A program to demonstrate high thermal efficiency of a heat insulated turbocompound diesel engine was carried out. Major problems were choosing proper heat resisting materials, obtaining high mechanical and thermal efficiency of components, providing lubrication oil which works at high temperature and controling heat flux from a combustion chamber.A six cylinder, 125mn bore, turbocharged diesel engine was chosen for this program. Ceramic coating was mainly employed as a means of insulating heat and protecting engine parts. For the heat insulation, a ductile cast iron piston coated with ZrO2 was used and the cooling water was entirely eliminated. Heat flow analysis was conducted both analytically and experimentally. Thus, heat rejection was reduced by about 35%.While maximum temperature of the cylinder wall was raised up to 350°C, no scuffing and excessive wear took place in the sliding parts of a single cylinder engine for 500 hours.It was found that improvement in efficiency of components such as a turbocharger, an aftercooler, a gear train and a power recovery turbine was very important to increase the thermal efficiency of the total system. The heat insulation including the effect of the reduction in fan driving power and turbocompounding contributed to improve the fuel consumption by an amount of 11.2%.As a result of the program, the engine with the thermal efficiency of 48% (171g/kwh) was obtained.