<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, 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 June 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 June 30, 1999 and December 31, 1998

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

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

                  D.       Notes to consolidated financial statements



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



Item 3.  Quantitative and Qualitative Disclosures about Market Risk.
         -----------------------------------------------------------




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


Item 1. Legal Proceedings
        -------------------


Item 2. Changes in Securities
        ---------------------

Item 3. Defaults Upon Senior Securities
        -------------------------------


Item 4. Submission of Matters to a Vote of Shareholders
        ------------------------------------------------
A.       Annual Meeting and Proxies
B.       Election of Director
C.       Other Matters and Results


Item 5. Other Information
        -----------------


Item 6. Exhibits and Reports on Form 8-K
        --------------------------------


</TABLE>

<PAGE>

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

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

                                                                ARIEL CORPORATION
                                                           CONSOLIDATED BALANCE SHEETS
                                                                  (Unaudited)

                                                                                   June 30,      December 31,
                                                                                     1999            1998
                                                                                ------------    -------------
          ASSETS

CURRENT ASSETS:
       CASH AND CASH EQUIVALENTS ............................................   $ 11,026,567    $ 17,996,575
       ACCOUNTS RECEIVABLE, NET OF ALLOWANCE FOR DOUBTFUL
             ACCOUNTS OF $1,883,991 IN 1999 AND $1,460,855 IN 192,358,554 ...      3,593,709
       OTHER RECEIVABLES ....................................................      1,099,123       1,378,781
       INVENTORIES, NET .....................................................      2,096,706       2,857,326
       PREPAID EXPENSES .....................................................        467,150         449,691
                                                                                ------------    ------------
                            TOTAL CURRENT ASSETS ............................     17,048,100      26,276,082

EQUIPMENT, NET OF ACCUMULATED DEPRECIATION
            AND AMORTIZATION ................................................      1,308,213       1,365,354

INTANGIBLE ASSETS ...........................................................        805,490         997,225
GOODWILL ....................................................................      3,421,689       4,344,374

OTHER ASSETS ................................................................        647,592         699,345

                                                                                ============    ============
       TOTAL ASSETS .........................................................   $ 23,231,084    $ 33,682,380
                                                                                ============    ============


LIABILITIES & STOCKHOLDERS' EQUITY

CURRENT LIABILITIES:
       ACCOUNTS PAYABLE .....................................................   $  1,849,353    $  2,679,548
       ACCRUED EXPENSES .....................................................      3,074,147       5,388,661
       CURRENT PORTION OF LONG-TERM DEBT ....................................      5,116,996       5,480,430
       ROYALTIES PAYABLE ....................................................         42,021          95,410
                                                                                ------------    ------------

                            TOTAL CURRENT LIABILITIES .......................     10,082,517      13,644,049



LONG-TERM DEBT ..............................................................         73,479         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 JUNE 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 .............       (415,931)         31,272
       ACCUMULATED DEFICIT ..................................................    (19,821,083)    (13,637,877)
                                                                                ------------    ------------
                            TOTAL STOCKHOLDERS' EQUITY ......................     13,075,088      19,705,497

                                                                                ============    ============
       TOTAL LIABILITIES & STOCKHOLDERS' EQUITY .............................   $ 23,231,084    $ 33,682,380
                                                                                ============    ============


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

<PAGE>

<TABLE>

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





                                                       For The Three Months Ended June 30,    For The Six Months Ended June30,
                                                                 1999           1998             1999            1998
                                                       ------------------   -------------   -------------   --------------
SALES ...................................................   $  2,760,021    $  4,111,190    $  5,824,661    $ 10,387,808

COST OF GOODS SOLD ......................................      1,129,731       2,468,064       2,521,869       6,148,445
                                                               ---------       ---------       ---------       ---------

       GROSS PROFIT .....................................      1,630,290       1,643,126       3,302,792       4,239,363

EXPENSES:
     SALES AND MARKETING ................................      1,630,492       1,320,868       3,155,795       2,422,944
     GENERAL AND ADMINISTRATIVE .........................      1,925,207       1,681,821       3,738,654       3,037,868
     RESEARCH AND DEVELOPMENT ...........................      1,359,278       1,922,063       2,712,961       3,771,203
                                                               ---------       ---------       ---------       ---------

         TOTAL OPERATING EXPENSES .......................      4,914,977       4,924,752       9,607,410       9,232,015
                                                               ---------       ---------       ---------       ---------

       LOSS FROM OPERATIONS .............................     (3,284,687)     (3,281,626)     (6,304,618)     (4,992,652)

INTEREST INCOME .........................................        132,502          23,405         293,350          40,208

INTEREST EXPENSE ........................................       (146,550)       (180,239)       (292,051)       (277,402)

OTHER INCOME ............................................         30,799          60,199          28,575          52,655
                                                                  ------          ------          ------          ------

       LOSS BEFORE INCOME TAXES .........................     (3,267,936)     (3,378,261)     (6,274,744)     (5,177,191)
                                                              ----------      ----------      ----------      ----------

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

       NET LOSS .........................................   ($ 3,267,936)   ($ 3,378,261)   ($ 6,274,744)   ($ 5,177,191)
                                                            ------------    ------------    ------------    ------------







OTHER COMPREHENSIVE INCOME / (LOSS), NET OF TAX:
      FOREIGN CURRENCY TRANSLATION ADJUSTMENTS ..........       (112,215)              0        (295,154)              0
                                                                --------               -        --------               -


                               COMPREHENSIVE (LOSS) .....     (3,380,151)     (3,378,261)     (6,569,898)     (5,177,191)
                                                              ==========      ==========      ==========      ==========



BASIC AND DILUTED PER SHARE DATA:
       WEIGHTED AVERAGE NUMBER OF
                                COMMON SHARES OUTSTANDING      9,760,150       9,697,114       9,760,150       9,514,482
                                                               =========       =========       =========       =========


       NET LOSS PER SHARE ...............................          (0.33)          (0.35)          (0.64)          (0.54)
                                                               =========       =========       =========       =========





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

<PAGE>

<TABLE>

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


                                                                                ARIEL CORPORATION
                                                                     CONSOLIDATED STATEMENTS OF CASH FLOWS
                                                                                    (Unaudited)






                                                                        For The Six Months Ended June 30,
                                                                            1999                  1998
                                                                        ==============         ============
Cash flows from operating activities:
Net Loss ...............................................................   ($ 6,274,744)   ($ 5,177,191)
Adjustments to reconcile net loss to net cash used in ..................              0
     operating activities: .............................................              0
                            Depreciation and amortization ..............        458,780         631,725
                            Amortization of goodwill & intangibles .....        515,930               0
                            Amortization of debt issuance costs ........         32,181          32,178
                            Provision for doubtful accounts ............        270,093          30,000
                            Provision for inventory obsolescence .......        (65,321)        180,000
                            Non-Cash compensation expense ..............              0          55,409
(Increase) decrease in assets:
                            Accounts receivable ........................      1,222,171      (2,639,768)
                            Inventories ................................        810,959        (895,703)
                            Other assets ...............................       (117,030)       (136,470)
Increase (decrease) in liabilities:
                            Accounts payable and accrued expenses ......     (2,820,300)         47,820
                            Royalties payable, related parites .........        (53,389)         (6,855)
                                                                           ------------    ------------
                                                                             (6,020,669)     (7,878,855)
                                                                           ------------    ------------

Cash flows from investing activities:
                            Purchase of equipment ......................       (349,366)       (333,945)
                                                                           ------------    ------------
                                                                               (349,366)       (333,945)
                                                                           ------------    ------------

Cash flows from financing activities:
                            Proceeds from debt financing ...............              0       4,500,000
                            Principal payments on long-term debt .......       (575,888)       (132,630)
                            Proceeds from exercise of common stock
                               and stock warrants ......................              0       1,882,788
                                                                           ------------    ------------
                                                                               (575,888)      6,250,158
                                                                           ------------    ------------


Effect of exhange rate changes on cash .................................        (24,085)              0

Net increase (decrease) in cash ........................................     (6,970,008)     (1,962,642)

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


Cash and cash equivalents, end of period ...............................   $ 11,026,567    $    683,222
                                                                           ============    ============












                   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  generally  accepted  accounting   principles  and  the  Rules  and
Regulations of the Securities and Exchange  Commission.  Certain information and
footnote  disclosures  normally  included in  financial  statements  prepared in
accordance with generally accepted accounting  principles have been condensed or
omitted pursuant to such rules and regulations.  The Company believes,  however,
that the  disclosure  contained  herein  is  adequate  to make  the  information
presented not misleading. The financial statements should be read in conjunction
with the financial  statements and notes thereto  included in the Company's Form
10-K for the year ended December 31, 1998.

     As of June 30,  1999,  the  Company  had  working  capital  of  $6,965,583,
including cash and cash equivalents of $11,026,567. The Company expects to incur
costs and expenses in excess of expected  revenues during the ensuing six months
as the Company  continues  to execute  its  business  strategy  in the  Internet
Service Provider (ISP) and Technical Original Equipment (TOEM) markets. There is
no assurance the Company will generate  sufficient  cash flow from product sales
to liquidate liabilities as they become due. Accordingly the Company may require
additional funds to meet planned  obligations through December 31, 1999 and will
seek to raise such amounts through a variety of options,  including  future cash
from operations,  borrowings and proceeds from equity  financings.  In the event
the Company is unable to liquidate its  liabilities,  planned  operations may be
scaled back. The financial  statements do not include any adjustments that might
result from the outcome of these uncertainties.

     Additional  funding may not be available when needed or on terms acceptable
to us, which could have a material  adverse  effect on our  business,  financial
condition and results of operations.  If adequate funds are not available we may
delay or eliminate some expenditures.

     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 June 30,  1999 and the  results  of  operations  for the three and six months
ended  June  30,  1999  and  1998.  The  results  for  interim  periods  are not
necessarily indicative of results for the full year.


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

2. Inventories, net of allowance:
         Inventories, net of allowance, consists of the following:
                                                                         June 30,       December 31,
                                                                          1999              1998
                                                                          ------------------------
         Component Materials.........................................  $   494,214       $1,040,115
         Work-in process..........................................       1,211,815        1,536,870
         Finished Goods..........................................          390,678          280,341
                                                                           -------          -------
                                                                       $ 2,096,706       $2,857,326
                                                                       ===========       ==========

</TABLE>
3.       Debt
     As of June 30, 1999 the Company had total debt of $5,190,475  consisting of
notes due to  Transamerica  Business  Credit  Corporation's  Technology  Finance
Division of Farmington Connecticut of $4,819,789 and acquired foreign debt of
$370,686.
     Under its credit facility with Transamerica, outstanding debt of $4,819,789
as of June  30,1999  consisted of a  $2,504,788  Term Loan payable  quarterly in
arrears  over  twenty  consecutive  quarters  commencing  October 1,  1998,  and
$2,315,001 drawn against a Revolver which matures on June 12, 2000. The Revolver
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  $185,000 of the Revolver  balance was paid in June as
the Company had  insufficient  eligible  accounts  receivable  and  inventory to
support amounts drawn.  As of June 30, 1999 the Company had sufficient  eligible
accounts receivable and inventory to support the revolver balance of $2,315,001.

     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 June 30, 1999 was 12.099%.

Payment terms for the term loan are as follows:
    July 1, 1999 through June 30, 2000                                  $455,787
    July 1, 2000 through June 30, 2001                                  $536,000
    July 1, 2001 through June 30, 2002                                  $603,856
    July 1, 2002 through October 1, 2002                                $909,145
                                                                        --------
                                                         Total        $2,504,788
                                                                      ==========

     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 June 30,  1999 the  Company is in  compliance  with these  covenants.
However,  due to the uncertainty of attaining  future covenants all Transamerica
debt is reflected as a current liability as of June 30, 1999.

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.

     Summary information by segment as of and for the three and six months ended
June 30, 1999 is as follows:

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



                                                                  For the three months       For the six months ended
              NORTH AMERICA:                                      ended June 30, 1999             June 30, 1999
                                                            ---------------------------    ---------------------------
              Revenues from external customers                              $2,597,740                  $5,517,714
              Intersegment revenues                                                -0-                       5,250
              Segment loss                                                 (2,729,966)                 (4,895,067)
              Segment assets                                                17,506,173                  17,506,173

              EUROPE:
              Revenues from external customers                                $162,281                    $306,947
              Intersegment revenues                                                -0-                         -0-
              Segment loss                                                   (537,970)                 (1,381,952)
              Segment assets                                                 5,724,911                   5,724,911



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

          Segment profit / (loss)                                         ($3,267,936)                ($6,277,019)
          Profit margins on intersegment revenues                                  -0-                       2,275
                                                            --------------------------  --------------------------
          Net loss                                                        ($3,267,936)                ($6,274,744)
                                                            =========================== ===========================

</TABLE>

<PAGE>


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


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

COMPARISON OF RESULTS OF OPERATIONS
-----------------------------------

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


                                                                            Six Months Ended
                                                                                June 30,

                                                                         1999              1998

Sales                                                                    100%              100%

Cost of goods sold                                                        43                59
                                                                      -----------        ----------

     Gross profit                                                         57                41


Expenses

     Sales and marketing                                                  54                23

     General and administrative                                           64                29

     Research and development                                             47                36
                                                                      -----------        ----------

     Total Operating Expenses                                            165                89

Loss from operations                                                    (108)              (48)


Interest Income                                                           5                  0

Interest Expense                                                         (5)                (3)

Other (expense) Income                                                    *                  1
                                                                      -----------        ----------

    Loss before income taxes                                            (108)              (50)

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


                 Net Loss                                               (108)%             (50)%
                                                                      ===========        ==========
o        Total is less than 1%


</TABLE>

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

Net Sales

     Worldwide sales were $2,760,021 for the three months ended June 30, 1999, a
decrease of $1,351,169  compared to net sales of $4,111,190 for the three months
ended June 30, 1998.  Domestic sales were  $2,426,820 for the three months ended
June 30, 1999 compared to $3,781,075 for the three months ended June 30, 1998, a
decrease  of  $1,354,255.   Approximately  $1.1  million  of  this  decrease  is
attributable to a decrease in T1-Modem+  sales to Compaq,  a major PC Integrator
customer.  Compaq has  discontinued  its networking  group and as a result,  the
Company  expects 1998 sales to PC  integrators  to be a significant  part of its
1999 sales  variances from the previous year. The Company  expects to offset the
reduction in sales to PC  integrators by sales to Technical  Original  Equipment
Manufacturers  (TOEMs) and Internet Service  Providers  (ISPs).  There can be no
assurance  the  Corporation  will be  successful in expanding its sales in these
areas.

     International  sales were $333,201 for the second quarter of 1999 including
U.S. exports of $170,920 and sales from European operations of $162,281. This as
compared to $330,115 for the second quarter of 1998.

Gross Profit

     Gross profit  decreased by $12,836 to $1,630,290 for the three months ended
June 30, 1999 from  $1,643,126  for the three months ended June 30, 1998.  Gross
profit  margin was 59% for the three months ended June 30, 1999  compared to 40%
for the three months  ended June 30, 1998.  The decrease in gross profit was the
result of reduced  sales.  The  increase  in gross  profit as a percent to sales
resulted   from  a  higher  mix  of  sales  to  technical   original   equipment
manufacturers (TOEM) as compared to PC integrators such as Compaq.  TOEM's 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 $1,630,492 or 59% of sales for the Three
months ended June 30, 1999  compared to $1,320,868 or 32% of sales for the Three
months  ended June  30,1998,  an  increase  of  $309,624.  Salaries  and related
expenses  increased  $101,884  as a result  of the  addition  of a  Senior  Vice
President  of  Marketing  and the  transfer of the former  President to the Vice
President  of  Sales  position.   These  changes   occurred  in  December  1998.
Advertising, marketing research and promotions increased $289,066 over the prior
year as the  Company  introduced  its  PowerPopTM  concept to  Internet  Service
Providers  (ISP)  and  continues  efforts  to  penetrate  the ISP  market.  Such
increases  were offset by a  reduction  in  commissions  of $38,514 due to lower
sales and a reduction  in trade show  expenses of $49,546 as shows for these new
markets did not occur in the second quarter of 1999.

General and administrative

     General and  administrative  expenses were  $1,925,207 for the three months
ended June 30, 1999 compared to  $1,681,821  for the three months ended June 30,
1998. The increase of $243,386 is primarily due to the  amortization of goodwill
and other  intangibles  realized in the Company's  November 1998  acquisition of
SCii Telecom SA. Amortization  charges for the three months ending June 30, 1999
were $250,249. This increase was partially offset by a reduction to wages due to
the departure of the Company's Chief Financial Officer during the second quarter
of 1998.

Research and Development

     Research and  development  expenses were $1,359,278 or 49% of sales for the
three months ended June 30, 1999  compared to $1,922,063 or 47% of sales for the
three  months  ended June 30,  1998,  a decrease of  $562,785  or 29%.  Expenses
declined  by  $978,177  from the same  period  last  year due to the sale of the
Company's  Communications  Systems  Group (CSG) to Cabletron in September  1998.
These  decreases  were  offset by an increase in  research  and  development  of
$236,187  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 $213,000.


Six Months Ended June 30, 1999 as compared to Six Months Ended June 30, 1998

Net Sales

     Worldwide  sales were  $5,824,661 for the six months ended June 30, 1999, a
decrease of $4,563,147  compared to net sales of $10,387,808  for the six months
ended June 30, 1998.  Domestic  sales were  $5,282,012  for the six months ended
June 30, 1999 compared to  $9,534,794  for the six months ended June 30, 1998, a
decrease  of  $4,252,782.   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 TOEM
customers  accounted  for an additional  decrease of $1.1  million.  The Company
expects to offset the reduction in sales to PC integrators by sales to Technical
Original Equipment  Manufacturers (TOEMs) and Internet Service Providers (ISPs).
There can be no assurance  the  Corporation  will be successful in expanding its
sales in these areas.

     International  sales  were  $542,649  for  the  first  six  months  of 1999
including  U.S.  exports of  $234,284  and sales  from  European  operations  of
$308,366.  This as compared to $853,014  for the same period in 1998. A decrease
in  international  sales of  $310,365  reflects a decrease in sales of T1 Modem+
products to European  OEM  customers  of  $618,730.  This  decrease is partially
offset by sales from the Company's European subsidiaries of $308,366.

Gross Profit

     Gross profit  decreased by $936,571 or 22% to $3,302,792 for the six months
ended June 30,  1999 from  $4,239,363  for the six months  ended June 30,  1998.
Gross profit  margin was 57% for the six months ended June 30, 1999  compared to
41% for the six months ended June 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 TOEM's  customers that carry
higher gross margins.

Sales and marketing

     Sales and marketing  expenses  were  $3,155,795 or 54% of sales for the six
months ended June 30, 1999  compared to  $2,422,944  or 23% of sales for the six
months  ended June  30,1998.  The  increase of $732,851  reflects an increase in
salaries and related  expenses of $222,755 as the Company has added  selling and
marketing   resources  including  a  Senior  Vice  President  of  Marketing  and
transferred the former President to the Vice President of Sales position.  Other
increases include $431,564 for advertising and marketing programs related to the
Company's ISP and TOEM target markets and $231,127 for European operations. Such
increases  were offset by decreases in commissions of $64,537 due to lower sales
and a decrease in trade show  expenses of $92,948  related to a shift in markets
from the same period last year.

General and administrative

     General and  administrative  expenses  were  $3,738,654  for the six months
ended June 30, 1999  compared to  $3,037,868  for the six months  ended June 30,
1998. The increase of $700,786 is primarily due to the  amortization of goodwill
and other  intangibles  realized in the Company's  November 1998  acquisition of
SCii Telecom,  SA. Amortization  charges for the six months ending June 30, 1999
were  $515,928.  Additionally,  the  Company  incurred  $331,899  in general and
administrative  expenses  related to its European  subsidiaries  including costs
related to  establishing a wholly owned German  subsidiary.  Such increases were
partially  offset by decreases in domestic  administrative  wages,  benefits and
related taxes of $212,982 related to a reduction in domestic employees.

Research and Development

     Research and  development  expenses were $2,712,961 or 47% of sales for the
six months ended June 30, 1999  compared to  $3,771,203  or 36% of sales for the
six months  ended June 30,  1998,  a decrease  of  $1,058,242  or 28%.  Expenses
declined  by  $1,864,550  from the same  period last year due to the sale of the
Company's  Communications  Systems  Group (CSG) to Cabletron in September  1998.
These  decreases  were  offset by an increase in  research  and  development  of
$452,559  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 $426,000.

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  June  30,  1999,  there  was  $2,504,788
outstanding  under the term loan and $2,315,001 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 June 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 June 30,  1999 the  Company is in  compliance  with these  covenants.
However,  due to the uncertainty of attaining  future covenants all Transamerica
debt is reflected as a current liability as of June 30, 1999.

     During the six months ended June 30, 1999, there was a net decrease in cash
and cash equivalents of $6,970,008.  At June 30, 1999, cash and cash equivalents
amounted to $11,026,567. Working capital amounted to $6,965,583 at June 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 six months  ended June 30,
1999 amounted to $6,020,669.  The negative cash flows from  operations were due,
in part, to the  Company's  net loss of $6,274,744  which was offset by non-cash
expenditures related to depreciation,  amortization,  reserves and allowances of
$1,276,984. Other operating cash uses included decreases in accounts payable and
accrued  liabilities  of $2,820,300 as the Company paid down  obligations of its
subsidiary  and  accrued  costs  related  to the  sale of the CSG and  executive
bonuses. Such decreases were partially offset by increases in operating cash due
to reduced  inventory  and  accounts  receivable  of  $810,959  and  $1,222,171,
respectively.

     Net cash used in  investing  activities  for the six months  ended June 30,
1999  amounted to $349,366  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 six months  ended June 30,
1999  amounted to  $575,888,  reflecting  principal  payments on debt  including
$184,999 against the Revolver.

     The  Company  expects to incur  costs and  expenses  in excess of  expected
revenues  during the ensuing six months as the Company  continues to execute its
business strategy in the ISP and TOEM markets. There is no assurance the Company
will generate  sufficient cash flow from product sales to liquidate  liabilities
as they become due. Accordingly the Company may require additional funds to meet
planned  obligations  through  December  31,  1999 and will  seek to raise  such
amounts  through a variety of options,  including  future cash from  operations,
borrowings  and  proceeds  from equity  financings.  In the event the Company is
unable to liquidate its liabilities,  planned operations may be scaled back. The
financial  statements do not include any adjustments  that might result from the
outcome of these uncertainties.

     Additional  funding may not be available when needed or on terms acceptable
to us, which could have a material  adverse  effect on our  business,  financial
condition and results of operations.  If adequate funds are not available we may
delay or eliminate some expenditures.

Readiness for Year 2000

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

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

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

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

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

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

<PAGE>

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
        -----------------------------------------------------------

     The Company does not have material exposure to market risk from market risk
sensitive instruments.

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


Item 1. Legal Proceedings
        ------------------
         None


Item 2. Changes in Securities
        ---------------------
         None


Item 3. Defaults Upon Senior Securities
        -------------------------------
         None


Item 4. Submission of Matters to a Vote of Shareholders
        ------------------------------------------------

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


a) The Company held its annual meeting of stockholders, through the solicitation
of proxies, on June 23, 1999.

b)            Jay H. Atlas, President and Chief Executive Officer was elected as
              a director  for a term of three  years.  Messrs.  Robert  Ranalli,
              Edward  Horowitz,  Harold Paul and  Theodore  Coburn  continued as
              directors. Anthony Agnello continued as Chairman.

c) In addition,  the stockholders voted to amend the Company's 1995 Stock Option
Plan,
              increasing  the  number of shares  authorized  under the Plan from
              1,700,000 to 2,200,000.  Finally, the stockholders voted to ratify
              the  selection  of  PricewaterhouseCoopers,  LLP as the  Company's
              auditors for the fiscal year ending December 31, 1999.

                  The voting totals were as follows:

(i)      Election of Jay H. Atlas
              For 8,749,444;        Against 0;       Withheld 458,650;

(ii)     Amendment to the 1995 Stock Option Plan
              For 2,831,239;        Against 724,477;            Abstain 63,848; Not Voted 5,588,530

(iii)                   Proposal  to  ratify   PricewaterhouseCoopers,   LLP  as
                        Independent  Public  Accountants for the Company for the
                        year ending December 31, 1999

              For 9,131,223;        Against 52,271;           Abstain 24,600;

</TABLE>

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.

                                    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



                                                       -------------------------
                                                       John R. Loprete
                            Vice President of Finance
                            and Principal Accounting
                                                                         Officer
Date:  August 13, 1999

<PAGE>