<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, 1997                                  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                                   9,229,125  shares outstanding
                                                                as of September 30, 1997


                                     Documents Incorporated by Reference: None
</TABLE>

                                                            1         
<PAGE>



<TABLE>
<CAPTION>
<S>                                                                                                   <C>
                                                 Ariel Corporation
                                                       Index

Part I.  Financial Information
------------------------------

Item 1.  Financial Statements  (Unaudited)
         --------------------

                  A.       Balance sheets  -  September 30, 1997 and December 31, 1996

                  B.       Statements  of  operations  for the  three  and  nine
                           months ended September 30, 1997 and 1996.

                  C.       Statements  of cash flows for the nine  months  ended
                           September 30, 1997 and 1996.

                  D.       Notes to financial statements



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


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


</TABLE>


                                                                 2
<PAGE>


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

PART I. - FINANCIAL INFORMATION
ITEM 1. - FINANCIAL STATEMENTS
                                                 ARIEL CORPORATION
                                                   BALANCE SHEETS
                                                     (Unaudited)
               
                                                                                  September 30,                December 31,
                                                                                      1997                        1996
                                                                             ---------------------       ---------------------

          ASSETS

CURRENT ASSETS:
       CASH AND CASH EQUIVALENTS                                                    $5,057,362                  $4,626,583
       MARKETABLE SECURITIES                                                                 0                   5,999,377
       ACCOUNTS RECEIVABLE, NET OF ALLOWANCE FOR DOUBTFUL
               ACCOUNTS OF $178,416 AT SEPTEMBER 30, 1997 AND
               $212,678 AT DECEMBER 31, 1996                                         1,432,956                   3,199,542
       OTHER RECEIVABLES                                                                84,671                     190,023
       INVENTORIES                                                                   3,696,574                   3,528,252
       PREPAID EXPENSES                                                                425,411                     156,005
                                                                             ---------------------       ---------------------
                            TOTAL CURRENT ASSETS                                    10,696,974                  17,699,782

EQUIPMENT, NET OF ACCUMULATED DEPRECIATION
            AND AMORTIZATION                                                         2,495,400                   2,036,897

OTHER ASSETS                                                                           804,673                     366,385

                                                                             ---------------------       ---------------------
       TOTAL ASSETS                                                                $13,997,047                 $20,103,064
                                                                             =====================       =====================


LIABILITIES & STOCKHOLDERS' EQUITY

CURRENT LIABILITIES:
       ACCOUNTS PAYABLE                                                              $822,088                  $1,840,986
       ACCRUED EXPENSES                                                             1,755,261                   1,826,591
       NOTES PAYABLE - CURRENT PORTION OF LONG-TERM DEBT                              600,000                           0
       NOTES PAYABLE, RELATED PARTIES                                                       0                     154,021
       ROYALTIES PAYABLE                                                               67,327                      82,571
       DEFERRED REVENUES                                                              765,431                           0

                                                                             ---------------------       ---------------------

                            TOTAL CURRENT LIABILITIES                               4,010,107                   3,904,169



NOTES PAYABLE - LONG TERM                                                           2,400,000                           0


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 -  9,229,125 AT SEPTEMBER 30, 1997
                                 AND 8,949,975 AT DECEMBER 31, 1996                       9,229                       8,950

       ADDITIONAL PAID-IN CAPITAL                                                    30,701,382                  29,321,748
       UNEARNED COMPENSATION                                                            (44,702)                   (178,819)
       ACCUMULATED DEFICIT                                                          (23,078,969)                (12,952,984)
                                                                             --------------------       ---------------------
                            TOTAL STOCKHOLDERS' EQUITY                                7,586,940                  16,198,895
                                                                             --------------------       ---------------------

       TOTAL LIABILITIES & STOCKHOLDERS' EQUITY                                     $13,997,047                 $20,103,064
                                                                             =====================       =====================


<FN>
                              The accompanying notes are an integral part of the financial statements.
</FN>
                              
                                                            
</TABLE>
                                                                   3
<PAGE>
<TABLE>
<CAPTION>
<S>                                         <C>                     <C>                       <C>                   <C>
                                                                   ARIEL CORPORATION
                                                              STATEMENTS OF OPERATIONS
                                                                    (Unaudited)





                                                Three Months Ended September 30,                  Nine Months Ended September 30,
                                                   1997                    1996                     1997                    1996
                                            =================       ==================       =================      ===============

SALES                                          $3,044,843               $3,760,367             $10,104,405               $8,943,415

COST OF GOODS SOLD                              1,635,391                1,886,051               5,576,133                4,583,584

                                             -----------------       ------------------       -----------------       -------------
       GROSS PROFIT                             1,409,452                1,874,316               4,528,272                4,359,831

EXPENSES:
     SALES AND MARKETING                        1,157,894                1,024,198               3,583,142                2,972,661
     GENERAL AND ADMINISTRATIVE                 1,080,047                1,045,844               3,210,846                3,158,795
     RESEARCH AND DEVELOPMENT                   2,714,236                1,806,204               7,760,244                4,280,640
     RESTRUCTURING CHARGE                         379,454                        0                 379,454                        0
                                            -----------------       ------------------       -----------------       --------------
         TOTAL OPERATING EXPENSES               5,331,631                3,876,246              14,933,686               10,412,096

                                           -----------------       ------------------       -----------------       ---------------
       LOSS FROM OPERATIONS                    (3,922,179)              (2,001,930)            (10,405,414)              (6,052,265)

INTEREST INCOME                                    67,140                  205,919                 278,564                  519,587

INTEREST EXPENSE                                 (118,976)                  (9,773)               (147,709)                 (28,840)

OTHER INCOME                                        2,293                   40,642                 148,567                   59,858

                                            -----------------       ------------------       -----------------       --------------
       LOSS BEFORE INCOME TAXES                (3,971,722)              (1,765,142)            (10,125,992)              (5,501,660)

      INCOME TAXES                                      0                        0                       0                        0
                                            -----------------       ------------------       -----------------       --------------
                                            
       NET LOSS                               ($3,971,722)             ($1,765,142)           ($10,125,992)             ($5,501,660)
                                            =================       ==================       =================       ===============


WEIGHTED AVERAGE NUMBER OF COMMON
       SHARES OUTSTANDING                       9,179,201                8,813,487               9,139,023                7,660,248
                                            =================       ==================       =================       ===============

NET LOSS PER COMMON SHARE                          ($0.43)                  ($0.20)                 ($1.11)                  ($0.72)
                                            =================       ==================       =================       ===============









<FN>
                                   The accompanying notes are an integral part of the financial statements.
</FN>
</TABLE>
                                                                     4
<PAGE>

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


                                                                   ARIEL CORPORATION
                                                                STATEMENTS OF CASH FLOWS
                                                                       (Unaudited)


                                                                                             Nine Months Ended September 30,
                                                                                               1997                       1996
                                                                                        ==================         =================

Cash flows from operating activities:
Net loss                                                                                     ($10,125,992)              ($5,501,660)
Adjustments to reconcile net loss to net cash used in
     operating activities:
                Depreciation and amortization                                                     839,247                   392,457
                Amortization of discount on royalties payable                                       2,998                    24,026
                Loss on sale of marketable securities                                              12,812                         0
                Provision for doubtful accounts                                                    30,000                    30,000
                Provision for inventory obsolescence                                               85,000                    30,000
                Non-cash compensation expense                                                     134,117                         0
(Increase) decrease in assets:
                Accounts receivable and other receivables                                       1,841,938                (1,260,918)
                Inventories                                                                      (263,322)                 (772,377)
                Other assets                                                                     (406,342)                  (24,315)
Increase (decrease) in liabilities:
                Accounts payable and accrued expenses                                          (1,090,228)                  740,011
                Royalties payable                                                                 (15,244)                    4,234
                Unearned revenue                                                                  765,431                         0
                Notes payable, related parties                                                   (154,021)                  (78,509)
                                                                                        ------------------         -----------------
                              Net cash used in operating activities                            (8,343,606)               (6,417,051)
                                                                                        ------------------         -----------------
Cash flows from investing activities:
                Proceeds from the sale and maturity of investments                              5,993,634                         0
                Purchase of equipment                                                          (1,297,750)               (1,307,159)
                                                                                        ------------------         -----------------
                              Net cash provided by (used in) investing activities               4,695,884                (1,307,159)
                                                                                        ------------------         -----------------
Cash flows from financing activities:
                Proceeds from debt financing                                                    3,000,000                         0
                Proceeds from exercise of warrants and common stock
                       options, net of expenses                                                 1,078,501                 6,824,965
                Proceeds from exercise of underwriters purchase option                                  0                   768,000
                                                                                        ------------------         -----------------
                              Net cash provided by financing activities                         4,078,501                 7,592,965
                                                                                        ------------------         -----------------

Net increase (decrease) in cash                                                                   430,779                  (131,245)
                Cash and cash equivalents, beginning of year                                    4,626,583                13,979,009
                                                                                        ==================         =================
Cash and cash equivalents, end of period                                                       $5,057,362               $13,847,764
                                                                                        ==================         =================



Supplemental Cash Flow Information:

Other assets includes an increase of $316,445  representing  the value of 83,333
warrants  issued as part of the fees associated with the acquisition of a credit
facility.

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

                                                            
</TABLE>
                                                                 5
<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, 1996.  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 September 30, 1997,  the Company had working  capital of  $6,686,867,
including cash and cash equivalents of $5,057,362. 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 six months as the Company  continues to execute its business strategy in
the Remote Access  market.  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 event the Company is unable
to liquidate its  liabilities,  planned  operations will need to be scaled back.
Continuance  of the Company as a going  concern is dependent  upon the Company's
ability to generate  capital and its  attainment of profitable  operations.  The
financial  statements do not include any adjustments  that might result from the
outcome of these uncertainties.
     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 September 30, 1997 and the results of operations for the three and
nine months ended  September 30, 1997 and 1996. The results for interim  periods
are not necessarily indicative of results for the full year.

                                                                 6
<PAGE>                                                            
<TABLE>
<CAPTION>
<S>                                                                    <C>              <C>

2. Inventories, net of allowance:

         Inventories, net of allowance, consists of the following:
                                                                       September 30,    December 31,
                                                                            1997            1996

         Component Materials.......................................... $ 2,012,185       $1,313,092
         Work-in process..............................................     677,680          620,367
         Finished Goods...............................................   1,006,709        1,594,793
                                                                        ----------        ---------
                                                                       $ 3,696,574       $3,528,252
                                                                         =========        =========
3.    Credit Facility
         On June 12, 1997, the Company  completed a $10 million credit  facility
      with the  Technology  Finance  Division of  Transamerica  Business  Credit
      Corporation with the following terms and provisions:

         $6 million, five year 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.

            - Interest rate is based on the weekly average yield on five-year U.S.
              Treasury  Securities  plus 5.75 percent, fixed for five years as of
              the date of advance.

            - $3 million is  outstanding  at September 30, 1997.  Interest rate in
              effect at September 30, 1997 was 11.66%.

            - $3  million  available  upon  attainment  of any  one  of  certain
              milestones,  such as  profitability,  minimum  net  proceeds of $7
              million  from  the  sale of  common  stock,  or  achievement  of a
              significant  strategic partner  relationship.  As of September 30,
              1997, this facility has not been utilized.


         $4 million, three-year revolving credit facility, which can be extended
         for two additional one-year periods:

            - This revolving  credit  facility can be increased to $7 million in
              the event that the Company achieves one of the milestones referred
              to under the term loan,  but elects not to draw the second advance
              under the term loan.

            - Interest  rate is based on the prime rate plus 2.50  percent as of
              the date the revolver is utilized.

            - Available  line of credit based on a formula of eligible  accounts
              receivable and inventory.

            - As of September 30, 1997, this facility has not been utilized.

                                                                 7

<PAGE>

           Under terms of the credit agreement, the Company must maintain agreed
        upon  levels of  financial  performance  as  measured  against  specific
        financial covenants. They are as follows:

            - Cash on hand - The Company must at all times maintain cash or cash
              equivalents on hand of not less than $3,000,000  during the fiscal
              year ending December 31, 1997,  $4,000,000  during the fiscal year
              ending  December 31, 1998, and  $4,500,000  during the fiscal year
              ending  December  31,  1999.  The Company is in  compliance  as of
              September 30, 1997.

            - Accounts Receivable  Collection Period - The Company must maintain
              an accounts  receivable  collection  period of not greater than 60
              days for any fiscal quarter during the fiscal year ending December
              31,  1997  and 55 days  for any  fiscal  quarter  thereafter.  The
              Company is in compliance as of September 30, 1997.

            - The  Tangible  Net  Worth  on the  last  day of each  fiscal  year
              specified shall not be less than $10 million at December 31, 1997;
              $15 million at December 31, 1998; $20 million at December 31, 1999
              and $30  million  at  December  31,  2000  and  each  fiscal  year
              thereafter.

           - Gross Profit Margin / Operating Profit (Loss) Percentage / Net Income
             (Loss) Before Taxes Percentage - The Gross Profit Margin, Opearating
             Profit (Loss)Percentage and the Net Income (Loss) Before Taxes
             Percentage must meet specified thresholds for the fiscal year ended
             December 31, 1997 and each fiscal year thereafter as specified in 
             the credit agreement.
             
     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 possible noncompliance of certain financial covenants at
December 31, 1997,  Transamerica has given the Company an  unconditional  waiver
with  respect to each of these  financial  covenants  for the fiscal year ending
December 31, 1997,  with the  exception  of the accounts  receivable  collection
period for which the Company is and expects to be in  compliance.  Additionally,
Transamerica  has  agreed to waive the  minimum  cash on hand  covenant  through
December 31, 1998,  which allows the Company to use all of its cash,  as needed.
Transamerica has reviewed the Company's Form 10-Q for the quarterly period ended
September  30,  1997  and  its  forecasted  balance  sheets  and  statements  of
operations  and cash flows dated October 16, 1997 for the fourth quarter of 1997
and 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 occurence of a material  adverse event is
remote.

</TABLE>

                                                                     8

<PAGE>


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


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.


                                                            Three months ended                  Nine months ended
                                                               September 30,                      September 30,

                                                          1997             1996               1997             1996
                                                        -------          --------           --------         -------
Sales                                                     100%             100%               100%             100%

Cost of goods sold                                         54               50                 55               51
                                                       -----------       ----------         ----------       ---------

     Gross Profit                                          46               50                 45               49


Expenses:

     Sales and marketing                                   38               27                 35               33

     General and administrative                            35               28                 32               35

     Research and development                              89               48                 77               48

     Restructuring Charge                                  12                -                  4               -
                                                       -----------       ----------         ----------       ---------

     Total Operating Expenses                             174               103                148             116

Loss from operations                                     (128)             (53)               (103)            (67)


Interest Income                                            2                 5                  3               6

Interest Expense                                          (4)                *                 (1)              *

Other (expense) Income                                     *                 1                  1               *
                                                       -----------       ----------         ----------       ---------

    Loss before income taxes                             (130)             (47)               (100)            (61)

     Income taxes                                          -                 -                  -               -
                                                       ===========       ==========         ==========       =========


                 Net Loss                                (130)%            (47)%              (100)%           (61)%
                                                       ===========       ==========         ==========       =========
* Total less than 1%

</TABLE>
                                                                       9    
<PAGE>


Three  months  ended  September  30,  1997 as  compared  to three  months  ended
--------------------------------------------------------------------------------
 September 30, 1996
 ------------------

Net Sales

     Worldwide  sales were  $3,044,843 for the three months ended  September 30,
1997, a decrease of $715,524  compared to net sales of $3,760,367  for the three
months ended  September 30, 1996.  Domestic sales were  $2,860,303 for the three
months ended  September  30, 1997  compared to $ 3,326,217  for the three months
ended  September 30, 1996.  The decrease of $465,914 in domestic sales is solely
attributable to no additional  shipments of a digital signal processing  ("DSP")
OEM product that  accounted for 36% of sales in the third  quarter of 1996.  All
outstanding  purchase  orders for this customer were completed  during the first
quarter of 1997. Export sales were $184,540 for the three months ended September
30, 1997 compared to $434,150 for the three months ended September 30, 1996.

Gross Profit

     Gross  profit  decreased  by  $464,864 or 25% to  $1,409,452  for the three
months  ended  September  30, 1997 from  $1,874,316  for the three  months ended
September  30,  1996.  Gross  profit  margin was 46% for the three  months ended
September  30, 1997  compared to 50% for the three  months ended  September  30,
1996.  The  decrease in gross profit  margin as a percent of sales  reflects the
continued  shift in product  mix from sales of higher  margin DSP OEM product to
shipments of the Company's  T1-Modem  products which initially  contained higher
material costs for certain components. Such component costs have been reduced in
recent months and gross margins have  increased to 49% in August 1997 and 52% in
September 1997.

Sales and marketing

     Sales and marketing  expenses were $1,157,894 or 38% of sales for the three
months ended  September  30, 1997 compared to $1,024,198 or 27% of sales for the
three months ended  September 30, 1996. The increase of $133,696 or 13% reflects
increased  marketing expenses in conjunction with the introduction of the RASCAL
product line and an increase in trade show expenses  related to participation in
the NT  WINDOWS  show.  Such  increases  were  offset  by a  reduction  in sales
commissions due to the decrease in sales and a reduction in advertising expenses
related to the Company's DSP OEM products.

General and administrative

     General and  administrative  expenses were  $1,080,047 for the three months
ended  September  30, 1997  compared to  $1,045,844  for the three  months ended
September  30,  1996.  The  increase  of $34,203 or 3% related to an increase in
legal expenses in  conjunction  with various  projects  related to the Company's
ADSL  product  group and an increase in  consulting  expense  related to certain
compensation  issues  offset by a reduction  in various  expenses,  most notably
recruiting expense.

                                                                 10
<PAGE>

Research and Development

     Research and  development  expenses  were  $2,714,236  for the three months
ended  September  30, 1997  compared to  $1,806,204  for the three  months ended
September  30,  1996,  and increase of  $908,032.  Salaries and wages  increased
approximately  $334,000  reflecting  the hiring of additional  engineers to meet
internal  product  development  demand  related to Data  Communications  and the
Communications Systems Group ("CSG"). Additionally,  expenses related to outside
contract  labor  increased by  approximately  $103,000 for certain  research and
development projects related to forward looking technologies.

Restructuring Charge

     In  September  1997 the Company  announced a reduction  in  workforce of 11
employees.  Additionally,  effective  September 26, 1997, the Company terminated
the employment agreement of Jeffrey Sasmor, its Vice Chairman and Secretary, and
entered  into a  termination  agreement  with Mr.  Sasmor.  As a  result  of the
reduction in  workforce  and Mr.  Sasmor's  termination  agreement,  the Company
recorded a  restructuring  charge of  $379,454,  which  reflects  severance  and
related employee benefits  payments,  of which $143,072 was paid as of September
30, 1997.

Other Matters

     In January 1996 the Company formed a  Communications  Systems team to begin
development  of an ADSL  carrier  class  product  targeting  the  needs of major
telecommunication and network service providers. To date, the team has developed
Horizon,  a carrier class product which is currently in laboratory  environments
at a certain network service provider.  The Company's recent strategic decisions
to  focus  on the  Remote  Access  Server  ("RAS")  marketplace  has  led to the
Company's  announcing  in August 1997 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 markets and customer base.
     The Company has incurred  approximately  $4.9 million in costs and expenses
on a cumulative basis from January 1, 1996 through  September 30, 1997,  related
to this product effort.  For the nine months ended September 30, 1997, costs and
expenses approximate $3.1 million for such product. The Company expects to incur
approximately  $1.0 million of costs and expenses in the fourth  quarter of 1997
with respect to this  product.  The Company is currently  in  discussion  with a
number of companies  concerning a purchase of the Horizon  product and team, but
no definitive sale agreement has been reached as of October 31, 1997.
     For the foregoing reasons,  the Company incurred a net loss of $(3,971,722)
for the  three  months  ended  September  30,  1997  compared  to a net  loss of
$(1,765,142) for the three months ended September 30, 1996.

                                                                 11

<PAGE>

Nine months ended  September 30, 1997 as compared to nine months ended
----------------------------------------------------------------------
 September 30, 1996
 ------------------

Net sales

     Worldwide  sales were  $10,104,405  for the nine months ended September 30,
1997, an increase of $1,160,990 or 13% compared to worldwide sales of $8,943,415
for the nine months ended September 30, 1996. Domestic sales were $9,321,958 for
the nine months ended  September  30, 1997  compared to $ 7,606,663 for the nine
months ended  September  30, 1996.  The increase in domestic  sales for the nine
months ended  September 30, 1997 reflects  increased  shipments of the Company's
T1-Modem and CTI Modem products offset by decreased shipments of various DSP OEM
products.  Export sales were  $782,447 for the nine months ended  September  30,
1997 compared to $1,336,752 for the nine months ended September 30, 1996.

Gross Profit

     Gross profit  increased  $168,441 or 4% to  $4,528,272  for the nine months
ended  September  30, 1997  compared  to  $4,359,831  for the nine months  ended
September 30, 1996. Gross profit margin as a percentage of sales was 45% for the
first nine months of 1997 compared to 49% for the first nine months of 1996. The
decrease  is the  result  of a shift in  product  mix from DSP OEM  products  to
shipments of Data Communication products.

Sales and Marketing

     Sales and marketing  expenses were  $3,583,142 or 35% of sales for the nine
months ended  September  30, 1997 compared to $2,972,661 or 33% of sales for the
nine months  ended  September  30,  1996.  The  increase  of  $610,481  reflects
increased trade show expenses of approximately  $253,000  relating to first time
attendance  at certain  trade  shows where the  Company's  RASCAL and ADSL DSLAM
carrier  class  products were  introduced.  Advertising  and marketing  expenses
increased by approximately $144,000 reflecting increased expenditures related to
T1-Modem and RASCAL product lines.

General and Administrative

     General and administrative expenses increased by $52,051 from $3,158,795 or
35% of sales for the nine months ended  September  30, 1996 to $3,210,846 or 32%
of sales for the nine months ended  September  30, 1997.  The increase  reflects
higher  salaries and  benefits of  approximately  $238,000  related to seven new
hires, along with approximately $98,000 of various operating expenses related to
these hires.  The nine months ended  September 30, 1996  included  approximately
$284,000  of  non-recurring  severance  expenses  related to certain  management
personnel.

                                                                 12

<PAGE>

Research and Development

     Research and  development  expenses were $7,760,244 or 77% of sales for the
nine months ended  September 30, 1997 compared to $4,280,640 or 48% of sales for
the nine months ended September 30, 1996. The increase of $3,479,604 reflects an
increase of approximately $1,196,000 in salaries and related expenses reflecting
an increase in engineers to meet the demands for internal product development in
the data  communication and CSG product groups.  Additionally,  outside contract
labor  expenses  increased by  approximately  $935,000  for projects  related to
forward looking technologies.

Restructuring Charge

     In  September  1997 the Company  announced a reduction  in work force of 11
employees.  Additionally,  effective  September 26, 1997, the Company terminated
the employment agreement of Jeffrey Sasmor, its Vice Chairman and Secretary, and
entered  into a  termination  agreement  with Mr.  Sasmor.  As a  result  of the
reduction  in work force and Mr.  Sasmor's  termination  agreement,  the Company
recorded a  restructuring  charge of  $379,454,  which  reflects  severance  and
related employee benefits  payments,  of which $143,072 was paid as of September
30, 1997.

Other Matters

     In January 1996 the Company formed a  communications  systems team to begin
development  of an ADSL  carrier  class  product  targeting  the  needs of major
telecommunication and network service providers. To date, the team has developed
Horizon,  a carrier class product which is currently in laboratory  environments
at a certain network service provider.  The Company's recent strategic decisions
to focus on the RAS  marketplace  has led to the Company's  announcing in August
1997 its intent to seek a buyer for the Horizon  product  and team.  The carrier
class  product does not fit well into the Company's  markets and customer  base.
Needham and Company is representing the Company in this effort.

     The Company has incurred  approximately  $4.9 million in costs and expenses
on a cumulative basis from January 1, 1996 through  September 30, 1997,  related
to this product effort.  For the nine months ended September 30, 1997, costs and
expenses approximate $3.1 million for such product. The Company expects to incur
approximately  $1.0 million of costs and expenses in the fourth  quarter of 1997
with respect to this  product.  The Company is currently  in  discussion  with a
number of companies  concerning a purchase of the Horizon  product and team, but
no definitive sale agreement has been reached as of October 31, 1997.

                                                       
                                                                  13

<PAGE>

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,  $6.0 million  term loan and a  three-year,  $4.0  million  revolving
credit facility ("Revolver"). The term loan provides for an immediate advance of
$3.0 million and a second advance of $3.0 million upon achievement of any one of
certain  milestones such as  profitability,  net proceeds of at least $7 million
from the sale of common stock, or achievement of a significant strategic partner
relationship.  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 September 30, 1997, there was $3.0 million outstanding under the term loan
and there were no outstanding advances under the Revolver. 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 September  30,  1997,  the
interest  rate in effect  was  11.66%.  The  interest  rate in effect  under the
Revolver  is based on the  prime  rate plus  2.50%.  Under  terms of the  credit
agreement,   the  Company  must   maintain   agreed  upon  levels  of  financial
performance,  including the  maintenance of cash or cash  equivalents on hand at
all times of not less than $3.0 million  during the fiscal year ending  December
31, 1997 and $4.0  million  during the fiscal year ended  December  31, 1998 and
$4.5 million thereafter.

     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 possible noncompliance of certain financial covenants at
December 31, 1997,  Transamerica has given the Company an  unconditional  waiver
with  respect to each of these  financial  covenants  for the fiscal year ending
December 31, 1997,  with the  exception  of the accounts  receivable  collection
period for which the Company is and expects to be in  compliance.  Additionally,
Transamerica  has  agreed to waive the  minimum  cash on hand  covenant  through
December 31, 1998,  which allows the Company to use all of its cash,  as needed.
Transamerica has reviewed the Company's Form 10-Q for the quarterly period ended
September  30,  1997  and  its  forecasted  balance  sheets  and  statements  of
operations  and cash flows dated October 16, 1997 for the fourth quarter of 1997
and 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 occurence of a material  adverse event is
remote.

     During the nine months ended  September 30, 1997,  there was a net increase
in cash and cash  equivalents of $430,779,  including a net amount of $5,993,634
in proceeds from the maturity and sale of investments  in marketable  securities
which were used to fund operations.  On June 13, 1997 the Company received gross
proceeds of $3,000,000  under the above  referenced  term loan. At September 30,
1997, cash and cash equivalents amounted to $5,057,362. Working capital amounted
to  $6,686,867 at September  30, 1997  compared to  $13,795,613  at December 31,
1996, a decrease of $7,108,746.

     Net cash used in operating  activities for the nine months ended  September
30, 1997  amounted to  $8,343,606.  The negative cash flow from  operations  was
primarily  the result of the Company's  net loss of  $10,125,992.  Additionally,
trade accounts payable and accrued expenses  decreased by $1,090,228  reflecting
lower shipments during the third quarter of 1997.


                                                                 14

<PAGE>

     Net  cash  provided  by  investing  activities  for the nine  months  ended
September  30, 1997  amounted  to  $4,695,884.  This  included  net  proceeds of
$5,993,634  from the maturity  and  subsequent  sale of high quality  government
agency securities.  Capital  expenditures of $1,297,750  reflected  purchases of
computer and peripheral  equipment  related to engineering  staff and final test
and assembly in manufacturing and also office furniture related to the Company's
relocation of its CSG group to Piscataway, New Jersey in January, 1997.

     Net  cash  provided  by  financing  activities  for the nine  months  ended
September 30, 1997 amounted to $4,078,501,  reflecting a draw down of $3,000,000
under the Transamerica term loan and $1,078,501 in proceeds from the exercise of
common stock options.

     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  six  months as the  Company
continues to execute its business strategy in the Remote Access market. 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 event the Company is unable to  liquidate  its  liabilities,
planned operations will need to be scaled back.  Continuance of the Company as a
going concern is dependent  upon the Company's  ability to generate  capital and
its attainment of profitable operations. The financial statements do not include
any adjustments that might result from the outcome of these uncertainties.

     Statements  contained in this Form 10-Q 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  judgment  as of the date of this  document.  The  Company  disclaims,
however, any intent or obligation to update these forward looking statements.


                                                                 15

<PAGE>


Impact of the Adoption of Recently Issued Accounting Standards

     In February 1997, the Financial Accounting Standards Board issued Statement
of Financial  Accounting  Standards No. 128.  "Earnings per Share" ("SFAS 128"),
which  simplifies   existing   computational   guidelines,   revises  disclosure
requirements  and increases the  comparability  of earnings per share data on an
international  basis. The Company  anticipates no material impact resulting from
SFAS 128.  This  statement is effective  for  financial  statements  for periods
ending  after  December 15, 1997 and requires  restatement  of all  prior-period
earnings per share data presented.


Part II.     Other Information
------------------------------
Item 6.  Exhibits and Reports on Form 8-K
         --------------------------------
         a)    Exhibits -
                  Exhibit 11 - Statement of Computation of Per Share Amounts
                  Exhibit 27 - Financial Data Schedule (filed electronically)
         b) Reports on Form 8-K - None.


                                                                 
                                                                 16

<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/ GERARD E. DORSEY
                                              ---------------------------------
                                              Gerard E. Dorsey
                                              Chief Financial Officer and
                                              Principal Accounting Officer

Date:  November 14, 1997






                                                                 17
<PAGE>




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


                                                                                                                        Exhibit 11
                                                              ARIEL CORPORATION
                                                  STATEMENT OF COMPUTATION OF PER SHARE AMOUNTS
                                                   For the Three Months and Nine Months Ended
                                                            September 30, 1997 and 1996


                                                                 Three Months Ended September 30,    Nine Months Ended September 30,
                                                                      1997            1996                1997            1996
                                                                  -------------   -------------       --------------   ------------

Primary:

       Net loss for the  period                                    ($3,971,722)    ($1,765,142)        ($10,125,992)   ($5,501,660)
                                                                  =============   =============       ==============   ============

       Weighted average number of shares of common
          stock outstanding                                          9,179,201       8,813,487            9,139,023      7,660,248

       Shares issuable upon exercise of outstanding
          options and warrants                                               0               0                    0              0

       Shares assumed to be acquired in accordance
          with the treasury stock method                                     0               0                    0              0
                                                                  -------------   -------------       --------------   ------------

       Shares used in computing per share loss                       9,179,201       8,813,487            9,139,023      7,660,248
                                                                  =============   =============       ==============   ============

       Net loss per share                                               ($0.43)         ($0.20)              ($1.11)        ($0.72)
                                                                  =============   =============       ==============   ============


Fully Diluted:

       Net loss for the  period                                    ($3,971,722)    ($1,765,142)        ($10,125,992)   ($5,501,660)
                                                                  =============   =============       ==============   ============

       Weighted average number of shares of common
          stock outstanding                                          9,179,201       8,813,487            9,139,023      7,660,248

       Shares issuable upon exercise of outstanding
          options and warrants                                       2,454,621       1,329,515            2,191,339      2,482,754

       Shares assumed to be acquired in accordance
          with the treasury stock method                            (1,344,642)       (400,727)          (1,084,757)      (402,854)
                                                                  -------------   -------------       --------------   ------------

       Shares used in computing per share loss                      10,289,180       9,742,275           10,245,605      9,740,148
                                                                  =============   =============       ==============   ============

       Net loss per share                                               ($0.39)         ($0.18)              ($0.99)        ($0.56)
                                                                  =============   =============       ==============   ============
</TABLE>