CORPORATE PROFILE
Orbital Engine Corporation Limited (Orbital) is a leading developer of engine technologies using direct injection, lean burn combustion and control systems. These technologies are collectively called the Orbital Combustion Process or OCP Technology.

Our goal is to rapidly commercialise innovative OCP products and technologies into global markets to create significant economic and environmental value for our shareholders, customers, employees, and the community.

Orbital strives to build value through the development and marketing of innovative technical solutions that create significant new market opportunities. The Group's strategy is to actively participate in the commercialisation process to reduce risks and advance the rate of adoption of OCP technology. Strategic alliances with key established industrial groups are an important part of this strategy.

The Orbital Group earns income from the sale of rights to its intellectual property (patents and know-how) to major vehicle, engine and component manufacturers through licence and engineering service agreements. The agreements grant the licensee certain rights to manufacture, use and sell products utilising OCP Technology.

Orbital's income stream also extends to profits from the sale of fuel systems and other components made by Orbital through joint ventures and fees for the provision of consulting and engineering services to a growing worldwide customer base.

Orbital currently has 12 agreements which grant licence rights and a customer base that covers applications in the automotive, marine, recreational, and motorcycle markets.

Orbital has sold licence rights to the following customers:

• Ford Motor Company
• General Motors Corporation
• Fiat Auto Company
• Brunswick Corporation (parent of Mercury Marine)
• Outboard Marine Corporation
• Tohatsu Corporation
• Bombardier-Rotax GmbH
• Bajaj Auto Limited
• Piaggio V.E.S.p.A
• Asian motorcycle manufacturer
• Meteor (joint venture with Brunswick Corporation)
• Synerject (joint venture with Siemens Automotive Corporation)

In addition to the strategic alliances with Brunswick Corporation and Siemens Automotive Corporation, Orbital has close affiliations with Motorola and Johnson Matthey.

Orbital is listed on both the Australian and New York Stock Exchanges. 47% of its shares are held and traded on the New York Stock Exchange, up from 7.4% in late 1991.

CHAIRMAN'S & CEO'S REPORT

REVIEW OF OPERATIONS
During 1996/97, several new Orbital-based products entered the marine market and four new licenses were concluded, two being joint venture arrangements with Siemens and Brunswick. The OCP engine was selected for the Maleo Indonesian national car project and major automotive companies confirmed the excellent results of OCP technology on 4-stroke engines.

Trading revenue increased by 53% to $17.404 million from $11.397 million. An additional $11.734 million in license fees was received but reported as unearned income. We also maintained a strong cash and receivables position of $32.385 million.

Mercury Marine has followed the successful first model launch in 1996 with the introduction of four new marine engine models using Orbital technology in 1997.

We have signed a new licence with Tohatsu (a Japanese marine engine maker) and with a major Asian motorcycle producer. Both have aggressive production plans for applying our technology into their product ranges.

The fleet of 100 Orbital-powered vehicles introduced into the Australian market (the Genesis program) has performed well providing invaluable data for future production programs. Progress has been made in adapting and applying the Genesis engines into the Maleo Indonesian national car project.

The Group has made excellent technical and commercial progress toward applying its direct injected, stratified charge, combustion and control systems to conventional automotive 4-stroke engines.

Orbital is actively supporting production and development programmes for customers across all market applications. The status of each customer program is depicted in the Product Development and Commercialisation Cycles as shown in the detailed reports which follow.

Orbital's ability to advance the prospect, timing and rate of adoption of its technologies into the automotive and non-automotive markets is enhanced by the strategic alliances we have established with Siemens Automotive and Brunswick Corporation.

Synerject, the joint venture between Orbital and Siemens Automotive, a premier automotive fuel systems manufacturer, commenced operation during 1997. Synerject was formed to design, develop, manufacture and supply the fuel rail assembly which incorporates key components such as fuel injectors, air injectors, and regulators for Orbital's fuel system.

The Directors recognise that the investment in OCP technology and our progress has not yet been translated satisfactorily into increased shareholder value through capital growth or dividends. This is an immediate and primary objective of Orbital. A number of initiatives to increase revenue and reduce cost have significantly reduced annual cash usage.

The goal through 1997/98 is to become cash positive and achieve a modest operating profit before interest, tax and abnormal items based on conservative United States Generally Accepted Accounting Principles. Long term contracts for the supply of fuel and engine management systems are being negotiated with four companies. As a result Orbital expects a growing positive impact on the Group's financial position from royalties and the sale of manufactured products.

STRATEGIC ALLIANCE - SIEMENS
The Synerject joint venture combines the R&D skills, OCP product knowledge, and low volume manufacturing skills of Orbital with the extensive capabilities of Siemens, one of the world's lowest cost producer of high volume fuel injectors. Siemens has global operations to support their worldwide customer base for automotive fuel systems.

The manufacturing equipment for Orbital fuel systems is now incorporated into Siemens' fuel injector manufacturing facilities in Newport News, Virginia to provide high quality, low cost OCP products during the early years of production. Current plans provide for Synerject to expand to a stand alone facility allowing for efficient manufacturing at high volumes within two to three years.

The formation of the joint venture with Siemens is of strategic significance to Orbital because it removes a major barrier to commercialisation. With the Siemens association, Orbital customers can be confident that the electro-mechanical devices crucial to the performance of the Orbital technology will be delivered at the quality and cost levels expected by industry. The alliance is proving to be a key catalyst for customers to achieve early and sustainable production of OCP technology in automotive 4-stroke engines.

STRATEGIC ALLIANCE - BRUNSWICK
The Meteor Joint Venture between Brunswick Corporation and Orbital has been an important enabling asset in the commercialisation process for the marine, personal watercraft and motorcycle industries. Meteor supplies fuel systems and undertakes applications engineering to support OCP technology being implemented in programs by Orbital customers.

The manufacturing expertise and industry experience provided by Brunswick has been critical in ensuring the products being developed are world class in terms of functionality, quality, and cost. Meteor is also executing a disciplined program of ongoing product refinement to meet the needs of each market segment.

PATENTS
Orbital continues to actively investigate new technologies while improving and enhancing existing technology. Orbital believes that patent protection of its technologies and processes is critical to the generation and longevity of its royalty revenue.

As at July 1997, Orbital had over 110 individual patent families with more than 1075 patents and patent applications worldwide.

FINANCIAL

Background
Over the last two years, Orbital has sought to more closely align its Australian accounting treatments to the more conservative treatments provided under United States Generally Accepted Accounting Principles. This change has been necessary because of the confusion caused by the large differences between the financial statements prepared under Australian and US standards and because US shareholders and investors are now the predominant users of financial information on the Group.

There have been three key impacts of this alignment process:

The elimination of the large intangible assets from its balance sheet. Shareholders approved measures to effect this at the 1995 Annual General Meeting, however subsequent developments have resulted in that course being only partially implemented. Directors have since resolved to eliminate all intangibles, whether arising from cash or non-cash transactions, by amortising these amounts over the period 1 January 1996 to 30 June 1999.

All R&D expenditure is now being expensed whereas previously a large proportion was capitalised as pre-production expenditure for Australian accounting purposes.

Licence fees received by Orbital under the Meteor and Synerject joint ventures have not being recognised as revenue but will be held on the balance sheet as unearned income until these ventures have demonstrated the ability to generate ongoing positive cashflows. In addition, all investments in these ventures are being expensed as incurred and provisions are being made for expected future investments in these alliances in certain circumstances.

In the short term, these very conservative accounting treatments mean that Orbital will report significantly lower earnings in Australia. However, in the longer term it will enable Orbital to report lower costs and declare dividends earlier than if these policies were not adopted.

Cash Position
The conservative accounting treatments discussed above have no impact upon the Group's current cash position.

The positive commercial developments through the year including the receipt of licence fees from its joint venture arrangements, in conjunction with the successful cost reduction program, have enabled Orbital to maintain a strong financial position. As at 30 June 1997, Orbital had cash and receivables of $32.385 million compared with $34.628 million last year. Orbital also holds $8.175 million in research and development deposits which are available for future expenditure on the OCP-4S and Genesis syndicates. In addition, we have recognised a provision of $5.163 million for future contributions to joint ventures. Orbital's goal through 1997/98 is to become cash positive.

Operating Results
Trading revenue increased by 53% from $11.397 million in the previous year to $17.404 million in the current year. The increase in trading revenue was mainly due to an increase in manufacturing income associated with the introduction of marine engines into the market and an increase in fees from a large number of engineering contracts. This was offset by a reduction in contracted research and development syndicate revenue from $13.816 million to $4.972 million.

Consequently, consolidated operating revenue for the year ended 30 June 1997 decreased by 16% from $29.959 million to $25.303 million in the twelve months to 30 June 1996.

In addition to the revenue bought to account, there was $11.734 million in licence fees derived during the year from the Meteor and Synerject joint ventures which was not recognised but held on the balance sheet as unearned income.

Orbital recorded an operating loss before abnormal items and income tax of $26.179 million for the year ended 30 June 1997, compared to $25.948 million for the corresponding period last year.

Abnormal expenses totalling $112.252 million were recorded in relation to amortisation of cash expenditures on patents, licenses and technologies ($33.574 million) and patents, licenses and technologies arising from corporate restructurings ($78.678 million). An amortisation expense of approximately $85 million will be recognised for each of the next two financial years. The nature and extent of these items is discussed in more detail in the Background section above and Proposed Capital Restructure section below.

Orbital recorded an income tax expense of $5.663 million incorporating an income tax credit of $42.044 million and an abnormal tax expense of $19.760 million arising from its research and development syndication arrangements. These syndicates involve the generation of income for tax purposes but not for accounting. In addition, an abnormal tax expense of $28.324 million was recorded in relation to the non-deductible amortisation of patents, licenses and technologies arising from corporate restructurings.

The operating loss after abnormal items and income tax was $144.094 for the year ended 30 June 1997 (1996: $69.829 million).

Proposed Capital Restructure
On 30 October 1995, shareholders approved two special resolutions to restructure Orbital's share capital. Orbital's subsequent application to the Australian Federal Court to approve the restructure was discontinued by consent after discussions with the Australian Securities Commission (ASC). The ASC has granted Orbital relief under Section 313 of the Corporations Law from compliance with certain Australian Accounting Standards. The relief relates to a part of Orbital's share capital which is attributable to the Sarich Technologies Trust conversion.

Orbital's Directors have resolved to account for the matter as follows:

Accept the relief the ASC has granted under section 313 of the Corporations Law in relation to the Sarich Technologies Trust conversion, for $52.5 million. This amount has been transferred from patents, licenses and technologies to the newly created "Capital Reduction Reserve".

Amortise the remainder of the patents, licenses and technologies balance arising from corporate restructurings, which did not arise from any cash expenditures, over the period 1 January 1996 to 30 June 1999. This policy is consistent with the amortisation of patents, licenses and technologies arising from cash expenditures and has resulted in the inclusion of an amortisation charge of $78.678 million in the financial statements for the year ended 30 June 1997. Concurrently, a transfer for the same amount as the amortisation charge is made from retained losses to the Capital Reduction Reserve.

Pending court approval, at the appropriate time(s) the capital reduction will be effected by a transfer from the Share Premium Reserve to the Capital Reduction Reserve.

Orbital's Directors believe this is a satisfactory resolution of the proposed capital restructure as it ultimately achieves the original objectives, whilst avoiding incurring additional costs in terms of legal fees and management time.

ACKNOWLEDGEMENT
The achievements for Orbital during the year could not have been reached without the sustained efforts of our staff and the support of our customers and shareholders. The Board wishes to express its sincere thanks and gratitude to those who have assisted our Group with its achievements.

We would like to give special recognition to the commitment and hard work of the Group's employees worldwide, along with the support from their families.

Mr Ross Kelly, Chairman
Mr Kim Schlunke, CEO

Dated at Perth, Western Australia this 15th day of September, 1997.

AUTOMOTIVE 2-STROKE

The prime objective of Orbital's efforts in the automotive 2-stroke area is to secure business arrangements and production commitments that will provide a return on the investment made by the Orbital group to date.

The demonstrated maturity of OCP technology for application in automotive 2-stroke engines in terms of durability, emissions compliance, and production readiness means there is minimal need to dedicate additional Group funds to further advance this technology. The focus is to market the existing proven cost, size, weight, and emissions benefits of an OCP 2-stroke engine to gain a foothold in the market place that demonstrates significant advantages in investment savings and a competitive position for the emerging engine manufacturers. This will lead to market acceptance and resulting commitments to further production programs.

96/97 REVIEW

Genesis
The benefits of the OCP 2-stroke engine have been demonstrated through the release of a fleet of 100 vehicles to Government, fleet and private customers primarily in Australia. The aim of this $18 million project, named Genesis, was to highlight the real world benefits of the engine technology and to provide valuable and relevant in-field data to potential high volume users of the technology.

The last batch of 19 Genesis vehicles was delivered in May 1997 to Nifty-Rent-A-Car in Darwin in the Northern Territory of Australia.

To date the fleet of 100 vehicles have accumulated in excess of 1.4 million kilometres. Customer response is particularly positive about the on-road performance and overall capability of the vehicles. Importantly, several problems have been identified and remedied. These relate to accessory items which are not fundamental to OCP technology. The program results to date have confirmed the Group's confidence that the technology is a viable and attractive alternative to conventional engine designs.

Maleo National Car Project
A direct result of the Genesis program was the selection in September 1996 by Dr B.J. Habibie, Indonesia's Science Minister, of the Orbital powertrain for the Maleo national car in Indonesia.The Maleo program is the first high volume production program for OCP 2-stroke automotive engines and provides an initial foothold in the automotive market. Orbital is pursuing this opportunity with vigour. It must be recognised however there are political, technical, market, and other risks associated with the establishment of a new automotive company in this market.

Other Activity
Under a program funded by a Chinese customer and supported by an Australian Government Aid program, Orbital delivered two 800cc two cylinder engines and two three cylinder Genesis engines for test bed and vehicle evaluations. These evaluations have been successful with the next stage of this relationship planned to be a trial of up to 50 vehicles in China.

Negotiations are also underway with two other automotive companies in Asia to evaluate OCP-powered vehicles.

BUSINESS OUTLOOK

It has become apparent that the greatest opportunity for rapid penetration of automotive 2-stroke OCP engines exists at the current time with newly established or rapidly expanding vehicle producers. Such producers are generally located in Asia and do not have the inertia generated by large investments in existing technology infrastructure. Typically these producers wish to establish a home market initially and then grow with exports into developed markets.

We offer these companies a competitive advantage through a lower cost engine, lower initial investment plus inherent performance advantages. By establishing a market presence in this way, Orbital expects to influence the larger vehicle producers to adopt our technology.

In addition to the Maleo National Car Project and the Chinese vehicle program, several customers throughout Asia have committed to evaluate Genesis vehicles as a precursor to more detailed evaluations that are hoped to lead to fleet trials and production commitments. The major attraction for these customers is the ability to have complete access to leading edge technology to produce a lower cost engine which meets the stringent emission laws of the developed markets.

The emergence of a greater number of "city cars" in world car markets which must meet demanding fuel economy, cost, and performance specifications may also provide opportunities for Orbital with our two cylinder, 800cc, OCP engine.

AUTOMOTIVE 4-STROKE

Direct injection of conventional 4-stroke engines is now clearly established as the next step in the evolution of automotive powerplants in developed markets because of the improvement in fuel economy, performance, and transient control while meeting increasingly stringent emissions levels.

Orbital's direct injection combustion technology has been successfully transferred from automotive 2-stroke programs to existing 4-stroke engine applications.

96/97 REVIEW

Over the 1996/97 period, Orbital demonstrated a 15% fuel economy improvement on customer engines, while maintaining or improving the power of the original engine and the stringent year 2000 European Stage 3 emissions capability.

More importantly, this impressive achievement has been confirmed in customer laboratories. Our direct injection 4-stroke technology (referred to as OCP-4S) is now developed to the point where it is robust and readily transferable to different customer engines.

Orbital's direct injection 4-stroke unit has been built up from a small core development program to one which is supporting a range of customer programs, industrialising the fuel system for production, developing the core technology to new levels, and marketing to a worldwide range of customers.

Our marketing activities have been aided to a great extent by the establishment of a European office. This representation has provided a closer link to our principal target market and will play a key role in supporting existing customer programs and relationships, as well as developing new customers. It has also provided a forum for more closely integrating with the European technical community.

Engineering staff at Orbital's Balcatta facilities have been working on three significant customer application programs with a production focus and they have also provided OCP-4S fuel systems and applications engineering support for a further two customers during the last year. Negotiations are progressing with customers on four new application programs.

BUSINESS OUTLOOK

Our target market for the direct injection, 4-stroke technology are worldwide automotive engine manufacturers, focusing on Western Europe, North America, and Asia-Pacific. Orbital has active customer programs in all three regions.

The European market has two principal drivers that make it a region with a very strong interest in direct injection technology for its future vehicles. These drivers are a strong economic and political commitment to reduce both vehicle fuel consumption and exhaust gas emissions by the year 2000. In addition, there is a strong competitive imperative as the Japanese auto makers have foreshadowed entry into this market with their own version of direct injection technology.

In 1996, Mitsubishi and Toyota started supplying vehicles incorporating their direct injection technology into the Japanese market. However, Japan has significantly less stringent emissions requirements than the European market and there are also technical challenges for these systems that are related to the high sulphur fuel used in Europe. Fuel system suppliers are developing their own direct injection components to meet the current strong demand for this technology.

We believe we are in a strong position to make OCP-4S the system of choice in this market because of the technical and commercial results achieved to date. Our position is strengthened by the maturity of the OCP system, our experience with the Genesis program, and market experience in the marine and recreation sector. Our unique expertise in stratified charge combustion, and control and after-treatment systems for lean burn gasoline engines gives us great leverage over competing systems.

During the next 12 months, Orbital aims to consolidate the technical gains that have been made with OCP-4S by moving towards fully industrialised systems (developed in conjunction with Synerject) that can go into production with our customers. Furthermore, our core development team will be aiming to achieve fuel economy gains already demonstrated, but at the more stringent European Stage 4 emissions that are currently being developed for the year 2004 and beyond.

We have commenced licence negotiations with two customers and will also be targeting new customer programs to increase the penetration of OCP technology in the 4-stroke automotive engine market.

MOTORCYCLES & SCOOTERS

Key drivers for introduction of OCP technology into the motorcycle and scooter market are pending emissions legislation and the need for product differentiation through technology advancements. Motorcycle and scooter manufacturers are looking for a cost effective and durable emissions solution that does not compromise the 2-stroke engine performance advantage.

The OCP system proposed for motorcycles and scooters is a simplified version of the system being applied to the Mercury V6 outboards. It has been developed over the last five years with significant improvements being made since the formation of the Meteor joint venture. Market introduction of the Mercury marine engines has greatly enhanced market confidence with direct injection technology.

Motorcycles and scooters fitted with OCP systems have demonstrated the ability to meet all the proposed emissions legislation with very little impact on engine performance, and in some cases improved performance has been demonstrated.

96/97 REVIEW
In June 1997, we signed a technical cooperation agreement with one of Asia's largest motorcycle manufacturers. The agreement covers engineering programs and grants licence rights to the manufacturer for high volume production of motorcycles and scooters.

The agreement was finalised following a thorough evaluation of Orbital's technology by the Asian company, which is also one of the world's most rapidly growing manufacturers and is aggressively pursuing a dominant position in the Chinese and South-East Asian markets. They produce a stylish range of popular motorcycles which are sold in Asia, Europe, South America and Africa.

Activity with this customer has now focused on programs which are aimed at achieving high volume production.

Orbital's motorcycle group is also currently engaged in negotiations with two leading European motorcycle manufacturers. Initial technology conversion work has commenced and the conclusion of formal arrangements is expected during the year.

BUSINESS OUTLOOK
The motorcycle and scooter market is large and growing rapidly. Worldwide annual production is approximately 17 million units with an annual growth rate of approximately 8%. Europe, Taiwan, India and Thailand represent approximately 45% of the total market and all are facing tough proposed emissions legislation.

These markets are well established and have been dominated by small 2-stroke engines in the 50 to 150cc range which accounts for approximately 70% the of market. This share could fall unless an emissions and fuel economy solution can be provided for carburetted 2-stroke engines.

The primary growth areas are developing Asian countries. China, currently representing around 38% of the market, has a rapidly growing motorcycle industry. Emissions legislation is being discussed but no firm proposals have been put forward to date. Vietnam, Malaysia, and Indonesia are all rapid growth areas but do not yet have any emissions legislation proposals.

The Japanese industry, being the traditional technology centre for motorcycles, has a large influence on the direction of the motorcycle market. Japanese companies also supply many Asian manufacturers with designs for engines and motorcycles through joint venture arrangements.

However, there is a trend among emerging Asian manufacturers to move away from reliance on established manufacturers who are often competitors. This move towards technology independence draws manufacturers to organisations like Orbital. Through a relationship with Orbital they can gain an understanding of the principles behind engine design and the methods available to meet impending emissions legislation and obtain required product differentiation.

We have developed good relationships with many of the major emerging motorcycle companies in China, Taiwan, Indonesia, Thailand, India, and Malaysia. The OCP technology has been demonstrated on small scooters through to high performance motorcycles.

Penetration of this growing market will complement activities in other areas, such as the marine market, as increased volumes will lead to lower system costs. Our current focus is to bring our lead customers to the market and complete productionisation of the OCP systems for motorcycles and scooters.

MARINE & RECREATION

Orbital's Marine and Recreation division supplies technology, engineering services, and fuel and engine management systems to customers in the marine and recreation industries. This industry includes all forms of marine propulsion (outboard, stern drive, and direct drive), personal watercraft, snowmobiles, and all-terrain vehicles.

The inherent design traits of the 2-stroke engine, namely high power in a small and lightweight package, precisely fit what the market demands. These advantages have made 2-stroke engines the only current powerplant used in snowmobiles and personal watercraft and the dominant powerplant in outboard engines.

The largest marine manufacturer, Mercury Marine, has already introduced OCP technology into the market and has announced that all their marine engines over 75 horsepower will be converted to our technology in the next several years to meet tough new emissions standards in the United States.

Orbital is also working closely with Bombardier-Rotax and Tohatsu Corporation, recent licensees of OCP technology.

96/97 REVIEW
The marine and recreation area is leading the commercialisation of OCP technology with product being commercially released in low volumes by Mercury Marine in the 3.0 litre V6 outboard in 1996, followed by the expansion to four new models in 1997. Mercury is now shipping V-6 products to their customers, and we are confident the hard work of many Mercury and Orbital employees will be rewarded by continuously increasing sales to satisfied customers.

Mercury have announced that their second generation of outboard engines using OCP technology will be marketed under the "Optimax" brand name. The Orbital direct injection systems used on the Optimax models have already established a benchmark for new technology outboards having set the American Power Boat Association (APBA) Pro Bass Low Emissions class speed record.

The new Optimax engines also helped Mercury to a clean sweep in the recent "24 Hours of Rouen" endurance race in France. Mercury made history with its entry of two Optimax 200 horsepower engines, which was the first time low emissions outboards had competed in the event. Not only did they complete the gruelling endurance contest to win their class, but they beat every competitive non-Mercury product on the river, burning half as much fuel as some of their competitors and running smoke-free during the entire race. Mercury said the result was a testament to the product's reliability and durability.

During the year, Orbital's fuel system development and low volume manufacturing centre was moved from Cass City, Michigan to nearby Saginaw. New equipment was installed and qualified for volume production of air injectors, fuel rails, pressure regulators and oil pumps. Initial production was launched for Mercury Marine and we achieved 100% on time delivery of production orders during the year.

We are actively supporting activities with Tohatsu Corporation, a licensee since February 1997. At the opening of the 1997 Tokyo International Boat Show, Tohatsu unveiled a 50 horsepower, three cylinder marine engine utilising OCP technology and capable of meeting the harsh new United States emissions standards.

Based in Tokyo and established in 1932, Tohatsu is the second biggest Japanese outboard engine manufacturer and a leading producer of portable fire pumps. Tohatsu was the first Japanese company to manufacture and market marine outboard engines, primarily for the commercial fishing fleet.

In 1996, Bombardier-Rotax GmbH evaluated OCP technology and exercised its rights to the licence. Bombardier (the parent company) are the world's largest personal water craft manufacturer and are achieving increasing market share in both the personal watercraft and snowmobile markets.

Fuel rail assemblies will now be sourced from the newly formed Synerject joint venture and provided to Orbital's marine and recreation customers as part of a total systems package. This package provides the customer with validated systems and qualified components from preferred and proven vendors.

BUSINESS OUTLOOK
Marine and recreation is traditionally a cyclic market. It has recently come under significant pressure worldwide to reduce emissions, particularly in North America, the largest market geographically. In the United States, the EPA is requiring a 75% emission reduction by model year 2006. In Europe, even more stringent emissions legislation has been demanded.

In this market, the OCP 2-stroke engine is the ideal emissions, performance, and cost solution. Utilising OCP technology allows the manufacturers to easily meet the existing emissions regulations that are approved and can provide a margin to accommodate possible future tightening of these regulations.

The 2-stroke engine also has inherent advantages over the conventional 4-stroke engine due to power density, and since the base engine design is retained, the manufacturer's development and implementation costs are minimised.

The experience gained from close involvement in commercialising the marine and recreation products is directly applicable to future OCP product areas. This applies to the systems integration work and development and sign-off of manufacturing processes. In addition, the knowledge base of OCP's technical performance capability in the market is enhanced. At the same time, growth in component volumes in both the motorcycle and automotive markets ultimately drives down cost to the point that it is difficult for alternative technologies to compete.

A further consideration is that success in this area will enable customer confidence to be gained and expand general acceptance of OCP technology.

PROFIT & LOSS ACCOUNTS

	CONSOLIDATED		THE COMPANY
	1997	1996	1997	1996
Operating revenue	25,303	29,959	471	220
Total operating expenditure	(51,482)	(55,907)	(5,111)	(6,746)
Operating (loss) before abnormal items and income tax	(26,179)	(25,948)	(4,640)	(6,526)
Abnormal Expenses:
Amortisation of patents, licenses and technologies arising from corporate restructurings	(78,678)	-	-	-
Expensing of deferred pre-production expenditure and start-up costs capitalised in prior financial years	-	(29,202)	-	-
Provision against carrying value of investments in subsidiaries	-	-	(156,314)	-
Amortisation of cash expediture on certain intangible assets	(33,574)	(19,948)	-	-
Other abnormal expenses	-	(7,551)	-	(2,506)
Total abnormal expenses	(112,252)	(56,701)	(156,314)	(2,506)
Operating (loss) before income tax	(138,431)	(82,649)	(160,954)	(9,032)
Income tax (expense)/credit attributable to operating (loss), including abnormal tax write-offs	(5,663)	12,820	1,568	2,403
Operating (loss) after income tax attributable to members of the Company	(144,094)	(69,829)	(159,386)	(6,629)
(Accumulated losses)/retained profits at the beginning of the financial year	(23,528)	46,301	(8,236)	(1,607)
Transfer to capital reduction reserve	78,678	-	78,678	-
(Accumulated losses) at the end of the financial year	(88,944)	(23,528)	(88,944)	(8,236)

BALANCE SHEETS

	CONSOLIDATED		THE COMPANY
	1997	1996	1997	1996
CURRENT ASSETS
Cash	21,350	30,411	10,858	6,088
Receivables	11,035	4,217	55	74
Inventories	2,894	4,214	-	-
Other	7,094	1,368	128	85
TOTAL CURRENT ASSETS	42,373	40,210	11,041	6,247
NON-CURRENT ASSETS
Receivables	-	-	58,998	70,810
Investments	-	-	132,603	342,049
Property, plant & equipment	39,388	40,438	242	378
Intangibles	169,495	334,247	-	-
Other	85,323	50,738	7,457	5,955
TOTAL NON-CURRENT ASSETS	294,206	425,423	199,300	419,192
TOTAL ASSETS	336,579	465,633	210,341	425,439
CURRENT LIABILITIES
Creditors and borrowings	5,347	3,302	717	2,348
Provisions	8,952	3,731	720	2,684
Other	6,262	911	-	-
TOTAL CURRENT LIABILITIES	20,561	7,944	1,437	5,032
NON-CURRENT LIABILITIES
Creditors and borrowings	25,165	19,236	19,033	19,005
Provisions	9,994	9,644	691	470
Other	91,679	43,169	-	-
TOTAL NON-CURRENT LIABILITIES	126,838	72,049	19,724	19,475
TOTAL LIABILITIES	147,399	79,993	21,161	24,507
NET ASSETS	189,180	385,640	189,180	400,932
SHAREHOLDERS' EQUITY
Share Capital	161,767	161,694	161,767	161,694
Reserves	116,357	247,474	116,357	247,474
(Accumulated losses)	(88,944)	(23,528)	(88,944)	(8,236)
TOTAL SHAREHOLDER'S EQUITY	189,180	385,640	189,180	400,932

STATEMENTS OF CASH FLOWS

	CONSOLIDATED		THE COMPANY
	1997	1996	1997	1996
CASH FLOWS USED IN OPERATING ACTIVITIES
Cash receipts in the course of operations	21,878	25,895	-	-
Cash payments in the course of operations	(28,586)	(51,541)	(6,246)	(6,661)
Withholding tax paid	(208)	(433)	-	-
Net cash (used in) operating activities	(6,916)	(26,079)	(6,246)	(6,661)
CASH FLOWS USED IN INVESTING ACTIVITIES
Interest received	1,691	3,243	135	166
Proceeds from sale of property, plant & equipment	118	614	43	54
Payments for property, plant & equipment	(3,846)	(5,285)	(56)	(161)
Payment for additional investment in controlled entity	-	-	-	(17,278)
Payments for addition investment in business undertaking	(2,482)	(1,158)	-	-
Payments for patents	-	(1,798)	-	-
Net cash (used in)/provided by investing activities	(4,519)	(4,384)	122	(17,219)
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from borrowings	7,376	-	-	-
Less: Restricted access industrial revenue bonds	(4,673)	-	-	-
	2,703	-	-	-
Proceeds from issue of shares	134	221	134	219
Repayment of advances to controlled entities	-	-	10,760	26,962
Net cash provided by financing activities	2,837	221	10,894	27,181
Net (decrease)/increase in cash held	(8,598)	(30,242)	4,770	3,301
Cash at beginning of the financial year	29,924	60,166	6,088	2,787
Cash at the end of the financial year	21,326	29,924	10,858	6,088

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