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<SEC-DOCUMENT>0001144204-04-018920.txt : 20041115
<SEC-HEADER>0001144204-04-018920.hdr.sgml : 20041115
<ACCEPTANCE-DATETIME>20041115141940
ACCESSION NUMBER:		0001144204-04-018920
CONFORMED SUBMISSION TYPE:	10-Q
PUBLIC DOCUMENT COUNT:		9
CONFORMED PERIOD OF REPORT:	20040930
FILED AS OF DATE:		20041115
DATE AS OF CHANGE:		20041115

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:		041143986

	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>v08383_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 SEPTEMBER 30, 2004

                         COMMISSION FILE NUMBER 0-19771

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

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

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


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


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


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

                  |X| Yes                       |_| No


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

                   | | Yes                      |X| No


             Number of shares outstanding of the registrant's common
                   stock, as of November 12, 2004: 8,021,691

<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, 2003 and
      September 30, 2004..................................................     1

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

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

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

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

Item 2. Management's Discussion and Analysis of Financial Condition
        and Results of Operations.........................................    11

Item 3. Quantitative and Qualitative Disclosures
        about Market Risk.................................................    15

Item 4. Controls and Procedures...........................................    15


PART II. OTHER INFORMATION

Item 6. Exhibits and Reports on Form 8-K..................................    16

SIGNATURES................................................................    17

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

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

<TABLE>
<CAPTION>
                                                                    As of                     As of
                                                                 December 31,              September 30,
                                      ASSETS                        2004                      2003
                                                                   --------                 --------
Current assets:                                                                            (unaudited)
<S>                                                              <C>                      <C>
  Cash and cash equivalents                                        $  1,213                 $    896
  Restricted cash                                                       241                      241
  Accounts receivable, net                                            7,053                    6,361
  Inventory                                                              88                       87
  Other current assets                                                  661                      768
                                                                   --------                 --------

    Total current assets                                              9,256                    8,353
                                                                   --------                 --------

Investment in Comverge, net                                              68                       --
Property and equipment, net                                             814                      677
Other assets                                                            613                      540
Funds in respect of employee termination benefits                     2,379                    2,636
Goodwill                                                              4,430                    4,236
Other intangible assets, net                                            114                       85
                                                                   --------                 --------
    Total assets                                                   $ 17,674                 $ 16,527
                                                                   ========                 ========

                      LIABILITIES AND SHAREHOLDERS' EQUITY

Current liabilities:
   Short-term bank credit and current
   maturities of long-term debt                                    $  1,517                 $  1,394
   Trade accounts payable                                             2,586                    2,315
   Accrued payroll, payroll taxes and social benefits                 1,451                    1,431
   Other current liabilities                                          2,973                    2,064
                                                                   --------                 --------
   Total current liabilities                                          8,527                    7,204
                                                                   --------                 --------
Investment in Comverge, net                                              --                    1,268
                                                                   --------                 --------

Long-term liabilities:
     Long-term debt                                                     632                      241
     Other liabilities                                                  227                       84
     Liability for employee termination benefits                      3,721                    4,088
                                                                   --------                 --------

            Total long-term liabilities                               4,580                    4,413
                                                                   --------                 --------
Minority interests                                                    1,367                    1,351
                                                                   --------                 --------
Shareholders' equity:
     Common stock - $0.01 par value per share:
       Authorized - 20,000,000 shares;
       Issued - 8,740,729 and 8,842,395 shares as of
          December 31, 2003 and September 30, 2004, respectively         87                       88
     Additional paid-in capital                                      39,595                   39,685
     Warrants                                                           461                      461
     Stock-based deferred compensation                                   --                      (64)
     Accumulated deficit                                            (33,069)                 (33,929)
      Treasury stock, at cost - 838,704 and 820,704
      shares at December 31, 2003 and
         September 30, 2004, respectively                            (3,874)                  (3,791)
     Accumulated other comprehensive loss                                --                     (159)
                                                                   --------                 --------
         Total shareholders' equity                                   3,200                    2,291
                                                                   --------                 --------
         Total liabilities and shareholders' equity                $ 17,674                 $ 16,527
                                                                   ========                 ========
</TABLE>
              The accompanying notes are an integral part of these
                  condensed consolidated financial statements.

                                      - 1 -
<PAGE>

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

<TABLE>
<CAPTION>
                                                               Nine months ended            Three months ended
                                                                 September 30,                September 30,
                                                             ----------------------      ----------------------
                                                               2003          2004          2003          2004
                                                             --------      --------      --------      --------
Sales:
<S>                                                          <C>           <C>           <C>           <C>
     Products ..........................................     $ 16,900      $ 13,157      $  3,779      $  4,764
     Services ..........................................        7,306         6,831         2,327         2,141
     Projects ..........................................        2,459         2,049           564           577
                                                             --------      --------      --------      --------
           Total sales .................................       26,665        22,037         6,670         7,482
                                                             --------      --------      --------      --------

Cost of sales:
     Products ..........................................       13,951        10,801         3,202         3,887
     Services ..........................................        5,082         5,049         1,665         1,670
     Projects ..........................................        2,087         1,655           601           469
                                                             --------      --------      --------      --------
           Total cost of sales .........................       21,120        17,505         5,468         6,026
                                                             --------      --------      --------      --------
     Gross profit ......................................        5,545         4,532         1,202         1,456

Operating expenses:
   Research and development ............................          153            --            --            --
   Selling, marketing, general and administrative ......        8,345         5,496         1,982         2,168
                                                             --------      --------      --------      --------
           Total operating expenses ....................        8,498         5,496         1,982         2,168
                                                             --------      --------      --------      --------
Operating loss .........................................       (2,953)         (964)         (780)         (712)
Interest income ........................................           42            79            15             2
Interest expense .......................................         (714)         (125)          (68)          (39)
Other income (expense), net ............................         (408)          239          (243)            2
                                                             --------      --------      --------      --------
     Loss before taxes on income .......................       (4,033)         (771)       (1,076)         (747)
Taxes on income ........................................            7            17           (27)           37
                                                             --------      --------      --------      --------
Loss from operations of the Company and its consolidated
   subsidiaries ........................................       (4,040)         (788)       (1,049)         (784)
Share of losses in Comverge ............................       (1,161)       (1,066)         (611)         (382)
Gain on sale of shares in Comverge .....................           --           705            --           705
Minority interests .....................................          139           (59)           35           (11)
                                                             --------      --------      --------      --------
       Net loss from continuing operations .............       (5,062)       (1,208)       (1,625)         (472)
Net income (loss) from discontinued operations,
   net of tax ..........................................          (38)          348            (4)           --
                                                             --------      --------      --------      --------
       Net loss ........................................       (5,100)         (860)       (1,629)         (472)
                                                             --------      --------      --------      --------

Differences from translation of financial statements of
   subsidiaries ........................................           --          (159)           --            11
                                                             --------      --------      --------      --------
       Comprehensive loss ..............................     $ (5,100)     $ (1,019)     $ (1,629)     $   (461)
                                                             ========      ========      ========      ========

Basic and diluted net income (loss) per share:
  Loss per share from continuing operations ............     $  (0.66)     $  (0.15)     $  (0.21)     $  (0.06)
  Discontinued operations ..............................        (0.00)         0.04         (0.00)        (0.00)
                                                             --------      --------      --------      --------
  Basic and diluted net loss per share .................     $  (0.66)     $  (0.11)     $  (0.21)     $  (0.06)
                                                             ========      ========      ========      ========
Weighted average number of shares outstanding:
        Basic and diluted ..............................        7,680         7,927         7,894         7,936
                                                             ========      ========      ========      ========
</TABLE>

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

                                      - 2 -
<PAGE>

                  DATA SYSTEMS & SOFTWARE INC. AND SUBSIDIARIES
      CONSOLIDATED STATEMENT OF CHANGES IN SHAREHOLDERS' EQUITY (UNAUDITED)
                      NINE MONTHS ENDED SEPTEMBER 30, 2004
                                 (in thousands)
<TABLE>
<CAPTION>
                                                                                                         Accumulated
                                              Additional             Stock-Based                            Other
                          Number    Common     Paid-In                Deferred   Accumulated  Treasury  Comprehensive
                        of Shares    Stock     Capital    Warrants  Compensation  Deficit      Stock        Loss        Total
                        --------   --------    --------   --------    --------    --------    --------    --------    --------
<S>                     <C>        <C>        <C>         <C>        <C>          <C>         <C>        <C>          <C>
Balances as of
   December 31, 2003       8,741   $     87    $ 39,595   $    461    $     --    $(33,069)   $ (3,874)   $     --    $  3,200

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

Shares issued as
  compensation ......        100          1          70         --          --          --          --          --          71

Changes related
  to stock-based
  deferred
  compensation ......         --         --          68         --         (68)         --          --          --          --

Amortization of
  stock-based
  deferred
  compensation ......         --         --          --         --           4          --          --          --           4

Net loss ............         --         --          --         --          --        (860)         --          --        (860)

Differences from
  translation of
  subsidiaries'
  financial
  statements ........         --         --          --         --          --          --          --        (159)       (159)
                        --------   --------    --------   --------    --------    --------    --------    --------    --------

Balances as of
   September 30, 2004      8,842   $     88    $ 39,685   $    461    $    (64)   $(33,929)   $ (3,791)   $   (159)   $  2,291
                        ========   ========    ========   ========    ========    ========    ========    ========    ========
</TABLE>

*     Less than $1

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

                                      - 3 -
<PAGE>

                  DATA SYSTEMS & SOFTWARE INC. AND SUBSIDIARIES
                CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
                             (dollars in thousands)

<TABLE>
<CAPTION>
                                                                                      Nine months ended September 30,
                                                                                      ------------------------------
                                                                                              2003         2004
                                                                                            -------      -------
<S>                                                                                         <C>          <C>
Cash flows used in operating activities:
     Net loss .........................................................................     $(5,100)     $  (860)
      Adjustments to reconcile net loss to net cash provided by  operating activities -
      Schedule A: .....................................................................       4,913          318
                                                                                            -------      -------
         Net cash used in operating activities ........................................        (187)        (542)
                                                                                            -------      -------
Cash flows provided by (used in) investing activities:
     Restricted cash ..................................................................       4,200           --
     Proceeds from sale of property and equipment .....................................          11           52
     Proceeds from sale of Comverge shares ............................................          --          975
     Acquisitions of property and equipment ...........................................        (193)         (99)
     Funding of termination benefits ..................................................        (243)        (257)
     Business disposition - see Schedule B ............................................      (3,527)          --
                                                                                            -------      -------
         Net cash provided by investing activities ....................................         248          671
                                                                                            -------      -------

Cash flows provided by (used in) financing activities:
     Short-term debt, net .............................................................        (503)          --
     Borrowings of long-term debt .....................................................         441           --
     Repayments of long-term debt .....................................................        (479)        (481)
     Investment in subsidiary by minority interest ....................................          22           --
     Exercise of options ..............................................................          17           35
     Purchase of treasury stock .......................................................          (2)          --
                                                                                            -------      -------
         Net cash used in financing activities ........................................        (504)        (446)
                                                                                            -------      -------
Net decrease in cash and cash equivalents .............................................        (443)        (317)
Cash and cash equivalents at beginning of period ......................................       1,150        1,213
                                                                                            -------      -------
Cash and cash equivalents at end of period ............................................     $   707      $   896
                                                                                            =======      =======
Supplemental cash flow information:
     Cash paid during period for interest .............................................     $   308      $   113
                                                                                            =======      =======
     Cash paid during period for income taxes .........................................     $   106      $    35
                                                                                            =======      =======
Non-cash investing and financing activities:
      Issuance of common stock in lieu of debt repayment ..............................     $   803
      Increase in investment in Comverge from issuance of common stock credited to
       additional paid in capital .....................................................     $ 1,085
</TABLE>

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

                                      - 4 -
<PAGE>

                  DATA SYSTEMS & SOFTWARE INC. AND SUBSIDIARIES
                CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
                             (dollars in thousands)

<TABLE>
<CAPTION>
                                                                                           Nine months ended September 30,
                                                                                           ------------------------------
                                                                                               2003             2004
                                                                                            -----------       ----------
<S>                                                                                       <C>                <C>
Schedule A:
  Adjustments to reconcile net loss to net cash (used in) provided by operating
    activities:
     Depreciation and amortization.....................................................           $447             $177
     Stock and stock-based compensation................................................             55               75
       Accretion of discount on convertible note and amortization of
                related costs and warrants.............................................            493                -
     Minority interests................................................................          (139)               59
     Share of losses in Comverge.......................................................          1,161            1,066
     Loss on write-off of stockholder's note...........................................            298                -
     Increase in liability for employee termination benefits...........................            283              367
     Exchange adjustment on long-term debt.............................................             49             (33)
     Loss (gain) on disposition of property and equipment..............................              3              (4)
     Gain on sale of Comverge shares...................................................              -            (705)
     Change in deferred taxes..........................................................          (166)              (9)
     Change in operating assets and liabilities:
         Decrease in accounts receivable and other assets..............................          4,332              658
         Increase in inventory.........................................................            326                1
         Decrease in accounts payable and other liabilities............................        (2,229)          (1,334)
                                                                                            -----------      -----------
         Total.........................................................................         $4,913            $ 318
                                                                                            ===========      ===========

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

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

                                      - 5 -

<PAGE>

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

NOTE 1:  BASIS OF  PRESENTATION

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

NOTE 2: FINANCING OF OPERATIONS

      As of  September  30,  2004,  the Company  had working  capital of $1,149,
including $896 in non-restricted cash and cash equivalents. Net cash used in the
nine months of 2004 was $317. Net cash of $542 was used in operating  activities
during the first three quarters of 2004. The net loss for the nine-month  period
ended  September  30, 2004 of $860,  was due  primarily to the net loss from the
Company's   investment  in  Comverge  of  $361  and  expenses  incurred  in  the
unsuccessful  transaction with Kardan Communications Ltd. of $342. The Company's
use of cash in  operating  activities  during the first nine  months of 2004 was
primarily  for payment of accounts  payable and other  liabilities  in excess of
collections  of  trade  accounts  receivables  of  $676,  net.  Net cash of $671
provided by investing  activities,  was primarily  from the net proceeds of $975
from  the  sale by the  Company  of  preferred  shares  of its  Comverge  equity
investment,  less  amounts  used to fund  employee  termination  benefits in the
Company's  majority-owned  dsIT  subsidiary  of $257.  Net cash of $446  used in
financing activities was primarily for payment of debt of $481.

      Approximately $287 of the total working capital at September 30, 2004, was
in  dsIT.  Due to  Israeli  tax  and  company  law  constraints,  as well as the
significant  minority interest in dsIT, such working capital and cash flows from
dsIT's operations are not readily available to finance U.S. activities.

      dsIT was utilizing  approximately $859 of its $1,100 lines of credit as of
September 30, 2004.  dsIT's lines of credit are  denominated  in NIS and bear an
average interest rate of the Israeli prime rate plus 1.4% per annum. The Israeli
prime rate fluctuates and as of September 30, 2004 was 5.6%.

      The Company  intends to fund its US activities with the cash available and
anticipated  profits  from  its  US  operations.  The  Company  is  seeking  and
considering  various  restructuring,  merger  or  acquisition  and/or  financing
transactions.  Should the Company  need  additional  liquidity to finance its US
activities  and should it be  unsuccessful  in  completing a timely  transaction
providing the necessary  liquidity,  it may not have sufficient funds to finance
its US  activities.  In such event,  the Company  might need to sell  additional
Comverge shares.

                                      - 6 -

<PAGE>

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


Note 3: Investment in Comverge

      Comverge's  summary  results  of  operations  for the three and nine month
periods ended September 30, 2004 are as follows:

                                                 Nine months        Three months
                                                    ended              ended
                                                September 30,      September 30,
      Results of Operations                          2004               2004
                                                -------------      -------------
      Sales                                          $12,375            $ 3,774
      Gross profit                                   $ 5,057            $ 1,534
      Net loss                                       $(6,947)           $(2,707)

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


<TABLE>
<CAPTION>
                                                Comverge         Comverge    Net investment
                                              common stock   preferred stock   in Comverge
                                              ------------   ---------------   -----------
<S>                                           <C>            <C>               <C>
        Balances as of December 31, 2003         $(1,824)        $ 1,892         $    68
        Shares sold                                   --            (270)           (270)
        Equity loss in Comverge                       --          (1,066)         (1,066)
                                                 -------         -------         -------

        Balances as of September 30, 2004        $(1,824)        $   556         $(1,268)
                                                 =======         =======         =======
</TABLE>


      In September  2004,  the Company  signed an agreement  with certain  other
shareholders of Comverge's  Series A Preferred Stock for the sale by the Company
to other  shareholders  of  shares  of  Comverge  Series A  Preferred  Stock for
approximately  $1,000,  resulting in a gain of $705. After giving effect to this
transaction,  the Company held approximately 11% of Comverge's  preferred equity
and approximately 34% of its total equity.


      In  October  2004  Comverge  completed  the  sale of  preferred  stock  to
investors. For more detail see Note 9 - Subsequent Event.

Note 4: Goodwill

      The  entire  balance  of  goodwill  was in  the  software  consulting  and
development  segment.  There were no  acquisitions  or  impairments  of goodwill
recorded during the nine-month period ended September 30, 2004.

      The  Company's   amortizable   intangible  assets  consisted  of  software
licenses, with a gross carrying amount of $253, accumulated amortization of $163
and $139 and net balances of $90 and $114, as of September 30, 2004 and December
31, 2003,  respectively.  All intangibles  assets are being amortized over their
estimated useful lives, which averaged 5 years and the amortization  expense for
the nine  months  ended  September  30,  2003 and 2004  amounted to $59 and $24,
respectively.

Note 5: Warranty Provision

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


                                       -7-

<PAGE>

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


Note 6: Stock-Based Compensation

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

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

<TABLE>
<CAPTION>
                                                          Nine months ended           Three months ended
                                                           September 30,                 September 30,
                                                           -------------                 -------------
                                                      2003            2004            2003            2004
                                                     -------         -------         -------         -------
<S>                                                  <C>             <C>             <C>             <C>
Net loss as reported ........................        $(5,100)        $  (860)        $(1,629)        $  (472)
Plus: Stock-based employee and director
       compensation expense included in
       reported net loss ....................             55              75               2              75
Less: Total stock-based employee compensation
       expense determined under fair value
       based method for all awards ..........            186             136               2              75
                                                     -------         -------         -------         -------

Pro forma net loss ..........................        $(5,231)        $  (921)        $(1,629)        $  (472)
                                                     =======         =======         =======         =======

   Net loss per share:
      Basic and diluted - as reported .......        $ (0.66)        $ (0.11)        $ (0.21)        $ (0.06)
                                                     =======         =======         =======         =======
      Basic and diluted - pro forma .........        $ (0.68)        $ (0.12)        $ (0.21)        $ (0.06)
                                                     =======         =======         =======         =======
</TABLE>

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

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


                                       -8-

<PAGE>

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

Note 7: Segment Information

<TABLE>
<CAPTION>
                                             Software           Energy
                                           consulting and    intelligence
                                            development       solutions        Computer
                                                (*)              (**)           hardware       Other (***)         Total
                                              --------         --------         --------         --------         --------
<S>                                        <C>               <C>               <C>              <C>              <C>
Nine months ended September 30, 2004:
   Revenues from external customers           $  8,676         $     --         $ 13,335         $     26         $ 22,037
   Intersegment revenues                            --               --               --               --               --
   Segment gross profit                          2,056               --            2,450               26            4,532
   Segment income (loss)                           208             (361)             231                6               84

Nine months ended September 30, 2003:
   Revenues from external customers           $  8,966         $  4,700         $ 12,974         $     25         $ 26,665
   Intersegment revenues                            --              284               20               --              304
   Segment gross profit                          1,931            1,313            2,276               25            5,545
   Segment loss                                   (455)          (2,772)            (247)             (17)          (3,491)

Three months ended September 30, 2004:
   Revenues from external customers           $  2,675         $     --         $  4,806         $      1         $  7,482
   Intersegment revenues                            --               --               --               --               --
   Segment gross profit                            562               --              893                1            1,456
   Segment income (loss)                            23              323              (60)              (1)             285

Three months ended September 30, 2003:
   Revenues from external customers           $  2,813         $     --         $  3,856         $      1         $  6,670
   Intersegment revenues                            --               --               --               --               --
   Segment gross profit                            548               --              653                1            1,202
   Segment loss                                    (24)            (909)            (156)             (11)          (1,100)
</TABLE>

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

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

(**)  Operating  results  of  Comverge  (in the  energy  intelligence  solutions
      segment) are no longer consolidated beginning the second quarter of 2003.

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

Reconciliation of Segment Loss to Consolidated Net Loss

<TABLE>
<CAPTION>
                                                       Nine months ended             Three months ended
                                                         September 30,                  September 30,
                                                   -----------------------         -----------------------
                                                    2003            2004            2003            2004
                                                   -------         -------         -------         -------
<S>                                                <C>             <C>             <C>             <C>
Total income (loss) for reportable segments        $(3,474)        $    78         $(1,089)        $   286
Other operational segment income (loss)                (17)              6             (11)             (1)
                                                   -------         -------         -------         -------
Total operating income (loss)                       (3,491)             84          (1,100)            285

Net loss of corporate headquarters                  (1,571)         (1,292)           (525)           (757)
Discontinued operations income (loss)                  (38)            348              (4)             --
                                                   -------         -------         -------         -------
Total consolidated net loss                        $(5,100)        $  (860)        $(1,629)        $  (472)
                                                   =======         =======         =======         =======
</TABLE>

                                       -9-

<PAGE>

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

Note 8: Discontinued Operations

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

      Assets and liabilities of the discontinued operation were as follows:

<TABLE>
<CAPTION>
                                                  December 31, 2003   September 30, 2004
                                                  -----------------   ------------------
<S>                                               <C>                 <C>
Current assets .............................            $  2                $ --
                                                        ====                ====
Fixed assets ...............................            $  2                $ --
                                                        ====                ====
Current liabilities ........................            $729                $ --
                                                        ====                ====
</TABLE>

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

<TABLE>
<CAPTION>
                                            Nine months ended          Three months ended
                                               September 30,              September 30,
                                               -------------              -------------
                                            2003          2004         2003           2004
                                            ----          ----         ----           ----
                                          Restated                   Restated
                                          --------                   --------
<S>                                        <C>           <C>           <C>           <C>
Sales ...............................      $ 172         $  --         $  14         $--
Cost of sales .......................        154            --            13          --
                                           -----         -----         -----         ---
Gross profit ........................         18            --             1          --
                                           -----         -----         -----         ---
Loss from operations ................        (31)           (2)           (1)         --
Interest expense ....................          7             4             3          --
                                           -----         -----         -----         ---
Net income (loss) from discontinued
    operations ......................      $ (38)        $ 348         $  (4)        $--
                                           =====         =====         =====         ===
</TABLE>


Note 9: Subsequent Event

      In  October  2004,  Comverge  closed on the sale of  additional  preferred
equity financing in the amount of $13,600. The preferred equity is senior to the
preferred  stock of  Comverge  owned by the  Company.  This  round of  financing
diluted the  Company's  holdings to  approximately  7% of  Comverge's  preferred
equity and approximately 25% of its total equity.

                                     - 10 -
<PAGE>

                          DATA SYSTEMS & Software Inc.
                     MANAGEMENT'S DISCUSSION AND ANALYSIS OF
                  FINANCIAL CONDITION AND RESULTS OF OPERATIONS

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

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

OVERVIEW AND TREND INFORMATION

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

      SOFTWARE CONSULTING AND DEVELOPMENT

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

      ENERGY INTELLIGENCE SOLUTIONS

      In October 2004,  Comverge completed its latest round of equity financing,
raising  approximately  $13.6 million.  These funds will  facilitate  Comverge's
ability to enter into  additional  fourth  Virtual  Peaking  Capacity TM ("VPC")
programs.  DSSI did not participate in this round of finance, which included the
existing investors and new investors, and as a result our equity in Comverge was
diluted to approximately 7% of Comverge's preferred equity and approximately 25%
of its total equity.

      COMPUTER HARDWARE

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

      CORPORATE

      Starting the beginning of this year, our Chief  Executive  Officer retired
from full-time  employment,  although at the Board's request he continues to act
as CEO as a consultant, under the terms of his employment agreement.

RECENT DEVELOPMENT

      As of September 30, 2004 our  shareholders  equity was $2.3 million,  $0.2
million short of the $2.5 million minimum required for continued  listing on The
Nasdaq  SmallCap  Market.  As a result,  our securities may be delisted from The
Nasdaq  Stock  Market.  We intend to  present  to Nasdaq  our plan to regain and
maintain compliance with the minimum shareholders equity requirement.  There can
be no assurance  that we will be able to maintain the listing for our securities
on the Nasdaq Stock Market.


                                     - 11 -
<PAGE>

Results of Operations

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

<TABLE>
<CAPTION>
                                                    Nine months ended September 30,
                                      ----------------------------------------------------------
                                              2003                      2004             Change
                                      --------------------     --------------------     --------
                                                   % of                      % of         % of
                                      ($,000)      sales        ($,000)      sales        2003
                                      --------    --------     --------    --------     --------
<S>                                   <C>         <C>          <C>         <C>          <C>
Sales                                 $ 26,665         100%    $ 22,037         100%         -17%
Cost of sales                           21,120          79       17,505          79          -17
                                      --------    --------     --------    --------     --------

           Gross profit                  5,545          21        4,532          21          -18
R&D expenses                               153           1           --           0         -100
SMG&A expenses                           8,345          31        5,496          25          -34
                                      --------    --------     --------    --------     --------

          Operating loss                (2,953)        (11)        (964)         (4)         -67
Interest expense, net                     (672)         (3)         (46)          0          -93
Other income (loss), net                  (408)         (2)         239           1         -159
                                      --------    --------     --------    --------     --------

Loss before taxes on income             (4,033)        (15)        (771)         (3)         -81
Taxes on income                              7           0           17           0          143
                                      --------    --------     --------    --------     --------

Loss from operations of the             (4,040)        (15)        (788)         (4)         -80
   Company and its
   consolidated
   subsidiaries
Share of losses in Comverge             (1,161)         (4)      (1,066)         (5)          -8
Gain on sale of share in Comverge           --          --          705           3
Minority interests                         139           1          (59)          0         -142
                                      --------    --------     --------    --------     --------

Net loss from
  continuing operations                 (5,062)        (19)      (1,208)         (5)         -76

Net income (loss) from
   discontinued operations,
   net of tax                              (38)          0          348           2       -1,016
                                      --------    --------     --------    --------     --------
Net loss                              $ (5,100)        (19%)   $   (860)         (4)%       -83%
                                      ========    ========     ========    ========     ========
</TABLE>

<TABLE>
<CAPTION>
                                                    Three months ended September 30,
                                      ----------------------------------------------------------
                                             2003                      2004              Change
                                      --------------------     --------------------     --------
                                                    % of                   % of           % of
                                       ($,000)      sales      ($,000)     sales         2003
                                      --------    --------     --------    --------     --------
<S>                                   <C>         <C>          <C>         <C>          <C>
Sales                                 $  6,670         100%    $  7,482         100%          12%
Cost of sales                            5,468          82        6,026          81           10
                                      --------    --------     --------    --------     --------

           Gross profit                  1,202          18        1,456          19           21
R&D expenses                                --          --           --           0
SMG&A expenses                           1,982          30        2,168          29            9
                                      --------    --------     --------    --------     --------

          Operating loss                  (780)        (12)        (712)        (10)          -9
Interest expense, net                      (53)         (1)         (37)          0          -30
Other income (loss), net                  (243)         (4)           2           0         -101
                                      --------    --------     --------    --------     --------

Loss before taxes on income             (1,076)        (16)        (747)        (10)         -31
Taxes on income                            (27)         (0)          37           0         -237
                                      --------    --------     --------    --------     --------

Loss from operations of the             (1,049)        (16)        (784)        (10)         -25
   Company and its
   consolidated
   subsidiaries
Share of losses in Comverge               (611)         (9)        (382)         (5)         -37
Gain on sale of share in Comverge           --          --          705           9
Minority interests                          35           1          (11)          0         -131
                                      --------    --------     --------    --------     --------

Net loss from
  continuing operations                 (1,625)        (24)        (472)         (6)         -71

Net income (loss) from
   discontinued operations,
   net of tax                               (4)          0           --           0         -100
                                      --------    --------     --------    --------     --------
Net loss                              $ (1,629)        (24)    $   (472)         (6)%       -71%
                                      ========    ========     ========    ========     ========
</TABLE>

      Sales. The decrease in sales in the first nine months of 2004, as compared
to the same period in 2003,  was due the inclusion of  Comverge's  sales of $4.7
million in the first quarter of 2003;  commencing the second quarter of 2003, we
no longer consolidated Comverge's operations. The increase in sales in the third
quarter of 2004 was due to a $1 million  increase  in computer  hardware  sales,
which was partially offset by a $0.1 million decrease in software consulting and
development  sales.  The increase in computer  hardware sales was from Databit's
existing  customers.  The decrease in software  consulting and development sales
was due a decrease in development project revenues.

      Gross  profit.  The decrease in gross  profits in the first nine months of
2004 as compared to the same period in 2003, was  attributable  to the inclusion
of Comverge's  gross profit of $1.3 million in the first  quarter of 2003.  This
decrease  was net of an  increase  in gross  profit in both of our  consolidated
segments.  In the third quarter of 2004,  gross profit and gross profit  margins
increased in both operating segments, compared to the third quarter of 2003.

      Selling,  marketing,  general and administrative  expenses ("SMG&A").  The
decrease  in SMG&A in the first nine  months of 2004 as compared to SMG&A in the
first nine months of 2003, was  attributable  to the fact that SMG&A in the 2003
period included $2.2 million of Comverge's SMG&A and since the second quarter of
2003, we no longer consolidate Comverge's operations.  The remaining decrease in
SMG&A was due to decreased corporate G&A and a decrease in SMG&A in our software
consulting and development  segment.  The increase in SMG&A in the third quarter
of 2004 as compared to third quarter of 2003, was primarily due to  professional
fees incurred in connection with the contemplated transaction with Kardan, which
was discontinued by Kardan in the third quarter of 2004.

                                     - 12 -
<PAGE>

      Share of losses in  Comverge.  The equity  loss in the third  quarter  and
first nine months of 2004 was attributable to our investment in Comverge,  whose
results we account for on an equity basis as of the second  quarter of 2003. Our
share of  Comverge's  net loss of $2.7  million and $6.9  million,  in the third
quarter  and first  nine  months of 2004,  was $0.4  million  and $1.1  million,
respectively.  Comverge's increased losses during the 2004 periods was primarily
due to  increased  SMG&A  expenses,  primarily  attributable  to  the  marketing
expenses  associated  with its new VPC  programs  and the  deferral  of revenues
pending the completion of certain test to be performed within these programs.

      Gain on sale of shares in Comverge.  During the third  quarter of 2004, we
sold a portion of our  investment  in  Comverge,  as a result  which we recorded
income of approximately $0.7 million.

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

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

Liquidity and Capital Resources

      As of  September  30,  2004,  we had  working  capital  of  $1.1  million,
including $0.9 million in  non-restricted  cash and cash  equivalents.  Net cash
used in the first  three  quarters  of 2004 was $0.3  million.  Net cash of $0.5
million was used in  operating  activities  during the first  three  quarters of
2004.  The net loss for the nine-month  period ended  September 30, 2004 of $0.9
million, resulted primarily from the net loss from our investment in Comverge of
$0.4 million and expenses  incurred in the unsuccessful  transaction with Kardan
of $0.3 million. We used cash in our operating activities during the first three
quarters  of 2004  primarily  for the  payment  of  accounts  payable  and other
liabilities  in excess of  collections  of trade  accounts  receivables  of $0.7
million,  net. The net cash of $0.7 million provided by investing activities was
primarily  related to the net proceeds received from the sale of Comverge shares
of $1.0 million less the funding employee  termination benefits of $0.3 million.
Net cash of $0.5 million used in financing  activities was primarily for the net
payment of debt.  Of the total  working  capital at  September  30,  2004,  $0.3
million  was in our  majority-owned  dsIT  subsidiary.  Due to  Israeli  tax and
company law  constraints as well as the significant  minority  interest in dsIT,
such  working  capital  and cash flows from  dsIT's  operations  are not readily
available to finance U.S. activities.

      As of October 31, 2004 our wholly  owned US  operations  (i.e.,  excluding
dsIT and  Comverge)  had an aggregate of $0.9 million in  unrestricted  cash and
cash  equivalents,  reflecting  a $0.2 million  decrease  from the balance as of
December 31, 2003.

      We intend to fund our US operations and corporate activities with the cash
available and anticipated profits from our US operations. Based on our operating
plans, we believe that we have sufficient liquidity to finance our US operations
and corporate  activities for at least the 12 months  following the date of this
report.  There is,  however,  no  assurance  that we will be able to operate our
business and  activities  as planned.  We continue to seek and consider  various
restructuring,  merger or acquisition and/or financing  transactions which would
increase shareholders equity and provide additional liquidity. Should we require
additional  liquidity  and  should we be  unsuccessful  in  completing  a timely
transaction providing the necessary liquidity,  we may not have sufficient funds
to finance  our US  activities.  In such event,  we may need to sell  additional
Comverge shares in order to finance our US activities.


                                     - 13 -
<PAGE>

Contractual Obligations and Commitments

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

<TABLE>
<CAPTION>
                                                        Cash Payments Due During the Year Ending September 30,
                                                    --------------------------------------------------------------
                                                                        (amounts in thousands)
      Contractual Obligations                        Total         2005          2006          2007       After 2007
      -----------------------                       ------        ------        ------        ------        ------
<S>                                                 <C>           <C>           <C>           <C>              <C>
Long-term debt related to Israeli operations        $  777        $  535        $  179        $   63           $--

Guarantees                                             410           410            --            --            --

Operating leases                                     2,825         1,084           606           422           713

Consulting agreement with CEO                        1,127            --         1,127            --            --
                                                    ------        ------        ------        ------        ------

Total contractual cash obligations                  $5,139        $2,029        $1,912        $  485        $  713
                                                    ======        ======        ======        ======        ======
</TABLE>


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

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

      Our Israeli subsidiaries provided various performance,  advance and tender
guarantees as required in the normal course of its  operations.  As at September
30, 2004, such guarantees totaled approximately  $422,000 and were due to expire
through October 2005.

                                     - 14 -

<PAGE>

Item 3. Quantitative and Qualitative Disclosures About Market Risk

      In the  normal  course of  business,  we are  exposed to  fluctuations  in
interest  rates on  lines-of-credit  and long-term  debt incurred to finance our
operations in Israel,  currently  $0.9 million and $0.5  million,  respectively.
Additionally,   our  monetary   assets  and   liabilities   (net   liability  of
approximately  $0.9 million) in Israel are exposed to  fluctuations  in exchange
rates.  We do not  employ  specific  strategies,  such as the use of  derivative
instruments or hedging, to manage our interest rate or foreign currency exchange
rate exposures.


Item 4. Controls and Procedures

Evaluation of Controls and Procedures

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

Changes in Controls and Procedures

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


                                     - 15 -

<PAGE>

                           PART II - Other information

Item 6: Exhibits and Reports on Form 8-K

      (a)   Exhibits

            10.1  Employment Agreement executed on August 19, 2004 and effective
                  as  of  January  1,  2004  between   Databit   Inc.,   Shlomie
                  Morgenstern and the Registrant.

            10.2  Restricted Stock Award Agreement, dated as of August 19, 2004,
                  between the Registrant and Shlomie Morgenstern.

            10.3  Stock Option  Agreement  dated as of August 19, 2004,  between
                  the Registrant and Shlomie Morgenstern.

            10.4  Second   Amended  and  Restated   Co-Sale  And  First  Refusal
                  Agreement dated as of October 26, 2004, by and among Comverge,
                  Inc., the Registrant, and other persons party thereto.

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

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

            32(a) Section 1350 Certification by Chief Executive Officer *

            32(b) Section 1350 Certification by Chief Financial Officer *

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

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


(b)   Reports on Form 8-K

      (i) Report on Form 8-K,  filed on July 28, 2004  (earliest  event reported
      July 26, 2004): Item 5 was reported.

      (ii) Report on Form 8-K, filed on August 13, 2004 (earliest event reported
      August 13, 2004): Item 2 was reported.

      (iii)  Report  on Form 8-K,  filed on  August  17,  2004  (earliest  event
      reported August 13, 2004): Item 7 was reported.

      (iv) Report on Form 8-K, filed on August 19, 2004 (earliest event reported
      August 18, 2004): Item 5 was reported.

      (v)  Report on Form 8-K,  filed on  September  10,  2004  (earliest  event
      reported September 9, 2004): Item 1.01 was reported.


                                     - 16 -

<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:  November 12, 2004

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

                                     - 17 -

</TEXT>
</DOCUMENT>
<DOCUMENT>
<TYPE>EX-10.1
<SEQUENCE>2
<FILENAME>v08383_ex10-1.txt
<TEXT>

                              EMPLOYMENT AGREEMENT

This  EMPLOYMENT  AGREEMENT  executed  on August 19,  2004 and  effective  as of
January 1, 2004 between Databit Inc., a Delaware  corporation  (the  "Company"),
Shlomie  Morgenstern  (the  "Executive")  and Data  Systems & Software  Inc.,  a
Delaware corporation ("DSSI").

WHEREAS,  the  Executive  has been  employed by the  Company  since 1996 and has
served as its President since 1998;

WHEREAS,  the Executive has been an executive  officer of DSSI and has served as
Vice President - Operations of DSSI since February 2000;

WHEREAS,  during the Executive's tenure, the Company has established itself as a
successful  and  profitable   value-added  reseller  of  hardware  and  software
products, which has and is operating at a profit;

WHEREAS, the Company and DSSI desire to assure the Executive's continued service
to the Company by entering into an Employment  Agreement with the Executive with
appropriate  provisions  to assure such  continued  service and  non-competition
covenants;

WHEREAS,  the Company  desires to employ the  Executive  as its Chief  Executive
Officer on the terms hereinafter set forth;

WHEREAS,  in order to secure the  services  of the  Executive,  the  Company has
requested  DSSI to  guarantee  its  obligations  and provide  certain  financial
incentives under an agreement with the Executive,  and DSSI is willing to do so,
as hereinafter set forth;

WHEREAS,  the  Executive  desires to remain in the  Company's  employment on the
terms hereinafter set forth.

NOW,  THEREFORE,  in  consideration  of the  mutual  covenants  and  obligations
hereinafter set forth, the parties hereto hereby agree as follows:

SECTION 1. EMPLOYMENT.  Effective as of January 1, 2004 ("the date hereof"), the
Company  hereby  employs  the  Executive,   and  the  Executive  hereby  accepts
employment  by the  Company,  upon  the  terms  and  subject  to the  conditions
hereinafter set forth.

SECTION 2. TERM. The employment of the Executive  hereunder shall commence as of
the date  hereof and  terminate  on the fourth  anniversary  of such date unless
earlier  terminated  under Section 6 (Termination)  or Section 7 (Termination by
the Company for Cause) hereof (the "Initial  Term").  Upon the conclusion of the
Initial Term,  unless either party shall have given the other written  notice of
its intent to terminate  not less than ninety (90) days prior to the  expiration
of the Initial Term,  this Agreement  shall  automatically  renew for additional
terms of one year each (each, a "Renewal Term"), unless terminated in the manner
set forth above.
<PAGE>

SECTION 3.  DUTIES.  The  Executive  shall be  employed  as the Chief  Executive
Officer and President of the Company,  or in such other  position as the Company
and the  Executive  shall agree in writing.  The  Executive  shall  perform such
executive  duties and services of a responsible  nature as are  appropriate  and
commensurate with the Executive's  position. In his capacity as President of the
Company,  the  Executive  shall be  subject to the  supervision  of the Board of
Directors of the Company and shall report  directly to such Board of  Directors.
Notwithstanding  the above,  the Executive  shall not be required to perform any
duties and  responsibilities  which  would,  or would be likely to,  result in a
non-compliance with or violation of any applicable law,  regulation,  regulatory
bulletin, and/or any other regulatory requirement.

SECTION 4. TIME TO BE DEVOTED TO EMPLOYMENT.

            (a)  Except  for four (4)  weeks of  vacation  per  year,  which the
Executive is entitled to ("Vacation"),  absences due to temporary illness,  such
holidays as are observed by the Company and  traditional  and recognized  Jewish
holidays,  during  the Term,  the  Executive  shall  devote the  business  time,
attention and energies necessary to perform his obligations and responsibilities
as the Chief Executive Officer and President of the Company.

            (b) During the Term, the Executive shall not be engaged in any other
business  activity which  conflicts with the duties of the Executive  hereunder,
whether or not such  activity  is pursued  for gain,  profit or other  pecuniary
advantage; provided, however, that the Executive shall be allowed, to the extent
such  activities do not  substantially  interfere  with the  performance  by the
Executive  of his  duties  and  responsibilities  hereunder,  (a) to manage  his
personal  affairs,  and (b) to serve on boards or committees of  corporations or
other companies, civic or charitable organizations and/or trade associations.

            (c) At all times  during the Initial and each  Renewal  Term hereof,
the  Company's  principal  offices,  at which  Executive  shall be based,  shall
continue to be located at 200 Route 17, Mahwah,  New Jersey 07430,  or elsewhere
within a radius of not more than  thirty-five  (35) miles from Monsey,  New York
unless such other  location  shall be  acceptable  to Executive  within his sole
determination.

SECTION 5. COMPENSATION; BENEFITS; REIMBURSEMENT.

            (a) Base Salary.

                  (i) The Company shall pay to the Executive  during the initial
      twelve (12) month period of this Agreement (the "Initial  Year"), a salary
      (the "Base Salary") of not less than two hundred fifty thousand ($250,000)
      dollars,  payable  in  accordance  with  the  Company's  standard  payroll
      schedule.  Such Base Salary shall be applied  retroactive to the beginning
      of 2004.


                                       2
<PAGE>

                  (ii) Thereafter, during each subsequent twelve month period of
      the balance of the Initial Term and each  Renewal Term (each,  a "Contract
      Year"),  Executive's  salary shall be approved by the  Company's  Board of
      Directors;  provided,  however,  that in each Contract Year, the amount of
      such  salary  shall  not be less than that  paid  during  the  immediately
      preceding Contract Year.

            (b) Bonus.

                  (i) With respect to each  calendar  year,  including  the year
      ending  December 31, 2004,  the Company shall pay to the Executive a bonus
      (referred to generally as the "Bonus")  consisting of an amount equivalent
      to twenty  percent (20%) of the  Company's  Gross Profit in excess of $2.8
      million for the year. For purposes of this Agreement  "Gross Profit" shall
      mean the  Company's  total net sales in  accordance  with GAAP  (including
      freight  revenue)  minus  the  direct  cost of  goods  (including  cost of
      freight),  without any other cost  allocation.  The Bonus shall not exceed
      fifty percent (50%) of the Base Salary in the event the Company realizes a
      Net Income for the applicable year or thirty-six percent (36%) of the Base
      Salary in the event the  Company  does not  realize a Net  Income  for the
      applicable  year.  For purposes of this  Agreement "Net Income" shall mean
      income before taxes in accordance with GAAP (after  including the Bonus in
      SG&A for the  applicable  year)  but  shall be before  any  deduction  for
      allocations  of  DSSI  corporate  overhead  (such  as  professional  fees,
      directors'  and  officers'  liability  insurance,  listing  fees  etc.) or
      management fees, if any.

                  (ii)  Executive  may make  quarterly  draws  against the Bonus
      equal to 20% of the  Company's  Gross Profit in excess of $700,000 for the
      preceding quarter,  provided,  however,  that no such quarterly draw shall
      exceed 30% of the  Executive's  Base  Salary for such  quarter.  Any draws
      shall be  reconciled  against the Bonus as  computed  after the end of the
      Company's fiscal year.

            (c)   Reimbursement.   The  Company  shall  promptly  reimburse  the
Executive,  in accordance  with the Company's  policies and  practices,  for all
reasonable and necessary traveling expenses,  disbursements and other reasonable
and  necessary  incidental  expenses  incurred  by him for or on  behalf  of the
Company in the  performance  of his duties  hereunder upon  presentation  by the
Executive to the Company of appropriate  receipts and  documentation.  Executive
shall be  entitled  to fly  business  class for any flights in excess of 4 hours
traveling time.

            (d) Automobile  Allowance.  During the Initial Term and each Renewal
Term,  the  Company  shall lease an  automobile  for  Executive  or shall pay to
Executive an allowance  equivalent  to  Executive's  lease or financing  payment
costs for the automobile of Executive's  choice and the Company shall pay all of
Executive's insurance, repairs and maintenance, and fuel costs.

            (e) Standard  Benefits.  During the Term and to the extent available
to  executives  of the  Company  and  DSSI  (including  its  subsidiaries),  the
Executive  shall be entitled  generally  to  participate  in all benefit  plans,
welfare  and  retirement   plans,   401(k)  plans,   life  insurance,   medical,


                                       3
<PAGE>

hospitalization and prescription  coverage (individual and  family)(collectively
"Medical  Insurance"),  sick leave,  vacation  and holiday  policies,  long-term
disability  coverage and such other standard benefits maintained or sponsored by
the Company or its subsidiaries.  Notwithstanding the foregoing, (i) the Company
shall pay the premiums on a term life insurance policy selected and owned by the
Executive which total amount of the face value of such policy for any given year
shall be five (5) times the aggregate Base Salary for the preceding  year,  (ii)
the Company shall pay Executive's premiums for supplemental  disability coverage
which  shall  provide  for  benefits  of up to 80% of Base  Pay;  and  (iii) the
Executive  shall be  entitled to no less than the  following:  four (4) weeks of
vacation; five (5) personal days; (5) five sick days; and the Executive will not
be required to work on or utilize  vacation or personal days for all traditional
and recognized Jewish holidays.

            (f) Stock Grant and Options. Upon execution of this Agreement,  DSSI
shall issue to the  Executive  or his  designees,  which may include one or more
trusts,  under the Company' 1994 Stock Incentive Plan, (i) 100,000 shares of the
common stock of DSSI, as well as an additional 95,000 shares which shall vest in
accordance with the following schedule:

            -------------------------------------------------------------------
            Vesting Date                                       Number of Shares
            -------------------------------------------------------------------
            2nd Year Anniversary of the Date Hereof            31,666
            -------------------------------------------------------------------
            3rd Year  Anniversary of the Date Hereof           31,667
            -------------------------------------------------------------------
            4th Year Anniversary of the Date Hereof            31,667
            -------------------------------------------------------------------

and (ii) options (the "Options") to purchase  305,000 shares of the common stock
of DSSI in accordance  with the 1994 Stock  Incentive  Plan,  and subject to the
following vesting schedule:

            --------------------------------------------------------------------
            Vesting Date                                       Number of Options
            --------------------------------------------------------------------
            24 Month Anniversary of the Date Hereof            105,000
            --------------------------------------------------------------------
            30 Month Anniversary of the Date Hereof            100,000
            --------------------------------------------------------------------
            42 Month Anniversary of the Date Hereof            100,000
            --------------------------------------------------------------------

The Options shall expire on January 1, 2014 subject to earlier  termination upon
termination  of  employment of the  Executive,  in which event the Options shall
terminate no earlier than twelve (12) months  subsequent to the  termination  of
employment of the Executive,  other than in the event of a Termination for Cause
(as defined in Section 7 hereof),  in which event the  Options  shall  terminate
three (3) months  subsequent to the  termination of employment of the Executive.
In the event of a Change of Control (as defined in Section 6(c) all stock grants
and option grants pursuant to this Section 5(f) shall become  immediately  fully
vested.

            (g) Unused  Vacation.  All unused  vacation will accrue from year to
year.

SECTION 6. TERMINATION FOR DEATH OR DISABILITY; TERMINATION BY THE EXECUTIVE.

            (a) If the  Executive  is  incapacitated  or disabled  by  accident,
sickness or other cause so as to render him mentally or physically  incapable of
performing the services required to be performed by him under this Agreement for


                                       4
<PAGE>

a period  of 180 days or  longer  (whether  consecutively  or in the  aggregate)
during any  twelve-month  period (such  condition  being herein referred to as a
"Disability"),  prior to the Executive resuming the performance of his duties as
contemplated  herein,  the Company may terminate the employment of the Executive
under  this  Agreement  and upon such  termination  the  Executive's  employment
hereunder shall terminate.

            (b) If the Executive dies during the Term, his employment  hereunder
shall be deemed to terminate as of the date of his death.

            (c) If  there  is a  Change  of  Control,  and  within  one (1) year
thereafter  the  Executive  shall have  delivered a notice to the Company of the
termination of his employment hereunder,  Executive's employment hereunder shall
be deemed to terminate as of the date of delivery of such notice to the Company.
As used herein,  the term  "Change of Control"  shall mean the  occurrence  with
respect  to the  Company  or DSSI,  as the case may be, of any of the  following
events:

                  i. An acquisition  of any voting  securities of the Company or
      DSSI (as the case may be, the "Voting Securities") by any "Person" (as the
      term  Person  is used  for  purposes  of  Section  13(d)  or  14(d) of the
      Securities  Exchange  Act  of  1934,  as  amended  (the  "Exchange  Act"))
      immediately after which such Person has "Beneficial Ownership" (within the
      meaning of Rule 13d-3  promulgated  under the Exchange Act) of 50% or more
      of the combined voting power of the then  outstanding  Voting  Securities;
      provided  that  prior  to such  acquisition  such  Person  had  Beneficial
      Ownership of less than 50% of the then outstanding Voting Securities;

                  ii. The individuals who, as of the date hereof, are members of
      the Board of DSSI (as the case may be, the "Incumbent  Board"),  cease for
      any reason to  constitute  at least a majority  of such  Board;  provided,
      however,  that if the election or nomination for election by the Company's
      or  DSSI's,  as the  case may be,  stockholders  of any new  director  was
      approved by a vote of at least a majority of the Incumbent Board, such new
      director shall, for purposes of this Agreement,  be considered as a member
      of the Incumbent Board;  provided,  further,  however,  that no individual
      shall be considered a member of the Incumbent Board if (A) such individual
      initially  assumed  office as a result  of either an actual or  threatened
      "Election  Contest"  (as  described in Rule 14a-11  promulgated  under the
      Exchange  Act) or other actual or  threatened  solicitation  of proxies or
      consents  by or on  behalf  of a Person  other  than the  Board (a  "Proxy
      Contest"),  including  by reason  of any  agreement  intended  to avoid or
      settle any Election  Contest or Proxy Contest,  or (B) such individual was
      designated by a Person who has entered into an agreement  with the Company
      or  DSSI,  as the case  may be,  to  effect  a  transaction  described  in
      subsection  (c)(ii)(A)(1)  or  (c)(ii)(A)(3)  below;  or (iii) approval by
      stockholders of the Company or DSSI, as the case may be, of:

                  (A) A merger,  consolidation or reorganization  involving such
                  company, unless,


                                       5
<PAGE>

                        (1) the stockholders of the Company or DSSI, as the case
                        may be, immediately before such merger, consolidation or
                        reorganization, own, directly or indirectly, immediately
                        following such merger,  consolidation or reorganization,
                        at least a majority of the combined  voting power of the
                        outstanding  Voting  Securities of the corporation  (the
                        "Surviving Corporation");

                        (2) the  individuals  who were members of the  Incumbent
                        Board   immediately   prior  to  the  execution  of  the
                        agreement  providing for such merger,  consolidation  or
                        reorganization  constitute  at least a  majority  of the
                        members  of the  board  of  directors  of the  Surviving
                        Corporation; and

                        (3) no Person  (other than any Person  who,  immediately
                        prior to such merger,  consolidation or  reorganization,
                        had  Beneficial  Ownership  of a majority or more of the
                        then  outstanding   Voting  Securities)  has  Beneficial
                        Ownership of a majority or more of the  combined  voting
                        power of the Surviving  Corporation's  then  outstanding
                        Voting Securities.

                  (B) A complete liquidation or dissolution of such company; or

                  (C) An agreement for the sale or other  disposition  of all or
                  substantially all of the assets of such company to any Person.

Notwithstanding the foregoing,  a Change of Control shall not be deemed to occur
solely because any Person (the "Subject Person") acquired  Beneficial  Ownership
of more than the permitted  percentage of the outstanding Voting Securities as a
result of the  acquisition  of Voting  Securities by the Company or DSSI, as the
case may be,  which,  by reducing the number of Voting  Securities  outstanding,
increased the proportional  number of shares  Beneficially  Owned by the Subject
Person;  provided that if a Change of Control would occur (but for the operation
of this  sentence) as a result of the  acquisition  of Voting  Securities by the
Company or DSSI,  as the case may be, and after  such share  acquisition  by the
Company or DSSI, as the case may be, the Subject  Person  becomes the Beneficial
Owner of any  additional  Voting  Securities  Beneficially  Owned by the Subject
Person, then a Change of Control shall be deemed to have occurred.

            (d) If the Company shall have breached a material  provision of this
Agreement (including,  but not limited to, the Company significantly diminishing
the Executive's his position,  duties,  authority,  or  responsibilities  or the
Company's  breach of its  obligations  under Section 5 hereof),  and such breach
remains uncured for ten (10) calendar days after the notice thereof is delivered
to the  Company,  than the  Executive's  employment  hereunder  shall be  deemed
terminated by the Executive upon the expiration of such 10-day cure period.


                                       6
<PAGE>

SECTION 7.  TERMINATION BY THE COMPANY FOR CAUSE.  The Company may terminate the
Executive's  employment  hereunder for "Cause" (a  "Termination  for Cause") and
upon such  termination the Executive's  employment  hereunder shall be deemed to
terminate upon the delivery to the Executive of the notice thereof. For purposes
of this  Agreement,  "Cause" shall be limited to the  Executive's (i) willful or
gross  misconduct  in  performing  his  duties on behalf of the  Company  or its
subsidiaries  or  affiliates  (including  misconduct  or fraud which  results in
material financial injury to the Company),  or (ii)  misappropriation  of funds,
properties or assets of the Company (including its subsidiaries and affiliates).

SECTION 8. EFFECT OF TERMINATION OF EMPLOYMENT OR NON-RENEWAL.

            (a) Upon the  termination of the  Executive's  employment  hereunder
pursuant  to  Section  6(a)  or  6(b)  hereof,  neither  the  Executive  nor his
beneficiary  or estate  shall  have any  further  rights or claims  against  the
Company under this Agreement,  except (i) to receive payment from the Company to
Executive  (or his  estate) of Base  Salary and a pro rata  portion of his Bonus
through the date of  Termination,  and (ii) all grants  pursuant to Section 5(f)
hereof will immediately vest and shall be exercisable in accordance with Section
5(f) hereof.

            (b) If this  Agreement is not renewed  after the Initial Term or any
Renewal Term,  the Executive  shall have no further rights or claims against the
Company under this  Agreement,  except to receive  payment from the Company of a
lump sum equal to the Base Salary and Bonus  provided in Sections  5(a) and 5(b)
for a period of one (1)  Contract  Year from the date of such  Termination;  and
(ii) all grants pursuant to Section 5(f) hereof will  immediately vest and shall
be  exercisable in accordance  with Section 5(f) hereof.  In such case, the Base
Salary and Bonus required to be paid hereunder  shall be equivalent to that paid
or payable for the Contract Year in which such Termination occurred.

            (c) Upon a  Termination  for  Cause,  the  Executive  shall  have no
further  rights or claims  against the Company  under this  Agreement  except to
receive the payment of his Base Salary through the effective date of Termination
for Cause.

            (d) If the Company shall terminate Executive's employment during the
Term of this Agreement other than for Cause or the Executive shall terminate his
employment  hereunder  pursuant to Section  6(c) or 6(d)  hereof,  all grants of
stock and options  pursuant to Section 5(f) hereof shall  immediately  vest (and
shall be exercisable  in accordance  with Section 5(f) hereof) and the Executive
shall be entitled to an amount equal to:

                  (i) 2.9 times the  Executive's  then  current Base Salary plus
      (ii) 2.9 times the  average  of the  Bonuses  which  have been paid to the
      Executive based upon the three prior years,  or, if the Executive has been
      employed by the Company for less than three  years,  2.9 times the average
      of the  Bonuses  granted  based  upon all  prior  years  during  which the
      Executive has been employed by the Company;

                  (ii) any unpaid  portion of the Base  Salary  provided  for in
      Section  5(a) (Base  Salary),  computed on a pro rata basis to the date of
      termination;


                                       7
<PAGE>

                  (iii) cash compensation equal to the product of (A) the number
      of days of accrued Vacation,  if any,  accumulated by the Executive to the
      effective date of termination divided by the total number of work days per
      annum  multiplied by (B) the Base Salary and any adjustments  which are in
      effect at the time of termination;

                  (iv)  reimbursement  for any expenses for which the  Executive
      shall not have  theretofore  been  reimbursed  as provided in Section 5(c)
      (Reimbursement);  and

                  (v) any other  compensation and benefits as may be provided in
      accordance  with the  terms  and  provisions  of any  applicable  plans or
      programs, if any, of the Company or any subsidiary of the Company on a pro
      rata basis to the date of termination.

            (e) In the  event  of  any  termination  of  employment  under  this
Agreement,  the Executive shall be under no obligation to seek other  employment
or to mitigate damages,  and there shall be no offset against any amounts due to
the Executive under this Agreement on account of any  remuneration  attributable
to any subsequent  employment that would not constitute a breach of the covenant
set forth in Section 9  (Non-Competition;  Non-Disclosure of Information) hereof
that the  Executive  may obtain.  Any amounts due are in the nature of severance
payments,  or  liquidated  damages,  or  both,  and are not in the  nature  of a
penalty.

SECTION 9. NON-COMPETITION; NON-DISCLOSURE OF INFORMATION.

            (a) The Executive  shall not during the Initial Term and any Renewal
Term, and for a period of one (1) year following the end of the Initial Term and
any Renewal Term (or earlier  termination  of the  employment  relationship  for
whatever reason):  (i) directly or indirectly engage in any Competitive Business
(as defined below),  whether such engagement shall be as an employee,  employer,
owner,  consultant,  partner or other  participant in any Competitive  Business,
(ii)  assist  others in  engaging  in any  Competitive  Business  in the  manner
described in the foregoing  clause (i), (iii) induce employees of the Company or
any of its  subsidiaries  or affiliates to terminate  their  employment with the
Company or any of its  subsidiaries  or  affiliates  and accept  employment in a
competitive  business  or engage in any  Competitive  Business  or (iv)  solicit
customers or vendors of the Company or any of its  subsidiaries or affiliates to
alter or terminate  their business  relationship  with the Company or any of its
subsidiaries  or  affiliates;  provided,  however,  that the  Executive  may own
directly  or  indirectly,  solely as a  passive  investment,  securities  of any
Competitive  Business  traded on any national  securities  exchange or quotation
system if the Executive is not a controlling  person of, nor a member of a group
which controls such person and does not, directly or indirectly,  own 5% or more
of any class of securities of such person. As used herein, the term "Competitive
Business" shall mean the business of re-selling  Hewlett-Packard,  Dell Computer
and IBM hardware in New York, New Jersey and Los Angeles, California.

            (b) The Executive  understands  that the foregoing  restrictions may
limit  his  ability  to earn a  livelihood  in a  Competitive  Business,  but he
nevertheless   believes  that  he  has  received  and  will  receive  sufficient
consideration  and other benefits  (including stock option grants) in connection
with his  employment to clearly  justify such  restrictions.  Nothing  contained


                                       8
<PAGE>

herein shall  prohibit the  Executive  from engaging in a business that is not a
Competitive  Business,  as long as he remains  otherwise in compliance with this
Agreement.

            (c)   Anything   contained   in  this  Section  9  to  the  contrary
notwithstanding,  the  enforceability  of the  provisions  hereof by the Company
against  Executive  shall  be  entirely   conditioned  and  dependent  upon  the
observance by the Company of its  obligations to Executive  hereunder  including
the payment by Company to Executive of all amounts  provided under  subparagraph
5(a), 5(b), 8(a) and 8(b).

            (d) The  Executive  agrees  that he will not,  at any time during or
after the Term,  disclose  to any person,  firm,  corporation  or other  entity,
except as required by law, a court of competent jurisdiction,  or any recognized
subpoena  power,  or to  prosecute  claims under this  Agreement,  any secret or
confidential  information  not already in,  available  to or known by the public
domain  concerning  the  business,  clients  or  affairs  of the  Company or any
subsidiary or affiliate thereof for any reason or purpose  whatsoever other than
in  furtherance  of the  Executive's  work for the Company or any  subsidiary or
affiliate  thereof  nor shall the  Executive  make use of any of such  secret or
confidential  information  for his own purpose or for the benefit of any person,
firm,  corporation or other business entity except the Company or any subsidiary
or affiliate thereof.

SECTION  10.  MUTUAL  NON-DISPARAGEMENT.   In  consideration  of  the  foregoing
provisions of this  Agreement,  each party agrees that it will not,  directly or
indirectly,  make or cause others to make any  statement or take any action that
could reasonably be construed to be a false or misleading statement of fact or a
libelous,  slanderous or  disparaging  statement of or concerning the Executive,
the Company, its subsidiaries,  its affiliates, its businesses or its employees,
officers, directors, agents, consultants or stockholders.

SECTION 11. ENFORCEMENT.  It is the desire and intent of the parties hereto that
the  provisions  of this  Agreement  shall be  enforced  to the  fullest  extent
permissible  under the laws and public policies applied in each  jurisdiction in
which enforcement is sought.  Accordingly,  if any particular  provision of this
Agreement  shall be adjudicated to be invalid or  unenforceable,  such provision
shall be deemed amended to delete  therefrom the portion thus  adjudicated to be
invalid or  unenforceable,  such  amendment  to apply  only with  respect to the
operation  of such  provision  in the  particular  jurisdiction  in  which  such
adjudication  is  made;  provided,  however,  that  if any  one or  more  of the
provisions  contained in this  Agreement  shall be  adjudicated to be invalid or
unenforceable  because  such  provision  is held to be  excessively  broad as to
duration,  geographical  scope,  activity or subject,  such  provision  shall be
deemed amended by limiting and reducing it so as to be valid and  enforceable to
the maximum extent  compatible  with the applicable  laws of such  jurisdiction,
such  amendment to apply only with respect to the operation of such provision in
the particular jurisdiction in which such adjudication is made.


                                       9
<PAGE>

SECTION 12. REMEDIES; SURVIVAL.

            (a)  Notwithstanding  anything  contained  in this  Agreement to the
contrary, the provisions of this Agreement shall survive the expiration or other
termination of the Term or this Agreement until, by their terms, such provisions
are no longer operative.

            (b) It is  understood  and agreed that the  provisions  of Section 9
(Non-Competition;   Non-Disclosure   of  Information)  and  Section  10  (Mutual
Non-disparagement)  of this  Agreement  are separate and distinct from any other
agreement between the parties hereto.  Accordingly,  in the event of a breach of
such provisions,  the breaching party shall only be held responsible for damages
arising  under such  provisions  and not for any damages which may be claimed to
arise  under or with  respect  to any  other  agreement  that is not  separately
breached.

SECTION 13. KEY PERSON INSURANCE.  The Company may, for its own benefit,  in its
sole discretion,  maintain  "key-person" life and disability  insurance policies
covering  the  Executive.  The  Executive  will  cooperate  with the Company and
provide such  information  as the Company may  reasonably  request in connection
with the Company's obtaining and maintaining such policies.

SECTION 14. NOTICES.  Except as otherwise  expressly provided in this Agreement,
any notice, request, demand, statement,  authorization or consent made hereunder
shall be in writing  and shall be (a) hand  delivered  or (b) sent by  facsimile
followed  by  receipted  U.S.  Express  Mail or a reputable  nationwide  private
overnight  courier  service for delivery on the next  business day, and shall in
any case be deemed given when first received at the following addresses:

            If to the Executive:

            Shlomie Morgenstern
            4 Shalvah Place
            Monsey, New York 10952
            Facsimile: 201-529-3163

            with a copy to:
            Edward Burnbaum, Esq.
            Burnbaum, Edward
            Novack, Burnbaum & Crystal, P.C.
            300 East 42nd Street
            New York, New York  10017
            Facsimile: (212) 986-2907


                                       10
<PAGE>

            If to the Company or DSSI:

            c/o DSSI
            200 Route 17
            Mahwah, New Jersey 07430
            Attention: Chief Executive Officer
            Facsimile: 201-529-3163

            with a copy to:

            Keith Moskowitz, Esq.
            Ehrenreich Eilenberg & Krause LLP
            11 East 44th Street, Suite 1700
            New York, New York 10017
            Facsimile: 212-986-2399

SECTION 15. BINDING AGREEMENT.  This Agreement shall inure to the benefit of and
be enforceable by the Executive's personal or legal representatives,  executors,
administrators,  successors,  heirs, distributees and devisees. If the Executive
should die while any amount  would still be payable to him  hereunder,  all such
amounts,  unless otherwise provided herein, shall be paid in accordance with the
terms of this  Agreement to the  beneficiary  designated  by the  Executive in a
writing delivered to the Company, or if there be no such designated beneficiary,
to his estate.

SECTION 16. GOVERNING LAW; JURISDICTION. This Agreement shall be governed by the
laws of the State of New York,  without  regard to conflicts of laws  principles
thereof.  All  disputes  arising out of or relating to this  Agreement  shall be
subject to the non-exclusive jurisdiction of the state and federal courts in New
York City,  New York to which the parties  irrevocably  submit.  Notwithstanding
this Section 16, either party may commence  proceedings or seek remedies  before
the  courts  or  any   competent   authority  of  any  country  for  interim  or
interlocutory remedies in relation to any breach of this Agreement.

SECTION  17.  WAIVER OF BREACH.  The  waiver by either  party of a breach of any
provision of this  Agreement by the other party must be in writing and shall not
operate  or be  construed  as a waiver of any  subsequent  breach by such  other
party.

SECTION 18. ENTIRE AGREEMENT; AMENDMENTS; EXECUTION. This Agreement contains the
entire  agreement  between  the  parties  with  respect  to the  subject  matter
contained herein and supersedes all prior agreements or understandings among the
parties with respect thereto. This Agreement may be amended only by an agreement
in writing signed by the parties  hereto.  This Agreement may be executed in any
number of counterparts,  each of which shall be deemed an original  document but
all of which shall constitute but one agreement.


                                       11
<PAGE>

SECTION 19. SEVERABILITY.  Any provision of this Agreement that is prohibited or
unenforceable in any jurisdiction shall, as to such jurisdiction, be ineffective
to the extent of such prohibition or unenforceability  without  invalidating the
remaining provisions hereof, and any such prohibition or unenforceability in any
jurisdiction shall not invalidate or render  unenforceable such provision in any
other jurisdiction.

SECTION  20.  ASSIGNMENT.  With  respect to the  Executive,  this  Agreement  is
personal  in its nature and the  Executive  shall not  assign or  transfer  this
Agreement or any rights or obligations hereunder.  This Agreement and its rights
and obligations  herein shall inure to the benefit of, and be binding upon, each
successor of the Company,  whether by merger,  consolidation,  recapitalization,
transfer of all or substantially all assets, or otherwise.

SECTION 21. GUARANTEE.  DSSI, by its execution of this Agreement  hereunder,  in
consideration  of the benefits and advantages which accrue and will accrue to it
as the parent of the Company,  and in  consideration  of other good and valuable
consideration,  the receipt and sufficiency of which is hereby acknowledged, and
intending  to be  legally  bound  hereby,  does  unconditionally  guarantee  the
performance  of all of the duties and  obligations  of the  Company set forth in
this Agreement.

IN WITNESS WHEREOF,  the parties have duly executed this Employment Agreement on
August 19, 2004 with an effective date as of January 1, 2004.

/s/ SHLOMIE MORGENSTERN
- -------------------------------------
SHLOMIE MORGENSTERN

DATABIT INC.


By: /s/ Alice Knoll
   ----------------------------------
   Name:  Alice Knoll
   Title: Treasurer

DATA SYSTEMS & SOFTWARE INC.


By: /s/ Yacov Kaufman
   ----------------------------------
   Name:  Yacov Kaufman
   Title: Vice President and Chief Financial Officer


                                       12

</TEXT>
</DOCUMENT>
<DOCUMENT>
<TYPE>EX-10.2
<SEQUENCE>3
<FILENAME>v08383_ex10-2.txt
<TEXT>

                        RESTRICTED STOCK AWARD AGREEMENT

            This RESTRICTED STOCK AWARD AGREEMENT,  dated as of August 19, 2004,
is made by and between DATA SYSTEMS & SOFTWARE INC., a Delaware corporation (the
"Company"), and Shlomie Morgenstern (the "Grantee").

                              Preliminary Statement

            Pursuant to Section 8 of the Company's 1994 Stock Incentive Plan, as
amended to date (the "Plan") and Section  5(f)(i) of the  Employment  Agreement,
dated as of  January  1, 2004 and  executed  on August  19,  2004,  between  the
Grantee,  Databit Inc. (a wholly-owned subsidiary of the Company ("Databit") and
the Company (the "Employment Agreement"),  the Board of Directors of the Company
(the "Board") has  authorized  the granting to the Grantee of 195,000  shares of
the  Company's  Restricted  Stock  (as  defined  in the  Plan),  subject  to the
restrictions,  terms and  conditions  set forth  herein,  in the Plan and in the
Employment Agreement.  The parties hereto desire to enter into this Agreement in
order to set forth the terms of such grant.

            Accordingly, the parties hereto agree as follows:

            1. Award of Shares. Subject to the Plan and the terms and conditions
of this Agreement and the Employment Agreement, the Company hereby grants to the
Grantee 195,000 shares of Restricted Stock (the "Award").

            2. Plan Governs Terms of Award. The Award is subject in all respects
to the terms and conditions of the Employment  Agreement and the Plan. A copy of
the Plan is available from the Secretary of the Company.

            3. Vesting of Shares.  Subject to Paragraphs 4, 5 and 8 hereof,  the
Grantee's ownership of the Restricted Shares shall vest as follows:

            (a)   100,000  Restricted  Shares  shall vest as of the date  hereof
                  immediately  upon  the  execution  of  this  Agreement  by the
                  Company and the Grantee;

            (b)   31,666 Restricted Shares shall vest on August 18, 2006;

            (c)   31,667 Restricted Shares shall vest on August 18, 2007; and

            (d)   31,667 Restricted Shares shall vest on August 18, 2008 ("Final
                  Vesting Date").

            4. Forfeiture of Restricted Stock. Subject to the further provisions
of this Agreement, if at any time prior to the Final Vesting Date, the Grantee's
employment  with Databit  terminates for "Cause" (as defined in Section 7 of the
Employment  Agreement),  the Grantee shall forfeit all of the unvested shares of
Restricted Stock granted hereby,  and shall repay any dividends  previously paid
to the Grantee with respect to such unvested shares.
<PAGE>

            5.  Acceleration  of Vesting of Restricted  Stock. In the event that
the Grantee's employment with Databit is terminated (i) pursuant to Section 6 of
the  Employment  Agreement,  or (ii)  upon  the  non-renewal  of the  Employment
Agreement (whether after the Initial Term or any Renewal Term (as each such term
is defined in the Employment Agreement)), then all unvested shares of Restricted
Stock shall immediately vest upon such termination. Anything in this Paragraph 5
and the  Employment  Agreement  to the  contrary  notwithstanding,  all unvested
shares of  Restricted  Stock shall  immediately  vest upon the  occurrence  of a
Change of Control (as defined in Section 6(c) of the  Employment  Agreement)  of
the Company or Databit.

            6. Taxes.  To the extent that the Award is subject to Federal income
tax and as permitted  under  applicable  law,  pursuant to Section  12(e) of the
Plan, the Grantee may elect to satisfy his withholding  obligation by forfeiture
of a portion of the Award or surrender of previously owned shares.

            7. Voting;  Dividends.  The Grantee  shall have the same rights with
respect to the Restricted  Stock as holders of unrestricted  Common Stock of the
Company as to voting.  The Grantee  shall be eligible  to receive  dividends  or
other distributions,  when and if declared or paid by the Company, on all of the
shares granted  hereby,  regardless of vesting,  on the same basis as holders of
unrestricted Common Stock;  provided that the Grantee shall be required to repay
or return any  distributions  with  respect to any  Restricted  Stock  forfeited
pursuant to Paragraph 4 hereof.

            8. Other Acceleration of Vesting.  Notwithstanding the provisions of
paragraphs 4 and 5 hereof,  the Board shall have the authority to accelerate the
vesting of any or all of the shares of Restricted  Stock granted hereby upon the
occurrence of circumstances determined by the Board, in its sole discretion,  to
warrant such acceleration.

            9.  Restriction  on  Transfer.  This  Award may not be  assigned  or
transferred except (i) by will or the law of descent and distribution or (ii) if
the transferee or assignee acknowledges in writing that he or she is taking such
shares subject to the restrictions described herein.

                        [SIGNATURES APPEAR ON NEXT PAGE]


                                       2
<PAGE>

      IN WITNESS WHEREOF,  the parties hereto have executed this Agreement as of
the date and year first above written.

                                      DATA SYSTEMS & SOFTWARE INC.


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

                                      GRANTEE:

                                      /s/ Shlomie Morgenstern
                                      ------------------------------------------
                                      Shlomie Morgenstern


                                       3

</TEXT>
</DOCUMENT>
<DOCUMENT>
<TYPE>EX-10.3
<SEQUENCE>4
<FILENAME>v08383_ex10-3.txt
<TEXT>

                             STOCK OPTION AGREEMENT

            STOCK OPTION  AGREEMENT  dated as of August 19,  2004,  between DATA
SYSTEMS & SOFTWARE INC., a Delaware  corporation  (the  "Company"),  and Shlomie
Morgenstern (the "Optionee").

                              Preliminary Statement

            Pursuant to the Company's  1994 Stock  Incentive  Plan (the "Plan"),
and in accordance with Section 5(f)(ii) of the Employment Agreement, dated as of
January 1, 2004 and  executed  on August 19,  2004,  between the  Optionee,  the
Company and  Databit  Inc.  (a  wholly-owned  subsidiary  of the  Company)  (the
"Employment Agreement"), the Board of Directors of the Company (the "Committee")
has authorized the granting to Optionee of an option to purchase  305,000 shares
of the  Company's  Common  Stock,  par value  $.01 per share  ("Common  Stock"),
subject to the Plan and the terms and conditions  set forth herein.  The parties
hereto  desire to enter into this  Agreement  in order to set forth the terms of
such option.

            Accordingly, the parties hereto agree as follows:

            1. Grant of Option. Subject to the Plan and the terms and conditions
of this  Agreement,  the  Company  hereby  grants to  Optionee  the option  (the
"Option") to purchase from the Company up to 305,000 shares of Common Stock (the
"Option  Shares")  at a price per share of $0.71.  The number of shares to which
this  Option  pertains  and the  price  per share at which  this  Option  may be
exercised are subject to adjustment  in  accordance  with the  provisions of the
Plan.

            2. Plan  Governs  Terms of  Option.  The  Option is  subject  in all
respects to the terms and  conditions  of the Plan as amended to date. A copy of
the Plan is available from the Secretary of the Company.

            3. Type of  Option.  The  Option is not  intended  to  qualify as an
"incentive  stock  option"  within the meaning of Section  422A of the  Internal
Revenue Code of 1986, as amended.

            4. Time of Exercise of Option.  (a) This Option may be  exercised as
to not more than 105,000  shares at any time after  August 18,  2006,  as to not
more than 205,000 shares at any time after February 18, 2007 and as to the total
of 305,000  shares at any time after  February  18,  2008 unless this Option has
been terminated in accordance with the provisions of Paragraph 5.

            (b) Change of Control.  Anything in the Employment  Agreement and in
this Paragraph 4 and in Paragraph 5 hereof to the contrary notwithstanding, this
Option may be exercised  as to all the Option  Shares (less the number of Option
Shares as to which it has previously been  exercised,  surrendered or forfeited)
during the  period  commencing  on the  occurrence  of a Change of  Control  (as
defined in Section 6(c) of the  Employment  Agreement) of the Company or Databit
Inc. ("Databit"), and ending on August 18, 2014.
<PAGE>

            5. Termination of Option.  This Option shall  immediately  terminate
after  August  18,  2014,  or upon the  earlier  termination  of the  Optionee's
employment with Databit or the Company,  except that (x) if such termination was
pursuant to Section 6 of the Employment Agreement,  this Option may be exercised
as to all the Option Shares (less the number of Option Shares as to which it has
previously been exercised, surrendered or forfeited) and the Optionee's right to
exercise such unexercised portion shall continue for 12 months after the date of
such  termination  (but in no event later than August 18, 2014),  or (y) if such
termination  was pursuant to Section 7 of the Employment  Agreement and the date
of such termination is on or after August 18, 2006, this Option may be exercised
as to the  number of  Option  Shares  as to which it would  otherwise  have been
exercisable and the Optionee's right to exercise such vested unexercised portion
of  this  Option  shall  continue  for  three  months  after  the  date  of such
termination  (but in no event later than August 18, 2014).  The Optionee's right
to exercise any portion of this Option after any  termination  of the Optionee's
employment  with  Databit or the  Company  shall be  subject  to the  Optionee's
compliance  with (i)  Section 9 of the  Employment  Agreement  (Non-Competition;
Non-Disclosure  of Information) and (ii) Section 10 of the Employment  Agreement
(Mutual Non-Disparagement)..

            6. Manner of Exercise.  This Option may be exercised by the delivery
to the Company of a written notice signed by the Optionee in the form of Exhibit
A hereto,  together with either (i) full payment of the purchase  price therefor
in cash or by  certified  check  payable  to the  order of the  Company  or (ii)
irrevocable  instructions  to a broker  designated or approved by the Company to
sell shares of Common Stock  issuable  upon exercise of this Option and promptly
deliver to the Company a portion of the proceeds  thereof  equal to the exercise
price and any  applicable  withholding  taxes.  As  provided  in the  Plan,  the
Committee may require  Optionee to remit to the Company an amount  sufficient to
satisfy  any  federal,  state or local  withholding  tax  requirements  prior to
delivering to Optionee any shares  purchased upon exercise of this Option.  This
Option may not be exercised with respect to a fractional share.

            7.  Restriction  on  Transfer.  This  Option may not be  assigned or
transferred except by will or the law of descent and distribution and during the
Optionee's lifetime may be exercised only by Optionee.

            8.  Notice.  Any notice or  communication  to the Company  hereunder
shall be in writing  and shall be deemed to have been duly given when  delivered
in person,  or by United States mail, to the following address (or to such other
address as the Company shall from time to time specify):

                             Data Systems & Software Inc.
                             200 Route 17
                             Mahwah, New Jersey  07340
                             Attention: Secretary
<PAGE>

            IN WITNESS WHEREOF,  the parties hereto have executed this Agreement
as of the date and year first above written.

                                   DATA SYSTEMS & SOFTWARE INC.


                                   By /s/ Yacov Kaufman
                                     -------------------------------------------
                                                  Yacov Kaufman, CFO

                                   OPTIONEE:

                                     /s/ Shlomie Morgenstern
                                     -------------------------------------------
                                                 Shlomie Morgenstern
<PAGE>

                       EXHIBIT A TO STOCK OPTION AGREEMENT

                              OPTION EXERCISE FORM

DATA SYSTEMS & SOFTWARE INC.
200 ROUTE 17
MAHWAH, NJ  07430

Gentlemen:

            I hereby exercise the following portion of the stock option that has
heretofore been granted to me as follows:

            Date of grant                    August 19, 2004
                         -------------------------------------------------------
            Exercise price per share              $0.71
                                    --------------------------------------------
            Number of shares underlying option grant
                                                    ----------------------------
            Number of shares underlying option held
                                                   -----------------------------
            Number of shares for which option being exercised hereby
                                                                    ------------
            In connection with this exercise [check one]:

            _____ I enclose my check in the amount of $__________

            _____ I am  delivering  to a broker  designated  or  approved by the
Company  irrevocable  instructions  to (i) sell shares of Common Stock  acquired
upon exercise and (ii) promptly deliver to the Company a portion of the proceeds
thereof equal to the exercise price and any applicable withholding taxes.

            I hereby agree to execute  whatever other documents are necessary in
order  to  comply  with  the  Plan  and any  applicable  legal  requirements  in
connection with the issuance of the stock to me pursuant to the Plan.


- ------------------------------              ------------------------------
Optionee (Signature)                        Social Security Number


- ------------------------------              ------------------------------
Please print name


- ------------------------------              ------------------------------
Date                                        Address

</TEXT>
</DOCUMENT>
<DOCUMENT>
<TYPE>EX-10.4
<SEQUENCE>5
<FILENAME>v08383_ex10-4.txt
<TEXT>

                                                                  EXECUTION COPY

                           SECOND AMENDED AND RESTATED
                       CO-SALE AND FIRST REFUSAL AGREEMENT

      This SECOND AMENDED AND RESTATED Co-Sale and First Refusal Agreement (this
"Agreement"),  is made as of October 26, 2004,  by and among  Comverge,  Inc., a
Delaware  corporation  (the  "Company"),  each of the  individuals  and entities
listed  on  Schedule  A  attached  hereto  (the  "Investors")  and  each  of the
individuals  and  entities  listed on Schedule B attached  hereto  (the  "Common
Stockholders" and, together with the Investors, the "Stockholders"). Capitalized
terms not  defined  herein  shall  have the  meanings  given  such terms in that
certain Series B Preferred  Stock Purchase  Agreement of even date herewith (the
"Purchase Agreement").

                                 R E C I T A L S

      WHEREAS,  the Company and certain of its  stockholders are parties to that
certain  Amended and Restated  Co-Sale and First Refusal  Agreement  dated as of
September 12, 2003 (the "Prior Agreement");

      WHEREAS,  the Company  desires to sell shares of Series B Preferred  Stock
pursuant  to  the  terms  of  the  Purchase  Agreement  and  the  amendment  and
restatement  of the Prior  Agreement  as set forth  herein is a condition to the
Initial Closing (as defined in the Purchase Agreement);

      WHEREAS,  pursuant  to  Section  4.6 of the  Prior  Agreement,  the  Prior
Agreement  may be amended by a written  instrument  executed by the holders of a
majority of the shares of Common Stock  (determined  on an  as-converted  basis)
held by all the Investors under the Prior Agreement; and

      WHEREAS,  the  undersigned  represent  a majority  of the shares of Common
Stock (determined on an as-converted  basis) held by all the Investors under the
Prior Agreement and such stockholders desire to amend the Prior Agreement as set
forth below,  on behalf of themselves and the other Investors party to the Prior
Agreement.

                                A G R E E M E N T

      NOW, THEREFORE,  in consideration of the premises, and the mutual promises
and agreements contained herein, the parties hereby agree as follows:

1.       RESTRICTIONS ON TRANSFERS

            1.1 General Prohibition on Transfers; Permitted Transfers

                  (a) Except as otherwise permitted hereby, no Stockholder shall
directly or indirectly sell, assign, pledge or encumber or otherwise transfer to
any person or entity (a "Transferee") any shares of capital stock of the Company
the  Stockholder  now owns or may hereafter  acquire (the  "Stock")  unless such
Stockholder has complied with all of the terms of this Agreement.  Any purported
sale,  assignment,  pledge,  encumbrance  or other  transfer in violation of any
provision of this Agreement  shall be void and ineffectual and shall not operate
to transfer any interest or title to the purported Transferee.  No transfer that
is permitted under this Section 1 may be made by any Stockholder  without (i) an
opinion  of  counsel  satisfactory  to the  Company  that such  transfer  may be
lawfully  made  without  registration  under  the Act and all  applicable  state
securities laws, or (ii) registration under such securities laws.


                                       1
<PAGE>

                  (b) The restrictions  contained in this Agreement with respect
to transfers by each  Stockholder of shares of Stock shall not apply to: (i) any
transfer of Stock by the Stockholder to any spouse, parents, siblings (by blood,
marriage or adoption) or lineal  descendants  (by blood,  marriage or adoption);
(ii)  any  transfer  of  Stock  by  the  Stockholder  to a  trust,  partnership,
corporation,  limited  liability company or other similar entity for the benefit
of the  Stockholder or the  Stockholder's  spouse,  parents,  siblings or lineal
descendants;   (iii)  any  transfer  of  Stock  by  the  Stockholder,  upon  the
Stockholder's death, to the executors,  administrators,  testamentary  trustees,
legatees or beneficiaries of the Stockholder;  (iv) any transfer of Stock by the
Stockholder  to any person who  controls,  is  controlled  by or is under common
control with the Stockholder  (within the meaning of the Securities Act of 1933,
as amended)  (an  "Affiliate");  (v) any  transfer to any (x) general or limited
partner of a Stockholder  that is a  partnership  or (y) member of a Stockholder
that is a  limited  liability  company  or (vi)  any  transfer  of  stock by the
Stockholder  (A)  pursuant to a merger or  consolidation  of the Company with or
into another  corporation  or  corporations,  (B)  pursuant to the  liquidation,
dissolution  or winding up of the Company,  (C) at, and pursuant to, a Qualified
Public  Offering  as  defined  in  the  Company's  then-current  Certificate  of
Incorporation,  or (D) in connection  with a  transaction  in which stock of the
Company  having  more than 50% of the voting  power of all the then  outstanding
stock  of the  Company  is  transferred;  provided,  that in  each of the  cases
referred to in clauses (i) through (v) above,  each transferee,  donee,  heir or
distributee shall, as a condition precedent to such transfer,  become a party to
this  Agreement  by executing an Adoption  Agreement  substantially  in the form
attached  as Annex A and shall  have all of the rights  and  obligations  of the
Stockholder hereunder;  and provided further, that in each of the cases referred
to in  subclauses  (A),  (B)  and  (D)  of  clause  (vi)  above,  the  Company's
stockholders  of record as  constituted  immediately  prior to such event  will,
immediately  after such event,  hold less than a majority of the voting power of
the surviving or acquiring entity.  If a Stockholder  intends to transfer any or
all of its Stock under  clauses (i) through  (v) above,  such  Stockholder  must
provide notice of such transfer to the Company.

                  (c) Notwithstanding anything to the contrary contained in this
Agreement,  no  Stockholder  may transfer any  securities  to a person or entity
primarily engaged in a line of business that is competitive with the Company, as
determined  in good faith by the Board of Directors,  except in connection  with
any consolidation or merger of the Company with or into any other corporation or
other  entity or person,  or any other  corporate  reorganization,  in which the
stockholders of the Company immediately prior to such  consolidation,  merger or
reorganization,  own less than fifty percent (50%) of the Company's voting power
immediately  after  such  consolidation,   merger  or  reorganization,   or  any
transaction or series of related  transactions  in which more than fifty percent
(50%) of the Company's voting power is transferred.

                  (d)  Notwithstanding  any  provision in this  Agreement to the
contrary, Data Systems & Software, Inc. ("DSSI") shall have the right to sell or
otherwise  transfer up to 480,000  shares (the "DSSI  Exception  Shares") of its
Series A Preferred Stock in accordance  with this Section  1.1(d).  In the event
DSSI desires to sell or otherwise  transfer  any of the DSSI  Exception  Shares,
DSSI shall provide  notice to the Company and the other  Investors of the number
of DSSI Exception Shares it desires to sell (the "DSSI Transfer Shares") and the
price per share and any other terms of such proposed transfer. The Company and


                                       2
<PAGE>

the  other  Investors  shall  have 15 days  following  receipt  of notice by the
Company and all  Investors  (other than DSSI) to purchase all, but not less than
all, of the DSSI Transfer  Shares at the price and on the terms set forth in the
notice pertaining to such transfer. The Company and the Investors agree that the
Company shall have the first right to purchase DSSI Transfer Shares and any DSSI
Transfer  Shares not elected to be purchased  by the Company  shall be allocated
among the  Investors  (excluding  DSSI)  based on their  pro-rata  ownership  of
Preferred Stock (determined on an as-converted  basis). In the event the Company
and the Investors (excluding DSSI) do not collectively  purchase all of the DSSI
Transfer  Shares,  the  Company  and the  Investors  shall not have the right to
purchase  any DSSI  Transfer  Shares and DSSI shall be free,  for a period of 60
calendar days to sell the DSSI Transfer Shares to any purchaser at a price equal
to or greater than the sale price set forth in the notice  relating to such DSSI
Transfer  Shares and upon terms no more favorable  than those  specified in such
notice;  provided,  however, DSSI shall not transfer shares to any purchaser who
is not an Investor unless such purchaser  acquires at least 200,000 shares.  Any
transference of DSSI Exception  Shares shall,  as a condition  precedent to such
transfer,  become  a party  to (i)  this  Agreement  by  executing  an  Adoption
Agreement in the form attached as Annex A and (ii) each of the Investors' Rights
Agreement and Voting Agreement in the manner provided by such agreements.

            1.2 Right of First Refusal

                  (a) Except as otherwise  permitted in Section 1.1(b) or (d) of
this  Agreement  or as required by Section 1.6 of this  Agreement,  transfers of
shares  of the  Stock by each  Stockholder  shall not be  permitted  unless  the
Stockholder  has complied with this Section 1.2. If the  Stockholder  intends to
sell any of its shares of Stock (the "Proposed  Seller"),  it shall give written
notice (the "Seller's  Notice") to the Company and each of the Investors stating
that the Proposed  Seller  intends to make such a sale or transfer,  identifying
the party who made the offer (the "Proposed Transferee"),  specifying the number
of shares of Stock  proposed to be purchased  or acquired  pursuant to the offer
(the "First Refusal Shares"),  the nature of such sale or transfer, all material
terms of the proposed  sale,  including the per share  purchase  price which the
Proposed  Transferee  has offered to pay for the First Refusal Shares (the "Sale
Price")  and the name and  address of each  Proposed  Transferee.  A copy of the
offer, if available, and a statement of the number of shares held by each of the
Investors shall be attached to the Seller's Notice.

                  (b) (i) Upon receipt of the Seller's Notice, the Company shall
have the  irrevocable  and  exclusive  option to purchase,  upon delivery to the
Proposed Seller within fifteen (15) days of its receipt of the Seller's  Notice,
all or any portion of the First  Refusal  Shares.  The Company  shall  deliver a
notice (the "Company  Notice") to the Proposed  Seller and each of the Investors
of its election to purchase or not to purchase such First Refusal  Shares within
such fifteen (15) day period,  together  with payment to the Proposed  Seller of
the Sale  Price  therefor.  To the  extent  that the  Company  does not elect to
purchase  all  of the  First  Refusal  Shares,  each  Investor  shall  have  the
irrevocable and exclusive  option to purchase up to that number of the remaining
First  Refusal  Shares at the Sale Price as equals the product of (A) the number
of remaining First Refusal Shares multiplied by (B) a fraction, the numerator of
which  shall be the number of shares of Common  Stock  issued or  issuable  upon
conversion  of the  Preferred  Stock held by such  Investor and any Common Stock
issued as a dividend or other distribution with respect to or in exchange for or
in replacement of such Common Stock  (collectively,  the "Investor  Shares") and
the  denominator of which shall be the number of Investor Shares owned by all of
the  Investors  (the  "Proportionate  Share").  Within twenty (20) calendar days
after delivery of the Company Notice, each Investor shall deliver to the Company
and the Proposed  Seller a written notice stating  whether it elects to exercise
its option  under this Section  1.2(b) and the maximum  number of shares (not to
exceed  all of  such  Investor's  Proportionate  Share)  that it is  willing  to
purchase,  and such notice shall  constitute an  irrevocable  commitment by such
Investor to purchase such shares.


                                       3
<PAGE>

            (ii)  If  an  Investor   does  not  elect  to   purchase   its  full
Proportionate Share, the Proposed Seller shall deliver another written notice to
the  Company  and  each   Investor   that  has  elected  to  purchase  its  full
Proportionate  Share (a  "Fully  Exercising  Investor")  stating  the  number of
unpurchased  shares.  Each  Fully  Exercising  Investor  shall be  entitled,  by
delivering  written  notice to the Company and the Proposed  Seller  within five
calendar days following such Investor's  receipt of such notice,  to purchase up
to all  of  the  remaining  shares  at  the  Sale  Price.  In  the  event  of an
oversubscription,  the oversubscribed amount shall be allocated among such Fully
Exercising  Investors  pro rata based on the number of Investor  Shares owned by
each of them. The delivery of the notice of election under this paragraph  shall
constitute an irrevocable commitment to purchase such shares.

            (iii) Each Investor shall be entitled to assign its rights  pursuant
to this Section 1.2 to any of its Affiliates.

            (iv)  If any of the  First  Refusal  Shares  are not  elected  to be
purchased pursuant to this Section 1.2, then, subject to Section 1.3 hereof, the
Proposed Seller shall be free, for a period of sixty (60) calendar days from the
date of the Seller's  Notice,  to sell the remaining First Refusal Shares to the
Proposed Transferee, at a price equal to or greater than the Sale Price and upon
terms no more favorable to the Proposed  Transferee  than those specified in the
Notice.  Any  transfer of the  remaining  First  Refusal  Shares by the Proposed
Seller after the end of such sixty (60) day period or any change in the terms of
the sale as set forth in the  Seller's  Notice  which are more  favorable to the
Proposed  Transferee  shall  require a new  notice of intent to  transfer  to be
delivered to the  Investors  and shall give rise anew to the rights  provided in
this Section 1.2.

                  (c) If the Company and/or the Investors  elect to purchase any
or all of the First Refusal Shares mentioned in the Seller's Notice, the Company
and/or  such  Investor(s)  shall have the right to  purchase  the First  Refusal
Shares for cash  consideration  whether or not part or all of the  consideration
specified  in the  Seller's  Notice is other  than  cash.  If part or all of the
consideration  to be paid for the First Refusal Shares as stated in the Seller's
Notice is other than cash,  the price  stated in such  Seller's  Notice shall be
deemed  to be the  sum of the  cash  consideration,  if any,  specified  in such
Seller's Notice, plus the fair market value of the non-cash  consideration.  The
fair market value of the non-cash consideration shall be determined by the Board
of Directors of the Company (without the participation of any member who has any
interest in the Proposed Transferee or the Proposed Seller), and its judgment as
to the fair market value of such  non-cash  consideration  shall be binding upon
the Proposed Seller and the other Investors.


                                       4
<PAGE>

            1.3 Right of  Co-Sale.  In the event  that all of the First  Refusal
Shares are not  purchased by the Company or the Investors as provided in Section
1.2 hereof,  the Proposed  Seller shall deliver a notice to each Investor (other
than the Proposed  Seller,  if the Proposed  Seller is an Investor)  who did not
purchase  shares   pursuant  to  Section  1.2(b)  above  (a   "Non-Participating
Investor")  informing  it of the number of shares not elected to be purchased by
the other  Investors and the number of First Refusal  Shares it still holds (the
"Co-Sale  Shares")  and intends to sell to the  Proposed  Transferee.  Each such
Non-Participating Investor shall have the right, exercisable upon written notice
to the Company and the Proposed  Seller  within five (5) calendar days after the
giving of such notice by the Proposed  Seller,  to  participate  in the Proposed
Seller's sale of Co-Sale  Shares at the Sale Price and upon the terms  specified
in the Notice.  The delivery of the notice of election  under  Section 1.3 shall
constitute an irrevocable commitment by such Non-Participating  Investor to sell
the number of shares  specified in such notice  pursuant to this Section 1.3. To
the extent one or more of the Non-Participating Investors exercise such right of
participation  in accordance with the terms and conditions set forth below,  the
number of shares of Stock  which the  Proposed  Seller may sell to the  Proposed
Transferee shall be correspondingly  reduced. The right of participation of each
of the  Non-Participating  Investors shall be subject to the following terms and
conditions:

                  (a) Each  Non-Participating  Investor may elect to sell all or
any part of that number of shares of Common  Stock of the  Company  held by such
Non-Participating  Investor equal to the product obtained by multiplying (i) the
aggregate number of Co-Sale Shares by (ii) a fraction, the numerator of which is
the  number  of  Investor  Shares  at the time  owned by such  Non-Participating
Investor  and the  denominator  of which is the sum of the  number  of shares of
Common  Stock of the  Company  (assuming  full  conversion  and  exercise of all
convertible and  exercisable  securities into Common Stock) at the time owned by
the  Proposed  Seller  and the  number of  Investor  Shares  owned by all of the
Non-Participating Investors (the "Co-Sale Proportionate Share").

                  (b) If a Non-Participating Investor does not elect to sell his
full Co-Sale  Proportionate  Share,  the Proposed  Seller shall deliver  another
written  notice  to the  Company  and each  Non-Participating  Investor  who has
elected  to sell  its full  Co-Sale  Proportionate  Share  (a  "Fully-Exercising
Co-Sale  Investor") stating the number of unsold shares.  Each  Fully-Exercising
Co-Sale Investor shall be entitled,  by delivering written notice to the Company
and the Proposed Seller within five calendar days following such notice, to sell
up to all of the shares not sold by the  Non-Participating  Investors  above and
beyond its Co-Sale  Proportionate  Share.  Such  election  shall  constitute  an
irrevocable  commitment by such  Fully-Exercising  Co-Sale  Investor to sell the
number of shares  specified in such notice  pursuant to this Section 1.3. In the
event the number of shares requested to be sold by all Fully-Exercising  Co-Sale
Investors  exceeds the aggregate Co-Sale Shares available for sale by all of the
Fully-Exercising  Co-Sale  Investors,  the remaining  shares to be sold shall be
allocated pro rata among such Fully-Exercising  Co-Sale Investors (including the
Proposed Seller) based on the number of Investor Shares owned by each.


                                       5
<PAGE>

                  (c) Each of the exercising  Non-Participating  Investors shall
effectuate the sale by promptly  delivering to the Proposed  Seller for transfer
to the  Proposed  Transferee  one or more  certificates,  properly  endorsed for
transfer (or  accompanied by duly executed stock  powers),  which  represent the
number of shares of Common Stock which the Non-Participating  Investor elects to
sell.

                  (d)   The   stock    certificates    which   the    exercising
Non-Participating  Investors deliver to the Proposed Seller shall be transferred
by the Proposed Seller to the Proposed Transferee in consummation of the sale of
the Stock pursuant to the terms and conditions specified in the Seller's Notice,
and the  Proposed  Seller shall  promptly  thereafter  remit to each  exercising
Non-Participating  Investor  that  portion  of the sale  proceeds  to which  the
exercising Non-Participating Investor is entitled by reason of its participation
in such  sale.  To the  extent  that any  prospective  purchaser  or  purchasers
prohibits  such  assignment  or  otherwise  refuses to purchase  shares or other
securities from any Non-Participating  Investor exercising its rights of co-sale
hereunder,  the Proposed Seller shall not sell to such prospective  purchaser or
purchasers  any Stock  unless and  until,  simultaneously  with such  sale,  the
Proposed  Seller  shall  purchase  such  shares  or other  securities  from such
Non-Participating  Investor for the same consideration and on the same terms and
conditions as the proposed transfer described in the Seller's Notice.

            1.4 Additional  Transactions.  The exercise or  non-exercise  of the
rights of an Investor  hereunder  to  participate  in one or more sales of Stock
made  by the  Proposed  Seller  shall  not  adversely  affect  their  rights  to
participate in subsequent sales by the Stockholder.

            1.5 Ownership.  The Stockholders  represent and warrant that each is
the sole legal and  beneficial  owner of those shares of Stock such  Stockholder
currently  holds  subject  to this  Agreement  and that no other  person has any
interest (other than community property interest) in such shares.

            1.6 Drag-Along Rights.

                  (a)  Applicability.  In the event the holders of a majority of
the  then   outstanding   Preferred   Stock  of  the  Company  (the   "Proposing
Stockholders")  approve a sale of the Company or a sale of all or  substantially
all of the Company's assets,  in a bona fide transaction,  whether by means of a
merger,  consolidation,  sale of stock or  assets  or  otherwise,  in a  single,
simultaneous or related series of transactions  (an "Approved  Sale"),  then the
Stockholders (collectively, the "Remaining Holders") shall each consent to, vote
for and raise no objections to the Approved Sale. If the proposed acquiror is an
Affiliate of any  stockholder of  then-outstanding  Preferred  Stock,  then this
Section  1.6(a)  shall only apply to the Approved  Sale if the Approved  Sale is
approved by the holders of a majority of the  then-outstanding  Preferred  Stock
held of record by holders that are not Affiliates of such proposed acquiror.  If
the Approved Sale will take the form of an asset sale,  merger or consolidation,
the Remaining  Holders shall vote in favor of such  transaction  and shall waive
any appraisal rights or dissenters'  rights in connection with such transaction.
If the Approved Sale is  structured as a sale of the stock of the Company,  each
Remaining  Holder shall agree to sell all capital stock in the Company then held
by such Remaining  Holder on the terms and conditions  approved by the Proposing
Stockholders.  A Remaining  Holder shall have no obligations  under this Section
1.6 to the  extent  that the  terms  of the  Approved  Sale  provide  that  such
Remaining Holder would receive less than the amount that would be distributed to
such  Remaining  Holder in the  event  that the  proceeds  were  distributed  in
accordance with the Company's  then-current  Certificate of  Incorporation.  All
capital stock  transferred by the Remaining Holders pursuant to this Section 1.6
shall be sold at the same  price  and  otherwise  treated  identically  with the
capital  stock  of the  same  class  and  series  being  sold  by the  Proposing
Stockholders in all respects. The Remaining Holders shall each take such actions
as may be  reasonably  required and  otherwise  cooperate in good faith with the
Proposing  Stockholders  in  connection  with  consummating  the Approved  Sale,
including  the  execution  of such  agreements  and such  instruments  and other
actions  reasonably  necessary  to (i) provide  reasonable  representations  and
warranties and other  provisions  and agreements  relating to such Approved Sale
and  (ii)   effectuate  the  allocation  and   distribution   of  the  aggregate
consideration upon the Approved Sale.


                                       6
<PAGE>

                  (b) Notice of Sale. The Proposing  Stockholders shall give the
Remaining  Holders at least ten (10) days prior  written  notice of any Approved
Sale as to which the  Proposing  Stockholders  intend to exercise  their  rights
under this Section 1.6.

                  (c) Notwithstanding any other provision of this Agreement,  no
Stockholder or group of Stockholders  (the "Offering  Stockholders")  shall be a
party to any transaction or series of  transactions  that involves a transfer to
any person,  persons acting in concert or entity (a  "Prospective  Acquiror") of
shares of the  Company if such sale would  result in the  Prospective  Acquiror,
together  with  its  Affiliates,  holding  50% or more by  voting  power  of all
outstanding capital stock of the Company, unless the Prospective Acquiror offers
to purchase all of the capital  stock of the Company for the same  consideration
per share (with appropriate  adjustment to reflect the conversion of convertible
securities and the  preference  and priorities of any preferred  stock) and upon
the same terms and conditions for securities of the same type,  class and series
as are offered to the Offering Stockholder(s).

2.    LEGENDED CERTIFICATES

            2.1 Legend on the Stockholders' Stock. Each certificate representing
shares of the Stock now or hereafter owned by each  Stockholder or its permitted
Transferees  pursuant  to clauses (i)  through  (v) of Section  1.1(b)  shall be
endorsed with the following legend:

"THIS CERTIFICATE AND THE SHARES REPRESENTED  HEREBY MAY NOT BE SOLD,  ASSIGNED,
TRANSFERRED,  ENCUMBERED, OR IN ANY MANNER DISPOSED OF EXCEPT IN CONFORMITY WITH
THE TERMS AND  CONDITIONS  OF A CO-SALE AND FIRST  REFUSAL  AGREEMENT  AMONG THE
HOLDER (OR THE  PREDECESSOR  IN INTEREST TO THE  SHARES),  THE  CORPORATION  AND
CERTAIN OTHER  STOCKHOLDERS OF THE CORPORATION.  ADDITIONALLY,  THIS CERTIFICATE
AND THE SHARES REPRESENTED  HEREBY ARE SUBJECT TO CERTAIN DRAG-ALONG  PROVISIONS
SET FORTH IN THE CO-SALE AND FIRST REFUSAL AGREEMENT.  THE CORPORATION WILL UPON
WRITTEN  REQUEST  FURNISH A COPY OF SUCH  AGREEMENT TO THE HOLDER HEREOF WITHOUT
CHARGE. THE CORPORATION WILL NOT REGISTER THE TRANSFER OF SUCH SECURITIES ON THE
BOOKS OF THE  CORPORATION  UNLESS  AND  UNTIL  THE  TRANSFER  HAS  BEEN  MADE IN
COMPLIANCE WITH THE TERMS OF SUCH AGREEMENT."


                                       7
<PAGE>

            2.2 The legend  required  under  Section 2.1 hereof shall be removed
upon  termination of this Agreement in accordance with the provisions of Section
4.1.

3.    PROHIBITED TRANSFERS

            3.1 Grant. In the event that any  Stockholder  should sell any Stock
in contravention of the participation rights of the Non-Participating  Investors
under   Section  1.3  of  this   Agreement  (a   "Prohibited   Transfer"),   the
Non-Participating Investors shall have the put option provided in Section 3.2.

            3.2  Put  Option.  In  the  event  of  a  Prohibited  Transfer,  the
Non-Participating Investors shall have the option to sell to the Proposed Seller
a number of shares of Common  Stock of the Company  (either  directly or through
conversion  and  delivery  of Series A Preferred  Stock)  equal to the number of
shares that the Non-Participating Investors would have been entitled to sell had
such Prohibited Transfer been effected in accordance with Section 1.3 hereof, on
the following terms and conditions:

                  (a) The price per share at which the  shares are to be sold to
the  Proposed  Seller shall be equal to the price per share paid to the Proposed
Seller by the third party  purchaser  or  purchasers  of the  Proposed  Seller's
Stock. The Proposed Seller shall also reimburse the Non-Participating  Investors
exercising  the  put  option  for  any  and all  fees  and  expenses,  including
reasonable  out-of-pocket  legal  fees and  expenses  incurred  pursuant  to the
exercise or attempted exercise of rights under this Section 3.

                  (b)  The  Non-Participating  Investors  shall  deliver  to the
Proposed  Seller,  within thirty (30) days after they have received  notice from
the Proposed Seller or otherwise  become aware of the Prohibited  Transfer,  the
certificate or certificates  representing shares to be sold, each certificate to
be properly  endorsed  for  transfer  (or  accompanied  by duly  executed  stock
powers).

                  (c)  The   Proposed   Seller   shall,   upon  receipt  of  the
certificates  for the  repurchased  shares,  pay the  aggregate  purchase  price
therefor  provided  for in this Article 3, by delivery of  consideration  in the
same form such  Proposed  Seller  received for the Stock sold in the  Prohibited
Transfer and shall reimburse the Non-Participating  Investors for any additional
expenses, including legal fees and expenses, incurred in effecting such purchase
and resale.

            3.3 Company  Expenses.  In the event of a Prohibited  Transfer,  the
Proposed  Seller in the Prohibited  Transfer shall reimburse the Company for any
and all fees and expenses,  including  reasonable  out-of-pocket  legal fees and
expenses, incurred by the Company in connection with such Prohibited Transfer.


                                       8
<PAGE>

4.    GENERAL

            4.1  Termination.  The rights and  obligations  of an Investor under
this Agreement  shall terminate at such time as that Investor shall no longer be
the  owner  of  at  least  1,000  shares,  or  rights  to  acquire  shares,  (as
appropriately  adjusted for any stock splits, stock dividends,  combinations and
recapitalizations)  of Common Stock (as  determined on an  as-converted  basis).
Unless  sooner  terminated  with respect to a particular  Investor in accordance
with the preceding sentence,  this Agreement shall terminate upon the occurrence
of any of the following events:

                  (a) the  liquidation,  dissolution or indefinite  cessation of
the business  operations of the Company,  or the  acquisition  of the Company by
another  entity (or group of  affiliated  entities  or entities  operating  as a
group) by means of any transaction or series of related transactions (including,
without  limitation,  any  reorganization,  merger or consolidation)  unless the
Company's  stockholders  of  record  as  constituted  immediately  prior to such
acquisition or sale will,  immediately after such acquisition or sale (by virtue
of securities issued as consideration  for the Company's  acquisition or sale or
otherwise)  hold at least 50% of the voting power of the  surviving or acquiring
entity  (except  that the sale by the Company of shares of its capital  stock to
investors  in bona  fide  financing  transactions  shall  not be deemed to be an
acquisition for this purpose);

                  (b)  the  consummation  of a  Qualified  Public  Offering  (as
defined  in the  Company's  Certificate  of  Incorporation,  as the  same may be
amended and restated from time to time); or

                  (c) upon the  execution  and  delivery of a written  agreement
signed by the holders of at least 60% of the Preferred  Stock,  voting or acting
together as a single class.

Notwithstanding  this Section 4.1,  Section 1.6 shall survive any termination of
this Agreement  pursuant to Section 4.1(a) until such transaction has closed and
all proceeds of such transaction  (including  without limitation any earn-out or
escrowed  proceeds)  have been  fully  distributed  to all  stockholders  of the
Company in accordance with the terms of such transaction.

            4.2 Notices. All notices and other communications hereunder shall be
in writing and shall be deemed given if delivered  personally  or by  commercial
delivery  service,  or mailed by  registered or certified  mail (return  receipt
requested) or sent via facsimile  (with  confirmation of receipt) to the parties
at the address for such party set forth  beneath such party's name on Schedule A
hereto  (or at such  other  address  for a party as shall be  specified  by like
notice) and, in the case of the Company:

                                    Comverge, Inc.
                                    120 Eagle Rock Avenue
                                    East Hanover, NJ  07936
                                    Fax:  (973) 884-3501
                                    Attn: Chief Executive Officer

                                    with a copy to

                                    Andrews Kurth LLP
                                    111 Congress Ave., Suite 1700
                                    Austin, Texas 78701
                                    Fax:  (512) 320-9292
                                    Attn: Carmelo M. Gordian


                                       9
<PAGE>

Notice given by facsimile  shall be  confirmed  by  appropriate  answer back and
shall be effective upon actual receipt if received during the recipient's normal
business hours,  or at the beginning of the recipient's  next business day after
receipt if not  received  during the  recipient's  normal  business  hours.  All
notices by facsimile shall be confirmed  promptly after  transmission in writing
by  certified  mail or  personal  delivery.  Any party may change any address to
which  notice is to be given to it by giving  notice as  provided  above of such
change of address.

            4.3  Assignments  and  Transfers.  This Agreement and the rights and
obligations  of the  parties  hereunder  shall  inure to the  benefit of, and be
binding upon, their respective  successors,  assigns and legal  representatives;
provided,  however, and other than as set forth in Section 1.1(b) hereunder, the
first refusal and co-sale  rights  hereunder may be assigned only by an Investor
to a transferee or assignee of such Investor's  shares of Preferred Stock of the
Company who, after such  assignment or transfer,  holds such number of shares of
Preferred  Stock that is convertible  into at least 250,000 shares of the Common
Stock of the Company (subject to appropriate adjustments for stock splits, stock
dividends,  combinations  and  other  recapitalizations)  and  who  executes  an
Adoption Agreement in the form attached as Annex A. By their execution hereof or
of an Adoption  Agreement,  each party hereto hereby appoints the Company as its
attorney-in-fact  for the sole purpose of executing Adoption Agreements with any
subsequent permitted transferees.

            4.4 Optional Escrow. At the request of any Investor, an escrow shall
be set up to effect the transfer of any certificates or funds  hereunder.  Costs
of such escrow shall be borne by all of the parties  participating therein based
on the  aggregate  value of the shares held by them which are to be purchased or
sold thereunder.

            4.5 Severability. In the event one or more of the provisions of this
Agreement should for any reason be held to be invalid, illegal or unenforceable,
such  provisions  shall be excluded from this  Agreement and the balance of this
Agreement  shall be  interpreted  as if such  provision had never been contained
herein.

            4.6 Amendments and Waivers. Other than with respect to amendments to
Schedule A or Schedule B hereto,  which may be amended by the Company to reflect
additional  Investors  or  Stockholders  or  their  permitted  transferees,  any
amendment or modification of this Agreement shall be effective only if evidenced
by a written instrument executed by the holders of at least 60% of the shares of
Common Stock  (determined  on an  as-converted  basis) held by all the Investors
hereunder;  provided,  however,  that any  amendment  or waiver that affects one
Investor in a  disproportionately  adverse manner as compared to other Investors
must  be  approved  by the  disproportionately  affected  Investor.  Any  waiver
hereunder shall be effective only if evidenced by a written instrument  executed
by the  holders  of a  majority  of the  shares of Common  Stock held by all the
Investors   (determined  on  an  as-converted  basis)  or  by  the  Stockholders
(determined  on an  as-converted  basis),  as the case may be,  whose rights are
being waived.


                                       10
<PAGE>

            4.7 Governing Law. This Agreement shall be governed by and construed
in  accordance  with  the laws of the  State  of  Delaware,  without  regard  to
conflicts of law principles.

            4.8  Counterparts.  This  Agreement  may be  executed in two or more
counterparts,  each of which shall be deemed an original but all of which,  when
taken together, shall constitute one and the same instrument.

            4.9 Remedies.  The parties hereto shall have all remedies for breach
of this  Agreement  available  to them as  provided  by law or  equity.  Without
limiting the generality of the foregoing,  the parties agree that in addition to
any other rights and remedies  available at law or in equity,  the parties shall
be entitled to obtain  specific  performance of the obligations of each party to
this Agreement and immediate injunctive relief and that, in the event any action
or  proceeding  is brought in equity or to enforce the same, no party will urge,
as a defense, that there is an adequate remedy at law.

            4.10  Conflict  with Other Rights of First  Refusal.  Certain of the
Stockholders  have entered  into a stock  purchase  agreement  with the Company,
which  agreement  contains a right of first  refusal  provision  in favor of the
Company.  The right of first refusal provision contained in this Agreement shall
supersede  and replace the right of first  refusal  provision  contained  in the
Stockholder's  stock  purchase  agreement;  provided,  however,  that the  other
provisions  contained in the Stockholder's stock purchase agreement shall remain
in full force and effect and, provided  further,  that this Agreement is subject
to,  and  shall in no  manner  limit  the  right  that the  Company  may have to
repurchase  securities  from any Stockholder  pursuant to any stock  restriction
agreement or other agreement between the Company and the Stockholder.

            4.11  Aggregation  of Stock.  All  shares of Common  Stock  owned or
acquired by an Investor or its Affiliates (assuming full conversion and exercise
of all  convertible  and  exercisable  securities  into Common  Stock)  shall be
aggregated  together  for the purpose of  determining  the  availability  of any
rights under this Agreement.

            4.12  Entire  Agreement.   This  Agreement  constitutes  the  entire
agreement among the parties hereto with respect to the subject matter hereof.

                            [Signature Pages Follow]


                                       11
<PAGE>

      IN WITNESS  WHEREOF,  the parties have  executed  this Second  Amended and
Restated  Co-Sale  and First  Refusal  Agreement  on the day and year  indicated
above.

                                       COMVERGE, INC.


                                       By:
                                          --------------------------------------
                                          Robert M. Chiste
                                          Chief Executive Officer


                        [Signature Page to Comverge, Inc.
        Second Amended and Restated Co-Sale and First Refusal Agreement]
<PAGE>

                                       INVESTORS:

                                       DATA SYSTEMS & SOFTWARE INC.


                                       By:
                                          --------------------------------------
                                       Name:
                                            ------------------------------------
                                       Title:
                                             -----------------------------------

                                       ENERTECH CAPITAL PARTNERS II L.P.

                                       By: ECP II Management L.P.,
                                           Its General Partner

                                       By: ECP II Management L.L.C.,
                                           Its General Partner


                                       By:
                                          --------------------------------------
                                          David F. Lincoln
                                          Managing Director

                                       ECP II INTERFUND L.P.

                                       By: ECP II Management L.L.C.,
                                           Its General Partner


                                       By:
                                          --------------------------------------
                                          David F. Lincoln
                                          Managing Director

                                       EASTON HUNT CAPITAL PARTNERS, L.P.
                                       By:  EHC GP, L.P.
                                       Its: General Partner
                                       By:  EHC, Inc.
                                       Its: General Partner


                                       By:
                                          --------------------------------------
                                       Name:
                                            ------------------------------------
                                       Title:
                                             -----------------------------------


                        [Signature Page to Comverge, Inc.
        Second Amended and Restated Co-Sale and First Refusal Agreement]
<PAGE>

                                       E.ON VENTURE PARTNERS


                                       By:
                                          --------------------------------------
                                          Peter Bachsleitner
                                          Managing Director


                                       By:
                                          --------------------------------------
                                          Steffen Hasselwander
                                          Managing Director

                                       NTH POWER TECHNOLOGIES FUND II, L.P.,
                                       NTH POWER TECHNOLOGIES FUND II-A, L.P.

                                       BY: NTH POWER MANAGEMENT II, L.P.
                                           AND
                                           NTH POWER MANAGEMENT II-A, L.L.C.

                                       BY: NTH POWER L.L.C.
                                           THEIR MANAGEMENT AGENT


                                       By:
                                          --------------------------------------
                                       Name:
                                            ------------------------------------
                                       Title:
                                             -----------------------------------

                                       RIDGEWOOD COMVERGE, LLC


                                       By:
                                          --------------------------------------
                                       Name:
                                            ------------------------------------
                                       Title:
                                             -----------------------------------

                                       SHELL INTERNET VENTURES B.V.


                                       By:
                                          --------------------------------------
                                       Name:
                                            ------------------------------------
                                       Title:
                                             -----------------------------------

                                       NORSK HYDRO TECHNOLOGY VENTURES AS


                                       By:
                                          --------------------------------------
                                       Name:
                                            ------------------------------------
                                       Title:
                                             -----------------------------------


                        [Signature Page to Comverge, Inc.
        Second Amended and Restated Co-Sale and First Refusal Agreement]
<PAGE>

                                       ROCKPORT CAPITAL PARTNERS, L.P.

                                       By: RockPort Capital I, LLC,
                                           its General Partner


                                       By:
                                          --------------------------------------
                                       Name:
                                       Title: Managing Member

                                       RP CO-INVESTMENT FUND I, L.P.

                                       By: RP Co-Investment Fund I GP, LLC,
                                           its General Partner


                                       By:
                                          --------------------------------------
                                       Name:
                                       Title: Managing Member


                                       EMERSON VENTURES INC.


                                       By:
                                          --------------------------------------
                                       Name:
                                            ------------------------------------
                                       Title:
                                             -----------------------------------


                                       -----------------------------------------
                                       Frank Magnotti


                                       -----------------------------------------
                                       Richard Preston


                                       -----------------------------------------
                                       John Rossi


                                       -----------------------------------------
                                       Robert M. Chiste


                        [Signature Page to Comverge, Inc.
        Second Amended and Restated Co-Sale and First Refusal Agreement]
<PAGE>


                                       -----------------------------------------
                                       Joseph Esteves


                                       -----------------------------------------
                                       T. Wayne Wren


                        [Signature Page to Comverge, Inc.
        Second Amended and Restated Co-Sale and First Refusal Agreement]
<PAGE>

                                       STOCKHOLDERS:

                                       DATA SYSTEMS & SOFTWARE INC.


                                       By:
                                          --------------------------------------
                                       Name:
                                            ------------------------------------
                                       Title:
                                             -----------------------------------


                                       -----------------------------------------
                                       Robert M. Chiste


                                       -----------------------------------------
                                       T. Wayne Wren


                                       -----------------------------------------
                                       Joseph Esteves


                                       -----------------------------------------
                                       Frank Magnotti


                                       -----------------------------------------
                                       Coral Almog


                                       -----------------------------------------
                                       Dick Preston


                                       -----------------------------------------
                                       John Rossi


                        [Signature Page to Comverge, Inc.
        Second Amended and Restated Co-Sale and First Refusal Agreement]
<PAGE>

                                   SCHEDULE A

                              SCHEDULE OF INVESTORS

Data Systems & Software Inc.
200 RT 17
Mahwah, New Jersey  07430
Attention: George Morgenstern
Fax: (201) 529-8330


Easton Hunt Capital Partners, L.P.
641 Lexington Avenue, 21st Floor
New York, New York  10022
Attention: Richard Schneider
Fax: (212) 702-0952


EnerTech Capital Partners II L.P.
700 Building
435 Devon Park Drive
Wayne, Pennsylvania 19087-1990
Attention: David Lincoln
Fax: (610) 254-4188


ECP II Interfund L.P.
700 Building
435 Devon Park Drive
Wayne, Pennsylvania 19087-1990
Attention: David Lincoln
Fax: (610) 254-4188


E.ON Venture Partners
Kaistr. 20
40221 Dusseldorf
Germany
Attention: Ramin Mokhtari
Fax: +49 211 385 49611


Nth Power
50 California Street
San Francisco, California  94111
Attention: Tim Woodward
Fax: (415) 983-9984


                                      A-1
<PAGE>

Shell Internet Ventures B.V.
c/o Shell Centre, SIS SIW
London, SE1 7NA, UK
Attention: Alex Betts and
Michael Salmon
Fax: +44 207 7934 7797


Ridgewood Comverge, LLC
c/o Ridgewood Capital
947 Linwood Avenue
Ridgewood, NJ 07450
Attention: Robert L. Gold
Fax: (201) 214-2046


Norsk Hydro Technology Ventures AS
Kjorbov 16, Sandvika
N-0246 Oslo
Norway
Attention: Alex Tham
Fax:


Frank Magnotti
c/o Comverge, Inc.
23 Vreeland Road, Suite 160
Florham Park, NJ  07932
Fax: (973) 360-2220


Richard Preston
c/o Comverge, Inc.
23 Vreeland Road, Suite 160
Florham Park, NJ  07932
Fax: (973) 360-2220


John Rossi
c/o Comverge, Inc.
23 Vreeland Road, Suite 160
Florham Park, NJ  07932
Fax: (973) 360-2220


T. Wayne Wren
c/o Comverge, Inc.
23 Vreeland Road, Suite 160
Florham Park, NJ  07932
Fax: (973) 360-2220


                                      A-2
<PAGE>

Robert M. Chiste
c/o Comverge, Inc.
23 Vreeland Road, Suite 160
Florham Park, NJ  07932
Fax: (973) 360-2220


Joseph Esteves
3 River Road
Riverdale, NY 10463


Emerson Ventures Inc.
8000 W. Florissant Avenue
St. Louis, MO 63136
Attention: H. M. Smith
Fax:  (314) 553-3713


RockPort Capital Partners, L.P.
160 Federal Street, 18th Floor
Boston, MA  02110


RP Co-Investment Fund I, L.P.
160 Federal Street, 18th Floor
Boston, MA  02110


                                      A-3
<PAGE>

                                   SCHEDULE B

                         SCHEDULE OF COMMON STOCKHOLDERS

Name and Address of Stockholder
- -------------------------------

Data Systems & Software Inc.




Robert M. Chiste




T. Wayne Wren




Joseph Esteves




Frank Magnotti




Coral Almog




Dick Preston




John Rossi


                                      B-1
<PAGE>

                               ADOPTION AGREEMENT

            THIS ADOPTION  AGREEMENT (this "Adoption  Agreement") is executed by
the undersigned (the "Transferee")  pursuant to the terms of that certain Second
Amended and Restated Co-Sale and First Refusal Agreement dated as of October 25,
2004 (the  "Agreement")  by and among the Company and certain  Stockholders  and
Investors.  Capitalized  terms  used  but not  defined  herein  shall  have  the
respective meanings ascribed to such terms in the Agreement. By the execution of
this Adoption Agreement, the Transferee agrees as follows:

            1.  Acknowledgement.  Transferee  acknowledges  that  Transferee  is
acquiring  certain  shares of the capital  stock of the Company  (the  "Stock"),
subject to the terms and conditions, and entitled to benefits, of the Agreement.

            2. Agreement. As partial consideration for such transfer, Transferee
(a) agrees that the Stock  acquired by Transferee  shall be bound by and subject
to the terms,  and entitled to benefits,  of the Agreement and (b) hereby adopts
the Agreement with the same force and effect as if Transferee  were originally a
party thereto. Notwithstanding any other provision of this Adoption Agreement to
the contrary,  Transferee  shall be deemed an Investor if the  transferor of the
Stock was an  Investor or a  Stockholder  if the  transferor  of the Stock was a
Stockholder.

            3. Notice.  Any notice  required or permitted by the Agreement shall
be given to  Transferee  at the address  listed  beside  Transferee's  signature
below.

            4. Joinder. The spouse of the undersigned Transferee, if applicable,
executes  this  Adoption  to  acknowledge  its  fairness  and that it is in such
spouse's best  interests and to bind to the terms of the Agreement such spouse's
community interest, if any, in the Stock.

EXECUTED AND DATED this ______ day of _________________, ____.

                                       TRANSFEREE:


                                       By:
                                          --------------------------------------
                                       Name:
                                            ------------------------------------
                                       Title:
                                             -----------------------------------
                                       Address:
                                                 -------------------------------
                                                 -------------------------------
                                                 -------------------------------
                                       Facsimile:
                                                 -------------------------------

                                       Spouse (if applicable):

                                       Name:
                                            ------------------------------------

ACKNOWLEDGED AND ACCEPTED:

COMVERGE, INC.


By:
   ------------------------------------
Name:
     ----------------------------------
Title:
      ---------------------------------

</TEXT>
</DOCUMENT>
<DOCUMENT>
<TYPE>EX-31.A
<SEQUENCE>6
<FILENAME>ex31_a.txt
<TEXT>
                                                                   EXHIBIT 31(a)

      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-14 and 15d-14) for the registrant and we have:

         (a)      designed such disclosure controls and procedures 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 as of a date within 90 days prior to
                  the filing date of this quarterly report (the "Evaluation
                  Date"); and

         (c)      presented in this quarterly report our conclusions about the
                  effectiveness of the disclosure controls and procedures based
                  on our evaluation as of the Evaluation Date;

         5. The registrant's other certifying officers and I have disclosed,
based on our most recent evaluation, 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 in the design or operation of
                  internal controls which could adversely affect the
                  registrant's ability to record, process, summarize and report
                  financial data and have identified for the registrant's
                  auditors any material weaknesses in internal controls; and

         (b)      any fraud, whether or not material, that involves management
                  or other employees who have a significant role in the
                  registrant's internal controls; and


         6. The registrant's other certifying officers and I have indicated in
this quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal controls
subsequent to the date of our most recent evaluation, including any corrective
actions with regard to significant deficiencies and material weaknesses.



Dated:  November 12, 2004              By:  \S\ GEORGE MORGENSTERN
                                            ------------------------------
                                                George Morgenstern
                                                Chief Executive Officer


</TEXT>
</DOCUMENT>
<DOCUMENT>
<TYPE>EX-31.B
<SEQUENCE>7
<FILENAME>ex31_b.txt
<TEXT>
<PAGE>
                                                                 EXHIBIT 31(b)

         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-14 and 15d-14) for the registrant and we have:

         (a)      designed such disclosure controls and procedures 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 as of a date within 90 days prior to
                  the filing date of this quarterly report (the "Evaluation
                  Date"); and

         (c)      presented in this quarterly report our conclusions about the
                  effectiveness of the disclosure controls and procedures based
                  on our evaluation as of the Evaluation Date;

         5. The registrant's other certifying officers and I have disclosed,
based on our most recent evaluation, 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 in the design or operation of
                  internal controls which could adversely affect the
                  registrant's ability to record, process, summarize and report
                  financial data and have identified for the registrant's
                  auditors any material weaknesses in internal controls; and

         (b)      any fraud, whether or not material, that involves management
                  or other employees who have a significant role in the
                  registrant's internal controls; and


         6. The registrant's other certifying officers and I have indicated in
this quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal controls
subsequent to the date of our most recent evaluation, including any corrective
actions with regard to significant deficiencies and material weaknesses.



Dated:  November 12, 2004                  By: \S\ YACOV KAUFMAN
                                                ---------------------
                                                    Yacov Kaufman
                                                    Chief Financial Officer


</TEXT>
</DOCUMENT>
<DOCUMENT>
<TYPE>EX-32.A
<SEQUENCE>8
<FILENAME>ex32_a.txt
<TEXT>
<PAGE>
                                                                 EXHIBIT 32(A)


                            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 nine month periods ended September 30,
2004 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
November 12, 2004


</TEXT>
</DOCUMENT>
<DOCUMENT>
<TYPE>EX-32.B
<SEQUENCE>9
<FILENAME>ex32_b.txt
<TEXT>


                                                            EXHIBIT 32(B)




                            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 nine month periods ended September 30,
2004 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
November 12, 2004






























</TEXT>
</DOCUMENT>
</SEC-DOCUMENT>
-----END PRIVACY-ENHANCED MESSAGE-----
