**SECURITIES AND EXCHANGE COMMISSION**


**WASHINGTON,
D.C. 20549**





**AMENDMENT
NO. 1 ON FORM 10-K/A TO**




**FORM
10-K**




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


**SECURITIES
EXCHANGE ACT OF 1934**





**For
      the fiscal year ended December 31, 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 Identification No.)****incorporation
      or organization)****200
      Route 17, Mahwah, New Jersey**
    
    **07430****(Address
      of principal executive offices)**
    
    **(Zip
      Code)**




**(201)
529-2026**


**Registrant’s
telephone number, including area code**







**Securities
registered pursuant to Section 12(b) of the Act: None**




**Securities
registered pursuant to Section 12(g) of the Act:**


**Common
Stock, par value $.01 per share**


**Common
Stock Purchase Rights**


(Title of
Class)




Indicate
by check mark whether the registrant (1) has filed all reports required to be
filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the
preceding 12 months (or for such shorter period that the registrant was required
to file such reports), and (2) has been subject to such filing requirements for
the past 90 days. Yes  x No o




Indicate
by check mark if disclosure of delinquent filers pursuant to Item 405 of
Regulation S-K is not contained herein, and will not be contained, to the best
of registrant’s knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. o




Indicate
by check mark whether the registrant is an accelerated filer (as defined in
Rule 12b-2 of the Act). Yes  o No  x




The
aggregate market value of the common stock held by non-affiliates of the
registrant at June 30, 2004 was
approximately $13.3  million.
The aggregate market value was calculated by using the closing price of the
stock on that date on The Nasdaq SmallCap Market.




Number of
shares outstanding of the registrant’s common stock, as of March 31,
2005: 8,116,691





**DOCUMENTS
INCORPORATED BY REFERENCE:**




None.










**DATA
SYSTEMS & SOFTWARE INC.**


**AMENDMENT
NO. 1 ON FORM 10-K/A**


**TO
ANNUAL REPORT ON FORM 10-K**




**TABLE
OF CONTENTS**





**Page**PART
      IIIItem
      10. Directors and Executive Officers of the Registrant
    1Item
      11. Executive and Director Compensation
    3Item
      12. Security Ownership of Certain Beneficial Owners and Management and
      Related Stockholder Matters
    8Item
      13. Certain Relationships and Related Transactions
    9Item
      14. Principal Accounting Fees and Services
    9Signatures
    10




-i-





PART
III




**Item
10.** **Directors
and Executive Officers of the Registrant**




**Directors,
Executive Officers and Key Managers**




Set forth
below is certain information concerning our directors, executive officers and
key managers:




Name
    
    Age
    
    PositionGeorge
      Morgenstern
    
    71
    
    Director,
      Chairman of the Board, President and Chief Executive Officer; Chairman of
      the Board of our dsIT Technologies Ltd. subsidiary (“dsIT”); and director
      of Comverge, Inc. (“Comverge”)Samuel
      M. Zentman
    
    59
    
    Director,
      Member of Audit CommitteeAvi
      Kerbs
    
    57
    
    DirectorElihu
      Levine
    
    72
    
    Director,
      Member of Audit CommitteeShane
      Yurman
    
    57
    
    Director,
      Chairman of Audit CommitteeShlomie
      Morgenstern
    
    42
    
    Vice
      President-Operations, Chief Executive Officer and President of
      DatabitJacob
      Neuwirth
    
    58
    
    Chief
      Executive Officer and President of dsITYacov
      Kaufman
    
    47
    
    Vice
      President and Chief Financial Officer; and Vice President and Chief
      Financial Officer of dsIT




**George
Morgenstern** has been
our Chairman of the Board since June 1993, and has been our President and Chief
Executive Officer since our incorporation in 1986. Mr. Morgenstern also serves
as Chairman of the Board of dsIT, and as a director of Comverge. Mr. Morgenstern
was the Chairman of the Board of Comverge from October 1997 to April 2003.




**Samuel
M. Zentman** has been
one of our directors since November 16, 2004. Since 1980 Dr. Zentman has been
the president and chief executive officer of a privately-held textile firm,
where he also served as vice president of finance and administration from 1978
to 1980. From 1973 to 1978, Dr. Zentman served in various capacities at American
Motors Corporation.




**Avi
Kerbs** has been
one of our directors since December 2002. Since 1991, Mr. Kerbs has been the
Chief Executive Officer and President of Teuza Management and Development 1991
Ltd., a company that manages an Israeli publicly-traded venture capital company.
Mr. Kerbs is a director of Nova Measuring Instruments Ltd.




**Elihu
Levine** has been
one of our directors and a member of our Audit Committee since April 2003. From
1992 to his retirement in January 1997, Mr. Levine was an officer and employed
in various executive capacities by International Data Operations, Inc., one of
our subsidiaries. Mr. Levine also served as a director of Tower Semiconductor
Ltd. from March 1997 to January 2000.




**Shane
Yurman** has been
one of our directors and Chairman of the Audit Committee since April 2003. Mr.
Yurman, a certified public accountant, has been engaged in public accounting
since 1971. Mr. Yurman is a member of the American Institute of Certified Public
Accountants and the New York State Society of Certified Public Accountants where
he previously served as a member of the Auditing Standards and Procedures
Committee.




**Shlomie
Morgenstern** has been
our Vice President-Operations since February 2000 and was one of our directors
from November 2001 until December 2002. Mr. Morgenstern also serves as President
and Chief Executive Officer of our Databit subsidiary. Since 1996, Mr.
Morgenstern has been employed by us in various administrative capacities. Mr.
Morgenstern is the son of George Morgenstern, our Chairman of the Board,
President and Chief Executive Officer.




-1-


****


**Jacob
Neuwirth** has been
Chief Executive Officer and President of dsIT since December 2001. From 1994 to
2001, he was the President and the founder of Endan IT Solutions Ltd., an
Israeli IT solutions provider specializing in billing and healthcare IT
solutions, which was acquired by dsIT in December 2001.




**Yacov
Kaufman** has been
our Executive Vice President since December 2001 and our Chief Financial Officer
since February 1996. Mr. Kaufman has also served as a Vice President of dsIT
since 1992 and as Chief Financial Officer of dsIT since 1990, having served as
Controller of dsIT since 1986.




**Audit
Committee**




We have
an Audit Committee that was established by our Board of Directors for the
purpose of overseeing our accounting and financial reporting processes and
audits of our financial statements by our independent auditors. The members
of the Audit Committee are Messrs. Yurman (Chairman), Kerbs and Levine. Each of
the members of the Audit Committee meets the independence and experience
requirements of Marketplace Rule 4350(d)(2) of The Nasdaq Stock Market,
Inc.




**Audit
Committee Financial Expert**




Our Board
has determined that Mr. Shane Yurman, the Chairman of our Audit Committee, is an
“audit committee financial expert” as defined in Item 401(h)(2) of Regulation
S-K. Mr. Yurman is independent in accordance with SEC and Nasdaq listing
standards applicable to our company.




**Compliance
with Section 16(a) of the Securities Exchange Act of 1934**




Section
16(a) of the Securities Exchange Act of 1934 (the “Exchange Act”) requires our
executive officers and directors, and persons who own more than 10% of a
registered class of our equity securities to file reports of ownership and
changes in ownership with the SEC. These persons are also required by SEC
regulation to furnish us with copies of all Section 16(a) forms they file. Based
solely on its review of such forms received by us or written representations
from certain reporting persons, except as described below we believe that during
2004 all applicable filing requirements were complied with by its executive
officers and directors.





Dr.
Zentman’s Form 4 disclosing his receipt of options to purchase 7,500 shares of
common stock automatically granted to him on his election as a director on
November 16, 2004 was filed one day late due to delays in obtaining an EDGAR
identification number for Dr. Zentman.





**Code
of Ethics**




We have
adopted a code of ethics that applies to our principal executive officer,
principal financial officer, and principal accounting officer or controller,
and/or persons performing similar functions. Our code of ethics is incorporated
by reference as an exhibit to this Annual Report.





-2-





**Item
11.**  **Executive
and Director Compensation**




**Executive
Compensation**




The
following table sets forth for the periods indicated information concerning the
compensation of our Chief Executive Officer and the four other officers who
received in excess of $100,000 in salary and bonus during 2004 (the “named
executive officers”):




**SUMMARY
      COMPENSATION TABLE**Annual
      Compensation
    
    Long
      Term
      Compensation
      Awards
    
    All
      Other
      Compensation
      ($)Name
      and
      Principal
      Position
    
    Year
    
    Salary
      ($)
    
    Bonus
      ($)
    
    Restricted
      StockAwards
      ($)
    
    Securities
      UnderlyingOptions
      (#)George
      Morgenstern
    
    
    2004
    
    
    241,396
    
    
    13,712
    
    
    --
    
    
    180,000
    (1)
    
    101,550
    (2)Chief
      Executive Officer
    
    
    2003
    
    
    464,250
    
    
    --
    
    
    --
    
    
    --
    
    
    177,8252002
    
    
    465,700
    
    
    --
    
    
    --
    
    
    --
    
    
    182,860Yacov
      Kaufman
    
    
    2004
    
    
    183,839
    
    
    13,711
    
    
    --
    
    
    75,000
    (3)
    
    51,239
    (4)Chief
      Financial Officer
    
    
    2003
    
    
    182,942
    
    
    --
    
    
    --
    
    
    --
    
    
    49,9012002
    
    
    170,297
    
    
    --
    
    
    --
    
    
    --
    
    
    37,899Shlomie
      Morgenstern
    
    
    2004
    
    
    258,432
    
    
    181,035
    (5)
    
    67,450
    (6)
    
    305,000
    (7)
    
    21,990
    (8)Vice
      President
    
    
    2003
    
    
    210,800
    
    
    50,000
    
    
    --
    
    
    --
    
    
    14,0452002
    
    
    204,345
    
    
    15,000
    
    
    --
    
    
    --
    
    
    7,440Jacob
      Neuwirth
    
    
    2004
    
    
    220,369
    
    
    1,162
    
    
    --
    
    
    --
    
    
    35,572
    (4)Chief
      Executive Officer
    
    
    2003
    
    
    154,963
    
    
    83,694
    
    
    --
    
    
    --
    
    
    44,290and
      President of dsIT
    
    
    2002
    
    
    174,512
    
    
    --
    
    
    --
    
    
    --
    
    
    39,788
 ****










(1)
    Represents
      shares of common stock underlying options granted to George Morgenstern,
      and described in the table captioned “Option SAR Grants in 2004,” below.


(2)
    Consists
      of (i) $59,888 in contributions to a non-qualified retirement fund, (ii)
      $30,675 in life insurance premiums, (iii) $6,000 in director’s fees and
      (iv) $4,987 imputed value of automobile fringe
benefits.


(3)
    Represents
      shares of common stock underlying options granted to Yacov Kaufman as
      described below.


(4)
    Represents
      primarily contributions to severance and pension funds and automobile
      fringe benefits. Contributions to severance and pension funds are made on
      substantially the same basis as those made on behalf of Israeli
      executives.


(5)
    Consists
      of (i) $110,035 cash bonus earned with respect to 2004 under the terms of
      Shlomie Morgenstern’s employment agreement and (ii) $71,000 value (at
      $0.71 per share) of 100,000 shares of common stock, which were part of the
      August 2004 stock grant that vested immediately upon grant.


(6)
    Represents
      the value (at $0.71 per share) of 95,000 shares of common stock granted to
      Mr. Shlomie Morgenstern in August 2004 that did not vest immediately.
      One-third of these shares will vest on each anniversary of the grant,


(7)
    Represents
      shares of common stock underlying options granted to Shlomie Morgenstern
      in August 2004 which vest over time as described in the table captioned
      “Option/SAR Grants in 2004,” below.


(8)
    Consists
      of (i) $19,231for accrued vacation and (ii) $2,759 imputed value of
      automobile fringe benefits.




-3-




The
following tables summarize (i) the options granted in 2004 to the executive
officers named in the Summary Compensation Table above, (ii) the potential value
of these options at the end of the option term assuming certain levels of
appreciation of our common stock, (iii) the number of shares acquired by such
named executive officers upon the exercise of options in 2004 and the value
realized thereon, and (iv) the number and value of all options held by such
executive officers at the end of 2004




**OPTION/SAR
GRANTS IN 2004**


Individual
      Grants(1)
    
    Potential
      Realizable Value at Assumed Annual Rates of Stock Price
      Appreciation
      for
      Option Terms(2)Name
    
    Number
      of Securities Underlying Options
      Granted
      (#)
    
    %
      of Total Options Granted to Employees inFiscal
      Year (%)
    
    Base
      Price($/Share)
    
    Exercise
      orExpiration
      Date
    
    5%
      ($)
    
    10%
      ($)George
      Morgenstern
    
    
    180,000
    (3)
    
    23
    %
    
    $
    0.91
    
    
    12/31/09
    
    
    42,555
    
    
    100,002Yacov
      Kaufman
    
    
    75,000
    (4)
    
    9
    %
    
    $
    0.91
    
    
    12/31/09
    
    
    18,856
    
    
    41,667Shlomie
      Morgenstern
    
    
    305,000
    (5)
    
    39
    %
    
    $
    0.71
    
    
    1/1/14
    
    
    124,989
    
    
    345,125
 ****







(1)
    We
      did not grant any stock appreciation rights (SARs) in
  2004.


(2)
    The
      dollar amounts under these columns are the result of calculations at the
      5% and 10% compounded annual appreciation rates prescribed by the SEC and,
      therefore, are not intended to forecast possible future price
      appreciation, if any, of our common stock.


(3)
    The
      options vest as follows: 60,000 on June 30, 2005; 60,000 on December 31,
      2005; and 60,000 on June 30, 2006.


(4)
    The
      options vest as follows: 37,500 on December 31, 2005 and 37,500 on
      December 31, 2006.


(5)
    The
      options vest as follows: 105,000 on August 18, 2006; 100,000 on February
      18, 2007; and 100,000 on February 18, 2008.




**AGGREGATED
OPTION EXERCISES IN 2004**


**AND
FISCAL YEAR END STOCK OPTION VALUES**




Number
      of Shares
    
    
    
    
    
    Number
      of Securities
    
    
    Value
      of UnexercisedAcquired Upon
    
    
    Value Realized
    
    
    Underlying Unexercised
    
    
    In-the-MoneyName
    
    
    Exercise (#)
    
    
    ($)
    
    
    Options
      At Year End (#)
    
    
    Options
      ($)(1)Exercisable
    
    
    Unexercisable
    
    
    Exercisable
    
    
    UnexercisableGeorge
      Morgenstern
    
    
    --
    
    
    --
    
    
    297,250
    
    
    180,000
    
    
    --
    
    
    16,200Yacov
      Kaufman
    
    
    --
    
    
    --
    
    
    185,000
    
    
    75,000
    
    
    --
    
    
    6,750Shlomie
      Morgenstern
    
    
    --
    
    
    --
    
    
    47,500****
    
    
    305,000
    
    
    --
    
    
    88,450
 ****







(1)
    Based
      on the closing price for our common stock on December 31, 2004 of $1.00
      per share.




**Compensation
of Directors**





Each of
our directors is generally paid $1,000 for each Board or committee meeting which
he attends (except if a committee meeting is held on the same day as a Board
meeting) and is reimbursed for associated out-of-pocket expenses. Mr. Kerbs, Dr.
Zentman and Mr. Levine are each paid $6,000 per annum plus meeting fees in
connection with their service on the Board (and in the case of Mr. Levine and
Dr. Zentman, on the Audit Committee). Mr. Yurman is paid $24,000 per annum plus
meeting fees for his service on the Board and as Chairman of the Audit
Committee. In 2004, Mr. Kerbs was paid a total of $11,000, Mr. Yurman was paid a
total of $39,500, Mr. Levine was paid a total of $12,000, Dr. Zentman was paid a
total of $2,500, and Mr. Morgenstern was paid a total of $6,000 in connection
with their respective service on the Board and the Audit Committee.




-4-





Our 1994
Stock Option Plan for Outside Directors provides for awards of non-qualified
options to our directors who is not one of our employees or any of our
affiliates and who meet certain other eligibility criteria. Pursuant to the
plan, (i) upon first election or appointment to the Board of Directors, each
newly elected or appointed eligible director is granted an option to purchase
7,500 shares of our common stock and (ii) immediately following each of our
Annual Meeting of Stockholders, each eligible director will generally be granted
an option to purchase 7,500 shares of our common stock. Options granted under
the plan have an exercise price per share equal to the fair market value of our
common stock on the date of issuance and are exercisable beginning on the first
anniversary of the date of the grant until the earliest of (i) ten years from
the date of grant, (ii) one year from the date on which an optionee ceases to be
an eligible director and (iii) 90 days after the date on which the optionee
ceases to be a director. The maximum number of shares of our common stock in
respect of which awards may be granted under the plan is 400,000, of which
60,000 non-expired options are currently outstanding.




In
addition to the directors’ fees described above, in November 2004, Dr. Zentman
was granted options to purchase 7,500 shares of our common stock at an exercise
price equal to the fair market value of our common stock on the date of grant
(i.e., $0.88 per share). In December 2004, Mr. Yurman, Mr. Levine and Mr. Kerbs
were each granted options to purchase 7,500 shares of our common stock at an
exercise price equal to the fair market value of our common stock on the date of
grant (i.e., $1.15). These options were granted pursuant to our 1994 Stock
Option Plan for Outside Directors described above.




**Compensation
Committee Interlocks and Insider Participation**




All
matters related to the compensation of executive officers, including the Chief
Executive Officer, are acted upon by the full Board of Directors.




The
following person served both as a member of our Board of Directors and as an
officer or employee in 2004: George Morgenstern (Chairman of the Board,
President and Chief Executive Officer). During 2004, no member of the Board of
Directors who was also one of our officers participated in any deliberations of
the Board of Directors or any committee thereof relating to his own compensation
or to the compensation of any person to whom he is related. Except as described
above, each member of the Board of Directors participated in 2004 in
deliberations of the Board of Directors concerning executive officer
compensation. During 2004, George Morgenstern engaged in transactions with us in
which he was deemed to have an interest. For further information, see “Certain
Relationships and Related Transactions” below.




**Employment
Arrangements**




George
Morgenstern serves as our Chairman of the Board, President and Chief Executive
Officer pursuant to an employment agreement that commenced on January 1, 1997,
was amended in March 2002 to extend through December 31, 2003, and provides for
a period of consultancy thereafter as set forth below (the “CEO Employment
Agreement”). Through December 31, 2003, the Employment Agreement provided for a
base salary of $420,000 per annum (which was $470,000 due to cost of living
adjustments as of December 31, 2003), subject to annual review by the Board and
an annual cost of living adjustment, plus contributions to a nonqualified
retirement fund equal to 25% of his base salary. Mr. Morgenstern’s compensation
pursuant to the Employment Agreement also includes the use of two company
automobiles, premium payments on a life insurance policy owned by Mr.
Morgenstern and other fringe benefits.




Pursuant
to the terms of the CEO Employment Agreement, on December 31, 2003, Mr.
Morgenstern elected to terminate his employment with us and thereafter to
continue to serve us as a consultant for a period (the “Consulting Period”)
ending on December 31, 2010. At the request of the Board, Mr. Morgenstern has
continued on as our Chairman of the Board, President and Chief Executive
Officer. During the Consulting Period, Mr. Morgenstern receives an annual
consulting fee plus contributions to a nonqualified retirement fund and fringe
benefits on the same basis as during the term of his employment as described
above. Mr. Morgenstern’s annual consulting fee during the Consulting Period is
equal to 50% of his annual salary in effect immediately prior to the Consulting
Period through the end of the fourth full calendar year of the Consulting
Period, and 25% of such annual salary for the remainder of the Consulting Period
(subject in all cases to an annual cost of living adjustment). On December 30,
2004, in recognition of his continued service, and to provide additional
incentive for such continued service at the pleasure of the Board, the Board of
Directors agreed to extend the consulting period by one year. Under the CEO
Employment Agreement as so amended, Mr. Morgenstern would continue to serve as a
consultant until the end of 2011, and would receive a consulting fee (plus
certain other benefits) through the end of 2008 at a rate equal to 50% of that
which he received during 2003 (his last year of employment) and at 25% of such
base rate for the last three years of the consulting period. At the time of the
December 2004 amendments, we granted to Mr. Morgenstern options to purchase
180,000 shares of common stock which vested over the 18 months from the date of
the grant, subject to his continuing to serve as CEO at the pleasure of the
Board.




-5-





Under the
terms of the CEO Employment Agreement, the Company agrees to take appropriate
action to fund the payment of all consulting fees to become payable to Mr.
Morgenstern throughout the entire Consulting Period, by purchase of an annuity
from a reputable insurance company, deposit of funds or U.S. Treasury Securities
having maturities of less than one year in a bank acceptable to Mr. Morgenstern,
or other arrangements acceptable to Mr. Morgenstern. Mr. Morgenstern has agreed
to waive this obligation, except in the event of (i) his death or disability,
(ii) the Company entering into a definitive agreement(s) concerning a
transaction or series of transactions, the consummation of which will result in
the receipt by the Company of gross proceeds equal to or in excess of $1 million
or (iii) his termination as Chief Executive Officer of the Company for any
reason other than his voluntary resignation. Upon the occurrence of any of these
events, the Company would be obligated to fund all consulting fees as provided
in the CEO Employment Agreement. During the term of the CEO Employment Agreement
(including any Consulting Period), Mr. Morgenstern may not engage in a business
that is in substantial and direct competition with our business or the business
of any of our subsidiaries.




Shlomie
Morgenstern serves as the Chief Executive Officer and President of our Databit
Inc. subsidiary and as our Vice President-Operations and, pursuant to an
employment agreement that was executed on August 19, 2004 and commenced as of
January 1, 2004 (the “SM Employment Agreement”). The SM Employment Agreement
provides for a four year initial term and subsequent one year renewal terms
(unless either party gives notice of non-renewal within 90 days prior to the end
of the initial term or a renewal term). Under the SM Employment Agreement, Mr.
Morgenstern receives a base salary of $250,000 per annum. Mr. Morgenstern’s
compensation pursuant to the SM Employment Agreement also includes a car
allowance and participation in fringe benefits maintained and sponsored by DSSI
and Databit.




Pursuant
to the SM Employment Agreement, Mr. Morgenstern is entitled to an annual bonus
equal to 20% of the gross profit of Databit in excess of $2.8 million. The bonus
is capped at 50% of his base salary then in effect if Databit has net income for
the calendar year to which the bonus relates (36% of his base salary if Databit
does not have net income for the calendar year to which the bonus relates).
Under the SM Employment Agreement, on August 19, 2004, Mr. Morgenstern also
received stock options exercisable for the purchase of 305,000 shares of our
Common Stock at exercise price of $0.71 per share (the closing market price on
the date of grant) and a restricted stock grant of 195,000 shares of our Common
Stock. The stock option grant vests in installments of 105,000, 100,000 and
100,000 shares on August 18, 2006, February 18, 2007 and February 18, 2008,
respectively, and the restricted stock grant vests in installments of 100,000
upon issuance and 31,666, 31,667 and 31,667 shares on August 18, 2006, 2007 and
2008, respectively. The options and the restricted stock will fully vest if the
SM Employment Agreement, or if Mr. Morgenstern terminates his employment within
one year after a change in control or 10 days after notice to us of our breach
of a material provision of the SM Employment Agreement which breach remains
uncured.




If the SM
Employment Agreement is not renewed after the initial term or any renewal term,
Mr. Shlomie Morgenstern will be entitled to receive a lump sum payment equal to
one year’s salary and the bonus he would have earned for the calendar year in
which the non-renewal occurred (in a lump sum payment). If Mr. Morgenstern’s
employment is terminated by us other than for cause, Mr. Morgenstern terminates
his employment within one year after a change in control or after we breach a
material provision of the SM Employment Agreement and fail to cure that breach
in a timely matter, then Mr. Morgenstern will be entitled to 2.9 times both his
annual salary then in effect and the average bonus paid to Mr. Morgenstern
during the three preceding years (or such shorter period if the termination
occurred before the third year).




-6-





Yacov
Kaufman serves as Vice President and Chief Financial Officer of the Company and
as Executive Vice President and Chief Financial Officer of dsIT pursuant to an
employment agreement entered into with the Company on January 1, 1999, and
amended in 2002, providing for a salary of $200,000.




We make
certain payments to fund in part our future severance obligations to Mr.
Kaufman. If Mr. Kaufman’s employment is voluntarily terminated or is terminated
by us for reasons other than for cause, we must pay him an amount equal to 150%
of his last month's salary multiplied by the number of years (including partial
years) that Mr. Kaufman worked for us. This severance obligation, which is
customary for executives of Israeli companies, would be reduced by the amount
contributed by us to certain Israeli pension and severance funds pursuant to Mr.
Kaufman’s employment agreement. In addition, the agreement with Mr. Kaufman
provides for an additional payment equal to six times his last month’s total
compensation, payable at the end of his employment with us, unless he is
terminated by us for cause. As of December 31, 2004, the unfunded portion of
these payments was $162,000. In December 2004 we granted  Mr.
Kaufman options to purchase 75,000 shares of common stock which vest over
the two years from the date of the grant.




The stock
option agreements with our executive officers generally provide for accelerated
vesting in the event we have a change in control.





Jacob
Neuwirth serves as President and Chief Executive Officer of dsIT pursuant to an
employment agreement that commenced on December 16, 2001. Mr. Neuwirth’s
employment agreement provides for a base salary which is denominated in linked
NIS equivalent to $195,000 per
annum, linked to the Israeli Consumer Price Index (“Index”). Mr. Neuwirth’s
agreement provides for an increase in salary, provided dsIT achieves certain
performance targets. In addition to his base salary, Mr. Neuwirth receives 5% of
dsIT’s net profit before tax. In addition, the agreement with Mr. Neuwirth
provides for six months advance notice of termination of employment by either
side, and an additional payment equal to six times his last month’s total
compensation, payable upon any termination of his employment. As of December 31,
2004, the unfunded portion of these payments was $181,000.




Under his
employment agreement, Mr. Neuwirth is entitled to a loan of up to $100,000 from
dsIT. As of December 31, 2003 the loan balance which is denominated in linked
NIS, bears interest at 4% and has no fixed maturity date plus accumulated
interest, had an outstanding balance of $112,000.







-7-





**Item
12. Security Ownership of Certain Beneficial Owners and Management and
Related Stockholder Matters**




The
following table and the notes thereto set forth information, as of April 26,
2004 (except as otherwise noted), concerning beneficial ownership (as defined in
Rule 13d-3 under the Securities Exchange Act of 1934) of our common stock by (i)
each of our directors, (ii) each of the “named executive officers,” (iii) all of
our executive officers and directors as a group, and (iv) each holder of 5% or
more of our outstanding common stock:




Name
      and Address of
      Beneficial
      Owner(1)(2)
    
    Number
      of Shares of
      Common
      Stock
      Beneficially
      Owned(2)
    
    Percentage
      of
      Common
      Stock
      Outstanding(2)George
      Morgenstern
    
    
    386,804
    (3)
    
    4.6
    %Howard
      A. Gutzmer5550
      Oberlin DriveSan
      Diego, CA 92121
    
    
    676,291
    (4)
    
    8.6
    %Dimensional
      Fund Advisors Inc.1299
      Ocean AvenueSanta
      Monica, CA 90401
    
    
    402,200
    (5)
    
    5.0
    %Avi
      Kerbs
    
    
    15,000
    (6)
    
    *Elihu
      Levine
    
    
    58,470
    (7)
    
    1.0
    %Shane
      Yurman127
      Route 59Monsey,
      NY 10952
    
    
    8,500
    (8)
    
    *Samuel
      Zentman
    
    
    --
    
    
    *Shlomie
      Morgenstern
    
    
    243,500
    (9)
    
    3.0
    %Yacov
      Kaufman
    
    
    185,000
    (6)
    
    2.2
    %Jacob
      Neuwirth
    
    
    57,870
    (10)
    
    *All
      executive officers and directors of the Company as a group (8
      people)
    
    
    955,144
    
    
    11.0
    %


****





*
    Denotes
      less than 1% of the issued and outstanding common
stock.


(1)
    Unless
      otherwise indicated, business address is in care of the
      Company.


(2)
    Unless
      otherwise indicated, each person has sole investment and voting power with
      respect to the shares indicated. For purposes of this table, a person or
      group of persons is deemed to have “beneficial ownership” of any shares as
      of a given date which such person has the right to acquire within 60 days
      after such date. Percentage information is based on 8,116,691 shares,
      which is the number of shares outstanding as of April 20,
      2005.


(3)
    Consists
      of (i) 40,115 shares held by Mr. Morgenstern, including 20,000 shares
      received by Mr. Morgenstern pursuant to a restricted stock grant which are
      not yet fully vested, (ii) 297,250 currently exercisable options held by
      Mr. Morgenstern, and (iii) 49,439 shares owned by Mr. Morgenstern’s
      wife.


(4)
    As
      of December 31, 2004, based on information in Amendment No. 2 to Schedule
      13G filed on January 27, 2003. Consists of (i) 60,340 shares owned by Mr.
      Gutzmer (including shares held in his IRA), (ii) 508,125 shares owned by
      the Gutzmer Family Trust, of which Mr. Gutzmer is a co-trustee, (iv)
      64,950 shares held in an IRA of Mr. Gutzmer’s wife, (v) 37,576 shares
      owned by a corporation of which Mr. Gutzmer is an executive officer,
      director and principal shareholder, and (vi) 5,300 shares owned by a
      limited partnership, the corporate general partner of which Mr. Gutzmer is
      the sole director.


(5)
    As
      of December 31, 2004, based on information in an amendment to Schedule 13G
      filed on February 9, 2005. The securities are owned by four investment
      company funds to which Dimensional Fund Advisors Inc. (“Dimensional”)
      furnishes investment advice and/or serves as investment manager. In its
      role as investment advisor or manager, Dimensional possesses voting and/or
      investment power over the securities. Dimensional disclaims beneficial
      ownership of these securities.


(6)
    Consists
      of currently exercisable options.


(7)
    Consists
      of (i) 40,000 shares owned by Mr. Levine and his wife in a joint account,
      (ii) 1,180 shares held in an IRA of Mr. Levine, (iii) 8,000 shares owned
      by Mr. Levine’s wife, (iv) 1,790 shares held in an IRA of Mr. Levine’s
      wife and (v) 7,500 currently exercisable options held by Mr.
    Levine.


(8)
    Consists
      of (i) 1,000 shares owned by Mr. Yurman and (ii) 7,500 currently
      exercisable options held by Mr. Yurman.


(9)
    Consists
      of (i) 196,000 shares, which includes 195,000 shares received as a
      restricted stock grant of which 95,000 shares are subject to vesting, and
      (ii) 47,500 currently exercisable options.


(10)
    Consists
      of 57,870 shares held by an entity controlled by Mr.
    Neuwirth.






-8-


****


**Item
13.** **Certain
Relationships and Related Transactions**




During
2004, we paid approximately $479,000 for legal services rendered and
reimbursement of out-of-pocket expenses to Eilenberg & Krause LLP, a law
firm in which Sheldon Krause, a former director and our Secretary and General
Counsel, is a member. Such fees related to services rendered by Mr. Krause and
other members and employees of his firm, as well as certain special and local
counsel retained and supervised by his firm who performed services on our
behalf. Mr. Krause is the son-in-law of George Morgenstern, our Chairman,
President and Chief Executive Officer.




As
reported on the Summary Compensation Table above, Shlomie Morgenstern, the son
of George Morgenstern, our Chairman, President and Chief Executive Officer,
received compensation during 2004 in connection with his position as Vice
President-Operations.




In
January 2000, Comverge extended loans of $9,925 each evidenced by a promissory
note to both our Chief Executive Officer and Chief Financial Officer to finance
the purchase of Comverge common stock. The loans had an initial maturity date of
January 3, 2002 and were extended at that time to mature on January 3, 2004. The
loans bear interest at 4.25% per annum, payable at maturity. In April 2004, the
Board approved a bonus to each of the Chief Executive Officer and Chief
Financial Officer in the amount of $13,712. In April 2004, the loans were paid
off in full by the Chief Executive Officer and Chief Financial
Officer.




dsIT’s
Chief Executive Officer has a loan outstanding from dsIT based on a contract
from 2001. The loan balance and accrued interest at December 31, 2004 was
$112,000. The loan has no defined maturity date, is denominated in NIS, is
linked to the Israeli Consumer Price Index and bears interest at 4%.




**Item
14. Principal Accounting Fees and Services**




**Accounting
Fees**




Aggregate
fees billed by our principal accountant during the last two fiscal years are as
follows:




2003
    
    2004Audit
      Fees
    
    $
    146,000
    
    $
    143,000Audit-
      Related Fees
    
    
    58,000
    
    
    35,000Tax
      Fees
    
    
    7,000
    
    
    4,000Other
      Fees
    
    
    --
    
    
    12,000Total
    
    $
    211,000
    
    $
    194,000




*Audit
Fees* were for
professional services rendered for the audits of the consolidated financial
statements of the Company, statutory and subsidiary audits, assistance with
review of documents filed with the SEC, consents, and other assistance required
to be performed by our independent accountants.




*Audit
Related Fees* were for
assurance and related services, internal control reviews and attestation
services.




*Tax
Fees* were for
services related to tax compliance, tax planning and tax advice for our dsIT
subsidiary.




*Other
Fees* were for
services related to a strategic acquisition that was not
consummated.





**Audit
Committee Pre-Approval Policies and Procedures**




The Audit
Committee’s current policy is to pre-approve all audit and non-audit services
that are to be performed and fees to be charged by our independent auditor to
assure that the provision of these services does not impair the independence of
the auditor. The Audit Committee was in compliance with the requirements of the
Sarbanes-Oxley Act of 2002 regarding the pre-approval of all audit and non-audit
services and fees by the mandated effective date of May 6, 2003.





-9-




**PART
IV**
  **ITEM
15. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES**
  **(a)(1)** **List of Financial Statements of the Registrant**
  Report of
Kesselman and Kesselman
 Report of
KPMG LLP
 Consolidated
Balance Sheets as of December 31, 2003 and 2004
 Consolidated
Statements of Operations for the years ended December 31, 2002, 2003 and
2004
 Consolidated
Statements of Changes in Shareholders’ Equity for the years ended December 31,
2002, 2003 and
2004
 Consolidated
Statements of Cash Flows for the years ended December 31, 2002, 2003 and
2004
 Notes to
Consolidated Financial Statements
  **(a)(2)
List of Financial Statement Schedules**
  Separate
Financial Statements of 50 Percent or Less Owned Persons:
 
 Consolidated
Financial Statements of Comverge, Inc.:
 
 Report of
PricewaterhouseCoopers LLP
 Consolidated
Balance Sheets as of December 31, 2004 and 2003
 Consolidated
Statements of Operations for the years ended December 31, 2004 and
2003
 Consolidated
Statement of Changes in Shareholders’ Equity for the years ended December 31,
2004 and
2003
 Consolidated
Statements of Cash Flows for the years ended December 31, 2004 and
2003
 Notes to
Consolidated Financial Statements
  **(a)(3)
List of Exhibits**
 
 Except as noted, all exhibits not incorporated by
reference were filed with the Registrant's Annual Report on Form 10-K as
originally filed on April 14, 2005.
 No.3.1
    
    Certificate
      of Incorporation of the Registrant, with amendments thereto (incorporated
      herein by reference to Exhibit 3.1 to the Registrant’s Registration
      Statement on Form S-1 (File No. 33-70482) (the “1993 Registration
      Statement”)).3.2
    
    By-laws
      of the Registrant (incorporated herein by reference to Exhibit 3.2 to the
      Registrant’s Registration Statement on Form S-1 (File No. 33-44027) (the
      “1992 Registration Statement”)).3.3
    
    Amendments
      to the By-laws of the Registrant adopted December 27, 1994 (incorporated
      herein by reference to Exhibit 3.3 of the Registrant’s Current Report on
      Form 8-K dated January 10, 1995).4.1
    
    Specimen
      certificate for the Common Stock (incorporated herein by reference to
      Exhibit 4.2 to the 1992 Registration Statement).4.2
    
    Warrant
      to Purchase Common Stock of the Registrant, dated October 12, 1999
      (incorporated herein by reference to Exhibit 4.4 to the Registrant’s
      Annual Report on Form 10-K for the year ended December 31, 2000 (the “2000
      10-K”)).4.3
    
    Securities
      Purchase Agreement, dated as of June 11, 2002, by and among the
      Registrant, Databit, Inc. and Laurus Master Fund, Ltd. (“Laurus”)
      (including the forms of convertible note and warrant) (incorporated herein
      by reference to Exhibit 10.1 to the Registrant’s Current Report on Form
      8-K dated June 11, 2002).4.4
    
    Purchase
      and Security Agreement, dated as of December 4, 2002, made by and between
      Comverge (“Comverge”) and Laurus (incorporated herein by reference to
      Exhibit 10.1 to the Registrant’s Current Report on Form 8-K dated December
      5, 2002 (the “December 2002 8-K”)).
  -10-
  4.5
    
    Convertible
      Note, dated December 4, 2002, made by and among Comverge, Laurus and, as
      to Articles III and V only, the Registrant (incorporated herein by
      reference to Exhibit 10.2 to the December 2002 8-K).4.6
    
    Common
      Stock Purchase Warrant, dated December 5, 2002, issued by the Registrant
      to Laurus (incorporated herein by reference to Exhibit 10.3 to the
      December 2002 8-K).4.7
    
    Registration
      Rights Agreement, dated as of December 4, 2002, by and between the
      Registrant and Laurus (incorporated herein by reference to Exhibit 10.4 to
      the December 2002 8-K).10.1
    
    Employment
      Agreement between the Registrant and George Morgenstern, dated as of
      January 1, 1997 (incorporated herein by reference to Exhibit 10.1 to the
      Registrant’s Annual Report on Form 10-K for the year ended December 31,
      1997 (the “1997 10-K”)).*10.2
    
    Employment
      Agreement between the Registrant and Yacov Kaufman, dated as of January 1,
      1999 (incorporated herein by reference to Exhibit 10.22 of the Registrants
      Annual Report on Form 10-K for the year ended December 31, 1999 (the “1999
      10-K”)).*10.3
    
    1991
      Stock Option Plan (incorporated herein by reference to Exhibit 10.4 to the
      1992 Registration Statement).*10.4
    
    1994
      Stock Incentive Plan, as amended.*10.5
    
    1994
      Stock Option Plan for Outside Directors, as amended (incorporated herein
      by reference to Exhibit 10.5 to the Registrant’s Form 10-K for the year
      ended December 31, 1995 (the “1995 10-K”)).*10.6
    
    1995
      Stock Option Plan for Non-management Employees, as amended.10.7
    
    Agreement
      dated January 26, 2002, between the Registrant and Bounty Investors LLC
      (incorporated herein by reference to Exhibit 10.12 to the 2000
      10-K).10.8
    
    Lease
      Agreement, dated February 5, 2002, between Duke-Weeks Realty Limited
      Partnership and Comverge, (incorporated herein by reference to Exhibit
      10.13 to the 2000 10-K).10.9
    
    Stock
      Option Agreements, dated as of October 1, 1999, between Powercom Control
      Systems Ltd. and George Morgernstern, Yacov Kaufman and Harvey E.
      Eisenberg (and related promissory notes) (incorporated herein by reference
      to Exhibit 10.14 to the 2000 10-K).*10.10
    
    Share
      Purchase Agreement, dated as of November 29, 2001, by and among the
      Registrant, Decision Systems Israel Ltd., Endan IT Solutions Ltd., Kardan
      Communications Ltd., Neuwirth Investments
      Ltd., Jacob Neuwirth (Noy) and Adv. Yossi Avraham, as Trustee for Meir
      Givon (incorporatedhereinby
      reference to Exhibit 10.1 to the Registrant’s Current Report on Form 8-K
      dated December 13, 2001).
 10.11
    
    Registration
      Rights Agreement, dated as of December 13, 2002, by and among the
      Registrant, Kardan Communications Ltd. and Adv. Yossi Avraham, as Trustee
      for Meir Givon (incorporated herein by reference to Exhibit 10.2 to the
      Registrant’s Current Report on Form 8-K dated December 13,
      2002).10.12
    
    Employment
      Agreement, dated as of September 1, 2002, by and between Comverge and
      Robert M. Chiste (incorporated
      herein by reference to Exhibit 10.1 to the Registrant’s Quarterly Report
      on Form 10-Q for the quarter ended September 30,
2002).*10.13
    
    Restricted
      Stock Purchase Agreement, dated as of September 1, 2002, by and between
      the Registrant and Robert M. Chiste (incorporated
      herein by reference to Exhibit 10.2 to the Registrant’s Quarterly Report
      on Form 10-Q for the quarter ended September 30,
2002).*10.14
    
    Option
      Agreement, dated as of September 1, 2002, by and between Comverge and
      Robert M. Chiste (incorporated
      herein by reference to Exhibit 10.3 to the Registrant’s Quarterly Report
      on Form 10-Q for the quarter ended September 30,
2002).*10.15
    
    Contract
      for Asset Management Services between the Registrant and Malley Associates
      Capital Management, Inc. (incorporated herein by reference to Exhibit 10.1
      to the Registrant’s Quarterly Report on Form 10-Q for the quarter ended
      March 31, 2002).
  -11-
  10.16
    
    Employment
      Agreement dated as of March 30, 2002 between Comverge and Joseph D.
      Esteves (incorporated
      herein by reference to Exhibit 10.1 to the Registrant’s Quarterly Report
      on Form 10-Q for the quarter ended June 30, 2002).*10.17
    
    Agreement,
      dated as of January 31, 2002, between Comverge and Bank Leumi USA
      (incorporated herein by reference to Exhibit 10.21 to the Registrant’s
      Annual Report on Form 10-K for the year ended December 31, 2001 (the “2001
      10-K”).10.18
    
    $6,000,000
      Term Note of Comverge dated as of January 31, 2002, payable to Bank Leumi
      USA(incorporated
      herein by reference to Exhibit 10.22 to the 2001 10-K).10.19
    
    First
      Amendment to Employment Agreement, dated as of May 17, 2002, by and
      between the Registrant and George Morgenstern(incorporated
      herein by reference to Exhibit 10.23 to the 2001 10-K).*10.20
    
    Agreement,
      dated as of January 31, 2003, between Comverge and Bank Leumi USA
      (including form of $6,000,000 Term Noteof
      Comverge dated as of January 31, 2003, payable to Bank Leumi
      USA)(incorporated herein by reference to Exhibit 10.24 to the Registrant’s
      Annual Report on Form 10-K for the year ended December 31, 2002 (the “2002
      10-K”).10.21
    
    Agreement,
      dated as of February 25, 2003, between the Registrant and J.P. Turner
      & Company, L.L.C. (incorporated herein by reference to Exhibit 10.25
      to the 2002 10-K).10.22
    
    Second
      Amendment to Employment Agreement, dated as of March 12, 2002, between the
      Registrant and George Morgenstern (incorporated herein by reference to
      Exhibit 10.1 to the Registrant’s Quarterly Report on Form 10-Q for the
      quarter ended March 31, 2002).*10.23
    
    Amendment
      to Employment Agreement, dated as of June 1, 2002, between the Registrant
      and Yacov Kaufman (incorporated herein by reference to Exhibit 10.1 to the
      Registrant’s Quarterly Report on Form 10-Q for the quarter ended September
      30, 2002).*10.24
    
    Guaranty,
      dated December 4, 2002, made by the Registrant in favor of Laurus
      (incorporated herein by reference to Exhibit 10.5 to theDecember
      2002 8-K).10.25
    
    Preferred
      Stock Purchase Agreement, dated as of April 7, 2003, by and among
      Comverge, the Registrant and the other investors named therein
      (incorporated herein by reference to Exhibit 10.29 to the 2002
      10-K).10.26
    
    Investors’
      Rights Agreement, dated as of April 7, 2003, by and among Comverge, the
      Registrant and the investors and Comverge management named therein
      (incorporated herein by reference to Exhibit 10.30 to the 2002
      10-K).10.27
    
    Co-Sale
      and First Refusal Agreement, dated as of April 7, 2003, by and among
      Comverge, the Registrant and the investors and stockholders named therein
      (incorporated herein by reference to Exhibit 10.31 to the 2002
      10-K).10.28
    
    Voting
      Agreement, dated as of April 7, 2003, by and among Comverge, the
      Registrant and the other investors named therein (incorporated herein by
      reference to Exhibit 10.32 to the 2002 10-K).10.29
    
    Letter
      Agreement, dated as of April 1, 2003, by and between the Registrant and
      Laurus (incorporated herein by reference to Exhibit 10.33 to the 2002
      10-K).10.30
    
    Employment
      Agreement dated as of August 19, 2004 and effective as of January 1,
      2004by
      and between the Registrant and Shlomie Morgenstern(incorporated
      herein by reference to Exhibit 10.1 to the Registrant’s Quarterly Report
      on Form 10-Q for the quarter ended September 30, 2004).*10.31
    
    Restricted
      Stock Award Agreement dated as of August 19, 2004, by and between the
      Registrant and Shlomie Morgenstern (incorporated herein by reference to
      Exhibit 10.2 to the Registrant’s Quarterly Report on Form 10-Q for the
      quarter ended September 30, 2004).*10.32
    
    Stock
      Option Agreement dated as of August 19, 2004, by and between Shlomie
      Morgenstern and the Registrant (incorporated herein by reference to
      Exhibit 10.3 to the Registrant’s Quarterly Report on Form 10-Q for the
      quarter ended September 30, 2004).*
  -12-
 10.33
    
    Second
      Amended and Restated Co-Sale And First Refusal Agreement dated as of
      October 26, 2004, by and among Comverge, Inc., the Registrant and other
      persons party thereto (incorporated herein by reference to Exhibit 10.4 to
      the Registrant’s Quarterly Report on Form 10-Q for the quarter ended
      September 30, 2004).10.34
    
    Third
      Amendment to Employment Agreement, dated as of December 30, 2004, between
      the Registrant and George Morgenstern.*10.35
    
    Form
      of Stock Option Agreement to employees under the 1994 Stock Incentive
      Plan.10.36
    
    Form
      of Stock Option Agreement under the 1994 Stock Option Plan for Outside
      Directors.10.37
    
    Form
      of Stock Option Agreement under the 1995 Stock Option Plan for
      Nonmanagement Employees.10.38
    
    Stock
      Option Agreement dated as of December 30, 2004 by and between George
      Morgenstern and the Registrant.*10.39
    
    Stock
      Option Agreement dated as of December 30, 2004 by and between Yacov
      Kaufman and the Registrant.*10.40
    
    Stock
      Option Agreement dated as of December 30, 2004 by and between Sheldon
      Krause and the Registrant.*14.1
    
    Code
      of Ethics of the Registrant(incorporated
      herein by reference to Exhibit 14.1 to the Registrant’s Annual Report on
      Form 10-K for the year ended December 31, 2003).21.1
    
    List
      of subsidiaries.23.1
    
    Consent
      of KPMG LLP.23.2
    
    Consent
      of Kesselman & Kesselman CPA.23.3
    
    Consent
      ofPricewaterhouseCoopers
      LLP.#31.1
    
    Certification
      pursuant to Section 302 of the Sarbanes-Oxley Act of
  2002.#31.2
    
    Certification
      pursuant to Section 302 of the Sarbanes-Oxley Act of
  2002.#32.1
    
    Certification
      pursuant to Section 906 of the Sarbanes-Oxley Act of
  2002.#32.2
    
    Certification
      pursuant to Section 906 of the Sarbanes-Oxley Act of
  2002.
________________
 *
    This
      exhibit includes a management contract, compensatory plan or arrangement
      in which one or more directors or executive officers of the Registrant
      participate.#
    This
      Exhibit is filed or furnished herewith.
  -13-


**SIGNATURE**





Pursuant
to the requirements of Section 13 or 15(d) of the Securities Exchange Act of
1934, the Registrant has duly caused this amendment to be signed on its behalf
by the undersigned, thereunto duly authorized, in the Township of Mahwah, State
of New Jersey, on May 2, 2005.





**DATA SYSTEMS
      & SOFTWARE, INC.**By:
    /s/ George
    MorgensternGeorge Morgenstern,
      Chief Executive Officer and
President






-14-