Edgar Filing: DATA SYSTEMS & SOFTWARE INC

SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549

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

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

For the fiscal year ended December 31, 2002

COMMISSION FILE NUMBER: 0-19771

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

DELAWARE 22-2786081
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)

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

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

SECURITIES REGISTERED PURSUANT TO SECTION 12(B) OF THE ACT: NONE

SECURITIES REGISTERED PURSUANT TO SECTION 12(G) OF THE ACT:
COMMON STOCK, PAR VALUE $.01 PER SHARE
COMMON STOCK PURCHASE RIGHTS
(TITLE OF CLASS)

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

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

The aggregate market value of the common stock held by non-affiliates
of the registrant at March 31, 2003 was approximately $19.1 million. The
aggregate market value was calculated by using the closing price of the stock on
that date on the Nasdaq SmallCap Market.

Number of shares outstanding of the registrant's common stock, as of
March 31, 2003: 7,391,363.

DOCUMENTS INCORPORATED BY REFERENCE:

None.

DATA SYSTEMS & SOFTWARE INC.
AMENDMENT NO. 1 ON FORM 10-K/A
TO ANNUAL REPORT ON FORM 10-K

TABLE OF CONTENTS

PAGE
----

PART III

Item 10. Directors and Executive Officers of the Registrant.....................................1

Item 11. Executive and Director Compensation....................................................3

Item 12. Security Ownership of Certain Beneficial Owners and Management and Related
Stockholder Matters....................................................................9

Item 13. Certain Relationships and Related Transactions........................................11

Signatures............................................................................12

PART III

ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
--------------------------------------------------

DIRECTORS, EXECUTIVE OFFICERS AND KEY MANAGERS

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

Name Age Position
---- ---- --------

George Morgenstern 69 Director, Chairman of the Board, President and Chief Executive
Officer; Chairman of the Board of our dsIT Technologies Ltd.
subsidiary (formerly Decision Systems Israel Ltd.) ("dsIT"); and
director of our Comverge, Inc. subsidiary (formerly
Comverge Technologies, Inc.) ("Comverge")

Avi Kerbs 55 Director

Elihu Levine 70 Director

Shane Yurman 55 Director

Shlomie Morgenstern 40 Vice President-Operations

Jacob Neuwirth 56 Chief Executive Officer and President of dsIT

Yacov Kaufman 45 Vice President and Chief Financial Officer; and Vice President
and Chief Financial Officer of dsIT

Robert M. Chiste 55 Chief Executive Officer and director of Comverge

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

AVI KERBS has served as one of our directors since December 2002. Since
1991, Mr. Kerbs has been the Chief Executive Officer and President of Teuza
Management and Development 1991 Ltd., a company that manages a family of Israeli
venture capital funds. Mr. Kerbs is a director of Nova Measuring Instruments
Ltd.

ELIHU LEVINE has been one of our directors since April 29, 2003. From 1992
to his retirement in January 1997, Mr. Levine was an officer and employed in
various executive capacities by International Data Operations, Inc., one of our
subsidiaries. Mr. Levine also served as a director of Tower Semiconductor Ltd.
from March 1997 to January 2000.

SHANE YURMAN has been one of our directors since April 30, 2003. Mr.
Yurman, who is a certified public accountant, has been engaged in public
accounting since 1971. Mr. Yurman is a member of the American Institute of
Certified Public Accountants and the New York State Society of Certified Public
Accountants where he previously served as a member of the Auditing Standards and
Procedures Committee.

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

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

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

ROBERT M. CHISTE was appointed Chief Executive Officer and elected
director of Comverge in September 2001. Mr. Chiste served as Vice Chairman of
Comverge from September 2001 to April 2003. From 1999 to 2001, Mr. Chiste served
as Chairman and Chief Executive officer of FuelONE, Inc., a technology oriented
fuel and lubricant wholesale distribution company that he co-founded, and as
Chairman of FuelQuest Inc., a related e-commerce enterprise. In 1998 Mr. Chiste
co-founded Tri-Active Inc., a network and systems management company. From 1997
to 1998, Mr. Chiste served as Executive Vice President at Philip Services Corp.
and as President of their Industrial Services/Utilities Management Division. Mr.
Chiste is also a director of Pentacon, Inc.

On January 21, 2003, Dr. Robert L. Kuhn resigned from our Board of
Directors. Dr. Kuhn had served as a director since 1986 and as Vice Chairman of
the Board of Directors since 1994. On April 28, 2003, Dr. Allen I. Schiff
resigned from our Board of Directors. Dr. Schiff had served as one a director
since 1992 and was chairman of our Audit and Compensation Committees. On April
29, 2003, Dr. Susan M. Malley resigned from our Board of Directors. Dr. Malley
had served as a director since 1998 and was a member of our Audit and
Compensation Committees.

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

COMPLIANCE WITH SECTION 16(A) OF THE SECURITIES EXCHANGE ACT OF 1934

Section 16(a) of the Securities Exchange Act of 1934 (the "Exchange
Act") requires our executive officers and directors, and persons who own more
than 10% of a registered class of our equity securities to file reports of
ownership and changes in ownership with the SEC. These persons are also required
by SEC regulation to furnish us with copies of all Section 16(a) forms they
file. Based solely on its review of such forms received by us or written
representations from certain reporting persons, except as described below we
believe that during 2002 all applicable filing requirements were complied with
by its executive officers and directors.

Although Mr. Morgenstern filed all of his Form 4's on a timely basis
during prior years, in 2002 Mr. Morgenstern failed to report on a timely basis
ten purchase transactions in his Form 4's for transactions made by his wife
during October 2002. The late reports for these ten transactions related to a
total of 9,800 shares.

Item 11. EXECUTIVE AND DIRECTOR COMPENSATION
-----------------------------------

EXECUTIVE COMPENSATION

The following table sets forth for the periods indicated information
concerning the compensation of our Chief Executive Officer and the four other of
our officers who received in excess of $100,000 in salary and bonus during 2002.

SUMMARY COMPENSATION TABLE

Long Term All Other
Annual Compensation Compensation Awards Compensation ($)
------------------- ------------------- ------------------
Securities
Name and Restricted Stock Underlying
Principal Position Year Salary ($) Bonus ($) Awards ($) Options (#)
------------------ ---- ---------- --------- ---------- -----------

George Morgenstern 2000 446,600 550,000 - - 193,900
Chief Executive Officer 2001 446,351 150,000 - - 187,721
2002 465,700(1) - - - 182,860(2)

Yacov Kaufman 2000 150,000 32,000 - - 27,400
Chief Financial Officer 2001 158,403 50,000 - - 48,400
2002 170,294 - - - 37,899(3)

Shlomie Morgenstern 2000 160,000 100,000 - - -
Vice President 2001 193,500 - - (4) -
2002 204,345 15,000 - - 7,440(5)

Jacob Neuwirth 2000 - - - - -
Chief Executive Officer 2001 - - - - -
and President of dsIT 2002 174,512 - - - 39,788(3)

Robert M. Chiste 2000 - - - - -
Chief Executive Officer 2001 (6) - - - -
of Comverge, Inc. 2002 250,000 - - $32,359(7)

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

(1) Reflects a voluntary 10% reduction in base salary commencing August 2002
and a catch up of contractual cost of living adjustments for prior years
that had not been taken in the amount of $21,200.

(2) Consists of (i) $120,800 in contributions to a non-qualified retirement
fund, (ii) $28,000 in life insurance premiums, (iii) $22,600 paid for
accrued vacation, (iv) $3,000 in director's fees and (v) $8,460 imputed
value of automobile fringe benefits.

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

(4) In 2001, Mr. Shlomie Morgenstern was awarded options to purchase shares of
Comverge representing 0.5% of the outstanding stock of Comverge, at an
aggregate exercise price of $35,340. Mr. Shlomie Morgenstern served as a
director of Comverge from June 1999 until April 2003.

(5) Consists of $3,000 in director's fees and $4,400 imputed value of
automobile fringe benefits.

(6) Mr. Chiste joined Comverge in September 2001.

(7) Consists of rental and travel allowances.

The following tables summarize (i) the options granted in 2002 to the
executive officers named in the Summary Compensation Table above, (ii) the
potential value of these options at the end of the option term assuming certain
levels of appreciation of our common stock, (iii) the number of shares acquired
by such named executive officers upon the exercise of options in 2002 and the
value realized thereon, and (iv) the number and value of all options held by
such executive officers at the end of 2002

OPTION/SAR GRANTS IN 2002

Potential Realizable Value at Assumed
Annual Rates of Stock Price Appreciation
Individual Grants(1) for Option Terms(2)
------------------------------------------ --------------------------------------------

Number of
Securities
Underlying % of Total
Options Options Granted
Granted to Employees in
------- Fiscal Year Base Price Exercise or
Name (#) (%) ($/Share) Expiration Date 5% ($) 10% ($)
---- --- --- --------- --------------- ------ -------

Yacov Kaufman(3) 25,000 100% $5.25 7/31/07 41,846 94,221

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

(1) We did not grant any stock appreciation rights (SARs) in 2002.

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

(3) Represents extension of expiring options at their original exercise
price.

AGGREGATED OPTION EXERCISES IN 2002
AND FISCAL YEAR END STOCK OPTION VALUES

Number of
Shares Number of Securities Underlying
Acquired Unexercised Options Value of Unexercised
Upon Value at Year End (#) In-the-Money Options ($) (1)
Exercise Realized --------------- ----------------------------
Name (#) ($) Exercisable Unexercisable Exercisable Unexercisable
---- ------------ ------------ ------------ --------------- ------------ ---------------

George Morgenstern - - 380,583 116,667 - -
Yacov Kaufman - - 185,666 19,334 - -
Robert Chiste - - 50,000 25,000 - -
Shlomie Morgenstern - - 60,833 9,167 - -
-------------

(1) Based on the closing price for our common stock on December 31, 2002 of
$0.85 per share.

COMPENSATION OF DIRECTORS

Each of our directors is generally paid $1,000 for each Board or committee
meeting, which he or she attends (except if a committee meeting is held on the
same day as a Board meeting) and is reimbursed for associated out-of-pocket
expenses. Dr. Schiff was paid $24,000 per annum for his service as Chairman of
both the Audit Committee and the Compensation Committee, and was paid a total of
$27,000 in 2002 in connection with his service on the Board of Directors and
Board committees. Dr. Kuhn was paid $39,580 in 2002 in connection with his
service on the Board and as our Vice Chairman. Dr. Malley was paid a total of
$17,000 in 2002 in connection with her service on the Board of Directors and
Board committees. Mr. Kerbs and Mr. Levine are each paid $6,000 per annum plus
meeting fees in connection with their service on the Board and Audit Committee.
Mr. Yurman is paid $20,000 per annum plus meeting fees for his service on the
Board and as Chairman of the Audit Committee.

In addition to the directors' fees described above, at the last Annual
Meeting of Stockholders each member of the Board of Directors who was not one of
our employees and who met certain other eligibility criteria (Mr. Kerbs, Dr.
Malley and Dr. Schiff) was granted options to purchase 7,500 shares of our
common stock at an exercise price of $1.77 per share (the fair market value of
our common stock on such date). These options were granted pursuant to our 1994
Stock Option Plan for Outside Directors described below.

Our 1994 Stock Option Plan for Outside Directors provides for awards of
non-qualified options to our directors who are not one of our employees or any
of our affiliates and who meet certain other eligibility criteria. Pursuant to
the plan, (i) upon first election or appointment to the Board of Directors, each
newly elected or appointed eligible director is granted an option to purchase
7,500 shares of our common stock and (ii) immediately following each of our
Annual Meeting of Stockholders, each eligible director will generally be granted
an option to purchase 7,500 shares of our common stock. Options granted under
the plan have an exercise price per share equal to the fair market value of our
common stock on the date of issuance and are exercisable beginning on the first
anniversary of the date of the grant until the earliest of (i) ten years from
the date of grant, (ii) one year from the date on which an optionee ceases to be
an eligible director and (iii) 90 days after the date on which the optionee
ceases to be a director. The maximum number of shares of our common stock in
respect of which awards may be granted under the plan is 400,000, of which
130,000 non-expired options have been granted to date.

COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION

The mandate of our Compensation Committee of the Board of Directors
encompasses all matters related to compensation, including determination of
stock option and other stock-based compensation and review of employment terms
and compensation of executive officers. All matters related to the compensation
of executive officers, including the Chief Executive Officer, are acted upon by
the full Board of Directors.

The following persons served both as members of our Board of Directors
and as our officers or employees in 2002: George Morgenstern (Chairman of the
Board, President and Chief Executive Officer), Mr. Krause (Secretary) and Mr.
Shlomie Morgenstern (Vice President-Operations). Both Mr. Krause and Mr. Shlomie
Morgenstern served as directors until our annual meeting on December 3, 2002.
Dr. Kuhn, who resigned as director on January 21, 2003, also served as our Vice
Chairman of the Board. During 2002, no member of the Board of Directors who was
also one of our officers participated in any deliberations of the Board of
Directors or any committee thereof relating to his own compensation or to the
compensation of any person to whom he is related. Except as described above,
each member of the Board of Directors participated in 2002 in deliberations of
the Board of Directors concerning executive officer compensation. During 2002,
Mr. George Morgenstern, Dr. Malley and Mr. Krause engaged in transactions with
us in which they were deemed to have an interest. For further information, see
"Certain Relationships and Related Transactions" below.

EMPLOYMENT ARRANGEMENTS

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

Pursuant to the Employment Agreement, Mr. Morgenstern may at any time
prior to December 31, 2003, elect to terminate his employment with us and
thereafter to continue to serve us as a consultant for a period (the "Consulting
Period") ending on December 31 of the seventh year following the year in which
he first commences to serve as a consultant. During the Consulting Period, Mr.
Morgenstern would be entitled to receive an annual consulting fee plus
contributions to a nonqualified retirement fund and fringe benefits on the same
basis as during the term of his employment as described above. Mr. Morgenstern's
annual consulting fee during the Consulting Period would be equal to 50% of his
annual salary in effect immediately prior to the Consulting Period through the
end of the fourth full calendar year of the Consulting Period, and 25% of such
annual salary for the remainder of the Consulting Period (subject in all cases
to an annual cost of living adjustment). However, if Mr. Morgenstern elects to
become a consultant following a breach by the Company of its obligations under
the Employment Agreement or following a change in control of the Company (as
defined in the Employment Agreement), Mr. Morgenstern would be entitled to
receive his full annual salary until December 31, 2003, and thereafter to
receive an annual consulting fee as described above for the balance of the
Consulting Period. We are obligated under the Employment Agreement to fund at
the beginning of the Consulting Period all amounts to become payable to Mr.
Morgenstern for consulting services and to fund upon his death all amounts
payable to his estate. During the term of the Employment Agreement (including
any Consulting Period), Mr. Morgenstern may not engage in a business that is in
substantial and direct competition with our business or any of our subsidiaries.

In addition to the compensation provided for Employment Agreement, in
January 2000, the Board approved a bonus of $150,000 if Mr. Morgenstern remained
employed full-time as President and Chief Executive Officer of the Company
through December 31, 2001, which bonus was paid in 2001, and a $150,000 bonus if
an equity financing of Comverge of at least $10 million was completed by
December 31, 2000, which bonus was not paid as no qualifying equity financing
was completed by the end of 2000.

Yacov Kaufman serves as Vice President and Chief Financial Officer of
the Company and as Executive Vice President and Chief Financial Officer of dsIT
pursuant to an employment agreement entered into with the Company on January 1,
1999, and amended in June 2002. The amendment to Mr. Kaufman's employment
agreement provides for (i) an increase in Mr. Kaufman's salary to $200,000
retroactive to January 1, 2002. In August 2002, Mr. Kaufman agreed to reduce his
annual salary by 10% until such time as we achieve profitability.

We make certain payments to fund in part our future severance
obligations to Mr. Kaufman. If Mr. Kaufman's employment is voluntarily
terminated or is terminated by us for reasons other than for cause, we must pay
him an amount equal to 150% of his last month's salary multiplied by the number
of years (including partial years) that Mr. Kaufman worked for us. This
severance obligation, which is customary for executives of Israeli companies,
would be reduced by the amount contributed by us to certain Israeli pension and
severance funds pursuant to Mr. Kaufman's employment agreement. As of December
31, 2002, the unfunded portion of our severance obligation was $71,000. In
addition, the agreement with Mr. Kaufman provides for an additional payment
equal to six times his last month's total compensation, payable at the end of
his employment with us, unless he is terminated by us for cause.

In addition to the compensation provided for by Mr. Kaufman's
employment agreement, in November 2001, the Board approved a $50,000 bonus and
the grant of options to purchase 15,000 shares of our common stock to Mr.
Kaufman in connection with his efforts with respect to the acquisition by our
Israeli subsidiary, dsIT, of Endan IT Solutions Ltd. The payment of the bonus
and the grant of the options were both contingent upon the closing of the Endan
acquisition, which occurred in December 2001.

Robert Chiste serves as Chief Executive Officer of Comverge pursuant to
an employment agreement that commenced on September 1, 2001. Under a voting
agreement entered into by us and other investors in Comverge, Mr. Chiste serves
as a director of Comverge. Mr. Chiste's employment agreement provides for a base
salary of $250,000 per annum, plus an annual bonus up to 75% of his base salary
contingent upon achieving performance objectives established each year by the
Board of Directors of Comverge. Mr. Chiste is also entitled to a one-time bonus
of $250,000 if Comverge has an initial public offering with gross proceeds of at
least $10 million or there is a change of control in which Comverge receives
either $20 million in cash or $25 million in publicly traded securities. Mr.
Chiste's employment agreement also provides for the reimbursement through March
2003 of up to $3,500 per month to cover Mr. Chiste's auto, living and personal
travel expenses.

In connection with the signing of his employment agreement, Mr. Chiste
also received an option to purchase shares of Comverge common stock,
representing 6% of the outstanding Comverge shares (on a fully diluted basis),
at an exercise price of $1.20 per share. The exercise price was determined based
upon a valuation of Comverge as of July 31, 2001, performed by an independent
appraiser. Mr. Chiste's Comverge option will be adjusted to protect against
dilution from issuances of common stock until Comverge's paid in capital is at
least $15 million. Under the agreement, Mr. Chiste also received a grant under
our 1994 Stock Incentive Plan of a stock option to purchase 75,000 shares of our
common stock at an exercise price of $5.95. In addition to the options, pursuant
to his employment agreement, Mr. Chiste entered into an agreement with us for
the purchase of 50,000 shares of our common stock at a price of $5.95 per share.
Mr. Chiste paid for the common stock by assigning and endorsing to us a 6%
subordinated note of Philip Services Corp. (NasdaqNM: PSCD), due April 2010, in
the principal amount of $297,500. The subordinated note, which is assignable, is

due April 2010; pays interest semi-annually (in cash or by an additional
promissory note); and is subject to repayment in four annual payments beginning
in April 2006.

Mr. Chiste will receive retirement payments from Comverge if, after his
60th birthday, his employment agreement is terminated without cause or because
of Mr. Chiste's death or disability. Mr. Chiste will not receive any retirement
payment if his employment is terminated prior to his 60th birthday. Mr. Chiste's
retirement payments will be made over seven years commencing on the date of
termination. During the first four years, Mr. Chiste's retirement payments will
be equal to 50% of his base salary in effect at the time of his termination, and
during the last three years the retirement payments will be equal to 25% of the
base salary.

Mr. Chiste may in certain circumstances receive severance payments from
Comverge. Under his employment agreement, if Mr. Chiste's employment is
terminated without cause, Comverge would have to pay Mr. Chiste one year of base
salary, or if there has been an IPO for Comverge, three years of base salary
plus up to 15% of any excess parachute payment, plus, if such termination is
before December 31, 2002, his base salary through December 31. Mr. Chiste will
not be entitled to any severance payments under his employment agreement if he
voluntarily terminates his employment agreement.

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

Jacob Neuwirth serves as President and Chief Executive Officer of dsIT
pursuant to an employment agreement that commenced on December 16, 2001. Mr.
Neuwirth's employment agreement provides for a base salary which is denominated
in linked NIS equivalent to $165,000 per annum, linked to the Israeli Consumer
Price Index, plus an annual bonus of 10%, should dsIT's annual net profit exceed
the NIS equivalent of $317,000 and a 20% bonus should it exceed the NIS
equivalent of $633,000. In addition, the agreement with Mr. Neuwirth provides
for six months advance notice of termination of employment by either side, and
an additional payment equal to six times his last month's total compensation,
payable upon any termination of his employment.

Under his employment agreement, Mr. Neuwirth is entitled to a loan of
up to $100,000 from dsIT. As of December 31, 2002 the loan, which is denominated
in linked NIS, bears interest at 4% and has no fixed maturity date, had an
outstanding balance was $48,000.

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

The following table and the notes thereto set forth information, as of
May 1, 2003 (except as otherwise noted, concerning beneficial ownership (as
defined in Rule 13d-3 under the Securities Exchange Act of 1934) of our common
stock by (i) each of our directors, (ii) each of the executive officers named in
the Summary Compensation Table under "Executive and Director Compensation,"
(iii) all of our executive officers and directors as a group, and (iv) each
holder of 5% or more of our outstanding common stock.

Number of Shares of Percentage of
Name and Address of Common Stock Common Stock
Beneficial Owner(1)(2) Beneficially Owned(2) Outstanding(2)
---------------------- --------------------- --------------

George Morgenstern 664,637(3) 8.1%
Howard Gutzmer 676,291(4) 8.7%
5550 Oberlin Drive
San Diego, CA 92121
Dimensional Fund Advisors Inc. 492,100(5) 6.3%
1299 Ocean Avenue
Santa Monica, CA 90401
Laurus Master Fund, Ltd. 400,000(6) 5.1%
c/o Ironshore Corporate Services Ltd.
P.O. Box 1234 G.T.
Queensgate House
South Church Street
Grand Cayman, Cayman Islands
Avi Kerbs - -
Elihu Levine 45,970(7) *
Shane Yurman - -
Shlomie Morgenstern 81,833(8) 1.0%
Yacov Kaufman 185,666(9) 2.3%
Robert M. Chiste 150,000(10) 1.9%
Jacob Neuwirth 60,870 *
All executive officers and directors of the
Company as a group (8 people) 1,188,976 14.0%

-----------------
* Less than 1%
(1) Unless otherwise indicated, business address is in care of the Company.
(2) Unless otherwise indicated, each person has sole investment and voting
power with respect to the shares indicated. For purposes of this table, a
person or group of persons is deemed to have "beneficial ownership" of any
shares as of a given date which such person has the right to acquire within
60 days after such date. Percentage information is based on the number of
Shares outstanding as of May 1, 2003.
(3) Consists of (i) 261,854 shares held by Mr. Morgenstern, including 20,000
shares received by Mr. Morgenstern pursuant to a restricted stock grant
which are not yet fully vested, (ii) 380,583 currently exercisable options
held by Mr. Morgenstern, and (iii) 22,200 shares owned by Mr. Morgenstern's
wife.
(4) As of December 31, 2002, based on information in Amendment No. 2 to
Schedule 13G filed on January 27, 2003. Consists of (i) 60,340 shares owned
by Mr. Gutzmer (including shares held in his IRA); (ii) 508,125 shares
owned by the Gutzmer Family Trust, of which Mr. Gutzmer is a co-trustee;
(iv) 64,950 shares held in an IRA of Mr. Gutzmer's wife; (v) 37,576 shares
owned by a corporation of which Mr. Gutzmer is an executive officer,
director and principal shareholder; and (vi) 5,300 shares owned by a
limited partnership, the corporate general partner of which Mr. Gutzmer is
the sole director.

(5) As of December 31, 2002, based on information in Amendment No. 2 to
Schedule 13G filed on February 11, 2003.
(6) As of May 1, 2003, based on information on Schedule 13D filed on April 22,
2003 and additional information known to us. Laurus is also the holder of a
(i) a promissory note due June 30, 2003 in the original principal amount of
$2 million, which is convertible into shares of our common stock at a
conversion price of $3.20 per share and had a remaining principal balance
of $600,000, (ii) three-year warrant issued in June 2002 exercisable to
purchase 125,000 shares of our common stock at an exercise price of $4.20
per share and (iii) five-year warrant issued in December 2002 exercisable
to purchase 190,000 shares of our common stock of which 30,000 shares are
exercisable at $2.00 per share, 60,000 shares are exercisable at $2.34 per
share and 100,000 shares are exercisable at $3.34 per share. Laurus has
contractually agreed to restrict its ability to convert the convertible
note or exercise its warrants if such conversion or exercise would result
in Laurus and its affiliates beneficially owning more than 4.99% of the
then issued and outstanding shares of common stock.
(7) Consists of (i) 40,000 shares owned by Mr. Levine and his wife in a joint
account, (ii) 1,180 shares held in an IRA of Mr. Levine, (iii) 3,000 shares
owned by Mr. Levine's wife and (iv) 1,790 shares held in an IRA of Mr.
Levine's wife.
(8) Consists of 21,000 shares and 60,833 currently exercisable options held by
Mr. Shlomie Morgenstern.
(9) Consists of currently exercisable options held by Mr. Kaufman.
(10) Consists of 100,000 shares and 50,000 currently exercisable options
held by Mr. Chiste.

Equity Compensation Plan Information
Number of securities
remaining available for
future issuance under
Number of securities to Weighted-average equity compensation
be issued upon exercise exercise price of plans (excluding
of outstanding options, outstanding options, securities reflected in
warrants and rights warrants and rights column (a))
Plan category (a) (b) (c)
--------------------------------------------------------------------------------------------------------

Equity compensation plans
approved by security
holders 1,209,750 $5.68 2,031,325

Equity compensation plans
not approved by security
holders 529,017 $4.04 888,900
-------------------------- --------------------------
TOTAL 1,738,767 $5.18 2,920,225
-------------------------- --------------------------

Our equity compensation plan that has not been approved by our
stockholders is the 1995 Stock Option Plan for Nonmanagement Employees, which we
adopted in April 1995. The 1995 Plan provides for the awarding of options to
purchase our common stock to certain of our employees and officers (other than
executive officers and directors) and others who render services to us. The
maximum number of shares of common stock that can be issued under the 1995 Plan
is 1,417,917. As of December 31, 2002, 529,017 options had been awarded under
this plan. No shares may be awarded under the 1995 plan after April 18, 2005.
The exercise price of each option, the period during which each option may be
exercised and other terms and conditions of each option are determined by the
Board (or by a committee appointed by the Board). The 1995 Plan also provides
that our Chief Executive Officer may award up to 75,000 options and act as the
committee with respect to those options to determine the exercise price, the
exercise period and other terms and conditions of options he grants. As of
December 31, 2002, our Chief Executive Officer has granted a total of 37,000
options under the 1995 Plan.

ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
----------------------------------------------

During 2002, we paid approximately $630,000 for legal services rendered
and reimbursement of out-of-pocket expenses to Ehrenreich Eilenberg & Krause
LLP, a law firm in which Sheldon Krause, a former director and our Secretary, is
a member. Such fees related to services rendered by Mr. Krause and other members
and employees of his firm, as well as certain special and local counsel retained
and supervised by his firm who performed services on our behalf. Mr. Krause is
the son-in-law of George Morgenstern, our Chairman, President and Chief
Executive Officer.

As reported on the Summary Compensation Table above, Shlomie
Morgenstern, the son of George Morgenstern, our Chairman, President and Chief
Executive Officer, received compensation during 2002 in connection with his
position as Vice President-Operations.

In March 2001, we retained Malley Associates Capital Management, an
asset management firm that is controlled by Susan L. Malley, then one of our
directors, to provide discretionary asset management services to us with respect
to $2 million of our funds. The agreement provided for a management fee of 1%
per annum of the amount under management. In September 2002, the arrangement was
terminated. Malley Associates no longer provides any asset management or other
services to us. The aggregate fees paid to Malley Associates from March 2001
through September 2002 were $25,407. Dr. Malley resigned as a director on April
29, 2003.

In July 2001, we entered in an arrangement with a corporation
wholly-owned by George Morgenstern, our Chairman, President and Chief Executive
Officer, for use by such corporation of approximately 400 of the approximately
4,650 square feet leased by us in New York City. Based on our lease for our New
York City premises, the pro rata full rental cost (including electricity) of the
portion of the premises utilized by the corporation was approximately $1,450 per
month. In October 2002, we entered into a written agreement for the
corporation's use of its portion of the premises. The agreement provided for the
payment to us of $2,000 per month and was terminable by either party on 60 days
written notice to the other. As of February 2002, the corporation gave us notice
of its intent to vacate the space in April 2002. During 2002 we received $35,000
of rent from this corporation.

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

SIGNATURE

Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this amendment to be signed
on its behalf by the undersigned, thereunto duly authorized, in the Township of
Mahwah, State of New Jersey, on May 5, 2003.

DATA SYSTEMS & SOFTWARE INC.

By: /s/ George Morgenstern
-------------------------------------
George Morgenstern,
Chief Executive Officer and President