Chairman and CEO's Speeches at Orbital Engine Corporation Limited Annual General Meeting Thursday October 24, 2002

PERTH, Australia, Oct. 24, 2002; The following is being issued by Orbital Engine Corporation Limited :

Chairman's Speech, Orbital Engine Corporation Limited Annual General Meeting

Good morning ladies and gentlemen, welcome to the 14th annual general meeting of the Orbital Engine Corporation. My name is Ross Kelly. I am the Chairman of your Company and will be chairing today's meeting.

We have a quorum of shareholders present, so I am pleased to declare the meeting open.

662 valid proxies representing approximately 80 million shares have been received up until 10.00am on Tuesday 22 October 2002. Details of the proxy voting will be recorded in the minutes and also notified to the Australian Stock Exchange

The Proxies are also available should anyone desire to see them. Before we deal with the agenda, may I introduce my fellow Directors:

-- Immediately to my left is our Managing Director and Chief Executive Officer - Peter Cook.

-- Next to him is Keith Halliwell, our Chief Financial Officer and Joint Company Secretary.

-- Next to Keith is Grahame Young, a non - executive Director.

-- And finally at the far end, Andrew Peacock and John Marshall, both of whom are non-executive directors.

I will start proceedings this morning by giving you an overview of Orbital's year and the current business environment. Peter Cook will then follow up with a presentation on commercial issues and the Company's current programs and future plans, after which we will conduct the formal business of the meeting.

Ladies and gentlemen, in the 12 months since the last AGM the company has changed significantly.

Much of the change has been triggered because of the Orbital Combustion Process starting to achieve technical maturity. This technical maturity is evidenced by: -

-- Our growing presence and the excellent performance of OCP equipped engines in the Marine and Motorcycle markets.

-- The fact that within the automotive sector, exhaustive testing of both engines and prototype vehicles shows that we can reliably deliver significant fuel savings and simultaneously meet the most stringent emission standards.

Accordingly, it becomes possible to reduce our expenditure on unfunded Research and Development to zero cost or thereabouts, and this has been done.

It was also possible to reorganise in order to provide greater focus on marketing and, equally importantly, on also achieving cash neutrality for the 2002/03 financial year and beyond.

As a consequence the following occurred: -

-- A new Chief Executive with experience in the commercialisation of new technology was appointed. Mr. Peter Cook will provide a brief summary of his background and experience in his presentation to you.

-- A number of staff concerned with the development and further refinement of our technology were retrenched. This was a difficult and distressing time for Orbital, which I will cover in more detail later.

-- In order to support our technology, and service new and existing customers, a significant technical capability was retained. This group has however been realigned and now functions commercially on a fees for service basis contributing positively to the overall results of the business.

-- The Board was reduced to a size deemed more appropriate to our current situation. We are actively seeking new directors who will progressively be added to the board and / or replace some of our existing Directors.

-- We also completed the successful restructuring of Synerject which has resulted in a much leaner and more highly focused organisation.

In an operational sense, that is what we have done - What then are the results?

Despite uncertainties and a reduced consumer confidence in USA and Europe, our Marine and Recreation and Motorcycle businesses are profitable or approaching profitability respectively and both are growing. This of course, also augurs well for Synerject. It is pleasing to note that both businesses are now cash flow positive.

Piaggio and Peugeot both successfully released new models in May of this year. Our European scooter volumes have now reached over 60,000 units per annum and this figure is expected to double over the next 12 months.

The restructured engineering business performed to budget in both sales and profit during the first quarter.

The engineering section is therefore expected to contribute to profitability and should remain profitable if sales continue at their current level.

The Synerject restructure has delivered.

In what is traditionally a quiet period, Synerject delivered an EBIT of A$ 900k for the 3 months to 30th September 2002 , and was cash neutral for the quarter.

This compares with a loss of A$ 4.5 million for the corresponding quarter last year.

We see no reason why this business shouldn't continue to strengthen for the second half, particularly given our growing motorcycle volumes.

Finally, to our automotive business. As I mentioned previously, we have been able to demonstrate conclusively that the Orbital Combustion Process reliably delivers significant fuel savings coincident with low levels of emissions. To date, and in the absence of legislation which mandates reductions of the order which we can achieve, manufacturers can afford to wait and see.

Certainly in the US the automotive industry has fought very strongly against such measures and both the US and Australian governments have failed to ratify the Kyoto Protocol. Europe is pursuing a strategy aimed more at fuel economy, due to their high cost of fuel, rather than emissions reductions. Obviously, we will continue to actively pursue the introduction of our technology in the automotive area.

By way of encouragement we continue to have programs and active dialogue with five major OEMs regarding the performance of OCP in their engines.

Despite progress operationally, the performance of our shares has been appalling. While I have no way of reliably delivering the reasons for market sentiment, no doubt there has been some scepticism about our ability to achieve the operating improvements. I emphasise that it is still early days, but I hope my previous comments suggest we have achieved a lot in a relatively short time.

Two other areas are of potential concern: -

First and foremost, the position with Synerject. Uncertainty has surrounded Siemens-VDO's continued participation in Synerject, and thus has clearly eroded investor confidence. Additionally, the need to extend the Siemens-VDO loan to Synerject beyond September 30th and the failure to announce this by the due date has also been a distinct negative for the Company.

At this point Siemens-VDO have indicated a desire to continue to participate as a 50% owner of Synerject.

Peter Cook will talk further on the status of the Siemens-VDO loan to Synerject, however both Siemens-VDO and ourselves continue to work on a finance package which will be of benefit to both partners and Synerject.

I must stress this process is not finished, but it is underway.

The second area of concern is the notification by the NYSE that Orbital has fallen below its continued listing requirements. NYSE listed companies have to maintain a number of ongoing listing requirements including a market capitalisation in excess of US $50 million and, in Orbital's case, this requirement was breached when our share price fell below 26 cents Australian.

In accordance with the NYSE's requirements we will be submitting (our existing) business plan to the Listings and Compliance Committee for their evaluation. The Committee will determine whether that plan demonstrates likely compliance with the continued listing standards within eighteen months. If so, our listing on the NYSE will be retained, subject to ongoing monitoring.

We believe our plan can deliver that outcome and should therefore get the requisite approval, however these are uncertain times, particularly when it relates to an assessment of future share prices and hence market capitalisation. I stress that in the event that we do not gain the Committee's approval, the market for the shares underlying the US ADRs would remain through our listing on the ASX. Additionally, we could also pursue an alternative US listing in order to maintain an easily accessible market in the United States for our many US based investors.

In conclusion, may I say that the changes and redundancies described previously have come at considerable cost to a number of people. Most of those retrenched were loyal, effective employees with many years service. I deeply regret that we could not continue to retain their accumulated knowledge and expertise. The impact on them and their families cannot be glossed over. I sincerely hope they have all been able to overcome this setback and thank them for their contribution to the company.

Obviously, those who remain were also impacted by the redundancies and I commend them for their continuing commitment and professionalism in the face of a very difficult environment.

At Board level the changes have also been significant. The most notable of these was the resignation from the Board and subsequently from the Company of Mr. Kim Schlunke. By every standard Kim's creativity and commitment to the Company over many years was exceptional.

Unquestionably he is one of a small select group responsible for the creation and development of our core technology -- the Orbital Combustion Process.

I salute his contribution and wish him well for the future.

Executive Directors Ken Johnsen and John Beech also stood down from the Board. Both are to be congratulated on their considerable contribution over many years.

In May we saw the resignations from the board of non-executive Directors, Robin Forbes and Alan Castleman. Robin was one of Ralph Sarich's original supporters and along with Alan was a great contributor.

Finally, Andrew Peacock, who was appointed to the Board last December, is standing down. Andrew intended to stand for election at this meeting, however, his recent appointment to the position of President -- Boeing Australia has forced him to reconsider his position. His new job is full time and involves a considerable workload overlaid with extensive overseas travel. He has therefore withdrawn his nomination for election which, of course, we regret.

Ladies and Gentlemen, it has been a difficult and in some ways tumultuous year. A lot has been done and there is still much to do.

I believe that in 12 months or so we will look back and recognise not only the difficulty of the year but also its significance.

Thank you.

Chief Executive Officer's Speech Orbital Engine Corporation Limited Annual General Meeting 24 October 2002

Good morning ladies and gentlemen

The Chairman's comments have gone a long way to setting the scene for me to review, in a little more detail, the operational performance of Orbital during the year completed 30 June 2002. Before I do that however, I recognise that I'm a relatively new face to most of you and, as such, an outline of my background and what I may be able to bring to Orbital, may prove appropriate.

My corporate background has been predominantly in the area of development and/or commercialisation of technology based products, offshore. My career has covered manufacturing and R&D as well as market development, to divisional responsibility, with some of Australia's better known companies, including Faulding Hospital Pharmaceuticals (as CEO), Ansell Protective Products (as President), and Nicholas-Kiwi (as separate roles and at separate times as both Head of R&D and Managing Director of its Asian operations).

During the late 1980s I was deputy MD of Invetech (subsequently Vision Systems), probably Australia's best-known commercial product development and process development consultancy.

In all of those roles, my contribution has been to bring about the commercialisation of innovation as well as trouble shoot divisional turnarounds in the international arena. Most of these roles have been in the medical devices / pharmaceutical / biotech sectors -- but not exclusively, and my background is, not inappropriately, technical. I believe I personally contributed to the significant turnaround of the Ansell business within Pacific Dunlop during the 90's; a result described by certain observers as "PD's jewel in the crown."

During my career I have lived and worked in Australia (Melbourne), South East Asia (Singapore) and USA (Atlanta) and for most of the 90's in the UK (London). But enough of me, other than to trust that I have your confidence as well as the Board's, to effect the move to commercialisation for Orbital.

Let me move onto the year's financial performance. You have all had a chance to review our position through the annual report. Whilst year on year and at the profit after tax level, there appears to be little improvement, there are a number of areas that indicate we are making progress.

The Chairman has particularly referred to the changes that have occurred in the second half of Fiscal year 02.

On the short term, we set out to cut costs so that the business could stand on its own feet, taking advantage of the cash contributing and profitable Marine & Recreation business and the improvements likely from Motorcycles, given the launch of new models in Europe. On the mid-term, we need to improve the revenue in both Marine and Recreation and Motorcycles, as well as improve the engineering fees for service business revenue as well.

The two major areas of cost control which needed to be addressed during the year were the company's overheads and the expense of Synerject.

The following group financial summary will highlight the extent to which progress has been made in these two critical items.

Overhead reductions year on year of $6.0 million have been achieved, with $4.0 million of that occurring in the second half.

Synerject, which had been a $12.8 million expense in FY01 was contained to a $3.1 million expense in FY02, with almost all of that cost in the first half. I will discuss Synerject in more detail a little later. There was also a $6.4 million charge carried in relation to Texmaco, a failed Indonesian licensee for our auto 2-stroke engines, as the result of the Indonesian meltdown 2 years ago - a non-recurring charge.

In the last 6 months of the financial year therefore, significant financial improvement has occurred.

I should also comment on some of the other elements of the Financial Summary, other than just costs.

FY02 saw a decline in both systems sales and royalty income -- principally from the "over production / excess stock builds" in the Marine & Recreation markets prior to September 11th and the subsequent drop in consumer confidence.

There are some signs of that market now stabilising. Engineering Services revenue also declined; a position, I think, attributable to a focus on Licence income by management, but without a corresponding attention to cost containment in that area.

We are, of course, a further three months into our plan than the previous financials show, and it is reasonable to ask, "How are we travelling now?"

-- System sales are up 32% over the same quarter last year and $2.5 million over budget.

-- Underlying royalty income is up nearly A$400k against the same quarter last year and 43% up on budget.

-- Gross margin is nearly three times that of the same quarter last year.

-- EBIT (before Synerject) is over $3.0 million better than this time last year.

-- Synerject has written US $400k EBIT in the quarter compared to a US $2.2 loss in the same period last year.

-- Profit after tax is nearly $6.0 million better than the same period last year.

All this has been achieved despite a shortfall in license fee income in the first quarter, principally due to timing. Furthermore our order book, particularly in the engineering fees for services business, looks strong. We have successfully secured some $1.5 million worth of work over the next few months for Environment Australia's evaluation of ethanol and petrol blends in a variety of vehicles and 2-stroke applications. We continue with a number of significant paid programs for a number of major OEMs.

In summary, our first quarter has us essentially on plan to deliver the cash neutrality from underlying trading, that we had earlier provided to shareholders as our target for FY03. Admittedly, we have three more quarters to deliver, but we are seeing results from the changes we have made.

Our task in FY03 will be to continue with these approaches.

Top priority will be to exploit what we have, i.e. our existing technologies. To minimise further risks to shareholders, the technology proving grounds in marine & recreation and motorcycles will have to show demonstrated growth and improved profit. Our major task is to secure a stable financial base, through the development of engineering fees as a source of income, along with existing royalties, to provide Orbital with the time, resources and availability to access the mass automotive market despite all its difficulties including its political complexity, size, vested interests, generic preferences and very long lead times.

I would now like to briefly summarise where we are technically and commercially with our product.

Commercial

We lose sight of how recently we first introduced product into the market. 1996 saw the first of the Optimax products introduced from Mercury. There are now 24 products in the market place today with 6 OEMs. Product sales have risen from $6.0 million in FY98 to $35.5 million in FY02. Royalties have grown from $0.6 million in FY98 to $2.5 million in FY02.

In the Marine & Recreation sectors, our major clients of Mercury, Bombardier and Tohatsu, represent 3 of the 5 major OEMs; the other two being Yamaha and Honda.

In the Motor scooter market, our customers Aprilia, Piaggio and Peugeot, are three of the four major suppliers in the European market, with the other being Yamaha.

These two sectors are well serviced with supply of goods by our Joint Venture company Synerject. Both markets have reasonable opportunities for organic growth through model roll out across the various OEM fleets. For example, whilst our technology is on 7 models of Mercury outboards (typically the high capacity / high horsepower engines), these represent less than 10% of the total volume of Mercury's production. The two-stroke 50cc European scooter market, as a second example, sells some 800,000 scooters per annum. Our royalties were derived from sales of less than 70,000 units, four models of which were new launches. We expect our scooter sales volumes to approximately double in this fiscal year in Europe, given the good, overall technical performance of our product. Additionally, there are territory expansion opportunities, particularly in motor scooters in Asia. At this stage we are very encouraged by these opportunities although they are only in early development.

Delphi have been providing specific access to the automotive majors. They have jointly developed 2 demonstration vehicles with Orbital and provided a number of quotations for both development programs and production systems supply to the automotive OEMs. Delphi have provided an essential interface as a Tier 1 supplier to the OEMs and while much has been achieved, the all critical "production-intent" model has, to date, proved elusive.

However, we have a good partner.

Synerject, our Joint Venture with Siemens-VDO, should be seen as filling an identical role to Delphi but within the non-automotive sector. Synerject, despite its difficult formation and early trading drains, has turned the corner and was, as earlier reported, cash neutral in the last half of FY02. That performance has continued into the first quarter and, with licences from Siemens-VDO to exploit their port injection technology in the non-automotive sector, there is considerable opportunity for growth. We would expect our 50% ownership of Synerject to become one of the company's most significant assets over the next few years, contributing to both our growth and profit targets.

Most shareholders are aware that Siemens-VDO provided full initial funding for Synerject, by way of a loan facility and that the loan facility matured on the 30 September 2002. Furthermore, a guarantee exists, should Siemens-VDO seek to exercise it, for Orbital to meet 50% of that loan facility. At this stage, Siemens-VDO and Orbital as the JV owners of Synerject, have commenced negotiations aimed at restructuring and refinancing Synerject. The basic outline of the arrangements has been developed although details are still to be agreed. When that process is complete, both companies will require formal Board approval. Subject to that approval, it is anticipated that the revised arrangements will be in place from 1 January 2003.

In the meantime, Synerject continues to operate under existing facilities and with sufficient funding capacity to meet short term requirements.

Technical

My intention is not to burden you with considerable technical detail, but rather to try and give you an impression of where we stand, technically, against our competition.

There are two areas where we appear to have the only viable technical solution, and hence where we are enjoying some success: -

1. High capacity, low emission 2-stroke engines and 2. 50cc (low) capacity, low emission scooters.

In the first category, the high performance marine 2-strokes, there is a risk from 4-strokes, although it would come at a considerable price premium to the consumer. 4-strokes do have some appeal, despite this premium, but most manufacturers expect both DI 2-strokes and 4-strokes to co-exist for many years.

In the 50 cc scooter market, there is no viable threat from 4-strokes, unless there was to be a legislative decision to ban 2-strokes. 4-stroke scooters need much larger capacity engines for comparable power output, with much higher cost and mass. In other areas of the motorcycle market, notably in the higher capacity bikes (>250cc), there is some advantage in DI 4-strokes and preliminary work suggests that there may be exploitable opportunities there for Orbital's technology.

In the difficult market of automotive, we have demonstrated to various OEMs during the year: -

-- Significant coking improvements against competitive single fluid high pressure direct inject (HPDI) systems.

-- Fuel economy improvements of 15-18% with exhaust pipe gas reductions that save $150 in after treatment - on a current model European compact.

-- During cold start (initial 25 seconds) demonstrated a 40% lowering of total Hydrocarbons against a best in class SULEV.

-- Driveability, in both Europe and USA.

In summary, our technology continues to outperform, but with a reluctance to adoption for reasons previously outlined. As recently as earlier this month, DaimlerChrysler's Mercedes group reported to the Aachen Kolloquoium a review of direct injection technologies. Their review identified that Air assisted Direct Injection (ADI) and piezo injection are the only two viable technologies for DI and that final decisions would be made after further consideration of manufacturability and cost of the respective injectors. They key point here is that our technology remains under consideration by even the most innovative and demanding of OEMs.

Closing Comments and Outlook

Orbital has had a long history of innovation, whether with the original Orbital engine, or with the development of automotive 2-stroke engines, or more recently, with air assisted direct injection. Its 2 plus decades have almost exclusively been in the development and refinement of basic powertrain technologies. Very little of its history has seen a focus on the commercialisation of those technologies.

Not surprisingly, Orbital has had the cost structure of a developer, and steps have now been taken to eliminate excess capacity in the development area, while at the same time improving the commercial support systems.

This brings me to the second aspect of the business that I should comment on -- namely the supposed inability of Orbital's management to have effectively sold licenses or effectively marketed the company's intellectual property. Major OEMs have been licensed, e.g. General Motors, Ford, Bombardier and Mercury along with Tier 1 suppliers, such as Delphi. With industry consolidation, there are in fact more and more individual brands included under any one master licence. For example, Jaguar, Range Rover and Volvo as part of Ford; Saab, Alfa Romeo, Isuzu, Subaru and potentially Daewoo, as part of GM. In practice, Orbital's management have been highly effective in establishing these licences. What has proved elusive has been the technology adoption, not the license sale itself. Increasing resources therefore to sell more licenses in an ever-reducing market would seem futile.

The issue here then, is to better understand the relatively long lead time for adoption of technologies, even when technology is sound. The situation is structurally worse in the automotive sector, where there are very conservative, large organizations with very narrow margins, and with very long lead times. Technologies that require re-tooling costs and high capital investment before adoption are even more scrutinised and more protracted.

The auto industry is also very reluctant to adopt "proprietary technology". The industry wants to see generic technologies adopted by most OEMs and supplies to be available from most suppliers, as this offers multiple sourcing and an all important price competition.

The result, for better or worse, is that our technology, along with the other partially competitive technologies of high pressure direct injection, variable valve train and cylinder deactivation will all be under evaluation at the "advanced engineering" stage, for some considerable period of time before an industry wide consensus will emerge on the most appropriate technology. At this stage the auto industry has not made up its mind on base technology and it has been in that position for some considerable period.

Furthermore, the automotive industry will not agree to invest in an environment where in their mind, the final consumer is not prepared to bear the cost of improved fuel economy or reduced emissions. The OEMs are struggling with that equation and it explains the apparent "no news," which a number of shareholders keep bringing to my attention.

Our technology has met all of its technical hurdles. When it will be adopted remains a matter of ongoing speculation.

In the meantime, we focus on getting some basic stability into our business, with attention to the fundamentals.

Our task is to recognise the long lead time in automotive business, realise that we cannot significantly alter its course, and make certain that we are viable from our Engineering revenues (fee for service) and from royalties in the 2-stroke area, (M&R and scooters), where market forces and a different technical environment have combined to see faster adoption of our product, albeit at lower volumes.

That is the restructuring target we have sought during the last half for FY02 and it remains our objective for FY03.

So let me just quickly summarise: -- our near term strategy has to be to make the business stand on its own feet (i.e. cash flow neutral) by reducing costs and boosting engineering revenue, taking advantage of the royalty streams already being generated in M&R and motorcycles.

I hope my earlier comments on our financial performance during the last 9 months have demonstrated that we have made major progress. The fundamentals of the business are appreciably better than they were twelve months ago.

There are no guarantees that we will see the Orbital Combustion Process (OCP) universally adopted by the auto industry, but we do know we have a chance and it is my task to make certain the company can afford to wait while this evolution continues.

I would now like to hand you back to the Chairman for the formal business of the meeting.

ENDS