FORM 6-K

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

Report of Foreign Issuer

Pursuant to rule 13a-16 or 15d-16 of the Securities Exchange Act of 1934for the month of ~~June,~~August 2003

AREL COMMUNICATIONS AND SOFTWARE LTD.
(Translation of registrant's name in English)

3 Hayarden Street, Yavne, Israel
(Address of principal executive offices)

Indicate by check mark whether the registrant files or will file annual
reports under cover Form 20-F or Form 40-F.

Form 20-F x

Form 40-F o

Indicate by check mark whether the registrant by furnishing the information
contained in this Form is also thereby furnishing the information to the Commission
pursuant to Rule 12g3-2(b) under the Securities Exchange Act of 1934.

Yes o

No x

This Form 6-K is incorporated by reference into the Registrant's Post-Effective Amendment No. 1 on Form F-3 to Registration Statement on Form F-1 under the Securities Act of 1933, declared effective on September 2, 1999 (Registration No. 333-10684).Contact:

Danny Yelin	Carmen Deville
Chief Financial Officer	Investor Relations
Arel Communications and Software Ltd.	Tel US: 770-396-8105 x 300
dyelin@arelcom.com	Tel Israel: +972-52-781748
	investor@arelcom.com

ARELArel COMMUNICATIONSReports ANDNet SOFTWAREProfit LTD.for Second Quarter of 2003

~~NOTICE~~Represents OFfirst Aquarterly ~~SPECIAL~~profit ~~GENERAL~~since ~~MEETING~~Q2 OFof ~~SHAREHOLDERS~~2000 Revenues increased 10% sequentially and 115% year over year to $2.3M Operating profit of approximately $272K Net profit of $71,000, or $0.01 per share

~~July~~YAVNE, 16Israel – August 14, 2003 – Arel Communications and Software Limited (NASDAQ: ARLC) (Arel), the world’s leading provider of Integrated Video, Voice and Data conferencing and distance training solutions, announced today the results for the second quarter of 2003.

~~Notice~~Second quarter revenues reached is$2,311,000, ~~hereby~~an ~~given~~increase ~~that~~of a10%, ~~Special~~compared ~~General~~to ~~Meeting~~$2,106,000 of revenues in the ~~shareholders~~first quarter of 2003, ~~Arel~~representing ~~Communications and~~the ~~Software~~third ~~Ltd.~~consecutive ~~(the~~quarterly ~~“Company”)~~growth ~~will~~in berevenues. ~~held~~Revenues atfor the ~~Company’s~~ ~~offices~~second atquarter 3of ~~Hayarden~~2003 ~~St.,~~represent ~~Yavne,~~an ~~Israel,~~increase onof ~~July~~116% ~~16,~~compared ~~2003~~to atrevenues ~~11:00~~of ~~(Israel time)~~ $1,071,000 for the ~~following~~ ~~purposes:~~second quarter of 2002.

1Second quarter 2003 net profit was $71,000, or $0.01 Tobasic ~~appoint~~and ~~one~~diluted ~~outside~~per ~~director~~share, compared to ~~the~~a ~~Board~~net loss of ~~Directors~~$262,000, ofor $0.02 ~~the~~basic ~~Company~~and diluted per share for the ~~three~~first ~~year~~quarter ~~period~~of ~~commencing~~2003. ~~from~~The ~~the~~Company ~~date~~reported a net loss of ~~her~~$2,465,000 ~~appointment~~(including amortization of goodwill of $142,000) or $0.19 basic and diluted per share, for the second quarter of 2002.

~~Shareholders of~~Commenting ~~record~~on atArel’s ~~the~~results, Mr. ~~close~~Philippe ofSzwarc, ~~business~~Chief onExecutive ~~June 9~~Officer, ~~2003~~said, ~~will~~“We beare ~~entitled~~proud to ~~notice~~report our first quarterly profit since June 2000. We have created a lean operating structure and have laid the foundation for continued revenue growth. Our progress is evidenced by new customers such as the Texas Department of Health. Visibility has improved, and towe remain confident ~~vote~~in ~~at,~~our ~~the~~ability ~~meeting~~to continue to improve our financial performance.”

~~Shareholders who~~Gross domargins ~~not~~in ~~expect to attend~~ the ~~meeting~~second inquarter of ~~person~~2003 ~~are~~improved ~~requested~~ to ~~mark~~62%, ~~date,~~compared ~~sign~~with ~~and mail~~55% in the ~~enclosed~~first ~~proxy~~quarter asof ~~promptly~~2003 asand ~~possible~~44% in the year ~~enclosed~~earlier ~~stamped~~period, ~~envelope~~due to a particularly favorable product mix.

~~By Order of the Board of Directors, Izhak Gross Chairman of the Board of Directors Arel Communications and Software Ltd.~~ 1

~~June~~Operating 10expenses (including the positive impact of the Chief Scientist participation of $261,000 pertaining to the first six months of 2003) declined 15% sequentially and 61% from the same period a year ago, resulting in operating profit of $272,000 in the second quarter of 2003. The Company has been notified by the Chief Scientist that it has been approved for participation of approximately $520,000 for the entire calendar year of 2003. The relatively large discrepancy between operating profit and net profit is due to a financial loss of $201,000, mainly resulting from a sharp revaluation of the New Israeli Shekel against the U.S. Dollar during the second quarter.

~~PROXY~~Cash ~~STATEMENT~~and cash equivalents at June 30, 2003 totaled $9,245,000 (including short-term investments of $239,000) compared with $10,260,000 (including short-term investments of $129,000) at the end of the first quarter. The change in the cash position versus the previous quarter relates primarily to working capital requirements to support growing revenues.

ARELAbout COMMUNICATIONSArel ANDCommunications SOFTWAREand LTD. 3 Hayarden St. Yavne IsraelSoftware

~~SPECIAL~~Arel ~~GENERAL~~Communications ~~MEETING~~and OFSoftware ~~SHAREHOLDERS~~Ltd (www.arelcom.com) Tooffers beeffective ~~held~~fully onintegrated ~~July~~video, 16voice and data interactive conferencing solutions by optimizing the use of existing network resources available to distributed enterprises. Our integrated networking and software platform is winning us loyalty from major Fortune 500 customers, ~~2003~~using our system for various needs such as video conferencing, collaboration, e-learning, and distance learning applications.

~~INTRODUCTION~~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.

~~This Proxy Statement is being furnished to shareholders of Arel Communications and Software Ltd., an Israeli corporation~~ (~~“Arel”~~Tables ~~or the “Company”), in connection with the solicitation of proxies by the board of directors of Arel (the “Board of Directors”) for use at a Special General Meeting of shareholders~~ to ~~be held on July 16, 2003 and at any adjournment thereof (the “Shareholders Meeting”~~follow)~~. This Proxy Statement and the accompanying form of proxy are being mailed to our shareholders on or about June 10, 2003.~~

~~PURPOSE OF THE SHAREHOLDERS MEETING~~ 2

AtArel Communications ~~the~~and ~~Shareholders~~Software ~~Meeting,~~Ltd. ~~the~~(an ~~shareholders~~Israeli ofCorporation) Condensed ~~Arel~~Consolidated Balance ~~will~~Sheet beat ~~asked~~June to30, ~~consider~~2003 ~~and~~(Unaudited) ~~vote upon the following matter:~~

1. To appoint one outside director to our board of directors for the three year period commencing from the date of her appointment.

	June 30,
	2003			2002			December 31, 2002
	(Unaudited)						(Audited)
	U.S. dollars in thousands
Assets
CURRENT ASSETS:
Cash and cash equivalents		9,006			3,109			10,354
Short-term investments		239			7,772			129
Accounts receivable:
Trade		2,840			3,429			2,455
Other		710			841			488
Inventories		1,118			1,271			1,168

Total current assets		13,913			16,422			14,594

INVESTMENTS AND LONG-TERM RECEIVABLE:
Investment in Arelnet Ltd.		125			404			125
Loans to employees, net of current maturity		31			37			31

		156			441			156

PROPERTY, PLANT AND EQUIPMENT:
Cost		2,166			3,761			2,183
Less - accumulated depreciation		1,625			2,089			1,493

		541			1,672			690

GOODWILL, net of accumulated amortization					4,575

		14,610			23,110			15,440


Liabilities and shareholders' equity
CURRENT LIABILITIES:
Short-term bank credit		52			38			27
Accounts payable:
Trade		770			650			801
Accrued restructuring costs		305						852
Deferred revenues		1,597			774			2,165
Other		3,650			3,242			3,157

Total current liabilities		6,374			4,704			7,002

LONG-TERM LIABILITIES:
Liability for employee rights upon retirement, net of
amount funded		362			304			371
Other		40			29			48

Total long-term liabilities		402			333			419

Total liabilities		6,776			5,037			7,421

SHAREHOLDERS' EQUITY:
Share capital		4			4			4
Capital surplus		52,746			52,740			52,740
Warrants and options		1,395			1,395			1,395
Accumulated deficit		(46,311	)		(36,066	)		(46,120	)

Total shareholders' equity		7,834			18,073			8,019

Total liabilities and shareholders' equity		14,610			23,110			15,440

~~VOTING~~ 3

~~Only holders~~AREL ~~of record of our ordinary shares, nominal value NIS 0.001 per share, at the close~~COMMUNICATIONS ofAND ~~business~~SOFTWARE ~~on June 9, 2003 (the “Meeting Record Date”), are entitled to vote at the Shareholders Meeting~~LTD. ~~As of such date, we had 13,128,466 ordinary shares~~ ~~outstanding~~CONDENSED ~~and entitled to vote on the Meeting Record Date (without taking into account~~CONSOLIDATED ~~options~~STATEMENTS ~~and~~OF ~~warrants~~INCOME ~~to purchase our ordinary shares). Every ordinary share will entitle~~ ~~its~~FOR ~~holder~~THE toSIX ~~one~~AND ~~vote upon each of the matters to be presented at the Shareholders~~THREE ~~Meeting.~~MONTH ~~All~~PERIODS ~~such~~ENDED ~~shares~~JUNE ~~entitled~~30, to2003 vote at the meeting are referred to herein as “Record Shares”. A quorum must be present in order for the Shareholders Meeting to be held. The presence in person or by proxy of at least two shareholders holding Record Shares that are entitled to vote in the aggregate at least 51% of the votes of all holders of Record Shares will constitute a quorum for the transaction of business at the Shareholders Meeting. Our Articles of Association do not permit cumulative voting for the election of directors or for any other purpose.

The proposal to be presented at the Shareholders Meeting requires the affirmative vote of shareholders present in person or by proxy and holding Record Shares amounting in the aggregate to at least: (i) a majority of the votes actually cast with respect to such proposal, including the affirmative vote of at least one third of the votes of shareholders present in person or by proxy at the Shareholders Meeting that are not controlling shareholders of the Company (as such term is defined in the Israel Securities Law, 1968) or (ii) the majority of votes at the Shareholders Meeting on condition that the total of opposing votes from among the non-controlling shareholders does not exceed 1% of all the voting rights in the Company.

	Six months ended June 30,					Three months ended June 30,						Year ended December 31,
	2003		2002			2003			2002			2002
	(Unaudited)					(Unaudited)						(Audited)
	U.S. dollars in thousands, except loss per share
REVENUES FROM SALES AND SERVICES	4,417			3,817			2,311			1,071			5,941
COST OF SALES AND SERVICES	1,817			2,241			868			595			3,604

GROSS PROFIT	2,600			1,576			1,443			476			2,337
RESEARCH AND DEVELOPMENT EXPENSES - net	709			1,199			236			869			2,218
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES	1,842			3,908			935			1,972			6,439
AMORTIZATION OF GOODWILL				283						142			283
IMPAIRMENT OF GOODWILL													4,575
RESTRUCTURING EXPENSES and IMPAIRMENT OF PROPERTY AND EQUIPMENT													2,301

OPERATING INCOME (LOSS)	49			(3,814	)		272			(2,507	)		(13,479	)
FINANCIAL INCOME, (LOSS) - net	(240	)		212			(201	)		42			102
IMPAIRMENT OF INVESTMENT IN ARELNET LTD.													(279	)

INCOME (LOSS) FOR THE PERIOD	(191	)		(3,602	)		71			(2,465	)		(13,656	)

BASIC AND DILUTED INCOME (LOSS) PER SHARE	(0.01	)		(0. 28)			0.01			(0. 19)			(1.06	)

Income (loss) for the period as reported	(191	)		(3,602	)		71			(2,465	)		(13,656	)
Adjustments to reconcile income (loss) for the period to income (loss) excluding
unusual items:
Amortization of goodwill				283						142			283
Impairment of goodwill													4,575
Restructuring expenses													2,301
Impairment of investment in Arelnet Ltd.													279


Income (loss) excluding unusual items:	(191	)		(3,319	)		71			(2,323	)		(6,218	)


Basic and diluted income (loss) per share excluding unusual items:	(0.01	)		(0.26	)		0.01			(0.18	)		(0.48	)


Weighted average number of ordinary shares used in computing loss per share	12,856			12,856			12,856			12,856			12,856
amounts (in thousands):

~~Abstentions~~AREL ~~and~~COMMUNICATIONS ~~broker~~AND ~~non-votes~~SOFTWARE ~~are~~LTD. ~~counted~~ (An asIsraeli ~~shares~~Corporation) CONDENSED ~~present~~CONSOLIDATED ~~for~~STATEMENTS ~~the~~OF ~~determination~~CASH ofFLOWS FOR aTHE ~~quorum.~~SIX AND THREE MONTH PERIODS ENDED JUNE 30, 2003

If within one-half hour from the time established for the commencement of the Shareholders Meeting a quorum is not present, the meeting shall stand adjourned to the same day in the next week, July 23, 2003, at the same time and place or, if the board of directors so decides, to such other day, time and place as shall be determined by the board of directors by notice to the shareholders and if at such adjourned meeting a quorum is not present within one-half hour from the time appointed for holding the meeting, two members present in person or by proxy shall constitute a quorum.

	Six months ended June 30,						Three months ended June 30,						Year ended December 31,
	2003			2002			2003			2002			2002
	(Unaudited)						(Unaudited)						(Audited)
	U.S. $ in thousands
CASH FLOWS FROM OPERATING ACTIVITIES:
Income (loss) for the period		(191	)		(3,602	)		71			(2,465	)		(13,656	)
Adjustments required to reconcile net income (loss)
to net cash used in operating activities:
Depreciation and amortization of property and
Equipment		181			389			85			210			588
Impairment of property and equipment														785
Amortization of goodwill					283						142			283
Impairment of goodwill														4,575
Decline in value of investment in Arelnet Ltd.														279
Employee stock-based compensation		6						6
Allowance for doubtful accounts		(19	)		40			(31	)		40			170
Accrued employee rights upon retirement - net		(9	)		(7	)		(11	)		(6	)		60
Exchange differences on long-term loan		6						5						(2	)
Capital loss on disposal of property and equipment					57						20			36
Loss (gain) on realization and decrease in value of
Marketable securities - net		(14	)		8			(11	)		2			10
Discount on (increase in value of) long-term loan
to an employee before allowance for doubtful accounts		(4	)		2			(3	)		1			3
Changes in operating asset and liability items:
Decrease (increase) in trade receivable before
Allowance for doubtful accounts		(366	)		(90	)		(312	)		(183	)		880
Decrease (increase) in other accounts receivable		(222	)					(361	)					210
Increase (decrease) in accounts payable and
accruals (includung long-term)		(653	)		(858	)		(728	)		(151	)		1,422
Decrease in inventories		50			994			270			73			1,097


Net cash used in operating activities		(1,235	)		(2,784	)		(1,020	)		(2,317	)		(3,260	)


CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of property and equipment		(32	)		(129	)		(25	)		(16	)		(174	)
Proceeds from disposal of property and equipment					55						8			186
Collection of long-term loan to an employee		4			3			2			1			25
Short-term bank deposits - net		(100	)		535			(100	)		(46	)		8,172
Acquisition of marketable securities		(2	)											(4	)
Proceeds from sale of marketable securities		6			25			1						33

Net cash provided by (used in) investing activities		(124	)		489			(122	)		(53	)		8,238

CASH FLOWS FROM FINANCING ACTIVITIES:
Short-term bank credit - net		20			22			23			18			(5	)
Repayment of long-term loan		(9	)					(5	)					(1	)

Net cash provided by (used in) financing activities		11			22			18			18			(6	)

INCREASE (DECREASE) IN CASH AND
CASH EQUIVALENTS		(1,348	)		(2,273	)		(1,124	)		(2,352	)		4,972

BALANCE OF CASH AND CASH EQUIVALENTS AT
BEGINNING OF PERIOD		10,354			5,382			10,130			5,461			5,382

BALANCE OF CASH AND CASH EQUIVALENTS AT
END OF PERIOD		9,006			3,109			9,006			3,109			10,354

~~PROXIES~~ 5

The enclosed proxy is being solicited for use at our Special General Meeting of shareholders to be held on July 16, 2003, or at any adjournment thereof. Proxies are being mailed and/or delivered in person to shareholders on or about June 10, 2003. We will bear the cost of the preparation and mailing of the proxy materials and the solicitation of proxies. Copies of solicitation materials will be furnished to brokerage firms, nominees, fiduciaries and other custodians for forwarding to their principals, and the reasonable fees and expenses of such forwarding agents will be borne by us. Contact:

All Record Shares represented by properly executed proxies received by us at least twenty-four (24) hours prior to the meeting will, unless such proxies have been previously revoked, be voted at the Shareholders Meeting in accordance with the directions on the proxies. A shareholder may vote in favor of the proposal or against the proposal or may abstain from voting on the proposal. Shareholders should specify their choice on the accompanying proxy card. If no direction is indicated on the properly executed proxy, the shares will be voted in favor of the resolution proposed at the Shareholders Meeting. A shareholder returning a proxy may revoke it at any time up to one (1) hour prior to commencement of the meeting by: (i) communicating such revocation in writing to our Chief Financial Officer, or (ii) by executing and delivering a later-dated proxy. In addition, any person who has executed a proxy and is present at the Shareholders Meeting may vote in person instead of by proxy, thereby canceling any proxy previously given, whether or not written revocation of such proxy has been given. Any written notice revoking a proxy should be sent to Arel Communications and Software Ltd., 3 Hayarden Street, Yavne, Israel, 70600, Attention: Chief Financial Officer.

Danny Yelin	Carmen Deville
Chief Financial Officer	Investor Relations
Arel Communications and Software Ltd.	Tel US: 770-396-8105 x 300
dyelin@arelcom.com	Tel Israel: +972-52-781748
	investor@arelcom.com

2AREL ANNOUNCES SETTLEMENT AGREEMENT WITH W2COM

~~PRINCIPAL~~YAVNE, ~~SHAREHOLDERS~~Israel – August 14, 2003 – Arel Communications and Software Limited (NASDAQ: ARLC) (Arel), the world’s leading provider of Integrated Video, Voice and Data conferencing and distance training solutions, announced today that its board of directors has approved a settlement agreement ending the litigation between Arel and the shareholders of W2Com. In 2000, Arel had purchased substantially all the assets and assumed certain liabilities of W2Com. The settlement agreement which was finalized between the parties is subject to the approval of Arel shareholders.

~~The~~As ~~following~~part ~~table~~of ~~sets~~the ~~forth,~~settlement ~~as of~~agreement ~~May~~which 1,provides ~~2003,~~for ~~the~~mutual ~~number~~waivers of ~~our~~all ~~ordinary shares~~claims, ~~owned~~Arel bywill ~~(i) all~~receive ~~shareholders~~$500,000 ~~known~~plus 200,000 byshares ~~the~~of ~~Company~~Arel tocommon ~~own~~stock, ~~more~~which ~~than~~had 5%been ofplaced ~~the~~in ~~ordinary~~escrow ~~shares~~at ~~and (ii)~~ the ~~officers~~time ~~and~~of the asset ~~directors~~purchase asto asecure ~~group~~post closing obligations.

	Ordinary Shares/Options Owned(1)
Name and Address	Number	Percent (see attached Excel)
Izhak Gross3 Hayarden StreetYavne 70600, Israel	992,619(2)	7.48%
Polar Communications Ltd. 21 Ha'arba'a StreetTel Aviv 64739, Israel	2,453,271	18.69%
Clayton L Mathile TTEE 10 Courthouse Pl SWSuite 1100, Dayton OH 45402, USA	1,076,458(3)	8.20%
W2COM, LLC10 Courthouse Pl SW Suite 1100, Dayton OH 45402, USA	1,053,994	8.03%
Mitchell E. Jones10 Courthouse Pl SW Suite 1100, Dayton OH 45402, USA	1,263,150(4)	9.53%
All officers and directors as a group (4 persons)	3,555,688(5)	25.88%

“We are pleased that we have reached this settlement agreement,” said Izhak Gross, Chairman of Arel. “Removing this distraction will free management to concentrate on achieving our business performance goals.”

~~(1)~~ ~~The~~About ~~table~~Arel ~~above~~Communications ~~includes~~and ~~the~~Software Arel ~~number~~Communications ofand ~~shares~~Software ~~underlying options that are~~Ltd ~~exercisable~~(www.arelcom.com) ~~within~~offers 60effective ~~days~~fully ofintegrated ~~May 1~~video, ~~2003.~~voice ~~Ordinary~~and ~~shares~~data ~~subject to these~~interactive ~~options~~conferencing ~~are~~solutions ~~deemed~~by ~~beneficially~~optimizing ~~owned for~~ the ~~purpose~~use of ~~computing~~existing ~~the~~network ~~ownership percentage~~resources ofavailable ~~the person or group holding these options, but are not deemed~~to ~~outstanding~~distributed ~~for purposes of computing the ownership percentage of any other person~~enterprises. ToOur ~~our~~integrated ~~knowledge,~~networking ~~the persons~~ and ~~entities~~software ~~named~~platform inis ~~the~~winning ~~table~~us loyalty ~~have~~from ~~sole voting~~major ~~and~~Fortune ~~dispositive~~500 ~~power~~customers, ~~with~~using ~~respect~~our tosystem ~~all~~for ~~shares~~various ~~shown~~needs such as ~~beneficially~~video ~~owned~~conferencing, bycollaboration, ~~them~~e-learning, ~~except~~and asdistance ~~described~~learning ~~below~~applications.

~~(2)~~ ~~Includes options to purchase 150,000 ordinary shares at an exercise price of $3.16 per share expiring on June~~ 1~~, 2004.~~

~~(3)~~ Certain statements made herein ~~According~~that toare anot ~~Schedule~~historical ~~13D~~are ~~(amended),~~forward-looking ~~dated~~within ~~February~~the 13meaning of the Private Securities Litigation Reform Act of 1995. The words “estimate”, ~~2003~~“project”, “intend”, ~~filed~~“expect”, by“believe”, ~~Clayton~~“hopeful” and Asimilar expressions are intended to identify forward-looking statements. ~~Mathile,~~These forward-looking Mrstatements involve known and unknown risks and uncertainties. ~~Mathile~~Many isfactors could cause the ~~beneficial~~actual ~~owner~~results, performance or achievements of 1the Company to be materially different from any future results,~~981~~ performance or achievements that may be expressed or implied by such forward-looking statements,~~998~~ ~~shares~~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 ~~which~~market heshare and pressure on prices resulting from competition, introduction of ~~has~~competing ~~sole~~products ~~voting~~by other companies, inability to manage growth and ~~dispositive~~expansion, ~~power~~loss ~~over~~of key 1partners,~~705~~ inability to attract and retain qualified personnel,~~276~~ ~~shares~~inability to protect the Company’s proprietary technology and ~~shared~~risks ~~voting~~associated with the Company’s international operations and ~~dispositive~~its ~~power~~location ~~over~~in ~~276~~Israel. For additional information regarding these and other risks and uncertainties associated with the Company’s business,~~722~~ reference ~~shares~~is made to the Company’s reports filed from time to time with the Securities and Exchange Commission.

(4) Includes 120,000 options at an exercise price of $11. According to a Schedule 13G, dated April 7, 2003, filed by Mitchell E. Jones, Mr. Jones is the beneficial owner of 1,816,281 shares of which he has sole voting and dispositive power over 1,539,559 shares and shared voting and dispositive power over 276,722 shares.

(5) Includes 42,619 shares held by Mr. Shimon Klier, one of our directors, 217,300 shares held by Mr. Zvika Klier, one of our officers who is Mr. Shimon Klier’s son and 700,000 shares held by relatives of Mr. Shimon Klier. Also includes options to purchase 610,000 ordinary shares at exercise prices ranging from $0.9 to $8.771 per share.

At the Shareholders Meeting, our shareholders will be asked to vote on the following proposal:

PROPOSAL NO.1

TO APPOINT ONE OUTSIDE DIRECTOR TO THE BOARD OFDIRECTORS OF THE COMPANY FOR THE THREE YEAR PERIOD COMMENCING FROM THE DATE OF HER APPOINTMENT

The Israel Companies Law — 1999 requires Israeli companies with shares that have been offered to the public in or outside of Israel to appoint two outside directors. No person may be appointed as an outside director if the person or the person’s relative, partner, employer or any entity under the person’s control, has or had, on or within the two years preceding the date of the person’s appointment to serve as outside director, any affiliation with the company or any entity controlling, controlled by or under common control with the company. The term “affiliation” includes:

• an employment relationship;

• a business or professional relationship maintained on a regular basis;

• control; and

• service as an office holder.

No person may serve as an outside director if the person’s position or other business activities create, or may create, a conflict of interest with the person’s responsibilities as an outside director or may otherwise interfere with the person’s ability to serve as an outside director.

The initial term of an outside director is three years and may be extended for an additional three-year period. Outside directors may be removed only by the same percentage of shareholders as is required for their election, or by a court, and then only if the outside directors cease to meet the statutory qualifications for their appointment or if they violate their duty of loyalty to the company. In general, each committee of our board of directors must include at least one outside director and all outside directors must be members of the Company’s audit committee.

Currently, Mr. Amos Sapir is serving as one of our two required outside directors. Mr. Sapir has served as an outside director of our company since June 2001. Since 1997, Mr. Sapir has held several positions. He serves as chairman of Maalot (the Israel Securities Rating Company Ltd.), and as a board member of various private and public companies. In addition, Mr. Sapir acts as an economic and business consultant. From 1980 to 1997, he held several management positions at Clal (Israel) Ltd. including President of Clal Capital Markets. Mr. Sapir has a bachelors of arts degree in economics and international relations from the Hebrew University of Jerusalem, a masters in business administration and a PhD from Columbia University, New York.

The Board of Directors of the Company has nominated Ms. Efrat Bronfeld for election as an outside director to serve for a period of three years and until her respective successor is duly elected and shall qualify. Ms. Bronfeld has advised us that she will serve as an outside director if elected.

The following table provides certain relevant information concerning Ms. Bronfeld, including her principal occupation during the past five years:

Nominee	Age	Principal Occupation	Shares beneficially owned on May 1,	Percent of Class
			2003(1)
Efrat Bronfeld	56	Since December 2002, Ms. Bronfeld has been serving as an outside director of the Industrial Development Bank of Israel Ltd. From 1996 until 2002, Ms. Bronfeld served as chief executive officer of Sitahal - Hagal Talia, a subsidiary of Tahal Consulting Engineers Ltd. in charge of the planning, building and operation of a modern landfill in Israel. From 1994-1996, Ms. Bronfeld served as an assistant to the Vice President of business development of Housing and Construction Holding Co. Ltd. Between 1988 and 1993, she served as a chief economist of Koor Industries Ltd. Prior to joining Koor, Ms. Bronfeld served as an executive for Negev Phosphates Ltd. for 8 years. Between 1976 to 1978, she served as an officer in the Israeli Ministry of Finance. Ms. Bronfeld holds a bachelors of arts degree in economics and French and a masters of arts degree in economics, both from the Hebrew University of Jerusalem.	0	0%

(1) For this purpose, “beneficial ownership” means voting or investment power with respect to, or the right to acquire, ordinary shares, at any time within 60 days of May 1, 2003.

Approval of this proposal by the shareholders requires approval by: (i) the majority of votes cast at the Shareholders Meeting, including at least one third of all votes of the non-controlling shareholders who are present in person or by proxy and vote on the proposal, or (ii) the majority of votes cast on the proposal at the Shareholders Meeting, provided that the total votes cast in opposition to the proposal by the non-controlling shareholders does not exceed 1% of all the voting rights in the Company.

Our articles of association specify that, until determined otherwise by a general meeting of the shareholders of the Company, the number of directors will be at least two but not more than eight. Currently, we have eight directors on our board. Assuming the election of the outside director, the shareholders will have determined that the number of directors on our board will be more than eight.

The Board of Directors will present the following resolution at the Meeting:

“RESOLVED, that Ms. Efrat Bronfeld is hereby elected to serve as an outside director of the Company for a three year term and until her respective successor is duly elected and shall qualify.”

Our board of directors recommends a vote FOR approval of the appointment of Ms. Efrat Bronfeld as an outside director.

Shareholders are urged to complete and return their proxies promptly in order to, among other things, insure action by a quorum and to avoid the expense of additional solicitation. If the accompanying proxy is properly executed and returned in time for voting, and a choice is specified, the shares represented thereby will be voted as indicated thereon. If no specification is made, the proxy will be voted in favor of the proposal described in this Proxy Statement.

ADDITIONAL INFORMATION

Foreign Private Issuer. We are subject to the informational requirements of the Securities Exchange Act of 1934, as amended (the “Exchange Act”), as applicable to foreign private issuers. Accordingly, we file reports and other information with the SEC. Shareholders may read and copy any document we file at the SEC’s public reference rooms at 450 Fifth Street, N.W., Washington, D.C. 20549. Shareholders can call the SEC at 1-800-SEC-0330 for further information on using the public reference room. In addition, similar information concerning us can be inspected and copied at the offices of the National Association of Securities Dealers, Inc., 9513 Key West Avenue, Rockville, Maryland 20850 USA. All documents which we will file on the SEC’s EDGAR system will be available for retrieval on the SEC’s website at www.sec.gov.

As a “foreign private issuer”, we are exempt from the rules under the Exchange Act prescribing certain disclosure and procedural requirements for proxy solicitations. Also, our officers, directors and principal shareholders are exempt from the reporting and “short-swing” profit recovery provisions contained in Section 16 of the Exchange Act and the rules thereunder, with respect to their purchases and sales of securities. In addition, we are not required under the Exchange Act to file periodic reports and financial statements with the SEC as frequently or as promptly as United States companies whose securities are registered under the Exchange Act.

ISA Exemption. We have received from the Securities Authority of the State of Israel an exemption from the reporting obligations as specified in Chapter Six of the Israel Securities Law 5728-1968. We must, however, make available for public review at our offices in Israel a copy of each report that is filed in accordance with applicable U.S. law. These documents are available for inspection at our offices at 3 HaYarden Street, Yavne, Israel.

By Order of the Board of Directors, Izhak Gross Chairman of the Board of Directors Arel Communications and Software Ltd. Yavne, Israel June 10, 2003

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