<DOCUMENT>
<TYPE>EX-99.3
<SEQUENCE>5
<FILENAME>c32031_ex99-3.txt
<TEXT>

                                                                    EXHIBIT 99.3


                  [Letterhead of Data Systems & Software Inc.]





                                                     April 19, 2004

Kardan Communications Ltd.
154 Petach Tikva Rd.
Tel Aviv, Israel

Neuwirth Investments Ltd.
250 Ben Gurion Rd.
Givatayim, Israel

                Re:   Data Systems & Software Inc. - Transaction with Kardan
                      Communications Ltd.
                      ------------------------------------------------------

Gentlemen:

                  This  Letter  confirms  our  agreement  concerning  the  basic
structure and underlying terms in connection with a contemplated  transaction or
transactions  (collectively,  the  "TRANSACTION")  by and among  Data  Systems &
Software Inc., a Delaware corporation  ("DSSI"),  Kardan Communications Ltd., an
Israeli  company  ("KARDAN"),  or another  affiliate of Kardan N.V. and Neuwirth
Investments  Ltd., an Israeli  company  ("NEUWIRTH").  Each of DSSI,  Kardan and
Neuwirth are sometimes collectively referred to herein as the "PARTIES".

                  Upon  acceptance by Kardan and  Neuwirth,  it is intended that
this Letter will  provide a framework  for a  Definitive  Agreement  (as defined
below) and ensure that the  willingness of the Parties to proceed in discussions
with respect  thereto is based on a mutual  understanding  of the basic economic
and  other  terms  of the  Transaction.  Any  obligation  to  proceed  with  the
Transaction as outlined herein is expressly subject,  among other things, to the
execution and delivery of a written Definitive  Agreement(s)  acceptable in form
and  substance  to  the  Parties,   as  well  as  completion  of  due  diligence
satisfactory  to  Kardan  and DSSI as set  forth in  Sections  4 and 13  hereof,
PROVIDED THAT, the provisions  contained in Sections 9, 10, 11, 14 and 15 hereof
shall be binding  upon the Parties in  accordance  with their  respective  terms
notwithstanding  the  termination of this Letter for any reason (the  "SURVIVING
PROVISIONS").

<PAGE>

1.   PRINCIPAL TERMS OF THE  TRANSACTION.  The Transaction will be structured as
     follows:

     a.   EXCHANGE OF SHARES OF DSIT  TECHNOLOGIES FOR SHARES OF DSSI. DSSI will
          purchase all of the issued and outstanding shares of dsIT Technologies
          Ltd., an Israeli company  ("DSIT"),  owned by Kardan and Neuwirth,  in
          exchange for the issuance of  approximately  389,022  shares of common
          stock of DSSI to Kardan  and  approximately  492,178  shares of common
          stock of DSSI to Neuwirth (the "SHARE EXCHANGE").

     b.   ASSET PURCHASE BY DSSI.  DSSI will purchase from Kardan a portfolio of
          companies (the "ASSETS"),  one of which will be consolidated with DSSI
          (the "CONSOLIDATED  ENTITY"),  in exchange for the issuance by DSSI of
          approximately  3,705,941  shares  of  its  common  stock  (the  "ASSET
          PURCHASE").  In the event that Kardan  makes any  acquisitions  in the
          portfolio  companies  comprising  the  Assets  prior  to  signing  the
          Definitive  Agreement,  the parties  will  negotiate  in good faith to
          adjust the terms of the Asset  Purchase  accordingly.  With respect to
          the  Consolidated  Entity,  upon the closing of the  Transaction  (the
          "CLOSING"),  Kardan will  transfer to DSSI 49% of an entity  ("NEWCO")
          that holds Kardan's  interest in the Consolidated  Entity and grant to
          DSSI the  right  to  appoint  all the  directors  of the  Consolidated
          Entity. Until the second anniversary of the Closing,  Kardan will have
          the option to sell to DSSI the  remaining 51% of Newco owned by Kardan
          at an exercise  price of 630,915  shares of common  stock of DSSI.  If
          Kardan does not exercise such option,  then, for 60 days following the
          second  anniversary  of the  Closing,  DSSI  will  have the  option to
          purchase from Kardan said 51% of Newco at the same exercise price.

     c.   CASH  INVESTMENT BY KARDAN.  Kardan will make a cash  investment of $2
          million in the equity of DSSI. In addition, through March 31, 2005, if
          at the end of any calendar  quarter,  DSSI has less than $1.25 million
          in cash and cash equivalents on hand,  Kardan will, within 15 business
          days of the  end of any  such  calendar  quarter,  make an  additional
          investment in the equity of DSSI in the amount of such deficiency (or,
          if  smaller,  the  amount  of the  deficiency  as of the  date of such
          investment) (the "CAPITAL  CALL"),  PROVIDED THAT, the aggregate total
          amount  invested  pursuant  to all  Capital  Calls shall not exceed $1
          million.

     d.   VALUATION OF SHARES OF COMMON STOCK OF DSSI.  For purposes of the Cash
          Investment,  the  valuation of one share of common stock of DSSI shall
          be equal to $3.17; and for purposes of the Capital Call, the valuation
          of one share of  common  stock of DSSI  shall be equal to the  average
          closing  price on Nasdaq of DSSI's  common stock during the 30 trading
          days  immediately  preceding  the date of the issuance of the relevant
          shares.


                                       2
<PAGE>

     e.   KARDAN WARRANT.  At the Closing,  DSSI will issue a warrant to Kardan,
          exercisable for 24 months, to purchase up to 500,000 additional shares
          of DSSI common stock,  at a price per share equal to 120% of the price
          per share of the Cash  Investment.  Upon any  exercise  of the Capital
          Call, DSSI will issue an additional warrant to Kardan, exercisable for
          24 months from the date thereof, to purchase additional shares of DSSI
          common stock,  in a number up to the amount  invested in such exercise
          divided  by four (4),  and at a price  per share  equal to 120% of the
          price per share of such exercise.

2.   REGISTRATION  RIGHTS. DSSI will use its best efforts to file a registration
     statement  or  statements,  as the case may be,  with  the  Securities  and
     Exchange  Commission  (the "SEC") with respect to the (i) shares  issued in
     the Share Exchange,  the Asset Purchase and the Cash  Investment  within 60
     days  following  the Closing and (ii) shares  issuable upon exercise of any
     warrants  issued  pursuant to a Capital Call within 60 days of the exercise
     of any such  warrants,  and  shall  use  reasonable  efforts  to have  such
     registration statement(s) declared effective by the SEC, in the case of (i)
     above,  within 120 days after the  Closing,  and in the case of (ii) above,
     within 120 days after the date of exercise of the relevant warrants.

3.   GUARANTEES OF  CONSOLIDATED  ENTITY.  Through and including  February 2006,
     Kardan or an  affiliate  thereof  will  remain as a  guarantor  for certain
     liabilities  of the  Consolidated  Entity in  connection  with that certain
     Share Purchase  Agreement dated December 18, 2003 by and among Kardan,  the
     Consolidated  Entity and certain other parties  thereto.  Through  February
     2006, or such earlier date as DSSI,  at its election,  procures the release
     of Kardan and its affiliates  from such  guarantees,  DSSI will ensure that
     all of the directors of the  Consolidated  Entity appointed or nominated by
     DSSI shall be approved by Kardan.

4.   DUE  DILIGENCE.   The  Parties  acknowledge  that,  prior  to  executing  a
     Definitive  Agreement,  they must complete  their  respective due diligence
     examinations  as well as  negotiations  with respect to matters  beyond the
     scope of this Letter.  Accordingly,  the Parties acknowledge and agree that
     execution  of a  Definitive  Agreement  is  subject  to  completion  of due
     diligence satisfactory to each of DSSI and Kardan in their sole discretion.

5.   TERMS OF DEFINITIVE AGREEMENT. The Definitive Agreement shall contain terms
     customary and appropriate to similar agreements,  including representations
     and warranties of, and indemnification by, the Parties (it being understood
     that  Kardan and  Neuwirth  will not make  substantive  representations  or
     indemnities  concerning  the  business  of dsIT  and  Kardan  will not make
     substantive  representations  or indemnities  concerning any minority-owned
     companies  comprising the Assets,  but Kardan  explicitly agrees to provide
     full   representations  and  warranties  and  indemnities   concerning  the
     Consolidated Entity, which representations, warranties and indemnities will
     terminate  as of the  Closing,  and a covenant of DSSI to call a


                                       3

<PAGE>

     meeting of its  shareholders  for the purpose of approving the  Transaction
     and, if permissible in accordance with applicable law, electing to the DSSI
     board (to be effective  following the Closing) a slate of between seven and
     eleven members  nominated by Kardan,  which will include Jacob Neuwirth and
     Shlomie  Morgenstern.  Consummation  of the  Transaction  shall be subject,
     among other things, to:

     a.   receipt  of all  necessary  consents  and  approvals  of  governmental
          entities and any other third parties;

     b.   absence of any  material  adverse  change in the  business,  financial
          condition,  assets,  prospects  or  operations  of either  DSSI or the
          companies comprising the Assets since the date of this Letter;

     c.   absence of pending or threatened material litigation regarding DSSI or
          the companies comprising the Assets, or any litigation challenging the
          Definitive Agreement, or the transactions contemplated thereby;

     d.   delivery of customary legal opinions,  closing  certificates and other
          appropriate   documentation   requested  by  DSSI,  Kardan  and  their
          respective counsel;

     e.   delivery by Kardan of fiscal year-end and interim financial statements
          of the  Consolidated  Entity in the form  required  by DSSI for filing
          with the SEC in connection  with the  Transaction  (including  without
          limitation,   audited  balance   sheets,   statements  of  income  and
          statements of cash flows for the current fiscal year and the preceding
          two fiscal years);

     f.   compliance with all applicable laws;

     g.   resignation  of all of the members of the board of  directors  of DSSI
          upon the  Closing (as a condition  of Kardan's  obligations  under the
          Definitive Agreement); and

     h.   the approval of the shareholders of DSSI and/or Kardan, if applicable.

6.   ADDITIONAL  AGREEMENTS.  The  following  agreements  will be  executed in a
     manner satisfactory to all the Parties:

     a.   Consulting Agreement between DSSI and George Morgenstern;

     b.   Employment  Agreement between DSSI and Israel Frieder,  who will serve
          as president and manager of communications activities;

     c.   Employment  Agreement between DSSI and Jacob Neuwirth,  who will serve
          as president and manager of IT activities; and


                                       4
<PAGE>

     d.   Employment  Agreement  between DSSI and/or its subsidiary  Databit and
          Shlomie Morgenstern,  upon terms and conditions to be agreed to by the
          Parties and Shlomie Morgenstern.

7.   GOOD FAITH  NEGOTIATION AND COOPERATION;  SEC FILINGS.  Each of the Parties
     shall,  and shall cause each of their  respective  Representatives  to, (i)
     negotiate the terms of the  Definitive  Agreement in good faith in order to
     proceed with the Transaction,  (ii) subject to the provisions  contained in
     Sections 4, 5 and 6 hereof,  use their respective best efforts to finalize,
     execute and deliver the Definitive Agreement,  and (iii) cooperate with the
     other Parties and their respective  Representatives in connection with this
     Letter, the proposed Transaction and the transactions contemplated thereby,
     including without  limitation,  providing  information or disclosure to any
     other Party  necessary or  appropriate  (in the discretion of such Party or
     its counsel) to be included in any filing with the SEC, whether on Form S-4
     or  otherwise,  required  to be  filed  as a  result  of this  Letter,  the
     Transaction or the transactions contemplated thereby.

8.   ACCESS  TO  INFORMATION.   From  the  date  hereof  until  this  Letter  is
     terminated,  as  provided  below,  Kardan,  with  respect to the  companies
     comprising  the  Assets,   and  DSSI,   with  respect  to  itself  and  its
     subsidiaries,  shall make and cause to be made available to the other Party
     such  books,  records  and  members of  management  as the other  Party may
     reasonably  request in connection  with any such Party's  evaluation of the
     relevant  business,  assets  and  properties  in  connection  with any such
     Party's  efforts to consummate  the  Transaction.  In connection  with such
     evaluation,  Kardan and DSSI shall coordinate  mutually  agreeable times at
     which representatives can visit the relevant companies' facilities, examine
     their properties and assets, contracts,  liabilities,  operations, records,
     financial  information and other aspects of their  businesses and interview
     their  senior  executives  and  stockholders.   Each  of  Kardan  and  DSSI
     authorizes  members of the  management of the relevant  companies to freely
     communicate  with the other  Party to  disclose  matters  concerning  their
     businesses without limitation.

9.   CONFIDENTIALITY.   Each  of  the  Parties  shall,  and  shall  cause  their
     respective directors, officers, shareholders, employees, agents, brokers or
     other representatives  ("REPRESENTATIVES") to, maintain the confidentiality
     of any confidential or proprietary information furnished to it by the other
     Party  (including,  with  respect  to Kardan and its  Representatives,  the
     existence of this Letter, the contemplated Transaction and any negotiations
     in  connection  therewith),  except to the extent such  information  is (i)
     otherwise disclosed by a party not bound by an agreement of confidentiality
     with respect thereto, (ii) independently  developed by another Party, (iii)
     required  to  be  disclosed  in  accordance   with  applicable  law,  rule,
     regulation or court order or decree

                                       5


<PAGE>

     applicable  to a Party  or its  direct  or  indirect  shareholders  or (iv)
     disclosed to accountants,  auditors, counsel, bankers, investors and others
     who  have  a need  to  know  such  information  in  connection  with  their
     evaluation  thereof  as  determined  in the  reasonable  discretion  of the
     relevant Party.

10.  EXCLUSIVITY.  Each of DSSI and Kardan  acknowledges  that the Parties  will
     devote  substantial  time and resources and incur  substantial  expenses in
     connection  with  the  investigation  and  documentation  of  the  proposed
     Transaction  contemplated  by this Letter.  To induce the Parties to devote
     such time and resources and to incur such expenses, each of DSSI and Kardan
     agrees  that at no time  during  the  period  from the date  hereof  to and
     including  the 60th day  after  such date (the  "TERMINATION  DATE")  shall
     either  DSSI  or  Kardan,  directly  or  indirectly  through  any of  their
     respective  Representatives,  solicit,  initiate,  furnish  information  or
     otherwise engage in any discussions concerning the sale of their respective
     assets  involved in the  Transaction  or stock or any  recapitalization  or
     restructuring  or  sale of  either  DSSI or the  companies  comprising  the
     Assets,  as the case may be  ("DISCUSSIONS"),  PROVIDED THAT, DSSI shall be
     permitted  to engage in (but not solicit or  initiate)  Discussions  at any
     time with any person or entity in the event that the Board of  Directors of
     DSSI or its counsel,  in their sole discretion,  determine that Discussions
     are  necessary,  appropriate  or  advisable  in order to satisfy any of the
     Board's  fiduciary  duties or obligations  under any applicable law. In the
     event that either DSSI or Kardan or any of their respective Representatives
     receives  any  proposal  from any person or entity with respect to any such
     matters, then DSSI, Kardan or their respective Representatives, as the case
     may be, shall immediately notify the other Party thereof in writing.

11.  NONDISCLOSURE.  None of the  Parties  shall,  and shall cause each of their
     respective  Representatives  not to, directly or indirectly make any public
     comment,  statement or communication with respect to, or otherwise disclose
     or permit the disclosure or existence of discussions  regarding, a possible
     Transaction among them or any of the terms,  conditions or other aspects of
     the Transaction  proposed in this Letter,  including the existence thereof,
     PROVIDED  THAT,  DSSI or Kardan may disclose  information  concerning  this
     Letter or the  Transaction  if, in the  opinion of its counsel (in its sole
     discretion),  it is  necessary,  appropriate  or  advisable  to comply with
     applicable  laws,  rules  or  regulations  of  the  SEC,  Nasdaq  or  other
     regulatory  agency or stock exchange  applicable to them or their direct or
     indirect parent companies.

12.  CONDUCT OF  BUSINESS.  Each of Kardan,  with respect only to the Assets and
     the business of the Consolidated Entity, and DSSI shall, during the term of
     this Letter, (i) conduct its business only in the ordinary course, (ii) not
     engage in any  transactions  other than in the ordinary  course of business
     without the prior  written  consent of the other  Party,  and (iii) use its
     best efforts to preserve intact its business  organization,  keep available
     the services of its employees, and maintain satisfactory relationships with
     all third parties with which it has business relationships.


                                       6
<PAGE>

13.  TERMINATION.  This Letter and the obligations of the Parties  hereunder may
     be  terminated  at any  time by  either  Kardan  or DSSI  on or  after  the
     Termination Date if the Parties have failed to reach a Definitive Agreement
     despite good faith negotiations based on the terms and conditions contained
     herein,  or by either  such Party at any time in the event that the results
     of a Party's due  diligence  are  unsatisfactory  in such  Party's sole and
     absolute  discretion.  If this Letter is terminated in accordance with this
     Section  13,  then no Party  shall have any  obligation  hereunder  or with
     respect to the transactions contemplated hereby, except with respect to the
     Surviving Provisions.

14.  COSTS. Each of the Parties shall be responsible for and bear its respective
     costs and expenses (including,  without limitation,  any fees of attorneys,
     accountants, brokers or finders) incurred in connection with this Letter or
     the proposed Transaction,  PROVIDED THAT, in the event that during the time
     period  subsequent  to the  execution  of  this  Letter  and  prior  to the
     termination hereof in accordance with Section 13 hereof, Kardan or DSSI (i)
     breaches any of the provisions  contained in Sections 9 or 10 hereof,  (ii)
     reaches an  agreement in  principle  in respect of a  transaction  with any
     third party  inconsistent with the Transaction  (whether or not Discussions
     in respect thereof are permitted in accordance with Section 10 hereof),  or
     (iii) fails to enter into a  Definitive  Agreement  other than as permitted
     pursuant to Section 13 hereof,  then DSSI, on the one hand,  or Kardan,  on
     the other hand,  shall be entitled  to  terminate  this Letter and shall be
     entitled  to  liquidated  damages in an amount  equal to the greater of (i)
     either such Party's  actual legal,  accounting  and other costs  reasonably
     incurred in connection with the  Transaction or (ii) $150,000.  The Parties
     agree that the Definitive  Agreement  shall contain a provision  similar to
     this  Section 14,  which shall  require the payment of costs by DSSI in the
     event that the shareholders of DSSI fail to approve the Transaction.

15.  MISCELLANEOUS.

     a.   This Letter shall be governed by and construed in accordance  with the
          laws of the State of New York  applicable to contracts  made and to be
          performed  within such State  without  giving  effect to principles of
          conflicts or choice of law thereof.

     b.   This Letter may be  executed by the Parties in separate  counterparts,
          which,  when  taken  together,  shall  constitute  one  and  the  same
          instrument.

     c.   This Letter constitutes the entire  understanding  between the Parties
          with respect to the subject  matter hereof and  supersedes any and all
          prior  agreements,  commitments,  understandings,   discussions,  term
          sheets, negotiations or arrangements of any nature relating thereto.


                                       7

<PAGE>

         Kindly indicate your approval and agreement with the foregoing by
executing this Letter in the space provided below and returning a copy thereof
to the undersigned.

                                            Very truly yours,

                                            DATA SYSTEMS & SOFTWARE INC.



                                            By: /s/ George Morgenstern
                                            ------------------------------------
                                                    Name:
                                                    Title:


AGREED AND ACCEPTED:

KARDAN COMMUNICATIONS LTD.


By: /s/ Israel Frieder
----------------------------------------
        Name:
        Title:


NEUWIRTH INVESTMENTS LTD.


By: /s/ Jacob Neuwirth
----------------------------------------

         Name:
         Title:

The undersigned, as sole shareholder of Neuwirth Investments Ltd., agrees to be
personally bound by the terms and conditions of this Letter applicable to
Neuwirth Investments Ltd.

                                             /s/ Jacob Neuwirth
                                             -----------------------------------
                                             Jacob Neuwirth



                                       8


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