• The formation of a new company in conjunction with Siemens Automotive, the second largest independent manufacturer of gasoline fuel injectors in the world. This US based company will develop, manufacture, distribute and sell fuel rail assemblies incorporating Orbital's technology.
• The signing of Orbital's first Japanese licensee, marine outboard engine manufacturer Tohatsu Corporation.
• Orbital's 1.2 litre, three cylinder OCP engine was selected as the powerplant for Indonesia's Maleo national car project.
• Orbital has secured a Research & Development Syndicate to fund the $14.5m development and implementation of Orbital's advanced, next generation injection, combustion and control system for the conventional 4-stroke automotive engine.
• Expansion of the fuel system relationship with Brunswick Corporation (METEOR). This joint venture is now licensed to offer Orbital's full range of systems to all non-automotive customers.

FINANCIAL

Background
As shareholders will be aware, over the last two years Orbital has sought to eliminate the large intangible asset values from its balance sheet (30 June 1995: $382.863 million). 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. This results in large amortisation charges which overwhelm the cash flows, revenues and costs for the period.

In the short term, these amortisation charges mean that Orbital will report significantly lower earnings in Australia. However, in the longer term Orbital will report reduced amortisation charges and declare dividends earlier than if these policies were not adopted.

Results
Consolidated operating revenue for the six months to 31 December 1996 increased by 7% to $17.043 million from $15.859 million in the six months to 31 December 1995. Orbital recorded an operating loss before abnormal items and income tax of $12.306 million for the six months ended 31 December 1996, compared to $16.451 million for the corresponding period last year.

The operating result before abnormal items and income tax includes a provision of $7.613 million representing Orbital's estimated future contribution obligations to the expanded METEOR partnership. This provision is equal to the cash received from Brunswick Technology Corporation (Orbital's METEOR partner) for the grant of the licence to the partnership. The provision effectively negates the licence fee as a receipt of income by Orbital. In the future, as funds are advanced to the partnership, these funds will be off-set against the provision, and therefore not negatively impact the income statement. In the event that funding of this level is not required, the provision will be reversed with a corresponding credit to the income statement.

Excluding the above provision, the operating loss before abnormal items and income tax is $4.693 million. The improved operating result can be attributed to Orbital's policies of reducing unfunded development work (which is accounted for as an expense) and concerted cost reduction efforts. During 1995 the Company embarked on a "Performance Enhancement Program" with a view to managing its resource requirements and enhancing productivity during Orbital's transition period from a development organisation to a company focused on commercialisation of its technology. Orbital is now reaping the significant benefits of this program and the Directors remain confident that further efficiency improvements are achievable as a result of the initiatives from this program.

Abnormal expenses totalling $69.041 million were recorded in relation to amortisation of cash expenditures on Patents, Licences and Technologies ($16.589 million) and Patents, Licences and Technologies arising from corporate restructurings ($52.452 million). The nature and extent of these items is also discussed in the "Background" section above.

Orbital recorded an income tax expense of $12.573 million incorporating an income tax credit of $23.984 million and an abnormal tax expense of $17.674 million arising from its research and development syndication arrangements. These syndicates involve the generation of income for tax purposes but not for accounting, such as, the sale of a non-exclusive core technology licence, interest on the restricted access security deposits and a markup on the contracted expenditure. In addition, an abnormal tax expense of $18.883 million was recorded in relation to the non-deductible amortisation of Patents, Licences and Technologies arising from corporate restructurings.

The operating loss after abnormal items and income tax was $93.920 million for the six months ended 31 December 1996 (1995: $17.773 million).

AUTOMOTIVE APPLICATIONS
In September 1996, Orbital's 1.2 litre, three cylinder, 2-stroke OCP engine was selected as the powerplant for Indonesia's "Maleo" national car project following Orbital's highly successful Genesis project. Under this project, a fleet of Orbital-powered vehicles were released into the Australian market. The selection of this engine as the powerplant for the Maleo national car project is a testament to the success of this R&D Syndication project.

The Maleo passenger vehicle will deliver world class performance and fuel economy while meeting Indonesia's domestic and export certification requirements. Throughout 1997 approximately 30 prototype vehicles will be produced with commercial production set for late 1998.

There is currently an unprecedented interest in the application of Orbital's direct injection technology to the conventional 4-stroke automotive engine. Direct injection is developing as the next major step forward in the evolution of automotive powerplants and it provides significant advantages in fuel economy, emissions and performance. These functional benefits are achieved by creating a stratified fuel-air mixture which is richer near the spark plug and this allows very lean engine operation. Orbital is involved in engine application programs for direct injection with six major automotive manufacturers, and negotiations with several others. The newly formed Siemens/Orbital joint venture is intended to act as a high volume supplier of injectors to this potentially substantial market.

Further core development of the next generation technology will be conducted in-house at Orbital. This development will be funded through a Research and Development Syndicate to a level of $14.5 million. Orbital's Directors believe the overwhelming support of shareholders in lobbying the government on this issue was an instrumental factor in Orbital securing the facility, and would like to extend their gratitude to all shareholders who sent letters to their parliamentary representatives. The Government's approval of this Syndicate demonstrates its commitment to furthering Australian technology.

Syndication is a Federal Government backed financing mechanism under which companies like Orbital obtain funds for approved research and development programs in Australia. This is achieved by researchers utilising income tax benefits to secure funds from syndicate investors who are able to obtain tax deductions associated with the research and development program. Syndication does not involve Orbital taking a loan or issuing equity.

NON AUTOMOTIVE APPLICATIONS
The license agreement signed in February 1997 with Tohatsu Corporation marked a historic achievement for Orbital. Tohatsu became Orbital's first Japanese licensee and is that country's second largest manufacturer of outboard marine engines. Tohatsu unveiled a 50hp three cylinder engine utilising OCP technology, and capable of meeting tough new US emission standards, at the recent Tokyo International Boat Show.

Orbital expanded its relationship with Brunswick Corporation (Mercury Marine's parent) by significantly expanding the METEOR (Mercury Orbital Technology) partnership This expansion provides for the growing global demand for low emissions fuel systems in the marine, personal watercraft, snowmobile and motorcycle markets. Interest in these DI systems is escalating with the rapid introduction of stringent new emissions standards being imposed by governments around the world. The fuel systems are engineered for specific customer application by METEOR.

Mercury Marine, a division of Brunswick Corporation, confirmed that programs are underway to introduce Orbital technology across additional engines in its outboard range. At the September 1996 International Marine Traders Exhibition and Congress held in Chicago, they announced plans to introduce DI technology to their 135, 150 and 225 horsepower engines. This follows the highly successful launch of the V6 200hp engine in January of 1996. Mercury Marine purchases its DI systems from METEOR.

The prospects of rapid penetration of the Asian motor cycle market also improved through 1996 with the successful development of a new cost effective and reliable fuel system. This system is capable of delivering less than 1.2g/km HC + Nox to easily meet the most stringent standards proposed in Taiwan, the leader in setting industry emissions standards.

SIEMENS/ORBITAL ALLIANCE
Siemens Automotive and Orbital used the Society of Automotive Engineers annual congress and exposition in Detroit to announce the formation of a joint venture to exploit Orbital's revolutionary direct injection technology.

The rapidly emerging market for direct injection technology in conventional 4-stroke automotive engines will be a key customer of the new Company, to be licensed by Orbital. Other key markets for the company will be the established US and European non-automotive and growing Asian markets which, driven by new emissions regulations, provide highly attractive near-term opportunities.

The joint venture will combine the established design, manufacturing and industrialisation skills of Siemens with the leading edge direct injection technology developed by Orbital. A high credibility producer of critical components will greatly assist the successful implementation of OCP technology in motor vehicles, which is expected to provide a significant portion of Orbital's future royalty income.

PROPOSED CAPITAL RESTRUCTURE
On 30 October 1995, shareholders approved two special resolutions giving effect to a capital restructure of Orbital. Orbital's original application to the Federal Court to validate the restructure was adjourned after discussions with the Australian Securities Commission (ASC). As an alternative it was agreed Orbital would apply for relief from certain Australian Accounting Standards under Section 313 of the Corporations Law. Regrettably the ASC has given notice of its refusal to grant Orbital relief under Section 313 for the full amount requested. The ASC has indicated they are willing to grant relief for $52.5 million (attributable to the Sarich Technology Trust conversion) of the $236.083 million. Orbital has avenues of appeal open through the Administrative Appeals Tribunal (AAT) and ultimately the Federal Court.

Orbital has lodged an appeal with the AAT, and adjourned Federal Court proceedings to confirm the capital reduction resolutions. Orbital's Directors have since resolved to account for the matter by accepting the $52.5 million relief the ASC indicated it was prepared to grant and commence amortisation of the balance of the amount. Amortisation commenced 1 January 1996 and will be completed by 30 June 1999 to coincide with Orbital's existing intangible asset amortisation timeframe. This policy resulted in an abnormal amortisation charge of $52.452 million for the six months to 31 December 1996.

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

INVESTOR RELATIONS
Orbital has adopted the policy of updating its shareholders on a quarterly basis with three quarterly reports and an Annual Report, in line with US company reporting requirements. Orbital has also established a worldwide web site on the internet (http://www.orbeng.com.au) which provides immediate updates on any media statements, technical papers and general information.

Copies of the half yearly financial statements are available on request from our Public Affairs department. Contact info@orbeng.com.au via email or by telephoning 09-4412311 in Australia or 517-423 6623 in the United States.

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

PROFIT AND LOSS ACCOUNT FOR THE SIX MONTHS ENDED
31 DECEMBER 1996

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