SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

ORBITAL ENGINE CORPORATION LIMITED

ABN 32 009 344 058

AND ITS CONTROLLED ENTITIES

FINANCIAL REPORT

30 JUNE 2004

ORBITAL ENGINE CORPORATION LIMITED AND ITS CONTROLLED ENTITIES

DIRECTORS’ REPORT FOR THE YEAR ENDED 30 JUNE 2004

The Directors present their report together with the financial report of Orbital Engine Corporation Limited (the Company or Orbital) and the consolidated financial report of the consolidated entity, being the Company and its controlled entities, for the year ended 30 June 2004 and the auditors’ report thereon.

DIRECTORS

The Directors of the Company at any time during or since the end of the financial year are:

DONALD WOOLGAR JOHN BOURKE, FCPA, AGE 65

Independent Non-Executive Director and Chairman appointed 21 August 2003. Mr Bourke has extensive business experience and is currently Executive Chairman of Australian Technology Group Limited, and Chairman of both Olex Holdings Limited and Compudigm International Limited. Previously Mr Bourke has been a Director of Crown Casino Limited and BIL (Australia Holdings) Limited as well as a Councillor of the National Library of Australia. For a number of years Mr Bourke was the Finance Director of Consolidated Press Holdings Limited. Mr Bourke has significant experience in the automotive industry, having occupied various finance and senior management positions with Ford Australia during almost eighteen years with that company.

PETER CHAPMAN COOK, M.Pharm FRMIT, PhC, MPS, ARACI, AGE 56

Managing Director, appointed on 13 February 2002. Appointed Chief Executive Officer on 1 January 2002. Mr Cook has extensive experience commercialising intellectual property together with marketing exposure in Europe, the United States and Asia Pacific. Prior to his appointment at Orbital, Mr Cook has held positions as Deputy Managing Director of Invetech Pty Ltd, President of Ansell’s Protection Products Division and most recently as Chief Executive Officer of Fauldings Hospital Pharmaceuticals.

JOHN RICHARD MARSHALL, B MECHE, DIP MECHE, FIE (AUST), F.SAE.A, MSME, AGE 72

Independent Non-Executive Director. Joined the Board in December 1995 after six years as a Non-Executive Director of Orbital Engine Company (Australia) Pty Ltd. Mr Marshall is currently Chairman, Industry Advisory Board Euro-Australian Cooperation Centre and was previously Co-chair of the Expert Panel in Physical Sciences and Engineering for the Collaborative Research Centre Program and a Finance Committee member of the Australian Conservation Foundation. Mr Marshall has extensive experience in the automotive industry and was Vice-President - Manufacturing of Ford Australia between 1983 and 1989.

JOHN GRAHAME YOUNG, LLB, FAICD AGE 60

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

ROSS WILLIAM KELLY, B.E. (Hons) FAICD, AGE 66

Independent Non-Executive Director and Chairman, retired 21 August 2003. Mr Kelly joined the Board in December 1995 and resigned on 21 August 2003. Mr Kelly has had extensive experience consulting to many of Australia’s larger businesses on both strategic and operational matters in his earlier career as Operations Director (Asia Pacific Zone) of PA Management Consultants. Mr Kelly is a non-executive director of Clough Limited.

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ORBITAL ENGINE CORPORATION LIMITED AND ITS CONTROLLED ENTITIES

DIRECTORS’ REPORT FOR THE YEAR ENDED 30 JUNE 2004

CORPORATE GOVERNANCE STATEMENT

This statement outlines the main Corporate Governance practices that were in place throughout the financial year, which comply with the ASX Corporate Governance Council recommendations, unless otherwise stated.

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.orbeng.com).

Board Processes

To assist in the execution of its responsibilities, the Board has established a number of Board Committees including an Audit Committee, a Remuneration Committee, a Nomination Committee and a Finance Committee. These committees have written mandates and operating procedures, which are reviewed on a regular basis. Each committee is reviewed through its reports to the Board. 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.

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.

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:

An independent director is a non-executive director who:

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:

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

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ORBITAL ENGINE CORPORATION LIMITED AND ITS CONTROLLED ENTITIES

DIRECTORS’ REPORT FOR THE YEAR ENDED 30 JUNE 2004

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.

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 approval of the Chairman, may seek independent professional advice at the Company’s expense.

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 J R Marshall, Mr D W J Bourke (appointed 21 August 2003) and Mr R W Kelly (resigned 21 August 2003). 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 30 June 2004 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 the 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 charter provides for rotation of the external audit partner every five years.

Nomination Committee

The role of the Nomination Committee is to oversee 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. The Board then appoints the most suitable candidate who must stand for election at the next general meeting of shareholders. As part of the induction process, new directors are provided with detailed information about the nature of the Company’s business, current issues, group strategy, financial matters, policies and procedures and are given the opportunity to meet with management to obtain an insight into the Company’s business operations. The Nomination Committee is also responsible for the selection, appointment and succession planning process of the Company’s Chief Executive Officer.

Members of the Nomination Committee during the year were Mr J G Young (Chairman), Mr J R Marshall, Mr D W J Bourke (appointed 21 August 2003) and Mr R W Kelly (resigned 21 August 2003). Mr Kelly did not attend meetings relating to the appointment of his successor.

The Nomination Committee meets as and when required. The Committee met formally once during the year. 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.

Finance Committee

The Finance Committee reviews and makes recommendations to the Board on policies dealing with, and specific transactions of, material items or arrangements of a financial nature. All Directors are members of the Finance Committee.

The Finance Committee meets as and when required.

REMUNERATION REPORT

Remuneration Committee

The role of the Remuneration 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. Remuneration levels are competitively set against the market rate and designed to attract and retain the most qualified and experienced Directors and senior executives. The Remuneration Committee obtains independent advice on the appropriateness of remuneration packages, and considers trends in comparative companies both locally and internationally.

The Remuneration Committee meets twice a year and as and when required. The members of the Remuneration Committee during the year were Mr D W J Bourke (Chairman – appointed 21 August 2003), Mr J R Marshall, Mr J G Young and Mr R W Kelly (Chairman – resigned 21 August 2003). The Chief Executive Officer is invited to Remuneration Committee meetings, as required, to discuss the performance of senior executives and their remuneration packages. The Remuneration Committee has a documented charter, approved by the Board. A copy of the Charter is available on the Company’s website.

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ORBITAL ENGINE CORPORATION LIMITED AND ITS CONTROLLED ENTITIES

DIRECTORS’ REPORT FOR THE YEAR ENDED 30 JUNE 2004

Remuneration Policies

The Remuneration Committee reviews and makes recommendations to the Board on remuneration packages and policies applicable to Board members and senior executives of the Company. The broad remuneration policy is to ensure the remuneration package properly reflects the person’s duties and responsibilities and that remuneration is consistent with current industry practice. Data is obtained from independent surveys to ensure that remuneration throughout the consolidated entity 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. Remuneration packages may include a mix of fixed remuneration, performance-based remuneration and equity-based remuneration.

Executive Directors and senior executives may receive bonuses based on the achievement of budgeted goals related to the performance of the consolidated entity, as measured by a combination of earnings before interest and tax (EBIT) and cash. Achievement of budgeted goals may result in bonuses of between 5 – 20% of salary.

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 by market capitalisation (other than resource companies and property and investment trust companies) within the S&P/ASX 300 Index.

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 Director.

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

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

Shareholders have previously approved the above plan in relation to the remuneration of Executive Directors. The plan was introduced in 2001 prior to the release in 2003 of the ASX Corporate Governance best practice recommendations and was not required to be put to shareholders for approval at the time. Consequently, the introduction of the plan departs from recommendation 9.4 of the ASX Corporate Governance Council recommendations, which recommends that companies seek shareholder approval of equity based reward schemes for executives. Shareholder approval for ongoing participation of executives in the plan will be sought at the Company’s 2004 Annual General Meeting.

Executive Directors and senior executives (together with all other eligible employees) are each offered shares in the Company to the value of $1,000 per annum under the terms of the Company’s Employee Share Plan. Participation of Executive Directors is subject to shareholder approval.

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 $42,500 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.

No retirement benefits are payable to non-executive Directors.

Directors’ and Senior Executives’ Remuneration

Details of the nature and amount of each major element of the emoluments of each Director of the Company and each of the five named officers of the Company and the consolidated entity receiving the highest emoluments are disclosed in note 25.1 to the financial statements.

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ORBITAL ENGINE CORPORATION LIMITED AND ITS CONTROLLED ENTITIES

DIRECTORS’ REPORT FOR THE YEAR ENDED 30 JUNE 2004

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 heath and financial reporting.

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:

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:

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

A key current financial reporting project is convergence with International Financial Reporting Standards (IFRS). The Board has established a formal project, monitored by the Audit Committee, to ensure a smooth transition to IFRS reporting, beginning with the half year ended 31 December 2005.

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.

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ORBITAL ENGINE CORPORATION LIMITED AND ITS CONTROLLED ENTITIES

DIRECTORS’ REPORT FOR THE YEAR ENDED 30 JUNE 2004

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 as required.

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 Australian Stock Exchange. The Company Secretary is responsible for all communications with the ASX.

Information is communicated to shareholders as follows:

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. Subsequent to the annual general meeting, an information meeting is held for shareholders based in the eastern states of Australia to provide those shareholders with the opportunity to meet representatives of the Board and senior management.

Shareholders are requested to vote on the appointment of Directors, 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.

PRINCIPAL ACTIVITIES

The principal activities of the consolidated entity during the course of the financial year were the provision of engineering services and the development of engine and related technologies, providing research, design and development services for the worlds producers of powertrains and engine management systems for application in motorcycles, marine and recreational vehicles, automobiles and trucks.

There were no significant changes in the nature of the activities of the consolidated entity during the year.

CONSOLIDATED RESULT

The consolidated profit after income tax for the year attributable to the members of Orbital was $3.405 million (2003: $1.865 million loss).

REVIEW OF OPERATIONS

Chairman’s Report

I am pleased to report that Orbital has recorded a profit after tax of $3.4 million. This represents a turn around of $5.3 million from the loss recorded for the prior year.

Additionally, for the first time in many years the company’s activities have become cash positive. This, together with the capital raisings in June/July 2003, resulted in cash on hand at the end of the financial year of $12.3 million. These initiatives have provided customers, and should provide shareholders, with confidence in the company’s future.

In the 12 months under review we have achieved continued improvement in our powertrain engineering services business.

Historically we were faced with a large, totally under-utilised R&D powertrain facility. To turn this into a viable engineering services business we have:

In 2004 we have achieved a 14% increase in revenue on lower costs to deliver a $2.8 million contribution improvement. This business does however, still offer the greatest short-term scope to enhance the company’s revenue and profit as the facility is still less than 60% utilised.

The full year effect of the restructure in April 2003 of our joint venture, Synerject, delivered a profit to Orbital of $2.7 million (50% share), which is an increase of $1.4 million from 2003. This result was achieved despite difficult trading conditions in the European scooter market and adverse currency movements.

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ORBITAL ENGINE CORPORATION LIMITED AND ITS CONTROLLED ENTITIES

DIRECTORS’ REPORT FOR THE YEAR ENDED 30 JUNE 2004

The Synerject management made substantial progress in reducing their costs and improving their productivity.

Last year I advised that the Board would review with management the Company’s current strategic direction, given our earlier focus of cash neutrality and profitability had substantially been achieved in the second half of FY2003. The outcome of this review, which was completed in February 2004, was to enhance and extend the strategy that had delivered the results to date. Our revised strategy will focus on:

Over the last 18 months Orbital has been working with the New York Stock Exchange to meet their minimum market capitalisation requirements for ongoing listing. In June 2004 this issue was resolved and we provided continuing liquidity for our US shareholders by transferring the company’s American Depository Receipts (ADRs) to the OTC Bulletin Board, which is a NASDAQ operated quotation service for securities not listed on a US National Exchange. Our underlying commercial prospects are not affected by the move which does not appear to have had any adverse trading effect on the company’s ADRs.

We remain acutely aware that our prime objective is to enhance shareholder value. The ultimate gauge of our success in this area is the company’s share price. Whilst there has been some improvement over the last 12 months period, we would hope that continued realisation of our plans will result in increased shareholder confidence and share price.

CEO’s Report

Overview

The 2004 financial year has demonstrated our ability to deliver profitable, cash positive results. It has continued to build on the trends clearly established during the past two years.

The strategy - announced in May 2002 and refined during the year - has delivered lower costs and improved throughput, which has allowed the Company to be a credible long term supplier of technology and powertrain services to international markets. Additionally, Synerject, our 50:50 JV with Siemens-VDO has continued with its growth and profitability. Continuing interest in our DI technology has been demonstrated with a new licensee in India, Bajaj, and growth in the marine markets, particularly through the introduction of further models by Mercury.

The financial performance has been encouraging. The profit of $3.4 million is a major improvement over the reported loss in FY2003 of $1.9 million. This represents a $5.3 million improvement year on year. Had the same exchange rate applied in FY2004 as existed in FY2003, this result would have been increased by a further net $0.6 million.

Other financial highlights include

The three segments of our business - powertrain engineering services, technology income (from licence fees and royalties) and the Company’s share of its 50% ownership of Synerject - have each been a significant contributor to the consolidated financial result.

Highlights

Powertrain Engineering Services

The area of greatest success during FY2004 was in the engineering services contribution, producing a $2.1 million result. It was achieved by a 14% improvement in revenue and with lower operating costs. This segment of business uses Orbital’s specialised skills and facilities to innovate, develop or improve powertrain solutions for the world’s engine manufacturers or suppliers. Additionally, we provide advice and services to regulators interested in emissions, alternate fuels and fuel consumption. The services are provided on a full fee basis and are a well developed class of business in Europe and the US. Increasing automotive manufacturing activity in the Asia-Pacific region should continue to see an increase in demand for these services.

In the past, these services have been heavily focused on Orbital’s proprietary fuel injection systems and it was encouraging to see the mix of business change during the year, as customers accept our capacity to undertake a broader base of work. This is important as most manufacturers are interested in incremental improvements to conventional port injected or early stage direct injection systems’ performance.

Our strategy continues to be to deliver exceptional value for money for our services through improved productivity and focused sales and marketing efforts to secure this class of work. Our major marketing effort will continue to be in the Asia-Pacific Region.

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ORBITAL ENGINE CORPORATION LIMITED AND ITS CONTROLLED ENTITIES

DIRECTORS’ REPORT FOR THE YEAR ENDED 30 JUNE 2004

Licences and Royalties

In our 2003 Report, Orbital advised shareholders of the potential of the Indian market for our proprietary DI technology, with the announcement of our Technical Co-operation Agreement with UCAL Fuel Systems. Under the TCA, UCAL has the right to manufacture and supply most of the components of the OCP system to the 2-stroke motorcycle market in India. During the year we were pleased to announce that Bajaj, the world’s largest manufacturer of three wheelers, had taken up an exclusive licence for the application of OCP to their auto-rickshaws. Their intention is to introduce product from December 2005 and we are working closely with them in the pre-production phases.

The Bajaj auto-rickshaw is widely used in India and will provide the first true commercial-use vehicular application for OCP. The fuel economy improvements will provide a cost advantage to the operators in addition to the improved emissions. There are 200,000 auto-rickshaws built per annum and an estimated 2,000,000 auto-rickshaws in service throughout India.

Our overall licence and royalty income declined by almost $0.7 million year on year, although half this amount was attributable to foreign exchange changes from the stronger Australian dollar. The remainder of the shortfall was attributable to the lower motor scooter volumes in Europe, where all manufacturers are experiencing problems with high domestic costs and a changing market. These pressures have been significant. By way of example, Orbital’s first scooter licensee Aprilia, has had to seek special accommodation with its banks and will most likely be acquired in the near future. Consequently, this has been a period of reduced model development and introduction, although the market now appears to have stabilised.

By comparison, Mercury, our most significant licensee, has introduced new models in its 3-cylinder, mid-horsepower range which have generated higher royalties for Orbital, year on year. The Japanese outboard manufacturer, Tohatsu, has also increased its OCP volumes.

The likelihood of a new scooter model to be introduced by Kymco, the new licence from Bajaj, the initial success of the new Mercury models and other initiatives give us cause to expect royalties to improve over the medium term.

Synerject

Synerject is Orbital’s 50:50 joint venture with Siemens-VDO Automotive Corporation. Based in Virginia in the US, with additional facilities in Toulouse (France), Synerject is a manufacturer of air and fuel injectors, fuel-rail assemblies and related componentry as well as a systems integrator and components’ supplier to the non-automotive market. Synerject also supplies prototype air assisted fuel injectors for automotive and other 4- stroke applications.

The restructuring and refinancing of Synerject, completed in late FY2003, has contributed to the significantly improved profit result. Orbital recognises 50% of Synerject’s profit (or loss) into its accounts and our share of that profit has increased to $2.7 million, more than doubling from the previous year’s $1.3 million. Had the Australian dollar remained at its FY2003 exchange rate, that result would have been better by an additional $0.6 million. The management team at Synerject has grown the business strongly over the year and delivered a favourable result.

In addition to growth in turnover and profit, Synerject enjoyed strong favourable cash generation and has more than met its obligations for loan repayments, under the new refinancing agreement advised to the market in FY2003. It is also worth noting that Orbital’s systems sales were transferred to Synerject in April 2003 and, as earlier advised, are now accounted for in that entity.

Outlook

Orbital has developed multiple revenue streams, each with its own distinct growth path and commercial opportunities and has demonstrated a sustainable cash-positive business, which is no longer dependent solely on IP.

Significant value is being created through our 50% ownership of Synerject.

In the 2005 financial year Orbital will be seeking to further consolidate its position and take advantage of its lower cost base.

Commercial Review

Engineering Services

The provision of engineering services is a significant area of revenue for the Company, generating turnover of $11.5 million in the 2004 financial year. This turnover represents an increase for those services of over 14% from the 2003 financial year and over 30% from the 2002 financial year.

The increase in turnover has been achieved on the back of a number of factors, although a concerted effort has been made to grow the Company’s presence as a provider of powertrain services to major Original Equipment Manufacturers (OEMs), particularly in the Australian and Asian regions, where Orbital has the advantage over a number of its competitors of operating in essentially the same time zone as its customers. By identifying the needs of its customers and developing the skills of its employees to meet those needs, Orbital has been able to generate further opportunities in these areas.

In order to maintain the provision of best practice engineering services, Orbital continues to invest in training and development of its engineering staff and, during the 2004 income year, further developed its project management system to focus on efficiencies and project delivery to customers.

The Company now provides a broader range of engineering services to a broader range of customers. Approximately 65% of engineering revenue in the 2004 financial year was derived from services unrelated to OCP. This movement of services towards more general powertrain solutions has also necessitated a shift in the resource mix at Orbital, which has resulted in both re-skilling and external recruitment to meet these new project requirements.

As part of its commitment to developing world-class engineers, Orbital sponsors a number of University engineering prizes. In addition, the Company has become a Platinum Sponsor of UWA Motorsport, a team of final year engineering students from the University of Western Australia. The team competes in the Formula SAE, an international competition conducted annually by the Society of Automotive Engineers International, in which students are required to design and build a new car.

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ORBITAL ENGINE CORPORATION LIMITED AND ITS CONTROLLED ENTITIES

DIRECTORS’ REPORT FOR THE YEAR ENDED 30 JUNE 2004

Orbital continues to source income from engineering services related to the application of OCP, as well as leveraging from its substantial direct injection knowledge base to provide engineering services in respect of non-OCP direct injection applications.

Research and development continued to be carried out to refine aspects of the OCP system and to reduce the cost of the direct injection system for the scooter and marine markets through continued evolution of OCP componentry. Further research and development has commenced to extend the application of direct injection into other areas including direct injection of gases such as CNG, LPG and hydrogen.

During the 2004 financial year, Orbital expanded its existing testing capabilities with the addition of new equipment to enable testing and development of exhaust particulate matter (specifically suited to light duty diesel engines), LPG fuelled engines, automotive gearbox durability and base engine calibration.

A number of significant projects were carried out during the year, including:

Licensing and Royalties

In May 2004, Orbital entered into licensing arrangements with Bajaj Auto Limited, one of India’s largest producers of two and three wheeler vehicles. The agreement provides for Orbital’s fuel injection technology to be applied to a significant volume of Bajaj’s auto-rickshaw three wheeler vehicles. These vehicles, representing a growth market within India, are used for commercial purposes and the use of Orbital’s technology will provide significantly increased fuel economy and reduced operating costs.

Production is expected to commence in late 2005, from which time royalties will be payable to Orbital. Further licence fees will be payable by Bajaj over the next 24 months dependent on the achievement of milestones.

The agreement with Bajaj follows the arrangements entered into in January 2003 by Orbital with UCAL Fuel Systems Limited, under which UCAL has been licensed to manufacture, in India, fuel injection systems using Orbital’s technology. UCAL will supply fuel injection system components to Bajaj.

Another of Orbital’s licensees, Kymco, one of Taiwan’s leading motorcycle manufacturers, is actively progressing towards commercial production of a 100cc scooter incorporating Orbital’s direct injection technology. The scooter is expected to be released into the Taiwanese market during calendar year 2005.

Future licensing efforts will focus on both 2-stroke and 4-stroke applications for customers in Japan, India, USA and Europe.

In the marine market, the successful introduction by our licensee, Mercury Marine, of further models in its 3-cylinder range of direct injection 2-stroke engines, as well as the maintenance of strong demand for the existing V6 direct injection engines, contributed significantly to royalty receipts. Mercury’s OptiMax ^™ outboard engines, which utilise Orbital’s direct injection technology, continue to perform at high levels. Boats powered by OptiMax ^™ engines finished 1 ^st , 2 ^nd and 3 ^rd in Class 2 (less than 2 litres) in the 2004 French “24 Heures de Rouen” endurance powerboat race. OptiMax engines have continued to claim new speed and endurance records.

Royalty streams from the personal watercraft (PWC) market were reduced as the global market continues to stagnate and has a greater emphasis on 4-stroke models. The total market remains in the region of 120,000 units annually, having reached a peak of almost double that number in 1995. Future significant sales volumes in this market are not anticipated.

Income from motorcycle royalties was significantly reduced in the 2004 financial year, compared to the prior year, primarily due to high manufacturing costs and the delay in implementation of the Euro III emission standards. This delay has enabled motorcycle OEMs to maintain the existing lower cost carburetted product in the market. While European scooter and motorcycle volumes appear to have stabilised, or entered a slight growth period, Orbital’s royalty income has also been adversely influenced by financial difficulty experienced by Aprilia which stopped manufacturing during the peak season until additional finance could be arranged through the Italian bank network. Once the final implementation and definition of the Euro III requirements is clarified (expected later this year), increased application of OCP can be anticipated. Further growth potential exists in the ‘geared’ 50cc engine products, which are an emerging and growth market within Europe. In addition, Orbital is actively continuing development and commercialisation of OCP systems for future 4-stroke motorcycle application.

Orbital continues to support its licensees with engineering services to improve the products in areas such as engine performance and reduced emissions, in addition to assisting licensees to introduce new models and continued internal development within Orbital to improve OCP systems. Orbital has been advised that over the next 18 to 24 month period, some five new models will be introduced by the Company’s licensees.

Synerject

Synerject LLC, Orbital’s 50:50 US-headquartered joint venture with Siemens VDO Automotive Corporation, designs, manufactures and sells engine management systems (EMS) including related components such as engine control units (ECU), air and fuel injectors, fuel rail assemblies, and sensors and actuators for supply to the worldwide non-automotive market. Additionally, Synerject is responsible for the design and manufacture of air injectors for the automotive market. Synerject also provides design and process validation testing services for a range of components and modules.

As part of its restructure in April 2003, Synerject acquired, by way of capital contributions from each joint venturer, the operations of Orbital’s marine and recreation system sales business and Siemens VDO’s non-automotive gasoline systems business.

At the same time, both parties also capitalised US$6.25 million in respect of accounts payable owed by Synerject to each of them.

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ORBITAL ENGINE CORPORATION LIMITED AND ITS CONTROLLED ENTITIES

DIRECTORS’ REPORT FOR THE YEAR ENDED 30 JUNE 2004

These transactions, the full effect of which flowed through to the 2004 financial year, resulted in:

Synerject’s profit after tax (PAT) of US$3.4 million for the 2004 financial year represents an increase of almost 200% on its PAT of US$1.1 million for the 2003 financial year.

The strong cash flow generated from its operations enabled Synerject to reduce long-term debt during the financial year by US$3.0 million to US$17.0 million at financial year end. At the same time, Synerject’s net debt after cash reduced to US$14.4 million.

Synerject’s revenue stream from system sales was adversely impacted by the financial difficulties faced by Aprilia and by weakness in the European 50cc motor scooter sector. This weakness can be attributed to worldwide delays in implementing emissions standards and the price sensitive nature of the small motorcycle and scooter market. However, this impact was partially offset by increased sales due to the US led worldwide recovery in the marine market and growth in the non-automotive systems business acquired from Siemens VDO as part of the restructure. Through effective cost and margin management, Synerject was able to maintain their budgeted EBIT performance for the year, even with the reduced motor scooter sales. Synerject worked closely with Aprilia through the year to minimise its financial exposure while supporting Aprilia with product deliveries crucial in ensuring the continued sale of their scooters and motorcycles. With the announcement of Piaggio’s takeover of Aprilia, Synerject looks forward to increased stability within the Italian motor scooter manufacturing base.

To expand its sales opportunities and customer support capabilities worldwide, Synerject is planning capital investment in the forthcoming year in its core EMS business, including ECU and port injection module development.

DIVIDENDS

No dividend has been paid or proposed in respect of the current financial year.

STATE OF AFFAIRS

Significant changes in the state of affairs of the consolidated entity during the financial year were as follows:

EVENTS SUBSEQUENT TO BALANCE DATE

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 consolidated entity, the results of those operations, or the state of affairs of the consolidated entity in subsequent financial years.

LIKELY DEVELOPMENTS

Information as to the likely developments in the operations of the consolidated entity is set out in the review of operations above. Further information as to the likely developments in the operations of the consolidated entity and the expected results of those operations in subsequent financial years has not been included in this report because to include such information would be likely to result in unreasonable prejudice to the consolidated entity.

OPTIONS

Refer to Note 25.3 for details of Employee Share Options on issue. The Company has no other unissued shares under option at the date of this report.

ROUNDING

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, amounts in the financial report and Directors’ Report have been rounded off to the nearest thousand dollars unless otherwise indicated.

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INDEMNIFICATION AND INSURANCE OF OFFICERS

To the extent permitted by law, the Company indemnifies every officer of the Company against any liability incurred by that person:

unless the liability arises out of conduct on the part of the officer which involves a lack of good faith.

During the year the Company paid a premium in respect of a contract insuring all Directors, Officers and employees of the Company (and/or any subsidiary companies of which it holds greater than 50% of the voting shares) against liabilities that may arise from their positions within the Company and its controlled entities, except where the liabilities arise out of conduct involving a lack of good faith. The Directors have not included details of the nature of the liabilities covered or the amount of the premium paid in respect of the insurance contract as such disclosure is prohibited under the terms of the contract.

Signed in accordance with a resolution of the Directors:

Dated at Perth, Western Australia this 25 ^th day of August 2004.

11

The statements of financial performance are to be read in conjunction with the notes to the financial statements set out on pages 15 to 49.

12

The statements of financial position are to be read in conjunction with the notes to the financial statements set out on pages 15 to 49.

13

Non-Cash Investing Activities

In 2003 the consolidated entity acquired US$6,250,000 (A$10,369,141) further equity in the joint venture entity (Synerject LLC) satisfied by conversion of non-current loans receivable from the joint venture entity. The consolidated entity also acquired further equity in Synerject LLC satisfied by sale to the joint venture entity of plant and equipment valued at US$103,603 (A$171,884) as part of the transfer of its marine & recreation systems business to Synerject LLC.

There were no non-cash investing or financing activities in 2004.

The statements of cash flows are to be read in conjunction with the notes to the financial statements set out in pages 15 to 49.

14

ORBITAL ENGINE CORPORATION LIMITED AND ITS CONTROLLED ENTITIES

NOTES TO THE FINANCIAL STATEMENTS FOR THE YEAR ENDED 30 JUNE 2004