<TABLE>
<CAPTION>
<S>            <C>
                       Securities and Exchange Commission

                              Washington, DC 20549
                        ----------------------------------

                                    Form 10-Q

                Quarterly Report pursuant to Section 13 or 15(d)
                     of the securities exchange act of 1934

For the quarterly period ended September 30, 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                                    9,760,150 shares outstanding
                                                                as of September 30, 1999


                    Documents Incorporated by Reference: None

</TABLE>

<PAGE>

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

Part I.  Financial Information

Item 1.  Financial Statements  (Unaudited)

                  A.       Consolidated balance sheets as of September 30, 1999 and December 31, 1998

                  B.       Consolidated statements of operations for the three and nine months ended
                           September 30, 1999 and 1998

                  C.       Consolidated  statements of cash flows for the nine months ended September 30, 1999 and 1998.

                  D.       Notes to consolidated financial statements
</TABLE>

<PAGE>


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



Part II.  Other Information

Item 1.  Legal proceedings - None
Item 2. Changes in Securities  - None
Item 3. Defaults upon senior securities  - None
Item 4. Submissions of matters to a vote of shareholders - None
Item 5. Other Information - None
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>


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

                                                               ARIEL CORPORATION
                                                                BALANCE SHEETS
                                                                  (Unaudited)
<TABLE>
<CAPTION>
<S>                                                                                <C>              <C>
                                                                                    September 30,  December 31,
                                                                                        1999           1998
                                                                                    ------------   ------------
          ASSETS

CURRENT ASSETS:
       CASH AND CASH EQUIVALENTS ................................................   $  6,152,272    $ 17,996,575
       ACCOUNTS RECEIVABLE, NET OF ALLOWANCE FOR DOUBTFUL
             ACCOUNTS OF $1,565,866 IN 1999 AND $1,460,855 IN 1998 ..............      3,191,526       3,593,709
       OTHER RECEIVABLES ........................................................        838,344       1,378,781
       INVENTORIES, NET .........................................................      1,978,500       2,857,326
       PREPAID EXPENSES .........................................................        411,668         449,691
                                                                                     ------------    ------------
                            TOTAL CURRENT ASSETS ................................     12,572,310      26,276,082

EQUIPMENT, NET OF ACCUMULATED DEPRECIATION
            AND AMORTIZATION ....................................................      1,176,393       1,365,354

INTANGIBLE ASSETS ...............................................................        248,285         997,225
GOODWILL ........................................................................      3,816,791       4,344,374

OTHER ASSETS ....................................................................        618,495         699,345
                                                                                    -------------   ------------
TOTAL ASSETS ....................................................................   $ 18,432,274    $ 33,682,380
                                                                                    =============   ============



LIABILITIES & STOCKHOLDERS' EQUITY

CURRENT LIABILITIES:
       ACCOUNTS PAYABLE .........................................................   $  1,529,864    $  2,679,548
       ACCRUED EXPENSES .........................................................      2,834,502       5,388,661
       CURRENT PORTION OF LONG-TERM DEBT ........................................      3,872,467       5,480,430
       ROYALTIES PAYABLE ........................................................         42,021          95,410
                                                                                       ---------      ----------

                            TOTAL CURRENT LIABILITIES ...........................      8,278,854      13,644,049



LONG-TERM DEBT ..................................................................         29,912         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 - 9,760,150 AT SEPTEMBER 30, 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 .................       (291,980)         31,272
       ACCUMULATED DEFICIT ......................................................    (22,896,614)    (13,637,877)

                            TOTAL STOCKHOLDERS' EQUITY ..........................     10,123,508      19,705,497
                                                                                      ----------      ----------
       TOTAL LIABILITIES & STOCKHOLDERS' EQUITY .................................   $ 18,432,274    $ 33,682,380
                                                                                    ============    ============


                                     The accompanying notes are an integral part of the financial statements

</TABLE>

<PAGE>


<TABLE>
<CAPTION>



                                                                                      ARIEL CORPORATION
                                                                              CONSOLIDATED STATEMENTS OF OPERATIONS
                                                                                         (Unaudited)

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


                                                       Three Months Ended September 30,  Nine Months Ended September 30,
                                                            1999             1998             1999          1998
                                                       ==============   ==============   ============== ==============

SALES ...............................................   $  2,869,593    $  3,180,252    $  8,694,254    $ 13,568,059

COST OF GOODS SOLD ..................................      1,133,081       1,802,570       3,654,950       7,951,014
                                                         ------------    ------------    ------------    ------------
       GROSS PROFIT .................................      1,736,512       1,377,682       5,039,304       5,617,045

EXPENSES:
     SALES AND MARKETING ............................      1,102,758       1,257,027       4,258,553       3,679,971
     GENERAL AND ADMINISTRATIVE .....................      1,723,805       3,402,922       5,370,956       6,440,794
     RESEARCH AND DEVELOPMENT .......................      1,425,861       1,847,725       4,230,325       5,618,925
     RESTRUCTURING CHARGE ...........................        369,528               0         369,528               0
                                                         ------------    ------------    ------------

         TOTAL OPERATING EXPENSES ...................      4,621,952       6,507,674      14,229,362      15,739,690

                                                        ------------    ------------    ------------    ------------
       LOSS FROM OPERATIONS .........................     (2,885,440)     (5,129,992)     (9,190,058)    (10,122,645)

INTEREST INCOME .....................................         85,384         140,399         378,734         180,607

INTEREST EXPENSE ....................................       (119,899)       (939,599)       (411,950)     (1,217,001)

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

OTHER INCOME / (EXPENSE) ............................        (64,038)             72         (35,463)         52,728

                                                        ------------    ------------    ------------    ------------
      INCOME / (LOSS) BEFORE INCOME TAXES ...........     (2,983,993)     23,608,776      (9,258,737)     18,431,585

      PROVISION FOR INCOME TAXES ....................              0         368,632               0         368,632

                                                        ------------    ------------    ------------    ------------
       NET INCOME / (LOSS) ..........................   ($ 2,983,993)   $ 23,240,144    ($ 9,258,737)   $ 18,062,953
                                                        ------------    ------------    ------------    ------------






OTHER COMPREHENSIVE INCOME / (LOSS), NET OF TAX:
      FOREIGN CURRENCY TRANSLATION ADJUSTMENTS ......         81,807               0        (213,346)              0
                                                         ============    ============    ============    ============
                      COMPREHENSIVE INCOME / (LOSS) .     (2,902,186)     23,240,144      (9,472,083)     18,062,953
                                                         ============    ============    ============    ============

      BASIC EARNINGS / (LOSS)  PER SHARE ............          (0.31)           2.39           (0.95)           1.86
                                                         ============    ============    ============    ============

      DILUTED EARNINGS / (LOSS)  PER SHARE ..........          (0.31)           2.36           (0.95)           1.84
                                                         ============    ============    ============    ============


       BASIC WEIGHTED AVERAGE NUMBER OF
                            COMMON SHARES OUTSTANDING      9,760,150       9,742,926       9,760,150       9,728,223
                                                         ============    ============    ============    ============
       EFFECT OF DILUTIVE OPTIONS ...................              0         123,314               0          74,157

       DILUTED WEIGHTED AVERAGE NUMBER OF
                            COMMON SHARES OUTSTANDING      9,760,150       9,866,240       9,760,150       9,802,380
                                                         ============    ============    ============    ============

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


</TABLE>

<PAGE>


<TABLE>

<CAPTION>

                                                                      ARIEL CORPORATION
                                                           CONSOLIDATED STATEMENTS OF CASH FLOWS
                                                                         (Unaudited)

<S>                                                                                 <C>                       <C>


                                                                                   For The Nine Months Ended September 30,
                                                                                            1999             1998
                                                                                       ==============    ==============
Cash flows from operating activities:
Net Loss ..............................................................................   ($ 9,258,737)   $ 18,062,953
Adjustments to reconcile net loss to net cash used in
     operating activities:
                            Gain/(loss) on disposal of assets .........................         60,911     (29,537,896)
                            Depreciation and amortization .............................        693,552         913,641
                            Amortization of goodwill & intangibles ....................        764,312               0
                            Amortization of debt issuance costs .......................         32,181          48,629
                            Provision for doubtful accounts ...........................        284,829         724,268
                            (Benefit from) / provision for inventory obsolescence .....        (28,706)        225,000
                            Non-Cash compensation expense .............................              0          83,115
(Increase) decrease in assets:
                            Accounts receivable .......................................        452,799      (3,202,582)
                            Inventories ...............................................        897,992        (779,711)
                            Other assets ..............................................        171,636        (119,351)
Increase (decrease) in liabilities:
                            Accounts payable and accrued expenses .....................     (3,466,637)        437,425
                            Royalties payable, related parties ........................        (53,389)         (2,406)
                                                                                          ------------    ------------
Net cash used in operating activities .................................................     (9,449,257)    (13,146,915)
                                                                                          ------------    ------------

Cash flows from investing activities:
                            Net proceeds from sale of assets ..........................              0      31,187,253
                            Purchase of equipment .....................................       (509,711)       (415,437)
                                                                                          ------------    ------------
Net cash (used in) provided by investing activities ...................................       (509,711)     30,771,816
                                                                                          ------------    ------------

Cash flows from financing activities:
                            Proceeds from debt financing ..............................              0       4,500,000
                            Principal payments on long-term debt ......................       (174,537)
                            Principal payments on short-term debt .....................     (1,927,501)     (2,000,000)
                            Proceeds from exercise of common stock options and warrants              0       2,010,915
                                                                                          ------------    ------------
Net cash (used in) provided by financing activities ...................................     (1,927,501)      4,336,378
                                                                                          ------------    ------------


Effect of exchange rate changes on cash ...............................................         42,166               0

Net increase (decrease) in cash .......................................................    (11,844,303)     21,961,279

                            Cash and cash equivalents, beginning of year ..............     17,996,575       2,645,864

                                                                                          ============    ============
Cash and cash equivalents, end of period ..............................................   $  6,152,272    $ 24,607,143
                                                                                          ============    ============



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

</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
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 September 30, 1999,  the Company had working  capital of  $4,293,456,
including cash and cash equivalents of $6,152,272.  The Company expects to incur
costs and  expenses in excess of  expected  revenues  during the ensuing  twelve
months as the Company continues to execute its business strategy in the Internet
Service Provider (ISP) and Original Equipment  Manufacturer (OEM) markets. There
is no  assurance  that the  Company  will  generate  sufficient  cash  flow from
operations  to  liquidate  liabilities  as they come due.  In the event that the
Company is unable to liquidate its  liabilities,  it may delay or eliminate some
expenditures and planned operations may be scaled back.  Accordingly the Company
expects that it will need additional funds to meet obligations  through the next
twelve  months and will seek to raise such amounts  through a variety of options
including expected future cash from operations, borrowings, proceeds from equity
or debt  financing and scaling back  operations.  Additional  funding may not be
available when needed or on terms acceptable to the Company,  which could have a
material  adverse effect on its business,  financial  condition,  and results of
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,  necessary to present fairly the financial  position of the Company as
of  September  30,  1999 and the  results of  operations  for the three and nine
months ended  September 30, 1999 and 1998.  The results for interim  periods are
not necessarily indicative of results for the full year.

2. Inventories, net of allowance:

         Inventories, net of allowance, consists of the following:

                                          September 30,             December 31,
                                               1999                     1998
                                          -------------             ------------
         Component Materials.............. $   783,755                $1,040,115
         Work-in process..................     322,369                 1,536,870
         Finished Goods....................    872,376                   280,341
                                               -------                   -------
                                            $1,978,500                $2,857,326
                                            ==========                ==========

<PAGE>


3.       Debt

     As of  September  30,  1999  the  Company  had  total  debt  of  $3,902,379
consisting of notes due to Transamerica Business Credit Corporation's Technology
Finance  Division of Farmington  Connecticut of $3,610,928 and acquired  foreign
debt of $291,451.

     Under its credit facility with Transamerica, outstanding debt of $3,610,928
as of September 30,1999 consisted of a $2,411,091 Term Loan payable quarterly in
arrears  over  twenty  consecutive  quarters  commencing  October 1,  1998,  and
$1,199,837 drawn against a revolving note. The Revolver matures on June 12, 2000
and can be extended for two additional  periods of one year each.  Amounts drawn
under the Revolver are based on a formula of eligible  accounts  receivable  and
inventory. Approximately $1,115,164 of the Revolver balance was paid in July and
August  as  the  Company  had  insufficient  eligible  accounts  receivable  and
inventory to support  amounts  drawn.  As of September  30, 1999 the Company had
sufficient  eligible  accounts  receivable and inventory to support the revolver
balance of $1,199,837.

     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 September 30, 1999 was 12.099%.

     Payment terms for the term loan are as follows:

     October 1, 1999 through September 30, 2000                         $490,161
     October 1, 2000 through September 30, 2001                         $552,214
     October 1, 2001 through September 30, 2002                         $622,122
     October 1, 2002                                                    $746,594
                                                                        --------
                                                         Total        $2,411,091
                                                                      ==========

     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.
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>

     As of September 30, 1999 the Company is in compliance with these covenants.
Portions of the term note due beyond one year were  classified  as long term for
purposes of computing  working capital and current ratio  covenants.  Due to the
uncertainty of attaining future covenants all Transamerica  debt is reflected as
a current liability as of September 30, 1999.


     On October 18, 1999 the Company executed a further  amendment to the credit
agreement that  substantially  reduces the amended financial  covenants that the
Company must be in  compliance  with as of and for the year ending  December 31,
1999.  The only  financial  covenants which remain are as follows:


o    As of December 31, 1999,  working capital shall be no less than $2,000,000.
o    The ratio of current assets to current  liabilities  shall not be less than
     1.25 to 1.00.
o    Tangible net worth shall not be less than $2,000,000.
o    Gross profit margins for the year ending December 31, 1999 shall not be
     less than 35%.


The amendment also eliminates financial covenants thereafter.


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
10K. 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>                         <C>
     Summary  information  by  segment  as of and for the three and nine  months
ending September 30, 1999 is as follows:



                                                                  For the three months         For the nine months
              NORTH AMERICA:                                 ending September 30, 1999   ending September 30, 1999
                                                            --------------------------- ---------------------------
              Revenues from external customers                              $2,835,559                  $8,353,273
              Intersegment revenues                                             14,068                      19,318
              Segment loss                                                  (2,293,294)                 (7,186,087)
              Segment assets                                                13,126,204                  13,126,204

              EUROPE:
              Revenues from external customers                                 $34,034                    $340,981
              Intersegment revenues                                                -0-                         -0-
              Segment loss                                                    (689,421)                 (2,069,097)
              Segment assets                                                 5,306,069                   5,306,069


         A reconciliation  of the Company's  segment losses to the corresponding
consolidated  amounts for the three and nine months ending September 30, 1999 is
as follows:

          Segment loss                                                    ($2,982,715)                ($9,255,184)
          Margins  on intersegment revenues                                    (1,278)                     (3,553)
                                                                        ==============               =============
          Net loss                                                        ($2,983,993)                ($9,258,737)
                                                                        ==============               =============
</TABLE>




5.          Restructuring Charge

     With the Company's  decision to focus on the ISP market and in  combination
with its newly  created  sales  channel  through  KeyLink  Systems,  the Company
terminated the employment  agreement of Brian Hoerl, its  Vice-President  of OEM
Sales and entered into a termination  agreement with Mr. Hoerl effective  August
20, 1999.  Two additional  field  sales-reps  were also  terminated in the third
quarter of 1999. As a result,  the Company  recorded a  restructuring  charge of
$369,528,  which  reflects  severance and related  benefits  payments,  of which
$47,576 was paid as of September 30, 1999. The remaining amounts are expected to
be paid over a six month period ending March 31, 2000.


<PAGE>



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

COMPARISON OF RESULTS OF OPERATIONS

     The following table sets forth, for the periods  indicated,  the percentage
relationship  that certain items of the Company's  results of operations bear to
total sales.

<TABLE>
<CAPTION>
<S>                                                                   <C>                 <C>
                                                                           Nine months Ended
                                                                             September 30,

                                                                         1999              1998
                                                                     -------------      ----------

Sales                                                                    100%              100%

Cost of goods sold                                                        42                59
                                                                      -----------        ----------

     Gross profit                                                         58                41


Expenses

     Sales and marketing                                                  49                27

     General and administrative                                           62                48

     Research and development                                             49                41

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

     Total Operating Expenses                                            164                116

Loss from operations                                                    (106)              (75)


Interest income                                                           4                  1

Interest expense                                                         (5)                (9)

Gain on sale of assets                                                    *                 218

Other (expense) income                                                    *                  1
                                                                      -----------        ----------

    Income / (Loss) before income taxes                                 (107)               136

    Provision for income taxes                                            -                  (3)
                                                                      ===========        ==========

                 Net Income / (Loss)                                    (107)%              133%
                                                                      ===========        ==========
*   Total is less than 1%

<PAGE>
</TABLE>

     Three  months  ended  September  30, 1999 as compared to three months ended
September 30, 1998

Sales

     Worldwide  sales were  $2,869,593 for the three months ended  September 30,
1999,  a decrease of  $310,659  compared  to sales of  $3,180,252  for the three
months ended  September 30, 1998.  Domestic sales were  $2,776,644 for the three
months ended  September  30, 1999  compared to  $2,544,862  for the three months
ended September 30, 1998, a decrease of $231,782.  This decrease is attributable
to a decrease in sales to PC manufacturers. Such decreases were partially offset
by sales to internet service providers (ISPs) and other end users as the Company
continues to execute its business strategy of shifting to ISP markets.

     International  sales were $92,949 for the third  quarter of 1999  including
U.S. exports of $58,915 and sales from European  operations of $34,034.  This as
compared to $635,390 for the third quarter of 1998. The decrease is attributable
to a reduction in demand by an OEM customer for our Audio Mixing  Product  which
the Company no longer  actively  markets.  A reduction  in demand for  T1-Modem+
products due to the release of the RS2000 also contributed to the decline.


Gross Profit

     Gross profit increased by $358,830 to $1,736,512 for the three months ended
September  30, 1999 from  $1,377,682  for the three months ended  September  30,
1998.  Gross profit margin was 61% for the three months ended September 30, 1999
compared to 43% for the three months ended  September 30, 1998.  The increase in
gross  profit  as  a  percent  to  sales  reflects  an  improved  mix  of  sales
concentrated  in  original   equipment   manufacturers   (OEM)  as  compared  to
lower-margin  PC  manufactures.  OEM gross  profits are higher as the Company is
able to charge premiums for engineering for specific customer applications.

Sales and marketing

     Sales and marketing  expenses were $1,102,758 or 38% of sales for the three
months ended  September  30, 1999 compared to $1,257,027 or 40% of sales for the
three months  ended  September  30,  1998, a decrease of $154,269.  Salaries and
related  expenses  decreased  $113,544 as a result of the Company's  decision to
restructure  its sales  department  and streamline its internal sales force (see
Note 5  "Restructuring  Charges").  As such, the Company has refocused its sales
efforts from PC manufacturers  and PC equipment  suppliers to the ISP market and
in August 1999 entered into an  arrangement  with KeyLink  Systems to distribute
the Company's  products.  A reduction in  commissions  of $80,019,  due to lower
sales,  contributed  to the overall  reduction in Sales and Marketing  expenses.
Such  decreases  in  employee  related  expenses  were  offset by an increase of
$44,717  in  trade  show  costs  as  the  Company   introduced   its  PowerPopTM
architecture to ISPs and continues its efforts to penetrate the ISP market.

<PAGE>

General and administrative

     General and  administrative  expenses were  $1,723,805 for the three months
ended  September  30, 1999  compared to  $3,402,922  for the three  months ended
September 30, 1998. The decrease of $1,679,117 is primarily due to non-recurring
bonuses paid in September 1998 of $1.1million in connection with the sale of the
Company's  Communications  Systems  Group (CSG) in that month.  Additionally,  a
provision  for doubtful  accounts  was  recognized  in September  1998 for Hayes
Microcomputer,   Inc.  and  its  affiliates  when  Hayes  filed  for  bankruptcy
protection.   Accordingly,   provisions  for  doubtful  accounts   decreased  by
approximately  $600,000 as compared to the three  months  ending  September  30,
1998.

Research and Development

     Research and  development  expenses were $1,425,861 or 50% of sales for the
three months ended September 30, 1999 compared to $1,847,725 or 58% of sales for
the three  months  ended  September  30,  1998,  a decrease  of $421,864 or 23%.
Expenses  declined by $462,236 from the same period last year due to the sale of
the Company's CSG group to Cabletron in September  1998.  These  decreases  were
offset by an increase in research  and  development  of $62,514  resulting  from
investments in products and technologies at the Company's  European  subsidiary,
SCii Telecom, SA.


Restructuring Charge

     With the Company's  decision to focus on the ISP market and in  combination
with its newly  created  sales  channel  through  KeyLink  Systems,  the Company
terminated the employment  agreement of Brian Hoerl, its  Vice-President  of OEM
Sales and entered into a termination  agreement with Mr. Hoerl effective  August
20, 1999.  Two additional  field  sales-reps  were also  terminated in the third
quarter of 1999. As a result,  the Company  recorded a  restructuring  charge of
$369,528,  which  reflects  severance and related  benefits  payments,  of which
$47,576 was paid as of September 30, 1999. The remaining amounts are expected to
be paid over a six month period ending March 31, 2000.


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 1999.

<PAGE>

     Nine months  Ended  September  30,  1999 as  Compared to Nine months  Ended
September 30, 1998


Sales

     Worldwide  sales were  $8,694,254  for the nine months ended  September 30,
1999, a decrease of  $4,873,805  compared to sales of  $13,568,059  for the nine
months ended  September 30, 1998.  Domestic  sales were  $7,880,355 for the nine
months ended  September  30, 1999  compared to  $12,240,787  for the nine months
ended September 30, 1998, a decrease of $4,414,325.  Approximately  $3.2 million
of this decrease is  attributable  to a decrease in 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.  A  reduction  in
T1-Modem+  sales to OEM customers  accounted for an additional  decrease of $1.1
million.

     International  sales  were  $813,899  for the  first  nine  months  of 1999
including  U.S.  exports of  $472,918  and sales  from  European  operations  of
$340,981.  This as  compared  to  $1,327,272  for the same  period of 1998.  The
decrease is  attributable  to a reduction  in demand by an OEM  customer for our
Audio Mixing  Product,  as well as a reduction in demand for T1-Modem+  products
due to the release of the RS2000.  Such decreases are partially  offset by sales
from the Company's European subsidiaries of $340,981.

Gross Profit

     Gross profit decreased by $577,741 or 10% to $5,039,304 for the nine months
ended September 30, 1999 from $5,617,045 for the nine months ended September 30,
1998.  Gross profit margin was 58% for the nine months ended  September 30, 1999
compared to 41% for the nine months ended  September  30, 1998.  The increase in
gross  profit  margin as a percent  of sales  reflects  the  continued  shift in
product mix from lower margin  shipments to PC  integrators  to shipments to OEM
customers that carry higher gross margins.

Sales and marketing

     Sales and marketing  expenses were  $4,258,553 or 49% of sales for the nine
months ended  September  30, 1999 compared to $3,679,971 or 27% of sales for the
nine  months  ended  September  30,1998.   The  increase  of  $578,582  reflects
incremental  spending  in 1999 of  $507,917  for  advertising,  trade  shows and
marketing programs related primarily to the launch of the Company's ISP PowerPoP
architecture and $322,324 for European operations. Such increases were offset by
decreases in  commissions  of $152,793 due to lower sales  volume.  Salaries and
related  expenses  decreased  $113,544 as a result of the Company's  decision to
restructure  (see  Note 5  "Restructuring  Charges")  its sales  department  and
streamline its internal sales force. The Company has refocused its sales efforts
from PC  manufacturers  to the ISP market  and in August  1999  entered  into an
arrangement with KeyLink Systems to distribute the Company's products.


General and administrative

     General and  administrative  expenses  were $ 5,370,956 for the nine months
ended  September  30, 1999  compared  to  $6,440,794  for the nine months  ended
September 30, 1998. The decrease of $1,069,838 is primarily due to non-recurring
bonuses paid in September 1998 of $1.1million in connection with the sale of the
Company's CSG group in that month and a reduction in staff  salaries as a result
of the sale.  Additionally,  a provision for doubtful accounts was recognized in
September 1998 for Hayes Microcomputer, Inc. and its affiliates when Hayes filed
for  bankruptcy  protection.   Accordingly,  provisions  for  doubtful  accounts
decreased  by  approximately  $600,000 as  compared  to the nine  months  ending
September 30, 1998. Such decreases were partially  offset by $527,737 in general
and  administrative  expenses  related to the  Company's  European  subsidiaries
including costs related to establishing a wholly owned German subsidiary,  Ariel
Deutschland, GmbH.

<PAGE>

Research and Development

     Research and  development  expenses were $4,230,325 or 49% of sales for the
nine months ended  September 30, 1999 compared to $5,618,925 or 41% of sales for
the nine months  ended  September  30, 1998,  a decrease of  $1,388,600  or 25%.
Expenses  declined by $2,869,773  from the same period last year due to the sale
of the Company's CSG group to Cabletron in September 1998.  These decreases were
offset by an increase in research and  development  of $606,576  resulting  from
investments in products and technologies at the Company's  European  subsidiary,
SCii  Telecom,  SA.  Additionally,  expenses  increased  due to bonuses  paid to
certain  engineers in conjunction  with  employment  contracts of  approximately
$715,000.

Restructuring Charge

     With the Company's  decision to focus on the ISP market and in  combination
with its newly  created  sales  channel  through  KeyLink  Systems,  the Company
terminated the employment  agreement of Brian Hoerl, its  Vice-President  of OEM
Sales and entered into a termination  agreement with Mr. Hoerl effective  August
20, 1999.  Two additional  field  sales-reps  were also  terminated in the third
quarter of 1999. As a result,  the Company  recorded a  restructuring  charge of
$369,528,  which  reflects  severance and related  benefits  payments,  of which
$47,576 was paid as of September 30, 1999. The remaining amounts are expected to
be paid over a six month period ending March 31, 2000.


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 months ending
June 30, 1998 due to losses reported for that period. There was no provision for
taxes for the nine months  ending  September  30,  1999.

<PAGE>

Liquidity and Capital Resources

     The Company maintains 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, 1999,  there was $2,411,091
outstanding  under the term loan and $1,199,837 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, 1999, 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.

     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.
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.

     As of September 30, 1999 the Company is in compliance with these covenants.
Portions of the term note due beyond one year were  classified  as long term for
purposes of computing  working capital and current ratio  covenants.  Due to the
uncertainty of attaining future covenants all Transamerica  debt is reflected as
a current liability as of September 30, 1999.

<PAGE>

     On October 18, 1999 the Company executed a further  amendment to the credit
agreement that  substantially  reduces the amended financial  covenants that the
Company must be in  compliance  with as of and for the year ending  December 31,
1999. The only financial covenants that remain are as follows:


o As of December 31, 1999,  working capital shall be no less than $2,000,000.
o The ratio of current assets to current  liabilities  shall not be less than
  1.25 to 1.00.
o Tangible net worth shall not be less than $2,000,000.
o Gross profit margins for the year ending December 31, 1999 shall not be less
  than 35%.


The amendment also eliminates financial covenants thereafter.

     During the nine months ended  September 30, 1999,  there was a net decrease
in cash and cash  equivalents of  $11,844,303.  At September 30, 1999,  cash and
cash equivalents amounted to $6,152,272.  Working capital amounted to $4,293,456
at September  30, 1999 as computed  with all  Transamerica  debt  reflected as a
current liability. This as compared to $12,632,033 at December 31, 1998.

     Net cash used in operating  activities for the nine months ended  September
30, 1999 amounted to $9,449,257.  The negative cash flows from  operations  were
due,  in part,  to the  Company's  net loss of  $9,258,737  which was  offset by
non-cash  expenditures  related  to  depreciation,  amortization,  reserves  and
allowances  of  $1,774,874.  Other  operating  cash uses  included  decreases in
accounts payable and accrued  liabilities of $3,466,637 as the Company paid down
obligations  of its  subsidiary and accrued costs related to the sale of CSG and
executive  bonuses.  Such  decreases  were  partially  offset  by  increases  in
operating cash due to reduced inventory and accounts  receivable of $897,992 and
$452,799, respectively.

     Net cash used in investing  activities for the nine months ended  September
30, 1999  amounted to $509,711 due 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 nine months ended  September
30, 1999 amounted to $1,927,501, reflecting principal payments on debt including
$1,115,164 against the Revolver.

     The  Company  expects to incur  costs and  expenses  in excess of  expected
revenues  as the  Company  continues  to execute  its  business  strategy in the
Internet  Service  Provider  (ISP) and  Original  Equipment  Manufacturer  (OEM)
markets.  There is no assurance that the Company will generate  sufficient  cash
flow from  operations  to liquidate  liabilities  as they come due. In the event
that the  Company  is  unable  to  liquidate  its  liabilities,  it may delay or
eliminate  some  expenditures  and  planned   operations  may  be  scaled  back.
Accordingly  the  Company  expects  that it will need  additional  funds to meet
obligations  through the next twelve  months and will seek to raise such amounts
through a variety of options  including  expected  future cash from  operations,
borrowings, proceeds from equity or debt financing and scaling back operations.

     Additional  funding may not be available when needed or on terms acceptable
to the  Company,  which could have a material  adverse  effect on our  business,
financial condition and results of operations.

<PAGE>

Year 2000 Disclosure

Overview

     Until recently, many computer programs were written using two digits 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.  We have  defined,  assessed and  converted or replaced  various  internal
computer  programs and systems to ensure that our information  technologies  are
year 2000  compliant.  This process and the testing of our critical  systems for
year 2000  compliance  were completed as of September 30, 1999.  While year 2000
costs are not  expected to be material to our  financial  position or any year's
results of operations, we cannot assure you that this will be the case.

     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 year 2000
problem.  We are currently  assessing the potential effect, if any, and the cost
of  remediating  the year 2000 problem with respect to our office and facilities
equipment.

State of readiness

     While we have not tested all the products we have sold in the past, we test
our current products for year 2000 readiness,  and because these products do not
utilize  date codes,  we believe that these  products  are year 2000  compliant.
However,  due to the fact that these  products  interact with third party vendor
products  and  operate on  computer  systems  not under our  control,  it is not
possible to be  completely  certain that all of the possible  year 2000 problems
have  been  foreseen.  We have not  tested  software  provided  by,  nor  sought
certifications  from,  third parties  bundling  software with our products.  Our
reasonably likely worst case year 2000 scenario would be that these products and
bundled  software  from  third  parties  fail in the year 2000,  resulting  in a
decreased  demand for our  products  and damage to our brand.  In the event of a
year 2000  failure,  we would  devote the  necessary  resources  to correct  it.
Because we do not believe our  products are date code  sensitive  and because of
our skilled  in-house  developers and our  relationships  with the third parties
whose  software  we bundle  with our  products,  we  believe  we will be able to
respond  promptly to any failures that occur. The costs of such response and the
diversion of resources,  however,  could have a material  adverse  effect on our
business, results of operation and financial condition.

Bundled third party applications and software components

     We have bundled third party  applications  and software  components  with a
limited number of our products. To date, we have made no assessment, and have no
knowledge,  of year 2000  readiness of third parties whose  products are bundled
with ours.  We intend to contact  these third  parties and remedy  problems on a
case-by-case  basis as  problems  arise.  Because  we  believe  that  the  costs
associated  with the failure of third party products will not be material to our
business,  results of  operations  or financial  condition,  we do not intend to
expend   resources  to  seek  out  and  correct   problems  before  they  arise.
Accordingly,  there is a possibility  that some of our customers may  experience
difficulties  related to third party software,  which may affect the performance
of our products and may lead to adverse results such as an unusually high number
of calls to our  technical  support  department  or other  unusual  requests for
information  or assistance.  Responding to these  requests may divert  resources
from pursuing our business strategy.  Moreover,  failure of applications bundled
with our  products  may  reduce  the value of our  products,  decrease  or delay
revenues,  tarnish our brand,  give rise to breach of warranty  claims or divert
resources, any of which could materially adversely affect our business,  results
of operations and financial condition.

<PAGE>

Third party suppliers

     We  are  seeking  certification  from  contract  manufacturers,   component
suppliers and external systems providers regarding year 2000 compliance of their
systems, products and processes.  Accordingly,  we have initiated communications
with these  suppliers to determine  whether  their  operations  and products and
services are year 2000  compliant.  A survey of our major suppliers has revealed
that 82% have  compliance  programs  in place  and are,  or will be,  year  2000
compliant in a timely manner.

Contingency plans

     Our  contingency  plans are based on the responses to our inquiries that we
have received from our suppliers and external  system  providers  regarding year
2000  compliance  of their  systems,  products  and  processes  and are  largely
dependent  on the ability of the systems  vendors and  suppliers to put in place
alternative  resources in the event their processes and systems fail as a result
of year 2000  issues.  Depending  on the  systems  affected,  these  plans could
include:

o        accelerated replacement of affected equipment or software;
o        short-term to medium-term use of backup equipment and software;
o        increased work hours for our personnel; and
o        use of contract  personnel  to  correct,  on an  accelerated  schedule,
         any year 2000 issues that arise or to provide manuals (workarounds) for
         information systems.

     The  implementation of any of these contingency plans could have a material
adverse effect on our business, results of operations and financial condition.



Costs

     To date,  we have not  expended a material  amount of capital  resources on
year 2000 compliance and do not anticipate future expenditures to be material to
our business,  results of operations and financial condition.  We have not hired
additional  personnel to specifically  address our year 2000 compliance  issues,
and presently, we do not expect to do so.

     Recovery under existing  insurance  policies should be available  depending
upon the  circumstances  of a year 2000  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 one of our  facilities.  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
have not identified or fixed all year 2000 problems in our critical  operations,
or if we are  affected by the  inability  of  suppliers  or major  customers  to
continue operations due to a year 2000 problem,  our results of operations could
be materially impacted.

<PAGE>

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.

     The results of our  operations  and the valuation of some of our assets and
liabilities  are sensitive to changes in the general level of interest  rates in
the United States and foreign exchange rate fluctuations.

Interest rate risk

     Our  interest  income is  sensitive  to  changes  in the  general  level of
interest rates in the United  States,  as our  investments  are in United States
dollar cash equivalents and short-term instruments.

     Our  interest  expense is  sensitive  to changes  in the  general  level of
interest rates in the United States,  because the computation of interest due on
our debt in the United States is based on key interest rate  indicators  used in
the United States such as the prime rate.

Foreign exchange risk

     We  currently  have  foreign  subsidiaries  that  conduct and report  their
operations in local currency.  The primary foreign currency is the French Franc.
Other  currencies  include  the  British  Pound and the German  Deutschmark.  On
January 1, 1999,  eleven member countries  (including France and Germany) of the
European Union  established  fixed conversion  rates between their existing,  or
local, currencies and one common currency, the euro. The euro trades on currency
exchanges  and may be used in  business  transactions.  Conversion  to the  euro
eliminates currency exchange risk between the participating member countries.

     Due to the limited  contribution of our foreign subsidiaries to our results
of operations,  the short-term nature of our cash  equivalents,  investments and
debt, we do not believe we have material market risk exposure.


Part II.     Other Information

Item 1.  Legal proceedings - None
Item 2. Changes in Securities - None
Item 3. Defaults upon senior securities - None
Item 4. Submissions of matters to a vote of shareholders - None
Item 5. Other Information - None
Item 6. Exhibits and Reports on Form 8-K
        a)Exhibits - Exhibit 27 - Financial Data Schedule (Filed Electronically)
        b)    Reports on Form 8-K - None.





<PAGE>



                                    Signature

     Pursuant to the  requirements  of the Securities  Exchange Act of 1934, the
registrant has caused this report to be signed on its behalf by the  undersigned
thereunto duly authorized.


                                                       Ariel Corporation
                                                       ------------------
                                                       Registrant






                                             /S/ JOHN R. LOPRETE
                                             -------------------------
                                             John R. Loprete
                                             Vice President of Finance and
                                                  Principal Accounting Officer
Date:  November 15, 1999

<PAGE>