Orbital Corporation Limited (OBTEF) 20-F 2008 FY Annual report (foreign)

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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 20-F

¨ REGISTRATION STATEMENT PURSUANT TO SECTION 12(b) OR (g) OF THE SECURITIES EXCHANGE ACT OF 1934

OR

x ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the fiscal year ended June 30, 2008

OR

¨ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

OR

¨ SHELL COMPANY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

Commission file number 1-10936

ORBITAL CORPORATION LIMITED

Australian Company Number: 009 344 058

WESTERN AUSTRALIA, AUSTRALIA

(Jurisdiction of incorporation)

4 WHIPPLE STREET, BALCATTA, WESTERN AUSTRALIA 6021, AUSTRALIA

(Address of principal executive offices)

Keith Halliwell

Chief Financial Officer

Tel: +61 8 9441 2311

Fax: +61 8 9441 2111

khalliwell@orbitalcorp.com.au

4 WHIPPLE STREET, BALCATTA, WESTERN AUSTRALIA, 6021, AUSTRALIA

(Name, Telephone, E-mail and/or Facsimile number and Address of Company Contact Person)

Securities registered or to be registered pursuant to Section 12(b) of the Act

None

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

American Depositary Shares*

Securities for which there is a reporting obligation pursuant to Section 15(d) of the Act.

None

Indicate the number of outstanding shares of each of the issuer’s classes of capital or common stock as of the close of the period covered by the annual report

Ordinary Shares 474,563,192

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.    YES  ¨    NO  x

If this report is an annual or transition report, indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934.    YES  ¨    NO  x

Note – Checking the box above will not relieve any registrant required to file reports pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 from their obligations under those Sections.

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days    YES  x    NO  ¨

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer. See definition of “accelerated filer and large accelerated filer” in Rule 12b-2 of the Exchange Act. (Check one).

Large accelerated filer	¨	Accelerated filer	x
Non-accelerated filer	¨  (Do not check if a smaller reporting company)	Smaller reporting company	¨

Indicate by check mark which basis of accounting the registrant has used to prepare the financial statements included in this filing:

U.S. GAAP  ¨ International Financial Reporting Standards as issued by the International Accounting Standards Board  x Other  ¨

If “Other” has been checked in response to the previous question, indicate by check mark which financial statement item the registrant has elected to follow.  ITEM 17  ¨  ITEM 18  ¨

If this is an annual report, indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    YES  ¨    NO  x

(APPLICABLE ONLY TO ISSUERS INVOLVED IN BANKRUPTCY PROCEEDINGS DURING THE PAST FIVE YEARS)

Indicate by check mark whether the registrant has filed all documents and reports required to be filed by Section 12, 13 or 15(d) of the Securities Exchange Act of 1934 subsequent to the distribution of securities under a plan confirmed by a court.    YES  ¨    NO  ¨

* Evidenced by American Depositary Receipts. Each American Depositary Share (“ADS”) represents forty Ordinary Shares.

TABLE OF CONTENTS

			Page
		Currency of Presentation and Definitions, Forward Looking Statements	1
PART I	ITEM 1	Not Applicable	2
	ITEM 2	Not Applicable	2
	ITEM 3	Key Information	2
	ITEM 4	Information on the Company	10
	ITEM 5	Operating and Financial Review and Prospects	21
	ITEM 6	Directors, Senior Management and Employees	31
	ITEM 7	Major Shareholders and Related Party Transactions	47
	ITEM 8	Financial Information	49
	ITEM 9	The Offer and Listing	50
	ITEM 10	Additional Information	51
	ITEM 11	Quantitative and Qualitative Disclosures about Market Risk	57
	ITEM 12	Not Applicable	59
PART II	ITEM 13	Defaults, Dividend Arrearages and Delinquencies	59
	ITEM 14	Material Modifications to the Rights of Security Holders and Use of Proceeds	59
	ITEM 15	Controls and Procedures	59
	ITEM 16	[Reserved]	60
	ITEM 16A	Audit Committee Financial Expert	60
	ITEM 16B	Code of Ethics	60
	ITEM 16C	Principal Accountant Fees and Services	61
	ITEM 16D	Not Applicable	61
	ITEM 16E	Not Applicable	61
PART III	ITEM 17	Not Applicable	61
	ITEM 18	Financial Statements	61
	ITEM 19	Exhibits	61
		Glossary of Technical Terms	63

CURRENCY OF PRESENTATION AND DEFINITIONS

“Orbital” means Orbital Corporation Limited, a corporation incorporated under the laws of the State of Western Australia, Commonwealth of Australia and its consolidated subsidiaries.

See the Glossary at the end of this Annual Report for definitions of technical terms.

Orbital publishes its consolidated financial statements in Australian dollars. In this Annual Report, unless otherwise specified or the context requires, references to the “US$” or “US Dollars” are to United States dollars and references to “$” or “A$” are to Australian dollars. For the convenience of the reader, this Annual Report contains translations of Australian dollar amounts into United States dollars at the rate or rates indicated. Unless otherwise stated, the translations of Australian dollars into US dollars have been made at the buy rate for telegraphic transfers of Westpac Banking Corporation, for the dates specified. These translations should not be construed as representations that the A$ amounts actually represent the US$ amounts or could be converted into US$ at the conversion rate used.

FORWARD LOOKING STATEMENTS

This Annual Report contains “forward-looking statements” as that term is used in the Private Securities Litigation Reform Act of 1995. Forward-looking statements are based on current expectations rather than historical facts and they are indicated by words or phrases such as “anticipate”, “estimate”, “expect”, “project”, “believe”, “intend”, “envision” and similar words or phrases. These forward-looking statements involve known and unknown risks, uncertainties and other factors, many of which are beyond Orbital’s control, that may cause actual results, performance or achievements to be materially different from any future results, performance or achievements expressed or implied by such forward-looking statements. Some of the factors that would affect our financial performance, cause actual results to differ from our estimates, or underlie such forward-looking statements, are set forth in various places in this report including, but not limited to, Item 3 “Key Information – Risk Factors”; Item 4 “Information on the Company” and Item 5 “Operating and Financial Review and Prospects”.

These risks include, but are not limited to, the following:

• reduction in fees from customers for our engineering, development and testing services;

• the impact of exchange rate movements on licence and royalty receipts;

• changes in engine manufacturers’ preferences towards OCP Technology;

• increased competition from existing or new engine technologies;

• changes in engine emissions standards or other environmental laws in countries where Orbital licenses or plans to license OCP Technology;

• a downturn in general economic conditions in industries and markets where Orbital licenses or plans to license OCP Technology; and

• the cost of any product liability or intellectual property suits against Orbital.

Orbital undertakes no obligation to publicly update or revise any forward-looking statements, whether as a result of new information, future events or otherwise. Because of the risks, uncertainties and other factors discussed above, such forward-looking statements should not be unduly relied upon.

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PART 1

ITEM 1. IDENTITY OF DIRECTORS, SENIOR MANAGEMENT AND ADVISERS

NOT APPLICABLE

ITEM 2. OFFER STATISTICS AND EXPECTED TIMETABLE

NOT APPLICABLE

ITEM 3. KEY INFORMATION

Exchange Rate Information

The following table sets forth, for the fiscal years indicated, the high, low, average and period-end Federal Reserve Bank of New York Noon Buying Rates for Australian dollars expressed in United States dollars per A$1.00. Orbital’s fiscal year ends on June 30 of each year.

Fiscal Year Ended June 30	At Period End		Average Rate (1)		High		Low
2004	$	0.6952	$	0.7155	$	0.7979	$	0.6390
2005	$	0.7618	$	0.7568	$	0.7974	$	0.6880
2006	$	0.7423	$	0.7472	$	0.7781	$	0.7056
2007	$	0.8491	$	0.7925	$	0.8491	$	0.7407
2008	$	0.9562	$	0.9042	$	0.9797	$	0.7860

(1) The average of the Noon Buying Rates on the last business day of each month during the period.

Details of the high and low Noon Buying Rates for Australian dollars expressed in United States dollars per A$1.00 in each month during the last six months are as follows:

Month	High		Low
June 2008	$	0.9610	$	0.9342
July 2008	$	0.9797	$	0.9415
August 2008	$	0.9317	$	0.8553
September 2008	$	0.8441	$	0.7831
October 2008	$	0.7937	$	0.6073
November 2008	$	0.7005	$	0.6191

On December 16, 2008, the Noon Buying Rate was US$0.6775 per A$l.00.

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The Australian dollar is convertible into US dollars at freely floating rates. There are currently no restrictions on the flow of Australian currency between Australia and the United States.

Fluctuations in the exchange rate between the Australian dollar and the US dollar may affect Orbital’s earnings, the book value of its assets and its shareholders’ equity as expressed in Australian and US dollars, and consequently may affect the market price for the American Depositary Shares (the “ADSs”). In addition, fluctuations in the exchange rate between the Australian dollar and the US dollar will affect the US dollar equivalent of the Australian dollar price of Orbital’s ordinary shares on the ASX and, as a result, are likely to affect the market price of Orbital’s ADSs in the United States. See “Item 3. Key Information—Risk Factors – Fluctuations in exchange rates may have a material adverse effect on us”. Any fluctuations will also affect the conversion into US dollars by the Depositary of cash dividends, if any, paid in Australian dollars on the ordinary shares represented by the ADSs.

To date, Orbital has denominated and received most of its earnings from license, development and supply agreements in US dollars. Cash and investments have been denominated in a combination of US dollars and Australian dollars, and a significant proportion of expenditure in past years has been denominated in US dollars however presently most of Orbital’s expenditure is denominated in Australian dollars. In periods when the US dollar appreciates against the Australian dollar, the Australian dollar conversion of the US dollar earnings under the license and supply agreements may be materially enhanced. However, when the US dollar depreciates against the Australian dollar, Australian dollar conversion of the US dollar earnings under the license and supply agreements may be materially reduced. Orbital may, where appropriate, enter into forward foreign currency hedging contracts to minimise currency exposure particularly in relation to royalties received in US dollars and Euros and their conversion into Australian dollars to satisfy Australian dollar expenditures and realise profits in Australian dollars.

Orbital’s financial statements for the years ended June 30, 2008, 2007 and 2006 have been prepared in accordance with Australian equivalents to International Financial Reporting Standards (“AIFRS”), which Orbital adopted on July 1, 2005. In complying with AIFRS, Orbital is also in compliance with International Financial Reporting Standards (“IFRS”) as issued by the International Accounting Standards Board.

Prior to July 1, 2005, Orbital prepared its financial statements in accordance with Australian Generally Accepted Accounting Practice (“AGAAP”). The accounting policies set out in Note 1 have been applied consistently to the 2006, 2007 and 2008 financial years.

The selected consolidated financial data in accordance with AIFRS below has been derived from Orbital’s consolidated financial statements for the years ended June 30, 2008, 2007, 2006 and 2005, which have been audited by Ernst & Young (2008) and KPMG (2007, 2006 & 2005), both independent registered public accounting firms. The consolidated financial statements as of June 30, 2008, 2007 and 2006, and the Reports of independent registered public accounting firms thereon, are included elsewhere in this report, see F1 – F44. The consolidated financial statements as of June 30, 2005 and the Report of independent registered public accounting firm thereon have not been included in this report.

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Selected Financial Data

Amounts prepared in accordance with IFRS

(in 000’s except per Ordinary Share and ADS amounts)

	2008 (1) US$		2008 A$		2007 A$		2006 A$		2005 A$
Consolidated Income Statement
Operating Revenue
Revenue from trading operations	9,779		14,939		15,256		11,371		10,469
Other income	243		372		390		492		1,007
	10,022		15,311		15,646		11,863		11,476
Costs and expenses
Employee expenses	(6,423	)	(9,812	)	(9,428	)	(8,297	)	(8,850	)
Selling, corporate and administration	(4,547	)	(6,946	)	(7,324	)	(6,346	)	(7,367	)
Share of profit of jointly controlled entity	1,543		2,357		3,157		4,135		2,936
Finance costs	(579	)	(886	)	(816	)	(622	)	(3	)
Profit before income tax	16		24		1,235		733		(1,808	)
Income tax credit/(expense) attributable to operating profit/(loss)	291		445		98		(218	)	107
Net profit after income tax	307		469		1,333		515		(1,701	)
Dividends paid or payable	—		—		—		—		—
Earnings/(loss) per Ordinary Share (2)
- Basic (cents)	0.06		0.10		0.30		0.13		(0.41	)
- Diluted (cents)	0.06		0.10		0.29		0.13		(0.41	)
Dividends per ordinary share (cents)	—		—		—		—		—

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Amounts prepared in Accordance with IFRS

(in ‘000’s except per Ordinary Share and ADS amounts)

	2008 (1) US$	2008 A$	2007 A$	2006 A$	2005 A$
Balance Sheet Data at period end
Total assets	27,650	42,239	41,000	26,172	24,693
Total long-term debt (2)	9,263	14,151	17,958	12,809	19,000
Net assets	10,140	15,490	16,402	7,743	(125	)
Total shareholders’ equity	10,140	15,490	16,402	7,743	(125	)

(1) For the convenience of the reader the 2008 Balance Sheet and Profit and Loss items have been translated at the Federal Reserve Bank of New York Noon Buying Rate for Australian dollars on November 30, 2008 which was US$0.6546 = A$1.00. Such translations are unaudited and provided for information purposes only. These translations should not be construed as representations of the amount that the Australian dollar amounts actually represent US dollar amounts, or could be converted into US dollars at the conversion rate used.

(2) The long-term debt consists principally of a loan facility with the State of Western Australia (A$19.0 million for 2008, 2007 and 2006). The loan facility provides for payment in full on the date which is 25 years after the date on which the first advance was made (May 1989) or if in any year prior to that date the aggregate number of OCP engines produced, calculated on a worldwide basis, exceeds five million, payment to be made by equal annual payments, each of one-fifth of the loan, on July 1 in each year commencing July 1 in the following year in which such production is achieved. No interest accrues on this facility until such time as the loan becomes payable. (for additional information see note 22 to the Consolidated Financial Statements).

As at 1 July 2005, upon the adoption of AIFRS, the loan facility with the State of Western Australia was recognised at fair value resulting in a non-cash decrease of A$6.8 million to A$12.2 million and subsequently stated at amortised cost with any difference between amortised cost and repayment value being recognised in the income statement over the period of the borrowings on an effective interest basis. This adjustment was reflected as a change in accumulated losses as at July 1, 2005.

(3) The options exercisable under the Orbital employee share plan have no material dilutive effect in respect of any year. At June 30 2008 there were 474,563,192 ordinary shares on issue.

(4) Comparative information for 2004 has not been provided as the Company adopted IFRS for the first time in 2005. Information for 2004 cannot be provided on a restated basis without unreasonable effort or expense.

Risk Factors

• We have a history of operating losses.

Orbital experienced operating losses over a number of years prior to the 2006 and 2005 fiscal years, as a result of which the company’s net assets have been significantly reduced. If we were to incur future losses, we may not be able to continue our operations. The company has positive shareholders’ equity and we believe that the company is operating on a going concern basis.

• Our customers may reduce their out-sourced engineering services expenditure.

A major source of Orbital’s revenue is the provision of engineering services to customers in the automotive, motorcycle and marine and recreation sectors. Customers utilise Orbital’s services as they either do not have the necessary skills in-house or their internal resources are overloaded. The sourcing of overload work is very dependent on the state of the market. In the event of a market downturn, this source of work would diminish. Reduction by Orbital’s customers of their expenditure on out-sourced engineering services may substantially lessen the revenue received by Orbital.

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• The future fees we receive under agreements with Original Equipment Manufacturers (“OEMs”) may be substantially less than the fees received in recent years.

Agreements are entered into with vehicle, engine and component manufacturers and financing parties that grant rights to manufacture, use and sell products that utilise Orbital Combustion Process (“OCP”) Technology. In the fiscal year ended June 30, 2008, royalty and licence fees revenue generated from the seventeen current licensed users of OCP technology and their affiliates accounted for approximately 18% of Orbital’s consolidated operating revenues. During the last two fiscal years, royalty and licence fees income from licensed users accounted for approximately 16% of Orbital’s total consolidated revenues.

Orbital has already received and brought to account through revenue a majority of the total lump sum fees due under its existing license agreements. The amount of additional lump sum fees earned under these agreements will depend on several factors, including the commercialisation of products incorporating OCP Technology, whether the licensees expand the territories or volumes covered by the agreements and whether additional engineering or engine development services are provided. As a result, the remaining fees received by Orbital under existing agreements may be substantially less than the fees received in prior years.

• The failure to obtain new customers or receive royalties from existing or new customers could have a material adverse effect on us.

The agreements with OEMs usually entitle Orbital to receive ongoing royalties when licensees sell engines incorporating OCP Technology. The total royalties paid to Orbital will depend on whether manufacturers succeed in selling large numbers of these engines to consumers. As at November 30, 2008, eleven of Orbital’s seventeen current licensed users are in commercial production and selling products using OCP Technology. For the year ended June 30, 2008, Orbital has not received any royalty payments, other than insubstantial minimum annual royalty payments, under any of its other agreements.

Orbital may not be able to enter into additional agreements with new customers. In addition, current licensees may choose not to commercially produce engines incorporating OCP Technology, and those who do may not succeed in selling these products to consumers. The failure to obtain new customers or receive royalties from existing or new customers could have a material adverse effect on Orbital’s business and results of operations.

• We rely on a small number of key customers.

Orbital relies on a small number of key customers for the majority of its revenues. Three customers accounted for 40% of total revenue in fiscal 2008. The loss of one or more of these customers could have a material adverse effect on Orbital’s business and results of operations. Three customers accounted for 43% of Orbital’s total revenue in fiscal 2007.

Synerject, which makes a significant contribution to Orbital’s overall result, is also reliant on a small number of key customers for the majority of its revenues. In fiscal 2008, two customers accounted for 78% (2007: three customers accounted for 77%) of Synerject’s total revenue.

• We may not be able to successfully complete the production testing programs for the application of OCP Technology to customer engines.

Orbital and its licensees engage in production testing programs, which typically last two to four years, for the application of OCP Technology to customer engines. These tests must be successfully completed before manufacturers will consider committing the large capital amounts needed to modify existing or build new engine manufacturing plants. Orbital generally receives engineering fees for undertaking these programs.

Orbital may not be able to complete these testing programs successfully or without unforeseen problems or delays. As a result there can be no certainty that further products using OCP Technology will be introduced into the market or that Orbital will continue to receive engineering fees for performing these production programs.

• The market may not accept OCP Technology.

Many factors will influence whether Orbital’s licensees decide to produce engines commercially using OCP Technology. These include the cost of adapting existing facilities or building new manufacturing facilities, the cost of producing each system and the reliability and efficiency of OCP Technology. Manufacturers also will evaluate competing technologies and consider how government fuel economy and emissions standards in different countries may favour one technology over another. If manufacturers begin commercial production using OCP Technology, the number of engines sold will depend on market

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acceptance. Many of these factors are beyond Orbital’s control, but will ultimately affect the amount of royalties received. If licensees decide not to use OCP Technology commercially or consumers choose not to buy products incorporating OCP Technology, there would be a material adverse effect on Orbital’s business and results of operations.

• We may not be able to fund the capital and working capital requirements necessary for our business.

Orbital has needed significant capital amounts to conduct its business. Although capital costs are now minimal, Orbital will incur on-going research and development costs and operating costs to enhance the OCP Technology to improve performance or lower unit costs to extend the roll out of our technology and requires working capital support. Additionally, the Company will be required to either repay or refinance the A$19 million loan for the Government of Western Australia in 2014 and there is no assurance that this can be done. In the past, these costs have been paid with a combination of operating revenues, equity injections, debt and other financing. However, there can be no assurance that Orbital will have sufficient operating revenues to fund future costs or that outside financing will be available at affordable prices, or at all. A failure to obtain sufficient financing for ongoing costs could prevent Orbital from carrying out business plans on time and give an advantage to competitors with greater financial resources. If a shortage of financing caused long delays in the further development and commercialisation of OCP Technology, licensees could choose not to build engines with OCP Technologies or to use competing technologies. This could have a material adverse effect on Orbital’s business and results of operations. If Orbital has insufficient cash available to meet its costs, it may be required to cease operations.

• We may not be able to protect our intellectual property rights.

Orbital has obtained patents on many aspects of its OCP Technology, and has applied for additional patents on other aspects of this technology. Orbital’s success in part, may depend upon the ability to protect the technology and products under United States and foreign intellectual property laws.

Orbital is not a party to any present patent or intellectual property litigation, but in the future may be sued by other parties that claim OCP Technology infringes their patent rights or other rights, or may need to sue other parties to enforce its patent or other intellectual property rights. In the event of being sued by other parties, if proved, these claims could have a material adverse effect upon Orbital. Even if Orbital won any of these suits, the management time and legal expenses required to defend these claims could have an adverse effect on Orbital’s future operating results. Orbital also has trade secrets and know-how, which are not patentable but are still important to Orbital’s business. Orbital seeks to protect these rights through confidentiality agreements and contractual protections. These arrangements may not protect Orbital from unauthorised use or disclosure of its trade secrets and know-how.

• Our share price may be volatile.

The price of Orbital’s ordinary shares on the Australian Stock Exchange (“ASX”) and price of the ADSs on the New York Stock Exchange (prior to July 1, 2004) and the OTC Bulletin Board have experienced historic volatility. (Orbital’s ADSs were de-listed from the NYSE effective June 30, 2004 and the ADSs now trade only on the OTC Bulletin Board.) In addition, high technology stocks traded in both markets have experienced substantial price and volume fluctuations from time to time, even though these changes were sometimes unrelated to the operating performance of specific companies. Announcements of operating results or technical innovations by Orbital or its competitors, including reports or announcements about OCP Technology, may have a material effect on the market price of the ordinaryshares or the ADSs. On November 30, 2008, the closing price of Orbital’s ordinary shares on the ASX was A$0.047. The closing price on June 30, 2008 was A$0.11. The closing price of the ADSs on the OTC Bulletin Board on November 30, 2008 was US$1.44, a decrease of approximately 68% from the closing price of US$4.50 for the ADSs on the OTC Bulletin Board on June 30, 2008. See Item 9. - “The Offer and Listing - Nature of Trading Market”.

• A large product liability or professional indemnity judgement could have a material adverse effect on us.

Orbital is subject to business risk from product liability or professional indemnity suits if third parties claim that defects in OCP Technology or in engineering services provided by Orbital resulted in personal injury or other losses. Orbital may also be required to indemnify licensees for claims arising from alleged defects in products, which use OCP Technology or are designed or manufactured by Orbital. Licensees are, however, required to indemnify us from liabilities caused by defects in products not manufactured by Orbital.

Orbital believes that sufficient product liability and indemnity insurance is held for the range of products and services currently provided to licensees and other customers but sufficient coverage may not be able to be obtained in the future, at affordable

costs, or at all. Even if Orbital has such insurance, a judgement against us in a large product liability or professional indemnity suit could have a material adverse effect on Orbital’s business or financial condition.

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• OCP Technology may not be able to compete successfully against other engine technologies.

Orbital faces significant competition from automobile and engine manufacturers and engineering firms specialising in internal combustion engine technology. Many of these competitors have substantially greater financial, marketing and technological resources than Orbital.

Orbital’s commercial success depends in part upon whether OCP Technology can compete successfully against both existing and new engine technologies, including new technologies that are similar to OCP Technology. To achieve further commercial success, OCP Technology will need to displace current four-stroke and two-stroke internal combustion engine technologies, which have a dominant market position. Current four-stroke and two-stroke engine technologies may continue to dominate the engine market, or they may be replaced by new technologies other than OCP Technology. Orbital’s competitors may develop products that are technically superior to Orbital’s products or more acceptable to the market. This could reduce available market share to Orbital or make OCP Technology less attractive or obsolete, which would have a material adverse effect on Orbital’s business.

• Fluctuations in exchange rates may have a material adverse effect on us.

Orbital records its transactions and prepares its financial statements in Australian dollars. Most of Orbital’s earnings from license and supply agreements are in US dollars. Cash and investments are denominated in both Australian and US dollars. Almost all Orbital’s expenditures are denominated in Australian dollars. When the US dollar appreciates against the Australian dollar, the US dollar earnings would convert into more Australian dollars. However, when the US dollar depreciates against the Australian dollar the US dollar earnings would convert into fewer Australian dollars. Fluctuations in exchange rates between the Australian dollar and the US dollar may also affect the book value of assets and the amount of shareholders’ equity. To reduce its potential currency exposure, Orbital has from time to time entered into forward foreign currency exchange contracts to fix, in Australian dollars, the majority of forecast US dollar royalty and engineering services fee receipts. Details of Orbital’s total foreign currency forward exchange contracts as of June 30, 2008 are contained in Item 5. – “Operating and Financial Review and Prospects – Foreign currency exchange sensitivity”. As at November 30, 2008, Orbital’s outstanding forward foreign currency exchange contracts totalled US$nil. See also Item 3 – “Key Information - Exchange Rate Information” above.

• We may not be able to comply with future governmental regulations.

Products using OCP Technology must comply with many emissions, fuel economy and other regulations in the US and other countries. Based on internal testing, Orbital believes that products using OCP Technology will be able to meet current emissions and fuel economy standards in the countries that are Orbital’s most important markets. The effects of any future regulations on Orbital’s business or results of operations cannot be predicted. However, if Orbital were unable to comply with any material new regulations in the US or other key markets, this could delay further commercialisation of OCP Technology and have a material adverse effect on Orbital’s business and results of operations.

• Classification as a “PFIC” would result in adverse tax treatment to our US shareholders.

Under US federal tax laws, a foreign corporation is treated as a passive foreign investment company (“PFIC”) if 50% or more of its assets or 75% or more of its income is passive. Historically, Orbital has not been treated as a PFIC and currently believes that it is not a PFIC. This is, however, a factual determination made annually, which could change, based upon future developments or changes in Orbital’s gross income or the value of its assets. If Orbital were classified as a PFIC in any taxable year, a US holder of Ordinary Shares or ADSs would be subject to special rules. These rules are intended to reduce or eliminate any benefit from the deferral of US income tax that a US holder could derive if the foreign company does not distribute all of its earnings on a current basis. See Item 10. - “Additional Information - United States Federal Income Taxation”.

• Our shareholding in our equity investee, Synerject LLC, may be reduced.

Synerject LLC was restructured and refinanced during fiscal 2003. As part of the restructure, in April 2003, Synerject LLC acquired, by way of capital contributions from each joint venturer, the operations of Orbital’s marine and recreation system sales business and Continental Corporation’s non-automotive systems business. The actual performance of each of these contributed

businesses in the period to June 30, 2006, compared to the planned performances, is being reviewed to determine the optional adjustment (if any) to the percentage shareholdings of Orbital and Siemens-VDO in Synerject LLC (the “recalculation”).

The maximum change in shareholdings as a result of the above recalculation is 10% ie. ownership percentages of 60:40.

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There is an option for the joint venturer who has the majority shareholding as determined by the recalculation above, to call from the other shareholder (“minority shareholder”) the percentage of shares determined by the recalculation. The minority shareholder may dilute their shareholding or may choose to exercise an option to maintain the 50:50 ownership structure by either paying the other joint venturer US$400,000 for each 1% interest of Synerject or by injecting additional capital into Synerject of US$800,000 for each 1% interest of Synerject. The exercise dates of these options was extended by two years to June 30, 2008. Until that date the ownership percentage remained 50:50.

The assessment of the contributed business performance will be tabled after June 30, 2008, however the parties anticipate that due to the stronger performance of the non-automotive systems business contributed by Siemens, the contingent consideration payable by Orbital to Siemens should Orbital elect to maintain their 50% interest may be up to US$4 million.

Orbital is now in discussions with Continental Corporation regarding the above to determine the change (if any) which may arise as a result of the options available above. Orbital has sufficient capital to exercise the option to maintain 50% ownership of Synerject should it so choose.

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ITEM 4. INFORMATION ON THE COMPANY

History And Development Of The Company

Orbital Corporation Limited is incorporated as a public company under the laws of Australia and operates under the Corporations Act 2001. Following a special resolution passed by shareholders at the Company’s annual general meeting on October 26, 2004, the Company changed its name from Orbital Engine Corporation Limited to Orbital Corporation Limited on October 27, 2004. The Company’s domicile is Australia where its registered office and principal place of business is located at 4 Whipple Street, Balcatta, Western Australia (tel +61 8 9441 2311).

The Company operates as the ultimate holding company of the Orbital group of companies, the details of which are as follows:

PARTICULARS IN RELATION TO CONTROLLED ENTITIES

		Consolidated Entity Interest
Orbital Corporation Limited	Class of Shares	2008 %	2007 %
Controlled Entities, incorporated and carrying on business in:
Australia
- Orbital Australia Pty Ltd	Ord	100	100
- S T Management Pty Ltd	Ord	100	100
- OFT Australia Pty Ltd	Ord	100	100
- Orbital Australia Manufacturing Pty Ltd	Ord	100	100
- Axiom Invest No. 2 Pty Ltd	Ord	71.3	71.3
- OEC Pty Ltd	Ord	100	100
- Investment Development Funding Pty Ltd	Ord	100	100
- Orbital Environmental Pty Ltd	Ord	100	100
- Power Investment Funding Pty Ltd	Ord	100	100
United States of America
- Orbital Holdings (USA) Inc	Ord	100	100
- Orbital Engine Company (USA) Inc	Ord	100	100
- Orbital Fluid Technologies Inc.	Ord	100	100
United Kingdom
- Orbital Engine Company (UK) Ltd	Ord	100	100

Orbital is an international developer of innovative technical solutions for a cleaner world. Orbital provides innovation, design, product development and operational improvement services to the world’s producers, suppliers, regulators and end users of engines and engine management systems for application in motorcycles, marine and recreational vehicles, automobiles and trucks. Orbital’s principal operations in Perth, Western Australia, provide a facility with capabilities in design, manufacturing, development and testing of engines and engine management systems.

Orbital’s beginnings date to the late 1960s, when Ralph Sarich, Orbital’s founder, began development of a rotary internal combustion engine called the Orbital Engine. Mr Sarich entered a partnership, known as the Sarich Design and Development Partnership, with two other individuals for the purpose of developing, patenting and marketing the Orbital Engine. In November 1972, the partnership entered into a joint venture with The Broken Hill Proprietary Company Limited (“BHP”), then one of Australia’s largest companies. Under that joint venture, in which each of the partnership and BHP had a 50% interest, Orbital Engine Company (Australia) Pty Ltd (now Orbital Australia Pty Ltd) was established in January 1973, for the development and commercialisation of the Orbital Engine.

In 1978, the partnership assigned its interest in Orbital Engine Company (Australia) Pty Ltd to the Sarich Design and Development Unit Trust (the “Trust”). In 1984, the Trust publicly offered some of its interest in Orbital Engine Company (Australia) Pty Ltd through the listing on the Australian Stock Exchange (“ASX”) of the Sarich Technologies Trust (“STT”). In December 1988, STT was converted to an ASX listed company, Sarich Technologies Limited. In May 1989, BHP exchanged its 50% equity interest in Orbital Engine Company (Australia) Pty Ltd for a 35% shareholding in Sarich Technologies Limited, reflecting BHP’s rights to income under the original joint venture agreement with the partnership and certain debt owing from Orbital Engine Company (Australia) Pty Ltd to BHP. In November 1990, Sarich Technologies Limited changed its name to Orbital Engine Corporation Limited.

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In the period between 1973 and 1983, Orbital established a team of engineers and technicians and developed fuel injection and combustion technology that enhanced the performance of the rotary Orbital Engine, culminating with General Motors Corporation entering into an agreement in 1983 to evaluate the Orbital Engine. During this period, Orbital recognised that its fuel injection and combustion technology could also be applied to a conventional two-stroke engine to reduce many of its shortcomings.

In 1983, Orbital determined that the application of its technology to two-stroke engines had the potential for greater commercial return and market acceptance than the rotary Orbital Engine due, among other things, to the commercial barrier of requiring completely new manufacturing processes and facilities to produce the rotary Orbital Engine. As a consequence, Orbital decided to cease development of the rotary Orbital Engine in favour of applying its fuel injection and combustion technology to two-stroke engines.

In December 1991, Orbital offered for sale 2,890,000 American Depositary Shares (“ADSs”) (representing 23,120,000 ordinary shares in Orbital) and BHP offered for sale 510,000 ADSs representing 4,080,000 ordinary shares in Orbital. These ADSs were listed on the NYSE at that time. BHP reduced its shareholding to 9.5% in July/August 1998 and to nil in December 1999.

In June 1997, Orbital and Siemens-VDO Automotive established a joint venture, Synerject LLC, to design, develop, manufacture, distribute and sell fuel rail assemblies incorporating OCP technology. See “Strategic Alliances – Siemens-VDO” below.

In July and August 1998, Orbital was listed by local market makers on “over the counter” markets in Germany, with the Company’s securities traded on the Frankfurt and Berlin Stock Exchanges.

Effective July 1, 2004, Orbital’s ADSs were de-listed from the NYSE as the continued listing requirements relating to market capitalization and shareholder equity were not met. Trading in the Company’s ADSs was transferred to the OTC Bulletin Board with effect from July 1, 2004. As of November 30, 2008, approximately 24% of Orbital’s outstanding shares were held in the form of ADSs traded on the OTC Bulletin Board. See Item 9. - “The Offer and Listing - Nature of Trading Market”.

Following approval by shareholders at its Annual General Meeting on October 26, 2004, the Company changed its name from Orbital Engine Corporation Limited to Orbital Corporation Limited with effect from October 27, 2004. Orbital Engine Company (Australia) Pty Ltd changed its name to Orbital Australia Pty Ltd, effective December 1, 2004.

The Company’s principal capital expenditures since July 1, 2002 have consisted of ongoing improvements to test facilities and equipment (A$2.066 million) and refurbishment of offices (A$0.616 million) at its Western Australian premises, a non-cash capital investment during fiscal 2003 of US$6.25 million in Synerject LLC and a cash capital injection of US$2.0 million in Synerject LLC in June 2006.

In June 2008 Orbital acquired the business assets of Boral Alternative Fuel Systems (renamed Orbital Gas Products – OGP), a tier 1 supplier of LPG fuels systems, for $1.758m.

Orbital is currently constructing a heavy duty engine testing facility with an estimated total cost of $3.56 million, of which $2.76 million has been funded through a government grant from the Australian Federal Government. There are no other significant capital expenditures and divestitures currently in progress.

Business Overview

Orbital’s strategy is to focus on:

• Targeted R&D to enhance OCP products to respond to requests raised by existing and potential customers who require improved performance or lower unit cost to extend the roll out of our technology. In turn this will enhance the company’s intellectual property portfolio.

• Judicious acquisitions, where we can add shareholder value.

• Expanding Orbital’s automotive engineering services by winning projects and establishing strategic alliances with Australian and Asian partners.

• Achieving future growth of licenses and royalties for OCP in niche markets.

• Expanding into an alternate fuels LPG business building on the Orbital Gas Products acquisition.

• Targeted growth in liquid natural gas/compressed natural gas for the Australian and Asian heavy transport sector.

• Continuing our commitment to grow Synerject as a profitable systems provider in the non-automotive markets and increase the value of this asset.

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Orbital technology has been commercialised in the motorcycle, marine and recreational markets. Orbital’s goal is to broaden the application of Orbital technology in these and other markets. Orbital’s strategy is to continue to participate actively, where appropriate, in the commercialisation of OCP Technology to reduce risks and advance the rate of adoption of this technology while targeting growth in the alternative fuels industry.

Orbital Combustion Process

The breakthrough in engine design achieved by Orbital is a stratified combustion process, which involves an air-assisted injection of fuel directly into the combustion chamber and uses electronic control of the fuel delivery, injection timing, ignition and other variables. The OCP combustion process and control is suitable for both two-stroke and four-stroke engines and has been applied successfully across a range of cylinder displacements from 50cc to greater than 500cc, including high operating engine speeds.

In a conventional engine, the fresh fuel/air mixture is prepared upstream of the cylinder (whether by carburettor or conventional EFI) and enters the cylinder during the intake stroke, with the intent of forming a homogenous mixture of air and fuel within the cylinder. The OCP systems allow a highly stratified combustion process to occur, containing the combustible fuel cloud to a small area within the cylinder, with the remainder of the air in the cylinder being not fuelled. This process, at light loads, allows the engines with OCP Technology to run very lean (in some cases, total engine operation is carried out without the use of an air intake throttle). Under high load conditions, the OCP system tends to run more like a homogeneously charged engine, with good mixing of the fuel/air mixtures within the cylinder.

In the case of a two-stroke engine, the OCP system allows injection to occur after exhaust port closures at light loads, minimising the short-circuiting of fresh fuel/air mixture out of the exhaust port as occurs in conventional two-stroke engines. In the case of a four-stroke engine, this allows lean engine operation, significantly reducing the engine pumping work.

The combustion process itself, due to control of the air to fuel ratio gradient within the spray plume, allows clean and controlled combustion, resulting in further improvements in fuel economy and emissions control.

Apart from the basic combustion process and the associated fuel and control system, Orbital has developed other technologies including catalyst systems, control systems, control hardware and control software for vehicle applications of engines using the OCP Technologies.

Sources of Revenue

(in 000’s of A$)

Orbital’s sources of revenue are currently from:

• provision of consulting and engineering services; and

• licence fee income and royalties.

In addition, Orbital equity accounts its 50% share of Synerject LLC’s results.

Orbital’s share of the net profit of Synerject LLC in 2006, 2007 and 2008 was A$4.135 million, A$3.157 million and A$2.357 million respectively.

During the last three fiscal years Orbital spent approximately A$2.902 million on research and development programs.

The Orbital group’s licence fee income and royalties relates to the sale of rights to its intellectual property, such as patents and know-how, to major vehicle, engine and component manufacturers through license and engineering service agreements. These agreements grant the licensee limited rights to manufacture, use and sell products utilising OCP Technology.

As at November 30, 2008, Orbital has 17 agreements to end users of technology or suppliers, which grant license rights related to OCP Technology. Orbital’s customer base covers applications in the automotive, marine, recreational and motorcycle markets.

At November 30, 2008 Orbital had 11 customers (2007: 8 customers) using OCP Technology in commercial production.

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At November 30, 2008 the following agreements granting rights to Orbital’s OCP Technology were in place:

Agreements for Rights to OCP Technology

Date	Company	Market
September 1987	Brunswick Corporation (Manufacturer of Mercury and Mariner engines)	Marine
June 1988	Ford Motor Company (Incorporating Jaguar Motor Cars)	Automotive
June 1989	General Motors Corporation	Automotive
May 1990	Piaggio & C. spa	Motorcycles
January 1991	Fiat Auto Company	Automotive
February 1997	Tohatsu Corporation	Marine and Fire Pump Engines
June 1997	Kymco	Motorcycles
June 1997	Synerject, LLC (1) (Joint Venture with Siemens-VDO Automotive Corporation)	Fuel Injection Systems
September 1999	Aprilia World Service B.V	Motorcycles
August 2001	Delphi Automotive Systems	Automotive
May 2002	Peugeot Motocycles	Motorcycles
January 2003	UCAL Fuel Systems Ltd	Motorcycles
May 2004	Bajaj Auto Limited	Auto-rickshaws
April 2005	Goebler-Hirth Motoren KG	Heavy fuelled UAVs
May 2005	Envirofit International Limited	Retrofit Applications
February 2006	Polaris Industries Inc.	Marine & Recreational
September 2006	Bajaj Auto Limited	Auto-rickshaws (gaseous)

(1) On November 16, 1998, Orbital announced an expansion of the Synerject Joint Venture to support motorcycle applications with air assisted direct injection and electronic fuel injected systems.

Although these license agreements differ in their specific terms, generally each license agreement defines the scope of access rights to the OCP Technology, including geographic regions, applications covered by the license agreement (for example, engine types and horsepower range), any areas of exclusivity which may have been granted, the duration of the license and royalty periods, and confidentiality provisions. The license agreements also set out the basis on which initial and ongoing technical disclosure is to be made between the parties and the details of technical programs to utilise the OCP Technology, such as performance targets and the quantities of vehicles and engines required to be produced by Orbital for testing purposes by the licensees. A license agreement also typically covers the licensee’s right to Orbital’s improvements and Orbital’s rights to the licensee’s improvements on the basic OCP Technology, as well as indemnity provisions relating to losses arising from products designed and manufactured by Orbital or its licensees. Under the terms of the license agreements, licensees are not specifically obliged to commence production and sale of engines using OCP Technology and may terminate the agreements upon notice to Orbital. If a licensee were to terminate its license agreement with Orbital, the licensee would forfeit the license and any technical disclosure fees paid through to the date of termination.

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The license agreements may provide for the payment to Orbital of fees upon the execution of the license agreement. These initial license fees may be negligible in some instances and significantly larger in others. Additional fees may also be required after a fixed time interval or after delivery of prototype engines and/or hardware employing the OCP Technology that meets specified performance targets, provided the license agreements are not terminated. In some cases the license agreements provide for technical disclosure fees and territory fees that are payable upon disclosure and transfer of Orbital’s technical know-how or upon any expansion of the licensees’ rights to OCP Technology.

Generally, under the terms of Orbital’s license agreements, royalty payments will become payable if licensees commence commercial production and sale of engines or components incorporating the OCP Technology. Such royalties will usually be based on several factors, which may include a base amount, the engine’s particular horsepower rating, an adjustment for inflation, the benefit delivered to the Original Equipment Manufacturer, access to improvements and the level of technology applied. Royalties currently achieved for the non-automotive application of OCP Technology range from approximately US$6.00 for a small scooter to US$67.00 for a large multi-cylinder marine outboard engine.

Commercial production or sale of engines with OCP Technology commenced in 1996. Production royalties of approximately A$1.99 million were received by Orbital in the 2008 fiscal year compared to approximately A$2.14 million in 2007. There can be no assurance that Orbital will be successful in entering into additional license agreements, that other licensees will commence commercial manufacture of products incorporating the OCP Technology, or that Orbital will receive additional fees under existing agreements. Orbital’s financial results have varied from period to period in the past and will continue to experience such fluctuations in the future. There can also be no assurance that products incorporating OCP Technology will achieve market success.

Strategic Alliances

Continental

In June 1997, Orbital formed a joint venture company, Synerject, LLC, with Continental Corporation (previously Siemens Automotive Corporation). At the time of formation, Synerject’s principal activities were to design, develop, manufacture, distribute and sell fuel rail assemblies incorporating OCP technology.

In November 1998, Orbital announced the expansion of the operations of the Synerject joint venture to allow Synerject to provide motorcycle and scooter Original Equipment Manufacturers (“OEMs”) with both air assisted direct injection and electronic fuel injection systems. This includes engine management systems and all peripheral components, and system integration services, in addition to supply of the fuel rail assembly. This expansion enables Synerject to provide both technical and program management services to the customer. Fiscal 2000 saw the launch of the Aprilia SR 50 DITECH (DI Technology), the first commercial motorcycle or scooter using Orbital’s DI technology, followed by Aprilia’s Scarabeo DITECH™ scooter in 2001. In May 2002, Piaggio, manufacturer of the Vespa brand scooter, and Peugeot Motocycles each launched two motor scooter models incorporating Orbital’s direct injection technology. Peugeot launched its Jetforce scooter during the 2003 fiscal year and Kymco launched its 100cc KDI 2-stroke scooter in the 2005 fiscal year. In May 2007 Bajaj Auto Ltd commenced production in India of an autorickshaw utilising Orbital’s direct injection technology.

During 1998 Orbital’s relationship with Continental was expanded to create an alliance that facilitates the supply of complete integrated systems incorporating OCP technology to automotive customers. This capability is attractive in order to penetrate the automotive industry, as manufacturers are continuing to reduce the number of suppliers and rely more heavily on large companies that act as systems integrators. These system integrators source, validate, and coordinate the supply of the components of a system which may include the fuel rail assembly, electronic control unit, compressor, fuel pump and wiring harnesses. The system is then sold to the manufacturer as a complete unit.

Synerject was restructured and refinanced in April 2003. As part of the restructure, Synerject acquired, by way of capital contributions from each joint venturer, the operations of Orbital’s marine and recreation system sales business and Continental’s non-automotive systems business. The actual performance of each of these contributed businesses in the period to June 30, 2006, compared to the planned performances, will be reviewed to determine the adjustment (if any) to the percentage shareholdings of Orbital and Continental in Synerject which may take place after June 30 2008. See Item 3 – “Key Information – Risk Factors – Our shareholding in Synerject LLC may be reduced”.

In June 2006 Synerject’s financing arrangements were renegotiated. Loans provided by Continental were replaced by a 4 year term loan provided by an external bank (see “Liquidity and Capital resources’). The bank loan was supported by additional capital injections of US$2 million from each member. The Orbital guarantee required for the previous financing arrangements is not required for the new bank loan.

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Orbital and Continental each hold a 50% interest in Synerject LLC and share equal board representation. Under the terms of the joint venture agreement, the net income and losses of the joint venture are allocated in accordance with the percentage interest held.

In March 2006 Synerject acquired a business based in Delavan, Wisconsin, which supplies fuel systems and components for outboard marine engines from BRP US Inc for approximately US$2.5m. The investment by Synerject consisted of working capital, principally inventory and plant & equipment.

During FY2007 Synerject established a manufacturing facility in Changchun, China and an engineering support facility in Chongqing, China . These facilities have been established to produce low cost electronic control units for motorcycle applications, with manufacturing commencing in FY2008.

Synerject has operations located in Newport News, Virginia, Delavan, Wisconsin, Toulouse, France and Changchun and Chongqing, China (as noted above). In Newport News, Synerject manufactures air injectors and fuel rail assemblies for the majority of Orbital’s marine and motorcycle customers and supplies systems to marine customers. In Delavan, Synerject manufactures electronic management modules and direct injection fuel injectors and oil pump assemblies primarily for Bombardier Recreational Products. In Toulouse, Synerject sources components (including air injectors and fuel rail assemblies manufactured in Newport News) and supplies systems to motorcycle customers. As noted below, in April 2003, Synerject acquired Continental’s non-automotive systems business which is now conducted in Toulouse.

UCAL Fuel Systems

In February 2003, Orbital entered into a Technical Cooperation Agreement with UCAL Fuel Systems Ltd, a manufacturer of carburettors and fuel injection system components for the Indian motorcycle and automotive markets. Under the agreement UCAL has been granted the right to manufacture and supply components of Orbital’s direct injection fuel systems to the 2-stroke 2 and 3 wheeler motor vehicle market in India.

Competition

Orbital’s success depends upon its ability to continue to earn revenue from engineering services and to maintain a competitive position in the development of OCP Technology in relation to other existing and emerging technologies.

Success of the OCP Technology is also dependent upon Orbital’s ability to both displace current fuel injection and combustion technologies for four-stroke or two-stroke internal combustion engines, which have an established and dominant position in this field, and its ability to gain market share against emerging technologies. There is significant competition from automobile and engine manufacturers and engineering firms specialising in the development of internal combustion engine technology for the automotive, marine, motorcycle and small engine industry. These companies may have substantially greater resources for research, development and manufacturing than Orbital. Despite the fact that Orbital has developed, patented and licensed the OCP Technology to a number of automobile and engine manufacturers, it is possible that Orbital’s competitors may succeed in developing alternative technologies and products that are more effective or commercially more acceptable than those developed by Orbital.

There is a difference between an individual engine design and the broad range of possibilities covered by the OCP Technology for which fees are charged under licensing agreements. Manufacturers may have their own specific engine designs incorporating OCP Technology as well as their own proprietary and non-proprietary know-how. Licensees may market the individual characteristics of their engine designs without reference to the fact that the OCP Technology is required or being used. Under the terms of Orbital’s license agreements, royalties would be payable in such situations.

The main competition to the use of OCP Technology for four-stroke automotive applications is both the previously introduced side injection high pressure, single fluid, direct injection fuel systems being employed by Japanese and European vehicle manufacturers and the newer generation spray guided systems now being introduced in Europe. OCP Technology provides a better combination of fuel economy and emissions when compared to current published side injection high pressure, single fluid, DI fuel systems on multi cylinder engines. Management also believes the OCP fuel system cost to be comparable to the side injection high pressure fuel systems and at the same production volumes would have a significant cost benefit to the new piezo high pressure guided fuel systems.

Technology for the 4-stroke engine that is entering the market place or is currently being tested for introduction into the market includes variable valve timing, variable valve lift, turbocharging and engine down sizing. Over the last few years there has been a slow increase in the introduction of high pressure side injection fuel systems for companies including Alfa Romeo, Renault,

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Peugeot, Volkswagon and Daimler Chrysler. These systems have been introduced into the European market primarily and operate in a stoichiometric mode most of the time and hence deliver only very small benefits in fuel economy.

Other competition to engines employing OCP Technology may also include other lean burn engines, electro-magnetic valve lift and timing actuation, electric motors, hybrid vehicles and fuel cells and other concepts not known to Orbital. Insofar as these technologies incorporate efficient technology for internal combustion engines they would be complementary to OCP Technology, for instance in hybrid vehicles.

Current four-stroke technology also remains the main competitor to the introduction of OCP Technology for non-automotive applications. Various direct injection technologies, such as high pressure, single fluid direct injection systems, are available to engine manufacturers to improve the performance of two-stroke engines as an alternative to both the current four-stroke and OCP Technology.

With respect to provision of engineering services, Orbital competes against engineering groups such as Ricardo, AVL, FEV and others, which have well established European presences and growing presences in the China/Asia market. An additional competitor to Orbital’s services is the customer’s internal resources. In all cases, Orbital must compete on work-scope, cost and quality with its competitors. Orbital’s competitors may have significantly more finance available than Orbital which may help to win certain work programs. The engineering service requirement is directly influenced by global, national and OEM company financial positions and also by the presence, or lack of, drivers such as new emission or other regulatory changes.

Synerject, as an Engine Management System and component supplier for the non-automotive market for both direct injection and manifold port injection, and for Orbital’s proprietary air injector for the automotive market, competes directly with established suppliers such as Bosch, Del’orto, Magneti Marelli, Delphi and others.

Alternative Fuels

During the year, Orbital has expanded into the alternative fuels industry, working with CNG, LPG, LNG and alcohol based fuels, both at the industry support and R&D level.

The rising cost of fuel, increasing environmental awareness and the depleting world supply of crude oil have further strengthened the call for alternative fuels and energy management. Both of these areas have strong growth potential for Orbital, which has both the skill base and infrastructure to provide significant value to customers.

Initial steps were taken late in the financial year to commence Orbital’s growth into the alternative fuels industry with the acquisition of Orbital Gas Products (OGP) (formerly Boral Alternative Fuel Systems).

OGP is a tier 1 supplier of LPG systems to the Ford Motor Corporation in Australia and to the aftermarket operators, assembling and distributing original equipment products in Australia and New Zealand. These are manufactured by Vialle, a leading Netherlands-based international manufacturer of LPG automotive fuel systems. OGP has direct access to Vialle’s new Liquid Injection (LPi) expertise, application experience and Intellectual Property. Orbital’s technical skill base will complement the development of the next generation OGP systems.

Reinforcing its position in the alternative fuels business, Orbital secured Commonwealth Government support to install a heavy duty engine testing facility at its Perth headquarters capable of operating engines on natural gas, LPG and biodiesel as well as diesel and gasoline. The facility will provide the following services:

• Heavy duty engine emissions testing research of in-service vehicles for Commonwealth and State Government authorities;

• Engine development and emission testing services for Australian and Asian companies seeking to develop cleaner engine technologies and reduce greenhouse gas emissions; and

• Heavy duty engines emissions research for government authorities seeking to validate the environmental credentials of alternative fuel and drive-train technologies for heavy vehicle applications in Australia and Asia.

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Synerject

Orbital’s 50% owned joint venture with Continental Corporation, Synerject LLC, is a supplier and manufacturer of engine management systems (EMS) and electronic fuel injection systems for non-automotive OEMs.

Notwithstanding the generally difficult market conditions during the year, particularly the North American marine market, Synerject generated a 2% increase in revenue to US$81 million.

The recently commissioned manufacturing facility in Changchun China, which produces the newly developed M3 ECU, shipped its first product during the financial year. The M3 ECU has been developed to meet emissions requirements for the motorcycle market in China where Euro 3 standards have recently been introduced.

Synerject’s first customers are in Taiwan with Chinese customers expected to take product in FY2009. The establishment of the Changchun facility together with an engineering support base in Chongqing and low initial sales volumes has resulted in a loss of US$2 million in China for the year.

The Delavan facility, which produces the Bombardier E-TEC fuel system and ECU, recorded a 4% reduction in sales but improved EBIT by approximately US$1 million. This was achieved by the introduction of reduced supply costs and facility efficiencies in line with productivity targets.

The Newport News facility manufactures air injectors and fuel rail assemblies for customers utilising Orbital’s air assist direct injection (OCP) technology. Sales were down by 1% due to reduced volumes in the North American marine market due to the slowing US economy.

Synerject took on new customers and introduced new products during the financial year including Ducati and the E-TEC snowmobile.

Orbital’s equity accounted share of the Synerject result was adversely affected by A$0.4 million compared to FY2007 due to the strong Australian dollar.

Synerject generated US$2.6 million (FY2007 US$2.6 million) operating cashflow. Investment in plant and equipment (principally in China) required US$0.7 million (FY2007 US$2.5 million) and net debt repayments were US$1.8 million (FY2007 US$0.5 million). Net debt at June 30, 2008 was US$3.1 million representing a gearing ratio of 18% (FY2007 21%).

During the financial year Synerject paid its first dividend of US$0.84 million to each of the joint venture parent companies.

Licensing and Royalties

Orbital licenses its patented direct injection technology to original equipment manufacturers (OEM) and suppliers. Since product introduction in 1996, over 1.6 million air injectors/cylinders have been sold, reducing greenhouse gas emissions and improving fuel economy.

Orbital products in the Marine Outboard sector, primarily the Mercury Marine Optimax and Tohatsu TLDi engines, stood up well in a US market that has suffered a significant downturn in tough economic conditions.

Licensing and Royalty revenue increased by 17% to $2.7m compared to the previous financial year. Despite the steady royalty volumes, the contribution from this business segment fell by $0.3 million due to the impact of the weaker US Dollar and the product mix. This negative impact was offset by increased license fees.

New products using Orbital’s technologies introduced this year include the Polaris MV800 ATV and the Envirofit retrofit kit for the 3 wheeler taxis in the Philippines.

The production launch of the Polaris MV800 is a key milestone for Orbital. This multi-fuel, all terrain vehicle is the first 4 stroke engine product to use Orbital’s technology. The direct injector required for the 4 stroke engines was fully productionised by Synerject.

Envirofit, a not-for profit organisation, developed and supplies a retrofit kit for the 3 wheeler taxis in the Philippines, giving significant reductions in emissions and up to 35% improvement in fuel economy. The fuel economy advantage is very attractive to the driver/owner as fuel costs are a significant part of operating costs. Initial volumes are low, with potential for increase in the coming year.

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Mercury Marine launched 2 new variants of the Optimax outboard family, the Jet 80 and 100 hp outboard units.

The production Bajaj DI Autorickshaws are now available in Pune and Varanasi with positive market feedback. Bajaj also has a license for LPG/CNG variants of this product.

The European motorcycle market for DI remains flat and will likely remain so until the next stage of Euro III emissions, scheduled for 2009/2010, is implemented. In the interim, the interest in high performance 2 stroke DI engines continues as this enables potential product retaining all the 2 stroke performance attributes while meeting the European emission requirements. The profile of these products is high, however the over-all volume produced is low compared to traditional scooters and motorcycles.

The interest in direct injection of 4 stroke engines for products such as motorcycles continues. Direct injection applied to a 4-stroke motorcycle results in better fuel economy and improved emissions. Orbital is undertaking multiple programs to assist customers in development and assessment in this market segment.

OEM’s using Orbital’s technology achieved the following awards during FY2008, highlighting the performance of these products:

• Kymco X-Mode 100 motorcycle using Orbital’s systems received the Taiwan Environmental Agency (EPA) award as the best motorcycle in their green motorcycle ranking.

• Mercury Marine received for the 3^rd consecutive year the J.D. Power Award for delivering the highest customer satisfaction in the direct-injected (DI) outboard category.

Engineering Services (ES)

Orbital’s ES provides professional technology engineering services to Governments, industry, engine manufacturers, OEM’s and their respective suppliers, with key activities in Australia, China, India, USA, Europe and Japan.

Engineering Service revenue decreased by 7% to $11.7m for the full year compared to the previous year, reflecting the challenges of the downturn in the general market and the stronger Australian dollar. This department provided increased internal support for Orbital’s business development in areas such as the formation of Orbital Gas Products and in the development of the Heavy Duty Engine Test Facilities that are now well underway.

Key external customer programs this year include:

• Long term contract with the Roads and Traffic Authority of NSW to manage the second National In-Service Emission Study (NISE)

• E5-E10 health impact study

• Continued contract work to assist in the development a dual fuel (CNG/Diesel) Engine Management System (EMS) suitable for the Australian heavy duty truck fleet

• Design and development of new family of “clean” general purpose engines

• Development of fuel systems for utility, lawn and garden engines

• Support for customer application programs of Orbital’s proprietary technologies

With greatly increased public awareness of global warming, rising oil costs and concerns regarding the longer term availability of crude oil, the call for alternative fuels and for energy/emission management has never been stronger. Orbital’s ES are well positioned to provide key technology services in the forthcoming year targeting high value add programs.

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FlexDI

A new initiative, FlexDI^TM, was launched during the year, supported by the R&D of previous years. The FlexDI^TM system “One Engine – Any Fuel” is the expansion of Orbital’s Direct injection systems to operate with a wide range of both liquid and gaseous fuels and has generated significant response from China and Europe.

With the capability of spark ignition combustion of heavy fuels such as kerosene and diesel for non-automotive applications, the FlexDI^TM system offers “bi” and “multi” fuel capability.

Orbital Research and Development

Orbital’s R&D, aligned with the growing importance of alternative fuels and energy management, are central to Orbital’s activities aimed at positioning the company as a leading edge technology company with the ability to provide solutions to OEM’s and Industry.

The continued commitment to the core R&D has resulted in 20 new patent applications being granted and 4 new patents applications in the last 12 months, strengthening the Orbital patent portfolio and extending the life of the current and future royalty streams. Over the 3 year period since commitment to internal R&D programs, some 83 patent applications have been granted along with 15 new patent applications.

During the year technical papers highlighting the results from the R&D programs and showcasing Orbital’s technology development capability to global OEM’s have been presented at a number of key technical conferences and congresses, with the paper on 100% Ethanol (E100) being awarded the best overseas paper at the 2007 Congresso SAE Brasil, São Paulo, Brazil and resulting in subsequent commercial discussions in South America where use of alternative fuels such as E100 are already very well established.

Patent Protection

Orbital continues to actively investigate new technologies while also seeking to improve and enhance existing technology through continued research and development and product development, particularly in regard to OCP related technology. Orbital believes that patent protection of its technologies and processes is critical to its future financial performance and that its success depends upon its ability to protect its proprietary products and technology under United States and foreign patent laws and other intellectual property laws. Accordingly, Orbital has been, and intends to continue to be, active in securing and policing intellectual property rights for its proprietary products and technology.

As at November 30, 2008, Orbital had approximately 80 individual patent families with a total of over 250 patents and patent applications around the world. As of November 30, 2008 there were approximately 55 granted patents and 2 patent applications pending in the United States (including PCT patent applications). There are numerous other developments for which patent protection has not been obtained and these form part of Orbital’s proprietary know-how. Trade secrets and confidential know-how are protected through confidentiality agreements, contractual provisions and administrative procedures. There can be no assurance that such arrangements will provide meaningful protection for Orbital in the event of any unauthorised use or disclosures.

Orbital is not a party to any present litigation relating to patents, but it has in the past and may in the future receive claims from other parties that the OCP engines or components or elements of such engines infringe patent rights or other rights of such other parties. Orbital may also in the future need to sue other parties for infringement of patent or other Intellectual Property rights relating to its OCP Technology. In the event of either being sued by other parties or suing other parties, the management time and legal expenses required to be devoted to these claims could have an adverse effect on Orbital’s future operating results, even if Orbital won any such suits.

Marketing channels

Engineering Services – dedicated salesforce with engineering background, servicing an international customer base – generally engine manufacturers. Presentation of papers at technical seminars.

Orbital Gas Products – OEM – direct marketing to Ford Australia who provides an LPG option. Aftermarket – supplier to aftermarket refitters who supply the retail customer.

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Description of Property

Orbital has its principal facilities in Balcatta, Western Australia.

The Balcatta premises comprise two owned properties and one leased property. The leased property is occupied on a monthly tenancy basis. Rent under the lease is payable monthly in advance. Orbital is responsible for its proportionate costs of insurance, rates and taxes of the leased property.

The primary focus of the Balcatta facility is the provision of engineering services, the preparation of engines utilising OCP Technology for the production validation process and research and development and administration. Equipment includes engine development test cells, engine durability test cells, vehicle emission chassis dynamometer cells, outboard motor test tanks, a personal water craft test tank, robot driven vehicle mileage accumulation chassis dynamometers, and an environmental test cell (incorporating both an engine and vehicle test cell). Other facilities include a comprehensive electronics laboratory, extensive emissions measuring equipment and a specialised computer system. The computer system supports a range of complex and data intensive engineering requirements, including computer-aided design, manufacturing and engineering programs, combustion analysis and fluid mechanics.

The Balcatta facility also includes a number of fuel systems laboratories with high speed transient fuelling analysis equipment and environmental and durability test equipment.

Under the terms of Orbital’s loan facilities with Westpac Banking Corporation and the State Government of Western Australia, the assets of Orbital, including its plant and equipment (but excluding patents, licences and technologies), have been pledged to secure the borrowings under such facilities.

Government Regulation

Orbital Corporation Limited is a company registered in Australia. Companies in Australia are regulated by the Australian Securities and Investments Commission (“ASIC”) and are governed by the Corporations Act 2001 (Cwth).

Events After the End of the Financial Year

There has not arisen in the interval between the end of the Company’s financial year and the date of this report, any item, transaction or event of a material and unusual nature that is likely to significantly affect the operations of the consolidated entity, the results of those operations or the state of affairs of the consolidated entity for the year ended June 30, 2008.

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ITEM 5. OPERATING AND FINANCIAL REVIEW AND PROSPECTS

General

During the 2008 fiscal year Orbital’s revenues were generated from contracts for engineering services, including engine development programs, licensing and licensing related agreements for OCP Technology. In addition Orbital equity accounted its 50% share in Synerject LLC’s result.

Because of the timing of recognition of fees due under Orbital’s license agreements, Orbital’s financial results have varied from period to period in the past and are expected to continue to experience such fluctuations in the future.

Unless otherwise indicated, all financial information in the following discussion is derived from Orbital’s Consolidated Financial Statements, included herein, prepared in accordance with International Financial Reporting Standards which are called IFRS to distinguish from previous Australian GAAP.

Recent Developments

Appointment of New Chief Executive Officer

On May 20, 2008 the Company announced the appointment of Mr Terry Stinson as the Chief Executive Officer and Managing Director from June 21, 2008. Mr Stinson replaced Dr Rodney Houston who resigned from the Company effective June 20, 2008.

Acquisition of Orbital Gas Products (OGP)

On June 26, 2008, Orbital Australia Pty Limited acquired 100% of the business assets of Boral Alternative Fuel Systems a business based in Australia specialising in the assembly and supply of automotive LPG fuel systems. Business assets include inventory, plant & equipment and goodwill but excluded receivables and payables.

The total cost of the combination was $1.869 million (including $0.111 million acquisition costs) and comprised the payment of cash and transaction costs directly attributable to the combination. This was funded out of Orbital’s cash reserve.

Critical Accounting Policies and Estimates

Orbital’s consolidated financial statements have been prepared in accordance with Australian Accounting Standards. Orbital has adopted IFRS with effect from July 1, 2005. Our significant accounting policies are more fully described in Note 3 to our consolidated financial statements. The preparation of our consolidated financial statements requires management to make estimates and judgements that affect the reported amounts of assets, liabilities, revenues and expenses and the disclosure of contingent liabilities. We continually evaluate our estimates and judgements including those related to product warranties, trade debtors and deferred taxation. We base our estimates and judgements on historical experience and on various other assumptions we believe to be reasonable under the circumstances. This forms the basis for making judgements about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions.

In developing accounting policies, in addition to IFRS requirements, we also consider industry practice.

The critical accounting policies discussed below are applied consistently to all segments of Orbital. Management has discussed the development and selection of these critical accounting policies with the Audit Committee of our Board of Directors.

The financial statements of the equity accounted associate, Synerject LLC, are prepared under US GAAP and adjusted to reflect consistent accounting policies with Orbital.

The following are the critical accounting policies and estimates that have been adopted in preparing our IFRS financial statements:

Non-Interest-bearing borrowings

Included in non-current liabilities is an amount owing to the Government of Western Australia resulting from a loan of $19,000,000 made to the Company in 1989. Repayment of this facility will be in full on the date which is 25 years after the date on which the first advance is made (May 1989), or in any year prior to that date if the aggregate number of commercially

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produced OCP 2 stroke engines, calculated on a worldwide basis, exceeds 5,000,000, by equal annual payments, each of one fifth of the loan, on 1 July in the year commencing 1 July following the year in which such production is achieved. To date there have been no OCP 2-stroke engines produced on a commercial basis. No interest accrues on this facility until such time as the loan becomes payable.

As at July 1, 2005 the non-interest bearing loan from the Government of Western Australia was recognised initially at fair value and subsequently stated at amortised cost with any difference between amortised cost and repayment value being recognised in the income statement over the period of the borrowings on an effective interest basis.

Equity Accounting

The consolidated financial statements include the consolidated entity’s share of the total recognised gains and losses of a jointly-controlled entity on an equity accounted basis. For a number of years, the consolidated entity’s share of losses exceeded its interest in the joint venture, and during that period, the consolidated entity’s carrying amount was reduced to nil and recognition of further losses continued to the extent that the consolidated entity had incurred legal or constructive obligations on behalf of the jointly controlled entity. During the year ended June 30, 2006, the joint venture recouped past losses, the consolidated entity released its provision for losses to profit and loss account, and equity accounting has now been resumed. The consolidated entity’s share of the joint venture’s net profit or loss was recognised in the year and will continue until the date joint control ceases. Orbital’s share of other movements in reserves, post recommencing equity accounting, are recognised directly in consolidated reserves.

Research and Development Expenditure

Expenditure on research activities, undertaken with the prospect of gaining new scientific or technical knowledge and understanding, is recognised in the income statement as an expense as incurred.

Expenditure on development activities, whereby research findings are applied to a plan or design for the production of new or substantially improved products and processes, is capitalised if the product or process is technically and commercially feasible and the consolidated entity has sufficient resources to complete development. Orbital’s share of development expenditure capitalised (included in results of jointly controlled entity) in FY2008 is $0.810 million (2007 $0.643 million)

Patents, Licences and Technologies

Patents, licences and technology development and maintenance costs are expensed as incurred.

Expenditure capitalised and amortisation

Expenditure on intangible assets which are capitalised includes the cost of materials, direct labour and an appropriate proportion of overheads. Other development expenditure is recognised in the income statement as an expense as incurred. Capitalised expenditure is stated at cost less accumulated amortisation and impairment losses. Amortisation will be charged to the income statement on a straight-line basis over the estimated useful lives of intangible assets unless such lives are indefinite.

Impairment

The carrying amount of all assets other than inventories and deferred tax assets but including property, plant and equipment and development expenditure is reviewed at each reporting date to determine whether there is any indication of impairment. If any such indication exists, the asset’s recoverable amount is estimated. The recoverable amount is the greater of the asset’s fair value less costs to sell and value in use. In assessing value in use, the estimated future cash flows are discounted to their present value using a pre-tax discount rate that reflects current market assessments of the time value of money and the risks specific to the asset.

Allowance for impairment loss of Trade Debtors

Allowance for impairment loss of trade debtors is estimated based on an analysis of trade debtors exceeding agreed payment terms and the likelihood of collection having regard to recent payment histories, subsequent cash receipts and direct correspondence with the relevant customers. We believe that we adequately manage our credit risk through our evaluation process, credit policies and credit control and collection procedures. However, losses on amounts receivable from our largest customers could be material to our results of operations. Allowance for impairment loss amounted to A$0.428 million at June 30, 2008 (A$0.049 million at June 30, 2007), with a bad debts write-off for the year of A$Nil (2007: A$Nil).

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Refer to “Results of Operations Fiscal 2008 Compared with Fiscal 2007” below for further explanation of the above expenses.

Income Tax

(i) Current income tax expense and liability

Income tax on the profit or loss for the year presented comprises current and deferred tax. Income tax is recognised in the income statement except to the extent that it relates to items recognised directly in equity, in which case it is recognised in equity.

Current tax is the expected tax payable on the taxable income for the year, using tax rates enacted or substantially enacted at the balance sheet date, and any adjustment to tax payable in respect of previous years.

(ii) Deferred income tax expense and liability

Deferred tax is provided using the balance sheet liability method, providing for temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for taxation purposes. The amount of deferred tax provided is based on the expected manner of realisation or settlement of the carrying amount of assets and liabilities, using tax rates enacted or substantively enacted at the balance sheet date.

A deferred tax asset is recognised only to the extent that it is probable that future taxable profits will be available against which the asset can be utilised. Deferred tax assets are reduced to the extent that it is no longer probable that the related tax benefit will be realised.

(iii) Tax Consolidation

The Company and its wholly-owned Australian resident entities have formed a tax-consolidated group with effect from 1 July 2002 and are therefore taxed as a single entity from that date. The head entity within the tax-consolidated group is Orbital Corporation Limited.

The head entity and the controlled entities in the tax consolidated group continue to account for their own current and deferred tax amounts. The Group has applied the group allocation approach in determining the appropriate amount of current taxes and deferred taxes to allocate to members of the tax consolidated group.

Any current tax liabilities (or assets) and deferred tax assets arising from unused tax losses of the subsidiaries is assumed by the head entity in the tax-consolidated group and are recognised as amounts payable (receivable) to (from) other entities in the tax-consolidated group in conjunction with any tax funding arrangement amounts. Any difference between these amounts is recognised by the Company as an equity contribution or distribution.

The Company recognises deferred tax assets arising from unused tax losses of the tax-consolidated group to the extent that it is probable that future taxable profits of the tax-consolidated group will be available against which the asset can be utilised.

Any subsequent period adjustments to deferred tax assets arising from unused tax losses as a result of revised assessments of the probability of recoverability is recognised by the head entity only.

Deferred taxation

We recognise a deferred tax asset in our balance sheet only where we determine that it is probable that it will be recovered. A portion of the deferred tax asset recorded in our balance sheet relates to current or prior period tax losses where management considers that it is more likely than not that we will recover the benefit of those tax losses in future periods through the generation of sufficient future taxable profits. Our assumptions in relation to the generation of sufficient future taxable profits depend on our estimates of future taxable profits, which are estimated based on forecasts of engineering services income, licence and royalty receipts and Synerject’s business plans. These estimates are subject to risk and uncertainty, hence there is a possibility that changes in circumstances will alter the projections, which may impact the recoverability of the deferred tax asset recorded in our balance sheet and those tax losses currently provided as not recoverable. In such circumstances, some or all of the carrying value of the deferred tax asset may require provisioning and we would charge the expense to the profit and loss account, and conversely, some or all of the amounts provided as not recoverable may be reversed and we would credit the benefit to the profit and loss account.

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At June 30, 2008, our deferred tax asset included A$5.494 million (A$6.082 million at June 30, 2007), in relation to prior period tax losses.

Temporary differences

Temporary taxation differences, arising due to timing differences between the periods in which transactions are recognised for accounting purposes differing to the periods in which those transactions are recognised for income taxation purposes, of the Company and its Australian resident controlled entities decreased during fiscal 2008 by A$0.184 million to A$9.263 million at June 30, 2008 from A$9.447 million at June 30, 2007. A$6.446 million of the temporary difference relates to a provision for capital loss on an investment.

Carry forward tax losses

Australia

Tax carry forward losses of the Company and its Australian resident controlled entities increased during fiscal 2008 by A$1.677 million to A$54.310 million at June 30, 2008 from A$52.633 million at June 30, 2007.

Australian income tax carry forward losses do not expire and can be carried forward indefinitely subject to:

i) the Company and/or its controlled entities continuing to comply with the conditions for deductibility imposed by the law; and

ii) the companies being able to satisfy the tests as set out in the new taxation consolidations legislation recently enacted in Australia, which provides further tests in relation to transferring losses to a consolidated group and recouping losses within the group; and

iii) no changes in tax legislation adversely affecting the relevant company and/or the consolidated entity in realizing the benefit.

Potential future income tax benefits in Australia have not been recognised as assets at June 30, 2008 because it is not probable that future profits will be available against which the consolidated entity can utilise the losses and timing differences.

For the consolidated entity to fully realize its potential Australian future income tax benefits it will need to generate future Australian taxable income of approximately A$54.310 million and be in a position to utilize the taxable income against the benefits in the Company and the controlled entities retaining those benefits in accordance with the consolidations legislation.

United States of America

Tax carry forward losses of approximately A$50.422 million (US$48.778 million) (2007: A$59.758 million (US$50.800 million)) are available to certain controlled entities in the United States. A deferred tax asset of A$5.494 million (US$5.315 million) (2007: A$6.082 million, US$5.17 million) has been recognized as an asset as it is probable that future profits will be available against which the consolidated entity can utilise the losses.

Under the tax laws of the United States, tax losses that cannot be fully utilized for tax purposes during the current year may, subject to some statutory limitations, be carried forward to reduce taxable income in future years. At June 30, 2008, the US$48.778 million of tax carry forward losses available expires between the years 2010 and 2024.

For the controlled entities in the United States to realize their potential United States future income tax benefits they will need to generate future taxable income of approximately US$48.778 million. Approximately US$5.24 million of taxable income will be required prior to 2010 when the first portion of the benefit is due to expire.

Based upon the level of historical taxable income and current projections for future taxable income over the periods in which the tax carry forward losses are deductible in both Australia and the United States, management are only in a position to state that it is probable that benefits totalling A$5.494 million in respect of carry forward losses will be realised in full.

The deferred tax asset recognised as at June 30 each year represents management’s assessment of the amount of carry forward losses that it is probable will be deductable in the following five years. The movement in the recognised deferred tax asset from June 30, 2007 to June 30, 2008 is the result of the movement of the assessment period and also updates to future forecast results.

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Results of Operations Fiscal 2008 Compared with Fiscal 2007

Orbital’s net profit after tax was A$0.469 million for the year ended June 30, 2008 compared to a net profit of A$1.333 million for the year ended June 30, 2007.

Revenue from trading activities in fiscal 2008 as detailed in note 6 to the Consolidated Financial Statements decreased as compared to fiscal 2007 by 2% to A$14.939 million:

• Engineering services income decreased 7% (A$0.833 million) to A$11.681 million, reflecting the downturn in the general market and the stronger Australian dollar. In particular engineering revenue from North American customers declined by $2.4 million (45%) as a result of tough economic conditions in the USA. Significant programs during the year included the second National In-Service Emissions Study for the Commonwealth Government through the Roads and Traffic Authority of NSW and a health impact study for E5-E10 fuel.

• Licence and Royalty income increased by 17% to A$2.684 million due mainly to an increase in licence fees offset by the impact of the appreciation of the Australian dollar against the United States dollar over the fiscal year. Royalty volumes were steady year on year.

Other income decreased by 5% to A$0.372 million compared to fiscal 2007 (A$0.390 million) primarily due to reduced system warranty credits, offset by an insurance claim for water damage.

Total costs and expenses (excluding share of net profit of equity accounted investee, Synerject LLC) increased 0.4% to A$17.644 million in fiscal 2008 from A$17.568 million in fiscal 2007. The net increase was due to the following:

• Total employee expenses increased by 4% to A$9.812 million due to inflationary pressures on remuneration levels in Western Australia.

• Depreciation and amortisation increased by 27% to A$1.272 million primarily due to accelerated depreciation on a group of specialised testing equipment.

• Engineering consumables and contractor expenses decreased by 44% to A$0.924 million reflecting the decreased use of external contractors and lower requirement of project consumables during the year reflecting reduced engineering activity.

• Travel and accommodation expenses increased by 3% to A$1.013 million as a result of increased overseas corporate travel.

• Communication and computing expenses remained steady at A$0.649 million.

• Patent costs decreased by 21% to A$0.404 million from A$0.509 million as a result of the continuing review and analysis of each patent filing in the Company’s intellectual property portfolio having regard to the Company’s strategic intellectual property requirements.

• Insurance, audit, compliance and listing costs have increased by 7% to A$1.205 million from A$1.124 million mainly as a result of increased compliance requirements for SEC registrants (Sarbanes Oxley section 404), offset by reduced insurance costs.

• Finance costs have increased by A$0.070 million to A$0.886 million as a result of the accretion of the commitment to Continental to maintain the 50% interest in Synerject and the fair value amortisation of the interest free A$19 million loan from the Western Australian Government.

• Other expenses have increased by 4% to A$1.479 million as a result increased foreign exchange losses and an increased allowance for impairment loss for trade receivables of A$0.383, offset by the settlement of the R&D Syndicate dispute with Coles Myer Ltd (A$0.582 million) in Fiscal 2007.

Orbital’s share of Synerject’s net profit decreased by 25% to A$2.357 million in fiscal 2008 from A$3.157 million in fiscal 2007. Synerject’s revenue increased by 2% to US$81.020 million with increases across a number of customers and products but offset (in general) by the difficult economic conditions experienced in the North American marine market. Development expenses of A$0.810 million incurred by Synerject have been capitalised in Orbital’s equity accounted results (fiscal 2007 A$0.643 million) in accordance with IFRS. The establishment of a manufacturing facility in Changchun, China with an engineering support base in Chongqing and low initial sales volumes has resulted in a loss of US$2 million for the year, including the costs of the factory and employees in China. Orbital’s equity accounted share of the Synerject result was adversely affected by $0.4 million compared to FY2007 due to the strong Australian dollar. Details of Synerject’s operations and results are contained in Synerject’s Consolidated Financial Statements (refer Item 19 – Exhibit (b)) included herein.

The income tax benefit for fiscal 2008 was A$0.445 million, being primarily net withholding tax recouped and recognised Deferred Tax Asset. In fiscal 2007 Orbital recognised benefits from tax losses not previously brought to account of A$0.358 million which, after expensing withholding taxes resulted in a net tax benefit of A$0.098 million.

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Inflation has had a minimal effect on Orbital’s results of operations in fiscal 2008 compared to fiscal 2007.

As outlined on page 30 the investment and on-going results of Synerject (as reported by Orbital) will continue to be susceptible to changes in the foreign currency exchange rates between the Australian and US Dollar.

Results of Operations Fiscal 2007 Compared with Fiscal 2006

Orbital’s net profit after tax was A$1.333 million for the year ended June 30, 2007 compared to a net profit of A$0.515 million for the year ended June 30, 2006.

Revenue from trading activities in fiscal 2007 as detailed in note 5 to the Consolidated Financial Statements increased as compared to fiscal 2006 by 32% to A$15.198 million:

• Engineering services income increased 45% (A$3.869 million) to A$12.514 million due to increased demand for the application and development of Orbital technology including programs in the area of spark ignited heavy fuel and new gaseous applications covering both LPG and CNG DI applications. The increased demand eminated mainly from customers in North America and India. This was offset by decreased demand in non OCP advanced powertrain applications primarily from Australian customers.

• Licence and Royalty income decreased by 4% to A$2.294 million due mainly to the appreciation of the Australian dollar against the United States dollar over the fiscal year.

Other income decreased by 19% to A$0.390 million compared to fiscal 2006 (A$0.480 million) primarily due to reduced system warranty credits.

Total costs and expenses (excluding share of net profit of equity accounted investee, Synerject LLC) increased 14% to A$16.683 million in fiscal 2007 from A$14.643 million in fiscal 2006. The net increase was due to the following:

• Total employee expenses increased by 14% to A$9.428 million due to increased engineering and operating staff numbers required to provide the increased engineering services noted above.

• Depreciation and amortisation decreased by 11% to A$1.001 million primarily due to fully depreciated testing facilities and equipment continuing in working order and therefore not requiring replacement capital expenditure and the rationalisation of operations in recent years.

• Engineering consumables and contractor expenses increased by 53% to A$1.641 million reflecting the increased engineering services noted above.

• Travel and accommodation expenses decreased by 3% to A$0.980 million as a result of increased overseas engineering project activity offset by reduced corporate travel.

• Communication and computing expenses decreased by 3% to A$0.647 million as a result of reduced staff numbers and continued renegotiation of contracts with service providers.

• Patent costs increased by 10% to A$0.509million from A$0.462 million as a result of the continuing review and analysis of each patent filing in the Company’s intellectual property portfolio having regard to the Company’s strategic intellectual property requirements.

• Insurance, audit, compliance and listing costs have decreased by 1% to A$1.206 million from A$1.224 million partly as a result of increased auditor’s remuneration due to additional audit and compliance requirements for SEC registrants and increased legal fees arising as a result of the review of research and development syndication contractual arrangements entered into in 1995 and 1996, offset by reduced insurance costs.

• Finance costs have increased by A$0.262 million to A$0.884 million as a result of the accretion of the commitment to Siemens VDO to maintain the 50% interest in Synerject and the fair value amortisation of the interest free A$19 million loan from the West Australian Government.

• Other expenses have increased by 61% to A$1.272 million as a result of the settlement of the R&D Syndicate dispute with Coles Myer Ltd (A$0.582 million,. refer note 25.2 of the Consolidated Financial Statements)

Orbital’s share of Synerject’s net profit decreased by 22% to A$3.228 million from A$4.135 million in fiscal 2006. Synerject’s revenue increased by 38% to US$79.627 million primarily as a result of the acquisition in March 2006 of a business which supplies fuel systems and components for outboard marine engines. Development expenses of A$0.631 million incurred by Synerject have been capitalised in Orbital’s equity accounted results (fiscal 2006 A$1.649 million) in accordance with AIFRS. Details of Synerject’s operations and results are contained in Synerject’s Consolidated Financial Statements (refer Item 19 – Exhibit (b)) included herein.

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The income tax benefit for fiscal 2007 was A$0.098 million, being primarily recognised Deferred Tax Asset offset by withholding taxes on royalties and license fees. In fiscal 2006 Orbital recognised benefits from tax losses not previously brought to account of A$0.386 million which, after expensing withholding taxes resulted in a net tax expense of A$0.218 million.

Inflation has had a minimal effect on Orbital’s results of operations in fiscal 2007 compared to fiscal 2006.

As outlined on page 29 the investment and on-going results of Synerject (as reported by Orbital) will continue to be susceptible to changes in the foreign currency exchange rates between the Australian and US Dollar.

Liquidity and Capital Resources

As at June 30, 2008, Orbital’s cash balance was A$8.804 million compared to A$11.287 million at June 30, 2007 and A$3.325 million at June 30, 2006. At November 30, 2008 the cash balance was A$12.243 million. In Orbital’s opinion, the working capital is sufficient for the Group’s present requirements.

For fiscal 2008 Orbital recorded a net cash outflow from operations of A$0.885 million compared to cash outflows of A$0.182 million in fiscal 2007 and A$1.868 million in fiscal 2006. The cash outflow in fiscal 2008 resulted from cash flow used in operating activities of A$0.057 million plus increased working capital requirements of A$0.828. This compares with net cash used by operating activities in fiscal 2007 of A$0.250 million (fiscal 2006: A$2,159 million) plus working capital sources of A$0.68 million (fiscal 2005: working capital sources A$0.291 million). Synerject’s equity accounted result is non cash and therefore has no impact on operating cash flow in either fiscal 2008 or fiscal 2007 (however Synerject paid a dividend to Orbital in FY2008).

Research and development expenditures were A$1.147 million in fiscal 2008, A$1.022 million in fiscal 2007 and A$0.733 million in fiscal 2006. Research and development activity during fiscal years 2008, 2007 and 2006 was in developing new technology for advanced combustion systems, combustion of alternative fuels (liquid and gaseous) in internal combustion engines, and further developing the air-assist DI system for application on new products. A continued focus has been placed on R&D in fiscal years 2008 and 2007 with increased expenditure compared to previous years, and more attention to the publication and presentation of technical papers.

Orbital utilised net cash of A$1.630 million for investing activities in fiscal 2008 compared with A$0.644 million in fiscal 2007 and A$2.78 million in fiscal 2006. In fiscal 2006 Orbital invested US$2.0 million (A$2.735 million) additional share capital in Synerject LLC as part of replacement of Synerject’s financing arrangements (see below). The expenditure in fiscal 2008 consisted mainly of the acquisition of the Boral Alternative Fuel Systems business ($1.869 million) and the acquisition of engineering equipment and software. No advances to Synerject were required in fiscal 2008 or 2007. Synerject paid Orbital a dividend of $0.958 million (US$0.84 million) in fiscal 2008 ($nil in fiscal 2007 and 2006).

Orbital raised A$8.792 million (after transaction costs) through a share placement and a share purchase plan in fiscal 2007. Orbital did not have any other cash flow requirements for financing activities in fiscal 2007.

In May 1989, the Government of Western Australia provided Orbital with a loan facility totalling A$19,000,000 under the terms of a “Development Agreement”. As at June 30, 2008 this facility was fully utilised by Orbital. Repayment of this facility is due:

• in full on the date which is 25 years after the date on which the first advance was made (May 1989); or

• if in any year prior to that date the aggregate number of commercially produced OCP 2 stroke engines, calculated on a worldwide basis, exceeds 5,000,000, by equal annual payments, each of one fifth of the loan, on 1 July in each year commencing 1 July following the year in which such production is achieved. To date there have been no OCP 2-stroke engines produced on a commercial basis.

Interest is not payable on this facility until such time as the loan becomes payable, when interest will begin to accrue at the overdraft rate charged by the Commonwealth Bank of Australia on overdrafts in excess of A$100,000.

Orbital also has standby arrangements with Westpac Banking Corporation to provide support facilities of A$0.823 million, of which A$0.073 million was drawn down at June 30, 2008. At June 30, 2007 available support facilities totalled A$0.808 million, of which A$0.046 million was drawn down.

Orbital had no capital expenditure contracted but not provided for as at June 30, 2008. In July 2008 the Group received funding of A$2.76 million from the Commonwealth of Australia through the Alternative Fuels Conversion Program administered by the

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Department of the Environment, Water, Heritage and the Arts towards the construction of a heavy duty engine test facility. The total construction costs are estimated at A$3.56 million. The Group will fund the maintenance and operation of the facility until at least financial year 2014/2015 and provide the Commonwealth with preferential access to the facility.

The government grant will be recognised as income over the periods and in the proportions in which depreciation on the heavy duty engine test facility is charged.

Capital Expenditure

The Company has budgeted capital expenditures of A$1.348 million for fiscal year 2009 including its contribution to the construction of the heavy duty engine testing facility noted above. Funds for such expenditure will be sourced internally. In the event of a delay or a reduction in capital expenditure during fiscal 2009 the Company would still have sufficient plant, equipment and other facilities to maintain operating levels in line with previous years and would also continue to have significant available capacity within its testing facilities. There are no long-term capital commitments by the Company.

The Company has recorded a liability for the deferred settlement of the anticipated payment to Continental of US$4 million (see note 20 of the Consolidated Financial Statements).

Orbital’s Jointly Controlled Entity, Synerject LLC

Net cash provided by Synerject’s operating activities in fiscal 2008 was US$2.692 million and fiscal 2007 was US$2.604 million. In June 2006 Synerject negotiated a 4 year term bank loan of $8.0 million which, together with additional capital contributions of US$2 million from each member, replaced loan arrangements which were due to mature in September 2006. In addition Synerject has available a US$3.0 million line of credit to be drawn as and when required maturing January 31 2009. At June 30, 2008 Synerject had drawn down $1.275 million under this line of credit. Synerject’s long term loan repayment commitments in fiscal 2009 are approximately US$2.0569 million (actual paid fiscal 2008 US$1.909 million) and it is expected that Synerject will fund these repayments out of operating cash surpluses during the year. Synerject’s cash at bank at June 30, 2008 was US$2.614 million (2007 US$4.324 million) and total debt outstanding (including the line of credit) at June 30, 2008 was US$5.736 million (June 2007 US$7.520 million). Member guarantees are not required to support Synerject’s financing arrangements.

Synerject uses an interest rate swap agreement to limit exposure to changing interest rates on its variable rate note payable. Interest rate differentials to be paid or received as a result of the swap agreement are accrued and recognised as an adjustment of interest expense related to the associated debt.

Trend Information

We anticipate that royalty earnings will be influenced by the downturn of the North American marine market. Engineering services revenue can be cyclical in nature and the order book (thus future revenue and cash flows) at June 30, 2008 was $5.0 million compared to $7.0 million at December 31, 2007. The Synerject result will be influenced by the timing of the launch of new products in China and India and the downturn in the North American marine market. The market for professional engineering services staff has been more competitive, causing a upward trend in labour costs over the past 3 years.

Off-Balance Sheet Arrangements

Synerject Loan Guarantee Commitments

Prior to July 2006 Orbital guaranteed 50% of the borrowings by its related business undertaking, Synerject LLC, the joint venture with Siemens-VDO Automotive. The guarantee was entered into in 1997, at the time of formation of Synerject, to enable it to obtain loan funds for its trading operations.

As noted above, in June 2006 Synerject negotiated new financing arrangements to replace the loan from Siemens-VDO. The new loan is secured by Synerject assets. There is no guarantee required from Orbital for the new financing arrangements and no obligations remaining under the Siemens-VDO line of credit.

Details of Synerject’s operations and results are contained above in this Annual Report and in Synerject’s Consolidated Financial Statements (refer Item 19 – Exhibit (b)) included herein.

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Inflation

Orbital’s operating costs are subject to the effects of inflation, and under the terms of Orbital’s license agreements, certain fees and royalty payments are, or will be, indexed to inflation, generally based on the US Producers Price Index for Finished Goods. In general, inflation has had minimal effect on Orbital’s results of operations during the last two fiscal years.

Market Exposures

Refer to Item 11. – “Qualitative and Quantitative Disclosures About Market Risk—Market Exposures” included herein.

Interest rate sensitivity

The table below provides information about Orbital’s financial instruments that are sensitive to changes in interest rates as at June 30.

Financial Instruments	A$’000		Weighted Average Interest rate %
	2008	2007	2008	2007
Cash – Floating (and fixed less than 6 months)	8,804	11,287	3.21	6.11

At June 30, 2008 and June 30, 2007 Orbital did not have any interest rate sensitive derivative instruments.

Foreign currency exchange sensitivity

The functional currency of the Company is Australian Dollars.

The table below provides information about Orbital’s derivative and other financial instruments that are sensitive to changes in foreign currency fluctuations as at June 30.

Financial Instruments	Fair Value A$’000		Weighted Average Exchange Rate A$
	2008	2007	2008	2007
Cash held in United States Dollars	109	268	0.9674	0.8501
Cash held in European currency units	62	49	0.6175	0.6379
Receivables in United States Dollars	952	512	0.9674	0.8501
Receivables in European currency units	13	23	0.6175	0.6379
Payables in United States Dollars	360	4,495	0.9674	0.8501

The Company’s equity accounted jointly controlled entity has a functional currency of United States dollars. The table below provides information about Orbital’s net investment in equity accounted jointly controlled entity which is sensitive to changes in foreign currency fluctuations as at June 30.

Investment in equity accounted investee	Carrying Value A$’000		Weighted Average Exchange Rate A$
	2008	2007	2008	2007
Synerject LLC	13,109	12,974	0.9674	0.8501

At June 30, 2008 Orbital did not have any foreign currency sensitive derivative instruments.

At June 30, 2007 Orbital had foreign currency exchange sensitive derivative instruments totalling US$0.500m (A$0.588m).

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Details of Orbital’s foreign currency translation exposure as at June 30, 2008, where movements on re-translation in future periods will be recognized in net profit / (loss) are as follows:

	Foreign Currency Amount	Translated Exchange Rate	A$ Equivalent
Receivables	US$0.546 m	0.9674	564,515
Receivables	Euro 0.008 m	0.6175	12,714

Maturity Profile of Commercial Commitments

	At June 30, 2008 Expected Maturity or Expiry Date
Obligations (A$’000s)	2009		2010	2011	2012	2014		Total	Fair Value
Operating Leases	56		9	6	—	—		71	71
Long –Term Debt (1)	4,135		—	—	—	19,000		23,135	18,286
Average Interest Rate	0	%				0	%
Total	4,191		9	6	—	19,000		23,206	18,357

(1) Fair value has been calculated based on discounted future cash flows at the 10-year bond rate. Refer also Item 5 – “Liquidity and Capital Resources.”

Synerject LLC was restructured and refinanced during fiscal year 2003. As part of the restructure, Synerject LLC acquired, by way of capital contributions from each joint venturer, the operations of Orbital’s marine and recreation system sales business and Continental’s non-automotive systems business. The actual performance of each of these contributed businesses in the 3 year period to June 30, 2006, compared to the planned performances, is to be reviewed to determine the optional adjustment (if any) to the percentage shareholdings of Orbital and Siemens VDO in Synerject LLC (the “recalculation”). The settlement of the arrangement has been deferred until June30, 2008.

The maximum change in shareholdings as a result of the above recalculation is 10% i.e. ownership percentages of 40:60.

There is an option for the joint venturer who has the majority shareholding as determined by the recalculation above, to call from the other shareholder (“minority shareholder”) the percentage of shares determined by the recalculation. The minority shareholder may dilute their shareholding or may choose to exercise an option to maintain the 50:50 ownership structure by either paying the other joint venturer US$400,000 for each 1% interest of Synerject LLC or by injecting additional capital into Synerject LLC of US$800,000 for each 1% interest in Synerject LLC. The exercise date of these options was at the earliest July 1, 2006 but has been extended by two years to June 30, 2008.

The assessment of the contributed business performance will not be tabled until after June 30, 2008. However, the Directors anticipate that due to the stronger performance of the non-automotive systems business contributed by Continental, Continental will become entitled to the full 10% under the recalculation provisions. To maintain Orbital’s 50% interest in Synerject (being the Director’s current intent), a liability representing the present value of US$4 million has been recognised which will become payable in Fiscal 2009.

Orbital is now in discussions with Continental Corporation regarding the above to determine the change (if any) which may arise as a result of the options available above. Orbital has sufficient capital to exercise the option to maintain 50% ownership of Synerject should it so choose.

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ITEM 6. DIRECTORS, SENIOR MANAGEMENT AND EMPLOYEES

Directors and Senior Management

The business of Orbital is managed by a board of directors which, in accordance with the company’s Constitution, may be comprised of no fewer than three, nor more than nine members. The present number of directors is four, one of whom is an executive director, as set out below.

On August 14, 2007 the Company announced that Mr Don Bourke the Chairman of the Board of Directors of Orbital had passed away. On August 22, 2007 the Company announced the appointment of Mr William Peter Day as a Director and Chairman of Orbital.

On March 11, 2008 the Company announced the appointment of Dr Mervyn Jones and Dr Vijoleta Braach-Maksvytis as Non-Executive Directors effective March 31, 2008.

On March 20, 2008 the Company announced that Managing Director and Chief Executive officer, Dr Rodney Houston was to resign from the Company. On May 20, 2008 the Company announced the appointment of Mr Terry Stinson as the Managing Director and Chief Executive Officer effective June 21, 2008.

On July 23, 2008 the Company announced the retirement of Mr John Marshall as a Non-Executive Director.

Directors of Orbital are classified as either executive or non-executive directors, with the former being those directors engaged in full-time employment by Orbital.

As at the date of this report, the directors of Orbital were as follows:

Name	Position	Initially Elected or Appointed to Board
William Peter Day	Non Executive Chairman (1)(2)	August 22, 2007
John Grahame Young	Non Executive Director (1) (2)	November 13, 1985
Mervyn Thomas Jones	Non Executive Director (1) (2)	March 31, 2008
Vijoleta Braach-Maksvytis	Non Executive Director (1) (2)	March 31, 2008
Terry Dewayne Stinson	Chief Executive Officer and Managing Director	June 21, 2008

(1) Member of Audit Committee

(2) Member of Human Resources, Remuneration and Nomination Committee

Qualifications and experience of each of the Directors are as follows:

MR WILLIAM PETER DAY, LLB (Hons), M Administration, FCPA, FCA (Aust & UK), FTIA, MAICD, age 58

Joined the Board and appointed Chairman in August 2007. Mr Day was most recently Chief Financial Officer of the global packaging group Amcor; he retired from that role on 31 December 2007. He has a diversified background in finance and general management in mining, manufacturing, food and financial services industries, as well as a number of public interest areas.

He has held senior executive and director positions with Bonlac Foods, Rio Tinto, CRA and Comalco including Chief Financial Officer at Commonwealth Aluminum Corporation (USA) and Managing Director, CRA Business Services in Australia.

He is a former Chairman of the Australian Accounting Standards Board, and was Deputy Chairman of the Australian Securities & Investments Commission. Mr Day is also a non executive director of Ansell Limited, SAI Global Limited, Multiple Sclerosis Limited (and related entities) and Financial Executives International (Australia) Pty Limited.

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MR JOHN GRAHAME YOUNG, LLB, FAICD age 64

Independent Non-Executive Director. Joined the Board in November 1985. Mr Young is a lawyer with more than 30 years experience in corporate, revenue and intellectual property law. He has been a director of Cape Bouvard Investments Pty Ltd since 1998. Mr Young chairs the Company’s Audit Committee.

DR MERVYN THOMAS JONES, B.Eng (Hons), Ph.D, DipBusStuds, CEng (UK), FIChemE (UK), MAICD, MIoD (NZ), age 60

Independent Non-Executive Director. Joined the Board in March 2008. Dr Jones has more than 35 years experience as a consulting engineer and as a senior executive. He has specific expertise in the development and management of organic business growth in the Asia Pacific region, as well as acquisition experience in both Australia and China. Dr Jones is also a director of a number of non listed and private companies.

DR VIJOLETA BRAACH-MAKSVYTIS, Bsc (Hons), Phd, MAICD age 50

Independent Non-Executive Director. Joined the Board in March 2008. Dr Braach-Maksvytis is an innovation strategist with more than 20 years experience in organisational change, formation of cross-sectoral and global partnerships, the commercialisation of technology, and intellectual property strategy. Previous roles include Head of the Office of the Chief Scientist of Australia, Science Executive and Director Global Development for CSIRO, and most recently, Deputy Vice Chancellor Innovation and Development at the University of Melbourne, where she is currently an advisor in the area of social innovation.

Dr Braach-Maksvytis pioneered nanotechnology in Australia and holds over 20 patents in the field, and is also a company director, on the advisory board of the Intellectual Property Research Institute of Australia, Commissioner for UNESCO, and Governor for Foundation for Development Cooperation.

MR TERRY DEWAYNE STINSON, BBA (Hons), age 50

Managing Director and Chief Executive Officer. Joined the Board on 21 June 2008. Mr Stinson has been a senior executive with Siemens VDO, Europe’s largest engineering conglomerate (recently purchased by Continental Corporation), with direct responsibility for sales in excess of US$300 million per annum in their Gasoline Systems, Fuel Systems and Fuel Components operations in the United States, Germany, Italy, China and support operations in every country where automobiles are manufactured. Mr Stinson has also served as a representative Director for Siemens VDO on the Synerject JV Board. Prior to that, he held the position of VP Manufacturing for Outboard Marine Corporation, a privately held $US1 billion multinational outboard marine propulsion and boat company.

Under an Executive Service Agreement, Mr Stinson’s total fixed remuneration (“TFR”) will be $350,000, with annual cash bonuses of up to 60% of the TFR payable on achievement of stringent performance targets to be set by the Board.

Mr Stinson will also participate in the Company’s performance based Executive Long Term Share Plan and the Performance Rights Plan.

Participation in the Executive Long Term Share Plan is subject to shareholders approval each year. The Executive Long Term Share Plan currently provides for the issue of shares based on the Company achieving a Total Shareholder Return, over a 3 year performance period, at or above the 50^th percentile of a peer group of companies.

Shareholders have approved Mr Stinson’s participation in the Performance Rights Plan under which Mr Stinson was awarded 11,500,000 performance rights. The performance rights have been granted in seven tranches, each tranche with a different specified share price target as set out below:

Tranche	Number of performance rights	Share price target
1	2,000,000	$	0.25
2	2,000,000	$	0.50
3	2,000,000	$	0.75
4	2,000,000	$	1.00
5	1,250,000	$	2.00
6	1,250,000	$	3.00
7	1,000,000	$	5.00

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Mr Stinson will only be permitted to exercise a performance right if:

• the Company attains the specified share price target (see table above) within eight years from the date of grant of the performance right; and

• the specified share price target is also achieved at the end of two years from the date the target is first achieved (“Vesting Date”) based on the Company’s average closing share price over a 90 day period up to and including the Vesting Date.

The combined potential annual value of the Executive Long Term Share Plan and the Performance Rights Plan will be set at a maximum of 70% of the TFR.

The service agreement is for an indefinite period and may be terminated at any time by the Company on 12 months notice (other than for reasons of serious misconduct). Mr Stinson is required to provide three months notice of termination.

Details of each Director’s remuneration are shown below.

		Short Term				Post Employment	Share Based Payments
	Year	Salary and Director’s Fees $	Cash Bonuses $ (a)	Non- Monetary Benefits $	Total $	Employer Superannuation Contributions $	Employee Share Plans $ (b)(c)	Total $
Directors
Non-executive
W Peter Day	2008	88,080	—	—	88,080	7,273	—	95,353
Chairman (Non-executive)	2007	—	—	—	—	—	—	—
	2006	—	—	—	—	—	—	—
Donald W J Bourke	2008	11,120	—	—	11,120	1,001	—	12,121
Chairman (Non-executive)	2007	96,376	—	7,033	103,409	8,674	—	112,083
	2006	96,376	—	6,228	102,604	8,674	—	111,278
J Grahame Young	2008	52,358	—	—	52,358	4,712	—	57,070
Director (Non-executive)	2007	52,358	—	—	52,358	4,712	—	57,070
	2006	52,358	—	—	52,358	4,712	—	57,070
John R Marshall	2008	55,050	—	—	55,050	—	—	55,050
Director (Non-executive)	2007	55,050	—	—	55,050	—	—	55,050
	2006	55,050	—	—	55,050	—	—	55,050
Mervyn T Jones	2008	11,655	—	—	11,655	1,049	—	12,704
Director (Non-executive)	2007	—	—	—	—	—	—	—
	2006	—	—	—	—	—	—	—
Vijoleta Braach-Maksvytis	2008	11,655	—	—	11,655	1,049	—	12,704
Director (Non-executive)	2007	—	—	—	—	—	—	—
	2006	—	—	—	—	—	—	—
Executive
Rodney A Houston	2008	291,908	—	—	291,908	33,132	71,930	396,970
Director and Chief Executive Officer	2007	277,525	37,500	—	315,025	30,618	55,668	401,311
	2006	239,163	40,000	—	279,163	28,202	46,453	353,818
Terry D Stinson	2008	36,948	—	—	36,948	3,325	—	40,273
Director and Chief Executive Officer	2007	—	—	—	—	—	—	—
	2006	—	—	—	—	—	—	—
Peter C Cook	2008	—	—	—	—	—	—	—
Director and Chief Executive Officer	2007	—	—	—	—	—	—	—
	2006	109,915	—	—	109,915	13,190	—	123,105
Total Consolidated, all specified directors	2008	558,774	—	—	558,774	51,541	71,930	682,245
	2007	481,309	37,500	7,033	525,842	44,004	55,668	625,514
	2006	552,862	40,000	6,228	599,090	54,778	46,453	700,321

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Currently, senior management of Orbital who are not directors are as follows:

Name and Date of Commencement	Position and Experience
Geoff Paul Cathcart March 14, 1994	Director of Engineering and Operations. Dr. Cathcart has held a number of senior management positions within the engineering department. Dr. Cathcart has overall responsibility for the engineering and operations department.
Brian Anthony Fitzgerald February 22, 1982	Director, Corporate Business Development. Mr. Fitzgerald has held a number of senior management positions within the group. Mr. Fitzgerald has overall responsibility for acquisition and establishment of new businesses for Orbital. He is also responsible for Orbital Gas Products and is a Director of Synerject.
Keith Anthony Halliwell August 14, 2000	Chief Financial Officer and Company Secretary. Mr. Halliwell has 24 years international experience as a professional accountant. Prior to his appointment he was Chief Financial Officer of another listed public company in Australia.

Details of each Key Management Personnel’s remuneration are shown below.

		Short Term				Post Employment	Share Based Payments
	Year	Salary and Director’s Fees $	Cash Bonuses $ (a)	Non- Monetary Benefits $	Total $	Employer Superannuation Contributions $	Employee Share Plans $ (b)(c)	Total $
Key Management Personnel
Keith A Halliwell	2008	234,715	7,500	—	242,215	26,121	47,710	316,046
Chief Financial Officer & Company Secretary	2007	225,387	30,500	—	255,887	24,611	45,430	325,928
	2006	213,811	17,000	—	230,811	24,772	46,293	301,876
B Anthony Fitzgerald	2008	203,117	7,500	—	210,617	20,651	36,690	267,958
Director of Sales and Marketing	2007	191,813	23,600	—	215,413	18,426	35,753	269,592
	2006	183,527	15,000	—	198,527	17,257	37,070	252,854
Geoff P Cathcart	2008	175,600	7,500	—	183,100	15,918	21,247	220,265
Director of Engineering & Operations	2007	156,368	14,800	—	171,168	12,994	15,212	199,374
	2006	141,042	9,000	—	150,042	12,993	13,717	176,752
Total Consolidated, all Key Management Personnel	2008	613,432	22,500	—	635,932	62,690	105,647	804,269
	2007	573,568	68,900	—	642,468	56,031	96,395	794,894
	2006	538,380	41,000	—	579,380	55,022	97,080	731,482

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Compensation

Details of total remuneration of Directors and executive officers of the Company and the consolidated entity are as follows:

	2008	2007	2006
	$	$	$
Short-term employee benefits	1,194,706	1,168,310	1,178,470
Post-employment benefits	114,231	100,035	109,800
Equity compensation benefits	177,577	152,063	143,533
	1,486,514	1,420,408	1,431,803

For fiscal 2008 the aggregate amount of compensation paid and accrued to the directors and senior management of Orbital as a group, inclusive of retirement and share plans, was A$1.487 million.

All permanent employees of Orbital (including executive directors and officers) are entitled to become members of Orbital’s retirement plans. Such employees and Orbital contribute various percentages of gross salary and wages. For the fiscal year ended June 30, 2008 the aggregate amount of compensation paid or accrued by Orbital for the retirement plans of directors and officers totalled A$0.114 million.

Board Practices

The directors (excluding the Managing Director) are subject to retirement by rotation, with one-third retiring each year (or the number nearest to one-third of the number of directors if not a multiple of three), and may not continue to hold office without re-election after the third Annual General Meeting of shareholders following their last election by the shareholders. Eligible retiring directors may offer themselves for re-election by the shareholders. Directors may be appointed by the Board of Directors up to the total number permitted. Such directors hold office until the next Annual General Meeting of shareholders and may be re-elected by the shareholders at such meeting. The service agreement between the Company and the Chief Executive Officer provides for a cash payment equal to one year’s remuneration in the event of termination by the Company other than by reason of the Chief Executive Officer’s serious misconduct or material breach of the agreement. No other officer’s service contract provides for benefits to such person upon termination, other than in the event of redundancy. No retirement or termination benefits are payable to non-executive Directors.

Corporate Governance

The following outlines the main Corporate Governance practices of the Company that were in place throughout the financial year:

Board of Directors and its Committees

The Board’s primary role is to protect and enhance long-term shareholder value by providing strategic guidance to the Company and effective oversight of management.

To fulfil this role, the Board is responsible for the overall corporate governance of the consolidated entity including its strategic direction, establishing goals for management and monitoring the achievement of these goals. The Board is also responsible for reviewing and ratifying systems of risk management and internal compliance controls. Details of the Board’s charter are located on the Company’s website (www.orbitalcorp.com.au).

• Board Processes

To assist in the execution of its responsibilities, the Board has established a number of Board Committees including an Audit Committee, and a Human Resources, Remuneration and Nomination Committee. These committees have written mandates and operating procedures, which are reviewed on a regular basis. The effectiveness of each committee is also constantly monitored. The Board has also established a framework for the management of the consolidated entity including a system of internal control and the establishment of appropriate ethical standards.

The full Board currently holds six scheduled meetings each year, plus strategy meetings and any extraordinary meetings at such other times as may be necessary to address any specific significant matters that may arise.

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The agenda for meetings is prepared in conjunction with the Chairman, Managing Director and Company Secretary. Standing items include the managing director’s report, financial reports, strategic matters, governance and compliance. Submissions are circulated in advance. Executives are regularly involved in board discussions and directors have other opportunities, including visits to operations, for contact with a wider group of employees.

The Board conducts an annual review of its processes to ensure that it is able to carry out its functions in the most effective manner.

• Independent Professional Advice and Access to Company Information

Each Director has the right of access to all relevant Company information and to the Company's executives and, subject to prior consultation with the Chairman, may seek independent professional advice from a suitably qualified adviser at the Group’s expense. The director must consult with an advisor suitably qualified in the relevant field, and obtain the Chairman’s approval of the fee payable for the advice before proceeding with the consultation. A copy of the advice received by the director is made available to all other members of the board.

• Composition of the Board

The names and qualifications of the Directors of the Company in office at the date of this Report are detailed above.

The composition of the Board is determined using the following principles:

• A minimum of three directors, with a broad range of expertise;

• An independent non-executive director as Chairman;

• A majority of independent non-executive directors; and

• The role of Chief Executive Officer (CEO) and Chairman should not be exercised by the same individual.

An independent director is a non-executive director who:

• is not a substantial shareholder of the company or an officer of, or otherwise associated directly with, a substantial shareholder of the company;

• within the last three years has not been employed in an executive capacity by the company or another group member, or been a Director after ceasing to hold any such employment;

• within the last three years has not been a principal of a material professional adviser or a material consultant to the company or another group member, or an employee materially associated with the service provided;

• is not a material* supplier or customer of the company or other group member, or an officer of or otherwise associated directly or indirectly with a material supplier or customer;

• has no material* contractual relationship with the company or another group member other than as a Director of the company;

• has not served on the board for a period which could, or could reasonably be perceived to, materially interfere with the Director’s ability to act in the best interests of the company; and

• is free from any interest and any business or other relationship which could, or could reasonably be perceived to, materially interfere with the Director’s ability to act in the best interests of the company.

* No non-executive Director is a supplier to or customer of the consolidated entity, nor does any non-executive Director have a contractual relationship with the consolidated entity (other than as a Director of the Company) and therefore the Board has not had to consider any materiality threshold.

• Directors and Officers Dealing in Company Shares

The Company's policy with respect to Directors and Officers dealing in the Company's shares or options states that:

• Directors and Officers are prohibited from dealing in the Company's securities at any time when they possess information which, if publicly disclosed, would be likely to affect the market price of the Company's securities;

• Directors and Officers are prohibited from short term trading in the Company's securities;

• Directors must obtain the written approval of the Chairman before undertaking any transactions involving the Company's securities; and

• Directors and Officers are prohibited from undertaking transactions in the Company's securities during the period from one month prior to the proposed release of the Company's annual or half-year result until two days after that release.

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A copy of the policy is available on the Company’s website.

• Conflict of Interest

In accordance with the Corporations Act 2001 and the Company's constitution, Directors must keep the Board advised, on an ongoing basis, of any interest that could potentially conflict with those of the Company. Where the Board believes that a significant conflict exists the Director concerned must not be present at the meeting whilst the item is considered or vote on the matter. The Board has procedures in place to assist Directors to disclose potential conflicts of interest.

• Human Resources, Remuneration and Nomination Committee

The role of the Human Resources, Remuneration and Nomination Committee is to review and make recommendations to the Board on the remuneration packages and policies applicable to the Chief Executive Officer, senior executives and Directors themselves. It also plays a role in evaluation of the performance of the Chief Executive Officer and management succession planning. This role also includes responsibility for share schemes, incentive performance packages, superannuation entitlements, fringe benefits policies and professional indemnity and liability insurance policies. The Remuneration Committee obtains independent advice on the appropriateness of remuneration packages, given trends in comparative companies both locally and internationally.

The Committee also oversees the appointment and induction process for directors. It reviews the composition of the Board and makes recommendations on the appropriate skill mix, personal qualities, expertise and diversity. When a vacancy exists or there is a need for particular skills, the Committee, in consultation with the Board, determines the selection criteria based on the skills deemed necessary. Potential candidates are identified by the Committee with advice from an external consultant, where appropriate. The Board then appoints the most suitable candidate who must stand for election at the next general meeting of shareholders. The Nomination Committee is also responsible for the selection, appointment and succession planning process of the Company’s Chief Executive Officer.

Members of the Human Resources, Remuneration and Nomination Committee during the year were Mr W P Day (Chairman), Mr D W J Bourke (Chairman), Mr J G Young, Mr J R Marshall, Dr M T Jones and Dr V Braach-Maksvytis.

The Human Resources, Remuneration and Nomination Committee meet as and when required. The Committee has a documented charter, approved by the Board. The charter may be viewed on the Company’s website.

The performance of all Directors is reviewed by the Chairman each year. Directors whose performance is unsatisfactory are asked to retire.

Remuneration Report

• Principles of compensation

Remuneration is referred to as compensation throughout this report.

This Remuneration Report outlines the director and executive remuneration arrangements of the Group. For the purposes of this report Key Management Personnel (KMP) of the Group are defined as those persons having authority and responsibility for planning, directing and controlling the major activities of the Company and the Group, directly or indirectly, including any director (whether executive or otherwise) of the parent company, and the senior executives of the Group.

The Remuneration Committee reviews and makes recommendations to the Board on remuneration packages and policies applicable to directors, secretary and senior executives of the Company.

The performance of the Company depends upon the quality of its directors and executives. To prosper, the Company must attract, motivate and retain highly skilled directors and executives. To this end, the Company embodies the following principles in its remuneration framework:

• provide competitive rewards to attract high calibre executives;

• link executive rewards to shareholder value and company performance;

• have a significant portion of executive remuneration 'at risk'; and

• establish appropriate, demanding performance hurdles for variable executive remuneration.

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Data is obtained from independent surveys to ensure that compensation throughout the Group is set at market rates having regard to experience and performance. In this regard, formal performance appraisals are conducted at least annually for all employees. Compensation packages may include a mix of fixed compensation, performance-based compensation and equity-based compensation.

In addition to their salaries, the Group also provides non-cash benefits to its key management personnel.

Fixed compensation

Fixed compensation consists of base compensation (which is calculated on a total cost basis and includes any FBT charges related to employee benefits including motor vehicles), as well as employer contributions to superannuation funds.

Compensation levels are reviewed annually by the remuneration committee through a process that considers segment and overall performance of the Group. In addition, data from independent surveys is reviewed to ensure the directors’ and senior executives’ compensation is competitive in the market place. A senior executive’s compensation is also reviewed on promotion.

Performance-linked compensation

Performance linked compensation includes both short-term and long-term incentives and is designed to reward key management personnel for meeting or exceeding their financial and personal objectives. The short-term incentive (STI) is an “at risk” bonus provided in the form of cash, while the long-term incentive (LTI) is provided as ordinary shares of Orbital Corporation Limited under the rules of the Executive Long Term Share Plan.

Short-term Incentive

Executive directors and senior executives may receive bonuses based on the achievement of goals related to the performance of the Group, including a combination of sales, earnings before interest and tax (EBIT) and cash and individual key performance indicators (KPI’s). These measures are chosen as they directly align the individual’s reward to the Group’s strategy and performance. Achievement of budgeted goals may result in bonuses of between 5 – 20% of salary. No bonus is awarded where performance falls below a minimum.

Long-term Incentive

Executives may also be offered shares in the Company’s Executive Long Term Share Plan under which offered shares will be granted subject to the satisfaction of performance conditions over a 3 year period or subject to Board discretion for other qualifying reasons. The performance conditions, which are based on the relative ranking of the Total Shareholder Return (“TSR”) of the Company to a group of selected peers, apply to determine the number of shares (if any) to be granted to the Executives.

TSR is the percentage increase in a company’s share price plus reinvested dividends over a given period and reflects the increase in value delivered to shareholders over that period. The peer group to which the Company’s TSR will be compared will comprise the 50 smallest companies, other than resource companies and property and investment trust companies, within the S&P / ASX 300 Index. These companies have a similar market capitalisation to the Company. The TSR performance criterion was chosen as it is widely accepted as one of the best indicators of shareholder wealth creation as it includes share price growth, dividends and other capital adjustments. In addition, this criterion provides a readily obtained objective means of measuring the Group’s performance against its peer group.

The Company’s TSR ranking at the end of the Performance Period, when compared to the TSR of the peer group will determine the percentage of shares originally offered which will be granted to the Executive.

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The following table sets out the relevant percentages based on various percentile rankings of the Company:

Company Performance (TSR Ranking)	% of offered shares issued to each executive
Up to the 50th percentile	0%
At or above the 50th percentile but below the 75th percentile	50% to 99% (on a straight line basis)
At or above the 75th percentile but below the 90th percentile	100%
At or above the 90th percentile	125%

No shares will be granted unless the Company’s TSR is at or above the 50th percentile. In 2008, 1,200,000 shares were issued in accordance with the terms of the plan. No shares were issued in the 2007 financial year as the company’s performance against its peer group ranked it below the 50th percentile.

At the Company’s Annual General Meetings in October 2004 and October 2008, shareholders approved the above plan in relation to the ongoing remuneration of Executive Directors and senior executives.

Executive Directors and senior executives (together with all other eligible employees) are each offered shares in the Company, at no cost to the employees, to the value of $1,000 per annum under the terms of the Company’s Employee Share Plan. There are no performance conditions, but the plan is designed to align the interests of participating employees with those of shareholders. Participation of Executive Directors is subject to shareholder approval.

In considering the Group’s performance and benefits for shareholders wealth the Remuneration Committee has regard to the following indices in respect of the current financial year and the previous four financial years.

EBIT is considered in setting the STI as it is considered an important short term financial performance target. Dividends, changes in share price, and return of capital are included in the TSR calculation which is the performance criterion assessed for the LTI.

The STI/LTI were first introduced in 2001 for the 2001/02 financial year. An analysis of the remuneration and performance data since that time has revealed that performance targets in the STI plan have been met in the 2003 and 2004 years, when the company recorded significant improvement in its results and in 2006 and 2007 when the Company achieved strategic goals and positive EBIT. Performance targets under the LTI were met under the LTI for the first time since its inception in 2008 and as a result 1,200,000 shares were issued.

	2008		2007	2006		2005		2004
EBIT ($ Millions)	0.336		1.603	1.023		(2.320	)	2.881
Dividends paid	—		—	—		—		—
Change in share price ($)	(0.190	)	0.209	(0.014	)	(0.035	)	0.015
Return of capital	—		—	—		—		—

Service Agreements

The service contract for the Chief Executive Officer is unlimited in term, but capable of termination on 12 months notice by the Company. The Company has the right to terminate the contract immediately by making payment equal to 12 months pay in lieu of notice. The Chief Executive Officer has the right to terminate the contract on 3 months notice. The Chief Executive Officer has no entitlement to termination payment in the event of removal for misconduct.

Contractual arrangements between the Company and other senior executives are also unlimited in term and provide for termination on one month’s notice (or payment in lieu) in accordance with the Company’s standard conditions. On termination of employment, executive directors and senior executives are also entitled to receive their statutory entitlements of accrued annual and long service leave, together with any superannuation benefits.

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Non-executive Directors

Total remuneration for all non-executive Directors, last voted upon by shareholders at the 2001 Annual General Meeting, is not to exceed $400,000 per annum. When setting fees and other compensation for non-executive Directors, the Board seeks independent advice and applies Australian and international benchmarks. The Chairman’s base fee is $100,000 per annum, plus a further fee of $5,050 per annum for membership of the Audit Committee. Other non-executive Directors’ base fees are currently $50,000 per annum. An additional fee of $5,050 per annum is payable for membership (other than as Chairman) of the Audit Committee. The Chairman of that Committee receives an additional fee of $7,070 per annum.

Non-executive Directors do not receive performance related remuneration.

• Audit Committee

The role of the Audit Committee is to give the Board of Directors additional assurance regarding the quality and reliability of financial information prepared for use by the Board in determining accounting policies for inclusion in the financial report. The Committee has a documented charter, approved by the Board. The charter is available on the Company’s website. All members of the Committee must be independent, non-executive directors.

Members of the Audit Committee during the year were Mr J G Young (Chairman), Mr W P Day, Mr J R Marshall, Dr M T Jones and Dr V Braach-Maksvytis. The external auditors, Chief Executive Officer, Chief Financial Officer, Company Secretary and other financial and accounting staff are invited to Audit Committee meetings at the discretion of the Committee. The Chief Executive Officer and Chief Financial Officer declared in writing to the Board that the Company’s financial reports for the year ended June 30, 2008 present a true and fair view, in all material respects, of the Company’s financial condition and operational results and are in accordance with relevant accounting standards. This statement is required annually.

The responsibilities of the Audit Committee include, liaising with external auditors and ensuring that the annual and half-year statutory audits/reviews are conducted in an effective manner; reviewing and ensuring management implement appropriate and prompt remedial action for any deficiencies identified; monitoring compliance with Australian and international taxation requirements, the Australian and United States corporations laws and Stock Exchange Listing Rules; and improving quality of the accounting function.

The Audit Committee reviews the performance of the external auditors on an annual basis and meets with them to discuss audit planning matters, statutory reporting and as required for any special reviews or investigations deemed necessary by the Board. The Audit Committee also assesses whether non-audit services provided by the external auditor are consistent with maintaining the external auditor’s independence and provides advice to the Board whether the provision of such services by the external auditor is compatible with the general standard of independence of auditors imposed by the Corporations Act 2001. The Audit Committee charter provides for rotation of the external audit partner every five years.

Risk Management

The Board oversees the establishment, implementation and review of the Company’s risk management systems, which have been established by management for assessing, monitoring and managing operational, financial reporting and compliance risks for the consolidated entity. Responsibility for establishing and maintaining effective risk management strategies rests with senior management, accountable to the Chief Executive Officer and the Audit Committee of the Board. The Audit Committee reviews the risk management and internal control structure implemented by management so as to obtain reasonable assurance that the consolidated entity’s assets are safeguarded and that reliable financial records are maintained. The Chief Executive Officer and Chief Financial Officer have declared, in writing to the Board, that they have evaluated the effectiveness of the company’s financial disclosure controls and procedures and have concluded that they are operating efficiently and effectively. Operational and other compliance risk management has also been reviewed and found to be operating efficiently and effectively. Details of the Company’s risk management policy are available on the Company’s website.

• Risk Profile

Risks to the consolidated entity arise from matters such as competitive technologies that may be developed, delays in government regulation, reduction in development and testing expenditure by the Company’s customers, the impact of exchange rate movements on royalty receipts, environmental issues, occupational safety and health and financial reporting.

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• Internal Control Framework

The Board recognises that no cost effective internal control system will preclude all errors and irregularities. The system is based upon written procedures, policies and guidelines, an organisational structure that provides an appropriate division of responsibility, and the careful selection and training of qualified personnel.

Established practices ensure:

• Capital expenditure commitments are subject to authority level approval procedures

• Financial exposures are controlled by the use of forward exchange contracts where appropriate

• Occupational safety and health issues are monitored by a management committee

• Financial reporting accuracy and compliance with regulatory requirements

• Compliance with environmental regulation

To ensure that its engineering services are of the highest standard, the consolidated entity has obtained ISO 9001 accreditation for research, design and development services to the world’s producers of powertrain and engine management systems and the provision of general engineering services.

Where risks, such as natural disasters, cannot be adequately mitigated using internal controls, those risks are transferred to third parties through insurance coverage to the extent considered appropriate.

Financial Reporting

The Chief Executive Officer and Chief Financial Officer are required to, at least annually, evaluate internal controls over financial reporting and disclose in writing to the Company’s Auditors and the Audit Committee:

1. All significant deficiencies and material weaknesses in the design or operation of internal controls over financial reporting which are reasonably likely to adversely affect the Company’s ability to record, process, summarise and report financial information; and

2. Any fraud, whether or not material, that involves management or other employees who have a significant role in the Company’s internal control over financial reporting. No such deficiencies, weaknesses or frauds have been detected.

Monthly financial results are reported against budgets approved by the Directors and revised forecasts for the year are prepared regularly.

Environmental Regulation

The consolidated entity holds a number of permits, licences and registrations for environmental regulation under both Australian Commonwealth and State legislation. These permits, licences and registrations are primarily for the storage of fuels and chemicals and the disposal of waste and are reviewed by the Company on an on-going basis. The Directors are not aware of any serious breaches during the period covered by this report.

Ethical Standards

All Directors, managers and employees are expected to act with the utmost integrity and objectivity, striving at all times to enhance the reputation and performance of the consolidated entity. Every employee has a nominated supervisor to whom they may refer any issues arising from their employment. The Board has approved a Code of Conduct, applicable to all Directors and employees of the consolidated entity, providing for the conduct of business in accordance with the highest ethical standards and sound corporate governance. The Code also incorporates the Company’s policy on trading in the Company’s securities. A Code of Ethics, relating to Accounting Practice and Financial Reporting, has also been adopted by the Board and applies specifically to the Chief Executive Officer, Chief Financial Officer and senior finance officers of the Company who influence financial performance. The Code of Ethics is complementary to the Code of Conduct, copies of both of which are available on the Company’s website.

Continuous Disclosure and Communication with Shareholders

The Board of Directors aims to ensure that shareholders are informed of all major developments affecting the consolidated entity's state of affairs. The Board has adopted a policy to identify matters that may have a material effect on the price of the Company’s securities and to notify the Australian Stock Exchange (“ASX”) as required.

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This policy on Release of Price Sensitive Information is overseen and coordinated by the Company Secretary. All directors, officers and members of the Company’s management committee are required to forward details of any potentially price sensitive information to the Company Secretary, who is also to be made aware, in advance, of proposed information disclosures (including information to be presented at private briefings) to enable consideration of the continuous disclosure requirements. Proposed announcements are to be approved by the Managing Director and either the Chairman or Company Secretary prior to release to the ASX. The Company Secretary is responsible for all communications with the ASX.

Information is communicated to shareholders as follows:

• The annual financial report is distributed to all shareholders (and to American Depositary Receipt (ADR) holders) on request in accordance with Corporation Act 2001 requirements and includes relevant information about the operations of the Group during the year, changes in the state of affairs of the Group and details of future developments, in addition to other disclosures required by the Corporations Act 2001 and US Securities Law;

• The half-yearly report contains summarised financial information and a review of the operations of the Group during the period. The half-year financial report is prepared in accordance with the requirements of Accounting Standards and the Corporations Act 2001 and is lodged with Australian and United States regulatory bodies and stock exchanges. Financial reports are sent to any shareholder or ADR holder who requests them; and

• Continuous disclosure of material information to the stock exchanges, media outlets and via the Company’s website. We encourage all shareholders to register email contact details on our website to enable concurrent electronic communication. All announcements made to market are placed on the Company’s website immediately after release to the Australian Stock Exchange.

The Board encourages participation of shareholders at the Annual General Meeting to ensure a high level of accountability and identification with the consolidated entity's strategy and goals. Important issues are presented to the shareholders as single resolutions. The Company’s external auditor is requested to attend annual general meetings to answer any questions concerning the audit and the content of the auditor’s report.

Shareholders are requested to vote on the appointment of Directors, the aggregate remuneration of non-executive directors, the granting of shares to directors and changes to the Constitution. A copy of the Constitution is available to any shareholder who requests it.

The Company’s policy on Release of Price Sensitive Information and its policy on communication with shareholders are available on the Company’s website.

Employees

Details of the number, category and location of employees of the Orbital Group in the last two years are as follows:

	June 2008		June 2007		June 2006
Category	Aus	US	Aus	US	Aus	US
Executive	4	—	4	—	5	—
Admin / Sales	16	—	15	1	20	1
Engineers	37	—	35	—	38	—
Technicians	30	—	29	—	28	—
Others	2	—	2	—	2	—
Total	89	—	85	1	93	1

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Share Ownership

Details of share ownership by Directors and senior managers at December 16, 2008 are as follows:

Director	Ordinary Shares
W P Day	100,000
T D Stinson	1,059,000
J G Young	748,537
M T Jones	180,000
Senior Managers
G P Cathcart B A Fitzgerald K A Halliwell	303,464 675,174 941,890

Directors and senior managers do not have different voting rights from other shareholders.

Employee Share Plan - 2001 Offer

The Company introduced two Employee Share Plans in 2001 to provide for eligible employees to be offered, at no cost, fully paid shares in the Company, rather than options. Under the No. 1 Plan, all eligible employees are offered shares in the Company to the value of A$1,000 (determined on the basis of the weighted average market price of the Company’s shares as traded on the Australian Stock Exchange in the five trading days before the date of offer) and under the No. 2 Plan employees are offered shares at the discretion of the Board. On November 21, 2001, a total of 351,041 and 187,566 fully paid ordinary shares were issued to employees under the No. 1 and No. 2 Plans respectively.

Orbital shall not offer or issue or grant any shares under the employee share plan if the number of shares the subject of the offer or issue or grant when aggregated with:

• unissued shares over which options (which remain outstanding and are then held by eligible employees or their nominees) have been granted under the employee option Plan; and

• shares issued during the previous five year period under the option plan and this Plan,

would exceed five percent of the total number of ordinary shares of Orbital on issue at the time of the offer or issue or grant.

Executive Long Term Share Plan – 2001 Offer

At the Company’s Annual General Meeting on October 25, 2001, shareholders approved the participation of the then Executive Directors, Messrs Schlunke, Johnsen and Beech, in the Company’s Executive Long Term Share Plan. Under this Plan, a performance related offer of shares has been made to the Executive Directors and eligible executives of the Company. Mr. Schlunke was offered 100,000 fully paid ordinary shares and Mr. Johnsen and Mr. Beech were each offered 70,000 fully paid ordinary shares.

Shares offered under the Plan would only be granted, at no cost to participants, if performance conditions were met or if, on cessation of employment, there was a Qualifying Reason. Qualifying Reasons are death, disability, ill health or redundancy. Where an executive ceases employment because of a Qualifying Reason, the Board will determine the number of shares, if any, to be granted and whether, and to what extent, the performance conditions will apply. In accordance with these provisions, the Board determined to grant to Mr Schlunke on the termination of his employment in July 2002, the 100,000 shares previously offered to him. Similarly, the Board determined to grant to Mr Beech on the termination of his employment in October 2002, the 70,000 shares previously offered to him.

The performance conditions were based on the relative ranking of the Total Shareholder Return (TSR) of the Company to a group of selected peers. TSR is the percentage increase in a company’s share price plus reinvested dividends over a given period and reflects the increase in value delivered to shareholders over that period. The peer group to which the Company’s TSR was compared comprised 100 companies within the Australian Stock Exchange All Industrials Index with a similar market capitalisation to the Company. The comparison was made over a three year “Performance Period” commencing on September 1, 2001 and ending on August 31, 2004. The TSR ranking of the Company at the expiry of the Performance Period was such that no further shares were granted as the performance conditions had not been met. The offered but unissued shares have now lapsed.

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Employee Share Plan – 2002 Offer

Under the Company’s No. 1 Plan referred to above, all eligible employees as at October 31, 2002 have been offered shares in the Company to the value of A$1,000 (determined on the basis of the weighted average market price of the Company’s shares as traded on the Australian Stock Exchange in the five trading days before that date). No shares have been offered to employees under the No. 2 Plan. On November 27, 2002, a total of 766,782 fully paid ordinary shares were issued to employees under the No. 1 Plan.

Executive Long Term Share Plan – 2002 Offer

At the Company’s Annual General Meeting on October 24, 2002, shareholders approved the participation of the then Managing Director, Mr Peter Cook, in the Company’s Executive Long Term Share Plan. Under this Plan, a performance related offer of shares has been made to the Managing Director and eligible executives of the Company. Mr. Cook has been offered 200,000 fully paid ordinary shares. The offer expired on the cessation of Mr Cook’s employment on September 30, 2005 and no shares were granted.

Shares offered under the Plan will only be granted, at no cost to participants, if performance conditions are met or if, on cessation of employment, there is a Qualifying Reason. The performance conditions are based on the relative ranking of the Total Shareholder Return (TSR) of the Company to a group of selected peers. TSR is the percentage increase in a company’s share price plus reinvested dividends over a given period and reflects the increase in value delivered to shareholders over that period. The peer group to which the Company’s TSR will be compared will comprise 100 companies (excluding resource companies) within the Australian Stock Exchange S&P 300 Accumulation Index with a similar market capitalisation to the Company. The comparison was made over a three year “Performance Period” commencing on September 1, 2002 and ending on August 31, 2005. The TSR ranking of the Company at the expiry of the Performance Period was such that no shares were granted as the performance conditions had not been met. The offered but unissued shares have now lapsed.

Employee Share Plan – 2003 Offer

Under the Company’s No. 1 Plan referred to above, all eligible employees as at October 31, 2003 have been offered shares in the Company to the value of A$1,000 (determined on the basis of the weighted average market price of the Company’s shares as traded on the Australian Stock Exchange in the five trading days before that date). No shares have been offered to employees under the No. 2 Plan. On November 20, 2003, a total of 495,604 fully paid ordinary shares were issued to employees under the No. 1 Plan.

Executive Long Term Share Plan – 2003 Offer

At the Company’s Annual General Meeting on October 23, 2003, shareholders approved the participation of the then Managing Director, Mr Peter Cook, in the Company’s Executive Long Term Share Plan. Under this Plan, a performance related offer of shares has been made to the Managing Director and eligible executives of the Company. Mr. Cook has been offered 400,000 fully paid ordinary shares. The offer expired on the cessation of Mr Cook’s employment on September 30, 2005 and no shares were granted.

Shares offered under the Plan will only be granted, at no cost to participants, if performance conditions are met or if, on cessation of employment, there is a Qualifying Reason. The performance conditions are based on the relative ranking of the Total Shareholder Return (TSR) of the Company to a group of selected peers. TSR is the percentage increase in a company’s share price plus reinvested dividends over a given period and reflects the increase in value delivered to shareholders over that period. The peer group to which the Company’s TSR will be compared will comprise 100 companies (excluding resource companies) within the Australian Stock Exchange S&P 300 Accumulation Index with a similar market capitalisation to the Company. The TSR ranking of the Company at the expiry of the Performance Period was such that no further shares were granted as the performance conditions had not been met. The offered but unissued shares lapsed on August 31 2006, the end of the 3 year performance period.

Employee Share Plan – 2004 Offer

Under the Company’s No. 1 Plan referred to above, all eligible employees as at October 31, 2004 have been offered shares in the Company to the value of A$1,000 (determined on the basis of the weighted average market price of the Company’s shares as traded on the Australian Stock Exchange in the five trading days before that date). No shares have been offered to employees under the No. 2 Plan. On November 18, 2004, a total of 578,000 fully paid ordinary shares were issued to employees under the No. 1 Plan.

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Executive Long Term Share Plan – 2004 Offer

At the Company’s Annual General Meeting on October 26, 2004, shareholders approved the participation of the then Managing Director, Mr Peter Cook, in the Company’s Executive Long Term Share Plan. Under this Plan, a performance related offer of shares has been made to the Managing Director and eligible executives of the Company. Mr. Cook was offered up to 750,000 fully paid ordinary shares. The offer expired on the cessation of Mr Cook’s employment on September 30, 2005 and no shares were granted.

Shares offered under the Plan will only be granted, at no cost to participants, if performance conditions are met or if, on cessation of employment, there is a Qualifying Reason. The performance conditions are based on the relative ranking of the Total Shareholder Return (TSR) of the Company to a group of selected peers. TSR is the percentage increase in a company’s share price plus reinvested dividends over a given period and reflects the increase in value delivered to shareholders over that period. The peer group to which the Company’s TSR will be compared will comprise the 50 smallest companies by market capitalisation (other than resource companies and property and investment trust companies) within the S&P/ASX 300 Index. The comparison will be made over a three year “Performance Period” commencing on September 1, 2004 and ending on August 31, 2007.

The Company’s TSR was compared to its peer group for the 3 year performance period ending on August 31, 2007. The Company performance was measured at the 76^th percentile of the peer group and 100% of the shares offered were granted to each eligible executive. The Managing Director, Dr Rod Houston was granted 300,000 shares under this offer.

Employee Share Plan – 2005 Offer

Under the Company’s No. 1 Plan referred to above, all eligible employees as at October 31, 2005 have been offered shares in the Company to the value of A$1,000 (determined on the basis of the weighted average market price of the Company’s shares as traded on the Australian Stock Exchange in the five trading days before that date). No shares have been offered to employees under the No. 2 Plan. On November 21, 2005, a total of 696,210 fully paid ordinary shares were issued to employees under the No. 1 Plan.

Executive Long Term Share Plan – 2005 Offer

At the Company’s Annual General Meeting on October 25, 2005, shareholders approved the participation of the then Managing Director, Dr Rodney Houston, in the Company’s Executive Long Term Share Plan. Under this Plan, a performance related offer of shares has been made to the Managing Director and eligible executives of the Company. Dr Houston has been offered up to 675,000 fully paid ordinary shares.

Shares offered under the Plan will only be granted, at no cost to participants, if performance conditions are met or if, on cessation of employment, there is a Qualifying Reason. The performance conditions are the same as those in the 2004 year under the Plan (referred to above). The comparison will be made over a three year “Performance Period” commencing on September 1, 2005 and ending on August 31, 2008.

The following table sets out the relevant percentages of offered shares to be issued, based on various percentile rankings of the Company:

Company Performance (TSR Percentile Ranking)	% of Shares offered granted to Executive
Up to the 50th percentile	0	%
At the 50th percentile	50	%
75th percentile or above	100	%
At or above the 90th percentile	125	%

No shares will be granted unless the Company’s TSR is at or above the 50th percentile.

If the Company’s TSR is between the 50th and 75th percentile, an additional proportion of the offer will be granted for each percentile increase above the 50th percentile (on a straight-line basis). There is no increase in the percentage of shares being granted between the 75th and 90th TSR percentile ranking.

On cessation of employment, all shares that have been offered but not granted will lapse unless the Board decides that there is a Qualifying Reason to make some or all of the shares available. Qualifying Reasons are death, disability, ill health or

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redundancy. Where an executive ceases employment because of a Qualifying Reason, the Board will determine the number of shares, if any, to be granted and whether, and to what extent, the performance conditions will apply.

The Company’s TSR was compared to its peer group for the 3 year performance period ending on August 31, 2008. The Company performance was measured at the 70th percentile of the peer group and 90% of the shares offered were granted to each eligible executive.

Employee Share Plan – 2006 Offer

Under the Company’s No. 1 Plan referred to above, all eligible employees as at October 31, 2006 have been offered shares in the Company to the value of A$1,000 (determined on the basis of the weighted average market price of the Company’s shares as traded on the Australian Stock Exchange in the five trading days before that date). No shares have been offered to employees under the No. 2 Plan. On October 31, 2006, a total of 471,872 fully paid ordinary shares were issued to employees under the No. 1 Plan.

Executive Long Term Share Plan – 2006 Offer

At the Company’s Annual General Meeting on October 24, 2006, shareholders approved the participation of the then Managing Director, Dr Rodney Houston, in the Company’s Executive Long Term Share Plan. Under this Plan, a performance related offer of shares has been made to the Managing Director and eligible executives of the Company. Dr Houston has been offered up to 1,243,750 fully paid ordinary shares.

Shares offered under the Plan will only be granted, at no cost to participants, if performance conditions are met or if, on cessation of employment, there is a Qualifying Reason. The performance conditions are the same as those in the 2004 year under the Plan (referred to above). The comparison will be made over a three year “Performance Period” commencing on September 1, 2006 and ending on August 31, 2009.

Employee Share Plan – 2007 Offer

Under the Company’s No. 1 Plan referred to above, all eligible employees as at October 31, 2007 have been offered shares in the Company to the value of A$1,000 (determined on the basis of the weighted average market price of the Company’s shares as traded on the Australian Stock Exchange in the five trading days before that date). No shares have been offered to employees under the No. 2 Plan. On October 31, 2007, a total of 236,374 fully paid ordinary shares were issued to employees under the No. 1 Plan.

Executive Long Term Share Plan – 2007 Offer

At the Company’s Annual General Meeting on October 23, 2007, shareholders approved the participation of the then Managing Director, Dr Rodney Houston, in the Company’s Executive Long Term Share Plan. Under this Plan, a performance related offer of shares has been made to the Managing Director and eligible executives of the Company. Dr Houston has been offered up to 512,500 fully paid ordinary shares.

Shares offered under the Plan will only be granted, at no cost to participants, if performance conditions are met or if, on cessation of employment, there is a Qualifying Reason. The performance conditions are the same as those in the 2004 year under the Plan (referred to above). The comparison will be made over a three year “Performance Period” commencing on September 1, 2007 and ending on August 31, 2010.

Dr Rod Houston

On 23 July 2008 the Company announced the issue of shares to Dr Rodney Houston, the former Chief Executive Officer and Managing Director, in accordance with the terms and conditions of the Executive Long Term Share Plan as approved by shareholders. The Board of Directors exercised their authority under the Plan to make an ex-gratia allocation of 1,037,500 ordinary shares in the Company. The remaining 907,500 Executive Long Term Share Plan shares offered under the 2005, 2006 and 2007 offers, but not yet granted, have been forfeited by Dr Houston.

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ITEM 7. MAJOR SHAREHOLDERS AND RELATED PARTY TRANSACTIONS

Major Shareholders

Orbital’s ordinary shares currently constitute the entire outstanding capital of the Company. As of December 16, 2008, Orbital had issued and outstanding 478,885,050 fully paid ordinary shares. Orbital is not directly or indirectly controlled by another corporation or by any foreign government and there are no arrangements known to Orbital, the operation of which may at a subsequent date result in a change in control of Orbital.

There is only one shareholder who has greater than 5% of the Company’s issued capital. The details of the shareholder are:

Name	Number of shares held	% of shares
Equity Trustees Limited SGH PI Smaller Co’s (as notified on 13 June 2007)	29,332,832	6.20	%

There has been no significant change in the composition of major shareholders.

The Executive Officers and Directors of Orbital as a group own 4,008,065 ordinary shares which represent 0.84% of that class.

Major shareholders do not have different voting rights from other shareholders.

Shareholder Locations

There are 478,885,050 ordinary shares in the company on issue at December 16, 2008, 74% of which are held by 5,497 shareholders located in Australia.

There are 2,812,631 ADR’s (representing 112,505,240 ordinary shares in the company) on issue at December 16, 2008 held by 387 registered holders located in the United States of America.

Related Party Transactions

There were no related party transactions with Directors during fiscal 2008 (nil in both fiscal 2007 and 2006).

The aggregate amounts receivable from (net of provisions for doubtful debts)/ payable to wholly owned controlled entities by the Company at November 30, 2008 and June 30 in each of the preceding two years are as follows:

	November, 30 2008 (A$000’s)	2008 (A$000’s)	2007 (A$000’s)	2006 (A$000’s)
Receivables - Non-current	21,029	17,375	12,826	12,642
Borrowings - Non-current	8,805	6,431	8,582	9,183

The largest amounts outstanding during the periods covered were as follows:

	2008 (A$000’s)	2007 (A$000’s)	2006 (A$000’s)
Receivables - Non-current	17,375	13,142	13,914
Borrowings - Non-current	8,582	9,183	11,684

During fiscal 2008, nil interest expense (fiscal 2007: nil; fiscal 2006: nil) was recognised by the Company in relation to these loans. The interest rate charged during the year was nil (2007 and 2006: nil)

Details of dealings with other related parties, being Synerject LLC, are as follows:

The aggregate amounts receivable from / payable to Synerject LLC by the Orbital Group at November 30, 2008 and June 30 in each of the preceding two years are:

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	November, 30 2008 (A$000’s)	2008 (A$000’s)	2007 (A$000’s)	2006 (A$000’s)
Receivables - Current	5	16	21	54
Payables - Current	—	—	—	43

During fiscal 2008, the Orbital Group provided engineering services to Synerject LLC to the value of A$0.081 million (2007: A$0.047 million) and purchased goods and services from Synerject LLC to the value of A$0.078 million (2007: A$0.088 million). All trading transactions are in the ordinary course of business and on normal commercial terms and conditions. Included above are unsecured working capital advances which are interest free and repayable on demand.

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ITEM 8. FINANCIAL INFORMATION

Consolidated Financial Statements and Other Financial Information

Refer pages F-1 through F-44 included herein.

Significant Changes

There have been no significant changes to the operations of the Company since the date of the annual financial statements.

Legal Proceedings

Orbital does not presently have any legal proceedings pending with significant effects on the Company’s financial position or profitability.

Dividend Policy

Orbital’s Board of Directors annually reviews the Company’s ability to pay dividends, which may be declared out of current year profits or retained earnings of the Company. The Company does not anticipate being in a position to pay a dividend in the 2009 fiscal year.

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ITEM 9. THE OFFER AND LISTING

Nature Of Trading Market

Orbital’s ordinary shares are traded on the ASX. The ASX is a nationally operated stock exchange with an Automated Trading System in the capital city of each Australian state.

The ordinary shares are also traded in the United States in the form of ADSs evidenced by American Depositary Receipts (“ADRs”) issued by The Bank of New York as depositary under a deposit agreement dated May 9, 2003. Each ADS represents forty ordinary shares. The ADSs have traded on the Over the Counter Bulletin Board (OTCBB) with effect from July 1, 2004, under the symbol “OBTLY”. Prior to that time, the ADSs were traded on the New York Stock Exchange (NYSE) but were de-listed as a result of Orbital’s non-compliance with NYSE’s continued listing requirements relating to market capitalization and stockholder equity.

The following table sets forth, for the periods indicated, the high and low closing sale prices per share and the high and low day trade volume of Orbital’s fully paid ordinary shares based upon information provided by the ASX Automated Trading System, and the high and low closing sale prices per ADS and the high and low day trade volume as reported on the NYSE to June 30, 2004 and thereafter on the OTCBB. Note that effective May 9, 2003 the ratio of ordinary shares to ADSs was changed from 1 : 8 to 1 : 40.

		Ordinary Shares								American Depositary Shares
		High Price			High Volume	Low Price			Low Volume	High Price			High Volume	Low Price			Low Volume
2003-04		A$	0.22		3,333,210	A$	0.12		58,000	US$	5.65		28,600	US$	3.35		0
2004-05		A$	0.16		2,728,797	A$	0.085		20,000	US$	4.40		31,810	US$	2.60		0
2005-06		A$	0.125		3,221,730	A$	0.085		20,000	US$	4.40		31,810	US$	2.60		0
2006-07		A$	0.345		3,760,493	A$	0.090		1,270	US$	11.17		22,900	US$	2.75		0
2007-08		A$	0.380		6,794,414	A$	0.100		4,864	US$	13.00		32,000	US$	3.90		0
2006-07	Q1	A$	0.105		13,760,545	A$	0.090	*	1,270	US$	3.05		23,900	US$	2.75	*	0
	Q2	A$	0.215		10,539,283	A$	0.094		43,000	US$	6.50		51,400	US$	2.83		200
	Q3	A$	0.240		8,929,938	A$	0.170		47,611	US$	7.45		34,700	US$	5.15		0
	Q4	A$	0.345	*	3,760,493	A$	0.210		67,000	US$	11.17	*	22,900	US$	6.95		0
2007-08	Q1	A$	0.380	*	6,794,414	A$	0.210		36,000	US$	13.00	*	32,000	US$	6.10		0
	Q2	A$	0.330		3,934,095	A$	0.235		2,711	US$	11.70		23,800	US$	8.55		200
	Q3	A$	0.255		4,746,064	A$	0.100		1,100	US$	8.90		23,000	US$	3.95		0
	Q4	A$	0.180		4,607,035	A$	0.100	*	4,864	US$	6.40		16,900	US$	3.90	*	0
Jun 2008		A$	0.155		1,730,630	A$	0.105		19,610	US$	5.78		10,600	US$	4.40		0
Jul 2008		A$	0.120		1,462,500	A$	0.090		10,000	US$	4.50		14,900	US$	3.10		0
Aug 2008		A$	0.090		2,018,000	A$	0.080		20,660	US$	4.35		9,700	US$	2.85		0
Sept 2008		A$	0.082		7,330,005	A$	0.055		36,000	US$	3.05		52,600	US$	1.95		0
Oct 2008		A$	0.068		1,460,659	A$	0.043		4,500	US$	2.10		17,144	US$	1.30		0
Nov 2008		A$	0.065		496,928	A$	0.044		10,000	US$	1.65		6,975	US$	1.05		0

* Denotes annual high and low closing market prices in the relevant year.

On November 30, 2008, the closing sale price of the ordinary shares on the ASX was A$0.047 per ordinary share and the closing sale price of the ADSs on the OTCBB on that date was US$1.44 per ADS. On November 30, 2008, 2,821,631 ADSs, representing 112,865,240 ordinary shares, or approximately 24% of the outstanding ordinary shares, were outstanding and were held by 387 holders of record including nominee companies holding on behalf of beneficial shareholders.

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ITEM 10. ADDITIONAL INFORMATION

Memorandum and Articles (Constitution)

No objects and purposes of the Company are stated or, under Australian law, are required to be stated, in the Company’s Constitution.

At the Company’s Annual General Meeting on October 26, 2004 shareholders voted to adopt a new Constitution for the Company – refer Exhibit 1.1.

Under the Company’s Constitution:

• a Director may not vote in relation to any contract or proposed contract or arrangement in which the Director has, directly or indirectly, a material interest;

• the maximum total of fees payable to Directors is required to be approved by the Company in general meeting;

• the Directors may at any time exercise all the powers of the Company to borrow money, except to the extent that such powers are required by law or the Listing Rules of Australian Stock Exchange Limited to be exercised by the Company in general meeting;

• a Director may not hold office in contravention of the Corporations Act 2001 (Aust.); and

• a Director is not required to have a share qualification.

The Company has fully paid ordinary shares on issue. Dividends, as declared by Directors and which are only payable from profits, are payable on all fully paid ordinary shares equally. Except as otherwise provided by statute, all dividends unclaimed for one year after having been declared may be invested or otherwise made use of by the Directors for the benefit of the Company until claimed.

At meetings of shareholders, each shareholder present in person or by proxy or representative has, on a show of hands, one vote and, on a poll, each shareholder present in person or by proxy or representative has one vote in respect of each fully paid share held by that shareholder. Nothing in the Company’s Constitution discriminates against any existing or prospective holder of shares in the Company as a result of such shareholder owning a substantial number of shares.

Changes to the rights of shareholders in relation to a particular class of shares may only be made with the consent in writing of the holders of three-quarters of the issued shares of that class or if authorised by a special resolution passed at a separate meeting of the holders of that class of share. The Company does not currently have different classes of shares.

Details of requirements for Directors to stand for re-election are set out at “Item 6. Directors, Senior Management and Employees – Board Practices”.

In accordance with the Company’s Constitution, any Director may whenever that Director thinks fit convene a general meeting of shareholders of the Company. Under the Corporations Act 2001, the Directors must call and arrange to hold a general meeting on the signed written request of either members with at least 5% of the votes that may be cast at the general meeting or at least 100 members who are entitled to vote at the general meeting. The request must state any resolution to be proposed at the meeting. The Directors must call the meeting within 21 days after the request is given to the Company and the meeting is to be held not later than 2 months after the request is given to the Company.

Shareholders must be given at least 28 days written notice of a meeting of the Company’s shareholders, which notice may be given personally or by post and must set out:

• the place, date and time of the meeting;

• the general nature of the meeting’s business;

• the resolution, if a special resolution is proposed; and

• a shareholder’s right to appoint a proxy.

The persons entitled to attend a general meeting of the Company shall be the shareholders (in person, by proxy or representative), the directors, the Company’s auditor and such other person or persons as the meeting may approve.

There are no limitations under the Constitution of Orbital to the right of non-residents to hold or vote ordinary shares.

Takeovers of Australian companies by foreign interests are subject to review and approval by the Treasurer of the Commonwealth of Australia under the Foreign Acquisitions and Takeovers Act 1975. The statute applies to any acquisition or proposed acquisition of 15% or more of the outstanding shares of an Australian company by one foreign person or group of

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associated foreign persons or any acquisition or proposed acquisition which results in one foreign person or group of associated foreign persons controlling 15% or more of total voting power. In addition, the statute applies to any acquisition or proposed acquisition by non-associated foreign persons resulting in foreign persons controlling, in the aggregate, 40% or more of total voting power or ownership.

Material Contracts

Other than the Executive Service Agreement referred to in Exhibit 10.1, there are no material contracts (other than contracts entered into in the ordinary course of business) to which the Company or any member of the Orbital Group is a party in the two years immediately prior to publication of this document.

Exchange Controls

Under existing Australian legislation, the Reserve Bank of Australia does not prohibit the import and export of funds, and generally no governmental permission is required for Orbital to move funds in and out of Australia. However, for the movement of funds to and from “tax havens”, as specified by current regulations, a tax clearance certificate must be obtained. The United States is not a declared tax haven. Accordingly, at the present time, remittances of any dividends, interest or other payments by Orbital to non-resident holders of Orbital’s securities in the United States are not restricted by exchange controls.

Taxation

The following is a summary of material United States federal income and Australian tax consequences of the ownership of ordinary shares or ADSs by US Holders. Except as otherwise noted, the statements of Australian and United States tax laws set out below are based on the laws in force, as of the date of this Annual Report, and are subject to any changes in United States or Australian law, and in any double taxation convention between the United States and Australia, occurring after that date possibly with retrospective effect.

On September 27, 2001, a Protocol was signed to amend the double tax convention between Australia and the United States. The Protocol provides for reductions in withholding taxes on certain dividends, interest and royalties. In particular, no withholding tax will be chargeable in the source country on dividends payable to a listed public company from an 80% or more beneficially owned subsidiary. The rate of withholding tax on royalties will be reduced from 10% to 5%. The Protocol was formally ratified on May 13, 2003 and has effect from July 1, 2003 in relation to withholding taxes and from income tax years beginning on or after July 1, 2004 for other taxes covered by the Protocol.

For purposes of this discussion, a US Holder is any beneficial owner of ADSs or ordinary shares that is:

• a citizen or resident of the United States;

• a corporation organised under the laws of the United States or any state;

• an estate the income of which is subject to United States federal income tax without regard to its source; or

• a trust if a court within the United States is able to exercise primary supervision over the administration of the trust and one or more United States persons have the authority to control all substantial decisions of the trust.

Australian Taxation

The following summary outlines the Australian income tax implications to non-resident holders of ADSs and ordinary shares who held ADSs or ordinary shares as capital assets. The summary is not exhaustive of all possible tax considerations, and holders of ADSs and ordinary shares are advised to satisfy themselves as to the overall tax consequences regarding the application of any relevant Double Taxation Agreement, by consulting their own tax advisers. The summary is based on legislation and case law applicable at the date of this report. Future legislative changes and developments in case law interpretation may impact upon the taxation position set out below.

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Residency

A natural person will be a resident of Australia if that person has been in Australia for more than 183 days in a year of income, unless that person has a usual place of abode outside of Australia and does not intend to take up residency in Australia.

A corporation will be a resident of Australia if it is incorporated in Australia, or if not being incorporated in Australia, carries on business in Australia, and has either its central management and control in Australia, or its voting power is controlled by shareholders who are residents of Australia.

Taxation of Dividends

Dividends paid by an Australian resident corporation may be paid as franked or unfranked dividends. Australian corporations are required to provide shareholders with notices detailing the extent to which dividends are franked or unfranked, and the deduction, if any, of dividend withholding tax. To the extent to which those dividends are paid out of profits which have been subject to Australian company tax, they will be franked dividends. Fully franked dividends paid to a non-resident will be exempt from Australian dividend withholding tax. Unfranked or partially franked dividends will be subject to Australian dividend withholding tax to the extent the dividends are unfranked. The rate of withholding tax on dividends is discussed below.

Shareholders who elect to participate in a dividend reinvestment plan in effect elect to invest their dividends in an allotment of ordinary shares. As is the case with a cash dividend, the receipt of these additional ordinary shares will represent assessable income to an Australian resident shareholder, and will carry franking credits to the same extent as any cash dividend.

The Australian Government provides a taxation incentive in the form of 125% tax deduction for companies which incur expenditure on research and development activities. This incentive has contributed to Orbital’s past level of accumulated carry forward tax losses, which were available for off-set against future income. The availability of these carry forward losses has impacted the amount of tax Orbital has paid and accordingly, the ability of Orbital to pay franked dividends.

Bonus shares issued to existing shareholders out of a share capital account are not dividends for Australian income tax purposes, and are therefore not subject to dividend withholding tax.

Withholding Tax on Dividends

The double taxation treaty between Australia and the United States limits the Australian dividend withholding tax on the unfranked portion of dividends paid to a US resident who is beneficially entitled to the dividend to 15%, unless the shareholder carries on business in Australia through a permanent establishment, or performs independent personal services from a fixed base in Australia, and his share holding is effectively connected with the permanent establishment or fixed base, in which case a 30% withholding tax applies. From July 1, 2003 where a US resident holds at least 10%, but less than 80%, of the voting power of an Australian company, withholding tax on the unfranked portion of a dividend will be 5%.

A withholding tax exemption is available where a dividend paid by the company is paid out of profits which include certain dividends received from foreign companies.

Capital Gains Tax (“CGT”)

The sale of ADSs and ordinary shares may be subject to Australian CGT where the ADSs or the ordinary shares are held by:

• natural persons or corporations who are residents of Australia;

• non-residents of Australia who, together with their associates, beneficially hold or, at any time during the five years prior to the sale, held 10% or more of the issued capital of the company, or options or rights to acquire ADSs or ordinary shares; or

• non-residents and are used in carrying on a trade or business through a permanent establishment in Australia.

Australian CGT is generally payable upon the profit arising from the sale of assets acquired after September 19, 1985. For assets that are sold prior to September 21, 1999 the profit is calculated as the disposal proceeds less the costs, indexed for inflation for assets held for at least twelve months. Capital losses are not subject to indexation and can only be offset against capital gains.

For assets that are sold after September 21, 1999 the taxation treatment depends on whether the assets were sold by an individual or a company. Special rules also apply to Australian complying superannuation funds.

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For assets that were acquired prior to September 21, 1999 by an individual, and held for at least one year, the individual taxpayer now has a choice of including in assessable income either:

• 50% of the profit on sale; or

• 100% of the difference between the disposal price and the indexed cost base as at September 30, 1999.

For assets acquired on or after September 21, 1999 by an individual, and held for at least one year, the individual will only be taxed on 50% of the difference between the disposal price and the original cost.

For assets that are sold after September 21, 1999, the capital gain is calculated as the disposal proceeds less the costs, indexed for inflation to September 30, 1999 for assets held for at least one year. Companies are not eligible for the 50% discount treatment.

Where the asset is held for less than one year, 100% of the gain will be assessable for both individuals and companies.

Assets acquired before September 19, 1985 generally remain free from tax. Capital losses are not available in respect of assets acquired before this date.

Ordinary shares issued to a shareholder who is a resident for Australian tax purposes, through participation in the dividend reinvestment plan will be deemed to be acquired when issued and will be subject to Australian CGT upon disposal as discussed above, regardless of the date of acquisition of the relevant original shares participating in the plan.

Stamp Duty

No Australian stamp duty will be payable on the issue or stock market transfer of an ADS, provided the ADS is registered on a register kept by or on behalf of the person who issued the ADS in the United States, and the ADS is registered on the register:

• for at least six months before the transfer, or on or before March 14, 1997; or

• since they were issued; and

• the transfer of the ADS must be made by an order lodged with a broker who is a member of the New York or NASDAQ stock exchanges; or

• be solely for the purpose of facilitating settlement of a transfer described above.

From July 1, 2001, no Australian stamp duty is payable on the transfer of Orbital’s ordinary shares.

United States Federal Income Taxation

The following is a summary of the material United States Federal income tax consequences resulting from the ownership and disposition of ADSs or ordinary shares by US Holders. This summary applies only to holders who hold ADSs or ordinary shares as capital assets and does not apply to holders of ADSs or ordinary shares that are subject to special rules, such as holders that:

• are generally exempt from United States Federal income tax,

• actually or constructively own ten percent or more of the voting shares of the Company,

• are dealers in ADSs or ordinary shares,

• are traders in securities that elect to use a mark to market method of accounting,

• are banks or life insurance companies,

• acquired ADSs or ordinary shares under employee share plans or otherwise as compensation,

• are liable for alternative minimum tax,

• hold ADSs or ordinary shares as part of a straddle or a hedging or conversion transaction, or

• have a functional currency that is not the US dollar.

This summary is based on the Internal Revenue Code of 1986, as amended, its legislative history, existing and proposed regulations, published rulings and court decisions, as well as on the Convention between the United States of America and Australia (the “Treaty”). These laws are subject to change, possibly on a retrospective basis.

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This summary is also based in part on representations of the Depositary and assumes that each obligation provided for in or otherwise contemplated by the Deposit Agreement and any related agreement will be performed in accordance with its terms. Beneficial owners of ADSs or ordinary shares are advised to consult their tax advisers as to the Australian, United States and other tax consequences resulting from the ownership and disposition of ADSs and ordinary shares, including state and local tax consequences.

For United States Federal income tax purposes, holders of ADRs evidencing ADSs will generally be treated as owners of the ordinary shares underlying such ADRs. Exchanges of ordinary shares for ADRs, and ADRs for ordinary shares, generally will not be subject to United States federal income tax.

Taxation of Dividends

Under the United States federal income tax laws, and subject to the passive foreign investment company (“PFIC”) rules discussed below, US Holders will include in gross income the gross amount of any dividend paid, before reduction for Australian withholding taxes, by Orbital out of its current or accumulated earnings and profits, as determined for United States federal income tax purposes. Dividends paid to non-corporate US Holders in taxable years beginning before January 1, 2011 that constitute qualified dividend income will be taxable at a maximum rate of 15 percent provided that the US Holder holds the ADSs or ordinary shares for more than 60 days during the 121-day period beginning 60 days before the ex-dividend date and meets other holding period requirements. Dividends paid with respect to the shares or ADSs generally will be qualified dividend income.

US Holders must include any Australian tax withheld from the dividend payment in this gross amount even though they do not in fact receive it. The dividend is taxable to a US Holder when such US Holder, in the case of ordinary shares, or the Depositary, in the case of ADSs, receives the dividend, actually or constructively. The dividend will not be eligible for the dividends-received deduction generally allowed to United States corporations in respect of dividends received from other United States corporations.

The amount of the dividend distribution to be included in income of a US Holder will be the US dollar value of the Australian dollar payments made, determined at the spot Australian dollar/US dollar rate on the date the dividend distribution is included in the income of the US Holder, regardless of whether the payment is in fact converted into US dollars. Generally, any gain or loss resulting from currency exchange fluctuations during the period from the date the dividend payment is includible in income to the date such payment is converted into US dollars will be treated as ordinary income or loss and will not be eligible for the special tax rate applicable to qualified dividend income. The gain or loss will generally be income or loss from sources within the United States for foreign tax credit limitation purposes. Distributions in excess of current and accumulated earnings and profits, as determined for United States federal income tax purposes, will be treated as a return of capital to the extent of the US Holder’s basis in the ordinary shares or ADSs and thereafter as capital gain.

Subject to foreign tax credit limitations, the Australian tax withheld in accordance with the double taxation treaty between Australia and the United States and paid over to Australia will be creditable against the US Holder’s United States federal income tax liability. Special rules apply in determining the foreign tax credit limitation with respect to dividends that are subject to the maximum 15 percent tax rate. Dividends will be income from sources outside the United States. Dividends paid in taxable years beginning before January 1, 2007 generally will be “passive” or “financial services” income and dividends paid in taxable years beginning after December 31, 2006 will, depending on the US Holder’s circumstances, be “passive” or “general” income which, in either case, is treated separately from other types of income for purposes of computing the foreign tax credit allowable to US Holders.

It is possible that we are or will be at least 50% owned by persons treated as United States persons under the US tax code. Under Section 904(h) of the US tax code, dividends paid by a non-U.S. corporation that is at least 50% owned by US persons may be treated as US source income rather than non-US source income for foreign tax credit purposes to the extent the non-US corporation has more than an insignificant amount of US source income. The effect of this rule, if applicable in future years, may be to treat a portion of the dividends paid by us as United States source income for foreign tax credit purposes. Such treatment may adversely affect a shareholder’s ability to use foreign tax credits.

Distributions of additional ordinary shares to US Holders with respect to their ordinary shares or ADSs that are made as part of a pro rata distribution to all shareholders of the company will generally not be subject to United States federal income tax.

US Holders of ADSs or ordinary shares that elect, under either the bonus share election plan or the dividend reinvestment plan, to receive additional ordinary shares at a discount rather than cash dividends will be treated for United States Federal income tax purposes as having received a dividend equal to the fair market value of the additional ordinary shares received.

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Taxation of Capital Gains

Subject to the PFIC rules discussed below, upon a sale or other disposition of ordinary shares or ADSs, a US Holder will recognize capital gain or loss for United States federal income tax purposes equal to the difference between the US dollar value of the amount realized and the US Holder’s tax basis, determined in US dollars, in the ordinary shares or ADSs sold or otherwise disposed of. Capital gain of a noncorporate US Holder that is recognized in taxable years beginning on or after May 6, 2003 and before January 1, 2011 is generally taxed at a maximum rate of 15 percent where the holder has a holding period greater than one year. The gain or loss will generally be income or loss from sources within the United States for foreign tax credit limitation purposes.

Passive Foreign Investment Company Rules

Orbital believes that ordinary shares and ADSs should not be treated as stock of a PFIC for United States federal income tax purposes, but this conclusion is a factual determination made annually and thus may be subject to change based upon future developments or changes in Orbital’s gross income or the value of its assets. If Orbital were to be treated as a PFIC, unless a US Holder elects to be taxed annually on a mark-to-market basis with respect to the ordinary shares or ADSs, gain realized on the sale or other disposition of ordinary shares or ADSs would in general not be treated as capital gain. The US Holder would be treated as if such holder had realized such gain and certain “excess distributions” rateably over the holder’s holding period for the ordinary shares or ADSs and would be taxed at the highest tax rate in effect for each such year to which the gain was allocated, together with an interest charge in respect of the tax attributable to each such year. With certain exceptions, ordinary shares or ADSs will be treated as stock in a PFIC if Orbital was a PFIC at any time during the US Holder’s holding period in the ordinary shares or ADSs. Dividends that a US Holder receives from Orbital will not be eligible for the special tax rates applicable to qualified dividend income if Orbital is treated as a PFIC with respect to a US Holder either in the taxable year of the distribution or the preceding taxable year, but instead will be taxable at rates applicable to ordinary income.

Documents on Display

The Company files annual and semi-annual reports and other information with the Securities and Exchange Commission (“SEC”). You may read and copy documents that have been filed with the SEC at the SEC’s public reference room located at 100 F Street NW, Washington DC 20549. Please telephone the SEC at 1-800-SEC-0330 to obtain information on the operation of the public reference room. Such materials can also be obtained on the SEC’s internet site atwww.sec.gov.

Copies of certain of the documents referred to in this annual report on Form 20-F may be on Orbital’s website (www.orbitalcorp.com.au) and may also be inspected on request at the Company’s registered office.

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ITEM 11. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.

Market Exposures

We are exposed to market risks, including changes in interest rates, changes in foreign currency exchange rates, and credit risk. To manage the volatility relating to these risks, we take advantage of natural offsets to the extent possible. For example, whenever possible we have cash expenses in the same countries and currencies as we generate our cash flows. In appropriate circumstances, and where we are unable to naturally offset our exposure to these risks, we enter into derivative transactions to synthetically reduce the exposures. The purpose of these hedging instruments is to create a corresponding, but opposite, movement in the underlying value of the cash flow being hedged. We enter into these transactions only in accordance with internal policies set by our directors. We do not hold or enter into derivative financial instruments for trading purposes.

A summary of market risk factors is generally discussed below. For additional quantitative and qualitative information about these market risks, refer to note 4 “Financial Risk Managements Objectives and Policies” in our audited consolidated financial statements.

Interest rate risk

The Group’s exposure to market interest rates relates primarily to the Group’s cash and cash equivalents on deposit with Australian banks.

The primary goal of the Group is to maximize returns on surplus cash, using deposits with maturities of less than 90 days. Management continually monitors the returns on funds invested.

Foreign currency risk

As a result of investment in the equity accounted jointly controlled entity, Synerject LLC, the Group’s balance sheet can be affected significantly by movements in the US$/A$ exchange rates. The present value of the additional investment in Synerject LLC is recognized in its functional currency and is not exposed to any foreign currency risk.

The Group also has transactional currency exposures. Such exposure arises from sales or purchases by an operating entity in currencies other than the functional currency.

Approximately 43% of the Group’s sales are denominated in currencies other than the functional currency of the operating entity making the sale, whilst almost 99% of costs are denominated in the unit's functional currency.

With respect to assets and liabilities denominated in foreign currencies, the Group ensures that its net exposure is kept to an acceptable level by buying or selling foreign currencies at spot rates when necessary. The Group does not hold foreign currency positions for trading purposes.

Credit risk

Credit risk arises from the financial assets of the Group, which comprise cash and cash equivalents and trade and other receivables. The Group’s exposure to credit risk arises from potential default of the counter party, with a maximum exposure equal to the carrying amount of these instruments.

The Group does not hold any credit derivatives to offset its credit exposure, however the Group does hold receivable insurance where appropriate.

It is the Group’s policy that all customers who wish to trade on credit terms are subject to credit verification procedures including an assessment of their independent credit rating, financial position, past experience and industry reputation. Risk limits are set for each individual customer in accordance with parameters set by management. These risk limits are regularly monitored.

In addition, receivable balances are monitored on an ongoing basis.

There are no significant concentrations of credit risk within the Group and financial instruments are only invested with a major financial institution to minimise the risk of default of counterparties.

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Liquidity risk

The Group’s does not have any bank overdrafts, bank loans, preference shares, finance leases or committed available credit lines as at 30 June 2008.

The only external borrowing of the Group is the interest free Western Australian Government loan of $19 million repayable in May 2014.

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ITEM 12. DESCRIPTION OF SECURITIES OTHER THAN EQUITY SECURITIES

Not Applicable

PART II

ITEM 13. DEFAULTS, DIVIDEND ARREARAGES AND DELINQUENCIES

None

ITEM 14. MATERIAL MODIFICATIONS TO THE RIGHTS OF SECURITY HOLDERS AND USE OF PROCEEDS.

None

ITEM 15. CONTROLS AND PROCEDURES

(a) Disclosure Controls and Procedures:

Orbital has carried out an evaluation, under the supervision and with the participation of management, including the Chief Executive Officer and Chief Financial Officer of Orbital, of the effectiveness of the design and operation of Orbital’s disclosure controls and procedures (as defined in Exchange Act Rule 13a-15(e)) as of the end of the period covered by this annual report. Based upon that evaluation, Orbital’s Chief Executive Officer and Chief Financial Officer concluded that, as of June 30, 2008, Orbital’s disclosure controls and procedures were effective.

(b) Management’s Report on Internal Control Over Financial Reporting:

Orbital’s management is responsible for establishing and maintaining adequate internal control over financial reporting. The Securities Exchange Act of 1934 defines internal control over financial reporting in Rule 13a-15(f) and 15d-15(f) as a process designed by, or under the supervision of, the company’s principal executive and principal financial officers and effected by the company’s board of directors, management and other personnel, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles and includes those policies and procedures that:

• pertain to the maintenance of records that in reasonable detail accurately and fairly reflect the transactions and dispositions of the assets of the company;

• provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and

• provide reasonable assurance regarding prevention or timely detection of unauthorised acquisition, use or disposition of the company’s assets that could have a material effect on the consolidated financial statements.

Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.

Orbital’s management assessed the effectiveness of its internal control over financial reporting as of June 30, 2008. In making this assessment, Orbital’s management used the criteria set forth by the Committee of Sponsoring Organizations of the Treadway Commission, or COSO, in Internal Control-Integrated Framework. Based upon its assessment, Orbital’s management concluded that, as of June 30, 2008, its internal control over financial reporting is effective based upon those criteria.

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Ernst & Young, an independent registered public accounting firm that audited the consolidated financial statements included in this annual report on Form 20-F, has issued an audit report on the Company’s internal control over financial reporting as of June 30, 2008

(c) Attestation Report of the Registered Public Accounting Firm:

See report of Ernst & Young, an Independent Registered Public Accounting Firm, on page F-2 for 2008.

(d) Changes in Internal Control Over Financial Reporting:

There have been no significant changes in the Company’s internal controls or in other factors that could significantly affect these controls subsequent to the Evaluation Date.

ITEM 16. [RESERVED]

ITEM 16A. AUDIT COMMITTEE FINANCIAL EXPERT

The Company’s audit committee is made up of the three non-executive directors of the Company’s Board. Mr W P Day qualifies as an audit committee financial expert as defined under the rules of the SEC. His responsibilities are, however, the same as those of the other Audit Committee members. The SEC has determined that an audit committee member who is designated as an audit committee financial expert will not be deemed to be an “expert” for any other purpose as a result of being identified as an audit committee financial expert. Mr Day is a Fellow of CPA Australia, Fellow of the Institute of Chartered Accountants in Australia and a Fellow of the Institute of Chartered Accountants in United Kingdom. He is currently a member of the International Accounting Standards Board’s Joint International Group on Financial Statements, a former Chairman of the Australian Accounting Standards Board and was Deputy Chairman of the Australian Securities and Investments Commission.

ITEM 16B. CODE OF ETHICS

The Company has adopted a Code of Ethics relating to Accounting Practice and Financial Reporting. The Code applies specifically to the Company’s Chief Executive Officer, Chief Financial Officer and senior finance officers of the Company who influence financial performance. The Code of Ethics is available on the Company’s website atwww.orbitalcorp.com.au or a copy may be obtained free of charge by writing to the Company Secretary, PO Box 901 Balcatta, Western Australia, Australia 6914.

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ITEM 16C. PRINCIPAL ACCOUNTANT FEES AND SERVICES

The aggregate fees billed for each of the last two fiscal years for professional services rendered by the Company’s auditor, 2008: Ernst & Young and 2007: KPMG, are as follows:

	2008		2007
Services Rendered	Fees ($A)	%	Fees ($A)	%
Audit Fees	378,979	91.8	403,017	91.8
Audit – Related Fees	—	—	—	—
Tax Fees (1)	9,000	2.2	28,000	6.4
- Other member firms	—	—	8,000	1.8
All Other Fees (2)	25,000	6.0	—	—

(1) Taxation services relate to services performed for preparation and lodgement of tax returns, advice in relation to consolidation under Australian income tax law, tax compliance, tax advice and preparation and lodgement of Research & Development Claims.

(2) All other fees relate to services performed for executive remuneration consultancy services.

Pre-approval Policies and Procedures

Orbital’s Audit Committee has adopted policies and procedures for the pre-approval of audit and non-audit services rendered by the Company’s auditors, Ernst & Young. Pre-approval of an audit or non-audit service may be given as a general pre-approval, as part of the Audit Committee’s approval of the scope of the engagement of the auditor or on an individual basis. Any proposed services exceeding general pre-approved levels require specific approval of the Chairman of the Audit Committee. The policy prohibits retaining the auditor to perform the prohibited non-audit functions as defined for the purposes of section 201 of the Sarbanes-Oxley Act.

All services performed by Ernst & Young and other Ernst & Young member firms as detailed above received Audit Committee approval prior to provision of those services. No services were approved by the Audit Committee pursuant to paragraph (c)(7)(i)(C) of Rule 2-01 of Regulation S-X.

ITEM 16D. EXEMPTIONS FROM THE LISTING STANDARDS FOR AUDIT COMMITTEES

Not Applicable

ITEM 16E. PURCHASES OF EQUITY SECURITIES BY THE ISSUER AND AFFILIATED PURCHASERS

Not Applicable

PART III

ITEM 17. FINANCIAL STATEMENTS

Not Applicable

ITEM 18. FINANCIAL STATEMENTS

See pages F-1 through F-44 included herein.

ITEM 19. EXHIBITS

(a) Financial Statements and Financial Statement Schedules

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The following financial statements together with the Report of Independent Registered Public Accounting Firm thereon, are filed as part of the Annual Report.

Report of Independent Registered Public Accounting Firm for the year ended June 30, 2008	F-1
Report of Independent Registered Public Accounting Firm for Internal Control Over Financial Reporting	F-2
Report of Independent Registered Public Accounting Firm for the years ended June 30, 2007 and 2006	F-3
Consolidated Income Statements for the years ended June 30, 2008, 2007 and 2006	F-4
Consolidated Statement of Recognised Income and Expenses for the years ended June 30, 2008, 2007 and 2006	F-5
Consolidated Balance Sheets as at June 30, 2008, and 2007	F-6
Consolidated Statements of Cash Flows for the years ended June 30, 2008, 2007 and 2006	F-7
Notes to the Consolidated Financial Statements	F-8
(b) Financial Statements – Synerject LLC (1)
The following financial statements together with the Report of Independent Auditors thereon, are filed as part of the Annual Report.
Independent Auditors’ Report	1
Consolidated Balance Sheets at June 30, 2008 and 2007	2
Consolidated Statements of Income for the years ended June 30, 2008, 2007 and 2006	3
Consolidated Statements of Members’ Equity (Deficit) and Comprehensive Income for the years ended June  30, 2008, 2007 and 2006	4
Consolidated Statements of Cash Flows for the years ended June 30, 2008, 2007 and 2006	5
Notes to the Consolidated Financial Statements	7

(1) The financial statements of Synerject LLC have been included in this document pursuant to Rule 3-09 of Regulation S-X

(c) Exhibits

1.1	Constitution of Orbital Corporation Limited dated October 26, 2004 (incorporated by reference to our registration statement on Form 20-F filed on December 30, 2004.)
12.1	Certification of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
12.2	Certification of Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
13.1	Certification of Chief Executive Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
13.2	Certification of Chief Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002

- 62 -

GLOSSARY OF TECHNICAL TERMS

“Chassis dynamometer”	Equipment used to apply a load to a vehicle in order to measure its power or to simulate actual operating characteristics.
“Direct injection” or “DI”	In a gasoline engine, direct injection means fuel injection directly into the combustion chamber. Most automotive gasoline engines with fuel injection inject into the intake manifold, not the combustion chamber.
“Dynamometer”	A piece of equipment used to apply a load to an engine in order to measure its power or to simulate actual operating characteristics.
“Emissions”	Refers generally to the polluting exhaust gases of an engine which are subject to governmental legislation (usually HC, CO and NOx).
“EFI”	Electronic Fuel Injection is when the fuel delivery per engine cycle is calculated by the Engine Management System from various inputs (eg engine speed, load, airflow) to enable precise fuel metering/delivery to the intake manifold of the engine for improved combustion, fuel economy and emission control.
“Four-stroke”	A “four-stroke cycle” or sometimes called the “Otto cycle”. A type of internal combustion engine operating cycle requiring two full engine revolutions (two up and two down piston movements) per combustion event in an engine.
“Fuel Rail Assembly”	The fuel rail assembly is an assembly, typically a cast modular, or extruded assembly that houses the fuel injector, interfaces the fuel injector to the air injector and provides fuel and air services to the injectors. Frequently the air and fuel regulators will be incorporated into the fuel rail assembly.
“Horsepower”	A unit of measure of power in the U.S. and Imperial system. The metric equivalent of horsepower is Kilowatt. One Kilowatt is equivalent to 1.34hp.
“OCP”	Orbital Combustion Process. A general term to describe the fuel injection and combustion process developed and marketed by Orbital.
“OCP Technology”	A collective term to describe the proprietary and non-proprietary technology involved in the Orbital Combustion Process and the technology that contributes to enhance the performance of engines that employ the OCP Technology. The proprietary technology or intellectual property includes patents, patent applications, copyrights and confidential know-how and trade secrets.
“OrbitalTMEngine”	A vane-type rotary internal combustion engine originally invented by Orbital's founder, Ralph Sarich. Orbital is no longer exploiting this technology.
“Production validation”	The process of engineering development carried out prior to the decision to produce a product in commercial quantities. Production validation tests attempt to simulate actual commercial use.
Stoichiometric	The chemically correct or theoretical proportions of reactants (fuel and air) in order for complete combustion to occur. Complete combustion is a process which burns all the carbon (C) to (CO2), all hydrogen (H) to (H2O) and all sulphur (S) to (SO2). If there are unburned components in the exhaust gas such as C, H2, CO the combustion process is uncompleted
“Two-stroke”	In full, a “two-stroke cycle”. A type of internal combustion engine operating cycle requiring one full engine revolution (one up and one down piston movement) per combustion event in an engine.

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SIGNATURES

The registrant hereby certifies that it meets all of the requirements for filing on Form 20-F and that it has duly caused and authorized the undersigned to sign this annual report on its behalf.

	ORBITAL CORPORATION LIMITED
	(Registrant)
	/s/ KA Halliwell
Date: December 19, 2008	KEITH HALLIWELL
	Company Secretary and Chief Financial Officer

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

The Board of Directors and Shareholders of Orbital Corporation Limited

We have audited the accompanying consolidated balance sheet of Orbital Corporation Limited and subsidiaries (the “Company”) as of June 30, 2008, and the related consolidated statements of income, shareholders’ equity, and cash flows for the year then ended. These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements based on our audit.

We did not audit the financial statements of Synerject LLC (“Synerject”), a significant investee of the Company which is accounted for by use of the equity method (see note 16 to the consolidated financial statements), as of and for the year ended June 30, 2008. The Company’s investment in Synerject was $13,109,000 as of June 30, 2008 and share of profit in income of Synerject was $2,357,000 for the year ended June 30, 2008. Those statements were prepared in accordance with accounting principles generally accepted in the United States of America and were audited by other auditors whose report has been furnished to us, and our opinion, insofar as it relates to the amounts included for Synerject, on the basis of accounting principles generally accepted in the United States of America, as of and for the year ended June 30, 2008, is based solely on the report of the other auditors. We have applied auditing procedures to the adjustments to reflect investment in Synerject and share of profit in income of Synerject in accordance with International Financial Reporting Standards as issued by the International Accounting Standards Board.

We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audit and the report of other auditors provide a reasonable basis for our opinion.

In our opinion, based on our audit and the report of other auditors, the financial statements referred to above present fairly, in all material respects, the consolidated financial position of Orbital Corporation Limited and subsidiaries as of June 30, 2008, and the consolidated results of their operations and their cash flows for the year then ended, in conformity with International Financial Reporting Standards as issued by the International Accounting Standards Board.

We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), Orbital Corporation Limited’s internal control over financial reporting as of June 30, 2008, based on the criteria established in Internal Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission and our report dated December 19, 2008 expressed an unqualified opinion thereon.

/s/ ERNST & YOUNG

Perth, Australia

December 19, 2008

F-1

Report of Independent Registered Public Accounting Firm

The Board of Directors and Shareholders of Orbital Corporation Limited

We have audited Orbital Corporation Limited’s internal control over financial reporting as of June 30, 2008, based on criteria established in Internal Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (the COSO criteria). Orbital Corporation Limited’s management is responsible for maintaining effective internal control over financial reporting, and for its assessment of the effectiveness of internal control over financial reporting included in the accompanying Management’s Report on Internal Control Over Financial Reporting. Our responsibility is to express an opinion on the company’s internal control over financial reporting based on our audit.

We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. Our audit included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, testing and evaluating the design and operating effectiveness of internal control based on the assessed risk, and performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion.

A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of the company’s assets that could have a material effect on the financial statements.

Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.

In our opinion, Orbital Corporation Limited maintained, in all material respects, effective internal control over financial reporting as of June 30,2008, based on the COSO criteria.

We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the consolidated balance sheet of Orbital Corporation Limited and subsidiaries as of June 30, 2008, and the related consolidated statements of income, shareholders’ equity, and cash flows for the year then ended, and our report dated December 19, 2008 expressed an unqualified opinion thereon.

/s/ ERNST & YOUNG

Perth, Australia

December 19, 2008

F-2

Report of Independent Registered Public Accounting Firm

The Board of Directors and Shareholders of Orbital Corporation Limited

We have audited the accompanying consolidated balance sheets of Orbital Corporation Limited and its controlled entities (the “Consolidated Entity”) as of 30 June 2007, and the related consolidated income statements, statements of cash flows, and recognised income and expenses for each of the years in the two year period ended 30 June 2007. These consolidated financial statements are the responsibility of the Consolidated Entity’s management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits.

We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.

In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of the Consolidated Entity as of 30 June 2007, and the results of its operations and its cash flows for each of the years in the two year period ended 30 June 2007, in conformity with Australian Accounting Standards (including the Australian Accounting Interpretations) and the Corporations Regulations 2001. In complying with Australian Accounting Standards, the financial statements are also in conformity with International Financial Reporting Standards (“IFRS”).

/s/ KPMG

KPMG

Perth, Australia

22 August 2007

F-3

INCOME STATEMENTS FOR THE YEAR ENDED 30 JUNE 2008

			2008		2007		2006
	NOTE		$’000		$’000		$’000
Engineering services income			11,681		12,514		8,645
Licence and royalty income			2,684		2,294		2,394
Other revenue	7		574		448		332
Total Revenue			14,939		15,256		11,371
Other income	8		372		390		492
Employee benefits expenses	9	(a)	(9,812	)	(9,428	)	(8,297	)
Depreciation and amortisation			(1,272	)	(1,001	)	(1,122	)
Engineering consumables and contractors			(924	)	(1,641	)	(1,136	)
Travel and accommodation			(1,013	)	(980	)	(1,009	)
Communications and computing			(649	)	(647	)	(667	)
Patent costs			(404	)	(509	)	(462	)
Insurance costs			(388	)	(422	)	(535	)
Audit, compliance and listing costs			(817	)	(702	)	(689	)
Settlement of legal dispute			—		(582	)	—
Finance costs	9	(b)	(886	)	(816	)	(622	)
Other expenses	9	(c)	(1,479	)	(840	)	(726	)
Share of profit of jointly controlled entity	16	(c)	2,357		3,157		4,135
Profit before income tax			24		1,235		733
Income tax benefit/(expense)	10	(b)	445		98		(218	)
Profit for the year attributable to the members of the parent entity			469		1,333		515
Earnings per share:
Basic earnings per share (in cents)	11		0.10		0.30		0.13
Diluted earnings per share (in cents)	11		0.10		0.29		0.13
Basic earnings per ADS (in cents)	11		3.96		11.94		4.00
Diluted earnings per ADS (in cents)	11		3.88		11.76		4.00

The income statements are to be read in conjunction with the notes to the financial statements set out on pages F8 to F44.

F-4

STATEMENTS OF RECOGNISED INCOME AND EXPENSE FOR THE YEAR ENDED 30 JUNE 2008

			2008		2007		2006
	NOTE		$’000		$’000		$’000
Foreign currency translation reserve	27	(b)	(1,627	)	(1,692	)	276
Share of jointly controlled entity’s cash flow hedge reserve	27	(b)	(35	)	(37	)	—
Income and expense recognised directly in equity			(1,662	)	(1,729	)	276
Profit/(loss) for the period			469		1,333		515
Total recognised income and expense for the period			(1,193	)	(396	)	791

The above items are net of tax where applicable.

The statements of recognised income and expense are to be read in conjunction with the notes to the financial statements set out on pages F8 to F44.

F-5

BALANCE SHEETS AS AT 30 JUNE 2008

		2008		2007
	NOTE	$’000		$’000
Assets
Cash and cash equivalents	12	8,804		11,287
Trade and other receivables	13	7,198		4,544
Inventories	14	1,697		6
Total Current Assets		17,699		15,837
Interests in jointly controlled entity	16	13,109		12,974
Deferred tax assets	17	5,494		6,082
Property, plant & equipment	18	5,586		6,107
Goodwill	19	351		—
Total Non-Current Assets		24,540		25,163
Total Assets		42,239		41,000
Liabilities
Trade and other payables	20	7,322		4,214
Employee benefits	23	1,028		1,190
Other provisions	24	126		—
Total Current Liabilities		8,476		5,404
Non interest bearing liabilities	22	14,151		17,958
Employee benefits	23	1,362		1,236
Government grants	25	2,760		—
Total Non-Current Liabilities		18,273		19,194
Total Liabilities		26,749		24,598
Net Assets		15,490		16,402
Equity
Share capital	26	225,720		225,560
Reserves	27	(2,457	)	(916	)
Accumulated losses	27	(207,773	)	(208,242	)
Total Equity		15,490		16,402

The balance sheets are to be read in conjunction with the notes to the financial statements set out on pages F8 to F44.

F-6

STATEMENTS OF CASH FLOWS FOR THE YEAR ENDED 30 JUNE 2008

		2008		2007		2006
	NOTE	$’000		$’000		$’000
Cash Flows from Operating Activities
Cash receipts from customers		10,728		14,267		10,159
Cash paid to suppliers and employees		(12,176	)	(14,516	)	(12,273	)
Cash used in operations		(1,448	)	(249	)	(2,114	)
Interest income		574		377		356
Income taxes paid		(11	)	(310	)	(110	)
Net cash provided by/(used in) operating activities	31	(885	)	(182	)	(1,868	)
Cash Flows from Investing Activities
Synerject dividend received		958		—		—
Synerject equity investment		—		—		(2,735	)
Proceeds from sale of property, plant & equipment		8		33		166
Acquisition of property, plant & equipment		(727	)	(677	)	(211	)
Costs incurred in acquisition of business	33	(111	)	—		—
Acquisition of business	33	(1,758	)	—		—
Net cash used in investing activities		(1,630	)	(644	)	(2,780	)
Cash Flows from Financing Activities
Proceeds from issue of share capital		—		9,204		—
Transaction costs from issue of shares		—		(412	)	—
Net cash provided by financing activities		—		8,792		—
Net increase/(decrease) in cash and cash equivalents		(2,515	)	7,966		(4,648	)
Cash and cash equivalents at 1 July		11,287		3,325		7,972
Effects of exchange rate fluctuations on the balances of cash held in foreign currencies		32		(4	)	1
Cash and cash equivalents at 30 June	12	8,804		11,287		3,325

Non-Cash Investing Activities

There were no non-cash investing or financing activities for the years ended 30 June 2006, 2007 and 2008.

The statements of cash flows are to be read in conjunction with the notes to the financial statements set out in pages F8 to F44

F-7

NOTES TO THE FINANCIAL STATEMENTS FOR THE YEAR ENDED 30 JUNE 2008

1. REPORTING ENTITY

Orbital Corporation Limited (the “Company”) is a company domiciled in Australia. The address of the Company’s registered office is 4 Whipple Street, Balcatta, Western Australia. The consolidated financial report of the Company for the year ended 30 June 2008, and the comparative periods, comprises the Company and its subsidiaries (together referred to as the “Group”) and the Group’s interest in jointly controlled entities.

The consolidated financial report was authorised for issue by the directors on 20 August 2008.

2. BASIS OF PREPARATION

(a) Statement of Compliance

The financial report complies with Australian Accounting Standards as issued by the Australian Accounting Standards Board and International Financial Reporting Standards (IFRS) as issued by the International Accounting Standards Board.

(b) Basis of Measurement

The consolidated financial statements have been prepared on the historical cost basis except for derivative financial instruments which are measured at fair value.

The methods used to measure fair values are discussed further in note 5.

(c) Functional and Presentation Currency

These consolidated financial statements are presented in Australian dollars, which is the Company’s functional currency and the functional currency of the majority of the Group.

The Company is of a kind referred to in ASIC Class Order 98/100 dated 10 July 1998 and in accordance with that Class Order, all financial information presented in Australian dollars has been rounded to the nearest thousand unless otherwise stated.

(d) Use of Estimates and Judgements

The preparation of financial statements requires management to make judgements, estimates and assumptions that affect the application of accounting policies and reported amounts of assets, liabilities, income and expenses. Actual results may differ from these estimates.

Estimates and underlying assumptions are reviewed on an ongoing basis. Revisions to accounting estimates are recognised in the period in which the estimate is revised if the revision affects only that period, or in the period of the revision and future periods if the revision affects both current and future periods.

Judgements made by management in the application of Australian Accounting Standards and IFRS that have a significant effect on the financial report and estimates with a significant risk of material adjustment in the next year are discussed in note 4.

3. SIGNIFICANT ACCOUNTING POLICIES

The accounting policies set out below have been applied consistently to all periods presented in these consolidated financial statements, and have been applied consistently by Group entities.

The Group has adopted AASB 7/IFRS 7 Financial Instruments: Disclosures and all consequential amendments which became applicable on 1 July 2007. The adoption of this standard has only affected the disclosure in these financial statements. There has been no affect on profit and loss or the financial position of the entity.

Certain comparative amounts have been reclassified to conform with the current year’s presentation. For details of these changes refer to note 27(c).

F-8

NOTES TO THE FINANCIAL STATEMENTS FOR THE YEAR ENDED 30 JUNE 2008

3. SIGNIFICANT ACCOUNTING POLICIES (continued)

(a) Basis of Consolidation

(i) Subsidiaries

Subsidiaries are entities controlled by the Group. Control exists when the Company has the power, directly or indirectly, to govern the financial and operating policies of an entity so as to obtain benefit from its activities. In assessing control, potential voting rights that presently are exercisable or convertible are taken into account. The financial statements of subsidiaries are included from the date control commences until the date control ceases.

Investments in subsidiaries are carried at their cost of acquisition less impairment losses in the Company’s financial statements.

(ii) Joint Ventures

The Group has an interest in a joint venture that is a jointly controlled entity. Joint ventures are contractual arrangements whereby two or more parties undertake an economic activity that is subject to joint control. A jointly controlled entity is a joint venture that involves the establishment of a corporation, partnership or other entity in which each venturer has an interest. The Group accounts for its interest in the jointly controlled entity using the equity method of accounting. Under the equity method, the investment in the joint venture is carried in the consolidated balance sheet at cost plus post-acquisition changes in the Group’s share of net assets of the joint venture. After application of the equity method, the Group determines whether it is necessary to recognise any impairment loss with respect to the Group’s net investment in the joint venture.

The Group’s share of the joint venture’s post-acquisition profits or losses is recognised in the income statement, and its share of post-acquisition movements in reserves is recognised in reserves. The cumulative post-acquisition movements are adjusted against the carrying amount of the investment. Dividends received from the joint venture are recognised in the consolidated financial statements as a reduction of the carrying amount of the investment.

When the Group’s share of losses in the joint venture equals or exceeds its interest in the joint venture, including any unsecured long-term receivables or loans, the Group does not recognise further losses, unless it has incurred obligations or made payments on behalf of the joint venture.

The reporting date of the joint venture and the Group are identical. The joint venture reports under US GAAP and appropriate adjustments are made to align the accounting policies to IFRS.

(iii) Transactions Eliminated on Consolidation

Intra-group balances, and any unrealised gains and losses or income and expenses arising from intra-group transactions, are eliminated in preparing the consolidated financial statements. Unrealised gains arising from transactions with joint venture entities are eliminated to the extent of the Group’s interest in the entity with adjustments made to the investment in the joint venture. Unrealised losses are eliminated in the same way as unrealised gains, but only to the extent that there is no evidence of impairment. Gains and losses are recognised as the contributed assets are consumed or sold by the joint venture entity or, if not consumed or sold by the joint venture entity, when the Group’s interest in such entities is disposed of.

(b) Foreign Currency

(i) Foreign currency transactions

Transactions in foreign currencies are translated to the respective functional currencies of Group entities at exchange rates at the dates of the transactions. Monetary assets and liabilities denominated in foreign currencies at the reporting date (except those representing the Group’s net investment in subsidiaries and jointly controlled entities – see below) are retranslated to the functional currency (Australian dollars) at the exchange rate at that date. Foreign exchange differences arising on translation are recognised in the income statement. Non-monetary assets and liabilities that are measured in terms of historical cost in a foreign currency are translated using the exchange rate at the date of the transaction. Non-monetary assets and liabilities denominated in foreign currencies that are stated at fair value are translated to the functional currency (Australian dollars) at exchange rates ruling at the dates the fair value was determined.

(ii) Financial statements of foreign operations

The assets and liabilities of foreign operations are translated to Australian dollars at exchange rates ruling at the reporting date. The revenues and expenses of foreign operations are translated to Australian dollars at rates approximating the exchange rates ruling at the dates of the transactions. Foreign exchange differences arising on retranslation are recognised directly in a separate component of equity described as ‘foreign currency translation reserve’.

(iii) Net investment in foreign operations

Exchange differences arising from the translation of the net investment in foreign operations are taken to the foreign currency translation reserve. They are released into the income statement upon disposal.

(c) Financial Instruments

(i) Non-derivative financial instruments

Non-derivative financial instruments comprise trade and other receivables, cash and cash equivalents, loans and borrowings, and trade and other payables.

Non-derivative financial instruments are recognised initially at fair value plus, for instruments not at fair value through profit or loss, any directly attributable transaction costs. Subsequent to initial recognition non-derivative financial instruments are measured as described below.

F-9

NOTES TO THE FINANCIAL STATEMENTS FOR THE YEAR ENDED 30 JUNE 2008

3. SIGNIFICANT ACCOUNTING POLICIES (continued)

(c) Financial Instruments (continued)

(i) Non-derivative financial instruments (continued)

A financial instrument is recognised if the Group becomes party to the contractual provisions of the instrument. Financial assets are derecognised if the Group’s contractual rights to the cash flows from the financial asset expire or if the Group transfers the financial asset to another party without retaining control or substantially all risks and rewards of the asset. Regular way purchases and sales of financial assets are accounted for at trade date, i.e., the date that the Group commits itself to purchase or sell the asset. Financial liabilities are derecognised if the Group’s obligations specified in the contract expire or are discharged or cancelled.

Trade receivables

Trade receivables are stated at their amortised cost, less impairment losses. Normal settlement terms are 30 to 60 days. The collectability of debts is assessed at balance sheet date and specific allowance is made for any doubtful accounts. Individual debts that are known to be uncollectible are written off when identified. An impairment provision is recognised when there is objective evidence that the Group will not be able to collect the receivable. Financial difficulties of the debtor, default payments or debts more than 60 days overdue are considered objective evidence of impairment. The amount of the impairment loss is the receivable carrying amount compared to the present value of estimated future cash flows, discounted at the original effective interest rate.

Cash

Cash and cash equivalents comprise cash balances, at call deposits and bank-endorsed bills of exchange at discounted value.

Non-interest bearing liabilities

Included in non-current liabilities is an amount owing to the Government of Western Australia resulting from a loan of $19,000,000 made to the Company in 1989. The loan is interest-free until repayment of this loan becomes due in May 2014 or prior to that date, by five equal annual instalments, if the worldwide aggregate number of OCP engines produced exceeds 5,000,000. The aggregate number of engines produced with OCP technology as at 30 June 2008 totalled approximately 597,000 (2007: 556,000).

The non-interest bearing loan from the Government of Western Australia was recognised initially at fair value and subsequently stated at amortised cost with any difference between cost and repayment value being recognised in the income statement over the period of the borrowings on an effective interest basis.

Included in current liabilities is an amount owing to Continental Corporation for the Group to maintain its 50% interest in Synerject LLC by the payment of US$4 million which has been deferred from 28 September 2006 to 30 June 2008. The liability was initially recognised at its fair value and subsequently stated at amortised cost with any difference between the fair value and the future payment value being recognised in the income statement over the period of the settlement deferral under the effective interest rate method.

Trade payables

Liabilities are recognised for amounts due to be paid in the future for goods or services received. Trade and other payables are stated at their amortised cost.

Trade payables are non-interest bearing and are normally settled on 30-day terms.

(ii) Derivative financial instruments

The Group may use derivative financial instruments to hedge its exposure to foreign exchange fluctuations and interest rate movements. In accordance with its treasury policy, the Group entity does not hold the derivative financial instruments for trading purposes. However, derivatives that do not qualify for hedge accounting are accounted for as trading instruments.

Derivative financial instruments are recognised initially at fair value. Subsequent to initial recognition, derivative financial instruments are stated at fair value. Changes in the fair value of the derivative financial instrument that are not designated as cash flow hedging instruments are recognised in profit or loss.

Cash flow hedges

Changes in the fair value of the derivative hedging instrument designated as a cash flow hedge are recognised directly in equity to the extent that the hedge is effective. To the extent that the hedge is ineffective, changes in fair value are recognised in profit or loss.

If the hedging instrument no longer meets the criteria for hedge accounting, expires or is sold, terminated or exercised, then hedge accounting is discontinued prospectively. The cumulative gain or loss previously recognised in equity remains there until the forecast transaction occurs. When the hedged item is a non-financial asset, the amount recognised in equity is transferred to the carrying amount of the asset when it is recognised. In other cases the amount recognised in equity is transferred to profit or loss in the same period that the hedged item affects profit or loss.

(d) Property, Plant and Equipment

(i) Recognition and measurement

Items of property, plant and equipment are stated at cost less accumulated depreciation and impairment losses.

Cost includes expenditures that are directly attributable to the acquisition of the asset.

(ii) Subsequent costs

The cost of replacing part of an item of property, plant and equipment is recognised in the carrying amount of the item if it is probable that the future economic benefits embodied within the part will flow to the Group and its cost can be measured reliably. The cost of day-to-day servicing of property, plant and equipment are recognised in profit or loss as incurred.

F-10

NOTES TO THE FINANCIAL STATEMENTS FOR THE YEAR ENDED 30 JUNE 2008

3. SIGNIFICANT ACCOUNTING POLICIES (continued)

(d) Property, Plant and Equipment (continued)

(iii) Depreciation and Amortisation

Items of property, plant and equipment, including buildings but excluding freehold land, are depreciated/amortised on a straight line basis over their estimated useful lives. The depreciation rates used in the current and comparative period for each class of asset are as follows: Buildings 2.5%; Plant and Equipment 6.67% to 33.3%. Assets are depreciated or amortised from the date of acquisition.

The residual value, the useful life and the depreciation method applied to an asset are reassessed at least annually.

(iv) Valuation

Land and buildings are independently valued every three years on a market value basis of valuation. The Directors then use these valuations to assess the recoverable amount of land and buildings.

(v) Asset Sales

The net profit or loss from asset sales are included as other income or expenses of the Group. The profit or loss on disposal of assets is brought to account at the date that an unconditional contract of sale is signed. The profit or loss on disposal is calculated as the difference between the carrying amount of the asset at the time of disposal and the net proceeds on disposal.

(e) Intangibles

(i) Research and Development

Expenditure on research activities, undertaken with the prospect of gaining new scientific or technical knowledge and understanding, is recognised in the income statement as an expense as incurred.

Expenditure on development activities, whereby research findings are applied to a plan or design for the production of new or substantially improved products and processes, is capitalised if the product or process is technically and commercially feasible and the Group has sufficient resources to complete development.

Expenditure on intangibles which may be capitalised includes the cost of materials, direct labour and an appropriate proportion of overheads. Other development expenditure is recognised in the income statement as an expense as incurred. Capitalised expenditure is stated at cost less accumulated amortisation and impairment losses. Amortisation is charged to the income statement on a straight-line basis over the estimated useful lives of intangible assets unless such lives are indefinite.

(ii) Patents, Licences and Technologies

Patents, licences and technology development and maintenance costs are expensed as incurred.

(f) Inventories

Inventories are carried at the lower of cost and net realisable value. Cost is based on the first-in first-out principle and includes expenditure incurred in acquiring the inventories and bringing them to their present location and condition. Net realisable value is the estimated selling price in the ordinary course of business, less the estimated costs of completion and selling expenses.

(g) Impairment

(i) Financial assets

A financial asset is considered to be impaired if objective evidence indicates that one or more events have had a negative effect on the estimated future cash flows of that asset.

An impairment loss in respect of a financial asset measured at amortised cost is calculated as the difference between its carrying amount, and the present value of the estimated future cash flows discounted at the original effective interest rate. An impairment loss in respect of an available-for-sale financial asset is calculated by reference to its current fair value.

Individually significant financial assets are tested for impairment on an individual basis. The remaining financial assets are assessed collectively in groups that share similar credit risk characteristics.

All impairment losses are recognised in profit or loss. Any cumulative loss in respect of an available-for-sale financial asset recognised previously in equity is transferred to profit or loss.

An impairment loss is reversed if the reversal can be related objectively to an event occurring after the impairment loss was recognised. For financial assets measured at amortised cost and available-for-sale financial assets that are debt securities, the reversal is recognised in profit or loss. For available-for-sale financial assets that are equity securities, the reversal is recognised directly in equity.

(ii) Non-financial assets

The carrying amounts of the Group’s non-financial assets, other than inventories and deferred tax assets, are reviewed at each reporting date to determine whether there is any indication of impairment. If any such indication exists then the asset’s recoverable amount is estimated.

An impairment loss is recognised if the carrying amount of an asset or its cash-generating unit exceeds its recoverable amount. A cash-generating unit is the smallest identifiable asset group that generates cash flows that largely are independent from other assets and groups. Impairment losses are recognised in profit or loss. Impairment losses recognised in respect of cash-generating units are allocated first to reduce the carrying amount of any goodwill allocated to the units and then to reduce the carrying amount of the other assets in the unit (group of units) on a pro rata basis.

F-11

NOTES TO THE FINANCIAL STATEMENTS FOR THE YEAR ENDED 30 JUNE 2008

3. SIGNIFICANT ACCOUNTING POLICIES (continued)

(g) Impairment (continued)

The recoverable amount of an asset or cash-generating unit is the greater of its value in use and its fair value less costs to sell. In assessing value in use, the estimated future cash flows are discounted to their present value using a pre-tax discount rate that reflects current market assessments of the time value of money and the risks specific to the asset.

An impairment loss in respect of goodwill is not reversed. In respect of other assets, impairment losses recognised in prior periods are assessed at each reporting date for any indications that the loss has decreased or no longer exists. An impairment loss is reversed if there has been a change in estimates used to determine the recoverable amount. An impairment loss is reversed only to the extent that the asset’s carrying amount does not exceed the carrying amount that would have been determined, net of depreciation or amortisation, if no impairment loss had been recognised.

(h) Share capital

(i) Dividends

Dividends are recognised as a liability in the period in which they are declared.

(ii) Transaction Costs

Transaction costs of an equity transaction are accounted for as a deduction from equity, net of any related income tax benefit.

(i) Employee Benefits

(i) Short-term benefits

The provisions for employee entitlements to wages, salaries and annual leave, to be settled within 12 months of year end represent present obligations resulting from employees’ services provided up to the balance date, calculated at undiscounted amounts based on wage and salary rates that the Group expects to pay as at the reporting date including related on-costs, such as workers’ compensation and payroll tax. Expenses for non-accumulating sick leave are recognised when the leave is taken and are measured at the rates paid or payable.

(ii) Long Service Leave

The provision for employee entitlements to long service leave represents the present value of the estimated future cash outflows to be made resulting from employees’ services provided up to balance sheet date.

The provision is calculated using estimated future increases in wage and salary rates including related on-costs and expected settlement dates based on the Group’s experience with staff departures and is discounted using the rates attached to national government securities at balance sheet date, which most closely match the terms of maturity of the related liabilities.

(iii) Defined Contribution Superannuation Fund

Obligations for contributions to the defined contribution superannuation fund are recognised as an expense in the income statement as incurred.

(iv) Share-based payment transactions

Employees have been offered the right to take up shares in the Company under two plans. The Employee Share Plan No.1 provides $1,000 of shares per annum and is subject to qualification by length of service. The Executive Long Term Share Plan (“ELTSP”) is subject to qualification by length of service and achievement of corporate performance targets related to returns to shareholders. The fair value of shares granted to employees is recognised as an employee benefit expense with a corresponding increase in equity. The fair value of the shares granted under the Employee Share Plan No.1 is based on the market price of the shares on the date of issue. The fair value of the ELTSP is measured at grant date taking into account market performance conditions only, and spread over the vesting period during which the employees become unconditionally entitled to the performance–based shares. The fair value of the shares granted is measured using a Monte-Carlo simulation model. The amount recognised as an expense is adjusted to reflect the actual number of shares that vest except where forfeiture is only due to market conditions that are not met.

(j) Provisions - Warranties

A provision is recognised if, as a result of a past event, the Group has a present legal or constructive obligation that can be estimated reliably, and it is probable that an outflow of economic benefits will be required to settle the obligation. Provisions are determined by discounting the expected future cash flows at a pre-tax rate that reflects current market assessments of the time value of money and the risks specific to the liability.

Provision for warranty is recognised when the underlying products are sold. The provision is based on historical claim data.

F-12

NOTES TO THE FINANCIAL STATEMENTS FOR THE YEAR ENDED 30 JUNE 2008

3. SIGNIFICANT ACCOUNTING POLICIES (continued)

(k) Revenue Recognition

Revenues are recognised at fair value of the consideration received net of the amount of goods and services tax (GST). Exchanges of goods or services of the same nature and value without any cash consideration are not recognised as revenues.

(i) Revenue from Rendering of Services

Revenue from services rendered is recognised in the income statement in proportion to the stage of completion of the transaction at the reporting date. The stage of completion is assessed by reference to the extent of work performed. No revenue is recognised if there are significant uncertainties regarding recovery of the consideration due, or the costs incurred or to be incurred cannot be measured reliably, or there is a risk of return of goods or there is continuing management involvement with the goods.

Revenue received in advance represents cash payments received from customers in accordance with contractual commitments prior to the performance of the service.

(ii) Licence and royalties

Revenue earned under various licence, royalty and other agreements is recognised on an accrual basis upon the satisfactory completion of contracted technical specifications. Additional revenue may be earned after a fixed time interval or after delivery of a prototype engine and/or hardware meeting specified performance targets, provided the licence agreements are not terminated. Under the terms of the licence agreements, licensees are not specifically obliged to commence production and sale of engines using OCP Technology and may terminate the agreements upon notice to Orbital. If a licensee were to terminate its licence agreement with Orbital, the licensee would forfeit the licence and any technical disclosure fees paid through to the date of termination. Revenue under royalty agreements is recognised when such amounts become due and payable.

(iii) Interest Revenue

Revenue is recognised as interest accrues using the effective interest method.

(iv) Dividends

Revenue is recognised when the Group’s right to receive the payment is established.

(l) Leases

(i) Operating lease payments

Payments made under operating leases are recognised in the income statement on a straight-line basis over the term of the lease.

(m) Finance expense

Financing costs include interest payable on borrowings calculated using the effective interest method, and gains and losses on hedging instruments that are recognised in the income statement. Borrowing costs are expensed as incurred and included in net financing costs.

(n) Income Tax

(i) Current income tax expense and liability

Income tax on the profit or loss for the year presented comprises current and deferred tax. Income tax is recognised in the income statement except to the extent that it relates to items recognised directly in equity, in which case it is recognised in equity.

Current tax is the expected tax payable on the taxable income for the year, using tax rates enacted or substantially enacted at the balance sheet date, and any adjustment to tax payable in respect of previous years.

(ii) Deferred income tax expense and liability

Deferred tax is provided using the balance sheet liability method, providing for temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for taxation purposes. The amount of deferred tax provided is based on the expected manner of realisation or settlement of the carrying amount of assets and liabilities, using tax rates enacted or substantively enacted at the balance sheet date.

A deferred tax asset is recognised only to the extent that it is probable that future taxable profits will be available against which the asset can be utilised. Deferred tax assets are reduced to the extent that it is no longer probable that the related tax benefit will be realised.

F-13

NOTES TO THE FINANCIAL STATEMENTS FOR THE YEAR ENDED 30 JUNE 2008

3. SIGNIFICANT ACCOUNTING POLICIES (continued)

(n) Income Tax (continued)

(iii) Tax Consolidation

The Company and its wholly-owned Australian resident entities have formed a tax-consolidated group with effect from 1 July 2002 and are therefore taxed as a single entity from that date. The head entity within the tax-consolidated group is Orbital Corporation Limited.

The head entity and the controlled entities in the tax consolidated group continue to account for their own current and deferred tax amounts. The Group has applied the group allocation approach in determining the appropriate amount of current taxes and deferred taxes to allocate to members of the tax consolidated group.

Any current tax liabilities (or assets) and deferred tax assets arising from unused tax losses of the subsidiaries is assumed by the head entity in the tax-consolidated group and are recognised as amounts payable (receivable) to (from) other entities in the tax-consolidated group in conjunction with any tax funding arrangement amounts. Any difference between these amounts is recognised by the Company as an equity contribution or distribution.

The Company recognises deferred tax assets arising from unused tax losses of the tax-consolidated group to the extent that it is probable that future taxable profits of the tax-consolidated group will be available against which the asset can be utilised.

Any subsequent period adjustments to deferred tax assets arising from unused tax losses as a result of revised assessments of the probability of recoverability is recognised by the head entity only.

(o) Segment Reporting

A segment is a distinguishable component of the Group that is engaged either in providing products or services (business segment), or in providing products or services within a particular economic environment (geographical segment), which is subject to risks and rewards that are different from those of other segments. The Group’s primary format for segment reporting is based on business segments.

(p) Goods and services tax

Revenue, expenses and assets are recognised net of the amount of goods and services tax (GST), except where the amount of GST incurred is not recoverable from the taxation authority. In these circumstances, the GST is recognised as part of the cost of acquisition of the asset or as part of the expense.

Receivables and payables are stated with the amounts of GST included. The net amount of GST recoverable from, or payable to, the ATO is included as a current asset or liability in the balance sheet.

Cash flows are included in the statement of cash flows on a gross basis. The GST components of cash flows arising from investing and financing activities which are recoverable from, or payable to, the ATO are classified as operating cash flows.

(q) Earnings per share

The Group presents basic and diluted earnings per share (EPS) data for its ordinary shares. Basic EPS is calculated by dividing the profit or loss attributable to ordinary shareholders of the Company by the weighted average number of ordinary shares outstanding during the period.

Diluted EPS is determined by adjusting the profit or loss attributable to ordinary shareholders and the weighted average number of ordinary shares outstanding for the effects of all dilutive potential ordinary shares.

(r) Government grants

Government grants are recognised when the grant is received.

When the grant relates to an asset (investment grants relating to the construction of a heavy duty engine test facility), the fair value is credited to deferred income and is released to the income statement over the expected useful life of the relevant asset by equal annual instalments.

(s) Accounting estimates and judgements

Management discussed with the Audit Committee the development, selection and disclosure of the Group’s critical accounting policies and estimates and the application of these policies and estimates. The estimates and judgements that have a significant risk of causing a material adjustment to the carrying amounts of assets and liabilities within the next financial year are discussed in note 5.

F-14

NOTES TO THE FINANCIAL STATEMENTS FOR THE YEAR ENDED 30 JUNE 2008

3. STATEMENT OF SIGNIFICANT ACCOUNTING POLICIES (continued)

(t) New standards and interpretations not yet adopted

The following standards, amendments to standards and interpretations have been identified as those which may impact the entity in the period of initial application. They are available for early adoption at 30 June 2008, but have not been applied in preparing this financial report:

Reference	Title	Summary	Application date of standard*	Impact on Group financial report	Application date for Group*
AASB 8/IFRS 8 and AASB 2007-3/IFRS 2007-3	Operating Segments and consequential amendments to other Australian Accounting Standards	New standard replacing AASB 114/IFRS 114Segment Reporting, which adopts a management reporting approach to segment reporting.	1 January 2009	AASB 8/IFRS 8 is a disclosure standard so will have no direct impact on the amounts included in the Group’s financial statements, although it may indirectly impact the level at which goodwill is tested for impairment. In addition, the amendments may have an impact on the Group’s segment disclosures.	1 July 2009
AASB 123/IFRS 123 (Revised) and AASB 2007-6/IFRS 2007-6	Borrowing Costs and consequential amendments to other Australian Accounting Standards	The amendments to AASB 123/IFRS 123 require that all borrowing costs associated with a qualifying asset be capitalised.	1 January 2009	These amendments to AASB 123/IFRS 123 require that all borrowing costs associated with a qualifying asset be capitalised. The Group has no borrowing costs associated with qualifying assets and as such the amendments are not expected to have any impact on the Group’s financial report.	1 July 2009
AASB 101/ IFRS 101 (Revised) and AASB 2007-8/IFRS 2007-8	Presentation of Financial Statements and consequential amendments to other Australian Accounting Standards	Introduces a statement of comprehensive income. Other revisions include impacts on the presentation of items in the statement of changes in equity, new presentation requirements for restatements or reclassifications of items in the financial statements, changes in the presentation requirements for dividends and changes to the titles of the financial statements.	1 January 2009	These amendments are only expected to affect the presentation of the Group’s financial report and will not have a direct impact on the measurement and recognition of amounts disclosed in the financial report. The Group has not determined at this stage whether to present a single statement of comprehensive income or two separate statements.	1 July 2009
AASB 2008-1/IFRS 2008-1	Amendments to Australian Accounting Standard – Share-based Payments: Vesting Conditions and Cancellations	The amendments clarify the definition of ‘vesting conditions’, introducing the term ‘non-vesting conditions’ for conditions other than vesting conditions as specifically defined and prescribe the accounting treatment of an award that is effectively cancelled because a non-vesting condition is not satisfied.	1 January 2009	The Group has share-based payment arrangements that may be affected by these amendments. However, the Group has not yet determined the extent of the impact, if any.	1 July 2009

F-15

NOTES TO THE FINANCIAL STATEMENTS FOR THE YEAR ENDED 30 JUNE 2008

(t) New standards and interpretations not yet adopted (continued)

Reference	Title	Summary	Application date of standard*	Impact on Group financial report	Application date for Group*
AASB 3/IFRS 3 (Revised)	Business Combinations	The revised standard introduces a number of changes to the accounting for business combinations, the most significant of which allows entities a choice for each business combination entered into – to measure a non-controlling interest (formerly a minority interest) in the acquiree either at its fair value or at its proportionate interest in the acquiree’s net assets. This choice will effectively result in recognising goodwill relating to 100% of the business (applying the fair value option) or recognising goodwill relating to the percentage interest acquired. The changes apply prospectively.	1 July 2009	The Group may enter into some business combinations during the next financial year and may therefore consider early adopting the revised standard. The Group has not yet assessed the impact of early adoption, including which accounting policy to adopt.	1 July 2009
AASB 127/IFRS 127 (Revised)	Consolidated and Separate Financial Statements	Under the revised standard, a change in the ownership interest of a subsidiary (that does not result in loss of control) will be accounted for as an equity transaction.	1 July 2009	If the Group changes its ownership interest in existing subsidiaries in the future, the change will be accounted for as an equity transaction. This will have no impact on goodwill, nor will it give rise to a gain or a loss in the Group’s income statement.	1 July 2009
AASB 2008-3/IFRS 2008-3	Amendments to Australian Accounting Standards arising from AASB 3/IFRS 3 and AASB 127/IFRS 127	Amending standard issued as a consequence of revisions to AASB 3/IFRS 3 and AASB 127/IFRS 127.	1 July 2009	Refer to AASB 3/IFRS 3 (Revised) and AASB 127/IFRS 127 (Revised) above.	1 July 2009
Amendments to International Financial Reporting Standards	Cost of an Investment in a Subsidiary, Jointly Controlled Entity or Associate	The main amendments of relevance to Australian entities are those made to IAS 27 deleting the ‘cost method’ and requiring all dividends from a subsidiary, jointly controlled entity or associate to be recognised in profit or loss in an entity's separate financial statements (i.e., parent company accounts). The distinction between pre- and post-acquisition profits is no longer required. However, the payment of such dividends requires the entity to consider whether there is an indicator of impairment. AASB 127/IFRS 127 has also been amended to effectively allow the cost of an investment in a subsidiary, in limited reorganisations, to be based on the previous carrying amount of the subsidiary (that is, share of equity) rather than its fair value.	1 January 2009	Recognising all dividends received from subsidiaries, jointly controlled entities and associates as income will likely give rise to greater income being recognised by the parent entity after adoption of these amendments. In addition, if the Group enters into any group reorganisation establishing new parent entities, an assessment will need to be made to determine if the reorganisation meets the conditions imposed to be effectively accounted for on a ‘carry-over basis’ rather than at fair value.	1 July 2009

F-16

NOTES TO THE FINANCIAL STATEMENTS FOR THE YEAR ENDED 30 JUNE 2008

(t) New standards and interpretations not yet adopted (continued)

Reference	Title	Summary	Application date of standard*	Impact on Group financial report	Application date for Group*
Amendments to International Financial Reporting Standards	Improvements to IFRSs	The improvements project is an annual project that provides a mechanism for making non-urgent, but necessary, amendments to IFRSs. The IASB has separated the amendments into two parts: Part 1 deals with changes the IASB identified resulting in accounting changes; Part II deals with either terminology or editorial amendments that the IASB believes will have minimal impact.	1 January 2009 except for amendments to IFRS 5, which are effective from 1 July 2009.	The Group has not yet determined the extent of the impact of the amendments, if any.	1 July 2009

* designates the beginning of the applicable annual reporting period unless otherwise stated.

4. FINANCIAL RISK MANAGEMENTS OBJECTIVES AND POLICIES

The Group’s principal financial instruments comprise cash and short-term deposits, receivables, payables, and non-interest bearing liabilities.

The Group manages its exposure to key financial risks, including interest rate and currency risk in accordance with the Group’s financial risk management policy. The objective of the policy is to support the delivery of the Group’s financial targets whilst protecting future financial security.

The Group from time-to-time enters into derivative transactions, principally forward currency contracts. The purpose is to manage the currency risks arising from the Group’s operations and its sources of revenue. The main risks arising from the Group’s financial instruments are interest rate risk, foreign currency risk, credit risk and liquidity risk. The Group uses different methods to measure and manage different types of risks to which it is exposed. These include monitoring levels of exposure to interest rate and foreign exchange risk and assessments of market forecasts for interest and foreign exchange rates. Ageing analyses and monitoring of specific credit allowances are undertaken to manage credit risk, liquidity risk is monitored through the development of future rolling cash flow forecasts.

The Board reviews and agrees policies for managing each of these risks as summarised below.

Primary responsibility for identification and control of financial risks rests with the Audit Committee under the authority of the Board. The Board reviews and agrees policies for managing each of the risks identified below, including the setting of limits for hedging cover of foreign currency and interest rate risk, credit allowances, and future cash flow forecast projections.

Risk Exposures and Responses

Interest rate risk

The Group’s exposure to market interest rates relates primarily to the Group’s cash and cash equivalents on deposit with Australian banks.

The primary goal of the Group is to maximize returns on surplus cash, using deposits with maturities of less than 90 days. Management continually monitors the returns on funds invested.

At balance date, the Group had the following mix of financial assets exposed to Australian variable interest rate risk that are not designated in cash flow hedges:

	2008	2007	2006
	$’000	$’000	$’000
Financial assets
Cash and cash equivalents	8,804	11,287	3,325
	8,804	11,287	3,325

F-17

NOTES TO THE FINANCIAL STATEMENTS FOR THE YEAR ENDED 30 JUNE 2008

4. FINANCIAL RISK MANAGEMENTS OBJECTIVES AND POLICIES (CONTINUED)

The following sensitivity analysis is based on the interest rate risk exposures in existence at the balance sheet date:

At 30 June 2008, if interest rates had moved, as illustrated in the table below, with all other variables held constant, post tax profit and equity would have been affected as follows:

	Post Tax Profit Higher/(Lower)						Other Equity Higher/(Lower)
	2008		2007		2006		2008	2007	2006
	$’000		$’000		$’000		$’000	$’000	$’000
Consolidated
+1% (100 basis points)	88		113		33		—	—	—
-.5% (50 basis points)	(44	)	(56	)	(17	)	—	—	—

The movements in profit are due to higher/lower interest revenue from variable rate cash balances. The sensitivity is the same in 2008 as in 2007 because the only balances affected by interest rates are cash balances.

Foreign currency risk

As a result of investment in the equity accounted jointly controlled entity, Synerject LLC, the Group’s balance sheet can be affected significantly by movements in the US$/A$ exchange rates. The present value of the additional investment in Synerject LLC is recognized in its functional currency and is not exposed to any foreign currency risk.

The Group also has transactional currency exposures. Such exposure arises from sales or purchases by an operating entity in currencies other than the functional currency.

Approximately 43% of the Group’s sales are denominated in currencies other than the functional currency of the operating entity making the sale, whilst almost 99% of costs are denominated in the unit’s functional currency.

With respect to assets and liabilities denominated in foreign currencies, the Group ensures that its net exposure is kept to an acceptable level by buying or selling foreign currencies at spot rates when necessary. The Group does not hold foreign currency positions for trading purposes.

At 30 June 2008, the Group had the following exposure to US$ foreign currency that is not designated in cash flow hedges:

	2008	2007	2006
	$’000	$’000	$’000
Financial assets
Cash and cash equivalents	172	317	129
Trade and other receivables	952	1,076	1,316
	1,124	1,393	1,445
Financial liabilities
Trade and other payables	—	—	—
Loans and advances from controlled entities	—	—	—
	—	—	—

F-18

NOTES TO THE FINANCIAL STATEMENTS FOR THE YEAR ENDED 30 JUNE 2008

4. FINANCIAL RISK MANAGEMENTS OBJECTIVES AND POLICIES (CONTINUED)

The following sensitivity is based on the foreign currency risk exposures in existence at the balance sheet date:

At 30 June 2008, had the Australian Dollar moved, as illustrated in the table below, with all other variables held constant, post tax profit and equity would have been affected as follows:

	Post Tax Profit Higher/(Lower)						Other Equity Higher/(Lower)
	2008		2007		2006		2008		2007		2006
	$’000		$’000		$’000		$’000		$’000		$’000
Consolidated
AUD/USD +10%	(102	)	(127	)	(131	)	178		373		428
AUD/USD -5%	96		240		76		(167	)	(707	)	(248	)

The movements in profit in 2007 are more sensitive than in 2008 due to the higher level of US Dollar cash and cash equivalents at balance date.

Credit risk

Credit risk arises from the financial assets of the Group, which comprise cash and cash equivalents and trade and other receivables. The Group’s exposure to credit risk arises from potential default of the counter party, with a maximum exposure equal to the carrying amount of these instruments.

The Group does not hold any credit derivatives to offset its credit exposure, however the Group does hold receivable insurance where appropriate.

It is the Group’s policy that all customers who wish to trade on credit terms are subject to credit verification procedures including an assessment of their independent credit rating, financial position, past experience and industry reputation. Risk limits are set for each individual customer in accordance with parameters set by management. These risk limits are regularly monitored.

In addition, receivable balances are monitored on an ongoing basis.

There are no significant concentrations of credit risk within the Group and financial instruments are only invested with a major financial institution to minimise the risk of default of counterparties.

Liquidity risk

The Group’s does not have any bank overdrafts, bank loans, preference shares, finance leases or committed available credit lines as at 30 June 2008.

The only external borrowing of the Group is the interest free Western Australian Government loan of $19 million repayable in May 2014.

The table below reflects all contractually fixed pay-offs, repayments and interest resulting from recognised financial liabilities as of 30 June 2008. For all obligations the respective undiscounted cash flows for the respective upcoming fiscal years are presented. Cash flows for financial liabilities without fixed amount or timing are based on the conditions existing at 30 June 2008. The Group’s approach to managing liquidity is to ensure, as far as is possible, that it will always have sufficient liquidity to meet its liabilities when due and payable without incurring unacceptable losses or risks.

The remaining contractual maturities of the Group’s financial liabilities are:

	2008	2007	2006
	$’000	$’000	$’000
6 months or less	7,322	4,214	3,268
6-12 months	—	—	—
1-5 years	—	4,543	—
Over 5 years	19,000	19,000	19,000
	26,322	27,757	22,268

Maturity analysis of financial assets and liability based on management’s expectation.

The risk implied from the values shown in the table below, reflects a balanced view of cash inflows and outflows. Trade payables and other financial liabilities mainly originate from the financing of assets used in our ongoing operations such as property, plant, equipment and investments in working capital eg inventories and trade receivables. These assets are considered in the Group’s overall liquidity risk.

F-19

NOTES TO THE FINANCIAL STATEMENTS FOR THE YEAR ENDED 30 JUNE 2008

4. FINANCIAL RISK MANAGEMENTS OBJECTIVES AND POLICIES (CONTINUED)

	<6 months	6-12 months	1-5 years	>5 years		Total
	$’000	$’000	$’000	$’000		$’000
Consolidated
Financial assets
Cash and cash equivalents	8,804	—	—	—		8,804
Trade and other receivables	7,198	—	—	—		7,198
	16,002	—	—	—		16,002
Consolidated
Financial liabilities
Trade & other payables	7,322	—	—	—		7,322
Non-interest bearing liabilities	—	—	—	14,151		14,151
	7,322	—	—	14,151		21,473
Net maturity	8,680	—	—	(14,151	)	(5,471	)

Fair value

The methods for estimating fair value are outlined in the relevant notes to the financial statements.

5. SIGNIFICANT ACCOUNTING JUDGEMENTS, ESTIMATES AND ASSUMPTIONS

The preparation of the financial statements requires management to make judgements, estimates and assumptions that affect the reported amounts in the financial statements. Management continually evaluates its judgements and estimates in relation to assets, liabilities, contingent liabilities, revenue and expenses. Management bases its judgements and estimates on historical experience and on other various factors it believes to be reasonable under the circumstances, the result of which form the basis of the carrying values of the assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions and conditions.

Management has identified the following critical accounting policies for which significant judgements, estimates and assumptions are made. Actual results may differ from these estimates under different assumptions and conditions and may materially affect financial results or the financial position reported in future periods.

Further details of the nature of these assumptions and conditions may be found in the relevant notes to the financial statements.

(a) Significant accounting judgements

Impairment of non-financial assets other than goodwill

The Group assesses impairment of all assets at each reporting date by evaluating conditions specific to the Group and to the particular asset that may lead to impairment. These include product and manufacturing performance, technology, economic and political environments and future product expectations. If an impairment trigger exists the recoverable amount of the asset is determined. Management do not consider that triggers for impairment testing exist at balance date and as such these assets have not been tested for impairment in this financial period.

Capitalised development costs

Development costs are only capitalised when it can be demonstrated that the technical feasibility of completing the intangible asset is valid so that the asset will be available for use or sale.

Taxation

The Group’s accounting policy for taxation requires management’s judgement as to the types of arrangements considered to be a tax on income in contrast to an operating cost. Judgement is also required in assessing whether deferred tax assets and certain deferred tax liabilities are recognised on the balance sheet. Deferred tax assets, including those arising from unrecouped tax losses, capital losses and temporary differences, are recognised only where it is considered more likely than not that they will be recovered, which is dependent on the generation of sufficient future taxable profits. Assumptions about the generation of future taxable profits and repatriation of retained earnings depend on management’s estimates of future cash flows. These depend on estimates of future production and sales volumes, operating costs, capital expenditure, dividends and other capital management transactions. Judgements are also required about the application of income tax legislation. These judgements and assumptions are subject to risk and uncertainty, hence there is a possibility that changes in circumstances will alter expectations, which may impact the amount of deferred tax assets and deferred tax liabilities recognised on the balance sheet and the amount of other tax losses and temporary differences not yet recognised. In such circumstances, some or all of the carrying amounts of recognised deferred tax assets and liabilities may require adjustment, resulting in a corresponding credit or charge to the income statement.

F-20

NOTES TO THE FINANCIAL STATEMENTS FOR THE YEAR ENDED 30 JUNE 2008

5. SIGNIFICANT ACCOUNTING JUDGEMENTS, ESTIMATES AND ASSUMPTIONS (continued)

b) Significant accounting estimates and assumptions

Share-based payment transactions

The Group measures the cost of equity-settled transactions with employees by reference to the fair value of the equity instruments at the date at which they are granted. The fair value of shares granted under the Employee Share Plan No.1 is the market value on the date of issue. The fair value of the Executive Long Term Share Plan shares is determined by an external valuer using a monte-carlo simulation model, with the assumptions detailed in note 32. The accounting estimates and assumptions relating to equity-settled share-based payments would have no impact on the carrying amounts of assets and liabilities within the next annual reporting period but may impact expenses and equity.

Product warranty

In determining the level of provision required for product warranties the Group has made judgements in respect of the expected performance of the product, number of customers who will actually use the product warranty and how often, and the costs of fulfilling the performance of the product warranty. Historical experience and current knowledge of the performance of products has been used in determining this provision. The related carrying amounts are disclosed in note 24.

Estimation of useful lives of assets

The estimation of the useful lives of assets has been based on historical experience as well as manufacturers’ warranties (for plant and equipment). In addition, the condition of the assets is assessed at least once per year and considered against the remaining useful life. Adjustments to useful lives are made when considered necessary.

6. SEGMENT REPORTING

Segment information is presented in respect of the Group’s business and geographical segments. The primary format, business segment, is based on the Group’s management and internal reporting structure.

Inter-segment pricing is determined on an arm’s length basis.

Segment results, assets and liabilities include items directly attributable to a segment as well as those that can be allocated on a reasonable basis. Unallocated items comprise mainly interest-earning assets and revenue, interest-bearing loans, borrowings and expenses, and corporate assets, income and expenses.

Segment capital expenditure is the total cost incurred during the period to acquire segment assets that are expected to be used for more than one period.

Business segments

The Group comprises the following main business segments:

• Engineering services; and

• Royalties and licences.

Geographical segments

The engineering services and royalties and licences segments are managed on a worldwide basis.

In presenting information on the basis of geographical segments, segment revenue is based on the geographical location of customers. Segment assets are based on the geographical location of the assets.

F-21

NOTES TO THE FINANCIAL STATEMENTS FOR THE YEAR ENDED 30 JUNE 2008

6. REPORTS FOR BUSINESS AND GEOGRAPHICAL SEGMENTS (continued)

Revenue is derived predominantly from the provision of engineering services and the sale of intellectual property rights to Orbital’s OCP technology. The consolidated entity operates predominantly in the automotive, marine and motorcycle engine markets.

(a) Business Segments (primary reporting)

	Engineering Services				Royalties and licences (i)			Consolidated
	2008	2007		2006	2008	2007	2006	2008		2007		2006
	$’000	$’000		$’000	$’000	$’000	$’000	$’000		$’000		$’000
Segment Revenue	11,681	12,514		8,645	2,684	2,294	2,394	14,365		14,808		11,039
Unallocated other revenue								574		448		332
Total Revenue								14,939		15,256		11,371
Segment Result	2,406	3,241		409	771	763	1,197	3,177		4,004		1,606
Unallocated expenses - net (ii)								(4,624	)	(5,110	)	(4,386	)
Finance costs								(886	)	(816	)	(622	)
Share of profit of jointly controlled entity								2,357		3,157		4,135
Net Profit before related income tax								24		1,235		733
Income tax benefit								445		98		(218	)
Profit after tax attributable to members								469		1,333		515
	Engineering Services				Royalties and licences			Consolidated
	2008	2007		2006	2008	2007	2006	2008		2007		2006
	$’000	$’000		$’000	$’000	$’000	$’000	$’000		$’000		$’000
Non-cash (revenue) and expenses
Depreciation and amortisation	1,097	1,001		1,122	—	—	—	1,097		1,001		1,122
Equity settled employee compensation	117	102		86	—	—	—	117		102		86
Other non-cash expenses	17	(1	)	3	354	—	—	371		(1	)	3
Segment non-cash expenses	1,231	1,102		1,211	354	—	—	1,585		1,102		1,211
Systems warranty credits								—		(101	)	(219	)
Equity settled employee compensation								164		161		178
Amortisation of non-interest bearing loans								886		816		622
Amounts set aside to warranty and other provisions								—		(52	)	(222	)
Share of profit of jointly controlled entity								(2,357	)	(3,157	)	(4,135	)
Foreign exchange translation loss								175		69		(12	)
Total non-cash (revenue) and expenses								453		(1,162	)	(2,577	)

(i) Royalty and licence costs include direct patent costs and research and development.

(ii) Unallocated expenses (net) include sales and marketing, corporate management and finance and administration overhead expenses net of unallocated other income.

F-22

NOTES TO THE FINANCIAL STATEMENTS FOR THE YEAR ENDED 30 JUNE 2008

6.

(a) Business Segments (primary reporting) (Continued)

	Engineering Services		Royalties and licences (i)		Consolidated
	2008	2007	2008	2007	2008	2007
	$’000	$’000	$’000	$’000	$’000	$’000
Segment Assets	11,971	10,140	813	517	12,784	10,657
Unallocated assets
Cash					8,804	11,287
Interests in jointly controlled entity					13,109	12,974
Assets relating to non-reportable segment					2,048	—
Deferred tax asset					5,494	6,082
Consolidated Total Assets					42,239	41,000
Segment Liabilities	8,217	6,640	—	—	8,217	6,640
Unallocated liabilities
Income tax liabilities					156	—
Trade and other payables					4,135	—
Borrowings					14,151	17,958
Systems warranty provision					75	—
Consolidated Total Liabilities					26,749	24,598
Consolidated Net Assets					15,490	16,402
Segment Acquisitions of Non current assets	727	677	—	—	727	677

(b) Geographic Segments (secondary reporting)

	North America			Europe			Asia			Australia			Consolidated
	2008	2007	2006	2008	2007	2006	2008	2007	2006	2008	2007	2006	2008	2007	2006
	$’000	$’000	$’000	$’000	$’000	$’000	$’000	$’000	$’000	$’000	$’000	$’000	$’000	$’000	$’000
Segment revenue	2,982	5,400	4,023	909	585	899	5,740	5,221	3,806	4,734	3,602	2,311	14,365	14,808	11,039

	North America		Europe		Asia		Australia		Consolidated
	2008	2007	2008	2007	2008	2007	2008	2007	2008	2007
	$’000	$’000	$’000	$’000	$’000	$’000	$���000	$’000	$’000	$’000
Segment assets	1,043	1,157	544	234	1,761	1,711	9,400	7,555	12,748	10,657
Acquisitions of non current assets	—	—	—	—	—	—	727	677	727	677

F-23

NOTES TO THE FINANCIAL STATEMENTS FOR THE YEAR ENDED 30 JUNE 2008

		2008		2007		2006
		$’000		$’000		$’000
7.	OTHER REVENUE
	Interest income	574		448		332
		574		448		332
8.	OTHER INCOME
	Gain/(loss) on sale of property, plant and equipment	(3	)	32		85
	Automotive Competitiveness and Investment Scheme credits (a)	201		204		152
	Net foreign exchange gains	—		—		12
	Systems warranty credit	—		101		219
	Insurance claim	144		—		—
	Other	30		53		24
		372		390		492
(a)	The Group receives Automotive Competitiveness and Investment Scheme credits from the Federal Government for qualifying research and development activities. The Group sells these credits through a tender process and recognises income from the sale when title to the credits passes to the purchaser.
9.	EXPENSES
(a)	Employee benefits expense
	Salaries and wages	7,994		7,844		6,730
	Contributions to defined contributions superannuation funds	800		780		726
	Equity settled transactions	281		263		264
	Increase in liability for annual leave	40		41		(9	)
	Increase in liability for long service leave	100		36		65
	Other associated personnel expenses	597		464		521
		9,812		9,428		8,297
(b)	Finance costs
	Non-cash interest expense WA Government Loan	687		654		622
	Non-cash interest expense on deferred settlement pertaining
	to investment in Synerject LLC	199		162		—
		886		816		622
(c)	Other expenses
	Occupancy	474		477		426
	Administration	244		193		127
	Marketing	46		29		88
	Investor relations	44		61		83
	Allowance for impairment of receivables	379		(4	)	(7	)
	Net foreign exchange losses	175		69		—
	Other	117		15		9
		1,479		840		726
(d)	Lease payments included in income statement
	Minimum lease payments - operating lease	93		64		31
(e)	Research and development costs
	Research and development costs charged directly to the income statement	1,147		1,022		733
(f)	Write off of assets due to water damage
	Plant and equipment	7		—		—
	A burst water filter cartridge in the administration area damaged carpets and furniture. An insurance recovery relating to the water damage of $144,000 has been recognised in other income (see note 8)

F-24

NOTES TO THE FINANCIAL STATEMENTS FOR THE YEAR ENDED 30 JUNE 2008

		2008		2007		2006
		$’000		$’000		$’000
10.	TAXATION
(a)	Recognised in the income statement
	Current tax expense
	Current year benefits/(expense)	295		(358	)	(192	)
		295		(358	)	(192	)
	Deferred tax expense
	Benefit/(expense) from previously unrecognised tax losses	150		456		(26	)
		150		456		(26	)
	Total income tax benefit/(expense) in income statement	445		98		(218	)
(b)	Numerical reconciliation between tax benefit/(expense) and pre-tax net profit
	Profit before tax	24		1,235		733
	Income tax using the statutory tax rates	(7	)	(371	)	(220	)
	- Non deductible expenditure	(236	)	(350	)	(315	)
	- Effect of tax losses utilised	243		721		535
	- Net withholding tax recouped/(paid)	456		(298	)	(192	)
	- United States of America Federal and State taxes	(161	)	(40	)	—
	- Under provided for in prior periods	—		(20	)	—
	- Deferred tax asset recognised	150		456		(26	)
	Income tax benefit/(expense) on pre-tax net profit	445		98		(218	)
(c)	Tax consolidation
	(i) Members of the tax consolidated group and the tax sharing arrangement
	Orbital Corporation Limited and its 100% owned Australian resident subsidiaries formed a tax consolidated group with effect from 1 July 2002. Orbital Corporation Limited is the head entity of the tax consolidated group. Members of the group have entered into a tax sharing agreement that provides for the allocation of income tax liabilities between the entities should the head entity default on its tax payment obligations. No amounts have been recognised in the financial statements in respect of this agreement on the basis that the possibility of default is remote.
	(ii) Tax effect accounting by members of the tax consolidated group
	Measurement method adopted under UIG 1052Tax Consolidation Accounting
	The head entity and the controlled entities in the tax consolidated group continue to account for their own current and deferred tax amounts. The Group has applied the group allocation approach in determining the appropriate amount of current taxes and deferred taxes to allocate to members of the tax consolidated group. The current and deferred tax amounts are measured in a systematic manner that is consistent with the broad principles in AASB 112/IFRS 112Income Taxes. The nature of the tax funding agreement is discussed further below.
	In addition to its own current and deferred tax amounts, the head entity also recognises current tax liabilities (or assets) and the deferred tax assets arising from unused tax losses and unused tax credits assumed from controlled entities in the tax consolidated group.
	Nature of the tax funding agreement
	Members of the tax consolidated group have entered into a tax funding agreement. Under the funding agreement the funding of tax within the group is based on current and deferred tax amounts of the head entity and subsidiary members of the tax consolidation group. The tax funding agreement requires payments to/from the head entity to be recognised via an inter-entity receivable (payable) which is at call.
	The amounts receivable or payable under the tax funding agreement are due upon receipt of the funding advice from the head entity, which is issued as soon as practicable after the end of each financial year. The head entity may also require payment of interim funding amounts to assist with its obligations to pay tax instalments.

F-25

NOTES TO THE FINANCIAL STATEMENTS FOR THE YEAR ENDED 30 JUNE 2008

11.	EARNINGS PER SHARE
	Basic earnings per share
	The calculation of basic earnings per share at 30 June 2008 was based on the profit/(loss) attributable to ordinary shareholders of $469,199 (2007:profit$1,332,856; 2006: profit $514,566) and a weighted average number of ordinary shares outstanding during the financial year ended 30 June 2008 of 474,182,565 (2007: 446,391,420; 2006:411,015,511), calculated as follows:
		2008	2007	2006
	Profit/(Loss) attributable to ordinary shareholders	$	$	$
	Profit attributable to ordinary shareholders	469,199	1,332,856	514,566
	Weighted average number of ordinary shares	Number	Number	Number
	Issued ordinary shares at 1 July	473,126,818	411,292,088	410,595,878
	Effect of share placement	—	16,657,534	—
	Effect of shares issued for the ELTSP	910,685	—	—
	Effect of shares issued for the ESP No.1	145,062	285,709	419,633
	Effect of share purchase plan	—	18,156,089	—
	Weighted average number of ordinary shares at 30 June	474,182,565	446,391,420	411,015,511
	Effect of potential dilutive ordinary shares	7,325,000	7,065,000	4,915,000
	Weighted average number of potential dilutive ordinary shares at 30 June	481,507,565	453,456,420	415,930,511
	Earnings per share	cents	cents	cents
	Basic earnings per share	0.099	0.299	0.125
	Diluted earnings per share	0.097	0.294	0.125
	Earnings per ADS	cents	cents	cents
	Basic earnings per share	3.958	11.943	4.000
	Diluted earnings per share	3.880	11.760	4.000
	The calculation of Earnings per ADS is simply the multiplication of the Earnings per Share figure by 40 as each ADS represents 40 ordinary shares.
	Shares granted to employees (including Key Management Personnel) as described in note 32 are considered to be potential ordinary shares and have been included in the determination of the diluted earnings per share to the extent they are dilutive. These ordinary shares have not been included in the determination of basic earnings per share.
			2008	2007
			$’000	$’000
12.	CASH AND CASH EQUIVALENTS
	Cash at bank		1,174	290
	Cash at bank - US dollars		4,022	268
	Cash at bank - European currency units		62	49
	At call deposits - financial institutions		602	877
	Bank bills		2,944	9,803
			8,804	11,287
	All bank bills are endorsed by the Group’s banker and are for terms of no more than 90 days.

F-26

NOTES TO THE FINANCIAL STATEMENTS FOR THE YEAR ENDED 30 JUNE 2008

		2008		2007
		$’000		$’000
13.	TRADE AND OTHER RECEIVABLES
	Current
	Trade receivables	6,508		3,879
	Trade receivable from related joint venture entity	16		21
	Allowance for impairment loss (a)	(428	)	(49	)
		6,096		3,851
	Accrued royalties	813		517
	Accrued interest	30		95
	Insurance claim receivable	162		—
	Taxation instalments	48		—
	Other receivables	10		22
	Prepayments	39		59
		7,198		4,544

(a) Allowance for impairment loss

Trade receivables are non-interest bearing and are generally on 30-60 day terms. An allowance for impairment loss is recognised when there is objective evidence that an individual trade receivable is impaired. An impairment loss of $428,000 (2007: $49,000) has been recognised by the Group in the current year. These amounts have been included in the other expenses item.

Movements in the allowance for impairment loss were as follows:

At 1 July	(49	)	(50	)
Charge for the year	(379	)	1
Amounts written off	—		—
At 30 June	(428	)	(49	)

At 30 June, the ageing analysis of trade receivables is as follows:

		Total	0-30 days	31-60 days	61-90 days PDNI*	+91 days PDNI*	+91 days CI*
2008	Consolidated	6,524	5,171	425	11	489	428
2007	Consolidated	3,900	3,081	112	177	481	49

* Past due not impaired (’PDNI’)

Considered impaired (’CI’)

Receivables past due but not considered impaired are $500,000 (2007:$658,000). Payment terms on these amounts have not been re-negotiated. Management has been in contact with each relevant debtor and is satisfied that payment will be received in full.

Other balances within trade and other receivables do not contain impaired assets and are not past due. It is expected that these other balances will be received when due.

(b) Related party receivables

For terms and conditions of related party receivables refer to note 29.

(c) Fair value and credit risk

Due to the short term nature of these receivables, their carrying value is assumed to approximate fair value.

The maximum exposure to credit risk is the fair value of receivables. Collateral is not held as security.

(d) Foreign exchange and interest rate risk

Detail regarding foreign exchange and interest rate risk exposure is disclosed in note 4.

F-27

NOTES TO THE FINANCIAL STATEMENTS FOR THE YEAR ENDED 30 JUNE 2008

		2008	2007
		$’000	$’000
14.	INVENTORIES
	Raw materials and stores - at cost	1,697	6
	The Group acquired inventories of LPG fuel systems in the business combination (see note 33).
15.	INVESTMENTS
	Investment in PT Texmaco Perkasa Engineering Tbk - at cost	—	6,446
	Less: impairment losses in the carrying value of investments	—	(6,446	)
		—	—

The investment in PT Texmaco Pekasa Engineering Tbk was written off during the year as there is no prospect of recovering any value for this investment. The investment had been fully impaired in prior reporting periods and had no impact on the income statement in the current period.

16. INTERESTS IN JOINTLY CONTROLLED ENTITY

(a) Interest in Synerject LLC

As at 30 June 2008, the Group holds a 50% interest in Synerject LLC, a joint venture entity with Continental Corporation (30 June 2007: 50%). The principal activities of Synerject LLC are the marketing, sale and manufacture, including research and development in the area of engine management of non-automotive systems and components and automotive components related to the Orbital combustion process.

The Group accounts for interests in a jointly controlled entity using the equity method.

The Group has the following interests in a jointly controlled entity:

				30 June Ownership
Name	Principal activities	Country of incorporation	Reporting Date	2008		2007
Synerject LLC	Manufacture of engine management systems	USA	30/06/2008	50	%	50%

	Revenues (100%)	Profit (100%)	Total Assets (100%)	Total Liabilities (100%)	Net assets (100%)
	US$’000	US$’000	US$’000	US$’000	US$’000
2008	81,020	2,400	37,841	20,895	16,946
2007	79,627	3,501	35,911	20,337	15,574
2006	57,478	2,694	31,247	19,366	11,881

	Revenues (100%)	Profit (100%)	Share of jointly controlled entities’ net profit recognised	Total Assets (100%)	Total Liabilities (100%)	Net assets as reported by jointly controlled entities (100%)	Share of jointly controlled entities’ net assets equity accounted
	A$’000	A$’000	A$’000	A$’000	A$’000	A$’000	A$’000
2008	89,872	2,662	2,357	39,116	21,599	17,517	13,109
2007	100,391	4,386	3,157	42,243	23,848	18,395	12,974
2006	77,494	3,632	4,135	42,129	26,111	16,018	6,321

F-28

NOTES TO THE FINANCIAL STATEMENTS FOR THE YEAR ENDED 30 JUNE 2008

16. INTERESTS IN JOINTLY CONTROLLED ENTITY (continued)

		2008		2007		2006
		$’000		$’000		$’000
(b)	Movements in the carrying amount of the Group’s interest in jointly controlled entity
	At 1 July	12,974		6,321		—
	Capital injection	—		4,656		2,735
	Share of profits after tax	2,357		3,157		4,135
	Share of reserves	308		151		103
	Dividends received	(958	)	—		—
	Unrealised foreign exchange movements	(1,572	)	(1,311	)	(652	)
	At 30 June	13,109		12,974		6,321
(c)	Results of jointly controlled entity
	Reversal of provision for borrowings of Synerject	—		—		654
	Share of jointly controlled entity’s profit before income tax after recommencement of equity accounting	1,353		2,314		1,649
	Share of income tax expense	(65	)	(121	)	(120	)
	Share of jointly controlled entity’s net profit - as disclosed by jointly controlled entity	1,288		2,193		2,183
	Adjustments:
	- dissimilar accounting treatment with respect to development expenditure	810		643		1,649
	- dissimilar accounting treatment with respect to intangibles	259		321		303
	Share of jointly controlled entity’s net profit accounted for using the equity method	2,357		3,157		4,135
(d)	Commitments
	Share of jointly controlled entity’s capital commitments contracted but not provided for or payable:
	Within one year	341		515		548
	One year or later and no later than five years	889		856		1,296
	Later than 5 years	787		88		—
		2,017		1,459		1,844

(e) Potential future changes to percentage shareholding in Synerject LLC

Synerject LLC was restructured and refinanced during fiscal year 2003. In January 2003, new financing arrangements were put in place for Synerject LLC until 30 September 2006. As part of the restructure, in April 2003, Synerject LLC acquired, by way of capital contributions from each joint venturer, the operations of Orbital’s marine and recreation system sales business and Continental’s non-automotive systems business. The actual performance of each of these contributed businesses in the 3 year period to 30 June 2006, compared to the planned performances, is being reviewed to determine the optional adjustment (if any) to the percentage shareholdings of Orbital and Continental in Synerject LLC (“the recalculation”). The review date was deferred until 30 June 2008, and is now under the consideration of Orbital and Continental.

The maximum change in shareholdings as a result of the above recalculation is 10% i.e. ownership percentages of 40:60.

There is an option for the joint venturer who has the majority shareholding as determined by the recalculation above, to call from the other shareholder (“minority shareholder”) the percentage of shares determined by the recalculation. The minority shareholder may dilute their shareholding or may choose to exercise an option to maintain the 50:50 ownership structure by either paying the other joint venturer US$400,000 for each 1% interest of Synerject LLC or by injecting additional capital into Synerject LLC of US$800,000 for each 1% interest in Synerject LLC. The exercise date of these options was originally 30 June 2006 but has been extended due to the change of the review date.

The assessment of the contributed business performance will not be tabled until after 30 June 2008 however the Directors anticipate that due to the stronger performance of the non-automotive systems business contributed by Continental, that Continental will become entitled to the full 10% under the recalculation provisions. To maintain Orbital’s 50% interest in Synerject (being the Director’s current intent), a liability representing the present value of US$4 million has been recognised which will become payable between 30 June 2008 and 31 December 2008.

F-29

NOTES TO THE FINANCIAL STATEMENTS FOR THE YEAR ENDED 30 JUNE 2008

17. DEFERRED TAX ASSETS AND LIABILITIES

Recognised deferred tax assets and liabilities

Deferred tax assets and liabilities are attributable to the following:

Consolidated

	Assets		Liabilities		Net
	2008	2007	2008	2007	2008	2007
	$’000	$’000	$’000	$’000	$’000	$’000
Tax value of loss carry-forwards recognised	5,494	6,082	—	—	5,494	6,082
Net tax assets	5,494	6,082	—	—	5,494	6,082

Unrecognised deferred tax assets

Deferred tax assets have not been recognised in respect of the following items:

	2008	2007
	$’000	$’000
Australia (net at 30%)
Tax losses	16,293	15,790
Timing difference from provision for capital loss on investment	1,934	1,934
Other net temporary differences	845	900
	19,072	18,624
United States of America (net at 34%)
Tax losses	11,649	14,236
Other net temporary differences	6,079	6,079
	17,728	20,315

Under the tax laws of the United States, tax losses that cannot be fully utilised for tax purposes during the current year may be carried forward, subject to some statutory limitations, to reduce taxable income in future years. At 30 June 2008, the $50.421 million of tax carry forward losses available expire between the years 2010 and 2024.

Movement in temporary differences during the year

	Balance 01-Jul-06	Recognised in income	Recognised in equity		Balance 30-Jun-07
	$’000	$’000	$’000		$’000
Tax value of loss carry-forwards recognised	6,445	456	(819	)	6,082
Net tax assets	6,445	456	(819	)	6,082
	Balance 01-Jul-07	Recognised in income	Recognised in equity		Balance 30-Jun-08
	$’000	$’000	$’000		$’000
Tax value of loss carry-forwards recognised	6,082	150	(738	)	5,494
Net tax assets	6,082	150	(738	)	5,494

The amounts recognised through equity represent the foreign exchange differences arising on the translation of the foreign subsidiary.

F-30

NOTES TO THE FINANCIAL STATEMENTS FOR THE YEAR ENDED 30 JUNE 2008

		2008		2007
		$’000		$’000
18.	PROPERTY, PLANT AND EQUIPMENT
	Freehold land
	At cost	1,091		1,091
	Buildings
	At cost	3,057		3,057
	Less: accumulated depreciation	(974	)	(893	)
		2,083		2,164
	Plant and equipment
	At cost	18,142		17,399
	Less: accumulated depreciation	(15,730	)	(14,547	)
		2,412		2,852
	Total property, plant and equipment - net book value	5,586		6,107
	Reconciliations
	Reconciliations of the carrying amounts for each class of property, plant and equipment are set out below:
	Freehold land
	Carrying amount at beginning of year	1,091		1,091
	Carrying amount at end of year	1,091		1,091
	Buildings
	Carrying amount at beginning of year	2,164		2,245
	Depreciation	(81	)	(81	)
	Carrying amount at end of year	2,083		2,164
	Plant and equipment
	Carrying amount at beginning of year	2,852		3,096
	Additions and transfers	762		677
	Disposals	(11	)	(1	)
	Depreciation	(1,191	)	(920	)
	Carrying amount at end of year	2,412		2,852
	Total
	Carrying amount at beginning of year	6,107		6,432
	Carrying amount at end of year	5,586		6,107
	All property, plant and equipment of the Group are subject to floating debentures from the Group’s banker (see note 21) and from the Government of Western Australia (see note 22).
19.	GOODWILL
	Acquired in business combination (note 33)	351		—
		351		—

The goodwill arose on the acquisition of Boral Alternative Fuel Systems on 26 June 2008. The initial accounting for the business combination has been based on provisional values. There were no indicators of impairment of this goodwill at balance date.

After initial recognition, goodwill acquired in a business combination is measured at cost less any accumulated impairment losses. Goodwill is not amortised but is subject to impairment testing on an annual basis or whenever there is an indication of impairment.

F-31

NOTES TO THE FINANCIAL STATEMENTS FOR THE YEAR ENDED 30 JUNE 2008

		2008	2007
		$’000	$’000
20.	TRADE AND OTHER PAYABLES
	Current
	Trade creditors and accruals	2,394	2,483
	Revenues received in advance	793	1,731
	Present value of additional investment in Synerject LLC (a)	4,135	—
		7,322	4,214

(a) Present value of additional investment in Synerject LLC

In accordance with note 16, the additional consideration payable to Continental to maintain Orbital’s 50% interest in Synerject LLC of US$4 million, has been deferred from 28 September 2006 to 30 June 2008. The liability was initially recognised at its fair value (28 September 2006 US$3.692 million) and subsequently stated at amortised cost (30 June 2008: US$4.000 million) on an effective interest basis.

(b) Fair value

Due to the short term nature of these payables, their carrying value is assumed to approximate their fair value.

(c) Related party payables

For terms and conditions relating to related party payables refer to note 29.

(d) Interest rate, foreign exchange and liquidity risk

Information regarding interest rate, foreign exchange and liquidity risk exposure is set out in note 4.

21. FINANCING ARRANGEMENTS

The consolidated entity has standby arrangements with banks to provide support facilities:

Total facilities available
Performance guarantee facility	8	8
Forward exchange contracts facility	3,500	3,500
Corporate credit card facility	65	50
Multi-option credit facility	750	750
	4,323	4,308
Facilities utilised at balance date
Performance guarantee facility	8	8
Forward exchange contracts facility	—	611
Corporate credit card facility	65	38
Multi-option credit facility	—	—
	73	657
Facilities not utilised at balance date
Performance guarantee facility	—	—
Forward exchange contracts facility	3,500	2,889
Corporate credit card facility	—	12
Multi-option credit facility	750	750
	4,250	3,651

A first ranking mortgage debenture with fixed and floating charges over the whole of the assets has been granted to the Company’s banker for the establishment of the credit facilities and forward exchange contracts totalling $4,323,000 (2007: $4,308,000; 2006: $4,376,000).

F-32

NOTES TO THE FINANCIAL STATEMENTS FOR THE YEAR ENDED 30 JUNE 2008

2008	2007
$’000	$’000

22. NON INTEREST BEARING LIABILITIES

Non-Current
Loans and advances - secured (a)	14,151	13,463
Present value of additional investment in Synerject LLC (b)	—	4,495
	14,151	17,958

(a) The Government of Western Australia has provided the company with a fully utilised loan facility of $19,000,000 under the terms of a "Development Agreement". Repayment of this facility will be in full on the date which is 25 years after the date on which the first advance is made (May 1989), or in any year prior to that date if the aggregate number of OCP engines produced, calculated on a worldwide basis, exceeds 5,000,000, by equal annual payments, each of one fifth of the loan, on 1 July in the year commencing 1 July following the year in which such production is achieved. No interest accrues on this facility until such time as the loan becomes payable.

This loan facility is secured by way of a second ranking floating debenture over the whole of the assets and undertakings of the Company.

The non-interest bearing loan from the Government of Western Australia was initially recognised at fair value and subsequently stated at amortised cost with any difference between cost and repayment value being recognised in the income statement over the period of the borrowings on an effective interest basis.

The fair value of the loan 2008: $13,088,174 (2007:$12,450,210) is calculated by discounting the expected future cash flows at the prevailing market interest rate at reporting date (2008: 6.50%, 2007: 6.30%)

(b) In accordance with note 16, the additional consideration payable to Continental to maintain Orbital’s 50% interest in Synerject LLC of US$4 million, has been deferred from 28 September 2006 to 30 June 2008. The liability was initially recognised at its fair value (28 September 2006 $US$3.692 million) and subsequently stated at amortised cost (30 June 2007: US$3.821 million) on an effective interest basis.

23. EMPLOYEE BENEFITS

(a)	Current	1,028		1,190
(b)	Non-Current	1,362		1,236
(c)	Aggregate Liability for employee entitlements	2,390		2,426
	The present value of employee entitlements not expected to be settled within twelve months of balance date have been calculated using the following weighted averages:
	Assumed rate of increase in wage and salary rates	5.0	%	6.5	%
	Discount rate at 30 June	6.5	%	6.3	%
	Settlement term (years)	10		10
	Number of employees
	Number of employees at year end	89		95

F-33

NOTES TO THE FINANCIAL STATEMENTS FOR THE YEAR ENDED 30 JUNE 2008

2008	2007
$’000	$’000

24. PROVISIONS

(a)	Current
	Systems warranty	90	—
	Other	36	—
		126	—
(b)	Reconciliations
	Reconciliations of the carrying amounts for each class of provisions except for employee entitlements, are set out below:
	Systems warranty - current
	Carrying amount at beginning of year	—	102
	Provision made during the year - net of (expired)	—	(102	)
	Fair value of acquired systems warranty provision (note 33)	90	—
	Net foreign exchange loss on translation	—	—
	Reclassified (to) from non current	—	—
	Carrying amount at end of year	90	—
	Systems warranty - non current
	Carrying amount at beginning of year	—	—
	Reclassified (to) from current	—	—
	Carrying amount at end of year	—	—
	Other provisions - current
	Carrying amount at beginning of year	—	4
	Provision made during the year	36	(4	)
	Carrying amount at end of year	36	—

(c) Nature and timing of provisions

(i) Systems warranty

Upon acquisition of Boral Alternative Fuel Systems (note 33), the Group has recognised a provision for expected warranty claims on products sold during the last three years, based on current sales levels, current information available about past returns and repairs, and on the two-year warranty period for all products sold by the LPG systems sales business.

With the transfer of the marine and recreation system sales business to Synerject LLC, warranty liabilities for all marine and recreation system sales as from 1 April 2003 are the contractual responsibility of Synerject LLC. Orbital retained the warranty responsibilities for product shipped prior to 1 April 2003 until the expiry of the warranty periods, the last of which expired in March 2007.

(ii) Other provisions.

The Group has recognised as an expense in the current financial year a provision for expected losses on engineering projects where it is probable that the total project costs will exceed total project revenues.

25. GOVERNMENT GRANTS

Non-Current Liabilities
Investment grant for construction of heavy duty engine testing facility	2,760	—
Total government grants deferred	2,760	—

In June 2008 the Group received funding of $2.76 million from the Commonwealth of Australia through the Alternative Fuels Conversion Program administered by the Department of the Environment, Water, Heritage and the Arts towards the construction of a heavy duty engine test facility. The total construction costs are estimated at A$3.56 million. The Group will fund the maintenance and operation of the facility until at least financial year 2014/2015 and provide the Commonwealth with preferential access to the facility.

The government grant will be recognised as income over the periods and in the proportions in which depreciation on the heavy duty engine test facility is charged.

(a)	Movement in government grants
	At 1 July	—	—
	Received during the year	2,760	—
	Released to the income statement	—	—
	At 30 June	2,760	—

F-34

NOTES TO THE FINANCIAL STATEMENTS FOR THE YEAR ENDED 30 JUNE 2008

2008	2007
$’000	$’000

26. CONTRIBUTED EQUITY

Ordinary shares	225,720	225,560
	225,720	225,560
Fully paid ordinary shares carry one vote per share and carry the right to dividends
	Number	$’000
Movement in ordinary shares on issue
At 1 July 2006	411,292,088	216,768
Shares issued pursuant to a share placement	26,666,667	4,000
Shares issued pursuant to employee share plans	471,872	—
Shares issued pursuant to a share purchase plan	34,696,191	5,204
Transaction costs		(412	)
At 30 June 2007	473,126,818	225,560
At 1 July 2007	473,126,818	225,560
Shares issued pursuant to employee share plans	1,436,374	160
At 30 June 2008	474,563,192	225,720

Holders of ordinary shares are entitled to receive dividends as declared from time to time and are entitled to one vote per share at shareholders’ meetings.

In the event of winding up of the Company, ordinary shareholders rank after creditors and are fully entitled to any proceeds of liquidation.

(a) Capital management

When managing capital, management's objective is to ensure the entity continues as a going concern as well as to maintain optimal returns to shareholders and benefits for other stakeholders. Management also aims to maintain a capital structure that ensures the lowest cost of capital, provides a strong capital base so as to maintain investor, creditor and market confidence and to sustain future development of the business.

Management has no current plans to change the share capital.

2008	2007
$’000	$’000

27. ACCUMULATED LOSSES AND RESERVES

(a)	Movements in accumulated losses were as follows:
	Balance 1 July	(208,242	)	(209,575	)
	Net Profit	469		1,333
	Balance 30 June	(207,773	)	(208,242	)

F-35

NOTES TO THE FINANCIAL STATEMENTS FOR THE YEAR ENDED 30 JUNE 2008

27. ACCUMULATED LOSSES AND RESERVES (continued)

(b) Other reserves

	Employee equity benefits reserve		Foreign Currency Translation Reserve		Cash Flow Hedge Reserve		Total
Consolidated	$’000		$’000		$’000		$’000
Balance 1 July 2005	248		(238	)	—		10
Equity-settled transaction-employee shares	264		—		—		264
Total recognised income and expense	—		276		—		276
Balance at 30 June 2006	512		38		—		550
Balance 1 July 2006	512		38		—		550
Equity-settled transaction-employee shares	263		—		—		263
Total recognised income and expense	—		(1,692	)	(37	)	(1,729	)
Balance at 30 June 2007	775		(1,654	)	(37	)	(916	)
Balance 1 July 2007	775		(1,654	)	(37	)	(916	)
Equity-settled transaction-employee shares	281		—		—		281
Transfer to share capital	(160	)	—		—		(160	)
Total recognised income and expense	—		(1,627	)	(35	)	(1,662	)
Balance at 30 June 2008	896		(3,281	)	(72	)	(2,457	)

(c) Nature and purpose of reserves

Employee equity benefits reserve

The employee equity benefits reserve is used to record the value of share based payments provided to employees, including KMP’s, as part of their remuneration. In prior years this reserve was recognised directly in accumulated losses. The reserve has been separately presented to enhance disclosure. Refer to note 32 for further details of these plans.

Foreign currency translation reserve

The foreign currency translation reserve is used to record exchange differences arising from the translation of the financial statements of foreign subsidiaries.

Cash flow hedge reserve

This reserve records the Group’s portion of Synerject LLC’s gain or loss on a hedging instrument in a cash flow hedge that is determined to be an effective hedge.

28. CONSOLIDATED ENTITIES

Parent Entity				Class	Consolidated Entity Interest
Orbital Corporation Limited		Note		of Shares	2008 %	2007 %
	Controlled Entities, incorporated and carrying on business in:
Australia
- Orbital Australia Pty Ltd				Ord	100	100
- Orbital Australia Manufacturing Pty Ltd				Ord	100	100
- OEC Pty Ltd		(a	)	Ord	100	100
- Axiom Invest No. 2 Pty Ltd		(a	)	Ord	71.3	71.3
- S T Management Pty Ltd		(a	)	Ord	100	100
- OFT Australia Pty Ltd		(a	)	Ord	100	100
- Investment Development Funding Pty Ltd		(a	)	Ord	100	100
- Power Investment Funding Pty Ltd		(a	)	Ord	100	100
- Orbital Environmental Pty Ltd		(a	)	Ord	100	100
United States of America
- Orbital Holdings (USA) Inc.		(a	)	Ord	100	100
- Orbital Fluid Technologies Inc.				Ord	100	100
- Orbital Engine Company (USA) Inc.		(a	)	Ord	100	100
United Kingdom
- Orbital Engine Company (UK) Ltd		(a	)	Ord	100	100

(a) Dormant for the years ended 30 June 2008 and 30 June 2007.

F-36

NOTES TO THE FINANCIAL STATEMENTS FOR THE YEAR ENDED 30 JUNE 2008

29. RELATED PARTIES

(a) Identity of related parties

The Group has a relationship with its subsidiaries (see note 28), jointly controlled entities (see note 16), and with its key management personnel (refer to disclosures for key management personnel, see note 30).

(b) Controlled Entities

Details of interest in controlled entities are set out in Note 28.

(c) Other Related Parties

Details of dealings with other related parties, being joint venture entity Synerject LLC, are set out below:

(i) Receivables and Payables

The aggregate amounts receivable from/payable to Synerject LLC by the Group at balance date are:

	2008	2007
	$’000	$’000
Receivables
Current	16	21
Payables
Current	—	—

(ii) Transactions

During the year the Group provided engineering services to Synerject LLC of $0.081 million (2007: $0.047 million; 2006: $0.209 million) and purchased goods and services to the value of $0.078 million (2007: $0.088 million; 2006: $0.139 million) from Synerject LLC. All transactions are in the ordinary course of business and on normal commercial terms and conditions.

30 KEY MANAGEMENT PERSONNEL

The following were key management personnel of the Group at any time during the reporting period and unless otherwise indicated were key management personnel for the entire period:

Non-executive directors

Mr WP Day (Chairperson) (appointed August 2007)

Mr DWJ Bourke (Chairperson) (deceased August 2007)

Mr JR Marshall

Mr JG Young

Dr MT Jones (appointed March 2008)

Dr V Braach-Maksvytis (appointed March 2008)

Executive directors

Mr TD Stinson (Managing Director & Chief Executive Officer) (appointed June 2008)

Dr RA Houston (Managing Director & Chief Executive Officer) (resigned June 2008)

Executives

Mr KA Halliwell (Chief Financial Officer)

Mr BA Fitzgerald (Director of Sales & Marketing)

Dr GP Cathcart (Director of Engineering & Operations)

Key management personnel compensation

The key management personnel compensation included in ‘employee benefits expense’ (see note 9) are as follows:

	2008	2007	2006
	$	$	$
Short-term employee benefits	1,194,706	1,168,310	1,178,470
Post-employment benefits	114,231	100,035	109,800
Equity compensation benefits	177,577	152,063	143,533
	1,486,514	1,420,408	1,431,803

F-37

NOTES TO THE FINANCIAL STATEMENTS FOR THE YEAR ENDED 30 JUNE 2008

30. KEY MANAGEMENT PERSONNEL (continued)

		Short Term				Post Employment	Share Based Payments
	Year	Salary and Director’s Fees $	Cash Bonuses $ (a)	Non-Monetary Benefits $	Total $	Employer Superannuation Contributions $	Employee Share Plans $ (b)(c)	Total $
Directors
Non-executive
W Peter Day	2008	88,080	—	—	88,080	7,273	—	95,353
Chairman (Non-executive)	2007	—	—	—	—	—	—	—
	2006	—	—	—	—	—	—	—
Donald W J Bourke	2008	11,120	—	—	11,120	1,001	—	12,121
Chairman (Non-executive)	2007	96,376	—	7,033	103,409	8,674	—	112,083
	2006	96,376	—	6,228	102,604	8,674	—	111,278
J Grahame Young	2008	52,358	—	—	52,358	4,712	—	57,070
Director (Non-executive)	2007	52,358	—	—	52,358	4,712	—	57,070
	2006	52,358	—	—	52,358	4,712	—	57,070
John R Marshall	2008	55,050	—	—	55,050	—	—	55,050
Director (Non-executive)	2007	55,050	—	—	55,050	—	—	55,050
	2006	55,050	—	—	55,050	—	—	55,050
Mervyn T Jones	2008	11,655	—	—	11,655	1,049	—	12,704
Director (Non-executive)	2007	—	—	—	—	—	—	—
	2006	—	—	—	—	—	—	—
Vijoleta Braach-Maksvytis	2008	11,655	—	—	11,655	1,049	—	12,704
Director (Non-executive)	2007	—	—	—	—	—	—	—
	2006	—	—	—	—	—	—	—
Directors
Executive
Rodney A Houston (d)	2008	291,908	—	—	291,908	33,132	71,930	396,970
Director and Chief Executive Officer	2007	277,525	37,500	—	315,025	30,618	55,668	401,311
	2006	239,163	40,000	—	279,163	28,202	46,453	353,818
Terry D Stinson (e)	2008	36,948	—	—	36,948	3,325	—	40,273
Director and Chief Executive Officer	2007	—	—	—	—	—	—	—
	2006	—	—	—	—	—	—	—
Peter C Cook	2008	—	—	—	—	—	—	—
Director and Chief Executive Officer	2007	—	—	—	—	—	—	—
	2006	109,915	—	—	109,915	13,190	—	123,105
Key Management Personnel
Keith A Halliwell	2008	234,715	7,500	—	242,215	26,121	47,710	316,046
Chief Financial Officer & Company Secretary	2007	225,387	30,500	—	255,887	24,611	45,430	325,928
	2006	213,811	17,000	—	230,811	24,772	46,293	301,876
B Anthony Fitzgerald	2008	203,117	7,500	—	210,617	20,651	36,690	267,958
Director of Sales and Marketing	2007	191,813	23,600	—	215,413	18,426	35,753	269,592
	2006	183,527	15,000	—	198,527	17,257	37,070	252,854
Geoff P Cathcart	2008	175,600	7,500	—	183,100	15,918	21,247	220,265
Director of Engineering & Operations	2007	156,368	14,800	—	171,168	12,994	15,212	199,374
	2006	141,042	9,000	—	150,042	12,993	13,717	176,752
Total Consolidated, all specified executives	2008	1,172,206	22,500	—	1,194,706	114,231	177,577	1,486,514
	2007	1,054,877	106,400	7,033	1,168,310	100,035	152,063	1,420,408
	2006	1,091,242	81,000	6,228	1,178,470	109,800	143,533	1,431,803

F-38

NOTES TO THE FINANCIAL STATEMENTS FOR THE YEAR ENDED 30 JUNE 2008

30. KEY MANAGEMENT PERSONNEL (continued)

Key management personnel compensation (continued)

Notes in relation to the table of directors’ and executive officers remuneration

(a) Bonuses are those paid or accrued as payable in relation to the year reported.

(b) The fair value of the employee share plan is based upon the market value (at offer date) of shares offered.

(c) The fair value of the Executive Long Term Share plan ("ELTSP") is calculated at the date of grant through utilisation of the assumptions underlying the Black-Scholes methodology to produce a Monte-Carlo simulation model and allocated to each reporting period evenly over the period from grant date to vesting date. The value disclosed is the portion of the fair value of the shares recognised in this reporting period. In valuing the shares the hurdles that must be met before the executive long term share plan shares vest in the holder have been taken into account.

The following factors and assumptions were used in determining the fair value of shares issued under the ELTSP on grant date:

Grant Date	Life	Fair Value per share	Exercise Price	Price of shares on grant date	Expected volatility		Risk free interest rate
30-Aug-05	3 years	9.9 cents	nil	11.0 cents	38.80	%	5.03	%
31-Aug-06	3 years	7.1 cents	nil	9.6 cents	33.40	%	5.79	%
31-Aug-07	3 years	17.3 cents	nil	22.0 cents	45.40	%	6.20	%

(d) Dr Houston resigned from the Board effective 20 June 2008

(e) Mr Stinson was appointed to the Board effective 21 June 2008

Individual directors and executives compensation disclosures

No director has entered into a material contract with the Company or the Group since the end of the previous financial year and there were no material contracts involving directors’ interest at year-end.

Loans to key management personnel and their related parties.

The Company and the Group have not made any loans to key management personnel or their related parties since the end of the previous financial year and there were no loans to any key management person or their related parties at year-end

Movements in shares

The movement during the reporting period in the number of ordinary shares in Orbital Corporation Limited held, directly, indirectly or beneficially, by each key management person, including their related parties, is as follows:

	Held at 01-Jul-07	Purchases	Granted as compensation	Sales		Other*		Held at 30-Jun-08
Non-executive directors
Mr WP Day	—	100,000	—	—		—		100,000
Mr DWJ Bourke	133,333	—	—	—		(133,333	)	—
Mr JR Marshall	66,880	—	—	—		—		66,880
Mr JG Young	183,537	65,000	—	—		—		248,537
Executive directors
Dr RA Houston	108,371	—	303,238	—		(411,609	)	—
Executives
Mr KA Halliwell	196,418	—	303,238	—		—		499,656
Mr BA Fitzgerald	101,702	—	203,238	—		—		304,940
Dr GP Cathcart	95,154	—	88,238	(16,162	)	—		167,230

F-39

NOTES TO THE FINANCIAL STATEMENTS FOR THE YEAR ENDED 30 JUNE 2008

30. KEY MANAGEMENT PERSONNEL (continued)

Movements in shares

	Held at 01-Jul-06	Purchases	Granted as compensation	Sales		Other*		Held at 30-Jun-07
Non-executive directors
Mr DWJ Bourke	100,000	33,333	—	—		—		133,333
Mr JR Marshall	66,880	—	—	—		—		66,880
Mr JG Young	149,906	33,631	—	—		—		183,537
Executive directors
Dr RA Houston	68,574	33,333	6,464	—		—		108,371
Executives
Mr KA Halliwell	156,621	33,333	6,464	—		—		196,418
Mr BA Fitzgerald	96,805	—	6,464	(1,567	)	—		101,702
Dr GP Cathcart	55,357	33,333	6,464	—		—		95,154
	Held at 01-Jul-05	Purchases	Granted as compensation	Sales		Other*		Held at 30-Jun-06
Non-executive directors
Mr DWJ Bourke	100,000	—	—	—		—		100,000
Mr JR Marshall	66,880	—	—	—		—		66,880
Mr JG Young	149,906	—	—	—		—		149,906
Executive directors
Dr RA Houston	58,484	—	10,090	—		—		68,574
Mr PC Cook	55,512	—	—	—		(55,512	)	—
Executives
Mr KA Halliwell	146,531	—	10,090	—		—		156,621
Mr BA Fitzgerald	86,715	—	10,090			—		96,805
Dr GP Cathcart	45,267	—	10,090	—		—		55,357

* Represents shareholding at date of ceasing to be a Director of the Company.

F-40

NOTES TO THE FINANCIAL STATEMENTS FOR THE YEAR ENDED 30 JUNE 2008

31. NOTES TO THE STATEMENTS OF CASH FLOWS

Reconciliation of cash flows from operating activities

			2008		2007		2006
	NOTE		$'000		$'000		$'000
Profit/(loss) after income tax			469		1,333		515
Adjustments for:
(Profit)/loss on sale of property, plant and equipment	8		3		(32	)	(85	)
Depreciation			1,272		1,001		1,122
Allowance for doubtful debts			379		(1	)	3
Amounts set aside for redundancy provision			—		—		(257	)
Amortisation of non-interest bearing loans			886		816		622
Amounts set aside to warranty and other provisions			(552	)	(52	)	(222	)
Share of net profit of joint venture entity			(2,357	)	(3,157	)	(4,135	)
Employee compensation expense			281		263		264
Non cash changes in tax balances			(613	)	(490	)	26
Net foreign exchange (gains)/losses	9	(c)	175		69		(12	)
Net cash (used in) operating activities before changes in assets and liabilities			(57	)	(250	)	(2,159	)
Changes in assets and liabilities during the year:
Decrease/(increase) in receivables			(3,032	)	(868	)	(661	)
Decrease in inventories			5		—		6
(Decrease)/increase in payables			(401	)	757		890
Increase in government grants			2,760		—		—
(Decrease)/increase in employee provisions			(160	)	179		56
			(828	)	68		291
Net cash used in operating activities			(885	)	(182	)	(1,868	)

32. SHARE-BASED PAYMENT PLANS

(a) Recognised share-based payment expenses

The expense recognised for employee services received during the year is shown in the table below:
Expense arising from equity-settled share-based payment transactions	281	263	264

The share-based payment plans are described below. There have been no cancellations or modifications to any of the plans during 2008 and 2007.

(b) Types of share-based payment plans

Employee Share Plan No. 1

Under Employee Share Plan No. 1 each eligible employee is offered fully paid ordinary shares to the value of $1,000 per annum, while under Employee Share Plan No. 2 shares may be offered to eligible employees at the discretion of the Board of Directors.

During the year there were 236,374 (2007: 471,872; 2006: 696,210) shares issued under Plan 1 to eligible employees at a market value on the day of issue of $73,000 (2007: $73,000; 2006: $69,000).

F-41

NOTES TO THE FINANCIAL STATEMENTS FOR THE YEAR ENDED 30 JUNE 2008

32. SHARE BASED PAYMENT PLANS (continued)

(b) Types of share-based payment plans (continued)

Executive Long Term Share Plan (“ELTSP”)

Executives may also be offered shares in the Company’s Executive Long Term Share Plan under which offered shares will be granted subject to the satisfaction of performance conditions over a 3 year period or subject to Board discretion for other qualifying reasons. The performance conditions, which are based on the relative ranking of the Total Shareholder Return (“TSR”) of the Company to a group of selected peers, apply to determine the number of shares (if any) to be granted to the Executives.

TSR is the percentage increase in a company’s share price plus reinvested dividends over a given period and reflects the increase in value delivered to shareholders over that period. The peer group to which the Company’s TSR will be compared will comprise the 50 smallest companies, other than resource companies and property and investment trust companies, within the S&P / ASX 300 Index. These companies have a similar market capitalisation to the Company. The TSR performance criterion was chosen as it is widely accepted as one of the best indicators of shareholder wealth creation as it includes share price growth, dividends and other capital adjustments. In addition, this criterion provides a readily obtained objective means of measuring the Group’s performance against its peer group.

The Company’s TSR ranking at the end of the Performance Period, when compared to the TSR of the peer group will determine the percentage of shares originally offered which will be granted to the Executive.

The following table sets out the relevant percentages based on various percentile rankings of the Company:

Company Performance (TSR Ranking)	% of offered shares issued to each executive
Up to the 50th percentile	0%
At or above the 50th percentile but below the 75th percentile	50% to 99% (on a straight line basis)
At or above the 75th percentile but below the 90th percentile	100%
At or above the 90th percentile	125%

No shares will be granted unless the Company’s TSR is at or above the 50th percentile. In 2008, 1,200,000 shares were issued in accordance with the terms of the plan. No shares were issued under the LTI in the 2007 financial year as the company’s performance against its peer group ranked it below the 50th percentile.

At the Company’s Annual General Meeting in October 2004, shareholders approved the above plan in relation to the ongoing remuneration of Executive Directors and senior executives.

During the year, a total of 1,460,000 shares were offered to 11 executives (2007: 3,905,000 shares offered to 14 executives).

(c) Summary of shares granted under the ELTSP

	2008 No.		2007 No.		2006 No.
Outstanding at the beginning of the year	7,065,000		4,640,000		3,125,000
Granted during the year	1,460,000		3,905,000		2,465,000
Forfeited during the year	—		(460,000	)	(275,000	)
Exercised during the year	(1,200,000	)	—		—
Expired during the year	—		(1,020,000	)	(675,000	)
Outstanding at the end of the year	7,325,000		7,065,000		4,640,000

The outstanding balance as at 30 June 2008 is represented by:

• 2,220,000 ordinary shares with a fair value at grant date of $0.099 that will potentially vest in August 2008;

• 3,645,000 ordinary shares with a fair value at grant date of $0.071 that will potentially vest in August 2009; and

• 1,460,000 ordinary shares with a fair value at grant date of $0.173 that will potentially vest in August 2010.

(d) Fair value of shares on grant date

The following factors and assumptions were used in determining the fair value of shares on grant date:

Grant Date	Life	Fair Value per share	Exercise Price	Price of shares on grant date	Expected volatility		Risk free interest rate
30-Aug-05	3 years	9.9 cents	nil	11.0 cents	38.80	%	5.03	%
31-Aug-06	3 years	7.1 cents	nil	9.6 cents	33.40	%	5.79	%
31-Aug-07	3 years	17.3 cents	nil	22.0 cents	45.40	%	6.20	%

F-42

NOTES TO THE FINANCIAL STATEMENTS FOR THE YEAR ENDED 30 JUNE 2008

33. BUSINESS COMBINATION

On 26 June 2008, Orbital Australia Pty Limited acquired 100% of the business assets of Boral Alternative Fuel Systems a business based in Australia specialising in the assembly and supply of automotive LPG fuel systems.

The total cost of the combination was $1,869,000 and comprised the payment of cash and costs directly attributable to the combination. The final total cost of the combination will be determined within the next financial year.

The fair values of the identifiable assets and liabilities of Boral Alternative Fuel Systems as at the date of acquisition were:

	Recognised on Acquisition		Carrying Value
	$'000		$'000
Inventories	1,697		1,697
Plant and equipment	35		43
	1,732		1,740
Provision for warranties	(90	)	(50	)
Provision for employee entitlements	(124	)	(111	)
	(214	)	(161	)
Fair value of identifiable net assets	1,518
Goodwill arising on acquisition	351
	1,869
Cost of the combination:
Cash paid	1,758
Direct costs relating to the acquisition	111
Total cost of the combination	1,869
The cash outflow on acquisition is as follows:
Net cash acquired with the business	—
Cash paid	(1,758	)
Direct costs paid	(111	)
Net consolidated cash outflow	(1,869	)

From the date of acquisition, the business has not contributed to the net profit of the Group. The Group is unable to determine what the revenue or profit of the combined entity would have been if the combination had taken place at the beginning of the year as it does not have access to the underlying information.

The goodwill relates to synergistic benefits and assembled workforce.

34. DEFINED CONTRIBUTION SUPERANNUATION FUND

The Group contributes to a defined contribution plan for the provision of benefits to Australian employees on retirement, death or disability. Employee and employer contributions are based on various percentages of gross salaries and wages. Apart from the contributions required under superannuation legislation, there is no legally enforceable obligation on the Company or its controlled entities to contribute to the superannuation plan.

F-43

NOTES TO THE FINANCIAL STATEMENTS FOR THE YEAR ENDED 30 JUNE 2008

		2008	2007
		$'000	$'000
35.	COMMITMENTS
(a)	Operating leases
	Non-cancellable future operating lease rentals not provided for in the financial statements and payable:
	- Not later than one year	56	9
	- Later than one year but not later than five years	15	15
	- later than five years	—	—
		71	24

The Group leases plant & equipment under operating leases. The plant & equipment leases typically run for a period of 5 years and the lease payments are fixed. None of the leases include contingent rentals.

During the financial year ended 30 June 2008, $8,931 was recognised as an expense in the income statement in respect of operating leases (2007:$8,931; 2006:$30,579).

(b) Other

The Group has a capital commitment of $2,760,000 payable not later than one year in relation to a Government Grant (see note 25).

36. CONTINGENT LIABILITIES

The details and estimated maximum amounts of contingent liabilities that may become payable are set out below. The directors are not aware of any circumstance or information that would lead them to believe that these liabilities will crystallise.

In the event of the Company terminating the employment of the Chief Executive Officer (other than by reason of serious misconduct or material breach of his service agreement), an equivalent of 12 months remuneration is payable to the CEO. There are no other contingent liabilities for termination benefits under the service agreements with Directors or other persons who take part in the management of any entity within the Group.

37. SUBSEQUENT EVENTS

There has not arisen in the interval between the end of the financial year and the date of this report any item, transaction or event of a material and unusual nature that is likely, in the opinion of the Directors of the Company, to significantly affect the operations of the Group, the results of those operations, or the state of affairs of the Group in subsequent financial years.

		2008	2007	2006
		$	$	$
38.	REMUNERATION OF AUDITORS
	Amounts received or due and receivable for audit services by:
	Auditors of the Company
	- Audit and review of financial reports	378,979	403,017	392,903
		378,979	403,017	392,903
	Amounts received or due and receivable for taxation services by:
	Auditors of the Company	9,000	28,000	27,246
	Other member firms of the Auditors of the Company	—	8,000	11,466
		9,000	36,000	38,712
	Amounts received or due and receivable for other services by:
	Auditors of the Company	25,000	—	—
	Total auditors’ remuneration	412,979	439,017	431,615

The Auditors of the Group in 2008 were Ernst & Young, whilst in 2007 and 2006 the Auditors of the Group were KPMG Australia.

F-44

SYNERJECT, LLC AND SUBSIDIARIES

Consolidated Financial Report

June 30, 2008 and 2007

TABLE OF CONTENTS

	Page
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM	1
FINANCIAL STATEMENTS
Consolidated Balance Sheets	2
Consolidated Statements of Income	3
Consolidated Statements of Members’ Equity and Comprehensive Income	4
Consolidated Statements of Cash Flows	5-6
Notes to Consolidated Financial Statements	7-18

Report of Independent Registered Public Accounting Firm

The Board of Directors

Synerject, LLC

Newport News, Virginia

We have audited the accompanying consolidated balance sheet of Synerject, LLC and subsidiaries as of June 30, 2008 and the related consolidated statements of income, members’ equity and comprehensive income, and cash flows for the year ended June 30, 2008. These consolidated financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these consolidated financial statements based on our audit. The consolidated financial statements of the Company as of June 30, 2007 and 2006 and for the years then ended, were audited by other auditors whose report dated August 15, 2007, expressed an unqualified opinion on those statements.

We conducted our audit in accordance with generally accepted auditing standards as established by the Auditing Standards Board (United States) and in accordance with the auditing standards of the Public Company Accounting Oversight Board (United States). Those standards required that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. Our audit included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion. An audit also includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audit provides a reasonable basis for our opinion.

In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Synerject, LLC and subsidiaries as of June 30, 2008 and the results of their operations and their cash flows for the year then ended, in conformity with accounting principles generally accepted in the United States of America.

Norfolk, Virginia

August 1, 2008

-1-

FINANCIAL STATEMENTS

SYNERJECT, LLC AND SUBSIDIARIES

Consolidated Balance Sheets

June 30, 2008 and 2007

	2008		2007
Assets
Current assets
Cash	$	2,614,242	$	4,323,697
Trade accounts receivable, net of allowance for doubtful accounts of $52,823 in 2008 and $75,562 in 2007		16,924,693		12,795,879
Inventories		4,286,519		4,046,952
Prepaid expenses and other assets		2,079,462		2,329,348
Total current assets		25,904,916		23,495,876
Property, plant and equipment, net		5,643,035		5,638,222
License agreements, net of accumulated amortization of $8,795,850 in 2008 and $7,352,906 in 2007		6,292,764		6,776,704
Total assets	$	37,840,715	$	35,910,802
Liabilities and Members’ Equity
Current liabilities
Accounts payable	$	11,538,187	$	9,464,263
Accrued expenses and other liabilities		2,993,340		2,874,223
Current portion of long-term debt		2,055,632		1,908,873
Line of credit		1,274,972		1,150,000
Total current liabilities		17,862,131		15,397,359
Accrued expenses – noncurrent		627,051		478,551
Long-term debt, excluding current portion		2,405,658		4,461,290
Total liabilities		20,894,840		20,337,200
Members’ equity		15,308,587		14,594,484
Accumulated other comprehensive income		1,637,288		979,118
Total members’ equity		16,945,875		15,573,602
Total liabilities and members’ equity	$	37,840,715	$	35,910,802

See accompanying notes.

-2-

SYNERJECT, LLC AND SUBSIDIARIES

Consolidated Statements of Income

Years ended June 30, 2008, 2007 and 2006

	2008			2007			2006
Revenue
Net sales	$	76,867,607		$	72,873,582		$	53,760,332
Engineering services revenue		4,153,867			6,753,583			3,717,173
Total revenue		81,021,474			79,627,165			57,477,505
Costs and expenses
Cost of goods sold		62,060,772			59,339,047			41,234,496
Engineering expenses		8,539,305			8,775,386			7,437,352
Selling, general and administrative expenses		7,267,068			7,267,979			5,433,075
Total costs and expenses		77,867,145			75,382,412			54,104,923
Operating income		3,154,329			4,244,753			3,372,582
Other income (expense)		(506,064	)		(580,539	)		(562,507	)
Interest expense		(246,570	)		(163,345	)		(116,097	)
Other		(752,634	)		(743,884	)		(678,604	)
Net income	$	2,401,695		$	3,500,869		$	2,693,978

See accompanying notes.

-3-

SYNERJECT, LLC AND SUBSIDIARIES

Consolidated Statements of Members’ Equity and Comprehensive Income

Years ended June 30, 2008, 2007 and 2006

	Members’ equity									Accumulated other comprehensive income									Total members’
	CAS			OFT			Total			CAS			OFT			Total			equity
Balances, June 30, 2005	$	2,199,819		$	2,199,818		$	4,399,637		$	349,324		$	349,324		$	698,648		$	5,098,285
Capital contributions		2,000,000			2,000,000			4,000,000			—			—			—			4,000,000
Comprehensive income:
Net income		1,346,989			1,346,989			2,693,978			—			—			—			2,693,978
Foreign currency translation adjustment		—			—			—			44,345			44,345			88,690			88,690
Total comprehensive income																				2,782,668
Balances, June 30, 2006		5,546,808			5,546,807			11,093,615			393,669			393,669			787,338			11,880,953
Comprehensive income:
Net income		1,750,434			1,750,435			3,500,869			—			—			—			3,500,869
Foreign currency translation adjustment		—			—			—			127,166			127,166			254,332			254,332
Net unrealized loss in fair value of derivatives		—			—			—			(31,276	)		(31,276	)		(62,552	)		(62,552	)
Total comprehensive income																				3,692,649
Balances at June 30, 2007		7,297,242			7,297,242			14,594,484			489,559			489,559			979,118			15,573,602
Distributions to members		(843,796	)		(843,796	)		(1,687,592	)		—			—			—			(1,687,592	)
Comprehensive income:
Net income		1,200,848			1,200,847			2,401,695			—			—			—			2,401,695
Foreign currency translation adjustment		—			—			—			367,465			367,465			734,930			734,930
Net unrealized loss in fair value of derivatives		—			—			—			(38,380	)		(38,380	)		(76,760	)		(76,760	)
Total comprehensive income																				3,059,865
Balances at June 30, 2008	$	7,654,294		$	7,654,293		$	15,308,587		$	818,664		$	818,664		$	1,637,288		$	16,945,875

See accompanying notes.

-4-

SYNERJECT, LLC AND SUBSIDIARIES

Consolidated Statements of Cash Flows

Years ended June 30, 2008, 2007 and 2006

	2008			2007			2006
Cash flows from operating activities
Net income	$	2,401,695		$	3,500,869		$	2,693,978
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization of property, plant and equipment		1,140,519			976,667			921,797
Amortization of license agreements		956,208			896,707			887,044
Loss on disposal of property, plant and equipment		27,285			—			—
Changes in assets and liabilities increasing (decreasing) cash flows from operations:
Accounts receivable		(3,205,497	)		(2,010,033	)		(4,775,040	)
Inventories		(205,972	)		(1,218,022	)		536,923
Prepaid expenses and other assets		457,766			(1,003,765	)		(146,310	)
Accounts payable		1,146,122			1,284,015			4,804,050
Accrued expenses and other liabilities		(19,166	)		104,392			598,827
Other		—			73,594			16,974
Net cash provided by operating activities		2,698,960			2,604,424			5,538,243
Cash flows from investing activities
Acquisition of business		—			—			(2,472,622	)
Acquisition of intangibles		(116,548	)		—			—
Acquisitions of property, plant and equipment		(1,025,088	)		(2,525,138	)		(1,372,581	)
Net cash used in investing activities		(1,141,636	)		(2,525,138	)		(3,845,203	)
Cash flows from financing activities
Capital contributions		—			—			4,000,000
Distributions to members		(1,687,592	)		—			—
Net borrowings (repayments) on line of credit		124,972			1,150,000			(14,000,000	)
Proceeds from issuance of note payable to bank		—			—			8,000,000
Principal payments on long-term debt		(1,908,873	)		(1,629,837	)		(306,212	)
Net cash used in financing activities		(3,471,493	)		(479,837	)		(2,306,212	)
Effect of exchange rate changes on cash		204,714			—			—
Net decrease in cash		(1,709,455	)		(400,551	)		(613,172	)

(Continued)

See accompanying notes.

-5-

SYNERJECT, LLC AND SUBSIDIARIES

Consolidated Statements of Cash Flows

Years ended June 30, 2008, 2007 and 2006

(Concluded)

	2008		2007		2006
Cash
Beginning of year	$	4,323,697	$	4,724,248	$	5,337,420
End of year	$	2,614,242	$	4,323,697	$	4,724,248
Supplement disclosure of cash flow information:
Cash paid for interest	$	523,398	$	534,705	$	905,954
Cash paid for foreign income taxes	$	—	$	249,816	$	197,341

See accompanying notes.

-6-

SYNERJECT, LLC AND SUBSIDIARIES

Notes to Consolidated Financial Statements

June 30, 2008

Note 1. Nature of Business and Summary of Significant Accounting Policies

Organization and Description of Business

Synerject, LLC (Synerject or the Company), a Delaware limited liability company, was formed on June 25, 1997 to manufacture, distribute, and sell fuel rail assemblies incorporating charge delivery injectors which deliver air and premetered quantities of gasoline directly into the combustion chambers of both two-stroke and four-stroke internal combustion engines.

The Company is the result of a Joint Venture and Limited Liability Company Agreement (the Agreement) between Continental Automotive Systems US, Inc. (CAS) (formerly Siemens VDO Automotive Corporation) and Orbital Fluid Technologies (OFT), whereby each member owns 50% of the Company. CAS is a wholly owned subsidiary of Continental VDO Automotive AG (CVA) (formerly Siemens Corporation), a corporation organized under the laws of the Federal republic of Germany. OFT is a wholly owned subsidiary of Orbital Engine Corporation Limited (OECL), a corporation organized under the laws of West Australia.

Pursuant to the terms of the Agreement, allocation of net income (loss) will be to and among the members in accordance with their ownership percentages. As of April 2003, under an amendment to the Agreement, the CEO and CFO of Synerject were added to the Company’s board of directors. Voting control of the Company’s board of directors is shared equally between CVA, OECL, and Synerject.

The initial term of the Agreement is 20 years and is subject to renewal upon terms and conditions as shall be mutually agreed by CVA and OECL.

In November 1998, the Company began functioning as a systems integrator for motorcycle, scooter and other two-wheel applications utilizing direct injection technology. In addition, in September 1999, the Company began functioning as a systems integrator for nonautomotive equipment utilizing certain Continental port injection technology. In April 2003, the Company began systems integration services and supply of systems components to customers in the marine and recreation market segment, and to a new customer, Bombardier Rotax (Austria), for engines supplied to the snowmobile and personal watercraft markets. In March 2006, the Company acquired from BRP US, Inc. a business associated with supplying fuel systems and components of outboard marine engines.

Principles of Consolidation

The consolidated financial statements include the financial statements of Synerject, LLC and its wholly owned subsidiaries. All significant intercompany balances and transactions have been eliminated in consolidation.

(Continued)

-7-

SYNERJECT, LLC AND SUBSIDIARIES

Notes to Consolidated Financial Statements

June 30, 2008

Note 1. Nature of Business and Summary of Significant Accounting Policies (Continued)

Trade Accounts Receivable

Trade accounts receivable are recorded at the invoiced amount and do not bear interest. The allowance for doubtful accounts is the Company’s best estimate of the amount of probable credit losses in the Company’s existing accounts receivable. The Company determines a general allowance utilizing percentages applied to aged outstanding receivable balances. The Company reviews its allowance for doubtful accounts monthly. Account balances are charged off against the allowance after all means of collection have been exhausted and the potential for recovery is considered remote. The Company does not have any off-balance sheet credit exposure related to its customers.

Inventories

Inventories which include raw materials and finished goods are stated at the lower of cost or market. Cost includes material, labor and applicable manufacturing overhead and is determined using standard costs, which approximate average costs.

Property, Plant and Equipment

Property, plant and equipment are stated at cost, net of accumulated depreciation and amortization. Depreciation and amortization are provided using the straight-line method over the estimated useful lives of the property as follows:

Leasehold improvements	10 Years
Manufacturing machinery and equipment	10 Years
Testing equipment and motor vehicles	5 Years
Tooling	3 Years
Office and computer equipment, Computer Software	3 Years

Intangible Assets – License Agreements

In June 1997, the Company entered into a license agreement with OFT for licensed technology. In November 1998, this license agreement was expanded, and the Company acquired the right to provide system integration services and products to the motorcycle market. In September 1999, the Company obtained a license agreement for the right to use CAS technology for systems integration for nonautomotive equipment. The license agreements are stated at cost, net of accumulated amortization.

Warranty Liability

The Company provides for estimated warranty costs based on historical warranty return data and accrues for specific items at the time their existence is known and the amounts are determinable.

(Continued)

-8-

SYNERJECT, LLC AND SUBSIDIARIES

Notes to Consolidated Financial Statements

June 30, 2008

Note 1. Nature of Business and Summary of Significant Accounting Policies (Continued)

Derivative Financial Instruments and Hedging Activities

The Company uses an interest rate swap agreement to limit exposure to rising interest rates on its variable-rate note payable. Interest rates differentials to be paid or received as a result of the swap agreement are accrued and recognized as an adjustment of interest expense related to the associated debt.

Derivatives are recognized on the consolidated balance sheet at their fair value. On the effective date of the derivative contract, the Company designates the derivative as either a hedge of the fair value of a recognized asset or liability or of an unrecognized firm commitment (fair value hedge), or a hedge of a forecasted transaction or of the variability of cash flows to be received or paid related to a recognized asset or liability (cash flow hedge). The Company enters only into cash flow hedge agreements. The company formally documents all relations between hedging instruments and hedged items, as well as its risk-management objective and strategy for undertaking various hedge transactions. This process includes linking all derivates that are designated as cash flow hedges to specific assets and liabilities on the balance sheet. The Company also formally assesses, both at the hedge’s inception and on an ongoing basis, whether the derivatives that are used in hedging transaction are highly effective in offsetting changes in cash flows of hedge items.

Changes in the fair value of a derivative that are highly effective and are designated and qualify as cash flow hedges are recorded in accumulated other comprehensive income until earnings are affected by the variability in cash flows of the designated hedge item.

Income Taxes

The Company has elected to have the income or loss of Synerject reported by the individual members on their U.S. income tax returns rather than by the Company. Accordingly, no U.S. income taxes related to the company have been provided for in the accompanying consolidated financial statements.

However, an election was not made to have the income or loss of one subsidiary, Synerject SAS, reported by the individual members on their income tax return. Synerject SAS incurs and pays foreign income taxes. The individual members may be entitled to a tax credit for such foreign income taxes paid by Synerject SAS if dividends are paid. For the years ended June 30, 2008, 2007 and 2006, foreign income taxes of approximately $113,000, $194,000 and $172,000, respectively, were included in other expense on the accompanying consolidated statements of income.

(Continued)

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SYNERJECT, LLC AND SUBSIDIARIES

Notes to Consolidated Financial Statements

June 30, 2008

Note 1. Nature of Business and Summary of Significant Accounting Policies (Continued)

Use of Estimates

Management of the Company has made a number of estimates and assumptions relating to the reporting of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the consolidated financial statements and the reported amounts of revenue and expenses during the reporting period to prepare these consolidated financial statements in conformity with U.S. generally accepted accounting principles. Actual results could differ from those estimates.

Translation of Foreign Currencies

The financial position and results of operations of the Company’s non-U.S. subsidiaries and branches are measured using functional currencies other than the U.S. dollar. Assets and liabilities are translated at the exchange rate in effect at the financial statement date. Income statement accounts are translated at the average rate of exchange prevailing during the period. Net exchange gains and losses resulting from the translation of foreign financial statements and the effect of exchange rate changes on intercompany transactions of a long-term investment nature are included in the cumulative foreign currency translation adjustment account in total members’ equity.

Impairment of Long-Lived Assets

In accordance with FASB Statement No. 144, long-lived assets such as property, plant and equipment and purchased intangibles subject to amortization are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. Recoverability of assets to be held and used is measured by a comparison of the carrying amount of an asset to future net cash flows expected to be generated by the asset. If the carrying amount of an asset exceeds its estimated future cash flows, an impairment charge is recognized by the amount of which the carrying amount of the asset exceeds the fair value of the assets. Assets to be disposed of are reported at then lower of the carrying amount or fair value less cost to sell.

Revenue Recognition

The Company recognizes revenue on sales after products are shipped, the customer takes ownership and assumes risk of loss, collection of the relevant receivable is probable, persuasive evidence of an arrangement exists, and the sale price is fixed or determinable. The Company recognizes revenue related to engineering services based on output measures and the achievement of certain billable milestones. Revenues are recorded net of taxes that are collected from customers and remitted to governmental authorities. Sales are presented net of any taxes applicable to sales transactions.

(Continued)

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SYNERJECT, LLC AND SUBSIDIARIES

Notes to Consolidated Financial Statements

June 30, 2008

Note 1. Nature of Business and Summary of Significant Accounting Policies (Concluded)

Research and Development

Research and development costs are expensed as incurred. They amounted to approximately $870,000, $1,736,000 and $2,057,000 in 2008,2007 and 2006, respectively.

Note 2. Transactions with Related Parties

The Company purchases services and materials from CAS, OECL and their related affiliates. Included in trade accounts receivable at June 30, 2008 and 2007 are approximately $3,000 and $102,000, respectively, due form related parties. Included in accounts payable at June 30, 2008 and 2007 are approximately $2,611,000 and $3,350,000, respectively, due to related parties. These payables primarily relate to product purchases and operating expenses, including engineering and technical assistance.

A breakdown of these related-party receivables and payables at June 30, 2008 and 2007 is as follows:

	2008		2007
Related party receivables:
CAS and its affiliates	$	3,000	$	57,000
OECL and its affiliates		—		45,000
	$	3,000	$	102,000
Related party payables:
CAS and its affiliates	$	2,525,000	$	3,332,000
OECL and its affiliates		86,000		18,000
	$	2,611,000	$	3,350,000

Total revenues from related parties for the years ended June 30, 2008 and 2007 were approximately $45,000 and $150,000, respectively. Total purchases from related parties for the years ended June 30, 2008 and 2007 were approximately $21,943,000 and $22,790,000, respectively. Rental expense related to a facility lease with a CVA affiliate was approximately $191,000 in 2008 and $48,000 in 2007.

Note 3. Line of Credit

The Company has available a line of credit with SunTrust Bank totaling $5,000,000. The total outstanding balance under this line of credit was $1,274,972 and $1,150,000 at June 30, 2008 and 2007, respectively. The line of credit matures January 31, 2009. The line of credit bears interest at the one month London Inter Bank Offered Rate (LIBOR) plus 1.35% (3.81% at June 30, 2008). The line of credit is secured by receivables and inventory assets of the Company.

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SYNERJECT, LLC AND SUBSIDIARIES

Notes to Consolidated Financial Statements

June 30, 2008

Note 4. Long-term Debt and Letter of Credit

Long-term debt as of June 30, 2008 and 2007 consists of a note payable to a bank under an agreement dated June 29, 2006, maturing July 1,2010. Interest accrues at a rate of LIBOR plus 1.45% (3.91% at June 30, 2008). The note is payable in monthly installments of principal and interest and is secured by substantially all assets of the Company. The aggregate maturities of long-term debt for each of the years subsequent to June 30, 2008 are as follows: 2009, $2,055,632; 2010, $2,213,676; 2011, $191,982.

At June 30, 2008, the Company had one outstanding interest rate swap agreement with a bank having a notional amount of $4,461,290 and terminating on July 1, 2010 (see note 5). The swap agreement provides for the payment of interest based on a fixed rate of 7.43% which remains unchanged over the term of the agreement. The floating rate of the swap agreement is based on LIBOR plus 1.45% (3.91% at June 30, 2008) and is reset monthly based on market conditions. The nature of the swap agreement changes variable-rate debt to fixed rate debt. The interest rate differential paid or received under the swap is recognized over the term of the contract as adjustments are made to the effective yield of the underlying debt. The Company may be exposed to credit loss in the event of nonperformance by the other party to the interest rate swap agreement. The Company does not anticipate such nonperformance. The fair value of the interest rate swap agreement has been determined by the holder of the interest rate swap agreement based on pricing models regarding past, present and future market conditions. The estimated fair value of the interest rate swap at June 30, 2008 was a net liability of $139,312, which is included in accrued expenses – noncurrent.

Note 5. Derivative Instruments and Hedging Activities

The Company has a derivative instrument to manage its exposure on its variable-rate debt. The Company does not enter into derivative instruments for any purpose other than cash flow hedging purposes. Specifically, the Company does not speculate using derivative instruments.

By using derivative financial instruments to hedge exposures to changes in interest rates, the Company exposes itself to credit risk and market risk. Credit risk is the failure of the counterparty to perform under the terms of the derivative contract. When the fair value of a derivate contract is positive, the counterparty owes the Company, which creates repayment risk for the Company. When the fair value of a derivative contract is negative, the Company owes the counterparty, and therefore, it does not possess repayment risk. The Company minimizes the credit or repayment risk in derivative instrument by entering into transitions with high-quality counterparties. Market risk is the adverse effect on the value of the financial

(Continued)

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SYNERJECT, LLC AND SUBSIDIARIES

Notes to Consolidated Financial Statements

June 30, 2008

Note 5. Derivative Instruments and Hedging Activities (Concluded)

Instrument that results from a change in interest rates. The market risk associated with interest rate contracts is mange by establishing and monitoring parameters that limit the types and degree of market risk that may be undertaken.

The company has a variable-rate note payable. This debt obligation exposes the Company to variability in interest payments due to change in interest rates. Management believes it is prudent to limit the variability of its interest payments. To meet this objective, management entered into an interest rate swap agreement to mange fluctuations in cash flows resulting from interest rate risk. This agreement changes the variable-rate cash flows exposure on the debt obligation to fixed cash flows. Under the terms of this agreement, the Company received variable interest rate payment and make fixed interest rate payment, thereby creating the equivalent of fixed-rate debt.

Note 6. Employee Benefit Plan

The Company sponsors a defined contribution 401(k) plan for its employees. Participation in the 401(k) plan is voluntary and is open to all employees over 18 years of age with six months of service. Discretionary employee contributions are base upon a percentage of annual salary (as defined by the 401(k) plan). The Company matches 50% of every dollar of employee contributions up to the first 3% of each employee’s salary. The Company may also make profit-sharing contributions at its discretion. Company contributions vest over a two-year period. The Company’s total expense under the plan was approximately $339,000, $368,000 and $223,000 for the years ended June 30, 2008, 2007 and 2006, respectively.

Note 7. Inventories

The major classes of inventories as of June 30, 2008 and 2007 are as follows:

	2008		2007
Raw materials	$	3,804,447	$	3,233,148
Finished goods		482,042		813,804
	$	4,286,519	$	4,046,952

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SYNERJECT, LLC AND SUBSIDIARIES

Notes to Consolidated Financial Statements

June 30, 2008

Note 8. Property, Plan And Equipment

Property, plant and equipment consist of the following as of June 30, 2008 and 2007:

	2008		2007
Leasehold improvements	$	235,443	$	173,075
Manufacturing machinery and equipment		7,921,439		6,388,136
Testing equipment		1,529,611		1,386,612
Tooling		2,847,387		2,579,088
Office equipment		253,800		222,670
Computer equipment		232,884		202,172
Computer software		653,876		587,257
Motor vehicles		23,359		23,359
Construction in progress		774,308		1,567,169
		14,472,107		13,129,538
Less accumulated depreciation and amortization		8,829,072		7,491,316
	$	5,643,035	$	5,638,222

Note 9. Intangible Assets – License Agreements

All intangible assets were acquired and consist of the following as of June 30, 2008 and 2007:

	June 30, 2008
	Gross carrying amount		Weighted average amortization period	Accumulated amortization
Amortizing intangible assets:
License agreement – OFT	$	12,376,164	18.5 Years	$	6,587,799
License agreement – CAS Affiliates		2,588,809	8.4 Years		2,201,868
License agreement – Other		123,641	5 Years		6,183
	$	15,088,614		$	8,795,850

(Continued)

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SYNERJECT, LLC AND SUBSIDIARIES

Notes to Consolidated Financial Statements

June 30, 2008

Note 9. Intangible Assets – License Agreements(Concluded)

	June 30, 2007
	Gross carrying amount		Weighted average amortization period	Accumulated amortization
Amortizing intangible assets:
License agreement – OFT	$	11,806,180	18.7 Years	$	5,630,135
License agreement – CAS Affiliates		2,323,430	8.5 Years		1,722,771
	$	14,129,610		$	7,352,906

Intangible assets are amortized using the straight-line method over their estimated useful lives. Aggregate amortization expense for intangible assets for the years ended June 30, 2008, 2007 and 2006 was approximately $956,000, $897,000 and $887,000, respectively. Estimated amortization expense for the next five years is $977,000 in 2009; $748,000 in 2010; $672,000 in 2011; $672,000 in 2012, and $672,000 in 2013.

Under its license agreement with OFT, the Company is contingently obligated to pay additional consideration of $1,000,000 on the last business day of the calendar year in which total sales of OCP Fuel Systems, as defined in the license agreement, reach a certain level. Based on recent sales trends, it is unlikely this hurdle will be met.

Note 10. Leases

The Company has signed several operating leases, primarily for facilities, office equipment and other equipment. Rental expense for the years ended June 30, 2008, 2007 and 2006 was approximately $1,176,000, $1,063,000 and $757,000, respectively.

As of June 30, 2008, approximate future minimum lease payments, including residual value guarantees and excluding renewal option periods are as follows:

Year ended June 30:
2009	$	1,118,000
2010		1,054,000
2011		934,000
2012		734,000
2013		721,000
Thereafter		3,043,000
	$	7,604,000

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SYNERJECT, LLC AND SUBSIDIARIES

Notes to Consolidated Financial Statements

June 30, 2008 and 2007

Note 11. Allowance for Doubtful Accounts

The activity in the allowance for doubtful accounts for the years ended June 30, 2008, 2007 and 2006 follows:

	2008			2007			2006
Allowance for doubtful accounts at beginning of year	$	75,562		$	61,768		$	32,823
Increases (decreases) to bad debt expense		(26,029	)		12,332			29,243
Write-offs, net of recoveries charged against the allowance		—			(3,681	)		—
Effects of foreign currency translation adjustments		3,290			5,143			(298	)
Allowance at end of year	$	52,823		$	75,562		$	61,768

Note 12. Warranty Liability

The activity in the warranty liability, which is included in accrued expenses and other liabilities, for the years ended June 30, 2008, 2007 and 2006 follows:

	2008			2007			2006
Liability at beginning of year	$	286,670		$	629,654		$	446,810
Additions (reductions) to warranty expense accrual		53,536			(316,997	)		340,259
Warranty costs charged against liability		(14,057	)		(48,811	)		(183,943	)
Effects of foreign currency translation adjustments		34,029			22,824			26,528
Liability at end of year	$	360,178		$	286,670		$	629,654

The warranty liability decreased due to an agreement reached with a supplier regarding responsibility for a specific portion of the liability. In addition, return rates have decreased from historical levels.

-16-

SYNERJECT, LLC AND SUBSIDIARIES

Notes to Consolidated Financial Statements

June 30, 2008

Note 13. Concentration of Credit Risk

Two customers comprised approximately 78%, 77% and 77% of net sales for the years ended June 30, 2008, 2007 and 2006, respectively, and 66%, 66% and 59% of trade accounts receivable as of June 30, 2008, 2007 and 2006, respectively.

The Company maintains bank deposits in the United States and other countries that may at times exceed the insurance limits, if any, that exist.

Note 14. Accumulated Other Comprehensive Income

	Foreign currency translation effects		Cash flow hedges			Accumulated other comprehensive income
Balances, June 30, 2006	$	787,338	$	—		$	787,338
Foreign currency translation adjustment		254,332		—			254,332
Net unrealized loss in fair value of derivative		—		(62,552	)		(62,552	)
Balances, June 30, 2007		1,041,670		(62,552	)		979,118
Foreign currency translation adjustment		734,930		—			734,930
Net unrealized loss in fair value of derivative		—		(76,760	)		(76,760	)
Balances, June 30, 2008	$	1,776,600	$	(139,312	)	$	1,637,288

Note 15. Fair Value of Financial Instruments

The fair value of a financial instrument is the amount at which the instrument could be exchanged in a current transaction between willing parties. The following method and assumptions were used to estimate the fair value of each class of financial instruments;

Cash, trade accounts receivable, accounts payable, accrued expense and other liabilities: The carrying amounts approximate fair value because of the short maturity of these items.

Long-term debt and line of credit: The carrying amount approximates fair value, as the obligation bears interest at a rate that fluctuates with the market.

Interest rate swap: The carrying amount approximates fair value, as it is marked to market as of the balance sheet date.

(Continued)

-17-

SYNERJECT, LLC AND SUBSIDIARIES

Notes to Consolidated Financial Statements

June 30, 2008

Note 16. Acquisition

On March 1, 2006, the Company acquired inventory and certain property, plant and equipment of BRP US, Inc. for the purpose of operating a manufacturing facility in Delavan, Wisconsin, which produces fuel systems and components. The accompanying consolidated financial statements include the operating results of the acquisition from the date of purchase. The acquisition cost for the purchase was allocated to inventory based on its estimated fair value and to the remaining assets acquired based on their relative fair vales. The acquisition cost was $2,472,622 and included inventory of $2,047,622 and property, plant and equipment of $425,000.

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