<PAGE>


                                      DRAFT

                       SECURITIES AND EXCHANGE COMMISSION
                             Washington, D. C. 20549

                                    FORM 10-K
                  ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D)
                    OF THE SECURITIES AND EXCHANGE ACT OF 1934
                   For the fiscal year ended December 31, 2000
                           Commission File No. 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)                       (Zip Code)

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

Securities registered pursuant to Section 12(g) of the Act:

         Common Stock, par value $.001; Preferred Stock Purchase Rights

Check whether the Issuer (1) has filed all reports required to be filed by
Section 13 or 15(d) of the Exchange Act during the preceding 12 months (or for
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

Check if disclosure of delinquent filers in response to Item 405 of Regulation
S-K is not contained in this form, and no disclosure will be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K.[ ]

Aggregate market value of voting stock held by non-affiliates of registrant as
of March 15, 2001: $13,277,793.

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, 13,083,720 shares
outstanding as of March 15, 2001.

Number of Pages -

Exhibit Index -

Documents incorporated by reference: None.


<PAGE>



Item 1.  Description of Business

Overview

         We are a leading provider of open systems-based digital remote access
equipment to Internet Service Providers ("ISPs"). Our remote access equipment
is compatible with open systems platforms running a variety of popular operating
systems, including Windows NT and Linux, and enables ISPs to build reliable,
scalable and easy to manage networks at a cost that is significantly below other
available alternatives.

         Remote access equipment enables a user dialing in over a standard
telephone line to connect to a computer network. Because of the significant
increase in Internet users, ISPs are faced with the challenge of providing
access to a growing number of subscribers, including those subscribers who are
staying connected to the Internet for longer periods of time. In addition, ISPs
must also find cost effective ways to expand their networks and computer systems
to provide additional services such as Internet telephony, fax and voice over
the Internet and unified messaging. Our products enable ISPs to use standard PC
Systems to build remote access server concentrators (the equipment used to
connect multiple users simultaneously to the Internet). Leveraging our expertise
and experience in developing digital signal processing systems and led by new
senior management, we are targeting the approximately 8,000 small to mid-sized
ISPs (with less than 100,000 subscribers).

         In 1999 the Company introduced a new family of dial-up Internet access
solutions we call the PowerPOP architecture, which leverages industry standard
hardware, software and applications. Our PowerPOP architecture enables us to
take advantage of the increasing performance and plummeting prices of PC-based
Systems to provide ISPs with more responsive, reliable and flexible networks
while significantly reducing capital equipment costs and simplifying network and
systems management. We sell our products to ISPs primarily through one
distributor.

         We have historically provided, and will continue to provide, remote
access products and digital signal processing (DSP) products to OEMs who
integrate our components into their products. Because integration of our complex
components involves a significant amount of technical development and testing by
the OEM, our product is generally used for the duration of the OEM's
product-life. We sell our products to OEMs though our direct sales force. We
intend to continue to offer our component products to OEMs, including those OEMs
who sell products in the ISP market.

Our Corporate History

         Founded in 1982, we were one of the first providers of digital signal
processing application development tools. In the mid-1990s, we evolved from
being a provider of digital signal processing application development tools to
supplying digital signal processing-based subsystems to OEMs and government
contractors. Our products are incorporated into a variety of applications,
including medical instrumentation, machine vision, professional audio, sonar,
radar and multimedia.

         In the mid-1990s, we introduced a series of products aimed at the
computer telephony integration market. Computer telephony integration products
provide additional functionality which allows standard computers to connect to
telephone lines, initiate, receive, transmit, store and otherwise manipulate
voice and data telephone communications. Our initial product, the CTI Modem, is
used for Internet access, online services and transaction processing.

                                       1

<PAGE>

         In 1996, we formed a communications systems group to begin development
of an Asymmetrical Digital Subscriber Line ("ADSL") carrier-class product
targeting the needs of major telecommunications and network service providers.
ADSL adds a high-speed data connection to a standard voice telephone line.
Carrier-class is a term used to describe equipment that meets the stringent
reliability and environmental needs of telephone carriers. As a result of our
strategic decision to reposition ourselves in 1997, we decided to sell our
communications systems group, and in September 1998, we completed the sale of
the group's assets to Cabletron Systems, Inc. for approximately $30 million.

         In 1997, we also announced our intent to focus on the remote access
equipment market through product offerings that provide high density and cost
effective remote access solutions based on industry standard PC platforms. We
developed a Windows NT-based remote access solution, which was adopted by
Compaq. By late 1998, widespread use of the Internet and improved Internet
security led enterprises to outsource their remote access needs to ISPs. As a
result, Compaq changed their strategy and there are no revenues from Compaq in
2000 and 1999 as compared to $4.4 million in 1998.

         While sales to OEM customers generate a majority of our revenues, today
we are focused on developing and marketing remote access solutions that leverage
industry standard hardware, software and applications to small and mid-sized
ISPs and competitive local exchange carriers (CLECs).

Industry Overview

The ISP Market

         The Internet has emerged as a global communications medium, enabling
millions of people to gather information, communicate and conduct business
electronically. International Data Corporation estimates that there were
approximately 250 million Internet users worldwide in 2000 and that the number
of users will grow to over 500 million by the end of 2003. As a result, the
demand for equipment to expand Internet access is growing at an unprecedented
rate.

         ISPs are commonly grouped into categories based on the size of their
customer or subscriber base. Large ISPs are generally those with more than
100,000 subscribers. These include ISPs such as America Online, EarthLink, The
Microsoft Network, AT&T, Concentric Network and MCI WorldCom. Mid-sized ISPs
typically have between 20,000 and 100,000 subscribers and are generally focused
in a defined geography, either a metropolitan area or region. Small ISPs have
under 20,000 subscribers. Boardwatch Magazine's directory of ISPs lists more
than 8,000 small and mid-sized ISPs in the United States.

        The vast majority of Internet access is through dial-up or analog
telephone connections using a PC and a modem. An ISP's network consists of POPs
established in various locations throughout its service area, and a network
operations center where the ISP's high speed connection to the Internet resides.
When a subscriber's call reaches the POP, it is connected to a port. A port is
one of many modems located within a remote access concentrator, which allows
multiple persons to be connected simultaneously. The subscriber's call is
converted to a digital network connection in the POP from which an ISP maintains
a high-bandwidth connection called the backhaul- connecting the POPs to its
network operations center.

         As demand for Internet access grows, ISPs are expanding the number of
POPs that they maintain and are increasing the number of ports within many of
their POPs to accommodate a growing number of new subscribers and subscribers
staying connected to the Internet for longer periods of time. Remote access
server concentrators range in size from 24 ports to hundreds of ports, with the
highest sales volume models generally

                                       2



<PAGE>

supporting 48 to 96 ports.

Market Trends

         Due to a broad combination of factors including deregulation of the
telecommunication industry, competition between network service providers and
advances in technology, ISPs are experiencing significant change. In this
context, we believe we are well positioned to take advantage of the following
major trends in our industry:

         Proliferation of PC-based servers. Remote access concentrators have
traditionally been designed as closed "black box" systems using proprietary
hardware and software. Customer-driven modifications or the need for additional
features can only be accommodated by each respective manufacturer, which can be
expensive and slow to market. Further, given that the systems are proprietary,
end users are required to understand the specific details associated with each
system. The combination of the increase in the processing power of PC central
processing units, and the rapid maturation of PC operating systems such as
Windows NT/Windows 2000 and Linux, have enabled the functions of a remote access
concentrator to be delivered as an upgrade to a standard PC server instead of
requiring a "black box." This approach offers ISPs many advantages, including
equipment cost savings of up to approximately 40% (due in part to decreasing PC
prices) and easier operation. We believe that the remote access market will
transition from using special-built boxes to industry standard hardware,
software, applications and development tools as a result of the advances in
performance, scalability and reliability of open systems.

         Demand for new services. Advances in the technology underlying the
Internet have made it possible to use the Internet to carry two-way voice
conversations. To remain competitive, ISPs must offer new services including
voice and fax services using voice over the Internet protocol ("VOIP") and fax
over the Internet protocol ("FOIP"). The system requirements imposed by these
and other new services will strain the capabilities of existing networking
equipment. In particular, it is impossible to upgrade many remote access
concentrators to provide voice call handling, or, where upgrades are available,
their cost can significantly exceed the purchase price of the original
equipment. ISPs expanding their services to add voice and fax services must
often purchase entirely new remote access concentrators.

         Emergence of CompactPCI standard to meet Telco needs. Supported by many
industry leaders, the CompactPCI standard enables the development of equipment
using PC system standards that meet the requirements for high reliability
carrier-grade applications. We were the first company to offer CompactPCI remote
access plug-in cards that adhere to this new standard. Improvements in open
Systems capabilities, price reductions and the advent of CompactPCI combine to
create new opportunities for standards-based systems in high-end ISP
environments.

Ariel's Approach

         We have developed a new ISP network architecture and a new family of
products that enable ISPs and other network service providers to build and scale
their infrastructure using open systems platforms. The proprietary means by
which we have integrated our products' capabilities into standard PCs enables
our products to more fully and more easily integrate the hardware/system/network
models expected by Windows NT, Windows 2000 and Linux operating systems. This
ensures compatibility with the full repertoire of communications systems
services and applications built for these operating systems.

                                       3
<PAGE>


         Introduced in 1999, the PowerPOP architecture is a new approach to
designing ISP networks. The PowerPOP architecture provides an alternative to the
dumb remote access concentrators that ISPs currently use to equip POPs. The
PowerPOP architecture combines standard PC servers running a standard
off-the-shelf PC operating system (Windows NT or Linux) with one or more of our
plug-in cards. ISPs use these new servers to perform all the functions of a
remote access concentrator and to enable the POP to autonomously provide
critical network services. The typical ISP network architecture is based on a
central network operations center, connected to a number of dumb POPs. These
include services needed to obtain the numerical addresses of Internet Resources
("Domain Name Services"), the mechanisms that allow a subscriber to log in to an
ISP's network with a user name and password (called RADIUS) and tools to improve
the response time for both recently and frequently accessed web content (called
web caching).

         By providing key network services at the POPs, ISPs can significantly
reduce network traffic between the POPs and their network operating centers,
thereby improving response time, reducing backhaul requirements and improving
operating performance. This also enables ISPs to significantly reduce equipment
costs while increasing the flexibility, efficiency, manageability and
scalability of their networks.

         New ISPs face the challenge of building an entirely new network from
scratch. These ISPs can also use the PowerPOP architecture to substantially
reduce the initial cost and complexity of their network. A traditional approach
would require a minimum of three boxes-- a remote access concentrator, a PC
server and a router- for connection to the Internet. Using the PowerPOP
architecture, all the services and capabilities required to become an ISP can be
deployed in a single PC server system. Additional capacity can be added by
installing additional systems either in the network operations center or in new
remote POPs.

         PowerPOP offers ISPs the following benefits:

         Reduced equipment costs. We believe our PowerPOP architecture redefines
the economics of remote access. Using a standards-based platform reduces
equipment costs and operating expenses. By leveraging the price erosion and
performance increases in PC systems and compared to traditional remote access
equipment, a solution built with our technology can be priced at approximately
40% less per port using standard rackmount PC Systems and open standard
operating systems such as Windows NT and Linux.

         Deliver better performance to subscribers. Placing key network services
closer to the user creates a more responsive network by reducing the time it
takes for subscribers' requests to be filled. In addition, PC-based systems in
the POPs have additional available computing capacity that ISPs can use to
deploy new services.

         Build more reliable and manageable networks. In a traditional ISP
network design, servers at the network operations center provide critical
network services. ISPs install multiple redundant servers to avoid having a
critical service outage and a backup server automatically takes the place of one
that fails. Our PowerPOP architecture uses the PC systems in POPs to duplicate
these previously centralized services into each POP with built-in backup
Systems.

         Add new services with a software upgrade. Our technology, and the power
available in today's PC servers, enable the upgrade of our data access solutions
from a data-only remote access service to full support of Internet telephony
without requiring new hardware. As a result, ISPs will be able to offer VOIP and
FOIP services using network-updateable software.

                                       4

<PAGE>

Products

         In 2000 we offered two families of products: remote access products
that are sold to ISPs and OEMs and high-performance general purpose digital
signal processing (DSP) products that are sold only to OEM customers for
inclusion in their products. In June 2000 we notified our DSP customers that we
would no longer offer certain DSP products due to the lack of availability of
component parts and the prohibitive cost of production, testing and technical
support for these older products.

         Remote Access Products. Our remote access products are plug-in cards
and software that enable standards-based systems to provide remote access
services using off-the-shelf operating systems such as Windows NT and Linux.
Plug-in cards are electronic circuits that are compatible with the system
expansion connectors built into standard PC systems.

         In 1999 we launched our fourth generation of remote access products for
Windows NT and Linux the RS4200 family based upon the Ariel Access Architecture
and incorporating the most recent developments in digital signal processing
technology. The RS4200 family was built to meet the demanding requirements of
both ISPs and OEM specifications.

         In 2000 we introduced our BypaSS7 gateway by connecting additional
hardware and software to PCs equipped with our RS4200. BypaSS7 adds system
signaling software used in the public system telephone network (PSTN) and allows
ISPs and CLECs to offer low cost network access via inter-machine trunk lines
(IMTs) . BypaSS7 is currently available for data connections to the PSTN and is
the first complete system solution offered by us including installation and
service.

<TABLE>
<CAPTION>

---------------------- ------------------------------------------------------------------------------------ --------
       Product                                      Technical Specifications                                 Date
---------------------- ------------------------------------------------------------------------------------ --------
<S>                    <C>                                                                                  <C>
RS4200                 2 PCI card set; Up to 120 DSP-based Modems, V.90, FOIP and VOIP capable; 4 T1/E1      1999
                       Telco Interfaces, Windows NT and Linux
---------------------- ------------------------------------------------------------------------------------ --------
BypaSS7                Dual Redundant SUN Netra-T Solaris servers, proprietary SS7 Signaling application     2000
                       uses ADC NewNet SS7 stack
---------------------- ------------------------------------------------------------------------------------ --------
RS2000                 PCI; Up to 30 V.90 Digital Modems 2 T1/E1 Telco                                       1998
---------------------- ------------------------------------------------------------------------------------ --------
RS2000C                CompactPCI bus; Up to 30 Digital V.90 Modems; 2 T1/E1 Telco Interfaces                1998
---------------------- ------------------------------------------------------------------------------------ --------
RS1000                 2 PCI card set; Up to 30 56K Modems 2 T1/E1 Telco                                     1997
---------------------- ------------------------------------------------------------------------------------ --------
T1 Modem Plus          ISA bus; Up to 30 Analog Modems, 56K Capable                                          1996
---------------------- ------------------------------------------------------------------------------------ --------
T1 Modem               ISA bus; Up to 30 Analog Modems                                                       1996
---------------------- ------------------------------------------------------------------------------------ --------

</TABLE>

                                       5
<PAGE>

         Digital Signal Processing Products. Our family of general purpose, high
performance digital signal processing products for OEMs uses the
industry-standard VMEbus and the PC standard ISAbus, and are aimed at
applications in audio, instrumentation/telemetry, radar, sonar, and imaging.
OEMs selecting high performance digital signal processing products do so for the
life of their project, therefore OEMs tend to continue to purchase these
products for many years after the design is no longer state of the art.

<TABLE>
<CAPTION>

-------------------------------- -------------------------------------------------------------------------- --------
           Product *                                     Technical Specifications                            Date
-------------------------------- -------------------------------------------------------------------------- --------
<S>                              <C>                                                                        <C>
DC-5                             ISA: Custom-built Telco/Modem                                               1994
-------------------------------- -------------------------------------------------------------------------- --------
COMMIO / IP                      VME: DSP320C40; modular expansion for signal Input/Output                   1995
-------------------------------- -------------------------------------------------------------------------- --------
DSP 56                           ISA: DSP56001; 2 channels of Auto Input/Output                              1988
-------------------------------- -------------------------------------------------------------------------- --------
DSP 96                           ISA: DSP96002; 2 channels of Audio Input/Output                             1990
-------------------------------- -------------------------------------------------------------------------- --------
DSP C40                          ISA: DSP320C40; 2 channels of Audio Input/Output                            1993
-------------------------------- -------------------------------------------------------------------------- --------
HYDRA II & VSB                   VME: Quad DSP320C40                                                         1995
-------------------------------- -------------------------------------------------------------------------- --------
KEOPS                            PCI: Quad DSP3210 with optical Audio Input/Output                           1995
-------------------------------- -------------------------------------------------------------------------- --------
VC 40 / HYDRA PLUS               VME: Quad DSP320C40                                                         1995
-------------------------------- -------------------------------------------------------------------------- --------

</TABLE>

* - In June 2000 we notified our DSP customers that we would no longer offer
certain DSP products due to the lack of availability of component parts and the
prohibitive cost of production, testing and technical support for these older
products, therefore, these products are no longer generally available after
December 31, 2000.

Research and Development

         We believe that strong product development capabilities as well as
enhancements and upgrades to our present products are essential to our strategy
of building on our position as a technological leader in our industry,
maintaining the competitiveness of our current products and adding new features,
functions and products. We have, in the past, made and intend to continue to
make, significant investments in product and technological development.

         We are focusing our development efforts on next generation voice plus
data network equipment using standards-based components. We will continue to
aggressively develop new capabilities to extend our PowerPOP architecture in
such areas as handling combined voice and data applications, system management,
performance, density and reduced product cost.

         Our research and development expenditures totaled $6.7 million, $5.7
million and $5.3 million in 1998, 1999 and 2000, respectively. We perform our
research and product development activities at our facilities in Cranbury, New
Jersey and Paris, France.

Manufacturing and Quality Control

         Substantially all of the manufacturing of our products is outsourced.
The primary contract manufacturing companies we use are Reptron Manufacturing
Services and JRE Inc. both located in the United States. This allows us to focus
our resources on product research and development, marketing and sales and

                                       6

<PAGE>

customer support. Our internal manufacturing operations consist primarily of
production of prototypes, testing, manufacturing and test engineering, materials
purchasing and inspection and quality control. We monitor the performance and
quality of the work performed by our outside contractors by using internal
quality assurance procedures and by making regular visits to manufacturing
facilities.

         Ensuring adequate and flexible production capacity, continuous cost
reduction and superior product quality are top priorities of our manufacturing
efforts. We achieve our manufacturing goals by:

         o  working closely with our contract manufacturers during the product
            design and build phases;

         o  effectively managing a limited number of the most qualified
            suppliers; and

         o  constantly improving upon our product performance tests.

         Our products are manufactured with components and subassemblies
supplied by subcontractors to our specifications. We have purchased digital
signal processing chips and certain other components from Texas Instruments,
Lucent Technologies, Conexant, Motorola and Analog Devices, each of which
manufactures and is the sole supplier of the digital signal processing chips
upon which some of our products have been developed. We purchase modems for our
RS4200 from Mapletree Networks. Although we have not experienced any material
difficulties in obtaining supplies or manufactured products, any reduction or
interruption in supply or manufacturing from these third parties would adversely
affect our ability to deliver products.

Sales and Marketing

         We market our products principally to ISPs, CLECs and networking and
communications OEMs. We sell our products to ISPs through our direct sales
force, value added resellers and distributors. Resellers and integrators
custom-configure systems with components from Intel, IBM, Compaq, Ariel and
others to ISP specifications and deliver directly to ISPs. This approach to
delivering products is similar to the low-cost delivery models of the PC
industry and ensures that the ISP can obtain its specific desired configuration
at a competitive price.

         We also market our products to OEM's in the United States and Europe
primarily through a direct sales force and through independent sales
representatives. Internationally, we also sell our products through value added
resellers and distributors in Europe, Israel and the Far East. We maintain sales
offices in Dortmund, Germany, and Paris, France.

          Our marketing communications activities have been outsourced to a
number of specialized outside agencies. We obtain most new sales prospects
through advertising, existing customers, strategic relationships and trade show
participation. Our principal marketing activities include display advertising in
trade publications, direct mail, trade show participation and a home page on the
Web.

Technical Support

         Technical support is provided by application engineers or customer
service employees located at our headquarters. We offer web, fax, pager,
telephone and electronic mail support to assist our customers. ISPs are
supported by our telephone support staff, a password protected section of our
website, and, when required, by onsite visits.

                                       7

<PAGE>


         OEMs support their own customers, however, our telephone support staff
provides support for OEMs during their development phase and, given that OEMs
have substantial technical knowledge, they are often also supported directly by
our engineering department. Development consultation support for OEM engineers
in developing their products is provided on a for-fee basis.

         In addition to assisting OEM customers in their own development
projects, we also have processes and capabilities in place to perform custom
engineering to provide OEMs with products that meet their precise requirements.

         Our products are covered by a 5-year limited warranty against defects
in manufacture. Product replacement is the most common mechanism used to resolve
product defect issues. Our support engineering staff has created an innovative
"Spare In The Air" program to ensure the delivery of replacement products within
24 hours of a reported failure. Extended service contracts are also available.

Customers

         We market our products to two groups of customers-- small and mid-sized
ISPs in the United States and networking and communications OEMs worldwide.
While the products we sell to ISPs and OEMs are similar, OEMs generally
incorporate our products into theirs before reselling to the end user. Some of
our OEM customers include PSI Net, Motorola, Lockheed Martin, UT Starcom and
AT&T. Two customers, PSI Net at 20% and Motorola at 11% represented greater than
10% of sales for the year ended December 31, 2000. Three customers represented
45% of sales for the year ended December 31, 1999, including sales to Motorola,
Transaction Network Services and Lockheed Martin, which represented 22%, 11%
and 12% respectively. In Europe, we sell our full range of products to
telecommunications OEMs. In June 2000 we discontinued sales of our line of ISDN
terminal adapters (acquired with Scii Telecom S.A.). During 1998 three of our
customers represented 52% of our sales. Sales to Compaq accounted for 25% of our
total sales and sales to Cabletron and Transaction Network Systems represented
14% and 13%, respectively. As a result of the decline of the enterprise remote
access market in late 1998, there have been no sales to Compaq since 1998.

Competition

         The markets for our products are intensely competitive, continually
evolving and subject to changing technologies. We compete principally on the
basis of (1) the flexibility, scalability, quality, ease of use, reliability and
cost effectiveness of our products and (2) our reputation and the depth of our
expertise, customer service and support.

         We compete directly or indirectly with the following categories of
companies: (I) other small companies that sell remote access server equipment,
such as Interphase, Avail and Netaccess, (2) large, well-established companies
that sell remote access server equipment such as Ascend/Lucent, Cisco, and 3Com,
(3) third party modem board manufacturers, such as Equinox and Digi
International and (4) manufacturing departments within our OEM customers.
Because the markets in which we compete are rapidly evolving, additional
competitors with significant market presence and financial resources, including
large telecommunications equipment manufacturers and computer hardware and
software companies, may enter these markets and further intensify competition.

Intellectual Property and Other Proprietary Rights

                                       8

<PAGE>

         We believe that our success is dependent, in part, on proprietary
technology. We seek to maintain the proprietary nature of our technology by
several methods, including:

         o  copyright, trade secret and trademark laws;

         o  confidentiality agreements with employees and third parties;

         o  contractual provisions contained in license and other agreements
            with consultants, suppliers, strategic partners, resellers and
            end-user customers; and

         o  patents.

         Substantially all of our hardware products contain security codes which
deter duplication by third parties. We also assert copyright in relation to
certain aspects of our products and we generally enter into confidentiality
agreements with our employees and limit access to our proprietary information.
Despite these precautions, it may be possible for unauthorized third parties to
copy certain aspects of our products or to obtain information that we regard as
proprietary. We have filed patent applications for patent protection covering
some aspects of our next generation products. To date, these patents have not
been granted, and we cannot assure you that they will ever be granted. We do not
hold patents on any of our other products, and in the event competitors are able
to create substantially similar or duplicate products, we will not be able to
avail ourselves of the protection afforded by the patent laws.

         We believe that due to the rapid pace of innovation within our
industry, factors such as the technological expertise of our personnel and
ongoing reliable product maintenance and support are more important in
establishing and maintaining a leadership position within the industry than the
pursuit of various legal protections of our technology.

         We also depend upon development, supply, marketing, licensing and other
operative relationships with third parties for complementary technologies
incorporated in our products. These cooperative relationships are with hardware
and software developers pursuant to which both parties make their respective
technology available to the other for the purpose of achieving compatible
products. Some of these relationships are based upon annually renewable license
agreements under which we obtain technology necessary to produce our products.
Although we have no reason to believe that these mutually beneficial
relationships will end, these relationships are generally non-exclusive and
terminable, and we cannot assure you that we will be able to maintain these
relationships or to initiate additional similar relationships. The loss of
certain cooperative relationships, particularly with any of the digital signal
processing chip suppliers, may have a material adverse effect on our business.

         Ariel BypaSS7 and PowerPOP are trademarks of Ariel. All other
trademarks and service marks appearing in this memorandum are trademarks or
service marks of the respective companies that use them.

Backlog

         Backlog shippable within a twelve-month period was approximately $.9
million at December 31, 2000. Backlog was $.5 million at December 31, 1999 and
approximately $2.1 million at December 31, 1998. Our

                                       9

<PAGE>

order trend is characterized by delivery cycles that range from several days to
quantities deliverable over several months. Further, customers may revise
scheduled delivery dates or cancel orders. Accordingly, the portion of sales in
each fiscal quarter derived from backlog at the beginning of such quarter varies
based on the customer's required delivery dates.

Employees

         As of December 31, 2000, we had 67 employees, including 6 in Europe and
2 part-time employees. None of our employees are represented by a collective
bargaining agreement nor have we experienced any work stoppage. We believe our
relationship with our employees is satisfactory.

Item 2.  Properties

         We maintain office and light assembly space comprising approximately
30,000 square feet at 2540 Route 130, Cranbury, New Jersey pursuant to a lease,
expiring January 2006. The annual rent is approximately $420,000 . We also
maintain branch or subsidiary offices in Paris, France, and Dortmund, Germany.

Item 3.  Legal Proceedings

         We are not engaged in any material legal proceedings. We may from time
to time become a party to various legal proceedings in the ordinary course of
business.

Item 4.  Submission of Matters to a Vote of Securities Holders

         On February 15, 2001 we held a special meeting of stockholders through
the solicitation of proxies. The meeting was originally scheduled for December
20, 2000 and adjourned until February 15, 2001 in order to obtain the necessary
quorum to conduct the business of the meeting. The stockholders voted on a
proposal concerning the issuance of 2,151,000 shares of common stock upon the
exercise of warrants issued by us in conjunction with a private placement of
common stock completed on February 24, 2000 and to approve the issuance to the
investors in the February 2000 private placement of up to 2,151,000 additional
warrants.

         The voting totals were as follows:
               For:  5,037,829           Against: 776,287     Abstain: 765,537

Item 5.  Market for Registrant's Common Equity and Related Stockholder Matters

         Our common stock is traded on the Nasdaq National Market under the
symbol "ADSP". The following table sets forth, for the periods indicated, the
high and low closing sale prices per share of our common stock, as reported by
the Nasdaq National Market:

                                            High               Low
1999
1st  Quarter . . . . . . . . . . . . .    $ 3   3/8         $ 1  5/8
2nd  Quarter . . . . . . . . . . . . .      3 15/16                2
3rd  Quarter . . . . . . . . . . . . .      6  9/16           1  7/8
4th  Quarter . . . . . . . . . . . . .           37           2  3/4


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<PAGE>

                                            High               Low
2000
1st  Quarter . . . . . . . . . . . . .    $12   3/8          $ 6  3/4
2nd  Quarter . . . . . . . . . . . . .      7 13/16            2  9/16
3rd  Quarter . . . . . . . . . . . . .      3  7/16            1 11/32
4th  Quarter . . . . . . . . . . . . .      2  7/16               9/16

2001

January 1 through  March 15,  2001 . .    $ 1 23/32          $   25/32

         As of December 31, 2000, the closing historical high and low prices of
our common stock as reported on the Nasdaq National Market were $ 12 3/8
occurring on March 9, 2000 and $ 9/16 occurring on December 26, 2000,
respectively. As of December 31, 2000, we had 127 holders of record of our
common stock. There are approximately 14,600 beneficial owners of our common
stock.

Dividend Policy

         No cash dividends have been declared on the Company's common stock
through March 15, 2001 and the Board of Directors has no current intention to
declare or pay dividends on the common stock in the foreseeable future.

         On October 9, 1998, the Board of Directors of the Company adopted a
rights plan pursuant to which it declared a dividend of one preferred share
purchase right for each outstanding share of common stock. Each right entitles
the registered holder to purchase one one-hundredth of a share of Series A
Preferred Stock, par value $.001 per share. The purchase price is $25 per one
one-hundredth of a share of Preferred Stock, subject to adjustment. Until the
occurrence of certain triggering events, the rights will be evidenced only by
the outstanding common stock certificates on the books and records of the
Company maintained by its transfer agent and will not be separately issued.

Item 6.  Selected Financial Data

         The following data has been derived from financial statements audited
by PricewaterhouseCoopers LLP, independent accountants. Consolidated balance
sheets as of December 31, 1999 and 2000 and the related consolidated statements
of income for each of the three years ended December 31, 2000 and notes thereto
appear elsewhere herein. The report of PricewaterhouseCoopers LLP which also
appears herein contains an explanatory paragraph relating to the Company's
ability to continue as a going concern as described in Note 1 to such financial
statements. You should read this data in conjunction with "Management's
Discussion and Analysis of Financial Condition and Results of Operation" and our
financial statements and the notes to those financial statements appearing
elsewhere in this Form 10-K.

                                      11

<PAGE>


<TABLE>
<CAPTION>

                                                                 Year Ended December 31,

Consolidated Statements of
Operations Data:                                       1996             1997             1998             1999             2000
                                                       ----             ----             ----             ----             ----
<S>                                                <C>              <C>              <C>              <C>              <C>
Sales .........................................    $ 13,030,637     $ 13,201,916     $ 17,445,829     $ 11,626,546     $  8,007,074
Cost of goods sold ............................       6,482,147        7,180,241       11,965,220        5,096,014        4,497,804
                                                   ------------     ------------     ------------     ------------     ------------

Gross profit ..................................       6,548,490        6,021,675        5,480,609        6,530,532        3,509,270

Operating Expenses:
     Selling and  marketing ...................       3,952,723        4,400,786        5,265,542        5,634,070        5,683,349
     General and administrative ...............       6,383,192        6,145,088        9,710,275        7,312,680        6,277,270
     Research and development net .............       5,758,413        8,182,584        6,722,905        5,688,414        5,321,127
     Restructuring charge .....................              --          379,454               --          369,528        2,356,656
                                                   ------------     ------------     ------------     ------------     ------------

Total operating expenses ......................      16,094,328       19,107,912       21,698,722       19,004,692       19,638,402

Loss from operations ..........................      (9,545,838)     (13,086,237)     (16,218,113)     (12,474,160)     (16,129,132)

Gain on sale of assets ........................              --               --       29,537,896               --               --

Total other income (expense) ..................         744,381          324,838         (874,645)         (25,655)          57,142

Income/(loss) before income taxes .............      (8,801,457)     (12,761,399)      12,445,138      (12,499,815)     (16,071,990)
                                                   ------------     ------------     ------------     ------------     ------------
Income tax expense (benefit) ..................              --               --          368,632               --         (423,938)
                                                   ------------     ------------     ------------     ------------     ------------
Net income/(loss) .............................    $ (8,801,457)    $(12,761,399)    $ 12,076,506     $(12,499,815)    $(15,648,052)
                                                   ============     ============     ============     ============     ============

Earnings/(loss) per share
     Basic ....................................    $      (1.10)    $      (1.39)    $       1.25     $      (1.27)    $      (1.23)
     Diluted ..................................    $      (1.10)    $      (1.39)    $       1.11     $      (1.27)    $      (1.23)

Weighted average number of
     common shares outstanding:
     Basic ....................................       7,979,249        9,161,758        9,652,664        9,843,402       12,726,382
                                                   ------------     ------------     ------------     ------------     ------------
     Diluted ..................................       7,979,249        9,161,758       10,843,215        9,843,402       12,726,382
                                                   ------------     ------------     ------------     ------------     ------------


Consolidated Balance Sheet Data: ..............        1996             1997             1998             1999             2000
                                                       ----             ----             ----             ----             ----
Cash, cash equivalents and marketable
securities ....................................    $ 10,625,960     $  2,645,864     $ 17,996,575     $  7,088,431     $  1,129,246

Working capital ...............................      13,795,614        4,329,018       12,632,033        7,827,522        2,385,855

Equipment, net ................................       2,036,897        2,382,645        1,365,354        1,387,128        1,261,112

Total assets ..................................      20,103,064       11,121,667       33,682,380       19,817,072        9,208,051

Long-term debt and capital leases .............              --        2,367,147          332,834        2,004,886        1,373,687

Stockholders equity ...........................      16,198,896        5,133,213       19,705,497       10,997,239        3,718,191
</TABLE>

                                      12
<PAGE>


Item 7.  Management's Discussion and Analysis of Financial Condition and
         Results of Operations

         The discussion and analysis below should be read in conjunction with
the Financial Statements of the Company and the accompanying notes set forth on
pages F-1 through F-24.

Overview

         We are a leading provider of open systems-based digital remote access
equipment to ISPs. Our remote access equipment is compatible with open systems
platforms running a variety of popular operating systems, including Windows NT
and Linux, and enables ISPs to build reliable, scalable and easy to manage
networks at a cost that is significantly below other available alternatives.

         Historically, our core strength has been supplying digital signal
processing-based (DSP) sub-systems to OEMs and government contractors. Our DSP
OEM products are incorporated into a variety of applications, including medical
instrumentation, machine vision, professional audio, sonar, radar and
multimedia.

         In 1996, we formed a communications systems group to begin development
of an Asymmetrical Digital Subscriber Line ("ADSL") carrier-class product
targeting the needs of major telecommunications and network service providers.
As a result of our strategic decision to reposition our company in 1997, we
decided to sell our communications systems group, and in September 1998 we
completed the sale of the group's assets to Cabletron Systems, Inc. for
approximately $30 million.

         In 1997, we also announced our intention to focus on the remote access
equipment market through product offerings that provide high density and
cost-effective remote access solutions based on industry standard PC platforms.
We developed the T1 Modem and Tl Modem Plus products, Windows NT-based remote
access solutions, for this market. Target customers for these products were OEMs
that wanted to integrate remote access capability into their computers. A major
PC manufacturer, Compaq, adopted the Tl Modem Plus remote access solution in
March 1998.

         By late 1998, widespread use of the Internet and improved Internet
security led enterprises to outsource their remote access needs to ISPs. This
led to the decline of Compaq's primary remote access market, the enterprise
remote access market, and our revenues from Compaq decreased from a total of
$4.4 million in 1998 to zero for the periods ended December 31, 2000 and
December 31, 1999.

         Our ability to successfully execute our new business strategy is
critical to the future performance of our business. During the second quarter of
1999 we changed our business strategy to focus on the ISP market following the
decline of the enterprise remote access market and we continued to focus on ISPs
through 2000. Historically, we have derived substantially all of our revenues
from product sales to OEMs and PC manufacturers. As we focus our efforts on the
ISP market, we expect sales to OEMs to represent a declining percentage of our
total revenue in the future if our business strategy is successful. Because the
ISP market is a new market for us, and the equipment we have developed for that
market has only recently been introduced, we have limited experience in selling
our products. Currently, only a limited number of ISPs have purchased our
product.

                                       13

<PAGE>


         To expand our international operations, in November 1998 we acquired
all of the outstanding common stock of Solutions for Communications and
International ISDN, S.A. (Scii) headquartered in Paris, France. The transaction
was accounted for using the purchase method of accounting and consideration,
including related transaction costs, consisted of $3,389,029 in cash.

         Revenue is derived from the sale of hardware and software products for
DSP and remote access applications. Our customers consist primarily of OEMs,
computer equipment distributors and ISPs. We recognize revenue at the time the
product is shipped to the customer when there is no additional significant
post-contract customer support obligation.

Results of Operations

         The following table sets forth statements of operations data as a
percentage of sales for the periods indicated.

<TABLE>
<CAPTION>


                                                           1996         1997         1998        1999          2000
<S>                                                       <C>          <C>          <C>          <C>          <C>
Sales ..............................................      100.0%       100.0%       100.0%       100.0%       100.0%

Cost of goods sold .................................       49.7         54.4         68.6         43.8         56.2

Gross profit .......................................       50.3         45.6         31.4         56.2         43.8

Operating Expenses:
     Selling and marketing .........................       30.3         33.3         30.2         48.5         71.0
     General and administrative ....................       49.0         46.5         55.7         62.9         78.3
     Research and development ......................       44.2         62.0         38.5         48.9         66.5
     Restructuring charge ..........................        0.0          2.9          0.0          3.2         29.4


Total operating expenses ...........................      123.5        144.7        124.4        163.5        245.2

Loss from operations ...............................      (73.3)       (99.1)       (93.0)      (107.3)      (201.4)

Gain on sale of assets .............................        0.0          0.0        169.3          0.0          0.0

Total other income (expense) .......................        5.7          2.5         (5.0)        (0.2)         0.7

Income/(loss) before income taxes ..................      (67.5)       (96.7)        71.3       (107.5)      (200.7)

Income tax expense (benefit) .......................        0.0          0.0          2.1          0.0         (5.3)

Net income/(loss) ..................................      (67.5)       (96.7)        69.2       (107.5)      (195.4)


</TABLE>


Year Ended December 31, 2000 Compared to Year Ended December 31, 1999.

         Worldwide sales were $8,007,074 for the year ended December 31, 2000, a
decrease of $3,619,472 compared to net sales of $11,626,546 for the year ended
December 31, 1999. Domestic sales were $7,075,431 for the year ended December
31, 2000 compared to $10,459,550 for the year ended December 31, 1999. In 1998
the Company began a shift from digital signal processing (DSP) to products and
markets for dial-up

                                       14
<PAGE>


remote access equipment (RAS). Initially the Company pursued the RAS market
though sales to manufacturers that focused primarily on selling remote access
equipment to business enterprises. During 1999 the Company shifted its sales and
marketing efforts to focus mostly on Internet service providers (ISPs) who
account for an increasing amount of RAS equipment purchases. The domestic sales
decrease of $3,384,119 was due to reduced demand for the Company's DSP products
from original equipment manufacturers (OEMs) resulting from this shift. Such
decreases were partially offset by sales of the Company's RAS products to ISPs.
International sales were $931,643 for the year ended December 31, 2000 including
U.S. exports of $489,354 and sales from European operations of $442,289. This as
compared to $1,166,996 for the same period of 1999. The decrease of $235,353
over prior year reflects and increase of US exports of RAS products, offset by a
decrease in sales of BRI products at international subsidiaries.

         Gross profit decreased by $3,021,262 to $3,509,270 for the year ended
December 31, 2000 from $6,530,532 for the year ended December 31, 1999. Gross
profit was reduced by approximately $1,500,000 for additional inventory reserves
recorded during the period. The Company introduced the RS4200 in the fall of
1999, which has improved price and performance over the RS2000. The RS4200 began
shipping in March of 2000. As a result, on hand quantities of the RS2000 are in
excess of future demand and reserves to write off approximately $1,100,000 of
excess RS2000 inventory have been recorded through the year ended December 31,
2000. The remaining value of RS2000's in inventory is approximately $200,000 at
December 31, 2000. The Company will continue to review expected demand and
adjust the carrying value of inventory as necessary. Additionally, certain older
DSP products are expected to be in excess of future demand and reserves of
$400,000 were recorded during the year ended December 31, 2000 to write-off
excess material. The decrease in gross profit percentage was also impacted by
certain fixed manufacturing overhead costs on reduced sales volume for the
period. The decrease was partially offset by the shipment of approximately
$634,000 in products during the period, which had been previously written down,
resulting in higher margins on such products for the current period. Gross
profit percent for the year ended December 31, 2000 was 54.6% before giving
effect to these write downs and sale of products previously reserved.

         Sales and marketing expenses were $5,683,349 for the year ended
December 31, 2000 compared to $5,634,070 for the year ended December 31,1999.
The increase of $49,279 includes a decrease in sales commission of approximately
$274,000 due to lower revenues as well as a reduction in wages and recruiting
costs of approximately $249,000 resulting from a restructuring of the sales
organization completed in August of 1999. Such decreases were partially offset
by increases in public relations and investor relations of approximately
$566,000.

         General and administrative expenses were $6,277,270 for the year ended
December 31, 2000 compared to $7,312,680 for the year ended December 31, 1999.
The decrease of $1,035,409 reflects a reduction in amortization expense of
approximately $447,000 for the year ended December 31, 2000 as compared to the
year ago period. Such decreases were due to the write-down of goodwill related
to the Company's French subsidiary, taken in the second quarter of 2000.
Additionally, reserves for un-collectible accounts decreased by $177,000 year
over year and cost incurred for recruiting and investor relations were
approximately $144,000 and $188,000 less, respectively, for the year ended
December 31, 2000 versus the same period last year. During fiscal year 2000, the
Company further reduced costs related to its European operations, which
contributed approximately $339,000 to the overall decrease in general and
administrative expenses over the prior year period. Such decreases were
partially offset by approximately $156,000 related to the amortization of
non-cash financing cost; $45,000 in expenses related to the closing of the
Company's San Diego office and, $55,000 of additional rental charges related to
the Company's corporate headquarters in Cranbury, New Jersey.

                                       15

<PAGE>

         Research and development expenses were $5,321,127 for the year ended
December 31, 2000 compared to $5,688,414 for the year ended December 31, 1999.
The decrease of $367,287 is comprised primarily of decreases in salaries and
related expenses of $469,000, as well as a reduction in cost for recruiting of
approximately $54,000. Such decreases were offset by increases in research and
development consultants of approximately $208,000.

         During fiscal year 2000, the Company further reduced costs related to
its European operations, which contributed approximately $263,000 to the overall
decrease in research and development expenses over the prior year period. Such
decreases were offset by increases in depreciation and maintenance of
approximately $103,000 for test lab equipment acquired in October 1999, as well
as labor and material costs of approximately $380,000 for engineers related to
development of Linux related software and the Company's SS7 Gateway enabled
remote access products. Variances in research and development labor costs
reflect a trend in the engineering job market of acquiring engineering resources
through independent contractors rather than full time employees.

         In June 2000 the board of directors approved a plan to phase out the
Company's low end products and reduce ongoing investment in these products in
Europe. Accordingly, the Company recorded a special non-recurring charge of
approximately $2,356,000 including the impairment of goodwill of approximately
$1,546,000 associated with the Company's 1998 acquisition of SCii Telecom, S.A.
(see note 3 to the financial statements).

     In addition, effective May 31, 2000 the Company terminated the employment
of Jay Atlas, its president and Chief Executive Officer, and entered into a
termination and separation agreement with Mr. Atlas. As a result of Mr. Atlas'
termination agreement, the Company recorded a charge of $810,515, which reflects
severance and related employee benefits payments of $306,145 and an estimated
value of $504,370 for the extension of stock options that vested during Mr.
Atlas' employment. As of December 31, 2000, $157,597 of the accrued severance
has been paid.

         Interest expense was $373,092 for the year ended December 31, 2000 as
compared to interest expense of $527,611 for the year ended December 31, 1999.
Interest expense in both periods consisted primarily of interest on the term and
revolving credit notes outstanding under our credit facility with Transamerica.
The reduction in interest expenses was due to a reduction in debt of
approximately $1.9 million during 2000. Interest income for the year ended
December 31, 2000 of $372,984 was down from $440,477 for the year ending
December 31, 1999 due to lower investment income as a result of declining cash
balances in 2000.

         There was no tax provision for the year ended December 31, 2000 and
1999 due to losses reported for that period.

         The Company qualified for the sale of certain net operating tax losses
and research and development credits under a New Jersey economic incentive
program. A benefit of $423,938 was recognized in November 2000 upon the sale of
research and development credits under the program.

     For the foregoing reasons the Company incurred a net loss of $15,648,052
for the year ended December 31, 2000 as compared to losses of $12,499,815 for
year ended December 31, 1999.

                                       16

<PAGE>

Year Ended December 31, 1999 Compared to Year Ended December 31, 1998.

         Worldwide sales were $11,626,546 for the year ended December 31, 1999,
a decrease of $5,819,283 compared to net sales of $17,445,829 for the year ended
December 31, 1998. Domestic sales were $10,459,550 for the year ended December
31, 1999 compared to $15,720,887 for the year ended December 31, 1998, a
decrease of $5,207,214. The decrease is related to widespread use of the
Internet and improved Internet security by late 1998. As a result, enterprises,
who had met remote access needs through PC Integrators such as Compaq Computers,
outsourced their remote access need to Internet Service Providers (ISPs). The
decrease in sales attributable to this shift included a decrease of
approximately $4.2 million in sales to Compaq, a major PC Integrator customer,
who had discontinued its networking group. Other PC Integrators selling to the
enterprise market comprised the remaining 1999 domestic sales variances from the
previous year.

         International sales were $1,166,996 for the year ended December 31,
1999 including U.S. exports of $769,531 and sales from European subsidiaries of
$397,465 compared to international sales of $1,724,942 for 1998. The decrease is
attributable to a reduction in demand by an OEM customer for our audio mixing
product, as well as a reduction in sales of T1 Modem Plus products due to the
release of our RS2000 product. Such decreases were partially offset by sales
from the Company's European subsidiaries.

         Gross profit increased by $1,049,923 or 19% to $6,530,532 for the year
ended December 31, 1999 from $5,480,609 for the year ended December 31,
1998. Gross profit margin was 56% for the year ended December 31, 1999
compared to 31% for the year ended December 31, 1998. The increase in
gross profit margin as a percent of sales reflects the continued shift in
product mix from lower margin shipments to PC integrators to shipments to OEM's
customers that carry higher gross margins. 1999 gross profit was reduced by
$195,000 for the write-down of RS2000 inventory. The Company introduced the
RS4200 in the fall of 1999 which has improved price and performance compared to
the RS2000. Consequently, sales of the RS2000 may be affected. As a result,
price reductions are planned and a write-down to affect lower of cost or market
valuation was applied. Additionally, 1998 profit margins reflect a charge of
approximately $2.0 million for the write-down of certain inventory primarily
related to T1 Modem+ and RS1000 products. The write-down was the result of a
substantial reduction in demand from several major customers including Compaq.
The Company negotiated additional sales with Compaq in the fourth quarter of
1998 and has sought new markets for these products. However, due to the
introduction of the Company's next generation RS2000 product family in September
1998, and the Company's change in focus from enterprise customers to ISPs,
management expected substantially reduced demand for these products from Compaq
and other T1-Modem+ customers in 1999 and beyond. Consequently, current
inventory levels are projected to be in excess of expected future consumption.
1998 gross profit margins were 42.9% before this write-down.

         Sales and marketing expenses were $5,634,070 or 48% of sales for the
year ended December 31, 1999 compared to $5,265,542 or 30% of sales for the year
ended December 31,1998. The increase of $368,528 reflects incremental spending
in 1999 of $391,331 for advertising, and marketing programs related primarily to
the launch of the Company's ISP PowerPOP architecture and $459,598 for European
operations. Such increases were offset by decreases in commissions of $128,383
and related sales travel of $25,046 due to lower sales volume. Additionally,
depreciation was reduced by $214,289 due to the disposition of certain trade
show and demonstration material resulting from the Company's market shift.

                                       17

<PAGE>

         General and administrative expenses were $7,312,680 for the year ended
December 31, 1999 compared to $9,710,275 for the year ended December 31, 1998.
The decrease of $2,397,595 is due in part to certain non-recurring expenses
recorded in 1998. Those expenses included bonuses paid in September 1998 of $1.1
million in connection with the sale of the Company's CSG group in that month and
a reduction in staff salaries as a result of the sale. Other non-recurring
expenses in 1998 included approximately $842,000 related to severance and
separation agreements with respect to an officer of the Company and a
consultant, $175,000 related to the settlement of a licensing dispute and
$292,923 of warranty expense related to the return of certain equipment from a
major customer. Additionally, 1998 general and administrative expenses included
a provision for doubtful accounts for Hayes Microcomputer, Inc. and it's
affiliates when Hayes filed for bankruptcy protection. Accordingly, provisions
for doubtful accounts decreased by approximately $231,000 as compared to the
year ended December 31, 1999. Additional expense reductions include a decrease
of approximately $1,170,000 in consulting fees resulting from the termination of
consulting agreements early in 1999. Such decreases were partially offset by an
increase of $588,734 in general and administrative expenses and $918,572 in
amortization of goodwill related to the Company's European subsidiaries acquired
in November 1998, (see Note 3 to the financial statements).

         Research and development expenses were $5,688,414 or 49% of sales for
the year ended December 31, 1999 compared to $6,722,905 or 39% of sales for the
year ended December 31, 1998, a decrease of $1,034,491. Expenses declined by
$2,309,430 from the same period in 1998 due to the sale of the Company's
Communications Systems Group (CSG) to Cabletron in September 1998. 1998 R&D
expenses also included in-process research and development costs of $297,330
related to the acquisition of SCii Telecom, SA in November 1998, (see Note 3 to
the financial statements). These decreases were offset by an increase in
research and development of $667,932 resulting from investments in products and
technologies at this subsidiary. Additionally, expenses increased due to bonuses
paid to certain engineers in conjunction with employment contracts of
approximately $885,000.

         With the Company's decision to focus on the ISP market and in
combination with its newly created sales channel through KeyLink Systems, the
Company terminated the employment agreement of Brian Hoerl, its Vice-President
of OEM Sales and entered into a termination agreement with Mr. Hoerl effective
August 20, 1999. Two additional field sales-reps were also terminated in the
third quarter of 1999. As a result, the Company recorded a restructuring charge
in September 1999 of $369,528, which reflects severance and related benefits
payments.

         Interest expense of $527,611 for the year ended December 31, 1999
consisted primarily of interest on the term and revolving credit notes
outstanding under our credit facility with Transamerica. Interest expense of
$1,371,970 for the year ended December 31, 1998 included interest related to the
Transamerica facility as well as a one-time charge of $750,000 in accordance
with the terms of a $2.0 million bridge loan drawn down on February 19, 1998
against the anticipated proceeds of the sale of the Communications Systems
Group. Interest income of $440,477 and $432,596 for the years ended December 31,
1999 and 1998 respectively consisted of income from the investment of our cash.

         There was no tax provision for the year ended December 31, 1999 due to
losses reported for that period. For the year ended December 31, 1998 a tax
provision of $368,632 was recorded to reflect our estimated federal and state
income tax liability for 1998 income. This liability was partially offset by the
use of the net operating losses we incurred in previous years. Alternative
minimum tax rules limit the use of such operating losses to entirely offset our
1998 income tax liability.

                                       18

<PAGE>

         For the foregoing reasons we reported a net loss of ($12,499,815) for
the year ended December 31, 1999 as compared to net income of $12,076,506 for
the year ended December 31, 1998.

Liquidity and Capital Resources

         We have incurred net losses of approximately $15.6 million and $12.5
million for the years ended December 31, 2000 and 1999, respectively, and expect
to incur costs and expenses in excess of revenues as we continue to execute our
business strategy in the ISP and OEM markets. Absent the pending transaction
with Mayan Networks, Inc. described below and in Note 20 to the financial
statements (which is contingent upon a number of factors), we have limited
financial resources available to support our ongoing operations, fund product
development programs to develop and market new competitive remote access
technology, and pay its obligations as they become due.

         These factors raise substantial doubt concerning our ability to
continue as a going concern. The consolidated financial statements do not
include any adjustments relating to the recoverability and classification of
asset carrying amounts or the amount and classification of liabilities that
might result should we be unable to continue as a going concern. Our ability to
continue as a going concern is dependent upon the ongoing support of our
stockholders, creditors, and certain key customers, the consummation of the
pending transaction with Mayan Networks, Inc. as described below and in Note 20
(or the closing of similar debt or equity transactions), and/or our ability to
successfully develop and market our remote access products and technology at
economically feasible levels in a highly competitive and rapidly changing
technology environment.

         We maintain a credit facility with Transamerica Business Credit
Corporation. Currently the Company has a five-year, $3 million term loan ("Term
Loan") and $4 million revolving line of credit ("Revolver"). As of December 31,
2000, there was $1,788,984 outstanding under the Term Loan. Amounts previously
drawn against the Revolver matured on June 12, 2000 and have been paid in full
as of December 31, 2000. (See Note 10 to the Financial Statements.)

         We took down the Term Loan on June 12, 1997 when we 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 December 31, 2000, the interest rate in effect was 12.10%.

         On February 24, 2000 we entered into an agreement with a number of
investors to sell 2,151,000 shares of our common stock at a purchase price of
$4.00 per share in a private placement. The Company also issued 2,151,000
warrants to purchase common stock with an exercise price of $6.875. The warrants
are exercisable as of September 1, 2000. The exercise price of the warrants was
reset to $.95 on March 1, 2001 based on the average market price for the five
trading days preceding the one year anniversary date of the agreement. Under the
terms of the agreement, we filed a registration statement to register the shares
sold and those underlying the warrants. That registration statement was declared
effective on April 20, 2000.

         The agreement also calls for the issuance of additional shares at no
cost to these investors should we

                                       19

<PAGE>

sell shares of common stock, or securities convertible into common stock, at a
price less than $4.00 per share within twenty four months of this agreement.
This provision requires us to issue additional shares such that the average
share price of these investors is equal to the then offered price. Additionally,
for twenty-four months from the date of the agreement, these investors have the
right of first refusal to participate in any future sales of our common stock,
or securities convertible into common stock, under the terms then offered.
Exceptions for these provisions include shares issued pursuant to the exercise
of outstanding common stock options and warrants or to effect a plan of merger.

        During the year ended December 31, 2000, there was a net decrease in
cash and cash equivalents of $5,959,185. At December 31, 2000, cash and cash
equivalents amounted to $1,129,246. Working capital amounted to $2,385,855 at
December 31, 2000. This as compared to working capital of $7,827,522 at December
31, 1999.

         Net cash used in operating activities for the year ended December 31,
2000 amounted to $11,469,679. The negative cash flows from operations were the
due primarily to the Company's net loss of $15,648,052 which was offset by
non-cash expenditures related to depreciation, amortization, reserves and
allowances of $3,637,957 and impairment of goodwill and restructuring charges of
$2,050,511. Increases in operating cash due to collections of accounts
receivables accounted for $614,457. Operating cash uses included decreases in
accounts payable and accrued liabilities of $1,189,935 as the Company paid down
obligations of its subsidiary and accrued costs related to the sale of CSG and
executive bonuses. Additionally, increases in inventory related to the
introduction of the RS4200 and SS7 Gateway products resulted in a decrease in
operating cash of $206,176.

         Net cash used in investing activities for the year ended December 31,
2000 amounted to $758,931 due to the purchases of computer and peripheral
equipment related mainly to a research and development test lab and final test
and assembly equipment in manufacturing.

         Cash from financing activities increased $6,251,456 for the year ended
December 31, 2000 as a result of proceeds of $8,067,216 from the issuance of
common stock and exercise of outstanding stock options and warrants. Such
increases were offset by principal payments on debt of $1,815,760.

         On March 28, 2001 we entered into a definitive agreement and plan of
merger with Mayan Networks which upon consummation requires us to, among other
things, effect a reverse stock split and to issue additional shares to Mayan
Network's shareholders immediately after the reverse stock split. Upon
consummation of the transaction Mayan Network, shareholders will control
approximately 90% of our outstanding voting stock.

         The consummation of the transaction requires, among other things, the
approval of the plan of merger by shareholders of both companies, the effective
registration with the SEC of the shares to be issued and the listing of those
shares with NASDAQ.

         The agreement and plan of merger also provides for a Promissory Note
which calls for Mayan Networks to provide up to $2 million in debt financing to
us on an as needed basis until the transaction is consummated or otherwise
terminated. In the event Mayan chooses to terminate the merger agreement due to
a superior offer, the note becomes a term note with any principal and accrued
interest payable on the one year anniversary of the termination. We must
maintain certain representations and warranties and not be in breach of the
covenants of the agreement and plan of merger to draw down funds against the
Note. The Note has an annual interest rate of 8% and requires us to execute a
subordinated security agreement.

                                       20

<PAGE>

        During the year ended December 31, 1999, there was a net decrease in
cash and cash equivalents of $10,908,144. At December 31, 1999, cash and cash
equivalents amounted to $7,088,431. Working capital amounted to $7,827,522 at
December 31, 1999. This is compared to working capital of $12,632,033 at
December 31, 1998.

         Net cash used in operating activities for the year ended December 31,
1999 amounted to $12,567,511. The negative cash flows from operations were due
primarily to the Company's net loss of $12,499,815 which was offset by non-cash
expenditures related to depreciation, amortization, reserves and allowances of
$2,938,550. Other operating cash uses included decreases in accounts payable and
accrued liabilities of $2,683,382 as the Company paid down obligations of its
subsidiary and accrued costs related to the sale of CSG and executive bonuses.
Additionally, increases in inventory related the introduction of the RS2000 and
RS4200 resulted in a decrease in operating cash of $729,945. Such decreases were
partially offset by increases accounts receivable of $69,335.

         Net cash used in investing activities for year ended December 31, 1999
amounted to $593,851 due to the purchases of computer and peripheral equipment
related mainly to a research and development test lab and final test and
assembly equipment in manufacturing.

         Cash from financing activities increased $2,215,963 for the year ended
December 31, 1999 as a result of proceeds of $4,326,540 from the exercise of
outstanding stock options and warrants. Such increases were offset by principal
payments on debt of $2,085,316 and capital lease obligation payments of $25,261.

         During the year ended December 31, 1998, there was a net increase in
cash and cash equivalents of $15,350,711, including an amount of $31,348,753 in
proceeds net of transaction costs from the sale of assets related to the
Communications Systems Group. On July 27, 1998 we received a deposit of
$5,000,000 on the sale and on September 1, 1998 we received the remaining gross
proceeds of $28,500,000. At December 31, 1998, cash and cash equivalents
amounted to $17,996,575. Working capital amounted to $12,632,033 at December 31,
1998 compared to $4,329,018 at December 31,1997, an increase of $8,303,015.

         Net cash used in operating activities for 1998 amounted to $16,176,526.
The negative cash flow from operations was primarily the result of our net
operating loss of $16,218,113. Additional operating decreases include accounts
receivable of $2,813,966, reflecting an increase in collection days, and
increases in inventory balances of $1,700,796 related to slow moving and excess
inventory.

         Net cash provided by investing activities for 1998 amounted to
$27,284,599. This included proceeds net of transaction costs of $31,348,753 from
the sale of the Communications Systems Group and a decrease due to acquisitions
of $3,340,122 net of cash acquired of $48,908. Capital expenditures of $724,032
reflected purchases of computer and peripheral equipment for the engineering
staff and final test and assembly in manufacturing.

         Net cash provided by financing activities for the year ended December
31, 1998 amounted to $4,242,638, reflecting proceeds of $4,500,000 received as a
result of a draw on the Transamerica revolving credit facility and $2,051,412 in
proceeds from the exercise of common stock options. Additionally, decreases of
$2,308,774 were incurred on principal payments of long-term debt.

         On February 24, 2000 the Company entered into an agreement to sell
2,151,000 shares of its common stock at $4.00 per share in a private placement.
On March 2, 2000 this transaction was completed resulting in net proceeds of
approximately $7.8 million. In addition to the sale of its common stock the
Company also

                                       21

<PAGE>

issued 2,151,000 warrants to purchase common stock at $6.875. Under the terms of
the agreement, the Company agreed to file a registration statement on or before
April 4, 2000 to register the shares sold and those underlying the warrants.

Qualitative and Quantitative Disclosures About Market Risk

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

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

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

         Foreign exchange risk. In the years ended December 31, 1998, 1999
and 2000 we had foreign subsidiaries that conducted and reported their
operations in local currency. The primary foreign currency is the French Franc.
Other currencies include the British Pound and the German Deutschmark. On
January 1, 1999, eleven member countries (including France and Germany) of the
European Union established fixed conversion rates between their existing, or
local, currencies and one common currency, the euro. The euro trades on currency
exchanges and may be used in business transactions. Conversion to the euro
eliminates currency exchange risk between the participating member countries.

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

Recent Pronouncements

         In March 2000, the Financial Accounting Standards Board issued
Interpretation No. 44, "Accounting for Certain Transactions Involving Stock
Compensation, an interpretation of APB Opinion No. 25" ("FIN No. 44"). The
interpretation provides guidance for certain issues relating to stock
compensation involving employees that arose in applying APB Opinion No. 25.
Among other things, this interpretation clarifies (a) the definition of an
employee for purposes of applying APB Opinion No. 25, (b) the criteria for
determining whether a plan qualifies as a noncompensatory plan, (c) the
accounting consequence of various modifications to the terms of a previously
fixed stock option or award and (d) the accounting for an exchange of stock
compensation awards in a business combination. The provisions of FIN No. 44 are
effective July 1, 2000, except for the provisions regarding modifications to
fixed stock options or awards that reduce the exercise price of an award, which
apply to modifications made after December 15, 1998. Provisions regarding
modifications to fixed stock options or awards to add reload features apply to
modifications made after January 12, 2000. The effect of adopting FIN No. 44 did
not have a material impact on the Company's financial statements.

         In December 1999, the staff of the SEC issued SAB 101, which summarizes
the staff's interpretations of the application of generally accepted accounting
principles to revenue recognition. The staff provided this

                                       22


<PAGE>

guidance due in part to the large number of revenue recognition issues that it
has encountered in registrant filings. In June 2000, SAB 101B, "Amendment:
Revenue Recognition in Financial Statements", was issued, which deferred the
effective date of SAB 101 until the fourth fiscal quarter of 2000. The effect of
adopting SAB 101 did not have a material impact on the Company's financial
statements.

         In June 1998, the Financial Accounting Standards Board issued SFAS No.
133, "Accounting for Derivative Instruments and Hedging Activities" ("SFAS No.
133"). This statement establishes accounting and reporting standards for
derivative instruments, including certain derivative instruments embedded in
other contracts, and for hedging activities. It requires recognition of all
derivatives as either assets or liabilities on the balance sheet and measurement
of those instruments at fair value. If certain conditions are met, a derivative
may be designated specifically as: (a) a hedge of the exposure to changes in the
fair value of a recognized asset or liability or an unrecognized firm commitment
(a fair value hedge), (b) a hedge of the exposure to variable cash flows of a
forecasted transaction (a cash flow hedge), or (c) a hedge of the foreign
currency exposure of a net investment in a foreign operation, an unrecognized
firm commitment, an available-for-sale security, or a
foreign-currency-denominated forecasted transaction. In June 1999, the Financial
Accounting Standards Board issued SFAS No. 137, delaying the effective date of
SFAS No. 133. The provisions of SFAS No. 133 are effective for all fiscal
quarters of all fiscal years beginning after June 15, 2000. The adoption of SFAS
No. 133 by the Company, effective January 1, 2001, had no effect on the Company.

Item 8. Financial Statements and Supplementary Data

         See Financial Statements beginning on page F-1.

Item 9.  Changes and Disagreement with Accountants on Accounting and Financial
         Disclosure

         Not applicable.

Item 10. Directors, Executive Officers, Promoters and Control Persons:
         Compliance with Section 16(a) of the Exchange Act

         The following table sets forth our executive officers and directors as
of December 31, 2000. Our board of directors currently consists of six
directors. Except as otherwise stated, executive officers serve at the
discretion of the board of directors.

Name                           Age    Position

Anthony M. Agnello             51     Chairman of the Board of Directors
Dennis I. Schneider            49     President and Chief Executive Officer
John R. Loprete                40     Vice President - Finance
Carlos G. Borgialli            58     Vice President - Engineering
Esmond T. Goei                 51     Vice Chairman of the Board of Directors
Harold W. Paul                 52     Director and Secretary
Robert F. Burlinson            61     Director
Ira H. Fuchs                   52     Director
Jay H. Atlas                   56     Director

                                       23


<PAGE>

         Anthony M. Agnello co-founded Ariel in 1982 and serves as Chairman of
the board. He has been a member of the compensation committee since June 1995.
He also held the title of President from 1988 until September 1996. In December
1998, Mr. Agnello resigned as Chief Executive Officer simultaneously with the
appointment of Mr. Atlas to that position.

         Dennis I. Schneider was appointed President and CEO in May 2000. Prior
to that he was Senior Vice President of Marketing for Ariel since December 1998.
For more than five years, he was a marketing consultant to major corporations in
the computer, networking and telecommunications industry including Chase
Manhattan Bank, Andersen Consulting, IBM and Lucent Technologies. He has more
than 25 years' experience in the industry, holding senior marketing and general
management positions with Digital Equipment Corporation and as an officer of
Motorola Inc.

         John R. Loprete began working with us in April 1998 and was appointed
Vice President - Finance in January 1999. He is a Certified Public Accountant
with over 15 years' experience in finance and accounting. His experience
includes eleven years with Concurrent Computer Corporation, a Florida-based
computer manufacturer.

         Carlos G. Borgialli was appointed to the position of Vice President -
Engineering in May 1999. Mr. Borgialli joined us from Digital/Compaq, where he
spent more than 20 years, leading and improving organizations in the design of
client/server business-critical production systems. In his most recent position
at Digital/Compaq, he served as Director of Engineering for the Network and
Application Communication Products division. Prior to that, he was instrumental
in developing and managing the development of a number of key telephony,
videotext, and transaction processing products for Digital. Mr. Borgialli has
also worked at the NASA Goddard Space Flight Center and spent five years at the
Pan American Health Organization/World Health Organization.

         Esmond T. Goei joined us as Vice-Chairman of the board in August 1999.
He is a member of the audit and compensation committees. Prior to joining us, he
worked at Northern Telecom, where he last served as Director of the Corporate
Venture Capital Division. Prior to that, he was Vice President of the Venture
Capital Division at Toronto Dominion Bank and a Senior Systems Consultant at
Touche Ross (now Deloitte & Touche).

         Harold W. Paul has been a director since June 1995 and was appointed
secretary in March 1998. He is a member of the compensation committee. Mr. Paul
has been a partner at Paul & Rosen LLP, a New York law firm specializing in
securities matters. Since July 1999, he has been a director of Kirlin Holding
Corp., a Nasdaq listed, Long Island based brokerage and investment banking
company.

         Ira H. Fuchs joined Ariel as a director in September 2000. Since July
2000 he has been Vice President for Research in Information Technology of the
Andrew W. Mellon Foundation in Princeton, New Jersey. From 1985 to 2000, he was
Vice President of Computing Information Technology at Princeton University.

         Robert F. Burlinson joined Ariel as a director in November, 2000.
Since July 2000 he has been a Director of Aztec Technology Partners, Inc. in
Braintree, MA. From 1996 through 1998 he was Executive Vice President and Chief
Financial Officer of Caribiner International, Inc. (NYSE). From 1996 through
1998 he was Vice President and Principal Financial Officer of Handy and Harman
Inc. (NYSE).

                                       24

<PAGE>

         Jay H. Atlas served as our Chief Executive Officer and President from
December 1998 through May 2000. He was appointed a director in January 1999.
From 1995 to 1998, he served as the President and CEO of CTF Group, a management
consulting firm. Since 1998, he has served as a trustee of the Kobrick
Investment Trust, a group of mutual funds. He has more than 30 years' experience
in the industry, including 20 years at Digital Equipment Corporation, in senior
management positions in sales, service and marketing.

         Our board of directors is composed of seven directors. The board is
divided into three classes and the members of each class are elected at the
annual stockholder meeting held in the year in which terms for that class
expire. Messrs. Agnello and Paul have terms expiring in 2001. Messrs. Atlas and
Goei have terms expiring in 2002. Messrs. Schneider, Fuchs and Burlinson have
terms expiring 2003. The incumbent board nominates new directors.

Committees of Our Board of Directors

         Compensation committee. The compensation committee is responsible for
reviewing our general compensation strategy; establishing salaries and reviewing
benefit programs (including pensions) for the Chief Executive Officer and those
persons who report directly to him; reviewing, approving, recommending and
administering our stock option plans and certain other compensation plans; and
approving certain employment contracts. The compensation committee met two times
in the 2000 fiscal year. The current members of the compensation committee are
Messrs. Goei, Agnello, and Paul.

         Audit committee. The audit committee's functions are to recommend the
appointment of independent accountants; review the arrangements for, and scope
of; the audit by our independent accountants; review the independence of our
independent accountants; consider the adequacy of our system of internal
accounting control and review any proposed corrective actions; review and
monitor our policies relating to ethics and conflicts of interests; discuss with
management and the independent accountants our draft annual financial statements
and key accounting and/or reporting matters, including year 2000 issues; and
review the activities and recommendations of our management audit department.
The audit committee met three times during the 2000 fiscal year. The current
members of the audit committee are Messrs. Goei, Burlinson and Fuchs.

Compensation Committee Interlocks and Insider Participation

         The members of our compensation committee are Messrs. Agnello, Goei and
Paul. None of these current or former members is currently or has been an
employee or officer of ours other than Mr. Agnello who was Chief Executive
Officer of the Company until December, 1998. No member of the board of directors
or the compensation committee serves as a member of the board of directors or
compensation committee of any entity that has one or more executive officers
serving as a member of our board of directors or compensation committee.

         Mr. Agnello was paid $25,000 and $54,166 for management consulting
services rendered in the years ending December 31, 2000 and 1999, respectively.
For the year ending December 31, 1998 Mr. Agnello received a bonus in the amount
of $950,000 in connection with his role in the sale of our Communications
Systems Group in November 1998. Effective June 30, 2000 Mr. Agnello became an
employee of the company and through December 31, 2000 he had received
compensation as an employee of $62,555.

                                       25

<PAGE>

         Mr. Paul is a non-employee director who provides legal services for us.
His firm received fees of approximately $113,000, $120,000 and $124,000, for the
years ended December 31, 2000, 1999 and 1998, respectively.

         Section 16 (a) of the Securities and Exchange Act of 1934 requires
Ariel's directors and executive officers to file with the SEC initial reports of
ownership and reports of changes in ownership of Ariel's common stock. Ariel
believes that during the fiscal year ended December 31, 2000, its officers and
directors complied with all these filings requirements. Ariel has relied upon
the representations of its directors and executive officers. The Company does
not believe any other stockholders are subject to Section 16(a) filing
requirements.

Item 11.  Executive Compensation

         The following table summarizes the compensation earned over the last
three fiscal years by the Chief Executive Officer, four executive officers and
one other individual who was not serving as an executive officer at year end,
whose earned compensation exceeded $100,000 for the year ended December 31,
1999.

<TABLE>
<CAPTION>


                                    Annual Compensation                        Long-Term Compensation

                                                                    Other Annual      Number of       All other
                            Year       Salary          Bonus       Compensation *      Options     Compensation **
<S>                         <C>        <C>             <C>         <C>                <C>          <C>
Dennis Schneider            2000       243,271         320,001          7,131         296,000          13,218
                            1999       200,000         120,000          5,119          95,000           4,615
                            1998         7,692              --             --          95,000              --

Jay H. Atlas                2000       116,347(1)       57,292(2)      10,732                         314,510(3)
                            1999       275,502         137,500          5,119              --          11,000
                            1998         5,288              --             --         486,000              --

Rich Flocco                 2000       145,438          48,500(5)       7,131          25,000          25,492
                            1999       134,879          12,000         12,924              --         169,966(7)
                            1998       123,351           2,538         11,869          45,750           8,973

John Loprete                2000       129,616          40,000(6)       8,618          15,000          15,152
                            1999       118,462          85,500         14,286              --           1,798
                            1998        84,231              --         10,462          30,000              --

Gene Corrado                2000        89,423          28,125          4,160          30,000           2,228
                            1999            --              --             --              --              --
                            1998

Carlos G. Borgialli         2000       170,000          42,750(4)      12,377         100,000           8,668
                            1999       113,333          20,000          8,912          50,000           1,569
                            1998

</TABLE>

(1)   Mr. Atlas' employment was terminated on May 31, 2000.
(2)   Includes $33,053 for bonuses paid in 2000 and accrued bonus of $24,239.
(3)   Includes  $158,655  severance and $137,440 in consulting fees subsequent
      to his termination. Mr. Atlas is entitled to $144,940 in severance
      benefits to be paid out in 2001 - this number is not included above.

                                       26

<PAGE>

(4)   Includes $35,250 for bonuses paid in 2000 and accrued bonus of $7,500
(5)   Includes $32,350 for MBO bonus paid in 2000 and accrued bonus of $16,250.
(6)   Includes $35,000 for MBO bonus paid in 2000 and accrued bonus of $5,000.
(7)   Includes $152,250 for options, $1,000 for auto allowance.


      *        Represents contributions made by the Company to the Company's
               medical and life insurance & LTD / STD plans, and a Company
               provided automobile.

      **       Represents the Company's contributions to the Company's 401(k)
               plan, severance, exercising of options, consulting, auto
               allowance, payout of excess sick and vacation time,
               forgiveness of loan, and commission.

Directors' Compensation

         Current compensation plan. In August 1999, the board of directors
approved a new compensation plan for our non-employee directors. Each director
is paid an annual amount of $6,000 for serving on the board. In addition, under
the 1996 directors stock option plan, 50,000 stock options are granted to each
director upon appointment to the board. The strike price for these options is
the price of the common stock on the date of appointment. An additional 15,000
options are granted for each subsequent year of service. Directors are also
compensated in the amount of $1,000 for each meeting attended in person, and
$500 for each meeting attended by telephone.

         In September and November 2000, respectively, we granted each of
Messrs. Fuchs and Burlinson 50,000 options when they joined the board.

Option Grants During the Year Ended December 31, 2000

         The following table sets forth information regarding stock options
granted to the executive officers named in the summary executive compensation
table. The table also shows a hypothetical potential realizable value of these
options based upon assumed rates of an annual compounded stock price
appreciation of 5% and 10% from the date the options were granted and over the
full term. The assumed rates of growth were selected for illustrative purposes
only, and are not intended to predict future stock prices which will depend upon
market conditions and our future performance and prospects. Based upon the
closing stock price and the number of common shares outstanding at the end of
2000, an assumed annual stock price appreciation of 10% would produce a
corresponding aggregate pretax gain over the full option term of approximately
$1.6 million for our common stockholders.

<TABLE>
<CAPTION>


                                           % of Total                                  Potential Realized Value at
                             Number of      Options                                      Assumed Annual Rates of
                             Securities    Granted to                                 Stock Price Appreciation for
                             Underlying    Employees      Per Share                               Term
                              Options      in Fiscal      Exercise      Expiration
           Name               Granted         Year          Price          Date            5%             10%
           ----              ----------    ----------     ---------     -----------        --             ---
<S>                          <C>           <C>            <C>           <C>            <C>             <C>
Dennis I. Schneider (1)       296,000        19.6%         $3.313         5/19/10      $1,838,208      $2,927,038

Carlos G. Borgialli (l)       100,000         6.6%         $3.813         4/18/10       $539,571        $859,177

John R. Loprete (1)            15,000         1.0%         $3.813         4/18/10        $93,152        $148,330

Richard Flocco (1)             25,000         1.7%         $3.813         4/18/10       $155,254        $247,216

Gene Corrado (1)               30,000         2.0%         $ 3.063        5/22/10       $149,655        $238,300

</TABLE>

                                       28


<PAGE>

(1)      Some options may vest at an accelerated rate if certain performance
         goals are achieved.

Option Exercises During the Year Ended December 31, 2000 and Aggregate Fiscal
Year-End Option Value

         The following table sets forth information concerning stock option
exercises by the executive officers named in the summary executive compensation
table during 2000, including the aggregate value of gains on the date of
exercise. In addition, this table includes the number of shares covered by both
exercisable and non-exercisable stock options as of December 31, 2000. Also
reported are the values for "in-the-money" options which represent the excess of
the closing market price of the common stock at December 31, 2000 over the
exercise price of the option.

<TABLE>
<CAPTION>

                                                             Number of Securities
                                                            Underlying Unexercised         Value of Unexercised
                             Shares                        Options At December 31,       In-The-Money Options At
                           Acquired On        Value                2000 (#)               December 31, 2000 ($)
         Name               Exercise      Realized ($)    Exercisable/Unexercisable     Exercisable/Unexercisable
         ----               --------      ------------    -------------------------     -------------------------
<S>                         <C>           <C>             <C>                           <C>
Dennis I. Schneider            -0-             -0-            323,000 / 163,000                   $0/$0

Jay H. Atlas                   -0-             -0-               236,250 / 0                      $0/$0

Jack Loprete                   -0-             -0-             21,000 / 24,000                    $0/$0

Richard Flocco                 -0-             -0-             18,200 / 32,800                    $0/$0

Gene Corrado                   -0-             -0-              6,000 / 24,000                    $0/$0

Carlos G. Borgialli            -0-             -0-             40,000 / 110,000                   $0/$0

</TABLE>

Employment Agreements

                                       28


<PAGE>

         Dennis I. Schneider, our Chief Executive Officer is employed under an
employment agreement effective May 31, 2000 for a term ending December 31, 2001,
pursuant to which he is paid a base salary of $275,000. He is eligible for a
bonus of up to an additional $137,500 based on the achievement if certain goals
set annually by the Board of Directors. Upon execution of the agreement, Mr.
Schneider was granted an additional 296,000 stock options at $3.31/share,
133,000 of which were vested as of December 31, 2000. The balance will vest at
December 31, 2001, or sooner based upon certain performance goals.

         Anthony M. Agnello, our Chairman, resigned as CEO in December 1999 upon
the appointment of Jay Atlas as our CEO and President. Mr. Agnello's employment
agreement provided for an annual salary of $200,000 and bonus to be determined
annually at the discretion of the board. Upon his resignation as CEO, Mr.
Agnello entered into a two-year consulting agreement pursuant to which he is
paid $50,000 per year.

         Severance Packages. Each of these employees has executed
non-competition and non-solicitation agreements pursuant to which for a
specified period following the termination of their employment, they have agreed
not to solicit any of our customers or employees or to become associated with
any of our competitors.

         Pursuant to Mr. Schneider's employment agreement, we have the right to
terminate his employment for "cause" or as a result of the employee's
disability. Upon the early termination of his employment agreement, by us
without cause or by Mr. Schneider for "good reason", Mr. Schneider is entitled
to receive one-half of his annual salary and one-half of his bonus actually
accrued prior to termination, and a pro rata portion of his bonus (which cannot
be less than 25% of the bonus that we granted him during the previous fiscal
year), payable within six months of termination. In addition, in the event of a
change in control, Mr. Schneider is entitled to accelerated vesting of options.
A "change in control" includes an acquisition of 15% or more of our voting
securities by any person, changes in the composition of the board of directors,
or an approval by the stockholders of a merger, consolidation, reorganization,
liquidation, dissolution or sale of all or substantially all of our assets.

                                       29

<PAGE>

         Mr. Agnello resigned as CEO effective upon Mr. Atlas' appointment as
CEO in December 1998. We entered into an agreement with Mr. Agnello in December
1998 providing for a one time severance payment of $600,000 in March 1999 and
the issuance of 100,000 common stock purchase options at $2.38 per share. His
non-competition and non-solicitation agreements have been extended through
December 2001.

         Jay Atlas served as the Company's Chief Executive Officer from December
1998 through May, 2000, at which time he and the Company mutually agreed to
terminate the employment relationship and enter into a separation agreement on
May 18, 2000. That agreement provided that Mr. Atlas would be paid severance in
accordance with the provisions of his employment agreement of December 21, 1998
of one years salary, a pro rata portion of his earned bonus and other
pre-termination benefits. Mr. Atlas continues as a Director of the Company
through his elected term. The agreement became effective on May 31, 2000 at
which time Mr. Atlas resigned and Mr. Schneider assumed the position of Chief
Executive Officer.

The 1992 Stock Option and Restricted Stock Plan

         During 1992, the board of directors approved, and our stockholders
ratified, the adoption of the 1992 stock option and restricted stock plan. The
plan provided for a maximum of 600,000 shares of our common stock to be issued
to employees, directors and consultants in connection with stock option grants
or restricted stock awards.

         During 1994, we granted a total of 268,875 options under the plan,
entitling the holders to acquire an equal number of shares of our common stock
at an exercise price per share of $2.27 or $2.45. The options vest over a
four-year period.

         Effective October 31, 1994, the board terminated the plan and,
accordingly, no additional options or awards will be issued under the plan. At
December 31, 2000, 22,625 options remain outstanding.

The 1994 Stock Option Plan

         In 1994, the board of directors approved, and our stockholders
ratified, the adoption of the 1994 stock option plan. The plan provides for a
maximum of 500,000 shares of our common stock to be issued to employees,
directors and consultants in connection with stock option grants. Stock options
are granted by the board or a committee appointed by the board. Each stock
option entitles the holder to acquire an equal number of shares of common stock
at an exercise price equal to the fair market value of the common stock on the
date of grant as determined by the board and 110% of the fair market value for
an employee who owns 10% or more of our common stock. The board will determine
the stock option vesting period and expiration date not to exceed ten years from
the date the stock options were granted. At the discretion of the board, we may
make loans to employees in order to enable them to exercise their stock options.
The plan also provides for the board, at its discretion, to accelerate the
vesting of all outstanding stock options so that they become fully and
immediately exercisable.

         During October 1994, we granted 150,000 stock options from the plan to
three members of our advisory board. Each stock option entitles the holder to
acquire one share of our common stock at exercise prices, per share, of $2.45
for 75,000 stock options and $6.00 for the remaining 75,000. All stock options
are immediately exercisable and expire three years from the date of grant. Since
our initial public offering in January 1995 and pursuant to the underwriting
agreement we entered into at the time, no options can be

                                       30

<PAGE>

granted under the 1994 plan at an exercise price of less than $4.00.

         All outstanding options vest over periods ranging from immediate
vesting to four years and have ten-year terms. At December 31, 2000, 1,200
options remain outstanding.

1995 Stock Option Plan

         In 1995, the board of directors adopted our 1995 incentive stock option
plan, which was approved by our stockholders at the annual meeting of
stockholders on May 14, 1996. The stockholders ratified an amendment to the plan
at the annual meeting of stockholders held on June 23, 1999, increasing the
number of shares issuable under the plan from 1,700,000 to 2,200,000.

         The board believes that the plan is desirable to attract and retain
executives and other key employees of outstanding ability. Under the plan,
options to purchase a maximum aggregate of 2,200,000 shares of our common stock
may be granted.

         During 2000, we granted a total of 1,042,250 options entitling the
holder to acquire an equal number of shares of our common stock at exercise
prices ranging from $1.13 to $8.19. The options vest over periods ranging from
immediate vesting to four years and have ten-year terms. At December 31, 2000,
1,306,699 options remain outstanding.

         The plan is administered by the board of directors, which may delegate
its powers to a committee of directors. The board is generally empowered to
interpret the plan, prescribe rules and regulations relating thereto, determine
the terms of the option agreements, amend them with the consent of the optionee,
determine the employees to whom options are granted and determine the number of
shares subject to each option and the applicable exercise price. The per share
exercise price for incentive stock options and for non-qualified stock options
cannot be less than the greater of $4.00 per share or 100% of the fair market
value of a share of the common stock on the date the option is granted (110% of
fair market value on the date of grant of an incentive stock option if the
optionee owns more than 10% of our common stock). Upon exercise of an option,
the optionee may pay the exercise price with previously acquired securities of
ours, or at the discretion of the board, we may loan a portion or all of the
purchase price to the optionee.

         Options are exercisable for a term determined by the board, which
cannot be greater than ten years from the date of grant. Options may be
exercised only as long as the original grantee maintains a relationship with us
which confers eligibility to be granted options, or within three months after
termination of such a relationship with us, or for up to one year following
death or total and permanent disability. In the event of the termination of the
relationship between us and the original grantee for cause, all options granted
to that original optionee terminate immediately. In the event of certain changes
affecting us, including a change in control, and in the discretion of the board,
each option may become fully and immediately exercisable. Incentive stock
options are not transferable other than by will or the laws of descent and
distribution. Non-qualified stock options may be transferred to the optionee's
spouse or lineal descendants, subject to certain restrictions. Options may be
exercised during the holder's lifetime only by the holder or his or her guardian
or legal representative.

         Options granted pursuant to the plan may be designated as incentive
stock options, with the attendant tax benefits provided under Sections 421 and
422 of the Internal Revenue Code of 1986. Accordingly, the plan

                                       31


<PAGE>

initially provided that the aggregate fair market value (determined at the time
an incentive stock option is granted) of the common stock subject to incentive
stock options exercisable for the first time by an employee during any calendar
year (under all of our plans or those of any of our subsidiaries) may not exceed
$100,000. The board may modify, suspend or terminate the plan; provided,
however, that certain material modifications affecting, and any changes in, the
plan must be approved by the stockholders. Any change in the plan that may
adversely affect an optionee's rights under an option previously granted under
the plan requires the consent of the optionee.

Non-Plan Options

         During 2000, we granted 311,500 stock options to certain employees and
outside consultants. The options were issued outside the 1995 plan and entitle
the holders to acquire an equal number of shares of our common stock at exercise
prices ranging from $2.75 to $7.81. The options vest over periods ranging from
immediate vesting to four years and have ten-year terms. At December 31, 2000, a
total of 951,252 non-plan options remain outstanding.

1996 Directors Plan

         The 1996 directors plan was adopted by the board of directors on
January 24, 1996 and approved by the stockholders at the annual meeting of
stockholders held on May 14, 1996. This plan provides for the issuance of up to
250,000 stock options to non-employee directors. At the annual meeting of
stockholders held on June 24, 1998, the stockholders ratified an amendment to
the plan increasing the number of issuable shares to 450,000. The plan is
administered by a committee appointed by the board of directors and is effective
for a period often years from the date it was adopted. The plan is not subject
to any provisions of the Employee Retirement Income Security Act of 1974
("ERISA").

         At December 31, 2000, 421,000 options remain outstanding pursuant to
the 1996 directors plan. The ability of a grantee to purchase the common stock
under the 1996 directors plan is terminated if his or her service is terminated,
provided that in certain circumstances the grantee or his estate will have the
right to purchase the common stock after termination of service for a limited
period of time. The right to acquire common stock is not transferable except in
the event of death of the grantee. In the event that a reorganization, merger,
consolidation, reclassification, recapitalization or capital adjustment
including a stock dividend or other similar change in our common stock, the
committee will adjust the number and kind of shares that may be acquired under
the 1996 directors plan. Common stock that may be acquired under the 1996
directors plan may be acquired by the surrender of other shares of common stock
owned by a director or the surrender of an unexercised portion of the right to
acquire common stock under the 1996 directors plan.

Report on Repricing of Stock Options

         Stock options were granted under the 1994 and 1995 stock option plans
to many of our employees from June 1995 through July 1998 with exercise prices
ranging from $4.50 to $l1.75 per share. Subsequent to these grants the market
price of our common stock suffered a significant decline. In order to ensure
that the options previously granted would provide a meaningful incentive to
motivate and retain employees, employees were given the opportunity to cancel
such options and receive in exchange a like number of options granted as of
November 15, 1998 with an exercise price of $4.00 providing for a newly
commenced vesting period as of the repricing date.

                                       32

<PAGE>

Item 12.  Security Ownership of Certain Beneficial Owners and Management

         The following table sets forth information regarding beneficial
ownership of our common stock as of December 31, 2000 by: (i) each stockholder
known by us to be the beneficial owner of 5% or more of the outstanding common
stock, (ii) each director and executive officer of the company individually, and
(iii) all directors and executive officers as a group. Except as otherwise
indicated in the footnotes below, we believe that each of the beneficial owners
of the common stock listed in the table, based on information furnished by such
owner, has sole investment and voting power with respect to such shares.

         We are not aware of any individual or group of individuals that is the
beneficial owner of more than 5% of our common stock, other than Mr. Agnello,
our Chairman and former Chief Executive Officer. Unless otherwise specified, the
address of the principal stockholders is to Ariel Corporation, 2540 Route 130,
Cranbury, NJ 08512.

<TABLE>
<CAPTION>

Directors and Executive Officers                                Number of Shares
                                                               Beneficially Owned   Percentage
<S>                                                            <C>                  <C>
Anthony M. Agnello                                                734,000 (1)          5.6%

Dennis I. Schneider                                               333,000 (2)          2.5%

Esmond T. Goei                                                     15,000 (3)            *

Ira H. Fuchs                                                       50,000 (3)            *

Harold W. Paul                                                     33,500 (4)            *

Robert F. Burlinson                                                50,000 (3)            *

Jay H. Atlas                                                      236,250 (5)          1.8%

Carlos G. Borgialli                                                40,000 (5)            *

John R. Loprete                                                    19,000 (6)            *

Gene Corrado                                                        6,000 (5)            *

Richard Flocco                                                     22,700 (7)            *

All officers and directors as a group (eleven people) .         1,539,450             11.8%
</TABLE>

*    Less than l%.

(1)  Includes 175,000 shares subject to presently exercisable options.
(2)  Includes 323,000 shares subject to presently exercisable options.
(3)  All shares beneficially owned by Messrs. Goei, Burlinson and Fuchs
     reflect options issued in exchange for
     their services as directors.
(4)  Includes 30,000 shares subject to presently exercisable options.
(5)  All shares shown are subject to presently exercisable options.
(6)  Includes 15,000 shares subject to presently exercisable options.
(7)  Includes 18,200 shares subject to presently exercisable options.

                                       33

<PAGE>

Item 13.  Certain Relationships and Related Transactions

         In June 1998, we entered into an agreement to sell our Communications
Systems Group to Cabletron Systems for approximately $33,500,000 net of amounts
paid to engineers and other members of the group which were paid directly to
them by Cabletron. As part of the transaction, we paid bonuses to three
directors who played an integral role in the transaction. These bonuses included
$950,000 to Mr. Agnello, $140,000 to Theodore Coburn and $75,000 to Robert
Ranalli, a director until September 1999. In addition, we paid Etienne Perold a
fee of $1,541,673 for his consulting services in the transaction. Mr. Perold was
a director at the time he performed these services.

         Mr. Agnello, our chairman, entered into a consulting agreement with the
Company in January 1999 to provide management advisory services. Pursuant to
that agreement Mr. Agnello was paid $54,166 for those services for the year
ended December 31, 1999.

         Paul & Rosen LLP, a law firm of which Mr. Paul, also one of our
directors, is a partner, received fees of approximately $ 120,000, $124,000 and
$75,000 for the years ended December 31, 1999, 1998 and 1997, respectively.
These fees were for legal services which it performed on our behalf.

         Mr. Perold, who was a director until the 1999 annual stockholders
meeting, has provided us management advisory services. Fees incurred for the
year ended December 31, 1998, 1997 and 1996 were approximately $450,000,
$218,000, and $208,000, respectively, and $104,000 for the six months ended June
30, 1998. No fees were incurred for the six months ended June 30, 1999. In
addition, in December 1998, Mr. Perold received 80,000 immediately exercisable
stock options for his management advisory services. Mr. Perold had an
outstanding loan of $100,000 owed to us as of December 31,1998, which was repaid
in full in January 1999.

         Brown, Coburn & Co., of which Mr. Coburn, one of our directors until
September 1999, is a co-founder and principal, received fees of $156,200,
$88,000 and $23,000 for the years ended December 31, 1998, 1997 and 1996,
respectively, and $40,211 and $60,701 for the six months ended June 30, 1999 and
1998, respectively, in connection with investment banking advisory services. In
addition, 40,000 stock options previously granted to Mr. Coburn for investment
banking advisory services, 20,000 in each of July 1996 and May 1997, vested
during 1998.

         In February 1999, we entered into a consulting agreement with GIOS
Incorporated to advise our senior management in connection with the installation
of new product development process capabilities, including assessing process
issues and providing strategic decision support. GIOS was co-founded in
September 1998 by Dennis Schneider, our Senior Vice President - Marketing. The
agreement provides that Mr. Schneider will represent only our interests during
the course of the consulting relationship. Compensation to GIOS under the
agreement is $2,000 per day, three days per week for the first month of the
agreement, and $1,750 per day for the remainder of the relationship, with
specific time commitments to be negotiated by the parties. At December 31, 1999,
we had paid approximately $106,000 to GIOS for consulting services.

Sales Consulting Services

         Mr. Atlas, a director and former executive officer of the Company,
entered into a consulting relationship with the Company in June 2000 to provide
sales consulting services. Fees received for those services for the year ended
December 31, 2000 were approximately $137,000.

         We believe that the transactions described above were on terms no less
favorable than could have been obtained from unaffiliated third parties. We have
undertaken that all future transactions with our executive officers, directors
and any 5% stockholders will be on terms no less favorable than could be
obtained from unaffiliated third parties and will be approved by a majority of
the directors disinterested in the transaction.

                                       34

<PAGE>


                                   SIGNATURES

         Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.

                             ARIEL CORPORATION


                             By:
                                ---------------------------------------------
                                    Dennis I. Schneider,
                                    CEO and President

         Pursuant to the requirements of the Securities Act of 1933, this
Registration Statement has been signed below by the following persons in the
capacities and on the dates indicated.

<TABLE>
<CAPTION>

<S>                                 <C>                                <C>
                                    Chief Executive Officer,
                                    President and Director             March      , 2001
--------------------------------    ----------------------             -----------------
Dennis I. Schneider                 Title                              Date

                                    Vice President Finance and
                                    Principal Accounting Officer       March      , 2001
--------------------------------    ----------------------------       -----------------
John R. Loprete                     Title                              Date


                                    Chairman                           March      , 2001
--------------------------------    --------                           -----------------
Anthony M. Agnell                   Title                              Date


                                    Director                           March      , 2001
--------------------------------    --------                           -----------------
Esmond T. Goei                      Title                              Date


                                    Director                           March      , 2001
--------------------------------    --------                           -----------------
Ira H. Fuchs                        Title                              Date


                                    Secretary and Director             March      , 2001
--------------------------------    ----------------------             -----------------
Harold W. Paul                      Title                              Date


                                    Director                           March      , 2001
--------------------------------    --------                           -----------------
Robert F. Burlinson                 Title                              Date


                                    Director                           March      , 2001
--------------------------------    --------                           -----------------
Jay H. Atlas                        Title                              Date

</TABLE>

                                       35
<PAGE>
ITEM 14. FINANCIAL STATEMENTS

                         INDEX TO FINANCIAL STATEMENTS

                                                                         PAGE(S)
                                                                         -------
Report of Independent Accountants                                          F-2
CONSOLIDATED FINANCIAL STATEMENTS
  At December 31, 2000 and 1999:
  Consolidated Balance Sheets                                              F-3
  For the years ended December 31, 2000, 1999 and 1998:
  Consolidated Statements of Income and Comprehensive Income               F-4
  Consolidated Statements of Shareholders' Equity                          F-5
  Consolidated Statements of Cash Flows                                    F-6
 Notes to Consolidated Financial Statements                                F-7




                                      F-1

<PAGE>

                        REPORT OF INDEPENDENT ACCOUNTANTS

To the Board of Directors and Stockholders of ARIEL CORPORATION:

In our opinion, the accompanying consolidated balance sheets and the related
consolidated statements of operations, cash flows and stockholders' equity
present fairly, in all material respects, the financial position of ARIEL
CORPORATION and subsidiaries (the Company), at December 31, 2000 and 1999, and
the results of their operations and their cash flows for each of the three years
in the period ended December 31, 2000, in conformity with accounting principles
generally accepted in the United States of America. These financial statements
are the responsibility of the Company's management; our responsibility is to
express an opinion on these financial statements based on our audits. We
conducted our audits of these statements in accordance with auditing standards
generally accepted in the United States of America, which require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatements. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements, assessing the accounting principles used and significant estimates
made by management, and evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.

The accompanying financial statements have been prepared assuming that the
Company will continue as a going concern. As discussed in Note 1 to the
financial statements, the Company is experiencing difficulty in generating
sufficient cash flow to meet its obligations and sustain its operations and has
experienced recurring losses from operations, all of which raise substantial
doubt about its ability to continue as a going concern. Management's plans in
regard to these matters are also described in Note 1. The financial statements
do not include any adjustments that might result from the outcome of these
uncertainties.

PricewaterhouseCoopers LLP

Florham Park, New Jersey
February 21, 2001, except as to Notes 3 and 20,
  which are as of March 28, 2001

                                      F-2
<PAGE>

                                ARIEL CORPORATION
                           CONSOLIDATED BALANCE SHEETS

                                     ASSETS

<TABLE>
<CAPTION>
                                                                                      December 31,
                                                                               ----------------------------
                                                                                   2000           1999
                                                                               ------------    ------------
<S>                                                                            <C>            <C>
Current assets:
     Cash and cash equivalents                                                 $  1,129,246    $  7,088,431
     Accounts receivable, net of allowance
        for doubtful accounts of $644,706
        in 2000 and $1,019,731 in 1999                                            2,077,581       3,091,362
     Other receivables                                                              240,082         383,676
     Inventories, net                                                             2,559,260       3,303,057
     Prepaid expenses                                                               495,859         775,943
                                                                               ------------    ------------
             Total current assets                                                 6,502,028      14,642,469

Equipment, net of accumulated
  depreciation and amortization                                                   1,261,112       1,387,128

Goodwill, intangible and other assets                                             1,444,911       3,787,475
                                                                               ------------    ------------
              Total assets                                                     $  9,208,051    $ 19,817,072
                                                                               ============    ============


          LIABILITIES and STOCKHOLDERS' EQUITY

Current liabilities:
     Accounts payable                                                          $  1,705,696    $  2,802,725
     Accrued expenses                                                             1,688,971       1,898,648
     Current portion of long term debt                                              520,263       1,895,926
     Current portion of capital-lease obligation                                    110,033         126,438
     Royalties payable                                                               91,210          91,210
                                                                               ------------    ------------
         Total current liabilities                                                4,116,173       6,814,947

Capital-lease obligation, net of current portion                                    104,966         215,901
Long-term debt                                                                    1,268,721       1,788,985
Commitments and contingencies  (See Note 14)

Stockholders' equity:
     Preferred stock, $.001 par value:
          Authorized - 2,000,000
          Issued and outstanding - none

     Common stock, $.001 par value:
          Authorized - 20,000,000
          Issued and outstanding -  13,073,920 in 2000 and                           13,074          10,833
               10,832,597 in 1999
     Additional paid-in capital                                                  46,436,667      37,627,809
     Unrealized gain/(loss) on foreign currency translation                        (945,806)       (503,711)
     Accumulated deficit                                                        (41,785,744)    (26,137,692)
                                                                               ------------    ------------
         Total stockholders' equity                                               3,718,191      10,997,239
                                                                               ------------    ------------
         Total liabilities and stockholders' equity                            $  9,208,051    $ 19,817,072
                                                                               ============    ============
</TABLE>

    The accompanying notes are an integral part of the financial statements


                                      F-3

<PAGE>



                                ARIEL CORPORATION
           CONSOLIDATED STATEMENTS OF INCOME AND COMPREHENSIVE INCOME


<TABLE>
<CAPTION>

                                                                        For the Years Ended December 31,
                                                                 --------------------------------------------
                                                                    2000                1999         1998
                                                                 ------------    ------------    ------------
<S>                                                              <C>             <C>             <C>

Sales                                                            $  8,007,074    $ 11,626,546    $ 17,445,829
Cost of goods sold                                                  4,497,804       5,096,014      11,965,220
                                                                 ------------    ------------    ------------
Gross profit                                                        3,509,270       6,530,532       5,480,609

Selling and marketing expenses                                      5,683,349       5,634,070       5,265,542
General and administrative expenses                                 6,277,270       7,312,680       9,710,275
Research and development expenses                                   5,321,127       5,688,414       6,722,905
Restructuring and special charges                                   2,356,656         369,528              --
                                                                 ------------    ------------    ------------
Total operating expenses                                           19,638,402      19,004,692      21,698,722
                                                                 ------------    ------------    ------------

          Loss from operations                                    (16,129,132)    (12,474,160)    (16,218,113)


Gain on sale of assets                                                     --              --      29,537,896
Interest income                                                       372,984         440,477         432,596
Interest expense                                                     (373,092)       (527,611)     (1,371,970)
Other income                                                           57,250          61,479          64,729
                                                                 ------------    ------------    ------------
          Income/(Loss) before Provision/(Benefit) for
          income taxes                                            (16,071,990)    (12,499,815)     12,445,138
Provision/(Benefit) for income taxes                                 (423,938)             --         368,632
                                                                 ------------    ------------    ------------
          Net Income / (Loss)                                    ($15,648,052)   ($12,499,815)   $ 12,076,506

Other comprehensive income/(loss), net of tax:
          Foreign currency translation adjustments                   (442,095)       (534,983)         31,272
                                                                 ------------    ------------    ------------
Comprehensive Income / (Loss)                                    ($16,090,147)   ($13,034,798)   $ 12,107,778
                                                                 ============    ============    ============
Basic and Diluted Per Share Data:
          Shares outstanding - Basic                               12,726,382       9,843,402       9,652,664
          Earnings/(Loss) per share - Basic                            ($1.23)         ($1.27)          $1.25
          Weighted average number of common
          shares outstanding - Diluted                             12,726,382       9,843,402      10,843,215
          Earnings/(Loss) per share - Diluted                          ($1.23)         ($1.27)          $1.11
</TABLE>

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


                                      F-4

<PAGE>



                                ARIEL CORPORATION
                 CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
              For the years ended December 31, 2000, 1999 and 1998
<TABLE>
<CAPTION>
                                                                          Unrealized      Unearned       Retained
                                                            Additional   Gain/(Loss)    Compensation     Earnings         Total
                                        Common Stock         Paid-In     on Currency     related to    (Accumulated    Stockholders'
                                     Shares       Amount     Capital     Translation    Stock Options     Deficit)        Equity
                                     ------       ------     -------     -----------    -------------   -----------   -------------
<S>                                 <C>          <C>        <C>          <C>            <C>            <C>            <C>

Balance at December 31, 1997        9,234,250    $ 9,235    $30,949,180    $      --     $(110,819)    $(25,714,383)     $5,133,213
Issuance of common stock in
  connection with exercise of
  425,900 common stock options        425,900        425      1,828,115           --            --               --       1,828,540
Issuance of common stock in
  connection with exercise of
  100,000 common stock purchase
  warrants                            100,000        100        271,900           --            --               --         272,000
Costs incurred in connection
  with the issuance of
  common stock                             --         --        (49,128)          --            --               --         (49,128)
Unearned compensation related to
  stock options                            --         --        302,275           --      (302,275)              --              --
Amortization of unearned
  compensation                             --         --             --           --       413,094               --         413,094
Unrealized gain/(loss) on
  currency translation                     --         --             --       31,272            --               --          31,272
1998 Net Income                            --         --             --           --            --       12,076,506      12,076,506
                                   ----------   --------    -----------    ---------     ---------     ------------    ------------
Balance at December 31, 1998        9,760,150    $ 9,760    $33,302,342     $ 31,272         $  --     $(13,637,877)   $ 19,705,497
Issuance of common stock in
  connection with exercise of
  866,364 common stock options        866,364        867      3,728,979           --            --               --       3,729,846
Issuance of common stock in
  connection with exercise of
  206,083 common stock purchase
  warrants                            206,083        206        264,794           --            --               --         265,000
Costs incurred in connection
  with the issuance of
  common stock                             --         --        (48,869)          --            --               --         (48,869)
Value of common stock warrants
  in connection with debt
  financing                                --         --        380,563           --            --               --         380,563
Unrealized gain/(loss) on
  currency translation                     --         --             --     (534,983)           --               --        (534,983)
1999 Net Loss                              --         --             --           --            --      (12,499,815)    (12,499,815)
                                   ----------   --------    -----------    ---------     ---------     ------------    ------------
Balance at December 31, 1999       10,832,597    $10,833    $37,627,809    $(503,711)        $  --     $(26,137,692)   $ 10,997,239
Issuance of common stock in
  connection with exercise
  of 90,000 common stock
  options 90,000                       90,000         90        250,535           --            --               --         250,625
Costs incurred in connection
  with the issuance of
  common stock                             --         --       (762,409)          --            --               --        (762,409)
Issuance of common stock            2,151,000      2,151      8,576,849           --            --               --       8,579,000
Stock purchase warrants
  issued for services rendered             --         --        239,513           --            --               --         239,513
Non-cash compensation related
  to resignation                           --         --        504,370           --            --               --         504,370
Unrealized gain/(loss) on
  currency translation                     --         --             --     (442,095)           --              --         (442,095)
2000 Net Loss                              --         --             --           --            --      (15,648,052)    (15,648,052)
                                   ----------   --------    -----------    ---------     ---------     ------------    ------------
Balance at December 31, 2000       13,073,597    $13,074    $46,436,667    $(945,806)    $(503,711)    $(41,785,744)     $3,718,191
                                   ==========    =======    ===========    =========     =========     ============    ============
</TABLE>

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


                                      F-5

<PAGE>




                                ARIEL CORPORATION
                      CONSOLIDATED STATEMENTS OF CASH FLOWS

<TABLE>
<CAPTION>
                                                                    For the Years Ended December 31,
                                                                    --------------------------------
                                                                2000             1999               1998
                                                                ----             ----               ----
<S>                                                        <C>               <C>               <C>>
Cash flows from operating activities:

Net income / (loss)                                        $(15,648,052)     $(12,499,815)     $ 12,076,506
Adjustments to reconcile net income / (loss) to
          net cash used in operating activities:
      Depreciation and amortization                             878,301           932,409         1,265,801
      Amortization of goodwill and intangibles                  563,661         1,010,677            92,105
      Acquired in process research and development                   --                --           297,330
      (Gain) / Loss on sale of assets                                --            60,911       (29,537,896)
      Amortization of debt issuance financing costs             278,985           122,988            64,719
       Provision for doubtful accounts                          289,313           546,144           851,415
      Provision for inventory obsolescence                    1,497,961           265,421         2,293,500
      Non-cash compensation expense                             129,736                --           413,094
      Non-cash restructuring and special charges              2,050,511                --                --
(Increase) decrease in assets:
      Accounts receivable                                       614,457           (69,335)       (2,813,966)
      Other receivables                                        (206,176)          545,883          (522,361)
      Inventories                                              (763,498)         (729,945)       (1,700,796)
      Other assets                                               35,057           (65,267)          (34,176)
 Increase (decrease) in liabilities:
      Accounts payable and accrued expenses                  (1,189,935)       (2,683,382)        1,062,523
      Royalties payable, related parties                             --            (4,200)           15,676
                                                            -----------     -------------     -------------
      Net cash used in operating activities               (11,469,679)      (12,567,511)      (16,176,526)
                                                            -----------     -------------     -------------

Cash flows from investing activities:
     Proceeds from sale of assets                                    --                --         31,348,753
     Acquisition of businesses (net of cash acquired)                --                --        (3,340,122)
     Purchase of equipment                                     (758,931)         (593,851)         (724,032)
                                                            -----------     -------------     -------------
Net cash (used in) / provided by investing
         activities                                            (758,931)         (593,851)       27,284,599
                                                            -----------     -------------     -------------

Cash flows from financing activities:
   Proceeds from debt financing                                      --                --         4,500,000
   Proceeds from issuance of common stock, net                7,816,591                --                --
   Proceeds from exercise of stock options and
       warrants, net                                            250,535         4,326,540         2,051,412
   Principal payments on capital lease obligations             (101,426)          (25,261)               --
   Principal payments on debt                                (1,714,334)       (2,085,316)       (2,308,774)
                                                            -----------     -------------     -------------
          Net cash provided by financing activities           6,251,456         2,215,963         4,242,638
                                                            -----------     -------------     -------------

Effect of exchange rate changes on cash and cash
       equivalents                                               17,969            37,255                --
                                                            -----------     -------------     -------------
Net increase (decrease) in cash and cash equivalents         (5,959,185)      (10,908,144)       15,350,711
   Cash and cash equivalents, beginning of year               7,088,431        17,996,575         2,645,864
                                                            -----------     -------------     -------------

   Cash and cash equivalents, end of period                $  1,129,246      $  7,088,431      $ 17,996,575
                                                           ============      ============     =============
</TABLE>


     The accompanying notes are integral parts of the financial statements.


                                      F-6


<PAGE>

                                ARIEL CORPORATION

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

1. Business Description:

     Ariel Corporation (the "Company") is a technology company that has
historically had digital signal processing (DSP) as its core strength. DSP is an
enabling technology driving rapidly growing technology markets such as Remote
Access Service and Internet Service Providers ("ISPs").

     The consolidated financial statements of the Company have been prepared on
the basis of accounting principles applicable to a going concern, which
contemplates the realization of assets and the satisfaction of liabilities in
the normal course of business. The Company incurred net losses of
approximately $15.6 million and $12.5 million for the years ended December 31,
2000 and 1999, respectively, and expects to incur costs and expenses in excess
of revenues as it continues to execute its business strategy in the ISP and
Original Equipment Manufacturers ("OEM") markets. Absent the pending transaction
described in Note 20 (which is contingent upon a number of factors also
described in Note 20), the Company has limited financial resources available to
support its ongoing operations, fund its product development program to develop
and market new competitive remote access technology, and pay its obligations as
they become due.

     The factors noted in the above paragraph raise substantial doubt concerning
the ability of the Company to continue as a going concern. The consolidated
financial statements do not include any adjustments relating to the
recoverability and classification of asset carrying amounts or the amount and
classification of liabilities that might result should the Company be unable to
continue as a going concern. The ability of the Company to continue as a going
concern is dependent upon the ongoing support of its stockholders, creditors,
and certain key customers, the consummation of the pending transaction as
described in Note 20 (or the closing of similar debt or equity transactions),
and/or its ability to successfully develop and market its remote access products
and technology at economically feasible levels in the highly competitive and
rapidly changing technology environment.

     As discussed in Note 20, the Company has a pending transaction with Mayan
Networks which the Company believes, if consummated, will provide adequate
financial resources to support the Company through March 2002. There is no
assurance, however, that the Company will be able to close the pending
transaction or that such financial resources provided by the pending
transaction, if closed, will be sufficient to support the Company until it
reaches a successful level of operations.

2. Summary of Significant Accounting Policies:

Principles of Consolidation

     The consolidated financial statements include the accounts of the
Company and its wholly-owned subsidiaries as of and for the years ended December
31, 2000, 1999 and 1998. All significant intercompany accounts and transactions
have been eliminated in consolidation.

Revenue Recognition

     Revenue is derived from the sale of hardware and software products for use
in DSP Original Equipment Manufacturers ("OEM"), Internet Service Providers and
Data Communications applications. The Company recognizes the sale of a product
at the time the product is shipped to the customer and when both the collection
of the resulting receivable is probable and no significant vendor and/or
post-contract customer support obligations remain.

Cash and Cash Equivalents

     The Company considers all highly liquid investments with original
maturities of three months or less to be cash equivalents.


                                      F-7

<PAGE>

Investments

     The Company's current investment policy is to invest available cash
balances in high quality debt securities. The cost of securities sold is based
on the specific identification method.

Concentration of Credit Risk

     Financial instruments which potentially subject the Company to a
concentration of credit risk consist principally of cash, cash equivalents and
trade receivables. The Company places its cash and cash equivalents with
commercial banks. From time to time the Company had significant sales to a few
customers which created a concentration of credit risk. Generally, the Company
does not require collateral to support customer receivables.

     During 2000 two customers represented 20% and 11% of total Company sales,
respectively. During 1999 three customers accounted 22%, 12% and 11% of sales
respectively. Combined, these customers comprised 45% of sales in 1999. During
1998, one customer accounted for 25% of the Company's sales. Two other customers
accounted for 14% and 13%, respectively, of total Company sales
during 1998.

Inventories

     Inventories are stated at lower of cost using the first-in, first-out
method or market. The Company computes the lower of cost or market in accordance
with the specific identification method.

     The markets for the Company's products are characterized by rapidly
changing technology and the consequential obsolescence of relatively new
products. The Company has recorded certain estimated reserves against
inventories related to such technological obsolescence.

Equipment

     Equipment consists principally of computer equipment and software, office
equipment and furniture and fixtures and is stated at cost. Depreciation is
provided for using the straight-line method over the estimated useful lives of
the assets, which are generally three to five years. Expenditures for
maintenance and repairs, which do not extend the economic useful life of the
related assets, are charged to operations as incurred. Gains or losses on
disposal of equipment are reflected in the statements of operations.

Goodwill and Intangible Assets

     Purchased technology and other intangible assets are recorded at cost and
are amortized on a straight-line basis over five years. Goodwill represents the
excess of cost over the fair value of identifiable assets acquired and is being
amortized on a straight-line basis over 5 years. In accordance with SFAS No.
121, "Accounting for the Impairment of Long-Lived Assets to Be Disposed Of," the
Company reviews for impairment of long-lived assets and certain identifiable
intangibles whenever events or changes in circumstances indicated that the
carrying amount of an asset may not be recoverable. In general, the Company will
recognize an impairment loss when the sum of undiscounted expected future net
cash flows is less than the carrying amount of such assets. The measurement for
such an impairment loss is based on the fair value of the asset.

     At each balance sheet date, the Company reviews recoverability of goodwill,
not identified with long-lived assets, based on estimated undiscounted future
net cash flows from operating activities compared with the carrying value of the
goodwill, and recognizes any impairment on the basis of such comparison. The
recognition and measurement of goodwill impairment is assessed at the
business-unit level.

Other Assets

     Other assets include deferred financing costs associated with debt
financing which are stated at cost. Amortization of deferred financing costs is
on a straight-line basis over the life of the debt agreement.


                                      F-8


<PAGE>

Foreign Currency Translation

     Financial position and results of operations of the Company's international
subsidiaries have been measured using local currencies as the functional
currency. Assets and liabilities of these operations are translated at the
exchange rates in effect at the end of the period. Statement of operations
accounts are translated at the average rates of exchange prevailing during the
period presented. Translation adjustments arising from the use of differing
exchange rates from period to period are included in the cumulative translation
account in stockholders' equity.

Estimates Used in Preparation of Financial Statements

     The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting periods. Actual results could differ from those estimates. Estimates
are used for, but not limited to, the accounting for: allowance for
uncollectible accounts receivable, allowance for inventory obsolescence,
impairment of goodwill and intangibles, depreciation and amortization, and
accrued expenses.

Research and Development and Software Development Costs:

     Costs incurred in the research and development of the Company's products
are expensed as incurred, except for certain software development costs.

     The Company accounts for software development costs in accordance with
Statement of Financial Accounting Standards No. 86, ("SFAS"), "Accounting for
the Costs of Computer Software to Be Sold, Leased or Otherwise Marketed". Costs
associated with the development of computer software are expensed prior to
establishment of technological feasibility and capitalized thereafter until the
product is available for general release to customers and amortized over the
economic life of the software product.

     Effective January 1, 1999, the Company adopted Statement of Position 98-1,
"Accounting for the Costs of Computer Software Developed or Obtained for
Internal Use" ("SOP 98-1"). Among other provisions, SOP 98-1 requires that
entities capitalize certain internal use software costs once certain criteria
are met. Under SOP 98-1, overhead, general and administrative and training costs
are not to be capitalized.

Earnings Per Share Data

     In accordance with SFAS No. 128, "Earnings per Share" ("SFAS No. 128"),
basic earnings per share are calculated based on the weighted average number of
shares of common stock outstanding during the reporting period. Diluted earnings
per share are calculated giving effect to all potentially dilutive common
shares, assuming such shares were outstanding during the reporting period.

Income Taxes

     The Company accounts for income taxes in accordance with the provisions of
SFAS No. 109, "Accounting for Income Taxes". SFAS No. 109 requires recognition
of deferred tax liabilities and assets for the expected future tax consequences
of events that have been included in the financial statements or tax return.
Under this method, deferred tax liabilities and assets are determined based on
the differences between the financial statement and tax basis of assets and
liabilities ("temporary differences") using enacted tax rates in effect for the
year in which the differences are expected to reverse. Valuation allowances are
established when necessary to reduce deferred tax assets to the amount that is
"more likely than not" to be realized.

Advertising / Marketing

     Advertising and Marketing costs are expensed as incurred and amounted to
$998,528, $1,102,211 and $703,625, for the years ended December 31, 2000, 1999
and 1998, respectively.

     Comprehensive Income

     SFAS No. 130, "Reporting Comprehensive Income," requires a full set of
general purpose financial statements to be expanded to include the reporting of


                                      F-9

<PAGE>

"comprehensive income." Comprehensive income is comprised of two components, net
income and other comprehensive income. For the years ended December 31, 2000,
1999 and 1998, the only item qualifying as other comprehensive income was
unrealized gain or loss on foreign currency translation.

Reclassifications

     Certain prior year amounts have been reclassified for consistency with the
current year presentation. Such reclassifications had no impact to net
income/(loss) and stockholders' equity.

Supplemental Cash Flow Information

     Interest paid for the years ended December 31, 2000, 1999 and 1998 was
$400,061, $549,411, and $1,362,978, respectively. Income taxes paid in 1998 were
$ 342,110. No income taxes were paid in 2000 and 1999.

     Excluded from the statements of cash flows were $19,746 and $62,273 of
equipment purchases which were included in accounts payable and accrued expenses
at December 31, 2000 and 1998, respectively. There were no such purchases
accrued as of December 31, 1999.

     The Company incurred capital lease obligations of $351,195 during 1999.
There were no capital lease obligations incurred in 2000 and 1998.

     Also see Notes 8 and 17 for additional non-cash transactions in connection
with the issuance of shares of common stock in consideration for services
rendered.

Recently Issued Accounting Pronouncements

     In March 2000, the Financial Accounting Standards Board issued
Interpretation No. 44, "Accounting for Certain Transactions Involving Stock
Compensation, an interpretation of APB Opinion No. 25" ("FIN No. 44"). The
interpretation provides guidance for certain issues relating to stock
compensation involving employees that arose in applying APB Opinion No. 25.
Among other things, this interpretation clarifies (a) the definition of an
employee for purposes of applying APB Opinion No. 25, (b) the criteria for
determining whether a plan qualifies as a noncompensatory plan, (c) the
accounting consequence of various modifications to the terms of a previously
fixed stock option or award and (d) the accounting for an exchange of stock
compensation awards in a business combination. The provisions of FIN No. 44 are
effective July 1, 2000, except for the provisions regarding modifications to
fixed stock options or awards that reduce the exercise price of an award, which
apply to modifications made after December 15, 1998. Provisions regarding
modifications to fixed stock options or awards to add reload features apply to
modifications made after January 12, 2000. The effect of adopting FIN No. 44 did
not have a material impact on the Company's financial statements.

     In December 1999, the staff of the SEC issued SAB 101, which summarizes the
staff's interpretations of the application of generally accepted accounting
principles to revenue recognition. The staff provided this guidance due in part
to the large number of revenue recognition issues that it has encountered in
registrant filings. In June 2000, SAB 101B, "Amendment: Revenue Recognition in
Financial Statements", was issued, which deferred the effective date of SAB 101
until the fourth fiscal quarter of 2000. The effect of adopting SAB 101 did not
have a material impact on the Company's financial statements.

     In June 1998, the Financial Accounting Standards Board issued SFAS No. 133,
"Accounting for Derivative Instruments and Hedging Activities" ("SFAS No. 133").
This statement establishes accounting and reporting standards for derivative
instruments, including certain derivative instruments embedded in other
contracts, and for hedging activities. It requires recognition of all
derivatives as either assets or liabilities on the balance sheet and measurement
of those instruments at fair value. If certain conditions are met, a derivative
may be designated specifically as: (a) a hedge of the exposure to changes in the
fair value of a recognized asset or liability or an unrecognized firm commitment
(a fair value hedge), (b) a hedge of the exposure to variable cash flows of a


                                      F-10

<PAGE>

forecasted transaction (a cash flow hedge), or (c) a hedge of the foreign
currency exposure of a net investment in a foreign operation, an unrecognized
firm commitment, an available-for-sale security, or a foreign-currency-
denominated forecasted transaction. In June 1999, the Financial Accounting
Standards Board issued SFAS No. 137, delaying the effective date of SFAS No.
133. The provisions of SFAS No. 133 are effective for all fiscal quarters of all
fiscal years beginning after June 15, 2000. The adoption of SFAS No. 133 by the
Company, effective January 1, 2001, had no effect on the Company.

3. Acquisitions :

     On November 23, 1998, the Company acquired all of the outstanding common
stock of Solutions for Communications and International ISDN, S.A. (SCii). The
transaction was accounted for using the purchase method of accounting.
Accordingly, the purchase price was allocated to the estimated fair value of the
assets acquired and liabilities assumed. Purchase consideration, including
related transaction costs, consisted of $3,389,030 in cash.

     Valuation of the intangible assets acquired was determined by an
independent appraisal company and consists of purchased in-process research and
development (IPR&D), proven technology and an assembled workforce. The purchase
price exceeded the estimated fair value of tangible and intangible assets
acquired by $4,419,284 which was recorded as goodwill.

     The table below is an analysis of the purchase price allocation:
<TABLE>
       <S>                                                                    <C>

        Cash                                                                  $3,080,073

        Direct Acquisition Costs                                              $  308,957

        SCii liabilities assumed, including estimated contingent liabilities  $3,686,527
                                                                              ----------

                                            Total Purchase Price              $7,075,557
                                                                              ==========

        Estimated Fair Value of Tangible Assets Acquired                      $1,344,523

        Estimated Fair Value of IPR&D                                         $  297,330

        Estimated Fair Value of Indentifiable intangible assets               $1,014,420

        Goodwill                                                              $4,419,284
                                                                              ----------

                                            Total                             $7,075,557
                                                                              ==========
</TABLE>



     Management, based upon an independent appraisal, estimates that $297,330 of
the purchase price represents the fair value of purchased IPR&D that had not yet
reached technological feasibility and has no alternative future use. The amount
allocated to IPR&D was expensed as a non-recurring, non-tax-deductible charge
upon consummation of the acquisition. The Company is using acquired in-process
research and development in the area of mid-range ISDN remote access technology
which it believes will broaden the Company's product line over the next several
years.

     The identifiable intangible assets of $1,014,420 included in the purchase
price allocation set forth above are comprised of proven technology with
appraised fair value of $926,970 and an assembled workforce with an appraised
fair value of $87,450. During 1999, goodwill was reduced by approximately
$600,000 related to revisions of estimates for contingent liabilities.

     In June 2000, the Company recorded a restructuring charge of $2,356,656 of
which $1,546,141 relates to the partial impairment of the carrying value of
goodwill recorded with the Company's November 1998 purchase of SCii. The
write-down of goodwill resulted from the Company's June 2000 decision to phase
out SCii's low-end basic rate ISDN (BRI) products and to dismiss certain SCii
employees related to these products and technologies. The decision was based on
reduced sales of BRI products due to the loss of major customers and advances in
competing technologies. Accordingly, future BRI sales forecasts have been
reduced and the Company recognized the impairment of goodwill to the extent that
undiscounted future net cash flows from operating activities do not exceed the
carrying value of the goodwill.

     On March 12, 2001 the Company executed a settlement agreement whereby the
former owner of SCii will reimburse the Company approximately $930,000. As of
March 27, 2001, the Company has received approximately $600,000 and an
additional $330,000 is due prior to May 25, 2001.


                                      F-11


<PAGE>

4. Inventories:

     Due to the introduction of the Company's new product line, the RS4200, in
the fall of 1999, the Company has experienced reduced demand for its RS2000
product. During 2000 the Company has initiated reduced pricing and other
programs to consume the remaining RS2000 inventory. At December 31, 2000
approximately $1,200,000 of RS2000 inventory remained on hand. As a result,
reserves of $1,070,000 and $195,000 were recorded at December 31, 2000 and 1999,
respectively.

     Inventories, net of allowance, consists of the following:

                                                  December 31,
                                             2000              1999
                                             ----              ----
         Component materials               $556,429            $371,821
         Work-in-progress                   557,632             814,923
         Finished goods                   1,445,199           2,116,313
                                         ----------          ----------
                                         $2,559,260          $3,303,057
                                         ==========          ==========

     Inventory at December 31, 2000 and 1999 included an allocation of
approximately $82,140 and $99,000, respectively, of capitalized general and
administrative expenses.

5. Equipment:

         Equipment consists of the following:
<TABLE>
                                                                   December 31,
                                                                 2000             1999
                                                                 ----             ----
         <S>                                                 <C>              <C>
         Computer and other equipment                        $3,788,145       $3,391,195
         Computer software                                    1,061,733          933,483
         Office equipment and furniture and fixtures            869,619          654,502
         Vehicles                                                     -           89,972
         Loaner Equipment                                       278,636          183,014
         Leasehold improvements                                 192,478          191,471
                                                                -------          -------
                                                              6,190,611        5,443,637
         Less, accumulated depreciation and
         amortization                                        (4,929,499)      (4,056,509)
                                                             ----------       ----------
                                                             $1,261,112       $1,387,128
                                                             ==========       ==========
</TABLE>

     Depreciation expense was $878,301, $932,409, and 1,265,801 during 2000,
1999 and 1998 respectively. 2000 expenses included $117,000 of depreciation for
equipment acquired under capital leases.

6. Reconciliation of Weighted Average Shares:

     Basic earnings per common share is calculated by dividing net income by the
weighted average number of common shares outstanding during the period. Diluted
earnings per common share is calculated by dividing net income by the sum of the
weighted average number of common shares outstanding, plus all additional common
shares that would have been outstanding if potentially dilutive securities or
common stock equivalents had been issued. The following table reconciles the
number of shares used in the earnings per share calculations:

                                                                         1998
                                                                         ----
            Common shares -- basic                                    9,652,664
            Effect of dilutive securities:
            Stock options                                             2,411,736
            Shares Acquired using the Treasury Stock Method          (1,221,185)
                                                                    -----------
            Common shares - diluted                                  10,843,215
                                                                    ===========


                                      F-12


<PAGE>

Options to purchase 2,621,776, 1,888,313 and 508,097 shares of common stock were
outstanding at December 31, 2000, 1999 and 1998 but were not included in the
computation of dilutive earnings per share because the options' exercise prices
were greater than the average market price of the Company's common stock.

7. Goodwill, Intangible and Other Assets:

     Goodwill, intangible and other assets consist of the following:

                                                               December 31,
                                                           2000          1999
                                                           ----          ----

     Goodwill and Intangible Assets, net of              $580,966    $3,098,889
     accumulated amortization of $1,666,443
     and $1,102,782 in 2000 and 1999,
     respectively

     Other Assets                                         863,945       688,586
                                                       ----------    ----------
                                                       $1,444,911    $3,787,475
                                                       ==========    ==========

     Amortization expense was $563,661 and $1,010,677 for the years ended
December 31, 2000 and 1999, respectively.

8.  Non-recurring items:

     Effective May 31, 2000 the Company terminated the employment of Jay Atlas,
its president and Chief Executive Officer, and entered into a termination and
separation agreement with Mr. Atlas. As a result of Mr. Atlas' termination
agreement, the Company recorded a charge of $810,515, which reflects severance
and related employee benefits payments of $306,145 and an estimated value of
$504,370 for the extension of stock options that vested during Mr. Atlas'
employment. As of December 31, 2000, $157,597 of the accrued severance has been
paid.

     On September 1, 1998, the Company completed the sale of all of the assets
of its Communications Systems Group, (CSG), to publicly held Cabletron Systems,
Inc. of Rochester, New Hampshire. The Company received $28.5 million in cash on
September 1, 1998 in addition to a $5.0 million deposit it took down on July 27,
1998, for total proceeds of $33.5 million for the assets of CSG. Expenses of the
transaction netted against the proceeds were approximately $3,962,104 including
$1,541,673 to Mr. Etienne A. Perold, $140,000 to Mr. Theodore J. Coburn and
$75,000 to Mr. Robert J. Ranalli, former directors of the Company, who have
provided management advisory services to the Company in the past.

     Additionally, interest expense reflects a one time charge of $750,000 in
accordance with the terms of a $2.0 million bridge loan the Company drew down on
February 19, 1998 against the anticipated proceeds of this sale. Under the terms
of the Bridge Loan, the note matured upon the sale of CSG. To avoid additional
interest, the Company amended the terms to pay the one time fee upon receipt of
the deposit on July 27, 1998. The outstanding principal balance of $2 million
and any accrued interest was repaid at closing on September 1, 1998. In addition
to these expenses, approximately $1.2 million in employee bonuses were paid as a
result of the sale.

9. Accrued Expenses:

         Accrued expenses consists of the following:

                                                              December 31,
                                                           2000          1999
                                                           ----          ----
         Salaries, severance and related benefits     $   699,348     $1,203,579
         Trade show and marketing expenses                271,335             --
         Other                                            718,288        695,069
                                                       ----------     ----------
                                                       $1,688,971     $1,898,648
                                                       ==========     ==========

                                      F-13


<PAGE>

10. Credit Facility:

     The Company maintains a credit facility with Transamerica. Currently the
Company has a five-year, $3 million term loan ("Term Loan") and a $4 million
revolving line of credit ("Revolver"). As of December 31, 2000, there was
$1,788,984 outstanding under the Term Loan. Amounts previously drawn against the
Revolver matured on June 12, 2000, and have been paid in full as of December 31,
2000.


     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. The interest rate in effect was 12.10% and 12.23% at December 31,
2000 and 1999, respectively.

     The Revolver provided for up to $4.0 million in advances based on a formula
of eligible accounts receivable and inventory. Amounts drawn under the Revolver
were collateralized accounts receivable and inventory. Eligibility was computed
monthly and amounts drawn that were not supported by the formula were repaid at
that time. Accordingly, a Revolver balance, if any, was reflected as a current
liability on the balance sheet. The interest rate in effect under the Revolver
was based on the prime rate plus 2.50%.


     In addition, the credit agreement includes a material adverse effect
clause, whereby Transamerica can accelerate the due date of the loan if certain
changes in conditions (financial or otherwise) are deemed to have a material
adverse effect on the Company or its ability to meet its obligations.

     In 1999 the Company incurred financing costs of $380,562 as consideration
for waivers and amendments to certain financial covenants. There were no
financing costs incurred during 1998 or 2000.

     Amortization of debt issuance costs for the years ended December 31, 2000,
1999 and 1998 were $278,985, $122,988 and $64,719, respectively.

     On October 18, 1999 the Company executed an amendment to the credit
agreement that eliminated financial covenants that the Company must be in
compliance with as of and for the year ended December 31, 2000 and subsequent
periods.

     The Company believes that the fair value of this financial instrument
approximates the carrying value.

Total debt as of December 31, 2000 consisted of the following:

<TABLE>
<CAPTION>
                                                  Short Term Debt        Long Term Debt      Total Debt
                                                  ---------------        --------------      -----------
       <S>                                        <C>                    <C>                 <C>
       Transamerica Revolver                            $     ---                   ---      $       ---
       Transamerica Term Note                             520,263           $ 1,268,721        1,788,984
                                                        $ 520,263           $ 1,268,721      $ 1,788,984
                                                        ---------           -----------      -----------
</TABLE>

Total debt as of December 31, 1999 consisted of the following:

<TABLE>
<CAPTION>
                                                 Short Term Debt          Long Term Debt        Total Debt
                                                 ---------------          --------------        ----------
       <S>                                        <C>                       <C>                 <C>
       Transamerica Revolver                         $ 1,199,837                $    ---        $ 1,199,837
       Transamerica Term Note                            504,988               1,788,985          2,293,973
       COFACE Credit                                     171,144                     ---            171,144
       Banque Nationale de Paris                          14,586                     ---             14,586
       ANVAR                                               5,371                     ---              5,371
                                                     -----------             -----------        -----------
                                                     $ 1,895,926             $ 1,788,985        $ 3,684,911
                                                     ===========             ===========        ===========
</TABLE>

                                      F-14
<PAGE>

     Acquired foreign debt of $191,101 consisted of three notes with various
institutions and interest rates ranging from 5.19% to 9.7%. Payments are monthly
or due at the end of the term with the last payment made on November 30, 2000.

         Principal payments on debt are as follows:

                                                For the Years Ended December 31,

2001                                                      $  520,263
2002                                                       1,268,721
2003                                                            ----
2004                                                            ----
Thereafter                                                      ----
                                                         -----------
Total                                                     $1,788,984
                                                          ==========


11. Supplemental Financial Data:

The following table sets forth the activity in the Company's inventory reserves:

December 31, 1997                                           $   256,839

Additions charged to costs and expenses                       2,293,500
Additions due to valuation of assets acquired                   135,923
Net write-offs                                                 (326,267)
                                                            -----------
December 31, 1998                                           $ 2,359,995

Additions charged to costs and expenses                         265,421
Net write-offs                                                 (498,545)
                                                            -----------
December 31, 1999                                           $ 2,126,871

Additions charged to costs and expenses                       1,497,961
Net write-offs                                                 (858,756)
                                                           ------------
December 31, 2000                                          $  2,766,076
                                                           ============



The following table sets forth the activity in the Company's allowance for
doubtful accounts:

December 31, 1997                                            $  187,446

Additions charged to costs and expenses                         851,415
Additions due to valuation of assets acquired                   486,688
Net write-offs                                                  (64,694)
Net recoveries                                                       --
                                                             ----------
December 31, 1998                                            $1,460,855

Additions charged to costs and expenses                         546,144
Net write-offs                                                 (990,518)
Net recoveries                                                    3,250
                                                             ----------
December 31, 1999                                            $1,019,731

Additions charged to costs and expenses                         289,313
Net write-offs                                                 (706,629)
Net recoveries                                                   42,291
                                                             ----------
December 31, 2000                                            $  644,706
                                                             ==========

                                      F-15

<PAGE>

12. Income Taxes:

     The Company's income tax provision/(benefit) consists of the following:

<TABLE>
<CAPTION>
                                                               Years Ended
                                                               December 31,
                                                   -----------------------------------
         <S>                                       <C>          <C>           <C>
                                                     2000         1999          1998
                                                     ----         ----          ----
         Current:
                  Federal                         $     ---     $    ---      $359,265
                  State                            (423,938)    $    ---      $  9,367
                                                  ---------     --------      --------
                                                   (423,938)    $    ---      $368,632
                                                  ---------     --------      --------
         Deferred:
                  Federal                         $     ---     $    ---      $    ---
                  State                           $     ---     $    ---      $    ---
                                                  ---------     --------      --------
                                                        ---          ---           ---
                                                  ---------     --------      --------
         Income Tax Provision / (Benefit)         $(423,938)    $    ---      $368,632
                                                  =========     ========      ========
</TABLE>


The differences between the United States federal statutory tax rate and the
Company's effective tax rate are as follows:

<TABLE>
<CAPTION>
                                                                       For the Years Ended December 31,
                                                                       --------------------------------
                                                                         2000        1999        1998
                                                                         ----        ----        ----
     <S>                                                                 <C>         <C>         <C>
     Tax at United States Federal statutory tax rate                      (34)%      (34)%         34%
     Benefit of net operating loss carryforward                             -%         -%         (36)%
     Accounting losses for which deferred tax benefit cannot be
        currently recognized                                               28%        24%           -%
     Foreign losses for which deferred tax benefits cannot
       currently be recognized                                              4%         9%           2%
     Other                                                                 (1%)        1%           -%
     Alternative Minimum Tax                                                -%         -%           3%
                                                                          ---        ---          ---
         Effective tax rate                                                (3)%        --%           3%
                                                                          ===        ===          ===
</TABLE>

     The tax effect of temporary differences and net operating loss
carryforwards which make up the significant components of the Company's net
deferred tax assets for financial reporting purposes are as follows:

<TABLE>
<CAPTION>


                                                                              December 31,
                                                                              ------------
         Deferred tax assets:                                             2000             1999
                                                                          ----             ----
         <S>                                                        <C>               <C>
               Accounts receivable                                  $    768,761      $    314,343
               Inventory                                               1,067,230           806,707
               Accrued expenses                                          562,887           191,524
               Net operating loss carry forward                       13,655,407         8,107,292
               Foreign capital loss carryforward                           5,431             5,807
               Foreign net operating loss carryforward                 1,791,544         1,510,367
               Research and development tax credits                    1,720,434         1,780,391
               Depreciation                                              416,578           167,899
               AMT Credit                                                302,254           337,799
                                                                         -------          -------
               Total                                                  20,290,526        13,222,129
         Valuation allowance                                         (20,290,526)      (13,222,129)
                                                                    ------------      ------------
                          Net                                       $        ---      $        ---
                                                                    ============      ============
</TABLE>

         At December 31, 2000, the Company had available net operating loss
carryforwards and research and development credits for federal income tax
purposes of approximately $41,100,000 and $1,300,000, respectively, which expire
in the years 2005 through 2020. At December 31, 2000, the Company had available
net operating loss carryforwards and research and development credits for state


                                      F-16
<PAGE>

income tax purposes of approximately $42,200,000 and $600,000, respectively,
which expire in the years 2004 through 2007. The tax benefits related to
approximately $9,600,000 of the federal and state net operating losses at
December 31, 2000 relate to stock option deductions and will be credited to
additional paid-in capital if recognized. At December 31, 2000, the Company had
available federal AMT credits of approximately $302,000 that will carryforward
indefinitely. The timing and manner in which the net operating loss
carryforwards and credits may be utilized to reduce future taxable income, if
any, may be limited by Internal Revenue Code Section 382.

     At December 31, 2000, the Company had available net operating loss
carryforwards for foreign income tax purposes of $4,900,000 of which
approximately $4,700,000 expires in the years 2002 through 2005. Aproximately
$200,000 of the foreign net operating loss carryforwards will carryover
indefinitely. At December 31, 2000, the Company had available foreign capital
loss carryforwards of $29,000 which expire in the year 2006.

13. Employee Benefit Plans:

     Effective January 1993, the Company adopted a defined contribution savings
plan. The terms of the plan provide for eligible employees ("participants") who
have met certain age and service requirements to participate by electing to
contribute up to 15% of their gross salary to the plan, as defined, with the
Company matching 50% of a participant's contribution up to a maximum of 3% of
gross salary. Company contributions vest after four years of employment. The
employees' contributions are immediately vested. The Company's contribution to
the savings plan for the years ended December 31, 2000, 1999 and 1998 was
$135,172, 120,411 and $163,106, respectively.

     The Company also maintains a profit sharing plan for the benefit of its
employees. Contributions are determined at the discretion of the Company as
defined in the Plan Document. No contributions were made for 2000, 1999 or 1998.

14. Commitments and Contingencies:

     In December 2000 the Company relocated the offices of its French subsidiary
in Paris, France. Under the Paris lease the subsidiary has certain future
obligations contingent on other tenants occupying the vacated premises. As the
Company believes that some amount related to these issues is probable,
contingent liabilities of $50,416 were recorded as of December 31, 2000.

     In December 1998, the Company's acquired French subsidiary, (See Note 3),
received an assessment for taxes, penalties and interest as a result of an audit
of the subsidiary's 1995 tax return. Additional assessments have subsequently
been received for 1996, 1997 and 1998. The subsidiary has also received notices
of additional customs taxes and related penalties and interest due to the French
government. The Company has contested all these assessments and reached a final
settlement with the tax authorities in December 2000. During the period the
assessments were contested, a contingent liability was recorded as the Company
believed some assessment was probable. The final settlement amount was recorded
in accounts payable at December 31, 2000. As of the filing date, a portion of
the settlement amount has been offset against certain tax credits due the
Company and the remainder remitted.

     Additionally, the Company purchases certain components upon which the
Company has developed specific products from sole source suppliers. The Company
does not have long-term agreements with any of these suppliers. Although the
Company has not experienced any material difficulties in obtaining these
components, any reduction or interruption in supply or manufacturing from these
third-party contractors would adversely affect its ability to continue to
deliver its products.

     The Company leases office space for its corporate headquarters under an
operating lease which expires in January 2006. The lease provides for annual
minimum lease payments during the first year of $379,872, increasing annually
thereafter by $22,500. The lease also provides for the Company to pay a portion
of common area costs as defined. The Company has two five-year options to renew
the lease at terms as defined based upon fair market value. In addition,
$125,000 is held in escrow to be applied to future rental payments. Such amount
is classified as a long-term prepayment. The Company also paid a $200,000
security deposit relating to this lease. Additionally, the Company has a lease
on office space in Paris, France which expires December 31, 2006 and in
Dortmund, Germany which expires December 31, 2004. The Company also has certain
property and equipment under capital leases. Future minimum lease payments under
all leases at December 31, 2000 are as follows:


                                      F-17


<PAGE>
<TABLE>
<CAPTION>
                  For the Year Ending December 31,       Operating Leases      Capital Leases
                  --------------------------------       ----------------      --------------
                  <S>                                    <C>                   <C>
                  2001                                            542,025             132,071
                  2002                                            468,866              99,053
                  2003                                            470,280                   -
                  2004                                            489,966                   -
                  2005                                            507,098                   -
                  Thereafter                                       79,061                 ---
                                                               ----------            --------
                  Total                                        $2,557,296             231,124
                                                               ----------
                  Less amounts representing interest                                  (16,125)
                                                                                     --------
                  Obligations under capital leases                                    214,999
                  Less current portion                                               (110,033)
                                                                                     --------
                                                                                     $104,966
</TABLE>

     Rent expense for the years ended December 31, 2000, 1999 and 1998 was
$629,515, $598,138, and $734,651, respectively.

15. Segment Data:

     In accordance with SFAS No. 131 ("Disclosures about Segments of an
Enterprise and Related Information"), the segment information is being reported
consistent with the Company's method of internal reporting. The Company's
reportable segments for 2000 and 1999 were North American and European
operations, which are a result of the acquisition of Scii (see Note 3) in 1998
and the establishment of Ariel Deutschland, GmbH, a wholly owned German
subsidiary in 1999. European operations were not material and did not qualify as
a reportable segment as of December 31, 1998; therefore, there is no comparable
segment information presented for 1998. 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. The Company does not include
intercompany transfers between segments for management reporting purposes.

     Summary information by segment as of and for the years ended December 31,
2000 and 1999 is as follows:

<TABLE>
<CAPTION>
                                                          For the years ended December 31,
                                                              2000                  1999
                                                              ----                  ----
        <S>                                              <C>                     <C>
        NORTH AMERICA:
        Revenues from external customers                 $  7,564,785            $11,229,081
        Intersegment revenues                                  49,562                 19,318
        Net segment (loss)                                (12,245,298)            (9,918,643)

        Interest income / (expense), net                        3,278                (76,349)
        Segment assets                                      8,070,360             16,759,363

        EUROPE:
        Revenues from external customers                 $    442,289            $   397,465
        Intersegment revenues                                     -0-                    -0-
        Net segment (loss)                                 (3,396,857)            (2,577,618)

        Interest income / (expense), net                       (3,386)               (10,785)
        Segment assets                                      1,137,691              3,057,709
</TABLE>


                                      F-18


<PAGE>

     A reconciliation of the Company's segment losses to the corresponding
consolidated amounts for the year ended December 31, 2000 and 1999 is as
follows:
<TABLE>
<CAPTION>
                                                        2000                   1999
                                                        ----                   ----
        <S>                                         <C>                   <C>
        Total Segment profit / (loss)               ($15,642,155)         ($12,496,261)
        Margins on intersegment revenues                  (5,897)               (3,554)
                                                    ------------          ------------
        Net loss                                    ($15,648,052)         ($12,499,815)
                                                    ============          ============
</TABLE>


16. Share Rights Plan:

     On October 15, 1998, the Board of Directors approved the declaration of a
dividend distribution of one preferred share purchase right on each outstanding
share of its Common Stock ("Rights"). Each Right will entitle shareholders to
buy one one-hundredth of a share of newly created Series A Preferred Stock of
the Company at an exercise price of $25. The Rights will be exercisable if a
person or group acquires 15% or more of the Common Stock of the Company or
announces a tender offer for 15% or more of the Common Stock. The Board of
Directors will be entitled to redeem the Rights at one cent per Right at any
time before such person acquires 15% or more of the outstanding Common Stock.
The Rights are more fully described in the Rights Plan dated as of October 9,
1998.

     Under the Rights Plan if a person acquires 15% or more of the outstanding
Common Stock of the Company, each Right will entitle its holder to purchase, at
the Right's exercise price, a number of shares of Common Stock having a market
value at that time of twice the Right's exercise price. If the Company is
acquired in a merger or other business combination transaction after a person
acquires 15% or more of the Company's Common Stock, each Right will entitle its
holder to purchase, at the Right's then-current exercise price, a number of the
acquiring company's common shares having a market value at that time of twice
the Right's exercise price. The Board of Directors may also exchange the Rights
at an exchange ratio of one share of Common Stock per Right. Rights held by a
15% holder will become void and will not be exercisable to purchase Common
Stock, or the acquiring person's common shares, at the discounted purchase
price, and will not be available for each exchange.

     The dividend distribution will be payable to shareholders of record as of
the close of business on October 9, 1998. The Rights will expire in ten years.

17. Related Party Transactions:

Legal

     The Company's outside legal counsel owns shares of the Company's common
stock and is a member of the Company's Board of Directors. Total legal fees paid
to this outside attorney for the years ended December 31, 2000, 1999 and 1998
were approximately $113,000, $120,000 and $124,000, respectively.

Management Advisory Services

     A director and former executive officer of the Company performed management
consulting services consisting primarily of supporting our efforts to raise
additional capital in the years ended December 31, 2000 and 1999. Fees received
for those services were $25,000 and $54,166 for the years ended December 31,
2000 and 1999, respectively. Effective May 11, 2000 that director was employed
by the company at an annual salary of $120,000. Total compensation paid to him
during 2000 was $62,555.

     A director of the Company provided management advisory services to the
Company since 1995. Fees incurred for the year ended December 31, 1998 were
approximately $450,000. In December 1998, the Company entered into a termination
agreement with this director. As a result, no such fees were incurred in 1999 or
2000.

     In addition, this director received a stock option grant of 80,000 options
for management advisory services. That grant is dated December 31, 1998 and


                                      F-19


<PAGE>

vested at the grant date. These fees are in addition to fees received for
management advisory services rendered for the sale of the Company's CSG unit
as disclosed in note 8. This director also had an outstanding receivable of
$100,000 to the Company as of December 31, 1998. This amount was repaid to the
Company in January 1999.

Investment Banking Services

     A former director of the Company had provided investment banking advisory
services to the Company since 1996. Fees and expenses incurred for the years
ended December 31, 1999 and 1998 were approximately $22,000 and $156,200,
respectively. No such fees were incurred for the year ended December 31, 2000.
In addition, this director received a stock option grant of 40,000 options dated
July 30, 1996 that vested 25% on July 30, 1996, 25% July 30, 1997 and 50% July
30, 1998 as well as an additional stock grant of 40,000 options dated May 1,
1997 that vested 50% on the effective date and 50% on May 1, 1998. These fees
are in addition to fees received for management advisory services rendered for
the sale of the Company's CSG unit as disclosed in note 8.

Program Management Services

     In February 1999, the Company entered into a consulting agreement with GIOS
Incorporated to advise our senior management in connection with the installation
of new product development process capabilities, including assessing process
issues and providing strategic decision support on an as needed basis. GIOS was
co-founded in September 1998 by Dennis Schneider, our CEO and President. The
agreement provides that Mr. Schneider will represent only our interests during
the course of the consulting relationship. Compensation to GIOS under the
agreement is $2,000 per day, three days per week for the first month of the
agreement, and $1,750 per day for the remainder of the relationship, with
specific time commitments to be negotiated by the parties. Under this agreement
the Company paid GIOS approximately $12,485 and $162,000, for the years ended
December 31, 2000 and 1999, respectively.

     A director and former executive officer of the Company performed management
consulting services consisting primarily of sales consulting in the year ended
December 31, 2000. Fees received for those services were approximately $137,000.

18. Stock Purchase Agreement:

     On February 24, 2000 the Company entered into an agreement with a number of
investors to sell 2,151,000 shares of our common stock at a purchase price of
$4.00 per share in a private placement. The Company also issued 2,151,000
warrants to purchase common stock with an exercise price of $6.875. The warrants
are exercisable as of September 1, 2000. The exercise price of the warrants was
reset to $.95 on March 1, 2001 based on the average market price for the five
trading days preceding the one year anniversary date of the agreement. Under the
terms of the agreement, the Company filed a registration statement to register
the shares sold and those underlying the warrants. That registration statement
was declared effective on April 20, 2000.

     The agreement also calls for the issuance of additional shares at no cost
to these investors should the Company sell shares of common stock, or securities
convertible into common stock, at a price less than $4.00 per share within
twenty four months of this agreement. This provision requires the Company to
issue additional shares such that the average share price of these investors is
equal to the then offered price. Additionally, for twenty-four months from the
date of the agreement, these investors have the right of first refusal to
participate in any future sales of our common stock, or securities convertible
into common stock, under the terms then offered.

19. Stock Option and Restricted Stock Awards:

The 1992 Stock Option and Restricted Stock Plan

     During 1992, the Board of Directors approved and stockholders of the
Company ratified the adoption of the 1992 Stock Option and Restricted Stock Plan
(the "1992 Plan"). The 1992 Plan provided for a maximum of 600,000 shares of the
Company's common stock to be issued to employees, directors and consultants, as
defined in connection with stock option grants ("Options") or restricted stock
awards ("Awards").

     During 1994, the Company granted, from the 1992 Plan, a total of 268,875
Options which entitle the holders to acquire an equal number of shares of the
Company's common stock at an exercise price per share of $2.27 or $2.45. The
Options vest over a four-year period.

         Effective October 31, 1994, the Board terminated the 1992 Plan and,
accordingly, no additional Options or Awards will be issued from the 1992 Plan.
As of December 31, 2000, 22,625 options remain outstanding.


                                      F-20


<PAGE>

The 1994 Stock Option Plan

     During 1994, the Board of Directors (the "Board") approved and stockholders
of the Company ratified the adoption of the 1994 Stock Option Plan (the "1994
Plan"). The 1994 Plan provides for a maximum of 500,000 shares of the Company's
common stock to be issued to employees, directors and consultants ("employees"),
as defined, in connection with stock option grants ("Stock Options"). Stock
Options will be granted by the Board or a committee appointed by the Board ("the
Committee"). Each Stock Option will entitle the holder to acquire an equal
number of shares of common stock at an exercise price equal to the fair market
value of the common stock on the date of grant as determined by the Committee
(110% of the fair market value for an employee who owns 10% or more of the
Company as defined). The Committee will determine the Stock Option vesting
period and expiration date not to exceed ten years from the date the Stock
Option was granted. The 1994 Plan contains a provision whereby an employee, at
the discretion of the Committee, may receive a loan from the Company in order to
exercise their Stock Options. The 1994 Plan also provides for the Committee, at
its discretion, to accelerate the vesting of all outstanding Stock Options so
that they become fully and immediately exercisable. During October 1994, the
Company granted, from the 1994 Plan, 150,000 Stock Options to three members of
the Company's Advisory Board. Each Stock Option entitles the holder to acquire
one share of the Company's common stock at exercise prices, per share, of $2.45
for 75,000 Stock Options and $6.00 for the remaining 75,000. The Advisory Board
Stock Options are immediately exercisable and expire three years from the date
of grant. In connection with the Company's initial public offering, the
underwriting agreement entered into in connection therewith prohibits the
Company from granting future Stock Options at an exercise price below $4.00.

     All other outstanding options vest over periods ranging from immediate to
four years and expire in ten years. At December 31, 2000, 1,200 options remain
outstanding.

The 1995 Stock Option Plan

     The Company adopted its 1995 Incentive Stock Option Plan ("Plan"), which
was approved by the Company's stockholders at the annual meeting of stockholders
on May 14, 1996. The stockholders ratified an amendment to the Plan at the 1997
annual meeting of stockholders held on June 13, 1997, increasing the number of
shares issuable under the Plan from 600,000 to 1,200,000. On June 24, 1998, the
stockholders ratified an amendment to the Plan , increasing the number of shares
issuable under the Plan from 1,200,000 to 1,700,000. On June 23, 1999, the
stockholders ratified another amendment to the Plan, increasing the number of
shares issuable under the Plan from 1,700,000 to 2,200,000.

     The Board believes that the Plan is desirable to attract and retain
executives and other key employees of outstanding ability. Under the Plan,
options to purchase an aggregate of not more than 2,200,000 shares of the
Company's common stock may be granted.

     At various times during 2000, the Company granted a total of 1,042,250
options which entitles the holder to acquire an equal number of shares of the
Company's common stock at exercise prices ranging from $1.13 to $8.19. The
options vest over periods ranging from immediate up to four years and expire in
ten years. At December 31, 2000, 1,306,699 options remain outstanding.

     The Plan is administered by the Board of Directors. The Board is generally
empowered to interpret the Plan, prescribe rules and regulations relating
thereto, determine the terms of the option agreements, amend them with the
consent of the optionee, determine the employees to whom options are to be
granted, and determine the number of shares subject to each option and the
exercise price thereof. The per-share exercise price for incentive stock options
("ISO") and for non-qualified stock options ("NQSO") will not be less than the
greater of $4.00 per share or 100% of the fair market value of a share of the
common stock on the date the option is granted (110% of fair market value on the
date of grant of an ISO if the optionee owns more than 10% of the common stock
of the Company). Upon exercise of an option, the optionee may pay the exercise
price with previously acquired securities of the Company, or at the discretion
of the Board, the Company may loan some or all of the purchase price to the
optionee.

         Options will be exercisable for a term determined by the Board, which
will not be greater than ten years from the date of grant. Options may be
exercised only while the original grantee has a relationship with the Company
which confers eligibility to be granted options or within three months after
termination of such relationship with the Company, or up to one year after death
or total and permanent disability. In the event of the termination of

                                      F-21


<PAGE>

such relationship between the original grantee and the Company for cause (as
defined in the Plan), all options granted to that original optionee terminate
immediately. In the event of certain basic changes in the Company, including a
change in control of the Company (as described in the Plan), in the discretion
of the Committee each option may become fully and immediately exercisable. ISOs
are not transferable other than by will or the laws of descent and distribution.
NQSOs may be transferred to the optionee's spouse or lineal descendants, subject
to certain restrictions. Options may be exercised during the holder's lifetime
only by the holder, his or her guardian or legal representative.

     Options granted pursuant to the Plan may be designated as ISOs, with the
attendant tax benefits provided under Section 421 and 422 of the Internal
Revenue Code of 1986. Accordingly, the Plan provides that the aggregate fair
market value (determined at the time an ISO is granted) of the common stock
subject to ISOs exercisable for the first time by an employee during the
calendar year (under all plans of the Company and its subsidiaries) may not
exceed $100,000. The Board may modify, suspend or terminate the Plan; provided,
however, that certain material modifications affecting the Plan must be approved
by the stockholders, and any change in the Plan must be approved by the
stockholders, and any change in the Plan that may adversely affect an optionee's
rights under an option previously granted under the Plan requires the consent of
the optionee.

Non-Plan Options

     During 2000, the Company granted 311,500 stock options to certain employees
and outside consultants. Such options were issued outside the 1995 Plan and
entitle the holders thereof to acquire an equal number of shares of the
Company's common stock at exercise prices ranging from $2.75 to $7.81. Such
options vest over periods ranging from immediate to four years and expire in ten
years. At December 31, 2000, a total of 951,752 non-plan options remain
outstanding.

The 1996 Directors Plan

     The 1996 Directors Plan was adopted by the Board of Directors on January
24, 1996 and approved by the stockholders of the Company at the annual meeting
of stockholders held May 14, 1996. The stockholders ratified an amendment to the
Plan at the 1998 annual meeting of stockholders held on June 24, 1998,
increasing the number of shares issuable under the Plan from 250,000 to 450,000.
The Plan is administered by a committee appointed by the Board of Directors. The
Plan is effective for a period of ten years from the date it was adopted. The
Plan is not subject to any provisions of the Employee Retirement Income Security
Act of 1974 ("ERISA").

     421,000 options have been granted pursuant to the 1996 Directors Plan to
date. The ability of a grantee to purchase the common stock under the 1996 plan
is terminated if his or her service with the Company is terminated, provided
that in certain circumstances the grantee or his estate will have the right to
purchase the common stock after termination of service for a limited period of
time. The right to acquire common stock is not transferable except in the
circumstances of death. In the event that a reorganization, merger,
consolidation, reclassification, recapitalization or capital adjustment
including a stock dividend or other similar change in the common stock of the
Company, equitable adjustment shall be made by the Company in the number and
kind of shares that may be acquired under the 1996 Directors Plan. Common stock
that may be acquired under the 1996 Directors Plan may be acquired by the
surrender of other shares of common stock owned by the employee or the surrender
of an unexercised portion of the right to acquire common stock under the 1996
Directors Plan.

     The Company applies APB No.25, "Accounting for Stock Issued to Employees",
and related interpretations for stock options issued to employees in accounting
for its stock option plans. Accordingly, no compensation expense has been
recognized for the Company's stock-based compensation plans other than for stock
options granted to outside consultants. During 1998, the Company recorded a
total of approximately $302,275 of compensation related to options granted to
consultants. These amounts are being amortized over the period of benefit,
resulting in a $413,094 charge to operations for the year ended December 31,
1998. No such charges were recorded during 2000 or 1999. The exercise price for
all stock options issued to employees and non-employees during 2000, 1999 and
1998 was equal to the market price of the Company's stock at the date of grant.

     The Company has adopted the disclosure-only provisions of SFAS No. 123,
"Accounting for Stock-Based Compensation." Had compensation cost for the
Company's stock options issued to employees been determined based upon the fair
value at the grant date for stock options issued under these plans pursuant to
the methodology prescribed under SFAS No. 123, the Company's basic and diluted
earnings/(loss) per share would have been adjusted, as shown in the table below.
The weighted average fair value of stock options granted to employees used

                                      F-22


<PAGE>

in determining the pro forma amounts is estimated using the Black-Scholes
option-pricing model for the pro forma amounts with the following weighted
average assumptions:

                                       For the years ended December 31,
                                       --------------------------------
                                    2000             1999              1998
                                    ----             ----              ----
Risk-free interest rate            4.62%            6.08%             4.70%
Expected life                  4.0 years        3.4 years         4.1 years
Expected volatility                 122%              86%               80%
Expected dividends                  None             None              None


         Net income/(loss) and basic and diluted earnings/(loss) per share as
reported, and on a pro forma basis as if compensation cost had been determined
on the basis of fair value pursuant to SFAS No. 123 is as follows:

<TABLE>
<CAPTION>
                                                      For the years ended December 31,
                                                      --------------------------------
Net income/(loss):                                2000             1999             1998
                                                  ----             ----             ----
<S>                                          <C>               <C>               <C>
    As reported                              ($15,648,052)     ($12,499,815)     $12,076,506
    Pro forma                                ($18,109,977)     ($11,776,096)     $ 9,285,433

Basic Earnings/(Loss) per share:
    As reported                                   $ (1.23)          $ (1.27)           $1.25
    Pro forma                                      $(1.42)           $(1.20)           $0.96
Diluted Earnings/(Loss) per share:
    As reported                                   $ (1.23)           $(1.27)           $1.11
    Pro forma                                     $ (1.42)           $(1.20)           $0.86
</TABLE>

         Pro forma amounts reflect options granted after 1994 and are not likely
to be representative of amounts in future years, as additional options are
awarded and vested.

         For the three years ended December 31, 2000, option activity for the
plans was as follows:

<TABLE>
<CAPTION>
                                                                            Weighted
                                                                            Average
                                                            Options       Exercise Price
                                                            -------       --------------
<S>                                                      <C>              <C>
Stock options outstanding at December 31, 1997            2,076,175           6.35

Granted                                                   2,697,300           3.82
Forfeited                                                (1,568,375)          6.29
Exercised                                                  (425,900)          4.32
                                                         ----------           ----
Stock options outstanding at December 31, 1998            2,779,200           4.24

Granted                                                     687,752           3.16
Forfeited                                                  (712,275)          5.45
Exercised                                                  (866,364)          4.31
                                                         ----------           ----
Stock options outstanding at December 31, 1999            1,888,313           3.37

Granted                                                   1,636,250           3.33
Forfeited                                                  (808,787)          3.37
Exercised                                                   (85,000)          2.95
                                                         ----------           ----
Stock options outstanding at December 31, 2000            2,630,776           3.35
</TABLE>

         The weighted average fair value of options granted during 2000, 1999
and 1998 was $3.33, $3.06, and $2.10, respectively.


                                      F-23

<PAGE>

The following table summarizes information about the outstanding and exercisable
stock options at December 31, 2000:

<TABLE>
<CAPTION>
                                    Stock Options Outstanding                          Stock Options Exercisable
                        --------------------------------------------------        -------------------------------------
                                                               Weighted
                                           Weighted            Average                                 Weighted
       Range of                             Average           Remaining                                Average
   Exercise Prices            Shares       Exercise        Contractual Life               Shares    Exercise Price
   ---------------            ------       ---------       ----------------               ------    --------------
                                             Price
                                             -----
   <S>                     <C>            <C>              <C>                         <C>          <C>
   $1.13 to $2.44            878,251        $ 2.20            8.6 years                  667,251        $ 2.31
   $2.45 to $3.81          1,277,376        $ 3.46            9.1 years                  457,576        $ 3.27
   $3.94 to $10.63           475,149         $5.17            7.6 years                  363,775        $ 5.37
                           ---------                                                   ---------
                           2,630,776                                                   1,488,602
</TABLE>


20. Subsequent Event

      On March 28, 2001 the Company entered into a definitive agreement and plan
of merger with Mayan Networks which upon consummation requires us to, among
other things, effect a reverse stock split and to issue additional shares to
Mayan Network's shareholders immediately after the reverse stock split. Upon
consummation of the transaction Mayan Network shareholders will control
approximately 90% of the Company's outstanding voting stock.

     The consummation of the transaction requires, among other things, the
approval of the plan of merger by shareholders of both companies, the filing of
a registration statement with the Securities and Exchange Commission on Form
S-4, the effectiveness of the shares to be issued in that filing and the listing
of those shares with NASDAQ.

      The agreement and plan of merger also provides for a Promissory Note (the
"Note") which calls for Mayan Networks to provide up to $2 million in debt
financing to the Company on an as needed basis until the transaction is
consummated or otherwise terminated. In the event Mayan chooses to terminate the
merger agreement due to a superior offer, the note becomes a term note with any
principal and accrued interest payable on the one year anniversary of the
termination. The Company must maintain certain representations and warranties
and not be in breach of the covenants of the agreement and plan of merger to
draw down funds against the Note. The Note has an annual interest rate of 8% and
requires the Company to execute a subordinated security agreement.


                                      F-24

<PAGE>




                                   SIGNATURES

Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the Registrant has duly caused this report to be signed on its
behalf by the undersigned, thereunto duly authorized.

                                       ARIEL CORPORATION


                                       By:/s/ Dennis I. Schneider
                                          -----------------------------------
                                          Dennis I. Schneider,
                                          President and CEO


     Pursuant to the requirements of the Securities Act of 1933, this
Registration Statement has been signed by the following persons in the
capacities and on the dates indicated.

<TABLE>
<CAPTION>
             Signature                                      Title                                                 Date
<S>                                          <C>                                                                  <C>
/s/ Dennis I. Schneider
-------------------------------------
        (Dennis I.Schneider)                 President - Chief Executive Officer and  Director


/s/ John R. Loprete
-------------------------------------
         (John R. Loprete)                   Vice President - Finance


/s/ Anthony M. Agnello
-------------------------------------
        (Anthony M. Agnello)                 Chairman of the Board of Directors


/s/ Harold W. Paul
-------------------------------------
          (Harold W. Paul)                   Director


/s/ Robert F. Burlinson
-------------------------------------
       (Robert F. Burlinson)                 Director


/s/ Ira H. Fuchs
-------------------------------------
           (Ira H. Fuchs)                    Director


/s/ Jay H. Atlas
-------------------------------------
           (Jay H. Atlas)                    Director


/s/ Esmond T. Goei
-------------------------------------
          (Esmond T. Goei)                   Director
</TABLE>


                                      F-25