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      Unassociated Document

      EILENBERG
        & KRAUSE LLP

      11 EAST
        44th
        STREET

      NEW
        YORK,
        NEW YORK 10017

      TELEPHONE: (212)
        986-9700

      FACSIMILE: (212)
        986-2399

      October
        16, 2005

      Ms.
        Kathleen Collins

      Accounting
        Branch Chief

      Division
        of Corporation Finance

      Securities
        and Exchange Commission

      100
        F
        Street, N.E.

      Washington,
        D.C. 20549

                Re:

                Data
                  Systems & Software Inc

                Form
                  10-K for Fiscal Year Ended December 31, 2004

                Forms
                  10-Q for Fiscal Quarters Ended March 31, 2005 and June
                  30, 2005

                File
                  No. 000-19771

      Dear
        Ms.
        Collins:

      This
        letter is submitted on behalf of Data Systems & Software Inc. (“we,”“DSSI”
        or the “Company”), in response to the comments of the Staff of the Division of
        Corporation Finance of the Securities and Exchange Commission in your letter
        of
        September 30, 2005 regarding the above-captioned filings.

      Our
        numbered responses correlate to the numbers in your September 30, 2005 letter,
        and we have set forth in full the text of the comments included in your letter
        for convenience purposes.

      We
        respond to the Staff’s comments as follows:

      Comment
        No. 1

      We
        note that your audit report was signed by an audit firm based in Tel Aviv,
        Israel. Please tell us how you concluded that it is appropriate to have an
        audit
        report issued by an auditor licensed outside of the United States. In accordance
        with Article 2 of Regulation S-X, we believe that the audit report of a
        registrant (that is not a foreign private issuer) should ordinarily be rendered
        by an auditor licensed in the United States.

      In
        response to the Staff’s comment, please be advised that, in January 2004 prior
        to engaging Kesselman & Kesselman CPA (Isr.), a member of
        PricewaterhouseCoopers International Limited (hereafter “K&K”), K&K was
        cleared by the accounting staff in the Division of Corporation Finance to
        sign
        the audit report of the Company for fiscal 2003 and 2004 with the understanding
        that the matter would need to be revisited before K&K commenced the 2005
        audit.

      The
        discussions which led to this clearance were held between Mr. Wayne Carnell
        of
        PricewaterhouseCoopers’ National SEC Practice and Mr. Craig Olinger from the
        SEC. Information that was presented to the Staff included:

              a)

                Structure
                  of the DSSI group;

              b)

                Type
                  and complexity of operation in each entity of the
                  group;

              c)

                Where
                  the majority of audit work shall be
                  conducted;

              d)

                Size
                  and place of assets of the group;

              e)

                Amount
                  and location where revenues were earned;
                  and

              f)

                Location
                  of management and in particular financial
                  management.

      Based
        on
        the information presented to the Staff, it was determined that it was
        appropriate for K&K, located in Israel, to sign the audit report of the
        Company.

      In
        addition, in early 2005, K&K with the assistance of Mr. Carnell, approached
        the Staff to obtain approval for K&K to sign the audit report of the Company
        for fiscal 2005. Information presented to the Staff included information
        (on
        matters a. through f. above) regarding dsIT subsequent to the sale of its
        outsourcing consulting business referred to below. In September 2005, Mr.
        Olinger advised Mr. Carnell that the Staff will not object to K&K signing
        the audit report for fiscal 2005 and 2006 with the understanding that before
        K&K commences the audit of 2007 this matter should be
        re-evaluated.

      Comment
        No. 2

      We
        note your disclosure that revenues from fixed-price contracts to design,
        develop, manufacture or modify complex equipment and software to customer
        specifications are recognized using the percentage-of-completion method.
        Tell us
        why you believe it is appropriate to apply SOP 81-1 to service arrangements.
        In
        this regard, Footnote 1 of SOP 81-1 indicates that SOP 81-1 is not intended
        to
        apply to service transactions. Clarify whether these services are part of
        a
        multiple element arrangement where significant software and services are
        being
        provided and whether you are following SOP 97-2 for these arrangements. If
        so,
        address paragraphs 65, 66, 70 and 71 of SOP 97-2 to support use of contract
        accounting for these arrangements.

      In
        response to the Staff’s comment, please be advised that the Company’s revenues
        from fixed-price contracts are arrangements to design and/or modify complex
        electronic equipment to a customer’s specification. Such arrangements in the
        areas of sonar, telecommunications, digital signal processing, image processing,
        software testing and validation,electronic warfare,
        simulation and electro-optics and healthcare, all require significant
        production, modification and customization of the Company’s core
        software.

          -2-

      The
        production, modification and customization services (“services”) are essential
        to the customer desired software and system functionality. Provided below
        is an
        analysis of the application of this essentiality:

              a)

                The
                  software is not off-the-shelf software, but rather core software
                  which
                  always sold with modification and customization
                  services;

              b)

                The
                  Company always includes such services as part of the arrangement,
                  and the
                  software was never sold separately without
                  them;

              c)

                The
                  services involve designing complex interfaces with existing software
                  at
                  the customer site. In many cases the integration service is essential
                  to
                  the functionality of the software working as specified by the
                  customer;

              d)

                Each
                  arrangement is tailored to the specifications of the customer.
                  Such
                  specifications include in almost all instances, changes to the
                  features
                  and functionality of the software;

              e)

                Payment
                  terms are always based on milestones related to the stages and
                  progress of
                  the services set in the agreement;

              f)

                Company’s
                  management believes that their ability to meet customer specifications
                  by
                  modifying and customizing the software is a key differentiating
                  factor for
                  selecting them over other
                  competitors.

      Based
        on
        the above factors, Company’s management believes that the fixed priced contracts
        arrangements involve significant modification and customization of the Company’s
        core software. Based on the provision of SOP 97-2 paragraph 7, the entire
        arrangement should be accounted for
        in
        conformity with ARB No. 45 “Long-Term
        Construction-Type Contracts”,
        using
        the relevant guidance in SOP 81-1 “Accounting
        for Performance of Construction-Type and Certain Production-Type
        Contracts”.

      Comment
        No. 3

      We
        note your disclosure on page 2 that you offer customers a full range of systems
        integration services and maintenance with your computer hardware sales. Other
        disclosures throughout your Form 10-K suggest that your arrangements include
        multiple elements (e.g., software, hardware, consulting services, integration
        services, implementation services, maintenance and extended service agreements).
        Your revenue recognition policy should clearly identify each deliverable
        included in your multi-element arrangement and how you allocate the arrangement
        fee to each element. For arrangements where you apply SOP 97-2, demonstrate
        how
        you determine vendor specific objective evidence of fair value for each element.
        While we note disclosure that your products and services are offered under
        separately negotiated and priced agreements, note that separate prices stated
        in
        a contract may not represent fair value and should not be used as a basis
        for
        allocating revenue to the elements of an arrangement. Refer to EITF 00-21
        and
        SOP 97-2, as applicable.

      In
        response to the Staff’s comment, please be advised that the primary source of
        our Computer Hardware segment revenues is the sale of computer hardware.
        Computer software is generally off-the-shelf software (such as Microsoft
        Windows
        or Microsoft Office), which is already pre-loaded onto the computer hardware
        and
        shipped directly to the customer. Revenue from the sale is recognized at
        time of
        delivery. When a customer requests a specific software installation, the
        computer hardware is shipped to us and we then install the requested software.
        After installation, the computer hardware is delivered to the customer and
        only
        at that time revenue is recognized. In both situations, the software included
        is
        incidental to the sale of our hardware products as a whole. Therefore, the
        Company’s management does not believe that such arrangements are within the
        scope of SOP 97-2, as indicated in SOP 97-2 paragraph 2.

          -3-

      Please
        note that our offer of integration services and maintenance with our computer
        hardware sales is a service that we offer to our customers as a separate
        service, subject to separate agreement, from our primary business of selling
        computer hardware and is rarely requested by our customers. We currently
        have
        two employees who are in part dedicated to such services. Such services have
        historically generated less than 2% of segment revenues in recent years.
        Our
        integration, implementation and consulting services, when provided, are based
        on
        hourly rates charged by software/hardware technicians in accordance with
        our
        predetermined price list. Such hourly rates are commensurate with market
        rates
        for the New York metropolitan area where most of the work is performed. Revenue
        from these services is recognized at the time the service is
        provided.

      Our
        maintenance contracts, which we no longer sell, were sold separately and
        were
        priced based upon predetermined price lists of maintenance contracts. In
        addition such prices match similar contracts that can be purchased from outside
        vendors. Revenue from these maintenance contracts was recognized ratably
        over
        the life of the maintenance contract (usually 12 to 24 months).

      In
        future
        filings we will clearly identify each deliverable included in our multi-element
        arrangements and how we allocate fees to each element in our Computer Hardware
        segment.

      Comment
        No. 4

      We
        note that you are a reseller of computer hardware and software and, in certain
        circumstances, account for revenues on a gross basis under EITF 99-19. Please
        tell us the amount of 2004 revenues recorded gross and describe you considered
        each of the factors listed in paragraphs 7 through 17 of EITF
        99-19.

      In
        response to the Staff’s comment, please be advised that in fiscal 2004, the
        computer hardware and software business was carried mainly through our
        subsidiary Databit Inc. (“Databit”) resulted $17,971,000 of revenues, $3,362,000
        of gross profit and $15,000 of net income.

      The
        Company’s management, following an analysis based on the provision of EITF
        99-19, determined that revenues from its Computer Hardware segment should
        be
        presented on a gross basis. Management’s analysis was based on the following
        factors:

      The
        company is the primary obligor in the arrangement-

      Databit
        is the primary obligor in the sales transaction opposite the customer. It
        is
        Databit that is responsible to the customer for fulfilling its order in its
        entirety. Should there be any problems with the products provided, it is
        Databit
        and not the supplier that must amend any damages.

      The
        company has latitude in establishing price-

      Databit
        has complete discretion (within economic constraints) as to the prices it
        charges for the products it sells. Databit’s suppliers do not determine the
        prices that Databit must charge for their products.

      The
        company changes the product or performs part of the
        service-

      As
        a
        general rule under the sale arrangement Databit does not change the product
        sold
        by the supplier. In certain incidences, when requested by the customer, subject
        to separate arrangement, Databit will modify the products purchased in
        accordance with the customer’s specifications. Such modifications may include
        implementation of local and wide area networks, additional hardware and software
        selection and integration.

      The
        company has discretion in supplier selection-

      Databit
        maintains multiple suppliers for its products and has the discretion to select
        the supplier that will provide the products ordered by the customer.

      The
        company is involved in the determination of product or service
        specifications-

      In
        conjunction with the customer and based on their needs and budgets, Databit
        assists in determining the nature, type, characteristics, and specifications
        of
        the products to be ordered by the customer.

      The
        company has credit risk-

      Databit
        assumes all credit risk for the amounts billed to its customer. Databit is
        responsible for collecting the sales price from a customer but must pay the
        amount owed to a supplier after the supplier performs, regardless of whether
        the
        sales price is fully collected.

      The
        company has general inventory risk (before customer order is placed or upon
        customer return)-

      Databit
        for the most part does not have inventory risk as it utilizes drop shipments
        by
        its suppliers for product sales and maintains small inventory of computer
        parts