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Date Posted: 02:06:09 03/10/03 Mon
Author: 6.38pm
Subject: We present to you a proposal to reconstruct the capital and debt ofERG Limited (ERG or the Company),

ERG LIMITED 2003-03-06 ASX-SIGNAL-G

HOMEX - Perth

+++++++++++++++++++++++++
LETTER FROM THE CHAIRMAN

We present to you a proposal to reconstruct the capital and debt of
ERG Limited (ERG or the Company), which, if approved, will
significantly strengthen the financial position of the Company.

The market in which we operate has changed dramatically over recent
times, and we have a compelling need to recapitalise the Company to
ensure we are in a position to maximise the return on our technology.
This need arises from the following:

* The delay in contract awards has impaired the Group's short-term
operating cash flow and profitability and therefore its ability to
generate surplus cash.

* The interest payable on the listed convertible notes weakens the
Group's profit and cash generation capability.

* The Group's balance sheet has been weakened by write-downs and
operating performance and this led to an emphasis of matter regarding
going concern in the 30 June 2002 audit opinion and in the 31
December 2002 half-year review opinion.

Our government customers require large performance bonds to be put in
place during the terms of our contracts, and with the difficult state
of world insurance markets it has become necessary to satisfy these
bonds with our own cash deposits or bank financing facilities. This
development diverts cash from our core operations and places a
significant additional demand on ERG's working capital position.

Based on the existing terms of your Notes and the current level of
the Share price, it is likely Noteholders would seek to redeem their
Notes for cash at maturity in October 2005. This would be a $250
million obligation for the Company at that time. Our ability to fund
that redemption would be dependent on our capacity to access
alternative sources of funding at that time either through new debt
or equity raisings or asset disposals and these cannot be guaranteed.
In the shorter term, we need to service the interest requirements on
the Notes and meet our other working capital, debt and liability
obligations. The interest costs associated with the Notes have also
been a large component of the operating loss the Group has reported
and will continue to impact profitability unless the Listed Note
Conversion is approved. The Recapitalisation Proposal is an important
component of the steps being taken by your Board to meet these
obligations.

In the event that the Recapitalisation Proposal does not proceed, the
ability of the Group to continue as a going concern will be dependent
on ERG raising alternative funding. In this regard I draw your
attention to Section 1.8 of the attached Information Memorandum.

The Company continues to have excellent commercial prospects for its
technology however, we must ensure we havean appropriate balance
sheet structure to support our business and sustain growth. Should
the Recapitalisation Proposal detailed in this document proceed in
full, the net asset and debt position of the Company will be
significantly improved and the Company will have access to additional
cash resources. These are tangible benefits that we expect to go a
long way to alleviate concerns regarding the Group's financial
position and allow us to meet the performance bond requirements of
our immediate operational prospects.

In this regard it is worth noting that the Group has recently
finalised or been awarded contracts in Sydney, Seattle and Washington
DC and is continuing delivery of operations in Rome, Melbourne,
Gothenburg, Oslo, Manchester and San Francisco. The collective
revenue from these contracts is over $1 billion.

The Directors and the Company's advisers, Babcock & Brown, believe
the Recapitalisation Proposal in this document will positionERG to
maximise the returns available to the Company. The Directors have
engaged Ernst & Young Corporate Finance Pty Ltd (EYCF) to prepare a
report for Noteholders on the proposal. EYCF has concluded that the
April Interest Capitalisation, Listed Note Conversion and Future
Interest Capitalisation are in the best interests of Noteholders. The
Directors recommend you vote in favour of the proposal.

The Recapitalisation Proposal is a staged process and we are asking
you as a Noteholder to consider the initial stages in this process,
converting your Noteholding and entitlement to interest into Shares.
We are proposing to issue you 93.375 Shares in exchange for each Note
you hold and the interest accumulated on it. This figure has been
calculated using the full $13.50 face value of the Notes, plus
accrued interest to 1 April 2003 of $0.50625 and a conversion price
of $0.15 per Share. We believe this ratio is an attractive
opportunity for you as a Noteholder as you would be receiving a
significant premium to the trading price of Notes in the market for
some time. Based on the price of Shares and Notes when the proposal
was announced at the AGM in November 2002, Noteholders will be
receiving Shares representing a premium of 231% to the value of their
Notes. Based on prices at 3 March 2003 the premium is 37%. The actual
value received will be dependent on the market price of both
securities at the time of conversion. The next stages of the proposal
will be a Shareholder Meeting to approve the issue of the Shares to
Noteholders and then a Rights Issue to raise $50 million (if the
Directors decide to proceed with it), in which you will be entitled
to participate if you receive and retain the Shares issued to you.

We have received strong support from the major Noteholders, who hold
approximately 46.5% of the Notes and have indicated they intend to
vote in favour of the proposal.

It will be necessary to conduct a meeting of the Noteholders to
consider this proposal. The meeting will be conducted on 28 March
2003 at 10.30am at the Hyatt Regency Perth, 99 Adelaide Terrace,
Perth, Western Australia. We urge you to vote in person or by proxy
at this meeting. This is the only immediate action you must take as a
result of this document.

Should the Listed Note Conversion be approved, we will then conduct a
meeting of Shareholders, and, if their approval is received, we will
proceed with the full Recapitalisation Proposal that includes both a
Share Consolidation and possibly the Rights Issue. The Rights Issue
will be made available to all Shareholders at that time and is
therefore expected to include the current Noteholders provided the
conversion of Notes to Shares has been approved. If it proceeds you
will receive a prospectus in the mail in due course in relation to
the Rights Issue.

The Recapitalisation Proposal is quite complex and thereare a number
of potential outcomes and so I urge you to carefully read the
attached explanatory materials and if you have any questions, seek
advice from your financial adviser. I also suggest you read the
opinion on page 4 of the attached Independent Expert's Report.

We look forward to your support for this proposal, and once again
strongly encourage you to have your say by voting at the Noteholder
Meeting.

A S Murdoch
CHAIRMAN

KEY DATES

The key dates for the Noteholder Meeting are set out below:

ACTION/EVENT DATE
Noteholder proxy form due at Computershare 10.30am (Perth Time)
26 March 2003

Meeting of Noteholders 10.30am (Perth Time)
28 March 2003

Adjourned meeting of Noteholders (if required) 16 April 2003*

* This date is indicative only

BALANCE OF RECAPITALISATION TIMETABLE

ERG is currently finalising the documentation for the required
Shareholder meeting which is expected to be held in late April 2003.
In addition, the Company expects to lodge the prospectus for the
proposed Rights Issue (subject to obtaining the required Noteholder
and Shareholder approvals for the Recapitalisation Proposal) in early
May 2003.

A summary of all key dates will be available at the time the
Shareholder meeting documents are lodged with the ASX, expected to be
inmid March 2003.

NOTEHOLDER CONSIDERATIONS AT A GLANCE

NOTEHOLDERS ARE BEING ASKED TO APPROVE THE CONVERSION OF NOTES AND
INTEREST INTO SHARES

Under the Recapitalisation Proposal, Noteholders will have each Note
converted into 90 Shares. You are also being asked to convert the 1
April 2003 Interest Payment of $0.50625 per Note into 3.375 Shares
and, if the Notes are not converted to Shares, to give ERG the power
to convert future interest payments to Shares.

THE CONVERSION OF NOTES IS THE FIRST STAGE OF THE LARGER
RECAPITALISATION PROPOSAL

The conversion of Notes to Shares is the first of a number of stages
in the Recapitalisation Proposal. Certain aspects are subject to
conditions such as ERG Shareholder approval. Not all steps are
inter-conditional and so the final effect of the Recapitalisation
Proposal cannot be predicted with certainty. Noteholders should
carefully consider the possible outcomes under the Recapitalisation
Proposal as the prospects of ERG, and so the value of the Shares they
will receive for their Notes, may vary depending on the extent to
which the proposal is implemented.

NEED FOR THE RECAPITALISATION PROPOSAL

As indicated by the emphasis of matter regarding going concern in the
30 June 2002 audit opinion and in the 31 December 2002 half-year
review opinion, the financial position of ERG must be strengthened if
the Company is to be able to continue to take advantage of its world
leading smart card technology. In addition, changes in world economic
conditions, the insurance industry and market perception of
technology companies in general have resulted in difficulties for ERG
(as well as other participants in the industry) to meet the
performance bond requirements of its government clients. Without the
financial strength to meet appropriate bonding requirements, the
ability of the Group to take on new projects and so to prosper will
be limited.

THE RECAPITALISATION PROPOSAL IS SUPPORTED BY THE DIRECTORS, BABCOCK
& BROWN AND THE MAJOR NOTEHOLDERS

The Recapitalisation Proposal and those aspects of it which relate
directly to Noteholders are supported by the Board and the Company's
strategic advisers, Babcock & Brown. Noteholders representing
approximately 46.5% of the Notes on issue have indicated that they
will support the Recapitalisation Proposal and will vote in favour of
all resolutions.

INDEPENDENT EXPERT'S CONCLUSIONS

The Board has also engaged Ernst & Young Corporate Finance Pty
Limited (EYCF) to prepare a report for Noteholders on the
Recapitalisation Proposal. EYCF has concluded that the Listed Note
Conversion, the April Interest Capitalisation and the Future Interest
Capitalisation are in the best interests of Noteholders. A copy of
the report is annexed.

CONTROL TO INGOT ENTITIES

As a result of the Listed Note Conversion, the former Noteholders
will receive approximately 65% of the enlarged share capital of ERG
and a major group of Noteholders, the Ingot Entities, will become
ERG's largest Shareholder holding approximately 27% of the Shares.
The interests of the Ingot Entities may increase in certain
circumstances or may be reduced if their Notes are classified as
Excluded Notes (see Section 5.2(g)).

YOUR VOTE IS IMPORTANT

The implications of the Recapitalisation Proposal for Noteholders are
significant and so you are urged to vote on the resolutions either in
person or by proxy. The resolutions must be passed by an
extraordinary resolution which requires 66?% of the votes cast by
Noteholders to support the resolutions. In addition, to be effective,
the Noteholder resolutions require holders of 75% of Notes to attend
the Noteholder Meeting either in person or by proxy.

QUESTIONS

If you have any enquiries concerning your Noteholding please contact
the Company's share registry, Computershare Investor Services Pty
Limited on(+61) 08 9323 2000 or contact your stockbroker or
professional adviser.

If you have any questions regarding the Recapitalisation Proposal
after having read the Information Memorandum and the Independent
Expert's Report, please contact the Company's toll free information
line on 1300 131 875 or contact your financial or other professional
adviser.

Information regarding ERG is available by contacting the ASX or on
the Company's website at www.erggroup.com.

NOTICE OF MEETING

Notice is given that a meeting of convertible noteholders
(Noteholders) of ERG Limited (the Company) will be held on Friday 28
March 2003 at 10.30am (Perth time) at The Hyatt Regency Perth, 99
Adelaide Terrace, Perth, Western Australia.

Special Business

Resolution 1: Approval of amendments to the Trust Deed

To consider, and if thought fit pass, the following resolution as an
extraordinary resolution:

"That:

(a) in accordance with clauses 24.2 and 24.3 and paragraph 27of
Schedule 2 of the Trust Deed, the Noteholders authorise and assent to
the Trust Deed being amended as set out in the Note Trust Amending
Deed, subject to the satisfaction of the conditions to those
amendments in the Note Trust Amending Deed; and

(b) in accordance with clause 24.3 and paragraph 27 of Schedule 2 of
the Trust Deed, the Note Trustee is authorised and directed to
execute the Note Trust Amending Deed and to do all things reasonably
incidental to give effect tothe terms of the Note Trust Amending
Deed."

Resolution 2: Approval of April Interest Capitalisation provision

To consider, and if thought fit pass, the following resolution as an
extraordinary resolution:

"That, subject to Resolution 1 and this resolution being passed
before 1 April 2003 and the Note Trust Amending Deed being executed
before 21 April 2003:

(a) the Noteholders authorise and assent to the Trust Deed being
amended to include Condition 3A set out in the NoteTrust Amending
Deed;

(b) the Company is authorised to satisfy the interest payment under
the Trust Deed which is payable on 1 April 2003 by way of an issue of
fully paid ordinary shares in the Company in the manner set out in
the new Condition 3A (April Interest Capitalisation) and the interest
payment may be satisfied in this way even if the Note Trust Amending
Deed is signed after 31 March 2003 (but before 21 April 2003) and the
fully paid ordinary shares are issued after1 April 2003;

(c) the Note Trustee is authorised and directed to do all things
reasonably required by it to give effect to the April Interest
Capitalisation; and

(d) Noteholders acknowledge, agree and authorise the potential breach
of the Trust Deed in relation to the satisfaction of the April
Interest Payment if this Resolution and Resolution 1 are passed by
Noteholders before 1 April 2003 but the Note Trust Amending Deed is
executed after 31 March 2003 but before 21 April 2003."

Resolution 3: Approval of Listed Note Conversion provision

To consider, and if thought fit pass, the following resolution as an
extraordinary resolution:

"That, subject to Resolution 1 being passed, the Note Trust Amending
Deed being executed and all other conditions precedent set out in
clause 2.1 of the Note Trust Amending Deed being satisfied or where
permitted waived on or before 30 June 2003:

(a) the Company is authorised to compulsorily convert the convertible
notes issued under the Trust Deed into fully paid ordinary shares in
the Company on the terms set out in the new Condition 20 to be
inserted in the Trust Deed by the Note Trust Amending Deed, subject
to the limited exclusions in the Note Trust Amending Deed (Listed
Note Conversion);

(b) Noteholders approve the use and application of the Listed Note
Conversion powers set out in the new Condition 20 to be inserted in
the Trust Deed by the Note Trust Amending Deed and this authorisation
will be effective even if the new Condition 20 has not been inserted
in the Trust Deed at the time of passing this resolution; and

(c) the Note Trustee is authorised and directed to do all things
reasonably required by it to give effect to the Listed Note
Conversion."

Resolution 4: Approval of Future Interest Capitalisation provision

To consider, and if thought fit pass, the following resolution as an
extraordinary resolution:

"That, subject to Resolution 1 being passed the Note Trust Amending
Deed being executed and all other conditions precedent set out in
clause 4.1(a) of the Note Trust Amending Deed being satisfied:

(a) the Noteholders authorise and assent to the Trust Deed being
amended to include Condition 3B set out in the Note Trust Amending
Deed and the Company is authorised to satisfy, at its election, any
interest payment due under the Trust Deed after 1 April 2003 by way
of an issue of fully paid ordinary shares in the Company in the
manner set out in the new Condition 3B (Future Interest
Capitalisation); and

(b) where an election is made by the Company in accordance with
paragraph (a), the Note Trustee is authorised and directed to do all
things reasonably required by it to give effect to the Future
Interest Capitalisation."

C Barrett-Lennard
COMPANY SECRETARY

A full copy of this announcement, including Information Memorandum,
is available in PDF format on www.asx.com.au. Alternatively it is
available for purchase from ASX Customer Service on 1 300 300 279.

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