Securities and Exchange Commission

                                               Washington, DC 20549
                                        __________________________________

<TABLE>
<CAPTION>      <S>                                                                   <C>
                                                  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, 1998                                   Commission file number: 0-25326

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

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

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

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

                                                 Yes ( X ) No ( )

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

Common Stock, $.001 par value                                    9,755,150 shares outstanding
                                                                as of September 30, 1998


           Documents Incorporated by Reference: Reports on Form 8-K dated September 16, 1998 and October 23, 1998
</TABLE>

<PAGE>

<TABLE>

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

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

                  B.       Statements of operations for the three and nine months ended
                           September 30, 1998 and 1997.



                  C.       Statements of cash flows for the nine months
                           nded September 30, 1998 and 1997.



                  D.       Notes to financial statements



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


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


Item 6.  Exhibits and Reports on Form 8K
         -------------------------------
</TABLE>

<PAGE>

PART I. - FINANCIAL INFORMATION
ITEM 1. - FINANCIAL STATEMENTS
                                                 ARIEL CORPORATION
                                                  BALANCE SHEETS
                                                    (Unaudited)

<TABLE>

<CAPTION>                             <S>                                       <C>           <C>
            
                                                                           September 30,      December 31,
                                                                                1998              1997

                                  ASSETS

CURRENT ASSETS:

       CASH AND CASH EQUIVALENTS .........................................   $ 24,607,143    $  2,645,864
       ACCOUNTS RECEIVABLE, NET OF ALLOWANCE FOR DOUBTFUL
             ACCOUNTS OF $860,867 IN 1998 AND $187,446 IN 1997 ...........      3,176,832       1,395,624
       OTHER RECEIVABLES .................................................        931,916          73,311
       INVENTORIES .......................................................      3,898,136       3,536,190
       PREPAID EXPENSES ..................................................        440,381         299,336
                                                                               -----------     -----------
TOTAL CURRENT ASSETS                                                           33,054,408       7,950,325



EQUIPMENT, NET OF ACCUMULATED DEPRECIATION
            AND AMORTIZATION .............................................      1,273,509       2,382,645
OTHER ASSETS .............................................................        681,416         788,697
                                                                             ------------    ------------

TOTAL ASSETS                                                                 $ 35,009,333    $ 11,121,667
                                                                              ============    ============


LIABILITIES & STOCKHOLDERS' EQUITY

CURRENT LIABILITIES:

       ACCOUNTS PAYABLE ..................................................   $    471,680    $  1,186,876
       ACCRUED EXPENSES ..................................................      3,508,891       1,754,697
       ROYALTIES PAYABLE .................................................         77,328          79,734
       INCOME TAXES PAYABLE ..............................................        368,632            --
       NOTES PAYABLE - CURRENT PORTION OF LONG-TERM DEBT .................      3,358,603         600,000
                                                                                ---------      ----------     
TOTAL CURRENT LIABILITIES                                                       7,785,134       3,621,307

NOTES PAYABLE - LONG TERM ................................................      1,934,007       2,367,147

STOCKHOLDERS' EQUITY

       PREFERRED STOCK, $.001 PAR VALUE:
                AUTHORIZED - 2,000,000 SHARES
                          ISSUED AND OUTSTANDING - NONE
       COMMON STOCK, $.001 PAR VALUE:
                AUTHORIZED - 20,000,000 SHARES
       ISSUED AND OUTSTANDING - 9,755,150  AT SEPTEMBER  30, 1998
                                 AND 9,234,250  AT  DECEMBER 31, 1997.....          9,755           9,235
       ADDITIONAL PAID-IN CAPITAL ........................................     32,959,573      30,949,180
       UNEARNED COMPENSATION .............................................        (27,704)       (110,819)
       ACCUMULATED DEFICIT ...............................................     (7,651,430)    (25,714,383)
                                                                               -----------    ----------- 
TOTAL STOCKHOLDERS' EQUITY                                                     25,290,194       5,133,213
                                                                               -----------    ----------- 
TOTAL LIABILITIES & STOCKHOLDERS' EQUITY                                      $ 35,009,333   $ 11,121,667
                                                                               ===========    =========== 


<FN>
             See accompanying notes to unaudited financial statements.
</FN>
</TABLE>
<PAGE>
                                                ARIEL CORPORATION
                                             STATEMENTS OF OPERATIONS
                                                    (Unaudited)
<TABLE>
<CAPTION>           <S>                           <C>            <C>            <C>               <C>

                                                Quarter Ended September 30,     Nine Months Ended September 30,

                                                    1998             1997            1998            1997
                                                  ----------      ----------     ----------      -----------
SALES .......................................   $  3,180,252    $  3,044,843    $ 13,568,059    $ 10,104,405

COST OF GOODS SOLD ..........................      1,934,344       1,635,391       8,247,966       5,576,133
                                                  ----------       ---------      ----------       ---------
       GROSS PROFIT .........................      1,245,908       1,409,452       5,320,093       4,528,272


EXPENSES:
     SALES AND MARKETING ....................      1,641,901       1,157,894       4,514,323       3,583,142
     GENERAL AND ADMINISTRATIVE .............      2,274,162       1,080,047       4,102,772       3,210,846
     RESEARCH AND DEVELOPMENT ...............      2,459,837       2,714,236       6,825,641       7,760,244
     RESTRUCTURING CHARGE ...................              0         379,454               0         379,454
                                                   ---------       ---------      ----------      ----------
         TOTAL OPERATING EXPENSES ...........      6,375,900       5,331,631      15,442,738      14,933,686
                                                   ---------      ----------     -----------     -----------
       LOSS FROM OPERATIONS .................     (5,129,992)     (3,922,179)    (10,122,645)    (10,405,414)


INTEREST INCOME .............................        140,399          67,140         180,607         278,564
INTEREST EXPENSE ............................       (939,599)       (118,976)     (1,217,001)       (147,709)

GAIN ON SALE OF ASSETS ......................     29,537,896               0      29,537,896               0

OTHER INCOME ................................             72           2,293          52,728         148,567
                                                  -----------     ----------      ----------     -----------
      INCOME / (LOSS) BEFORE INCOME TAXES ...     23,608,776      (3,971,722)     18,431,585     (10,125,992)
                                                  
      PROVISION FOR INCOME TAXES ............        368,632               0         368,632               0
                                                  -----------     -----------    -----------     -----------      
       NET INCOME / (LOSS) AFTER INCOME TAXES   $ 23,240,144    ($ 3,971,722)   $ 18,062,953    ($10,125,992)
                                                  ===========     ===========    ===========     ===========

BASIC EARNINGS /(LOSS) PER COMMON SHARE .....   $       2.39    $      (0.43)   $       1.86    $      (1.11)
                                                 ===========      ===========    ===========      ===========
    
DILUTED EARNINGS / (LOSS) PER COMMON SHARE ..   $       2.36    $      (0.43)   $       1.84    $      (1.11)
                                                 ===========      ===========    ===========      ===========
BASIC  WEIGHTED AVERAGE COMMON
                    SHARES OUTSTANDING ......      9,742,926       9,179,201       9,728,223       9,139,023

EFFECT OF DILUTIVE OPTIONS ..................        123,314               0          74,157               0

DILUTED WEIGHTED AVERAGE COMMON
                     SHARES OUTSTANDING .....      9,866,240       9,179,201       9,802,380       9,139,023
                                                  ===========      ===========    ===========      ===========


<FN>
             See accompanying notes to unaudited financial statements.
</FN>
</TABLE>
<PAGE>
                                                ARIEL CORPORATION
                                              STATEMENTS OF CASH FLOWS

<TABLE>

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

                                                                For The Nine  Months Ended September 30,
                                                                            1998             1997
                                                                           ------           ------
Cash flows from operating activities:

Net Profit (Loss) ...................................................   $ 18,062,953    $(10,125,992)
Adjustments to reconcile net loss to net cash used in
     operating activities:
                   Depreciation and amortization ....................        913,641         839,247
                   Amortization of discount on royalties payable ....           --             2,998
                   Gain on Sale of Assets ...........................    (29,537,896)           --
                   Loss on Sale of Marketable Securities ............           --            12,812
                   Amortization of non-cash financing costs .........         48,629            --
                   Provision for doubtful accounts ..................        724,268          30,000
                   Provision for inventory obsolescence .............        225,000          85,000
                   Non-cash compensation expense ....................         83,115         134,117
(Increase) decrease in assets:
                   Trade and other accounts receivable ..............     (3,202,582)      1,841,938
                   Inventories ......................................       (779,711)       (263,322)
                   Other assets .....................................       (119,351)       (406,342)
Increase (decrease) in liabilities:
                   Accounts payable and accrued expenses ............        444,309      (1,090,228)
                   Royalties payable ................................         (2,406)        (15,244)
                   Notes payable-related parties ....................           --          (154,021)
                   Deferred Revenue .................................         (6,884)        765,431
                                                                         ------------     -----------  
Cash flows used in operating activities: ............................    (13,146,915)     (8,343,606)
                                                                         ------------     -----------
Cash flows provided by investing activities:
                   Purchases of Investments .........................           --         5,993,634
                   Net Proceeds from Sale of Assets .................     31,187,253            --
                   Purchase of equipment ............................       (415,437)     (1,297,750)
                                                                          ----------      ----------- 
Cash flows provided by investing activities: ........................     30,771,816       4,695,884
                                                                          ----------       ---------- 
Cash flows provided by financing activities:
                   Proceeds from debt financing .....................      4,500,000       3,000,000
                   Principal payments on Long-term debt .............       (174,537)           --
                   Principal payments on Short-term debt ............     (2,000,000)           --   
                   Proceeds from exercise of common stock options and      
                   warrants                                                2,010,915       1,078,501
                                                                          ----------       ---------      
Cash flows provided by financing activities: ........................      4,336,378       4,078,501
                                                                          ----------       --------- 
Net increase (decrease) in cash .....................................     21,961,279         430,779

                   Cash and cash equivalents, beginning of period ...      2,645,864       4,626,583
                                                                         -----------       --------- 
Cash and cash equivalents, end of period ............................   $ 24,607,143    $  5,057,362
                                                                         ===========     ===========

<FN>
                       See accompanying notes to unaudited financial statements.
</FN>
</TABLE>
<PAGE>
                                                 Ariel Corporation
                                           Notes to Financial Statements
                                                    (Unaudited)

1.       Basis of Presentation

     The financial statements included herein have been prepared by the Company,
pursuant to the Rules and Regulations of the Securities and Exchange Commission.
Certain  information  and footnote  disclosures  normally  included in financial
statements prepared in accordance with generally accepted accounting  principles
have been  condensed  or omitted  pursuant  to such rules and  regulations.  The
Company  believes that the disclosure  contained  herein is adequate to make the
information presented not misleading. The financial statements should be read in
conjunction  with the financial  statements  and notes  thereto  included in the
Company's  Form 10-K for the year ended  December 31, 1997. The year end balance
sheet data was derived from audited  financial  statements  but does not include
all disclosures  required by generally  accepted  accounting  principles.
     As of September 30, 1998, the Company had working  capital of  $25,269,274,
including cash and cash equivalents of $24,607,143. The Company expects to incur
costs and  expenses in excess of expected  revenues as the Company  continues to
execute its business strategy in the Remote Access market.
     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,  1998 and the results of  operations  for the nine
months ended  September 30, 1998 and 1997.  The results for interim  periods are
not necessarily indicative of results for the full year.

<TABLE>
<CAPTION>      <S>                                                         <C>                      <C>
2.       Inventories, net of allowance:
         Inventories, net of allowance, consists of the following:
                                                                       September 30,         December 31,
                                                                            1998                  1997  
                                                                          --------             ---------      
         Component Materials............................................ $1,746,276           $2,077,866
         Work-in process................................................. 1,033,163              843,428
         Finished Goods.................................................. 1,118,697              614,896
                                                                         ----------            ---------  
                                                                         $3,898,136           $3,536,190
                                                                         ==========           ==========
</TABLE>

3.       Debt

     Under its credit facility with Transamerica  Business Credit  Corporation's
Technology  Finance  Division  of  Farmington   Connecticut,   the  Company  has
$5,292,610  in  outstanding  debt as of September  30, 1998.  $2,792,610 of this
outstanding  debt was a Term Loan  payable  quarterly  in  arrears  over  twenty
consecutive  quarters  commencing  October 1, 1997.  At  September  30, 1998 the
interest rate in effect on the term loan was 12.099%.
     The remaining $2,500,000 was 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.

<PAGE>

4.       Adoption of Statements of Financial Accounting Standards

     The Company adopted Statement of Financial  Accounting Standards (SFAS) No.
128, "Earnings  per Share".  SFAS 128 requires  presentation  of both basic and
diluted  earnings per share.  Basic earnings per share has been calculated based
on the weighted average number of shares of common stock outstanding  during the
reporting period.  Diluted earnings per share is calculated giving effect to all
potentially dilutive common shares, assuming such shares were outstanding during
the  reporting  period.  However,  for the three and nine month  periods  ending
September 30, 1997 the exercise of such  potentially  dilutive common shares has
not been  assumed  since the result is  antidilutive.  At  September  30,  1998,
options to purchase  1,584,533  shares of common  stock for the three months and
835,083  shares of common  stock for the nine  months were  outstanding  but not
included in the  computation of diluted  earnings per share because the options'
exercise  price were greater than the average market price of the common shares.
Option  prices  ranged  from $5.75 to $11.75 per share for the three  months and
$7.50 to $11.75 per share for the nine month period. These options, which expire
on various dates ranging from 04/01/04 through 08/21/08,  were still outstanding
as of September 30, 1998.
     A   reconciliation   of  the  weighted  average  number  of  common  shares
outstanding to common shares outstanding assuming dilution is as follows:


<TABLE>
<CAPTION>    <S>                                                <C>                         <C>                                  
                                                              3 Months Ending             9 Months Ending
                                                              September 30, 1998         September 30, 1998
                                                              ------------------         ------------------
Weighted Average Common Shares Outstanding                          9,742,926                 9,728,223

Options Assumed to be Exercised                                       418,524                 1,182,677

Shares Acquired Using 
          the Treasury Stock Method                                  (295,210)               (1,108,520)
                                                              ------------------          -----------------
Common Shares Outstanding Assuming Dilution                         9,866,240                 9,802,380
                                                              ==================          =================   
</TABLE>

5.       Adoption of Statements of Financial Accounting Standards

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

6.       Disposition of Assets

     On September 1, 1998,  the Company  completed the sale of all of the assets
of its  Communications  Systems  Group,  (CSG or DSLAM unit),  to publicly  held
Cabletron Systems, Inc. of Rochester,  New Hampshire. The Company received $28.5
million in cash on September  1, 1998 in addition to a $5.0  million  deposit it
took down on July 27, 1998,  for total  proceeds of $33.5 million for the assets
of the CSG.  Expenses  of the  transaction  netted  against  the  proceeds  were
approximately $3,962,104 including $1,541,673 to Mr. Etienne Perold, $100,000 to
Mr.  Theodore J. Coburn and $75,000 to Mr. Robert J.  Ranalli,  directors of the
Company,  who have provided  management  advisory services to the Company in the
past.
     Additionally,  interest  expense  reflects a one time charge of $750,000 in
accordance with the terms of a $2.0 million bridge loan the Company drew down on
February 19, 1998 against the anticipated proceeds of this sale. Under the terms
of the  Bridge  Loan,  the note  matured  upon  the  sale of the  CSG.  To avoid
additional interest,  the Company amended the terms to pay the one time fee upon
receipt of the deposit on July 27, 1998. The outstanding principal balance of $2
million and any accrued interest was repaid at closing on September 1, 1998.
     In  addition  to these  expenses  approximately  $1.2  million in  employee
bonuses were paid as a result of the sale.

7.  Tax Provision

     As of  December  31,  1997,  the  Company  had  available,  for  income tax
reporting purposes, unused federal and state net operating loss carryforwards of
approximately $24.5 million and $24.8 million,  respectively.  These losses will
expire through the years 2012 and 2004 respectively.  Under certain  Alternative
Minimum Tax rules, these losses can be used to offset up to 90% of the Company's
taxable gain. Therefore, a provision for income taxes of $368,632 was recognized
in the three months ending September 30, 1998.
     The  provision was computed  using an effective  rate of two percent of net
income before tax for the nine months ending  September 30, 1998.  The effective
rate is based on an  Alternative  Minimum Tax rate of 20% applied to 10% of nine
months income before taxes.  Remaining federal and state loss  carryforwards are
approximately $6.4 million and $6.7 million respectively.
     There were no tax provisions for the same period in 1997.


<PAGE>



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

COMPARISON OF RESULTS OF OPERATIONS
-----------------------------------
Three months ended September 30, 1998 as compared to three months
-----------------------------------------------------------------
ended September 30, 1997
------------------------

Net Sales
     Worldwide  sales were  $3,180,252 for the three months ended  September 30,
1998, an increase of $135,409  compared to net sales of $3,044,843 for the three
months ended  September 30, 1997.  Domestic sales were  $2,544,862 for the three
months ended  September  30, 1998  compared to  $2,860,303  for the three months
ended September 30, 1997. In November 1997 the Company announced its decision to
focus on the Remote  Access Open  Systems  market.  The  decrease of $315,441 in
domestic sales is  attributable to a shift from DSP products in the three months
ending September 30, 1997 to T1-Modem products to its OEM customers.  Management
attributes  the decrease to slower  acceptance of Open Systems  standards in the
remote  access  markets and believes  demand will  increase  with the  continued
improvements  of  related  software,   PCI  hardware  interface  technology  and
acceptance  of  standard  operating  systems  as the  basis  for  remote  access
applicaitons.  Export sales were $635,390 for the three months ending  September
30,  1998  compared to $184,540  for the same  period in 1997.  The  increase in
export sales of $450,850 is a result of increased  sales of Legacy  products and
increased sales efforts in Europe.

Gross Profit
     Gross  profit  decreased  by  $163,544 or 12% to  $1,245,908  for the three
months  ended  September  30, 1998 from  $1,409,452  for the three  months ended
September  30,  1997.  Gross  profit  margin was 39% for the three  months ended
September  30, 1998  compared to 46% for the three  months ended  September  30,
1997.  Reductions  in margin rates are due to a shift from higher  margin Legacy
products  in the three  months  ending  September  30,  1997 to a greater mix of
Datacommunications  product  sales to OEM customers for the same period in 1998.
Current margin rates reflect a mix of products and pricing  strategies  aimed at
improving  market share.  The Company believes these margins rates will continue
for the next several months and improve through 1999 as new product releases and
sales to distributors increase.

Sales and marketing
     Sales and marketing  expenses were $1,641,901 or 52% of sales for the three
months ended  September  30, 1998 compared to $1,157,894 or 38% of sales for the
three months ended September  30,1997.  Increases of $484,007 included increases
due to salaries, consulting and related travel expenses as the Company continues
its efforts to grow product and brand  recognition  through  sales and marketing
research, trade shows and other programs.

<PAGE>

General and Administrative
     General and  administrative  expenses were  $2,274,162 for the three months
ended  September  30, 1998  compared to  $1,080,047  for the three  months ended
September 30, 1997.  Increases were due primarily to an additional provision for
doubtful accounts of $678,600 for Hayes Microcomputer  Products,  Inc. Hayes and
its affiliates  voluntarily filed for protection under Chapter 11 of the federal
bankruptcy code on October 9, 1998. Other increases  resulted from incentives to
management  for the gain on the  sale of the  Company's  Communications  Systems
Group (DSLAM) to Cabletron Systems, Inc.
     These  increases were off set in part by reductions due to the departure of
the Company's  Chief  Financial  Officer during the second quarter of 1998 and a
software  licensing  fee incurred in the third quarter of 1997 that has not been
renewed for 1998.

Research and Development
     Research and  development  expenses were $2,459,837 or 77% of sales for the
Three months ended September 30, 1998 compared to $2,714,236 or 89% of sales for
the Three  months  ended  September  30,  1997,  a decrease  of  $254,399 or 9%.
Salaries and related  expenses  decreased by $220,056  reflecting a reduction in
engineers  related  to  the  cessation  of  certain  non-strategic   development
projects.  Additionally,  the current  quarter  reflects a reduction of expenses
related  to the  Communications  Systems  Group as a  result  of the sale of the
assets of that group and  termination  of its  employees  on  September 1, 1998.
Research  and  development  expenses  related to that  group were  approximately
$444,880  versus  $909,862 for the same period last year resulting in a $464,982
reduction.  These  reductions  were partially  offset by expenses  incurred as a
result of agreements signed by key engineers totaling approximately $470,000 for
the three  months  ending  September  30,  1998.  These  agreements  require the
employees to remain with the Company to realize additional  incentives that will
be amortized over the contract period.

Tax Provision
     As of  December  31,  1997,  the  Company  had  available,  for  income tax
reporting purposes, unused federal and state net operating loss carryforwards of
approximately $24.5 million and $24.8 million,  respectively.  These losses will
expire through the years 2012 and 2004 respectively.  Under certain  Alternative
Minimum Tax rules, these losses can be used to offset up to 90% of the Company's
taxable gain. Therefore, a provision for income taxes of $368,632 was recognized
in the three months ending September 30, 1998.
     The  provision was computed  using an effective  rate of two percent of net
income before tax for the nine months ending  September 30, 1998.  The effective
rate is based on an  Alternative  Minimum Tax rate of 20% applied to 10% of nine
months income before taxes.  Remaining federal and state loss  carryforwards are
approximately $6.4 million and $6.7 million respectively. There was no provision
for taxes for the same period in 1997.

<PAGE>

Nine months  Ended  September  30,  1998 as  Compared to Nine months  Ended
---------------------------------------------------------------------------
September 30, 1997
------------------

Net Sales
     Worldwide  sales were  $13,568,059  for the nine months ended September 30,
1998, an increase of  $3,463,654  compared to net sales of  $10,104,405  for the
nine months ended  September 30, 1997.  Domestic sales were  $12,240,787 for the
nine months ended  September 30, 1998 compared to $9,321,958 for the nine months
ended  September  30, 1997.  The  increase of  $2,918,829  in domestic  sales is
attributable to the increase in T1-Modem+  sales to OEM customers.  Export sales
were $1,327,272 for the nine month period ending  September 30, 1998 compared to
$782,447  for the same period in 1997.  The increase in export sales is a result
of increased  international  demand for Legacy products  combined with increased
sales efforts in Europe.

Gross Profit
     Gross profit increased by $791,821 or 17% to $5,320,093 for the nine months
ended September 30, 1998 from $4,528,272 for the nine months ended September 30,
1997.  Gross profit margin was 39% for the nine months ended  September 30, 1998
compared to 45% for the nine months ended  September  30, 1997.  The decrease in
gross  profit  margin as a percent  of sales  reflects  the  continued  shift in
product mix from  shipments of higher  margin DSP OEM products in the nine month
period ending September 30, 1997 to shipments of the Company's T1-Modem products
to OEM customers which carry lower gross margins.

Sales and marketing
     Sales and marketing  expenses were  $4,514,323 or 33% of sales for the nine
months ended  September  30, 1998 compared to $3,583,142 or 35% of sales for the
nine months ended September 30,1997. The increase of $931,181 or 26% reflects an
increase in salaries and related  expenses as the Company hired a Vice President
of Sales and  expanded  its sales  force to a more  senior  data  communications
focused group over the last nine months of 1998.  Commissions and other variable
selling  expenses  increased  proportionate  to  increased  sales  volume as did
expenses  related to trade shows that the Company  participated  in during 1998.
Such increases were offset by a reduction in advertising and marketing  expenses
related to the Company's DSP OEM products.

General and administrative
     General and  administrative  expenses were  $4,102,772  for the nine months
ended  September  30, 1998  compared  to  $3,210,846  for the nine months  ended
September 30, 1997.  The increase of $891,926  reflects an additional  provision
for doubtful accounts of $678,600 for Hayes Microcomputer  Products,  Inc. Hayes
and its  affiliates  voluntarily  filed for  protection  under Chapter 11 of the
Federal  Bankruptcy  Code on October  9, 1998.  Other  increases  resulted  from
incentives   to   management   for  the  gain  on  the  sale  of  the  Company's
Communications Systems Group (DSLAM) to Cabletron Systems, Inc.
     These  increases were off set in part by reductions due to the  resignation
of the  Company's  Vice  Chairman in  September  1997 and the  departure  of the
Company's Chief Financial Officer during the second quarter of 1998.

<PAGE>

Research and Development
     Research and  development  expenses were $6,825,641 or 50% of sales for the
nine months ended  September 30, 1998 compared to $7,760,244 or 77% of sales for
the nine  months  ended  September  30,  1997,  a decrease  of  $934,603 or 12%.
Salaries and related  expenses  decreased by $481,000  reflecting a reduction in
engineers  related  to  the  cessation  of  certain  non-strategic   development
projects. Additionally,  expenses related to outside contract labor decreased by
approximately  $329,000  reflecting the  discontinuance  of certain research and
development  projects  related to forward  looking  technologies.  Research  and
development  expenses  related  to the CSG  for the  nine  month  period  ending
September 30, 1998 were approximately  $2,309,430 versus $2,384,182 for the same
period in 1997 resulting in a decrease of $74,752.

Tax Provision
     A provision for income taxes of $368,632 was recognized for the nine months
ending  September 30, 1998. No provision was recognized for the six month period
ending  June 30,  1998 due to  losses  reported  for that  period.  There was no
provision for taxes for the nine months ending September 30, 1997.

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 September 30, 1998,  there was $2,792,610
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.

<PAGE>

     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.
     On February 19,  1998,  the Company  entered into a $2 million  bridge loan
("Loan") with Transamerica. This facility provided for a single advance provided
to the Company on February 19, 1998.  The loan matured on September 1, 1998 upon
the closing of the sale by the Company of its Communications  Systems Group. The
outstanding  principal balance of $2 million and accrued interest were repaid at
closing.
     During the nine months ended  September 30, 1998,  there was a net increase
in cash and cash  equivalents of  $21,961,279.  At September 30, 1998,  cash and
cash   equivalents   amounted  to  $24,607,143.   Working  capital  amounted  to
$25,269,274 at September 30, 1998 compared to $4,329,018 at December 31, 1997.
     Net cash used in operating  activities for the nine months ended  September
30, 1998 amounted to  $13,146,915.  The negative cash flows from  operations was
primarily the result of the Company's net operating loss of $10,122,645, as well
as increases in accounts  receivable  and inventory of $3,202,582  and $779,711,
respectively.  The increase in accounts  receivable  over the nine months ending
September  30,  1998 is a result of  approximately  $3.5  million in  additional
shipments combined with increased collection periods from a higher mix of export
and OEM customers.  The increase in inventory  occurred in finished goods and is
due to reduced forecasts from OEM customers. Such working capital increases were
partially offset by an increase in accounts payable of $444,309.
     Net cash  generated  by  investing  activities  for the nine  months  ended
September 30, 1998 amounted to  $30,771,816.  Cash proceeds from the sale of the
assets  of the CSG  amounted  to  $33,500,000  less  transaction  costs  paid of
$2,312,747 for a net cash increase from the sale of $31,187,253. This was offset
by purchases of computer and peripheral  equipment  related to  engineering  and
final test and assembly in manufacturing of $415,437.
     Net  cash  provided  by  financing  activities  for the nine  months  ended
September 30, 1998 amounted to $4,336,378.  Proceeds of $2,500,000 were received
as a  result  of the draw  down on the  Transamerica  Revolver  in  addition  to
$2,010,915 in proceeds from the exercise of common stock options and warrants.

<PAGE>

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 June 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 60% 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>

Other Matters
     On  September 1, 1998 the Company  completed  the sale of the assets of the
CSG  realizing  a  gain  before  taxes  of  approximately  $27.6  million  after
transaction  costs,  interest  and  administrative  expenses.  The  Company  has
incurred  approximately $8.5 million in costs and expenses on a cumulative basis
related to this product effort from January 1, 1996 through September 1, 1998.
     For the foregoing reasons, the Company earned net income of $18,062,953 for
the nine months ended September 30, 1998 compared to a net loss of $(10,125,992)
for the nine months ended September 30, 1997.
     Statements  contained  in this Form 10Q that are not  historical  facts are
forward looking  statements that are made pursuant to the safe harbor provisions
of the  Private  Securities  Litigation  Reform  Act of  1995.  Forward  looking
statements involve risks and uncertainties, including the timely development and
acceptance  of new  products,  the impact of  competitive  products and pricing,
changing  market  conditions  and the  other  risks  detailed  in the  Company's
prospectus  and from time to time in other  filings.  Actual  results may differ
materially from those projected.  These forward looking statements represent the
Company's  judgement  as of the date of this  document.  The Company  disclaims,
however, any intent or obligation to update these forward looking statements.

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

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

b)       The following reports on Form 8-K are incorporated by reference as part
         of this report:

     Incorporated  herein  by  reference  to Form 8K dated  October  23,  1998 -
Adoption of Shareholder  Rights Plan declared a dividend of one preferred  share
purchase right for each  outstanding  share of common stock, par value $.001 per
share,  of the Company.  Each right entitles the  registered  holder to purchase
from  the  Company  one  one-hundredth  of a share  of  newly  created  series A
preferred stock,  par value $.001 per share, of the Company.  The purchase price
is $25  per  one  one-hundredth  of a  share  of  preferred  stock,  subject  to
adjustment.  The  description  and terms of the rights are set forth in a Rights
Plan dated October 9, 1998.
     Incorporated  herein by reference to Form 8K dated  September 16, 1998 - On
September  1,  1998,   the  Company  closed  the  sale  of  the  assets  of  its
Communications  Systems Group (DSLAM) to Cabletron  Systems,  Inc. of Rochester,
New Hampshire for approximately $33.5 million in cash.
     Financial Statements  presented include;  unaudited pro-forma balance sheet
of Ariel  Corporation as of June 30, 1998  reflecting the disposition of the CSG
as if the transaction  had occurred as of June 30, 1998 and unaudited  pro-forma
statements of operations for the six months ended June 30, 1998 and for the year
ended December 31, 1997 as if the  transaction  had occurred at the beginning of
the periods indicated.

         c)  The Company has filed reports on Form 8-K as follows:

                  -        Form 8-K filed September 16, 1998
                  -        Form 8-K filed October 23, 1998


<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
                                                       Controller
Date:  November 16, 1998

<PAGE>