SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 6-K

REPORT OF FOREIGN PRIVATE ISSUER

PURSUANT TO RULE 13a-16 OR 15d-16 OF

THE SECURITIES EXCHANGE ACT OF 1934

For the month of August, 2004

AREL COMMUNICATIONS AND SOFTWARE LTD.

(Translation of Registrant’s name into English)

22 Einstein St., Science Park, Building #22, P.O. Box 4042, Kiryat Weizman, Nes Ziona 74140 Israel (Address of Principal Executive Offices)

Kiryat Weizman, Nes Ziona 74140 Israel

(Address of Principal Executive Offices)

Indicate by check mark whether the registrant files or will file annual reports under cover of 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~~Pursuant ~~report~~to onthe ~~Form~~requirements ~~6-K~~of isthe ~~incorporated~~Securities byExchange ~~reference~~Act ~~into~~of 1934, the ~~Registrant’s~~registrant ~~Post-Effective Amendment~~has ~~No.~~duly 1caused this onreport ~~Form F-3~~ to ~~Registration~~be ~~Statement~~signed on ~~Form~~its ~~F-1~~behalf ~~under~~by the ~~Securities Act of 1933~~undersigned, ~~declared~~thereunto ~~effective~~duly ~~on September 2, 1999 (Registration No~~authorized. ~~333-10684).~~

~~This report~~Arel onCommunications ~~Form~~and ~~6-K~~Software ~~is incorporated by reference into the Registrant’s Post-Effective Amendment No~~Ltd. 1BY: on/S/ ~~Form~~Daniel ~~F-3~~Yelin—————————————— toDaniel ~~Registration~~YelinChief ~~Statement~~Financial ~~on Form F-1 under the Securities Act of 1933, declared effective on June 28, 2000 (Registration No. 333-12076).~~ Officer

~~AREL~~Dated: ~~COMMUNICATIONS~~August ~~AND~~24, ~~SOFTWARE~~2004 ~~LTD.~~

NOTICE OF A SPECIAL GENERAL MEETING OF SHAREHOLDERS






Contacts:
Media Relations:	Investor Relations:
Courtney Chauvin/Sandra Fathi	Jody Burfening/Carolyn Capaccio
Affect Strategies, Inc.	Lippert/Heilshorn & Associates
212-398-9680 x 142	212-838-3777
courtney@affectstrategies.com	ccapaccio@lhai.com

~~September~~Arel Communications ~~13,~~and Software Reports Second Quarter 2004 Results

~~Notice is~~ATLANTA ~~hereby~~– ~~given~~August ~~that~~24, ~~a Special General Meeting (the “Meeting”) of the~~2004 ~~shareholders~~– of Arel Communications and Software ~~Ltd.~~ (~~the~~NASDAQ: ~~“Company”~~ARLC) ~~will~~, betechnology ~~held~~leader atin ~~the~~universal voice, ~~Company’s~~video ~~offices~~and atdata 22web ~~Einstein~~communication ~~Street,~~for ~~Park~~interactive ~~Hamadah,~~conferencing/collaboration ~~Building~~and 22training applications, ~~Kiryat~~reported ~~Weizmann,~~results ~~Nes~~for ~~Ziona,~~the ~~74140,~~second ~~Israel,~~quarter onended ~~September~~June 1330, 2004. ~~at 11:00 (Israel time) for the following purposes:~~

Revenue for the second quarter was $1.8 Tomillion ~~approve~~versus $1.0 million in the first quarter of 2004 and ~~ratify~~$2.3 million in the second ~~terms~~quarter of 2003. Net loss for the ~~compensation~~quarter ~~agreement~~was ~~between~~$(0.98) million, or $(0.07) per share versus net loss of $(1.1) million, or $(0.08) per share, in the ~~Company~~first quarter of 2004 and a Mrnet income of $71,000, or $0.01 ~~George~~per ~~Morris~~share, ~~one~~in the second quarter of 2003. The company recognized $1 million of deferred revenue associated with a long-term multi-million dollar contract for which the ~~Company~~deployment schedule is reaching finalization; the remainder $1.3 million portion of this contract’s ~~directors~~revenue ~~and~~is ~~its~~included ~~chairman~~in deferred revenue. Total deferred revenue in the quarter was $1.87 million.

2.Philippe ToSzwarc, ~~elect~~chief ~~Mr.~~executive officer ~~Amos~~of ~~Sapir~~Arel, asstated, ~~one~~“Second ofquarter ~~the~~results ~~Company~~reflect Arel’s ~~outside~~continued progress ~~directors~~in penetrating the very large market for ancollaborative ~~additional~~rich-media ~~three~~conferencing. We ~~year~~are ~~period~~pleased ~~commencing~~that ~~from~~the implementation plan for our previously-announced contract with a major North American retailer is materializing, allowing us to begin recognizing substantial revenue and showing us some encouraging signs about a much larger scale deployment in the ~~date~~future. ofDuring the ~~Meeting~~quarter, we both won a greater share of existing customers’ IT spending, with two customers extending or adding to existing contracts, and began many pilot tests with potential new customers. Currently, we have approximately ten pilots running, and see signs of strengthening in our overall business pipeline with a higher number of potential new deals for which customer budgets have been approved.

3“Looking into the second half, we remain upbeat about our ability to drive top-line momentum. ToWe ~~approve~~are supporting this potential by building a platform for growth, making selected investments in sales and marketing ~~ratify~~in Europe, the ~~terms~~Far ofEast ~~compensation~~and ofNorth America. We are also preparing to roll out our next-generation Spotlight enterprise software solution, which adds functionality and connection-agnostic usability to the ~~Company~~original version launched in February 2004. We do continue to expect quarterly results to be subject in the near-term to lengthy sales cycles and lumpiness from large contracts, but are focused on achieving continued increasing top-line momentum by quarter as well as profitability by year-end. Arel’s superior, ~~outside~~unique ~~directors~~communications tools solution, its liquid, debt-free balance sheet, and expanding footprint represent competitive advantages that are difficult to duplicate, and position the company well to capture the growth opportunities in today’s changing enterprise work styles.”

~~Shareholders of~~(more) ~~record at the close of business on August 5, 2004, will be entitled to notice of, and to vote at, the Meeting.~~

~~Shareholders~~Revenue for the first six months of ~~who~~2004 dowas ~~not~~$2.8 ~~expect~~million toversus ~~attend~~$4.4 million in the ~~Meeting~~first insix ~~person~~months ~~are~~of ~~requested~~2003. toNet ~~mark,~~loss ~~date~~for the first six months of 2004 was $2 million, ~~sign~~or ~~and mail~~$0.15 ~~the~~per ~~enclosed~~share, ~~proxy~~versus asnet ~~promptly~~loss asof $191,000 ~~possible~~or in$0.01 per share, for the ~~enclosed~~same ~~stamped~~period ~~envelope~~in 2003.

ByConference ~~Order~~Call of Arel’s ~~the~~management ~~Board~~will ofhost ~~Directors,~~a conference ~~August~~call at 9,:00 ~~2004~~a.m. ET 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: 9415953

~~PROXY~~The ~~STATEMENT~~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.

~~AREL~~About ~~COMMUNICATIONS~~Arel Communications ~~AND~~and ~~SOFTWARE~~Software: ~~LTD~~ 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 PlatformTM (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 scaleable, secure, and network-friendly universal conferencing solution is becoming the choice solution 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. www.arelcom.com

22Certain ~~Einstein~~statements Stmade herein that are not historical are forward-looking within the meaning of the Private Securities Litigation Reform Act of 1995. The words “estimate”, ~~Park~~“project”, “intend”, ~~Hamada~~“expect”, ~~Building~~“believe”, 22“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, ~~Kiryat~~performance ~~Weizmann~~or achievements of the Company to be materially different from any future results, ~~Nes~~performance ~~Ziona~~or achievements that may be expressed or implied by such forward-looking statements, ~~74140~~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.

~~SPECIAL~~(tables ~~GENERAL~~to ~~MEETING~~follow) ~~OF SHAREHOLDERS To be held on September 13, 2004~~

~~INTRODUCTION~~All trademarks recognized.

~~This~~AREL COMMUNICATIONS ~~Proxy~~AND ~~Statement~~SOFTWARE ~~is being furnished to shareholders of Arel Communications and Software Ltd~~LTD., ~~an Israeli corporation (“Arel” or the “Company”),~~ ~~in connection with the solicitation of proxies by the board of directors of Arel~~ (~~the “Board~~An ofIsraeli ~~Directors”~~Corporation) ~~for use at a Special General Meeting of~~ ~~shareholders~~CONDENSED ~~to be held on September 13, 2004 and at any adjournment thereof (the~~CONSOLIDATED ~~“Meeting”).~~BALANCE ~~This~~SHEETS ~~Proxy Statement and the accompanying form of proxy are being mailed to our shareholders on or about August 9, 2004.~~

PURPOSE OF THE MEETING

	June 30						December 31,
	2004			2003			2003
	(Unaudited)						(Audited)
	U.S. $ in thousands

A s s e t s
CURRENT ASSETS:
Cash and cash equivalents		3,873			9,006			3,897
Short term investments		2,215			239			4,106
Accounts receivable:
Trade		5,064			2,840			3,098
Other		757			710			614
Inventories		405			1,118			534

T o t a l current assets		12,314			13,913			12,249


INVESTMENT IN AREL NET LTD		125			125			125


PROPERTY, PLANT AND EQUIPMENT:
Cost		1,947			2,166			2,085
L e s s - accumulated depreciation and amortization		1,488			1,625			1,664

		459			541			421

OTHER ASSETS		96			31			683


T o t a l assets		12,994			14,610			13,478

Liabilities and shareholders' equity
CURRENT LIABILITIES:
Current maturities of long-term loan		41			52			52
Accounts payable and accruals:
Trade		390			770			489
Accrued restructuring costs					305			22
Deferred revenues		1,872			1,597			294
Other		3,880			3,650			3,718

T o t a l current liabilities		6,183			6,374			4,575

LONG-TERM LIABILITIES:
Liability for employee rights upon retirement,
net of amounts funded		210			362			391
Long-term loan					40

T o t a l long-term liabilities		210			402			391

T o t a l liabilities		6,393			6,776			4,966

SHAREHOLDERS' EQUITY:
Share capital		4			4			4
Capital surplus		52,875			52,746			52,760
Warrants and options		1,395			1,395			1,395
Accumulated deficit		(47,673	)		(46,311	)		(45,647	)

T o t a l shareholders' equity		6,601			7,834			8,512

T o t a l liabilities and shareholders' equity		12,994			14,610			13,478

AtAREL COMMUNICATIONS ~~the~~AND ~~Meeting,~~SOFTWARE ~~the~~LTD. ~~shareholders~~ (An ofIsraeli ~~Arel~~Corporation) ~~will~~ CONDENSED ~~be asked to consider and vote upon the~~CONSOLIDATED ~~following~~STATEMENTS ~~matters:~~OF OPERATIONS

1. To approve and ratify the terms of the compensation agreement between the Company and Mr. George Morris, one of the Company’s directors and its chairman.

	Three months ended June 30					Six months ended June 30
	2004			2003		2004			2003
	(Unaudited)					(Unaudited)
	U.S. $ in thousands, except earnings (loss) per share

REVENUES:
Sales		1,178			636		1,464			2,212
Services		614			1,675		1,330			2,205

		1,792			2,311		2,794			4,417
COST OF SALES AND SERVICES		946			868		1,404			1,817

GROSS PROFIT		846			1,443		1,390			2,600
RESEARCH AND DEVELOPMENT EXPENSES - net		417			236		1,000			709
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES		1,354			935		2,807			1,842
INCOME FROM SETTLEMENT WITH W2COM							411

OPERATING INCOME (LOSS)		(925	)		272		(2,006	)		49
FINANCIAL EXPENSES - net		55			201		20			240

INCOME (LOSS) FOR THE PERIOD		(980	)		71		(2,026	)		(191	)

BASIC AND DILUTED EARNINGS (LOSS) PER SHARE		(0.07	)		0.01		(0.15	)		(0.01	)

2.AREL ToCOMMUNICATIONS AND ~~elect~~SOFTWARE MrLTD. ~~Amos~~ (An ~~Sapir~~Israeli asCorporation) CONDENSED ~~one~~CONSOLIDATED STATEMENTS ofOF ~~the~~CASH ~~Company’s outside directors for an additional three year period commencing from the date of the Meeting.~~FLOWS

3. To approve and ratify the terms of compensation of the Company’s outside directors.

	Six months ended June 30
	2004			2003
	(Unaudited)


CASH FLOWS FROM OPERATING ACTIVITIES:
Loss for the period		(2,026	)		(191	)
Adjustments required to reconcile net loss to
net cash used in operating activities:
Depreciation and amortization of property and
Equipment		129			181
Employee stock-based compensation					6
Allowance for doubtful accounts		(15	)		(19	)
Accrued employee rights upon retirement - net		(181	)		(9	)
Loss (gain) on realization and decrease in value of
Marketable securities - net		2			(14	)
Other - net		(1	)		2
Changes in operating asset and liability items:
Increase in trade receivable before
Allowance for doubtful accounts		(1,951	)		(366	)
Increase in other accounts receivable		(143	)		(222	)
Increase (decrease) in accounts payable and
accruals		1,619			(653	)
Decrease in inventories		129			50

Net cash used in operating activities		(2,438	)		(1,235	)

CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of property and equipment		(167	)		(32	)
Amounts carried from (to) other assets		82
Collection of long-term loan to an employee		4			4
Short-term bank deposits - net		2,351			(100	)
Acquisition of marketable securities		(15	)		(2	)
Proceeds from sale of marketable securities		53			6

Net cash provided by (used in) investing activities		2,308			(124	)

CASH FLOWS FROM FINANCING ACTIVITIES:
Short-term bank credit - net					20
Repayment of long-term loan		(9	)		(9	)
Issuance of share capital		78
Exercise of options		37

Net cash provided by financing activities		106			11


DECREASE IN CASH AND CASH EQUIVALENTS		(24	)		(1,348	)

BALANCE OF CASH AND CASH EQUIVALENTS AT
BEGINNING OF PERIOD		3,897			10,354

BALANCE OF CASH AND CASH EQUIVALENTS AT
END OF PERIOD		3,873			9,006

VOTING

Only holders of record of our ordinary shares, nominal value NIS 0.001 per share (“Shares”), at the close of business on August 5, 2004 (the “Meeting Record Date”), are entitled to vote at the Meeting. As of the Meeting Record Date, we had 13,236,916 Shares outstanding and entitled to vote (without taking into account options and warrants to purchase Shares). Every Share will entitle its holder to one vote upon each of the matters to be presented at the Meeting. All such Shares entitled to vote at the meeting are referred to herein as “Record Shares”. A quorum must be present in order for the 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 Meeting. Our Articles of Association do not permit cumulative voting for the election of directors or for any other purpose.

Abstentions and broker non-votes are counted as shares present for the determination of a quorum.

If within one-half hour from the time established for the commencement of the Meeting a quorum is not present, the Meeting shall stand adjourned to the same day in the next week, September 20, 2004, at the same time and place, without it being necessary to notify the shareholders, 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. If at such adjourned meeting a quorum is not present within one-half hour from the time appointed for holding the meeting, subject to applicable law, two members present in person or by proxy shall constitute a quorum.

Proposals 1 and 3 to be presented at the Meeting require the affirmative vote of shareholders present in person or by proxy and holding Record Shares amounting in the aggregate to at least a majority of the votes actually cast with respect to each such proposal.

Proposal 2 to be presented at the 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 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 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.

PROXIES

The enclosed proxy is being solicited for use at the Special General Meeting of shareholders to be held on September 13, 2004, or at any adjournment thereof. Proxies are being mailed and/or delivered in person to shareholders on or about August 9, 2004. 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.

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 Meeting in accordance with the directions on the proxies. A shareholder may vote in favor of a proposal or against a proposal or may abstain from voting on a 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 resolutions proposed at the 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 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., 22 Einstein Street, Park Hamada, Building 22, Kiryat Weizmann, Nes Ziona, 74140, Israel, Attention: Chief Financial Officer.

PRINCIPAL SHAREHOLDERS

The following table and notes thereto set forth certain information as of July 26, 2004, concerning the beneficial ownership (as defined in Rule 13d – 3 under the Securities Exchange Act of 1934, as amended) of ordinary shares by: (i) each person or entity who, to our knowledge, beneficially owned more than 5% of our outstanding ordinary shares and (ii) all current directors and officers as a group. The voting rights of our major shareholders do not differ from the voting rights of holders of all of our ordinary shares.

	Ordinary Shares/Options Owned(1)
Name and Address	Number	Percent
Clayton L. Mathile6450 Sand Lake Road, Suite 200, Dayton OH 45414, USA	4,377,390(2)	33.07%
Polar Communications Ltd. 21 Ha'arba'a StreetTel Aviv 64739, Israel	1,842,709	13.92%
All officers and directors as a group (9 persons)	1,230,802	9.3%

(1) The table above includes the number of shares underlying options that are exercisable within 60 days of July 26, 2004. Ordinary shares subject to these options are deemed beneficially owned for the purpose of computing the ownership percentage of the person or group holding these options, but are not deemed outstanding for purposes of computing the ownership percentage of any other person. To our knowledge, the persons and entities named in the table have sole voting and dispositive power with respect to all shares shown as beneficially owned by them.

(2) According to a Schedule 13D/A, dated July 1, 2004, filed by Clayton L. Mathile, Mr. Mathile is the beneficial owner of, and has sole voting and dispositive power over, 4,377,390 Shares.

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

PROPOSAL NO.1

APPROVAL AND RATIFICATION OF AGREEMENT WITH MR. GEORGE MORRIS

On June 30, 2004, Mr. Izhak Gross, announced and tendered his resignation as active chairman and as a director of the Company. Following such resignation, the Board of Directors elected Mr. George Morris as Chairman of the Board Directors.

Mr. Morris began serving as a director of our Company in January 2004. He currently serves as a consultant to a number of companies and serves on the board of directors of a private company. Between May 1996 and April 2000, Mr. Morris held the position of senior vice president and chief financial officer of the Iams Company, a global pet food company that was acquired by Proctor and Gamble in 1999. Between 1993 and 1996, he held various positions with the Borden Corporation, including vice president of strategy, chief financial officer and president of the pasta and sauce business, the latter position which he held for almost 2 years before joining the Iams Company. Between the years 1972 and 1993, Mr. Morris held various senior executive positions with General Foods Corporation. Mr. Morris holds a bachelors degree in business administration in accounting from St. Bonaventure University, a masters of business administration degree from New York University, and has studied in the advanced management program at the Amos Tuck Graduate Business School at Dartmouth College.

Subject to our shareholders’ approval, the Company entered into an agreement with Mr. Morris (the “Agreement”) regarding the provision of services by Mr. Morris as Chairman of the Board of Directors.

The following is a summary of the terms of the Agreement:

— Mr. Morris shall serve as the Chairman of the Board of Directors in a non-employee capacity, subject to his appointment as a director by the Company’s shareholders.

— The term of the Agreement is three years commencing July 1, 2004 with automatic one year renewals, unless written notice is given by either party least six (6) months prior to any extension of the term.

— Mr. Morris shall receive a quarterly retainer fee of $21,250 payable in advance. Such fee shall be adjusted upward to equal twice the fee paid in cash to any other director of Arel, but shall not exceed an annual rate of $100,000.

— The Company shall grant Mr. Morris options to purchase 150,000 Shares at a purchase price of $1.51 per share (which was the closing price of Arel’s shares on the date of the grant). Such options shall vest in three installments of 50,000 shares each on June 30, 2005, 2006 and 2007 respectively, and are subject to the terms and conditions of the option agreement entered into between Arel and Mr. Morris, which provide for accelerated vesting of the options as described below.

— The Company shall reimburse Mr. Morris for all reasonable out-of-pocket expenses incurred in connection with performance of his duties under the Agreement.

— Arel shall amend its Articles of Association to provide for the exemption and indemnification of Mr. Morris in connection with his duties as an officer of the Company, to the fullest extent permitted under Israeli law and to cause Mr. Morris to be included as an insured party under its directors’ and officers’ liability insurance coverage at all times.

— If the Agreement is terminated by (a) Mr. Morris due to: (i) the assignment to Mr. Morris, without his consent, of any duties inconsistent with the duties contemplated by the Agreement; (ii) Mr. Morris’ determination in good faith during the pendency of a Change of Control (as defined in the Agreement), that, due to such Change in Control, he is not able to effectively discharge his duties under the Agreement; or (iii) any material breach by Arel of the Agreement, or (b) following a Change in Control in Arel, in which case the Agreement shall automatically terminate, then the Company shall pay Mr. Morris an amount equal to the aggregate amount of the fees to which he would have been entitled during the remainder of the term of the Agreement, had the Agreement not been terminated and the aforesaid options shall be immediately vest.

— Mr. Morris may also terminate the Agreement if he is not elected as a Director and Chairman of the Board (or is removed from such positions) and Arel may terminate the Agreement on account of Mr. Morris’ Disability or for Cause (as such terms are defined in the Agreement).

— Arel shall reimburse Mr. Morris for all legal fees and expenses reasonably incurred by him in connection with the Agreement as well as legal expenses incurred in contesting or disputing any termination of the Agreement or enforcing any of his rights or benefits thereunder, provided a court finds for Mr. Morris.

The Agreement has been approved by the Company’s audit committee and by the Board of Directors.

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

“RESOLVED, that the entering into, and the terms of, the compensation agreement with Mr. George Morris are hereby approved and ratified.”

Our board of directors recommends a vote FOR approval of the entering into, and the terms of, the compensation agreement with Mr. George Morris.

PROPOSAL NO.2

TO ELECT MR. AMOS SAPIR AS AN OUTSIDE DIRECTOR FOR AN ADDITIONAL THREE YEAR PERIOD COMMENCING FROM THE DATE OF THE MEETING

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 (other than having served as an outside director of 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. Additionally, no person may serve as an outside director in a company if one of the company’s other directors serves as an outside director in another company in which such person serves as a director and no person may serve as an outside director if such person is a member or employee of the Israel Securities Authority, or if such person is a member of the board or an employee of an Israeli stock exchange.

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, Ms. Ephrat Bronfeld is serving as one of our two required outside directors.

The Board of Directors has nominated Mr. Amos Sapir, who was elected as an outside director of the Company in June 2001, for election as an outside director to serve for an additional period of three years and until his respective successor is duly elected and shall qualify. Mr. Sapir has advised us that he will serve as an outside director if elected.

The following table provides certain relevant information concerning Mr. Sapir, including his principal occupation during the past five years:

Nominee	Age	Principal Occupation	Shares beneficially owned on July 26, 2004(1)	Percent of Class
Amos Sapir	65	In June 2001, Mr. Sapir was elected as an outside director of the Company for a three year term. Since 1997, Mr. Sapir has held several positions. He has served as chairman of Maalot the Israel Securities Rating Company Ltd., a board member of various private and public companies, chairman of a kibbutz and an economic and business consultant. From 1980 to 1997, he held several management positions at Clal (Israel) Ltd. Mr. Sapir has a Bachelor 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.	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 July 26, 2004.

Approval of this proposal by the shareholders requires approval by: (i) the majority of votes cast at the 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 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.

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

“RESOLVED, that Mr. Amos Sapir is hereby elected to serve as an outside director of the Company for a three year term and until his respective successor is duly elected and shall qualify.”

The Board of Directors recommends that the shareholders vote FOR the approval of the appointment of Mr. Amos Sapir as an outside director.

PROPOSAL NO.3

TO APPROVE THE TERMS OF COMPENSATIONOF THE COMPANY’S OUTSIDE DIRECTORS

We propose to pay our outside directors an annual fee of NIS 34,122 (approximately US$ 7,545) and a fee of NIS 1,270 (approximately US$ 280) for participation in board and board committee meetings. In accordance with regulations promulgated under the Israel Companies Law (The Israel Companies Regulations (Rules for the Payment of Remuneration and Expenses of Outside Directors) – 2000), the aforementioned terms of compensation are linked to the Israeli consumer price index as set forth therein and require approval of the Company’s shareholders.

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

“RESOLVED, that the terms of the compensation of the Company’s outside directors are hereby approved and ratified.”

Shareholders are urged to complete and return their proxies promptly in order to, among other things, ensure 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 proposals 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.

By Order of the Board of Directors, Nes Ziona, Israel August 9, 2004

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

Arel Communications and Software Ltd. BY: /S/ Daniel Yelin—————————————— Daniel YelinChief Financial Officer

Dated: August 9, 2004

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