................................................          9,256                 7,920
                                                                                ----------------       ---------------

Investment in Comverge, net.....................................................             68                    --
Property and equipment, net.....................................................            814                   723
Other assets....................................................................            613                   627
Funds in respect of employee termination benefits...............................          2,379                 2,581
Goodwill                                                                                  4,430                 4,355
Other intangible assets, net....................................................            114                    96
                                                                                ----------------       ---------------
           Total assets.........................................................        $17,674               $16,302
                                                                                ================       ===============

                               LIABILITIES AND SHAREHOLDERS' EQUITY

Current liabilities:

      Short-term bank credit and current maturities of long-term debt...........         $1,517                $1,417
      Trade accounts payable....................................................          2,586                 1,947
      Accrued payroll, payroll taxes and social benefits........................          1,451                 1,366
      Other current liabilities.................................................          2,973                 2,225
                                                                                ----------------       ---------------
           Total current liabilities............................................          8,527                 6,955
                                                                                ----------------       ---------------

Investment in Comverge, net.....................................................             --                   616
                                                                                ----------------       ---------------
Long-term liabilities:

      Long-term debt............................................................            632                   304
      Other liabilities.........................................................            227                   199
      Liability for employee termination benefits...............................          3,721                 4,056
                                                                                ----------------       ---------------
             Total long-term liabilities........................................          4,580                 4,559
                                                                                ----------------       ---------------
Minority interests..............................................................          1,367                 1,495
                                                                                ----------------       ---------------
Shareholders' equity:
      Common stock - $0.01 par value per share:
          Authorized - 20,000,000 shares;                                                    87
          Issued - 8,740,729 and 8,742,395 shares as of
             December 31, 2003 and June 30, 2004, respectively..................                                   87
      Additional paid-in capital................................................         39,595                39,547
      Warrants..................................................................            461                   461
      Accumulated deficit.......................................................       (33,069)              (33,457)
Treasury stock, at cost - 838,704 and 820,704 shares at December 31, 2003
           and June 30, 2004, respectively......................................        (3,874)               (3,791)
      Accumulated other comprehensive loss......................................             --                 (170)
                                                                                ----------------       ---------------
           Total shareholders' equity...........................................          3,200                 2,677
                                                                                ----------------       ---------------
           Total liabilities and shareholders' equity...........................        $17,674               $16,302
                                                                                ================       ===============
</TABLE>

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

                                      - 1 -


<PAGE>

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

<TABLE>
<CAPTION>
                                                                SIX MONTHS ENDED                      THREE MONTHS ENDED
                                                                    JUNE 30,                               JUNE 30,
                                                         -------------------------------     -----------------------------------
                                                              2003              2004                2003                2004
                                                         -------------     -------------       -------------       -------------
                                                             Restated                              Restated
<S>                                                           <C>                <C>                 <C>                 <C>
Sales:
      Products...........................................     $13,121            $8,156              $4,145              $4,123
      Services...........................................       4,979             4,927               2,247               2,467
      Projects...........................................       1,895             1,472                 832                 710
                                                         -------------     -------------       -------------       -------------
           Total sales                                         19,995            14,555               7,224               7,300
                                                         -------------     -------------       -------------       -------------
Cost of sales:
      Products...........................................      10,749             6,914               3,449               3,549
      Services...........................................       3,386             3,379              1, 686               1,684
      Projects...........................................       1,517             1,186                 805                 541
                                                         -------------     -------------       -------------       -------------
           Total cost of sales                                 15,652            11,479               5,940               5,774
                                                         -------------     -------------       -------------       -------------
      Gross profit.......................................       4,343             3,076               1,284               1,526
Operating expenses:
   Research and development expenses.....................        .153                --                  --                  --
   Selling, general and administrative expenses..........       6,363             3,328               2,106               1,498
                                                         -------------     -------------       -------------       -------------
           Total operating expenses                             6,516             3,328               2,106               1,498
                                                         -------------     -------------       -------------       -------------
Operating income (loss)..................................      (2,173)             (252)               (822)                 28
Interest income..........................................          27                77                   5                  75
Interest expense.........................................        (646)              (86)               (294)                (29)
Other income (expense), net..............................        (165)              237                (151)                136
                                                         -------------     -------------       -------------       -------------
      Income (loss) before taxes on income...............      (2,957)              (24)             (1,262)                210
Taxes on income..........................................          34               (20)                 22                (13)
                                                         -------------     -------------       -------------       -------------
Income (loss) from operations of the Company and its
   consolidated subsidiaries.............................      (2,991)               (4)             (1,284)                223
Share of losses in Comverge..............................        (550)             (684)               (550)               (331)
Minority interests.......................................         104               (48)                121                 (33)
                                                         -------------     -------------       -------------       -------------
       Net  loss from continuing operations                    (3,437)             (736)             (1,713)               (141)
Net income (loss) from discontinued operations,
   net of tax............................................         (34)              348                   3                 348
                                                         -------------     -------------       -------------       -------------
       Net income (loss).................................      (3,471)             (388)             (1,710)                207
                                                         -------------     -------------       -------------       -------------
Other comprehensive income (loss), net of tax:

Differences from translation of financial statements
   of subsidiaries.......................................          --              (170)                 --                  26
                                                         -------------     -------------       -------------       -------------
       Comprehensive income (loss).......................     $(3,471)            $(558)            $(1,710)               $233
                                                         =============     =============       =============       =============

Basic and diluted net income (loss) per share:

  Loss per share from continuing operations..............      $(0.46)           $(0.09)             $(0.22)            $(0.01)
  Discontinued operations................................       (0.00)              0.04                0.00               0.04
                                                         -------------     -------------       -------------       -------------
  Basic and diluted net income (loss) per share..........      $(0.46)           $(0.05)             $(0.22)              $0.03
                                                         =============     =============       =============       =============
Weighted average number of shares outstanding:
         Basic...........................................        7,570             7,918               7,792              7,922
                                                         =============     =============       =============       =============
         Diluted.........................................        7,570             7,918               7,792              7,964
                                                         =============     =============       =============       =============
</TABLE>

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

                                      - 2 -

<PAGE>

                  DATA SYSTEMS & SOFTWARE INC. AND SUBSIDIARIES
      CONSOLIDATED STATEMENT OF CHANGES IN SHAREHOLDERS' EQUITY (unaudited)
                         Six months ended June 30, 2004
                                 (in thousands)

<TABLE>
<CAPTION>
                                                                                                         Accumulated
                                                       Additional                                           other
                               Number of     Common     Paid-In               Accumulated    Treasury   comprehensive
                                 Shares       Stock     Capital    Warrants      Deficit       Stock          loss       Total
                               ------------  --------  ----------  ---------  -------------  ---------  -------------   --------
<S>                                  <C>      <C>       <C>           <C>        <C>          <C>            <C>        <C>
Balances as of
   December 31, 2003                 8,741    $   87    $39,595       $ 461      $(33,069)    $(3,874)       $     -    $3,200

Exercise of options                      1         *       (48)           -              -          83             -        35

Net loss                                 -         -          -           -          (388)           -             -     (388)

Differences from translation
  of subsidiaries' financial
  statements                             -         -          -           -              -           -         (170)     (170)
                               ------------  --------  ----------  ---------  -------------  ---------  -------------   --------

Balances as of
   June 30, 2004                     8,742    $   87    $39,547       $ 461      $(33,457)    $(3,791)       $ (170)    $2,677
                               ============  ========  ==========  =========  =============  =========  =============   ========
</TABLE>


* Less than $1



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

                                      - 3 -


<PAGE>


                  DATA SYSTEMS & SOFTWARE INC. AND SUBSIDIARIES

                CONSOLIDATED STATEMENTS OF CASH FLOWS (unaudited)

                             (dollars in thousands)

<TABLE>
<CAPTION>
                                                                                            SIX MONTHS ENDED JUNE 30,
                                                                                       ------------------------------------
                                                                                           2003                  2004
                                                                                       -------------          -------------
                                                                                         Restated
<S>                                                                                        <C>                       <C>
Cash flows used in operating activities:
      Net loss.......................................................................      $(3,471)                  (388)
      Adjustments to reconcile net loss to net cash provided by (used in)
           operating activities - Appendix A:                                                 4,241                    251
                                                                                       -------------          -------------
           Net cash provided by  (used in) operating activities......................           770                  (137)
                                                                                       -------------          -------------
Cash flows provided by (used in) investing activities:
      Restricted cash................................................................         4,200                      6
      Proceeds from sale of property and equipment...................................            13                     30
      Acquisitions of property and equipment.........................................         (131)                   (54)
      Funding of termination benefits................................................         (249)                  (202)
      Business disposition - see Schedule A..........................................       (3,527)                     --
                                                                                       -------------          -------------
           Net cash provided by (used in) investing activities.......................           306                  (220)
                                                                                       -------------          -------------
Cash flows provided by (used in) financing activities:
      Short-term debt, net...........................................................         (394)                   (71)
      Borrowings of long-term debt...................................................           441                     --
      Repayments of long-term debt...................................................         (403)                  (323)
      Exercise of options............................................................            --                     35
      Purchase of treasury stock.....................................................           (2)                     --
                                                                                       -------------          -------------
           Net cash used in financing activities.....................................         (358)                  (359)
                                                                                       -------------          -------------
Net (decrease) increase in cash and cash equivalents.................................           718                  (716)
Cash and cash equivalents at beginning of period.....................................         1,150                  1,213
                                                                                       -------------          -------------
Cash and cash equivalents at end of period...........................................        $1,868                   $497
                                                                                       =============          =============
Supplemental cash flow information:
      Cash paid during period for interest...........................................          $247                    $78
                                                                                       =============          =============
      Cash paid during period for income taxes.......................................           $91                    $23
                                                                                       =============          =============
Non-cash investing and financing activities:
       Issuance of common stock in lieu of debt repayment............................          $764
       Increase in investment in Comverge from issuance of preferred and common
         stock credited to additional paid in capital................................        $1,085
       Accounts payable incurred in investment of Comverge...........................           $43
       Adjustment of treasury stock and additional paid-in-capital with respect
         to options exercised........................................................                                  $83
</TABLE>


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

                                      - 4 -

<PAGE>


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

<TABLE>
<CAPTION>
                                                                                                SIX MONTHS ENDED JUNE 30,
                                                                                            ----------------------------------
                                                                                                2003                 2004
                                                                                            -------------        -------------
                                                                                              Restated

<S>                                                                                               <C>                    <C>
Adjustments  to  reconcile  net loss to net cash (used in) provided by operating
activities:
      Depreciation and amortization.......................................................           357                  122
      Allowance for doubtful accounts.....................................................            61                 (12)
      Stock and stock option compensation.................................................            53                   --
       Accretion of discount on convertible note and amortization of
                related costs and warrants................................................           493                   --
      Minority interests..................................................................         (104)                   48
      Equity loss.........................................................................           550                  684
      Increase in liability for employee termination benefits.............................           321                  335
      Exchange adjustment on long-term debt...............................................            82                 (34)
      Loss (gain) on disposition of property and equipment................................             4                  (4)
      Deferred taxes......................................................................          (96)                 (38)
      Change in operating assets and liabilities:
           Decrease in accounts receivable and other current assets.......................         3,988                  687
           (Decrease) increase in inventory...............................................           314                 (42)
           Increase (decrease) in other assets............................................         (102)                  (1)
           Decrease in accounts payable and other liabilities.............................       (1,680)              (1,494)
                                                                                            -------------        -------------
           Total..........................................................................        $4,241                 $251
                                                                                            -------------        -------------



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


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

                                      - 5 -


<PAGE>

                  DATA SYSTEMS & SOFTWARE INC. AND SUBSIDIARIES
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (unaudited)
                             (dollars in thousands)

NOTE 1: BASIS OF PRESENTATION

           The accompanying  unaudited consolidated financial statements of Data
Systems & Software Inc.  ("DSSI") and  subsidiaries  (the  "Company")  have been
prepared in accordance  with  accounting  principles  generally  accepted in the
United  States  of  America  for  interim  financial  information  and  with the
instructions to Article 10 of Regulation S-X.  Accordingly,  they do not include
all of the information and footnotes required by accounting principles generally
accepted in the United  States of America for  complete  consolidated  financial
statements.  In the opinion of management,  all adjustments considered necessary
for a fair presentation have been included.  Operating results for the six-month
period ended June 30, 2004 are not  necessarily  indicative  of the results that
may be  expected  for  the  year  ending  December  31,  2004.  These  unaudited
consolidated  financial  statements  should  be read  in  conjunction  with  the
consolidated   financial  statements  and  footnotes  thereto  included  in  the
Company's  Annual  Report on Form 10-K for the year  ended  December  31,  2003.
Certain  reclassifications  have  been  made  to the  Company's  prior  period's
consolidated   financial   statements   to  conform  to  the  current   period's
consolidated financial statement presentation.

NOTE 2: FINANCING OF OPERATIONS

           As of June  30,  2004,  the  Company  had  working  capital  of $965,
including $497 in non-restricted cash and cash equivalents. Net cash used in the
six months of 2004 was $716.  Net cash of $137 was used in operating  activities
during the first two  quarters of 2004.  The net loss for the  six-month  period
ended June 30, 2004 of $388 was  primarily due to non-cash  expenses,  primarily
the Company's share of unconsolidated  losses of Comverge of $684. The Company's
use of cash in  operating  activities  during  the first six  months of 2004 was
primarily  for payment of accounts  payable and other  liabilities  in excess of
collections of trade accounts receivables of $807, net. Net cash of $220 used in
investing activities, was primarily to fund employee termination benefits in the
Company's  majority  owned  dsIT  subsidiary  of $202.  Net cash of $359 used in
financing activities was primarily for payment of debt of $394.

           Approximately $309 of the total working capital at June 30, 2004, was
in  dsIT.  Due to  Israeli  tax  and  company  law  constraints,  as well as the
significant  minority interest in dsIT, such working capital and cash flows from
dsIT's operations are not readily available to finance U.S. activities.

           dsIT is utilizing approximately $790 of its $1,100 lines of credit as
of June 30,  2004.  dsIT's  lines of credit are  denominated  in NIS and bear an
average interest rate of the Israeli prime rate plus 1.4% per annum. The Israeli
prime rate fluctuates and as of June 30, 2004 was 5.6%.

           As of July 31, 2004 the Company's  wholly owned US operations  (i.e.,
excluding  dsIT)  had an  aggregate  of  $502  in  unrestricted  cash  and  cash
equivalents,  reflecting  a $693  decrease  from the balance as of December  31,
2003.

           On April 19, 2004 the Company  signed an agreement in principle  with
Kardan for a strategic  transaction in which, among other things,  Kardan was to
invest $2,000 in exchange for common stock of the Company.  The Company invested
significant effort and funds in order to complete that transaction.  On July 26,
2004,  Kardan  informed the Company that they would not be proceeding  with this
transaction.  In light of this  development,  the Company is  considering  other
strategic alternatives,  which could include possible  restructuring,  merger or
acquisition and/or financing transactions. Should the Company be unsuccessful in
completing a  transaction  providing the  necessary  liquidity,  it may not have
sufficient  funds to finance its US-based  operating  activities  and  corporate
activities for the 12 months following the date of this report.

                                      - 6 -


<PAGE>

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

NOTE 3: INVESTMENT IN COMVERGE

           Comverge's  summary results of operations for the three-months  ended
June 30, 2004 is as follows:

<TABLE>
<CAPTION>
                                                                                  Six months ended     Three months ended
       RESULTS OF OPERATIONS                                                       June 30, 2004         June 30, 2004
                                                                                 -------------------   ------------------

<S>                                                                                          <C>                   <C>
       Sales                                                                                 $8,601                $3,709
       Gross profit                                                                          $3,523                $1,669
       Net loss                                                                             $(4,240)              $(2,156)
</TABLE>

           The  change in the  Company's  Comverge  investment,  during  the six
months ended June 30, 2004 is as follows:

<TABLE>
<CAPTION>
                                                                Comverge common        Comverge        Net investment in
                                                                     stock         preferred stock          Comverge
                                                               -----------------  ------------------  --------------------

<S>                                                                   <C>                   <C>                   <C>
         Balances as of December 31, 2003                             $ (1,824)             $ 1,892               $  68
         Equity loss in Comverge                                           --                  (684)                (684)
                                                               -----------------  ------------------  --------------------

         Balances as of June 30, 2004                                 $ (1,824)             $ 1,208               $ (616)
                                                               =================  ==================  ====================
</TABLE>

           In March 2004, Comverge closed on an additional agreement for private
equity  financing in the amount of $3,000.  This round of financing  diluted the
Company's  holdings in Comverge  to 15% of its  preferred  equity and 37% of its
total equity.

NOTE 4--GOODWILL AND OTHER INTANGIBLE ASSETS

           The entire  balance of goodwill  was in the Software  Consulting  and
Development  segment.  There were no  acquisitions  or  impairments  of goodwill
recorded during the six-month period ended June 30, 2004.

           The Company's  amortizable  intangible  assets  consisted of software
licenses, with a gross carrying amount of $260, accumulated amortization of $164
and $146 and net balances of $96 and $114,  as of June 30, 2004 and December 31,
2003,  respectively.  All  intangibles  assets  are being  amortized  over their
estimated useful lives, which averaged 5 years and the amortization  expense for
the  six  months  ended  June  30,  2003  and  2004  amounted  to $42  and  $16,
respectively.

NOTE 5: WARRANTY PROVISION

           The  Company  grants its  customers  one-year  product  warranty.  No
provision  was made in respect of  warranties  based on the  Company's  previous
history.

                                       -7-


<PAGE>

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

NOTE 6: STOCK-BASED COMPENSATION

           The Company applies  Accounting  Principles Board Opinion ("APB") No.
25,  "Accounting for Stock Issued to Employees" and the related  interpretations
in accounting for its stock option grants to employees and  directors,  with the
disclosure   provisions   of  SFAS  No.   123,   "Accounting   for   Stock-Based
Compensation".  Under APB No. 25,  compensation  expense is  computed  under the
intrinsic  value method of  accounting  to the extent that the fair value of the
underlying  shares on the date of the grant  exceed  the  exercise  price of the
share option, and thereafter  amortized on a straight-line  basis against income
over the expected service period.

           Had compensation  cost for the Company's option plans been determined
based on the fair value at the grant dates of awards, consistent with the method
prescribed in SFAS No. 123, the Company's net loss and loss per share would have
been changed to the pro forma amounts indicated below:

<TABLE>
<CAPTION>

                                                               Six months ended June 30,        Three months ended June 30,
                                                             ------------------------------     ----------------------------
                                                                 2003              2004             2003             2004
                                                             -------------     ------------     ------------     -----------
                                                               Restated                           Restated
                                                             -------------                      ------------
<S>                                                              <C>                <C>            <C>                 <C>
Net income (loss) as reported ...............................    $(3,471)           $(388)         $(1,710)            $207
Plus: Stock-based employee and director compensation
        expense included in reported net loss ...............         53                -                1               -
Less: Total stock-based employee compensation expense
        determined under fair value based method for
        all awards ..........................................        186               61               77              46
                                                             -------------     ------------     ------------     -----------
Pro forma net income (loss) .................................    $(3,604)           $(449)         $(1,786)            $161
                                                             =============     ============     ============     ===========

   Net income (loss) per share:
      Basic and diluted - as reported .......................     $(0.46)          $(0.05)          $(0.22)           $0.03
                                                             =============     ============     ============     ===========
      Basic and diluted - pro forma .........................     $(0.48)          $(0.06)          $(0.23)           $0.02
                                                             =============     ============     ============     ===========
</TABLE>

           The pro forma information in the above table also gives effect to the
application  of  SFAS  No.  123 on  the  share  option  plans  of the  Company's
subsidiaries.

           The  Company   accounts  for  stock-based   compensation   issued  to
non-employees  on a fair value  basis in  accordance  with SFAS No. 123 and EITF
Issue No. 96-18,  "Accounting  for Equity  Instruments  That Are Issued to Other
Than Employees for Acquiring, or in Conjunction with Selling, Goods or Services"
and related interpretations.

                                       -8-


<PAGE>

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

NOTE 7: SEGMENT INFORMATION

<TABLE>
<CAPTION>
                                                         SOFTWARE          ENERGY
                                                      CONSULTING AND    INTELLIGENCE     COMPUTER
                                                       DEVELOPMENT(*)    SOLUTIONS(**)     HARDWARE      OTHER (***)    TOTAL
<S>                                                      <C>              <C>              <C>             <C>        <C>
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 (loss)                                    185             (684)              291           7           (201)

Six months ended June 30, 2003 (Restated):
   Revenues from external customers                      $6,153           $4,700           $9,118          $24        $19,995
   Intersegment revenues                                      -              284               20            0            304
   Segment gross profit                                   1,383            1,313            1,623           24          4,343
   Segment income (loss)                                   (431)          (1,675)             (91)         (6)         (2,203)

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 (loss)                                   122            (331)               93           10           (106)

Three months ended June 30, 2003 (Restated):
   Revenues from external customers                      $3,020               $-           $4,188          $16         $7,224
   Intersegment revenues                                      -                -                -            -              -
   Segment gross profit                                     530                -              738           16          1,284
   Segment income (loss)                                   (447)           (550)             (141)           -         (1,138)
</TABLE>

-----------

(*)    Excludes the results of the US-based consulting activities. See Note 8.

(**)   Operating  results  of  Comverge  (in the Energy  Intelligence  Solutions
       segment) are no longer consolidated beginning the second quarter of 2003.

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


RECONCILIATION OF SEGMENT LOSS TO CONSOLIDATED NET LOSS

<TABLE>
<CAPTION>
                                                               Six months ended               Three months ended June 30,
                                                                   June 30,
                                                        --------------------------------     ------------------------------
                                                            2003               2004              2003             2004
                                                        --------------     -------------     -------------     ------------
                                                          Restated                             Restated
                                                        --------------                       -------------
<S>                                                           <C>                 <C>            <C>               <C>
Total income (loss) for reportable segments                   (2,197)             (208)          $(1,138)          (116)
Other operational segment income (loss)                           (6)                 7                 -            10
                                                        --------------     -------------     -------------     ------------
Total operating income (loss)                                 (2,203)             (201)           (1,138)          (106)
Net loss of corporate headquarters                            (1,234)             (535)             (575)           (35)
Discontinued operation income (loss)                             (34)              348                 3            348
                                                        --------------     -------------     -------------     ------------
Total consolidated net income (loss)                         $(3,471)            $(388)          $(1,710)         $207
                                                        --------------     -------------     -------------     ------------
</TABLE>



                                       -9-


<PAGE>

                  DATA SYSTEMS & SOFTWARE INC. AND SUBSIDIARIES
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (unaudited)
                      (IN THOUSANDS EXCEPT PER SHARE DATA)

NOTE 8: DISCONTINUED OPERATIONS

           Since the latter part of 2003, the Company has not recorded  revenues
from its US-based  consulting  business.  During the second quarter of 2004, the
Company  decided to discontinue  its efforts to reestablish  this business as it
was  previously  conducted.  As a  result,  the  Company  recorded  a gain  from
discontinued operations of $348, net of tax.

           Assets and liabilities of the discontinued operation were as follows:


                                              December 31,       June 30,
                                                 2003             2004
                                              ----------       ----------

     Current assets ..........................    $   2             $  --
                                               =========        ==========
     Fixed assets ............................    $   2             $  --
                                               =========        ==========
     Current liabilities .....................    $ 729             $  --
                                               =========        ==========



           Profit  and loss of the  discontinued  operations  within  consulting
segment were as follows:

<TABLE>
<CAPTION>
                                                 Six months ended June 30,            Three months ended June 30,
                                              --------------------------------      -------------------------------
                                               2003                2004               2003              2004
                                              -------------     --------------      -----------      --------------
                                                Restated                             Restated
                                              -------------                         -----------
<S>                                                    <C>                <C>              <C>                 <C>
     Sales ...................................         $158               $ -              $61                 $ -
     Cost of sales ...........................          141                 -              54                    -
                                              -------------     --------------      -----------      --------------
     Gross profit ............................           17                 -               7                    -
                                              -------------     --------------      -----------      --------------
     Loss from operations ....................         (30)               (2)               5                  (1)
     Interest expense ........................            4                 4               2                    2
                                              -------------     --------------      -----------      --------------
     Net income (loss) from discontinued
           operations ........................        $(34)              $348              $3                 $348
                                              =============     ==============      ===========      ==============
</TABLE>


                                     - 10 -


<PAGE>

NOTE 9: RESTATEMENT

           Results have been restated for the second  quarter of 2003  following
the determination  that no change of the Company's interest in Comverge occurred
following  issuance of  Comverge's  preferred  stock.  In addition,  the Company
utilized a final value based on a third party valuation of the 877,000 shares of
Comverge's  common stock issued in connection with Comverge's  purchase of 6D in
April  2003.  As a  result  of  these  changes,  the  Company  reduced  the gain
previously  recorded in its additional  paid-in capital by $3,269,  reducing the
investment  and resulting  equity in the losses of Comverge in second quarter of
2003. In addition, the Company determined that it is no longer committed to fund
Comverge and due to its negative  common stock  investment  in Comverge,  ceased
recording  equity  losses  against its common  investment  and will  continue to
record equity losses against its preferred investment in Comverge.

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

<TABLE>
<CAPTION>
                                                             Six            Three
                                                            months          months
                                                             ended           ended
                                                          ----------------------------
                                                                  June 30, 2003
                                                          ----------------------------
<S>                                                           <C>           <C>
Net loss as reported                                          $(4,422)      $(2,661)
Effect of restatement                                              951           951
                                                          -------------    -----------
Net loss - as restated                                        $(3,471)      $(1,710)
                                                          =============    ===========


Basic and diluted net loss per share - as reported             $(0.58)       $(0.34)
Effect of restatement                                             0.12          0.12
                                                          -------------    -----------
Basic and diluted net loss per share - as restated             $(0.46)       $(0.22)
                                                          =============    ===========
</TABLE>

NOTE 10: SUBSEQUENT EVENT

           On April 19, 2004,  the Company signed an agreement in principle with
Kardan  Communications  Ltd.  ("Kardan"),  a subsidiary  of Kardan  N.V.,  for a
strategic  transaction  with Kardan or an  affiliate  thereof.  The  transaction
contemplated the purchase by the Company of certain  interests in a portfolio of
communication  and  technologies  companies  owned by Kardan in exchange for the
issuance  by the  Company of common  stock.  The  agreement  in  principle  also
contemplated  the  issuance  by the Company of  additional  shares of its common
stock to Kardan in exchange  for the  approximately  15% of the  Company's  dsIT
Technologies Ltd. subsidiary ("dsIT"),  not currently owned by the Company and a
$2,000  cash  investment.   The  agreement  included  an  exclusivity  provision
prohibiting  DSSI from soliciting or engaging in discussions with respect to any
third party alternative transaction. Consummation of the transaction was subject
to  completion  of  due  diligence,  negotiation  and  execution  of  definitive
agreements, and various other agreements, conditions and terms.

           On July 26, 2004 Kardan Communications Ltd. informed the Company that
Kardan no longer intends to proceed with the transaction. In connection with the
transaction, the Company recorded approximately $82 in deferred costs, primarily
professional fees, to be included in its Comverge  investment.  The write-off of
these expenses will be included in the third quarter results.

                                     - 11 -


<PAGE>


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

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

           The following discussion includes statements that are forward-looking
in nature.  Whether such statements ultimately prove to be accurate depends upon
a variety of factors  that may affect our business  and  operations.  Certain of
these factors are  discussed  below under  "Factors  That May  Influence  Future
Results" and in "Item 1.  Description  of  Business-Factors  That May  Influence
Future  Results" in our Annual  Report on Form 10-K for the year ended  December
31, 2003 (the "2003 10-K").

OVERVIEW AND TREND INFORMATION

           During the  periods  included  in this  report,  we operated in three
reportable  segments:  software consulting and development,  energy intelligence
solutions, and computer hardware. The following analysis should be read together
with  the  segment  information  provided  in  Note 7 to the  interim  unaudited
consolidated  financial  statements  included in this  quarterly  report,  which
information is hereby incorporated by reference into this Item 2.

           Software Consulting and Development

           Segment revenues continued to decrease in the second quarter of 2004,
primarily  as a result of the  decreasing  backlog  of fixed  price  development
projects.  We continue to invest significant  marketing efforts to introduce and
increase the visibility our products and expertise,  including our participation
in the MarketReach  America  program,  introducing our diver detection and sonar
system  (DDS) for  protecting  critical  coastal  and  offshore  sites to the US
Homeland Security market.

           Energy Intelligence Solutions

           In June 2004,  Comverge announced its fourth Virtual Peaking Capacity
TM ("VPC")  program.  This new  program,  contracted  with ISO New England to be
operated in Southwestern Connecticut,  brings the VPC now under contract to more
than 190 megawatts. These programs have significant marketing,  introduction and
installation  costs.  Comverge  expects  revenues  from these  programs to begin
showing their  positive  effect  towards the end of the third quarter and in the
fourth quarter of this year.

           Computer Hardware

           Sales  in the  second  quarter  of 2004  increased,  compared  to the
previous quarter and the second quarter of 2003. However, this increase was from
our traditional computer hardware VAR activity.  The sales in this area are very
competitive and difficult to forecast,  Databit is making significant efforts in
order to  increase  its sales in other  areas  such as WiFi and  other  network,
integrated hardware and software areas.

           Corporate

           Starting the  beginning  of this year,  our Chief  Executive  Officer
retired from full-time employment,  although at the Board's request he continues
to act as CEO as a  consultant,  under the terms  prescribed  by his  employment
agreement.  In the context of our continuing  evaluation of corporate  strategic
alternatives,  on  April  19,  2004 we  signed a letter  agreement  with  Kardan
Communications  Ltd.  ("Kardan"),  a subsidiary of Kardan N.V.,  for a strategic
transaction with Kardan or an affiliate thereof. The transaction contemplated us
purchasing  certain  interests in a portfolio of communication  and technologies
companies owned by Kardan in exchange for our issuing  approximately 3.7 million
shares of common stock and issuing additional stock in exchange for Kardan's 15%
interest in our dsIT subsidiary and a $2 million cash investment.  The agreement
in principal and consummation of the transactions  were subject to completion of
due diligence,  negotiation and execution of definitive agreements,  and various
other agreements, conditions and terms.

           On July 26, 2004 Kardan  informed  the Company  that Kardan no longer
intends to proceed with the  transaction  with the Company  contemplated  by the
aforementioned  agreement in principle. In light of this recent development,  we
intend to consider other strategic  alternatives,  which could include  possible
restructuring, merger or acquisition and/or financing transactions.

                                     - 12 -


<PAGE>


RESULTS OF OPERATIONS

       The following  table sets forth certain  information  with respect to the
consolidated  results of  operations  of the Company for the three  months ended
June 30, 2003 and 2004,  including the percentage of total revenues  during each
period attributable to selected components of the operations  statement data and
for the  period to period  percentage  changes  in such  components.  Being that
starting  the  second  quarter  of 2003 we do not fully  consolidate  Comverge's
results of operations,  but rather include them on an equity basis,  the results
of the periods presented are not fully comparable.

<TABLE>
<CAPTION>
                                           Six months ended June 30,                          Three months ended June 30,
                               --------------------------------------------------   ----------------------------------------------
                                       2003                2004           Change           2003              2004          Change
                               -------------------   -------------------  -------   -----------------  -----------------  --------
                                Restated                                            Restated
                               ----------  -------   ---------- --------  -------   ---------  ------  ---------- ------- --------
                                 ($,000)    % of       ($,000)   % of      % of      ($,000)    % of      ($,000)   % of    % of
                                           sales                 sales      2003               sales                sales   2003
                               ----------  -------   ---------- --------            ---------  ------  ---------- ------
<S>                            <C>          <C>       <C>        <C>        <C>       <C>       <C>       <C>       <C>      <C>
Sales                          $ 19,995     100%      $14,555    100%       (27)      $7,224    100%      $7,300    100%       1%
Cost of sales                    15,652      78        11,479     79        (27)       5,940     82        5,774     79       (3)
                               ----------  -------   ---------- --------            ---------  ------  ---------- ------
         Gross profit             4,343      22         3,076     21        (29)       1,284     18        1,526     21       18
R&D expenses                        153       1             -      0       (100)           -      -            -      0
SG&A expenses                     6,363      32         3,328     23        (48)       2,106     29        1,498     21      (29)
                               ----------  -------   ---------- --------            ---------  ------  ---------- ------
   Operating income (loss)      (2,173)     (11)        (252)     (2)       (88)       (822)    (11)          28      1     (103)

Interest expense, net             (619)      (3)          (9)      0        (99)       (289)     (4)          46      1     (116)
Other income (loss), net          (165)      (1)           237     2       (244)       (151)     (2)         136      2     (190)
                               ----------  -------   ---------- --------            ---------  ------  ---------- ------
Income (loss) before taxes on   (2,957)     (15)         (24)      0        (99)       (1,262)  (17)         210      3     (117)
   income
Taxes on income                      34       0           (20)     0       (159)          22      0          (13)     0     (159)
                               ----------  -------   ---------- --------            ---------  ------  ---------- ------
Income (loss) from operations   (2,991)     (15)          (4)      0       (100)     (1,284)    (18)         223      3     (117)
   of the Company and its
   consolidated subsidiaries
Share in losses of Comverge       (550)      (3)         (684)    (5)        24        (550)     (8)        (331)    (5)     (40)
Minority interests                  104       -          (48)      0       (146)         121      2          (33)     0     (127)
                               ----------  -------   ---------- --------            ---------  ------  ---------- ------
Net loss from continuing        (3,437)     (17)        (736)     (5)       (79)     (1,713)    (24)        (141)    (2)     (92)
   operations
Net income (loss) from
   discontinued operations,
   net of tax                      (34)      (0)          348      2         --            3      0          348      5       --
                               ----------  -------   ---------- --------            ---------  ------  ---------- ------
Net income (loss)              $(3,471)     (17%)      $(388)     (3)       (89)    $(1,710)    (24)        $207      3%    (112)%
                               ==========  =======   ========== ========  ========  =========  ======  ========== ======= ========
</TABLE>

           Sales.  Sales in the second  quarter of 2004 were similar to those in
the second  quarter of 2003,  with a slight shift of revenues  from projects and
products in favor of revenue from  services.  The decrease in sales in the first
six months of 2004,  as compared to the same period in 2003,  was  primarily due
the inclusion of Comverge's sales in the first quarter of 2003 and our no longer
consolidating Comverge's operations starting the second quarter of 2003.

           Gross  profit.  Both the gross  profit  and the gross  profit  margin
improved  in the second  quarter of 2004 as  compared  to the second  quarter of
2003,  due to improved  results in both our segments.  At dsIT,  although  sales
marginally  decreased,  gross profit  increased due our improved cost structure,
with the gross profit margin  increasing from 18% in the second quarter of 2003,
to 23% in the second  quarter of 2004. At Databit,  the increased  gross profits
was due to a  combination  of an increase  in sales and  improved  gross  profit
margins of 19% in the  second  quarter  of 2004,  compared  to 17% in the second
quarter of 2003.  The decrease in gross  profits in the first six months of 2004
as compared to the same period in 2003,  was  attributable  to the  inclusion of
Comverge's  gross  profit  in the  first  quarter  of  2003  and  our no  longer
consolidating Comverge's operations starting the second quarter of 2003.

           Selling, general and administrative expenses ("SG&A"). SG&A decreased
by $0.6  million,  or 29%,  in the second  quarter of 2004,  compared  to second
quarter  of  2003.  This  reflected  a  decrease  in  SG&A  expenses  in all our
activities,  particularly in corporate activities. This decrease was in addition
to the decrease already  achieved in the first quarter of 2004,  compared to the
first  quarter of 2003,  bringing  the total  decrease  in SG&A in the first six
months of 2004,  from our ongoing  consolidated  activities,  as compared to the
same period in 2003, to $0.9 million, or 20%. In addition, SG&A in the first six
months of 2003,  included  $2.2  million of  Comverge's  SG&A;  since the second
quarter of 2003, we no longer consolidate Comverge's operations.

                                     - 13 -


<PAGE>

           In our  attempt to close the deal with  Kardan we will have  invested
approximately  $0.3 million in professional fees that were to be included in our
investment.  As described above, we were recently  informed that Kardan does not
wish to proceed with the transaction. As a result these expenses will be charged
to our third quarter results.

           Interest income  (expense).  The decrease in net finance  expenses is
attributable  to completing the accretion of discounts and the  amortization  of
related costs in connection with  convertible debt and warrants in the first few
months of 2003,  which accounted for a significant  portion of these expenses in
the second quarter and first six months of 2003.

              Equity loss in unconsolidated  subsidiary.  The equity loss in the
second quarter and first six months of 2004 was attributable to Comverge,  whose
results we account for on an equity basis as of the second  quarter of 2003. Our
share of  Comverge's  $2.2  million and $4.2 million of net losses in the second
quarter and first six months of 2004,  respectively,  was $0.3  million and $0.7
million, for those periods, respectively. Comverge's increased losses during the
2004  periods  was  primarily  due  to  increased   SG&A   expenses,   primarily
attributable to the marketing expenses associated with its new VPC programs.

              Other  income.  During the second  quarter of 2004,  we received a
decision from the Israeli Supreme Court in our dispute with an Israeli bank.. In
its decision.  the Court reversed the district  court's award for costs in favor
of the bank for which we had had previously accrued.  The court also remanded to
the district  court our claims  against the bank for a  determination  as to the
amount of  damages  As a result of the  decision  we  recorded  other  income of
approximately $0.2 million.

           Discontinued  operations.  Since the latter part of 2003, we have not
recorded  revenues  from our US based  consulting  business.  During  the second
quarter of 2004,  we decided to  discontinue  our  efforts to  reestablish  this
business as it was previously  conducted.  As a result,  we recorded a gain from
discontinued operations of $0.3 million.

LIQUIDITY AND CAPITAL RESOURCES

           As of  June  30,  2004,  we had  working  capital  of  $1.0  million,
including $0.5 million in  non-restricted  cash and cash  equivalents.  Net cash
used in the first quarter of 2004 was $0.7 million. Net cash of $0.1 million was
used in operating activities during the first two quarters of 2004. The net loss
for the six-month period ended June 30, 2004 of $0.4 million  included  non-cash
expenses primarily  including our share of unconsolidated  losses of Comverge of
$0.7  million.  We used cash in our  operating  activities  during the first two
quarters  of 2004  primarily  for the  payment  of  accounts  payable  and other
liabilities  in excess of  collections  of trade  accounts  receivables  of $0.8
million,  net. The net cash of $0.2 million  used in  investing  activities  was
primarily  for funding  employee  termination  benefits and the net cash of $0.4
million used in financing activities was primarily for the net payments of debt.

           Of the total  working  capital at June 30, 2004,  $0.3 million was in
our  majority-owned  dsIT  subsidiary.  Due  to  Israeli  tax  and  company  law
constraints as well as the significant  minority  interest in dsIT, such working
capital  and cash flows from dsIT's  operations  are not  readily  available  to
finance U.S. activities.

           As of July 31, 2004 our wholly owned US operations  (i.e.,  excluding
dsIT and  Comverge)  had an aggregate of $0.5 million in  unrestricted  cash and
cash  equivalents,  reflecting  a $0.7 million  decrease  from the balance as of
December 31, 2003.

          On April 19, 2004 we signed an agreement with  Kardan for a  strategic
transaction  in which,  amongst  other  things,  Kardan was to invest  $2,000 in
exchange for DSSI's common stock.  We invested  significant  effort and funds in
order to complete that  transaction.  On July 26, 2004,  Kardan informed us they
would not be proceeding with this  transaction.  In light of this development we
are  considering  other  strategic  alternatives,  which could include  possible
restructuring, merger or acquisition and/or financing transactions. Should we be
unsuccessful  in completing a transaction  providing the necessary  liquidity to
finance our US-based  operating  activities we may not have sufficient  funds to
finance our US-based operating  activities and our corporate  activities for the
12 months following the date of this report.

                                     - 14 -


<PAGE>

CONTRACTUAL OBLIGATIONS AND COMMITMENTS

           Our  contractual  obligations  and  commitments  at  June  30,  2004,
excluding certain severance  arrangements  described below,  principally include
obligations  associated  with  our  outstanding  indebtedness,   future  minimum
operating lease obligations and contractual  obligations to our CEO for payments
for his post-retirement consulting services to us, are as set forth in the table
below.

<TABLE>
<CAPTION>
                                                                     Cash Payments Due During Year Ending June 30,
                                                            ---------------------------------------------------------------
                                                                                 (amounts in thousands)
                                                                                 ----------------------
Contractual Obligations                                      Total         2005         2006        2007         After 2007
-----------------------                                      -----         ----         ----        ----         ----------
<S>                                                         <C>          <C>          <C>           <C>                <C>
Long-term debt related to Israeli operations                  $934         $630         $202        $102                $--

Guarantees                                                     410          410           --          --                 --

Operating leases                                             2,877        1,212          595         435                635

Consulting agreement with CEO                                1,304           --        1,304          --                 --
                                                            ------       ------       ------        ----               ----

Total contractual cash obligations                          $5,525       $2,252       $2,101        $537               $635
                                                            ======       ======       ======        ====               ====
</TABLE>

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

           Previously,  we  accrued a loss for  contingent  performance  of bank
guarantees.  Our remaining  commitment under these guarantees is $0.4 million at
June 30 2004. We have collateralized a portion of these guarantees by means of a
deposit of $0.2 million as of June 30, 2004.  The  obligation  is presented as a
current liability, though it is uncertain as to when actual payment may be made.

           Under  Israeli  law and labor  agreements,  dsIT is  required to make
severance payments to dismissed employees and to employees leaving employment in
certain other  circumstances.  The  obligation  for  severance pay benefits,  as
determined by the Israeli Severance Pay Law, is based upon length of service and
last salary.  These  obligations are  substantially  covered by regular deposits
with recognized severance pay and pension funds and by the purchase of insurance
policies.  As of June 30,  2004,  we had a total of $4.1  million  in  potential
severance obligations,  of which approximately $2.6 million was funded with cash
to insurance  companies and approximately $1.5 million was unfunded.  The entire
$4.1 million was accrued for as of June 30, 2004.

           Under  the  terms of his  employment  agreement  with us,  we have an
obligation to pay our Chief Executive Officer  consulting fees over a seven-year
period starting  January 1, 2004.  During the first four years of the consulting
period,  we have to pay our CEO $237,000 per year, equal to 50% of his salary in
effect as of December  31, 2003.  During the last three years of the  consulting
period, we must pay $119,000 per year, equal to 25% of that salary. In addition,
we must make contributions to a non-qualified  defined  contribution  retirement
plan  equal to 25% of the  consulting  fee.  Under the  terms of the  employment
agreement,  we are  obliged  to fund  the  amounts  payable  for the term of the
consulting period by the purchase of an annuity or similar investment product at
the  beginning  of the  consulting  period.  The CEO has  agreed  to  forgo  the
commitment  of  immediate  funding  for the next 12 months  or until we  acquire
additional funding.

           We  also  have  obligations   under  various   agreements  and  other
arrangements  with  officers  and other  employees  with  respect  to  severance
arrangements and multiyear employment agreements as described below.

                                     - 15 -

<PAGE>

ITEM 3.    QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

           In the normal course of business,  we are exposed to  fluctuations in
interest  rates on  lines-of-credit  and long-term  debt incurred to finance our
operations   in  Israel,   currently   $787,000  and   $934,000,   respectively.
Additionally,   our  monetary   assets  and   liabilities   (net   liability  of
approximately $726,000) in Israel are exposed to fluctuations in exchange rates.
We do not employ specific strategies,  such as the use of derivative instruments
or  hedging,  to manage our  interest  rate or foreign  currency  exchange  rate
exposures.

ITEM 4.    CONTROLS AND PROCEDURES

EVALUATION OF CONTROLS AND PROCEDURES

           Within 90 days prior to the date of filing of this report, we carried
out an  evaluation,  under the  supervision  and with the  participation  of our
management,  including  the Chief  Executive  Officer  and the  Chief  Financial
Officer,  of the design and operation of our disclosure controls and procedures.
Based on this  evaluation,  our Chief  Executive  Officer  and  Chief  Financial
Officer concluded that our disclosure  controls and procedures are effective for
gathering,  analyzing and disclosing the information we are required to disclose
in the reports we file under the  Securities  Exchange  Act of 1934,  within the
time periods specified in the SEC's rules and forms.

CHANGES IN CONTROLS AND PROCEDURES

           There have been no significant changes in our internal controls or in
other factors that could  significantly  affect internal controls  subsequent to
the date of our most recent evaluation.

                                     - 16 -


<PAGE>

                           PART II - OTHER INFORMATION

ITEM 6: EXHIBITS AND REPORTS ON FORM 8-K

           (a) Exhibits

              31.1   Rule 13a-14(a) Certification by Chief Executive Officer

              31.2   Rule 13a-14(a) Certification by Chief Financial Officer

              32.1   Section 1350 Certification by Chief Executive Officer *

              32.2   Section 1350 Certification by Chief Financial Officer *

----------
* A signed original of this written  statement  required by Section 906 has been
provided to the Company and will be retained by the Company and furnished to the
Securities and Exchange Commission or its staff upon request.

           (b) Reports on Form 8-K

              (i)    Report on Form 8-K, filed on April 5, 2004 (earliest  event
                     reported March 31, 2004): Item 5 was reported.

              (ii)   Report on Form 8-K, filed on April 19, 2004 (earliest event
                     reported April 19, 2004): Item 5 was reported.

              (iii)  Report on Form 8-K, filed on May 17, 2004  (earliest  event
                     reported May 17, 2004): Item 12 was reported.

              (iv)   Report on Form 8-K, filed on May 27, 2004  (earliest  event
                     reported May 25, 2004): Item 5 was reported.



                                     - 17 -


<PAGE>

                                   SIGNATURES

           Pursuant to the requirements of the Securities  Exchange Act of 1934,
the  Registrant  has duly  caused  this report to be signed on its behalf by its
Principal Financial Officer thereunto duly authorized.


                                          DATA SYSTEMS & SOFTWARE INC.

Dated:  August 10, 2004

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


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