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<SEC-DOCUMENT>0001144204-03-004777.txt : 20030826
<SEC-HEADER>0001144204-03-004777.hdr.sgml : 20030826
<ACCEPTANCE-DATETIME>20030818163015
ACCESSION NUMBER:		0001144204-03-004777
CONFORMED SUBMISSION TYPE:	10-Q
PUBLIC DOCUMENT COUNT:		5
CONFORMED PERIOD OF REPORT:	20030630
FILED AS OF DATE:		20030814
DATE AS OF CHANGE:		20030826

FILER:

	COMPANY DATA:	
		COMPANY CONFORMED NAME:			DATA SYSTEMS & SOFTWARE INC
		CENTRAL INDEX KEY:			0000880984
		STANDARD INDUSTRIAL CLASSIFICATION:	SERVICES-COMPUTER PROGRAMMING SERVICES [7371]
		IRS NUMBER:				222786081
		STATE OF INCORPORATION:			DE
		FISCAL YEAR END:			1231

	FILING VALUES:
		FORM TYPE:		10-Q
		SEC ACT:		1934 Act
		SEC FILE NUMBER:	000-19771
		FILM NUMBER:		03853437

	BUSINESS ADDRESS:	
		STREET 1:		200 RTE 17
		CITY:			MAHWAH
		STATE:			NJ
		ZIP:			07430
		BUSINESS PHONE:		2015292026

	MAIL ADDRESS:	
		STREET 1:		200 ROUTE 17
		CITY:			MAHWAH
		STATE:			NJ
		ZIP:			07430

	FORMER COMPANY:	
		FORMER CONFORMED NAME:	DEFENSE SOFTWARE & SYSTEMS INC
		DATE OF NAME CHANGE:	19930328
</SEC-HEADER>
<DOCUMENT>
<TYPE>10-Q
<SEQUENCE>1
<FILENAME>datasystems_10q.txt
<TEXT>
================================================================================

                       SECURITIES AND EXCHANGE COMMISSION
                             WASHINGTON, D.C. 20549

                                    FORM 10-Q

               QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF
                       THE SECURITIES EXCHANGE ACT OF 1934

   FOR THE QUARTERLY PERIOD ENDED JUNE 30, 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
         incorporation or organization)            identification no.)

        200 Route 17, Mahwah, New Jersey                  07430
    (Address of principal executive offices)            (Zip code)

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


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

                                |X| Yes   |_| No

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

                                | | Yes   |X| No

     Number of shares outstanding of the registrant's common stock, as of August
8, 2003: 8,359,959

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

<PAGE>


                  DATA SYSTEMS & SOFTWARE INC. AND SUBSIDIARIES


                                TABLE OF CONTENTS

PART I.  Financial Information

Item 1.  Unaudited Consolidated Financial Statements

         Consolidated Balance Sheets
            as of December 31, 2002 and June 30, 2003......................... 1

         Consolidated Statements of Operations
            for the six and three month periods ended June 30, 2002 and 2003.. 2

         Consolidated Statement of Changes in Shareholders' Equity
            for the six month period ended  June 30, 2003..................... 3

         Consolidated Statements of Cash Flows
            for the six month periods ended June 30, 2002 and 2003............ 4

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

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

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

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


PART II. Other Information

Item 2.  Changes in Securities and Use of Proceeds ...........................21

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

Signatures ...................................................................22


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

<PAGE>

                  DATA SYSTEMS & SOFTWARE INC. AND SUBSIDIARIES
                           Consolidated Balance Sheets
                    (dollars in thousands, except share data)
                                      As of

<TABLE>
<CAPTION>
                                                                      December 31,  June 30,
                                 ASSETS                                   2002        2003
                                                                        --------    --------
<S>                                                                       <C>         <C>
Current assets:                                                                    (unaudited)
     Cash and cash equivalents ......................................     $1,150      $1,868
     Restricted cash ................................................        241       1,241
     Trade accounts receivable, net .................................     12,267       5,943
     Inventory ......................................................      2,217          67
     Other current assets ...........................................      1,401         837
                                                                        --------    --------
         Total current assets .......................................     17,276       9,956
Investment in affiliated company ....................................          -       3,270
Property and equipment, net .........................................      1,972         801
Goodwill ............................................................      4,929       4,430
Other intangible assets, net ........................................        404         148
Long-term deposits - restricted .....................................      5,700         500
Other assets ........................................................        669         746
Prepaid employee termination benefits ...............................      2,355       2,319
                                                                        --------    --------
         Total assets ...............................................    $33,305     $22,170
                                                                        ========    ========

                  LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
     Short-term debt and current maturities of long-term debt, net ..     $3,755      $1,825
     Trade accounts payable .........................................      5,185       2,214
     Accrued payroll, payroll taxes and social benefits .............      2,098       1,444
     Other current liabilities ......................................      3,411       2,992
                                                                        --------    --------
         Total current liabilities ..................................     14,449       8,475
                                                                        --------    --------
Long-term liabilities:
     Long-term debt .................................................      6,278         644
     Other liabilities ..............................................        477         289
     Liability for employee termination benefits ....................      3,364       3,285
                                                                        --------    --------
            Total long-term liabilities .............................     10,119       4,218
                                                                        --------    --------
Minority interests ..................................................      1,609       1,505
                                                                        --------    --------
Shareholders' equity:
     Common stock - $.01 par value per share:
         Authorized - 20,000,000 shares;
         Issued - 8,161,867 and 8,714,063 shares
          as of December 31, 2002 and June 30, 2003, respectively ...         82          87
     Additional paid-in capital .....................................     37,687      42,850
     Warrants .......................................................        364         461
     Deferred compensation ..........................................         (7)         (4)
     Accumulated deficit ............................................    (26,787)    (31,209)
     Treasury stock, at cost - 845,704 and 847,704 shares
          as of December 31, 2002 and June 30, 2003, respectively ...     (3,913)     (3,915)
       Stockholder's note ...........................................       (298)       (298)
                                                                        --------    --------
         Total shareholders' equity .................................      7,128       7,972
                                                                        --------    --------
         Total liabilities and shareholders' equity .................    $33,305     $22,170
                                                                        ========    ========
</TABLE>

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

                                      - 1 -
<PAGE>

                  DATA SYSTEMS & SOFTWARE INC. AND SUBSIDIARIES
                Consolidated Statements of Operations (unaudited)
                      (in thousands, except per share data)

<TABLE>
<CAPTION>
                                                      Six months ended         Three months ended
                                                           June 30,                  June 30,
                                                    ----------------------    ----------------------
                                                       2002         2003         2002         2003
                                                    ---------    ---------    ---------    ---------
<S>                                                   <C>          <C>           <C>          <C>
Sales:
     Products ...................................     $17,661      $13,121       $8,960       $4,145
     Services ...................................       7,930        7,032        3,823        3,140
                                                    ---------    ---------    ---------    ---------
                                                       25,591       20,153       12,783        7,285
                                                    ---------    ---------    ---------    ---------
Cost of sales:
     Products ...................................      14,051       10,749        7,230        3,449
     Services ...................................       5,970        5,044        2,961        2,545
                                                    ---------    ---------    ---------    ---------
                                                       20,021       15,793       10,191        5,994
                                                    ---------    ---------    ---------    ---------
     Gross profit ...............................       5,570        4,360        2,592        1,291

Research and development expenses ...............       1,010          153          550            -
Selling, general and administrative expenses ....       8,752        6,410        4,452        2,108
                                                    ---------    ---------    ---------    ---------
     Operating loss .............................      (4,192)      (2,203)      (2,410)        (817)

Interest income .................................         146           27           53            5

Interest expense ................................        (293)        (650)        (199)        (296)

Other income (expense), net .....................          92         (165)          66         (151)

Minority interests ..............................         203          104          207          121

Equity loss in unconsolidated subsidiary ........           -       (1,501)           -       (1,501)
                                                    ---------    ---------    ---------    ---------
     Loss before provision for income taxes .....      (4,044)      (4,388)      (2,283)      (2,639)

Provision for income taxes ......................          57           34           15           22
                                                    ---------    ---------    ---------    ---------
     Net loss ...................................     $(4,101)     $(4,422)     $(2,298)     $(2,661)
                                                    =========    =========    =========    =========

Basic and diluted net loss per share:
     Net loss per share .........................      $(0.56)      $(0.58)      $(0.31)      $(0.34)
                                                    =========    =========    =========    =========
Weighted average number of shares
         outstanding - basic and diluted ........       7,353        7,570        7,353        7,792
                                                    =========    =========    =========    =========
</TABLE>

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


                                      - 2 -
<PAGE>

                  DATA SYSTEMS & SOFTWARE INC. AND SUBSIDIARIES
      Consolidated Statement of Changes in Shareholders' Equity (unaudited)
                         Six months ended June 30, 2003
                                 (in thousands)

<TABLE>
<CAPTION>
                                                  Additional
                              Number     Common    Paid-In     Deferred              Treasury  Stockholder's Accumulated
                             of Shares    Stock     Capital  Compensation  Warrants    Stock       Note        Deficit     Total
                             ---------   ------   ---------- ------------  --------  --------  ------------- -----------   -----
<S>                             <C>          <C>    <C>            <C>        <C>     <C>           <C>        <C>          <C>
Balances as of
   December 31, 2002            8,162        $82    $37,687        $(7)       $364    $(3,913)      $(298)    $(26,787)    $7,128

Amortization of
  deferred
  compensation                      -          -          -          3           -          -           -            -          3

Issuance of shares
  as compensation                  50          -         50          -           -          -           -            -         50

Issuance of shares
  in lieu of debt
  repayment                       502          5        759          -           -          -           -            -        764

Warrants issued for
  professional
  services                          -          -          -          -          97          -           -            -         97

Purchase of
  treasury shares                   -          -          -          -           -         (2)          -            -         (2)

Equity from
  issuance of preferred
  shares by
  Comverge Inc.                     -          -      3,669          -           -          -           -            -      3,669

Equity from issuance
  of common shares by
  Converge Inc.                     -          -        685          -           -          -           -            -        685

Net loss                            -          -          -          -           -          -           -       (4,422)    (4,422)
                             --------   --------   --------   --------    --------   --------    --------     --------   --------

Balances as of
   June 30, 2003                8,714        $87    $42,850        $(4)       $461    $(3,915)      $(298)    $(31,209)   $ 7,972
                             ========   ========   ========   ========    ========   ========    ========     ========   ========
</TABLE>

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


                                      - 3 -
<PAGE>

                  DATA SYSTEMS & SOFTWARE INC. AND SUBSIDIARIES
                Consolidated Statements of Cash Flows (unaudited)
                             (dollars in thousands)

<TABLE>
<CAPTION>
                                                                                      Six months ended June 30,
                                                                                      -------------------------
                                                                                           2002        2003
                                                                                         --------    --------
<S>                                                                                       <C>         <C>
Cash flows (used in) provided by operating activities:
     Net loss ........................................................................    $(4,101)    $(4,422)
     Adjustments to reconcile net loss to net cash provided by
         operating activities - Appendix A: ..........................................      1,484       5,149
                                                                                         --------    --------
         Net cash (used in) provided by operating activities .........................     (2,617)        727
                                                                                         --------    --------
Cash flows (used in) provided by investing activities:
     Restricted cash .................................................................        (28)      4,200
     Proceeds from sale and maturity of debt securities ..............................        411           -
     Proceeds from sale of property and equipment ....................................          -          15
     Investment in debt securities ...................................................       (468)          -
     Acquisitions of property and equipment ..........................................       (201)       (131)
     Funding of termination benefits .................................................         64        (249)
     Acquisition of intangible assets ................................................         (2)          -
     Other ...........................................................................          -        (160)
     Investment in equity method investee ............................................          -      (3,327)
                                                                                         --------    --------
         Net cash provided by (used in) investing activities .........................       (224)        348
                                                                                         --------    --------
Cash flows (used in) provided by financing activities:
     Short-term debt, net ............................................................       (572)       (393)
     Proceeds from issuance of convertible note ......................................      2,000           -
     Borrowings of long-term debt ....................................................        646         441
     Repayments of long-term debt ....................................................        (37)       (403)
     Convertible note issuance costs .................................................       (167)          -
     Purchase of treasury stock ......................................................          -          (2)
                                                                                         --------    --------
         Net cash provided by (used in) financing activities .........................      1,870        (357)
                                                                                         --------    --------
Net (decrease) increase in cash and cash equivalents .................................       (971)        718
Cash and cash equivalents at beginning of period .....................................      4,025       1,150
                                                                                         --------    --------
Cash and cash equivalents at end of period ...........................................     $3,054      $1,868
                                                                                         ========    ========
Supplemental cash flow information:
     Cash paid during period for interest ............................................       $192        $247
                                                                                         ========    ========
     Cash paid during period for income taxes ........................................        $67         $91
                                                                                         ========    ========
Non-cash investing and financing activities:
      Issuance of common stock in lieu of debt repayment .............................          -        $764
      Increase in investment in Comverge from issuance of preferred and common stock
        credited to additional paid in capital .......................................          -      $4,354
      Accounts payable incurred in investment of Comverge ............................          -         $43
      Accounts payable incurred in acquisition of fixed assets .......................       $100           -
      Value of beneficial conversion feature and related warrants on
         issuance of convertible note ................................................       $692           -
      Adjustment of goodwill and intangible assets ...................................        $48           -
      Increase in deferred tax liability associated with adjustment of
         intangible assets ...........................................................        $17           -
</TABLE>

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


                                      - 4 -
<PAGE>

                  DATA SYSTEMS & SOFTWARE INC. AND SUBSIDIARIES
         Consolidated Statements of Cash Flows - Appendices (unaudited)
                             (dollars in thousands)

<TABLE>
<CAPTION>
Appendix A                                                                             Six months ended June 30,
                                                                                       -------------------------
                                                                                            2002        2003
                                                                                          --------    --------
<S>                                                                                         <C>         <C>
   Adjustments to reconcile net loss to net cash (used in) provided by operating
activities:
     Depreciation and amortization ....................................................     $  676      $  357
     Allowance for doubtful accounts ..................................................        (87)         61
     Stock and stock option compensation ..............................................         20          53
     Accretion of discount on convertible note and amortization of
          related costs and warrants ..................................................         54         493
     Minority interest and write-off of minority interest balance .....................       (243)       (104)
     Equity loss ......................................................................          -       1,501
     Unrealized gain on debt securities ...............................................        (13)          -
     (Decrease) increase in liability for employee termination benefits ...............        (65)        321
     Exchange adjustment on long-term debt ............................................        (27)         82
     Loss on disposition of property and equipment ....................................         14           4
     Deferred taxes ...................................................................          -         (96)
     Change in operating assets and liabilities:
         Decrease in accounts receivable and other current assets .....................      1,473       3,988
         (Decrease) increase in inventory .............................................     (1,642)        314
         Increase (decrease) in other assets ..........................................         91        (102)
         Increase (decrease) in accounts payable and other liabilities ................      1,233      (1,723)
                                                                                          --------    --------
         Total ........................................................................     $1,484      $5,149
                                                                                          --------    --------
</TABLE>


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


                                      - 5 -
<PAGE>


                  DATA SYSTEMS & SOFTWARE INC. AND SUBSIDIARIES
             Notes to Consolidated Financial Statements (unaudited)
                      (in thousands, except per share data)

Note 1: Basis of Presentation

     The  accompanying  unaudited  consolidated  financial  statements  of  Data
Systems & Software Inc.  ("DSSI") and  subsidiaries  (the  "Company")  have been
prepared in accordance  with  accounting  principles  generally  accepted in the
United  States  of  America  for  interim  financial  information  and  with the
instructions to Article 10 of Regulation S-X.  Accordingly,  they do not include
all of the information and footnotes required by accounting principles generally
accepted in the United  States of America for  complete  consolidated  financial
statements.  In the opinion of management,  all adjustments considered necessary
for a fair presentation have been included.  Operating results for the six-month
period ended June 30, 2003 are not  necessarily  indicative  of the results that
may be  expected  for  the  year  ending  December  31,  2003.  These  unaudited
consolidated  financial  statements  should  be read  in  conjunction  with  the
consolidated   financial  statements  and  footnotes  thereto  included  in  the
Company's  Annual  Report on Form 10-K for the year  ended  December  31,  2002.
Certain  reclassifications  have  been  made  to the  Company's  prior  period's
consolidated   financial   statements   to  conform  to  the  current   period's
consolidated financial statement presentation.

Note 2: Financing of Operations

     As of June 30, 2003, the Company had working  capital of $1,481,  including
$1,868 in unrestricted cash and cash equivalents. Net cash provided by operating
activities in the first six months of 2003 was $727. The primary  sources of the
Company's cash provided by operating  activities  during the first six months of
2003 were  collections of trade accounts  receivables in excess of reductions in
accounts payable ($2,265,  net), the Company's  non-cash equity loss in Comverge
($1,501) and other non-cash expenses included in net loss ($964).  These sources
of cash were partially  offset by the Company's loss ($4,422),  (primarily first
quarter   consolidated  losses  in  Comverge  ($1,125)  and  corporate  expenses
($1,171). Net cash provided by investing activities was $348. The primary source
of  cash  provided  by  investing  activities  was  the  release  of  previously
restricted cash ($4,200) of which $3,327 was invested in Comverge. Net cash used
in financing  activities was $357, which was comprised primarily of net payments
of debt ($355).

     Of the total working  capital at June 30, 2003,  approximately  $215 was in
the Company's  majority  owned Israeli subsidiary,  dsIT. Due to Israeli tax and
company law constraints,  as well as the significant  minority interest in dsIT,
such  working  capital  and cash flows from  dsIT's  operations  are not readily
available to finance U.S. activities.

     dsIT is utilizing  approximately $1,100 of its $1,700 lines of credit as of
June 30,  2003.  dsIT's  lines of credit are  denominated  in NIS and bearing an
average interest rate of the Israeli prime rate plus 0.9% per annum. The Israeli
prime rate  fluctuates and on June 30, 2003 was 9.4%. The Company  believes that
dsIT will have  sufficient  liquidity to finance its  activities  from cash flow
from its own operations and available lines of credit over the next 12 months.

     On April 7, 2003 the Company's formerly consolidated subsidiary,  Comverge,
Inc.  (Comverge)  signed and closed on an agreement for private equity financing
(see Note 3). As a result,  the Company is no longer required to fund Comverge's
operations. As part of the agreement for the private equity financing,  Comverge
received a new $6,500 credit facility, which included a $1,500 term loan secured
by a $1,500  restricted  deposit of DSSI at Comverge's new lender.  Comverge has
agreed to prepay the term loan in and permit  release of DSSI's  $1,500  deposit
over the 12 months commencing  December 31, 2003,  subject to certain conditions
(see Note 3). The Company  believes  that the proceeds of the  financing and new
credit arrangements  provide sufficient  financing for Comverge to independently
fund its  activities,  and has no obligation  to fund any of  Comverge's  losses
subsequent to April 1, 2003.

     As of July 31,  2003  the  Company's  wholly  owned  US  operations  (i.e.,
excluding  dsIT)  had an  aggregate  of  $1,854  in  unrestricted  cash and cash
equivalents,  reflecting  a $722  increase  from the balance as of December  31,
2002.


                                      - 6 -
<PAGE>


                  DATA SYSTEMS & SOFTWARE INC. AND SUBSIDIARIES
             Notes to Consolidated Financial Statements (unaudited)
                      (in thousands, except per share data)


     The Company  believes it has more than sufficient  liquidity to finance its
US-based operating activities and its corporate activities for at least the next
12 months. The Company intends to finance these activities from cash on hand and
operating cash flows.

Note 3: Comverge equity financing transaction

     On April 7, 2003,  the Company and its  formerly  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
$77. A syndicate of venture  capital firms  purchased  the  remaining  $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 $12,673 of
intercompany balances with Comverge to equity.

     The venture  capital firm which  purchased the Series A-1  Preferred  Stock
entered into an agreement with Comverge  pursuant to which  Comverge  granted to
the  venture  capital  firm an option to put its shares of Series A-1  Preferred
Stock to Comverge for $2,000. The put is exercisable from April 8, 2004 to April
18, 2004.  This agreement also grants to Comverge a right to call all the Series
A-1 Preferred Stock for $2,000, at anytime on or before April 18, 2004.

     The Series A and Series A-1 Convertible  Preferred Stock  (collectively the
"Preferred  Stock") have priority  over Comverge  common stock for dividends and
liquidations  (which includes a sale of Comverge).  Additionally,  the Preferred
Stock has anti-dilution protection for stock issuances by Comverge below the per
share  purchase  price of the Series A Preferred  Stock  (subject  to  customary
exceptions  such as employee stock options) as well as approval rights for major
corporate  transactions,  stock issuances,  declaration or payment of dividends,
changing corporate governance documents,  liquidation or dissolution of Comverge
and other  corporate  matters.  Each share of the Preferred Stock is convertible
into one share of Comverge common stock at any time at the holder's  option,  or
upon an initial  public  offering with gross proceeds of at least $30,000 and an
offering price of at least $10.40 per share. The Preferred Stock votes on an "as
converted" basis with the common stock.  The Comverge  articles of incorporation
provide  for an  initial  board of  directors  with five  members,  of which the
Preferred  Stock  holders elect three members and the common stock holders elect
two.

     In connection with the equity  financing  transaction,  Comverge  secured a
$6,500 credit facility with a leading financial institution.  In connection with
the private equity financing and this new credit facility, Comverge paid off its
bank term loan outstanding and its $2,000 secured line of credit, which line was
also terminated. As a result of the repayment of the term loan, $1,000 of DSSI's
long-term  deposit,  which had been pledged to  Comverge's  bank as security for
Comverge's loan, became unrestricted.

     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,  if (i) Comverge  raises at least $2
million  in  additional  equity in  subsequent  transactions  and (ii)  Comverge
exercises its right to call the Series A-1 Preferred Stock or the holder's right
to put such stock expires without being exercised.

     The prepayments by Comverge and release of the pledge account,  if any, are
to be made in three  payments of $500 each on December 31,  2003,  June 30, 2004
and December 31, 2004;  the first  payment will be deferred to April 28, 2004 if
the Series A-1 Preferred  Stock is not redeemed.  The prepayments and release of
the pledge will be  accelerated  to two payments of $750 each if, in addition to
satisfying  the other  conditions  referred to above,  Comverge  raises at least
$3,000 (rather than $2,000 as mentioned above) of additional  equity. If none of
the above conditions have been satisfied,  then the Company will not be entitled
to the release of the $1,500 until April 1, 2006, although Comverge is obligated
to use commercially  reasonable efforts to cause the release of the money to the
Company before that date.

                                      - 7 -
<PAGE>


                  DATA SYSTEMS & SOFTWARE INC. AND SUBSIDIARIES
             Notes to Consolidated Financial Statements (unaudited)
                      (in thousands, except per share data)


     Until  December  31,  2003,  the Company  has the option to  purchase  from
Comverge up to $1,500 of Series A-2 Convertible  Preferred  Stock. The amount of
Series A-2  Preferred  Stock that the Company may purchase from Comverge will be
limited to the number of shares that could be purchased by the principal balance
of the $1,500 term loan as of the date the Company  gives  notice of  exercising
the Series A-2  option.  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.

     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.  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  equity  financing  transactions,  Comverge
acquired Sixth Dimension, Inc. ("6D") in a purchase business combination, valued
at approximately  $1,052,  in exchange for 877,000 of Comverge's  common shares.
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.

     Comverge  is in the process of  obtaining  third  party  valuations  of the
assets  acquired,  thus the  preliminary  allocation  of the purchase  price may
change and effect the  Company's  equity loss from its  investment  in Comverge.
Based on the preliminary price allocation, Comverge has estimated goodwill to be
$596.

     At June 30,  2003,  the Company  remains  Comverge's  largest  shareholder,
owning  approximately  50.6% of the outstanding capital voting stock of Comverge
(42.6% if  outstanding  options and  warrants of Comverge  are  exercised).  The
Company holds approximately 26% of the Preferred Stock issued by Comverge in the
private equity financing,  in addition to owning approximately 76% of Comverge's
common stock. The Company's investment in Preferred Stock was primarily financed
by the  release  of  $3,000 of  previously  restricted  cash.  The  issuance  of
preferred and common stock in Comverge resulted in increases in the value of the
Company's  interest in Comverge.  These  increases were treated as a increase to
the Company's additional paid in capital.

                                       -8-
<PAGE>


                  DATA SYSTEMS & SOFTWARE INC. AND SUBSIDIARIES
             Notes to Consolidated Financial Statements (unaudited)
                      (in thousands, except per share data)


Note 4: Equity investment in Comverge

     As  a  result  of  the  private  equity  financing  transaction  and  other
agreements  described in Note 3, the Company can elect at most two  directors of
Comverge,  one of whom  must  be the CEO of  Comverge  (who is  selected  by the
Comverge Board which is not controlled by the Company); the Company is unable to
determine the selection of the remaining three  directors.  Therefore,  although
the Company  currently  owns 50.6% of Comverge's  voting  stock,  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.

     Summary  unaudited  financial  information for Comverge as of June 30, 2003
and for the period from April 1 to June 30, 2003 is as follows:

<TABLE>
<CAPTION>
                                                                                          As at June 30,
                                                                                               2003
                                                                                             --------
<S>                                                                                           <C>
     Financial Position
     Current assets                                                                           $12,830
     Property, plant, and equipment, net                                                        1,435
     Intangible and other assets, net                                                           1,695
                                                                                             --------
              Total assets                                                                    $15,960
                                                                                             ========

     Current liabilities (excluding current maturities of long-term debt)                     $ 2,433
     Current maturities of long-term debt                                                       2,700
     Long-term debt                                                                             1,500
     Other non-current liabilities                                                                225
                                                                                             --------
              Total liabilities                                                                 6,858
     Shareholders' equity                                                                       9,102
                                                                                             --------
              Total liabilities and shareholder's equity                                      $15,960
                                                                                             ========
</TABLE>

<TABLE>
<CAPTION>
                                                                                           Period from
                                                                                          April 1, 2003
                                                                                           to June 30,
                                                                                              2003
                                                                                          -------------
<S>                                                                                          <C>
     Results of Operations
     Sales                                                                                     $4,008
     Operating loss                                                                           $(1,984)
     Net loss                                                                                 $(2,211)
</TABLE>

     The  activity in the  Company's  investment  in  Comverge  during the three
months ended June 30, 2003 is as follows:

<TABLE>
<S>                                                                                            <C>
     Conversion of inter-company balances to equity                                          $ 12,673
     Accumulated deficit at March 31, 2003                                                    (15,583)
     Cash paid for preferred stock of Comverge                                                  3,250
     Transaction costs paid                                                                        77
                                                                                             --------
     Company's Comverge investment at March 31, 2003                                             $417
     Adjustment of the Company's Comverge investment from sale of preferred shares
       and issuance of common stock                                                             4,354
                                                                                             --------
     Investment balance prior to equity loss                                                    4,771
     Equity loss in Comverge - April 1 to June 30, 2003                                        (1,501)
                                                                                             --------
     Investment balance at June 30, 2003                                                       $3,270
                                                                                             ========
</TABLE>

     As a result of Comverge's  net loss during the quarter ended June 30, 2003,
the Company  reduced  its  investment  in  Comverge's  common  stock to zero and
recognized  a  charge  of 26% of the  excess  net  losses  of $57,  against  its
Preferred Stock investment.

                                      - 9 -
<PAGE>


                  DATA SYSTEMS & SOFTWARE INC. AND SUBSIDIARIES
             Notes to Consolidated Financial Statements (unaudited)
                      (in thousands, except per share data)

Note 5: Inventory

     Inventory consists of the following:

                                                     As of      As of
                                                  December 31, June 30,
                                                      2002       2003
                                                  ------------ --------
     Raw materials, spare parts and supplies          $1,396        $55
     Work-in-process                                     161          -
     Finished goods and merchandise                      660         12
                                                    --------   --------
                                                      $2,217        $67
                                                    ========   ========

Note 6--Goodwill and Other Intangible Assets

     The table below presents the carrying amount of goodwill, by segment. There
were no  acquisitions  or impairments of goodwill  recorded during the six-month
period ended June 30, 2003.

<TABLE>
<CAPTION>
                                                                      Software         Energy
                                                                   Consulting and   Intelligence
                                                                     Development      Solutions          Total
                                                                    -------------   -------------    -------------
<S>                                                                        <C>               <C>            <C>
     Segment balances as of December 31, 2002                              $4,430            $499           $4,929
     Deconsolidation of Comverge investment (See Notes 3 and 4)                 -            (499)            (499)
                                                                    -------------   -------------    -------------
     Segment balances as of June 30, 2003                                  $4,430            $  -           $4,430
                                                                    =============   =============    =============
</TABLE>

     The following table presents  certain  information  regarding the Company's
amortizable  intangible  assets  as of June 30,  2003  and  December  31,  2002.
Intangible  assets are amortized  over their  estimated  useful  lives,  with no
estimated residual values.

<TABLE>
<CAPTION>
                                                                                As of June 30, 2003
                                                                 -----------------------------------------------
                                           Weighted average          Gross                                Net
                                             amortization          carrying        Accumulated         carrying
                                                period               amount        amortization         amount
                                           ----------------      -------------     ------------       ----------
<S>                                               <C>                   <C>               <C>              <C>
     Amortizing intangible assets:
         Software licenses                        4.5 yrs                $260             $112             $148

<CAPTION>
                                                                             As of December 31, 2002
                                                                 -----------------------------------------------
                                           Weighted average          Gross                                Net
                                             amortization          carrying        Accumulated         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                        4.5 yrs                 260               79              181
                                                                 -------------     ------------       ----------
                   Total                                               $1,116             $712             $404
                                                                 =============     ============       ==========
</TABLE>


                                     - 10 -
<PAGE>

                  DATA SYSTEMS & SOFTWARE INC. AND SUBSIDIARIES
             Notes to Consolidated Financial Statements (unaudited)
                      (in thousands, except per share data)

     Amortization in respect of license,  patents and software licenses amounted
to $42 and $250 for the six months  ended June 30,  2002 and 2003,  respectively
(2002 includes  amortization  of $84 with respect to acquired  backlog which was
fully amortized in 2002).

     Estimated  amortization  expense  for the  remainder  of 2003 is $25 and as
follows with respect to intangible assets for each of the next five years:

                Year ended June 30,
                -------------------
                        2004                    $50
                        2005                     32
                        2006                     32
                        2007                     25
                        2008                      9
                                            -------
                                               $148
                                            =======

Note 7: Warranty Provision

     The Company 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.  The accrued product warranty
costs are based primarily on historical  experience of actual warranty claims as
well as current information on repair costs.

     The following  table  provides the changes in the  Company's  provision for
product warranties for the six-month periods ended June 30, 2002 and 2003:

<TABLE>
<CAPTION>
                                                                 Six months ended June 30,
                                                                 -------------------------
                                                                       2002        2003
                                                                    ---------    -------
<S>                                                                      <C>        <C>
         Warranty provision at beginning of the period                    $79        $52
         Accruals for warranties issued during the period                  61          3
         Warranty settlements made during the period                        -         (3)
         Other - deconsolidation of Comverge (see Note 4)                   -        (52)
                                                                    ---------    -------
         Warranty provision at the end of the period                     $140        $ -
                                                                    =========    =======
</TABLE>

     The Company's dsIT subsidiary  defers a portion of its revenues on projects
and recognizes them over the warranty period so as to cover any costs related to
these warranties. To date the Company has not incurred material costs related to
warranty obligations in excess of the revenues deferred.

     The Company's  product  license and services  agreements  include a limited
indemnification  provision  for  claims  from  third  parties  relating  to  the
Company's intellectual property included in the Company's products and projects.
Such  indemnification  provisions  are accounted for when amounts of liabilities
are probable and  estimable.  The  indemnification  is generally  limited to the
amount  paid by the  customer  and to date there have not been  material  claims
under  such  indemnification  provisions.  At  this  time,  the  Company  cannot
reasonably estimate future potential indemnifications, if any.


                                      -11-
<PAGE>


                  DATA SYSTEMS & SOFTWARE INC. AND SUBSIDIARIES
             Notes to Consolidated Financial Statements (unaudited)
                      (in thousands, except per share data)

Note 8: Stock-Based Compensation

     Statement of Financial  Accounting  Standards ("SFAS") No. 123, "Accounting
for Stock Based Compensation", permits companies to (i) recognize as expense the
fair value of  stock-based  awards,  or (ii) continue to apply the provisions of
Accounting  Principles  Board  Opinion No. 25,  "Accounting  for Stock Issued to
Employees"  and related  interpretations  ("APB 25"),  and provide pro forma net
income and earnings per share disclosures for employee stock option grants as if
the  fair-value-based  method  defined  in SFAS No.  123 had been  applied.  The
Company  continues to apply the  provisions  of APB 25 and provide the pro forma
disclosures in accordance  with the  provisions of SFAS No. 123, as amended,  to
its Stock  Option and  Incentive  Plan.  Under APB 25, the Company has  recorded
minimal stock-based employee and director  compensation cost associated with its
stock option plan, as all options  granted under the plan had an exercise  price
equal to the market value of the underlying common stock on the date of grant.

     The  following  table  illustrates  the effect on net loss and net loss per
share as if the Company had applied  the fair value  recognition  provisions  of
SFAS No. 123 to its stock option plan:

<TABLE>
<CAPTION>
                                                    Three months ended June 30,  Six months ended June 30,
                                                    ---------------------------  -------------------------
                                                          2002        2003            2002        2003
                                                        --------    --------        --------    --------
<S>                                                      <C>         <C>             <C>         <C>
     Net loss as reported ...........................    $(2,298)    $(2,661)        $(4,101)    $(4,422)
     Plus: Stock-based employee and director
            compensation expense included in
            reported net loss .......................          1           1               3          53
     Less: Total stock-based employee compensation
            expense determined under fair value
            based method for all awards .............        187          77             695         186
                                                        --------    --------        --------    --------
     Pro forma net loss .............................    $(2,484)    $(2,737)        $(4,793)    $(4,555)
                                                        ========    ========        ========    ========

        Net loss per share:
           Basic and diluted - as reported
                                                          $(0.31)     $(0.34)         $(0.56)     $(0.58)
                                                        ========    ========        ========    ========
           Basic and diluted - pro forma ............     $(0.34)     $(0.35)         $(0.65)     $(0.60)
                                                        ========    ========        ========    ========
</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  application  of SFAS No 123  with  respect  to  Comverge  is
included  for the six month  period  ended June 30,  2002 and the period in 2003
until the Company's deconsolidation of its interest in Comverge - see Note 4).

Note 9: Warrants

     On February 25, 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 is to pay 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  dividends.  The Company
estimated  the fair value of the  warrants to be $97,  which has been charged to
selling, general and administrative expense.


                                      -12-
<PAGE>

                  DATA SYSTEMS & SOFTWARE INC. AND SUBSIDIARIES
             Notes to Consolidated Financial Statements (unaudited)
                      (in thousands except per share data)

Note 10: Segment Information
<TABLE>
<CAPTION>
                                              Software
                                             Consulting      Energy
                                                 and      Intelligence     Computer
                                             Development  Solutions(**)    Hardware      Other (*)      Total
<S>                                             <C>           <C>           <C>              <C>       <C>
Six months ended June 30, 2003:
   Revenues from external customers**           $6,311        $4,700        $9,118           $24       $20,153
   Intersegment revenues                             -           284            20             -           304
   Segment gross profit                          1,400         1,313         1,623            24         4,360
   Segment loss                                   (465)       (2,626)          (91)           (6)       (3,188)

Six months ended June 30, 2002:
   Revenues from external customers             $7,297        $9,424        $8,777           $93       $25,591
   Intersegment revenues                            19           479            46             -           544
   Segment gross profit                          1,292         2,774         1,459            45         5,570
   Segment income (loss)                          (894)       (1,868)          (25)            5        (2,782)

Three months ended June 30, 2003:
   Revenues from external customers             $3,081           $ -        $4,188           $16        $7,285
   Intersegment revenues                             -             -             -             -             -
   Segment gross profit                            537             -           738            16         1,291
   Segment loss                                   (444)       (1,501)         (141)            -        (2,086)

Three months ended June 30, 2002:
   Revenues from external customers             $3,462        $4,770        $4,521           $30       $12,783
   Intersegment revenues                             -           208            29             -           237
   Segment gross profit                            503         1,334           745            10         2,592
   Segment income (loss)                          (720)       (1,017)            1           (15)       (1,751)
</TABLE>

- ----------
(*)  Represents  the  operations of a VAR software  operation in Israel that did
     not meet the quantitative thresholds of SFAS No. 131.
(**) Operating  results  of  Comverge  (in  the  Energy  Intelligence  Solutions
     segment) are no longer consolidated  beginning the second quarter of 2003 -
     see Note 4.


Reconciliation of Segment Loss to Consolidated Net Loss

<TABLE>
<CAPTION>
                                                Six months ended         Three months ended
                                                     June 30,                  June 30,
                                              ----------------------    ----------------------
                                                 2002         2003         2002         2003
                                              ---------    ---------    ---------    ---------
<S>                                             <C>          <C>          <C>          <C>
Total loss for reportable segments              $(2,787)     $(3,182)     $(1,736)     $(2,086)
Other operational segment income (loss)               5           (6)         (15)           -
                                              ---------    ---------    ---------    ---------
Total operating loss                             (2,782)      (3,188)      (1,751)      (2,086)
Net loss of corporate headquarters               (1,319)      (1,234)        (547)        (575)
                                              ---------    ---------    ---------    ---------
Total consolidated net loss                     $(4,101)     $(4,422)     $(2,298)     $(2,661)
                                              =========    =========    =========    =========
</TABLE>


                                     - 13 -
<PAGE>


                          Data Systems & Software Inc.
                     Management's Discussion and Analysis of
                  Financial Condition and Results of Operations


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

     The following  discussion  includes  statements that are forward-looking in
nature.  Whether such statements  ultimately prove to be accurate depends upon a
variety of factors that may affect our business and operations. Certain of these
factors are discussed  below under "Factors That May Influence  Future  Results"
and in "Item 1.  Description  of Business - Factors  That May  Influence  Future
Results" in our Annual Report on Form 10-K for the year ended  December 31, 2002
(the "2002 10-K").

Overview and Trend Information

     We  operate  in  three  reportable   segments:   software   consulting  and
development,  energy  intelligence  solutions,  and computer hardware.  As we no
longer  have  control  over  Comverge  (see  Notes  3  and  4 to  the  Financial
Statements),  effective the second quarter of 2003 we account for our investment
in Comverge on the equity method and no longer consolidate  Comverge's  balances
and  operating  activity  into our  consolidated  balance sheet and statement of
operations.  Therefore,  beginning  with the second  quarter of 2003, our energy
inteligence  solution segment consists solely of our equity method investment of
Comverge.  The  following  analysis  should be read  together  with the  segment
information  provided in Note 10 to our unaudited financial  statements included
in this report.

     Software Consulting and Development

     Segment  revenues  continued  to  decrease  in the second  quarter of 2003,
compared to the immediately  preceding quarter.  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 do not
see the market  improving and, while  increasing our marketing  efforts,  we are
constantly  implementing  cost cutting  measures so as to prevent this  activity
from incurring losses, until the market improves. These measures are what caused
the segment's  gross profit and segment loss in 2003 periods to improve on those
of the 2002 periods.  This  improvement was partially offset by foreign exchange
losses  included in other  expenses of $153,000  due to the  revaluation  of the
Israeli Shekel  against the US dollar during this quarter.  The exchange rate of
the Israeli Shekel  continues to fluctuate and there is no assurance it will not
have a negative effect on results in future periods.

     In June 2003 Clalit Health  Services,  Israel's  largest HMO and one of the
largest in the world, 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
is to be  implemented  over one  year  and  includes  a  seven-year  maintenance
contract.  In the future, we expect that this product, our OncoProTM product and
sonar technology  systems will have increased impact on our results,  offsetting
the continued deterioration in the software consulting market.

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

     Energy Intelligence Solutions

     On April 7, 2003  Comverge  signed and closed on an agreement  (see Note 3)
for private equity financing in the amount of $13,000.  We invested $3,250,  and
$9,750 was invested by a group of leading energy venture capital investors.


                                     - 14 -
<PAGE>


     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  June  30,  2003  have  been  included  in  equity  loss  in
unconsolidated subsidiary in the our consolidated statements of operations.

     Towards the end of the first  quarter and  beginning  of second  quarter of
2003,  Comverge  devoted  significant  attention to the capital  raising process
mentioned  above.  In  addition,  during this quarter  Comverge  signed a major,
long-term Virtual Peaking Capacity(TM) contract to provide significant peak load
reduction to PacifiCorp, a subsidiary of Scottish Power. Although no revenue was
recognized with respect to this contract in the second quarter,  we expect it to
have a positive  effect on revenues in future  periods.  Comverge and Gulf Power
have agreed in principle to modify their long term  agreement for the deployment
of  Maingate  gateway  systems,   temporarily  delaying  shipments.   This  will
significantly  reduce  revenues from this contract in the short term, but is not
expected to negatively  impact  operating  results at Comverge.  Over the longer
term,  the  modifications  are  expected  to improve  the Gulf  Power  project's
profitability, due to product improvements and reductions in component costs.

     Computer Hardware

     Sales in the second quarter of 2003 were below  expectations  and below the
level of sales  achieved in the first quarter of this year.  We expect  computer
hardware sales to improve in the coming quarters. To offset the weakness in this
market, and diversify our revenue base, we have initiated efforts towards adding
more value added software  products and services,  which we hope to leverage off
the expertise of our existing sales force and customer base.  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

     With the completion of Comverge's venture financing in April 2003, Comverge
has  sufficient  independent  finance  and we no longer  have  control  over its
activities. Our CEO, Mr. George Morgenstern, has informed the DSSI Board that he
intends to retire  from  full-time  employment  as of  December  31, 2003 and to
remain as a consultant to us as called for in his employment agreement. In light
of our reduced involvement at Comverge,  the capable  independent  management in
place at our dsIT and Databit  subsidiaries  and our CEO's  retirement,  we have
begun an evaluation of our corporate  activities and structure.  This evaluation
includes  exploration of restructuring and/or acquisitions or mergers. We expect
to continue this process during the next few months.




                                     - 15 -
<PAGE>


Results of Operations

     The  following  table sets forth  certain  information  with respect to our
consolidated  results of operations  for the three and six months ended June 30,
2002 and 2003,  including the  percentage of total  revenues  during each period
attributable to selected components of the operations statement data and for the
period to period percentage changes in such components.  Being that starting the
second  quarter  of 2003  we do not  fully  consolidate  Comverge's  results  of
operations;  rather include them on an equity basis,  the results of the periods
presented are not fully comparable.

<TABLE>
<CAPTION>
                                         Six months ended June 30,                          Three months ended June 30,
                           --------------------------------------------------    -------------------------------------------------
                                  2002                 2003           Change           2002                  2003          Change
                           ------------------   ------------------   --------    ------------------   ------------------  --------
                                      % of                 % of        % of                 % of                 % of       % of
                            ($,000)   sales      ($,000)   sales       2002      ($,000)    sales     ($,000)    sales      2002
                           --------  --------   --------  --------   --------    --------  --------   --------  --------  --------
<S>                         <C>           <C>    <C>           <C>       <C>      <C>         <C>      <C>           <C>      <C>
Sales                       $25,591       100%   $20,153       100%       (21)%   $12,783       100%   $ 7,285       100%      (43)%
Cost of sales                20,021        78     15,793        78        (21)     10,191        80      5,994        82       (41)
                           --------  --------   --------  --------               --------  --------   --------  --------
   Gross profit               5,570        22      4,360        22        (22)      2,592        20      1,291        18       (50)
R&D expenses                  1,010         4        153         1        (85)        550         4          -         -      (100)
SG&A expenses                 8,752        34      6,410        32        (27)      4,452        34      2,108        29       (53)
                           --------  --------   --------  --------               --------  --------   --------  --------
   Operating loss            (4,192)      (16)    (2,203)      (11)       (47)     (2,410)      (18)      (817)      (11)      (66)
Interest expense, net          (147)       (1)      (623)       (3)       324        (146)       (1)      (291)       (4)       99
Other income (loss), net         92         0       (165)       (1)      (279)         66         1       (151)       (2)     (329)
Minority interests              203         1        104         -        (49)        207         2        (21)        2       (42)
Equity loss in
unconsolidated subsidiary         -         -     (1,501)       (7)                     -               (1,501)      (21)        -
                           --------  --------   --------  --------               --------  --------   --------  --------
   Loss before provision     (4,044)      (16)    (4,388)      (22)        (1)     (2,283)      (16)    (2,639)      (37)       (1)
     for income taxes
Provision for income taxes       57         0         34         0        (40)         15         0         22         0        47
                           --------  --------   --------  --------               --------  --------   --------  --------
   Net loss                 $(4,101)      (16)%  $(4,422)      (22)%       (2)%   $(2,298)      (16)%  $(2,661)      (37)%      (1)%
                           ========  ========   ========  ========               ========  ========   ========  ========
</TABLE>

     Sales.  Sales in the second  quarter and first six months of 2003 were $7.3
million and $20.2  million,  respectively,  compared to $12.8  million and $25.6
million in the same periods of 2002, respectively.  The decreases were primarily
attributable to not consolidating Comverge sales in the second quarter of 2003.

     Sales in Comverge, in the first quarter of 2003, second quarter of 2002 and
first six  months of 2002 were $4.7  million,  $4.8  million  and $9.4  million,
respectively.

     Sales in the computer  hardware  segment in the second quarter of 2003 were
$4.2 million,  decreasing by 7% from sales of $4.5 million in the second quarter
of 2002. The decrease in sales in the second quarter of 2003 was attributable to
the softer and more competitive hardware market.  Computer hardware sales in the
first six months of 2003 were $9.1 million, increasing by 4%, from sales of $8.8
million in the first six months of 2002, due to increased non-recurring sales in
the first quarter of 2003.

     Software  consulting  and  development  sales  were $3.1  million  and $6.3
million  in the  second  quarter  and  first six  months of 2003,  respectively,
compared to $3.5  million  and $7.3  million in the same  periods of 2002.  This
decrease  was  primarily  attributable  to the decrease in  consulting  revenues
resulting from the continued  general weakness in the global hi-tech markets and
in the software consulting and development market in particular.

     Gross profit.  Gross profit in the second  quarter and the first six months
of 2003 was  $1.3  million  and $4.4  million,  respectively,  compared  to $2.6
million  and $5.6  million  in the same  periods  of 2002.  The  decreases  were
entirely attributable to not consolidating Comverge's gross profit in the second
quarter of 2003.  The gross  profit  margin in the  computer  hardware  segment,
increased to 18% in the 2003  periods,  from 16% for the second  quarter of 2002
and 17% for the first six months of 2002. As a result of our continued effort to
improve the cost structure of the software  development and consulting  segment,
gross profit margins  increased to 22% for the first six months of 2003 compared
to 18% for the first six months of 2002 and 17% in the  second  quarter of 2003,
compared to 15% in the second quarter of 2002.


                                     - 16 -
<PAGE>


     Research and development  expenses ("R&D"). The decrease in R&D expenses in
each 2003 period,  as compared to the comparable  periods in 2002, was primarily
attributable to not consolidating  Comverge's R&D in the second quarter of 2003,
although R&D in our software  consulting and  development  segment has ceased as
well.

     Selling,  general  and  administrative  expenses  ("SG&A").  In the  second
quarter and first six months of 2003,  SG&A  decreased  to $2.1 million and $6.4
million, respectively, from $4.5 million and $8.8 million in the same periods of
2002. The decrease was primarily  attributable to not  consolidating  Comverge's
SG&A, which was $2.9 million in the second quarter of 2002.  However,  corporate
SG&A and SG&A in the software  development and consulting  segment  continued to
decrease as well, as we continued to reduce our overhead.

     Interest  expense,  net. Prior to the investment  recently  secured for our
energy  intelligence   solution  segment,  we  raised  capital  through  issuing
convertible  debentures and utilized lines of credit to finance our  activities.
We incurred  finance  expenses in connection  with the capital raised  including
interest and amortization of non-cash 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,  amortization  of
non-cash costs has been completed and will no longer effect the coming quarters.
Of the  $296,000  and $650,000 of interest  expense  incurred  during the second
quarter and the first six months of 2003,  $252,000 and $396,000,  respectively,
was related to the accretion of discounts and the  amortization of related costs
in connection with convertible debt and warrants.

     Equity loss in unconsolidated  subsidiary. The equity loss in 2003 was from
our formerly consolidated subsidiary,  Comverge, whose results are accounted for
on an  equity  basis  starting  the  second  quarter  of 2003 (see Note 4 of our
unaudited  consolidated  Financial  Statements).  Our share of  Comverge's  $2.2
million of net  losses  during  the  second  quarter  of 2003 was $1.5  million.
Comverge's  increased losses in the second in the second quarter of 2003 of $2.2
million  compared to $1.1 million in the second  quarter of 2002,  was primarily
attributable to the increase in SG&A expenses. In addition, sales decreased from
$4.8 million in the second quarter of 2002 to $4.0 million in the second quarter
of 2003, reducing gross profits by approximately $300,000.

Liquidity and Capital Resources

     As of June 30, 2003, we had working capital of $1.5 million, including $1.9
million  in  unrestricted  cash  and cash  equivalents.  Net  cash  provided  by
operating  activities  in the first six  months  of 2003 was $0.7  million.  Our
primary  sources  cash  provided by  operating  activities  during the first six
months of 2003  were  collections  of trade  accounts  receivables  in excess of
reductions in accounts payable ($2.3 million,  net), our non-cash equity loss in
Comverge ($1.5 million) and other non-cash  expenses  included in net loss ($1.0
million). These sources of cash were partially offset by our loss ($4.4 million)
(primarily  first quarter  consolidated  losses in Comverge  ($1.1  million) and
corporate expenses ($1.2 million). Net cash provided by investing activities was
$0.3 million.  The primary  source of cash provided by investing  activities was
the release of previously  restricted  cash ($4.2 million) of which $3.4 million
was  invested  in  Comverge.  Net cash  used in  financing  activities  was $0.4
million, which was comprised primarily of net payments of debt.

     Of the total  working  capital at June 30,  2003,  $0.2  million was in our
majority owned Israeli  subsidiary,  dsIT. dsIT is utilizing  approximately $1.1
million of its $1.7 million lines of credit as of June 30, 2003.  Due to Israeli
tax and company law constraints as well as the significant  minority interest in
dsIT,  such  working  capital,  cash flows and  borrowing  capacity  from dsIT's
operations are not readily available to finance U.S. activities. We believe that
dsIT will have  sufficient  liquidity to finance its  activities  from cash flow
from its own operations and available lines of credit over the next 12 months.

     As of July 31, 2003 our wholly owned US operations  (i.e.,  excluding  dsIT
and  Comverge)  had an aggregate of $1.9 million in  unrestricted  cash and cash
equivalents,  reflecting a $722,000 increase from the balance as of December 31,
2002. We believe we have more than 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.  We  intend  to  finance  these  activities
primarily  from cash on-hand and from  operating  cash flows.  We are  currently
engaged in an evaluation of our corporate  activities and  structure,  including
possible  restructuring  and/or  acquisitions or mergers.  Possible changes from
resulting  from this  process  could  have a  material  effect on our  financing
requirements and resources.


                                     - 17 -
<PAGE>


Contractual Obligations and Commitments

     Our contractual  obligations  and  commitments at June 30, 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, are as set forth in the table below.

<TABLE>
<CAPTION>
                                                         Cash Payments Due During Year Ending June 30,
                                                       --------------------------------------------------
                                                                    (amounts in thousands)
                                                                    ----------------------
     Contractual Obligations                            Total      2004       2005      2006   After 2006
     -----------------------                           -------   -------    -------   -------  ----------
<S>                                                     <C>       <C>        <C>       <C>       <C>
     Long-term debt related to US operations               200    $  200         --        --        --
     Long-term debt related to Israeli operations        1,156       512     $  342    $  195    $  107
     Guarantees                                            558       558         --        --        --
     Operating leases                                    3,872     1,259      1,126       565       922
     Consulting agreement with CEO                       1,572     1,572         --        --        --
                                                       -------   -------    -------   -------   -------
     Total contractual cash obligations                 $7,358    $4,101     $1,468    $  760    $1,029
                                                       =======   =======    =======   =======   =======
</TABLE>

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

     Previously,   we  accrued  a  loss  for  contingent   performance  of  bank
guarantees.  Our remaining  commitment under these guarantees is $0.6 million at
June 30, 2003. We have  collateralized a portion of these guarantees by means of
a deposit of $0.2 million as of June 30, 2003.  The obligation is presented as a
current liability, though it is uncertain as to when actual payment may be made.

     Under Israeli law and labor agreements,  dsIT is required to make severance
payments to dismissed  employees and to employees leaving  employment in certain
other circumstances. The obligation for severance pay benefits, as determined by
the Israeli  Severance Pay Law, is based upon length of service and last salary.
These obligations are substantially  covered by regular deposits with recognized
severance pay and pension funds and by the purchase of insurance policies. As of
June  30,  2003,  we  had  a  total  of  $3.3  million  in  potential  severance
obligations,  of which  approximately  $2.3 million was funded with cash held by
insurance companies and approximately $1.0 million was unfunded. The entire $3.3
million was accrued for as of June 30, 2003.

     We are obligated to pay our Chief Executive Officer  consulting fees over a
seven-year  period upon his  retirement  on December  31,  2003.  Although it is
currently contemplated those payments will begin on January 1, 2004, the CEO has
the option to terminate his employment agreement and begin his consulting period
prior to  December  31,  2003.  During the first  four  years of the  consulting
period,  we would have to pay the CEO 50% of his salary in effect at the time of
termination and 25% of that salary during the last three years of the consulting
period, plus contributions to a non-qualified  defined  contribution  retirement
plan equal to 25% of the consulting fee. At the start of the consulting  period,
which is  expected to begin on January 31,  2004,  we are also  required to fund
amounts  payable  to the CEO  for the  term  of the  consulting  period,  by the
purchase of an annuity or similar investment product.  The CEO`s base salary for
2003  (including  cost  of  living  adjustments)  is  $474,000.   We  also  have
obligations  under various  agreements and other  arrangements with officers and
other employees with respect to severance  arrangements and multiyear employment
agreements as described below.


                                     - 18 -
<PAGE>


     Under an employment  agreement with the Chief  Financial  Officer,  we also
have  obligations to pay severance,  upon  termination of his employment for any
reason other than for cause. Under this agreement, 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. The severance  obligation would be reduced
by the amount  contributed by us to certain  Israeli pension and severance funds
pursuant to the CFO`s  employment  agreement.  As of June 30, 2003, the unfunded
portion of such severance obligation was $40,000.

     We also have severance  arrangements under an employment agreement with the
Chief Executive Officer of dsIT to pay severance under certain circumstances. If
his employment agreement is terminated by him or by our selves 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  amounts
contributed by us to certain Israeli pension and severance funds pursuant to his
employment  agreement.  As of  June  30,  2003,  the  unfunded  portion  of such
severance obligation was approximately $43,000.

Payments to Related Parties

     We paid an individual as a director and vice  president,  who is the son of
our Chief  Executive  Officer,  approximately  $134,000 and $155,000 for the six
months ending June 30, 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  $377,000  and $224,000 for the six months ended June 30, 2002 and
2003, respectively.  We also engaged an asset management firm that is controlled
by one of our  directors.  This firm  provided  discretionary  asset  management
services to us. In the six months ended June 30, 2002, we paid fees of $8,000 to
this asset  management  firm. The engagement with the asset  management firm was
terminated  in September  2002.  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 at June 30, 2003 was
$48,000 and $54,000,  respectively.  The loan has no defined  maturity  date, is
denominated  in NIS, is linked to the Index and bears  interest at 4% per annum.
The  Company's  Comverge  subsidiary  has made loans of $10,000 each to both our
Chief  Executive  Office 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
loans and accrued  interest at December  31, 2002 and June 30, 2003 were $25,000
and $26,000,  respectively.  The  Comverge  subsidiary  also  extended a loan of
$14,000 to Comverge's Executive Vice-President in 2001. This loan bears interest
at 6.5% per annum and is to mature in July  2004.  The  balance  of the loan and
accrued  interest  at  December  31,  2002 and at June 30,  2003 was $16,000 and
$17,000, respectively.


                                     - 19 -
<PAGE>

Recently Issued Accounting Pronouncement

     In  May  2003,  the  Financial  Accouting  Standards  Board  (FASB)  issued
Statement of Financial  Accounting  Standards  (SFAS) No. 150,  "Accounting  for
Certain  Instruments with  Characteristics of Both Liabilities and Equity" (SFAS
150). The standard  establishes  standards on the classification and measurement
of certain financial  instruments with  characteristics  of both liabilities and
equity and requires that such  instruments  be classified  as  liabilities.  The
standard is effective for financial  instruments  entered into or modified after
May 31, 2003,  and is otherwise  effective at the beginning of the first interim
period  beginning after June 15, 2003.  Adoption of the standard is not expected
to have an impact on the Company's consolidated financial position or results of
operations.

Item 3. Quantitative and Qualitative Disclosures About Market Risk

     In the normal course of business, we are exposed to fluctuations in Israeli
interest  rates on the $1.1  million  outstanding  on our line of credit and our
long-term debt of $1.2 million as of June 30, 2003, respectively, to finance our
Israeli  operations.  Of our $1.2 million of long-term  debt in Israel (which is
denominated in NIS),  $150,000 is linked to the Israeli consumer price index and
$1.0 million is unlinked.

     Additionally,  our  monetary  assets  and  liabilities  (net  liability  of
approximately  $1.0  million) in Israel are exposed to  fluctuations  in foreign
currency exchange rates.  During the second quarter, we incurred exchange losses
of  $153,000  due to an 8%  appreciation  of the NIS in  relation  to the dollar
during the period.  Since the end of the second quarter until July 31, 2003, the
dollar has strengthened in relation to the NIS by 3%.

     We do  not  employ  specific  strategies,  such  as the  use of  derivative
instruments or hedging, to manage our interest rate or foreign currency exchange
rate exposures.


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 the first six months of
2003 the appreciation of the NIS against the dollar was 9.0%, whereas during the
first six months of 2002 the devaluation of the NIS against the dollar was 8.0%.
During the period from July 1 to July 31, 2003,  there was a devaluation  of the
NIS  against  the dollar of 3.0%.  In the first six months of 2003,  the rate of
deflation in Israel was 0.5%  whereas in the first six months of 2002,  the rate
of inflation was 6.3%.

     As of June 30, 2003,  virtually all of our monetary  assets and liabilities
that were not denominated in dollars or  dollar-linked  NIS were  denominated in
NIS,  and the net  amount  of  such  monetary  assets  and  liabilities  was not
material.  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.


Item 4. Controls and Procedures

Evaluation of Controls and Procedures

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

Changes in Controls and Procedures

     During the period  covered by this  report,  we did not have any changes to
our internal controls over financial reporting that have materially affected, or
is reasonably likely to materially  affect, our internal controls over financial
reporting.


                                     - 20 -
<PAGE>

                           PART II - Other information


ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS

     (c) Unregistered Sales of Securities.


     (i) On May 5, 2003, we issued  102,196 shares of our common stock to Laurus
in lieu of payment of interest and a $200,000  monthly  installment of principal
due under a 10% convertible note issued by us to Laurus in June 2002. Laurus may
resell the shares we issued as payments under the 10% convertible  note under an
effective registration statement.

     We relied on Section 4(2) of the  Securities  Act of 1933 as our  exemption
from  registration  for the issuance of the common stock to Laurus in payment of
amounts due under the 10% convertible note.

     (ii) As  previously  reported in our Annual  Report on Form 10-K,  in March
2003,  we  received a notice of  conversion  from  Laurus,  as the lender  under
Comverge's  line of credit  obtained in December 2002,  for the conversion  into
shares of our common stock of $600,000  principal amount of the debt outstanding
under  the line at a  conversion  price  of  $1.50  per  share.  In April  2003,
following the repayment in full of all amounts  outstanding  under the line, we,
in lieu of the  conversion,  issued 400,000 shares of our common stock to Laurus
under the same terms as the  conversion  and at an amount equal to the aggregate
conversion price of $600,000.  Additionally, prior to June 5, 2003, Laurus could
sell the 400,000 shares of our common stock subject to a volume limitation equal
to 25% of the average  daily trading  volume of the calendar  month in which the
sale is to be made (as determined on a rolling basis).

     We relied on Section 4(2) of the  Securities  Act of 1933 as our  exemption
from registration for the sale and issuance of the common stock to Laurus.

     (iii) On February 25, 2003, we engaged J.P.  Turner & Company,  L.L.C.  for
the purposes of providing  investor awareness and business advisory services for
a period of one year. In connection with this engagement, we granted J.P. Turner
common stock purchase  warrants for the purchase of 120,000 shares of our common
stock,  of which  60,000  shares are  exercisable  at $2.00 per share and 60,000
shares are  exercisable at $2.50 per share.  The warrants became fully vested on
May 26, 2003 and expires on February 25, 2005. We granted J.P.  Turner the right
to have the shares of our common stock included in a registration statement that
we file  (commonly  referred to as piggyback  registration  rights),  subject to
contractual  restrictions  that  limit  our  ability  to  include  shares  in  a
registration statement.

     We relied on Section 4(2) of the  Securities  Act of 1933 as our  exemption
from registration for the sale and issuance of the warrants to J.P. Turner.

Item 6: Exhibits and Reports on Form 8-K

     (a)  Exhibits

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

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

          32.1      Certification of Chief Executive Officer pursuant to Section
                    906 of Sarbanes-Oxley Act of 2002.

          32.2      Certification of Chief Financial Officer pursuant to Section
                    906 of Sarbanes-Oxley Act of 2002.

     (b)  Reports on Form 8-K

          (i)       Report on Form 8-K, dated April 12, 2003,  filed on April 3,
                    2003,  relating to the  announcement  of our results for the
                    fourth quarter and year ended December 31, of 2002.

          (ii)      Report on Form 8-K,  dated April 29,  2003,  filed on May 2,
                    2003,  relating  to  changes in  membership  of our Board of
                    Directors.

          (iii)     Report on Form 8-K,  dated  May 15,  2003,  filed on May 19,
                    2003,  relating to the  announcement  of our results for the
                    first quarter ended March 31, of 2003.



                                     - 21 -
<PAGE>


                                   SIGNATURES

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


                                             DATA SYSTEMS & SOFTWARE INC.

Dated:  August 14, 2003

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




                                     - 22 -


</TEXT>
</DOCUMENT>
<DOCUMENT>
<TYPE>EX-31.1
<SEQUENCE>3
<FILENAME>datasystems_ex31-1.txt
<TEXT>

                                                                    Exhibit 31.1

                            CERTIFICATION PURSUANT TO
                             18 U.S.C. SECTION 1350,
                             AS ADOPTED PURSUANT TO
                  SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002


I, George  Morgenstern,  the Chief Executive  Officer of Data Systems & Software
Inc., certify that:

     1. I have  reviewed  this  quarterly  report on Form 10-Q of Data Systems &
Software Inc.;

     2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact  necessary to make
the statements made, in light of the  circumstances  under which such statements
were made, not  misleading  with respect to the period covered by this quarterly
report;

     3. Based on my knowledge,  the financial  statements,  and other  financial
information  included in this quarterly  report,  fairly present in all material
respects the financial  condition,  results of operations  and cash flows of the
registrant as of, and for, the periods presented in this quarterly report;

     4. The  registrant's  other  certifying  officer and I are  responsible for
establishing and maintaining  disclosure  controls and procedures (as defined in
Exchange Act Rules 13a-15(e) and 15d-15(e)) for the registrant and we have:

     (a)  Designed  such  disclosure  controls  and  procedures,  or caused such
          disclosure   controls  and   procedures  to  be  designed   under  our
          supervision,  to ensure  that  material  information  relating  to the
          registrant,  including its consolidated subsidiaries, is made known to
          us by others within those entities,  particularly during the period in
          which this quarterly report is being prepared;

     (b)  Evaluated the  effectiveness of the registrant's  disclosure  controls
          and procedures and presented in this quarterly  report our conclusions
          about the  effectiveness of the disclosure  controls and procedures as
          of the  end of the  period  covered  by  this  report  based  on  such
          evaluation and

     (c)  Disclosed  in this  repoirt  any change in the  registrant's  internal
          control over financial reporting that occurred during the registrant's
          most  recent  fiscal  quarter  that  has  materially  affected,  or is
          reasonably  likely to materially  affect,  the  registrant's  internal
          control over financial reporting; and

     5. The registrant's other certifying officer and I have disclosed, based on
our most recent evaluation of internal control over financial reporting,  to the
registrant's  auditors  and to the  audit  committee  of  registrant's  board of
directors (or persons performing the equivalent function):

     (a)  All significant  deficiencies and material weaknesses in the design or
          operation  of internal  control  over  financial  reporting  which are
          reasonably  likely to  adversely  affect the  registrant's  ability to
          record, process, summarize and report financial information; and

     (b)  Any fraud, whether or not material,  that involves management or other
          employees who have a  significant  role in the  registrant's  internal
          control over financial reporting.


Dated:  August 14, 2003                       By:  \s\ GEORGE MORGENSTERN
                                                   ----------------------------
                                                   George Morgenstern
                                                   Chief Executive Officer




</TEXT>
</DOCUMENT>
<DOCUMENT>
<TYPE>EX-31.2
<SEQUENCE>4
<FILENAME>datasystems_ex31-2.txt
<TEXT>

                                                                    Exhibit 31.2

                            CERTIFICATION PURSUANT TO
                             18 U.S.C. SECTION 1350,
                             AS ADOPTED PURSUANT TO
                  SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002

I, Yacov Kaufman,  the Chief Financial  Officer of Data Systems & Software Inc.,
certify that:

     1. I have  reviewed  this  quarterly  report on Form 10-Q of Data Systems &
Software Inc.;

     2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact  necessary to make
the statements made, in light of the  circumstances  under which such statements
were made, not  misleading  with respect to the period covered by this quarterly
report;

     3. Based on my knowledge,  the financial  statements,  and other  financial
information  included in this quarterly  report,  fairly present in all material
respects the financial  condition,  results of operations  and cash flows of the
registrant as of, and for, the periods presented in this quarterly report;

     4. The  registrant's  other  certifying  officer and I are  responsible for
establishing and maintaining  disclosure  controls and procedures (as defined in
Exchange Act Rules 13a-15(e) and 15d-15(e)) for the registrant and we have:

     (a)  Designed  such  disclosure  controls  and  procedures,  or caused such
          disclosure   controls  and   procedures  to  be  designed   under  our
          supervision,  to ensure  that  material  information  relating  to the
          registrant,  including its consolidated subsidiaries, is made known to
          us by others within those entities,  particularly during the period in
          which this quarterly report is being prepared;

     (b)  Evaluated the  effectiveness of the registrant's  disclosure  controls
          and procedures and presented in this quarterly  report our conclusions
          about the  effectiveness of the disclosure  controls and procedures as
          of the  end of the  period  covered  by  this  report  based  on  such
          evaluation and

     (c)  Disclosed  in this  repoirt  any change in the  registrant's  internal
          control over financial reporting that occurred during the registrant's
          most  recent  fiscal  quarter  that  has  materially  affected,  or is
          reasonably  likely to materially  affect,  the  registrant's  internal
          control over financial reporting; and

     5. The registrant's other certifying officer and I have disclosed, based on
our most recent evaluation of internal control over financial reporting,  to the
registrant's  auditors  and to the  audit  committee  of  registrant's  board of
directors (or persons performing the equivalent function):

     (a)  All significant  deficiencies and material weaknesses in the design or
          operation  of internal  control  over  financial  reporting  which are
          reasonably  likely to  adversely  affect the  registrant's  ability to
          record, process, summarize and report financial information; and

     (b)  Any fraud, whether or not material,  that involves management or other
          employees who have a  significant  role in the  registrant's  internal
          control over financial reporting.


Dated:  August 14, 2003                      By:  \s\ YACOV KAUFMAN
                                                  ---------------------------
                                                  Yacov Kaufman
                                                  Chief Financial Officer





</TEXT>
</DOCUMENT>
<DOCUMENT>
<TYPE>EX-32.1
<SEQUENCE>5
<FILENAME>datasystems_ex32-1.txt
<TEXT>

                                                                    Exhibit 32.1


                            CERTIFICATION PURSUANT TO
                             18 U.S.C. SECTION 1350,
                             AS ADOPTED PURSUANT TO
                  SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002

In  connection  with the  Quarterly  Report of Data Systems & Software Inc. (the
"Company")  on Form 10-Q for the three and six month periods ended June 30, 2003
as filed with the  Securities  and Exchange  Commission  on the date hereof (the
"Report"),  I, Yacov Kaufman,  Chief Financial Officer of the Company,  certify,
pursuant  to 18  U.S.C.  ss.  1350,  as  adopted  pursuant  to  ss.  906  of the
Sarbanes-Oxley Act of 2002, that:

     (1)  The Report fully  complies with the  requirements  of section 13(a) or
          15(d) of the Securities Exchange Act of 1934; and

     (2)  The  information  contained  in the  Report  fairly  presents,  in all
          material respects, the financial condition and result of operations of
          the Company.

/s/ YACOV KAUFMAN
- ----------------------------
Yacov Kaufman
Chief Financial Officer
August 14, 2003







</TEXT>
</DOCUMENT>
<DOCUMENT>
<TYPE>EX-32.2
<SEQUENCE>6
<FILENAME>datasystems_ex32-2.txt
<TEXT>

                                                                    Exhibit 32.2


                            CERTIFICATION PURSUANT TO
                             18 U.S.C. SECTION 1350,
                             AS ADOPTED PURSUANT TO
                  SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002

In  connection  with the  Quarterly  Report of Data Systems & Software Inc. (the
"Company")  on Form 10-Q for the three and six month periods ended June 30, 2003
as filed with the  Securities  and Exchange  Commission  on the date hereof (the
"Report"),  I,  George  Morgenstern,  Chief  Executive  Officer of the  Company,
certify,  pursuant to 18 U.S.C.  ss. 1350, as adopted pursuant to ss. 906 of the
Sarbanes-Oxley Act of 2002, that:

     (1)  The Report fully  complies with the  requirements  of section 13(a) or
          15(d) of the Securities Exchange Act of 1934; and

     (2)  The  information  contained  in the  Report  fairly  presents,  in all
          material respects, the financial condition and result of operations of
          the Company.

/s/ GEORGE MORGENSTERN
- ------------------------------
George Morgenstern
Chief Executive Officer
August 14, 2003







</TEXT>
</DOCUMENT>
</SEC-DOCUMENT>
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