<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 June 30, 1997                                       Commission file number: 0-25326

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

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

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

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

                                                 Yes ( X ) No ( )

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

Common Stock, $.001 par value                                   9,169,325  shares outstanding
                                                               as of June 30, 1997


                                     Documents Incorporated by Reference: None

</TABLE>

<PAGE>


                                                 Ariel Corporation
                                                       Index

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

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

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

                  B.      Statements of operations for the three and six months
                          ended June 30, 1997 and 1996.

                  C.      Statements of cash flows for the six months ended
                          June 30, 1997 and 1996.


                  D.      Notes to financial statements



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


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




<PAGE>

PART I. - FINANCIAL INFORMATION

ITEM I. - FINANCIAL STATEMENTS

<TABLE>
<CAPTION>
<S>                                                                                                    <C>                   <C>
                                                             ARIEL CORPORATION
                                                               BALANCE SHEETS
                                                                (Unaudited)

                                                                                                        June 30,       December 31,
                                                                                                          1997            1996
                                                                                                       ------------    ------------
                                                                                                        (Unaudited)     (Audited)

                                                       ASSETS

CURRENT ASSETS:
       CASH AND CASH EQUIVALENTS ...................................................................   $  6,141,333    $  4,626,583
       MARKETABLE SECURITIES .......................................................................      1,075,000       5,999,377
       ACCOUNTS RECEIVABLE, NET OF ALLOWANCE FOR DOUBTFUL
             ACCOUNTS OF $212,678 AT JUNE 30, 1997 AND DECEMBER 31, 1996 ...........................      1,833,900       3,199,542
       OTHER RECEIVABLES ...........................................................................         69,779         190,023
       INVENTORIES .................................................................................      3,781,134       3,528,252
       PREPAID EXPENSES ............................................................................        360,787         156,005
                                                                                                        ------------    ------------
                            TOTAL CURRENT ASSETS ...................................................     13,261,933      17,699,782

EQUIPMENT, NET OF ACCUMULATED DEPRECIATION
            AND AMORTIZATION .......................................................................      2,517,278       2,036,897

OTHER ASSETS .......................................................................................        833,328         366,385

                                                                                                        ============    ============
       TOTAL ASSETS ................................................................................   $ 16,612,539    $ 20,103,064
                                                                                                        ============    ============


                                            LIABILITIES & STOCKHOLDERS' EQUITY

CURRENT LIABILITIES:
       ACCOUNTS PAYABLE ............................................................................   $    440,709    $  1,840,986
       ACCRUED EXPENSES ............................................................................      1,750,135       1,826,591
       NOTES PAYABLE - CURRENT PORTION OF LONG-TERM DEBT ...........................................        450,000               0
       NOTES PAYABLE, RELATED PARTIES ..............................................................              0         154,021
       ROYALTIES PAYABLE ...........................................................................         67,706          82,571

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

                            TOTAL CURRENT LIABILITIES ..............................................      2,708,550       3,904,169



NOTES PAYABLE - LONG TERM ..........................................................................      2,550,000               0


STOCKHOLDERS' EQUITY
       PREFERRED STOCK, $.001 PAR VALUE:
                AUTHORIZED - 2,000,000 SHARES
                          ISSUED AND OUTSTANDING - NONE

       COMMON STOCK, $.001 PAR VALUE:
                AUTHORIZED - 20,000,000 SHARES
                          ISSUED AND OUTSTANDING - 9,169,325 AT JUNE 30, 1997
                                 AND 8,949,975 AT DECEMBER 31, 1996 ................................          9,169           8,950

       ADDITIONAL PAID-IN CAPITAL ..................................................................     30,541,482      29,321,748
       UNEARNED COMPENSATION .......................................................................        (89,408)       (178,819)
       ACCUMULATED DEFICIT .........................................................................    (19,107,254)    (12,952,984)
                                                                                                        ------------    ------------
                            TOTAL STOCKHOLDERS' EQUITY .............................................     11,353,989      16,198,895
                                                                                                        ============    ============
       TOTAL LIABILITIES & STOCKHOLDERS' EQUITY .....................................................  $ 16,612,539    $ 20,103,064
                                                                                                        ============    ============
<FN>
                                       The accompanying notes are an integral part of the financial statements.
</FN>
</TABLE>
<PAGE>

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



                                                           ARIEL CORPORATION
                                                        STATEMENTS OF OPERATIONS
                                                               (Unaudited)





                                                                          Three Months Ended June 30,     Six Months Ended June 30,
                                                                               1997           1996           1997           1996
                                                                           ===========    ===========    ===========    ===========

SALES ..................................................................   $ 2,540,036    $ 3,660,669    $ 7,059,562    $ 5,183,048

COST OF GOODS SOLD .....................................................     1,547,971      1,877,816      3,940,742      2,697,533
                                                                           -----------    -----------    -----------    -----------

       GROSS PROFIT ....................................................       992,065      1,782,853      3,118,820      2,485,515

EXPENSES:
     SALES AND MARKETING ...............................................     1,276,788        999,204      2,425,248      1,948,463
     GENERAL AND ADMINISTRATIVE ........................................       979,366      1,281,386      2,130,799      2,112,951
     RESEARCH AND DEVELOPMENT ..........................................     2,588,341      1,378,769      5,046,008      2,474,436
                                                                            -----------    -----------    -----------    -----------
         TOTAL OPERATING EXPENSES ......................................     4,844,495      3,659,359      9,602,055      6,535,850
                                                                            -----------    -----------    -----------    -----------
       LOSS FROM OPERATIONS ............................................    (3,852,430)    (1,876,506)    (6,483,235)    (4,050,335)

INTEREST INCOME ........................................................        93,067        144,968        211,424        313,668

INTEREST EXPENSE .......................................................       (24,759)        (9,629)       (28,733)       (19,067)

OTHER INCOME ...........................................................       147,749          4,467        146,274         19,216

                                                                            -----------    -----------    -----------    -----------
       LOSS BEFORE INCOME TAXES ........................................    (3,636,373)    (1,736,700)    (6,154,270)    (3,736,518)

      INCOME TAXES .....................................................             0              0              0              0

                                                                            ===========    ===========    ===========    ===========
       NET LOSS ........................................................   ($3,636,373)   ($1,736,700)   ($6,154,270)   ($3,736,518)
                                                                            ===========    ===========    ===========    ===========


WEIGHTED AVERAGE NUMBER OF COMMON
       SHARES OUTSTANDING ...............................................    9,169,325      7,285,416      9,118,091      7,079,120
                                                                            ===========    ===========    ===========    ===========

NET LOSS PER COMMON SHARE ...............................................  ($     0.40)   ($     0.24)   ($     0.67)   ($     0.53)
                                                                            ===========    ===========    ===========    ===========










<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)


                                                                                                        Six Months Ended June 30,
                                                                                                           1997            1996
                                                                                                        ===========    ============

Cash flows from operating activities:
Net loss ............................................................................................   ($6,154,270)   ($ 3,736,518)
Adjustments to reconcile net loss to net cash used in
     operating activities:
                Depreciation and amortization .......................................................       541,265         242,438
                Amortization of discount on royalties payable .......................................         2,998          15,953
                Loss on sale of marketable securities ...............................................         7,507               0
                Provision for doubtful accounts .....................................................             0          15,000
                Provision for inventory obsolescence ................................................        30,000          15,000
                Non-cash compensation expense .......................................................        89,408               0
(Increase) decrease in assets:
                Accounts receivable and other receivables ...........................................     1,485,885      (1,446,104)
                Inventories .........................................................................      (282,882)       (857,515)
                Other assets ........................................................................      (349,915)         83,336
Increase (decrease) in liabilities:
                Accounts payable and accrued expenses ...............................................    (1,476,734)        526,629
                Royalties payable ...................................................................       (14,866)          4,810
                Notes payable, related parties ......................................................      (154,021)              0
                                                                                                         -----------    ------------
                              Net cash used in operating activities .................................    (6,275,625)     (5,136,971)
                                                                                                         -----------    ------------
Cash flows from investing activities:
                Proceeds from the sale and maturity of investments ..................................     4,913,759               0
                Purchase of equipment ...............................................................    (1,021,530)       (961,557)
                                                                                                         -----------    ------------
                              Net cash provided by (used in) investing activities ...................     3,892,229        (961,557)
                                                                                                         -----------    ------------
Cash flows from financing activities:
                Proceeds from debt financing ........................................................     3,000,000               0
                Proceeds from exercise of warrants and common stock
                       options, net of expenses ......................................................      898,145       5,482,176
                                                                                                         -----------    ------------
                              Net cash provided by financing activities ..............................    3,898,145       5,482,176
                                                                                                         -----------    ------------

Net increase (decrease) in cash ......................................................................    1,514,749        (616,352)
                Cash and cash equivalents, beginning of year .........................................    4,626,583      13,979,009
                                                                                                         ===========    ============
Cash and cash equivalents, end of period .............................................................. $ 6,141,333    $ 13,362,657
                                                                                                         ===========    ============


Supplemental Cash Flow Information:
----------------------------------
Other assets includes an increase of $316,445 representing the theoretical value of 83,333 warrants issued as part of the fees 
associated with the acquisition of a credit facility.

<FN>

                                  The accompanying notes are an integral part of the financial statements.
</FN>
</TABLE>
<PAGE>
                                                 Ariel Corporation
                                           Notes to Financial Statements
                                                    (Unaudited)

1.    Basis of Presentation

     The financial statements included herein have been prepared by the Company,
pursuant to the Rules and Regulations of the Securities and Exchange Commission.
Certain  information  and footnote  disclosures  normally  included in financial
statements prepared in accordance with generally accepted accounting  principles
have been  condensed  or omitted  pursuant  to such rules and  regulations.  The
Company believes,  however,  that the disclosure contained herein is adequate to
make the information  presented not misleading.  The financial statements should
be read in conjunction with the financial  statements and notes thereto included
in the Company's  Form 10-K for the year ended  December 31, 1996.  The year end
balance sheet data was derived from audited  financial  statements  but does not
include all disclosures required by generally accepted accounting principles.
     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 June 30, 1997 and the results of operations  for the three and six
months  ended June 30, 1997 and 1996.  The  results for interim  periods are not
necessarily indicative of results for the full year.
<TABLE>
<CAPTION>
<S>                                                                       <C>           <C>

2.    Inventories, net of allowance:

         Inventories, net of allowance, consists of the following:
                                                                         June 30,       December 31,
                                                                           1997            1996      
                                                                        -----------    -------------- 
         Component Materials.....................................        $1,866,913       $1,313,092
         Work-in process.........................................          459, 423          620,367
         Finished Goods..........................................         1,454,798        1,594,793
                                                                        ------------    -------------
                                                                         $3,781,134       $3,528,252
                                                                       =============    =============                       
</TABLE>
3.    Credit Facility

     On June 12, 1997, the Company  completed a $10 million credit facility with
the Technology Finance Division of Transamerica Business Credit Corporation with
the following terms and provisions:

         $6 million, five year term loan:

     Payments of principal and interest are due in arrears in twenty consecutive
quarterly  installments,  payable  on the  first  day of each  calendar  quarter
commencing  October 1, 1997.
     Interest  rate is based on the  weekly  average  yield  on  five-year  U.S.
Treasury  Securities  plus 5.75 percent,  fixed for five years as of the date of
advance.
     $3 million,  is  outstanding  at June 30, 1997.  Interest rate in effect at
June 30, 1997 was 12.23%.
     $3 million available upon attainment of any one of certain milestones, such
as  profitability,  minimum net  proceeds of $7 million  from the sale of common
stock, or achievement of a significant  strategic  partner  relationship.  As of
June 30, 1997, this facility has not been utilized.


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

     This revolving  credit facility can be increased to $7 million in the event
that the Company achieves one of the milestones, referred to under the term
loan but elects not to draw the second advance under the term loan.
     Interest  rate is based on the prime rate plus 2.50  percent as of the date
the  revolver  is  utilized.
     Available line of credit based on a formula of eligible accounts receivable
and inventory.
     As of June 30, 1997, this facility has not been utilized.

     Under terms of the credit agreement,  the Company must maintain agreed upon
levels of  financial  performance,  including  the  maintenance  of cash on hand
through December 31, 1997 of $3 million. The Company anticipates  achievement of
all financial covenants.
<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>               <C>              <C> 

                                                            Three months ended                  Six months ended
                                                                 June 30,                           June 30,

                                                          1997             1996               1997            1996
                                                       ---------        ---------         -----------      ---------

Sales                                                     100%             100%               100%            100%

Cost of goods sold                                         61               51                 56              52
                                                       -----------       ----------         ----------      ---------

     Gross Profit                                          39               49                 44              48


Expenses:

     Sales and marketing                                   50               27                 34              38

     General and administrative                            39               35                 30              41

     Research and development                             102               38                 72              48
                                                       -----------       ----------         ----------      ---------

     Total Operating Expenses                             191               100                136            127

Loss from operations                                     (152)             (51)               (92)            (78)


Interest Income                                            4                 4                  3              6

Interest Expense                                          (1)                *                  *              *

Other (expense) Income                                     6                 *                  2              *
                                                       -----------       ----------         ----------      ---------

    Loss before income taxes                             (143)             (47)               (87)            (72)

     Income taxes                                          -                 -                  -              -
                                                       -----------       ----------         ---------       ----------
                                                  

                 Net Loss                                (143)%            (47)%              (87)%          (72)%
                                                       ===========       ==========         ==========      =========
* Total less than 1%

</TABLE>
<PAGE>


Three months ended June 30, 1997 as Compared to three months ended June 30, 1996
--------------------------------------------------------------------------------

Net Sales

     Worldwide sales were $2,540,036 for the three months ended June 30, 1997, a
decrease of $1,120,633 or 31% compared to net sales of $3,660,669  for the three
months ended June 30, 1996. Domestic sales decreased by $989,018 from $3,188,252
for the three  months  ended June 30, 1996 to  $2,199,234  for the three  months
ended June 30, 1997.  This decrease in domestic sales is solely  attributable to
no additional  shipments of a digital signal  processing  ("DSP") OEM product to
one customer that  accounted for 32% of sales in the second quarter of 1996. All
outstanding  purchase  orders for this customer were completed  during the first
quarter of 1997.  Export sales were $340,802 for the three months ended June 30,
1997 compared to $472,417 for the three months ended June 30, 1996.

Gross Profit

     Gross profit  decreased by $790,788 or 44% to $992,065 for the three months
ended June 30, 1997 from  $1,782,853  for the three  months ended June 30, 1996.
Gross  profit  margin  decreased to 39% for the three months ended June 30, 1997
compared to 49% for the three months ended June 30, 1996.  The decrease in gross
margin for the second  quarter of 1997  compared  to the second  quarter of 1996
reflects a shift in product mix from sales of higher  margin DSP OEM products to
initial shipments of the Company's T1 Modem products which carried lower margins
in order to seed the targeted markets.  Additionally, in the month of June 1997,
the Company began  shipments of its Rascal product to several  customers under a
beta program in which the selling price equated the Company's cost to produce.

Sales and marketing

     Sales and marketing  expenses were $1,276,788 or 50% of sales for the three
months  ended June 30,  1997  compared to $999,204 or 27% of sales for the three
months ended June 30, 1996. The increase of $277,584 or 28% includes an increase
of  approximately  $186,000  for trade show  expenses  related to the  Company's
first-time attendance at two trade shows: the Networld-Interop show at which the
Company  introduced  its Rascal  product line and the Supercom show at which the
Company's  Asymmetrical  Digital  Subscriber  Line ("ADSL")  carrier class DSLAM
product was introduced. Additionally,  advertising expenses increased by $62,000
reflecting expenditures related to the Company's VME and T1 Modem products. Such
increases were partially  offset by a decrease in sales  commissions  reflecting
lower sales volume for the second quarter of 1997.


General  and  administrative

     General and  administrative  expenses were $979,366 or 39% of sales for the
three months ended June 30, 1997  compared to $1,281,386 or 35% of sales for the
three  months  ended June 30,  1996,  a decrease of $302,020 or 24%.  The second
quarter of 1996  included  approximately  $235,000 for  non-recurring  severance
expense related to certain management personnel.

Research  and  Development

     Research and development  expenditures were $2,588,341 or 102% of sales for
the three months ended June 30, 1997  compared to $1,378,769 or 38% of sales for
the three months ended June 30, 1996,  an increase of  $1,209,572.  Salaries and
wages increased by approximately  $291,000 reflecting  principally the hiring of
additional   engineering   staff  to  meet  the  demands  for  internal  product
development in the Data Communications and Communications Systems Group ("CSG").
Additionally,  expenses  related to outside  contract labor for certain research
and development  projects related to forward looking  technologies  increased by
approximately  $253,000.  The Company incurred  approximately $91,000 related to
the use of outside consultants in conjunction with its CSG Group. There was also
an increase in the amount of overhead allocated to research and development as a
result of the increase in engineering  headcount.  The Company  anticipates that
research and  development  expense will begin to decline  starting in the latter
part of the third quarter through the remainder of calendar year 1997.

     For the foregoing  reasons,  the Company  incurred a net loss of $3,636,373
for the three  months ended June 30, 1997  compared to a net loss of  $1,736,700
for the three months ended June 30, 1996.

<PAGE>

Six months ended June 30, 1997 as compared to six months ended June 30, 1996
---------------------------------------------------------------------------

Net sales

     Worldwide  sales were $7,059,562 for the six months ended June 30, 1997, an
increase of $1,876,514 or 36% compared to worldwide  sales of $5,183,048 for the
six months  ended June 30,  1996.  Domestic  sales were  $6,461,655  for the six
months ended June 30, 1997 compared to $4,280,446  for the six months ended June
30, 1996.  The increase in domestic sales for the six months ended June 30, 1997
reflects  increased  shipments of one DSP OEM product to a single  customer that
accounted for 35% of total sales for the six months ended June 30, 1997 compared
to 25% of total  sales for the six  months  ended June 30,  1996.  Additionally,
modem  products  did not begin  shipments  until the  second  half of 1996 while
shipments  of such  product for the first six months of 1997 were  approximately
$1,356,000.  Export  sales were  $597,907 for the six months ended June 30, 1997
compared to $902,602 for the six months ended June 30, 1996. Backlog at June 30,
1997 was $5,972,245.

Gross Profit

     Gross profit increased $633,305 or 26% from $2,485,515 to $3,118,820. Gross
profit  margin as a percentage  of sales  decreased  from 48% for the six months
ended June 30, 1996 to 44% for the six months ended June 30, 1997.  The decrease
represents a shift in product mix from DSP OEM product mix to initial  shipments
of the Company's data communications products.

Sales and Marketing

     Sales and marketing  expenses  were  $2,425,248 or 34% of sales for the six
months ended June 30, 1997  compared to  $1,948,463  or 38% of sales for the six
months  ended June 30, 1996.  The  increase of $476,785  reflects an increase of
approximately  $195,000 for trade show expenses related to first-time attendance
at two trade shows:  The Networld  Interop Show at which the Company  introduced
its  RASCAL  product  line and the  Supercom  Show at which the  Company's  ADSL
carrier class DSLAM product was introduced.  Advertising  expenses  increased by
approximately  $120,000,  which was  related to the  Company's  VME and T1 Modem
products.

General and Administrative

     General and administrative expenses were $2,130,799 or 30% of sales for the
six months ended June 30, 1997  compared to  $2,112,951  or 41% of sales for the
six months  ended June 30,  1996,  an increase of $17,848.  The six months ended
June  30,  1996  included  approximately  $235,000  of  non-recurring  severance
expenses related to certain management personnel.

Research and Development

     Research and development expenditures were $5,046,008,  or 72% of sales for
the six months ended June 30, 1997  compared to  $2,474,436,  or 48% for the six
months ended June 30, 1996.  The increase of $2,571,572  reflects an increase of
approximately  $811,000 in salaries and related benefits reflecting  principally
the hiring of  additional  engineering  staff to meet the demands  for  internal
product   development  in  the  Data  Communications  and  CSG  product  groups.
Additionally, expenses related to outside contract labor for projects related to
forward looking technologies increased by approximately $814,000.

<PAGE>

Liquidity and Capital Resources

     On June 12,  1997,  the Company  announced  it had  completed a $10 million
credit  facility with  Transamerica  Business  Credit  Corporation's  Technology
Finance  Division,  of  Farmington,   Connecticut.   This  facility  provides  a
five-year,  $6.0 million  term loan and a  three-year,  $4.0  million  revolving
credit facility ("Revolver"). The term loan provides for an immediate advance of
$3.0 million and a second advance of $3.0 million upon achievement of any one of
certain  milestones such as  profitability,  net proceeds of at least $7 million
from the sale of common stock, or achievement of a significant strategic partner
relationship.  The Revolver provides for up to $4.0 million in advances based on
a formula of eligible  accounts  receivable and inventory.  This Revolver can be
increased  to $7.0  million in the event that the  Company  achieves  one of the
milestones,  but  elects  not to draw the  second  advance  under the term loan.
Additionally,  the Revolver can be extended for two additional one-year periods.
As of June 30, 1997, there was $3.0 million  outstanding under the term loan and
there were no outstanding advances under the Revolver. Payments of principal and
interest  are due in  arrears  in  twenty  consecutive  quarterly  installments,
payable on the first day of each calendar  quarter  commencing  October 1, 1997.
The  interest  rate  under the term loan is based on the  weekly  average of the
interest rate on five year U.S.  Treasury  Securities for stated periods plus an
agreed upon number of additional  basis points.  At June 30, 1997,  the interest
rate in effect was 12.23%.  The  interest  rate in effect  under the Revolver is
based on the prime rate plus 2.5%.
     During the six months ended June 30, 1997, there was a net increase in cash
and cash  equivalents  of  $1,514,750,  including a net amount of  $4,913,759 in
proceeds  from the maturity and sale of  investments  in  marketable  securities
which were used to fund operations.  On June 13, 1997 the Company received gross
proceeds of $3,000,000  under the above  referenced term loan. At June 30, 1997,
cash and cash  equivalents  amounted to  $6,141,333  and  marketable  securities
amounted to $1,075,000. Working capital amounted to $10,553,382 at June 30, 1997
compared to $13,795,613 at December 31, 1996, a decrease of $3,242,231.
     Net cash used in  operating  activities  for the six months  ended June 30,
1997  amounted  to  $6,275,625.  The  negative  cash  flow from  operations  was
primarily  the result of the  Company's  net loss of  $6,154,270.  Additionally,
trade accounts payable and accrued expenses  decreased by $1,476,734  during the
six  months  ended  June  30,  1997.  Trade  accounts  receivable  decreased  by
$1,485,885  reflecting  lower  shipments  during the second quarter of 1997. Net
cash  used in  operating  activities  for the six  months  ended  June 30,  1996
amounted  to  $5,136,971,  reflecting  principally  the  Company's  net  loss of
$3,736,518  and  increases  in  trade  accounts  receivable  of  $1,357,372  and
inventories  of  $857,515  offset by  increased  accounts  payable  and  accrued
expenses of $526,629.
     Net cash provided by investing activities for the six months ended June 30,
1997 amounted to $3,892,229.  This included net proceeds of $4,913,759  from the
maturity and  subsequent  sale of high  quality  government  agency  securities.
Capital   expenditures  of  $1,021,530   reflected  purchases  of  computer  and
peripheral equipment related to engineering staff and final test and assembly in
manufacturing and also office furniture  related to the Company's  relocation of
its CSG group to  Piscataway,  New  Jersey in  January,  1997.  Net cash used in
investing activities for the six months ended June 30, 1996 amounted to $961,557
and  reflected  purchases  of computer and  peripheral  equipment to support the
increase in engineering and professional  staff,  office equipment and furniture
related to the Company's  relocation to its corporate  headquarters in Cranbury,
New Jersey.
     Net cash provided by financing activities for the six months ended June 30,
1997  amounted to  $3,898,145,  reflecting a draw down of  $3,000,000  under the
Transamerica  term loan and  $898,145  in proceeds  from the  exercise of common
stock options.  Net cash provided from  financing  activities for the six months
ended June 30, 1996 amounted to  $5,482,176.  The Company  received  proceeds of
$4,723,660 from the exercise of 1,349,617  warrants and $768,000  resulting from
the  exercise  of  150,000  unit  purchase   options  issued  to  the  Company's
Underwriters in conjunction with its Initial Public Offering.
     Statements  contained in this Form 10-Q that are not  historical  facts are
forward looking  statements that are made pursuant to the safe harbor provisions
of the  Private  Securities  Litigation  Reform  Act of  1995.  Forward  looking
statements involve risks and uncertainties, including the timely development and
acceptance  of new  products,  the impact of  competitive  products and pricing,
changing  market  conditions  and the  other  risks  detailed  in the  Company's
prospectus  and from time to time in other  filings.  Actual  results may differ
materially from those projected.  These forward looking statements represent the
Company's  judgment  as of the date of this  document.  The  Company  disclaims,
however, any intent or obligation to update these forward looking statements.

<PAGE>

Impact of the Adoption of Recently Issued Accounting Standards

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

<PAGE>

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

Item 6.  Exhibits and Reports on Form 8-K
         --------------------------------
 
         a)    Exhibits -
                  Exhibit 11 - Statement of Computation of Per Share Amounts
                  Exhibit 27 - Financial Data Schedule (filed electronically)

         b)       Reports on Form 8-K - None.
<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:  August 13, 1997

<PAGE>                                                                         
<TABLE>
                                                                                                                       EXHIBIT 11 
<CAPTION>
<S>                                                                      <C>             <C>           <C>              <C>  
                                                                 ARIEL CORPORATION
                                                  STATEMENT OF COMPUTATION OF PER SHARE AMOUNTS
                                          For the Three Months and Six Months Ended June 30, 1997 and 1996


                                                                       Three Months Ended June 30,    Six Months Ended June 30,
                                                                           1997            1996            1997            1996
                                                                       ------------    ------------    ------------    ------------

Primary:

       Net loss for the  period ....................................   ($ 3,636,373)   ($ 1,736,700)   ($ 6,154,270)   ($ 3,736,518)
                                                                        ============    ============    ============    ============

       Weighted average number of shares of common
          stock outstanding ........................................      9,169,325       7,285,416       9,118,091       7,079,120

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

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

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

       Shares used in computing per share loss .....................      9,169,325       7,285,416       9,118,091       7,079,120
                                                                        ============    ============    ============    ============

       Net loss per share ..........................................   ($      0.40)   ($      0.24)   ($      0.67)   ($      0.53)
                                                                        ============    ============    ============    ============


Fully Diluted:

       Net loss for the  period ....................................   ($ 3,636,373)   ($ 1,736,700)   ($ 6,154,270)   ($ 3,736,518)
                                                                        ============    ============    ============    ============

       Weighted average number of shares of common
          stock outstanding ........................................      9,169,325       7,285,416       9,118,091       7,079,120

       Shares issuable upon exercise of outstanding
          options and warrants .....................................      1,820,308       2,857,586       1,983,446       3,064,882

       Shares assumed to be acquired in accordance
          with the treasury stock method ...........................     (1,049,002)     (2,575,748)       (979,373)     (2,575,748)
                                                                        ------------    ------------    ------------    ------------

       Shares used in computing per share loss .....................      9,940,631       7,567,254      10,122,164       7,568,254
                                                                        ============    ============    ============    ============

       Net loss per share ..........................................   ($      0.37)   ($      0.23)   ($      0.61)   ($      0.49)
                                                                        ============    ============    ============    ============


</TABLE>
<PAGE>