Arel Communications and Software Limited Announces Results for the Third Quarter of 1998.

YAVNE, Israel--(BUSINESS WIRE)--November 5, 1998--Arel Communications and Software Limited (NASDAQ/NMS:ARLCF; ARLWF) announced today results for the third quarter of 1998.

Revenues from sales and services for the third quarter of 1998 were $2,564,586 an increase of 112% in comparison to third quarter 1997 total revenues of $1,207,140, and an increase of 39% in comparison to second quarter 1998 total revenues of $1,849,978.

Revenues in the first nine-month period of 1998 were $5,569,824, an increase of 148% over nine month 1997 revenues of $2,248,653.

Gross profit for the third quarter of 1998 was $1,314,268, an increase of 119% over the third quarter 1997 total gross profit of $599,908, and an increase of 55% total gross profit of $847,611 in the second quarter of 1998.

Gross profit in the nine months of 1998 was $2,599,048, an increase of 146% over nine month 1997 total gross profit of $1,055,735.

Net loss in the third quarter of 1998 was $445,844, a decrease of 47% over the third quarter 1997 net loss of $849,219, and a decrease of 37% over the second quarter of 1998 net loss of $708,444.

Net loss in the nine months of 1998 was $1,881,831, a decrease of 36% over the first nine months of 1997 net loss of $2,925,873.

During the first nine months of 1998 the Company expended $2,033,760 in R&D activities, an increase of 39% over expenses of $1,460,315 for the same period of 1997. This increase in R&D is attributed to the continued development of our product line which includes IDEAL (Interactive Distance Education and Learning), i-Tone and i-Fax (IP/Telephony product line).

The Company will continue to significantly invest in R&D in order to maintain its leading technology in the marketplace.

Commenting of the results of the third quarter Mr. Izhak Gross the Chairman and CEO of Arel said: "for the third continuous quarter, the Company has managed to increase its revenues and decrease its loss; these results are very much in line with our business plans and future expectations. During this quarter, the Company was awarded a very significant contract to provide the Distance Training Network to Lucent Technologies in the US. According to the initial purchase order with a value of $1.4 million, the Company is currently in the stage of delivery of the first 270 training centers; we expect to expand this Network beyond the initial 270 sites as planned and according to schedule. We believe that the expansion of the Lucent network will positively effect our revenues in the coming quarters."

"ArelNet," added Mr. Gross "our 64% owned subsidiary is continuing its cooperation with Nortel. i-Tone is today part of the Nortel IP Connect portfolio and strategy in the emerging IP Telephony market. We are increasing our R&D expenses in coordination with Nortel in order to play a major role in this market when network deployments commence."

About Arel Communication and Software Ltd.

Arel Communications and Software Ltd., headquartered in Yavne, Israel, designs, develops, integrates and markets software for a family of products in the interactive distance learning market called IDEAL. Arel markets the IDEAL system in Canada and the U.S. through its fully own subsidiary - Arel Communications and Software Inc., based in Atlanta. In addition, through its other subsidiary ArelNet Ltd., Arel designs, develops, markets, produces, integrates and supports a family of IP Telephony products, i-FAX(tm) and i-Tone(tm) as well as software for worldwide families of message-switching wide-area-network systems called ARCOM(tm). ArelNet products are targeted to service providers and carriers based in North America, as well as major telecommunications companies worldwide.

Certain statements made herein that are not historical are forward-looking within the meaning of the Pr ivate 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. -0-

                 AREL COMMUNICATIONS AND SOFTWARE LTD.
                       (An Israeli Corporation)
                 CONDENSED CONSOLIDATED BALANCE SHEETS
                         AT SEPTEMBER 30, 1998

                                        September 30      December 31,
                                       1998       1997        1997
                                         (Unaudited)        (Audited)
                                                  U.S. dollars
                    A s s e t s
CURRENT ASSETS:
      Cash and cash equivalents        2,658,372  1,913,885  2,595,853
      Short term investments           4,578,458  2,622,943  1,335,113
      Accounts receivable:
            Trade                      3,446,151  1,802,908  1,441,229
            Receivables in
respect of issuance of
share capital in a subsidiary                                4,994,995
            Other                        882,250    529,421    526,532
      Inventories                        570,662    107,528    254,660
     T o t a l  current assets        12,135,893  6,976,685 11,148,382

LONG-TERM LOAN TO AN EMPLOYEE,
 net of current maturity                  69,316     72,435     69,905

PLANT AND EQUIPMENT:
 Cost                                  2,309,740  1,946,086  1,941,421
 L e s s - accumulated depreciation    1,086,463    869,689    961,276
                                       1,223,277  1,076,397    980,145
OTHER ASSET, net of
 accumulated amortization                            44,948
                                      13,428,486  8,170,465 12,198,432

Liabilities and shareholders' equity
CURRENT LIABILITIES:
      Short-term bank credit              73,298    128,599    117,698
      Accounts payable and accruals:
            Trade                      1,109,658    266,407    443,012
            Other                      1,266,080    992,186  1,014,090
  T o t a l  current liabilities       2,449,036  1,387,192  1,574,800

LONG-TERM LIABILITIES:
Accrued employee rights
upon retirement, net
of amount funded                         230,680    123,297    121,595
      Other                               10,916

T o t a l  long-term liabilities         241,596    123,297    121,595

T o t a l  liabilities                 2,690,632  1,510,489  1,696,395

MINORITY INTEREST                      2,139,034    211,742  2,335,196

SHAREHOLDERS' EQUITY:
      Share capital                        1,990      1,801      1,801
      Capital surplus                 10,014,533  7,700,912  7,700,912
      Warrant                            292,348    292,348    292,348
      Retained earnings
       (accumulated deficit)          (1,710,051)(1,546,827)   171,780
                                       8,598,820  6,448,234  8,166,841
                                      13,428,486  8,170,465 12,198,432

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


                   AREL COMMUNICATIONS AND SOFTWARE LTD.
                 CONDENSED CONSOLIDATED STATEMENTS OF LOSS
       FOR THE NINE AND THREE MONTH PERIODS ENDED SEPTEMBER 30, 1998

                                                Nine months ended
                                                  September 30
                                                1998        1997
                                                   (Unaudited)
                                                   U.S. Dollars

REVENUES FROM SALES AND SERVICES                5,569,824  2,248,653
COST OF SALES AND SERVICES                      2,970,776  1,192,918
GROSS PROFIT                                    2,599,048  1,055,735
RESEARCH AND DEVELOPMENT COSTS - net            2,033,760  1,460,315
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES    2,765,567  3,022,655
OPERATING LOSS                                 (2,200,279)(3,427,235)
FINANCIAL INCOME - net                            122,286    227,761
GAIN ON DILUTION OF INTEREST IN A SUBSIDIARY
LOSS FROM OPERATIONS OF THE COMPANY AND ITS
      SUBSIDIARIES                             (2,077,993)(3,199,474)
MINORITY INTEREST IN LOSSES OF SUBSIDIARY         196,162    273,601
LOSS FOR THE PERIOD                            (1,881,831)(2,925,873)
LOSS PER SHARE (BASIC AND DILUTED)                  (0.32)     (0.54)

WEIGHTED AVERAGE NUMBER OF SHARES OUTSTANDING   5,677,919  5,400,000

                                    Three moths ended     Year ended
                                       September 30      December 31,
                                     1998       1997         1997
                                      (Unaudited)         (Audited)
                                               U.S. Dollars

REVENUES FROM SALES AND SERVICES     2,564,586  1,207,140  3,125,521

COST OF SALES AND SERVICES           1,250,318    607,232  1,677,658

GROSS PROFIT                         1,314,268    599,908  1,447,863

RESEARCH AND DEVELOPMENT COSTS - net   859,946    442,918  1,875,157

SELLING, GENERAL AND ADMINISTRATIVE    956,873  1,065,273  4,132,787
 EXPENSES

OPERATING LOSS                        (502,551)  (908,283)(4,560,081)

FINANCIAL INCOME - net                  43,563     17,331    207,673

GAIN ON DILUTION OF INTEREST IN                            2,783,132
A SUBSIDIARY

LOSS FROM OPERATIONS OF THE
COMPANY AND ITS
      SUBSIDIARIES                   (458,988)  (890,952) (1,569,276)

MINORITY INTEREST IN LOSSES            13,144     41,733     362,010
 OF SUBSIDIARY

LOSS FOR THE PERIOD                  (445,844)  (849,219) (1,207,266)

LOSS PER SHARE (BASIC AND DILUTED)      (0.06)     (0.16)      (0.22)

WEIGHTED AVERAGE NUMBER OF SHARES   6,083,126  5,400,000   5,400,000
 OUTSTANDING

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