Document:

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               ARIEL CORPORATION 1996 DIRECTORS STOCK OPTION PLAN

                      I. ESTABLISHMENT OF PLAN; DEFINITIONS

1. Purpose. The purpose of the Ariel Corporation 1996 Directors Stock Option
Plan is to provide an incentive to non-employee directors of Ariel Corporation
(the "Corporation"), who are in a position to contribute materially to the
long-term success of the Corporation, to increase their interest in the
Corporation's welfare, and to aid in attracting and retaining non-employee
directors of outstanding ability.

2.  Definitions.  Unless the context clearly indicates otherwise,
the following terms shall have the meanings set forth below:

         (a)      "Board shall mean the Board of Directors of the
                  Corporation.

         (b)      "Code" shall mean the Internal Revenue Code of 1986, as
                  it may be amended from time to time.

         (c)      "Committee" shall mean a committee whose members shall,
                  from time to time, be appointed by the Board; provided,
                  however, that on such date as the Corporation's Stock is
                  first registered under Section 12 of the Securities
                  Exchange Act of 1934 such committee shall consist of at
                  least two Directors, all of whom are disinterested within
                  the meaning of Rule 16b-3 under the Securities Exchange
                  Act of 1934.

         (d)      "Corporation" shall mean Ariel Corporation, a Delaware
                  corporation, and any successor thereto.

         (e)      "Directors" shall mean those members of the Board of
                  Directors of the Corporation who are not Employees.

         (f)      "Fair Market Value" shall mean the fair market value of the
                  Stock as determined by the Committee on the basis of a review
                  of the facts and circumstances at the time.

         (g)      "Grantee" shall mean a non-employee director granted a
                  Stock Option under this Plan.

         (h)      "Non-Qualified Stock Option" shall mean an option granted
                  pursuant to the Non-Qualified Stock Option provisions as set
                  forth in Part II of this Plan.

         (i)      "Plan" shall mean the Ariel Corporation 1996 Directors Stock
                  Option Plan as set forth herein as amended from time to time.

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         (j)      "Stock" shall mean authorized but unissued shares of the
                  Common Stock of the Corporation or reacquired shares of the
                  Corporation's Common Stock.

         (k)      "Stock Option" shall mean an option granted pursuant to
                  the Plan to purchase shares of stock.

3. Shares of Stock Subject to the Plan. Subject to the provisions of Paragraph 2
of Part III, the Stock which may be issued or transferred pursuant to Stock
Options granted under the Plan to Directors shall not exceed 450,000 shares in
the aggregate. If a Stock Option shall expire and terminate for any reason, in
whole or in part, without being exercised, the number of shares of Stock as to
which such expired or terminated Stock Option shall not have been exercised may
again become available for the grant of Stock Options.

4. Administration of the Plan. The Plan shall be administered by the Committee.
Subject to the express provisions of the Plan, the Committee shall have
authority to interpret the Plan, to prescribe, amend, and rescind rules and
regulations relating to it, to determine the terms and provisions of Stock
Option agreements, and to make all other determinations necessary or advisable
for the administration of the Plan. Any controversy or claim arising out of or
related to this Plan shall be determined unilaterally by and at the sole
discretion of the Committee.

5. Amendment or Termination. The Board may, at any time, alter, amend, suspend,
discontinue, or terminate this Plan; provided, however, that such action shall
not adversely affect the right of Grantees to Stock Options previously granted
and no amendment, without the approval of the stockholders of the Corporation,
shall increase the maximum number of shares which may be awarded under the Plan
in the aggregate, materially increase the benefits accruing to Grantees under
the Plan, change the class eligible to receive options under the Plan, or
materially modify the eligibility requirements for participation in the Plan.

6. Effective Date and Duration of the Plan. The Plan shall become effective upon
its approval by the Board subject to its subsequent approval by the stockholders
of the Corporation. This Plan shall terminate ten years from the date the Plan
becomes effective, and no Stock Option may be granted under the Plan thereafter,
but such termination shall not affect any Stock Option theretofore granted.

                    II. NON-QUALIFIED STOCK OPTION PROVISIONS

1.  Granting of Stock Options.

         (a)      Directors of the Corporation who are not also Employees
                  shall be eligible to receive Non-Qualified Stock Options
                  under the Plan.

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         (b)      The Committee shall determine and designate from time to time
                  those Directors who are to be granted Non-Qualified Stock
                  Options and the amount subject to each Non- Qualified Stock
                  Option.

         (c)      The Committee may grant at any time new Non-Qualified Stock
                  Options to a Director who has previously received
                  Non-Qualified Stock Options or other options, whether such
                  prior Non-Qualified Stock Options or other options are still
                  outstanding, have previously been exercised in whole or in
                  part, or are canceled in connection with the issuance of new
                  Non-Qualified Stock Options.

         (d)      When granting a Non-Qualified Stock Option, the Committee
                  shall determine the purchase price of the Stock subject
                  thereto. Such price shall not be less than 100% of the Fair
                  Market Value of such Stock on the date the Non- Qualified
                  Stock Option is granted.

         (e)      The Committee, in its sole discretion, shall determine
                  whether any particular Non-Qualified Stock Option shall
                  become exercisable in one or more installments, specify
                  the installment dates, and, within the limitations herein
                  provided, determine the total period during which the
                  Non-Qualified Stock Option is exercisable.  Further, the
                  Committee may make such other provisions as may appear
                  generally acceptable or desirable to the Committee.

         (f)      No Non-Qualified Stock Option shall be exercisable more than
                  ten years from the date such option is granted.

2. Exercise of Stock Options. The option price of a Non-Qualified Stock Option
shall be payable on exercise of the option (i) in cash or by check, bank draft
or postal or express money order; (ii) by the surrender of Stock then owned by
the Grantee, provided that the stock surrendered by the Grantee has been owned
by the Grantee for at least six (6) months; or (iii) partially in accordance
with clause (i) and partially in accordance with clause (ii) of this Paragraph.
Shares of Stock so surrendered in accordance with clause (ii) or (iii) shall be
valued at the Fair Market Value thereof on the date of exercise, surrender of
such Stock to be evidenced by delivery of the certificate(s) representing such
shares in such manner, and endorsed in such form, or accompanied by stock powers
endorsed in such form, as the Committee may determine.

3.  Termination of Service as a Director.

         (a)      If a Grantee ceases to be a Director (other than by death),
                  the terms of any then outstanding Non-Qualified Stock Option
                  held by the Grantee shall extend for a period ending on the
                  earlier of the date on which such option would otherwise
                  expire or three months after such

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                  cessation of being a Director and such option shall be
                  exercisable to the extent it was exercisable as of the date of
                  cessation of being a Director.

         (b)      If a Grantee ceases to be a Director by reason of death,
                  the representative of his estate or beneficiaries thereof
                  to whom the option has been transferred shall have the
                  right during the three-month period following his death
                  to exercise any then outstanding Non-Qualified Stock
                  Options in whole or in part.  If a Grantee dies within
                  three months after he ceases to be a Director without
                  having fully exercised any then outstanding Non-Qualified
                  Stock Options, the representative of his estate or
                  beneficiaries thereof to whom the option has been
                  transferred shall have the right during such three month
                  period to exercise such options in whole or in part.  The
                  number of shares of Stock in respect of which a Non-
                  Qualified Stock Option may be exercised after a Grantee's
                  death shall be the number of shares of Stock in respect
                  of which such option could be exercised as of the date of
                  the Grantee's death.  In no event may the period for
                  exercising a Non-Qualified Stock Option extend beyond the
                  date on which such option would otherwise expire.

                             III. GENERAL PROVISIONS

1. Substitution of Options. In the event of a corporate merger or consolidation,
or the acquisition by the Corporation of property or stock of an acquired
corporation or any reorganization or other transaction qualifying under Section
425 of the Code, the Committee may, in accordance with the provisions of that
Section, substitute options under this Plan for options under the plan of the
acquired corporation provided (i) the excess of the aggregate fair market value
of the shares subject to option immediately after the substitution over the
aggregate option price of such shares is not more than the similar excess
immediately before such substitution and (ii) the new option does not give the
Director additional benefits, including any extension of the exercise period.

2.  Adjustment Provisions.

         (a)      If the shares of Stock outstanding are changed in number or
                  class by reason of a split-up, merger, consolidation,
                  reorganization, reclassification, recapitalization, or any
                  capital adjustment, including a stock dividend, or if any
                  distribution is made to the holders of common stock other than
                  a cash dividend, then

               (i)         the aggregate number and class of shares or other
                           securities that may be issued or transferred
                           pursuant to Paragraph 3 of Part I;

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           (ii)            the number and class of shares or other securities
                           which are issuable under outstanding Stock Options,
                           and

           (iii)           the purchase price to be paid per share under
                           outstanding Stock Options, shall be adjusted as
                           provided hereinafter.

         (b)      Adjustment under this Paragraph 2 shall be made in an
                  equitable manner by the Committee, whose determination as to
                  what adjustments shall be made, and the extent thereof, shall
                  be final, binding, and conclusive.

3.  General.

         (a)      Each Stock Option shall be evidenced by a written instrument
                  containing such terms and conditions, not inconsistent with
                  this Plan, as the Board shall approve.

         (b)      The granting of a Stock Option in any year shall not give the
                  Grantee any right to similar grants in future years or any
                  right to be retained as a Director of the Corporation.

         (c)      No director, and no beneficiary or other person claiming
                  under or through him, shall have any right, title or
                  interest by reason of any Stock Option to any particular
                  assets of the Corporation, or any shares of Stock
                  allocated or reserved for the purposes of the Plan or
                  subject to any Stock Option except as set forth herein.
                  The Corporation shall not be required to establish any
                  fund or make any other segregation of assets to assure
                  the payment of any Stock Option.

         (d)      No right under the Plan shall be subject to anticipation,
                  sale, assignment, pledge, encumbrance, or charge except by
                  will or the laws of descent and distribution, and a Stock
                  Option shall be exercisable during the Grantee's lifetime only
                  by the Grantee.

         (e)      Notwithstanding any other provision of this Plan or agreements
                  made pursuant thereto, the Corporation's obligation to issue
                  or deliver any certificate or certificates for shares of Stock
                  under a Stock Option, and the transferability of Stock
                  acquired by exercise of a Stock Option, shall be subject to
                  all of the following conditions:

           (i)             Any registration or other qualification of such
                           shares under any state or federal law or regula-
                           tion, or the maintaining in effect of any such
                           registration or other qualification which the Board

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                           shall, in its absolute discretion upon the advice
                           of counsel, deem necessary or advisable;

           (ii)            The obtaining of any other consent, approval, or
                           permit from any state or federal governmental agency
                           which the Board shall, in its absolute discretion
                           upon the advice of counsel, determine to be necessary
                           or advisable; or

           (iii)           Each stock certificate issued pursuant to a Stock
                           Option shall bear the following legend:

                           "The transferability of this certificate and the
                           shares of Stock represented hereby are subject to
                           restrictions, terms and conditions contained in the
                           Ariel Corporation 1996 Directors Stock Option Plan,
                           and an Agreement between registered owner of such
                           Stock and Ariel Corporation. A copy of the Plan and
                           Agreement are on file in the office of the Secretary
                           of Ariel Corporation"

         (f)      All payments to Grantees or to their legal
                  representatives shall be subject to any applicable tax,
                  community property, or other statutes or regulations of
                  the United States or of any state having jurisdiction
                  thereof.  The Grantee may be required to pay to the
                  Corporation the amount of any withholding taxes which the
                  Corporation is required to withhold with respect to a
                  Stock Option or its exercise.  In the event that such
                  payment is not made when due, the Corporation shall have
                  the right to deduct, to the extent permitted by law, from
                  any payment of any kind otherwise due to such person all
                  or part of the amount required to be withheld.

         (g)      A Grantee entitled to Stock as a result of the exercise
                  of an option shall not be deemed for any purpose to be,
                  or have rights as, a shareholder of the Corporation by
                  virtue of such exercise, except to the extent a stock
                  certificate is issued therefor and then only from the
                  date such certificate is issued.  No adjustments shall be
                  made for dividends or distributions or other rights for
                  which the record date is prior to the date such stock
                  certificate is issued.  The Corporation shall issue any
                  stock certificates required to be issued in connection
                  with the exercise of a Stock Option with reasonable
                  promptness after such exercise.

         (h)      The grant or exercise of Stock Options granted under the Plan
                  shall be subject to, and shall in all respects comply with,
                  applicable Delaware corporate law relating to such grant or
                  exercise.

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Adopted by the Board of Directors:        January 24, 1996 to be
                                          effective February 1, 1996

Adopted by the Stockholders:  1996 Annual Meeting

                                        7<PAGE>
                                ARIEL CORPORATION

                             STOCK OPTION AGREEMENT

                  Agreement made this 19th day of May 2000 between ARIEL
CORPORATION, a Delaware corporation, (hereinafter called the "Corporation") and
Dennis Schneider, (hereinafter called the "Grantee").

                  WHEREAS, the Corporation desires to provide the Grantee with
an opportunity to acquire or increase his or her proprietary interest in the
business of the Corporation and, through stock ownership, to possess an
increased personal interest in its continued success and progress;

                  NOW, THEREFORE, in consideration of the premises, the mutual
covenants hereinafter set forth, and other good and valuable consideration, the
Corporation and the Grantee agree as follows:

                  1. Award of Option. The Corporation hereby awards to the
Grantee, as a matter of separate inducement and agreement, and not in lieu of
salary or any other compensation for services, options to purchase an aggregate
of 244,000 shares of the Corporation's Common Stock on the terms and conditions
hereinafter set forth, at the purchase price of $3.3125 per share.

                  2. Exercise of Option. The stock option granted pursuant to
this Agreement is exercisable in installments in accordance with the following
schedule, in which time periods are calculated from the date of this Agreement:

                     Installments               Exercisable After
                     ------------               -----------------

                        81,000                  December 21, 2000

                        81,000                  December 21, 2001

                  The Grantee has the right to exercise the options with respect
to the remaining 82,000 shares (the "Remaining Shares") on December 21, 2001 or
earlier, in part, if the following average common stock prices are achieved as
measured by closing prices during any sixty (60) consecutive trading days on
Nasdaq:20,500 shares @ $6 per share; 20,500 shares @ $9 per share; 20,500 shares
@ $12 per share; and 20,500 shares at $15 per share.

                  Such portion of the "Remaining Shares" which meet the sixty
(60) day minimum price requirement referred to above shall vest immediately;
otherwise, the "Remaining Shares" shall all vest on December 21, 2001.

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                  3. Termination of Employment. If the Grantee's employment with
the Corporation or with a subsidiary of the Corporation is terminated, the term
of any then outstanding option held by the Grantee shall extend for a period
ending on the earlier of the date on which such option would otherwise expire or
three months after such termination of employment, and such option shall be
exercisable to the extent it was exercisable as of such last date of employment,
except in the event the Corporation is acquired and the grantee's job is
terminated as a result of corporate restructuring, the option shall remain in
full force and effect. The representative of a deceased Grantee's estate or
beneficiaries thereof to whom the option has been transferred shall have the
right during the three-month period following his or her death to exercise any
then outstanding option in whole or in part.

                  4. Manner of Exercise. Full payment for the shares purchased
shall be made at the time of any exercise of this Agreement. The purchase price
shall be payable to the Corporation either (i) in United States dollars in cash
or by check, bank draft, or postal or express money order, or (ii) through the
delivery of shares of Stock of the Corporation owned by the Grantee for at least
six months prior to the date of exercise having a Fair Market Value on the date
of exercise equal to the full purchase price, or (iii) by a combination of (i)
and (ii) above; provided, however, that no fractional share shall be accepted by
the Corporation in partial payment of the purchase price of any Stock but the
value of any such fractional interest shall be paid to the Corporation in the
manner specified in (i) above.

                  Subject to the terms and conditions hereof, the options shall
be exercisable by notice to the Corporation on the form provided by the
Corporation, a copy of which is attached hereto. In the event that the options
are being exercised by any person or persons, other than the Grantee, the notice
shall be accompanied by proof, satisfactory to the Corporation, of the right of
such person or persons to exercise any right under this Agreement.

                  5. Rights of Grantee. The grant of an option in any year shall
give such Grantee neither any right to similar grants in future years nor any
right to be retained as an employee of the Corporation or its subsidiaries, such
employment being terminable to the same extent as if this Agreement were not in
effect. The right and power of the Corporation or its subsidiaries to dismiss or
discharge any participant is specifically and unqualifiedly unimpaired by this
Agreement.

                  Neither the Grantee nor any other person legally entitled to
exercise any rights under this Agreement shall be entitled to any of the rights
or privileges of a stockholder of the Corporation with respect to any shares
which may be issuable upon any exercise pursuant to this Agreement, unless and
until a certificate or certificates representing such shares will have been
actually issued and delivered to the Grantee or such person.

                  6. Non-Transferability of Option. Except as otherwise provided
herein, an option and the rights and privileges conferred hereby may not be
transferred, assigned, pledged or hypothecated in any way, other than by will or
the laws of descent and distribution, and an option shall be exercisable during
the Grantee's lifetime only by the Grantee or his conservator.

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                  Neither the Grantee nor any other person legally entitled to
exercise any rights under this Agreement shall be entitled to any of the rights
or privileges of a stockholder of the Corporation with respect to any shares
which may be issuable upon any exercise pursuant to this Agreement, unless and
until a certificate or certificates representing such shares will have been
actually issued and delivered to the Grantee or such person.

                  7. Taxes and Withholding. All payments to a Grantee or to his
legal representative shall be subject to any applicable tax, community property,
or other statutes or regulations of the United States or of any state having
jurisdiction thereof. The Grantee may be required to pay to the Corporation the
amount of any withholding taxes which the Corporation is required to withhold
with respect to a stock option or its exercise. In the event that such payment
is not made when due, the Corporation shall have the right to deduct, to the
extent permitted by law, from any payment of any kind otherwise due to such
person all or part of the amount required to be withheld.

                  8. Notices. Each notice to the Corporation relating to this
Agreement shall be in writing and delivered in person or by registered mail to
the Corporation at its office, 2540 Route 130, Cranbury, New Jersey 08512 to the
attention of the General Counsel. All notices to the Grantee or other person
then entitled to exercise any right pursuant to this Agreement shall be
delivered to the Grantee or such other person or persons at the Grantee's
address specified below or at such other address as the Grantee or such other
person or persons at the Grantee's address specified below or at such other
address as the Grantee or such other person may specify in writing to the
Corporation by a notice delivered in accordance with this paragraph.

                  9. Restriction on Shares. The Corporation's obligation to
issue or deliver any certificate or certificates for shares of Stock under this
option, and the transferability of shares acquired by the exercise of this
option, shall be subject to all of the following conditions:

                       (a) Any registration or other qualification of such
                  shares under any state or federal law or regulation, or the
                  maintaining in effect of any such registration or other
                  qualification which the Corporation shall, in its absolute
                  discretion upon the advice of counsel, deem necessary or
                  advisable.

                       (b) The obtaining of any other consent, approval, or
                  permit from any state or federal governmental agency which the
                  Corporation shall, in its absolute discretion upon the advice
                  of counsel, determine to be necessary or advisable; and

                       (c) Each stock certificate issued pursuant to a Stock
                  Option shall bear the following legend:

                  "The transferability of this certificate and the shares
                  of stock represented hereby are subject to restrictions, terms
                  and conditions contained in an Agreement between the
                  registered owner of such stock and Ariel Corporation. A copy
                  of the Agreement is on file in the office of the Secretary of
                  Ariel Corporation."

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                  10. Miscellaneous. This Agreement comprises the whole
Agreement between the parties hereto. It may not be modified or terminated
orally, and it shall be deemed to be a Delaware contract, subject to
construction and enforcement in accordance with the laws of Delaware.

                  This Agreement shall inure to the benefit of and be binding
upon each successor of the Corporation and to the extent specifically provided
herein shall inure to the benefit of and be binding upon the Grantee's heirs,
legal representatives, and successors.

                  IN WITNESS WHEREOF, this Agreement is executed by the Grantee
and by the Corporation through its duly authorized officer or officers as of the
day and year first above written.

                                    GRANTOR:

                                    ARIEL CORPORATION

                                    By:
                                        --------------------------------------
                                        CEO

                                    By:
                                        --------------------------------------
                                        Secretary

                                    GRANTEE:

                                    ------------------------------------------
                                    Full Name

                                    ------------------------------------------
                                    Mailing Address

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

                                    ------------------------------------------
                                    Social Security No.

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                         LETTER OF STOCK OPTION EXERCISE

CONFIDENTIAL
                                                          Dated:
                                                                ---------------
ARIEL CORPORATION
2540 Route 130
Cranbury, New Jersey 08512

Attention:  General Counsel

Gentlemen:

         I wish to purchase the following number of shares of Common Stock
pursuant to the option granted to me on May 19, 2000:

         Number of Stock Option shares:
                                       ----------------------

         The purchase price for these shares is $3.3125 per share. My check
payable to Ariel Corporation in the amount $_______________ in payment of the
purchase price is enclosed.* Please issue the stock certificate(s) for these
shares in my name as follows:

-----------------------------------
Name**
-----------------------------------
Address

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

-----------------------------------
Social Security Number

                                           Sincerely yours,

                                           -----------------------------------
                                           Signature

                                           -----------------------------------
                                           Office/Home Telephone

* If stock is used in payment, please contact the General Counsel's office at
(609) 860-2900.

** If you wish to have the shares issued in your name and that of another person
jointly, we suggest that the following form be used: "(Your name) and (name of
other person), as joint tenants with right of survivorship."

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