Arel Communications and Software Limited Announces Results of Operations for the Fourth Quarter of 1997 and the Year Ended December 31, 1997.

YAVNE, Israel--(BUSINESS WIRE)--March 16, 1998--Arel Communications and Software Limited (NASDAQ NMS Symbols ARLCF; ARLWF) announced today the results for the fourth quarter of 1997 and the year ended December 31, 1997.

Revenues from sales and services decreased to $3,125,521 in 1997 from $5,001,112 in 1996. Net loss in 1997 was $1,207,266 in comparison to a net loss of $2,054,126 in 1996. This decrease in revenues was the result of a decrease in sales resulting from price erosion of the Company's initial ARCOM Message Handling System and decrease of the market for large general purpose Messaging Systems, as a result of a significant increase of IP/Telephony opportunities - and the appearance of new products such as the Company's new i-Tone(TM) - the single dial tone IP/Telephony Gateway.

Revenues from sales and services for the fourth quarter of 1997 were $876,868 compared to fourth quarter 1996 revenues of $1,236,413. Net income for the last quarter of 1997 was $1,718,607 in comparison to a net loss of $717,465 in the same quarter of 1996.

Income for the last quarter of 1997 (and for the whole year) includes gain on dilution of interest in the Company's ArelNet subsidiary of $2,783,132, as a result of Northern Telecom's investment in that subsidiary.

Selling, general and administrative expenses increased to $4,132,787 in 1997, from $3,674,617 in 1996. This increase is mainly attributed to a provision for doubtful and bad debts amounting to $746,000 compared to $374,000 in 1996.

The Company anticipates that its marketing investments in the Interactive Distance Learning product line will continue to increase in the future, as it penetrates new markets with its new products. In the fourth quarter of 1997, selling, general and administrative expenses were $1,110,132 in comparison to $1,128,294 in the prior period.

Research and Development expenses increased in 1997 to $1,875,157 from $1,655,412 in 1996. In the fourth quarter of 1997, R&D expenses were $414,842 in comparison to $535,408 for the same period in 1996.

Mr. Izhak Gross, the Chairman of Arel said that "during 1997, the Company was pleased to have completed the closing of the $5 million investment by Northern Telecom Ltd. for 20% of the outstanding shares of Arel's subsidiary, ArelNet Limited. We view Nortel not only as a strategic partner, but also as our marketing arm for the Company's IP/Telephony products. We are hopeful that during the coming years, we will, together with Nortel, acquire a significant portion of the IP telephony market which has been estimated by industry analysts as a $500 million market in 1998. This market is projected to grow at a rate of approximately 100% during each of the next 5 years".

The contribution of the Company's IDEAL product line was minimal in 1997, and the majority of the Company's loss relates to investments in this activity. During 1997, the Company installed several IDEAL evaluation systems, the majority of which were installed in North America. The Company is hopeful that firm orders will result from these evaluation installations.

To better serve the Company's IDEAL customers, the Company recently formed a wholly owned Atlanta, Georgia based-subsidiary, Arel Communications and Software Inc.

The Company and ArelNet -- its subsidiary -- began 1998 with a backlog of approximately $3.2 million.

Arel Communications and Software Ltd., through its subsidiary ArelNet, designs, develops, markets, produces, integrates and supports, on a worldwide basis, software for two families of message-switching wide-area network systems called ARCOM and I-FAX. Arcom is rated among the leading products in its field worldwide. I-Fax is a leading solution for IP Telephone, designed for medium to large networks. In addition, Arel designs, develops, integrates and markets software for a family of products in the interactive distance learning market called IDEAL. The IDEAL system is a one-to-many virtual classroom system. It enables a remote instructor to broadcast, control and conduct a fully interactive lesson from one center to a large number of students in remote locations.

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.

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                  AREL COMMUNICATIONS AND SOFTWARE LTD.
                       (An Israeli Corporation)
                      CONSOLIDATED BALANCE SHEETS

                                                   December 31
                                             1997             1996
                                                     U.S.$
             Assets

CURRENT ASSETS
 Cash and cash equivalents                 2,595,853       1,346,933
 Short-term investments                    1,335,113       5,313,319
Accounts receivable
  Trade                                    1,441,229       2,534,198
Receivables in respect of issuance
of share capital in a subsidiary           4,994,995
Other                                        526,532         463,486
Inventories                                  254,660         129,643

      Total current assets                11,148,382       9,787,579

LONG-TERM LOAN TO AN EMPLOYEE, net of
current maturity                              69,905          67,030
                                           ---------     ----------
PLANT AND EQUIPMENT
Cost                                       1,941,421      1,759,237
Less - accumulated depreciation and
amortization                                 961,276        590,643
                                         --------------  -----------
                                             980,145      1,168,594
OTHER ASSET, net of accumulated                             179,792
amortization                            --------------  ------------

                                          12,198,432     11,202,995

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                                              December 31
                                       1997                 1996
                                                 U.S.$

Liabilities and shareholders' equity
CURRENT LIABILITIES
  Short-term bank credit              117,698
Accounts Payable and accruals:
  Trade                               443,012              335,412
Other                               1,014,090              928,576

Total current liabilities           1,574,800            1,263,988

ACCRUED EMPLOYEE RIGHTS UPON
RETIREMENT,net of amount funded       121,595               79,557

COMMITMENTS AND CONTINGENT LIABILITY

   Total labilities                 1,696,395            1,343,545

MINORITY INTEREST                   2,335,196              485,343
                                  --------------- ------------------
                                    4,031,591            1,828,888

SHAREHOLDERS' EQUITY
  Share capital-Ordinary Shares of
NIS 0.001 par value (authorized -
December 31, 1997 and 1996 -
10,000,000 shares; issued and
outstanding-December 31,1997
and 1996-5,400,000 shares)             1,801                 1,801
  Capital surplus                  7,700,912             7,700,912
  Warrant                            292,348               292,348
  Retained Earnings                  171,780             1,379,046
                                 -------------       -------------
    Total shareholdes' equity      8,166,841             9,374,107
                               ----------------       -------------
                                  12,198,432            11,202,995

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                        Arel Communications and Software Ltd.
                                (An Israeli Corporation)
                           Consolidated Statement of Income

                             Year ended          Three months ended
                             December 31            December 31
                          1997        1996        1997       1996
                                  $                      $

REVENUES FROM SALES AND
SERVICES                3,125,521  5,001,112    876,868    1,236,413

COST OF SALES AND
SERVICES                1,677,658  1,918,921    484,740      401,011

GROSS PROFIT            1,447,863  3,082,191    392,128      835,402

RESEARCH AND DEVELOP-
MENT COSTS, NET         1,875,157  1,655,412    414,842      535,408

SELLING, GENERAL AND
ADMINISTRATIVE EXPENSES 4,132,787  3,674,617    1,110,132  1,128,294

OPERATING INCOME(LOSS) (4,660,081)(2,247,838)  (1,132,846)  (828,300)

FINANCIAL INCOME NET      207,673    211,823      (20,038)   137,381

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

INCOME (LOSS) BEFORE
TAXES ON INCOME         (1,569,276) (2,086,015)(1,630,198)  (690,919)

TAXES ON INCOME

MINORITY INTEREST IN
PROFIT OF CONSOLIDATED
SUBSIDIARY               362,010    (18,111)      88,409     (26,546)

NET INCOME (LOSS)    ($1,207,266)($2,054,126) $1,718,607   ($717,465)

EARNINGS (LOSS)PER
SHARE                     ($0.22)    ($0.38)      $0.32      ($0.13)

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

CONTACT: Izhak Gross, 972-8-942-0880

Fax: [phone]