SECURITIES AND EXCHANGE COMMISSION

                             WASHINGTON, D.C. 20549

                                    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, 2003

                         COMMISSION FILE NUMBER: 0-19771

                          DATA SYSTEMS & SOFTWARE INC.
               (EXACT NAME OF REGISTRANT AS SPECIFIED IN CHARTER)

         DELAWARE                                       22-2786081
(State or other jurisdiction of             (I.R.S. Employer 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 / /

         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. / /

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

         The aggregate  market value of the common stock held by  non-affiliates
of the  registrant  at March  29,  2004 was  approximately  $23.7  million.  The
aggregate market value was calculated by using the closing price of the stock on
that date on the Nasdaq National Market.

Number of shares  outstanding of the registrant's  common stock, as of March 29,
2004: 7,902,025

                      DOCUMENTS INCORPORATED BY REFERENCE:

         Certain  sections  of the  registrant's  Proxy  Statement  to be  filed
pursuant to Regulation 14A under the Securities  Exchange Act of 1934 within 120
days of the end of the  registrant's  fiscal year are  incorporated by reference
into Part III of this Form 10-K.


<PAGE>


                                TABLE OF CONTENTS
<TABLE>
<CAPTION>

                                                                                                         PAGE
                                                                                                         ----
<S>        <C>                                                                                             <C>
PART I

Item 1.    Business.....................................................................................    1

Item 2.    Properties...................................................................................   10

Item 3.    Legal Proceedings............................................................................   10

Item 4.    Submission of Matters to a Vote of Security Holders..........................................   10

PART II

Item 5.    Market for Registrant's Common Equity and Related Stockholder Matters........................   11

Item 6.    Selected Financial Data......................................................................   11

Item 7.    Management's Discussion and Analysis of Financial Condition
              and Results of Operations.................................................................   14

Item 7A.   Quantitative and Qualitative Disclosures About Market Risk...................................   25

Item 8.    Financial Statements and Supplementary Data..................................................   25

Item 9.    Changes in and Disagreements with Accountants on Accounting and
              Financial Disclosure......................................................................   25

Item 9A.  Controls and Procedures.......................................................................   26

PART III

Item 10.   Directors and Executive Officers of the Registrant...........................................   27

Item 11.   Executive Compensation.......................................................................   27

Item 12.   Security Ownership of Certain Beneficial Owners
             and Management.............................................................................   27

Item 13.   Certain Relationships and Related Transactions...............................................   27

Item 14.   Principal Accountant Fees and Services.......................................................   27

Part IV

Item 15.   Exhibits, Financial Statement Schedules, and Reports on Form 8-K.............................   28
</TABLE>

         Certain  statements  contained  in this report are  forward-looking  in
nature.  These  statements  can  be  identified  by the  use of  forward-looking
terminology  such  as  "believes",   "expects",   "may",  "will",   "should"  or
"anticipates",  or the  negatives  thereof,  or  comparable  terminology,  or by
discussions of strategy.  You are cautioned that our business and operations are
subject to a variety of risks and uncertainties  and,  consequently,  our actual
results  may  materially  differ  from those  projected  by any  forward-looking
statements.  Certain of such risks and  uncertainties  are discussed below under
the heading "Item 1. Business-Factors That May Affect Future Results."

          EASYBILL(TM)  and ONCOPRO(TM) are trademarks of our Endan IT Solutions
Ltd  subsidiary.  MAINGATE(R) is a registered  trademark and  POWERCAMP(TM)  and
SUPERSTAT(TM) are trademarks of our Comverge, Inc. investment.


<PAGE>


                                     PART I

ITEM 1.  BUSINESS

OVERVIEW

         We  operate  in three  reportable  segments:  software  consulting  and
development,  energy  intelligence  solutions,  and computer hardware.  As we no
longer have control over our formerly consolidated subsidiary Comverge Inc. (see
Note 4 to the  Consolidated  Financial  Statements),  effective as of the second
quarter of 2003, we account for our  investment in Comverge by the equity method
and no longer  consolidate  Comverge's  balances and operating activity into our
consolidated balance sheet and statement of operations.

         o    SOFTWARE  CONSULTING  AND  DEVELOPMENT--Providing  consulting  and
              development services for computer software and systems,  primarily
              through our dsIT subsidiary.

         o    ENERGY  INTELLIGENCE   SOLUTIONS--Developing  and  marketing  load
              control,   data   communications  and  other  energy  intelligence
              solutions for electric utilities and their customers,  through our
              Comverge investment.

         o    COMPUTER  HARDWARE  SALES--Serving  as an authorized  dealer and a
              value-added-reseller  (VAR)  of  computer  hardware,  through  our
              Databit subsidiary.

SALES BY ACTIVITY

         The following table shows, for the years  indicated,  the dollar amount
and the  percentage  of the sales  attributable  to each of the  segments of our
operations.

<TABLE>
<CAPTION>

                                                                   2001                 2002                 2003
                                                            -------------------  -------------------  -------------------
                                                                Amount     %         Amount     %        Amount      %
                                                            -------------------  ------------ ------  ------------ ------
<S>                                                             <C>        <C>       <C>        <C>        <C>       <C>
Software consulting and development...........................  $12,279    27        $14,202    25        $12,156    35
Energy intelligence solutions.................................   13,793    30         19,023    34          4,700    13
Computer hardware sales.......................................   19,794    43         22,605    41         18,139    52
Other.........................................................       58    --             56    --             39    --
                                                            -------------------  ------------ ------  ------------ ------
          Total Sales                                           $45,924   100        $55,886   100        $35,034   100
                                                            ===================  ============ ======  ============ ======

</TABLE>

SOFTWARE CONSULTING AND DEVELOPMENT

SERVICES

         Through dsIT Technologies Ltd.  ("dsIT"),  we provide computer software
and systems consulting,  development and integration services. dsIT is a systems
and software house, with significant capabilities in a wide range of application
areas,  spanning  military  applications,  security and public  safety  systems,
telecom and datacom  systems,  and command and control  principal  systems.  Our
technological  expertise  includes   state-of-the-art   hardware  with  embedded
real-time  software  systems  in  a  wide  variety  of  applications,  primarily
telecommunications,   digital  signal  processing,  image  processing,  software
testing and validation,  electronic warfare,  simulation and electro-optics.  In
addition, we offer expertise and solutions products for billing,  healthcare and
other IT applications.

         We provide our services either on a  time-and-materials  or fixed-price
basis. When working on a  time-and-materials  basis, our engineers are generally
sent to the  customer's  premises to perform design and  development  activities
under the customer's  direction.  In these engagements,  our personnel typically
have no specific  obligation for product  delivery.  During 2001, 2002 and 2003,
sales attributable to services provided on a time-and-materials  basis were $7.9
million,   $10.3  million  and  $8.9  million,   respectively,   accounting  for
approximately 64%, 73% and 73% of segment sales for such years, respectively.

         When working on a fixed-price  basis, we undertake to deliver  software
or  hardware/software  solutions to a customer's  specifications or requirements
for   a   particular   project,   accounting   for   these   services   on   the
percentage-of-completion  method. Since the profit margins on these projects are
primarily  determined by our success in controlling  project  costs,  margins on
these projects may vary substantially as a result of various factors,  including
underestimating   costs,   difficulties   associated   with   implementing   new
technologies

                                      -1-
<PAGE>

and economic and other  changes that may occur during the term of the  contract.
During 2001, 2002 and 2003, sales from fixed-price  contracts were $4.4 million,
$3.9 million and $3.2 million,  respectively,  accounting for approximately 36%,
27% and 27% of segment sales for such years, respectively. Included in our fixed
price  projects  are  sales  and  maintenance  of  our  billing  and  healthcare
proprietary  software,  totaling $0.6 million and $1.1 million,  during 2002 and
2003, respectively.

CUSTOMERS AND MARKETS

         Israel  has  historically  been  the  primary  area of  this  segment's
operations,  accounting for 88%, 95% and 98% of segment sales in 2001,  2002 and
2003,  respectively.  In the future,  we expect  virtually all of this segment's
sales  to  continue  to  originate  from  Israel.  We have  created  significant
relationships  with some of Israel's  largest  companies as well as its banking,
healthcare and electronics  industries,  two of which account for 12% and 10% of
segment sales in 2003. No other customer  accounted for more than 10% of segment
revenues.

COMPETITION

         Our software consulting and development activity faces competition from
numerous competitors,  both large and small, operating in the Israeli and United
States  markets,   some  with  substantially  greater  financial  and  marketing
resources.   We  believe  that  our  wide  range  of  experience  and  long-term
relationships  with large  corporations  in Israel and the  United  States  will
enable us to compete successfully and obtain future business.

PROPRIETARY RIGHTS

         We own two proprietary software packages: EASYBILL(TM), a comprehensive
customer  service and billing system aimed at the low to middle end  application
market;  and ONCOPRO(TM),  which manages hospital medical files and has advanced
applications  for  oncology   departments.   The  intellectual  property  rights
resulting from our consulting and development  services,  are generally owned by
the customer for whom the services are performed.

ENERGY INTELLIGENCE SOLUTIONS

OVERVIEW

         Although  we no longer  have  control  over  Comverge  as of the second
quarter of 2003,  we continue  to include  Comverge's  results in our  financial
statements by the equity method.  Comverge continues to play a major role in our
corporate  strategy,  and Comverge  continues  to have a material  effect on our
financial results.

         Comverge  designs,  develops  and markets a full  spectrum of products,
services and solutions to electric  utilities and energy  service  companies and
their residential and business customers that provide energy  intelligence - the
optimal transfer and usage of energy.  Comverge's energy intelligence  solutions
bring  to  bear  a  combination  of  hardware   development  and   manufacturing
capabilities  and a suite of software  products  which,  together or separately,
help investor-owned  utilities,  energy service companies and other providers of
electricity,  as well as their  customers,  address  energy usage issues through
load control, data communications and analysis, real-time pricing and integrated
billing and reporting.  Comverge's load control solutions allow its customers to
reduce  usage or "shed load" during peak usage  periods,  such as the summer air
conditioning  season,  thereby  reducing or  eliminating  the need to buy costly
additional  power  on the spot  market,  or  invest  in new  peaking  generation
capacity.  This solution is both cost-effective and environmentally  superior to
building new generation  capabilities.  Comverge's  two-way data  communications
solutions  allow  utilities to gather,  transmit,  verify and analyze  real-time
usage  information,  and  can be  used  for  automated  meter  reading,  support
time-of-use  metering,  theft  detection,  remote  connect/disconnect  and other
value-added services.

                                      -2-
<PAGE>

         In 2003, Comverge began two new initiatives.  In March,  Comverge began
installation of its MainGate Home product for its largest  customer,  Gulf Power
and then in June,  Comverge  signed a long  term  Virtual  Peaking  Capacity(TM)
contract to provide significant peak load reduction to PacifiCorp,  a subsidiary
of ScottishPower.

HISTORY

         Since 1992, we have been  designing,  developing and marketing  two-way
interactive  communications  solutions that provide real-time,  remote automated
meter reading and data management capabilities to utilities internationally.  We
developed  state-of-the-art,  high-speed,  power  line  carrier  technology  and
deployed pilot systems in Thailand,  Taiwan,  Venezuela,  Argentina,  Israel and
Mexico.

         In January  1998,  Comverge  acquired  certain  assets and  licenses to
intellectual  property from Lucent  Technologies'  Utilities  Solution  business
division.  This licensed technology relates to a product which had been deployed
by Lucent using a two-way cable TV system as well as an Internet-based  wireless
network.  Comverge  employs  a number  of the  employees  who were  involved  in
developing this product.

         In  August  1999,   Comverge  purchased  the  assets  and  business  of
Scientific-Atlanta's  Control Systems  division,  acquiring its load control and
gateway product lines and hiring a number of employees from this division.

         During 2003,  Comverge completed private equity financing in the amount
of $18.6 million and the  finalization of terms for a new credit  arrangement of
$5  million  with a  leading  financial  institution.  Included  in the group of
investors were Nth Power,  EnerTech Capital Partners,  Ridgewood  Capital,  E.ON
Venture  Partners,  Shell Internet  Ventures,  Easton Hunt Capital  Partners and
Norsk Hydro  Technology  Ventures.  In  conjunction  with the equity  financing,
Comverge  acquired the fixed assets and iNET(TM)  software  platform  from Sixth
Dimension, Inc.

         Comverge has an office in East Hanover, New Jersey from which its sales
and marketing and  PowerCAMP(TM)  software  groups operate aided by its iNET(TM)
office  in  Newark,   California.   Comverge's  administrative  and  engineering
personnel and principal product  manufacturing  facility are located in Atlanta,
Georgia.  Comverge  operates  its  installation  program  for Gulf Power from an
office in Pensacola,  Florida.  Comverge also and maintains a small research and
development center in Israel.

PRODUCTS AND SERVICES

         Comverge offers data  communications and load control product solutions
that  address the  information  and control  needs of the global  energy  market
through its power line technology and expertise it developed,  combined with our
strategic  acquisitions  of technology,  personnel,  contracts and customer base
from  Lucent,  Scientific-Atlanta  and  Sixth  Dimension.  Comverge's  technical
expertise   includes   load   control,   broadband,   wireless   and   powerline
communications, as well as Internet and home networking and automation.

         Comverge  currently offers products and services in four product lines:

         o    Real-time usage information products;

         o    Load control products;

         o    Gateway products, which combine real-time information and control;
              and

         o    PowerCAMP(TM)  Software products that allow utilities to conserve,
              analyze, monitor and price electric usage.

         REAL-TIME USAGE  INFORMATION  PRODUCTS.  Comverge  markets the MainGate
C&I, which is a meter-reading  device for gathering and  transmitting  real-time
usage information and providing  distributed  generation  monitoring and control
for commercial and industrial  customers.  The MainGate C&I uses  Internet-based
CDMA  communications  to transmit  detailed  information  regarding  patterns of
energy  consumption and is targeted at industrial and commercial  customers,  an
important segment of the user market for energy  companies.  The use of CDMA for
data communication makes our product easier to install and less expensive to run
than products that require a dedicated telephone line. Comverge's alliances with
Verizon  Wireless,  AT&T Wireless and GTE give us a national platform from which
to market this product.

                                      -3-
<PAGE>

         LOAD CONTROL PRODUCTS.  Power  distribution  companies use load control
products  to reduce  peak  electrical  demand,  avoiding  the need to buy costly
electricity on the spot market or to build new generation facilities. Generators
and energy  marketers can use load control products to free capacity during high
cost periods for resale to others.  Comverge offers its customers two major load
control products: digital control units, also known as DCUs, and SuperStats(TM).
The DCU is a  switch  that can be  connected  to any  appliance,  such as an air
conditioner or water heater, and that permits the user to turn appliances on and
off  from  a  remote  location  utilizing  wireless  communications.  Comverge's
SuperStat(TM)  product  combines  a  programmable  thermostat  with  a  wireless
communication  module to provide cooling  systems direct load control,  allowing
customers  to choose when and how much energy to use,  while  giving the utility
the ability to control air  conditioning  systems through the thermostat  during
peak usage periods.

         GATEWAY PRODUCTS. Maingate(TM), Comverge's gateway product, is a system
designed  around a  communications  "gateway," or bridge,  which permits two-way
real-time communications between a local area network (LAN) (such as a "network"
of appliances and other devices within a home or a network of meters at multiple
users)  and a wide  area  network  (WAN)  (such as  cable,  telephone  or CDPD).
Maingate  provides  information  and  load  control  functionality  to both  the
electricity  provider  and  its  customers  and  can  significantly  reduce  the
customer's   electricity   bills.   When  fully   integrated   with   Comverge's
PowerCAMP(TM) software, Maingate(TM) provides our customers with a comprehensive
solution for their diverse energy management requirements.

         Maingate(TM) provides two-way real time metering,  time-of-use pricing,
load control and whole house surge  suppression  for  residential  users. In the
typical  configuration,  the central air  conditioning  system,  controlled by a
SuperStat(TM)  thermostat,  the water heater and up to one additional  appliance
within the home,  are fitted with power line  communication  ("PLC")  based load
control devices.  The load control devices and the  SuperStat(TM) are networked,
and linked via the Maingate gateway to the WAN.  Maingate allows the customer to
automatically  respond to energy price variations to minimize their usage during
high priced  periods.  Rollout of Maingate Home is being  deployed for Florida's
Gulf Power under a contract that provides for the  installation of Maingate into
40,000 homes.

         POWERCAMP(TM) SOFTWARE PRODUCTS. PowerCAMP(TM) is an extensive suite of
software  developed  by our  engineers  and deployed in several  countries.  The
software used in PowerCAMP(TM)  has been subject to extensive  field-testing and
customer  interaction  and has been the backbone for  monitoring  and  analyzing
utility meter reading and load  management  programs  using  Comverge  products.
Comverge has taken this software and packaged and  modularized  it as a suite of
stand-alone  software editions for utilities and their  residential,  commercial
and industrial customers. PowerCAMP(TM) can also serve those customers through a
web-based  Application Service Provider,  or ASP, model. With the acquisition of
the  iNET(TM)  software  platform,  Comverge has added  technology  for upstream
monitoring  and control of capital assets by offering  comprehensive  monitoring
and control of power generation and substation assets.

CUSTOMERS AND MARKETS

         Our energy  intelligence  solutions  business has over 500 customers in
eight  countries  and we  have an  installed  base  of  approximately  5,000,000
end-point  installations  worldwide.  The global market for energy  intelligence
solutions is immature and still emerging. Reliable information as to the current
size of the market we serve or its rate of growth is not readily available.  The
anticipated growth in Comverge's market will be driven by the following factors:

     o   Increasing   worldwide   demand  for   electricity  and  volatility  of
         electricity prices;

     o   Anticipated  market  and  regulatory  incentives  to manage  peak usage
         periods  in an  economically  efficient  and  environmentally  friendly
         manner; and

     o   Continued  deregulation of the electric  utility industry in the United
         States and  resulting  increased  competition  among  electric  service
         companies.

         Although the effects of the current  trend toward  deregulation  in the
United  States and overseas are not certain,  we  anticipate  that the new, more
competitive  environment,  combined  with  expected  government  incentives  and
mandates, will result in continued growth in the demand for products designed to
gather information and manage electricity usage.

                                      -4-
<PAGE>

         Comverge's   customers  are  generally  domestic  electric   utilities,
electric service companies or prime  contractors that serve electric  utilities.
Comverge's   largest   customer  is  Florida's  Gulf  Power,   which   purchased
approximately  $3  million  in  products  and  services  in 2003.  Comverge  has
demonstrated  that its CDC and  SuperStat(TM)  products  generally  work well in
small-scale  deployments,  and as its track record  grows,  Comverge  expects to
expand  its  sales to its  existing  customers  to  full-scale  deployments.  In
addition to expanding relationships with existing customers, Comverge's strategy
is to take  advantage of the  relationships  with these  customers to extend its
sales  to their  affiliates,  many of whom are  owned by large  utility  holding
companies  with  several  owned  utilities.  Comverge's  has also  formed  joint
marketing  partnerships with Verizon Wireless,  Schlumberger and Honeywell,  and
continues  to plan to  expand on these  relationships.  In  September,  Comverge
signed a five-year agreement with Landis+Gyr,  a leading meter manufacturer,  to
jointly market and develop commercial and industrial metering solutions.

COMPETITION

         Within the  emerging  energy  intelligence  solutions  market,  we face
competition from a variety of companies and products, each of which is trying to
garner a larger market share. Key competitors  include Itron, ABB,  Schlumberger
and Mainstreet  Networks with respect to Comverge's gateway products,  CEPG with
respect  to  Comverge's  commercial  and  industrial  AMR  products,  and Cannon
Technologies  and Itron with respect to  Comerge's  load  control  products.  In
addition to these  companies,  there are many other  competitors  and  potential
competitors  vying  for a  portion  of this as yet  undefined  market.  Comverge
believes that its products  offer  significant  competitive  advantages  because
they:

     o   have been proven in the field;

     o   offer  significant  technological  advantages over competing  products;
         and/or

     o   cost less than many of our competitors' products.

         However,  some of our competitors  have more  resources,  better market
recognition,  a larger  sales  force or can offer  features  not  offered by our
products. In addition,  certain of our competitors manufacture and sell electric
meters or back-end  billing or other  software  systems to  utilities,  possibly
providing them an advantage in marketing  their utility  solution  products.  We
cannot be certain that our products  will win market  acceptance or that we will
be able to capture a significant segment of the market.

PROPRIETARY RIGHTS

         Comverge holds 12 patents and has 13 patents pending. Comverge attempts
to  vigorously  protect all of its  proprietary  rights.  Certain  products that
Comverge  has  developed  and is  developing  incorporate  or are  derived  from
intellectual property owned by third parties under license to Comverge.

         In Comverge's  product  development  activities,  Comverge  relies on a
combination of nondisclosure  agreements and technical measures to establish and
protect its proprietary rights, if any, in its products.  Comverge believes that
as a result of the  rapid  pace of  technological  change  in the  software  and
real-time system industries,  legal protection for its products, if any, will be
less  significant to its prospects than the knowledge,  ability and expertise of
its management and technical personnel.

COMPUTER HARDWARE SALES

PRODUCTS AND SERVICES

         Through our Databit  subsidiary,  we sell and service PC-based computer
hardware,  software,  data  storage,   client/server  and  networking  solutions
principally  in the  greater  New York  City  metropolitan  area.  Databit  is a
value-added-reseller  and an  authorized  service  provider  for  equipment  and
software  from such  well-known  industry  leaders  as Compaq,  IBM,  Microsoft,
Oracle,  3Com,  Compaq/Hewlett-Packard,  NEC, Acer, Apple and Dell. We offer our
customers  a full  range of  systems  integration  services,  including  design,
implementation, hardware and software selection, and implementation of local and
wide area networks. In addition, we provide maintenance and service to customers
under extended  service  agreements.  Our equipment and software sales and other
services are offered under separately negotiated and priced agreements.

                                      -5-
<PAGE>

CUSTOMERS AND MARKETS

         Computer  hardware  segment sales include sales to two major customers,
Montefiore Medical Center, which accounted for approximately 25%, 22% and 28% of
segment sales in 2001, 2002 and 2003, respectively,  and a large law firm, which
accounted for approximately 21% in 2002. Another law firm customer accounted for
12% of segment sales in 2001. No other  customer  accounted for more than 10% of
segment  sales.  We reduced our  dependence on the New York metro market,  which
accounted  for 71% and 70% of segment  revenues in 2003 and 2002,  respectively,
compared 84% in 2001.

COMPETITION

         The market for PCs and related  peripheral  hardware  sales in which we
operate is characterized by severe competition in price-performance,  breadth of
product line, financing capabilities,  technical expertise,  service and overall
reputation. Manufacturers have been increasing their direct sales efforts on the
Internet and  otherwise,  reducing  prices to end-users,  which  reduces  profit
margins  for  distributors  and  value-added-resellers   such  as  Databit.  Our
competitors  include  manufacturers,  other VAR's,  large equipment  aggregators
(some of whom sell to us) and systems integrators.  Many of our competitors have
longer operating  histories,  greater  financial  resources and buying power and
larger, established customer bases. We compete by offering attractive prices and
flexible  payment terms,  and by helping our customers  evaluate their needs and
tailoring solutions by offering other value-added services such as configuration
and on-site service.

BACKLOG

         As of December 31, 2003,  our backlog of work to be completed  was $3.2
million,   $3.1  million  of  which  related  to  our  software  consulting  and
development  segment  (of which $2.2  million is related to our  contracts  with
Clalit  Health  Services).  We estimate that we will perform approximately  $1.8
million of our backlog work in 2004.

EMPLOYEES

         At December 31, 2003, we employed a total of 210 people,  including 160
persons in engineering and technical support,  16 in marketing and sales, and 30
in management,  administration  and finance. A total of 183 of our employees are
based  in  Israel.  We  consider  our  relationship  with  our  employees  to be
satisfactory.

         We have no collective  bargaining agreements with any of our employees.
However,  with  regard to our  Israeli  activities,  certain  provisions  of the
collective   bargaining   agreements  between  the  Israeli  Histadrut  (General
Federation of Labor in Israel) and the Israeli  Coordination  Bureau of Economic
Organizations (including the Industrialists Association) are applicable by order
of the Israeli Ministry of Labor.  These provisions mainly concern the length of
the  workday,  contributions  to a  pension  fund,  insurance  for  work-related
accidents,  procedures for dismissing employees,  determination of severance pay
and other conditions of employment.  We generally  provide our Israeli employees
with benefits and working conditions beyond the required  minimums.  Israeli law
generally  requires severance pay upon the retirement or death of an employee or
termination of employment without due cause. Furthermore,  Israeli employees and
employers  are  required  to pay  specified  amounts to the  National  Insurance
Institute,  which administers Israel's social security programs. The payments to
the National Insurance Institute include health tax and are approximately 17% of
wages  (up  to  a  specified   amount),   of  which  the  employee   contributes
approximately 60% and the employer approximately 40%.

SEGMENT INFORMATION

         For additional financial  information regarding our operating segments,
foreign and domestic operations and sales, see "Item 7. Management's  Discussion
and Analysis of Financial  Condition and Results of  Operations"  and Note 17 to
our Consolidated Financial Statements included in this Annual Report.

FACTORS WHICH MAY AFFECT FUTURE RESULTS

         We may from time to time make written or oral  statements  that contain
forward-looking  information.  However, our actual results may differ materially
from our expectations, statements or projections. The

                                      -6-
<PAGE>

following risks and uncertainties  could cause actual results to differ from our
expectations, statements or projections.

GENERAL FACTORS

WE HAVE A  HISTORY  OF  OPERATING  LOSSES  AND  DECREASING  CASH  AVAILABLE  FOR
OPERATIONS.

         We have in the past,  and  continue  to  experience  operating  losses,
although they have been  decreasing  over the years.  In 2001, 2002 and 2003, we
had  operating  losses  of  $10.4  million,   $8.2  million  and  $3.6  million,
respectively.  Cash used in operations in 2001,  2002 and 2003 was $8.7 million,
$6.2 million and $1.0 million, respectively.

         Our Comverge  investment  was the primary  source of operating  losses,
which amounted to losses of  approximately  $6.4 million,  $2.2 million and $1.1
million in 2001,  2002, and 2003 (results  consolidated  in the first quarter of
2003),  respectively.  Of our net cash  used in  operating  activities  in 2003,
approximately  $0.3  million  was  used  in the  energy  intelligence  solutions
segment,  $0.6  million  was  provided by our Israeli  software  consulting  and
development  segment  operations,  $0.3  million was  provided  by our  computer
hardware  segment  and $1.6  million  was used by our  corporate  and other U.S.
activities.  As described  under the caption "Recent  Developments"  in "Item 7.
Management's  Discussion  and  Analysis of  Financial  Condition  and Results of
Operations,"  throughout 2003,  Comverge  successfully  completed private equity
financing and new credit arrangements which should provide sufficient  financing
for Comverge to independently fund its activities.

         We  believe  that  as a  result  of  Comverge's  obtaining  independent
financing, the release of previously restricted cash and anticipated improvement
in operating results in 2004 in our other U.S. and Israeli operating activities,
we currently have  sufficient  liquidity to fund all our activities for at least
the next 12 months.  For  additional  discussion of our  liquidity  position and
factors  that may affect  our future  liquidity,  see the  discussion  under the
captions "Recent Developments" and "Liquidity and Capital resources" in "Item 7.
Management's  Discussion  and  Analysis of  Financial  Condition  and Results of
Operations."

LOSS OF THE SERVICES OF A FEW KEY EMPLOYEES COULD HARM OUR OPERATIONS.

         We depend on our key  management and technical  employees.  The loss of
certain   managers   could   diminish   our  ability  to  develop  and  maintain
relationships  with  customers  and  potential  customers.  The loss of  certain
technical   personnel   could  harm  our   ability  to  meet   development   and
implementation  schedules.  Most  of our  significant  employees  are  bound  by
confidentiality and non-competition  agreements.  We do not maintain a "key man"
life insurance policy on any of our executives or employees.  Our future success
also depends on our continuing ability to identify, hire, train and retain other
highly qualified  technical and managerial  personnel.  If we fail to attract or
retain highly qualified  technical and managerial  personnel in the future,  our
business could be disrupted.

RISKS RELATED TO THE SOFTWARE CONSULTING AND DEVELOPMENT SEGMENT

FAILURE TO ACCURATELY FORECAST COSTS OF FIXED-PRICED  CONTRACTS COULD REDUCE OUR
MARGINS.

         When working on a fixed-price  basis, we undertake to deliver  software
or  integrated  hardware/software  solutions to a customer's  specifications  or
requirements  for a  particular  project.  The profits  from these  projects are
primarily  determined  by our success in  correctly  estimating  and  thereafter
controlling  project costs.  Costs may in fact vary substantially as a result of
various  factors,   including   underestimating  costs,  difficulties  with  new
technologies  and economic  and other  changes that may occur during the term of
the  contract.  If, for any  reason,  our costs are  substantially  higher  than
expected, we may incur losses on fixed-price contracts.

HOSTILITIES  IN THE MIDDLE EAST REGION MAY  FURTHER  DEEPEN THE  WEAKNESS IN THE
ISRAELI  HI-TECH  MARKET  AND MAY  HARM  OUR  ISRAELI  OPERATIONS;  OUR  ISRAELI
OPERATIONS  MAY BE NEGATIVELY  AFFECTED BY THE  OBLIGATIONS  OF OUR PERSONNEL TO
PERFORM MILITARY SERVICE.

         A substantial part of our software consulting and development  services
segment is conducted in Israel.  Accordingly,  political,  economic and military
conditions in Israel may directly affect this segment of our business.  Over the
past three years,  the Israeli  hi-tech  market has  experienced  a  significant
downturn,  particularly in the software  consulting and development market. This
weakness has been prolonged by the

                                      -7-
<PAGE>

increase in unrest, terrorist activity and military action in and around Israel,
which began in September  2000 and which has  continued  with varying  levels of
intensity  into 2004.  Any increase in  hostilities in the Middle East involving
Israel could further weaken the Israeli  hi-tech  market,  which may result in a
significant deterioration of the results of our Israeli operations. In addition,
an increase in  hostilities  in Israel  could cause  serious  disruption  to our
Israeli  operations  if acts  associated  with  such  hostilities  result in any
serious  damage  to our  offices  or  those  of our  customers  or  harm  to our
personnel.

         Many of our  employees  in Israel are  obligated  to  perform  military
reserve duty. In the event of severe unrest or other conflict, individuals could
be required to serve in the military for extended periods of time. Over the past
two years,  there have been numerous  call-ups of military  reservists to active
duty, and it is possible that there will be additional call-ups in the future.

         Our  Israeli  operations  could  be  disrupted  by  the  absence  for a
significant  period of time of one or more of our key employees or a significant
number of our other employees due to military  service.  Such  disruption  could
harm our Israeli operations.

EXCHANGE RATE FLUCTUATIONS COULD INCREASE THE COST OF OUR ISRAELI OPERATIONS.

         Most of the sales in this segment stem from our Israeli  operations and
a significant  portion of those sales are in New Israeli  Shekels ("NIS") linked
to the dollar.  Such  transactions are negotiated in dollars;  however,  for the
convenience  of the  customer,  they are settled in NIS. The dollar value of the
revenues of our  operations in Israel will decrease if the dollar is devalued in
relation to the NIS during the period from the invoicing of a transaction to its
settlement.  In  addition,   significant  portions  of  our  expenses  in  those
operations are in NIS, so that if the dollar is devalued in relation to the NIS,
the dollar value of these expenses will increase.

FINANCIAL VIABILITY OF CLALIT HEALTH FUND.

         In 2003, 12% of the software consulting and development segment's sales
and 14% of its  receivables  at  December  31,  2003 were  related to the Clalit
Health Fund.  The Clalit Health Fund is the largest HMO in Israel and one of the
largest in the world.  The fund has a history of running at a deficit,  which in
the past has required  numerous cost cutting plans and periodic  assistance from
the  Israeli  government.  Should  the fund have to  institute  additional  cost
cutting measures in the future, which may include  restructuring of its terms of
payment,  this could have a material  adverse effect on the  performance of this
segment.

RISKS RELATED TO THE ENERGY INTELLIGENCE SOLUTIONS SEGMENT

         Although we no longer  control  Comverge and the business in our energy
intelligence  solutions segment,  we have made a significant  investment in this
segment and it continues to have a material effect on our consolidated  results.
Comverge  revenues  have  fluctuated  significantly  from quarter to quarter and
Comverge  continuously  operates at a loss.  The  activities of this segment are
subject to many risks, including the following:

THE  MARKET  FOR  OUR  ENERGY   INTELLIGENCE   SOLUTIONS  IS  SUBJECT  TO  RAPID
TECHNOLOGICAL  CHANGE;  IF WE  FAIL  TO  KEEP  PACE,  WE  WILL  HAVE  DIFFICULTY
DEVELOPING AND MAINTAINING A MARKET FOR OUR PRODUCTS AND SERVICES.

         The   market  for  our  energy   intelligence   solutions   segment  is
characterized  by rapid  technological  change.  Communications  and  networking
technologies are  continuously  changing and we will need to invest in continued
product  development,  both  hardware and  software,  in order to keep pace with
these changing  technologies.  Although  Comverge has been successful in raising
significant  financing,  over  the long  term, Comverge  may not  have  adequate
resources to invest in development and accordingly,  its development efforts may
not be successful.

THE  PACE OF  UTILITY  DEREGULATION  HAS  BEEN  SLOW;  THE  ULTIMATE  REGULATORY
STRUCTURE OF THE UTILITY  INDUSTRY  MAY NOT PROVIDE  MANDATES OR  INCENTIVES  TO
PURCHASE OUR PRODUCTS.

         The electric utility industry is undergoing  significant  deregulation.
The pace of  deregulation  appears to have slowed due to the  uncertainty  about
deregulation  in the wake of the  energy  crisis in  California  in 2000 and the
Enron  reorganization.  Market observers  expect  deregulation to include energy
choice  and  time-of-use  pricing  requirements,  which will  mandate,  or favor
implementation  by utilities of, load control  programs and the use of automated
meter reading and data distribution. However, the pace of deregulation

                                      -8-
<PAGE>

has not been as rapid as expected and to date only a limited number of utilities
have made purchase commitments for automated meter reading and data distribution
systems. Many utilities have also deferred the purchase of load control systems,
pending resolution of broader industry and regulatory developments.  The results
of  deregulation  are uncertain and may not result in the mandates or incentives
for the types of  services  which  require  AMR  systems.  If state and  federal
regulation does not provide these requirements or incentives, the market for our
products may not develop as we expect.

WE MUST COMPETE WITH OTHER UTILITY SOLUTION  PROVIDERS FOR MARKET ACCEPTANCE AND
CUSTOMERS.

         While we believe  that the systems  offered by our energy  intelligence
solutions  segment  offer  advantages  over  competing  load  control  and  data
communications solutions, there are alternative solutions, and we cannot predict
what share of the market we will obtain.  In addition,  some of our  competitors
have  more  sales and  marketing  resources,  better  brand  recognition  and/or
technologies that offer alternative  advantages.  If our potential  customers do
not adopt  our  solutions  or do so less  rapidly  than we  expect,  our  future
financial results and our ability to achieve positive cash flow or profitability
will be harmed.

WE MAY ENCOUNTER  DIFFICULTIES  IN  IMPLEMENTING  OUR  TECHNOLOGY,  PRODUCTS AND
SERVICES.

         Problems may occur in the implementation of our technology, products or
services, and we may not successfully complete the commercial  implementation of
our  technology  on a wide  scale.  Future  advances  may render our  technology
obsolete or less cost effective than competitive systems.  Consequently,  we may
be unable to offer competitive services or offer appropriate new technologies on
a timely basis or on satisfactory terms.

DELAYS,  QUALITY  CONTROL AND PRICE  PROBLEMS COULD ARISE DUE TO OUR RELIANCE ON
THIRD-PARTY MANUFACTURERS OF CERTAIN COMPONENTS.

         We use a limited number of outside parties to manufacture components of
some of our products.  Our reliance on third party  manufacturers  exposes us to
risks relating to timeliness,  quality control and pricing.  We have experienced
certain delays and quality control  problems from  third-party  manufacturers in
the past and we may  experience  such problems  with our current  manufacturers.
Implementing  these new product offerings could cause some  transitional  delays
and the  diversification  could  have a  negative  impact on price  and  quality
control.  Such delays,  price increases  and/or quality control  problems at our
third-party  manufacturers could harm our relationships with our customers,  our
operating results and cash flow.

RISKS RELATED TO THE COMPUTER HARDWARE SEGMENT

WE FACE LOW MARGIN, MASS MARKETING COMPETITION.

         The market for PCs and related  peripheral  hardware  sales in which we
operate  is  characterized  by  severe  competition  in  price-performance   and
financing  capabilities.  Manufacturers  and on-line  Internet vendors have been
increasing  their direct sales efforts on the Internet and  otherwise,  reducing
prices to end-users,  which reduce  profit  margins for  distributors  and value
added resellers such as our Databit subsidiary.  Should this trend continue,  it
could  make our  method  of sales  uneconomical  and  bring  into  question  the
long-term viability of the business model used by Databit.

A LARGE  PORTION  OF OUR SALES ARE  CONCENTRATED  IN THE  GREATER  NEW YORK CITY
METROPOLITAN AREA.

         Computer  hardware sales to the greater New York City metropolitan area
represented  84%,  70% and 71% of the total  segment  sales for the years  ended
December 31, 2001, 2002 and 2003, respectively.  Furthermore,  most of the sales
force for the  segment  is based in  Manhattan  and  northern  New  Jersey.  The
decrease in percentage of sales centered in the New York City  metropolitan area
is partially attributable to the sales office we opened on the West Coast, which
we enhanced in 2003.  There can be no assurance  business  will continue to grow
outside the New York City  metropolitan  area, and if the region suffers from an
economic  downturn  similar  to that of 2001,  our  operating  results  could be
materially adversely affected.

                                      -9-
<PAGE>

ITEM 2.  PROPERTIES

         Our  corporate  headquarters  and the  principal  offices  for our U.S.
software  consulting and  development and hardware sales segments are located in
Mahwah, New Jersey in approximately 5,000 square feet of office space, at a rate
of $85,000 per annum, under a lease that expired in September 2003,  although we
continue to rent these premises on a month-to-month  basis. We also rent offices
of  approximately  4,600  square  feet in New York  City,  at a current  rate of
$185,000 per annum,  under a lease which expires in October 2005. Our West Coast
sales office for our hardware sales segment  consists of 500 square feet located
in Los Angeles,  California  at a rate of $11,000 per annum,  under a lease that
expires in March 2004.  We also lease a 600 square foot sales office in southern
New Jersey at a current rent of $8,000 per annum.

         Our Israeli  activities  are conducted in  approximately  18,000 square
feet of  office  space  in the Tel Aviv  metropolitan  area  under a lease  that
expires  in August  2009.  The  annual  rent is  approximately  $289,000.  These
facilities  are used for the Israeli  operations of the software  consulting and
development segment and the energy intelligence  solutions segment. In addition,
as part of our  acquisition  of Endan,  we acquired  Endan's leased office space
located in the Tel Aviv  metropolitan  area and are subleasing  this space.  The
leases  expire in October 2004 and the annual net rent expense is  approximately
$19,000.

ITEM 3.  LEGAL PROCEEDINGS

         None.

ITEM 4.  SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

         On December 8, 2003, we conducted our annual  meeting of  stockholders.
At this meeting,  the stockholders elected the following persons to serve as our
directors:  George  Morgenstern,  Shane Yurman,  Avi Kerbs and Elihu Levine. The
stockholders did not vote on any other matters.

                                      -10-
<PAGE>

                                     PART II

ITEM 5.  MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS

         Our Common  Stock is  currently  traded on the Nasdaq  SmallCap  Market
under the symbol "DSSCE". Prior to March 3, 2003, our Common Stock traded on the
Nasdaq National Market System (NASDAQ/NNM).  The following table sets forth, for
the periods  indicated,  the high and low reported sales prices per share of our
Common Stock on both the Nasdaq  SmallCap  Market and the Nasdaq National Market
System.

                                                           High      Low
                                                          -------  -------
         2002:
         First Quarter...............................      $5.62    $3.83
         Second Quarter..............................       3.96     2.74
         Third Quarter...............................       3.04     1.04
         Fourth Quarter..............................       1.93     0.84

         2003:
         First Quarter...............................      $2.79    $0.91
         Second Quarter..............................       2.79     1.80
         Third Quarter...............................       3.39     2.25
         Fourth Quarter..............................       3.45     2.45

         As of March 23, 2004, the last reported sales price of our common stock
on the Nasdaq  SmallCap  Market was $23.7,  there were 81 record  holders of our
common  stock and we  estimate  that there were 1,456  beneficial  owners of our
common stock.

         We paid no  dividends in 2002 or 2003 and we presently do not intend to
pay any dividends in 2004.

         The following table provides  information about our equity compensation
plans as of December 31, 2003,  including  both  stockholder  approved plans and
non-stockholder approved plans. The section entitled "Compensation of Directors"
in our proxy statement for the annual meeting of  stockholders  held on December
8, 2003 contains a summary  explanation  of the  Non-Employee  Director's  Stock
Option Plan, which has been adopted without the approval of stockholders, and is
incorporated herein by reference.

<TABLE>
<CAPTION>

                                                                                                             NUMBER OF SECURITIES
                                                                                                           REMAINING AVAILABLE FOR
                                                                NUMBER OF SECURITIES TO  WEIGHTED-AVERAGE   FUTURE ISSUANCE UNDER
                                                                    BE ISSUED UPON       EXERCISE PRICE OF    EQUITY COMPENSATION
                                                                       EXERCISE OF          OUTSTANDING       PLANS (EXCLUDING
                                                                 OUTSTANDING  OPTIONS,   OPTIONS, WARRANTS  SECURITIES REFLECTED IN
                                                                   WARRANTS AND RIGHTS       AND RIGHTS           COLUMN (a))
                                                                          (a)                   (b)                    (c)

                      PLAN CATEGORY                              -------------------------------------------------------------------
<S>                                                                      <C>                   <C>                 <C>
Equity Compensation Plans Approved by Security Holders                   817,750               $5.32               2,421,325

Equity Compensation Plans Not Approved by Security Holders               488,301               $4.00                 929,616
                                                                         -------               -----               ---------
           Total                                                       1,308,051               $4.83               3,350,941
                                                                       =========               =====               =========

</TABLE>

ITEM 6.  SELECTED FINANCIAL DATA

         The selected  consolidated  statement of operations  data for the years
ended December 31, 2001, 2002 and 2003 and consolidated balance sheet data as of
December  31,  2002 and 2003 have been  derived  from our  audited  Consolidated
Financial  Statements included in this Annual Report. The selected  consolidated
statement of operations  data for the years ended December 31, 1999 and 2000 and
the consolidated  balance sheet data as of December 31, 1999, 2000 and 2001 have
been derived from our audited  Consolidated  Financial  Statements  not included
herein.

         This data should be read in conjunction with our Consolidated Financial
Statements and related notes and "Item 7.  Management's  Discussion and Analysis
of Financial Condition and Results of Operations."

                                      -11-
<PAGE>

SELECTED CONSOLIDATED STATEMENT OF OPERATIONS DATA

<TABLE>
<CAPTION>

                                                                                    For the Years Ended December 31,
                                                                                   ---------------------------------
                                                                     1999          2000          2001          2002          2003
                                                                   ----------------------      --------      --------      --------
                                                                                 (in thousands, except per share data)
<S>                                                                <C>           <C>           <C>           <C>           <C>
Sales                                                              $ 39,708      $ 57,839      $ 45,924      $ 55,886      $ 35,034

     Cost of sales ...........................................       31,615        45,606        37,612        42,971        27,976
                                                                   --------      --------      --------      --------      --------
     Gross profit ............................................        8,093        12,233         8,312        12,915         7,058

Research and development expenses ............................        1,269           928         2,284         1,526           153
Selling, general and administrative expenses .................       12,471        16,340        16,617        16,689        10,498
Impairment of goodwill and investment ........................         --            --             227         2,850          --
Gain on sale of subsidiary/division ..........................         --           1,144           397          --            --
                                                                   --------      --------      --------      --------      --------
     Operating loss ..........................................       (5,647)       (3,891)      (10,419)       (8,150)       (3,593)
Interest income ..............................................           61         1,758         1,104           253            61
Interest expense .............................................         (910)         (709)         (459)       (1,212)         (788)
Loss on early redemption of debt .............................         --            (943)         --            --            --
Other income (loss), net .....................................         (306)          (50)          (32)          113          (475)
                                                                   --------      --------      --------      --------      --------
    Loss from operations before taxes on income ..............       (6,802)       (3,835)       (9,806)       (8,996)       (4,795)
Taxes on income ..............................................           62           171           (11)           28            (1)
                                                                   --------      --------      --------      --------      --------
     Loss from operations of the Company and its .............       (6,864)       (4,006)       (9,795)       (9,024)       (4,794)
        consolidated subsidiaries
Share of losses in Comverge ..................................         --            --            --            --          (1,752)
Minority interests, net of tax ...............................         (275)         --            --             880           264
                                                                   --------      --------      --------      --------      --------
     Loss from continuing operations .........................       (7,139)     .(4,006)        (9,795)       (8,144)       (6,282)
Loss from discontinued operations, net of income taxes .......       (8,728)         (104)         --            --            --
Gain on sale of discontinued operations, net of income
  taxes ......................................................         --           4,222          --            --            --
                                                                   --------      --------      --------      --------      --------
    Net income (loss) ........................................     $(15,867)     $    112      $ (9,795)     $ (8,144)     $ (6,282)
                                                                   ========      ========      ========      ========      ========

Basic and diluted net income (loss) per share:

        Loss from continuing operations ......................     $  (0.96)     $  (0.54)     $  (1.41)     $  (1.11)     $  (0.81)
   Discontinued operations ...................................        (1.17)         0.56          --            --            --
                                                                   --------      --------      --------      --------      --------
     Net income (loss) per share (basic and diluted) .........     $  (2.13)     $   0.02      $  (1.41)     $  (1.11)     $  (0.81)
                                                                   ========      ========      ========      ========      ========
Weighted average number of shares
              outstanding - basic and diluted ................        7,433         7,422         6,970         7,349         7,738
                                                                   ========      ========      ========      ========      ========

</TABLE>

SELECTED CONSOLIDATED BALANCE SHEET DATA:

<TABLE>
<CAPTION>

                                                                                       As of December 31,
                                                                                      ------------------
                                                           1999            2000             2001             2002             2003
                                                         -------------------------         -------          -------          -------
                                                                                          (in thousands)
<S>                                                      <C>              <C>              <C>              <C>              <C>
Working capital ...............................          $20,030          $18,178          $ 6,809          $ 2,845          $   729

Total assets ..................................           50,458           42,157           39,244            3,347           17,674

Short-term and long-term ......................            9,007            6,606            8,681           10,033            2,149
debt

Minority interests ............................               10               40            2,530            1,609            1,367

Total shareholders' equity ....................           24,850           22,581           14,362            7,128            3,200

</TABLE>

(1)  Results for 1999 include the gain on the sale of our help desk segment. See
     Notes 3 and 4 to the  Consolidated  Financial  Statements  included in this
     Annual  Report  for  a  description   of  our  various   acquisitions   and
     dispositions  of business  operations  and segments  during the period from
     2001 to 2003.

                                      -12-
<PAGE>

(2)  Effective July 1, 2002, we adopted Statement of Financial  Standards (SFAS)
     No. 141,  "Business  Combinations" and effective  January 1, 2002,  adopted
     SFAS No. 142, "Goodwill and Other Intangibles". As a result, we have ceased
     amortization  of all goodwill  beginning  January 1, 2002. Had SFAS No. 142
     been  adopted by us  effective  January 1, 2001,  net loss and net loss per
     share, basic and diluted, would have been as follows (in thousands,  except
     per share data):


                                                                   Year ended
                                                                  December 31,
                                                                      2001
                                                                  ------------

      Net loss as reported ......................................     $(9,795)
      Plus: Goodwill amortization, net of income taxes ..........         502
                                                                  ------------
      Adjusted net loss .........................................     $(9,293)
                                                                  ============

      Net loss per share:
         Basic and diluted - as reported ........................      $(1.41)
                                                                  ============
         Basic and diluted - as adjusted ........................      $(1.33)
                                                                  ============

                                      -13-
<PAGE>

ITEM 7.  MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
         RESULTS OF OPERATIONS

         OVERVIEW AND TREND INFORMATION

         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 in "Item 1. Description of Business-Factors That May
Influence Future Results."

            We operate in three  reportable  segments:  software  consulting and
development,  energy  intelligence  solutions,  and computer hardware.  As we no
longer have control over our formerly consolidated subsidiary Comverge (see Note
4 to the Consolidated Financial Statements),  effective as of the second quarter
of 2003,  we account for our  investment in Comverge by the equity method and no
longer  consolidate   Comverge's   balances  and  operating  activity  into  our
consolidated  balance sheet and statement of operations.  The following analysis
should be read together with the segment information  provided in Note 17 to our
Consolidated Financial Statements included in this report.

         SOFTWARE CONSULTING AND DEVELOPMENT

         Segment revenues decreased in 2003 compared to 2002, causing continuing
losses despite the significant cost cutting measures  instituted during the past
two years. The decrease  resulted  primarily from the continued general weakness
in the global hi-tech  markets and in the software  consulting  and  development
market in particular.  We currently expect segment revenues to increase in 2004;
this  increase,  coupled with the improved cost structure  achieved,  lead us to
believe that this segment will return to profitability in 2004.

         Beginning  in the  fourth  quarter  of  2003,  we  started  recognizing
revenues from the contract signed with Clalit Health Services,  Israel's largest
HMO and one of the largest HMOs in the world, which awarded our dsIT subsidiary,
together with Yael Software,  a $4 million contract,  of which dsIT's portion is
approximately 50%. The contract includes the development and implementation of a
new  Customer  Care and Billing  system,  based  entirely on dsIT's  e-asyBillTM
billing  system.  The system,  to be implemented  over a one-year  period with a
seven-year  maintenance  contract, is expected to generate revenues in the years
2004 through  2011. In the future,  we expect that this product,  as well as our
OncoProTM  product and sonar technology  systems,  will have increased impact on
our results of operations.

         In addition,  the consulting  market seems to be  stabilizing  and even
showing certain signs of growth that leave us optimistic regarding revenues from
this activity in 2004.

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

         ENERGY INTELLIGENCE SOLUTIONS

         During 2003,  Comverge  signed and closed on agreements  (see Note 4 to
our Consolidated  Financial  Statements) for private equity  financing  totaling
$18.7 million. We invested $3.35 million in these financings, and $15.35 million
was invested by a group of leading energy venture capital investors, in exchange
for Series A Convertible Preferred Stock of Comverge.

         Comverge's  operating  results for the period  from  January 1, 2003 to
March 31,  2003 have been  consolidated  and are  included  in our  consolidated
statements  of  operations.  Our share of Comverge's  operating  results for the
period from April 1, 2003 to  December  31,  2003  (effective  April 1, 2003) is
reflected  in "Share of losses in Comverge" in our  consolidated  statements  of
operations.

         In  2003,  Comverge  saw a  decrease  in the  market  for  its  DCU and
Superstat  families  of  products,  causing a  general  decrease  in  sales.  In
addition,  in 2003 Comverge devoted significant attention to the capital raising
process mentioned above. However,  during this period, Comverge signed its first
two major, long-term Virtual Peaking CapacityTM contracts to provide significant
peak load reduction to PacifiCorp,  a subsidiary of Scottish  Power,  and to San
Diego Gas and Electric, a subsidiary of Sampora Energy.  Although little revenue
was recognized with respect to these contracts in 2003, we expect them to have a
positive  effect  on  revenues  in  future  periods.  Comverge  signed a 10-year
contract extension modifying the contract with

                                      -14-
<PAGE>

Gulf Power for Price Responsive Load Management.  Although this  modification is
expected to bring the contract's total revenues to an excess of $50 million,  it
will reduce  revenues from this contract in the short term.  However,  it is not
expected to negatively impact overall  operating  results of Comverge.  Over the
longer term,  the contract  modification  is expected to improve this  project's
profitability, due to product improvements and reductions in component costs.

         COMPUTER HARDWARE

         Sales in 2003  were  lower  than  sales in 2002,  primarily  due to the
extraordinarily high amount of sales in the fourth quarter of 2002. We currently
expect  to  maintain  average  sales in 2004 at a level  similar  to that of the
fourth  quarter of 2003,  by further  expanding  our new offices in southern New
Jersey  and on the West  Coast.  In  addition,  to offset  the  weakness  in the
hardware resale market, we are attempting to diversify our revenue base and have
initiated efforts toward  alternatives adding more value added software products
and services. These activities, together with continuing joint marketing efforts
with dsIT for  Israeli  Ministry  of Defense  projects,  are  intended to reduce
Databit's dependency on the computer hardware markets in the future.

         CORPORATE

         Comverge has been successful in raising approximately $18.6 million and
establishing bank credit lines of $5 million, so that although we no longer have
control  over  Comverge  activities,  we do not need to  further  fund  Comverge
operations.  George Morgenstern,  our Chairman and Chief Executive Officer,  has
retired from full-time  employment,  initiating  his  consulting  contract as of
January  1,  2004,  and has  agreed  to make  himself  available  to fill  other
appropriate  positions the Board may desire. In light of our reduced involvement
with  Comverge,  the  independent  management  in place at our dsIT and  Databit
subsidiaries  and  our  CEO's  semi-retirement,  we  continue  to  evaluate  our
corporate  activities and structure.  This  evaluation  includes  exploration of
restructuring,  acquisitions or mergers and/or other strategic alternatives.  To
assist us in this effort, we have retained Foresight,  a strategic and financial
consulting  and research  firm, to perform a valuation of our  subsidiaries  and
Comverge,  as well as perform  other  analysis  to be  utilized  by our Board of
Directors in its exploration of possible  strategic  alternatives.  We expect to
continue this process and complete it within the next few months.

         CRITICAL ACCOUNTING POLICIES

         The  Securities  and  Exchange  Commission  ("SEC")  defines  "critical
accounting  policies" as those that require  application  of  management's  most
difficult,  subjective  or complex  judgments,  often as a result of the need to
make estimates about the effect of matters that are inherently uncertain and may
change in subsequent periods.

         The following discussion of critical accounting policies represents our
attempt to report on those accounting  policies which we believe are critical to
our consolidated financial statements and other financial disclosure.  It is not
intended  to be a  comprehensive  list  of  all of  our  significant  accounting
policies,  which  are  more  fully  described  in  Note  2 of the  Notes  to the
Consolidated Financial Statements included in this Annual Report. In many cases,
the accounting treatment of a particular transaction is specifically dictated by
generally accepted accounting principles, with no need for management's judgment
in their  application.  There  are  also  areas in  which  the  selection  of an
available alternative policy would not produce a materially different result.

         We have  identified  the  following  as  critical  accounting  policies
affecting our company: principles of consolidation and investments in associated
companies, revenue recognition; foreign currency transactions; inventory; income
taxes; and goodwill and other long-lived assets.

         PRINCIPLES OF CONSOLIDATION AND INVESTMENTS IN ASSOCIATED COMPANIES

         Our  consolidated  financial  statements  include  the  accounts of all
majority-owned  subsidiaries.  All intercompany  balances and transactions  have
been eliminated.  Minority  interests in net losses are limited to the extent of
their equity capital.  Losses in excess of minority  interest equity capital are
charged against us in our consolidated statements of operations.  Investments in
associated companies are accounted for by the equity method.

                                      -15-
<PAGE>

         In April 2003,  we,  together  with our then  consolidated  subsidiary,
Comverge,  signed and  closed on a  definitive  agreement  with a  syndicate  of
venture  capital  firms raising an aggregate of $13,000 in capital  funding.  We
purchased  $3,250 of Series A Convertible  Preferred Stock issued by Comverge in
the equity  financing and incurred  transaction  costs of an additional $294. In
December  2003,  we  invested  an  additional  $100 in  Series  A-2  Convertible
Preferred Stock. A syndicate of venture capital firms purchased $7,750 of Series
A  Convertible  Preferred  Stock  issued  by  Comverge,  and one  member  of the
syndicate also purchased  $2,000 of Series A-1  Convertible  Preferred  Stock of
Comverge.  In  connection  with the  transaction,  we also  converted  to equity
intercompany  balances of $9,673.  As a result of Comverge  securing  its equity
investments,  we no  longer  control  Comverge's  activity  and we are no longer
required to nor have any intention to fund Comverge's activity.

         In connection  with  Comverge's  April equity  financing  transactions,
Comverge  acquired Sixth  Dimension,  Inc. in a purchase  business  combination,
valued at  approximately  $510,  in  exchange for  877,000 of Comverge's  common
shares. In connection with this transaction, as a result of our dilution and the
new valuation of Comverge's  common stock,  we recorded an increase of $1,085 to
our common  stock  investment  in  Comverge.  The  adjustment  was  recorded  to
additional-paid-in-capital.

         Following  Comverge's  first equity  transaction  of the year,  we held
approximately  50.6%  of  the  outstanding  capital  voting  stock  of  Comverge
(approximately   76%  of  Comverge's  common  stock  and  approximately  26%  of
Comverge's  Preferred Stock).  As a result of the transaction,  we are no longer
obligated  to fund  Comverge.  Additionally,  as a result  of the  April  equity
transactions,  we have a negative  investment balance in Comverge's common stock
of $1,824.  Due to our commitment to no longer fund Comverge,  we have ceased to
record equity losses against our common stock  investment.  Our negative  common
investment  will only be  adjusted  upon  disposition  of the our  common  stock
investment  or when we realize  equity  income  from  Comverge  in excess of any
accumulated  equity  losses  recorded on our  Preferred  Stock  investment.  Our
Preferred  Stock  investment  of $3,644  (which was  primarily  financed  by the
release  of $3,000 of  previously  restricted  cash) has been  reduced by equity
losses in  Comverge  for the  period of April 1, 2003 to  December  31,  2003 of
$1,752.

         In  September  2003,   Comverge   completed  an  agreement  raising  an
additional  $2,000 in  capital  funding  in  exchange  for  additional  Series A
Convertible Preferred Stock issued by Comverge. Comverge utilized these funds to
repurchase  the Series A-1  Convertible  Preferred  Stock  previously  issued by
Comverge. In October 2003, Comverge completed an agreement raising an additional
$5,600 in capital  funding  in  exchange  for  additional  Series A  Convertible
Preferred Stock issued by Comverge.

         Following  the equity  transactions  in 2003,  we  remained  Comverge's
largest  shareholder,  owning  approximately  40.9% of the  outstanding  capital
voting  stock  of  Comverge,  which is  comprised  of  approximately  17% of the
Preferred Stock and approximately 76% of Comverge's common stock.

         As a result of the private equity financing  transactions,  Comverge is
no longer a controlled  subsidiary of ours. Thus, effective April 1, 2003, we no
longer consolidated Comverge's balance sheet and results of operations, and from
that date, accounted for our investment in Comverge on the equity method.

         As a result  of  Comverge's  net loss  during  the  nine  months  ended
December 31,  2003,  we  recognized  $1,752 as equity loss  representing  26% of
Comverge's  losses for the period from April 1 to September  30, 2003 and 17% of
Comverge's losses for the period from October 1 to December 31, 2003 against our
Preferred Stock investment.

         REVENUE RECOGNITION

         Our revenue recognition policies are significant because our revenue is
a key component of our results of  operations.  Revenue from  time-and-materials
service contracts,  maintenance  agreements and other services are recognized as
services  are  provided.  Revenue  on the  sale of  products  and  software  are
recognized  when  substantial  evidence of an arrangement  exists,  the price is
fixed  and  determinable,  delivery  or  shipment  has  occurred  and  there  is
reasonable  assurance  of  collection  of  the  sales  proceeds.  Such  revenues
generally do not involve difficult, subjective or complex judgments.

         In  2003,  we  derived  $3.2  million  of  revenues  from   fixed-price
contracts,  all of  which  are  attributable  to  our  software  and  consulting
development segment, representing approximately 9% of consolidated sales in

                                      -16-
<PAGE>

2003  ($3.9  million  and 7%,  and  $4.4  million  and 10%,  in 2002  and  2001,
respectively),  which  require the accurate  estimation  of the cost,  scope and
duration of each  engagement.  Revenue and the related costs for these  projects
are recognized  using the  percentage-of-completion  method as costs  (primarily
direct labor) are incurred,  with revisions to estimates reflected in the period
in which changes become known.  If we do not  accurately  estimate the resources
required  or the scope of work to be  performed,  or do not manage our  projects
properly within the planned periods of time or satisfy our obligations under the
contracts,  then future revenue and consulting  margins may be significantly and
negatively  affected or losses on existing  contracts may need to be recognized.
Any such  resulting  changes in revenues and  reductions  in margins or contract
losses could be material to our results of operations.

         FOREIGN CURRENCY TRANSACTIONS

         The currency of the primary economic environment in which our corporate
headquarters  and our U.S.  subsidiaries  operate  is the United  States  dollar
("dollar").  Accordingly,  the Company and all of its U.S.  subsidiaries use the
dollar as their functional currency.  We have several Israeli subsidiaries which
together  account for  approximately  34% of our net revenues for the year ended
December  31, 2003 (24% for the year ended  December 31,  2002),  and 55% of our
assets and 53% of our total  liabilities  as of  December  31,  2003 (31% of our
assets and 23% of our total liabilities as of December 31, 2002).

         The financial  statements of the Company's Israeli  subsidiaries  whose
functional currency is the New Israeli Shekel ("NIS") have been translated using
the exchange rates in effect at the balance sheet date. Statements of operations
amounts have been translated using the exchange rate at date of transaction.  In
2001,  2002 and 2003 the  resulting  translation  adjustments  are not reported,
since the effect is  immaterial  All exchange  gains and losses  denominated  in
non-dollar  currencies  are  reflected  in  other  income  (loss),  net  in  the
consolidated  statement of  operations  when they arise.  Such foreign  currency
gains  (losses),  net  amounted  to $(3),  $154 and $(124)  for the years  ended
December 31, 2001, 2002 and 2003, respectively.

         INVENTORIES

         Inventories are stated at the lower of cost or market. Inventories have
been reduced by an allowance for excess and obsolete  inventories to establish a
new cost basis.  The allowance for excess and obsolete  inventories  at December
31, 2002 and 2003 was $43 and $13,  respectively.  The  estimated  allowance  is
based on management's review of inventories on hand compared to estimated future
usage and sales. We evaluate the adequacy of these reserves quarterly.

         INCOME TAXES

         We have a history of unprofitable  operations from losses incurred in a
number of our operations.  These losses  generated  sizeable state,  federal and
foreign tax net operating loss ("NOL")  carryforwards as of December 31, 2003 of
approximately $5.9 million, $8.7 million and $10.0 million, respectively.

         Generally  accepted  accounting  principles  require  that we  record a
valuation  allowance against the deferred income tax asset associated with these
NOL  carryforwards and other deferred tax assets if it is "more likely than not"
that we will not be able to utilize them to offset future  income taxes.  Due to
our history of  unprofitable  operations,  we only  recognize  net  deferred tax
assets in those  subsidiaries  in which we believe  that it is "more likely than
not" that we will be able to utilize them to offset  future  income taxes in the
future.  We currently provide for income taxes only to the extent that we expect
to pay cash taxes on current income.

         It is possible,  however,  that we could be profitable in the future at
levels which cause  management  to conclude that it is more likely than not that
we will realize all or a portion of the NOL carryforwards and other deferred tax
assets.  Upon  reaching  such a  conclusion,  we would  immediately  record  the
estimated net realizable value of the deferred tax assets at that time and would
then provide for income taxes at a rate equal to our combined  federal and state
effective  rates or foreign  rates.  Subsequent  revisions to the  estimated net
realizable value of the deferred tax assets could cause our provision for income
taxes to vary significantly from period to period.

         GOODWILL AND OTHER LONG-LIVED ASSETS

         We review the  carrying  value of our  long-lived  assets  held for use
whenever  circumstances  indicate  there may be an  impairment.  For all  assets
excluding goodwill, the carrying value of a long-lived asset is

                                      -17-
<PAGE>

considered  impaired if the sum of the undiscounted  cash flows is less than the
carrying value of the asset.  If this occurs,  an impairment  charge is recorded
for the amount by which the carrying value of the  long-lived  asset exceeds its
fair value.  The fair value is determined by applying a market- rate multiple to
the estimated  near-term  future revenue  stream  expected to be produced by the
segment.  Effective  July 1, 2001 and January 1, 2002,  we adopted SFAS No. 141,
"Business  Combinations"  and SFAS  No.  142,  "Goodwill  and  Other  Intangible
Assets." Under these  accounting  standards,  we no longer amortize our goodwill
and are  required  to  complete an annual  impairment  test.  For the purpose of
implementing  SFAS No. 142, we have  designated the fourth quarter as the period
of the annual test and determined that we have three reporting units,  which are
the same as our three  reportable  segments.  In 2002 we came to the  conclusion
that due to the slow down in the hi-tech  markets,  we  recognize an expense for
the  impairment of goodwill and acquired  software of $3.0 million ($2.4 million
net of minority interests). No impairment was found in the annual assessment for
the year ended December 31, 2003.

         As of  December  31,  2003,  we had an  aggregate  of $4.4  million  of
goodwill,  all of which  relates  to our  software  consulting  and  development
segment.  Additionally, at December 31, 2003, we had $0.1 million net book value
of other identifiable intangible assets.

         STOCK-BASED COMPENSATION

         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. The Company uses the Black-Scholes valuation method
to estimate the fair value of the  warrants.  For  warrants  granted in 2003 the
Company used a risk free interest rate of 1.75%,  their  contractual life of two
years,  an annual  volatility  of 88% and no  expected  dividends.  The  Company
estimated the fair value of these  warrants to be  approximately  $97, which has
been charged to selling, general and administrative expense.

RESULTS OF OPERATIONS

         The  following  table sets forth  selected  consolidated  statement  of
operations data as a percentage of our total sales:

<TABLE>
<CAPTION>

                                                                                            Year Ended December 31,
                                                                                            -----------------------
                                                                              1999        2000        2001        2002        2003
                                                                            --------    --------    --------    --------    --------
<S>                                                                            <C>         <C>         <C>         <C>         <C>
Sales ..................................................................       100%        100%        100%        100%        100%

Cost of sales ..........................................................        80          79          82          77          80
                                                                              ----        ----        ----        ----        ----
                                                                                20          21          18          23          20
     Gross profit
Research and development expenses ......................................         3           2           5           3          --
Selling, general and administrative expenses ...........................        31          28          36          30          30
Impairment of goodwill and investment ..................................        --          --          --           5          --
Gain on sale of subsidiary/division ....................................        --           2           1          --          --
                                                                              ----        ----        ----        ----        ----
     Operating loss ....................................................       (14)         (7)        (23)        (15)        (10)
Interest income (expense), net .........................................        (2)          2           2          (1)         (2)
Loss on early redemption of debt .......................................        --          (2)         --          --          --
Other income (loss), net ...............................................        (1)         --          --          --          (1)
                                                                              ----        ----        ----        ----        ----
    Loss from operations before taxes on income ........................       (17)         (7)        (21)        (16)        (14)
Taxes on income ........................................................        --          --          --          --          --
                                                                              ----        ----        ----        ----        ----
    Loss from operations of the Company and its consolidated
        subsidiaries ...................................................       (17)         (7)        (21)        (16)        (14)
Share of losses in Comverge ............................................        --          --          --          --          (5)
Minority interests, net of tax .........................................        (1)         --          --           1           1
                                                                              ----        ----        ----        ----        ----
     Loss from continuing operations ...................................       (18)         (7)        (21)        (15)        (18)
Loss from discontinued operations, net of income taxes .................       (22)         --          --          --          --
Gain on sale of discontinued operations, net of income taxes ...........        --           7          --          --          --
                                                                              ----        ----        ----        ----        ----
    Net income (loss) ..................................................       (40)%       --%         (21)%       (15)%       (18)%
                                                                              ====        ====        ====        ====        ====

</TABLE>

                                      -18-
<PAGE>

         The  following  table sets forth  certain  information  with respect to
revenues  and profits of our three  reportable  business  segments for the years
ended December 31, 2001,  2002 and 2003,  including the  percentages of revenues
attributable to such segments.  The column marked "Other" aggregates information
relating  to  miscellaneous  operating  segments,  which  may  be  combined  for
reporting under applicable accounting principles.

<TABLE>
<CAPTION>

                                                             Software          Energy
                                                          Consulting and    Intelligence      Computer
                                                            Development       Solutions       Hardware        Other         Total
                                                            -----------       ---------       --------
                                                                                      (dollars in thousands)
<S>                                                           <C>             <C>             <C>             <C>         <C>
Year ended December 31, 2003:
   Revenues from external customers ....................      $ 12,156        $  4,700        $ 18,139        $  39       $ 35,034
   Percentage of total revenues from external
     customers .........................................            35%             13%             52%          --            100%
   Gross profit ........................................         2,581           1,313           3,125           39          7,058
   Share of losses in Comverge .........................            --          (1,752)             --           --         (1,752)
   Net loss ............................................          (849)         (3,174)           (199)         (17)        (4,239)

Year ended December 31, 2002:
   Revenues from external customers ....................      $ 14,202        $ 19,023        $ 22,605        $  56       $ 55,886
   Percentage of total revenues from external
     customers .........................................            25%             34%             41%          --            100%
   Gross profit ........................................      $  2,674        $  6,087        $  4,098        $  56       $ 12,915
   Impairment of goodwill and investments ..............      $  2,850              --              --           --       $  2,850
   Segment income (loss) ...............................        (4,503)       $ (2,161)       $     15        $  (2)      $ (6,651)

Year ended December 31, 2001:
   Revenues from external customers ....................      $ 12,279        $ 13,793        $ 19,794        $  58       $ 45,924
   Percentage of total revenues from external
     customers .........................................            27%             30%             43%          --            100%
   Gross profit ........................................      $  2,104        $  2,652        $  3,498        $  58       $  8,312
   Impairment of goodwill and investments ..............      $    227              --              --           --       $    227
   Segment income (loss) ...............................      $ (2,052)       $ (6,447)       $  1,006        $(217)      $ (7,710)

</TABLE>

2003 COMPARED TO 2002

         SALES. Of the $20.9 million decrease in sales in 2003 compared to 2002,
$14.3 million was due to Comverge,  which,  since the second quarter of 2002, is
no longer fully  consolidated.  Sales  decreased in the computer  hardware sales
segment  by  $4.5  million,   primarily  due  to  the   non-recurrence   of  the
extraordinarily  high  segment  sales in the  fourth  quarter  of  2002.  In the
software  consulting and development  segment,  sales decreased by $2.0 million,
primarily  due to the  decrease  in the number of  consultants  and  development
projects in 2003. This decrease is primarily attributable to the downturn in the
high-tech market in general and the software  consulting and development  market
in particular.

         GROSS PROFIT. The decrease in gross profits and gross profit margins in
2003 as compared to 2002 was also  primarily  due to our company no longer fully
consolidating  Comverge's  operations  since the second  quarter  of 2003.  This
accounted  for $4.8  million  of the $5.9  million  decrease.  In  addition,  as
Comverge's gross profit margin was higher than the average in the group, ceasing
to consolidate its operations caused a decrease in our consolidated gross profit
margin.  Gross profit in the computer hardware segment decreased in 2003 by $1.0
million,  primarily due to the aforementioned decrease in sales. In the software
consulting and development  segment,  despite the significant decrease in sales,
gross profits remained  relatively  stable,  with gross profit margins improving
from 19% in 2002 to 21% in 2003, due to the improved cost structure  achieved as
a result of cost cutting  measures  implemented over the last two years, and the
completion of most of the projects  running at lower profit  margins in previous
periods.

         RESEARCH AND DEVELOPMENT EXPENSES ("R&D"). The decrease in R&D expenses
was primarily due to our company no longer consolidating  Comverge's  operations
since the second quarter of 2003.

                                      -19-
<PAGE>

         SELLING, GENERAL AND ADMINISTRATIVE EXPENSES ("SG&A"). The discontinued
full  consolidation  of Comverge's  operations  since the second quarter of 2003
accounted for $4.3 million of the $6.2 million decrease in SG&A expenses in 2003
as compared to 2002.  However,  SG&A  decreased in all our other  activities  as
well. In the software consulting and development segment, SG&A decreased by $0.6
million,  or 17%,  as a  result  of cost  cutting  measures  begun  in 2002  and
continuing  through  2003.  SG&A in our  computer  hardware  sales  segment also
decreased  by $0.5  million,  primarily  due to reduced  commissions  on reduced
sales.  Finally,   corporate  SG&A  also  decreased  primarily  due  to  reduced
professional fees and compensation  expenses.  We presently expect to be able to
maintain  the  current  level  of  expenses  in  the  software   consulting  and
development  segment and further reduce corporate SG&A as we reduce compensation
expenses  as a  result  of  our  CEO  retiring  and  the  implementation  of his
consulting agreement.

         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 2002 and the
first few months of 2003,  which accounted for  approximately  half the interest
expense in 2002.

         OTHER LOSS,  NET. The other loss in 2003 was primarily  attributable to
the write-off of a stockholder's note received from Comverge's CEO.

         EQUITY LOSS IN UNCONSOLIDATED  SUBSIDIARY.  The equity loss in 2003 was
attributable to Comverge,  whose results we account for on an equity basis as of
the  second  quarter  of  2003  (see  Note  4  of  our  consolidated   Financial
Statements).  Our share of Comverge's  $7.9 million net losses during the period
from April 1, 2003 to December 31, 2003 was $1.8 million.  Comverge's  increased
losses in 2003 of  $9.3 million, compared to $2.2 million in 2002, was primarily
attributable  to a decrease in sales,  particularly  those related to Comverge's
family of DCU and  SuperstatTM  products as well as those stemming from its Gulf
Power  contract,  where  shipments  have  been  suspended.  Sales  from  the VPN
contracts will primarily  effect future periods.  In addition,  SG&A in Comverge
has increased  primarily due to increased  advertising  and marketing  expenses,
particularly  those  related  to  marketing  and  advertising  its  new  Utah  -
PacifiCorp program.

         MINORITY  INTERESTS.  Minority interests reflect the minority interests
in losses generated by our dsIT subsidiary.

2002 COMPARED TO 2001

         SALES.  Sales in 2002 were $55.9 million,  increasing by $10.0 million,
or 22%, from $45.9 million in 2001, due to sales increases in all segments.

         Energy  intelligence  solution sales increased by $5.2 million, or 38%,
from $13.8  million in 2001,  to $19.0  million in 2002.  The  increase  in this
segment's sales was primarily attributable to fulfillment of a large contract to
sell  our  Maingate  C&I  and  PowerCAMP  systems  to a major  utility  and to a
generally higher level of business.

         Sales in the computer hardware segment continued to improve, increasing
by $2.8  million,  or 14%, from $19.8 million in 2001, to $22.6 million in 2002.
Although sales in this segment were improving through the year, the increase was
primarily  attributable  to the $9.2  million in sales in the fourth  quarter of
2002. The increase in the fourth quarter of 2002 was primarily  attributable  to
sales of $4.5 million to a single customer.

         Software consulting and development sales increased by $1.9 million, or
16%, from $12.3 million in 2001, to $14.2 million in 2002.  This  improvement in
sales was  entirely  attributable  to the expanded  revenue  base  achieved as a
result of the Endan acquisition by dsIT in December 2001, which more than offset
the  general  weakness  in the  global  hi-tech  markets  and  in  the  software
consulting and development market in particular.

         GROSS  PROFIT.  Gross profit in 2002 was $12.9  million,  increasing by
$4.6 million, or 55%, compared to 2001, with gross profit margins improving from
18% in 2001 to 23% in 2002.  The increase in gross profits was  attributable  to
improvements in all segments,  particularly in the energy intelligence solutions
segment.

         Gross profit in the energy  intelligence  solution segment increased by
$3.4  million,  or 130%,  from $2.7  million,  or 19% of sales,  in 2001 to $6.1
million,  or 32% of sales,  in 2002.  The  increase  in gross  profit  margin is
primarily  attributable  to a $0.7  million  settlement  with a former  contract
manufacturer and an increase of approximately  $2.7 million in sales of products
of higher margin products.

                                      -20-
<PAGE>

         In the  computer  hardware  segment,  gross  profit  increased  by $0.6
million, or 17%, primarily due to the increase in sales.

         Gross profit in the software  consulting and  development  segment also
increased by $0.6 million,  or 27%, from $2.1 million, or 17% of sales, in 2001,
to $2.7  million,  or 19% of sales,  in 2002.  The increase in gross profits was
primarily  attributable  to the  increase  in sales,  as well as  improved  cost
structure.

         RESEARCH AND DEVELOPMENT  EXPENSES ("R&D"). R&D expenses decreased from
$2.3  million  in 2001 to $1.5  million  in  2002.  This  decrease  was due to a
decrease in R&D expenditures in the energy intelligence  solution segment, as it
shifted its emphasis from R&D in 2001 to marketing and sales in 2002.

         SELLING,  GENERAL AND  ADMINISTRATIVE  EXPENSES  ("SG&A").  Despite the
significant  increase in sales, SG&A remained  relatively stable,  increasing by
$0.1 million, from $16.6 million in 2001, to $16.7 million in 2002.

         IMPAIRMENT OF GOODWILL AND INVESTMENT.  The entire expense recorded was
due to our software consulting and development segment.  With the acquisition of
Endan by our dsIT  subsidiary  in December  2001,  we  recognized  goodwill  and
acquired software valued at a total of $6.4 million. This value was supported by
third party valuations  prepared at the time of the acquisition,  based on sales
and business  projections  made at that time.  Since then, the hi-tech market in
general  and  that of  software  consulting  in  particular  have  continued  to
deteriorate.  As a result,  we recorded in 2002 a goodwill  impairment charge of
$2.8 million.  In addition,  we recorded a write down of $90,000 with respect to
an investment in a start-up company.

         INTEREST INCOME (EXPENSE).  To finance our operations,  we utilized our
investments,  raised  capital by issuing  convertible  debentures,  and obtained
lines of credit.  The  utilization  of our  investments  caused the  decrease in
interest  income and we expect  interest  income to further  decrease  in future
periods.  We incurred  finance  expenses in connection  with the capital  raised
including  interest and  amortization  of costs  associated with the convertible
debt and warrants issued.  Although the interest associated with the utilization
of  lines  of  credit  is  expected  to  continue  at  the  current  level,  the
amortization  expenses are expected to decrease over the future quarters. Of the
$1.2 million of interest  expense during the year ended December 31, 2002,  $0.7
million  was related to the  accretion  of  discounts  and the  amortization  of
related costs in connection with convertible debt and warrants.

         MINORITY  INTERESTS.  Minority interests reflect the minority interests
in losses generated by our dsIT  subsidiary,  primarily due to the impairment of
goodwill and acquired software in this segment as described above.

LIQUIDITY AND CAPITAL RESOURCES

         As of  December  31,  2003,  we had  working  capital of $0.7  million,
including $1.2 million in cash and cash equivalents.  Net cash used in operating
activities in 2003 was $1.0 million,  all of which was used to finance corporate
expenses,  which totaled $2.1 million.  Our  controlled  operating  entities had
positive cash flow from operations.

         We  believe  that  the  proceeds  of  the   financing  and  new  credit
arrangements  acquired by Comverge provide sufficient  financing for Comverge to
independently fund its operations.  Due to significant interest in Comverge held
by others and other  restrictions,  working  capital  and cash flows of Comverge
will not be available to finance other U.S. activities.

         Of the total working  capital at December 31, 2003, $0.2 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 available to finance U.S.
activities. As at December 31, 2003, dsIT was utilizing $0.9 million of its $1.1
million line of credit.  dsIT's line of credit is  denominated  in NIS and bears
interest  at a rate equal to the  Israeli  prime  rate plus 1.4% per annum.  The
Israeli prime rate  fluctuates and as of December 31, 2003, was 6.7%. We believe
that dsIT will have  sufficient  liquidity to finance its  activities  from cash
flow from its own operations over the next 12 months. This is based on continued
utilization of its line of credit and improved  operating  results stemming from
continued cost reductions as well as growth in sales.

         We believe  that we have  sufficient  liquidity to finance our US-based
operating  activities  and our corporate  activities  for at least the 12 months
following the date of this report, utilizing the cash on hand of

                                      -21-
<PAGE>

$0.8  million  as of March  22,  2004 and  operating  cash  flow  from  expected
profitable  operations of the computer  hardware  segment.  However,  due to our
liquidity,  successful  implementation  of our  plans  is  subject  to risk  and
uncertainties,  including  those  associated  with (i)  maintaining  and further
increasing  the level of revenues  obtained in the fourth  quarter of 2003,  and
(ii) effective and timely  implementation of cost reductions  already begun. Our
long-term  liquidity  is  contingent  on our ability to increase our revenue and
profit base,  become cash flow neutral in our US based activities and attracting
equity investments to the extent required.

CONTRACTUAL OBLIGATIONS AND COMMITMENTS

         Our  contractual  obligations  and  commitments  at December  31, 2003,
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, and are as set forth in the
following table:

<TABLE>
<CAPTION>

                                                                   Cash Payments Due During Year Ending December 31,
                                                               --------------------------------------------------------
                                                                                    (In Thousands)
                                                                                                                 After
      Contractual Obligations                                   Total         2004        2005        2006        2006
      -----------------------                                   -----         ----        ----        ----        ----
<S>                                                             <C>           <C>         <C>         <C>          <C>
      Long-term debt related to Israeli operations              $1,291        $659        $435        $172         $25
      Guarantees                                                   558         558          --          --          --
      Operating leases                                           3,208       1,298         803         335         771
      Consulting agreement with CEO                              1,304          --       1,304          --          --
                                                                 -----       -----  ----------        ----        ----
      Total contractual cash obligations                        $6,361      $2,515      $2,542        $507        $796
                                                                ======      ======      ======        ====        ====

</TABLE>

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

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

         Previously,  we  accrued  a loss  for  contingent  performance  of bank
guarantees, the balance of which was $558,000 at December 31, 2003. A portion of
these  guarantees  was  collateralized  by means of a deposit of  $241,000 as of
December 31, 2003. Although we've accrued this loss, we contested this liability
and expect an Israeli  Supreme Court decision in this regard within the next few
months.

         Under  Israeli  law and  labor  agreements,  dsIT is  required  to make
severance  payments to dismissed  employees and to employees leaving  employment
under 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  December  31,  2003,  we accrued a total of $3.7  million  for
potential severance obligations,  of which approximately $2.4 million was funded
with cash to insurance companies.

         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 pay  contributions to a non-qualified  defined  contribution  retirement
plan equal to 25% of the  consulting  fee.  In  accordance  with the  employment
contract,  we are obliged to fund 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 twelve months or until we acquire  additional
funding.

         We also have a severance arrangement under an employment agreement with
our Chief Financial Officer to pay severance under certain circumstances. If our
CFO  employment  agreement is  terminated by us or by him for reasons other than
for  cause,  we must pay him (i) an  amount  equal  to 150% of his last  month's
salary multiplied by the number of years (including  partial years) that the CFO
worked for us, plus (ii) an amount equal to six times his last  month's  salary.
Our severance obligation would be reduced by the

                                      -22-
<PAGE>

amount contributed by us to certain Israeli pension and severance funds pursuant
to the CFO's employment agreement. As of December 31, 2003, the unfunded portion
of such severance obligation was $84,000.

         We also have a severance arrangement under an employment agreement with
the  Chief   Executive   Officer  of  dsIT  to  pay   severance   under  certain
circumstances.  If his  employment  agreement is  terminated by us or by him for
reasons  other than for cause,  we must pay him (i) an amount  equal to his last
month's salary multiplied by the number of years (including  partial years) that
he worked for Endan and dsIT. Our severance  obligation  would be reduced by the
amount contributed by us to certain Israeli pension and severance funds pursuant
to his employment  agreement.  As of December 31, 2003, the unfunded  portion of
such severance obligation was $117,000.

IMPACT OF INFLATION AND CURRENCY FLUCTUATIONS

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

         The dollar cost of our  operations in Israel may be adversely  affected
in the future by a revaluation  of the NIS in relation to the dollar,  should it
be significantly  different from the rate of inflation. In 2003 the appreciation
of the NIS against the dollar was 7.6%,  whereas in 2002 the  devaluation of the
NIS against the dollar was 7.3%.  Inflation in Israel was -1.9% in 2003 and 6.5%
during 2002.  During the first two months of 2004, the NIS was devalued  against
the dollar by 2.4% and inflation during this period was 0.0%.

         As of December  31,  2003,  virtually  all of our  monetary  assets and
liabilities  that were not  denominated  in  dollars or  dollar-linked  NIS were
denominated  in NIS.  In the  event  that in the  future  we have  material  net
monetary assets or liabilities  that are not denominated in  dollar-linked  NIS,
such net  assets  or  liabilities  would  be  subject  to the  risk of  currency
fluctuations.

PAYMENTS TO RELATED PARTIES

         We paid an individual as a director and vice president,  who is the son
of our Chief Executive Officer,  approximately  $197,000,  $230,000 and $273,000
for the years ending  December 31, 2001,  2002 and 2003,  respectively.  We also
have  engaged   certain  of  our  directors  and  former   directors  to  render
professional  services  to us.  One of our  former  directors,  who is also  the
son-in-law of our Chief  Executive  Officer,  is principal of a law firm that we
engage to  perform  legal  services  for us. We paid to this firm legal fees and
out-of-pocket disbursements (which includes fees and expenses of special counsel
hired on our behalf) of  approximately  $575,000,  $630,000 and $403,000 for the
years ended December 31, 2001, 2002 and 2003, respectively.  The chief executive
officer of the Company's Israeli  subsidiary has a loan from the subsidiary that
was acquired in 2001. The loan balance and accrued interest at December 31, 2002
and 2003 was $48,000 and $52,000, respectively. The loan has no defined maturity
date, is denominated in NIS, is linked to the Index and bears interest at 4% per
annum.  Comverge  has made  loans of  $10,000  each to both our Chief  Executive
Officer and Chief Financial  Officer.  The loans had an initial maturity date of
January 3, 2002 and were extended at that time to mature on January 3, 2004. The
loans bear  interest  at 4.25% per annum.  The  balance of the loans and accrued
interest at December 31, 2002 and 2003 was $25,000 and $26,000, respectively.

                                      -23-
<PAGE>

SUMMARY QUARTERLY FINANCIAL DATA (UNAUDITED)

         The  following  table sets forth  certain  of our  unaudited  quarterly
consolidated  financial  information  for the years ended  December 31, 2002 and
2003.  This  information  should be read in  conjunction  with our  Consolidated
Financial Statements and the notes thereto.

<TABLE>
<CAPTION>

                                                               2002                                         2003
                                          --------------------------------------------    -----------------------------------------
                                           First      Second       Third      Fourth       First      Second      Third     Fourth
                                          Quarter     Quarter     Quarter     Quarter     Quarter     Quarter    Quarter    Quarter
                                          --------    --------    --------    --------    --------    -------    -------    -------
                                                                                                     (Restated)
                                                                    (in thousands, except per share amounts)
<S>                                       <C>         <C>         <C>         <C>         <C>         <C>        <C>        <C>
Sales .................................   $ 12,808    $ 12,783    $ 11,269    $ 19,026    $ 12,868    $ 7,285    $ 6,684    $ 8,197
Cost of sales .........................      9,830      10,191       8,906      14,044       9,799      5,994      5,481      6,702
                                          --------    --------    --------    --------    --------    -------    -------    -------
Gross profit ..........................      2,978       2,592       2,363       4,982       3,069      1,291      1,203      1,495
Research and development expenses .....        460         550         256         260         153         --         --         --
Selling, general and
  administrative expenses .............      4,300       4,452       3,923       4,014       4,302      2,108      1,984      2,104
Impairment of goodwill and
  investment ..........................         --          --       2,760          90          --         --         --         --
                                                      --------    --------    --------    --------    -------    -------    -------
Operating income (loss) ...............     (1,782)     (2,410)     (4,576)        618      (1,386)      (817)      (781)      (609)
Interest income (expense), net ........         (1)       (146)       (393)       (419)       (332)      (291)       (56)       (48)
Other income (loss), net ..............         27          66          56         (36)        (14)      (151)      (243)       (67)
                                          --------    --------    --------    --------    --------    -------    -------    -------
Loss before taxes on income ...........     (1,756)     (2,490)     (4,913)        163      (1,732)    (1,259)    (1,080)      (724)
Taxes on income .......................         42          15           7         (36)         12         22        (27)        (8)
                                          --------    --------    --------    --------    --------    -------    -------    -------
Loss from operations of the
  Company and its consolidated
  subsidiaries ........................     (1,798)     (2,505)     (4,920)        199      (1,744)    (1,281)    (1,053)      (716)
Minority interests, net of tax ........         (4)        207         649          28         (17)       121         35        125
Share of loss in Comverge .............         --          --          --          --          --       (550)      (611)      (591)
                                          --------    --------    --------    --------    --------    -------    -------    -------
Net income (loss) .....................   $ (1,802)   $ (2,298)   $ (4,271)   $    227    $ (1,761)   $(1,710)   $(1,629)   $(1,182)
                                          ========    ========    ========    ========    ========    =======    =======    =======
Basic and diluted net income (loss)
  per share:
Net income (loss) per share ...........   $  (0.25)   $  (0.31)   $  (0.58)   $   0.03    $  (0.24)   $ (0.22)   $ (0.21)   $ (0.15)
                                          ========    ========    ========    ========    ========    =======    =======    =======
Weighted average number of
  shares outstanding - basic ..........      7,353       7,353       7,353       7,335       7,345      7,792      7,894      7,902
                                          ========    ========    ========    ========    ========    =======    =======    =======
Weighted average number of
  shares outstanding - diluted ........      7,353       7,353       7,353       7,336       7,345      7,792      7,894      7,902
                                          ========    ========    ========    ========    ========    =======    =======    =======

</TABLE>

Results have been restated for the second and third  quarters of 2003  following
the determination  that no change of our interest in Comverge occurred following
issuance of Comverge's  preferred stock. In addition,  we 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,  we decreased by $3,269 the gain previously recorded in
our  additional  paid-in  capital and reduced the  investment  and our resulting
equity in the losses of Comverge in both the second and third  quarters of 2003.
In addition,  we determined  that we are no longer  committed to fund  Comverge,
and, due to our negative  common stock  investment in Comverge,  should cease to
record equity losses  against our common  investment and will continue to record
equity losses against our preferred investment in Comverge.

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

<TABLE>
<CAPTION>
                                                       Three           Nine           Three
                                      Six months       months          months         months
                                        ended          ended           ended          ended
                                      ----------     ----------     ----------     ----------
                                             June 30, 2003              September 30, 2003
                                      -------------------------     -------------------------
<S>                                     <C>            <C>            <C>            <C>
Net loss as reported                    $(4,422)       $(2,661)       $(6,153)       $(1,731)

Effect of restatement                       951            951          1,053            102
                                        -------        -------        -------        -------
Net loss - as restated                  $(3,471)       $(1,710)       $(5,100)       $(1,629)
                                        =======        =======        =======        =======

Basic and diluted net loss per
  share - as reported                   $ (0.58)       $ (0.34)       $ (0.80)       $ (0.22)

Effect of restatement                      0.12           0.12           0.14           0.01
                                        -------        -------        -------        -------
Basic and diluted net loss per
  share - as restated                   $ (0.46)       $ (0.22)       $ (0.66)       $ (0.21)
                                        =======        =======        =======        =======
</TABLE>

The effect of the  restatement  with respect to the three and nine month periods
ended  September  30, 2003 were  previously  reflected  in an  amendment on Form
10-Q/A which we filed with the SEC on March 30, 2004.



                                      -24-
<PAGE>

ITEM 7A.  QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

         GENERAL

         We are required to make certain  disclosures  regarding  our  financial
instruments, including derivatives, if any.

         A financial  instrument  is defined as cash,  evidence of an  ownership
interest in an entity,  or a contract  that imposes on one entity a  contractual
obligation either to deliver or receive cash or another financial  instrument to
or from a second entity. Examples of financial instruments include cash and cash
equivalents,  trade  accounts  receivable,  loans,  investments,  trade accounts
payable, accrued expenses,  options and forward contracts. The disclosures below
include,  among other matters, the nature and terms of derivative  transactions,
information about significant  concentrations of credit risk, and the fair value
of financial assets and liabilities.

         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  $0.9 million and $1.3  million,  respectively.
Additionally,   our  monetary   assets  and   liabilities   (net   liability  of
approximately  $1.4 million) 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 exchange rate exposures.

         FAIR VALUE OF FINANCIAL INSTRUMENTS

         Fair values of  financial  instruments  included in current  assets and
current  liabilities  are estimated to approximate  their book values due to the
short maturity of such investments.  Fair value for long-term debt and long-term
deposits are  estimated  based on the current  rates  offered to us for debt and
deposits  with similar  terms and  remaining  maturities.  The fair value of our
long-term debt and long-term  deposits are not  materially  different from their
carrying amounts.

         CONCENTRATIONS OF CREDIT RISK

         Financial  instruments,  which potentially subject us to concentrations
of credit risk,  consist  principally  of cash and cash  equivalents,  short and
long-term bank deposits,  and trade receivables.  The counterparty to a majority
of our cash equivalent deposits as well as our short and long-term bank deposits
is a major  financial  institution  of high credit  standing.  We do not believe
there  is  significant  risk  of   non-performance   by  these   counterparties.
Approximately 28% of the trade accounts  receivable at December 31, 2003 was due
from a U.S.  customer that pays its trade receivables over usual credit periods.
Credit  risk with  respect to the  balance  of trade  receivables  is  generally
diversified due to the large number of entities comprising our customer base.

ITEM 8.   FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

         Furnished at the end of this report commencing on page F-1.

ITEM  9.  CHANGES  IN AND  DISAGREEMENTS  WITH  ACCOUNTANTS  ON  ACCOUNTING  AND
          FINANCIAL DISCLOSURE

         On October 9, 2003, KPMG LLP ("KPMG") notified us that as of that date,
it had resigned as our independent auditor.

         KPMG's audit reports on our consolidated  financial  statements for the
past two  fiscal  years did not  contain an adverse  opinion  or  disclaimer  of
opinion,  and were not qualified or modified as to  uncertainty,  audit scope or
accounting principles, except where the reports of KPMG refer to our adoption of
FAS No. 141, "Business Combinations",  for purchase method business combinations
completed  after June 30, 2001,  SFAS No. 142,  "Goodwill  and Other  Intangible
Assets",  effective  January  1, 2002.


                                      -25-
<PAGE>

         During the two most recent  fiscal  years and through  October 9, 2003,
there were no  disagreements  between us and KPMG as to any matter of accounting
principles  or  practices,  financial  statement  disclosure,  or audit scope or
procedure,  which  disagreement,  if not resolved to the  satisfaction  of KPMG,
would have caused it to make reference to the subject matter of the disagreement
in its reports on the financial  statements  for such periods within the meaning
of Item 304(a)(1)(iv) of Regulation S-K.

            On January 14, 2004, the Registrant engaged Kesselman & Kesselman, a
member of  PricewaterhouseCoopers  International Limited  ("Kesselman"),  as our
independent  auditors for the fiscal year ended December 31, 2003. Kesselman has
also been engaged to review our interim  financial  statements  contained in our
quarterly  report on Form 10-Q for the quarter ended  September 30, 2003,  which
was filed on November 14, 2003 without an independent auditor review, subsequent
to KPMG's resignation.

ITEM 9A.  CONTROLS AND PROCEDURES

EVALUATION OF CONTROLS AND PROCEDURES

         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 as of  December  31,  2003,  our  disclosure
controls and procedures  were effective for gathering,  analyzing and disclosing
the  information we are required to disclose in the reports we file with the SEC
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 disclosure controls and procedures
subsequent to the date of our most recent evaluation.

                                      -26-
<PAGE>

                                    PART III

ITEM 10.  DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT

         The  information  relating to each of our  directors  and  nominees for
director and the  information  relating to our  executive  officers  will appear
under the  captions  "Election  of  Directors  - Certain  Information  Regarding
Directors and Officers" and "Compliance with Section 16(a) of the Securities and
Exchange  Act of 1934" in our  definitive  proxy  statement  for the 2004 Annual
Meeting of Stockholders (the "2004 Proxy Statement"), and is hereby incorporated
by reference.

         The  information  required  by this Item  pursuant  to Item  401(h) and
401(i) of Regulation  S-K relating to an audit  committee  financial  expert and
identification  of the Audit  Committee  of our Board of  Directors  will appear
under the heading  "Corporate  Governance" in the 2004 Proxy  Statement,  and is
hereby incorporated by reference.

         We have adopted a written 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 being filed with this Annual Report as an exhibit hereto.

ITEM 11.  EXECUTIVE COMPENSATION

         The  information  relating to  compensation  of directors and executive
officers will appear under the captions  "Executive and Director  Compensation -
Compensation of Directors",  "Executive and Director Compensation - Compensation
Committee  Interlocks  and  Insider  Participation",   "Executive  and  Director
Compensation - Employment Arrangements",  "Executive and Director Compensation -
Executive  Compensation" and "Compensation  Report of the Board of Directors" in
the 2004 Proxy Statement, and is hereby incorporated by reference.

ITEM 12.  SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
          AND RELATED STOCKHOLDER MATTERS

         The  information  relating to security  ownership will appear under the
caption "Stock  Ownership of Certain  Beneficial  Owners and  Management" in the
2004 Proxy Statement, and is hereby incorporated by reference.

ITEM 13.  CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

         The information relating to certain relationships and transactions will
appear under the caption "Executive and Director  Compensation - Certain Related
Party  Transactions" in the 2004 Proxy Statement,  and is hereby incorporated by
reference.

ITEM 14.  PRINCIPAL ACCOUNTANT FEES AND SERVICES

         The information  relating to principal accountant fees and services and
audit  committee  pre-approval  policies  and  procedures  will appear under the
caption  "Principal  Accountant Fees and Services" in the 2004 Proxy  Statement,
and is hereby incorporated by reference.

                                      -27-
<PAGE>

                                     PART IV

ITEM 15.  EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K.

         (a) EXHIBITS:

    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  Securities   Purchase  Agreement  between  the  Registrant  and  Bounty
         Investors LLC, dated as of October 12, 1999,  including Form of Warrant
         (incorporated  herein by  reference  to  Exhibit 1 to the  Registrant's
         Current  Report on Form 8-K dated  October 12, 1999 (the  "October 1999
         8-K")).

    4.3  Form of Registration Rights Agreement between the Registrant and Bounty
         Investors  LLC,  dated as of October 12, 1999  (incorporated  herein by
         reference to Exhibit 1 to October 1999 8-K).

    4.4  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")).

    4.5  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).

    4.6  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")).

    4.7  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).

    4.8  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).

    4.9  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   (incorporated   herein  by
         reference  to Exhibit 10.4 to the  Registrant's  Form 10-K for the year
         ended December 31, 1995 (the "1995 10-K")).

  *10.5  1994 Stock Option Plan for Outside Directors,  as amended (incorporated
         herein by reference to Exhibit 10.5 to the 1995 10-K).

   10.6  1995  Stock  Option  Plan for  Non-management  Employees  (incorporated
         herein by reference to Exhibit 10.6 to the 1995 10-K).

                                      -28-
<PAGE>

   10.7  Asset Purchase Agreement,  dated as of August 2, 2000, by and among the
         Registrant,  International Data Operations, Inc., and Eclipse Networks,
         Inc. (incorporated herein by reference Exhibit 10.1 to the Registrant's
         Quarterly  Report  on Form 10-Q for the  quarter  ended  September  30,
         2000).

   10.8  Credit Agreement dated as of February 7, 2000 between Comverge and Bank
         Leumi USA  (incorporated  herein by reference  to Exhibit  10.12 of the
         1999 10-K).

   10.9  License Agreement  between the Registrant and Lucent  Technologies Inc.
         dated as of January 9, 1998  (incorporated  herein by  reference to the
         Registrant's Current Report on Form 8-K dated February 17, 1998).

   10.10 Warrant  Repurchase  Agreement,  dated  September  25, 2000,  among the
         Registrant,  Bank  Leumi  USA and Bank  Leumi  le-Israel  (incorporated
         herein by reference to Exhibit 10.11 to the 2000 10-K).

   10.11 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).

   10.12 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).

  *10.13 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).

   10.14 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  (incorporated
         herein by reference to Exhibit 10.1 to the Registrant's  Current Report
         on Form 8-K dated December 13, 2001).

   10.15 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).

  *10.16 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).

  *10.17 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).

                                      -29-
<PAGE>

  *10.18 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).

   10.19 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).

  *10.20 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).

   10.21 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").

   10.22 $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).

  *10.23 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).

   10.24 Agreement,  dated as of January 31,  2003,  between  Comverge  and Bank
         Leumi USA (including  form of $6,000,000 Term Note of 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").

   10.25 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).

  *10.26 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).

  *10.27 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 June 30, 2002).

   10.28 Guaranty,  dated  December 4, 2002,  made by the Registrant in favor of
         Laurus  (incorporated  herein  by  reference  to  Exhibit  10.5  to the
         December 2002 8-K).

   10.29 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).

   10.30 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).

   10.31 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).

   10.32 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).

                                      -30-
<PAGE>

   10.33 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).

   #14.1 Code of Ethics of the Registrant.

   #21.1 List of subsidiaries.

   #23.1 Consent of KPMG LLP.

   #23.2 Consent of Kesselman & Kesselman.

   #23.3 Consent of PricewaterhouseCoopers 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 herewith.

   +  This Exhibit is furnished herewith.

                                      -31-
<PAGE>

(b) FINANCIAL STATEMENT SCHEDULES.

                  None.

(c) REPORTS ON FORM 8-K.

         (i)      Report on Form 8-K,  dated  October 9, 2003,  filed on October
                  16,  2003,  relating  to the  resignation  of KPMG  LLP as the
                  Registrant's certifying accountant.

         (ii)     Report on Form 8-K, dated November 14, 2003, filed on November
                  26, 2003,  relating to the  announcement  by the Registrant of
                  its financial  results for the third  quarter ended  September
                  30, 2003.

         (iii)    Report on Form 8-K, dated December 10, 2003, filed on December
                  10, 2003,  relating to the Registrant's  announcement  that it
                  had received a notice from The NASDAQ Stock Market  indicating
                  that the Company was not in compliance with  Marketplace  Rule
                  4310(c)14  and that the  Registrant  was subject to  delisting
                  from The NASDAQ Stock Market.

                                      -32-
<PAGE>

                                   SIGNATURES

         Pursuant to the  requirements  of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this report to be signed on
its behalf by the  undersigned,  thereunto duly  authorized,  in the Township of
Mahwah, State of New Jersey, on March 31, 2004.

                           DATA SYSTEMS & SOFTWARE INC.

                           BY              /s/ GEORGE MORGENSTERN
                              --------------------------------------------------
                                             George Morgenstern
                                       Chairman of the Board, President
                                         and Chief Executive Officer



         Pursuant to the  requirements  of the Securities  Exchange Act of 1934,
this  report  has  been  signed  by  the  following  persons  on  behalf  of the
registrant, in the capacities and on the dates indicated.

<TABLE>
<CAPTION>

                 SIGNATURE                                                TITLE                              DATE
                 ---------                                                -----                              ----
<S>                                                 <C>                                                  <C>
          /s/ GEORGE MORGENSTERN                    Chairman of the Board; President; Chief Executive    March 31, 2004
--------------------------------------------        Officer; and Director
             George Morgenstern

             /s/ YACOV KAUFMAN                      Vice President, Chief Financial Officer              March 31, 2004
--------------------------------------------        (Principal Financial Officer and Principal
               Yacov Kaufman                        Accounting Officer)

              /s/ SHANE YURMAN                      Director                                             March 31, 2004
--------------------------------------------
                Shane Yurman

               /s/ AVI KERBS                        Director                                             March 31, 2004
--------------------------------------------
                 Avi Kerbs

               /s/ ELI LEVINE                       Director                                             March 31, 2004
--------------------------------------------
                Eli Levine

</TABLE>

                                      -33-
<PAGE>


                          DATA SYSTEMS & SOFTWARE INC.
                   INDEX TO CONSOLIDATED FINANCIAL STATEMENTS

<TABLE>

<S>                                                                                                                 <C>
CONSOLIDATED FINANCIAL STATEMENTS OF DATA SYSTEMS & SOFTWARE INC.:

Report of Kesselman and Kesselman................................................................................... F-2

Report of KPMG LLP ................................................................................................. F-3

Consolidated Balance Sheets
    as of December 31, 2002 and December 31, 2003................................................................... F-4

Consolidated Statements of Operations
   for the years ended December 31, 2001, December 31,  2002 and December 31, 2003.................................. F-5

Consolidated Statements of Changes in Shareholders' Equity
   for the years ended December 31, 2001, December 31, 2002 and December 31, 2003................................... F-6

Consolidated Statements of Cash Flows
   for the years ended December 31, 2001, December 31, 2002 and December 31, 2003................................... F-7

Notes to Consolidated Financial Statements.......................................................................... F-10

CONSOLIDATED FINANCIAL STATEMENTS OF COMVERGE, INC.:

Report of PriceWaterhouseCoopers, LLP............................................................................... F-34

Consolidated Balance Sheet
    as of December 31,  2003........................................................................................ F-35

Consolidated Statements of Operations
   for the year ended December 31, 2003............................................................................. F-36

Comverge Consolidated Statement of Changes in Shareholders' Equity
   for the year ended December 31, 2003............................................................................. F-37

Comverge Consolidated Statements of Cash Flows
   for the year ended December 31, 2003............................................................................. F-38

Notes to Consolidated Financial Statements.......................................................................... F-39

</TABLE>
                                      F-1



<PAGE>


                         Report of Independent Auditors

To the Board of Directors and Shareholders of
Data Systems & Software Inc.

We have audited the  accompanying  consolidated  balance sheet of Data Systems &
Software Inc.  (hereafter the "Company") and its subsidiaries as of December 31,
2003, and the related consolidated statements of operations, shareholders equity
and of cash flows for the year then ended.  These  financial  statements are the
responsibility of the Company's management.  Our responsibility is to express an
opinion on these financial statements based on our audit.

We conducted our audit in accordance with auditing standards  generally accepted
in the United States of America and in Israel, including those prescribed by the
Israeli  Auditors  (Mode of  Performance)  Regulations,  1973.  Those  standards
require that we plan and perform the audit to obtain reasonable  assurance about
whether the financial  statements  are free of material  misstatement.  An audit
includes  examining,  on a test  basis,  evidence  supporting  the  amounts  and
disclosures in the financial  statements.  An audit also includes  assessing the
accounting principles used and significant estimates made by management, as well
as evaluating the overall financial statement presentation.  We believe that our
audit provides a reasonable basis for our opinion.

In our opinion,  the 2003 consolidated  financial  statements  referred to above
present fairly, in all material respects,  the financial position of the Company
and its  subsidiaries at December 31, 2003, and the results of their  operations
and their  cash  flows for the year then  ended in  conformity  with  accounting
principles generally accepted in the United States of America.

/s/ Kesselman & Kesselman
March 31, 2004
Tel Aviv, Israel


                                      F-2
<PAGE>

                          Independent Auditors' Report

The Board of Directors and Shareholders of
Data Systems & Software Inc.:

         We have audited the  accompanying  consolidated  balance  sheet of Data
Systems & Software  Inc.  and  subsidiaries  as of December  31,  2002,  and the
related consolidated statements of operations,  changes in shareholders' equity,
and cash flows for each of the years in the two-year  period ended  December 31,
2002. These  consolidated  financial  statements are the  responsibility  of the
Company's  management.  Our  responsibility  is to  express  an opinion on these
consolidated financial statements based on our audits.

         We conducted our audits in accordance with auditing standards generally
accepted in the United States of America.  Those standards  require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement.  An audit includes examining, on a
test basis,  evidence  supporting  the amounts and  disclosures in the financial
statements.  An audit also includes assessing the accounting principles used and
significant  estimates  made by  management,  as well as evaluating  the overall
financial  statement  presentation.   We  believe  that  our  audits  provide  a
reasonable basis for our opinion.

         In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of Data Systems
& Software  Inc. and  subsidiaries  as of December 31, 2002,  and the results of
their  operations  and their  cash  flows for each of the years in the  two-year
period  ended  December  31,  2002  in  conformity  with  accounting  principles
generally accepted in the United States of America.

         As discussed in Notes 2 and 9 to the consolidated financial statements,
the Company  adopted  Statements  of  Financial  Accounting  Standards  No. 141,
"Business  Combinations",  for purchase method business  combinations  completed
after June 30, 2001, and No. 142,  "Goodwill and Other  Intangibles",  effective
January 1, 2002.


/s/ KPMG LLP

Short Hills, New Jersey
March  7,  2003,  except as to the first paragraph of  Note 4 and the second and
third  sentences of the third paragraph of Note 10(b), which are as of April 10,
2003



                                      F-3
<PAGE>

                  DATA SYSTEMS & SOFTWARE INC. AND SUBSIDIARIES
                           CONSOLIDATED BALANCE SHEETS
                 (IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)

<TABLE>
<CAPTION>

                                         ASSETS                                                  As of December 31,
                                                                                           -------------------------------
                                                                                               2002               2003
<S>                                                                                               <C>              <C>
Current assets:
    Cash and cash equivalents...........................................................          $1,150           $1,213
         Restricted cash................................................................             241              241
         Accounts receivable, net.......................................................          12,267            7,053
         Inventory......................................................................           2,217               88
         Other current assets...........................................................           1,443              661
                                                                                           --------------      -----------
          Total current assets..........................................................          17,318            9,256
                                                                                           --------------      -----------
 Investment in Comverge, net............................................................              --               68
 Property and equipment, net............................................................           1,972              814
 Long-term deposit - restricted.........................................................           5,700               --
 Other assets...........................................................................             599              613
 Funds in respect of employee termination benefits......................................           2,425            2,379
 Goodwill ..............................................................................           4,929            4,430
 Other intangible assets, net...........................................................             404              114
                                                                                           --------------      -----------
          Total assets..................................................................         $33,347          $17,674
                                                                                           ==============      ===========
                          LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
         Short-term bank credit and current maturities of long-term debt................          $2,531           $1,517
         Convertible note, net..........................................................           1,224               --
         Trade accounts payable.........................................................           5,096            2,586
         Accrued payroll, payroll taxes and social benefits.............................           2,211            1,451
         Other current liabilities......................................................           3,411            2,973
                                                                                           --------------      -----------
          Total current liabilities.....................................................          14,473            8,527
                                                                                           --------------      -----------
Long-term liabilities:
         Long-term debt.................................................................           6,278              632
         Other liabilities..............................................................             477              227
         Liability for employee termination benefits....................................           3,382            3,721
                                                                                           --------------      -----------
             Total long-term liabilities................................................          10,137            4,580
Commitments and contingencies (Note 13)
 Minority interests.....................................................................           1,609            1,367
                                                                                           --------------      -----------
Shareholders' equity:
         Common stock - $0.01 par value per share:
         Authorized - 20,000,000 shares; Issued - 8,161,867 and 8,749,729 shares
             for 2002 and 2003, respectively............................................              82               87
         Additional paid-in capital.....................................................          37,687           39,595
         Warrants.......................................................................             364              461
         Deferred compensation..........................................................              (7)              --
         Accumulated deficit............................................................         (26,787)         (33,069)
           Treasury stock, at cost - 845,704 and 839,704 shares for 2002 and 2003,
              respectively .............................................................          (3,913)          (3,874)
    Shareholder's note..................................................................            (298)              --
                                                                                           --------------      -----------

   Total shareholders' equity...........................................................           7,128            3,200
                                                                                           --------------      -----------

          Total liabilities and shareholders' equity....................................         $33,347          $17,674
                                                                                           ==============      ===========

</TABLE>

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

                                      F-4
<PAGE>

                  DATA SYSTEMS & SOFTWARE INC. AND SUBSIDIARIES
                      CONSOLIDATED STATEMENTS OF OPERATIONS
                 (IN THOUSANDS, EXCEPT NET LOSS PER SHARE DATA)

<TABLE>
<CAPTION>

                                                                                                  YEAR ENDED DECEMBER 31,
                                                                                  --------------------------------------------------
                                                                                        2001             2002              2003
                                                                                  ---------------   --------------   ---------------
<S>                                                                                  <C>                <C>                <C>
Sales:
        Products ..........................................................          $ 32,717           $ 39,831           $ 22,006
        Services ..........................................................             8,830             12,149              9,791
        Projects ..........................................................             4,377              3,906              3,237
                                                                                     --------           --------           --------
          Total sales .....................................................            45,924             55,886             35,034
                                                                                     --------           --------           --------
Cost of sales:

        Products ..........................................................            27,122             30,994             18,201
        Services ..........................................................             6,754              8,689              6,997
        Projects ..........................................................             3,736              3,288              2,778
                                                                                     --------           --------           --------
          Total cost of sales .............................................            37,612             42,971             27,976
                                                                                     --------           --------           --------
         Gross profit .....................................................             8,312             12,915              7,058

Operating expenses:
        Research and development expenses .................................             2,284              1,526                153
        Selling, general and administrative expenses ......................            16,617             16,689             10,498
        Impairment of goodwill ............................................                --              2,760                 --
        Impairment of investments .........................................               227                 90                 --
        Gain on issuance of subsidiary stock ..............................               397                 --                 --
                                                                                     --------           --------           --------

          Total operating expenses ........................................            18,731             21,065             10,651
                                                                                     --------           --------           --------

Operating loss ............................................................           (10,419)            (8,150)            (3,593)
Interest income ...........................................................             1,104                253                 61
Interest expense ..........................................................              (459)            (1,212)              (788)
Other income (loss), net ..................................................               (32)               113               (475)
                                                                                     --------           --------           --------
Loss before taxes on income ...............................................            (9,806)            (8,996)            (4,795)
Taxes on income ...........................................................               (11)                28                 (1)
                                                                                     --------           --------           --------
Loss from operations of the Company and its consolidated
subsidiaries ..............................................................            (9,795)            (9,024)            (4,794)
Share in losses of Comverge ...............................................                --                 --             (1,752)
Minority interests in losses of subsidiary, net of tax ....................                --                880                264
                                                                                     --------           --------           --------
Net loss ..................................................................          $ (9,795)          $ (8,144)          $ (6,282)
                                                                                     ========           ========           ========


Net loss per share - basic and diluted ....................................          $  (1.41)          $  (1.11)          $  (0.81)
                                                                                     ========           ========           ========
Weighted average number of shares
              outstanding - basic and diluted .............................             6,970              7,349              7,738
                                                                                     ========           ========           ========

</TABLE>

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

                                      F-5
<PAGE>

                  DATA SYSTEMS & SOFTWARE INC. AND SUBSIDIARIES
           CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
                                 (IN THOUSANDS)

<TABLE>
<CAPTION>

                                                        Additional          Deferred
                                     Number of  Common   Paid-In             Compen-  Accumulated   Treasury  Shareholder's
                                       Shares    Stock   Capital   Warrants   sation     Deficit      Stock       Note       Total
                                     ---------  ------  ---------- -------- --------  -----------   --------- ------------- --------
<S>                                     <C>      <C>    <C>          <C>        <C>     <C>          <C>           <C>     <C>
Balances as of December 31, 2000        8,035    $80    $ 35,970     $ 114      $--     $ (8,813)    $(4,770)      $--     $ 22,581

Exercise of options                        77      1         192      --        --           (35)         73      --            231
Issuance of shares                         50      1         297      --        --          --          --        (298)        --
Issuance of deferred compensation        --       --          16      --        (16)        --          --        --           --
Amortization of deferred
  compensation                           --       --        --        --          2         --          --        --              2
Treasury shares issued in respect
  of acquisition at average cost         --       --         506      --        --          --         1,744      --          2,250
Purchase of treasury shares              --       --        --        --        --          --          (907)     --           (907)
Net loss                                 --       --        --        --        --        (9,795)       --        --         (9,795)
                                     ---------  ------  ---------- -------- --------  -----------   ---------   -------     --------

Balances as of December 31, 2001        8,162    $82    $ 36,981     $ 114     $(14)    $(18,643)    $(3,860)    $(298)    $ 14,362

Grant and amortization of stock
  option compensation                    --       --          18      --          7         --          --        --             25
Expiration of warrants                   --       --         114      (114)     --          --          --        --           --
Value of convertible note and
  convertible portion of line of
  credit allocated to beneficial
  conversion feature and related
  warrants                               --       --         574       364      --          --          --        --            938
Purchase of treasury shares              --       --        --        --        --          --           (53)     --            (53)
Net loss                                 --       --        --        --        --        (8,144)       --        --         (8,144)
                                     ---------  ------  ---------- -------- --------  -----------   ---------   -------     --------

Balances as of December 31, 2002        8,162    $82    $ 37,687     $ 364     $ (7)    $(26,787)    $(3,913)    $(298)    $  7,128


Amortization of deferred
  compensation                           --       --        --        --          7         --          --        --              7
Issuance of shares as compensation         50      *          50      --        --          --          --        --             50
Exercise of options                        11      *         (25)     --        --          --            41      --             16
Issuance of shares in lieu of
  debt repayment                          127      1         239      --        --          --          --        --            240
Conversion of line of credit, net
  of professional fees                    400      4         559      --        --          --          --        --            563
Issuance of warrants for
  professional services                  --       --        --          97      --          --          --        --             97
Purchase of treasury shares              --       --        --        --        --          --            (2)     --             (2)
Write off of stockholder's note          --       --        --        --        --          --          --         298          298
Equity from issuance of shares by
  Comverge                               --       --       1,085      --        --          --          --        --          1,085
Net loss                                 --       --        --        --        --        (6,282)       --        --         (6,282)
                                     ---------  ------  ---------- -------- --------  -----------   ---------   -------     --------
Balances as of December 31, 2003        8,750    $87    $ 39,595     $ 461      $--     $(33,069)    $(3,874)      $--     $  3,200
                                     =========  ======  ========== ======== ========  ===========   =========   =======     ========

</TABLE>

* Less than $1

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

                                      F-6
<PAGE>

                  DATA SYSTEMS & SOFTWARE INC. AND SUBSIDIARIES
                      CONSOLIDATED STATEMENTS OF CASH FLOWS
                                 (IN THOUSANDS)

<TABLE>
<CAPTION>

                                                                                                 YEAR ENDED DECEMBER 31,
                                                                                      ----------------------------------------------
                                                                                           2001              2002           2003
                                                                                      -------------     -------------  -------------
<S>                                                                                        <C>              <C>             <C>
  Cash flows used in operating activities:

      Net loss ....................................................................        $ (9,795)        $(8,144)        $(6,282)

      Adjustments to reconcile net loss to net cash used in
      operating  activities (see Schedule A) ......................................           1,060           1,908           5,332
                                                                                           --------         -------         -------
      Net cash used in operating activities .......................................          (8,735)         (6,236)           (950)
                                                                                           --------         -------         -------

Cash flows provided by investing activities:

      Withdrawal of long-term  deposit ............................................              --             300           5,700

      Short-term bank deposits, net ...............................................           5,994              --              --

      Investment in debt securities ...............................................          (3,215)           (154)             --

      Proceeds from sale and maturity of marketable and debt securities ...........           1,383           2,031              --

      Amounts funded for employee termination benefits ............................            (437)           (579)           (474)

      Utilization of employee termination benefits ................................             401             807             235

      Acquisitions of property and equipment ......................................            (904)           (492)           (231)

      Proceeds from sale of property and equipment ................................              23              28              16

      Business acquisitions - see Schedule C ......................................            (500)             --              --

      Business dispositions - see Schedule D ......................................              --              --          (3,644)
                                                                                           --------         -------         -------
      Net cash provided by investing activities ...................................           2,745           1,941           1,602
                                                                                           --------         -------         -------


Cash flows provided by (used in) financing activities:

      Purchase of treasury stock ..................................................            (907)            (53)             (2)

      Issuance of subsidiary shares to minority interests .........................              --              --              22

      Proceeds from employee stock option exercises ...............................             231              --              16

      Proceeds from issuance of convertible note, net of issuance costs ...........              --           1,749              --

      Short-term debt borrowings (repayments), net ................................             836            (510)           (860)

      Proceeds from borrowings of long-term debt ..................................              --             679             835

      Repayments of long-term debt and debt acquired in acquisition ...............          (1,022)           (445)           (600)
                                                                                           --------         -------         -------
      Net cash provided by (used in) financing activities .........................            (862)          1,420            (589)
                                                                                           --------         -------         -------

Net increase (decrease) in cash and cash equivalents ..............................          (6,852)         (2,875)             63

Cash and cash equivalents at beginning of year ....................................          10,877           4,025           1,150
                                                                                           --------         -------         -------
Cash and cash equivalents at end of year ..........................................        $  4,025         $ 1,150         $ 1,213
                                                                                           ========         =======         =======

Supplemental cash flow information:

     Cash paid during the year for:

          Interest ................................................................        $    372         $   579         $   328
                                                                                           ========         =======         =======
          Income taxes ............................................................        $    459         $   138         $   136
                                                                                           ========         =======         =======

</TABLE>

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

                                      F-7
<PAGE>


                  DATA SYSTEMS & SOFTWARE INC. AND SUBSIDIARIES
               SCHEDULES TO CONSOLIDATED STATEMENTS OF CASH FLOWS
                             (DOLLARS IN THOUSANDS)

<TABLE>
<CAPTION>

                                                                                                   YEAR ENDED DECEMBER 31,
                                                                                          ------------------------------------------
                                                                                               2001          2002           2003
                                                                                          -------------  ------------  -------------
<S>                                                                                           <C>            <C>            <C>
A.   Adjustments  to  reconcile  net  loss  to net  cash  used  in  operating
     activities:
Depreciation and amortization .........................................................       $ 1,338        $ 1,155        $   527
Minority interests ....................................................................            --           (921)          (264)
Impairment of goodwill and acquired software ..........................................            --          3,000             --
Share in losses of Comverge ...........................................................            --             --          1,752
Change in the allowance for doubtful accounts .........................................          (279)           (46)          (159)
Deferred taxes ........................................................................            14           (107)           (98)
Increase (decrease) in liability for employee termination benefits ....................           332           (429)           739
Gain on issuance of subsidiary stock ..................................................          (397)            --             --
Loss (gain) on sale of marketable securities and debt securities, net .................             4            (49)            --
Loss from write-down of investment ....................................................           227             90             --
Loss on write-off of stockholder's note ...............................................            --             --            298
Write-down of inventory ...............................................................           391             --             --
Loss (gain) on sale of property and equipment, net ....................................            33             (4)           (47)
Stock and stock option compensation ...................................................             2             25             57
Accretion of discount on convertible debt and amortization of related
     costs ............................................................................            --            679            500
Receipt of investments for services rendered ..........................................          (164)            --             --
Other .................................................................................             7           (208)            70
Changes in operating assets and liabilities, net of effect of acquisitions:
     Restricted cash ..................................................................           (15)            76           --
     Decrease (increase) in accounts receivable and other assets ......................         1,508         (1,111)         3,267
     Decrease (increase) in inventory .................................................          (601)        (1,559)           293
     Increase (decrease) in accounts payable and other liabilities ....................        (1,340)         1,317         (1,603)
                                                                                              -------        -------        -------
                                                                                              $ 1,060        $ 1,908        $ 5,332
                                                                                              =======        =======        =======

B.   Non-cash investing and financing activities:
     Issuance of common stock in lieu of debt repayment................................                                        $803
     Increase in investment in Comverge from issuance of preferred and
     common stock credited to additional paid-in capital...............................                                      $1,085
     Accrued expenses incurred in investment of Comverge...............................                                        $200
     Adjustment of treasury stock and additional-paid-in-capital with
     respect to options exercised......................................................                                         $41
     Adjustment of goodwill............................................................                          $48
     Accounts payable incurred in acquisition of fixed assets..........................                          $50
     Value of beneficial conversion feature and related warrants on
     issuance of convertible debt......................................................                         $938
     Increase in deferred tax liability associated with adjustment of
     intangible assets.................................................................                          $17
     Issuance of shares for debt.......................................................          $298
     Issuance of deferred compensation.................................................           $16
     Shares of subsidiary issued in respect of acquisition.............................        $2,938
     Treasury shares issued in respect of acquisition..................................        $2,250
     Reduction of goodwill from realization of acquired deferred tax asset.............          $180
     Write-off of retired and fully depreciated property and equipment.................        $1,842

</TABLE>

                                      F-8
<PAGE>

<TABLE>

<S>                                                                                          <C>                         <C>
C.   Assets/liabilities acquired in acquisitions:
     Current assets....................................................................      $(2,124)
     Property, equipment and other assets..............................................         (995)
     Goodwill and intangibles..........................................................       (6,570)
     Current liabilities...............................................................         1,958
     Long-term debt....................................................................         1,319
     Other liabilities, minority interests and deferred taxes..........................         3,662
     Shareholders' equity..............................................................         2,250
                                                                                          -----------
                                                                                               $(500)
                                                                                          ===========
D.   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.......................................................                                    (3,444)
                                                                                                                        -----------
                                                                                                                          $(3,644)
                                                                                                                        ===========

</TABLE>

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

                                      F-9
<PAGE>

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

NOTE 1--NATURE OF OPERATIONS

     (a) Description of Business

         Data Systems & Software Inc., a Delaware corporation ("DSSI"),  through
its subsidiaries  (collectively,  the "Company") and its equity  investment (see
Note 4) in Comverge Inc.  ("Comverge"),  (i) provides  software  consulting  and
development services, (ii) is an authorized dealer and a value-added-reseller of
computer  hardware,   and  (iii)  provides  energy  intelligence  solutions  for
utilities and energy companies (through Comverge).  The Company's operations are
based in the United States and in Israel.  DSSI's shares were  transferred  from
the Nasdaq National Market  effective March 3, 2003 and its shares are currently
traded on the Nasdaq SmallCap  Market.  As to principal  customers and principal
markets - see Note 17.

     (b) Financing of Operations

         As of December  31,  2003,  the  Company  had working  capital of $729,
including $1,213 in unrestricted cash and cash equivalents. Net cash of $950 was
used in  operating  activities  during  2003.  The net loss  for the year  ended
December  31, 2003 of $6,282  included  the  Company's  share of  unconsolidated
losses of Comverge of $1,752 and other  non-cash  expenses and losses of $1,382.
The primary source of the Company's cash provided by operating activities during
2003 was  collections of trade accounts  receivables and other current assets in
excess of reductions in accounts  payable and other  liabilities  of $1,664 net.
Net cash of $1,602  provided by  investing  activities  was  primarily  from the
release of previously restricted cash of $5,700, of which $3,444 was invested in
Comverge. Net cash of $589 used in financing activities was primarily due to net
payments of debt of $625.

         The working  capital of $729 at December  31,  2003,  included  working
capital  of  $188 in the  Company's  majority  owned  Israeli  subsidiary,  dsIT
Technologies Ltd (dsIT). Due to Israeli tax and company law constraints, as well
as the  significant  minority  interest in dsIT,  working capital and cash flows
from  dsIT's  operations  are  not  readily  available  to  finance  U.S.  based
activities.

         Since April  2003,  the  Company's  formerly  consolidated  subsidiary,
Comverge completed private equity financings totaling approximately $18,600 (see
Note 4). As a result of the financing,  Comverge no longer  requires  additional
funding  from the  Company.  As part of the  agreements  related to the  private
equity financing, Comverge received a new $5,000 unsecured credit facility.

         As of February 28, 2004 the Company's wholly-owned US operations (i.e.,
excluding dsIT and Comverge) had an aggregate of $965 in  unrestricted  cash and
cash equivalents,  reflecting an approximately $200 decrease from the balance as
of December 31, 2003.

     (c) Accounting Principles

         The consolidated  financial statements have been prepared in conformity
with accounting principles generally accepted in the United States of America.

     (d) Use of Estimates in Preparation of Financial Statements

         The preparation of consolidated financial statements in conformity with
accounting  principles  generally  accepted  in the  United  States  of  America
requires  management to make estimates and assumptions  that affect the reported
amounts of assets and  liabilities  and the disclosure of contingent  assets and
liabilities as of the date of the financial statements, and the reported amounts
of revenues and expenses  during the  reporting  periods.  Actual  results could
differ from those estimates.

NOTE 2--SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

FOREIGN CURRENCY TRANSACTIONS

         The  currency  of  the  primary  economic   environment  in  which  the
operations of DSSI and its U.S.  subsidiaries are conducted is the United States
dollar ("dollar"). Accordingly, the Company and all of its U.S. subsidiaries use
the  dollar  as their  functional  currency.  The  financial  statements  of the
Company's  Israeli  subsidiaries  whose  functional  currency is the New Israeli
Shekel  ("NIS") have been  translated  using the

                                      F-10
<PAGE>

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

exchange  rates in effect at the balance  sheet date.  Statements  of operations
amounts have been translated using the exchange rate at date of transaction.  In
2001,  2002 and 2003 the  resulting  translation  adjustments  are not reported,
since the effect is immaterial.  All exchange  gains and losses  denominated  in
non-dollar  currencies  are  reflected  in  other  income  (loss),  net  in  the
consolidated  statement of  operations  when they arise.  Such foreign  currency
gains  (losses),  net  amounted  to $(3),  $154 and $(124)  for the years  ended
December 31, 2001, 2002 and 2003, respectively.

PRINCIPLES OF CONSOLIDATION AND PRESENTATION

         The  consolidated  financial  statements  of the  Company  include  the
accounts of all  majority-owned  subsidiaries.  All  intercompany  balances  and
transactions have been eliminated.  Minority interests in net losses are limited
to the extent of their  equity  capital.  Losses in excess of minority  interest
equity capital are charged against the Company.

CASH AND CASH EQUIVALENTS

       The  Company  considers  all highly  liquid  investments,  which  include
 short-term  deposits  (up to three  months from date of  deposit)  that are not
 restricted as to withdrawal or use, to be cash equivalents.

INVENTORY

         Inventories  are  stated  at the  lower  of  cost  or  market.  Cost is
determined  for raw  materials,  spare parts and  supplies  on the average  cost
method.  For finished goods and merchandise  inventories,  cost is determined on
the first-in, first-out method.

INVESTMENTS IN ASSOCIATED COMPANIES

         Investments  in  associated  companies  are accounted for by the equity
method.

OTHER INVESTMENTS

         Investments  in private  companies  over whose  operating and financial
policies the Company does not have the power to exercise significant  influence,
are  accounted  for by the cost  method.  In 2001,  2002 and 2003,  the  Company
recorded  write-downs  of  $227,  $90  and  $0,  respectively,  with  regard  to
investments in such companies.

PROPERTY AND EQUIPMENT

         Property  and   equipment   are  presented  at  cost  at  the  date  of
acquisition.   Depreciation   and   amortization  is  calculated  based  on  the
straight-line  method over the estimated useful lives of the depreciable assets,
or in the case of  leasehold  improvements,  the lease  term.  Improvements  are
capitalized while repairs and maintenance are charged to operations as incurred.

GOODWILL AND ACQUIRED INTANGIBLE ASSETS

         Goodwill  represents  the  excess  of cost  over the fair  value of net
assets of businesses  acquired.  The Company  adopted the provisions of SFAS No.
141, "Business  Combinations" as of July 1, 2001 and SFAS No. 142, "Goodwill and
Other Intangible  Assets", as of January 1, 2002. SFAS No. 141 requires that the
purchase  method  of  accounting  be used  for  all  business  combinations  and
specifies the criteria that intangible assets acquired in a business combination
must meet to be recognized and reported separately from goodwill.  In accordance
with SFAS No. 142, goodwill and acquired intangible assets determined to have an
indefinite  useful life are not amortized,  but instead tested for impairment at
least annually. SFAS No. 142 also requires that intangible assets with estimable
useful lives be amortized over their respective  estimated useful lives to their
estimated  residual values,  and reviewed for impairment in accordance with SFAS
No. 144, "Accounting for Impairment or Disposal of Long-Lived Assets".

         SFAS No. 142 requires the Company to assess  annually  whether there is
an  indication  that  goodwill is  impaired,  or more  frequently  if events and
circumstances  indicate  that the asset might be impaired  during the year.  The
Company  performs its annual  impairment  test at the  conclusion  of its annual
budget  process,  generally in the fourth  quarter of each year (though in 2002,
the Company  recorded an  impairment  in the third quarter based on its judgment
that an  impairment  had occurred  with respect to its software  consulting  and
development  segment).  The Company has identified its operating segments as its
reporting  units for purposes of the  impairment  test and assigned its goodwill
and  intangible  assets to its software  consulting and  development  and energy
intelligence  solutions  segments.  The Company determines the carrying value of
each  reporting  unit by assigning  the assets and  liabilities,  including  the
existing  goodwill and intangible  assets, to those reporting units. The Company
then  determines  the fair value of each  reporting  unit and compares it to the
carrying  amount  of the  reporting  unit.  Calculating  the  fair  value of the
reporting units requires significant estimates and assumptions by management. To
the extent the carrying amount of a reporting unit exceeds the fair value of the
reporting  unit,  there is an indication that the reporting unit goodwill may be
impaired and a second step of the impairment  test is performed to determine the
amount of the impairment to be recognized, if any.

         In  accordance   with  SFAS  No.  141,   goodwill  from  the  Company's
acquisition of Endan IT Solutions  Ltd.  ("Endan") in December 2001 (see Note 3)
is not amortized. Goodwill from other acquisitions prior to the adoption of SFAS
No. 141 and No. 142 was  amortized  on a  straight-line  basis over the expected
periods to be  benefited,  ranging  from five to seven  years,  and assessed for
recoverability  using a  methodology  consistent  with  that of  SFAS  No.  121,
"Accounting for Impairment of Long-Lived  Assets and for Long-Lived Assets to be
Disposed Of" (see "Impairment of Long-Lived Assets" below).

         Identifiable  intangible  assets deemed to have an indefinite  life are
tested annually for impairment,  or more frequently if events and  circumstances
indicate that the asset might be impaired during the year. An impairment loss is
recognized to the extent that the carrying amount exceeds the asset's fair value
as determined  based on discounted  cash flows  associated  with the asset.  The
Company has not identified any indefinite life intangible assets.

         The  costs  of  licensed  technology  and  software  are  presented  at
estimated  fair  value at  acquisition  date.  These  costs are  amortized  on a
straight-line basis over the term of the license or estimated useful life of the
software, generally five years.

         The costs of registered patents and patents pending acquired from third
parties are presented at estimated fair value at acquisition  date. In addition,
registration costs and fees for patents are capitalized. Registered patent costs
are amortized over the estimated remaining useful life of the patents, from four
to fourteen  years.  Costs for patents  pending are not amortized until they are
issued.


                                      F-11
<PAGE>

IMPAIRMENT OF LONG-LIVED ASSETS

         Effective  January 1, 2002,  the Company  adopted  SFAS No.  144.  This
Statement  requires that long-lived  assets,  except those addressed by SFAS No.
142, be reviewed  for  impairment  whenever  events or changes in  circumstances
indicate  that  the  carrying  amount  of  an  asset  may  not  be  recoverable.
Recoverability  of assets to be held and used is measured by a comparison of the
carrying amount of an asset to the  undiscounted  future net cash flows expected
to be generated by the asset.  If the  carrying  amount of an asset  exceeds its
estimated future  undiscounted cash flows, an impairment charge is recognized by
the amount by which the carrying  amount of the asset  exceeds the fair value of
the asset. SFAS No. 144 requires the Company to separately  report  discontinued
operations  and extends  that  reporting to a component of an entity that either
has been disposed of (by sale,  abandonment,  or in a distribution to owners) or
is  classified  as held for sale.  Assets to be disposed of are  reported at the
lower of the carrying  amount or fair value less costs to sell.  The adoption of
SFAS No. 144 did not have any  impact on the  Company's  consolidated  financial
statements  because  the  impairment  assessment  under  SFAS No. 144 is largely
unchanged from the Company's previous policy.

         Through December 31, 2001, the carrying values of long-lived assets and
goodwill  were   reviewed  for   impairment   whenever   events  or  changes  in
circumstances  occurred that indicated that the net carrying amount would not be
recoverable.  The  review  was based on  comparing  the  carrying  amount of the
long-lived assets to the undiscounted  estimated cash flows over their remaining
useful lives. If the sum of the expected undiscounted future cash flows was less
than  the  carrying  amount  of the  assets,  the  Company  would  recognize  an
impairment  loss. The impairment  loss, if determined to be necessary,  would be
measured  as the amount by which the  carrying  amount of the asset  exceeds the
fair value of the asset.  Assets to be disposed of were reported at the lower of
the carrying amount or fair value, less cost to sell.


TREASURY STOCK

         Company  shares  held by the Company are  presented  as a reduction  of
 shareholders' equity, at their cost to the Company.

REVENUE RECOGNITION

         Revenue  from   time-and-materials   service   contracts,   maintenance
agreements and other services are recognized as services are provided.

         Revenues from fixed-price contracts to design, develop,  manufacture or
modify  complex  load  control  or other  equipment  and  software  to  customer
specifications are recognized the percentage-of-completion method in a long-term
contract transaction.  The percentage-of-completion is determined based on labor
hours incurred.  Percentage-of-completion  estimates are reviewed  periodically,
and any adjustments required are reflected in the period when such estimates are
revised.  Losses on contracts, if any, are recognized in the period in which the
loss is determined.

         Revenues  from the sale of  software  licenses  are  recognized  when a
license  agreement  exists,  delivery has occurred,  the license fee is fixed or
determinable,   and  collectibility  is  reasonably  assured.   Maintenance  and
subscription revenue is recognized ratably over the contract period.

         Revenues on the sale of products,  which are shipped from the Company's
 stock of inventory,  are recognized when the products are shipped provided that
 appropriate signed documentation of the arrangement, such as a signed contract,
 purchase order or letter of agreement,  has been received,  the fee is fixed or
 determinable and collectibility is reasonably assured.

       In accordance  with Emerging  Issues Task Force  ("EITF") Issue No. 99-19
"Recording  Revenue Gross as a Principal  Versus Net as an Agent",  revenue from
drop  shipments of third-party  hardware and software sales are recognized  upon
delivery,  and recorded at the gross amount when the Company is responsible  for
fulfillment  of the  customer  order,  has latitude in pricing,  customizes  the
product to the customer's  specifications and has discretion in the selection of
the supplier.

                                      F-12
<PAGE>

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

CONCENTRATION OF CREDIT RISK - ALLOWANCE FOR DOUBTFUL ACCOUNTS

       Financial   instruments,   which  potentially   subject  the  Company  to
concentrations of credit risk, consist principally of cash and cash equivalents,
short and long-term bank deposits and trade  receivables.  The counterparty to a
majority of the Company's  cash  equivalent  deposits as well as its  short-term
bank deposits is a major  financial  institution  of high credit  standing.  The
Company does not believe there is  significant  risk of  non-performance  by the
counterparty.  Approximately  28% and 12% of the trade  accounts  receivable  at
December 31, 2003 and 2002,  respectively,  were due from a U.S.  customer  that
pays its trade  receivables  over usual credit periods (as to revenues from such
customer - see Note  17(e)).  Credit  risk with  respect to the balance of trade
receivables  is  generally  diversified  due to the  large  number  of  entities
comprising the Company's customer base.

         An appropriate  allowance for doubtful  accounts is included in respect
of specific debts of which  collection is in doubt. The Company performs ongoing
credit evaluations of its customers and usually does not require collateral.

RESEARCH AND DEVELOPMENT EXPENSES

         Research  and  development  costs  consisting  primarily  of labor  and
related costs are charged to operations as incurred.

 ADVERTISING EXPENSES

         Advertising expenses are charged to operations as incurred. Advertising
expenses in the years ended December 31, 2001,  2002 and 2003 totaled $120, $171
and $35, respectively.

WARRANTY PROVISION

       Comverge  generally  warrants its products against certain  manufacturing
and other defects. These product warranties are provided for specific periods of
time and/or usage of the product  depending  on the nature of the  product,  the
geographic  location of its sale and other factors. As of December 31, 2002, the
Company  had  accrued  $52 for  estimated  product  warranty  claims,  which was
included in other current  liabilities.  The accrued product warranty costs were
based  primarily on historical  experience of actual  warranty claims as well as
current  information  on repair costs.  Warranty  claims expense for each of the
years 2001 and 2002 were:  $302 and $(250),  respectively.  Starting  the second
quarter of 2003, the Company no longer consolidates Comverge's activities.

         The  following  table  provides  the changes in the  Company's  product
warranties for the year ended December 31, 2003:

<TABLE>
<CAPTION>
                                                                                       Year ended December 31,
                                                                                    ------------------------------
                                                                                        2002             2003
                                                                                    -------------    -------------

             <S>                                                                            <C>               <C>
             Warranty provision at beginning of the period                                  $302              $52
             Accruals for warranties issued during the period                                 87               23
             Warranty settlements made during the period                                     (2)             (23)
             Changes in liability for pre-existing warranties during the period,
                including expirations                                                      (335)               --
             Other - deconsolidation of Comverge (see Note 4)                                 --             (52)
                                                                                    -------------    -------------
             Warranty provision at the end of the period                                     $52              $--
                                                                                    =============    =============

</TABLE>

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

ISSUANCE OF STOCK OF SUBSIDIARY

         The Company recognizes gains and losses from the issuance of subsidiary
stock   through  the   consolidated   statement  of   operations.   In  non-cash
transactions,  when the assurance as to the reliability of the fair value of the
non-cash asset received is difficult to determine, gains and losses are recorded
in additional paid in capital.

STOCK-BASED COMPENSATION

         The Company applies Accounting  Principles Boar Opinion ("APB") No. 25,
"Accounting  for Stock

                                      F-13
<PAGE>

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

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 income (loss) and loss per share
would have been changed to the pro forma amounts indicated below:

<TABLE>
<CAPTION>

                                                                                         Year Ended December 31,
                                                                                         -----------------------
                                                                                   2001             2002           2003
                                                                                   ----             ----           ----
<S>                                                                                 <C>             <C>            <C>
         Net loss as reported                                                      $  (9,795)       $ (8,144)      $ (6,282)
         Plus: Stock-based employee compensation expense included in
                reported net income, net of related tax effects                            2              25             57
         Less: Total stock-based employee compensation expense determined
                under fair value based method for all awards, net of related
                tax effects                                                              718           1,199            502
                                                                                -------------     -----------    -----------
         Pro forma net loss                                                        $ (10,511)       $ (9,318)      $ (6,727)
                                                                                =============     ===========    ===========

            Net loss per share:
               Basic and diluted - as reported                                     $   (1.41)       $  (1.11)      $  (0.81)
                                                                                =============     ===========    ===========
               Basic and diluted - pro forma                                       $   (1.51)       $  (1.27)      $  (0.87)
                                                                                =============     ===========    ===========

</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.

INCOME TAXES

         Deferred  income  taxes  reflect  the  net  tax  effects  of  temporary
differences between the carrying amounts of assets and liabilities for financial
reporting  purposes  and the amounts  used for income tax  purposes,  as well as
operating loss, capital loss and tax credit  carryforwards.  Deferred tax assets
and  liabilities  are  classified  as  current  or  non-current   based  on  the
classification of the related assets or liabilities for financial reporting,  or
according to the expected reversal dates of the specific temporary  differences,
if not  related to an asset or  liability  for  financial  reporting.  Valuation
allowances are established against deferred tax assets if it is more likely than
not that they will not be  realized.  Deferred  tax assets and  liabilities  are
measured  using  enacted tax rates  expected  to apply to taxable  income in the
years in which those  temporary  differences  are  expected to be  recovered  or
settled.  The effect on deferred tax assets and  liabilities  of a change in tax
rates or laws is  recognized  in  operations  in the period  that  includes  the
enactment date.

BASIC AND DILUTED NET INCOME (LOSS) PER SHARE

         Basic net income  (loss) per share is computed  by dividing  net income
(loss) by the weighted  average  number of shares  outstanding  during the year,
excluding  treasury  stock.  Diluted net income  (loss) per share is computed by
dividing net income (loss) by the weighted average number of shares  outstanding
plus the  dilutive  potential  of common  shares  which  would  result  from the
exercise of stock options and warrants or conversion of convertible  securities.
However,  the  dilutive  effects  of stock  options,  warrants  and  convertible
securities  are excluded from the  computation  of diluted net income (loss) per
share if doing so would be antidilutive.

RECENTLY ISSUED ACCOUNTING PRINCIPLES

         In  January  2003,  the  FASB  issued  FASB   Interpretation   No.  46,
"Consolidation of Variable  Interest  Entities" (FIN 46). Under FIN 46, entities
are separated into two populations: (1) those for which voting

                                      F-14
<PAGE>

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

interests are used to determine  consolidation (this is the most common) and (2)
those for which variable interests are used to determine  consolidation.  FIN 46
explains how to identify  Variable Interest Entities (VIEs) and how to determine
when  a  business   enterprise   should   include   the   assets,   liabilities,
non-controlling   interests,   and  results  of  activities  of  a  VIE  in  its
consolidated financial statements.

         Since issuing FIN 46, the FASB has proposed  various  amendments to the
Interpretation  and has deferred its effective date. Most recently,  in December
2003,  the FASB  issued a  revised  version  of FIN 46 (FIN  46-R),  which  also
provides for a partial deferral of FIN 46. This partial deferral established the
effective  date for  public  entities  to apply FIN 46 and FIN 46-R based on the
nature  of the  variable  interest  entity  and the date upon  which the  public
company  became  involved with the variable  interest  entity.  In general,  the
deferral  provides  that  (i) for  variable  interest  entities  created  before
February  1, 2003,  a public  entity must apply FIN 46-R at the end of the first
interim or annual  period  ending after March 15,  2004,  and may be required to
apply  FIN 46 at the end of the first  interim  or annual  period  ending  after
December 15, 2003, if the variable  interest entity is a special purpose entity,
and (ii) for variable interest entities created after January 31, 2003, a public
company  must  apply FIN 46 at the end of the  first  interim  or annual  period
ending after December 15, 2003, as previously required,  and then apply FIN 46-R
at the end of the first  interim or annual  reporting  period ending after March
15, 2004.

         The  Company   currently   has  no  variable   interests  in  any  VIE.
Accordingly,  the Company believes that the adoption of FIN 46 and FIN 46-R will
not have a material impact on its financial position,  results of operations and
cash flows.

         In  December  2003,  the  FASB  issued  FAS  No.  132  (revised  2003),
"Employers'  Disclosures about Pensions and Other  Postretirement  Benefits,  an
amendment  of FASB  Statements  No.  87,  88 and  106,  and a  revision  of FASB
Statement No. 132 ("FAS 132 (revised 2003)").  This Statement revises employer's
disclosures about pension plans and other postretirement  benefit plans. It does
not change the measurement or recognition of those plans.  The new rules require
additional  disclosures  about the  assets,  obligations,  cash  flows,  and net
periodic benefit cost of defined benefit pension plans and other  postretirement
benefit plans.

         Part of the new disclosures  provisions are effective for 2003 calendar
year-end financial statements,  and accordingly have been applied by the company
in these consolidated financial statements.

         The remaining  provisions of FAS 132 (revised 2003), which have a later
effective date, are currently being evaluated by the Company.

RECLASSIFICATIONS

         Certain  reclassifications have been made to the Company's prior years'
consolidated   financial   statements   to  conform  with  the  current   year's
consolidated financial statement presentation.

NOTE 3--ACQUISITION

         In December  2001, a  subsidiary  of the Company  acquired  100% of the
shares of Endan IT Solutions Ltd. ("Endan") in a transaction  accounted for as a
purchase  business  combination  and partial sale of a  subsidiary.  Endan was a
privately-held  Israeli information  technology software and consulting firm and
as a result of the acquisition became an integral part of the Company's software
consulting and development  segment. The acquisition was consummated in order to
broaden the Company's markets into information  technology and to take advantage
of  economies  of  scale  and  synergistic  cost  savings.  Endan's  results  of
operations  are included in the Company's  consolidated  statement of operations
beginning  January 1, 2002.  Results for the period from acquisition to December
31, 2001 were not included in the Company's consolidated statement of operations
as they were immaterial.

         The  aggregate  purchase  price for Endan was $5,788,  comprised of (i)
$2,250  representing  the issuance of 365,210 shares of DSSI common stock valued
at $6.16 per share,  (ii) $2,912  representing the estimated value of 32% of the
outstanding  ordinary shares of dsIT, (iii) $500 of cash, (iv) $100 of estimated
closing  costs and (v) $26  representing  the fair value of options to  purchase
dsIT ordinary shares in exchange for the cancellation of outstanding Endan stock
options.  The  Company  recognized  a gain of $397 on the  issuance  of ordinary
shares representing a 32% interest in dsIT connection with this transaction.

                                      F-15
<PAGE>

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

         In addition to the purchase consideration  mentioned above, in December
2001,  the  Company  also  repaid  a  $1,000  loan  previously  made  by  Kardan
Communications  Ltd.  ("Kardan"),  Endan's  majority  shareholder  prior  to the
acquisition.

         The following  table  summarizes the estimated fair value of the assets
acquired and liabilities assumed at December 31, 2001 adjusted for valuations of
intangible assets received in 2002, the effective date of acquisition before the
repayment of the Kardan debt.

                  Current assets                                          $2,075
                  Property and equipment                                     609
                  Intangible assets                                          620
                  Goodwill                                                 6,039
                  Other assets                                               314
                                                                         -------
                         Total assets acquired                             9,657
                                                                         -------
                  Current liabilities                                      1,858
                  Long-term debt                                           1,319
                  Other liabilities                                          495
                  Deferred tax liability created in acquisition              197
                                                                         -------
                         Total liabilities assumed                         3,869
                                                                         -------
                         Net assets acquired                              $5,788
                                                                         =======

       The  intangible  assets  represent  the fair value of  software  licenses
acquired (five-year useful life). The goodwill resulting from the acquisition is
not  deductible  for income tax purposes and will not be amortized for financial
statement purposes in accordance with SFAS No. 142. The entire goodwill acquired
was assigned to the software consulting and development segment.

       The  following  unaudited  pro forma  information  presents  a summary of
consolidated  results of  operations of the Company as if this  acquisition  had
occurred  at the  beginning  of each of the  periods  presented,  with pro forma
adjustments to give effect to the  amortization  of acquired  intangibles  and a
reduction of interest expense resulting from Endan's repayment of a $1,000 loan.
The  unaudited  pro forma  information  does not  include  the  amortization  of
goodwill  acquired,  as it is not required to be amortized  pursuant to SFAS No.
142. The gain on the partial sale of 32% of dsIT is excluded  from the unaudited
pro  forma  consolidated  results  of  operations  as it is  non-recurring.  The
unaudited  pro  forma  consolidated  results  of  operations  are  provided  for
illustrative  purposes  only and do not purport to represent  what the Company's
results of operations  would  actually have been, nor do they purport to project
the Company's results of operations for any future period.

                                                                  YEAR ENDED
                                                               DECEMBER 31,2001
                                                                  (UNAUDITED)

Net sales.................................................          $52,355
Gross profit..............................................          $10,849
Net loss .................................................          $(9,884)
Loss per share - basic and diluted........................          $ (1.35)

         Upon receipt of third-party  valuation  information,  it was determined
that the fair value of software  licenses  acquired  (five-year useful life) was
$500 and that the fair  value of backlog  acquired  (one-year  useful  life) was
$120. The acquired  goodwill  resulting  from the  acquisition  was $5,387.  The
entire goodwill acquired was assigned to the software consulting and development
segment.  The goodwill  resulting  from the  acquisition  is not  deductible for
income tax purposes and will not be amortized for financial  statement  purposes
in accordance with SFAS No. 142.

NOTE 4--DISPOSITIONS

         On April 7, 2003,  the  Company and its then  consolidated  subsidiary,
Comverge,  signed and  closed on a  definitive  agreement  with a  syndicate  of
venture  capital firms raising an aggregate of $13,000 in capital  funding.  The
Company  purchased  $3,250 of Series A  Convertible  Preferred  Stock  issued by
Comverge in the equity financing and incurred transaction costs of an additional
$294.  A  syndicate  of  venture  capital  firms  purchased  $7,750  of Series A
Convertible Preferred Stock issued by Comverge,  and one member of the syndicate
also purchased $2,000 of Series A-1 Convertible  Preferred Stock of Comverge. In
connection with the transaction,  the Company  converted to equity  intercompany
balances of $9,673.  The purchaser of the Series A-1 Preferred Stock was granted
a put option exercisable in April 2004 and Comverge received a right to call all
the Series A-1  Preferred  Stock for $2,000,  at anytime on or before  April 18,
2004.


                                      F-16
<PAGE>

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

         In  September  2003,   Comverge   completed  an  agreement  raising  an
additional  $2,000 in  capital  funding  in  exchange  for  additional  Series A
Convertible Preferred Stock issued by Comverge. Comverge utilized these funds to
repurchase  the Series A-1  Convertible  Preferred  Stock  previously  issued by
Comverge.

         The  Preferred  Stock  is  convertible  into  Comverge's  common  stock
initially on a one-for-one  basis subject to adjustment  for the  achievement of
certain performance  criteria.  Conversion is mandatory on (i) in the event that
the  holders of at least a majority of the  then-outstanding  shares of Series A
Preferred  consent  to such  conversion  or (ii)  upon the  closing  of a firmly
underwritten  public  offering  of shares of Common  Stock of  Comverge at a per
share price not less than five times the original  per-share  purchase  price of
the Preferred Stock. The holders of Preferred Stock have no mandatory redemption
rights. Under Comverge's Amended and Restated Certificate of Incorporation,  the
holders  of  Comverge  common  stock  have the  right  to elect  two of the five
directors on Comverge's  Board.  Certain preferred  shareholders  other than the
Company have the right to elect the other three directors.  Pursuant to a voting
agreement,  one of the directors  elected by the holders of the Comverge  common
stock must be the Chief  Executive  Officer  (CEO) of  Comverge.  The  Company's
chairman and CEO and Comverge's CEO were elected as the initial directors by the
Comverge common stockholders.

         In connection  with  Comverge's  April equity  financing  transactions,
Comverge   acquired  Sixth  Dimension,   Inc.  ("6D")  in  a  purchase  business
combination, valued at approximately $510, in exchange for 877,000 of Comverge's
common shares. In connection with this transaction,  as a result of our dilution
and this new  valuation of Comverge's  common stock,  we recorded an increase of
$1,085 to our common stock  investment in Comverge.  The adjustment was recorded
to  additional-paid-in-capital.  Some of the  venture  capital  participants  in
Comverge's equity financing transaction were the principal owners in 6D prior to
the acquisition.  6D is an early stage  Internet-based  software company,  whose
iNET  product  enables a broad  range of  energy  services  including:  upstream
facility metering,  monitoring,  and control;  performance-based  operations and
proactive  maintenance;  economic demand  response and active load  curtailment;
aggregated distributed generation; power reliability and quality monitoring; and
other real-time capital equipment  analysis using a low-cost,  robust,  software
for service  delivery.  The  acquisition  adds to Comverge's  product  offering,
technology  for upstream  monitoring & control of capital  assets,  by combining
6D's  real-time,   internet-based,  data  warehousing  iNET  software  with  the
analytical  and  metering   capabilities   of  Comverge's   PowerCAMP   software
applications.

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

                                      F-17
<PAGE>

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

         Also,  in  connection  with the  equity  financing  in April,  Comverge
secured  a  $6,500  credit  facility  with  a  leading  financial   institution.
Comverge's new credit facility  includes a $1,500 term loan secured by a Company
pledge of a $1,500 restricted  deposit at Comverge's new lender, and a revolving
line of credit of up to  $5,000  secured  by the  assets of  Comverge.  Comverge
agreed to make  certain  prepayments  of the $1,500 term loan and the new lender
agreed to the release of amounts equal to such payments from the pledge account,
subject to Comverge's  compliance with certain  financial and other covenants in
its agreement  with the lender.  Such covenants  have been  subsequently  either
fulfilled  or waived.  The $1,500  restricted  deposit was  released in December
2003.

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

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

         Until  December  31, 2003,  the Company had an option to purchase  from
Comverge up to $1,500 of Series A-2 Convertible  Preferred Stock. The Series A-2
Preferred  Stock has the same purchase price as the Series A-1 Preferred  Stock.
The  Series  A-2  Preferred  Stock has the same  rights as the  Series A and the
Series A-1 Preferred  Stock,  except the Series A-2 Preferred Stock is junior in
priority in liquidation (which includes the sale of Comverge) to both the Series
A and Series A-1 Preferred  Stock.  On December 22, 2003, the Company  exercised
its option and invested an additional $100 in Series A-2  Convertible  Preferred
Stock.

         As a result of the  equity  transactions  in 2003,  the  Company  owned
approximately  40.9%  of the  outstanding  capital  voting  stock  of  Comverge,
comprised of approximately  17% of the Preferred Stock and  approximately 76% of
Comverge's common stock.

         As a result of the  private  equity  financing  transactions  and other
agreements described above, Comverge is no longer a controlled subsidiary of the
Company.  Thus,  effective  April 1, 2003,  the  Company no longer  consolidates
Comverge's  balance  sheet and  results  of  operations,  and  accounts  for its
investment in Comverge on the equity method.

         The Company's Preferred Stock investment of $3,644 (which was primarily
financed  by the  release  of $3,000  of  previously  restricted  cash) has been
reduced by equity losses in Comverge for the period of April 1, 2003 to December
31, 2003 of $1,752.

         Summary unaudited financial information for Comverge as at December 31,
2003 and for the period from April 1 to December 31, 2003 is as follows:

                                      F-18
<PAGE>

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

<TABLE>
<CAPTION>

      FINANCIAL POSITION                                                                             As at December
                                                                                                        31, 2003
                                                                                                   -------------------
<S>                                                                                                          <C>
      Cash and cash equivalents                                                                              $4,570
      Other current assets                                                                                    6,949
      Property, plant, and equipment, net                                                                     2,097
      Intangible and other assets, net                                                                        1,405
                                                                                                   -------------------
                    Total assets                                                                            $15,021
                                                                                                   ===================
      Current liabilities                                                                                    $4,136
      Long-term debt                                                                                          1,346
      Other non-current liabilities                                                                             816
                                                                                                   -------------------
                    Total liabilities                                                                         6,298
      Convertible preferred stock                                                                            18,525
      Shareholders' deficit                                                                                  (9,802)
                                                                                                   -------------------
                    Total liabilities and shareholder's equity                                              $15,021
                                                                                                   ===================
<CAPTION>

                                                                                                       Period from
                                                                                                    April 1, 2003 to
      RESULTS OF OPERATIONS                                                                        December 31, 2003
                                                                                                   -------------------
<S>                                                                                                         <C>
      Sales                                                                                                 $10,942
      Operating loss                                                                                        $(7,578)
      Net loss                                                                                              $(7,955)

</TABLE>

       The activity in the  Company's  investments  in Comverge  during the nine
months ended December 31, 2003 is as follows:

<TABLE>

<S>                                                                                                         <C>
      Investment in Comverge common stock
         Conversion of inter-company balances to equity                                                     $ 9,673
         Accumulated deficit at March 31, 2003                                                              (12,582)
         Adjustment of the Company's investment from dilution of common shares                                1,085
                                                                                                   -------------------
            Total investment in Comverge common stock                                                       $(1,824)
                                                                                                   -------------------
      Investment in Comverge preferred stock
         Cash paid for preferred stock of Comverge                                                          $ 3,350
         Transaction costs                                                                                      294
                                                                                                   -------------------
         Investment balance prior to equity loss                                                              3,644

         Equity loss in Comverge - April 1 to December 31, 2003                                              (1,752)
                                                                                                   -------------------
            Total investment in Comverge preferred stock                                                    $ 1,892
                                                                                                   -------------------
      Investment in Comverge, net                                                                              $ 68
                                                                                                   ===================

</TABLE>

       As a result of Comverge's  net loss during the nine months ended December
31,  2003,  the Company  recognized  $1,752 as equity loss  representing  26% of
Comverge's  losses for the period from April 1 to September  30, 2003 and 17% of
Comverge's losses for the period from October 1 to December 31, 2003 against its
Preferred Stock investment.

NOTE 5--ACCOUNTS RECEIVABLE, NET

<TABLE>
<CAPTION>

             Accounts receivable, net, consists of the following:                            As of December 31,
                                                                                             ------------------
                                                                                            2002             2003
                                                                                         -----------      -----------
<S>                                                                                         <C>               <C>
                   Trade accounts receivable                                                $11,341           $6,480
                   Unbilled work-in-process                                                   1,140              628
                   Allowance for doubtful accounts                                             (214)             (55)
                                                                                         -----------      -----------
                   Accounts receivable, net                                                 $12,267           $7,053
                                                                                         ===========      ===========

</TABLE>

                                      F-19
<PAGE>

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

         Unbilled work-in-process  represents direct labor and expenses incurred
on  consulting  contracts  that have not been invoiced to the customer as of the
end of the period.  Such amounts are generally  billed upon the  completion of a
project milestone.

         Bad debt expense related to trade accounts receivable was $71, $194 and
$50 for the years ended December 31, 2001, 2002 and 2003, respectively.

NOTE 6--INVENTORY

<TABLE>
<CAPTION>

             Inventory consists of the following:                                              As of December 31,
                                                                                           --------------------------
                                                                                             2002            2003
                                                                                           ---------      -----------
<S>                                                                                          <C>                 <C>
                   Raw materials, spare parts and supplies                                   $1,396              $50
                   Work-in-process                                                              161               --
                   Finished goods and merchandise                                               660               38
                                                                                           ---------      -----------
                                                                                             $2,217              $88
                                                                                           =========      ===========

</TABLE>

NOTE 7--OTHER CURRENT ASSETS

<TABLE>
<CAPTION>

             Other current assets consist of the following:                                   As of December 31,
                                                                                         ----------------------------
                                                                                            2002             2003
                                                                                         -----------      -----------
<S>                                                                                            <C>              <C>
                   Prepaid expenses                                                            $355             $135
                   Interest receivable                                                           41               --
                   Income tax receivable                                                        215              267
                   Deferred income taxes                                                        205               87
                   Other                                                                        627              172
                                                                                         -----------      -----------
                                                                                             $1,443             $661
                                                                                         ===========      ===========

</TABLE>

NOTE 8--PROPERTY AND EQUIPMENT, NET

       Property and equipment consist of the following:

<TABLE>
<CAPTION>

                                                                           Estimated
                                                                          Useful Life
                                                                           (in years)         As of December 31,
                                                                                         ----------------------------
             Cost:                                                                          2002             2003
                                                                                         -----------      -----------
<S>                                                                            <C>           <C>              <C>
                   Computer hardware and software                              3             $2,727           $1,103
                   Office furniture and equipment                            4-10             2,530              873
                   Motor vehicles                                             4-7               592              515
                   Leasehold improvements                                Term of lease          316              258
                                                                                         -----------      -----------
                                                                                              6,165            2,749
                                                                                         -----------      -----------
             Accumulated depreciation and amortization
                   Computer hardware and software                                             2,573              894
                   Office furniture and equipment                                             1,288              662
                   Motor vehicles                                                               221              249
                   Leasehold improvements                                                       111              130
                                                                                         -----------      -----------
                                                                                              4,193            1,935
                                                                                         -----------      ===========

             Property and equipment, net                                                     $1,972             $814
                                                                                         ===========      ===========

</TABLE>

         Depreciation  and  amortization  in respect of property  and  equipment
amounted to $687, $834 and $451 for 2001, 2002 and 2003, respectively.

                                      F-20
<PAGE>

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

NOTE 9--GOODWILL AND OTHER INTANGIBLE ASSETS

         Effective  July 1, 2001 and  January 1, 2002 the  Company  adopted  the
provisions of SFAS No. 141 and No. 142,  respectively.  In  connection  with the
initial  adoption  of  SFAS  No.  142,  the  Company  performed  a  transitional
impairment  evaluation of goodwill and concluded that there was no indication of
impairment  as of January 1, 2002.  Upon  adoption of SFAS No. 142,  the Company
evaluated its existing  intangible  assets and goodwill and  determined  that no
reclassifications  were  necessary in order to conform  with the  classification
criteria of SFAS No. 141 for  recognition  separate from  goodwill.  The Company
also assessed the useful lives and residual values of all amortizable intangible
assets and determined that no adjustments were necessary.

         Amortization  expense  related to goodwill  was $502 for the year ended
December 31, 2001. In accordance  with SFAS No. 142,  goodwill  arising from the
Company's acquisition of Endan in December 2001 has not been amortized. Net loss
and  basic  and  diluted  net loss  per  share,  adjusted  to  exclude  goodwill
amortization,  as if the  provisions of SFAS No. 142 had been adopted on January
1, 2000, are as follows:

                                                                     Year Ended
                                                                      December
                                                                      31, 2001
                                                                     -----------
         Net loss, as reported ....................................   $(9,795)
         Plus: Goodwill amortization ..............................       502
                                                                      -------
         Adjusted net loss ........................................   $(9,293)
                                                                      =======

         Net loss per share:
           Basic and diluted -- as reported .......................    $(1.41)
                                                                      =======
           Basic and diluted -- ad asjusted .......................    $(1.33)
                                                                      =======

         As the end of the third quarter of 2002, management believed that there
was an other than temporary decline in the hi-tech market in general, and in the
software consulting market in Israel in particular. As required by SFAS No. 142,
the Company evaluated its goodwill for impairment as of September 30, 2002 which
indicated that its software  consulting and development  segment's  goodwill was
impaired.  The fair value of the software consulting and development segment was
determined by applying a market-rate  multiple to the estimated near-term future
revenue  stream  expected to be produced by the segment  (the method used at the
time of the Endan acquisition).  As a result, the Company recognized a provision
for goodwill  impairment of $2,760 and 2002. In the fourth  quarters of 2002 and
2003,  the  Company  performed  its  annual  impairment  test and no  additional
indications of goodwill impairment were noted.

<TABLE>
<CAPTION>

                                                                        Software          Energy
                                                                     Consulting and    Intelligence
                                                                       Development       Solutions
                                                                        Segment          Segment             Total
                                                                     ---------------- ----------------  ---------------
<S>                                                                           <C>                <C>            <C>
         Balance as of December 31, 2001                                      $7,238             $499           $7,737
         Adjustment to goodwill acquired                                         (48)              --              (48)
         Impairment charge                                                    (2,760)              --           (2,760)
                                                                     ---------------- ----------------  ---------------
         Balance as of December 31, 2002                                      $4,430             $499           $4,929
                                                                     ---------------- ----------------  ---------------
         Deconsolidation of Comverge                                              --             (499)            (499)

         Balance as of December 31, 2003                                      $4,430             $ --           $4,430
                                                                     ================ ================  ===============

</TABLE>

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

<TABLE>
<CAPTION>

                                                                                  As of December 31, 2003
                                                                     --------------------------------------------------
                                               Weighted average          Gross
                                                 amortization           carrying       Accumulated       Net carrying
                                                    period               amount        amortization         amount
                                             -----------------------  -------------  -----------------  ----------------
<S>                                                 <C>                      <C>                <C>               <C>
         Amortizing intangible assets:
             Software licenses                      5.0 yrs                  $260               $146              $114
                                                                      =============  =================  =================
<CAPTION>

                                                                                  As of December 31, 2002
                                                                     --------------------------------------------------
                                               Weighted average          Gross
                                                 amortization           carrying       Accumulated       Net carrying
                                                    period               amount        amortization         amount
                                             -----------------------  -------------  -----------------  ----------------
<S>                                                 <C>                      <C>                <C>                <C>
         Amortizing intangible assets:
             Licenses                               5.0 yrs                  $568               $563              $  5
             Patents                               15.0 yrs                   288                 70               218
             Software licenses                      5.0 yrs                   260                 79               181
                                                                     -------------  -----------------  ----------------
                       Total                                               $1,116               $712              $404
                                                                     =============  =================  ================

</TABLE>

         Amortization  in respect of license,  patents,  software  licenses  and
acquired  backlog  amounted  to $147,  $321  and $76 for  2001,  2002 and  2003,
respectively.  In 2002,  in  connection  with the  Company's  evaluation  of the
software consulting and development segment goodwill,  the Company recognized an
impairment  charge of $240 for  software  licenses,  included in cost of service
sales.

         Amortization  expense with respect to intangible assets for each of the
next four years is estimated as follows:

                        Year Ended December 31,
                        -----------------------
                                  2004                                     $32
                                  2005                                      32
                                  2006                                      32
                                  2007                                      18
                                                                    -----------
                                                                          $114
                                                                    ===========

                                      F-21
<PAGE>

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

NOTE 10--DEBT AND CONVERTIBLE NOTE

Debt consists of the following:
                                                         As of December 31,
                                                  -----------------------------
                                                     2002              2003
                                                  ------------      -----------
   Bank debt                                           $6,486           $1,291
   Lines of credit, net of discount                     2,315              858
   Capital lease obligations                                8               --
                                                  ------------      -----------
                                                        8,809            2,149

 Less: current portion                                 (2,531)          (1,517)
                                                  ------------      -----------
 Long-term bank debt                                   $6,278             $632
                                                  ============      ===========

(a) Bank debt

         Bank debt as of December  31,  2003  represents  loans  received by the
Company's  Israeli  subsidiaries from Israeli banks which are denominated in New
Israeli  Shekels  (NIS) of which $115 is linked to the  Israeli  Consumer  Price
Index (the Index) and $1,176 is unlinked (at  December 31, 2002,  $104 and $601,
respectively,  and $81 linked to the U.S.  dollar).  At December 31,  2003,  the
loans bear a weighted average  interest rate of 8.6% (December 31, 2002,  7.8%).
During the year ended December 31, 2003, the Index  decreased by 1.9% (increased
by 6.5% in 2002) and the NIS  appreciated  in value  against the U.S.  dollar by
7.6%  (depreciated  by 7.3% in 2002).  In connection with these loans, a lien in
favor of the Israeli banks was placed on some of dsIT's assets.

         Bank debt as of December  31, 2002  included a $5,700  loan,  which was
payable in a single  installment  upon maturity in February  2004. In connection
with this loan,  the Company was  required to deposit  $5,700 with the lender as
collateral for the loan. In March 2003, using the  collateralized  deposit,  the
Company repaid $3,000 of the loan in connection  with its additional  investment
in Comverge (see Note 4) (the Company had previously  repaid $200 of the loan in
2003).  As the  compensating  balance was required for the term of the loan, the
deposit was shown as a non-current asset in 2002.

       The aggregate maturities of debt are as follows:

       Year Ending December 31,
       ------------------------
          2004.................................................     $659
          2005.................................................      435
          2006.................................................      172
          2007.................................................       25
                                                                 -------
                                                                  $1,291

 (b) Lines of credit

         (i) At December  31,  2003,  the Company  had  approximately  $1,140 in
Israeli  credit lines  available to dsIT, of which  approximately  $858 was then
being used and $282 was  available  for future  draws.  These  credit  lines are
generally  for a term of one year,  denominated  in NIS and bear  interest  at a
weighted average rate of the Israeli prime rate per annum plus 1.4% (at December
31, 2002,  plus 0.9%).  The Israeli prime rate fluctuates and as of December 31,
2003 was 6.7%  (December 31, 2002,  10.6%).  The Company has a floating lien and
provided guarantees of up to $500 with respect to dsIT's lines of credit.

         (ii) In December 2002, the Company's subsidiary Comverge, Inc., secured
a three-year $2 million  revolving line of credit from Laurus Master Fund,  Ltd.
("Laurus") of which $1 million was outstanding at December 31, 2002. The line of
credit was closed as a result of Comverge's  equity  financing  transactions  in
April 2003 (see Note 4).

         In  addition,  Laurus was able to convert up to an aggregate of $600 of
the  line of  credit  into  shares  of the  Company's  common  stock  at a fixed
conversion  price of $1.50.  On April 10, 2003,  the Company  received $600 from
Laurus in  connection  with the sale to them of 400,000  shares of the Company's
common stock.  Such sale was in lieu of the  conversion by Laurus of $600 of the
credit line it afforded Comverge. The Company also issued a five-year warrant to
purchase  190,000  shares of the Company's  common stock,  exercisable  in three
tranches at exercise prices ranging from $2.00 to $3.34 per share,  all of which
were immediately exercisable.

                                      F-22
<PAGE>

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

         The Company  used the  Black-Scholes  valuation  method to estimate the
fair value of the  warrants to purchase  190,000  shares of common  stock of the
Company,  using a risk free interest rate of 3.1%, its contractual  life of five
years,  an annual  volatility  of 82% and no  expected  dividends.  The  Company
estimated  the fair  value of the  beneficial  conversion  feature  and  related
warrants at the issuance of the convertible  line of credit to be  approximately
$244 and  credited  such  amount to  additional  paid-in  capital.  The  Company
recorded  interest  expense  of $178 and $66,  with  respect  to the  beneficial
conversion  feature of the warrants during the years ended December 31, 2003 and
2002,  respectively.  The unamortized debt discount from the related warrants of
$178, was included in short-term debt and current  maturities of long-term debt,
net at December 31, 2002. In addition,  Comverge recorded debt issuance costs of
$86 with  respect to the  issuance of the line of credit.  The Company  recorded
amortization  of such  costs of $7  during  the year  ended  December  31,  2003
(amortization  is only for the period during which the Company  consolidated the
results of Comverge - see Note 4).

(c) Convertible note

         In June 2002, the Company completed a transaction with Laurus, pursuant
to which  Laurus made a $2,000  investment  in the Company in exchange for a 10%
convertible  note and a  three-year  warrant to purchase  125,000  shares of the
Company's  common stock at an exercise  price of $4.20 per share.  Under the 10%
convertible  note, the Company made  interest-only  payments for the first three
months  and  thereafter  ten  payments  of $200  plus  accrued  interest  on the
outstanding balance. In 2003, the Company issued to Laurus 127,196 shares of its
common stock as settlement of $240 of the convertible note.

         The Company  used the  Black-Scholes  valuation  method to estimate the
fair value of the  125,000  warrants to purchase  common  stock of the  Company,
using a risk free interest rate of 3.0%, its contractual life of three years, an
annual  volatility of 73% and no expected  dividends.  The Company estimated the
fair value of the  beneficial  conversion  feature  and  related  warrant at the
issuance  of the  convertible  note to be  approximately  $692.  Such amount was
credited to additional  paid-in capital and is being charged to interest expense
over the  conversion  period (with respect to the note) and the term of the note
(with respect to the  warrants),  using the effective  interest  method.  In the
years ended  December  31, 2003 and 2002,  the Company  recorded  $176 and $516,
respectively of the interest  expense with respect to the beneficial  conversion
feature and warrants.  The face value debt of $1,400,  less $176 of  unamortized
debt discount,  from the beneficial conversion feature and the related warrants,
was included in short-term  debt and current  maturities of long-term debt, net,
at December 31, 2002.  In addition,  the Company  incurred  other debt  issuance
costs of $167 with respect to the issuance of the convertible note. In the years
ended December 31, 2003 and 2002, the Company  recorded  interest expense of $42
and $125, respectively, with respect other debt issuance costs.

NOTE 11--OTHER CURRENT LIABILITIES

Other current liabilities consists of the following:

                                                         As of December 31,
                                                       ------------------------
                                                          2002          2003
                                                       ----------    ----------

                  Taxes payable                             $827          $795
                  Lien allowance                             558           558
                  Deferred revenue                           224           239
                  Warranty provision                          52            --
                  Accrued expenses                           952           755
                  Other                                      798           626
                                                       ----------    ----------
                                                          $3,411        $2,973
                                                       ==========    ==========

NOTE 12--LIABILITY FOR EMPLOYEE TERMINATION BENEFITS

(a)    Israeli  labor law  generally  requires  payment  of  severance  pay upon
       dismissal of an employee or upon  termination  of  employment  in certain
       other  circumstances.  The Company has recorded a severance pay liability
       for the  amount  that  would be paid if all its  Israeli  employees  were
       dismissed  at the  balance  sheet  date,  on an  undiscounted  basis,  in
       accordance  with Israeli labor law. This liability is computed based upon
       the number of years of service  multiplied by the latest monthly  salary.
       The amount of accrued  severance

                                      F-23
<PAGE>

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

       pay as determined above represents the Company's  severance pay liability
       in  accordance  with  labor  agreements  in force  and  based  on  salary
       components,  which in the opinion of  management  create  entitlement  to
       severance pay.

       The  liability is partially  funded by  insurance  policies.  The amounts
       funded are included among investments and long-term  receivables as funds
       in respect of employee termination benefits. The Company may only utilize
       the insurance policies for the purpose of disbursement of severance pay.

(b)    Severance  pay expenses  amounted to  approximately,  $1,394,  $1,280 and
       $1,132  for  the  years  ended   December  31,   2001,   2002  and  2003,
       respectively.

(c)    The Company  expects to  contribute  $444 to the  insurance  policies  in
       respect of its severance pay  obligations  in the year ended December 31,
       2004.

NOTE 13--COMMITMENTS AND CONTINGENCIES

(a) Leases of Property and Equipment

         Office rental and automobile leasing expenses, for 2001, 2002 and 2003,
were $1,521, $2,171 and $1,521,  respectively.  The Company and its subsidiaries
lease office space and equipment under operating lease agreements.  Those leases
will expire on different  dates from 2004 to 2009. The lease payments are mainly
in dollars or are linked to the  exchange  rate of the  dollar.  Future  minimum
lease payments on non-cancelable operating leases as of December 31, 2003 are as
follows:

        Year Ending December 31,
        ------------------------
           2004.................................................         $1,298
           2005.................................................            803
           2006.................................................            335
           2007.................................................            289
           2008.................................................            289
           Thereafter...........................................            193
                                                                        --------
                                                                         $3,207
                                                                        ========

(b) Employee Retirement Savings Plan

         The  Company  sponsors  a tax  deferred  retirement  savings  plan that
permits  eligible U.S.  employees to  contribute  varying  percentages  of their
compensation up to the limit allowed by the Internal Revenue Service.  This plan
also provides for discretionary Company  contributions,  of which none were made
for the years ended December 31, 2001, 2002 and 2003.

(c) Guarantees

         Previously,  the Company  accrued a loss for contingent  performance of
bank  guarantees.  The Company's  remaining  commitment  under these  guarantees
(included in other current  liabilities)  is $558 at December 31, 2002 and 2003.
The  Company  has  collateralized  a portion of these  guarantees  by means of a
deposit  (classified  as  restricted  cash) of $241 as of December  31, 2002 and
2003.

         The Company's  subsidiaries have provided various performance,  advance
and tender guarantees as required in the normal course of its operations.  As at
December 31, 2003, such guarantees  totaled  approximately  $355 and were due to
expire through December 2004.

         See Note 10(b) with respect to  guarantees  on the  Company's  lines of
credit.

(d) Litigation

         The  Company is  involved  in various  other  legal  actions and claims
arising in the ordinary  course of business.  In the opinion of management,  the
ultimate disposition of these matters will not have a material adverse effect on
the Company's  consolidated  financial  position,  results of operations or cash
flow.

                                      F-24
<PAGE>

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

NOTE 14--SHAREHOLDERS' EQUITY

(a)    Share Capital

         The Company's ordinary shares are traded on the Nasdaq SmallCap Market.

(b) Stock Option Plans

         The Company's  stock option plans provide for the granting to officers,
directors and other key employees of options to purchase  shares of common stock
at not less than 85% of the market  value of the  Company's  common stock on the
date  of  grant.  The  purchase  price  must be paid in  cash.  Each  option  is
exercisable  to one share of the  Company's  common  stock.  All options  expire
within five to ten years from the date of the grant,  and generally  vest over a
two to three year period from the date of the grant.  At December 31, 2003,  the
total  authorized  number of options or other equity  instruments  available for
grant under the various plans was 3,350,941.

         A summary status of the Company's option plans as of December 31, 2001,
2002 and 2003,  as well as  changes  during  each of the years  then  ended,  is
presented below:

<TABLE>
<CAPTION>

                                                  2001                      2002                        2003
                                        ------------------------- --------------------------  --------------------------
                                                      Weighted                   Weighted                    Weighted
                                         Number of    Average      Number of      Average      Number of      Average
                                          Options     Exercise      Options      Exercise       Options      Exercise
                                        (in shares)     Price     (in shares)      Price      (in shares)      Price
                                        ------------- ----------- ------------  ------------  ------------  ------------
<S>                                       <C>             <C>      <C>               <C>       <C>               <C>
   Outstanding at beginning of year       1,554,775       $5.01    1,568,442         $5.11     1,738,767         $5.18
   Granted                                  273,500        5.38      236,000          5.38        17,000          1.86
   Exercised                                (91,866)       2.51           --            --       (10,666)         1.70
   Forfeited and expired                   (167,967)       6.04      (65,675)         4.26      (437,050)         6.17
                                        -------------             ------------                ------------
   Outstanding at end of year             1,568,442       $5.11    1,738,767         $5.18     1,308,051         $4.83
                                        =============             ============                ============
   Exercisable at end of year             1,102,404       $4.85    1,557,395         $5.21     1,282,048         $4.88
                                        =============             ============                ============

</TABLE>

         Under various  employee option plans of the Company,  192,500,  195,000
and 15,000  options were granted to related  parties of the Company in the years
ending  December 31, 2001, 2002 and 2003,  respectively.  During the years ended
December 31, 2001,  2002, and 2003, no options were exercised by related parties
to purchase  common shares of the Company.  As of December 31, 2001,  2002,  and
2003,  the number of outstanding  options held by the related  parties amount to
1,092,250, 1,289,750 and 932,250 options, respectively.

The  following  table  summarized  information  about  options  outstanding  and
exercisable at December 31, 2003:

<TABLE>
<CAPTION>

                                                                                       Exercisable as of
                                        Outstanding as of December 31, 2003            December 31, 2003
                                      -------------------------------------------------------------------------
                                                      Weighted
                                                       Average      Weighted                       Weighted
                                                      Remaining      Average                       Average
                                          Number     Contractual    Exercise          Number       Exercise
        Range of Exercise Prices       Outstanding       Life         Price        Exercisable      Price
        ------------------------      -------------- ------------  ------------    ------------  -------------
                                       (in shares)    (in years)                   (in  shares)
                                      -------------- ------------                  ------------
              <S>                          <C>             <C>          <C>           <C>              <C>
              $1.15 - 2.02                 229,834         3.06         $1.82         213,166          $1.82
              $2.44 - 4.00                 198,000         2.55          3.25         188,665           3.21
              $4.50 - 6.00                 470,467         2.56          5.44         470,467           5.44
              $6.06 - 7.88                 409,750         0.96          6.59         409,750           6.59
                                      -------------- ------------  ------------    ------------  -------------
                                         1,308,051         2.14         $4.83       1,282,048          $4.88
                                      ============== ============  ============    ============  =============

</TABLE>

         The  weighted  average  grant-date  fair value of the  options  granted
during  2001,  2002 and 2003,  amounted  to $3.27,  $2.46 and $1.51 per  option,
respectively.  The Company  utilized the  Black-Scholes  option pricing model to
estimate  fair value,  utilizing the following  assumptions  for the  respective
years (all in weighted averages):

                                      F-25
<PAGE>

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

<TABLE>
<CAPTION>

                                                                           2001           2002            2003
                                                                       -------------- --------------  --------------
<S>                                                                        <C>            <C>             <C>
   Risk-free interest rate                                                 4.9%           4.2%            3.9%
   Expected life of options, in years                                      6.1            5.3             9.4
   Expected annual volatility                                               60%            78%             78%
   Expected dividend yield                                                 None           None            None

</TABLE>

         The  Company's  Israeli  subsidiary  adopted a stock  option  plan that
allows the grant of  options  for up to  573,268  shares of common  stock of the
Israeli  subsidiary.  Through December 31, 2003 170,659 options were granted, no
options were exercised and no options were forfeited.

         If all  options  are  exercised,  the  Company's  share in the  Israeli
 Subsidiary will decrease from approximately 68% to approximately 65%.

         At December 31, 2003, the weighted-average  remaining  contractual life
of the stock options outstanding is approximately 5.22 years.

(b) Warrants

         The Company has issued  warrants at exercise prices equal to or greater
than market  value of the  Company's  common  stock at the date of  issuance.  A
summary of warrants activity follows:

<TABLE>
<CAPTION>

                                                  2001                      2002                        2003
                                        ------------------------- --------------------------  --------------------------
                                                      Weighted                   Weighted                    Weighted
                                         Number of     Average     Number of      Average      Number of      Average
                                         Warrants    Exercise      Warrants      Exercise      Warrants      Exercise
                                        (in shares)     Price     (in shares)      Price      (in shares)      Price
                                        ------------- ----------- ------------  ------------  ------------  ------------
<S>                                         <C>           <C>        <C>             <C>         <C>             <C>
   Outstanding at beginning of year         120,000       $3.07      120,000         $3.07       315,000         $3.36
   Granted                                       --          --      315,000          3.36       120,000          2.25
   Forfeited                                     --          --      120,000          3.07            --            --
                                        ------------- ----------- ------------  ------------  ------------  ------------
   Outstanding at end of year               120,000       $3.07      315,000         $3.36       435,000         $3.06
                                        ============= =========== ============  ============  ============  ============
   Exercisable end of year                  120,000       $3.07      315,000         $3.36       435,000         $3.06
                                        ============= =========== ============  ============  ============  ============

</TABLE>

The following  table  summarized  information  about  warrants  outstanding  and
exercisable at December 31, 2003:

<TABLE>
<CAPTION>

                                                                                        Exercisable as of
                                         Outstanding as of December 31, 2003            December 31, 2003
                                      ------------------------------------------------------------------------
                                                       Weighted
                                                        Average      Weighted                       Weighted
                                                       Remaining      Average                       Average
                                          Number      Contractual    Exercise        Number        Exercise
              Exercise Price           Outstanding       Life          Price       Exercisable       Price
              --------------          --------------  ------------  ------------   ------------  -------------
                                       (in shares)     (in years)                  (in shares)
                                      --------------  ------------                 ------------
                  <S>                       <C>             <C>          <C>           <C>             <C>
                  $2.00                     90,000          2.08         $2.00         90,000          $2.00
                  $2.34                     60,000          3.93          2.34         60,000           2.34
                  $2.50                     60,000          1.16          2.50         60,000           2.50
                  $3.34                    100,000          3.93          3.34        100,000           3.34
                  $4.20                    125,000          1.50          4.20        125,000           4.20
                                      --------------  ------------  ------------   ------------  -------------
                                           435,000          2.47         $3.06        435,000          $3.06
                                      ==============  ============  ============   ============  =============

</TABLE>

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

                                      F-26
<PAGE>

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

dividends.  The  Company  estimated  the  fair  value  of  the  warrants  to  be
approximately $97, which has been charged to selling, general and administrative
expense.  Total expenses with respect to warrants  granted to service  providers
amounts to $0, $0, and $97 for the years ended December 31, 2001, 2002 and 2003,
respectively.

         See Notes 10(b) and 10(c) with respect to warrants issued in 2002.

(c) Stock Awards

         In September 2001, the Company entered into a restricted stock purchase
agreement  with  the then  newly  hired  Chief  Executive  Officer  (CEO) of the
Company's energy  intelligence  solutions segment  subsidiary.  Pursuant to this
agreement,  the Company  issued to the  segment CEO 50,000  shares of its common
stock at a purchase  price of $5.95 per share.  The common stock was paid for by
assigning and  endorsing to the Company a 6%  subordinated  note,  due April 15,
2010,  in the  principal  amount of $298.  The  subordinated  note was issued by
Philip Services Corp. (NasdaqNM: PSCD) in favor of the segment CEO under a trust
indenture with Wilmington Trust Company.  The subordinated note was reflected as
a reduction in shareholders'  equity. PSCD has recently filed for bankruptcy and
the Company has written off this note to other loss in 2003.

         In January 2003, the CEO of the energy  intelligence  solutions segment
subsidiary received a restricted stock grant of 50,000 shares of common stock of
the Company. The Company recognized an expense of $50, which has been charged to
selling, general and administrative expense.

(d) Stock Repurchase Program

         In September  2000,  the Company's  Board of Directors  authorized  the
purchase of up to 500,000 shares of the Company's  common stock. In August 2002,
the Company's  Board of Directors  authorized the purchase of up to 300,000 more
shares  of the  Company's  common  stock.  During  2002 and  2003,  the  Company
purchased  37,000  and 2,000 of its common  stock,  respectively  (in 2003,  the
Company also issued 9,000  treasury  shares with respect to options  exercised),
and at December 31, 2003 owned in the aggregate 839,704 of its own shares.

(e) Other

         In March 1996, the Company's  Board of Directors  adopted a stockholder
rights plan providing for the  distribution  of common stock purchase  rights at
the rate of one right  for each  share of the  Company's  common  stock  held by
shareholders  of record as of the close of business on April 1, 1996. The rights
plan is designed to deter coercive takeover tactics,  including the accumulation
of shares in the open market or through private transactions,  and to prevent an
acquirer from gaining  control of the Company  without  offering a fair price to
all of the Company's shareholders. Each right initially entitles shareholders to
buy one-half of a share of common stock of the Company for $15.  Generally,  the
right  will be  exercisable  only  if a  person  or  group  acquires  beneficial
ownership of 15% or more of the Company's  common stock or commences a tender or
exchange  offer  upon   consummation   of  which  such  person  or  group  would
beneficially own 15% or more of the Company's common stock.

         If any person ("Acquiring  Person") becomes the beneficial owner of 15%
or more of the  Company's  common  stock,  other  than  pursuant  to a tender or
exchange offer for all outstanding  shares of the Company approved by a majority
of the Company's independent directors,  then, subject to certain exceptions set
forth in the  rights  plan,  each  right  not owned by the  Acquiring  Person or
related parties will entitle its holder to purchase, at the right's then current
exercise   price,   shares  of  the  Company's   common  stock  (or  in  certain
circumstances,  as determined by the Board of Directors, cash, other property or
other  securities)  having a value of twice the right's  then  current  exercise
price.  The Company will  generally be entitled to redeem the rights at one half
of one cent per right at any time until 10 days (subject to extension) following
a public  announcement  that a 15% position has been  acquired.  The rights plan
will expire in March 2006.

                                      F-27
<PAGE>

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

NOTE 15--INCOME TAXES

(a) Composition of loss before income taxes is as follows:

<TABLE>
<CAPTION>

                                                                                      Year Ended December 31,
                                                                                      -----------------------
                                                                               2001             2002            2003
                                                                               ----             ----            ----
<S>                                                                            <C>              <C>             <C>
         Domestic                                                              $(6,767)         $(4,805)        $(3,739)
         Foreign                                                                (3,039)          (4,191)         (1,056)
                                                                             -----------      -----------     -----------
                                                                               $(9,806)         $(8,996)        $(4,795)
                                                                             ===========      ===========     ===========
        Income tax expense (benefit) consists of the following:

<CAPTION>

                                                                                      Year Ended December 31,
                                                                                      -----------------------
                                                                               2001             2002            2003
                                                                               ----             ----            ----
<S>                                                                               <C>                <C>             <C>
        Current:
           Federal                                                                $(29)              $--             $--
           State and local                                                         (56)               24              18
           Foreign                                                                  60                80              79
                                                                             -----------      -----------     -----------
                                                                                   (25)              104              97
                                                                             -----------      -----------     -----------
        Deferred:
           Federal                                                                  $--              $--             $--
           State and local                                                           14             (13)            (10)
           Foreign                                                                   --             (63)            (88)
                                                                             -----------      -----------     -----------
                                                                                     14             (76)            (98)
                                                                             -----------      -----------     -----------
        Total income tax expense (benefit)                                        $(11)              $28            $(1)
                                                                             ===========      ===========     ===========

</TABLE>

    (b) Effective Income Tax Rates

Set  forth  below  is a  reconciliation  between  the  federal  tax rate and the
Company's effective income tax rates:

<TABLE>
<CAPTION>

                                                                                      Year Ended December 31,
                                                                           ----------------------------------------------
                                                                               2001             2002            2003
                                                                           -------------    -------------   -------------
<S>                                                                                <C>              <C>             <C>
  Statutory Federal rates                                                          34%              34%             34%
  Increase (decrease) in income tax rate resulting from:
    Non-deductible expenses                                                        (4)             (12)              1
   State and local income taxes, net                                                5                4               5
   Other                                                                           (1)               1              --
   Valuation allowance                                                            (34)             (27)            (40)
                                                                             -----------      -----------     -----------
Effective income tax rates                                                          0%               0%              0%
                                                                             ===========      ===========     ===========

</TABLE>

(c) Analysis of Deferred Tax Assets (Liabilities)

<TABLE>
<CAPTION>

Deferred tax assets consist of the following:                                                       As of December 31,
                                                                                                --------------------------
                                                                                                   2002           2003
                                                                                                -----------    -----------
<S>                                                                                                    <C>            <C>
Accelerated depreciation for tax purposes                                                              $13            $24
Intangible asset basis differences                                                                      77             --
Other temporary differences                                                                          1,434          1,016
Net operating and capital loss carryforwards                                                        11,630          7,764
                                                                                                -----------    -----------
                                                                                                    13,154          8,804
Valuation allowance                                                                                (12,634)        (8,552)
                                                                                                -----------    -----------
Net deferred tax assets                                                                               $520           $252
                                                                                                ===========    ===========

<CAPTION>

Deferred tax liabilities consist of the following:                                                 As of December 31,
                                                                                                --------------------------
                                                                                                   2002           2003
                                                                                                -----------    -----------
<S>                                                                                                   <C>             <C>
Intangible asset basis differences                                                                    $197            $41
Other temporary differences                                                                            210             --
                                                                                                -----------    -----------
Total deferred tax liabilities                                                                        $407            $41
                                                                                                ===========    ===========
</TABLE>

                                      F-28
<PAGE>

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

<TABLE>
<CAPTION>

Net deferred tax assets consist of the following:                                                  As of December 31,
                                                                                                --------------------------
                                                                                                   2002           2003
                                                                                                -----------    -----------
<S>                                                                                                   <C>             <C>
Deferred tax assets - current                                                                         $205            $87
Deferred tax assets - non-current                                                                      315            167
Deferred tax liabilities - non-current                                                                (407)           (41)
                                                                                                -----------    -----------
Net deferred tax assets                                                                               $113           $211
                                                                                                ===========    ===========

</TABLE>

         No valuation  allowance is  established  for the Company's  operations,
which are reasonably  expected to utilize their  deferred tax assets.  Valuation
allowances   relate   principally   to  net  operating  loss  and  capital  loss
carryforwards and foreign tax credit carryforwards.  The change in the valuation
allowance in 2002 was an increase of $2,593 whereas in 2003 there was a decrease
of $4,082.  The decrease was due  primarily to the  deconsolidation  of Comverge
(see Note 4).

    (d) Summary of Tax Loss Carryforwards

As  of  December  31,  2003,   the  Company  had  various  net  operating   loss
carryforwards, which expire as follows:

                                  Federal            State            Foreign
                               -------------      -----------       -----------
EXPIRATION:

 2004-2007                              $--             $113               $--
    2008                                 --              801                --
    2009                                 --            2,316                --
    2010                                 --            2,642                --
2019-2023                             8,699               --                --
Unlimited                                --               --             9,996
                               -------------      -----------       -----------
Total                                $8,699           $5,872            $9,996
                               =============      ===========       ===========

NOTE 16--RELATED PARTY BALANCES AND TRANSACTIONS

(a)    The Company paid  consulting and other fees to directors of $109, $98 and
       $112 for the years ended December 31, 2001, 2002 and 2003,  respectively,
       which are included in selling, general and administrative expenses.

(b)    The  Company  paid legal fees for  services  rendered  and  out-of-pocket
       disbursements  to a firm in which a principal is a former director and is
       the son-in-law of the Company's Chief Executive Officer, of approximately
       $575, $630 and $403 for the years ended December 31, 2001, 2002 and 2003,
       respectively.  Approximately  $90 and $106  was  owed to this  firm as of
       December  31,  2002 and  2003,  respectively,  and is  included  in other
       current liabilities.

(c)    The Company  paid a director,  who is a vice  president  of the  Company,
       president  of it's  Databit  subsidiary,  and who is also  the son of the
       Company's Chief Executive Officer,  approximately $197, $230 and $273 for
       the years ending December 31, 2001, 2002 and 2003, respectively.

(d)    An asset  management  firm that is controlled by a former director of the
       Company provided  discretionary asset management services to the Company.
       The  Company  paid $13 and $12 for these  services  for the  years  ended
       December 31, 2001 and 2002,  respectively.  The engagement with the asset
       management firm was terminated in September 2002.

(e)    The Company received $35 and $6 of rent from a company  controlled by the
       Chief  Executive  Officer for the years ended December 31, 2002 and 2003,
       respectively.

(f)    The chief  executive  officer of the Company's  Israeli  subsidiary has a
       loan from the subsidiary  that was acquired in 2001. The loan balance and
       accrued  interest  at  December  31,  2002  and  2003  was $48  and  $52,
       respectively.  The loan has no defined  maturity  date, is denominated in
       NIS, is linked to the Index and bears interest at 4%.

                                      F-29
<PAGE>

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

(g)    The Company's formerly consolidated Comverge subsidiary extended loans of
       $10  each to  both  the  Company's  Chief  Executive  Officer  and  Chief
       Financial  Officer.  The loans had an initial maturity date of January 3,
       2002 and were  extended  at that time to mature on January  3, 2004.  The
       loans bear  interest  at 4.25% per annum.  The  balances  of the loan and
       accrued  interest  at  December  31,  2002  and  2003  were  $25 and $26,
       respectively.

NOTE 17--SEGMENT REPORTING AND GEOGRAPHIC INFORMATION

(a) General Information

         The Company has three  reportable  segments:  software  consulting  and
development, computer hardware sales and energy intelligence solutions.

         (i) The software  consulting and development  segment provides computer
         software and systems consulting and development services

         (ii)  The  computer  hardware  segment  is  an  authorized  dealer  and
         value-added reseller of computer hardware.

         (iii) The energy  intelligence  solutions segment develops load control
         and data communication solutions for utilities.

         The Company's  reportable  segments are strategic  business  units that
offer different products and services.  They are managed separately because each
business  requires  different  technology  and  marketing  strategies.   Similar
operating  segments that operate in different  countries are aggregated into one
reportable segment.

(b) Information about Profit or Loss and Assets

         The accounting  policies of all the segments are those described in the
summary of significant  accounting policies.  The Company evaluates  performance
based on the profit or loss from  operations  before  income taxes not including
nonrecurring gains and losses.

         The Company  accounts for  intersegment  sales and  transfers as if the
sales or transfers were to third parties, that is, at current market prices. The
Company  does  not  systematically  allocate  assets  to  the  divisions  of the
subsidiaries   constituting   its  consolidated   group,   unless  the  division
constitutes  a  significant  operation.  Accordingly,  where  a  division  of  a
subsidiary constitutes a segment that does not meet the quantitative  thresholds
of SFAS No. 131, depreciation expense is recorded against the operations of such
segment,  without  allocating  the related  depreciable  assets to that segment.
However,  where a division of a subsidiary  constitutes a segment that does meet
the quantitative  thresholds of SFAS No. 131, related depreciable assets,  along
with other identifiable assets, are allocated to such division.

                                      F-30
<PAGE>

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

The following tables  represent  segmented data for the years ended December 31,
2003, 2002 and 2001:

<TABLE>
<CAPTION>

                                                        SOFTWARE         ENERGY
                                                     CONSULTING AND   INTELLIGENCE          COMPUTER
                                                       DEVELOPMENT     SOLUTIONS(**)        HARDWARE       OTHER(*)          TOTAL
                                                      --------------   -------------        --------       --------        --------
<S>                                                       <C>              <C>              <C>              <C>           <C>
Year ended December 31, 2003:
   Revenues from external customers                       $ 12,156         $  4,700         $ 18,139         $  39         $ 35,034
   Intersegment revenues                                        --              284               20            --              304
   Interest income                                              17                1               --            --               18
   Interest expense                                            288              108              159            --              555
   Depreciation and amortization                               350              158               16            --              524
   Segment gross profit                                      2,581            1,313            3,125            39            7,058
   Segment loss                                               (849)          (3,174)            (199)          (17)          (4,239)
   Minority interests                                          264               --               --            --              264
   Income tax expense (benefit)                                (10)               1                8            --               (1)
   Segment assets                                           11,640               68            4,324            --           16,032
   Expenditures for equity investments                          --            3,444               --            --            3,444
   Expenditures for segment assets                             162               54               15            --              231

Year ended December 31, 2002:
   Revenues from external customers                       $ 14,202         $ 19,023         $ 22,605         $  56         $ 55,886
   Intersegment revenues                                        19            1,125               87            --            1,231
   Interest income                                               8                5               --            --               13
   Interest expense                                            323              201              464            --              988
   Depreciation and amortization                               580              552               17            --            1,149
   Segment gross profit                                      2,674            6,087            4,098            56           12,915
   Segment loss                                             (4,503)          (2,161)              15            (2)          (6,651)
   Minority interests                                          880               --               --            --              880
   Income tax expense (benefit)                                 11                6               11            --               28
   Segment assets                                           12,614            7,872            5,651            --           26,137
   Expenditures for segment assets                             112              407               14            --              533

Year ended December 31, 2001:
   Revenues from external customers                       $ 12,279         $ 13,793         $ 19,794         $  58         $ 45,924
   Intersegment revenues                                       283            1,164              107            --            1,554
   Interest income                                              18                3               --            --               21
   Interest expense                                            154              311               --            --              465
   Depreciation and amortization                               281              706               22            --            1,009
   Segment gross profit                                      2,104            2,652            3,498            58            8,312
   Segment loss                                             (2,052)          (6,447)           1,006          (217)          (7,710)
   Minority interests                                           --               --               --            --               --
   Income tax expense (benefit)                                 57               10               21            --               88
   Segment assets                                           16,297            5,537            2,886            --           24,720
   Expenditures for segment assets                             361              512               20            --              893

</TABLE>

   (*)   Represents segments below the quantitative  thresholds of SFAS No. 131,
         as follows:  in 2003 and 2002, a VAR software operation in Israel and a
         holding  company;  and in 2001, a VAR software  operation in Israel,  a
         holding company and residual  operations from the Company's  multimedia
         software segment.

  (**)   Operating  results  of  Comverge  (the  Energy  Intelligence  Solutions
         segment) are no longer  consolidated  beginning  the second  quarter of
         2003 - see Note 4. Segment loss in 2003 includes the Company's share of
         Comverge's  losses from April 1 to December  31, 2003 of $1,752 (on the
         Company's  preferred  stock  investment)  and  other  expense  of $298,
         relating  to  the  write-off  of a  stockholder's  note  received  from
         Comverge's CEO.

                                      F-31
<PAGE>

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

The  following  tables  represent  a  reconciliation  of  the  segment  data  to
consolidated  statement of operations and balance sheet data for the years ended
December 31, 2001, 2002 and 2003:

<TABLE>
<CAPTION>

                                                                                                Year Ended December 31,
                                                                              ------------------------------------------------------
                                                                                   2001               2002                2003
                                                                              --------------      -------------       -------------
<S>                                                                              <C>                  <C>                  <C>
Revenues:
  Total revenues for reportable segments                                         $ 45,866             $ 55,830             $ 34,995
  Other operational segment revenues                                                   58                   56                   39
                                                                                 --------             --------             --------
  Total consolidated revenues                                                    $ 45,924             $ 55,886             $ 35,034
                                                                                 ========             ========             ========

Income (loss)
  Total loss for reportable segments                                             $ (7,493)            $ (6,649)            $ (4,222)
  Other operational segment operating loss
                                                                                     (217)                  (2)                 (17)
                                                                                 --------             --------             --------
  Total operating loss                                                             (7,710)              (6,651)              (4,239)
  Net loss of corporate headquarters                                               (2,085)              (1,493)              (2,043)
                                                                                 --------             --------             --------
Consolidated loss                                                                $ (9,795)            $ (8,144)            $ (6,282)
                                                                                 ========             ========             ========

</TABLE>

<TABLE>
<CAPTION>

                                                                                                     As of December 31,
                                                                                                  --------------------------
                                                                                                     2002           2003
                                                                                                  -----------    -----------
<S>                                                                                                  <C>            <C>
Assets:
   Total assets for reportable segments                                                              $26,137        $16,032
   Unallocated amounts: Net assets of corporate headquarters *                                         7,210          1,642
                                                                                                  -----------    -----------
   Total consolidated assets                                                                         $33,347        $17,674
                                                                                                  ===========    ===========

</TABLE>

  * In 2003 includes cash and cash  equivalents  of $1,116 as well as restricted
    cash of $241. In 2002 includes cash and cash  equivalents of $897 as well as
    long-term bank deposits of $5,700.

<TABLE>
<CAPTION>

Other Significant Items                                                      Segment                         Consolidated
                                                                              Totals        Adjustments         Totals
                                                                           -------------  ---------------  -----------------
<S>                                                                             <C>                <C>              <C>
Year ended December 31, 2003
   Depreciation and amortization                                                $524               $3               $527
   Expenditures for assets                                                       231               --                231
   Interest expense                                                              555              233                788

Year ended December 31, 2002
   Depreciation and amortization                                              $1,149               $6             $1,155
   Expenditures for assets                                                       533                1                534
   Interest expense                                                              988              224              1,212

</TABLE>

The  reconciling  items  are all  corporate  headquarters  data,  which  are not
included  in  the  segment  information.  None  of  the  other  adjustments  are
significant.

<TABLE>
<CAPTION>

                                                                                        Year Ended December 31,
                                                                              --------------------------------------------
                                                                                  2001            2002           2003
                                                                              -------------   -------------  -------------
<S>                                                                                <C>             <C>            <C>
Revenues based on location of customer:
   United States                                                                   $33,800         $41,622        $21,682
   Israel                                                                           10,382          13,700         13,087
   Far East                                                                            540              51             11
   Other                                                                             1,202             513            254
                                                                                -----------     -----------    -----------
                                                                                   $45,924         $55,886        $35,034
                                                                                ===========     ===========    ===========

</TABLE>

                                      F-32
<PAGE>

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

<TABLE>
<CAPTION>

                                                                                                     As of December 31,
                                                                                                  --------------------------
                                                                                                     2002           2003
                                                                                                  -----------    -----------
Long-lived assets located in the following countries:
<S>                                                                                                   <C>              <C>
   Israel                                                                                             $1,016           $780
   United States                                                                                         956             34
                                                                                                  -----------    -----------
                                                                                                      $1,972           $814
                                                                                                  ===========    ===========

</TABLE>

 (e) Revenues from Major Customers

<TABLE>
<CAPTION>

                                                                         Consolidated Sales
                                                                      Year Ended December  31,
                                                                       ------------------------
 Customer        Segment                             2001                     2002                     2003
 --------        -------                             ----                     ----                     ----
                                                        % of Total                % of Total                 % of Total
                                             Revenues    Revenues      Revenues    Revenues      Revenues     Revenues
                                             --------   ----------     --------   ----------     --------    ----------
 <S>             <C>                          <C>          <C>         <C>            <C>         <C>           <C>
    A            Computer hardware            $4,894       10.7        $4,910         8.8         $5,143        14.7
                                              ------       ----         -----         ---         ------        ----

</TABLE>

NOTE 18--FINANCIAL INSTRUMENTS

         Fair values of  financial  instruments  included in current  assets and
current  liabilities are estimated to approximate their book values,  due to the
short maturity of such instruments. Fair values for long-term debt and long-term
deposits as of December  31,  2003 and 2002 are  estimated  based on the current
rates  offered to the Company for debt and deposits  with the similar  terms and
remaining  maturities.  The  fair  value  of the  Company's  long-term  debt and
long-term deposits are not materially different from their carrying amounts.

                                      F-33
<PAGE>



                         REPORT OF INDEPENDENT AUDITORS

To Board of Directors and Shareholders of Comverge, Inc.



In our opinion, the accompanying consolidated balance sheet and the related
consolidated statement of operations, changes in shareholders' deficit and cash
flows present fairly, in all material respects, the financial position of
Comverge, Inc. and its subsidiaries at December 31, 2003, and the results of
their operations and their cash flows for the year then ended in conformity with
accounting principles generally accepted in the United States of America. These
financial statements are the responsibility of the Company's management; our
responsibility is to express an opinion on these financial statements based on
our audit. We conducted our audit of these statements in accordance with
auditing standards generally accepted in the United States of America, which
require that we plan and perform the audit to obtain reasonable assurance about
whether the financial statements are free of material misstatement. An audit
includes examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements, assessing the accounting principles
used and significant estimates made by management, and evaluating the overall
financial statement presentation. We believe that our audit provides a
reasonable basis for our opinion.



/s/ PricewaterhouseCoopers LLP


Atlanta, Georgia
March 29, 2004




                                      F-34
<PAGE>


COMVERGE, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
DECEMBER 31, 2003
-------------------------------

(IN THOUSANDS OF DOLLARS, EXCEPT PER SHARE DATA)

<TABLE>
<S>                                                                                           <C>
ASSETS
Current assets
Cash and cash equivalents                                                                     $             4,570
Accounts receivable                                                                                         3,021
Inventory                                                                                                   3,404
Other current assets                                                                                          524
                                                                                              -----------------------
            Total current assets                                                                           11,519

 Property and equipment, net                                                                                2,097
 Goodwill and other intangible assets, net                                                                    993
 Prepaid employee termination benefits                                                                        375
 Other assets                                                                                                  37
                                                                                              -----------------------
            Total assets                                                                      $            15,021
                                                                                              =======================
 LIABILITIES AND SHAREHOLDERS' DEFICIT
 Current liabilities
  Accounts payable                                                                            $             2,793
  Deferred revenue                                                                                            371
  Accrued expenses and other current liabilities                                                              972
                                                                                              -----------------------
            Total current liabilities                                                                       4,136

 Long-term liabilities
  Long-term bank debt                                                                                       1,346
  Liability for employee termination benefits                                                                 644
  Other liabilities                                                                                           172
                                                                                              -----------------------
            Total long-term liabilities                                                                     2,162

 Commitments and Contingencies (Note 8)

 Convertible Preferred Stock
  Series A, $.01 par value per share authorized, 10,394,416 shares; issued and
    outstanding 8,954,946 shares at December 31, 2003; net of offering costs of
    $217; liquidation preference at December 31, 2003 $27,995                                              18,425

  Series A-2, $.01 par value per share authorized, 541,145 shares; issued and
    outstanding 35,996 shares at December 31, 2003; liquidation preference at
    December 31, 2003 $150                                                                                    100
                                                                                              -----------------------
                                                                                                           18,525
 Shareholders' Deficit
  Common stock $.01 par value per share
    Authorized 20,009,774 shares; issued and outstanding 5,814,743 shares
      at December 31, 2003                                                                                     58

  Additional paid-in capital                                                                               18,961
  Accumulated deficit                                                                                     (28,821)
                                                                                              -----------------------
            Total shareholders' deficit                                                                    (9,802)
                                                                                              -----------------------
            Total liabilities and shareholders' deficit                                       $            15,021
                                                                                              =======================
</TABLE>

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

                                      F-35
<PAGE>



COMVERGE, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF OPERATIONS
YEAR ENDED DECEMBER 31, 2003
------------------------------------

(IN THOUSANDS OF DOLLARS)

Revenue
    Product                                                        $     12,592
    Service                                                               3,050
                                                                   ------------
        Total revenue                                                    15,642
                                                                   ------------
Cost of Revenue
    Product                                                               9,763
    Service                                                                 875
                                                                   ------------
        Total cost of revenue                                            10,638
                                                                   ------------
        Gross profit                                                      5,004
General and administrative expenses                                       7,777
Marketing and selling expenses                                            4,177
Depreciation and amortization                                             1,166
Research and development expenses                                           615
                                                                   ------------
        Operating loss                                                   (8,731)
Interest and other expense, net                                             586
                                                                   ------------
Net loss                                                           $     (9,317)
                                                                   ============


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

                                      F-36

<PAGE>

COMVERGE, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CHANGES IN
SHAREHOLDERS' DEFICIT YEAR ENDED DECEMBER 31, 2003
--------------------------------------------------------------------------------

(IN THOUSANDS OF DOLLARS)

<TABLE>
<CAPTION>
                                                                                 ADDITIONAL
                                                       NUMBER OF      COMMON       PAID-IN     ACCUMULATED
                                                        SHARES        STOCK        CAPITAL       DEFICIT            TOTAL
                                                      -----------------------------------------------------------------------
<S>                                                       <C>     <C>           <C>           <C>                 <C>
 BALANCES, DECEMBER 31, 2002                              4,937   $        49   $     8,587   $      (19,504)     $  (10,868)

 Issuance of Common Stock                                   877             9           501                -             510
 Contribution of debt by affiliated investor                  -             -         9,673                -           9,673
 Executive compensation payable by affiliated investor        -             -           200                -             200
 Net loss                                                     -             -             -           (9,317)         (9,317)
                                                      -------------------------------------------------------     -----------
 BALANCES, DECEMBER 31, 2003                              5,814   $        58   $    18,961   $      (28,821)     $   (9,802)
                                                      ==========  ===========   ===========   ===============     ===========
</TABLE>

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

                                      F-37
<PAGE>


COMVERGE, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CASH FLOWS
YEAR ENDED DECEMBER 31, 2003
------------------------------------
(IN THOUSANDS OF DOLLARS)

<TABLE>

<S>                                                                                                   <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net loss                                                                                              $          (9,317)
 Adjustments to reconcile net loss to net cash used in operating activities
   Depreciation and amortization                                                                                  1,166
   Executive compensation payable by affiliate investor                                                             200
   Write-off of fixed assets                                                                                         62
 Changes in operating assets and liabilities
   Accounts receivable                                                                                              579
   Prepaid expenses and other assets                                                                               (286)
   Inventory                                                                                                     (1,364)
   Accounts payable                                                                                               1,596
   Accrued expenses and other liabilities                                                                           231
                                                                                                      ------------------
        Net cash used in operating activities                                                                    (7,133)
                                                                                                      ------------------
 CASH FLOWS USED IN INVESTING ACTIVITIES
 Acquisition of property and equipment                                                                           (1,485)
 Funding of termination benefits                                                                                    (69)
                                                                                                      ------------------
        Net cash used in investing activities                                                                    (1,554)
                                                                                                      ------------------
 CASH FLOWS PROVIDED BY FINANCING ACTIVITIES
 Proceeds from Series A Preferred Stock issuances net of $217 offering costs                                     18,425
 Proceeds from Series A-1 Preferred Stock issuance                                                                2,000
 Repurchase of Series A-1 Preferred Stock                                                                        (2,000)
 Proceeds from Series A-2 Preferred Stock issuance                                                                  100
 Repayments of long-term debt                                                                                    (8,200)
 Borrowings under credit facility                                                                                 2,822
        Net cash provided by financing activities                                                                13,147
 Net increase in cash and cash equivalents                                                                        4,460
 Cash and cash equivalents at beginning of year                                                                     110
                                                                                                      ------------------
 Cash and cash equivalents at end of year                                                              $          4,570

 SUPPLEMENTAL DISCLOSURE OF NON-CASH INVESTING AND FINANCING ACTIVITIES
 Cash paid for interest                                                                                $            190
 Affiliated investor contribution of debt to paid-in-capital                                           $          9,673
 Assets/liabilities acquired in acquisition
 Property and Equipment                                                                                $           (472)
 Identified intangible                                                                                 $           (104)
 Other current liabilities                                                                             $             66
 Issuance of shares in respect of acquisition                                                          $            510

</TABLE>


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

                                      F-38
<PAGE>

COMVERGE, INC. AND SUBSIDIARIES NOTES
TO CONSOLIDATED FINANCIAL STATEMENT
DECEMBER 31, 2003
  (ALL NOTES IN THOUSANDS OF DOLLARS, EXCEPT PER SHARE DATA)


1. DESCRIPTION OF BUSINESS AND SIGNIFICANT ACCOUNTING POLICIES

       DESCRIPTION OF BUSINESS
       Comverge, Inc., a Delaware corporation, and its subsidiaries
       (collectively, the "Company"), provides energy intelligence systems
       (including hardware and software products and the installation of such
       products) to energy suppliers and their residential, commercial and
       industrial customers. Prior to April 2003, the Company was a wholly-owned
       subsidiary of Data Systems & Software, Inc. ("DSSI"). In April 2003 and
       continuing thereafter the Company completed a series of equity financings
       totalling approximately $18,600 (Note 9). As a result of these
       transactions, at December 31, 2003, DSSI remained the Company's largest
       shareholder owning approximately 41 percent of the Company's issued and
       outstanding voting equity.

       USE OF ESTIMATES IN PREPARATION OF FINANCIAL STATEMENTS
       The preparation of financial statements in conformity with accounting
       principles generally accepted in the United States of America requires
       management to make estimates and assumptions that affect the reported
       amounts of assets and liabilities and the disclosure of contingent assets
       and liabilities as of the date of the financial statements, and the
       reported amounts of revenues and expenses during the reporting periods.
       Actual results could differ from those estimates.

       FOREIGN CURRENCY TRANSLATIONS
       The currency of the primary economic environment in which the operations
       of the Company are conducted is the United States dollar ("dollar").
       Accordingly, Comverge and its subsidiaries use the dollar as their
       functional currency. All exchange gains and losses denominated in
       non-dollar currencies are presented on a net basis in operating expense,
       in the consolidated statement of operations when they arise. Such foreign
       currency loss, net, amounted to $15 for the year ended December 31, 2003.

       PRINCIPLES OF CONSOLIDATION AND PRESENTATION
       The consolidated financial statements of the Company include the accounts
       of its subsidiaries. The consolidated financial statements have been
       prepared in conformity with accounting principles generally accepted in
       the United States of America. All intercompany balances and transactions
       have been eliminated.

       CASH AND CASH EQUIVALENTS
       The company considers all highly liquid investments with an original
       maturity of three months or less to be cash equivalents. Cash and cash
       equivalents consist of cash and demand deposits in banks and short-term
       investments.

       ALLOWANCE FOR DOUBTFUL ACCOUNTS
       The allowance for doubtful accounts is based on specific identification
       of accounts considered to be doubtful of collection. As of December 31,
       2003, there were no accounts identified as doubtful of collection.

       INVENTORY
       Inventories are stated at the lower of cost or market. Cost is determined
       for raw materials, spare parts, supplies on the first-in, first-out cost
       method. For work in process and finished goods, cost is

                                      F-39
<PAGE>


COMVERGE, INC. AND SUBSIDIARIES NOTES
TO CONSOLIDATED FINANCIAL STATEMENT
DECEMBER 31, 2003
  (ALL NOTES IN THOUSANDS OF DOLLARS, EXCEPT PER SHARE DATA)


       determined on the basis of standard costs, adjusted for variances, which
       approximates the first-in, first out method of cost.

       PROPERTY AND EQUIPMENT
       Property and equipment are presented at cost or fair value at the date of
       acquisition. Depreciation is calculated based on the straight-line method
       over the estimated useful lives of the depreciable assets, or in the case
       of leasehold improvements, the shorter of the lease term or useful life.
       Improvements are capitalized while repairs and maintenance are expensed
       as incurred.

       INTANGIBLES
       Goodwill represents the excess of cost over the fair value of the net
       assets of subsidiaries acquired in purchase transactions. Goodwill is not
       being amortized in accordance with Statement on Financial Accounting
       Standards No. 142 GOODWILL AND OTHER INTANGIBLE ASSETS.

       The costs of licensed technology are presented at estimated fair value at
       acquisition date. These costs are amortized on a straight-line basis over
       the term of the license, generally five years.

       The costs of registered patents and patents pending acquired from third
       parties are presented at estimated fair value at acquisition date. In
       addition, registration costs and fees for patents are capitalized.
       Registered patents costs are amortized over the estimated remaining
       useful life of the patents, from four to fourteen years. Costs for
       patents pending are not amortized until they are issued.

       REVENUE RECOGNITION
       The Company recognizes revenues when the following criteria have been
       met: delivery has occurred, the price is fixed and determinable,
       collection is probable, and persuasive evidence of an arrangement exits.

       Revenue from time-and-materials service contracts and other services are
       recognized as services are provided. Revenue for maintenance contracts is
       recognized on a straight-line basis over the life of the contract.

       Revenues from fixed-price service contracts are recognized as services
       are provided using the percentage-of-completion method as labor costs are
       incurred, in the proportion that actual costs incurred bear to total
       estimated costs. Percentage-of-completion estimates are reviewed
       periodically, and any adjustments required are reflected in the period
       when such estimates are revised. Losses on contracts, if any, are
       recognized in the period in which the loss is determined.

       In accordance with Emerging Issues Task Force issue 00-10, ACCOUNTING FOR
       SHIPPING AND HANDLING FEES AND COSTS, the Company reports shipping and
       handling revenues and their associated costs in Revenue and Cost of
       Revenue, respectively.

       WARRANTY PROVISION
       Comverge  generally  warrants its products against certain  manufacturing
       and other  defects.  These product  warranties  are provided for specific
       periods of time and/or  usage of the product  depending  on the nature of
       the product, the geographic location of its sale and other factors. As of
       December  31, 2003 the Company had  accrued  $152 for  estimated  product
       warranty  costs,  which was included in other  current  liabilities.  The
       accrued product warranty costs were based primarily on estimated costs to
       satisfy  customer warranty  claims. Warranty claims expense for 2003 were
       $20.


<TABLE>
<CAPTION>
                                                                       Year ended December 31, 2003
<S>                                                                   <C>
Warranty provision at beginning of period                                                       $52

Accruals for warranties issued during the period                                                100

Warranty settlements during the period                                                         (20)

Changes in liability for pre-existing warranties during the period,                              20
including expirations


Warranty provision at the end of period                                                        $152
</TABLE>

       ADVERTISING EXPENSES
       Advertising costs are expensed as incurred. Advertising expense amounted
       to $813 for the year ended December 31, 2003.

                                      F-40
<PAGE>



COMVERGE, INC. AND SUBSIDIARIES NOTES
TO CONSOLIDATED FINANCIAL STATEMENT
DECEMBER 31, 2003
  (ALL NOTES IN THOUSANDS OF DOLLARS, EXCEPT PER SHARE DATA)


       RESEARCH AND DEVELOPMENT EXPENSES
       Research and development costs are expensed as incurred.

       STOCK-BASED COMPENSATION The Company accounts for employee and director
       stock-based compensation in accordance with Accounting Principles Board
       Opinion No. 25 ACCOUNTING FOR STOCK ISSUED TO EMPLOYEES and related
       interpretations. In accordance therewith, the Company records
       compensation expense on fixed stock options and restricted common stock
       granted to employees and directors at the date of grant if the current
       market price of the Company's common stock exceeds the exercise price of
       the options and restricted common stock. Compensation expense on variable
       stock option grants is estimated until the measurement date. Deferred
       compensation is amortized to compensation expense over the vesting period
       of the underlying options. The Company complies with the disclosure
       provisions of Statement on Financial Accounting Standards No. 123,
       ACCOUNTING FOR STOCK-BASED COMPENSATION ("SFAS 123"). As such, the
       Company provides pro forma net income and pro forma earnings per share
       disclosures for employee and director stock option grants as if the
       fair-value-based method defined in SFAS No. 123 had been applied. The
       Company's net loss for the year, as reported, was $9,317. Total
       stock-based compensation expense determined under the fair value method
       for all awards, net of related tax effects, was $52. Based on the fair
       value method, the Company's pro forma net loss for 2003 was $9,369. The
       Company's stock-based employee compensation plan is described more fully
       in Note 10.

       The Company accounts for stock-based compensation issued to consultants
       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.

       INCOME TAXES
       Deferred income taxes reflect the net tax effects of temporary
       differences between the carrying amounts of assets and liabilities for
       financial reporting purposes and the amounts used for income tax
       purposes, as well as operating loss, capital loss and tax credit carry
       forwards. Deferred tax assets and liabilities are classified as current
       or noncurrent based on the classification of the related assets or
       liabilities for financial reporting, or according to the expected
       reversal dates of the specific temporary differences, if not related to
       an asset or liability for financial reporting. Valuation allowances are
       established against deferred tax assets if it is more likely than not
       that they will not be realized.

       Income taxes associated with the undistributed earnings of a subsidiary
       are provided for in accordance with Accounting Principals Board Opinion
       No. 23, when the Company has sufficient evidence that the subsidiary has
       invested or will invest the undistributed earnings indefinitely. If it is
       determined that the undistributed earnings of a subsidiary will be
       remitted in the foreseeable future, all taxes related to the remittance
       of such undistributed earnings are provided for in the current period as
       income tax expense.

       IMPAIRMENT OF LONG-LIVED ASSETS
       The Company evaluates the recoverability of its long-lived assets and
       certain identifiable intangible assets in accordance with SFAS 144,
       ACCOUNTING FOR THE IMPAIRMENT OR DISPOSAL OF LING-LIVED ASSETS. SFAS 144
       requires recognition of impairment in the event the net book value of
       such assets exceeds the future undiscounted cash flows attributable to
       such assets. If impairment is indicated, the carrying amount of the asset
       is written down to fair value. The Company has identified no such
       impairments.


                                      F-41
<PAGE>


COMVERGE, INC. AND SUBSIDIARIES NOTES
TO CONSOLIDATED FINANCIAL STATEMENT
DECEMBER 31, 2003
  (ALL NOTES IN THOUSANDS OF DOLLARS, EXCEPT PER SHARE DATA)


       SIGNIFICANT RISKS AND UNCERTAINTIES
       The Company's operations are subject to certain risks and uncertainties
       including, but not limited to; a history of unprofitably and the
       inability to fund its operations with free cash flow, the continued
       ability to obtain financing on commercially reasonable terms, operating
       results that are often volatile and difficult to predict, the ability to
       develop new products and the market's acceptance of those products, a
       highly competitive marketplace, the reliance on strategic relationships
       as distribution channels to market products, the use of technology
       licensed from third parties, the potential of product defects, the
       commoditization of products and resulting pricing pressures, lengthy
       sales cycles of our utility customers, the ability to manage growth,
       possible disruption in commercial activities due to terrorist activity
       and armed conflict, delays in product development and related release
       schedules, the ability to protect intellectual property and the need to
       retain key personnel. Additionally, the Company has a significant share
       of a market that, presently, is very small making it difficult to achieve
       internal growth absent a significant market expansion. Any of these
       factors could impair our ability to expand our operations or to generate
       significant revenues and cash flows from those markets in which we
       operate. As a result of the above and other factors, the Company's
       financial condition can vary significantly from year-to-year.

       IMPACT OF RECENT ACCOUNTING PRONOUNCEMENTS
       In August 2001, the Financial Accounting Standards Board ("FASB") issued
       SFAS 143, ACCOUNTING FOR ASSET RETIREMENT OBLIGATIONS. SFAS 143 addresses
       accounting and reporting for obligations associated with the retirement
       of tangible long-lived assets and the associated asset retirement costs.
       This statement requires that the fair value of a liability for asset
       retirement obligations be recognized in the period in which is incurred
       if a reasonable estimate of fair value can be made. The associated asset
       retirement costs are, capitalized as part of the carrying amount of the
       long-lived asset. The liability is accreted to its present value each
       period while the cost is depreciated over its useful life. We adopted the
       provisions of this statement in 2003 and the effect of adopting this
       statement did not have any effect on our results of operations, financial
       position, or cash flows.

       In June 2002, the FASB issues SFAS 146, ACCOUNTING FOR COSTS ASSOCIATED
       WITH EXIT OR DISPOSAL ACTIVITIES. SFAS 146 requires that a liability for
       costs associated with an exit or disposal activity by recognized and
       measured initially at fair value only when the liability is incurred. A
       fundamental conclusion reached by the FASB in this statement is that an
       entity's commitment to an exit plan, by itself, does not create a present
       obligation to others that meets our definition of a liability. We adopted
       the provisions of this statement in 2003 and the effect of adopting this
       statement did not have any effect on our results of operations, financial
       position, or cash flows.

       In November 2002, the FASB reached a consensus on Emerging Issues Task
       Force issue 00-21 ACCOUNTING FOR REVENUE ARRANGEMENTS WITH MULTIPLE
       DELIVERABLES (the "Issue"). The guidance in this issue is effective for
       revenue arrangements entered into fiscal years beginning after June 15,
       2003. The Issue addresses certain aspects of the accounting by a vendor
       for arrangements under which it will perform multiple revenue-generating
       activities. Specifically, the Issue addresses how to determine whether an
       arrangement involving multiple deliverables contains more than one
       earnings process AND, if it does, how to divide the arrangement into
       separate units of accounting consistent with the identified earnings
       processes for revenue recognition purposes. The Issue also addresses how
       arrangement consideration should be measured and allocated to the
       separate units of accounting in the arrangement. The Company is
       analyzing the effect the adoption of this standard will have.


                                      F-42
<PAGE>


COMVERGE, INC. AND SUBSIDIARIES NOTES
TO CONSOLIDATED FINANCIAL STATEMENT
DECEMBER 31, 2003
  (ALL NOTES IN THOUSANDS OF DOLLARS, EXCEPT PER SHARE DATA)



       In November 2002, the FASB issued FASB Interpretation 45, Guarantor's
       Accounting and Disclosure Requirements of Guarantees, including Indirect
       Guarantees of Indebtedness of Others. This interpretation clarifies the
       requirements of SFAS 5, Accounting for Contingencies, relating to
       guarantors accounting for and disclosure of, the issuance of certain
       types of guarantees. This interpretation is intended to improve the
       comparability of financial reporting by requiring identical accounting
       for guarantees issued with a separately identified premium and guarantees
       issued without a separately identified premium. The interpretation's
       provisions for initial recognition and measurement are required on a
       prospective basis to guarantees issued or modified after December 31,
       2002. We adopted the provisions of this interpretation in 2003 and the
       effect of adopting these provisions did not have any effect on our
       financial position, results operations, or cash flows.

       In May 2003, the FASB issued SFAS 150, ACCOUNTING FOR CERTAIN FINANCIAL
       INSTRUMENTS WITH CHARACTERISTIC OF BOTH LIABILITIES AND EQUITY. SFAS 150
       establishes standards for classifying and measuring as liabilities
       certain financial instruments that embody obligations of the issuer and
       have characteristics of both liabilities and equity. SFAS 150 represents
       a significant change in practice in the accounting for a number of
       financial instruments, including mandatorily redeemable equity
       instruments and certain equity derivatives that frequently are used in
       connection with share repurchase programs. We adopted the provisions of
       this statement in 2003 and the effect of adopting this statement did not
       have any effect on our results of operations, financial position, or cash
       flows.

       In January 2003, the FASB issued FASB Interpretation No. 46,
       "Consolidation of Variable Interest Entities" (FIN 46). Under FIN 46,
       entities are separated into two populations: (1) those for which voting
       interests are used to determine consolidation (this is the most common)
       and (2) those for which variable interests are used to determine
       consolidation. FIN 46 explains how to identify Variable Interest Entities
       (VIEs) and how to determine when a business enterprise should include the
       assets, liabilities, non-controlling interests, and results of activities
       of a VIE in its consolidated financial statements.

       Since issuing FIN 46, the FASB has proposed various amendments to the
       Interpretation and has deferred its effective date. Most recently, in
       December 2003, the FASB issued a revised version of FIN 46 (FIN 46-R),
       which also provides for a partial deferral of FIN 46. This partial
       deferral established the effective date for public entities to apply FIN
       46 and FIN 46-R based on the nature of the variable interest entity and
       the date upon which the public company became involved with the variable
       interest entity. In general, the deferral provides that (i) for variable
       interest entities created before February 1, 2003, a public entity must
       apply FIN 46-R at the end of the first interim or annual period ending
       after March 15, 2004, and may be required to apply FIN 46 at the end of
       the first interim or annual period ending after December 15, 2003, if the
       variable interest entity is a special purpose entity, and (ii) for
       variable interest entities created after January 31, 2003, a public
       company must apply FIN 46 at the end of the first interim or annual
       period ending after December 15, 2003, as previously required, and then
       apply FIN 46-R at the end of the first interim or annual reporting period
       ending after March 15, 2004.

       The Company currently has no variable interests in any VIE. Accordingly,
       the Company believes that the adoption of FIN 46 and FIN 46-R will not
       have a material impact on its financial position, results of operations
       and cash flows.

2. ACQUISITIONS

       On April 7, 2003, the Company acquired from an unrelated company, Sixth
       Dimension, Inc. ("6D"), certain property and equipment and technological
       know-how (software) relating to its iNET software platform in exchange
       for 877,000 of its common shares (the "Acquisition"). The Acquisition was
       accounted for using the purchase method of accounting. The Company
       acquired a business including property and equipment, intellectual
       property, certain contracts with customers and all of 6D's employees. In
       consideration of the Company's acquisition, certain 6D investors
       purchased $3,750 of the Company's Series A Preferred Stock. 6D is an
       early stage Internet-based software company, whose iNET platform enables
       a broad range of energy services including: upstream facility metering,
       monitoring, and control; performance-based operations and proactive
       maintenance; economic demand response and active load curtailment;
       aggregated distributed generation; power reliability and quality
       monitoring; and other real-time capital equipment analysis using a
       low-cost, robust, software for service delivery. The iNET platform adds
       to Comverge's product offering, technology for upstream monitoring and
       control of capital assets, by combining real-time, internet-based, data
       warehousing capabilities with the analytical and metering capabilities of
       the Company's PowerCAMP software applications.


                                      F-43
<PAGE>


COMVERGE, INC. AND SUBSIDIARIES NOTES
TO CONSOLIDATED FINANCIAL STATEMENT
DECEMBER 31, 2003
  (ALL NOTES IN THOUSANDS OF DOLLARS, EXCEPT PER SHARE DATA)


       The purchase price of the acquired assets was $510, determined by an
       independent appraisal of the value of the Company's common shares issued
       in respect of the Acquisition as of the Acquisition date. As a result of
       the Acquisition, the Company recorded an intangible asset, the iNET
       software, of $104. This asset will be amortized on a straight line basis
       over three years from the Acquisition date.

3. PROPERTY AND EQUIPMENT

       Property and equipment, at December 31, 2003, consisted of the following:

                                                  ESTIMATED
                                                  USEFUL LIFE
                                                  (IN YEARS)
                                                  -------------

       Load control equipment                          10          $        973
       Computer hardware and software                   3                 1,807
       Office furniture and equipment                   5-7               1,657
       Leasehold improvements                     Term of lease             103
                                                                   -------------
                                                                          4,540
       Accumulated depreciation                                           2,443
                                                                   -------------
       Property and equipment, net                                 $      2,097
                                                                   =============

       Depreciation in respect of property and equipment amounted to $831 for
       and the year ended December 31, 2003.

4. GOODWILL AND INTANGIBLE ASSETS

       As of December 31, 2003 the Company had goodwill balances of $499.

       Intangible assets and accumulated amortization as of December 31, 2003,
       consisted of the following:

<TABLE>
<CAPTION>
                                                           ESTIMATED
                                                          USEFUL LIFE
                                                           (IN YEARS)
                                                          -----------

<S>                                                             <C>        <C>
       Technological Know-How                                   5          $     1,436
       Acquired Software                                        3                  104
       License                                                  5                  568
       Patents                                                4-14                 287
                                                                           ------------
                                                                                 2,395

       Accumulated amortization                                                  1,901
                                                                           ------------
       Identified intangible assets with finite lives, net                 $       494
                                                                           ============
</TABLE>


                                      F-44
<PAGE>


COMVERGE, INC. AND SUBSIDIARIES NOTES
TO CONSOLIDATED FINANCIAL STATEMENT
DECEMBER 31, 2003
  (ALL NOTES IN THOUSANDS OF DOLLARS, EXCEPT PER SHARE DATA)


       The Company uses the straight line method of computing amortization
       expense. Amortization expense for the year ended December 31, 2003 was
       $335. Estimated amortization expense for the next five years is as
       follows:

        (IN THOUSANDS OF DOLLARS)

        2004                                                     $        266
        2005                                                               50
        2006                                                               24
        2007                                                               15
        2008                                                               15

5. LONG-TERM DEBT

       On April 7, 2003, in connection with a private equity financing, the
       Company entered into a $6,500 credit facility ("New Credit Facility")
       with a major United States commercial bank. The facility consisted of a
       three-year term loan ("Term Loan") of $1,500 bearing interest at the
       prime rate and a $5,000, three year, revolving credit facility
       ("Revolving Facility") bearing interest between prime+1.5 percent and
       prime+2.0 percent per annum. Initial borrowings were used to refinance
       certain debt. The Term Loan was secured by cash collateral in a like
       amount pledged by DSSI and was repaid by the Company in December 2003.
       Interest paid on this Term Loan totaled $45 in 2003. The Revolving
       Facility is secured by virtually all of the assets of the Company
       including the Company's intellectual property. Borrowings under the
       Revolving Facility can be requested, from time to time, as formula and/or
       non-formula advances. The borrowing availability for formula based
       advances is calculated monthly based upon 80 percent of eligible
       receivables and eligible inventory limited to the lesser of (i) 25
       percent of FMV, (ii) 80 percent of net orderly liquidation value or (iii)
       $500. Non-formula advances are limited to $700. The ability of the
       Company to request nonformula advances terminates on October 7, 2004, at
       which time any non-formula advances, plus accrued interest thereon, must
       be repaid. At December 31, 2003, the Company had $1,346 outstanding under
       the Revolving Facility of which $700 represented non-formula advances and
       $646 represented formula advances. Since the Company had both the ability
       and intent to refinance the $700 non-formula portion of this debt as of
       December 31, 2003, it is classified as long-term. In January 2004, the
       company repaid the non-formula advances and increased formula advances in
       a like amount. As of December 31, 2003, the Company had unutilized
       borrowing availability under its Revolving Facility of approximately
       $2,000. The Revolving Facility terminates on April 6, 2006, at which time
       the principal amount of all outstanding advances plus accrued interest
       thereon must be repaid.

6. LIABILITY FOR EMPLOYER TERMINATION BENEFITS

       Under Israeli law and labor agreements, one of the Company's
       subsidiaries, Comverge Control Systems, is required to make severance and
       pension 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. The pension
       plans are multi-employer


                                      F-45
<PAGE>


COMVERGE, INC. AND SUBSIDIARIES NOTES
TO CONSOLIDATED FINANCIAL STATEMENT
DECEMBER 31, 2003
  (ALL NOTES IN THOUSANDS OF DOLLARS, EXCEPT PER SHARE DATA)


       and  independent of the Company.  Pension and severance costs for 2003 of
       $217 is included in selling, general and administrative expenses.

7. INCOME TAXES

       The Company has  Federal,  state,  and  foreign net  operating  losses of
       approximately $17,591, $13,009 and $2,950, respectively,  at December 31,
       2003. The Federal net operating loss carryforwards begin expiring in 2019
       and state net operating loss carryforwards begin expiring in 2006. During
       year  ended  December  31,  2003,  certain  substantial  changes  in  the
       Company's ownership, as defined in the provisions of the Internal Revenue
       Code, result in a limitation on the utilization of a significant  portion
       of the Federal and state net operating losses on an annual basis.

       At December 31, 2003, the Company has provided a valuation  allowance for
       the full amount of its net  deferred tax asset since  realization  of any
       future tax benefit cannot be sufficiently assured.

       A reconciliation of income tax expense (benefit) at the statutory federal
       income  tax  rate  and  income  taxes as  reflected  in the  consolidated
       financial statements is as follows:

                                                                       2003
                                                                     -------
       Federal income tax at statutory federal rate                    34.0%
       State income tax expense                                         6.0%
       Other                                                           (0.4%)
       Valuation Allowance                                            (39.6%)
                                                                     -------
       Effective tax rate                                                 0%
                                                                     =======


       Deferred tax assets (liabilities) consist of the following:

                                                                       2003
                                                                     -------
       Deferred tax assets
          Net operating loss carryforwards                           $ 7,981
          Other                                                          735

       Deferred tax liabilities                                         (185)
                                                                     -------
                                                                       8,531

       Valuation Allowance                                            (8,531)
                                                                     -------

       Net deferred tax assets (liabilities)                         $     0
                                                                     =======

8. COMMITMENTS AND CONTINGENCIES (a)

       Leases of Property and Equipment

       Rental and leasing expenses, for 2003, amounted to $532. Future minimum
       rental payments and lease payments on non-cancelable operating leases as
       of December 31, 2003 are as follows:

        (IN THOUSANDS OF DOLLARS)

        YEAR ENDING DECEMBER 31,

                 2004                                                $     535
                 2005                                                      434
                 2006                                                      325
                 2007                                                      174
                 2008                                                      169

       (b) Employee Retirement Savings Plan

       The Company sponsors a tax deferred retirement savings plan that permits
       eligible U.S. employees to contribute varying percentages of their
       compensation up to the limit allowed by the Internal Revenue Service.
       This plan also provides for discretionary Company contributions. No
       discretionary contributions were made for the year ended December 31,
       2003.

       (c) Royalties

       The Company is committed to pay royalties to the Government of Israel on
       proceeds from the sale of certain products in which the Government of
       Israel participated in the research and development by way of grants.
       Royalties are currently payable at a rate of 4.5 percent of the annual
       sales of the product. The amount payable as royalties is limited to the
       amount of the original grant of $595. The net amount due in respect of
       these grants amounted to approximately $418 at December 31, 2003.

                                      F-46
<PAGE>



COMVERGE, INC. AND SUBSIDIARIES NOTES
TO CONSOLIDATED FINANCIAL STATEMENT
DECEMBER 31, 2003
(ALL NOTES IN THOUSANDS OF DOLLARS, EXCEPT PER SHARE DATA)


9. SHAREHOLDERS' DEFICIT

       CONTRIBUTION OF DSSI DEBT TO PAID-IN-CAPITAL

       In April of 2003, by agreement, and in consideration of the sale of the
       Company's Series A and A-1 preferred shares and the placement of a New
       Credit Facility, DSSI and its affiliated companies (other than the
       Company) contributed accrued management fees and the principal amount of
       loans, advances and accrued interest thereon in the amount of $9,673 to
       paid in capital.

       COMMON STOCK

       Holders of the Company's common stock are entitled to dividends if and
       when declared by the board of directors. The holders of Common Stock,
       voting as a separate class, are entitled to elect two members of the
       Board of Directors at each meeting or pursuant to each consent of the
       Corporation's stockholders for the election of directors, and to remove
       from office such directors and to fill any vacancy caused by the
       resignation, death or removal of such directors.

       CONVERTIBLE PREFERRED STOCK

       During 2003, the Company sold to investors (i) 8,954,946 shares of its
       Series A Convertible Preferred Stock ("Series A Preferred") for $18,663,
       (ii) 721,527 shares of its Series A-1 Convertible Preferred Stock
       ("Series A-1 Preferred") for $ 2,000 and (iii) 35,996 of its Series A-2
       Convertible Preferred Stock ("Series A-2 Preferred") for $100. The
       Company repurchased its Series A-1 Preferred in 2003, pursuant to a put
       right of an investor for $2,000 plus accrued dividends of $74 which
       dividends were recognized as a financial expense in 2003.

       The rights, preferences and privileges attached to the Series A and
       Series A-2 (Collectively, the "Preferred Stock") are as follows:

       (a) Conversion

       The Preferred Stock is convertible into the Company's common stock
       initially on a one-for-one basis subject to adjustment for the
       achievement of certain performance criteria. Conversion is mandatory on
       (i) in the event that the holders of at least a majority of the
       then-outstanding shares of Series A Preferred consent to such conversion
       or (ii) upon the closing of a firmly underwritten public offering of
       shares of Common Stock of the Company at a per share price not less than
       five times the original per-share purchase price of the Preferred Stock.
       The holders of Preferred Stock have no mandatory redemption rights.

       (b) Board of Directors

       The holders of Series A Preferred Stock, voting as a separate class,
       shall be entitled to elect three members of the Board of Directors at
       each meeting or pursuant to each consent of the Corporation's
       stockholders for the election of directors, and to remove from office
       such directors and to fill any vacancy caused by the resignation, death
       or removal of such directors. After December 31, 2003, the board can be
       increased by no more than two additional seats based on a majority vote
       of the then members of the board. The additional two seats shall be
       filled by outside directors, who shall be selected by a majority of the
       other members of the Board of Directors, including the affirmative vote
       of at least two of the directors designated by the holders of Series A
       Preferred.

                                      F-47
<PAGE>



COMVERGE, INC. AND SUBSIDIARIES NOTES
TO CONSOLIDATED FINANCIAL STATEMENT
DECEMBER 31, 2003
(ALL NOTES IN THOUSANDS OF DOLLARS, EXCEPT PER SHARE DATA)


       (c) Dividends

       In the event the Company declares and pays any dividend on its common
       stock other than stock or other dividends payable solely in shares of
       common stock, the Company must also pay to the holders of Preferred Stock
       the dividends that would have been payable had all of the outstanding
       Preferred Stock been converted to common stock immediately prior to the
       record date of the dividend.

       The holders of shares of Preferred Stock, on a PARI PASSU basis and in
       preference to the holders of any shares of any other class of capital
       stock of the Company, shall be entitled to receive, when, as and if
       declared by the Board of Directors, but only out of funds legally
       available therefor, dividends at the rate of 8 percent per annum based,
       in each case, on the original Preferred Stock issue price. Dividends are
       noncumulative.

       (d) Voting

       The Preferred Stock shall vote together with all other classes and series
       of stock of the Company as a single class on all actions to be taken by
       the stockholders of the Company.

       (e) Liquidation Preferences

       Upon any liquidation, dissolution or winding up of the Company, whether
       voluntary or involuntary, the holders of shares of Series A Preferred
       Stock shall be entitled to be paid, on a pari passu basis, before any
       distribution or payment is made upon the Series A-2 Preferred Stock or on
       the common stock an amount equal to 1.5 times the original Series A issue
       price per share plus all declared and unpaid dividends. After payment to
       the holders of Series A Preferred Stock of the full amounts to which they
       are entitled the holders of Series A-2 Preferred Stock shall be entitled
       to be paid, before any distribution or payment is made upon the common
       stock, an amount equal to 1.5 times the original Series A-2 issue price
       per share plus all declared but unpaid dividends. After the preferential
       payments have been made in full, any additional remaining assets shall be
       distributed ratably to the holders of Preferred Stock (on an as-converted
       basis) and common stock until such holders of Preferred Stock have
       received, inclusive of their liquidation amount, an amount equal to 5
       times their original issue price per share. After payment all
       preferential amounts, the entire remaining assets of the Company legally
       available for distribution, if any, shall be distributed ratably among
       the holders of its common stock.

       Unless otherwise agreed by holders of at least 66 2/3 percent of the
       then-outstanding shares of Preferred Stock, a liquidation, dissolution or
       winding up of the Company shall also include (i) the acquisition or sale
       of the Company unless the Company's stockholders of record as constituted
       immediately prior to such acquisition or sale will, immediately after
       such acquisition or sale hold at least 50 percent of the voting power of
       the surviving or acquiring entity or (ii) a sale, lease or other
       conveyance or disposition of all or substantially all of the assets of
       the Company, including a sale of all or substantially all of the assets
       of the Company's subsidiaries, if such assets constitute substantially
       all of the assets of the Company and such subsidiaries taken as a whole.

                                      F-48
<PAGE>


COMVERGE, INC. AND SUBSIDIARIES NOTES
TO CONSOLIDATED FINANCIAL STATEMENT
DECEMBER 31, 2003
(ALL NOTES IN THOUSANDS OF DOLLARS, EXCEPT PER SHARE DATA)


       (f) Anti-dilution Rights

       The conversion prices of Preferred Shares are subject to broad-based
       weighted average anti-dilution adjustments to reduce dilution in the
       event that the Company issues additional equity securities (other than
       Board approved employee incentives, including stock options) at a
       purchase price less than the then-applicable conversion price of the
       Series A Preferred. The conversion price is also be subject to
       proportional adjustment for stock splits, stock dividends,
       recapitalizations and the like.

       (g) Protective Provisions

       For so long as at least 100,000 shares of Series A Preferred remain
       outstanding, consent of the holders of at least a majority of the Series
       A Preferred shall be required to (i) alter or change the rights,
       preferences or privileges of the Series A Preferred, (ii) create (by
       reclassification or otherwise) any new class or series of shares having
       rights, preferences or privileges senior to or on a parity with the
       Series A Preferred, (iii) amend or waive any provision of the Company's
       Articles of Incorporation or Bylaws, (iv) increase or decrease the
       authorized number of shares of Common or Preferred Stock, (v) redeem any
       shares of Common Stock (other than pursuant to equity incentive
       agreements with service providers giving the Company the right to
       repurchase shares upon the termination of services), (vi) consummate any
       merger, other corporate reorganization, sale of control, or any
       transaction in which all or substantially all of the assets of the
       Company are sold, (vii) increase or decrease the authorized size of the
       Company's Board of Directors or the Compensation Committee of the Board
       of Directors, (viii) pay or declare any dividend on any shares of Common
       or Preferred Stock, (ix) liquidate or dissolve the Company, (x) increase
       the number of shares reserved for issuance under the Option Plan, (xi)
       issue any shares of capital stock of the Company or options to acquire
       capital stock of the Company under the Option Plan, unless such issuance
       is approved by the Board of Directors and the Compensation Committee of
       the Board of Directors, or (xii) authorize or incur any additional
       indebtedness in excess of $500,000 (other than the revolving Credit
       Facility), unless such incurrence of indebtedness is approved by the
       Board of Directors, including at least two of the directors designated by
       the holders of Series A Preferred.

10. STOCK OPTION PLANS

       The Company's stock option plans provide for the granting to officers,
       directors and other key employees of options to purchase shares of common
       stock at not less than 85 percent of the estimated market value of the
       Company's common stock on the date of grant. The purchase price must be
       paid in cash. At December 31, 2003, the Company had issued 2,215,830
       options under the various plans of which 74,658 options had been
       exercised by optionees. Options expire between five years and ten years
       from the date of the grant. The options generally vest over a two to
       three year period from the date of the grant. At December 31, 2003,
       43,481 options were available for grant under the various plans.


                                      F-49
<PAGE>


COMVERGE, INC. AND SUBSIDIARIES NOTES
TO CONSOLIDATED FINANCIAL STATEMENT
DECEMBER 31, 2003
(ALL NOTES IN THOUSANDS OF DOLLARS, EXCEPT PER SHARE DATA)


       A summary status of the Company's option plans as of December 31, 2003,
       as well as changes during the year then ended, is presented below:

                                                NUMBER OF           WEIGHTED
                                                OPTIONS              AVERAGE
                                               (IN SHARES)     EXERCISE PRICE

        OUTSTANDING AT BEGINNING OF YEAR            943,530           $1.20
        Granted                                   1,278,800           $1.20
        Exercised                                     (219)           $1.20
        Forfeited                                   (6,281)           $1.20
                                                  ---------           -----
        OUTSTANDING AT END OF YEAR                2,215,830           $1.20
                                                  ---------           -----
        Exercisable at end of year                  921,094           $1.16
                                                  =========           =====




                             NUMBER          AVERAGE REMAINING        NUMBER
EXERCISE PRICES            OUTSTANDING       CONTRACTUAL LIFE      EXERCISABLE
----------------------   ----------------   --------------------   -------------
                           (In Shares)          (In Years)         (In Shares)

$0.40                            146,079                   0.75        146,079
$1.20                          1,956,509                   5.42        698,854
$1.31                             64,361                   7.87         42,907
$2.00                             12,192                   1.76          8,795
$4.00                             36,689                   2.25         24,459
                         ----------------                          -------------
                               2,215,830                   5.11        921,094
                         ================                          =============


       The weighted average grant-date fair value of the 1,278,800 options
       granted during 2003 was zero. The Company utilized the Black-Scholes
       option pricing model to estimate fair value, utilizing the following
       assumptions for the respective years (all in weighted averages):

        Risk-free interest rate                                       5.38%
        Expected life of options, in years                              5.0
        Expected annual volatility                                       0%
        Expected dividend yield                                        None


                                      F-50
<PAGE>

COMVERGE, INC. AND SUBSIDIARIES NOTES
TO CONSOLIDATED FINANCIAL STATEMENT
DECEMBER 31, 2003
  (ALL NOTES IN THOUSANDS OF DOLLARS, EXCEPT PER SHARE DATA)


       During 2002, the Company repriced certain incentive stock options of ten
       employees. One of these employee's options were repriced, pursuant to his
       employment agreement, from $4.00 to $1.20 per share. The Company also
       repriced certain incentive stock options of ten employees (including the
       aforementioned employee) who held certain anti-dilution options from
       $1.94 to $1.31 per share. As a result of these repricings, the options
       are accounted for as variable awards with a compensation charge
       recognized for periodic changes in the intrinsic value of the option
       until the award expires, is exercised, or is forfeited. At December 31,
       2003, no compensation charge was recognized related to these options
       since the fair market value of the common stock was below the exercise
       prices.

11. MAJOR CUSTOMER

       During the year ended December 31, 2003, the Company had one customer
       which accounted for 18.5 percent of the Company's total revenue. The
       total accounts receivable from this customer was $172 at December 31,
       2003. No other customer accounted for more than 10% of the Company's
       total revenue.

12. RELATED PARTY TRANSACTIONS AND BALANCES

       An affiliate of DSSI charged the Company's Israeli subsidiary, Comverge
       Control Systems, $138 in consideration of it providing office space and
       certain accounting and administrative services which amount is included
       in general and administrative expense. Also, DSSI paid a cash bonus of
       $200 to an executive officer of the Company in January 2004 related to
       performance metrics achieved during 2003. This amount was recognized in
       the Company's Statement of Operations as compensation expense and
       included in general and administrative expense. Because the Company had
       no obligation to reimburse DSSI for such bonus payment, it is classified
       on the Company's balance sheet as a contribution to paid-in-capital.
       Additionally, in January of 2003, DSSI granted the Company's Chief
       Executive Officer a restricted stock grant of 50,000 shares of common
       stock of DSSI. Also, in 2003, the Company purchased $100 of computers and
       other equipment from an affiliate of DSSI of which $62 is recorded in
       property and equipment and $38 is recorded as a general and
       administrative expense.

       Prior to April 2003, DSSI charged the Company $130 in consideration of
       certain management fees and interest on advances and loans made by DSSI
       to the Company and included in selling and administrative services. Such
       amount was classified on the Company's balance sheet as a liability to
       DSSI. By agreement, in April 2003, such amount was contributed to the
       Company's paid in capital. See Note 9. Also by agreement, subsequent to
       April 2003, no management fees are payable to DSSI.

       The Company extended loans of $10 each to both the Chief Executive
       Officer and Chief Financial Officer of DSSI. 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 percent per
       annum. The balance of the loans and accrued interest at December 31, 2003
       were $26.

       The Company has 38,724 stock options issued and outstanding to executive
       officers of affiliated companies.



                                      F-51
<PAGE>


COMVERGE, INC. AND SUBSIDIARIES NOTES
TO CONSOLIDATED FINANCIAL STATEMENT
DECEMBER 31, 2003
(ALL NOTES IN THOUSANDS OF DOLLARS, EXCEPT PER SHARE DATA)


13. SUBSEQUENT EVENT

       In December 2003, the Company signed an executory agreement with an
       investor to sell $3,000 of its Series A preferred shares contingent upon
       the successful completion of a joint development agreement ("Development
       Agreement") between its subsidiary and the Company. The proceeds of the
       sale were placed in escrow pending the completion of a Development
       Agreement. In March of 2004, a Development Agreement was executed between
       Comverge and the investor's subsidiary and the $3,000 of proceeds were
       released to the Company completing the sale of its Series A preferred
       shares.





















                                      F-52