Introduction
Since 30 June 1995, Orbital Engine Corporation Limited and its controlled entities ("Orbital") has achieved a number of milestone events including the production and release of the Mercury Marine ("Mercury") Direct Fuel Injected ("DFI") engine, the first sale of a Genesis vehicle, the demonstration of a high-performance capability on a direct-injected Honda NSR motorcycle, delivery of automotive engines with Orbital's new direct injected 4-stroke ("OCP 4-stroke") technology and the display of an Orbital-powered S2S concept vehicle.

There is significant worldwide interest in Orbital's technology at present. Orbital will deliver fourteen different vehicles and engines under thirteen separate customer programs during the first three months of 1996.

These deliveries include personal watercraft and other recreational products to North America, motorcycles to Asia and Europe, and marine engines to Japan. Four commercial arrangements have been signed in the non-automotive market which we anticipate will be converted to licensing and fuel system agreements on completion of their respective evaluation periods. In addition, Orbital has a number of direct injected 2-stroke and 4-stroke automotive programs underway which involve the delivery of engines to prospective customers for evaluation.

Background
Orbital is currently undertaking a series of development programs designed to achieve high volume production of a wide range of products incorporating Orbital Combustion Process ("OCP") technologies.

These development programs are currently being funded partly by the capital raised from the public for that specific purpose, and partly by funding received from customers. In the past, a portion of the expenditures incurred on these development programs was capitalised. This practice is no longer being adopted with all such expenditures now being expensed as incurred.

From an accounting perspective the net cost of these development programs is recorded as an operating loss. It is important to understand however that in a commercial sense this shortfall represents the cost of developing OCP technologies to enable commercialisation rather than losses being incurred as a result of unprofitable trading activities.

Results
The consolidated operating revenue for the six months to 31 December 1995 increased by 60% to $15.859 million from $9.933 million in the six months to 31 December 1994. Orbital recorded an operating loss before abnormal items and income tax of $16.451 million for the six months ended 31 December 1995 compared to a pre-tax profit of $2.099 million for the corresponding period last year.

The lower operating result is primarily due to a change in accounting policy whereby all research and development expenditure, pre-production expenditure and start-up costs have been expensed as incurred from 1 July 1995. The Directors consider that this new policy is more appropriate now that Orbital technology is being introduced to the market through customer programs and the Genesis vehicle program [refer "Change in Accounting Policies" below]. The financial effect of the change in accounting policy is that the operating loss before tax has increased by $8.146 million. Additional costs associated with the Genesis vehicle program and the expansion of activities at Orbital Fluid Technologies Inc were also incurred in the current period.

An abnormal expense of $4.128 million has been incurred in respect of a mediated settlement of litigation with Walbro Corporation, and a provision for legal fees and possible settlement costs of litigation arising from a public offering of American Depositary Shares at the time of our US listing in December 1991. Regrettably, the highly litigious nature of the USA business sector has resulted in the economic entity being burdened with extremely expensive legal costs even when the claims can be defended.

The operating loss after income tax was $17.773 million for the six months ended 31 December 1995 [1994: profit $4.178 million].

Marine & Small Engine Applications
The Company is particularly pleased with the progress of several leading marine, recreational vehicle and motorcycle producers who have indicated aggressive introduction plans.

The introduction of the Mercury 200 horsepower DFI engine is a historic achievement by Orbital and Mercury. On 15 January 1996 the first engine came off the production line. At the Miami Boat Show Orbital executives addressed a large and very positive media contingent following the on water evaluation of the engine's capabilities. The DFI Mercury engine is already attracting very positive feedback and an immediate following from Mercury's strong customer base.

Orbital has been expanding its influence in the Asian region and recently received acclaim from officials of the Petroleum Authority of Thailand and King Mongkut's Institute of Technology Thonburi ("KMITT") on Orbital's technological ability to dramatically reduce emissions from motorcycles. The Thai authorities evaluated and verified the Company's emissions, performance and fuel economy targets on the newly unveiled sports motorcycle which is one of the most popular of the seven million motorcycles on the roads in Thailand.

The 125cc 2-stroke Honda NSR motorcycle sets new standards for very low emission levels combined with very high power output. It matches conventionally powered motorcycles with an impressive 180 horsepower per litre running up to engine speeds of 11,000 rpm.

The METEOR Partnership between Orbital and Mercury has made excellent progress toward production intent versions of the Small Engine Fuel Injection System ("SEFIS") for marine and motorcycle engines. Fleets of motorcycles and scooters are now demonstrating high levels of performance, fuel economy, reliability and emissions control.

Manufacturing capacity to produce high volumes of fuel systems is currently being installed in Orbital Fluid Technologies Inc ("OFT") facilities in Cass City, Michigan.

Automotive Applications
Orbital's Genesis program is progressing well with an anticipated official release date in April 1996. There will be 20 vehicles delivered to DASFleet, 30 to the Western Australian State Government, 40 to Orbital shareholders and the remainder of the vehicles will be sold to interested parties in selected industry and specialty groups.

The Orbital Customer Service ("OCS") network has been developed and tested and is now ready to assist the Genesis vehicle owner/driver. OCS is set up to gather real time customer feedback and to respond to any issues should they arise.

Orbital's ground breaking work on applying its direct injection, combustion and control systems to existing automotive 4-stroke engines continues to attract strong commercial interest. The first delivery of the system has been made and there are active licensing and joint manufacturing discussions underway.

The new OCP 4-stroke technology and the Genesis vehicles are to be presented for the first time to the world automotive community in technical presentations and media conferences at the Society of Automotive Engineers annual conference in Detroit in March 1996.

Orbital's S2S prototype sports car will be unveiled at the Melbourne Motor Show in March 1996 and has already received a lot of media and public attention. The vehicle is powered by the Orbital three cylinder 2-stroke engine that is used in the Genesis vehicles and accentuates the sporty potential of the OCP high technology 2-stroke in a purpose-built vehicle. The car which weighs approximately 700 kilograms, can deliver excellent performance, fuel economy and emissions levels.

Performance Enhancement Program
The past six months have been a time of profound transition for Orbital as it moves from a development organisation to a company supporting its customers with product in the market. As part of this process, Orbital is undertaking a detailed program to enhance productivity and re-align its resource requirements. This program is yielding very good efficiency improvements and management is confident of achieving higher levels of productivity at lower cost. Orbital must ensure it marshals its resources wisely through the period until major royalty income flows from licensees.

Change in Accounting Policies
In the past, research and development costs were capitalised as pre-production expenditure if they were incurred in enhancing OCP technology to enable commercial production. Pre-production costs incurred throughout the economic entity, as well as start-up costs incurred by the manufacturing plant at Tecumseh, Michigan were also deferred to the extent that they did not relate solely to revenue which had already been brought to account.

In light of the number of commercial milestones achieved since 30 June 1995, including the first commercial production of engines incorporating OCP technology, the Directors have decided to change certain accounting policies to ensure that the policies being adopted are appropriate as Orbital embarks on a new era of commercialisation of its products. Specifically, from 1 July 1995, the economic entity has adopted the policy of expensing all research and development expenditure, pre-production expenditure and start-up costs as incurred.

The Directors are also considering the implementation of a conservative amortisation policy in respect of those amounts previously capitalised in accordance with the previous accounting policy.

The result of these changes is that Orbital's accounting results reported in accordance with Australian Generally Accepted Accounting Principles ("AUS GAAP") will come more in line with the results being reported in accordance with United States Generally Accepted Accounting Principles ("US GAAP").

In the short term, the adoption of these conservative policies will mean that Orbital may report significantly lower earnings in Australia than would otherwise be the case. However, in the longer term it will enable Orbital to report higher profits (as a result of reduced future amortisation charges) and declare dividends earlier than if these policies were not adopted.

Proposed Capital Restructure
On 30 October 1995, shareholders overwhelmingly approved two special resolutions giving effect to a capital restructure of Orbital. If approved by the court, the restructure will result in a reduction of the Company's share premium reserve of $236,083,315 with a corresponding reduction in the amounts denominated as "Patents, licences and technologies" and "Investments" in the balance sheets of Orbital and the Company respectively. An application has been lodged for a Directions Hearing in the Federal Court on 19 March 1996. The Company will be applying to have the final court hearing held prior to 30 June 1996.

Change in Directors
In December 1995 Mr Russell Fynmore retired as Chairman and Non-Executive Director after a long and distinguished association with the Company. Mr Fynmore was replaced by Mr Ross Kelly who has had extensive experience with a number of Australia's largest businesses on both strategic and operational matters in his earlier career as Operations Director (Asia Pacific Zone) of PA Management Consultants. Mr Kelly is currently Chairman of Sumich Group Limited, Fraser Range Granite NL and the Fremantle Football Club, and Director of Aurora Gold Ltd and Beltreco Ltd.

Mr John Richard Marshall has also joined the Board of Directors after serving on Orbital Engine Company (Australia) Pty Ltd's board since 1989. Mr Marshall is the Executive Director of the Advanced Engineering Centre for Manufacturing. He has extensive experience in the automotive industry and was Vice President Manufacturing of Ford Australia between 1983 and 1989.

Corporate Directory

ORBITAL ENGINE CORPORATION LIMITED
A.C.N. 009 344 058
(Incorporated in Western Australia)

REGISTERED OFFICE

Level 43, Central Park,
152 - 158 St George's Terrace,
Perth, Western Australia, 6000
Telephone: 61 (09) 429 3100
Facsimile: 61 (09) 429 3133

PRINCIPAL SUBSIDIARIES

Orbital Engine Company (Australia) Pty Ltd
1 Whipple Street
Balcatta, Western Australia, 6021
Telephone: 61 (09) 441 2311
Facsimile: 61 (09) 441 2345


Orbital Engine Company (USA) Inc.
5550 Occidental Highway
Tecumseh, Michigan, 49286
United States of America
Telephone: 1 (517) 423 6623
Facsimile: 1 (517) 423 6079


Orbital Fluid Technologies Inc.
4260 Doerr Road
Cass City, Michigan, 48726-1397
United States of America
Telephone: 1 (517) 872 4361
Facsimile: 1 (517) 872 3700


Orbital Engine Company (UK) Limited
7 Murdoch Road
Bicester, England
United Kingdom
Telephone: 441 (869) 323 205
Facsimile: 441 (869) 323 206


Mercury Technologies Orbital (METEOR)
4 Whipple Street
Balcatta, Western Australia, 6021
Telephone: 61 (09) 441 2311
Facsimile: 61 (09) 441 2345


Email Address
orbital@yarrow.wt.com.au

DIRECTORS

Ross William Kelly - Chairman
Kim Christopher Schlunke -Chief Executive Officer
John William Beech
Richard John Carter
Alan James Castleman
Robert Slade Forbes
Kenneth Noel Johnsen
John Richard Marshall
John Grahame Young

COMPANY SECRETARY

Barry Anthony Mahon

BANKERS

Westpac Banking Corporation
Level 17
109 St George's Terrace
Perth, Western Australia, 6000

AUDITORS

KPMG Peat Marwick
Level 31, Central Park
152 - 158 St George's Terrace
Perth, Western Australia, 6000

SOLICITORS

Minter Ellison Northmore Hale
Level 51, Central Park
152 -158 St George's Terrace
Perth, Western Australia, 6000

SHARE REGISTRY

KPMG Registrars Pty Ltd
Level 29, Central Park
152 - 158 St George's Terrace
Perth, Western Australia, 6000
Telephone: 61 (09) 324 1199
Facsimile: 61 (09) 324 2499

ADR FACILITY

The Bank of New York
101 Barclay Street
New York, New York, 10286
United States of America
Telephone: 1 (212) 815 2218
Facsimile: 1 (212) 571 3050

STOCK EXCHANGE LISTING

The Australian Stock Exchange Limited
(Code "OEC")
The New York Stock Exchange Inc (Code "OE")

Financial

The following financial summary is based on accounts which have been subject to a limited review by the auditors, which is not an audit.

Note

The lower operating result is primarily due to a change in accounting policy whereby all research and development expenditure, pre-production expenditure and start-up costs have been expensed as incurred from 1ÑJuly 1995. The financial effect of the change in accounting policy is that the operating loss before tax has increased by $8.146 million. Additional costs associated with the Genesis vehicle program and the expansion of activities at Orbital Fluid Technologies Inc were also incurred in the current period.

Balance Sheet

The following financial summary is based on accounts which have been subject to a limited review by the auditors, which is not an audit.

CashFlow Statement

The following financial summary is based on accounts which have been subject to a limited review by the auditors, which is not an audit.

Investor Relations
This year, in response to numerous requests for regular information on the Company's activities, Orbital will be updating its shareholders on a quarterly basis with three quarterly reports and an Annual Report, in line with US company reporting requirements. Orbital also has a site on the world-wide web on the internet ("WWW:http://www.orbeng.com.au") which is updated immediately with any media statements, technical papers and general information.

Detailed copies of the half yearly financial report are available on request from our Public Affairs department.

Finally, the Board of Directors and staff of Orbital wish to thank you for your continued support.

Yours sincerely

KIM SCHLUNKE
Chief Executive Officer

Orbital Corporation Limited, 4 Whipple Street, Balcatta, Western Australia 6021.
Phone: +618 9441 2311    Fax: +618 9441 2133    Email: info@orbitalcorp.com.au