<PAGE>

<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 June 30, 1998                                       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                                  9,720,750 shares outstanding
                                                               as of June 30, 1998


                                     Documents Incorporated by Reference: None


</TABLE>

<PAGE>


                                                 Ariel Corporation
                                                       Index

Part I.  Financial Information
------------------------------
Item 1.  Financial Statements  (Unaudited)
         ---------------------------------
 
                  A.  Balance sheet  -  June 30, 1998 and December 31, 1997

                  B.  Statements of operations for the three and six months
                      ended June 30, 1998 and 1997.

                  C.  Statements of cash flows for the six months ended June 30,
                      1998 and 1997.

                  D.  Notes to financial statements



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



Part II.  Other Information
---------------------------

Item 3.  Submission of matters to a vote of Security Holders
         --------------------------------------------------- 

                  A.        Annual Meeting and Proxies

                  B.        Election of Directors

                  C.        Other Matters and Results




<PAGE>

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



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

                                                  ARIEL CORPORATION
                                                    BALANCE SHEETS
                                                     (Unaudited)

                                                                                               June 30,     December 31,
                                                                                                 1998           1997
                                                                                         ----------------  -------------
                                                                                             (Unaudited)       (Audited)
                                      ASSETS



CURRENT ASSETS:
       CASH AND CASH EQUIVALENTS .......................................................   $    683,222    $  2,645,864
       ACCOUNTS RECEIVABLE, NET OF ALLOWANCE FOR DOUBTFUL
             ACCOUNTS OF $217,433 IN 1998 AND $187,446 IN 1997 .........................      3,536,690       1,395,624
       OTHER RECEIVABLES ...............................................................        542,013          73,311
       INVENTORIES .....................................................................      4,251,893       3,536,190
       PREPAID EXPENSES ................................................................        443,238         299,336
                                                                                            ------------    ------------
                               TOTAL CURRENT ASSETS ....................................      9,457,056       7,950,325

EQUIPMENT, NET OF ACCUMULATED DEPRECIATION
            AND AMORTIZATION ...........................................................      2,084,865       2,382,645

OTHER ASSETS ...........................................................................        749,086         788,697
                                                                                            ------------    ------------
       TOTAL ASSETS ....................................................................   $ 12,291,007    $ 11,121,667
                                                                                            ============    ============
                          IABILITIES & STOCKHOLDERS' EQUITY

CURRENT LIABILITIES:
       ACCOUNTS PAYABLE ................................................................   $    936,167    $  1,186,876
       ACCRUED EXPENSES ................................................................      2,053,227       1,754,697
       NOTES PAYABLE - CURRENT PORTION OF LONG-TERM DEBT ...............................      4,858,603         600,000
       ROYALTIES PAYABLE ...............................................................         72,879          79,734
                                                                                            ------------    ------------
                               TOTAL CURRENT LIABILITIES ...............................      7,920,876       3,621,307



NOTES PAYABLE - LONG TERM ..............................................................      2,475,914       2,367,147


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 - 9,720,750  AT JUNE 30, 1998
                                 AND 9,234,250 AT DECEMBER 31, 1997 ...................          9,721           9,235

       ADDITIONAL PAID-IN CAPITAL .....................................................     32,831,481      30,949,180
       UNEARNED COMPENSATION ..........................................................        (55,409)       (110,819)
       ACCUMULATED DEFICIT ............................................................    (30,891,574)    (25,714,383)
                               TOTAL STOCKHOLDERS' EQUITY .............................      1,894,219       5,133,213
                                                                                           ------------    ------------
       TOTAL LIABILITIES & STOCKHOLDERS' EQUITY .......................................   $ 12,291,007    $ 11,121,667
                                                                                           ============    ============

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

</FN>

</TABLE>

<PAGE>

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

                                                                    ARIEL CORPORATION
                                                               STATEMENTS OF OPERATIONS
                                                                       (Unaudited)





                                                             Three Months Ended June 30 ,       Six Months Ended June 30,
                                                                  1998           1997             1998            1997
                                                             -------------    ------------     -----------     ----------
SALES .....................................................   $  4,111,190    $  2,540,036    $ 10,387,807    $  7,059,562

COST OF GOODS SOLD ........................................      2,555,497       1,547,971       6,313,622       3,940,863
                                                                ------------    ------------    ------------    ------------
       GROSS PROFIT .......................................      1,555,693         992,065       4,074,185       3,118,699

EXPENSES:
     SALES AND MARKETING .................................       1,597,989       1,276,788       2,872,422       2,425,212
     GENERAL AND ADMINISTRATIVE ..........................         959,262         979,366       1,828,610       1,923,011
     RESEARCH AND DEVELOPMENT ............................       2,280,067       2,588,341       4,365,804       5,253,717
                                                               ------------    ------------    ------------    ------------
         TOTAL OPERATING EXPENSES ........................       4,837,318       4,844,495       9,066,838       9,601,940
                                                                ------------    ------------    ------------    ------------
       LOSS FROM OPERATIONS ..............................      (3,281,625)     (3,852,430)     (4,992,651)     (6,483,241)

INTEREST INCOME ..........................................          23,405          93,067          40,208         211,423

INTEREST EXPENSE .........................................        (180,239)        (24,759)       (277,402)        (28,733)

OTHER INCOME (EXPENSE) ...................................          60,198         147,749          52,655         146,281
                                                                ------------    ------------    ------------    ------------
       LOSS BEFORE INCOME TAXES ..........................      (3,378,261)     (3,636,373)     (5,177,191)     (6,154,270)

      INCOME TAXES .......................................               0               0               0               0
                                                                ------------    ------------    ------------    ------------
       NET LOSS ..........................................    $ (3,378,261)   $ (3,636,373)   $ (5,177,191)   $ (6,154,270)
                                                                ============    ============    ============    ============

BASIC AND DILUTED PER SHARE DATA:

WEIGHTED AVERAGE NUMBER OF COMMON
                       SHARES OUTSTANDING                        9,697,114       9,169,325       9,514,482       9,118,091
                                                                ============    ============    ============    ============
NET LOSS PER SHARE ......................................      $     (0.35)    $     (0.40)    $     (0.54)     $    (0.67)
                                                                ============    ============    ============    ============







<FN>
                                   The  accompanying  notes are an integral part of the financial statements.
</FN>

</TABLE>


<PAGE>


<TABLE>

<CAPTION>

<S>                                                                                           <C>            <C>
                                                                      ARIEL CORPORATION
                                                                  STATEMENTS OF CASH FLOWS
                                                                         (Unaudited)




                                                                                           For The Six Months Ended June 30,

                                                                                                  1998           1997
Cash flows from operating activities:                                                          ----------     -----------
Net loss ..................................................................................   $(5,177,191)   $(6,154,270)
Adjustments to reconcile net loss to net cash used in operating activities:
                            Depreciation and amortization .................................       631,725        541,265
                            Amortization of discount on royalties payable .................             0          2,998
                            Loss on Sale of Marketable Securities .........................             0          7,507
                            Amortization of non-cash financing costs ......................        32,178              0
                            Provision for doubtful accounts ...............................        30,000              0
                            Provision for inventory obsolescence ..........................       180,000         30,000
                            Non-cash compensation expense .................................        55,409         89,408
(Increase) decrease in assets:
                            Accounts receivable ...........................................    (2,639,768)     1,485,885
                            Inventories ...................................................      (895,703)      (282,882)
                            Other assets ..................................................      (136,470)      (349,915)
Increase (decrease) in liabilities:
                            Accounts payable and accrued expenses .........................        47,820     (1,476,734)
                            Royalties payable .............................................        (6,855)       (14,866)
                            Notes payable-related parties .................................             0       (154,021)
                                                                                              -----------    -----------
                                           Net cash used in operating activities ..........    (7,878,855)    (6,275,625)
                                                                                              -----------    -----------
Cash flows provided by investing activities:
                            Purchases of Investments ......................................             0      4,913,759
                            Purchase of equipment .........................................      (333,945)    (1,021,530)
                                                                                              -----------    -----------
                                           Net cash provided by investing activities ......      (333,945)     3,892,229
                                                                                              -----------    -----------
Cash flows provided by financing activities:
                            Proceeds from debt financing ..................................     4,500,000      3,000,000
                            Principal payments on Long-term debt ..........................      (132,630)             0
                            Proceeds from exercise of common stock options and warrants ...     1,882,788        898,145
                                                                                              -----------    -----------
                                           Net cash provided by financing activities ......     6,250,158      3,898,145
                                                                                              -----------    -----------
Net increase (decrease) in cash ...........................................................    (1,962,642)     1,514,749
                            Cash and cash equivalents, beginning of period ................     2,645,864      4,626,583
                                                                                              -----------    -----------
Cash and cash equivalents, end of period ..................................................   $   683,222    $ 6,141,333
                                                                                              ===========    ===========



<FN>
                   The accompanying notes are an integral part of the financial statements.
</FN>

</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,
1997.  The year end  balance  sheet  data was  derived  from  audited  financial
statements but does not include all disclosures  required by generally  accepted
accounting principles.
         As of June 30,  1998,  the Company had working  capital of  $1,536,180,
including cash and cash equivalents of $683,222.  The financial  statements have
been prepared on a going-concern basis, which contemplates realization of assets
and liquidation of liabilities in the ordinary  course of business.  The Company
expects to incur costs and  expenses in excess of expected  revenues  during the
ensuing three months as the Company  continues to execute its business  strategy
in the Remote Access market.  As of June 30, 1998 there is no assurance that the
Company  will  generate  sufficient  cash flow from  product  sales to liquidate
liabilities as they become due. Accordingly,  the Company may require additional
funds to meet  planned  obligations  through  December 31, 1998 and will seek to
raise such amounts  through a variety of options,  including  equity  financing,
proceeds  from the sale of the Horizon  product and team,  borrowings  under the
existing Revolver, and the expected future cash flows from operations.
     In the opinion of the management of the Company, the accompanying unaudited
financial  statements  contain all  adjustments,  consisting of normal recurring
accruals,  which are necessary to present  fairly the financial  position of the
Company as of June 30,  1998 and the  results of  operations  for the Six Months
Ended  June  30,  1998  and  1997.  The  results  for  interim  periods  are not
necessarily indicative of results for the full year.


<TABLE>
<CAPTION>

<S>                                                                             <C>             <C>  

2. Inventories, net of allowance:

         Inventories, net of allowance, consists of the following:
                                                                                 June 30,        December 31,
                                                                                   1998             1997
                                                                                -----------      ------------
         Component Materials..............................................      $1,426,990       $2,077,866
         Work-in process..................................................       1,212,547          843,428
         Finished Goods...................................................       1,612,356          614,896
                                                                                ----------       ------------     
                                                                                $4,251,893       $3,536,190
                                                                                ==========       ============
</TABLE>

3.    Debt

         On February 19, 1998,  the Company  completed a $2 million  bridge loan
("Bridge Loan") with Transamerica which provided for a single advance. This loan
matures on the earlier of: 1) December  31,  1998;  2) a public  offering by the
Company of its equity  securities which yields cash proceeds at least equivalent
to the amount of the Bridge Loan; 3) the closing of a sale by the Company of its
Horizon product line and team with net cash proceeds at least  equivalent to the
amount of the Bridge Loan; or 4) the second advance to the Company of $3 million
under the Term Loan. The Bridge Loan interest rate is the prime rate plus 2.50%,
including all terms and conditions and affirmative and negative covenants.
         On May 14, 1998 the Company  drew $2.5  million  against its  revolving
credit facility with Transamerica ("Revolver"). Amounts drawn under the Revolver
mature on June 12, 2000 but can be extended for two additional one year periods.
The  interest  rate in effect under the Revolver is based on the prime rate plus
2.50% and is payable monthly in arrears.
         As of June 30, 1998, $2,834,517 of the Term Loan was outstanding.
         (See Note 5 - Subsequent Event.)



4.    Adoption of Statements of Financial Accounting Standards

         The  Company  adopted  Statement  of  Financial   Accounting  Standards
("SFAS") No. 130,  "Reporting  Comprehensive  Income".  SFAS No. 130 establishes
standards for reporting and displaying  comprehensive  income and its components
in  a  full-set  of  general   purpose   financial   statements   and   requires
reclassification of prior-period  financial statements.  For the quarters ending
June 30, 1998 and 1997,  net income was equal to  comprehensive  income as there
were no items classified as other comprehensive income.



5. Subsequent Events - Disposition of Assets

     On June 10,  1998 the Company  signed a  definitive  agreement  to sell its
Communications  Systems Group,  (CSG,  Horizon team or DSLAM unit), to Cabletron
Systems,  Inc. of  Rochester,  New  Hampshire.  The Company will  receive  $33.5
million in cash for the assets of the CSG less  expenses of the  transaction  of
approximately $3,975,000. The asset purchase agreement was voted on and approved
by the Company's Board of Directors on June 4, 1998. Form 8-K was filed with the
Securities  and  Exchange  Commission  on June 25,  1998.  On July 27,  1998 the
Company  received a $5 million  deposit towards the sale with the balance due at
the closing  scheduled  September  1, 1998.
     Under the terms of the Bridge  Loan,(see Debt Note 3), the note will mature
upon the closing of the CSG sale. Accordingly, the entire outstanding balance of
$2 million and any accrued interest will be repaid when the sale is completed.


<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>

                                                                          Six Months Ended
                                                                              June 30,

                                                                       1998               1997
                                                                  -----------        -----------
Sales                                                                  100%               100%

Cost of goods sold                                                      61                 56
                                                                    -----------        -----------

     Gross profit                                                       39                 44


Expenses

     Sales and marketing                                                28                 35

     General and administrative                                         17                 27

     Research and development                                           42                 74
                                                                    -----------        -----------

     Total Operating Expenses                                           87                136

Loss from operations                                                   (48)               (92)


Interest Income                                                         *                  3

Interest Expense                                                       (2)                 *

Other (expense) Income                                                  *                  2
                                                                

    Loss before income taxes                                           (50)               (87)

     Income taxes                                                       -                  -
                                                                   -----------        -----------  


                 Net Loss                                             (50)%              (87)%
                                                                    ===========        ===========
  *-Total is less than 1%

</TABLE>

<PAGE>


Three months ended June 30, 1998 as compared to three months ended June 30, 1997
--------------------------------------------------------------------------------

Net Sales

         Worldwide  sales were  $4,111,190  for the Three  months ended June 30,
1998,  an increase of  $1,571,154  compared to net sales of  $2,540,036  for the
Three months ended June 30, 1997.  Domestic sales were  $3,710,666 for the Three
months  ended June 30, 1998  compared to  $2,199,234  for the Three months ended
June 30, 1997. The increase of $1,511,432 in domestic sales is  attributable  to
the increase in T1-Modem+ sales to OEM customers. Export sales were $400,524 for
the first  quarter of 1998  compared to $340,802 for the first  quarter of 1997.

Gross Profit

         Gross profit  increased by $563,628 or 57% to $1,555,693  for the Three
months  ended June 30, 1998 from  $992,065  for the Three  months ended June 30,
1997.  Gross  profit  margin was 38% for the Three  months  ended June 30,  1998
compared to 39% for the Three months ended June 30, 1997  reflecting an increase
in OEM sales from the same period last year.

Sales and marketing

         Sales and marketing  expenses  were  $1,597,989 or 39% of sales for the
Three months ended June 30, 1998  compared to $1,276,788 or 50% of sales for the
Three months ended June 30,1997. The variance of $321,201 included increases due
to salaries,  consulting and related  expenses,  travel costs and other variable
selling  expenses  as  the  Company   continues  to  expand  product  and  brand
recognition  through  marketing  programs and trade shows.  Such  increases were
offset by a reduction in advertising  related to the Company's DSP OEM products.

General and administrative

         General and administrative  expenses were $959,262 for the Three months
ended June 30, 1998  compared to $979,366  for the Three  months  ended June 30,
1997.   Reductions  were  due  primarily  to  the  departure  of  the  Company's
Vice-Chairman  in  September  1997 and Chief  Financial  Officer in May of 1998.

Research and Development

         Research and  development  expenses were $2,280,067 or 55% of sales for
the Three months ended June 30, 1998 compared to $2,588,341 or 102% of sales for
the Three months  ended June 30, 1997, a decrease of $308,274 or 12%.  Salaries,
consulting,  recruiting and training expenses decreased by $521,848 reflecting a
decrease in engineers and other costs related to certain  development  projects.
Such decreases were offset by increases in expenses  related to outside contract
labor of  approximately  $286,030  reflecting  the continued  enhancement of the
Company's  Horizon  Product ADSL unit and the development of its next generation
of remote access products.




Six Months Ended June 30, 1998 as Compared to Six Months Ended June 30, 1997
-----------------------------------------------------------------------------

Net Sales

         Worldwide  sales were  $10,387,808  for the Six  Months  Ended June 30,
1998, an increase of $3,328,246  compared to net sales of $7,059,562 for the Six
Months Ended June 30, 1997.  Domestic  sales were  $9,276,260 for the Six Months
Ended June 30, 1998  compared to  $6,461,655  for the Six Months  Ended June 30,
1997.  The  increase of  $2,814,605  in domestic  sales is  attributable  to the
increase in T1-Modem+  sales to OEM customers.  Export sales were $1,111,548 for
the first and second  quarters of 1998  compared to $597,907 for the same period
in 1997.  The  increase in export  sales is a result of an increase in T1 Modem+
sales to new OEM  customers and  increased  sales and  marketing  efforts in the
European market.

 Gross Profit

         Gross  profit  increased by $955,486 or 31% to  $4,074,185  for the Six
Months  Ended June 30, 1998 from  $3,118,699  for the Six Months  Ended June 30,
1997.  Gross  profit  margin  was 39% for the Six  Months  Ended  June 30,  1998
compared to 44% for the Six Months  Ended June 30,  1997.  The decrease in gross
profit margin as a percent of sales reflects the continued  shift in product mix
from  shipments  of higher  margin DSP OEM  product in the first half of 1997 to
shipments of the Company's  T1-Modem products to OEM customers which carry lower
gross margins. 

Sales and marketing

         Sales and marketing  expenses  were  $2,872,422 or 28% of sales for the
Six Months Ended June 30, 1998  compared to  $2,425,212  or 35% of sales for the
Six Months  Ended June  30,1997.  The  increase of  $447,210 or 18%  reflects an
increase in salaries and related  expenses as the Company hired a Vice President
of Sales and expanded its sales force to a more senior data communications group
over the last six  months  of 1997 and  also an  increase  in  variable  selling
expenses such as  commissions  and travel  commensurate  with increases in sales
volume as compared to the same period last year. Such increases were offset by a
reduction in advertising and marketing expenses related to the Company's DSP OEM
products.

 General and administrative

         General and administrative  expenses were $1,828,610 for the Six Months
Ended June 30, 1998  compared to  $1,923,011  for the Six Months  Ended June 30,
1997.  The  decrease  of $94,401  reflects a reduction  in salaries  and related
expenses  related to the resignation of the Company's Vice Chairman in September
1997 and a reduction in consulting and other  professional  services incurred in
the first half of 1997  related to the  Company's  strategic  planning  process.

Research and Development

         Research and  development  expenses were $4,365,804 or 42% of sales for
the Six Months Ended June 30, 1998  compared to  $5,253,717  or 74% of sales for
the Six Months  Ended June 30,  1997,  a decrease of $887,913 or 17%.  Salaries,
consulting and related expenses  decreased by $533,876  reflecting a decrease in
engineers  related  to  certain  development  projects.  Additionally,  expenses
related to outside contract labor decreased by approximately  $95,023 reflecting
the  discontinuance  of certain  research and  development  projects  related to
forward looking technologies.

Liquidity and Capital Resources

         On June 12, 1997, the Company  announced it had completed a $10 million
credit  facility with  Transamerica  Business  Credit  Corporation's  Technology
Finance  Division,  of  Farmington,   Connecticut.   This  facility  provides  a
five-year,  $6 million term loan and a three-year,  $4 million  revolving credit
facility ("Revolver").  Upon closing, the Company took down $3 million under the
term loan. Further advances of up to $4 million can be extended upon achievement
of any one of the  following  milestones:  positive  (greater  than 0) operating
profit and net income from  continuing  operations  for the most recently  ended
fiscal quarter;  receipt by the Company of at least $7 million from the issuance
and sale of shares of its capital stock;  or the Company shall have received net
proceeds of at least $7 million  from the sale of the Horizon  product  line and
team; or the Company shall have entered into a significant joint venture with TI
as a result of which, the Company's  research and development  expenses would be
reduced  and  the  Company's   revenues  and  profits  increased  as  reasonably
determined  by  Transamerica;  or the Company shall have entered into such other
agreement or consummated  such other  transaction and as a result  thereof,  the
Company's  research and  development  costs will be  materially  reduced and the
Company's revenues and profits materially increased as reasonably  determined by
Transamerica.  As of June 30, 1998 the Company had not achieved any of the above
milestones.
         The Revolver  provides  for up to $4.0  million in advances  based on a
formula of eligible  accounts  receivable  and  inventory.  This Revolver can be
increased  to $7.0  million in the event that the  Company  achieves  one of the
milestones,  but  elects  not to draw the  second  advance  under the term loan.
Additionally,  the Revolver can be extended for two additional one-year periods.
As of June 30, 1998,  there was $2,834,517  outstanding  under the term loan and
$2,500,000  outstanding  under the Revolver.  Based on the Revolver  formula the
Company could have borrowed  approximately an additional $700,000 for a total of
$3.2 million  available  under the Revolver at June 30, 1998. Term loan payments
of principal  and interest  are due in arrears in twenty  consecutive  quarterly
installments,  payable  on the first  day of each  calendar  quarter  commencing
October 1, 1997.  The  interest  rate under the term loan is based on the weekly
average of the interest rate on five year U.S.  Treasury  Securities  for stated
periods plus an agreed upon number of additional basis points. At June 30, 1998,
the interest  rate in effect was 12.099%.  The interest rate in effect under the
Revolver  is based on the  prime  rate  plus  2.50% and is  payable  monthly  in
arrears.
         In addition,  the 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 or its ability to meet its obligations.
              In anticipation of noncompliance of certain financial covenants at
December 31, 1997,  Transamerica  gave the Company an unconditional  waiver with
respect to each of these financial  covenants for the fiscal year ended December
31, 1997, with the exception of the accounts  receivable  collection  period for
which the  Company  was in  compliance  as of  December  31,  1997.  Such waived
covenants  are as  follows:  minimum  tangible  net worth of $10  million  as of
December 31, 1997;  minimum gross profit margin of 45% for the fiscal year ended
December 31, 1997; a maximum  operating loss  percentage of (30%) for the fiscal
year ended  December 31, 1997;  and a net loss before taxes  percentage of (30%)
for the fiscal year ended  December 31, 1997.  The Company was not in compliance
with such covenants as of December 31, 1997.
              In anticipation of  non-compliance  with certain of the covenants,
the Company has  obtained an  additional  waiver from  Transamerica  of selected
covenants  and/or  revised  covenants for the terms of the debt  agreement.  The
covenants  that were waived for fiscal year 1998 are as  follows:  tangible  net
worth,  operating profit percentage and net income before taxes  percentage.  In
addition,  the credit agreement also amended some of the financial  covenants as
follows:  gross  profit  margin was amended to 35% from 50% for the fiscal years
ended December 31, 1998 and thereafter;  operating profit percentage was amended
to 7.5% from 20% for the fiscal years ended  December  31, 1999 and  thereafter;
and net income  before  taxes was  amended  to 5% from 15% for the fiscal  years
ended December 1999 and thereafter. Transamerica also amended the debt agreement
to delete the cash on hand covenant,  which allows the Company to use all of its
cash,  as needed.  Transamerica  has reviewed the Company's  forecasted  balance
sheets and  statements of operations and cash flows dated March 20, 1998 for the
calendar  years 1998 and 1999, and does not deem such  information  contained in
such documents as a material adverse event.  Management believes such forecasted
balance  sheets and  statements of operations  and cash flows are reasonable and
the likelihood of the occurrence of a material adverse event is remote.
              On February 19, 1998, the Company  announced it had completed a $2
million  bridge loan ("Loan")  with  Transamerica.  This facility  allowed for a
single advance  provided to the Company on February 19, 1998.  This loan matures
on the earliest of: 1) December 31, 1998; 2) a public offering by the Company of
its equity  securities  which yields cash  proceeds at least  equivalent  to the
amount of the Loan;  3) the  closing  of a sale by the  Company  of its  Horizon
product line and team with net cash  proceeds at least  equivalent to the amount
of the Loan;  or, 4) the second advance to the Company of $3.0 million under the
term loan.  The interest  rate under the Loan is the prime rate plus 2.50%.  The
Loan is subject to the existing $10 million  credit  facility  loan and security
agreement,  including  all terms and  conditions  and  affirmative  and negative
covenants.
         On June 10, 1998 the Company signed a definitive  agreement to sell its
Communications  Systems Group,  (CSG,  Horizon team or DSLAM unit),  to publicly
held  Cabletron  Systems,  Inc. of Rochester,  New  Hampshire.  The Company will
receive  $33.5  million  in cash  for the  assets  of CSG less  expenses  of the
transaction of approximately $3,975,000. On July 27, 1998 the Company received a
$5  million  deposit  towards  the sale  with  the  balance  due at the  closing
scheduled  September  1,  1998.  (See  note  5 to  the  financial  statements  -
Subsequent Events.)
         The CSG sale will accelerate the due date of the $2 million bridge loan
to the  scheduled  closing  date of September 1, 1998.  Further,  the  Company's
option of either  drawing an  additional  $3 million term loan or extending  its
Revolver an additional $3 million expired on June 11, 1998.  There are currently
no plans to extend that option.  The credit  agreement  also included a variable
additional  bridge loan  interest fee based on net  proceeds  and closing  date.
Based on the June 10, 1998 asset sale  agreement  with  Cabletron that fee is $1
million due at the scheduled  closing date. On July 30, 1998 the Company amended
its credit  agreement  with  Transamerica  to reduce  that fee to  $750,000  and
accelerate  the  payment  to July 31,  1998.  Payment  of the  $750,000  fee was
subsequently made on July 31, 1998.
         During the Six Months Ended June 30, 1998,  there was a net decrease in
cash  and cash  equivalents  of  $1,962,642.  At June  30,  1998,  cash and cash
equivalents amounted to $683,222. Working capital amounted to $1,536,180 at June
30, 1998 compared to $4,329,018 at December 31, 1997.
            Net cash used in operating  activities for the Six Months Ended June
30, 1998  amounted to  $7,878,855.  The negative cash flow from  operations  was
primarily  the  result  of the  Company's  net  loss of  $5,177,191,  as well as
increases  in accounts  receivable  and  inventory  of  $2,639,768  and $895,703
respectively.  The increase in accounts  receivable is a result of approximately
$2.3 million in shipments occurring in the last month of the second quarter. The
increase  in  inventory  occurred  in finished  goods and was due  primarily  to
rescheduling and subsequent cancellations of orders in June 1998.
         Net cash used in investing activities for the Six Months Ended June 30,
1998  amounted to $333,945 for  purchases of computer and  peripheral  equipment
related to engineering staff and final test and assembly in manufacturing.
     Net cash provided by financing activities for the Six Months Ended June 30,
1998  amounted to  $6,250,158,  reflecting  proceeds of  $2,000,000  received in
February  1998 as a result of the  Transamerica  bridge loan,  $2,500,000  drawn
against the Revolver in May 1998 and $1,882,788 in proceeds from the exercise of
common stock  options and warrants.  These  proceeds  were  partially  offset by
principal payments on term loans of $132,630.
               
Other Matters

          The Company's  strategic decision to focus on the Remote Access Server
("RAS")  marketplace  led to the  announcement in November 1997 of its intent to
seek a buyer for the Horizon  product and team.  The ADSL carrier  class product
does not fit well into the Company's  target  markets and customer base. In June
1998 the Company  accomplished  that  objective with the signing of a definitive
agreement with Cabletron Systems, Inc.. The sale will allow the Company to fully
dedicate management  resources towards achieving its strategic  objectives while
the proceeds will substantially  improve the Company's capital structure and its
ability to position itself to take advantage of the growing RAS market.
         The  Company  has  incurred  approximately  $8.4  million  in costs and
expenses on a  cumulative  basis from  January 1, 1996  through  June 30,  1998,
related to the Horizon product effort. Expenses for the first six months of 1998
attributable  to the CSG  represent  approximately  25% of the  Company's  total
operating expenses over that period. Additionally,  the Company expects to incur
approximately $350,000 in expenses through July 1998 for this product effort.
         For  the  foregoing  reasons,  the  Company  incurred  a  net  loss  of
$(5,177,191)  for the Six Months  Ended June 30, 1998  compared to a net loss of
$(6,154,270) for the Six Months Ended June 30, 1997.
         Statements contained in this Form 10Q that are not historical facts are
forward looking  statements that are made pursuant to the safe harbor provisions
of the  Private  Securities  Litigation  Reform  Act of  1995.  Forward  looking
statements involve risks and uncertainties, including the timely development and
acceptance  of new  products,  the impact of  competitive  products and pricing,
changing  market  conditions  and the  other  risks  detailed  in the  Company's
prospectus  and from time to time in other  filings.  Actual  results may differ
materially from those projected.  These forward looking statements represent the
Company's  judgement  as of the date of this  document.  The Company  disclaims,
however, any intent or obligation to update these forward looking statements.

Part II.     Other Information
------------------------------

Item 4. Submission of Matters to a Vote of Security Holders
        ----------------------------------------------------

         a)   The Company held its annual meeting of  Stockholders,  through the
              solicitation of proxies, on June 24, 1998.
         b)   Anthony  Agnello,  Theodore Coburn and Harold Paul were re-elected
              as  directors  at the  meeting.  Messrs.  Etienne  Perold,  Robert
              Ranalli, and Edward Horowitz continued as directors.
         c)   In addition,  the  stockholders  voted to amend the Company's 1995
              Stock  Option  Plan,  increasing  the number of shares  authorized
              under the Plan from 1,200,000 to 1,700,000.  The stockholders also
              voted to amend the Company's  1996  Director's  Stock Option Plan,
              increasing  the  number of shares  authorized  under the Plan from
              250,000 to 450,000.  Finally, the stockholders voted to ratify the
              selection of Coopers & Lybrand,  LLP as the Company's auditors for
              the fiscal year ending  December 31, 1998.
<TABLE>
<CAPTION>

<S>            <C>
              The voting totals were as follows:

               (i)    Election of Anthony Agnello

                           For  8,389,966;  Against  519,593; Withheld 0;

              (ii)     Election of Theodore Coburn

                           For  8,398,186;  Against  511,373; Withheld 0;

              (iii)    Election of Harold Paul

                           For  8,398,589;  Against  510,973; Withheld 0;

              (iv)     Amendment to the 1995 Stock Option Plan

                           For  2,803,431; Against 1,101,207; Withheld 85,025;

              (v)      Amendment to the 1996 Director's Stock Option Plan

                           For  2,541,133; Against 1,358,695; Withheld 89,835;

              (vi)    Proposal to ratify  Coopers & Lybrand,  LLP as Independent
                      Public  Accountants  for the  Company  for the fiscal year
                      ending  December 31, 1998

                           For 8,816,860;   Against  64,703;  Withheld 27,996;



</TABLE>

<PAGE>




Item 6.  Exhibits and Reports on Form 8-K
         --------------------------------
         a)   Exhibits-Exhibit 27-Financial Data Schedule (Filed Electronically)

         b)   Reports on Form 8-K. - None.





<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
                                                      Corporate Controller


Date:  August 14, 1998