<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 March 31, 1999                                       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                                    9,775,150 shares outstanding
                                                                as of March 31, 1999


                    Documents Incorporated by Reference: None


</TABLE>
<PAGE>

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

Part I.  Financial Information 

Item 1.  Consolidated Financial Statements  (Unaudited)

                  A.       Consolidated balance sheets as of March 31, 1999 and December 31, 1998

                  B.       Consolidated  statements of operations  for the three
                           months ended March 31, 1999 and 1998.



                  C.       Consolidated  statements of cash flows for the three months
                           ended March 31, 1999 and 1998.



                  D.       Notes to consolidated financial statements



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



Part II.  Other Information


</TABLE>


<PAGE>

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

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

                                                                         ARIEL CORPORATION
                                                                     CONSOLIDATED BALANCE SHEETS

                                                                             (Unaudited)

                                                                                March 31,       December 31,
                                                                                 1999                1998
                                                                                 ----                ----

                                        ASSETS

CURRENT ASSETS:
       CASH AND CASH EQUIVALENTS .............................................   $ 12,858,830    $ 17,996,575
       ACCOUNTS RECEIVABLE, NET OF ALLOWANCE FOR DOUBTFUL
             ACCOUNTS OF $1,554,055 IN 1999 AND $1,460,855 IN 1998 ...........      2,910,536       3,593,709
       OTHER RECEIVABLES .....................................................      1,164,533       1,378,781
       INVENTORIES, NET ......................................................      2,260,737       2,857,326
       PREPAID EXPENSES ......................................................        354,875         449,691
                                                                                      -------         -------
                            TOTAL CURRENT ASSETS .............................     19,549,511      26,276,082

EQUIPMENT, NET OF ACCUMULATED DEPRECIATION
            AND AMORTIZATION .................................................      1,392,443       1,365,354

INTANGIBLE ASSETS ............................................................        890,944         997,225
GOODWILL .....................................................................      3,789,866       4,344,374

OTHER ASSETS .................................................................        659,111         699,345
                                                                                      -------         -------
       TOTAL ASSETS ..........................................................   $ 26,281,875    $ 33,682,380
                                                                                 ============    ============


                         LIABILITIES & STOCKHOLDERS' EQUITY

CURRENT LIABILITIES:
       ACCOUNTS PAYABLE ......................................................   $  1,705,529    $  2,679,548
       ACCRUED EXPENSES ......................................................      2,595,065       5,388,661
       CURRENT PORTION OF LONG-TERM DEBT .....................................      5,243,386       5,480,430
       ROYALTIES PAYABLE .....................................................         48,610          95,410
                                                                                       ------          ------
                            TOTAL CURRENT LIABILITIES ........................      9,592,590      13,644,049



LONG-TERM DEBT ...............................................................        270,086         332,834


                                   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 - 9,755,150 AT MARCH 31, 1999
                                 AND 9,760,150 AT DECEMBER 31, 1998 ..........          9,760           9,760

       ADDITIONAL PAID-IN CAPITAL ............................................     33,302,342      33,302,342
       UNREALIZED GAIN / (LOSS) ON FOREIGN CURRENCY TRANSLATION ..............       (245,909)         31,272
       ACCUMULATED DEFICIT ...................................................    (16,646,994)    (13,637,877)
                                                                                  -----------     ----------- 
                            TOTAL STOCKHOLDERS' EQUITY .......................     16,419,199      19,705,497
                                                                                   ----------      ----------

       TOTAL LIABILITIES & STOCKHOLDERS' EQUITY ..............................   $ 26,281,875    $ 33,682,380
                                                                                 ============    ============


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






</TABLE>

<PAGE>


<TABLE>

<Caption.                    <S>                                                               <C>                      <C>

                                                                              ARIEL CORPORATION
                                                                  CONSOLIDATED STATEMENTS OF OPERATIONS

                                                                                 (Unaudited)





                                                                                                     Three Months Ended March 31,
                                                                                                         1999           1998
                                                                                                         ----           ----

SALES ...........................................................................................   $ 3,073,529    $ 6,276,617

COST OF GOODS SOLD ..............................................................................     1,393,598      3,680,378
                                                                                                      ---------      ---------
       GROSS PROFIT .............................................................................     1,679,931      2,596,239

EXPENSES:
     SALES AND MARKETING ........................................................................     1,524,903      1,102,077
     GENERAL AND ADMINISTRATIVE .................................................................     1,826,855      1,356,051
     RESEARCH AND DEVELOPMENT ...................................................................     1,352,127      1,849,137
                                                                                                      ---------      ---------
         TOTAL OPERATING EXPENSES ...............................................................     4,703,885      4,307,265
                                                                                                      ---------      ---------

       LOSS FROM OPERATIONS .....................................................................    (3,023,954)    (1,711,026)

INTEREST INCOME .................................................................................       160,832         16,803

INTEREST EXPENSE ................................................................................      (142,961)       (97,163)

OTHER INCOME / (EXPENSE) ........................................................................        (2,734)        (7,544)
                                                                                                         ------         ------ 

       LOSS BEFORE INCOME TAXES .................................................................    (3,008,817)    (1,798,930)

      INCOME TAXES ..............................................................................             0              0
                                                                                                    -----------    -----------    
       NET LOSS .................................................................................   ($3,008,817)   ($1,798,930)
                                                                                                    -----------    ----------- 


OTHER COMPREHENSIVE INCOME / (LOSS), NET OF TAX:
      FOREIGN CURRENCY TRANSLATION ADJUSTMENTS ..................................................      (182,939)             0
                                                                                                       --------       --------
COMPREHENSIVE INCOME / (LOSS) ...................................................................    (3,191,756)    (1,798,930)
                                                                                                     ==========     ========== 


BASIC AND DILUTED PER SHARE DATA:
       WEIGHTED AVERAGE NUMBER OF
                                COMMON SHARES OUTSTANDING .......................................     9,755,150      9,380,293
                                                                                                      =========      =========

       NET LOSS PER SHARE .......................................................................         (0.31)         (0.19)
                                                                                                      =========      ========= 





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


</TABLE>
<PAGE>                                  


<PAGE>


<TABLE>
<CAPTION>         <S>                                                                               <C>                  <C>       
                                                                    ARIEL CORPORATION
                                                         CONSOLIDATED STATEMENTS OF CASH FLOWS

                                                                      (Unaudited)





                                                                                                For The Three Months Ended March 31,
                                                                                                           1999            1998
                                                                                                           ----            ----
Cash flows from operating activities:
Net Loss ...........................................................................................   ($ 3,008,817)   ($ 1,798,930)
Adjustments to reconcile net loss to net cash used
     operating activities:
                   Depreciation and amortiz ........................................................        226,765         313,651
                   Amortization of goodwill & intangibles ..........................................        357,182               0
                   Amortization of debt issuance costs .............................................         16,089          16,089
                   Provision for doubtful accounts .................................................        206,248          15,000
                   Provision for inventory obsolescence ............................................         25,861          55,000
                   Non-Cash compensation expense ...................................................              0          27,705
(Increase) decrease in assets:
                   Accounts receivable .............................................................        467,739      (3,522,666)
                   Other receivables ...............................................................        190,834             420
                   Inventories .....................................................................        562,645      (1,653,746)
                   Other assets ....................................................................         65,583        (202,085)
Increase (decrease) in liabilities:
                   Accounts payable and accrued expenses ...........................................     (3,592,153)      1,775,887
                   Royalties payable, related parites ..............................................        (46,800)        (21,146)
                                                                                                         ----------      ---------- 
   Net cash (used in) operating activiities.........................................................     (4,528,826)     (4,994,821)
                                                                                                         ----------      ---------- 

Cash flows from investing activities:
                   Purchase of equipment ...........................................................       (321,162)       (223,372)
                                                                                                           --------        -------- 
   Net cash (used in) investing activities..........................................................       (321,162)       (223,372)
                                                                                                           --------        -------- 

Cash flows from financing activities:
                   Proceeds from debt financing ....................................................              0       2,000,000
                   Principal payments on long-term debt ............................................       (269,463)        (69,710)
                   Proceeds from exercise of common stock options and warrants .....................              0       1,628,552
                                                                                                            --------      --------- 
   Net cash provided by (used in) financing activities..............................................       (269,463)      3,558,842
                                                                                                           --------       ---------

Effect of exhange rate changes on cash .............................................................        (18,294)              0

Net increase (decrease) in cash ....................................................................     (5,137,745)     (1,659,351)

                   Cash and cash equivalents, beginning of year ....................................     17,996,575       2,645,864
                                                                                                         ----------      ----------
Cash and cash equivalents, end of period ...........................................................   $ 12,858,830    $    986,513
                                                                                                       ============    ============








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





</TABLE>
<PAGE>

<PAGE>


<PAGE>
                                       Ariel Corporation
                           Notes to Consolidated 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, 1998.
     As of March 31,  1999,  the  Company  had  working  capital of  $9,956,921,
including cash and cash equivalents of $12,858,830. The Company expects to incur
costs and  expenses in excess of expected  revenues as the Company  continues to
execute its business strategy.
     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 March 31, 1999 and the results of operations  for the three months
ended  March  31,  1999 and  1998.  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:
                                                                                   March 31,      December 31,
                                                                                     1999              1998
                                                                                     ----              ----
        
         Component Materials...................................................  $   673,631        $1,040,115
         Work-in process...........................................................1,312,108         1,536,870
         Finished Goods............................................................  274,998           280,341
                                                                                     -------           -------
                                                                                  $2,260,737        $2,857,326
                                                                                  ==========        ==========
</TABLE>

<PAGE>

3.       Debt

     As of March 31, 1999 the Company had total debt of $5,513,472 consisting of
notes due to  Transamerica  Business  Credit  Corporation's  Technology  Finance
Division of Farmington Connecticut of $5,004,788 and acquired foreign debt of
$508,684.
     Under its credit facility with Transamerica, outstanding debt of $5,004,788
as of March 31,1999  consisted of the following:  a $2,504,788 Term Loan payable
quarterly  in arrears over twenty  consecutive  quarters  commencing  October 1,
1997, and $2,500,000 drawn against a Revolver which matures 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 prime rate plus 2.50% and is payable  monthly in
arrears.  The  interest  rate in effect  on the term loan at March 31,  1999 was
12.099%.
     On May 14, 1999 the Company  executed an  amendment to its  agreement  with
Transamerica that included a waiver for certain financial  covenants the Company
was not in  compliance  with as of  December  31,  1998 and March  31,  1999 and
amended  covenants for 1999 and 2000.  With the execution of this  amendment all
previous financial covenants have been waived.  Amended covenants consist of the
following:

  o As of June 30, 1999 working  capital shall be no less than  $8,000,000.  The
    ratio of current assets to current  liabilities  shall not be less than 1.50
    to 1.00. Tangible net worth shall not be less than $7,000,000.
  oAs of September 30, 1999 working  capital  shall be no less than  $6,000,000.
   The ratio of  current  assets to current  liabilities  shall not be less than
   1.50 to 1.00. Tangible net worth shall not be less than $5,000,000.
  o As of December 31, 1999 working  capital  shall be no less than  $8,000,000.
    The ratio of current  assets to current  liabilities  shall not be less than
    1.75 to 1.00. Tangible net worth shall not be less than $6,500,000.
  o Gross Profit Margins for the year ending December 31, 1999 shall not be less
    than 35%.
  o Net losses  before  taxes for the year ending  December  31, 1999 are not to
    exceed $10,000,000.
  o Net losses  before  taxes for the year ending  December  31, 2000 are not to
    exceed $ 0.


<PAGE>

4.       Segment Data

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

     On November 23, 1998 the Company  acquired all of the outstanding  stock of
SCii Telecom,  SA, in Paris France. As a result of the acquisition,  the Company
now reports segments on a geographic basis.  European operations did not qualify
as a  reportable  segment  as of  December  31,  1998,  therefore,  there  is no
comparable segment information presented.

<TABLE>

<CAPTION>                <S>                                               <C> 

Summary  information  by segment as of and for the three months ending March 31,
1999 is as follows:

     NORTH AMERICA:
              Revenues from external customers                           $2,919,974
              Intersegment revenues                                           5,250
              Segment profit / (loss)                                    (2,162,827)
              Segment assets                                             24,268,657

     EUROPE:
              Revenues from external customers                             $153,555
              Intersegment revenues                                             -0-
              Segment profit / (loss)                                      (843,715)
              Segment assets                                              6,472,523



      A reconciliation of the Company's segment losses to the corresponding  consolidated  amounts for the three months
      ending March 31, 1999 is as follows:

              Segment profit / (loss)                                  ($3,006,542)
              Profit margins on intersegment revenues                       (2,275)
                                                                   =================
              Net loss                                                 ($3,008,817)
                                                                   =================




</TABLE>


<PAGE>


<TABLE>

<CAPTION>           <S>                                                    <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
                                                                               March 31,

                                                                         1999              1998

Sales                                                                    100%              100%
                                                                                           
Cost of goods sold                                                        45                59
                                                                      -----------       ----------

     Gross profit                                                         55                41


Expenses

     Sales and marketing                                                  50                18

     General and administrative                                           59                22

     Research and development                                             44                29
                                                                      -----------        ----------

     Total Operating Expenses                                            1.53               69

Loss from operations                                                     (98)              (27)


Interest Income                                                           5                  *

Interest Expense                                                         (5)                (2)

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

    Loss before income taxes                                             (98)              (29)

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


                 Net Loss                                               (98)%              (29)%
                                                                      ===========        ==========
o        Total is less than 1%

</TABLE>

<PAGE>

Three  months  ended March 31, 1999 as Compared to three  months ended March 31,
1998

Net Sales

     Worldwide  sales were $3,073,529 for the three months ended March 31, 1999,
a decrease  of  $3,203,088  compared  to net sales of  $6,276,617  for the three
months ended March 31, 1998. Domestic sales were $2,682,539 for the three months
ended March 31, 1999 compared to $5,592,581 for the three months ended March 31,
1998, a decrease of $2,910,042.  Approximately  $2.1 million of this decrease is
attributable to a decrease in T1-Modem+  sales to Compaq,  a major PC Integrator
customer.  Compaq has  discontinued  its networking  group and as a result,  the
Company  expects 1998 sales to PC  integrators  to be a significant  part of its
1999 sales variances from the previous year. Other domestic  decreases include a
reduction in RS1000 product sales to technical original equipment  manufacturers
(TOEM).  International  sales  were  $390,990  for  the  first  quarter  of 1999
including  U.S.  exports of  $237,435  and sales  from  European  operations  of
$153,555.  This as  compared  to  $684,036  for the first  quarter of 1998.  The
decrease of $293,046 in  international  sales is a result of a decrease in sales
of RS1000  and  T1-Modem+  due to the  introduction  of the  RS2000  product  in
September of 1998.  Such decreases  were  partially  offset by revenues from the
Company's European  subsidiary,  SCii Telecom, SA which was acquired in November
1998.

Gross Profit

     Gross  profit  decreased  by  $916,308 or 35% to  $1,679,931  for the three
months ended March 31, 1999 from $2,596,238 for the three months ended March 31,
1998.  Gross  profit  margin was 55% for the three  months  ended March 31, 1999
compared to 41% for the three months ended March 31,  1998.  Margin  differences
were due to a  reduction  in sales  that was  partially  offset by higher  gross
margin  rates.  The 14%  increase in gross  profit  margin as a percent of sales
reflects the shift in markets from lower margin sales to PC  Integrators  in the
first  quarter of 1998 to shipments to TOEM  customers  which carry higher gross
margins.

Sales and marketing

     Sales and marketing  expenses were $1,524,903 or 50% of sales for the three
months ended March 31, 1999 compared to $1,102,077 or 18% of sales for the three
months ended March 31,1998. The increase of $422,826 or 38% reflects an increase
in salaries and related expenses.  These increases resulted from the acquisition
of the Company's European subsidiaries, hiring a Senior Marketing Vice President
and transferring the former President to the Vice President of Sales position in
the fourth quarter of fiscal 1998.  Such  increases  were partially  offset by a
reduction  in  commissions  due to lower  sales and  reduced  costs for  product
demonstration equipment.

<PAGE>

General and administrative

     General and  administrative  expenses were  $1,826,855 for the three months
ended March 31, 1999 compared to $1,356,051 for the three months ended March 31,
1998.  The  increase of $470,804  reflects  amortization  of goodwill  and other
intangibles of $265,679  realized in the Company's  November 1998 acquisition of
SCii Telecom,  SA. General and administrative  expenses of SCii also contributed
$129,481 in the quarter ending March 31, 1999.  Allowances for doubtful accounts
constituted  a $191,248  increase as compared to the first  quarter of the prior
year. Such increases were partially  offset by decreases in consulting and other
administrative  expenses related to the Company's  Communications  Systems Group
(CSG). The CSG was sold to Cabletron in September 1998.

Research and Development

     Research and  development  expenses  were  $1,352,127  for the three months
ended March 31, 1999 compared to $1,849,137 for the three months ended March 31,
1998, a decrease of $497,010.  Research and development  expenses increased as a
percent  to  sales  from  29% in the  first  quarter  of 1998 to 44% in the same
quarter of 1999. CSG research and development  expenses  incurred in the quarter
ending March 31, 1998 were  $886,373.  As a result of the sale of the CSG, there
were no  expenses  related to this group in 1999.  Increases  in  expenses  were
comprised  primarily of research and  development  of the foreign  subsidiary of
$214,815 and bonuses paid to certain  engineers in conjunction  with  employment
contracts of approximately $213,000.

<PAGE>

Liquidity and Capital Resources

     The  Company  has a  credit  facility  with  Transamerica  Business  Credit
Corporation's Technology Finance Division, of Farmington, Connecticut. Currently
the Company has a  five-year,  $3 million  term loan and a $4 million  revolving
credit  facility  ("Revolver").  As of March  31,  1999,  there  was  $2,504,788
outstanding  under the term loan and $2,500,000 under the Revolver.  (See Note 3
to the Financial Statements.)
     The  Company  took down the term loan on June 12,  1997 when it signed  the
agreement.  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 September 30, 1998, the interest rate in effect was 12.099%.
     The Revolver provides for up to $4.0 million in advances based on a formula
of eligible accounts receivable and inventory.  Amounts drawn under the Revolver
mature on June 12, 2000.  Eligibility is computed monthly and amounts drawn that
are not supported by the formula are to be repaid at that time. Accordingly, the
Revolver  balance is reflected as a current  liability on the balance sheet. 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.
    
     The Company was not in compliance  with certain  financial  covenants as of
December  31,  1998 and March 31,  1999.  Such  covenants,  as  amended,  are as
follows:  minimum gross profit margin of 35% for the fiscal year ending December
31, 1998; and accounts receivable  collection period of 55 days. On May 14, 1999
the Company  executed an  amendment  to its  agreement  with  Transamerica  that
included a waiver  for  noncompliance  with the above  mentioned  covenants  and
amended  covenants for 1999 and 2000.  With the execution of this  amendment all
previous financial covenants have been waived.  Amended covenants consist of the
following:

     o As of June 30, 1999 working capital shall be no less than $8,000,000. The
     ratio of current assets to current  liabilities shall not be less than 1.50
     to 1.00.  Tangible  net worth  shall not be less than  $7,000,000.  o As of
     September 30, 1999 working  capital shall be no less than  $6,000,000.  The
     ratio of current assets to current  liabilities shall not be less than 1.50
     to 1.00.  Tangible  net worth  shall not be less than  $5,000,000.  o As of
     December 31, 1999 working  capital  shall be no less than  $8,000,000.  The
     ratio of current assets to current  liabilities shall not be less than 1.75
     to 1.00.  Tangible  net worth  shall not be less than  $6,500,000.  o Gross
     Profit Margins for the year ending December 31, 1999 shall not be less than
     35%. o Net losses  before  taxes for the year ending  December 31, 1999 are
     not to exceed  $10,000,000.  o Net losses  before taxes for the year ending
     December 31, 2000 are not to exceed $ 0.

<PAGE>

     During the three months  ended March 31, 1999,  there was a net decrease in
cash and cash  equivalents  of  $5,137,745.  At March  31,  1999,  cash and cash
equivalents  amounted to $12,858,830.  Working capital amounted to $9,956,921 at
March 31, 1999 compared to $12,632,033 at December 31, 1998.
     Net cash used in operating  activities for the three months ended March 31,
1999 amounted to $4,528,826.  The negative cash flows from  operations  were the
due,  in part,  to the  Company's  net loss of  $3,008,817  which was  offset by
non-cash  expenditures  related  to  depreciation,  amortization,  reserves  and
allowances of $832,145. Other operating cash uses included decreases in accounts
payable  and  accrued  liabilities  of  $3,592,153  as  the  Company  paid  down
obligations  of its subsidiary and accrued costs related to the sale of the CSG.
Such  decreases  were  partially  offset by increases  in operating  cash due to
reduced   inventory   and  accounts   receivable   of  $562,645  and   $467,739,
respectively.
     Net cash used in investing  activities for the three months ended March 31,
1999 amounted to $321,162 due mostly to the purchases of computer and peripheral
equipment   related  to  engineering  staff  and  final  test  and  assembly  in
manufacturing.
     Net cash used in financing  activities for the three months ended March 31,
1999 amounted to $269,463, reflecting principal payments on debt.

         Readiness for Year 2000

     Until recently,  many computer  programs were written using two digits as a
space saving measure  rather than four digits to define the  applicable  year in
the twentieth century. Such software may recognize a date using "00" as the year
1900  rather  than the year 2000.  The  Company is in the  process of  defining,
assessing and converting,  or replacing  various internal  computer programs and
systems to ensure that these  Information  Technologies  will be Year 2000 (Y2k)
compliant.  Implementation is expected to be completed before September 30, 1999
at which  time the  Company  expects  to have  completed  its  plans to test Y2k
compliance of critical  systems.  While the estimated Y2k costs of these efforts
are not  expected  to be  material to the  Company's  financial  position or any
year's results of operations, there can be no assurance to this effect.

     Non-Information  Technology systems, which include embedded technology such
as  micro-controllers  used in fax machines,  photocopiers,  telephone switches,
security  systems,  and other  common  devices  may also be  affected by the Y2k
Problem.  The Company is currently  assessing the potential  effect, if any, and
the  cost  of  remediating  the Y2k  Problem  with  respect  to its  office  and
facilities equipment.

     While  the  Company  continues  to test its  products,  it  believes  these
products, which do not utilize date codes, are Y2k compliant.  However, the fact
that these products  interact with other third party vendor products and operate
on  computer  systems  which  are not  under the  Company's  control,  it is not
possible  to be  completely  certain  that  all of the Y2k  problems  have  been
foreseen.

     In  addition,  the Company has  initiated  communications  with third party
suppliers  to  determine  that the  supplier's  operations  and the products and
services  they provide are Y2k  compliant.  Where  practicable  the Company will
attempt to mitigate its risks with respect to the failure of suppliers to be Y2k
ready. A survey of the Company's  major suppliers has revealed that 82% have Y2K
compliance  programs  in place and are,  or will be, Y2k  compliant  in a timely
manner. In the event that these third parties are not Y2k compliant, the Company
will seek  alternative  sources of supplies.  However,  such  failures  remain a
possibility  and could  have an  adverse  impact  on the  Company's  results  of
operations or financial condition.

     Recovery under existing  insurance  policies should be available  depending
upon the circumstances of a Y2k related event and the type of facility involved.
Generally,  no recovery  would be available in the event of an orderly  shutdown
which does not result in damage to a facility. Potential recoveries in the event
of  facility  damage,  including  business  interruption,  would be  subject  to
deductibles in place under these policies.

     The above expectations are subject to uncertainties. For example, if we are
unsuccessful  in  identifying  or  fixing  all  Y2k  problems  in  our  critical
operations,  or if we are  affected  by the  inability  of  suppliers  or  major
customers  to  continue  operations  due  to  such a  problem,  our  results  of
operations could be materially impacted."
<PAGE>

Part II.     Other Information

       None

Item 6.Exhibits and Reports on Form 8-K

a)     Exhibits -  Exhibit 27  Schedule of Financial Data (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
                                               Vice President of Finance and
                                               Principal Accounting Officer


Date:  May 17, 1999
<PAGE>