AT their launch in 1997, the Volvo S40 sedan and V40 wagon made the obvious statement that times have changed for the Swedish manufacturer. The styling is far more rounded and contemporary than anything the company has done in the past.

Developed in conjunction with Mitsubishi - the S40 and Mitsubishi Carisma share platforms - this new generation Volvo is aimed at the entry-level prestige market where it is up against BMW 3 Series, Lexus IS200, Audi 80, VW Passat and Saab 9-3.

Wagon and sedan versions are separated by $1000 - explaining partly why wagon sales are so strong - and there is an SE pack which adds substantially to the ambience, as well as the price.

The SE brings alloy wheels, leather-faced upholstery, leather-clad steering wheel, wood on the dash, climate control, cruise control and an in-dash single-CD player.

The leather - which gives the cabin a rich, upmarket smell - and the other features boost overall equipment levels to competitive levels.

Inside, the S40 is not huge although it offers enough room for four. The biggest criticism is the lack of rear headroom in the sedan. Those approaching 180 centimetres will be touching the roof.

The car's high waistline and small windows make the back seat feel more cramped than it is and this feeling of lack of space is compounded by the big headrests on the front seats which limit forward vision.

The boot on the sedan is huge and the rear seat folds down to further boost luggage space.

Unlike its German rivals, Volvo has steered clear of the all-black interior look. But maybe it has gone too far the other way with the test cars we drove featuring an all-grey or beige interior. Even the steering wheel is colour coded.

This light look can give the impression the car is a bit down-market and the grey instruments with red needles are not the easiest to read.

But overall the interior works well - the sound system is particularly impressive - but fails to impart the same feelings of solidity that come from a BMW 3-Series or Audi A4.

Power comes from a 2.0-litre, 16 valve, four-cylinder engine. Basically, it is the company's five-cylinder engine with one cylinder lopped off.

It develops 103kW and 183Nm of torque at a high 4500rpm although 90 per cent of this pulling power is developed from just 2000rpm.

The low-pressure turbo version develops an even more useful 118kW while for real grunt there is the 1.8-litre T4 that punches out a substantial 147kW.

But even the base engine delivers above average levels of performance.

There is a little exhaust boom in the mid rev range while it takes on a harder, slightly metallic sporty note as it approaches maximum revs.

The engine mates to a five-speed manual or four-speed auto.

Most people will no doubt opt for the smooth-changing auto but the manual is a pleasure to use. The clutch action is one of the nicest we have experienced, offering good weight and a progressive take-up.

Steering gets high marks, providing decent weight and faithful, accurate response - although more feel would be nice.

Using MacPherson struts at the front and an independent five-link system at the rear, the S40 cannot match the ride sophistication of the Audi A4.

It is generally much harsher and less happy dealing with roughed-up surfaces than any of its competition.

Handling is not as adept as the A4 with its basic understeering characteristic being dominant under pressure. Larger tyres could help reduce the tendency to lose grip at the front of the car.

Apply too much power and the MacPherson strut front-end can be made to tramp a little on slick, wet roads. A traction control system is offered as an option.

The combination of performance, comfort and value make the S4 a strong challenger.

It is a competent prestige package, held back by its relative lack of driving flair.