Arel Communications and Software Ltd. Reports First Quarter 2005 Results.

ATLANTA -- Arel Communications and Software Ltd. (NASDAQ: ARLC), a technology leader in universal voice, video and data communications for interactive conferencing, collaboration and training applications, reported results for the first quarter ended March 31, 2005.

Revenue for the fourth

quarter was $754,000 versus $555,000 in the fourth quarter of 2004 and $1.0 million in the first quarter of 2004. Net loss for the quarter was $(1.6) million, or $(0.12) per share, versus $(2.1) million, or $(0.16) per share in the fourth quarter of 2004 and $(1.0) million, or $(0.08) per share, in the first quarter of 2004.

Philippe Szwarc, chief executive officer of Arel, stated, "We are pleased that our first quarter results improved sequentially from Q4, although they remain modest as is typical of nascent technologies in emerging markets. Through new business wins, new strategic alliances and a growing pipeline of new business, we are proving both the strength and superiority of the Arel's Spotlight(TM) solution and the gathering momentum of the rich media conferencing and collaboration market. During Q1, we converted 6 pilot programs into new, signed end-user contracts, and launched new selling agreements with 5 new channel partners, each a leader in its geography. Through our direct and channel selling efforts, we are also generating a solid pipeline of pilot projects and potential new customers. These opportunities affirm the immediate, unique benefits of improving business communication and increasing productivity that Arel's solution offers."

Mr. Szwarc concluded, "Arel remains in the nascent stage of the rich-media conferencing and collaboration market's development as this technology, by its disruptive nature, gains acceptance. Our focus this year remains on winning new customers through our highly active multi-pronged sales approach, the addition of new channel partnerships, and continued development of our managed service option, all supported by unrelenting demonstration of the benefits of our unparalleled collaboration solution. Further, we are carefully managing expenses and conserving cash while making selected investments in R&D and sales to sustain our competitive lead. Our objective is to create, over time, a more consistent revenue stream, but remain subject in the near term to the quarter-to-quarter volatility that early stage development companies often experience. However, all indications are that industry sources and existing and prospective customers endorse Arel's Spotlight(TM) solution as pioneering the development of this large addressable market through superior performance, seamless integration, and rich media capability. Arel remains focused capturing our emerging opportunity as rapidly as possible, on building a lengthening chain of opportunities, and on delivering the financial proof of our success over time."

Conference Call

Arel's management will host a conference call at 10:00 a.m. ET today to discuss earnings and corporate activity. Please call the following dial-in numbers to participate:

United States (888) 527-1593

International Participants (706) 679-7685

Conference ID: 6468725

The public is invited to listen to the live webcast of the conference call. For details, visit Arel's website at www.arelcom.com. An archive of the on-line broadcast will be available on the website.

About Arel Communications and Software:

Arel Communications and Software, a technology leader in interactive web communications, develops, markets and sells a universal conferencing software solution for enterprise-wide deployment of integrated voice, video and data web conferencing/collaboration and training applications. Designed around Arel's Integrated Conferencing Platform(TM) (ICP) core software, the Arel Spotlight(TM) application suite facilitates collaboration for key business processes such as corporate and marketing communications, distance learning, product development, customer relationship management, and supply chain management by allowing dispersed enterprise users to collaborate in real time with synchronized voice, video and data. Arel's scalable, secure, and network-friendly universal conferencing solution is becoming the solution of choice for large enterprises moving from 'off-network' pay per usage services to 'on-network' solutions for greater control, cost-savings and integration with internal systems. For additional information, please visit www.arelcom.com.

Certain statements made herein that are not historical are forward-looking within the meaning of the Private Securities Litigation Reform Act of 1995. The words "estimate", "project", "intend", "expect", "believe", "hopeful" and similar expressions are intended to identify forward-looking statements. These forward-looking statements involve known and unknown risks and uncertainties. Many factors could cause the actual results, performance or achievements of the Company to be materially different from any future results, performance or achievements that may be expressed or implied by such forward-looking statements, including, among others, changes in general economic and business conditions, inability to maintain market acceptance to the Company's products, inability to timely develop and introduce new technologies, products and applications, rapid changes in the market for the Company's products, loss of market share and pressure on prices resulting from competition, introduction of competing products by other companies, inability to manage growth and expansion, loss of key partners, inability to attract and retain qualified personnel, inability to protect the Company's proprietary technology and risks associated with the Company's international operations and its location in Israel. For additional information regarding these and other risks and uncertainties associated with the Company's business, reference is made to the Company's reports filed from time to time with the Securities and Exchange Commission.

All trademarks recognized.

AREL COMMUNICATIONS AND SOFTWARE LTD.
                 CONDENSED CONSOLIDATED BALANCE SHEETS


                                                March 31      December
                                            -----------------    31,
                                              2005     2004     2004
                                            -------- -------- --------
                                               (Unaudited)   (Audited)
                                            --------------------------
                                                U.S. $ in thousands
                                            --------------------------
                Assets
CURRENT ASSETS:
  Cash and cash equivalents                     912    3,134    3,123
  Short-term investments                        678    4,195      704
  Accounts receivable:
     Trade                                    2,419    5,865    1,681
     Other                                      358      502      484
  Investment in ArelNet Ltd.                  1,271      641    1,070
  Inventories                                   777      809      791
                                            -------- -------- --------
        Total current assets                  6,415   15,146    7,853
                                            -------- -------- --------

SEVERANCE PAY FUNDS                             439      554      601
                                            -------- -------- --------

PROPERTY AND EQUIPMENT, NET                     335      418      352
                                            -------- -------- --------

OTHER ASSETS                                     82      686       86
                                            -------- -------- --------
        Total assets                          7,271   16,804    8,892
                                            ======== ======== ========

    Liabilities and shareholders' equity
CURRENT LIABILITIES:
  Current maturities of long-term loans           -       65        -
  Accounts payable and accruals:
     Trade                                      291    1,015      332
     Deferred revenues                          412    3,078      104
     Employees related obligations              737      620      709
     Other                                    1,156    3,019    1,894
                                            -------- -------- --------
        Total current liabilities             2,596    7,797    3,039
                                            -------- -------- --------

LONG-TERM LIABILITIES:
  Income tax payable                          1,037        -    1,068
  Accrued severance pay liability               699      947      840
                                            -------- -------- --------
        Total long-term liabilities           1,736      947    1,908
                                            -------- -------- --------
        Total liabilities                     4,332    8,744    4,947
                                            -------- -------- --------

SHAREHOLDERS' EQUITY:
  Share capital                                   4        4        4
  Additional paid-in capital                 54,271   54,233   54,271
  Accumulated other comprehensive income      1,146      516      945
  Accumulated deficit                       (52,482) (46,693) (51,275)
                                            -------- -------- --------
                                              2,939    8,060    3,945
                                            -------- -------- --------
                                              7,271   16,804    8,892
                                            ======== ======== ========


                 AREL COMMUNICATIONS AND SOFTWARE LTD.
            CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

                                                   Three months ended
                                                        March 31,
                                                   -------------------
                                                      2005      2004
                                                   --------- ---------
                                                       (Unaudited)
                                                   -------------------
                                                   U.S. $ in thousands
                                                   -------------------
Revenues:
   Sales                                                195       286
   Services                                             559       716
                                                   --------- ---------
                                                        754     1,002
Cost of sales and services                              359       458
                                                   --------- ---------
Gross profit                                            395       544
Research and development expenses - net                 607       583
Selling, general and administrative expenses          1,580     1,453
Income from settlement with W2COM                         -       411
                                                   --------- ---------
Operating loss                                       (1,792)   (1,081)
Financial income (expense) - net                          1        35
                                                   --------- ---------
Net loss before income tax benfit                    (1,791)   (1,046)
Income tax benfit                                       228         -
                                                   --------- ---------
Net loss for the period                              (1,563)   (1,046)
                                                   ========= =========

Basic and Diluted loss per share                      (0.12)    (0.08)
                                                   ========= =========


                 AREL COMMUNICATIONS AND SOFTWARE LTD.
            CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

                                                        Three months
                                                            ended
                                                          March 31
                                                       ---------------
                                                        2005    2004
                                                       ------- -------
                                                        (Unaudited)
                                                       ---------------
                                                          U.S. $ in
                                                          thousands
                                                       ---------------
CASH FLOWS FROM OPERATING ACTIVITIES:
  Net loss for the period                              (1,563) (1,046)
    Adjustments required to reconcile net loss to net
cash used in operating activities:
     Depreciation and amortization of property and
      equipment                                            36      88
     Capital loss on sale of property and equipment         -       -
     Trading marketable securities, net                     1      55
     Allowance for doubtful accounts                     (173)    (29)
     Accrued employee rights upon retirement - net         21       2
     Loss from decline in the value of short-term
      investments                                          25       -
     Other - net                                            2       1
  Changes in operating asset and liability items:
     Decrease (increase) in trade receivables (before
      allowance for doubtful accounts)                   (565) (2,738)
     Decrease in other accounts receivable                126     112
     Decrease (increase) in inventories                    14    (275)
     Increase (decrease) in trade payables                (41)    570
     Increase (decrease) in deferred revenues             308   2,784
     Increase in employees related obligations             28      14
     Decrease in other liabilities (including long-
      term)                                              (413)   (160)
                                                       ------- -------
  Net cash used in operating activities                (2,194)   (622)
                                                       ------- -------

CASH FLOWS FROM INVESTING ACTIVITIES:
  Short-term bank deposits - net                            -    (144)
  Purchase of property, plant and equipment               (19)    (85)
  Collection of long-term loan to an employee               2       2
  Amounts carried to other assets                           -      (6)
                                                       ------- -------
  Net cash provide by (used in) investing activities      (17)   (233)
                                                       ------- -------

CASH FLOWS FROM FINANCING ACTIVITIES:
  Short-term bank credit-net                                -      19
  Issuance of share capital                                 -      78
  Exercises of options                                      -       -
  Repayment of long-term loan                               -      (5)
                                                       ------- -------
  Net cash provided by financing activities                 -      92
                                                       ------- -------

NET DECREASE IN CASH AND CASH EQUIVALENTS              (2,211)   (763)
BALANCE OF CASH AND CASH EQUIVALENTS AT BEGINING OF
 PERIOD                                                 3,123   3,897
                                                       ------- -------
BALANCE OF CASH AND CASH EQUIVALENTS AT END OF
 PERIOD                                                   912   3,134
                                                       ======= =======