<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, 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                                   9,673,125 shares outstanding
                                                               as of March 31, 1998


                                     Documents Incorporated by Reference: None
</TABLE>

<PAGE>


                                                 Ariel Corporation
                                                       Index

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

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

                  A.  Balance sheet  -  March 31, 1998 and December 31, 1997

                  B.  Statements of  operations  for the three months ended
                      March 31, 1998 and 1997.


                  C.  Statements  of cash flows for the three months ended March
                      31, 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
---------------------------



<PAGE>


<TABLE>


<CAPTION>                

<S>                                                                                  <C>                       <C>

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



                                                                                     March 31,                  December 31,
                                                                                       1998                         1997
                                                                                    ----------                  ------------
                              ASSETS

CURRENT ASSETS:
       CASH AND CASH EQUIVALENTS                                                       $986,513                  $2,645,864
       ACCOUNTS RECEIVABLE, NET OF ALLOWANCE FOR DOUBTFUL
             ACCOUNTS OF $202,446 IN 1998 AND $187,446 IN 1997                        4,903,291                   1,395,624
       OTHER RECEIVABLES                                                                 72,889                      73,311
       INVENTORIES                                                                    5,134,936                   3,536,190
       PREPAID EXPENSES                                                                 506,760                     299,336
                                                                                     -----------                 -----------
       TOTAL CURRENT ASSETS                                                          11,604,389                   7,950,325

EQUIPMENT, NET OF ACCUMULATED DEPRECIATION
            AND AMORTIZATION                                                          2,264,651                   2,382,645

OTHER ASSETS                                                                            767,271                     788,697
                                                                                    ------------                ------------
       TOTAL ASSETS                                                                 $14,636,311                 $11,121,667
                                                                                    ============                ============

                    LIABILITIES & STOCKHOLDERS' EQUITY

CURRENT LIABILITIES:
       ACCOUNTS PAYABLE                                                              $2,878,553                  $1,186,876
       ACCRUED EXPENSES                                                               1,811,192                   1,754,697
       NOTES PAYABLE - CURRENT PORTION OF LONG-TERM DEBT                              2,600,000                     600,000
       ROYALTIES PAYABLE                                                                 58,589                      79,734
                                                                                      ---------                   ---------
       TOTAL CURRENT LIABILITIES                                                      7,348,334                   3,621,307


NOTES PAYABLE - LONG TERM                                                             2,297,437                   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 - 9,673,125  AT MARCH 31, 1998
                                 AND 9,234,250 AT DECEMBER 31, 1997                      9,673                       9,235

       ADDITIONAL PAID-IN CAPITAL                                                   32,577,294                  30,949,180
       UNEARNED COMPENSATION                                                           (83,114)                   (110,819)
       ACCUMULATED DEFICIT                                                         (27,513,313)                (25,714,383)
                                                                                    -----------                 -----------
       TOTAL STOCKHOLDERS' EQUITY                                                    4,990,540                   5,133,213
                                                                                   ------------                ------------
       TOTAL LIABILITIES & STOCKHOLDERS' EQUITY                                    $14,636,311                 $11,121,667
                                                                                   ============                ============

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

</TABLE>

<PAGE>

<TABLE>

<CAPTION>

<S>                                                         <C>                                     <C>
                                                                                   ARIEL CORPORATION
                                                                              STATEMENTS OF OPERATIONS
                                                                                    (Unaudited)




                                                                             Three Months Ended March 31,
                                                                 1998                                       1997
                                                         ===================                       =====================

SALES                                                          $6,276,617                                  $4,519,526

COST OF GOODS SOLD                                              3,758,124                                   2,392,892
                                                         -------------------                       ---------------------
       GROSS PROFIT                                             2,518,493                                   2,126,634


EXPENSES:
     SALES AND MARKETING                                        1,274,434                                   1,148,424
     GENERAL AND ADMINISTRATIVE                                   869,348                                     943,645
     RESEARCH AND DEVELOPMENT                                   2,085,737                                   2,665,376
                                                          -------------------                       ---------------------

         TOTAL OPERATING EXPENSES                               4,229,519                                   4,757,445
                                                          -------------------                       ---------------------

       LOSS FROM OPERATIONS                                    (1,711,026)                                 (2,630,811)

INTEREST INCOME                                                    16,803                                     118,356

INTEREST EXPENSE                                                  (97,163)                                     (3,974)

OTHER INCOME (EXPENSE)                                             (7,544)                                     (1,468)

                                                         -------------------                       ---------------------
       LOSS BEFORE INCOME TAXES                                (1,798,930)                                 (2,517,897)

      INCOME TAXES                                                      0                                           0

                                                         ===================                       =====================
       NET LOSS                                               ($1,798,930)                                ($2,517,897)
                                                         ===================                       =====================


BASIC AND DILUTED PER SHARE DATA:
       WEIGHTED AVERAGE NUMBER OF
                COMMON SHARES OUTSTANDING                        9,380,293                                   9,066,638
                                                         ===================                       =====================

       NET LOSS PER SHARE                                          ($0.19)                                     ($0.28)
                                                         ===================                       =====================






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

</TABLE>

<PAGE>


<TABLE>

<CAPTION>

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



                                                                                             For the three months ended March 31,

                                                                                               1998                          1997
                                                                                            ------------                ------------
Cash flows from operating activities:
Net loss                                                                                     ($1,798,930)               ($2,517,897)
Adjustments to reconcile net loss to net cash used in
     operating activities:
                       Depreciation and amortization                                             313,651                    256,913
                       Amortization of discount on royalties payable                                   0                      2,998
                       Amortization of non-cash financing costs                                   16,089                          0
                       Amortization of discounts on investments                                        0                      4,319
                       Provision for doubtful accounts                                            15,000                          0
                       Provision for inventory obsolescence                                       55,000                     15,000
                       Non-cash compensation expense                                              27,705                     44,705
(Increase) decrease in assets:
                       Accounts receivable                                                    (3,522,246)                   423,400
                       Inventories                                                            (1,653,746)                  (431,069)
                       Other assets                                                             (202,085)                  (192,578)
Increase (decrease) in liabilities:
                       Accounts payable and accrued expenses                                   1,775,887                   (845,281)
                       Royalties payable                                                         (21,146)                   (20,320)
                       Notes payable-related parties                                                   0                   (117,764)
                                                                                          ----------------         -----------------
                                       Net cash used in operating activities                  (4,994,821)                (3,377,573)
                                                                                          ----------------         -----------------

Cash flows provided by investing activities:
                       Purchases of Investments                                                        0                  3,643,594
                       Purchase of equipment                                                    (223,372)                  (822,430)
                                                                                          ---------------          -----------------
                                       Net cash provided by investing activities                (223,372)                 2,821,164
                                                                                          ---------------          -----------------

Cash flows provided by financing activities:
                       Proceeds from debt financing                                            2,000,000                          0
                       Principal payments on Long-term debt                                      (69,710)                         0
                       Proceeds from exercise of common stock options and warrants             1,628,552                    898,145
                                                                                          ---------------           ----------------
                                       Net cash provided by financing activities               3,558,842                    898,145
                                                                                          ---------------           ----------------

Net increase (decrease) in cash                                                               (1,659,351)                   341,736

                       Cash and cash equivalents, beginning of period                          2,645,864                  4,626,583

                                                                                           ===============          ================
Cash and cash equivalents, end of period                                                        $986,513                 $4,968,319
                                                                                           ===============          ================







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

</TABLE>

<PAGE>

                                                Ariel Corporation
                                           Notes to Financial Statements
                                                    (Unaudited)

1.    Basis of Presentation

     The financial statements included herein have been prepared by the Company,
pursuant to the Rules and Regulations of the Securities and Exchange Commission.
Certain  information  and footnote  disclosures  normally  included in financial
statements prepared in accordance with generally accepted accounting  principles
have been  condensed  or omitted  pursuant  to such rules and  regulations.  The
Company believes,  however,  that the disclosure contained herein is adequate to
make the information  presented not misleading.  The financial statements should
be read in conjunction with the financial  statements and notes thereto included
in the Company's  Form 10-K for the year ended  December 31, 1997.  The year end
balance sheet data was derived from audited  financial  statements  but does not
include all disclosures required by generally accepted accounting principles.
     As of March 31,  1998,  the  Company  had  working  capital of  $4,256,055,
including cash and cash equivalents of $986,513.  The financial  statements have
been prepared on a going-concern basis, which contemplates realization of assets
and liquidation of liabilities in the ordinary  course of business.  The Company
expects to incur costs and  expenses in excess of expected  revenues  during the
ensuing three months as the Company  continues to execute its business  strategy
in the  Remote  Access  market.  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 March 31, 1998 and the results of operations  for the three months
ended  March  31,  1998 and  1997.  The  results  for  interim  periods  are not
necessarily indicative of results for the full year.

<PAGE>


<TABLE>

<CAPTION>

<S>                                                                            <C>                 <C>
2. Inventories, net of allowance:

         Inventories, net of allowance, consists of the following:
                                                                               March 31,           December 31,
                                                                                 1998                  1997
                                                                               -----------         ------------       
         Component Materials................................................... $2,163,791          $2,077,866
         Work-in process.....................................................    1,068,649             843,428
         Finished Goods......................................................    1,902,496             614,896
                                                                                ----------          ----------
                                                                                $5,134,936          $3,536,190
                                                                                ==========          ==========
</TABLE>

3. Debt

     On  February  19,  1998,  the Company  completed  a $2 million  bridge loan
("Bridge Loan") with  Transamerica and provided for a single advance.  This loan
matures on the earlier of: 1) December  31,  1998;  2) a public  offering by the
Company of its equity  securities which yields cash proceeds at least equivalent
to the amount of the Bridge Loan; 3) the closing of a sale by the Company of its
Horizon product line and team with net cash proceeds at least  equivalent to the
amount of the Bridge Loan; or 4) the second advance to the Company of $3 million
under the Term Loan.  The Bridge loan interest rate is the prime rate plus 2.5%,
including all terms and conditions and affirmative negative conenants.
     As of March 31, 1998, $2,897,437 was outstanding of the Term Loan and there
were no outstanding  advances on the Revolver;  however,  the Company could have
borrowed approximately $4 million under the Revolver as of March 31, 1998.

4. Adoption of Statements of Financial Accounting Standards

     The Company adopted Statement of Financial  Accounting  Standards  ("SFAS")
No. 130, "Reporting  Comprehensive  Income".  SFAS No. 130 establishes standards
for  reporting  and  displaying  comprehensive  income and its  components  in a
full-set of general purpose financial  statements and requires  reclassification
of prior-period financial statements. For the quarters ending March 31, 1998 and
1997,  net  income  was equal to  comprehensive  income  as there  were no items
classified as other comprehensive income.
 
<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,

                                                                       1998               1997
                                                                    ----------         ----------

Sales                                                                  100%               100%

Cost of goods sold                                                      60                 53
                                                                    -----------        -----------

     Gross profit                                                       40                 47


Expenses

     Sales and marketing                                                20                 25

     General and administrative                                         14                 21

     Research and development                                           33                 59
                                                                    -----------        -----------

     Total Operating Expenses                                           67                105

Loss from operations                                                   (27)               (58)


Interest Income                                                         *                  3

Interest Expense                                                       (2)                 *

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

    Loss before income taxes                                           (29)               (55)

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


                 Net Loss                                             (29)%              (55)%
                                                                    ===========        ===========
   * Total is less than 1%

</TABLE>

<PAGE>

Three  months  ended  March 31, 1998 as  Compared  to three  months ended March
--------------------------------------------------------------------------------
31,1997
-------

Net Sales
     Worldwide  sales were $6,276,617 for the three months ended March 31, 1998,
an increase of  $1,757,091  compared  to net sales of  $4,519,526  for the three
months ended March 31, 1997. Domestic sales were $5,592,581 for the three months
ended March 31, 1998 compared to $4,262,421 for the three months ended March 31,
1997.  The  increase of  $1,330,160  in domestic  sales is  attributable  to the
increase in T1-Modem+ sales to OEM customers. Export sales were $684,036 for the
first quarter of 1998  compared to $257,105 for the first  quarter of 1997.  The
increase in export  sales is a result of an  increase in T1 Modem+  sales to new
OEM customers.

Gross Profit
     Gross  profit  increased  by  $391,859 or 18% to  $2,518,493  for the three
months ended March 31, 1998 from $2,126,634 for the three months ended March 31,
1997.  Gross  profit  margin was 40% for the three  months  ended March 31, 1998
compared to 47% for the three months ended March 31, 1997. The decrease in gross
profit margin as a percent of sales reflects the continued  shift in product mix
from  shipments of higher margin DSP OEM product in the first quarter of 1997 to
shipments of the Company's  T1-Modem products to OEM customers which carry lower
gross margins.

Sales and marketing
     Sales and marketing  expenses were $1,274,434 or 20% of sales for the three
months ended March 31, 1998 compared to $1,148,424 or 25% of sales for the three
months ended March 31,1997. The increase of $126,010 or 11% reflects an increase
in salaries and related  expenses as the Company hired a Vice President of Sales
and expanded its sales force to a more senior data communications group over the
last six months of 1997 and also an  increase  in the number of trade shows that
the Company  participated  in during the first quarter of 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  $869,348  for the three months
ended March 31, 1998  compared to $943,645  for the three months ended March 31,
1997.  The  decrease  of $74,297  reflects a reduction  in salaries  and related
expenses  related to the resignation of the Company's Vice Chairman in September
1997 and a reduction in recruiting and relocation expense.

<PAGE>

Research and Development
     Research and  development  expenses were $2,085,737 or 33% of sales for the
three months ended March 31, 1998 compared to $2,665,376 or 59% of sales for the
three months  ended March 31, 1997, a decrease of $579,639 or 22%.  Salaries and
related  expenses  decreased  by $123,000  reflecting  a decrease  in  engineers
related to  certain  development  projects.  Additionally,  expenses  related to
outside  contract  labor  decreased by  approximately  $361,000  reflecting  the
discontinuance  of certain research and development  projects related to forward
looking technologies.

Liquidity and Capital Resources
     On June 12,  1997,  the Company  announced  it had  completed a $10 million
credit  facility with  Transamerica  Business  Credit  Corporation's  Technology
Finance  Division,  of  Farmington,   Connecticut.   This  facility  provides  a
five-year,  $6 million term loan and a three-year,  $4 million  revolving credit
facility ("Revolver").  Upon closing, the Company took down $3 million under the
term loan. Further advances of up to $4 million can be extended upon achievement
of any one of the  following  milestones:  positive  (greater  than 0) operating
profit and net income from  continuing  operations  for the most recently  ended
fiscal quarter;  receipt by the Company of at least $7 million from the issuance
and sale of shares of its capital stock;  or the Company shall have received net
proceeds of at least $7 million  from the sale of the Horizon  product  line and
team; or the Company shall have entered into a significant joint venture with TI
as a result of which, the Company's  research and development  expenses would be
reduced  and  the  Company's   revenues  and  profits  increased  as  reasonably
determined  by  Transamerica;  or the Company shall have entered into such other
agreement or consummated  such other  transaction and as a result  thereof,  the
Company's  research and  development  costs will be  materially  reduced and the
Company's revenues and profits materially increased as reasonably  determined by
Transamerica.  As of March 31,  1998,  the Company had not  achieved  any of the
above  milestones,  and it is unlikely  that the Company  will  achieve the last
milestone  in the  foreseeable  future.  The  Revolver  provides  for up to $4.0
million in  advances  based on a formula of  eligible  accounts  receivable  and
inventory.  As of March 31, 1998, the Company could have borrowed  approximately
$4.0 million under this Revolver. 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 March 31, 1998, there was
$2,897,437  outstanding  under  the term  loan  and  there  were no  outstanding
advances under the Revolver.  The Company does  anticipate  drawing  against the
Revolver  for  working  capital  purposes  during  the  second  quarter of 1998.
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
March 31, 1998,  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%.
<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.
     In anticipation of noncompliance of certain financial covenants at December
31, 1997,  Transamerica gave the Company an unconditional waiver with respect to
each of these  financial  covenants for the fiscal year ended December 31, 1997,
with the exception of the accounts  receivable  collection  period for which the
Company was in compliance as of December 31, 1997. Such waived  covenants are as
follows:  minimum  tangible  net worth of $10 million as of December  31,  1997;
minimum gross profit margin of 45% for the fiscal year ended  December 31, 1997;
a maximum  operating loss percentage of (30%) for the fiscal year ended December
31, 1997;  and a net loss before taxes  percentage  of (30%) for the fiscal year
ended December 31, 1997.  The Company was not in compliance  with such covenants
as of December 31, 1997.
     In  anticipation  of  non-compliance  with  certain of the  covenants,  the
Company  has  obtained  an  additional  waiver  from  Transamerica  of  selected
covenants  and/or  revised  covenants for the terms of the debt  agreement.  The
covenants  that were waived for fiscal year 1998 are as  follows:  tangible  net
worth,  operating profit percentage and net income before taxes  percentage.  In
addition,  the credit agreement also amended some of the financial  covenants as
follows:  gross  profit  margin was amended to 35% from 50% for the fiscal years
ended December 31, 1998 and thereafter;  operating profit percentage was amended
to 7.5% from 20% for the fiscal years ended  December  31, 1999 and  thereafter;
and net income  before  taxes was  amended  to 5% from 15% for the fiscal  years
ended December 1999 and thereafter. Transamerica also amended the debt agreement
to delete the cash on hand covenant,  which allows the Company to use all of its
cash,  as needed.  Transamerica  has reviewed the Company's  forecasted  balance
sheets and  statements of operations and cash flows dated March 20, 1998 for the
calendar  years 1998 and 1999, and does not deem such  information  contained in
such documents as a material adverse event.  Management believes such forecasted
balance  sheets and  statements of operations  and cash flows are reasonable and
the likelihood of the occurrence of a material adverse event is remote.
     On February 19, 1998,  the Company  announced it had completed a $2 million
bridge loan ("Loan")  with  Transamerica.  This  facility  provided for a single
advance  which was  provided  to the  Company on February  19,  1998.  This loan
matures on the earliest of: 1) December  31, 1998;  2) a public  offering by the
Company of its equity  securities which yields cash proceeds at least equivalent
to the  amount of the  Loan;  3) the  closing  of a sale by the  Company  of its
Horizon product line and team with net cash proceeds at least  equivalent to the
amount of the Loan;  or, 4) the second  advance to the  Company of $3.0  million
under the term  loan.  The  interest  rate under the Loan is the prime rate plus
2.5%. The Loan is subject to the existing $10 million  credit  facility loan and
security  agreement,  including all terms and  conditions  and  affirmative  and
negative covenants.

<PAGE>

     During the three  months ended March  31,1998,  there was a net decrease in
cash and cash  equivalents  of  $1,659,351.  At March  31,  1998,  cash and cash
equivalents  amounted to $986,513.  Working  capital  amounted to  $4,256,055 at
March 31, 1998  compared to  $4,329,018  at December 31, 1997.
    Net cash used in operating activities for the three months ended March 31,
1998  amounted  to  $4,994,821.  The  negative  cash flows from  operations  was
primarily  the  result  of the  Company's  net  loss of  $1,798,930,  as well as
increases in accounts  receivable  and inventory of $3,522,246  and  $1,653,746,
respectively.  The increase in accounts  receivable is a result of approximately
$3.6 million in shipments occurring in the last month of the first quarter.  The
increase  in  inventory  occurred  in  finished  goods in  response  to  planned
shipments  against open orders during the second  quarter of 1998.  Such working
capital  increases were partially  offset by an increase in accounts  payable of
$1,775,887.
     Net cash used in investing  activities for the three months ended March 31,
1998  amounted to $223,372 for  purchases of computer and  peripheral  equipment
related to engineering staff and final test and assembly in manufacturing.
     Net cash provided by financing  activities for the three months ended March
31, 1998 amounted to $3,558,842, reflecting proceeds of $2,000,000 received as a
result of the  Transamerica  bridge loan and  $1,628,552  in  proceeds  from the
exercise of common stock options and warrants.

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 November 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  $7.0 million in costs and expenses
on a cumulative  basis from January 1, 1996 through  March 31, 1998,  related to
this product effort. The Company expects to incur  approximately $1.0 million of
costs and expenses in the second  quarter of 1998 with respect to this  product.
The Company is currently in discussion with two companies  concerning a purchase
of the Horizon  product and team,  but no  definitive  sale  agreement  has been
reached as of May 4, 1998.
     For the foregoing reasons,  the Company incurred a net loss of $(1,798,930)
for the three months ended March 31, 1998 compared to a net loss of $(2,517,897)
for the three months ended March 31, 1997.

<PAGE>

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

Date:  May 13, 1998

<PAGE>