<TABLE>
<CAPTION>       <S>                                             <C>


                                                  Securities and Exchange Commission

                                                         Washington, DC 20549
                                                  __________________________________

                                                               Form 10-Q

                                           Quarterly Report pursuant to Section 13 or 15(d)
                                                of the securities exchange act of 1934

For the quarterly period ended September 30, 2000                                   Commission file number: 0-25326

                                                           Ariel Corporation
                                        (exact name of registrant as specified in its charter)

                      Delaware                                             13-3137699
              (State of incorporation)                        (IRS employer identification number)
                                                            2540 Route 130
                                                      Cranbury, New Jersey 08512
                                               (Address of principal executive offices)

                                                             609-860-2900
                                                (Telephone number, including area code)
                                             ____________________________________________

         Indicate by check mark whether the Issuer (1) has filed all reports required to be filed by Section 13 or 15(d) of the
Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file
such reports), and (2) has been subject to such filing requirements for the past 90 days.

                                                           Yes ( X ) No ( )

         State the number of shares outstanding of each of the issuer's classes of common stock, as of the latest practicable date.

Common Stock, $.001 par value                                   13,073,920 shares outstanding
                                                                as of September 30, 2000



                                               Documents Incorporated by Reference: None
</TABLE>

<PAGE>

<TABLE>
<CAPTION> <S>                                              <C>

                                                           Ariel Corporation
                                                                 Index

Part I.  Financial Information

Item 1.  Financial Statements  (Unaudited)

         A.       Consolidated balance sheets as of September 30, 2000 and December 31, 1999
         B.       Consolidated statements of operations for the three and nine months ended September 30, 2000 and 1999
         C.       Consolidated statements of cash flows for the nine months ended September 30, 2000 and 1999
         D.       Notes to consolidated financial statements


Item 2.  Management's Discussion and Analysis of Financial Condition and Results of Operations.


Part II.  Other Information

Item 1.  Legal Proceedings

Item 2.  Changes in Securities

Item 3. Defaults on Senior Securities

Items 4. Submission of Matters to a Vote of Shareholders

Item 5. Other Information

Item 6. Exhibits and Reports on Form 8-K


</TABLE>

<PAGE>

PART I. - FINANCIAL INFORMATION
ITEM 1. - FINANCIAL STATEMENTS


                                                           ARIEL CORPORATION
                                                     CONSOLIDATED BALANCE SHEETS
                                                               (Unaudited)

<TABLE>
<CAPTION>   <S>                                                                             <C>               <C>
                                                                                            September 30,    December 31,
                                                                                                 2000           1999
ASSETS

CURRENT ASSETS:
       CASH AND CASH EQUIVALENTS ........................................................   $  3,915,528    $  7,088,431
       ACCOUNTS RECEIVABLE, NET OF ALLOWANCE FOR DOUBTFUL
             ACCOUNTS OF $332,867 IN 2000 AND $1,019,731 IN 1999 ........................      1,465,669       3,091,362
       OTHER RECEIVABLES ................................................................        242,074         383,676
       INVENTORIES, NET .................................................................      2,890,995       3,303,057
       PREPAID EXPENSES .................................................................        725,623         775,943
                                                                                                 -------         -------
                            TOTAL CURRENT ASSETS ........................................      9,239,889      14,642,469

EQUIPMENT, NET OF ACCUMULATED DEPRECIATION
            AND AMORTIZATION ............................................................      1,269,793       1,387,128

GOODWILL, INTANGIBLE ASSETS AND OTHER, NET ..............................................      1,465,399       3,787,475
                                                                                               ---------       ---------

       TOTAL ASSETS .....................................................................   $ 11,975,081    $ 19,817,072
                                                                                            ============    ============


LIABILITIES & STOCKHOLDERS' EQUITY

CURRENT LIABILITIES:
       ACCOUNTS PAYABLE .................................................................   $    483,342    $  1,190,807
       ACCRUED EXPENSES .................................................................      2,593,004       3,510,566
       CURRENT PORTION OF CAPITAL-LEASE OBLIGATION ......................................        126,438         126,438
       CURRENT PORTION OF LONG-TERM DEBT ................................................        541,406       1,895,926
       ROYALTIES PAYABLE ................................................................         91,210          91,210
                                                                                                  ------          ------
                            TOTAL CURRENT LIABILITIES ...................................      3,835,400       6,814,947


CAPITAL LEASE OBLIGATION, NET OF CURRENT PORTION ........................................        133,303         215,901
LONG-TERM DEBT ..........................................................................      1,400,666       1,788,985


STOCKHOLDERS' EQUITY
       PREFERRED STOCK, $.001 PAR VALUE:
                AUTHORIZED - 2,000,000 SHARES
                          ISSUED AND OUTSTANDING - NONE

       COMMON STOCK, $.001 PAR VALUE:
                AUTHORIZED - 20,000,000 SHARES
                          ISSUED AND OUTSTANDING - 13,073,920 AT SEPTEMBER 30, 2000
                                 AND 10,832,597 AT DECEMBER 31, 1999 ....................         13,074          10,833

       ADDITIONAL PAID-IN CAPITAL .......................................................     46,436,667      37,627,809
       UNREALIZED LOSS ON FOREIGN CURRENCY TRANSLATION ..................................       (963,309)       (503,711)
       ACCUMULATED DEFICIT ..............................................................    (38,880,720)    (26,137,692)
                                                                                             -----------     -----------
                            TOTAL STOCKHOLDERS' EQUITY ..................................      6,605,712      10,997,239

       TOTAL LIABILITIES & STOCKHOLDERS' EQUITY .........................................   $ 11,975,081    $ 19,817,072
                                                                                              ==========      ==========




                                The accompanying notes are an integral part of the financial statements.

</TABLE>

<PAGE>

<TABLE>
<CAPTION>   <S>                                                      <C>            <C>              <C>            <C>

                                                        ARIEL CORPORATION
                                              CONSOLIDATED STATEMENTS OF OPERATIONS
                                                           (Unaudited)

                                                               Three Months Ended September 30,   Nine Months Ended September 30,
                                                                        2000            1999            2000            1999
                                                                     ------------    ------------    ------------    ------------

SALES ..............................................................$  2,180,597    $  2,869,593    $  5,350,029    $  8,694,254

COST OF GOODS SOLD ................................................... 1,253,346       1,133,081       3,143,102       3,654,950
                                                                     ------------    ------------    ------------    ------------
       GROSS PROFIT ..................................................   927,251       1,736,512       2,206,927       5,039,304

EXPENSES:
     SALES AND MARKETING ............................................. 1,318,727       1,102,758       4,187,263       4,258,553
     GENERAL AND ADMINISTRATIVE ...................................... 1,482,279       1,723,805       4,476,833       5,370,956
     RESEARCH AND DEVELOPMENT ........................................ 1,307,543       1,425,861       3,976,823       4,230,325
     RESTRUCTURING AND SPECIAL CHARGES ...............................         0         369,528       2,356,656         369,528
                                                                     ------------    ------------    ------------    ------------
         TOTAL OPERATING EXPENSES .................................... 4,108,549       4,621,952      14,997,575      14,229,362
                                                                     ------------    ------------    ------------    ------------
       LOSS FROM OPERATIONS ..........................................(3,181,298)     (2,885,440)    (12,790,648)     (9,190,058)

INTEREST INCOME ......................................................   100,952          85,384         341,107         378,734

INTEREST EXPENSE .....................................................   (65,546)       (119,899)       (313,195)       (411,950)

OTHER INCOME, NET ....................................................     1,404         (64,038)         19,708         (35,463)
                                                                     ------------    ------------    ------------    ------------
      LOSS BEFORE INCOME TAXES .......................................(3,144,488)     (2,983,993)    (12,743,028)     (9,258,737)

      PROVISION FOR INCOME TAXES .....................................         0               0               0               0
                                                                     ------------    ------------    ------------    ------------
      NET LOSS .....................................................($ 3,144,488)   ($ 2,983,993)   ($12,743,028)   ($ 9,258,737)
                                                                     ------------    ------------    ------------    ------------


OTHER COMPREHENSIVE  INCOME /(LOSS), NET OF TAX:
      FOREIGN CURRENCY TRANSLATION ADJUSTMENTS ....................      (19,450)         81,807        (303,335)       (213,346)
                                                                     ------------    ------------    ------------    ------------
      COMPREHENSIVE LOSS .......................................... ($ 3,163,938)   ($ 2,902,186)   ($13,046,363)   ($ 9,472,083)
                                                                    =============    ============    ============    ============

      BASIC  LOSS  PER SHARE ....................................    $     (0.24)    $     (0.31)          (1.01)    $     (0.95)
                                                                     ============    ============    ============    ============

      DILUTED  LOSS  PER SHARE ..................................    $     (0.24)    $     (0.31)          (1.01)    $     (0.95)
                                                                     ============    ============    ============    ============


       BASIC WEIGHTED AVERAGE NUMBER OF
                COMMON SHARES OUTSTANDING .......................     13,073,920       9,760,150      12,610,958       9,760,150
                                                                      ==========       =========      ==========       =========

       EFFECT OF DILUTIVE OPTIONS ...............................              0               0               0               0

       DILUTED WEIGHTED AVERAGE NUMBER OF
                COMMON SHARES OUTSTANDING .......................     13,073,920       9,760,150      12,610,958       9,760,150
                                                                      ==========       =========      ==========       =========


                                   The accompanying notes are an integral part of the financial statements.

</TABLE>
<PAGE>


<PAGE>

<TABLE>

                                                                 ARIEL CORPORATION
                                                        CONSOLIDATED STATEMENTS OF CASH FLOWS
                                                                     (Unaudited)


<CAPTION>       <S>                                                                                <C>              <C>
                                                                                             For The Nine Months Ended September 30,

                                                                                                        2000            1999
                                                                                                     ============    ============
Cash flows from operating activities:
Net Loss ........................................................................................   ($12,743,028)   ($ 6,274,744)
Adjustments to reconcile net loss to net cash used in
     operating activities:
       Depreciation and amortization ............................................................        695,812         458,780
       Amortization of goodwill & intangibles ...................................................        515,465         515,930
       Amortization of debt issuance costs ......................................................        209,239          32,181
       (Recovery) /Provision for doubtful accounts ..............................................        (53,002)        270,093
       Provision / (Recovery) for inventory obsolescence ........................................        737,391         (65,321)
       Non-Cash compensation expense ............................................................         89,817               0
       Non-Cash restructuring and special charges ...............................................      2,050,511               0
(Increase) decrease in assets:
       Accounts receivable ......................................................................      1,669,135         961,142
       Other receivables ........................................................................       (170,599)        261,030
       Inventories ..............................................................................       (334,077)        810,959
       Other assets .............................................................................        (56,664)       (117,030)
Increase (decrease) in liabilities:
       Accounts payable and accrued expenses ....................................................     (1,381,825)     (2,820,300)
       Royalties payable, related parites .......................................................              0         (53,389)
                                                                                                     ------------    ------------
             Net cash used in operating activities ..............................................     (8,771,824)     (6,020,669)
                                                                                                     ------------    ------------

Cash flows from investing activities:
       Purchase of equipment ....................................................................       (588,007)       (349,366)
                                                                                                     ------------    ------------
             Net cash used in investing activities ..............................................       (588,007)       (349,366)
                                                                                                     ------------    ------------

Cash flows from financing activities:
       Principal payments on capital lease obligation ...........................................        (82,598)              0
       Principal payments on term-note ..........................................................       (376,917)       (575,888)
       Principal payments on revolving credit ...................................................     (1,353,108)              0
       Proceeds from exercise of common stock options and warrants ..............................      8,067,217               0
                                                                                                     ------------    ------------
              Net cash provided by (used in) financing activities ...............................      6,254,594        (575,888)
                                                                                                     ------------    ------------


Effect of exchange rate changes on cash .........................................................        (67,666)        (24,085)

Net decrease in cash ............................................................................     (3,172,903)     (6,970,008)

       Cash and cash equivalents, beginning of year .............................................      7,088,431      17,996,575

                                                                                                     ------------    ------------
Cash and cash equivalents, end of period ........................................................   $  3,915,528    $ 11,026,567
                                                                                                     ============    ============


                          The accompanying notes are an integral part of the financial statements.


</TABLE>

<PAGE>

                                                    Ariel Corporation
                                             Notes to Financial Statements
                                                      (Unaudited)

1.       Basis of Presentation

     The financial statements included herein have been prepared by the Company,
pursuant to the Rules and Regulations of the Securities and Exchange Commission.
Certain  information  and footnote  disclosures  normally  included in financial
statements prepared in accordance with generally accepted accounting  principles
have been  condensed  or omitted  pursuant  to such rules and  regulations.  The
Company believes,  however,  that the disclosure contained herein is adequate to
make the information  presented not misleading.  The financial statements should
be read in conjunction with the financial  statements and notes thereto included
in the Company's Form 10-K for the year ended December 31, 1999.

     In the opinion of the management of the Company, the accompanying unaudited
financial  statements  contain all  adjustments,  consisting of normal recurring
accruals,  necessary to present fairly the financial  position of the Company as
of  September  30,  2000 and the  results of  operations  for the three and nine
months ended  September 30, 2000 and 1999.  The results for interim  periods are
not necessarily indicative of results for the full year.


Liquitity and future funding needs
----------------------------------
     As of September 30, 2000,  the Company had working  capital of  $5,402,641,
including cash and cash equivalents of $3,915,528.  The Company's use of working
capital may be negatively impacted by its ability to convert current inventories
and accounts  receivable  into cash.  Inventories net of reserves for excess and
obsolete  material were  $2,890,995  as of September  30, 2000.  The Company has
incurred  substantial  operating  losses  and  has  an  accumulated  deficit  of
$38,882,567  as of September 30, 2000. It expects to continue to incur costs and
expenses in excess of expected  revenues as it continues to execute its business
strategy  in  the  Internet  Service  Provider  (ISP)  and  Original   Equipment
Manufacturer  (OEM) markets.  If the Company does not  successfully  execute its
business  strategy in the ISP and OEM markets,  there is no  assurance  that the
Company will generate  sufficient cash flow from operations to meet  anticipated
operating  needs and  liquidate  liabilities  as they come due.  Based  upon the
Company's current backlog and projections, the Company will have sufficient cash
and  cash  equivalents  to meet its  operating  needs  through  the end of 2000.
However,  without an increase in revenue or a reduction  of costs,  based on its
current cash utilization, the Company will exhaust its cash in the first quarter
of 2001.  Therefore,  the Company will be required to implement a cost reduction
plan or raise  additional  funds in the first quarter of 2001.  The Company will
delay or  eliminate  some  expenditures  and  planned  operations  in both North
America  and  Europe  will be  scaled  back or the  Company  will  need to raise
additional funds to meet obligations. It will seek to raise such amounts through
a variety of options  including  borrowings  and  proceeds  from  future  equity
financing.  Additional  funding  may not be  available  when  needed or on terms
acceptable  to the Company,  which could have a material  adverse  effect on its
business,   financial  condition,  and  results  of  operations.  The  financial
statements do not include any adjustments  that might result from the outcome of
these uncertainties.


2. Recent Pronouncements

     In June 1998, the Financial  Accounting  Standards Board (FASB) issued SFAS
No. 133,  "Accounting for Derivative  Instruments and Hedging  Activities." This
statement requires that all derivatives be measured at fair value and recognized
as either assets or liabilities on our balance sheet. Changes in the fair values
of derivative instruments will be recognized in either earnings or comprehensive
income, depending on the designated use and effectiveness of the instruments.

     In June  2000,  the FASB  issued  SFAS No.  138,  "Accounting  for  Certain
Derivative  Instruments and Certain Hedging  Activities," which amended SFAS No.
133. The amendments in SFAS No. 138 address  certain  implementation  issues and
relate to such matters as the normal purchases and normal sales  exception,  the
definition      of     interest      rate     risk,      hedging      recognized
foreign-currency-denominated    assets   and   liabilities,   and   intercompany
derivatives.  The Company must adopt SFAS No. 133 no later than January 1, 2001,
however,  the Company does not believe that such  adoption  will have a material
effect on its consolidated results of operations and financial position.

     In December 1999, the Securities and Exchange  Commission  (``SEC'') issued
Staff Accounting Bulletin No. 101(``SAB 101''), Revenue Recognition in Financial
Statements.  SAB 101 provides guidance on applying generally accepted accounting
principles to revenue recognition issues in financial statements.  In June 2000,
the  SEC  issued  Staff  Accounting  Bulletin  No. 101B  (``SAB 101B''),  Second
Amendment:  Revenue  Recognition in Financial  Statements.  SAB 101B  delays the
implementation  date of SAB 101 for  registrants  with  fiscal  years that begin
between December 16,  1999 and March 15, 2000. The Company will adopt SAB 101 as
required in the fourth quarter of 2000; however, the Company does not believe it
will have a material effect on the Company's historical results of operations or
financial position.



3.       Restructuring and special charges

     In June 2000,  the  Company  recorded  restructuring  and other  charges of
$2,356,656.  $1,546,141 reflects the partial impairment of the carrying value of
goodwill  recorded  with the  Company's  November  1998  purchase  of SCii.  The
write-down of goodwill  resulted from the Company's  June 2000 decision to phase
out SCii's  low-end basic rate ISDN (BRI)  products and to dismiss  certain SCii
employees related to these products and technologies.  The decision was based on
reduced sales of BRI products due to the loss of major customers and advances in
competing  technologies.  Accordingly,  future  BRI  sales  forecasts  have been
reduced.  As a result,  the Company has recognized the impairment of goodwill to
the extent that undiscounted future cash flows from operating  activities do not
exceed the carrying value of the goodwill.

     The Company utilizes an undiscounted cash flows valuation method to measure
the carrying value of goodwill not identified with long lived assets.
     In addition,  effective May 31, 2000 the Company  terminated the employment
of Jay Atlas,  its president  and Chief  Executive  Officer,  and entered into a
termination  and separation  agreement with Mr. Atlas. As a result of Mr. Atlas'
termination agreement, the Company recorded a charge of $810,515, which reflects
severance and related  employee  benefits  payments of $306,145 and an estimated
value of $504,370  for the  extension of stock  options  that vested  during Mr.
Atlas'  employment.  As of September 30, 2000,  $84,616 of the accrued severance
has been paid.

<TABLE>
<CAPTION>                                   <S>                         <C>                   <C>

4.       Inventories, net of allowance:
         Inventories, net of allowance, consists of the following:
                                                                        September 30,        December 31,
                                                                            2000                  1999
                                                                            ----                  ----

         Component Materials.............................................  $  488,422          $ 371,821
         Work-in process.................................................     757,532            814,923
         Finished Goods..................................................   1,645,041          2,116,313
                                                                            ---------          ---------
                                                                           $2,890,995         $3,303,057
                                                                           ==========         ==========

</TABLE>

<PAGE>

5.       Debt

     As of  September  30,  2000  the  Company  had  total  debt  of  $1,942,072
consisting  of a term note due to  Transamerica  Business  Credit  Corporation's
Technology Finance Division of Farmington Connecticut of $1,920,929 and acquired
foreign debt of $21,143.

     As of September  30, 2000,  under its credit  facility  with  Transamerica,
outstanding  debt of  $1,920,929  remained on a Term Loan  payable  quarterly in
arrears over twenty  consecutive  quarters  commencing  October 1, 1997. Amounts
previously drawn against a revolving credit line (Revolver), matured on June 12,
2000,  and have been paid in full.  The interest rate in effect on the term loan
at September 30, 2000 was 12.099%.

     The  Transamerica  credit  agreement  includes  a material  adverse  effect
clause,  whereby Transamerica can accelerate the due date of the loan if certain
changes in conditions  (financial  or  otherwise)  are deemed to have a material
adverse effect on the Company's ability to meet its obligations.

6.       Segment Data

     Segments  are  comprised  of European and North  American  operations.  The
accounting  policies  of the  segments  are the same as those  described  in the
"Summary of  Significant  Accounting  Policies" in Note 1 of the Company's  Form
10K. Segment profit includes  operating  expenses  directly  attributable to the
segment including administrative,  selling, marketing,  research and development
costs and taxes.  Certain expenses  managed outside the reportable  segments are
excluded.  Costs  excluded from segment  profit  include  charges for in-process
technology and costs related to mergers and  acquisitions.  The Company does not
include  intercompany   transfers  between  segments  for  management  reporting
purposes.

<PAGE>

<TABLE>
<CAPTION>       <S>                                                         <C>                        <C>
     Summary information by segment as of and for the three and nine months ended September  30:

NORTH AMERICA:                                                          For the three months ended   For the nine months ended
                                                                             September 30, 2000          September 30, 2000

         Revenues from external customers ...................................   $  2,085,067                 $  5,040,149
         Intersegment revenues ..............................................          8,202                       49,562
         Segment profit / (loss) ............................................     (2,768,767)                  (9,685,888)
         Segment assets .....................................................   $ 10,694,842                 $ 10,694,842


EUROPE:

         Revenues from external customers ...................................   $     95,530                 $    309,880
         Intersegment revenues ..............................................              0                            0
         Segment profit / (loss).............................................       (382,354)                  (3,051,243)
         Segment assets .....................................................   $  1,280,240                 $  1,280,240



         A  reconciliation  of the Company's  segment losses to the  corresponding  consolidated  amounts for the three and nine
 months ended September 30, 2000 is as follows:

        Segment profit / (loss) ............................................      ($3,151,121)               ($12,737,131)
        Profit/(loss)  on intersegment revenues ............................            6,633                      (5,897)
                                                                                        -----                      ------
        Net loss .............................................................   ($ 3,144,488)               ($12,743,028)
                                                                                  ============                ============
</TABLE>

<PAGE>
7. Stock Purchase Agreement

     On February 24, 2000 the Company entered into an agreement with a number of
investors to sell  2,151,000  shares of our common stock at a purchase  price of
$4.00  per share in a private  placement.  The  Company  also  issued  2,151,000
warrants to purchase common stock with an exercise price of $6.875. The warrants
are exercisable as of September 1, 2000. The exercise price of the warrants will
be reset to the average market price for the five trading days preceding the one
year anniversary  date of the agreement  provided the average price is less than
$6.875.  Under the terms of the  agreement,  the  Company  filed a  registration
statement on April 4, 2000 to register the shares sold and those  underlying the
warrants. That registration statement was declared effective on April 20, 2000.


     The agreement  also calls for the issuance of additional  shares at no cost
to these  investors  should  we sell  shares  of  common  stock,  or  securities
convertible  into  common  stock,  at a price less than  $4.00 per share  within
twenty four months of the  agreement.  This  provision  requires  the Company to
issue additional  shares such that the average share price of these investors is
equal to the then offered price. Additionally, these investors have the right of
first refusal to participate in any offer to sell the Company's common stock, or
securities  convertible into common stock,  within the next  twenty-four  months
under the terms then offered.


<PAGE>

ITEM 2.  MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
         AND RESULTS OF OPERATIONS.

COMPARISON OF RESULTS OF OPERATIONS
     The following table sets forth, for the periods  indicated,  the percentage
relationship  that certain items of the Company's  results of operations bear to
total sales.

<TABLE>
<CAPTION>  <S>                                                           <C>             <C>

                                                                           Nine months ended
                                                                             September 30,

                                                                            2000     1999
                                                                            ----     ----
Sales ...................................................................    100      100

Cost of goods sold ......................................................     59       42
                                                                            ----     ----
     Gross profit .......................................................     41       58

Expenses
     Sales and marketing ................................................     78       49
     General and administrative .........................................     84       62
     Research and development ...........................................     74       49
     Restructuring and other charges ....................................     44        4
                                                                            ----     ----
     Total Operating Expenses ...........................................    280      164

Loss from operations ....................................................   (239)    (106)

Interest Income .........................................................      6        4

Interest Expense ........................................................     (6)      (4)

Other (expense) Income ..................................................      *        *
                                                                            ----     ----
    Loss before income taxes ............................................   (239)    (107)
    Income taxes ........................................................      -        -
                                                                            ----     ----

                 Net Loss ...............................................   (239)%   (107)%
                                                                             ====     ====
o  Total is less than 1%

</TABLE>

<PAGE>

Three months ended September 30, 2000 as Compared to three months
ended September 30, 1999

Net Sales

     Worldwide  sales were  $2,180,597 for the three months ended  September 30,
2000, a decrease of $688,996  compared to net sales of $2,869,593  for the three
months ended  September 30, 1999.  Domestic sales were  $2,035,550 for the three
months ended  September  30, 2000  compared to  $2,776,644  for the three months
ended  September 30, 1999. In 1998 the Company began a shift from digital signal
processing  (DSP) to products and markets for dial-up  remote  access  equipment
(RAS).   Initially  the  Company   pursued  the  RAS  market  through  sales  to
manufacturers  that focused  primarily  on selling  remote  access  equipment to
business  enterprises.  During 1999 the Company  shifted its sales and marketing
efforts to focus mostly on Internet service  providers (ISPs) who account for an
increasing  amount of RAS equipment  purchases.  The domestic  sales decrease of
$741,094 was due to reduced  demand for the  Company's  older DSP products  from
original  equipment   manufacturers  (OEMs)  resulting  from  this  shift.  Such
decreases  were  partially  offset by sales of the  Company's  RAS and  BypaSS7
products to ISPs.  International  sales were  $145,047 for the third  quarter of
2000  including  U.S.  exports of $49,517 and sales from European  operations of
$95,530. This as compared to $92,949 for the third quarter of 1999. The increase
of $52,098 over prior year  reflects an increase of US exports of RAS  products,
offset by a decrease in sales of BRI products at international subsidiaries.


Gross Profit

     Gross  profit  decreased by $809,261 to $927,251 for the three months ended
September  30, 2000 from  $1,736,512  for the three months ended  September  30,
1999.  Gross profit was reduced by $395,000 for  additional  inventory  reserves
recorded  during the period.  The Company  introduced  the RS4200 in the fall of
1999 which has  improved  price and  performance  over the RS2000.  As a result,
on-hand   quantities  of  the  RS2000,   are  in  excess  of  expected   demand,
consequently,  the Company  reduced the carrying value of this product by taking
an additional  inventory  write-down of $395,000 in the three month period ended
September  30,  2000.   The   remaining   value  of  RS2000's  in  inventory  is
approximately  $350,000 at  September  30, 2000.  The Company  will  continue to
review  expected demand and adjust the carrying value of inventory as necessary.
Gross  profit  percent for the three  months  ended  September  30, 2000 was 61%
before giving effect to this write down. This percentage includes  approximately
$287,000  of  revenue  for  products  which had been  previously  written  down,
resulting in higher gross margins rates.



Sales and marketing

     Sales and  marketing  expenses were  $1,318,727  for the three months ended
September 30, 2000 compared to $1,102,758  for the three months ended  September
30, 1999.  The increase of $215,969 is due to increases in public  relations and
investor   relations  of  approximately   $132,000  and  increased  salaries  of
approximately  $78,000 related to the addition of a new VP of sales, as well as,
the addition of three new sales representatives. Additionally, expenses incurred
for consulting services added approximately  $69,000 to the overall increase for
the period.  Such increases were offset by reduced  participation in trade shows
during the third quarter of 2000 versus the same period last year.

General and administrative

     General and  administrative  expenses were  $1,482,279 for the three months
ended  September  30, 2000  compared to  $1,723,805  for the three  months ended
September  30,  1999.   The  decrease  of  $241,526   reflects  a  reduction  in
amortization  expense  of  approximately  $200,000  for the three  months  ended
September  30, 2000 as  compared  to the same period last year . Such  decreases
were due to the June 30, 2000  write-down  of goodwill  related to the Company's
French subsidiary. Additionally, cost incurred for recruiting were approximately
$100,000  less for the three  months  ended  September  30, 2000 versus the same
period last year.  The Company  further  reduced  costs  related to its European
operations,  which contributed approximately $210,000 to the overall decrease in
general and  administrative  expenses.  Such decreases were partially  offset by
increases in expenses of  approximately  $140,000 for legal and accounting  fees
and other outside professionals, as well as, an increase in compensation expense
of approximately $105,000 related to the appointment of a new President and CEO.

Research and Development

     Research and  development  expenses  were  $1,307,543  for the three months
ended  September  30, 2000  compared to  $1,425,861  for the three  months ended
September 30, 1999. The decrease of $118,318 is comprised primarily of decreases
in salaries and related  expenses of  $241,284.  Such  decreases  were offset by
increases in contract  labor and material  costs of  approximately  $102,152 for
engineers related to the development of Linux related software and the Company's
SS7  Gateway  enabled  remote  access   products.   Variances  in  research  and
development  labor  costs  reflect  a trend in the  engineering  job  market  of
acquiring engineering resources through independent contractors rather than full
time employees.

     For the foregoing reasons the Company incurred a net loss of $3,144,488 for
the three months ended  September  30, 2000 as compared to losses of  $2,983,993
for the three months ended September 30, 1999.

<PAGE>

Nine months ended September 30, 2000 as Compared to Nine months
ended September 30, 1999

Net Sales

     Worldwide  sales were  $5,350,029  for the Nine months ended  September 30,
2000, a decrease of $3,344,225  compared to net sales of $8,694,254 for the nine
months ended  September 30, 1999.  Domestic  sales were  $4,614,244 for the nine
months ended September 30, 2000 compared to $7,826,462 for the nine months ended
September  30,  1999.  In 1998 the  Company  began a shift from  digital  signal
processing  (DSP) to products and markets for dial-up  remote  access  equipment
(RAS).   Initially   the  Company   pursued  the  RAS  market  though  sales  to
manufacturers  that focused  primarily  on selling  remote  access  equipment to
business  enterprises.  During 1999 the Company  shifted its sales and marketing
efforts to focus mostly on Internet service  providers (ISPs) who account for an
increasing  amount of RAS equipment  purchases.  The domestic  sales decrease of
$3,212,218  was due to  reduced  demand  for the  Company's  DSP  products  from
original  equipment   manufacturers  (OEMs)  resulting  from  this  shift.  Such
decreases were partially  offset by sales of the Company's RAS products to ISPs.
International  sales were $735,785 for the nine months ended  September 30, 2000
including  U.S.  exports of  $425,905  and sales  from  European  operations  of
$309,880. This as compared to $340,981 for the same period of 1999. The increase
of $394,804 over prior year reflects and increase of US exports of RAS products,
offset by a decrease in sales of BRI products at international subsidiaries.

Gross Profit

     Gross profit  decreased by  $2,832,377  to  $2,206,927  for the nine months
ended September 30, 2000 from $5,039,304 for the nine months ended September 30,
1999.  Gross profit was reduced by $943,548 for  additional  inventory  reserves
recorded  during the period.  The Company  introduced  the RS4200 in the fall of
1999, which has improved price and performance over the RS2000. The RS4200 began
shipping in March of 2000. As a result,  on hand quantities of the RS2000 are in
excess of future  demand and  reserves  to write off  approximately  $720,000 of
excess  RS2000  inventory  have been  recorded  through  the nine  months  ended
September  30,  2000.   The   remaining   value  of  RS2000's  in  inventory  is
approximately  $350,000 at  September  30, 2000.  The Company  will  continue to
review  expected demand and adjust the carrying value of inventory as necessary.
Additionally,  certain older DSP products are expected to be in excess of future
demand and a reserve of  $223,000  was  recorded  during the nine  months  ended
September 30, 2000 to write-off  excess  material.  Gross profit percent for the
nine months ended September 30, 2000 was 59% before giving effect to these write
downs.  The decrease in gross  profit  percentage  was also  impacted by certain
fixed  manufacturing  overhead costs on reduced sales volume for the period. The
decrease was partially offset by approximately  $533,000 during the period,  for
products  which had  previously  been  written  down,  resulting in higher gross
margins rates.


Sales and marketing

     Sales and  marketing  expenses  were  $4,187,263  for the nine months ended
September 30, 2000 compared to  $4,258,553  for the nine months ended  September
30,1999.  The  decrease of $71,290  includes a decrease in sales  commission  of
approximately  $194,000 due to lower revenues as well as a reduction in wages of
approximately  $311,000 resulting from a restructuring of the sales organization
completed in August of 1999.  Such decreases were partially  offset by increases
in public relations and investor relations of approximately $417,000.

General and administrative

     General and  administrative  expenses were  $4,476,833  for the nine months
ended  September  30, 2000  compared  to  $5,370,956  for the nine months  ended
September  30,  1999.   The  decrease  of  $894,123   reflects  a  reduction  in
amortization  expense  of  approximately  $250,000  for the  nine  months  ended
September 30, 2000 as compared to the year ago period.  Such  decreases were due
to the write-down of goodwill related to the Company's French subsidiary,  taken
in the second quarter of 2000. Additionally, reserves for uncollectible accounts
decreased  by  $285,000  year over year and cost  incurred  for  recruiting  and
investor relations were approximately $139,000 and $114,000 less,  respectively,
for the nine months ended  September  30, 2000 versus the same period last year.
During the first nine months of fiscal year 2000,  the Company  further  reduced
costs  related  to its  European  operations,  which  contributed  approximately
$269,000 to the overall decrease in general and administrative expenses over the
prior  year  period.  Such  decreases  were  partially  offset by  approximately
$160,000 related to the amortization of non-cash financing cost.

Research and Development

     Research and development expenses were $3,976,823 for the nine months ended
September 30, 2000 compared to  $4,230,325  for the nine months ended  September
30,  1999.  The  decrease of $253,502 is  comprised  primarily  of  decreases in
salaries and related  expenses of $261,281,  as well as, a reduction in cost for
recruiting and consulting of approximately $63,000 and $109,000, respectively.

<PAGE>

     During  the first nine  months of fiscal  year 2000,  the  Company  further
reduced   costs   related  to  its  European   operations,   which   contributed
approximately  $224,000 to the overall  decrease  in  research  and  development
expenses over the prior year period.  Such decreases were offset by increases in
depreciation  and  maintenance of  approximately  $65,000 for test lab equipment
acquired in October 1999, as well as, labor and material costs of  approximately
$325,000 for engineers  related to the development of Linux related software and
the Company's SS7 Gateway enabled remote access products.  Variances in research
and  developement  labor costs reflect a trend in the  engineering job market of
acquiring engineering resources through independent contractors rather than full
time employees.

Restructuring and special charges

     In June  2000  the  board of  directors  approved  a plan to phase  out the
Company's low end products and reduce  ongoing  investment in these  products in
Europe.  Accordingly,  the Company  recorded a special  non-recurring  charge of
approximately  $2,356,000  including the impairment of goodwill of approximately
$1,546,000  associated with the Company's 1998 acquisition of SCii Telecom, S.A.
(see note 3 to the financial statements).

     In addition,  effective May 31, 2000 the Company  terminated the employment
of Jay Atlas,  its president  and Chief  Executive  Officer,  and entered into a
termination  and separation  agreement with Mr. Atlas. As a result of Mr. Atlas'
termination agreement, the Company recorded a charge of $810,515, which reflects
severance and related  employee  benefits  payments of $306,145 and an estimated
value of $504,370  for the  extension of stock  options  that vested  during Mr.
Atlas'  employment.  As of September 30, 2000,  $84,616 of the accrued severance
has been paid.

     For the foregoing  reasons the Company  incurred a net loss of  $12,743,028
for the nine months ended September 30, 2000 as compared to losses of $9,258,737
for the nine months ended September 30, 1999.

<PAGE>

Liquidity and Capital Resources

     On February 24, 2000 the Company entered into an agreement with a number of
investors to sell  2,151,000  shares of our common stock at a purchase  price of
$4.00  per share in a private  placement.  The  Company  also  issued  2,151,000
warrants to purchase common stock with an exercise price of $6.875. The warrants
are exercisable as of September 1, 2000. The exercise price of the warrants will
be reset to the average market price for the five trading days preceding the one
year anniversary  date of the agreement  provided the average price is less than
$6.875.  Under the terms of the  agreement,  the  Company  filed a  registration
statement on April 4, 2000 to register the shares sold and those  underlying the
warrants. That registration statement was declared effective on April 20, 2000.

     The agreement  also calls for the issuance of additional  shares at no cost
to these investors should the Company sell shares of common stock, or securities
convertible  into  common  stock,  at a price less than  $4.00 per share  within
twenty four months of the this agreement. This provision requires the Company to
issue additional  shares such that the average share price of these investors is
equal to the then offered price.  Additionally,  for twenty-four months from the
date of the  agreement,  these  investors  have the  right of first  refusal  to
participate in any future sales of our common stock,  or securities  convertible
into common stock, under the terms then offered.

     As of September 30, 2000,  the Company had working  capital of  $5,402,641,
including cash and cash equivalents of $3,915,528.  The Company's use of working
capital may be negatively impacted by its ability to convert current inventories
and accounts  receivable  into cash.  Inventories net of reserves for excess and
obsolete  material were  $2,890,995  as of September  30, 2000.  The Company has
incurred  substantial  operating  losses  and  has  an  accumulated  deficit  of
$38,882,567  as of September 30, 2000. It expects to continue to incur costs and
expenses in excess of expected  revenues as it continues to execute its business
strategy  in  the  Internet  Service  Provider  (ISP)  and  Original   Equipment
Manufacturer  (OEM) markets.  If the Company does not  successfully  execute its
business  strategy in the ISP and OEM markets,  there is no  assurance  that the
Company will generate  sufficient cash flow from operations to meet  anticipated
operating  needs and  liquidate  liabilities  as they come due.  Based  upon the
Company's current backlog and projections, the Company will have sufficient cash
and  cash  equivalents  to meet its  operating  needs  through  the end of 2000.
However,  without an increase in revenue or a reduction  of costs,  based on its
current cash utilization, the Company will exhaust its cash in the first quarter
of 2001.  Therefore,  the Company will be required to implement a cost reduction
plan or raise  additional  funds in the first quarter of 2001.  The Company will
delay or  eliminate  some  expenditures  and  planned  operations  in both North
America  and  Europe  will be  scaled  back or the  Company  will  need to raise
additional funds to meet obligations. It will seek to raise such amounts through
a variety of options  including  borrowings  and  proceeds  from  future  equity
financing.  Additional  funding  may not be  available  when  needed or on terms
acceptable  to the Company,  which could have a material  adverse  effect on its
business,   financial  condition,  and  results  of  operations.  The  financial
statements do not include any adjustments  that might result from the outcome of
these uncertainties.

     As of  September  30,  2000  the  Company  had  total  debt  of  $1,942,072
consisting  of a term note due to  Transamerica  Business  Credit  Corporation's
Technology Finance Division of Farmington Connecticut of $1,920,929 and acquired
foreign debt of $21,143.

     Under its credit facility with Transamerica, outstanding debt of $1,920,929
as of September 30,2000 remains on a Term Loan payable quarterly in arrears over
twenty consecutive quarters commencing October 1, 1997. Amounts previously drawn
against a revolving  credit line  matured on June 12, 2000 and have been paid in
full.  The interest  rate in effect on the term loan at  September  30, 2000 was
12.099%.

     The  Transamerica  credit  agreement  includes  a material  adverse  effect
clause,  whereby Transamerica can accelerate the due date of the loan if certain
changes in conditions  (financial  or  otherwise)  are deemed to have a material
adverse effect on the Company's ability to meet its obligations.

     During the nine months ended  September 30, 2000,  there was a net decrease
in cash and cash equivalents of $3,172,903. At September 30, 2000, cash and cash
equivalents  amounted to $3,915,528.  Working capital  amounted to $5,402,641 at
September 30, 2000 compared to cash and  equivalents  of $7,088,431  and working
capital of $7,827,522 at December 31, 1999.

     Net cash used in operating  activities for the nine months ended  September
30, 2000 amounted to $8,771,824.  The negative cash flows from  operations  were
due,  primarily,  to the Company's net loss of  $12,743,028  reduced by non-cash
expenditures related to depreciation,  amortization,  reserves and allowances of
$2,194,722 and impairment of goodwill and  restructuring  charges of $2,050,511.
Other  operating  cash uses included  decreases in accounts  payable and accrued
liabilities of $1,381,825 as the Company paid down obligations of its subsidiary
and accrued costs  related to fiscal year end bonuses and accrued  compensation.
Such cash decreases were partially  offset by increases due to the conversion of
accounts receivable to cash of $1,669,135.

     Net cash used in investing  activities for the nine months ended  September
30, 2000  amounted to $588,007 due to the  purchases of computer and  peripheral
equipment related primarily to engineering equipment for the SS7 Gateway project
and acquisition of trade show booth equipment.

     Net cash  increases due to financing  activities  for the nine months ended
September 30, 2000 amounted to $6,254,594 which included  proceeds of $8,067,217
from the  February  24,  2000  stock  purchase  agreement  net of costs and fees
related to the  transaction.  The  increase  was  partially  offset by principal
payments  on debt  and  capital  lease  obligations  of  $1,812,623  during  the
nine-month period.

<PAGE>

Qualitative and Quantitative Disclosures About Market Risk

     The results of our  operations  and the valuation of some of our assets and
liabilities  are sensitive to changes in the general level of interest  rates in
the United States and foreign exchange rate fluctuations.
     Interest  rate risk.  Our  interest  income is  sensitive to changes in the
general level of interest rates in the United States,  as our investments are in
United States dollar cash equivalents and short-term instruments.
     Our  interest  expense is  sensitive  to changes  in the  general  level of
interest rates in the United States,  because the computation of interest due on
our debt in the United States is based on key interest rate  indicators  used in
the United States such as the prime rate.
     Foreign exchange risk. We currently have foreign  subsidiaries that conduct
and report their  operations in local currency.  The primary foreign currency is
the French  Franc.  Other  currencies  include the British  Pound and the German
Deutschmark.  On January 1, 1999, eleven member countries  (including France and
Germany) of the European Union  established fixed conversion rates between their
existing,  or local,  currencies  and one common  currency,  the euro.  The euro
trades  on  currency  exchanges  and  may  be  used  in  business  transactions.
Conversion  to  the  euro   eliminates   currency   exchange  risk  between  the
participating member countries.
     Due to the limited  contribution of our foreign subsidiaries to our results
of operations and the short-term nature of our cash equivalents, investments and
debt, we do not believe we have material market risk exposure.

<PAGE>

Part II.     Other Information

Item 1. Legal Proceedings - None
Item 2. Changes in Securities - None
Item 3. Defaults Upon Senior Securities -  None
Item 4. Submission of Matters to a Vote of Shareholders - None
Item 5. Other Information - None
Item 6. Exhibits and Reports on Form 8-K
        a) Exhibits-Exhibit 27 Schedule of Financial Data (Filed Electronically)




<PAGE>


                                                               Signature

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

                                                       Ariel Corporation
                                                       -----------------------
                                                       Registrant



                                                        /S/ John R. Loprete
                                                       -----------------------
                                                       John R. Loprete
                                                       Vice President of Finance
                                                       and Principal Accounting
                                                                        Officer
Date:  November 13, 2000

<PAGE>