The present work is set to explore the effect of compression ratio (CR) and injection timing (IT) on energy and exergy potential of a palm oil methyl ester (POME) run diesel engine. Experiments are carried out in a single cylinder, direct injection, water cooled variable compression ratio diesel engine at a constant peed of 1500 rpm under a full load of 4.24 bar brake mean effective pressure (BMEP). The study involves four different CRs of 16, 17, 17.5 and 18: and three different ITs of 20 degrees, 23 degrees and 28 degrees BTDC. Here, the CR of 17.5 and IT of 23 degrees BTDC are the standard ones. The energy analysis performed for the experimental data includes shaft power, energy input through fuel, output by cooling water and exhaust, uncounted loss per unit time. Side by side, the effects of varying CR and IT on peak pressure, peak heat release rate, brake thermal efficiency and exhaust gas temperature are also studied. The exergy analysis is carried out for availability input, shaft, cooling water and exhaust availability, availability destruction and entropy generation. It shows that higher values of CR increase the shaft availability and cooling water availability, however, they decrease the exhaust flow availability. The retardation and advancement of IT give similar results. The exergy analysis also shows that with the increase of CR, the injection retardation and advancement increase the shaft availability and exergy efficiency, while it reduces the exergy destruction. The entropy generation is also reduced for the similar CR and IT modifications. (C) 2012 Elsevier Ltd. All rights reserved.