TELSTRA GROUP LIMITED — Management Reports 2006

Oct 8, 2006

9 October 2006

The Manager

Company Announcements Office Australian Stock Exchange 4^th Floor, 20 Bridge Street SYDNEY NSW 2000

Office of the Company Secretary

Level 41 242 Exhibition Street MELBOURNE VIC 3000 AUSTRALIA

Telephone 03 9634 6400 Facsimile 03 9632 3215

ELECTRONIC LODGEMENT

Dear Sir or Madam

Telstra 3 - 2006 Supplemental Information

In accordance with the listing rules, I attach a document for release to the market.

Yours sincerely and braking

Douglas Gration Company Secretary

Telstra Corporation Limited

$(A.B.N. 33 051 775 556)$

2006 Supplemental Information

Cautionary Statement Regarding Forward-Looking Statements

Some of the information contained in this 2006 Supplemental Information constitutes forward-looking statements that are subject to various risks and uncertainties. These statements can be identified by the use of forward-looking terminology such as "may", "will", "expect", "anticipate", "estimate", "continue", "plan", "intend", "believe", "objectives", "outlook", "guidance" or other similar words, including statements relating to our outlook for fiscal 2007 and strategic management objectives set forth in "Operational and Financial Review and Prospects", including under the captions "Operational and Financial Review and Prospects — Strategic Management Objectives" and "— Outlook". Our actual results, performance or achievements could be significantly different from the results or objectives expressed in, or implied by, those forward-looking statements.

Our fiscal 2007 outlook and strategic management objectives contained in this 2006 Supplemental Information are based on a large number of assumptions concerning future events, including without limitation the successful implementation of our transformation strategy and no further adverse regulatory outcomes, as well as a number of assumptions and estimates relating to factors affecting our business. As a result, these assumptions and estimates are inherently uncertain and subject to a wide variety of risks, including significant regulatory, business, economic and competitive risks, that could cause our actual results to differ materially from our fiscal 2007 outlook and strategic management objectives. Investors should note that our Board established the strategic management objectives in order to measure the performance of management, particularly in relation to the implementation of our transformation strategy. See "Operating and Financial Review and Prospects — Strategic Management Objectives". It is important to note that our outlook for fiscal 2007 and strategic management objectives are not forecasts or projections, and should not be regarded as such by investors. Investors should also note that any movement in an assumption may offset or compound the effect of a change in any other assumption. Accordingly, there can be no assurance that the fiscal 2007 outlook and strategic management objectives will be indicative of our future performance or that actual results will not differ materially. We can not give any assurance that either our fiscal 2007 outlook or strategic management objectives will be achieved and their inclusion in this 2006 Supplemental Information should not be regarded as a representation by any person that they will be achieved.

Important factors that could cause our actual results to differ materially from our fiscal 2007 outlook and strategic management objectives and other forward-looking statements in this 2006 Supplemental Information are set forth under the caption "Risk Factors" and elsewhere in this 2006 Supplemental Information, including under the captions "Operational and Financial Review and Prospects — Outlook" and " — Strategic Management Objectives". Given these risks, uncertainties and other factors, you should not place an undue reliance on any forward-looking statement.

Presentation of Financial Information

In July 2002, the Financial Reporting Council in Australia formally announced that Australian reporting entities would be required to comply with Australian accounting standards equivalent to International Financial Reporting Standards ("A-IFRS") as adopted by the Australian Accounting Standards Board ("AASB") and other pronouncements set by the International Accounting Standards Board ("IASB") for financial years commencing on or after 1 January 2005.

Our audited consolidated financial statements for the year ended 30 June 2006 were prepared in accordance with A-IFRS, and comparative information for the year ended 30 June 2005 has been restated in accordance with A-IFRS, except for AASB 132: "Financial Instruments: Disclosure and Presentation" and AASB 139: "Financial Instruments: Recognition and Measurement", where comparative information was not required to be restated. In addition, we have elected to early adopt AASB 7: "Financial Instruments: Disclosures", which supersedes the disclosure requirements of AASB 132. Certain financial information for the years ended 30 June 2004. 2003 and 2002 has been reconciled to US-GAAP and is derived from our audited consolidated financial data for those periods, which is not included herein. A-IFRS differs in some material respects from US-GAAP. For a reconciliation of the material differences between A-IFRS and US-GAAP as they relate to our audited consolidated financial statements, see note 37 to our audited consolidated financial statements.

Information based on Australian generally accepted accounting principles in existence prior to the adoption of A-IFRS is not comparable to information prepared in accordance with A-IFRS.

Table of Contents

Summary Overview.
Risk Factors
Dividends	-14
Relationship with the Commonwealth	15
The Future Fund	18
Selected Consolidated Financial and Statistical Data	-20
Operating and Financial Review and Prospects	-24
Quantitative and Qualitative Disclosures about Market Risk	-92
Information on the Company	- 96
Competition
Regulation
Directors and Senior Executives' Shareholdings in Telstra
Glossary

Summary Overview

The terms "we", "our", "us", and other like terms refer to Telstra Corporation Limited and its consolidated subsidiaries, unless the context requires otherwise. The Commonwealth of Australia is referred to as the "Commonwealth" and the Government of the Commonwealth of Australia is referred to as the "Australian Government" or the "Government".

General

We are Australia's leading telecommunications and information services company, offering a full range of services in these markets. We also operate in certain overseas countries.

Our main activities include the provision of:

• basic access services to most homes and businesses in Australia;
• local and long distance telephone calls in Australia and international calls to and from Australia;
• mobile telecommunications services:
• broadband access and content;
• a comprehensive range of data and Internet services including through Telstra BigPond®, Australia's leading Internet service provider ("ISP");
• management of business customers' information technology and/or telecommunications services:
• wholesale services to other carriers, carriage service providers ("CSPs") and ISPs;
• advertising, search and information services through Sensis; and
• cable distribution services for FOXTEL's cable subscription television services.

One of our strengths in providing integrated telecommunications services is our extensive geographical coverage through both our fixed and mobile network infrastructure. This underpins the carriage and termination of the majority of Australia's domestic and international voice and data traffic.

We own 50% of FOXTEL, and our international businesses include interests in CSL New World Mobility Group ("CSL"), Hong Kong's leading mobile operator, TelstraClear Limited ("TelstraClear"), the second largest full service carrier in New Zealand, and Reach Ltd ("REACH"), a provider of global connectivity and international voice and satellite services, as well as SouFun Holdings Limited, a leading real estate and home furnishings website in China.

Corporate Objective

Our corporate objective is to create long-term shareholder value through providing integrated communication, information and entertainment services and customer-focused solutions.

Vision and Mission

Our vision is to do for our customers what no one else has done. That is, create a world of 1-click, 1-touch, 1button, 1-screen, 1-step solutions that are simple, easy and valued by individuals, businesses, enterprises and governments.

Our mission is to know our customers and meet their needs better than anyone else. We aim to give customers a personalised, seamless experience that makes it easy for them to do what they want, when they want it.

Strategy

Following a comprehensive review of our operations during the first half of fiscal 2006, from customer-facing to back-office operations, we announced a whole-of-company, five year transformation strategy in November 2005. The key elements of this transformation strategy are:

• building a next-generation fixed network to support the growing demand for IP-based services and simplifying IT systems;
• rolling out next-generation wireless services over our recently launched NEXT $G^TM$ national wireless broadband network ("NEXT G™ wireless network");
• implementing market-based management using extensive customer research and knowledge to differentiate our product and service offerings tailored for particular customer segments;
• providing customers with an integrated user experience across all devices and platforms fixed, wireless and Internet:
• removing costs from operations, by reducing complexity, making business systems more efficient and simplifying operations;
• expanding and enhancing our Sensis business through organic growth and targeted acquisitions of advertising, search and information businesses; and
• undergoing cultural transformation, including large investments in training staff and reforming the way we do business.

Our transformation strategy involves a complex and fundamental change to our business, operations, networks and systems and we are undertaking the transformation on an accelerated schedule. A transformation of this size, speed and complexity has not been attempted by any other telecommunications company around the world. The initiatives associated with our transformation strategy involve significant capital expenditure and extensive management attention and resources and entail substantial risks. Our ongoing investment in this transformation has significantly reduced income and free cash flows. We believe we have to undertake these major changes at this time and under our proposed schedule in order to maintain our competitiveness and improve our financial results in an increasingly competitive, technologically challenging and highly regulated environment. The main initiatives of our transformation strategy are described below.

Strengthening our fixed line telecommunication network and services

We intend that our next-generation fixed network will deliver new, better and faster services to our customers. This next-generation fixed network will include an IP core network that will offer increased platform capacity compared to our current network. We intend to provide users with more reliable and stable media and telephony services and expand the number and range of services available to customers.

The development of our IP core network is well advanced. We are beginning to deploy advanced services to upgrade business customers, including IP telephony and conferencing, IP-based call centres, reliable higher-speed broadband, web-hosting and security services. We will offer new multimedia applications to residential customers when higher speed services become available.

The new next-generation fixed network is expected to provide us with the ability to address increasing customer demand and the growing market for Virtual Private Networks ("VPNs") to connect organisations and enterprises to the Internet. The new next-generation fixed network is expected to reduce overall unit costs, allow proactive management of actual and predicted network demand and permit network upgrades to be implemented simultaneously across the nation rather than sequentially over many months. We are also investing in technology that greatly improves the speed of ADSL.

Deploying NEXT $G^{rM}$ — our national wireless broadband network for Australians

In October 2006, we launched our new NEXT $G^{TM}$ wireless network to replace our existing CDMA network. Our NEXT $G^{m}$ wireless network customers will enjoy access to a greater range of content and services as well as many enhanced features, such as improved video calling services and faster broadband access speeds, in addition to better in-building coverage. We will continue to operate services over both our existing GSM and CDMA networks until the national NEXT G™ wireless network provides the same or better coverage than the CDMA network, and in any event at least until January 2008. From that time, once the software upgrades are complete and the new service matches or betters the current range and performance of CDMA and any necessary Government agreements have been gained, we will close our CDMA network. We expect that this initiative will reduce duplication of both capital and operational expenditure.

Implementing market-based management

We are implementing a market-based management approach focused on our customers' needs. We believe that extensive customer research will allow us to differentiate ourselves from competitors by creating offers that are more relevant to the lifestyles and needs of particular customer segments. Our ongoing customer research has guided the restructure of our consumer and small business sales and marketing teams around seven consumer and five small and mid-sized enterprise segments.

Creating integrated solutions for customers

We are seeking to provide individual and business customers with an integrated user experience across devices and platforms — fixed, wireless and Internet. Our transformation strategy involves the integration of services across mobiles, BigPond®, and Sensis and is designed to facilitate product differentiation tailored to customer needs, increasing the value of our products and services for our customers.

Rationalising product and network platforms using a "one factory" approach

We are endeavouring to remove costs from our operations in part by reducing complexity, making business systems more efficient and simplifying operations. We are removing or capping obsolete, duplicated and ageing products and network platforms. Working with the customer is a crucial part of this program as the customers move off legacy systems. Cutting complexity and the associated cost from our operations is a critical first step to deliver customers a powerful and seamless user experience, integrating devices and platforms in a simpler way.

Expanding and enhancing Sensis' online offerings

Sensis, our advertising, search and information services business, is building on its search and transaction business and over time integrating its applications and services business with other products such as BigPond^® and Telstra Mobile. Sensis is seeking to achieve rapid user and advertiser growth by increasing online and wireless usage with a wide range of new content, services and improvements across Sensis' online network and through targeted acquisitions.

Transforming our culture

We are also undergoing a cultural transformation, with large investments in training employees and improving the way we do business.

We have recast leadership, talent management and performance incentives to deliver essential culture change. Our technical field workforce is becoming more mobile and responsive to customer needs with new tools and equipment to support its operational performance. We are investing an additional A\$210 million over three years in a new training program for technical, engineering and marketing staff in order to equip them with the right skills to build, operate and maintain next-generation networks and better serve customers.

Achieving regulatory reform

We remain committed to working towards a new regulatory environment that is pro-investment, pro-consumer, pro-innovation and pro-competition. That is the kind of environment that we believe is good for our business, our shareholders, our customers and the Australian telecommunications industry overall. We will continue to invest considerable time and resources in a dialogue with policy-making and regulatory authorities seeking to achieve a regulatory environment that safeguards shareholder investments in next-generation networks and services.

Risk Factors

The following describes some of the significant risks that could affect us. Additionally, some risks may be unknown to us and other risks, currently believed to be immaterial, could turn out to be material. Some or all of these could materially adversely affect our business, profits, outlook and management objectives, assets, liquidity and capital resources. These risks should be considered in conjunction with any forward-looking statements in this 2006 Supplemental Information and the cautionary statement regarding forward-looking statements in this 2006 Supplemental Information.

We operate in a highly regulated environment that negatively affects our business and profitability. In particular, we believe that regulation limits our ability to pursue certain business opportunities and activities affecting the returns we can generate on our assets. We are required to give our competitors access to certain services and infrastructure in which we have invested significant shareholder funds, even though the competitors could have invested in developing their own capabilities but chose not to do so.

A further description of Australia's telecommunications regulatory regime is contained in "Relationship with the Commonwealth — The Commonwealth as regulator" and "Regulation".

Telstra believes that regulation is the most significant ongoing risk to the company. There can be no assurances as to future policies, ministerial decisions or regulatory outcomes. These may be significantly adverse to our shareholders.

We are focused on building competitive advantage. This may however be undermined by adverse policies. decisions or regulatory outcomes.

We believe the current regulatory regime is value destroying. Regulatory reform is an issue with which management is seriously engaged and although recent history does not give us any indication that regulatory risks will be reduced, we are committed to seek regulatory reform on behalf of our shareholders.

We face substantial regulatory risks that we believe have, and will continue to have, substantial adverse effects on our operations and financial performance. The key risks include:

• Access pricing: The ACCC can require us to provide certain services to our competitors using our networks, at a price based on the ACCC's calculation of the efficient costs of providing these services if the parties fail to agree a price. In many cases we believe that the ACCC proposes prices that are below our efficient cost of supply. The ACCC is yet to issue its final ruling on the prices it will allow us to charge for various wholesale services including unconditioned local loop service ("ULLS") and spectrum sharing service ("SSS"). We believe that these are extremely important matters for the financial performance of our business. The ACCC has recently issued several interim determinations in ULLS arbitrations to which we are a party, reducing the price from A\$22 to A\$17.70 per line per month in band 2 (metropolitan areas, where the greatest number of ULLS services will be provided). We are effectively required by law to charge the same price for a basic line rental service for all retail customers across Australia, but the ACCC will not follow the same principle for wholesale customers, instead setting prices which differentiate between metropolitan and non-metropolitan areas (de-averaged prices), well below our calculation of the efficient costs. This will enable our competitors to target customers in higher density areas where access prices are low, leaving us to provide services to some customers in high cost, low density areas at the same retail price as in metropolitan areas. The ACCC may reduce access prices further which would adversely affect our revenues, earnings and shareholder returns, including dividends. In addition, the ACCC recently issued two draft interim decisions in SSS arbitrations significantly reducing the monthly charge to A\$3.20. We believe such a price would lead to accelerated growth in SSS enabling our competitors to provide broadband and VoIP services with greater growth opportunities while we are restricted to supplying basic access services. In addition, we believe such reduced access prices would be likely to lead to a reduction in our retail prices.
• Mandated access to Telstra networks: A key part of our transformation strategy involves deploying nextgeneration networks, including our recently launched NEXT G^™ wireless network. The ACCC may hold a public inquiry at any time into whether compulsory competitor access to the network should be required. We believe such compulsory competitor access would not be appropriate because of the wide availability of

competing wireless networks. Were such access to be required this would deprive our shareholders of the benefits of the wider coverage of our network and we believe this would materially adversely affect our investment returns, earnings and shareholder returns, including dividends. This may undermine our commercial incentives to continue to invest in the NEXT $G^{(M)}$ wireless network, for example, to increase data speeds.

• Conduct regulation: On 12 April 2006, the ACCC claimed that we engaged in anti-competitive conduct when we raised our wholesale basic access prices to allow greater recovery of our estimated costs of providing the service without a similar increase in retail prices, in breach of the Trade Practices Act. The ACCC may take us to the Federal Court for this alleged breach. The maximum potential penalties that the Federal Court could impose exceed A\$470 million as at 30 September 2006 and are increasing at A\$3 million per day. Optus Networks Pty Ltd, a subsidiary of one of our principal competitors, has issued proceedings in the Federal Court in the same matter seeking damages and an injunction. We will vigorously defend these proceedings and any enforcement proceedings that may be brought by the ACCC, on the basis that we have not acted anti-competitively and that we believe we should be allowed to move our prices closer to our costs. The ACCC may in the future reach the view that other of our conduct is a breach of the Act. For example, a refusal by us to supply services to our competitors for what we believe to be normal commercial reasons may in the ACCC's view, be a breach of the Act. We believe that, should the ACCC allege that we have engaged in anti-competitive conduct, it will rely upon the potential for very large fines in an endeavour to have us modify what we believe to be normal commercial behavior. We will defend our right to act in what we believe to be a normal commercial manner.
• Wide ministerial and regulatory discretion: The Communications Minister has broad and largely discretionary powers to impose and vary licence conditions and other obligations on us. For example, the requirement to operate separate retail, wholesale and network business units ("operational separation") places a burden on us with many restrictions imposed on the way we run our business. Refer "Regulation $-$ Operational separation". However, the real risk with operational separation lies in the power of the Communications Minister to determine the way we conduct our business by directing us to vary our operational separation plan, subject only to the aims and objects of the legislation which are very broad. In addition, we are subject to retail price controls — for example, we are not allowed to charge for directory assistance (even to customers of our competitors), but there is no such restriction on our competitors charging for these services. Also, we are obliged to make certain uneconomic services available in rural and remote areas, without receiving what in our opinion is a fair contribution to our costs from our competitors. Further, the ACCC has broad discretionary powers and is in general not subject to ministerial oversight or direction.

Because of these regulatory factors, there is a risk that we are, and could be, exposed to significant limitations, uncommercial imposts, penalties and compensation payments in relation to our current and future activities and assets. This may make it prudent on some occasions for us to cease, or choose not to engage in, business activities in which we might otherwise engage; or avoid, defer or abandon certain capital projects as was the case with our fibre to the node (FTTN) project, where we chose not to build this network because in our view the access price likely to be set by the ACCC would not enable us to earn a competitive return for our shareholders. These regulatory risks could therefore have an adverse effect on our ability to pursue certain business opportunities and activities and the returns we can generate on our assets, and could benefit our competitors. This may in turn adversely affect our financial performance.

For more detailed information regarding our regulatory environment and our obligations and potential liabilities under Australian regulations, see "Regulation".

We may not succeed in implementing our transformation strategy. Even if successfully implemented, our transformation strategy may not achieve the expected benefits, or may not be achieved within the intended timeframe.

We have invested substantial capital and other resources in the development, streamlining and modernisation of our networks and systems and have embarked upon a substantial transformation of the company. Our transformation strategy involves a complex and fundamental change to our business, operations, networks and systems, and we are undertaking the transformation on an accelerated schedule. A transformation of this size, speed and complexity has not been attempted by any other telecommunications company around the world. There is a significant risk that we may not be successful in the implementation of our transformation strategy. In particular, there are substantial risks that:

• our next-generation technologies and network, including our recently launched NEXT $G^{m}$ wireless network, and IT support systems and processes will not function as anticipated;
• key vendors on which we are dependent may not perform as expected;
• customer take-up of and planned large-scale migration to our new products and services are significantly less than planned;
• extended delays and other execution problems in implementing our transformation strategy may develop;
• competitors may in time offer similar services and capabilities; and
• our actual capital and operating costs turn out to be substantially greater than those budgeted.

The occurrence of any or all of these risks may have a material adverse impact on our competitiveness, earnings and shareholder returns, including dividends.

Our next-generation technologies and network and IT support systems may not function as planned and the timetable for implementation is aggressive.

Our next-generation technologies span across our fixed line and wireless networks, including our switching and transmission systems, as well as all our network and IT support systems and processes. We face significant risks that the technology may not be installed in a satisfactory manner, on time or within budget, and that the technology may not perform as expected and represented by our key vendors. The risks of non-performance include those relating to speed of transmission, quality of service, costs to deploy and operate the new networks and systems, the ability to create and effectively implement new product and service offerings and the capability to integrate applications and create seamless interfaces with front office order-entry systems and back office billing and customer support systems. As more customers are migrated to our next-generation networks and systems, some of these operational risks will increase. Any substantial delays in completing the new IT systems, or the customer migration, will lead to an extended period where we face the additional cost of operating old and new systems in parallel and delay the benefits from decommissioning the old systems.

One of the most complex and highest risk elements of our transformation strategy is the rationalisation of our network platforms and IT systems, including our operational support systems and business support systems. Our plan to cap or exit 65% of our network platforms and reduce the number of our IT systems by at least 80% by 2010 is in its early stages and we have not yet delivered the initial release. If we are unable to simplify and rationalise our networks and systems or if we are substantially delayed in achieving this objective, we may not be able to achieve the full benefits of our transformation strategy.

Our transformation strategy also depends upon the installation of new and untested support systems that we expect will allow us to price and sell services efficiently and bill and care for the customers who purchase them. The systems we are deploying are largely untested in the applications and the environments we intend for them. There is therefore substantial risk that our planned system installation and the migration of our customers to the new systems may not be successful or that we may not be able to integrate the systems supporting the multiple technologies and services we plan to operate. In addition, the migration of our CDMA customers to our NEXT G™ wireless network may be more costly or take longer than anticipated, leading to unanticipated costs in operating the CDMA network for longer than expected.

We are dependent on key vendors which may not perform as expected.

We are dependent on key vendors for the implementation of our transformation strategy, such as Accenture, Alcatel, Cisco, Ericsson, Siebel, Kenan Systems and IBM. Our dependence on key vendors for the implementation of our next-generation technologies creates a number of risks, including risks that key vendors may not deliver or perform as promised or may fail, and the products we have chosen may be discontinued or become unsupported. Also, our ability to use other vendors, obtain contractual recourse or secure intellectual property rights should one of our chosen vendors fail to deliver or perform as promised may be limited.

Customer acceptance and take up of our new product and service offerings and our planned large-scale customer migration to new platforms, including in relation to our recently launched NEXT $G^{m}$ wireless network, may be significantly less than planned.

The success of our transformation strategy depends upon the large scale customer take-up of newly-created products and services enabled by our next-generation networks, including our NEXT G^TM wireless network. No other major international telecommunications company has proven the commercial viability of creating and marketing the next-generation products and services we are planning to roll out. There is a substantial risk that we will not be able to create and develop appropriate or commercially attractive products and services that take advantage of these new network capabilities and meet market demand or that we will not develop appropriately tailored bundles of products and services compared to our competitors. Even if we do, there is a risk that customers will not purchase them in sufficient quantities or at high enough prices to recoup our investment.

The take-up of new next-generation products and services also depends on our ability to successfully migrate our substantial customer base to our new network platforms. There is a risk that we may be unable to migrate our customers to our new networks and systems successfully and that we experience excessive churn of customers to other providers during the migration process. We may also be unable to suppress continuing demand for development of existing or legacy IT systems. The occurrence of any of these risks could also complicate the build and integration of new systems and hamper the application of sufficient resources to build and integrate the new systems and cause us to have to operate old and new systems for an extended period.

We may face extended delays and other execution problems in implementing our transformation strategy.

Our transformation strategy calls for more deployments of more network technologies and IT support systems than we have ever attempted or that any major telecommunications company worldwide has successfully accomplished. The risks of executing all aspects of these deployments and the integration process on time and on budget, with high quality results, are significant. The risks associated with any one such deployment increase significantly as multiple deployments are being pursued simultaneously, each dependent in some measure upon the others being performed. In addition, our transformation is being executed in a relatively short period by a company that has not experienced a transformation process of this magnitude. There is substantial risk that our installation of these systems and the conversion of our embedded base of customers to them will take longer, be more expensive and cause more disruption than we anticipated, leading to lower sales, higher costs and widespread customer dissatisfaction. The risks associated with the execution of our transformation strategy also include the lack of suitable personnel and resources to implement our transformation, an inability of new IT systems and processes to deliver productivity gains and targeted workforce reductions and the potential for industrial disputes, each of which could significantly delay the transformation or limit its effectiveness.

Competitors may in time offer similar services and capabilities.

We expect our competitors to continue to adapt their product offerings and technical capabilities. As a result, there is a risk that our ability to differentiate ourselves from our competitors on the basis of our planned nextgeneration technologies, network and IT support systems may be reduced, affecting our revenues, margins and profits. In addition, the relative advantages expected of our NEXT G™ wireless network's geographic and inbuilding coverage and speed may be offset by competitors offering similar services and capabilities.

Our actual capital and operating costs may turn out to be substantially greater than budgeted.

Our transformation strategy is very costly and has resulted in significant declines in our net income and our cash flow available for reinvestment or the payment of dividends. The foregoing risks could cause additional costs and expenses, delays in the availability of new technology and new products and services, fewer than expected customers buying fewer new products at lower than expected prices, and asset write-downs. These risks could lead to us not generating profits or cash flow to the levels prevailing when the transformation began and could also result in a significant reduction in earnings and shareholder returns, including dividends. In addition, while our transformation strategy is designed to respond to current market changes through the modernisation of our networks and systems, future technology and market changes may create the need for other network and systems changes and therefore require us to spend more than currently budgeted.

The success of our transformation strategy is highly dependent on our key personnel and the loss of one or more of these key executives could materially impact the timely and effective implementation of this strategy.

Our CEO and a number of key members of his senior management team have joined the company within the last eighteen months and bring with them extensive telecommunications expertise. The transformation strategy that we are now pursuing is an enormous enterprise formulated by our current senior management team. Given the breadth of the strategy and the significant undertakings associated with it, the loss of one or more of these key executives, in particular the CEO or COO, could have a material adverse impact on our ability to achieve some or all of the objectives of the transformation strategy and consequently our earnings and shareholder returns, including dividends. There is also a risk that if the CEO were to leave us one or more of the overseas executives he has recruited may also leave.

We could experience difficulty in retaining and attracting skilled and experienced people.

As technology evolves we will need to attract, retain and train our workforce. The relevant skills are in short supply worldwide. There is a risk that an inability to attract and retain skilled and experienced people and hence to embrace new technology and retain our corporate knowledge could impact our ability to remain competitive.

If we are not successful in addressing the decline in revenues from our traditional high-margin fixed-line (PSTN) products and services and in increasing the revenues and profitability of our emerging products and services, our overall profitability will decline.

Our PSTN revenues declined by 6.7% in fiscal 2006. This decline will continue and may accelerate. The decline has been caused by increasing competition, substantial regulatory impacts and the continued growth and development of technologies that offer increasingly viable alternatives to our PSTN services. This trend is present across telecommunications markets globally, and it is expected to continue. PSTN revenues comprise a significant portion of our revenues and provide high margins and strong cash flows that enable us to invest in and develop our business. If we are unable to arrest or slow the rate of decline in our PSTN revenues or grow alternative revenue sources, manage costs and minimise margin erosion in newer lower-margin products and services, such as mobiles, Internet, IP solutions, advertising and directory services and pay TV bundling, our earnings and shareholder returns, including dividends, could be materially adversely affected.

Rapid technological changes and the convergence of traditional telecommunications markets with data, Internet and media markets expose us to significant operational, competitive and technological risks.

Rapid changes in telecommunications and IT are continuing to redefine the markets in which we operate, the products and services required by our customers and the ability of companies to compete in the telecommunications industry in Australia and elsewhere in the world. These changes are likely to broaden the range, reduce the costs and expand the capacities and functions of infrastructure capable of delivering these products and services. We are responding to current market changes through the modernisation of our networks and systems, including the deployment of our new nationwide NEXT $G^{TM}$ wireless network, but future technology and market changes may create the need for other network and systems changes at considerable cost to Telstra.

To address the continuing changes in converging telecommunications, data, Internet and media markets, we may be required to devote considerable resources to enhancing our ability to deliver services required by these markets. There is a risk that competitors may leverage both their own and our infrastructure or deploy or develop technologies or infrastructure that provides them with a lower cost base or other operating advantages that may

drive down market prices. This could give these competitors an advantage if we are unable to promptly and efficiently provide equivalent services.

Competition in the Australian telecommunications market could cause us to continue to lose market share and reduce our prices and profits from current products and services.

The Australian telecommunications market has become increasingly competitive since the Commonwealth introduced open competition on 1 July 1997. Although the overall market has experienced growth to date, we have lost substantial market share in some key markets particularly as a result of aggressive price competition, the development of new technologies and facilities by competitors, the market entry of non-traditional competitors with access to significant content and resources and increased regulatory action. In response to increased competition, we have lowered the prices of our products and services, particularly the prices for our local calls, national long distance calls and international telephone services and calls to and from mobile services.

There is also a risk that non-traditional competitors with greater access to content, substantial resources and/or alternative delivery platforms, such as Internet search engine and Internet trading companies, VoIP and media companies, may enter and compete effectively in our telecommunications markets.

We expect vigorous price and facilities or network-based competition to continue or accelerate. We also expect that our competitors will continue to market aggressively to our high value customers. The continued loss of market share or downward pressure on prices would have an adverse effect on our financial results in the market or markets in which this type of competition occurs.

The Australian Government has announced Connect Australia, a A\$1.1 billion package to subsidise the supply of broadband, mobile and fixed line services for people living in regional, rural and remote areas in Australia. In addition, nine of our competitors have outlined a possible model for the building of a jointly owned FTTN network to deliver broadband services to a large number of customers. Connect Australia is likely to increase facilities and network-based competition in these areas.

For more information on our competitive environment, see "Competition".

Our ability to pursue our strategy with some joint investments may be limited.

Some of our domestic and international activities are conducted through subsidiaries, joint venture entities and other equity investments. These include our interests in FOXTEL, REACH, our 3GSM 2100 network sharing partnership with Hutchison (3GIS), CSL and SouFun. Under the governing documents for some of these entities, certain key matters such as the approval of business plans and decisions as to capital invested and the timing and amount of cash distributions require the agreement of our co-participants. Our co-participants may have different approaches with respect to the investment and the markets in which they operate and on occasions we may be unable to reach agreement with them. Any dispute or disagreement from time to time with our partners may negatively affect our ability to pursue our business strategies.

In some cases, strategic or venture participants may choose not to continue their participation. In addition, our arrangements with our co-participants may expose us to additional investment, capital expenditure or financing requirements. There are also circumstances where we do not participate in the control of, or do not own a controlling interest in an investment and our co-participants may have the right to make decisions on certain key business matters with which we do not agree.

All of these factors could negatively affect our ability to pursue our business strategies with respect to the concerned entities or business objectives and the markets in which they operate. For more information on some of our investments, see "Information on the Company - International investments" and "Information on the Company - Products and services - Mobiles - 3G wireless service" and "Information on the Company -Products and services — Subscription television", and "Information on the Company — Networks and Systems".

Network and system failures could damage our reputation and earnings.

Our technical infrastructure is vulnerable to damage or interruption from a range of factors including floods, wind storms, fires, power loss, telecommunication failures, cable cuts and/or intentional wrongdoing. The networks and systems that make up our infrastructure require regular maintenance and upgrade that may cause disruption. The occurrence of a national disaster or other unanticipated problems at our facilities or any other damage to or failure of our networks and/or systems could result in consequential interruptions in service across our integrated infrastructure. Network and/or system failures, hardware or software failures or computer viruses could also affect the quality of our services and cause temporary service interruptions.

There is a risk that our major customers' capacity requirements will be in excess of our ability to supply, resulting in lost revenue, customers moving to competitors and possibly claims by customers against us.

Our IT systems are complex and there is a risk that our ability to support strategic priorities in customer service and growth products may be delayed by our transformation program and the complexity of changing our systems. Our IT systems are also vulnerable to viruses, denial of service and other similar attacks which may damage our systems and data and that of our customers. Any of these occurrences could result in customer dissatisfaction and damages or compensation claims as well as reduced earnings.

Future sales of a substantial portion of our shares by the Future Fund could depress the market price for our shares and other equity interests.

The Commonwealth has announced that it will sell part of its remaining interest in Telstra through a global offering of shares (the "Global Offering") and that it will transfer its Telstra shares not sold in the Global Offering to the Future Fund, a Commonwealth investment fund. Following the Global Offering the Future Fund will have a substantial shareholding in Telstra. The shares held by the Future Fund will be subject to an escrow or lock-up period of two years (with certain exceptions). After the escrow or lock-up period, the Future Fund will be required to sell down its shareholding over the medium-term to a level consistent with its investment strategy (at least below 20% of our issued share capital). See "Future Fund — General investment mandate". Future disposals by the Future Fund of our shares or the perception that such disposals may occur could reduce our share price, and adversely affect the timing and effectiveness of our capital raisings, which could have an adverse impact on our cost of capital.

The Finance Minister may issue directions to the Board of the Future Fund in relation to Telstra shares held by the Future Fund, including specifying how disposals, voting and other rights relating to the shares are to be exercised. While the current Government does not intend to issue directions specific to Telstra shares (except to impose the escrow and require the sell-down), a future Government might take a different approach, using its direction power to require the disposal or voting of the Telstra shares held by the Future Fund to pursue Government objectives. There is also a risk that the interests of the Future Fund and/or the Commonwealth may not be aligned with the interests of our other shareholders, and the Future Fund could take actions that we may not regard as being in the best interests of our shareholders.

There are significant differences between the Commonwealth and the Telstra Board with respect to the nomination for election as a director of Mr Geoffrey Cousins.

Telstra's annual general meeting on 14 November 2006 will be held shortly before the completion of the Global Offering, at which time the Commonwealth will still own approximately 51.8% of Telstra shares. The Commonwealth has sought the nomination of Mr Geoffrey Cousins for election as a director of Telstra at the annual general meeting and has indicated that it will vote in favour of the election of Mr Cousins. Mr Cousins has more than 26 years experience as a company director and is currently a director of Insurance Australia Group Limited. Mr Cousins was previously the Chairman of George Patterson Australia and is a former director of Publishing and Broadcasting Limited, the Seven Network, Hoyts Cinemas group and NM Rothschild & Sons Limited. He was the first Chief Executive of Optus Vision and before that held a number of executive positions at George Patterson, including Chief Executive of George Patterson Australia.

Mr Cousins was a part-time consultant to the Prime Minister for nine years resigning upon his nomination for the Board. Mr Cousins is a director of the Cure Cancer Australia Foundation.

The Government believes that Mr Cousins has the necessary qualifications to serve as a director given his broad experience across the telecommunications, broadcasting and advertising sectors and if elected would be an effective director. It does not intend or believe that Mr Cousins will act as a representative of the Government on the Telstra Board. It is not the Government's intention to issue additional directions specific to Telstra shares to the Future Fund (see "The Future Fund"). The Government raised Mr Cousins' nomination with Telstra at the beginning of the week commencing 11 September 2006 and believes that it has given Telstra ample time to consider his nomination, having regard to his extensive experience.

The Telstra Board did not seek Mr Cousins' nomination and did not have the opportunity to adequately assess Mr Cousins' candidacy in accordance with its governance processes, which include assessing a proposed director having regard to the independence requirements of the Board's Charter and the ASX Principles of Good Corporate Governance. The Board's Charter states that it is the Board's current intention that non-executive directors should be independent directors. While the Board has not reached a concluded view, the Board is concerned that there is a risk that Mr Cousins' previous consulting role with the Government could interfere with his capacity to be considered an independent director. In the Telstra's notice of meeting for the annual general meeting, the Board did not recommend that shareholders vote in favour of Mr Cousins.

To be satisfied that a director is independent the Board would need to conclude, among other things, that the director is not "associated directly with a substantial shareholder of Telstra" and "is free from any interest and any business or other relationship which could, or could reasonably be perceived to, materially interfere with the exercise of his or her unfettered and independent judgement and ability to act in the best interests of the company". The Board has been very careful to ensure that it does not, and is not seen to, prejudge in any way whether Mr Cousins would meet these requirements. However, it is clear from the circumstances of Mr Cousins' nomination and his previous association with Government that these issues will require careful examination in accordance with best practice and that this is likely to take some time to conduct appropriately. The Board has commenced a process to assist it reaching a conclusion on these issues.

The Government believes that Mr Cousins will act independently as a director and not as a representative of the Government on the Telstra Board.

However, Telstra operates in a highly regulated environment and the Commonwealth and its agencies are the key regulators. While Telstra acknowledges that Mr Cousins has served as a public company director, Telstra believes that there is a risk if Mr Cousins cannot be considered an independent director that this could prove disruptive to the smooth and effective functioning of the Board. Were this to occur, this could also affect Telstra's ability to attract and retain qualified directors.

Actual or perceived health risks relating to the emission of electromagnetic energy ("EME") by mobile handsets and transmission equipment could lead to decreased mobile communications usage.

While certain reports have suggested that EME emissions from mobile handsets and transmission equipment may have adverse health consequences, the overwhelming weight of scientific evidence is that there are no adverse health effects when wireless equipment is used in accordance with applicable standards. Nonetheless, any widespread perception of EME risks may lead to decreased mobile communication usage, which would decrease our wireless business.

There may be a lower level of dividends.

The Board's current intention is to declare dividends totaling A\$0.28 per share fully franked for fiscal 2007, subject to continued success in implementing our transformation strategy and no further material adverse regulatory outcomes during the course of the year. There is a risk that if we are unsuccessful in implementing our transformation strategy or there are further material adverse regulatory outcomes, the amount of dividends in any year may be reduced or not fully franked, which would negatively affect yield.

We intend to deregister from the SEC and delist our ADRs from the NYSE as soon as feasible following adoption of new SEC regulations on deregistration.

In December 2005, the SEC proposed rules that, if adopted, would make it easier for foreign companies to terminate their SEC registration. If these rules are adopted, we intend to deregister from the SEC and to delist our ADRs from the NYSE at the earliest opportunity, which may be accomplished by the end of the 2006 calendar year. Following the deregistration and delisting, we will no longer prepare annual reports on Form 20-F and instead will only be required to comply with the Australian reporting obligations. Investors should note that such disclosure obligations differ in certain material respects from our SEC ongoing reporting obligations. In addition, the public trading market for our ADRs on the NYSE would then no longer exist.

Other risks

We also face other risks with respect to economic exposure to movements in market risks and the environment which are discussed in "Information on the Company" and "Quantitative and Qualitative Disclosures about Market Risk". In addition, the government of the Australian Capital Territory is seeking to charge rates on our infrastructure, which could lead to an additional cost burden on us if this practise were to spread.

Dividends

Our Board has considered the level of future dividends. In the interests of shareholders, it is the current intention of the Board to declare fully franked ordinary dividends of A\$0.28 per share for fiscal 2007. This assumes that we continue to be successful in implementing our transformation strategy and there are no further material adverse regulatory outcomes during the course of fiscal 2007.

The Board is unable to give guidance on ordinary dividends for fiscal 2008 owing to the continuing uncertainty attached to regulatory outcomes and impacts on our business as well as transformation and market place risks. The final amount of dividends declared for any year is a decision for the Board to make twice a year in its normal cycle having regard to our earnings and cash flow as well as future regulatory impacts and all other factors that affect our operations.

See also "Operating and Financial Review and Prospects — Liquidity and capital resources" and "Operating and Financial Review and Prospects - Outlook".

It is our policy to pay dividends to Australian and New Zealand shareholders by direct credit to the shareholder's or another nominated person's account with a bank or other financial institution. We consider that payment by direct credit is fast, efficient and secure and significantly reduces our administrative costs in relation to payment of dividends.

Relationship with the Commonwealth

We have a number of distinct relationships with the Commonwealth, including as shareholder, regulator and customer. The Commonwealth is currently our controlling shareholder and has special rights and privileges under the Telstra Act. Our relationship with all of our shareholders (including the Commonwealth) is, in general, regulated by the Corporations Act, the ASX Listing Rules and our constitution. Commonwealth departments and independent agencies are also responsible for the regulation of the telecommunications industry generally and us in particular under the Telstra Act, the Trade Practices Act, the Telecommunications Act and the Telecommunications (Consumer Protection and Service Standards) Act.

The Commonwealth as shareholder

As of the date of this 2006 Supplemental Information, the Commonwealth owns approximately 51.8% of our shares. In September 2005, the Commonwealth amended the Telstra Act by passing the Telstra (Transition to Full Private Ownership) Act 2005 (the "Transition to Full Private Ownership Act") to enable the Commonwealth to undertake a sale of all or part of its stake in Telstra.

The Commonwealth has issued requests to us and our Board under section 8AQ of the Telstra Act for us and our Board to assist the Commonwealth and its advisers with the Global Offering. The Telstra Act provides that, in providing such assistance, we are not subject to restrictions that would otherwise apply under the Corporations Act, the listing rules of stock exchanges regulated under Australian law, or rules of common law or equity (except for administrative law rules). The Commonwealth has agreed to indemnify us and our directors and senior management for certain liabilities that may be incurred in relation to the Global Offering, and to reimburse us for our reasonable costs incurred in relation to the Global Offering.

Following completion of the Global Offering, the Commonwealth intends to transfer all of its remaining Telstra shares to the Future Fund. See "The Future Fund" and "Risk Factors". While the Commonwealth continues to hold its stake in us, we are required under the Telstra Act to provide it with certain information that we would not generally be required to disclose concurrently, if at all, to other shareholders. This information includes:

• annual provision of our three-year corporate plan;
• interim financial statements, if requested by the Communications Minister; and
• reports regarding significant proposed events, including corporate restructurings, acquisitions and divestitures or joint venture and partnership activities.

Under the Telstra Act, we are also required to keep the Communications Minister and the Finance Minister generally informed about our operations and to give them such information about our operations as they require.

The Communications Minister has the power under the Telstra Act to give us, after consultation with our Board, such written directions as appear to the Communications Minister to be necessary in the public interest. To date, no directions have been issued under this power. Our Board must ensure that we comply with any such direction. The Telstra Act also deems the Commonwealth Auditor-General to have been appointed as our auditor for the purposes of the Corporations Act.

Under the Telstra Act, as a result of new requirements introduced by the Transition to Full Private Ownership Act, we must also notify the Finance Minister if we intend to issue securities or financial products or otherwise engage in conduct that is likely to result in a dilution of the Commonwealth's equity in us. The Finance Minister may direct us not to engage in that conduct.

Our management is also required to appear before and, with limited exceptions, provide information to Parliamentary committees.

For information about the intentions of the Commonwealth with respect to voting at the Telstra annual general meeting on 14 November 2006, see "Information on the Company — Annual general meeting".

Consequences of the Global Offering

Under the amendments to the Telstra Act made by the Transition to Full Private Ownership Act, certain provisions in the Telstra Act and other Commonwealth legislation will cease to have effect or apply to us once the Commonwealth's ownership of Telstra falls below one of two particular levels. Those two ownership thresholds are below 50% and 15% or less. For this purpose, Telstra shares transferred to the Future Fund following completion of the Global Offering will not be considered to be owned by the Commonwealth. This means that these thresholds will be triggered following the Global Offering.

The Commonwealth's ownership of Telstra will fall below 50% on completion of the Global Offering. As a result, we will lose our Australian capital gains tax (CGT) exempt status on assets that we acquired before 20 September 1985. Accordingly, any future gains in the value of these assets after completion of the Global Offering will be taxable upon disposal of the asset by us. Since we do not currently intend to dispose of any material assets acquired before 20 September 1985, the loss of CGT exempt status for these assets is not expected to have a material impact on Telstra.

The legislative consequences of the Commonwealth's ownership of Telstra falling below 50% are not considered to have a material impact on Telstra but include:

• our employees who are members of the Commonwealth Superannuation Scheme (CSS) will cease to be "eligible employees" for the purposes of the Superannuation Act 1976, and will no longer be entitled to contribute to the CSS; and
• our auditor, currently the Commonwealth Auditor-General, may (and is expected to) resign. In any event, the Auditor-General will cease to be our auditor on the earlier of his resignation or the end of the first annual general meeting held after the Commonwealth's ownership of Telstra falls below 50%. This means that we and our shareholders can decide who to appoint as our auditor.

The Commonwealth has advised Telstra that it will introduce legislation into parliament that maintains coverage for Telstra employees under existing Commonwealth long service leave legislation for three years after the Commonwealth's ownership in Telstra falls below 50%.

The Commonwealth's ownership of Telstra is expected to fall to 15% or less no later than when the Commonwealth transfers to the Future Fund Telstra shares not sold as part of the Global Offering. This is intended to occur as soon as practicable after the exercise or expiry of the Over-allotment Option, and in any event, no later than 24 February 2007. The main consequences of the Commonwealth's ownership of Telstra falling to 15% or less are:

• we will no longer be subject to the obligations to provide financial and other information to the Commonwealth:
• we will no longer be subject to the Communications Minister's power to direct us (as appears to the Communications Minister to be necessary, in the public interest); and
• we will no longer be subject to the Finance Minister's power to direct us not to dilute the Commonwealth's equity in Telstra or to issue securities or financial products.

The closing of the Global Offering and the transfer of the Commonwealth's remaining shares to the Future Fund may require regulatory or governmental approval under regulatory licenses of Telstra's international operations. For more information, refer to "Regulation — Offshore subsidiaries".

Upon completion of the Global Offering, we expect to no longer have a standing obligation to appear before and provide information to Parliamentary committees.

The Commonwealth as regulator

We are currently regulated by the Commonwealth, its Ministers and independent agencies under a number of statutes including:

• the Telstra Act;

• the Telecommunications (Consumer Protection and Service Standards) Act 1999;
• the Trade Practices Act: and
• the Telecommunications Act.

The Commonwealth has stated that the telecommunications regulatory regime is intended to promote the longterm interests of telecommunications consumers, including through promoting competitive telecommunications markets and encouraging economically efficient investment in infrastructure. The telecommunications regime also supports industry self-regulation and is intended to minimise the financial and administrative burdens on the telecommunications industry.

The Commonwealth believes that since the market was fully opened to competition in 1997, consumers have benefited through a wider range of services and significant reductions in prices.

The Commonwealth considers that the telecommunications industry is currently in transition to full competition and that appropriately targeted regulation is in place to facilitate this outcome. Overall, the Commonwealth regards the regulatory legislation as settled. However, the Commonwealth has announced that it will review the telecommunications competition regulatory regime in 2009.

Refer to "Regulation" for details of the regulatory regime and its effect on our business.

The Commonwealth as customer

The Commonwealth is a major user of our services. The Commonwealth, as a result of telecommunications liberalisation, is increasingly seeking to take advantage of open competition when purchasing telecommunications services in such a competitive environment.

Related party transactions

A discussion of our related party transactions is contained in "Operating and Financial Review and Prospects - Related party transactions".

The Future Fund

In February 2006, the Commonwealth passed legislation to establish the Future Fund. The Future Fund is a Commonwealth investment fund set up to strengthen the Commonwealth's long term finances by providing for its unfunded superannuation liabilities. Following completion of the Global Offering, the Commonwealth intends to transfer to the Future Fund all of its Telstra shares which are not transferred under the Global Offering. The exact number of shares to be transferred to the Future Fund and the date of transfer will be determined by the final size of the Global Offering, whether or not the Over-Allotment Option is exercised and other administrative mechanisms. The Commonwealth will initially retain sufficient shares to meet the bonus loyalty obligations available to certain retail investors in the Global Offering. These retained shares will be held for the Commonwealth by the trustee until they are transferred to those entitled, and will not be voted while they are so held. Any of these shares which are ultimately not required, because holders have transferred instalment receipts or otherwise lost the right to receive bonus loyalty shares, will be transferred to the Future Fund after the date the final instalment is due.

Assuming an offer size of 2.15 billion shares and no exercise of the Over-allocation Option, the Future Fund will hold approximately 35% of our outstanding shares following the completion of the Global Offering, or approximately 32% assuming full exercise of the Over-allotment Option.

The Future Fund

The Future Fund is a Commonwealth investment fund set up to strengthen the Commonwealth's long-term finances by providing for its unfunded superannuation liabilities. The Future Fund Board is responsible for investment decisions and holds the Future Fund's investments (for and on behalf of the Commonwealth).

The Future Fund Board is a separate legal entity from the Commonwealth. The members of the Future Fund Board are appointed by the Commonwealth for terms of up to 5 years. Their appointment may only be terminated in certain limited circumstances. The Future Fund Board members are subject to duties similar to those of company directors.

Currently, the Chair of the Future Fund Board is Mr. David Murray. Other members of the Future Fund Board are Mr. Jeffrey Browne, Ms. Susan Doyle, Dr. John Mulcahy, Mr. Trevor Rowe AM and Mr. Brian Watson. There is currently one vacancy on the Future Fund Board.

No specific direction

The Future Fund Act 2006 (Cth) provides that, subject to its obligations under that Act and any directions from the Commonwealth, the Future Fund Board must seek to maximise the return earned over the long term, consistent with international best practice for institutional investment.

The Government does not intend to issue directions specific to Telstra shares held by the Future Fund Board, other than the escrow direction and changes to the general investment mandate discussed below. However, a future Government may take a different approach.

In the absence of such specific directions, the Future Fund Board may vote the Future Fund's Telstra shares as it sees fit, subject to complying with the Future Fund's obligations under the Future Fund Act and the general investment mandate issued by the Government.

Escrow direction

On the day that shares are first transferred to the Future Fund, the Finance Minister will direct the Future Fund Board not to dispose of or agree to dispose of the Future Fund's Telstra shares for a period of two years from the date instalment receipts under the Global Offering are first listed on the ASX except:

• in order to satisfy demand from eligible Telstra shareholders under a Telstra initiated dividend reinvestment plan (if any); or

• as part of a Telstra capital management initiative, (if any); such as a buy-back or capital reduction; or
• to a single investor, provided that:
• the disposal involves at least 3% of Telstra's issued ordinary shares at the time of the disposal;
• the disposal does not take place until at least six months after the date instalment receipts are first listed on the ASX;
• the investor provides an acceptable undertaking for at least the balance of the escrow period;
• the price per share is no less than the final price in the institutional component of the Global Offering; and
• Telstra is advised prior to such disposal.

After the two-year escrow period the Future Fund Board will sell down its Telstra shareholding as directed under the investment mandate. The Government intends that the escrow direction will not be varied or revoked, however, a future Government may take a different approach.

General investment mandate

The current investment mandate requires, among other things, the Future Fund Board to adopt a benchmark for returns on the Future Fund of at least an average return of the Consumer Price Index $+4.5\%$ to $+5.5\%$ per annum over the long term.

Prior to the shares being transferred to the Future Fund, the Commonwealth intends to amend the investment mandate. The revised directives will be consistent with the following principles:

• after the two-year escrow, the Future Fund Board will be required to sell down its Telstra shareholding over the medium term to a level consistent with its investment strategy (at least below 20% of Telstra's issued share capital):
• the sell down is to be on a best endeavours basis with a view to optimising the long-term value of the Future Fund:
• the performance of the Future Fund Board's Telstra shareholding will be assessed and reported separately to the rest of the Future Fund until the sell down is completed; and
• the investment mandate will no longer prohibit the Future Fund Board from purchasing Telstra shares.

The Finance Minister and the Treasurer of the Commonwealth will formally invite the Future Fund Board to make a submission on the revised directions to be issued and must consider any submission that the Future Fund Board chooses to make, consistent with the Future Fund Act.

Selected Consolidated Financial and Statistical Data

The following selected consolidated financial data comes from our audited consolidated financial statements. The statistical data represent management's best estimates. The following information should be read in conjunction with our audited consolidated financial statements and the other information contained in this 2006 Supplemental Information. Our audited consolidated financial statements for the year ended 30 June 2006 were prepared in accordance with A-IFRS, and comparative information for the year ended 30 June 2005 has been restated in accordance with A-IFRS, except for AASB 132: "Financial Instruments: Disclosure and Presentation" and AASB 139: "Financial Instruments: Recognition and Measurement", where comparative information was not required to be restated. In addition, we have elected to early adopt AASB 7: "Financial Instruments: Disclosures", which supersedes the disclosure requirements of AASB 132. The financial information for the years ended 30 June 2004, 2003 and 2002 has been reconciled to US-GAAP and is derived from our audited consolidated financial data for those periods, which is not included herein. A-IFRS differs in some material respects from US-GAAP. For a reconciliation of the material differences between A-IFRS and US-GAAP as they relate to our audited consolidated financial statements, see note 37 to our audited consolidated financial statements.

Financial data in accordance with A-IFRS for the two-year period ended 30 June 2006

		Year Ended 30 June
	2006	2006(1)	2005
	A\$	USS	AŚ
		(In millions, except per share) amounts)
Income Statement data
Total Income (excluding finance income) $(2)$	23,100	17,147	22.442
Expenses (excluding depreciation, amortisation and finance $costs(2)(3) \dots \dots$	13,516	10,032	11,978
Depreciation and amortisation	4,087	3,034	3,52
Net finance costs	936	695	880
Profit before income tax expense	4.561	3,386	6.055
Profit for the year	3,181	2.362	4.309
Basic earnings per share(4) $\ldots \ldots \ldots \ldots \ldots \ldots \ldots \ldots \ldots \ldots \ldots \ldots$	0.26	0.19	0.35
Dividends paid(5)	4,970	3,689	4,124
Dividends declared for the fiscal year	4,224	3.135	4.970
Dividends declared per share	0.34	0.25	0.40
Total income comprises
Sales revenue	22,750	16,888	22.161
Other revenue	22	16	20
Other income	328	243	261
Finance income	66	49	-83
	23,166	$\frac{17,196}{2}$	22,525
Balance Sheet data
Total assets	36,175	26,853	35.211
Current borrowings	1,969	1.462	1.507
Non current borrowings	11.409	8,469	10,941
Share capital $\ldots \ldots \ldots \ldots \ldots \ldots \ldots \ldots \ldots \ldots \ldots \ldots \ldots \ld$	5,569	4,134	5.536
Equity/net assets	12,832	9,525	13,658

(1) Unless otherwise noted, all amounts have been translated at the noon buying rate on 30 June 2006 of $A$1.00 =$ US\$0.7423.

(2) For a breakdown of operating revenue by product group and a breakdown of operating expenses by expense category, see "Operating and Financial Review and Prospects".

• (3) Includes our share of net (profit)/loss from jointly controlled and associated entities.
• (4) Calculated based on the weighted average number of issued ordinary shares that were outstanding during the fiscal year. Refer to note 3 in our consolidated financial statements for further details. Basic earnings per share for each year was materially consistent with diluted earnings per share. As at 30 June 2006, we had issued ordinary shares of 12,443,074,357 (2005: 12,443,074,357). During fiscal 2005, we completed a share buy-back of 185,284,669 ordinary shares.
• (5) During fiscal 2006, we paid dividends of A\$4,970 million, being the previous year's final dividend of A\$1,739 million, a special dividend of A\$746 million paid with the previous year's final dividend, the fiscal 2006 interim dividend of A\$1,739 million and a special dividend of A\$746 million paid with the interim dividend.

Financial data in accordance with US-GAAP for the five-year period ended 30 June 2006

			Year Ended 30 June
	2006	2006(1)	2005(4)	2004(4)	2003(4)	2002(4)
	АŞ	US\$	A\$	А\$	A\$	A\$.
			(In millions, except per share amounts)
Income Statement data
Operating revenue	22,779	16,909	22.167	20.737	20.495	20,196
Net income, before cumulative effect of change in $\alpha$ counting principle $\ldots \ldots \ldots \ldots \ldots \ldots \ldots \ldots$	2,718	2,019	4,204	1,265	3,847	3,922
Cumulative effect of change in accounting principle(2) $\dots$	(245)	(181)		4	(309)
Net income	2,473	1,838	4.204	1.269	3.538	3,922
Basic earnings per share, before cumulative effect of change in accounting principle	0.22	0.16	0.34	0.10	0.29	0.31
Cumulative effect of change in accounting principle(2) $\dots$	(0.02)	(0.01)			(0.02)
Basic earnings per share(3)	0.20	0.15	0.34	0.10	0.27	0.31
Proforma net income(2)	2.718	2.019	4.184	1,228	3.569	3,936
Proforma basic earnings per share(2)	0.22	0.16	0.34	0.10	0.28	0.31
Balance Sheet data
Total assets	35,777	26,557	37,040.	35,670	40,529	42,948
Current borrowings	1,984	1,473	1.524	3.246	1.323	1,866
Non current borrowings $\ldots \ldots \ldots \ldots \ldots \ldots \ldots \ldots$	11,734	8,710	11.641	9.095	11,580	12,372
Share capital	5,954	4,420	5.921	6.164	6.568	6,536
Equity/net assets	11,803	8,761	14.196	15.082	17.899	18,363

• (1) Unless otherwise noted, all amounts have been translated at the noon buying rate on 30 June 2006 of A\$1.00 = US\$0.7423.
• (2) During fiscal 2006, we changed our accounting principles under US-GAAP in relation to mobile handset subsidies and capitalisation of pension costs. Refer to note 37(b) in our financial statement for further details. The proforma amounts for net income and basic earnings per share assume that these changes in accounting principle were applied retroactively.
• (3) Calculated based on the weighted average number of issued ordinary shares that were outstanding during the fiscal year. Refer to note 3 in our consolidated financial statements for further details. Basic earnings per share for each year was materially consistent with diluted earnings per share. As at 30 June 2006, we had issued ordinary shares of 12,443,074,357. As at 30 June 2005, we had issued ordinary shares of 12,443,074,357 after completing a share buy-back of 185,284,669 ordinary shares. As at 30 June 2004, we had issued ordinary shares of 12,628,359,026 after completing a share buy-back during fiscal 2004 of 238,241,174 ordinary shares. As at 30 June 2003 and 30 June 2002, we had 12,866,600,200 issued ordinary shares.
• (4) Certain US-GAAP amounts in 2005, 2004, 2003 and 2002 have been restated as a result of a number of immaterial adjustments that were identified as part of our adoption of A-IFRS. Refer to note 37(a) in our consolidated financial statements for further details.

			Year Ended 30 June
	2006	2005	2004	2003	2002
Billable Traffic Data (in millions)
Local calls (number of calls)	7.432	8.469	9,397	9,794	10,269
National long distance minutes(1)	7.215	7,743	8,520	9,161	9.170
Fixed to mobile minutes	4,491	4,375	4,226	3.944	3,691
International direct minutes	534	580	651	740	781
Mobile voice telephone minutes(2)	7,311	6,746	6,145	6,335	5.780
Inbound Calling Products - B Party minutes	2,922	2,773	2,708	2,655	3,345
Inbound Calling Products — A Party minutes	1.012	940	938	918	N/A
Number of short messaging service (SMS) sent	3,019	2.289	1.944	1,413	N/A
Network and Operations Data (in millions)
Basic access lines in service(3) Residential	5.46	5.60	5.87	6.20	6.35
Business	2.32	2.45	2.57	2.71	2.72
Total retail customers.	7.78	8.05	8.44	8.91	9.07
Domestic wholesale	2.16	2.07	1.84	1.55	1.33
Total basic access lines in service
	9.94	10.12	10.28	10.46	10.40
ISDN access (basic lines equivalents) (in thousands) $(4)$	1,214	1,208	1,288	1,213	1,268
Mobile Services in Operation (SIO) (in thousands)(5)
3G	317
GSM	6.468	6,894	6.653	5.812	5,346
CDMA	1,703	1,333	951	757	596
Mobile services in operation	8,488	8,227	7,604	6,569	5,942
Total Wholesale mobile SIOs (in thousands).	-119	83	61	N/A	N/A
Online subscribers (in thousands)
Narrowband subscribers	1.027	1,205	1,194	1.158	1.056
Broadband subscribers - Retail	1.476	856	427	121	168
Broadband subscribers — Wholesale $(6)$	1,427	888	379	240	N/A
Total Broadband subscribers	2.903	1,744	806	361	168
Total online subscribers	3,930	2,949	2,000	1,519	1,225
Total FOXTEL subscribers (in thousands)	1.130	1.023	904	836	800
Employee Data
Domestic full time staff $(7)$	37.599	39.680	36,159	37,169	40,427
Full-time staff and equivalents(8)	44.452	46.227	41.941	41,941	44.977
Total workforce(9)	49.443	52,705	N/A	N/A	N/A

(1) Includes national long distance minutes from our public switched telephone network (PSTN) and independently operated payphones. Excludes minutes related to calls from non-PSTN networks, such as ISDN and virtual private networks.

• (2) Includes all calls made from mobile telephones including long distance and international calls; excludes data, messagebank, international roaming and CSL New World.
• (3) Excludes Incontact service (a free service with restrictive calling access) and advanced access services, such as ISDN services.
• (4) Expressed in equivalent number of clear voice channels. Comparatives have been restated to reflect updated assessment of channels per SIO on ISDN 10/20/30. The previous assessment was based on a calculation of channel configurations across sample services. The revised assessment is based on the entire customer base.

• (5) Excludes CSL New World SIOs.

• (6) Within Broadband, retail products include cable, satellite, BigPond Wireless, HyperConnect, ADSL and Symmetrical HDSL, while wholesale products include DSL Layer 1, DSL Layer 2, DSL Layer 3, Spectrum Sharing and vISP Broadband. Total Broadband subscribers exclude Broadband component of ULL and Mobile Broadband which form part of intercarrier services and mobiles revenue respectively.

• (7) Excludes offshore, casual and part-time employees.
• (8) Includes all domestic and offshore employees, including controlled entities.
• (9) Includes all domestic and offshore employees, including controlled entities, as well as contractors and agency staff.

Operating and Financial Review and Prospects

The following discussion should be read in conjunction with the annual consolidated financial statements. including the notes to these consolidated financial statements. These annual consolidated financial statements have been prepared for the first time in accordance with Australian equivalents to International Financial Reporting Standards ("A-IFRS"). Our comparatives have been restated to reflect the adoption of A-IFRS, with the exception of the accounting standards on financial instruments that were subject to an exemption and adopted from 1 July 2005. A-IFRS differs in certain respects from Generally Accepted Accounting Principles in the United States ("US-GAAP"). A discussion of the principal differences between A-IFRS and US-GAAP as they relate to us and a detailed reconciliation of net income and equity to US-GAAP, is provided in note 37 to our consolidated financial statements. Refer to the 2005 Annual Report for the financial results of the prior periods determined under previous Australian Generally Accepted Accounting Principles ("AGAAP").

The Operating and Financial Review and Prospects includes statements of future expectations and forwardlooking statements that are based on management's current views and assumptions, and involve known and unknown risks and uncertainties that could cause actual results, performance or events to differ materially from those in the forward-looking statements. For a discussion of some of the principal risks that could affect our business is presented in this International Offering Memorandum refer to "Risk Factors" and "Cautionary Statement Regarding Forward-Looking Statements".

In this section, we refer to our fiscal years ended 30 June 2006 and 30 June 2005 as fiscal 2006 and fiscal 2005 respectively. We have referred to the two fiscal years ended 30 June 2006 as the two-year period.

Our transformation strategy

At the beginning of fiscal 2006, our new CEO and management team initiated a comprehensive review of our operations and strategies. Based on this review, we determined that our networks, systems and products and service offerings were outdated and lagging behind our international peers and that our costs were escalating due to increasing costs of goods and labour costs as well as rising costs associated with maintaining and supporting complex legacy systems. In addition, revenues from our traditional high margin PSTN products and services have been declining due to a combination of increased competition and customers migrating to lower margin emerging products and services.

In November 2005, we decided to implement wholesale changes to our networks, systems and operations under a five-year transformation strategy. The key elements of this transformation strategy are:

• building a next generation fixed network to support IP-based services;
• rolling out next generation wireless services over our recently launched NEXT GTM wireless network:
• implementing market-based management and using customer research to differentiate our product offerings;
• providing customers with integrated services across fixed, wireless and Internet platforms;
• simplifying systems and operations to reduce costs;
• expanding and enhancing our Sensis advertising, search and information services business; and
• instituting cultural changes through business reform and increased training.

We believe that if we can successfully transform our business, it will improve our competitiveness and financial results.

Our transformation strategy is significantly more extensive than similar initiatives undertaken by other telecommunications companies, involves significant capital spend and is subject to significant execution risks. In addition, we are endeavouring to accomplish this transformation on an accelerated timetable. As a result, during the early years of the transformation our earnings and cash flows will be significantly reduced, and we have needed to increase borrowings to fund our capital expenditures, investments and dividends. However, we believe that we need to undertake these major changes now and under our proposed timetable in order to remain competitive and improve the financial results and position of our company in the future.

Strategic Management Objectives

Together with the announcement of our transformation strategy in November 2005, our Board set strategic management objectives to measure the successful implementation of our five year transformation strategy. We have linked our remuneration structure to the transformation strategy, with the aim of increasing the focus and understanding by senior executives of the key strategic objectives and motivating employees to execute on the strategy. In October 2006, our Board revised these strategic targets in order to reflect the current regulatory environment and market conditions and the experience of the first year of our transformation plan, and approved the following:

• revenue compound annual growth in the range of $2.0\%$ to $2.5\%$ (to fiscal 2010 from the fiscal 2005 base level), to be achieved by offsetting the expected substantial deterioration in traditional PSTN revenues with revenues from new products and services delivered through our next-generation networks;
• new product revenue exceeding 30% of sales revenue by fiscal 2010;
• limiting compound annual growth of operating expenses (excluding depreciation and amortisation) to 2.0% to 3.0% (to fiscal 2010 from the fiscal 2005 base level):
• EBITDA compound annual growth in the range of 2.0% to 2.5% (to fiscal 2010 from the fiscal 2005 base level) and EBITDA margins of between 46% to 48% by fiscal 2010. We are expecting EBITDA during the five year transformation strategy to decrease in the early years of the transformation, and are then targeting improvement in the later years of the transformation;
• cash capital expenditure falling to a range of $10\%$ to $12\%$ of sales revenue by fiscal 2010;
• free cash flow increasing to between A\$6,000 million and A\$7,000 million by fiscal 2010; and
• work force reductions of approximately 12,000 over five years of the transformation strategy.

It is important to understand that these are internal objectives set by our Board in order to measure our management's performance in implementing the transformation strategy, and are not financial forecasts or projections and should not be regarded as such. The strategic management objectives are primarily based on:

• our decision not to roll-out an FTTN network, and instead offer high-speed broadband products and services through our existing networks;
• successfully rolling out our NEXT $G^{m}$ wireless network services and migrating CDMA customers to the new network:
• successfully deploying our next-generation fixed line network;
• existing regulatory settings, including the ACCC interim determination establishing ULLS pricing of A\$17.70 per month in band 2, and no mandated competitor access to our NEXT G^TM wireless network;
• successfully implementing short, medium and long-term revenue initiatives in key PSTN, mobile and broadband markets and customer segments;
• our ability to differentiate ourselves and obtain new revenues from our new networks and new products and services to replace declining revenues from our traditional high-margin PSTN products and services;
• rationalising our operational support systems (OSS) and business support systems (BSS), and achieving an 80% reduction in the number of such systems by the end of fiscal 2010;
• key vendors in connection with our transformation performing on-time and as contracted;

• growing our Sensis business organically and by targeted acquisitions;

• competitors not engaging in sustained and extreme price competition or investing in substantial new infrastructure or disruptive technologies; and

• our workforce embracing our cultural transformation.

The strategic management objectives are based on the current regulatory environment and market and competitive conditions, which are expected to change over time. Our ability to achieve our strategic management objectives is subject to significant risks. See "Risk Factors" for a description of these key risks. Investors should note that many of these risks are outside of our control, and that no assurance can be given that we will successfully complete our transformation or achieve our strategic management objectives.

Revenue and products

During the two-year period, our increase in sales revenues was due mainly to revenue growth in mobiles. Internet and IP solutions, advertising and directory services, and pay TV bundling. Our challenge moving forward will be to continue and to consolidate the growth in these areas, while controlling costs, minimising margin erosion and managing the decline in our PSTN revenues. Competition has continued to intensify and, as a result, we have seen our revenues decline in a number of areas despite increasing volumes. We have continued to focus on maximising returns from our higher margin traditional products such as PSTN products, while managing the shift in customer demand for our lower margin emerging products, such as mobiles, broadband and other Internet based products. We have aligned our investment strategies with our growth products and continue to focus on simplifying our existing processes to identify cost efficiencies and protect operating margins, while improving our customer service levels. Our overall operating margins are under constant pressure from the product mix change to lower margin products. However, we are building a software-based cost efficient infrastructure that we expect will enable us to deliver new products at low incremental costs and good margins.

Most of our revenues are generated from basic access, fixed and mobile call charges, specialised data, Internet and IP solutions, advertising and directories services, solution management services and our international operations. We are focusing on a range of key products and services within these categories in order to grow our revenues. This is further described below:

• PSTN products: We first experienced a significant decline in overall PSTN revenues in the second half of fiscal 2005. Performance in this market has been depressed by competition and product substitution. Our PSTN revenue was also adversely impacted by ULL as carriers have reached customer density thresholds to be able to undertake viable ULL investment, which has further been assisted by falling equipment prices reducing the capital required.

This market remains a focal point and a significant part of our company in terms of sales revenue. It continues to provide us with strong cash flows.

We continue to focus on maximising returns and improving customer service in this area by offering a broad range of product packages that include bundling traditional products with new products. In addition, in June 2006 we introduced new capped calling plans on our basic access lines, which includes untimed local and national long distance calls. Despite a positive response to these initiatives, total PSTN revenues declined in fiscal 2006, led by competitive pricing pressures and the continued migration of customers to mobiles and other products and services.

• Mobiles: While the rate of growth has slowed, mobile revenue growth has been driven by low access fee plans, value added services including mobile data and the increasing popularity of prepaid offerings. We continue to increase revenues by providing more innovative products on our mobile networks including access to a wide range of Internet products and content through mobile handsets and the provision of highspeed wireless services, including 3G mobile services. In addition, revenues continue to increase with the higher number of mobile users.
• Internet and IP services: Growth in this area was attributable to an increase in both retail and wholesale broadband subscribers. We expect the Internet and IP solutions products to continue their expansion as a result of large increases in the number of broadband subscribers and robust competition as providers compete for market share. This market is in a growth phase and our strategy to capitalise on this growth

involves the provision of high speed, innovative Internet products such as the launch of Australia's first legal movie download service. The ability to offer a suite of product and services, combined with value based pricing, is a key to our strategy.

We expect take up of ADSL and other emerging broadband Internet services via HFC cable and satellite to increase in future reporting periods as the market becomes more aware of their performance capabilities.

• Advertising and directories: Growth in our Sensis business has been led by an increase in revenue from our Yellow^® and White Pages^® printed and online advertising solutions. This was predominantly driven by product innovation and customer demand. In addition, we have continued to grow our Yellow^® and White Pages^® Online directory businesses.

As telecommunications, computing and media technologies continue to converge, we are focused on enhancing our capabilities to provide new and innovative application and content services and to expand further into these converging markets.

• Solutions management: We have continued to strengthen our position in the managed services and information and communication technology (ICT) market. During fiscal 2005, we acquired KAZ, a provider of business process outsourcing, systems integration, consulting, applications development and IT management services. During fiscal 2005, we also acquired PSINet, a provider of e-business infrastructure solutions and corporate IP based communication services. These acquisitions expanded our IT services capability to both our Australian and international customers, complementing our core strength in telecommunications. These acquisitions combined with our pre-existing solutions management business have significantly broadened our solutions management services, which we believe will assist us to achieve our goal of becoming an Australian leader in the ICT market.
• International operations: Our offshore controlled entities contributed 7.7% of our total sales revenue in fiscal 2006 and 7.3% in fiscal 2005. This is primarily attributable to the CSL New World Mobility Group operations in Hong Kong and the TelstraClear operations in New Zealand, which generate revenues mainly from the mobile market and from fixed network services respectively.

During fiscal 2006, we merged our 100% owned Hong Kong mobile operations (CSL) with the Hong Kong mobile operations of New World Mobility Group to form the CSL New World Mobility Group (CSLNW). Under the merger agreement, CSL issued new shares to New World Mobility Holdings Limited in return for 100% of the issued capital of the New World Mobility Group and A\$42 million in net proceeds. The share issue diluted our ownership in the merged group to 76.4%. This merger was undertaken because the two entities have complementary services in providing mobile telecommunication products and services in Hong Kong. We believe CSLNW will be able to leverage their strong brand recognition and common network to improve its operating performance. The merged entity is now the largest wireless service provider in the Hong Kong market.

During fiscal 2006, TelstraClear unveiled a new strategic focus for growth through the delivery of differentiated services and investment in high value voice and data services. New Zealand is a strategically important market for our trans-Tasman customers and the combination of TelstraClear and Telstra enables us to provide customers on both sides of the Tasman with seamless communication and IT solutions.

We have maintained our attention on managing the performance of our individual product and service categories. However, as a fully integrated telecommunications company, we are building on our existing customer base and capturing the market trend towards integrated access and seamless voice, data and content offerings. To achieve this, we continue to bundle our individual products and provide customers with price discounts. In addition, we are expanding the integrated content services provided through our BigPond® and Sensis applications to enable our customers to access content across multiple devices including mobiles, personal computers and home phones.

In fiscal 2006, we implemented a number of revenue initiatives, particularly in our PSTN, mobile and broadband businesses. These initiatives include subscription pricing plans, targeted "win-back" campaigns, differentiated customer propositions and distribution channel optimisation. Achievement of our strategic

management objectives, particularly during the later years of our transformation, depends in part on our success in implementing these initiatives.

On 31 August 2006, we announced our acquisition of a 51.0% shareholding in SouFun Holdings Limited (SouFun) for a total cash consideration of US\$254 million (approximately A\$333 million). SouFun is a leading real estate and home furnishing and improvement website in China. It provides information, advertising and listing services to China's growing online real estate and home furnishing and improvement sectors. This investment is integral to Sensis' growth strategy of expanding into new geographic markets through the pursuit of partnerships or acquisitions that can deliver value to our shareholders. On 31 August 2006, we also announced the sale of Australian Administration Services (AAS), the superannuation administration business of our subsidiary KAZ, for A\$215 million, giving rise to a profit on sale of A\$56 million. The sale followed our comprehensive review that determined that superannuation administration services were no longer strategic to our business in future reporting periods. As a result of these transactions, we have divested a non core asset and redeployed the funds into one of our growth areas.

Costs and operational efficiency

In fiscal 2006 we began our transformation program as outlined by the strategic review. During this review, we identified complexity in the business involving our cost and operational structure, resulting in an upward pressure on costs. The transformation program will occur over a five-year period, with cost reduction being a major objective of the overall program.

Our total expenses grew during the two-year period, led by the recognition of additional expenses incurred as part of the transformation program, including a provision at year end for restructuring and redundancy costs of A\$427 million. We also experienced expense growth across various categories to support our emerging business areas such as broadband, 3G mobile services and pay television, as well as to meet our customer service requirements, partly offset by previous cost reduction programs. In addition, our depreciation and amortisation expense increased reflecting the impact of a review of the service lives of our assets as part of the transformation strategy. The accelerated depreciation and amortisation was mainly in relation to adjusting the service lives of the CDMA network, our switching systems, certain business and operational support systems and related software.

We are committed to continuing our review of areas of the business where cost and operational efficiencies can be achieved, while improving the customer experience. We believe opportunities to achieve this include:

• rationalising our various IT and network platforms;
• streamlining our business operations;
• obtaining better value from our capital expenditure;
• extracting synergies from our recent investment acquisitions;
• improving network efficiency; and
• · managing total labour costs more efficiently.

During the two-year period, we have devoted increased capital expenditure to upgrade our telecommunications networks, eliminate components that are no longer useful and improve the systems used to operate our networks. We continue to upgrade and simplify our telecommunications networks to meet customer demands, particularly for new growth product areas such as broadband.

As part of our strategic review, we have introduced the "one factory" approach to consolidate and simplify the way we operate at all levels of the business. The company is very dependent on business and operational support systems. Historically, significant time and investment has been required to meet changing market conditions. The IT transformation will provide an integrated platform that is much more flexible and is expected to require lower costs to maintain. The objective is an 80% reduction in the number of systems over five years from November 2005. In addition to operational efficiency, overall effectiveness is expected to improve. We believe the deployment of our new IP core network will reduce the cost of installing new applications and will provide our customers with better and faster services. We believe incremental change is not enough to meet our strategic objectives and as a result we are looking to transform our IT capability.

On 6 October 2006, we launched our new NEXT G^TM wireless network. This network will replace our existing CDMA network, and over time we will migrate all of our mobile customers onto the NEXT $G^{m}$ wireless network. The move will reduce duplication of both capital and operational expenditure and the digital divide between our regional and metropolitan customers. In addition to current services already experienced on existing networks, we believe our NEXT G™ wireless network customers will enjoy access to a greater range of content and services, as well as many enhanced features, such as improved video calling services and faster broadband access speeds, in addition to better in-building coverage. We plan for the CDMA network to be available until replacement services and coverage provided by our NEXT $G^TM$ wireless network are the same as or better than the CDMA network and in any event at least until January 2008.

Customer service

We strive to continually improve our customer service. During fiscal 2006, we announced a A\$210 million training initiative to ensure our staff have the best available training to enable and maintain next generation networks. In addition, we are achieving service delivery innovations that cater to the needs of our customers such as providing and improving our online billing facilities. Our focus for continual improvement in customer service is in the following key areas:

• upgrading our networks and reducing fault incidence;
• placing additional trained staff in our call centres to directly deal with our customers;
• providing tools to sales representatives that help them consult with customers;
• improving the self service technology;
• enhancing the skills of our staff, enabling them to solve a customer's problem on the first call;
• ensuring customer appointments are met and reducing response times and queue lengths; and
• further improving our performance under the customer service guarantees.

Business segments

During fiscal 2006, we changed our business segments to improve the way our business is structured and operates to meet the needs of our customers. We have restated all our comparative segment information to reflect the current financial reporting position as if all our new business segments and segment accounting policies existed in the prior year. Our significant changes included:

• the creation of a new business segment named Telstra Business to specifically cater for the full provision of telecommunication products and services to small and medium enterprises;
• the creation of a new business segment named Telstra Operations. This group consolidated Telstra Services (formerly known as Infrastructure Services). Telstra Technology, Innovation and Products and Operations Support, which was previously reported within our corporate areas. The consolidation of these operational areas reflects our move to the "one factory" approach;
• the creation of the Telstra Product Management Group within Telstra Operations to focus on the management and performance of our existing and future products; and
• the creation of the Strategic Marketing Group to implement the market based management approach adopted to better understand the needs of our customers and provide better products and services to meet their requirements.

The Telstra Country Wide ^$\Phi$ business unit ensures we continue to have a strong commitment to telecommunication services in the major rural, minor rural and remote areas of Australia. In addition, under the USO regime, we deliver the standard telephone service and prescribed carriage services to all people, wherever they reside or carry on business. Through our continued focus on providing excellent customer service, we aim to satisfy our existing customers and drive future revenue growth by providing quality services to all our customers.

Refer to "Information on the Company — Organisational structure" for details on our organisational structure.

Returns to shareholders

During the two-year period, in addition to continuing ordinary dividends, we have also returned A\$2,988 million to shareholders through special dividends and share buy-backs as part of our capital management program. During fiscal 2006, we announced that the third year of the capital management program, whereby A\$1,500 million was to be returned each year to shareholders through special dividends and share buy-backs, would not occur to allow the funds to be diverted to our transformation program.

In fiscal 2006, we paid special dividends totalling A\$1,492 million (A\$0.12 per share). In fiscal 2005, we paid a special interim dividend of A\$746 million (A\$0.06 per share) and also undertook a share buy-back that resulted in the buy-back of 185,284,669 ordinary shares. In total, 1.47% of our total issued ordinary shares, or 3.00% of our non-Commonwealth owned ordinary shares, were bought back. The cost of the share buy-back comprised the purchase consideration of A\$750 million and associated transaction costs of A\$6 million. The shares bought back were subsequently cancelled, reducing the number of fully paid ordinary shares on issue. The Commonwealth did not participate in the share buy-back and as a result its shareholding increased from 51.0% before the buy-back to 51.8%. The share buy-back improved our earnings per share as we have fewer shares outstanding and has not hindered our ability to take advantage of profitable investment opportunities when they arise.

Outlook

Overview

Whether our future financial performance will improve is largely dependent on our ability to implement and execute our transformation strategy successfully and generate the increased volumes and usage rates for our products and services we seek to achieve. In addition, our transformation is a five-year plan, with the early years involving the deployment of large amounts of capital, the roll-out of new networks and systems and the incurrence of additional operating costs and provisions associated with the fundamental changes we are implementing throughout our systems and operations. Our ability to successfully implement our transformation strategy is subject to significant risks. See "Risk Factors".

We are involved in continuing discussions over the current and future regulatory environment impacting the Australian telecommunications industry in general and us in particular. There are several key regulatory issues, which include:

• regulated wholesale access pricing;
• retail price controls;
• any potential competitor access to our NEXT $G^{TM}$ wireless network; and
• the use by the ACCC of the conduct rules in the Trade Practices Act to affect the way we price our products and services.

Some of the key factors that we believe may impact our future financial results include:

• our ability to implement and execute our transformation strategy, including the deployment of our NEXT $G^{m}$ wireless services, and the rationalisation of our various IT and network platforms;
• our ability to introduce new value-added products and services to compensate for lower prices, volumes and earnings we expect to realise from our traditional higher margin product and service lines;
• the difficulties for us in predicting regulatory outcomes and, in our view, the unpredictable actions of the key regulators; and
• changes to our competitive environment as markets and technologies evolve and competition intensifies, and the actions and initiatives of our major competitors.

General trends

Our traditional high margin PSTN revenues have been and will continue to be negatively affected by both intense competitive pressure and customers migrating to alternative platforms, such as wireless, high bandwidth Internet, IP telephony, and web and managed services. We expect these trends to continue. The overall volume of telecommunications services purchased in Australia has continued to increase and the range of products and services offered has continued to expand. One of the central objectives of our transformation is to position the company to have the networks, systems and capabilities to meet the evolving needs of our customer base. With our planned next-generation networks, we are building the infrastructure to reduce our reliance on our traditional highmargin PSTN revenue stream and to grow our mobile, Internet and other next-generation revenues.

We intend to streamline our businesses, systems and operations to reduce the high operating costs associated with maintaining and supporting complex legacy IT systems, products and services. However, we expect depreciation and amortisation to increase as we invest heavily in transforming our IT base, together with the acceleration of depreciation for certain assets that are being phased out.

A number of key regulatory decisions and determinations are still unresolved. In August 2006, for example, the ACCC made several interim determinations reducing ULLS access pricing for some of our largest wholesale customers to A\$17.70 per month in band 2 (representing the metropolitan area, where the greatest number of ULLS services will be provided). These decisions are only interim determinations by the ACCC and the ACCC's final determinations can be higher or lower than this price. We are uncertain as to the ACCC's timeframe for making these final determinations. We no longer propose to build an FTTN network because we disagreed with the ACCC as to the costs which could be taken into account in setting a price at which our competitors could use that network.

Fiscal 2007 outlook

We are currently in the early years of our transformation, which has required increased capital and operating expenditures to roll out new networks and implement our planned system and operational changes, resulting in significant reductions to our earnings and cash flow.

Accordingly, we expect that our fiscal 2007 financial results will show:

• reported revenue (total income) growth of between 1.5% and 2.0% compared with our fiscal 2006 total income of A\$23,100 million;
• reported earnings before interest and income tax expense ("EBIT") growth in the range of 2.0% and 4.0% compared with our fiscal 2006 EBIT of A\$5,497, but we expect fiscal 2007 reported EBIT will be in the range of 18% to 20% lower than fiscal 2005 EBIT of A\$6,935 million. Note 7(b) of our 2006 audited financial statements discloses that in explaining our fiscal 2006 financial performance, it is relevant to note that expenses associated with the implementation of the strategic review initiatives of A\$1,126 million were incurred. We expect similar net costs of approximately A\$800 million to be incurred in fiscal 2007; and
• reported cash capital expenditure (excluding investments) in the range of A\$5,400 million to A\$5,700 million.

Importantly, our ability to achieve the fiscal 2007 outlook described above, as well as our outlook for the first and second halves of fiscal 2007 described below, is subject to a number of key assumptions, including:

• not building an FTTN network;
• a band 2 ULLS price of A\$17.70 per month applying to all wholesale customers for the remainder of fiscal 2007;
• · no additional redundancy and restructuring provision;
• slowing the decline in PSTN revenues;

• retail volume growth in mobiles voice and data traffic, dependent in part on the successful roll-out of our NEXT G^™ wireless network services;

• growth in the retail broadband market and in our market share;

• growth in Sensis print and online revenues;
• not exceeding budgeted net transformation related operating expenditure costs of approximately A\$500 million; and
• general productivity gains from our reduced workforce.

Our ability to achieve our fiscal 2007 outlook is also subject to significant risks. Refer to "Risk Factors" for a description of these key risks.

We expect fiscal 2007 to be the largest transformation spend year in terms of operating and capital expenditure. Provided there are no further material adverse regulatory outcomes and we continue to be successful in implementing our transformation strategy, we expect our free cash flow to improve in fiscal 2008 compared with fiscal 2007.

It is the current intention of the Board to declare fully franked ordinary dividends of A\$0.28 per share for fiscal 2007. This assumes that we continue to be successful in implementing our transformation strategy and there are no further material adverse regulatory outcomes during fiscal 2007. The Board will make its final decision on the future amount of dividends in its normal cycle having regard to, among other factors, our earnings and cash flow, as well as regulatory impacts on our business and all other factors that affect our operations. On 10 August 2006, the directors declared a fully franked final dividend of A\$0.14 per share (A\$1,739 million), which will be recognised in our accounts for fiscal 2007.

Two months ended 31 August 2006 review

Our unaudited operating results for the two-month period ended 31 August 2006 compared with the prior corresponding period show the following:

• sales revenue growth of 3.3% reflecting continued growth in retail broadband of 41.0%, mobiles of 9.0% and advertising and directories revenue of 10.6%. This growth was partially offset by the decline in PSTN revenues of 5.9% as the market continues its trend from high-margin PSTN products and services to lowermargin emerging telecommunication products and services. In addition, the rise in sales revenue reflected the inclusion of revenues for the New World Mobility Group.
• EBIT decline of 8.6% as our income growth during the two months was offset by higher expenses mainly due to an increase in cost of good sold led by additional take up of our 3G mobile handsets and a rise in the number of subscribers to our services and higher depreciation and amortisation expenses attributable to our transformation initiatives. The increase in expenses was partially offset by lower labour expenses reflecting a reduction in the number of staff.

We believe that our results for the first two operating months of fiscal 2007 are consistent with the trends identified during fiscal 2006 and we are on track to achieve our fiscal 2007 outlook. Investors should note, however, that these results are only for two months and are not necessarily indicative of what our results will be for the year.

First half fiscal 2007 outlook

We expect that our reported results for the first half of fiscal 2007 will be impacted by the following factors:

• revenue will be impacted by the distribution of Melbourne Yellow^® being completed in the second half of fiscal 2007, therefore the revenue will be recognised in the second half of fiscal 2007. In fiscal 2006, distribution of Melbourne Yellow® was completed in the first half of fiscal 2006 and as a result, the revenue was recognised in the first half of fiscal 2006;
• expenses will include significant transformation related costs in the first half of fiscal 2007 compared with no transformation expenses in the first half of fiscal 2006;
• revenue and expenses for the CSL New World Mobility Group will be included for the full year in fiscal 2007; and

• accelerated depreciation and amortisation expenses in the range of A\$150 million to A\$175 million will be reported in the first half of fiscal 2007, reflecting our transformation, compared with no accelerated depreciation and amortisation in the first half of fiscal 2006.

As a result of these factors, we expect our reported EBIT to be 17% to 20% lower in the first half of fiscal 2007 compared with the first half of fiscal 2006.

Second half fiscal 2007 outlook

We expect that our reported results for the second half of fiscal 2007 will be impacted by the following factors:

• revenue will be impacted by the distribution of Melbourne Yellow^® being completed in the second half of fiscal 2007, therefore the revenue will be recognised in the second half of fiscal 2007. In fiscal 2006, distribution of Melbourne Yellow® was completed in the first half of fiscal 2006 and as a result, the revenue was recognised in the first half of fiscal 2006;
• expenses will reduce in the second half of fiscal 2007 compared with the second half of fiscal 2006. During fiscal 2006, transformation costs were only incurred in the second half of fiscal 2006 including the redundancy and restructuring provision. We do not expect to raise a redundancy and restructuring provision during fiscal 2007; and
• revenue and expenses for the CSL New World Mobility Group will be included for the full year in fiscal 2007.

As a result of these factors, we expect our EBIT to be 37% to 40% higher in the second half of fiscal 2007 compared with the second half of fiscal 2006.

Due to the combination of our expected first half and second half reported results for fiscal 2007, we expect reported EBIT for fiscal 2007 to increase between 2.0% and 4.0% compared with fiscal 2006 as previously outlined.

Management estimates and judgements in the application of our critical accounting policies

Our consolidated financial statements have been prepared in accordance with A-IFRS. Our basis of preparation and significant accounting policies are fully described in note 1 and note 2 to our consolidated financial statements respectively.

During fiscal 2006, we adopted A-IFRS in the preparation and presentation of our consolidated financial statements. Our accounting policies for both fiscal 2006 and fiscal 2005 are compliant with all aspects of A-IFRS. As a result, we remeasured and restated our fiscal 2005 comparative financial information to be consistent with A-IFRS. We have taken the exemption available under AASB 1: "First time adoption of Australian Equivalents to International Financial Reporting Standards" to only apply AASB 132: "Financial Instruments: Disclosure and Presentation" and AASB 139: "Financial Instruments: Recognition and Measurement" from 1 July 2005. In addition, we elected to early adopt AASB 7: "Financial Instruments: Disclosures", which supersedes the disclosure requirements of AASB 132.

In all material respects, our accounting policies are applied consistently across the Telstra Group of companies and to all business segments. Where there is no conflict with A-IFRS, we align our accounting policies with US-GAAP to reduce the number of A-IFRS/US-GAAP reconciliation differences required to be adjusted in note 37 to our consolidated financial statements

The preparation of our consolidated financial statements requires management to make estimates and judgements that impact the reported amounts of assets, liabilities, revenues and expenses and the disclosure of off balance sheet arrangements, including commitments and contingent liabilities. We continually evaluate our estimates and judgements. We base our estimates and judgements on historical experience, various other assumptions we believe to be reasonable under the circumstances and, where appropriate, practices adopted by international telecommunications companies. Actual results may differ from these estimates in the event that the scenarios on which our assumptions are based proves to be different.

The following are the critical accounting estimates and judgements we have applied in producing our A-IFRS consolidated financial statements:

Carrying value and amortisation of investments, goodwill and acquired intangible assets

We assess the carrying value of our goodwill and other indefinite useful life assets for impairment annually at each reporting date. In respect of other assets, an assessment of the carrying value is only required in instances where there is some indication of impairment. Our assessment of the carrying value covers both goodwill and other assets, as it would be difficult to separate the cash flows generated from the other assets as distinct from the cash flows supporting the carrying value of goodwill. In addition, we have allocated goodwill and intangible assets with an indefinite useful life to cash generating units (CGUs) for the purposes of undertaking impairment testing.

Our assessment of the carrying value generally applies the discounted cash flow analysis approach, except in the case of listed investments, where we use market prices. The discounted cash flow analysis is based on the value in use calculation, representing the present value of the future amount expected to be recovered through the cash inflows and outflows arising from the assets continued use and subsequent disposal, discounted to its present value by an applicable discount rate.

In determining our value in use, we apply management judgement in establishing our forecasts of future operating performance of the assets in their current condition, as well as the selection of an appropriate discount rate and terminal value growth rate. These judgements are based on past experience and expectations for the future. The discount rate reflects the market determined discount rate adjusted for specific risks relating to the CGU and the country in which it operates. Our terminal value growth rate represents the growth rate applied to extrapolate our cash flows beyond the five year forecast period.

We acquire intangible assets either as part of a business combination or through separate acquisition. Intangible assets acquired in a business combination are recorded at fair value at the date of acquisition and recognised separately from goodwill. On initial acquisition, we apply management judgement to determine the appropriate allocation of purchase consideration to the assets being acquired, including goodwill and identifiable intangible assets.

The carrying value of goodwill was A\$2,073 million as at 30 June 2006 compared with A\$2,037 million as at 30 June 2005. On initial acquisition, and at each subsequent reporting date, we assess the useful life of goodwill and other acquired intangible assets as part of our assessment of the carrying value of our investments. The increase in the carrying value of goodwill was mainly attributable to the acquisition of controlled entities and foreign exchange movements.

The carrying value of our investments in jointly controlled and associated entities was A\$23 million as at 30 June 2006 compared with A\$48 million as at 30 June 2005. The carrying amount has reduced during fiscal 2006 due to the sale of our 35.0% shareholding in Xantic B.V.

The carrying value of our acquired intangible assets including patents, trademarks, licences, brandnames, customer bases and mastheads was A\$1,686 million as at 30 June 2006 compared with A\$1,702 million as at 30 June 2005. The carrying value of these intangible assets are assessed annually and adjusted down where it exceeds recoverable amount.

Our acquired intangible assets are amortised on a straight-line basis over the period of expected benefit starting from the commencement date of use, with the exception of assets assessed as having an indefinite useful life (predominately relating to mastheads). We apply management judgement to determine the amortisation period based on the expected useful lives of the respective assets. In some cases, the useful lives are supported by external valuation advice at the time of acquisition. As at 30 June 2006, the remaining amortisation period of our acquired intangible assets was reviewed and deemed appropriate. The mastheads of A\$447 million were acquired as part of our acquisition of the Trading Post^®. The mastheads are deemed to have an indefinite life, the appropriateness of which is reassessed at each reporting date.

If our forecasts and assumptions prove to be incorrect or circumstances change, we may be required to impair the carrying value of our investments, goodwill and acquired intangible assets. In applying our assessments, we have not written down significant amounts of these assets during the two-year period. We believe that as at 30 June 2006 our investments, goodwill and acquired intangible assets are recoverable at the amounts at which they are stated in the consolidated financial statements.

Carrying value and depreciation of property, plant and equipment

Property, plant and equipment assets made up 65.3% of our total assets in fiscal 2006 compared with 65.0% in fiscal 2005. We therefore consider our accounting policies in relation to the carrying value and depreciation of these assets to be critical. We have adopted the cost basis of recording our property, plant and equipment, rather than the fair value basis. Land and buildings are subject to valuation at least every three years, except properties that are on a disposal program, which are subject to valuation each year.

We assess whether there is an indicator of impairment in our property, plant and equipment at each reporting date. Where assets can be shown to be working together to generate net cash flows, this assessment is performed over the group of assets rather than individually. When considering this assessment we exclude the HFC cable network, as we do not consider this network to be integrated with the rest of our ubiquitous telecommunications infrastructure in Australia. As at 30 June 2006, our assessment of the ubiquitous network and the HFC cable network did not identify any impairment triggers and therefore it was not necessary to perform a recoverable amount test in relation to the carrying value of the network assets.

We assess the appropriateness of the service lives of our property, plant and equipment assets on an annual basis. This assessment includes a comparison against international trends for other telecommunications companies. In relation to communications assets, our assessment includes a determination of when the asset may be superseded technologically. We use a 'end date lifing' methodology where we believe technologies will be replaced by a certain date. Assets are grouped into classes based on technologies when making the assessment of useful lives.

The review of service lives was carried out at the commencement of the year and updated in November 2005 to take into account the impacts associated with the transformation. As part of our review, certain assets are reassessed with lives being extended or in some cases being reduced. The net effect of the reassessment for fiscal 2006 was an increase in our depreciation expense of A\$66 million compared with a decrease of A\$60 million in fiscal 2005. The fiscal 2006 net increase comprised a reduction in depreciation of A\$196 million based on the review of services lives at 1 July 2005 and accelerated deprecation of A\$262 million as a result of our transformation initiatives. Any reassessment in a particular year will affect the depreciation expense (either increasing or decreasing) for both that current year and future years through to the end of the reassessed useful life.

If our forecasts and assumptions prove to be incorrect or circumstances change, we may be required to impair the carrying value of our property, plant and equipment. Our impairment for property, plant and equipment was A\$69 million in fiscal 2006 compared with A\$17 million in fiscal 2005. The increase in fiscal 2006 was mainly due to our decision to shut down certain networks and platforms that are no longer considered recoverable as part of our transformation program. This also includes our decision to cancel certain projects relating to the construction of property, plant and equipment. We believe that as at 30 June 2006 our items of property, plant and equipment are recoverable at the amounts at which they are stated in our consolidated financial statements.

Capitalisation of costs

Costs are classified as either operating or capital expenditure. We expense operating expenditure to the income statement as it is incurred. We capitalise expenditure where it is expected to generate future economic benefits. Capital costs are recorded as assets and reported in our balance sheet based on the asset class considered most appropriate to those costs. Management judgement is applied in determining costs to be capitalised in relation to the following major asset categories:

Capitalisation of costs related to construction activities

The cost of our constructed property, plant and equipment includes directly attributable costs such as purchased materials, direct labour and direct overheads required to bring the asset to the location and condition

necessary for its intended use. Satisfying the directly attributable criteria requires an assessment of those unavoidable costs that, if not incurred, would result in the asset not being constructed or installed.

The cost of our constructed property, plant and equipment also includes an allocation of indirect overheads. Indirect overhead costs are directly attributable to the construction of assets, but can only be allocated to specific projects on an arbitrary basis, as they do not usually vary with construction activity volumes. Examples of indirect overhead costs include planning and design of construction projects and the management of construction contracts. Management judgement is applied in determining the indirect cost pool and allocating it to each project.

Capitalisation of software assets developed for internal use

We capitalise costs associated with the development of network and business software for internal use where future benefits embodied in the particular asset will eventuate and can be reliably measured. Management applies judgement to assess the costs to be capitalised in the development of software assets and the amortisation period applied.

Costs capitalised as software assets for internal use include:

• external direct costs of materials and services consumed:
• payroll and direct payroll related costs for employees associated with a project; and
• internal indirect costs directly attributable to the software asset being developed.

Capitalised software assets totalled A\$1,782 million as at 30 June 2006 compared with A\$1,970 million as at 30 June 2005. The recoverability of capitalised software assets is assessed semi-annually at each reporting date. If our estimates prove to be incorrect or circumstances change, we may be required to impair the carrying value of our software assets.

The service lives of software assets are reviewed each year with reference to global industry practices. Software assets have a weighted average life of six years in both fiscal 2006 and fiscal 2005, despite the changes resulting from the impact of transformation on certain software asset lives in the current year. Major systems such as certain billing systems may have a longer life. The net effect of the reassessment of the useful life of software assets for fiscal 2006 resulted in an increase in amortisation expense of A\$160 million in fiscal 2006 compared with A\$nil in fiscal 2005, reflecting the impact of transformation initiatives in the current year.

If these assumptions prove to be incorrect or circumstances change, we may be required to impair the carrying value of capitalised software assets. Our impairment for capitalised software assets was A\$65 million in fiscal 2006 compared with A\$nil in fiscal 2005. The increase in fiscal 2006 was led by our decision to shut down certain networks and platforms that are no longer considered recoverable as part of our transformation program. This also includes our decision to cancel certain projects relating to the development of software. We believe that as at 30 June 2006, our capitalised software assets are recoverable at the amounts at which they are stated in our consolidated financial statements.

Deferred expenditure

Our deferred expenditure relates to costs deferred for basic access installation and connection, major service solution contracts and the generation of Yellow^® and White Pages^® revenue. In addition, incentive and administration fees associated with acquisition of certain mobile subscribers are also recorded as deferred expenditure.

We defer expenditure where it is probable that the future benefits embodied in the particular asset will eventuate and can be reliably measured. As a result, we are required to identify future benefits expected to arise from the deferral of expenses, which relate to the revenue that is to be recognised in future periods. Each year we use management judgement to determine the average period over which the related benefits of our deferred expenditure are expected to be realised. We also review expenditure deferred in previous periods to determine the amount, if any, that is no longer recoverable. The amount of deferred expenditure that is no longer recoverable is recorded as an expense immediately in the income statement.

A substantial portion of our deferred expenditure relates to basic access installation and connection costs. These costs are taken to the income statement in line with the release of installation and connection fee revenues. which are deferred and recognised over the average estimated customer life. Based on our reviews of historical information and customer trends, we have determined that the average estimated customer life is five years for both fiscal 2006 and fiscal 2005. Our deferred expenditure after amortisation was A\$582 million as at 30 June 2006 compared with A\$620 million as at 30 June 2005.

Defined benefit assets and actuarial gains/losses

We currently sponsor two post employment defined benefit plans. The Telstra Entity and some of our Australian controlled entities participate in the Telstra Superannuation Scheme ("Telstra Super"). Our controlled entity. CSL, participates in the HK CSL Retirement Scheme. We recognise a defined benefit asset for the net surplus recorded in each of our post employment defined benefit plans. The net surplus represents the fair value of the plan assets less the present value of the defined benefit obligations, adjusted for contributions tax. The fair value of plan assets approximates its net market values. Defined benefit obligations are based on expected future payments required to settle the obligations arising from current and past employee services. This obligation is significantly influenced by factors such as estimates on final salaries and employee turnover.

All of the actuarial gains/losses associated with our defined benefit plans are recognised directly in retained profits in the period in which they occur. For financial reporting purposes, we engage an actuary to assist in the determination of our net defined benefit asset and the associated actuarial gains/losses at each reporting date. The following represent the main assumptions used in the actuarial calculations of the pension expense, plan assets and defined benefit obligations:

• the discount rate to determine the defined benefit plan expense;
• the discount rate used for reporting defined benefit obligations:
• the rate of increase on future salary levels for both the defined benefit plan expense and the defined benefit obligations; and
• the expected long term rate of return on plan assets.

The assumptions applied in our calculation have a significant impact on the reported amount of our defined benefit plan assets of A\$1,029 million as at 30 June 2006 and A\$247 million as at 30 June 2005. In fiscal 2006, the increase was mainly due to higher investment returns than expected and a reduction in accrued benefits as a result of a large number of defined benefit members leaving the scheme, mainly reflecting the redundancies during the current year. In applying our estimates, we have recorded an actuarial gain of A\$962 million in fiscal 2006, compared with an actuarial loss of A\$90 million in fiscal 2005, directly in retained profits in accordance with the applicable accounting standard. Refer to note 28 to our consolidated financial statements for details on the assumptions applied to each of our defined benefit plans, the method of determining these assumptions and sensitivity analysis of a one percentage point decline in these key assumptions on our defined benefit expense and asset.

If our current estimates proves to be incorrect, the carrying value of our defined benefit assets as at 30 June 2006 may be materially impacted in the next reporting period. Additional volatility may also be recorded in retained profits to reflect differences between actuarial assumptions of future outcomes applied at the current reporting date and the actual outcome in the next annual reporting period. Based on the assumptions applied at year end, we believe that as at 30 June 2006, our defined benefit assets are fairly stated in our consolidated financial statements.

Valuation of receivables

We maintain allowances for doubtful debts based on an estimate of the inability of our customers to pay amounts due to us for services rendered to them. These allowances are based on historical trends and management's assessment of general economic conditions. An allowance for doubtful debts is raised when it is considered that there is a credit risk, insolvency risk or incapacity to pay a legally recoverable debt. We have adopted a number of methodologies depending on the different customer portfolio to determine the appropriate allowance for doubtful

debts in each of our business segments. If the financial condition of our customers deteriorates, these provisions may not be sufficient and may lead to an increase in bad and doubtful debt expenses. We have no reason to believe that the allowances raised will not sufficiently cover bad debts arising from the receivables we currently have on hand.

Our allowance for doubtful debts was A\$144 million as at 30 June 2006 compared with A\$159 million as at 30 June 2005. Trade debtors before any allowance for doubtful debts was A\$2,565 million as at 30 June 2006 compared with A\$2,434 million as at 30 June 2005.

Included in our receivables is the loan to REACH of A\$210 million as at 30 June 2006 and A\$204 million as at 30 June 2005. We fully provided for this loan to REACH in both fiscal 2006 and fiscal 2005 due to the uncertainty of repayment in the medium term.

Provisions

Our provision for employee benefits predominantly relates to the provisions for annual leave and long service leave entitlements. The calculation of annual leave entitlements should be based on remuneration rates expected to be paid when the obligation is settled. Ordinarily this would require the provision for annual leave entitlements to use estimated remuneration rates at the time leave is expected to be settled or taken. We use nominal remuneration rates in determining the annual leave provision on the basis that the difference between the nominal rates and applying the estimated future rates would not be material to our provision.

We accrue for long service leave entitlements not expected to be paid or settled within one year of balance date at present values of the future amounts expected to be paid. The calculation is actuarially determined and includes the following estimates:

• the projected increases in wage and salary rates over an average of ten years;
• the probability of employees reaching their long service leave entitlement at year 10;
• the employee leave taking rate; and
• the weighted average discount rate.

In relation to the discount rate, we apply the weighted average government bond rate for the one year period ended 30 June, rather than the government bond rate as at 30 June. This approach is taken to limit the impact of volatility in government bond rates. Our provision for employee benefits was A\$892 million as at 30 June 2006 compared with A\$946 million as at 30 June 2005.

We self-insure for workers' compensation liabilities. A provision is taken up for the present value of the estimated liability, based on an actuarial review of the liability. This review includes an assessment of actual accidents and estimated claims incurred but not yet reported. Our provision for workers' compensation was A\$216 million as at 30 June 2006 compared with A\$214 million as at 30 June 2005.

Our provision for redundancy of A\$186 million and provision for restructuring of A\$209 million was recorded in fiscal 2006 as part of our transformation program. A provision has been raised for only those redundancy and restructuring costs where a detailed formal plan has been approved and we have raised a valid expectation in those affected that the plan will be carried out. Management judgement was applied in determining the extent that future transformation activities were likely to result in restructuring costs and in estimating those future costs. These provisions extend beyond a period of 12 months, and as a result we applied the pre-tax government bond rate for the redundancy provision and the Telstra pre-tax weighted average cost of capital for the restructuring provision as the discount rate to reflect the present value of these provisions as at 30 June 2006.

Derivative financial instruments and hedge accounting

Under A-IFRS, we are required to recognise the fair value of all our derivative financial instruments on the balance sheet from 1 July 2005. As a result, we apply management judgement to determine the application of an appropriate valuation technique, which includes references to prices quoted in active markets, discounted cash flow analysis, recent arm's length transactions involving the same or similar instruments and option pricing models.

When using a discounted cash flow analysis, our assumptions are based on market conditions existing at balance date and we use an appropriate market based yield curve, which is independently derived and representative of our cost of borrowing.

We use various derivative financial instruments to hedge the following risks:

• changes in the fair value of our financial assets and liabilities:
• variability of future cash flows attributable to foreign currency fluctuations; and
• the foreign currency risk when we translate the net assets of our foreign investments.

Revenue recognition

We recognise revenues when they are earned through the delivery of a product or service. Telecommunications revenues are recorded at amounts billed plus an appropriate accrual for calls made since the last billing date. Revenues that relate to more than one period are deferred and amortised into sales revenue over the expected period of benefit.

All of our Yellow^® and White Pages^® print directory advertising revenues are recognised on delivery of the published directories. We apply our management judgement to determine that our directories are delivered when they have been published and delivered to our customers' premises. Revenue from online directories is recognised over the life of service agreements, which is on average one year. Voice directory revenues are recognised at the time of providing the service to customers.

Accrued revenue comprises mainly the recognition of unbilled amounts relating to telephone usage, service and maintenance. Our major billing system generates most of the accrued revenue and automatically accrues revenue for billing cycles that remain unbilled as at the reporting date.

Where multiple revenue generating deliverables are sold under a single arrangement each deliverable that is considered to be a separate unit of accounting is accounted for separately. We allocate the consideration from the revenue arrangement to the separate units based on the relative fair values of each unit. If the fair value of the delivered item is not readily available, revenue is allocated based on the difference between the total arrangement consideration and the fair value of the undelivered items. We currently have a number of arrangements that are considered to be distinguishable into separate units of accounting, including mobile handsets offered as part of a mobile network contract or sold as part of a prepaid package, broadband Internet installation kits where the modem is provided and advertising in the Yellow® printed and online directories.

Management estimates and judgements applied in our US-GAAP reconciliation

We disclose our A-IFRS/US-GAAP reconciliation differences in detail in note 37 to our consolidated financial statements. During fiscal 2006, the conversion to A-IFRS required us to restate our fiscal 2005 comparative financial information, including our US-GAAP reconciliation. The management estimates and judgments that we believe have the most significant impact on the US-GAAP reconciliation are as follows:

Capitalisation of indirect costs and borrowing costs before 1 July 1996 for property, plant and equipment

Under previous AGAAP, we did not capitalise indirect costs and borrowing costs prior to 1 July 1996. In addition, under A-IFRS we no longer capitalise borrowing costs. However, under US-GAAP we are required to capitalise borrowing costs and those indirect costs associated with operations and personnel directly involved in the construction of our communication assets. This involved the use of estimation techniques and the reconstructing of records as far back as 1980. Due to the fact that we used estimation techniques to reconstruct the balances, the actual balance may have been greater or less than the adjustment calculated. This impacts the adjustment made to property, plant and equipment each fiscal year and the resulting annual depreciation expense in our US-GAAP reconciliation.

Property, plant and equipment with a net book value of A\$834 million as at 30 June 2006 and A\$894 million as at 30 June 2005 was capitalised for US-GAAP purposes, which was not capitalised under A-IFRS. Additional

depreciation and disposals have also been recorded of A\$147 million in fiscal 2006 and A\$168 million in fiscal 2005 as a result of this difference.

Net pension asset/liability and actuarial gains/losses

We engage an actuary to assist in the determination of our prepaid pension asset/liability and retirement benefit gains and losses. Many of the assumptions used under A-IFRS are also applied under US-GAAP. These assumptions have a significant impact on the calculations and adjustments made. The discount rate applied under US-GAAP is different to the discount rate applied under A-IFRS due to the differing treatment of investment tax, with A-IFRS accounting for investment tax of the fund by adjusting the pre-tax discount rate.

Under A-IFRS we have elected to recognise all our actuarial gains/losses directly in retained profits. Under US-GAAP, the recognition of certain gains/losses are delayed in the income statement using the corridor approach. Under this approach, the aggregated unrecorded gains and losses exceeding 10% of the greater of the aggregated projected benefit obligation or the market value of the plan assets are amortised over the average expected service period of active employees expected to receive benefits under the plan.

As at 30 June 2006, the net pension liability for US-GAAP was A\$167 million, comprising the net deficit of Telstra Super of A\$172 million, partially offset by a surplus of A\$5 million in relation to the HK CSL Retirement Scheme. Refer to note 37(f) for further details on the accounting treatment under US-GAAP.

Impairment of goodwill

During fiscal 2006, the balance of our goodwill in CSL was impaired prior to the merger with New World Mobility Group. Due to historical US-GAAP adjustments, our CSL goodwill balance for US-GAAP has always been higher than under A-IFRS and previous AGAAP. For the purposes of recording the impairment, we have applied management judgement with the assistance of external advisers, in calculating an implied fair value of CSL and allocating that fair value to CSL's identifiable assets and liabilities, including the intangible assets. The impairment of CSL's goodwill for US-GAAP purposes does not impact the carrying value assessment of the goodwill recognised under A-IFRS.

Changes in accounting policies

Australian entities reporting under the Corporations Act 2001 must prepare their financial reports for financial years commencing on or after 1 January 2005 under A-IFRS as adopted by the Australian Accounting Standards Board (AASB). This involved preparing our first full year set of consolidated financial statements applying A-IFRS for the financial year ended 30 June 2006.

The transitional rules for first time adoption of A-IFRS require that we restate our comparative financial report using A-IFRS applied as of 1 July 2004, except for AASB 132: "Financial Instruments: Disclosure and Presentation" and AASB 139: "Financial Instruments: Recognition and Measurement", where comparative information was not required to be restated. In addition, we have elected to early adopt AASB 7: "Financial Instruments: Disclosures", which supersedes the disclosure requirements of AASB 132.

For reporting in the current year, comparatives were remeasured and restated for the financial year ended 30 June 2005. Most of the adjustments on transition were made to opening retained profits at the beginning of the first comparative period $(i.e., at 1 July 2004).$

Our adoption of A-IFRS has significantly impacted the accounting policy and reported amounts of the following items:

• share based payments;
• business combinations:
• · income taxes;

• property, plant and equipment;

• · leases;

• employee benefits;
• changes in foreign exchange rates;
• borrowing costs;
• investments in associates and joint ventures;
• impairment of assets; and
• intangible assets.

Under A-IFRS, our net profit after tax may be more volatile compared with previous Australian accounting standards. The volatility in net profit after tax could be caused by the accounting requirements in areas such as impairment of goodwill balances and hedging. However, the adoption of A-IFRS has not affected our net cash flows, our ability to borrow funds or our capacity to pay dividends to our shareholders. In note 36 to our consolidated financial statements, we have:

• identified and explained the key differences in accounting policy;
• provided our differences on the date of transition (i.e., 1 July 2004) and for the current comparative period $(i.e., 30 June 2005);$
• provided full reconciliations of our reported results under previous AGAAP to those comparatives reported in our current year consolidated financial statements under A-IFRS; and
• provided qualitative information on the exemptions applied under AASB 1 on first time adoption of A-IFRS.

Other than the adoption of A-IFRS, we have had no significant change in accounting policy during the twoyear period.

Results of operations

	Year Ended 30 June
	2006	2005	Change	2006/2005
		(In A\$ millions)		$(\%$ change)
Sales revenue	22,750	22,161	589	2.7%
Other revenue (excl. finance income)	22	20	2	$10.0\%$
Total revenue	22.772	22.181	591	2.7%
Other income	328	261	67	25.7%
Total income (excl. finance income)	23,100	22,442	658	2.9%
Operating expenses (excl. interest expense and depreciation and amortisation	13.521	11.884	1.637	13.8%
Share of net (gain)/loss from jointly controlled and associated entities.	(5)	94	(99)	$(105.3)\%$
Earnings before interest, income tax expense, depreciation and amortisation (EBITDA)(1)	9,584	10.464	(880)	(8.4)%
Depreciation & amortization	4,087	3,529	558	15.8%
Earnings before interest & income tax expense $(EBIT)(1)$	5.497	6.935	(1,438)	(20.7)%
Net finance costs	936	880	56	6.4%
Profit before income tax expense	4.561	6.055	(1.494)	(24.7)%
Income tax expense	1,380	1,746	(366)	$(21.0)\%$
Net profit for the year $\ldots \ldots \ldots \ldots \ldots \ldots \ldots \ldots \ldots \ldots$	3,181	4,309	(1.128)	(26.2)%
Effective tax rate	30.3%	28.8%		1.5%
EBITDA margin on sales revenue	42.1%	47.2%		(5.1)%
EBIT margin on sales revenue	24.2%	31.3%		(7.1)%

		Change
	A\$ (cents)	A\$ (cents)	A\$ (cents)	$%$ change
Basic earnings per share(2)	-25.7	34.7	(9.0)	(25.9)%
Diluted earnings per share $(2)$	-25.7	34.6	(8.9)	$(25.7)\%$
Dividends paid or declared:
Interim dividend paid	14.0	14.0
Special dividend paid with interim dividend	6.0	6.0
Final dividend declared $(2005 \text{ paid})$	14.0	14.0
Special dividend to be paid with final dividend $(2005 \text{ paid}) \dots$		6.0

(1) EBITDA reflects our profit prior to including the effect of interest revenue, borrowing costs, income taxes, depreciation and amortisation. We believe that EBITDA is a relevant and useful financial measure used by management to measure our operating profit. Our management uses EDITDA, in combination with other financial measures, primarily to evaluate our operating performance before financing costs, income tax and non-cash capital related expenses. In consideration of the capital intensive nature of our business, EBITDA is a useful supplement to net income in understanding cash flows generated from operations that are available for payment of income taxes, debt service and capital expenditure. In addition, we believe EBITDA is useful to investors because analysts and other members of the investment community largely view EBITDA as a key and widely recognised measure of operating performance. EBITDA is not a US-GAAP measure of income or cash flow from operations and should not be considered an alternative to net income as an indication of our financial performance, or as an alternative to cash flow from operating activities as a measure of our liquidity. EBIT is a similar measure to EBITDA, but takes into account the effect of depreciation and amortisation.

(2) Basic and diluted earnings per share are impacted by the effect of shares held in trust for employee share plans and instruments held under executive remuneration plans.

In fiscal 2006, sales revenue growth was driven by Internet & IP solutions, mobile revenues, advertising $\&$ directories, CSL's merger with New World PCS and pay TV bundling. Growth was partially offset by a decline in revenues mainly from PSTN calling products, specialised data and ISDN products. Sales revenue grew by 2.7% as we continue to manage the shift in customer demand from our traditional products such as PSTN to our emerging products such as broadband.

In April 2006, CSL and New World Mobile Holdings Limited merged, however this had minimal impact on the overall sales revenue in fiscal 2006. Apart from this transaction, there was little activity in the mergers and acquisitions area in 2006.

Sales growth was marginally impacted by acquisitions that took place in fiscal 2005, with current year revenue figures including a full twelve months of operation for acquired entities KAZ, PSINet, Universal Publishers Pty Ltd (Universal Publishers) and Telstra Business Systems Pty Ltd (formerly known as Damovo (Australia) Pty Ltd).

Our expenses have been impacted by the initial stages of our transformation strategy and our focus continues to be on executing our strategy as announced to the market in November 2005. Our total expenses increased due to higher labour costs, in particular redundancy costs, higher goods and services purchased supporting revenue growth, and higher other expenses, primarily as a result of the transformation program. These expense categories were also impacted by the recognition of a provision at year end for redundancy and restructuring of A\$427 million to cover activity in future years relating to our business transformation. Depreciation and amortisation also increased, primarily due to accelerated depreciation after a review of asset service lives impacted by our transformation strategy.

As a result of these factors, our profit before income tax expense was A\$4.561 million in fiscal 2006 compared with A\$6,055 million in fiscal 2005, and our net profit decreased by $26.2\%$ in fiscal 2006.

Operating revenues

In the following discussion, we analyse revenue for each of our major products and services. The principal areas of operating revenue growth for fiscal 2006 were:

• · mobiles;
• internet and IP solutions;
• advertising and directories; and
• pay TV bundling.

In fiscal 2006, our sales revenue growth was partially offset by a $6.7\%$ decline in PSTN product revenues as customers continue to move towards new products and services to satisfy their requirements and competition further intensifies in the market.

Competition has continued to intensify and, as a result, we have seen our revenues decline in a number of areas despite increasing volumes. We have also experienced a continued shift in revenue from our traditional higher margin retail operations (such as our PSTN products) to our lower margin retail products (such as mobiles and broadband). We have continued to concentrate on product bundling initiatives and managing the migration of customers to other products. In the second half of fiscal 2006, we introduced our first subscription price based offers into the consumer market to help address the decline of our traditional product revenues and to make pricing easier for our customers. We have also introduced market based management to enable us to better serve our customers' needs.

We expect that there will be continued competitive pressure in some of our traditional product areas. However, the volume of telecommunications services purchased in Australia has increased and the range of products and services offered continues to expand.

Categorisation of our operating revenue

We categorise revenue from the products and services we derive from wholesale customers according to the nature of the product or service provided. For example, we categorise operating revenue from interconnect and access charges relating to PSTN and mobiles, within those categories as appropriate. Products resold are also within the relevant product categories. This is a revised approach from how interconnect and access charge revenues were presented in the prior year.

We are actively promoting alternative access services that are faster and have more capabilities than our basic access service. As more of our customers purchase these alternative services, operating revenue will continue to move from one category to another. For example, as our customers continue to switch from buying basic access services to buying other forms of access services, such as ADSL, operating revenue from some customers will shift from the basic access category to the Internet and IP solutions category.

The rates we charge our retail customers are subject to regulated retail price controls

The rates we charge our retail customers for selected fixed network telephony products are subject to retail price controls. The retail price control regime, set by the Commonwealth, applies to us and no other telecommunications provider. The new price control regime commenced on 1 January 2006.

These retail price controls require us to:

• ensure parity in the local call prices offered to regional and metropolitan customers;
• ensure there is a package of PSTN services targeted and available to low income customers;
• notify and seek the consent of the ACCC when price increases to residential line rental rates are proposed; and
• report on compliance to the ACCC no later than three months after 30 June 2007 and subsequently each year until 30 June 2009.

In addition, we are required to apply the following price controls:

• the price of a bundle of services including basic access, local calls, national long distance calls, fixed-to-mobile calls and international calls will not increase;
• basic residential and business access charges will not increase by more than the consumer price index (CPI) with current basic residential access charges maintained until 30 June 2007;
• charges for connections capped to increases in CPI;
• the charge for charity organisations not to be increased to a level which exceeds the price of the standard residential line rental rate;
• the price for local calls made from one of our public payphones will not exceed A\$0.50 (GST included) per call: and
• the price for untimed local calls and dial-up Internet calls are capped at A\$0.22 (GST included) per call, except for untimed local or dial-up calls which form part of a subscription pricing package or a discounted line rental arrangement.

Despite these restrictions, we have been able to innovate and recently introduced a range of calling plan options, including new capped calling plans. We continue to reduce prices on a range of telephony services in order to respond to customer needs and market conditions. We also monitor our pricing to ensure that we comply with the price control requirements.

The previous price control determination that applied up until 31 December 2005 had required our revenues from line rentals and calling products to be separately measured. These price controls imposed a cap of CPI plus 4% for line rental, and CPI minus 4.5% on a basket of calls comprising local, long distance, international and fixed-to-mobile. The previous regime also required the price for local calls made from one of our public payphones

not to exceed A\$0.40 (GST included) per call. Business customers on negotiated contractual arrangements are excluded from the new price controls.

Operating Revenues

			Year Ended 30 June
	2006	2005	Change	2006/2005
		(In A\$ millions)		(% change)
PSTN Products
Basic access	3,318	3,362	(44)	$(1.3)$ %
Local calls	1.023	1,284	(261)	$(20.3)\%$
PSTN value added services	246	250	(4)	$(1.6)$ %
National long distance calls	913.	1,013	(100)	$(9.9)$ %
Fixed to mobile	1,491	1,566	(75)	(4.8)%
International direct	201	234	(33)	$(14.1)\%$
Fixed interconnection	286	309	(23)	$(7.4)$ %
Total PSTN	7,478	8,018	(540)	(6.7)%
Mobiles
Mobile services — Retail	3.846	3,736	110	2.9%
Mobile services — Wholesale	36	24	12	50.0%
Mobile services — Interconnection $\ldots \ldots \ldots \ldots \ldots \ldots \ldots \ldots$	623	547	76	13.9%
Mobile handsets	467	381	86	22.6%
Total Mobiles.	4,972	4,688	284	6.1%
Internet and IP solutions
Narrowband	220	275	(55)	$(20.0)\%$
Retail broadband	730	463	267	57.7%
Wholesale broadband	461	261	200	76.7%
Internet direct	143	123	20	16.3%
IP solutions	285	207	78	37.7%
Other	68	48	20	41.7%
Total Internet and IP solutions $\ldots$ ,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,	1,907	1,377	-530	38.5%
$ISBN$ products	807	890	(83)	$(9.3)$ %
Specialised data	884	966	(82)	$(8.5)$ %
Advertising and directories	1,711	1,585	126	7.9%
Intercarrier services	351	290	61	21.0%
Inbound calling products	449	449	$\overline{\phantom{0}}$
Solutions management	989	931	58	6.2%
HKCSL New World	830	734	96	13.1%
TelstraClear	620	625	(5)	$(0.8)$ %
Offshore services revenue	295	252	43	17.1%
Payphones	104	121	(17)	$(14.0)\%$
Pay TV bundling	320	263	57	21.7%
Customer premises equipment	274	231	43	18.6%
Other sales & service	759	741	18	2.4%
Sales revenue	22,750	22,161	589	2.7%
Other revenue $\ldots \ldots \ldots \ldots \ldots \ldots \ldots \ldots \ldots \ldots \ldots$	22	20	2	10.0%

	Year Ended 30 June
	2006	2005	Change	2006/2005
	(In A\$ millions)	$(\%$ change)
Total revenue			- 591	2.7%
Other income	- 328	261	-67	25.7%
Total income		-22.442	658	2.9%

PSTN Products

	Year Ended 30 June
	2006	2005	Change	2006/2005
		(In A\$ millions)		$(\%$ change)
Basic access revenue
Retail	2.592	2.725	(133)	(4.9)%
Domestic wholesale $\ldots$ , $\ldots$ , $\ldots$ , $\ldots$ , $\ldots$ , $\ldots$ , $\ldots$ , $\ldots$ , $\ldots$ , $\ldots$	726	637	-89	14.0%
Total basis access revenue	3.318	3.362	(44)	$(1.3)\%$
Local call revenue	1.023	1.284	(261)	$(20.3)\%$
PSTN value added services revenue	246	250	(4)	(1.6)%
National long distance call revenue $\ldots \ldots \ldots \ldots \ldots \ldots \ldots$	913	1.013	(100)	(9.9)%
Fixed to mobile revenue	1.491	1.566	(75)	$(4.8)\%$
International direct revenue	201	234	(33)	$(14.1)\%$
Fixed interconnection	286	309	(23)	(7.4)%
Total PSTN revenue	7,478	8,018	(540)	(6.7)%
Basic access lines in service (in millions)
Residential	5.46	5.60	(0.14)	$(2.5)\%$
Business	2.32	2.45	(0.13)	(5.3)%
Total Retail	7.78	8.05	(0.27)	(3.4)%
Domestic wholesale $\ldots$ , $\ldots$ , $\ldots$ , $\ldots$ , $\ldots$ , $\ldots$ , $\ldots$ , $\ldots$ , $\ldots$ , $\ldots$ , $\ldots$	2.16	2.07	0.09	4.3%
Total access lines in service	9.94	10.12 $!=$	$\underline{(0.18)}$	(1.8)%
Number of local calls (in millions)	7.432	8.469	(1.037)	$(12.2)\%$
National long distance minutes (in millions) $(1)$	7.215	7.743	(528)	(6.8)%
Fixed to mobile minutes (in millions)	4,491	4,375	116	2.7%
International direct minutes (in millions) $\ldots \ldots \ldots \ldots \ldots \ldots$	534	580	(46)	$(7.9\%)$

Note: statistical data represents management's best estimates.

(1) Includes national long distance minutes from our public switched telephone network (PSTN) and independently operated payphones. Excludes minutes related to calls from non-PSTN networks, such as ISDN and virtual private networks.

Total PSTN products revenue in fiscal 2006 was A\$7,478 million, which declined by 6.7% or A\$540 million from fiscal 2005. This compares with a decline of 3.6% in fiscal 2005 (inclusive of fixed interconnection).

There has been a general reduction in PSTN volumes, with a decline in retail basic access lines, and volume reductions across local calls, national long distance calls, international direct calls and fixed interconnection. Yields have also declined in local calls, national long distance, fixed-to-mobile, international direct and fixed interconnection due to competitive pricing pressure. The decline in the first half of the fiscal year was 7.6% which was slowed to 5.8% for the second half of the fiscal year.

Work continues on the integration of mobile, fixed and broadband services to add value to the fixed line. This is aimed at arresting the decline in fixed line use.

Late in the second half of the year, we introduced subscription pricing plans for our PSTN customers, which offer greater choice and value from the home phone, including untimed national long distance calls and low or no charge local calls. These plans did not have any significant impact on our PSTN revenues in fiscal 2006 with the benefits expected to be seen in the next fiscal year.

Basic access

Our basic access revenue includes monthly rental fees, installation charges and connection charges, from telephone service connections between a customer's premises and our PSTN network.

Basic access revenues are affected by:

• housing growth;
• · competition;
• demand for telephone services and additional lines;
• regulatory constraints in relation to wholesale basic access;
• migration to other products such as Broadband and mobiles; and
• price changes.

Under our basic access pricing structure, we have a range of access and call pricing packages to give our residential and business customers choice in the plan they select, along with a range of reward options. These pricing packages are reviewed regularly to reflect the changing needs of customers. For the most part, wholesale customers receive the pricing plan which only incorporates the basic telephone service with local call rates, excluding long distance and fixed-to-mobile calls (with a "residential" and "business" differentiation still applying).

Our operating revenue from basic access services was also affected by competition during fiscal 2006. During fiscal 2006, the number of retail residential and business basic access lines decreased due to strong competition and migration to alternative products such as broadband and mobiles. Domestic wholesale basic access lines in service grew, reflecting the increased penetration of our competitors into the retail basic access market. In the retail segment, we saw a decline of 270,000 lines in service or 3.4%, mainly driven by the migration to other technologies which is underpinning the retail trend across PSTN revenues. This decline was partially offset by an increase of 90,000 lines in service or 4.3% in the wholesale market.

Overall our operating revenue from basic access services decreased by A\$44 million or 1.3%. During fiscal 2006, we introduced various basic access packages, which reduced the decline in revenue in this area, despite an overall decrease in basic access lines in service.

Rental revenue increased due to a rise in line rental price charges from December 2005, which included a rise in basic access prices for wholesale and non preselected retail residential customers. In addition, penetration of higher value HomeLine plans including HomeLine Ultimate, a new subscription based plan introduced in April 2006, is also expected to contribute positively. Partly offsetting this was an increase in the discounts to Whole of Business customers and pensioners.

Local calls

Our local call revenue from local call charges, consists of revenue from local calls on our PSTN network and includes revenue from our megapop product which allows ISPs to offer untimed local call PSTN dial up access for their customers via a single national dial up 019 number. For the most part we charge for local calls without a time limit.

Our local call revenue is affected by:

• the number of basic access lines in service and customers moving from our basic access service to our other access services, such as mobiles and broadband;
• competition:
• increasing use of email:
• customers migrating to mobile and fixed-to-mobile calling; and
• pricing changes and regulatory retail price restrictions.

Local call revenue decreased by A\$261 million or 20.3% in fiscal 2006, with both our retail and wholesale revenues being negatively impacted by ongoing product substitution from fixed calling to mobile voice calls and SMS, which is accelerated by the take up of capped mobile plans currently being heavily promoted by competitors. Substitution of data local calls continues to occur due to the migration of dial up Internet customers to broadband. The price in the wholesale market also declined as a result of a rise in volume discounts.

Generally, call volumes have continued to fall during fiscal 2006, reflecting the impact of customers migrating to other products, such as mobiles, fixed-to-mobile, and broadband products, and fewer basic access lines in service. This is highlighted by the fact that the number of local calls reduced by 12.2% during the year.

PSTN value added services

Our revenue from PSTN value added services declined by A\$4 million or 1.6% during fiscal 2006. This decrease was driven by a reduction in a number of mature products, such as Indial, Siteline, Enhanced faxstream and other access products nearing the end of their lifecycle. Customers are also migrating to product offerings such as Internet products and premium voice communication applications.

Messaging and call completion products increased marginally during fiscal 2006. Calling number display continued to grow due to attractive packaging discounts resulting in subscriber numbers increasing by 10%. This has been partially offset by call return revenue which declined by 14% due to lower overall call volumes and substitution to other products.

National long distance calls

Our operating revenue from national long distance consists of revenue from national long distance calls made from our PSTN network to the fixed network.

We generally charge for national long distance calls based on the time of day, day of week, destination and duration of the call, but packages are also offered on a capped price basis and under subscription pricing arrangements. A variety of promotions and pricing options are offered to encourage our customers to use our service and to inform them about the price and value of our service. The majority of our operating revenue from national long distance calls comes from our residential and small business customers.

General economic conditions and customer perceptions about the cost and value of our service relative to competitor alternatives, largely drive our national long distance call revenue. Competitive activity continues to negatively affect this revenue category directly through override and preselection, and indirectly through competition for access lines. In addition, national long distance calls are impacted by customers migrating to mobile, broadband and fixed-to-mobile calling.

Our operating revenue from national long distance calls declined by A\$100 million or 9.9% in fiscal 2006 compared with fiscal 2005. Competitor activity in the fixed line market continues to be high and most carriers have a fixed or mobile cap, or a combination of both, in the market. This is having a direct impact on our national long distance revenues, particularly where competitors are bundling these calls with broadband offerings. Volumes are down as a result of lower basic access services in operation and the impact of fixed-to-mobile substitution and other calling options available to customers. We have increased discounts compared to fiscal 2005 in order to retain and win back customers.

We continue to respond to competition with competitively priced packages. However, with the strong growth in mobile and Internet services in the Australian market, we expect national long distance call revenue to continue to be negatively impacted by ongoing migration of customers to mobile and Internet products, and by the continued growth of subscription pricing plans.

Fixed-to-mobile calls

Our fixed-to-mobile revenue is generated by calls originating on our fixed networks and terminating on any mobile network. We generally charge for fixed-to-mobile calls based on time of day and mobile carrier, however packages are also offered on a capped price basis. Our operating revenue for fixed-to-mobile calls is approximately split evenly between business and residential customers. The growth of the Australian mobile telecommunications market has driven revenue expansion in this product category in recent times. However, the introduction of capped plans in the mobile market has now impacted the volume of fixed-to-mobile activity as customers continue to slowly move their usage from our PSTN products. The fixed-to-mobile environment is influenced by fixed-to-mobile preselection, whereby the carriage service provider ("CSP") selected by a customer for national long distance calls automatically becomes the customer's provider for fixed-to-mobile calls.

During fiscal 2006, fixed-to-mobile revenue declined by A\$75 million or 4.8%. We experienced a decline of A\$114 million due to lower revenue per minute resulting from higher discounts from ongoing competitive pressure, including incorporating fixed-to-mobile calls in reward offerings and the changing mix in services in operation ("SIOs") from PSTN to ISDN and CustomNet. This increase in the level of discounting is representative of our increased campaign activity aimed at reducing customer churn to other providers and win customers in the market place.

This decline in revenue was partially offset by growth in call volumes mainly due to the continued expansion of mobile services in the Australian market. The positive volume growth for fiscal 2006 contributed A\$38 million due to higher calls and minutes of use. This growth is consistent with the growth in the total market mobile SIOs, meaning there is a higher number of mobiles on which fixed calls can terminate, and hence a higher number of calls.

International direct calls

Our operating revenue from international direct relates to revenue we generate from international calls made from Australia to a destination outside Australia (outbound). This revenue is largely driven by general economic conditions, customer perceptions about the cost and value of our service, competition, migration to broadband alternatives and promotion and advertising.

Our international direct revenue declined by 14.1% to A\$201 million in fiscal 2006 primarily as a result of lower volumes and continued competitive pressure on price. Factors which have influenced this trend include the competitive pressures from calling cards, fixed-to-mobile substitution and the growth of Voice over IP in the market place. Despite major international events and the occurrence of unfortunate circumstances which have provided short term stimulus to call traffic, international direct minutes declined 7.9% for the year.

Fixed Interconnection

Fixed interconnection is made up of local and non local PSTN/ISDN access interconnection services provided. to other carriers. This category is a highly regulated area of the Australian telecommunication market. Our operating revenue from fixed interconnection decreased by 7.4% to A\$286 million during fiscal 2006 driven by reduction in both volume and price. Volume declines are in line with cross company trends in PSTN traffic and have been particularly impacted by migration to mobiles and, to a smaller degree, ULL build.

Mobiles

Our operating revenue from mobiles consists of revenue from access fees and call charges, as well as value added services comprising international roaming, mobile MessageBank® and mobile data. It also includes revenue from the sale of mobile handsets and interconnection charges where calls from other carriers' customers terminate on our network.

During fiscal 2006, we commenced the construction of our new NEXT G™ wireless network. We launched this network on 6 October 2006. Until recently, we operated two primary mobile networks, GSM and CDMA. Over time we will migrate our customers from our old networks onto our new NEXT G^TM wireless network. We continue to offer 3G services to our customers over our existing 3G 2100 network, a network jointly owned through our joint venture with Hutchison Telecommunication (Australia) Limited (Hutchison).

The mobile telecommunications market continued to grow during fiscal 2006, although at a lower rate of growth than in the prior year. The growth was slowed by the increase in capped price plans by all the major mobile competitors, heightened campaign activity particularly around 3G services, and the increasing use of mobile data services such as Blackberry and EVDO. While voice continues to be the largest contributor to mobiles revenue. value added services, including mobile data, is the fastest growing, now representing 25.4% of mobile services revenue in fiscal 2006. With competition intensifying, we have introduced a comprehensive and broad reaching program of segment based customer management to enable us to provide the best service and solutions to all of our customers.

Mobiles

			Year Ended 30 June
	2006	2005	Change	2006/2005
		(In A\$ millions)		(% change)
Access fees and call charges	2,703	2,765	(62)	(2.2)%
Value added services:
- International roaming	266	243	23	9.5%
— Mobile messagebank	199	187	12	6.4%
- Short message service $(SMS)$	494	457	37	8.1%
— Other mobile data	184	84	100	119.0%
Total value added services	1,143	971	172	17.7%
Total mobile services revenue - retail	3,846	3,736	110	2.9%
Mobile services revenue — wholesale	36	24	12	50.0%
Mobile services revenue — mobiles interconnection $\dots \dots \dots \dots$	623	547	76	13.9%
Total mobile services revenue	4,505	4,307	198	4.6%
Mobile handset sales	467	381	86	22.6%
Total mobile goods and services $revenue(1)$	4,972	4,688	284	6.1%
$3G$ mobile SIO (thousands)	317		317
GSM mobile SIO (thousands).	6.468	6,894	(426)	(6.2)%
CDMA mobile SIO (thousands)	1,703	1,333	370	27.8%
Total mobile SIO (thousands)	8,488	8,227	261	3.2%
Mobile Wireless - EVDO SIO (thousands) (included in CDMA SIO
above)	60	19	41	215.8%
Prepaid mobile SIO (thousands)	3,597	3,570	27	0.8%
Postpaid mobile SIO (thousands)	4,891	4,657	234	5.0%
Total mobile SIO (thousands)	8,488	8,227	261	3.2%
CDMA wholesale mobile SIO (thousands) $\dots \dots \dots \dots \dots \dots$	73	62	$\mathbf{1}$	17.7%
GSM wholesale mobile SIO (thousands)	46	21	25	119.0%
Total wholesale mobile SIO (thousands)	119	83	36	43.4%
Number of SMS sent (in millions)	3,019	2,289	730	31.9%
Deactivation rate	23.4%	19.2%		4.2%
Mobile voice telephone minutes (in millions) $(2)$	7,311	6,746	564	8.4%

	Year Ended 30 June
	2006	2005	Change	2006/2005
	(In A\$ millions)					$(\%$ change)
Average revenue per user per month $AS's(3)$			$(0.98)\%$	$(2.5)\%$
Average prepaid revenue per user per month $A\$ 's(3)		12.24	(1.39)	$(11.4)\%$
Average postpaid revenue per user per month $A\$ s $(3)$		-59.06	(0.07)	$(0.1)\%$
Average mobile data revenue per user per month $(4)$		-5.70	1.07	18.8%

Note: statistical data represents management's best estimates.

• (1) Excludes revenue from:
• calls from our fixed network which we categorise as fixed-to-mobile; and
• CSL New World which is recognised separately as controlled entity revenue.
• (2) Includes all calls made from mobile telephones including long distance and international calls, excludes data, MessageBank®, international roaming and CSL New World.
• (3) Average retail revenue per user per month is calculated using average retail SIO and includes mobile data, MessageBank® and roaming revenues. It excludes interconnection and wholesale revenue.
• (4) Includes mobile wireless EVDO revenue, excludes BigPond® wireless.

During fiscal 2006, mobile service revenue increased by A\$198 million or 4.6% mainly due to the continued growth in the number of mobile telephone subscribers and expanding minutes of use, offset by continued pressure on prices. In addition, we experienced strong growth in our value added services revenue for example MessageBank®, SMS, Blackberry and EVDO.

Access fees and call charges declined by 2.2% to A\$2,703 million in fiscal 2006 reflecting a decrease in GSM revenues partially offset by an increase in CDMA revenues. Both technology categories have been impacted during the year by the competitive environment and the growth in capped price plans which has directly impacted yields. CDMA prepaid was also impacted by lower revenues attributable to a promotion which gave CDMA subscribers half price calls for a year. During the year we moved from 1% of our mobile customers on capped plans to 4.3% on capped plans.

SIOs increased overall, but it was CDMA that drove the growth with a 27.8% increase while GSM (including 3G) reduced marginally by 1.6%. The CDMA revenues benefited from a increased activations during the first half of fiscal 2006 and the availability of more competitively priced handsets. Call minutes generally increased for each technology, but these benefits did not outweigh the impact on price for the period. Average revenue per user (ARPU) dropped by A\$0.98 over the year led by a reduction in prepaid ARPUs by 11.4% or A\$1.39, with postpaid ARPUs stable.

Revenue from international roaming grew by 9.5% to A\$266 million in fiscal 2006. The rise was primarily due to an increase in outbound roaming minutes and a marginal increase in revenue per call. In addition, inbound roaming revenue remained steady as price increases offset decreased usage.

Revenue from MessageBank® increased by 6.4% to A\$199 million in fiscal 2006 primarily due to growth in minutes resulting from higher mobile usage and SIOs.

During fiscal 2006, SMS and Multimedia Messaging Services (MMS) revenues increased by 8.1% to A\$494 million after a significant increase in the number of messages sent. There is a component of migration from voice communication to message communication which is evident in the reported growth rates. This was stimulated by a A\$0.01 text offer and other rewards and bonus options offered during the year. In addition, mobile data growth was also experienced in the corporate segment through the Blackberry and Telstra Mobile Broadband^TM products on the CDMA network. This is reflected in the average mobile data revenue per user per month increasing over fiscal 2006.

Revenue from handset sales increased by 22.6% to A\$467 million in fiscal 2006 primarily due to growth in the number of GSM mobile handsets sold. This growth was attributed to an increase in marketing campaign activity focusing on the sale of 3G handsets, particularly in the second half of the year.

Mobiles interconnection revenue has grown 13.9% to A\$623 million during fiscal 2006. The main product driving this growth is GSM wholesale domestic roaming which grew in fiscal 2006 by A\$43 million after Hutchison 3G roaming commencing in April 2005. This corresponds directly to an A\$8 million drop in CDMA roaming after Hutchison introduced their 3G product as an alternative to CDMA, SMS interconnect has grown A\$17 million due to an increase in traffic resulting from growth in mobile SIOs as well as a continued increase in the popularity of text messaging as a cheaper alternative to mobile voice calling. In addition, mobiles terminating revenue grew by A\$24 million due to a 12% increase in termination volumes, partially offset by price reductions resulting from regulatory pricing pressures on mobile terminating rates. The increase in termination volumes has resulted from growth in retail SIOs, particularly in CDMA and pre-paid services.

Wholesale mobile service revenue increased in fiscal 2006 by 50.0% or A\$12 million due to growth in the wholesale GSM resale product introduced in fiscal 2005. It enabled resellers to develop and market their own branded mobile solutions including voice, text, multimedia messaging and MessageBank^® on the GSM network which they could only previously do on the CDMA network. Minutes of use have grown significantly since this product was introduced.

The level of deactivations increased by 4.2% which was driven by prepaid activity. After we changed systems for managing prepaid SIO's in fiscal 2005, all relevant prepaid SIOs were automatically given a recharge period of 12 months, extended from the normal 6-month period, to ensure no customers were disadvantaged while we consolidated the new system. In the last quarter of fiscal 2006, these SIOs reached the end of this period and many were subsequently deactivated. This contributed to the deactivation of 1.1 million prepaid SIOs in fiscal 2006. This change in recharge period has not impacted the year on year growth rate but has impacted the timing of deactivations occurring throughout the year.

Internet and IP solutions

Our operating revenue from Internet and IP solutions is driven primarily by:

• demand for capacity to support business networking;
• the increased use of IP services by business customers (small to medium enterprises);
• the introduction of new products to meet customer needs;
• the movement of our customers from basic access and associated calling products to other access services such as ADSL; and
• demand for greater bandwidth services such as broadband.

While the IP and Internet markets have been experiencing growth, competition has put pressure on our prices. We expect that these trends will continue.

Internet and IP solutions

	Year Ended 30 June
	2006	2005	Change	2006/2005
		(In A\$ millions)		$(\%$ change)
Narrowband	220	275	(55)	$(20.0)\%$
Retail broadband(1)	730	463	267	57.7%
Wholesale broadband	461	261	200	76.6%
Internet direct	143	123	20	16.3%
IP solutions	285	207	78	37.7%
Other	68	48	20	41.7%
Total internet & IP solutions revenue	1,907	1.377	530	38.5%
Broadband subscribers — retail (in thousands) $(1)$	1.476	856	620	72.4%
Broadband subscribers — wholesale (in thousands). $\dots$	1,427	888	-539	$60.7\%$
Total broadband subscribers (in thousands).	2.903	1.744	1.159	66.5%
Narrowband subscribers — retail (in thousands)	1.027	1,205	(178)	$(14.8)\%$
Total online subscribers	3,930	2,949	981	33.3%
Average revenue per retail broadband subscriber per month $(ASos)$	52.16	60.10	(7.94)	$(13.3)\%$

Note: statistical data represents management's best estimates.

(1) Telstra mobile broadband and Telstra internet direct (Retail ADSL) are not included in retail broadband revenue and subscriber numbers.

Our narrowband products allow customers to connect to the Internet from any telephone line in Australia. Our broadband products allow customers to experience an "always on" connection to the Internet, although this is not available to all lines due to technology limitations. In fiscal 2006, continued demand for capacity combined with competitive pricing has resulted in customers migrating their narrowband services to broadband. This trend placed additional price pressure on our dial-up products and resulted in a decline in our narrowband revenues.

We offer a range of Internet products and packages under our BigPond^® brand. Telstra BigPond^® home and business packages offer dial-up modem services to residential and business customers across Australia. Telstra BigPond® broadband provides broadband Internet services to consumer and business customers via HFC cable, ADSL, satellite and mobile access technologies.

During fiscal 2006, our Internet and IP solutions revenue grew by 38.5% or A\$530 million to A\$1,907 million, despite a reduction in prices. The subscriber base for our broadband products grew significantly during this time, partially due to migration from narrowband products but also due to growth in the overall online market. As at 30 June 2006, we had approximately 2.9 million broadband customers of which nearly 1.5 million were retail customers. There has been a significant rise in demand resulting from competitive pricing strategies.

Narrowband revenue decreased by 20.0% to A\$220 million in fiscal 2006. This decline highlights the growing impact of dial-up to broadband migration as the dial-up market proceeds with its decline. We expect this trend to continue with further price adjustments likely to occur as broadband prices fall and customers require higher speeds.

Retail broadband revenue increased by 57.7% to A\$730 million in fiscal 2006, mainly due to strong increases in SIOs. SIO growth has occurred across all technologies but ADSL has been the key driver of the growth. We have introduced a number of key price and value campaigns to stimulate broadband take up including a combination of discounting access and installation offers. We have also introduced new products and plans including a wireless EVDO offer and enhanced focus on our cable offerings. The Australian Government's Higher Bandwidth Incentive Scheme (HiBIS) and broadband regional connect packages have also enabled affordable broadband and higher bandwidth to be provided to regional and remote locations and encourage take up in those areas. Given this strong take up, increased competition and resultant price offerings, average revenue per user has declined.

Wholesale broadband revenue increased by 76.6% to A\$461 million in fiscal 2006 driven by a continuing strong market demand for high bandwidth services and increased demand at the retail level. Wholesale DSL Internet grade has grown by A\$181 million driven by volume increases with a 60.7% growth in SIOs.

Internet direct is our business oriented Internet access product with a range of data access options and features to meet the needs of business. Internet direct revenue increased by 16.3% during fiscal 2006 to A\$143 million. The result was driven by our virtual ISP product which increased by A\$14 million, mainly because of a new commercial deal signed resulting in a significant increase in data usage. SIOs for this product category increased by 258% in fiscal 2006.

IP solutions revenue increased by 37.7% to A\$285 million in fiscal 2006, mainly due to the products in this category being in the growth phase of their lifecycle. Fiscal 2006 saw an increase of A\$48 million in IP MAN/ Ethernet, our 'next generation' data access services which provide high speed IP and Ethernet access solutions respectively for large and medium corporate enterprises. The government sector has been the key user and driver of this product. IP WAN grew by A\$29 million, after growth was stimulated through competitive pricing and improved network performance. It is also evident that customers now appear more willing to move towards IP based solutions.

Other Internet and IP solutions revenue grew by A\$20 million in fiscal 2006 due to growth in wholesale Internet and data traffic, in particular in our Wholesale Ethernet product, and increased revenue from our wholly owned entity, Chief Entertainment, which is a media production house that provides Internet content.

ISDN

ISDN is a flexible, switched network based on digital technology. It can support many applications at one time (such as voice, data and video) while using a single access point to the network. ISDN services are offered to residential and business customers across Australia. Our ISDN products revenue is impacted by offerings and packages in the broadband market, growth in the number of DSL enabled exchanges and migration to advanced data products such as IP solutions.

ISDN

	Year Ended 30 June
	2006	2005	Change	2006/2005
		(In A\$ millions)		$(\%$ change)
Access	418	421	(3)	(0.7)%
Data calls	118	165	(47)	$(28.5)\%$
Voice calls $\ldots \ldots \ldots \ldots \ldots \ldots \ldots \ldots \ldots \ldots \ldots$	271	304	(33)	$(10.9)\%$
Total calls		469	(80)	$(17.1)\%$
Total ISDN revenue		-890	$\underline{\text{(83)}}$	$(9.3)\%$
ISDN access lines (basic access line equivalents) (in thousands))(1)				$0.5\%$

Note: statistical data represents management's best estimates.

(1) Statistical data - we have adjusted comparative data to show a more accurate reflection of the market. Conversion factors have been adjusted in calculating ISDN access lines.

ISDN access revenue has declined marginally to A\$418 million in fiscal 2006. Growth in access lines has slowed in recent years from 3.3% in fiscal 2005 to 0.5% in the current year. Data access line declines in the consumer segment have been driven by customer movement to broadband, while declines in the business segment have arisen as a result of the migration to alternative technologies such as ADSL and symmetrical HDSL. Data access line declines have been offset by voice access line growth, driven by customers taking up ISDN as a stepping stone towards a full IP environment. Whole of customer discounts in the enterprise segment have also impacted the result in the current year.

ISDN voice calls revenue, which is made up of local, national and international voice calls made on the integrated services digital network, declined by 10.9% or A\$33 million in fiscal 2006, mainly due to declines in the local and national categories. National voice calls revenue was negatively impacted by competitor price pressure during the year. Local voice calls revenue was negatively impacted by a decrease of 14% in minutes of use primarily because calls on our Priority® One3 and 1300 A Party products have been reclassified from ISDN to inbound calling revenues. This reclassification amounted to A\$13 million in fiscal 2006.

ISDN data calls revenue declined in fiscal 2006 by 28.5% or A\$47 million. Both ISDN local and national data calls contributed to the decline. ISDN local data and ISDN national local data calls revenue declined by 28% and 32% respectively due to customers migrating to alternative products such as ADSL and symmetrical HDSL, as a result of improved bandwidths at reduced prices in each of these products.

Specialised data

	Year Ended 30 June
	2006	2005	Change	2006/2005
		(In A\$ millions)		$(\%$ change)
Frame Relay	305.	351	(46)	$(13.1)\%$
ATM	90	-89		1.1%
Digital data services	-198	227	(29)	$(12.8)\%$
Leased lines.	-229.	-235.	(6)	$(2.6)\%$
International private lines	30	26	4	$15.4\%$
Other specialised data	-32	38	(6)	$(15.8)\%$
Total data revenue $\ldots \ldots \ldots \ldots \ldots \ldots \ldots \ldots \ldots \ldots$	884	966	(82)	$(8.5)\%$
Domestic Frame access ports (in thousands)	-30	34	(4)	$(11.8\%)$

Note: statistical data represents management's best estimates.

Specialised data revenue is comprised mainly of revenue from frame relay, digital data services and leased lines. Frame relay offers high speed data transmission from 64kb to 45Mb per second to customers connecting any number of sites to other national or international locations. It is frequently used as a building block to construct corporate wide area networks. Digital data services provide high quality, leased line digital data transmission offering dedicated bandwidth from 1.02Kb to 1.984Kb per second, which may be used for communication between all major capital cities, and most regional and country areas in Australia. Analogue leased lines provide high quality, low cost, low bandwidth and dedicated end-to-end connections between customer sites.

During fiscal 2006, total specialised data revenue decreased to A\$884 million, reflecting a decline in mature products such as frame relay, digital data and leased line services. This decline has been driven by product substitution to more technologically advanced IP and DSL based product options, included with our Internet and IP solutions revenue category.

Frame relay revenue decreased as this product enters the declining stages of its product life cycle with customers migrating to new technologies such as Business DSL which offers the same coverage and similar assurance, but at a lower price. In addition, we introduced price discounting to retain existing customers. Reduced frame relay revenue was due to a combination of a reduction in ports by 11.8% with a similar reduction in revenue per customer.

Digital data services are mature products that declined 12.8% to A\$198 million during fiscal 2006 primarily due to customers transferring to newer technologies and price pressures experienced from alternative products.

Leased line revenues experienced a 2.6% reduction to A\$229 million, mainly due to customers with voice graded dedicated lines moving to DSL, wireless or IP telephony based solutions. Other high capacity products such as wideband have grown. New business has also been generated by offering premium packages in combination with Internet Direct but they tend to be short distance services which are low revenue generating.

Advertising and directories

Our advertising and directories revenue is predominantly derived from our wholly owned Sensis group. Sensis provides innovative advertising and local search solutions through a print, online, voice, wireless and satellite navigation network.

The majority of Sensis' revenue is derived from its print and online directories - Yellow® and White Pages^® — which have grown steadily overall due to the introduction of new print and directory advertising initiatives.

Product innovation and customer demand continue to drive growth in our broader online and electronic advertising and non-directories advertising business.

Advertising and directories

	Year Ended 30 June
	2006	2005	Change	2006/2005
		(In A\$ millions)		$(\%$ change)
Advertising and Directories revenue		1.585.	126	7.9% $=$

Yellow^® revenue increased by 5.8% to A\$1,172 million in fiscal 2006, primarily due to the strong performance in our non-metropolitan books and 54% growth in Yellow^® OnLine revenue to A\$124 million. The growth in nonmetropolitan books has been driven by new category guides and subheadings, higher uptake of half page advertisements and the release of three new local directories. Online performance was driven by a 25% rise in Yellow OnLine display customer numbers and higher uptake of Platinum advertising, leading to increased revenue per customer.

During fiscal 2006, White Pages^® revenue grew by 12.2% to A\$302 million, reflecting continued growth in both print and online, with improved sales force effectiveness through better "go to market" strategies. Growth has continued with the success of coloured listings and logos resulting in higher revenue per customer.

Our emerging businesses delivered 17.1% revenue growth, driven by strong growth in Whereis® locationbased search revenues and in MediaSmart^®. Fiscal 2006 includes a full year of revenue for our mapping and travel related products company Universal Publishers (purchased December 2005).

Overall revenue performance was impacted by a decline in classifieds revenue over the period. This was driven by competition and economic weakness in the Sydney and Melbourne markets. However, we regard our advertising and directories business as a growth area, with improving margins especially online, and strong market presence accounting for almost 14% of the Australian main media advertising market.

Sensis' Trading Post^® business is experiencing strong growth in online classifieds revenues while print based classifieds revenues are declining. This trend is expected to continue, and as a result the achievement of continued online revenue growth is critical to the future performance of the business.

Intercarrier services

Our operating revenue from intercarrier services comprises a number of products and services relating to the provision of telecommunications services to other carriers (including REACH), CSPs and ISPs. The majority of this revenue base is derived from interconnect and access services which is a highly regulated area of the Australian telecommunications market. Interconnection revenues relating to our PSTN and mobile products are included in those product categories.

The remaining revenue component in intercarrier services is derived from wholesale specific product offerings such as facilities access, wholesale transmission and ULL which, while they are subject to significant price pressures resulting from ongoing oversupply of capacity in the market place, are a focus for delivering incremental

revenue growth for us in the coming years. This growth, however, will be negatively impacted by the recent interim determinations by the ACCC regarding a reduction in the amount we can charge wholesale customers for ULL access.

Intercarrier services revenue

			Year Ended 30 June
	2006	2005	Change	2006/2005
	(In A\$ millions)			$(\%$ change)
Intercarrier services revenue		290.	-61	-21.0% $=$

Intercarrier Services revenue has grown by 21.0% to A\$351 million during fiscal 2006 due to increases in facilities access, wholesale transmission solutions and other wholesale revenues mainly consisting of ULL.

Our growth in facilities access was 40.7% or A\$24 million during fiscal 2006 for the year largely driven by demand for equipment building and mobile tower access as other carriers and service providers have sought to expand their infrastructure over time.

Growth in wholesale transmission relates to leased transmission services led by a rise in demand from Internet service providers for backhaul transmission to expand their DSL network coverage. Partly offsetting these increases in intercarrier revenue was the unfavourable impact of a backdated rate adjustment for MCI Worldcom in September 2005 as well as a decline in services leased by the same customer.

Other wholesale intercarrier revenue growth of A\$18 million was due to ULL driven by a number of factors such as:

• carriers have reached customer density thresholds on wholesale DSL and resale PSTN to be able to undertake viable ULL; and
• falling equipment prices have reduced the capital required by carriage service providers to undertake ULL build.

Inbound calling products

Our operating revenue from inbound calling products consists principally of the fees we charge our business customers for the provision of inbound calling numbers:

• for Freecall^TM 1800, the cost of the call, charged to the party called, with no cost incurred by the caller;
• for Priority® 1300 and Priority® One3:
• the calling party from a PSTN service incurs a cost of A\$0.25 (including GST) from anywhere in Australia. Different charges apply for calls made from ISDN, mobiles and payphones; and
• the service owner incurs the other components of the call charges as applicable.

Also included is revenue from enhanced call centre products using network voice processing, which provides access to advanced call handling capabilities, without customers having to purchase and maintain their own networks.

Our inbound calling products revenue therefore is driven by two different streams, the caller (A party) and the lessee of the inbound service (B party). The A party revenues are affected by substitution to other voice products such as mobiles and the Internet. B party revenues are affected by increased customer competition impacting prices.

Revenue from inbound calling products remained steady at A\$449 million in fiscal 2006 mainly due to an increase in Priority^® One3 and 1300 A Party products offset by Priority® One3 and 1300 B Party products.

Inbound calling products

	Year Ended 30 June
	2006	2005	Change	2006/2005
	(In A\$ millions)	$(\%$ change)
Inbound calling products revenue		$\frac{449}{1}$		三
B Party minutes (in millions)		2.773	149	5.4%
A Party calls (in millions)		-940	-72	7.7%
	3.934 ___	3.713 $\equiv$	221 $=$	6.0%

Note: statistical data represents management's best estimates.

Our overall revenue from Priority® One3 and 1300 B Party products declined in fiscal 2006 due to very competitive market pressures resulting in lower returns. Minutes of use and services in operation have actually increased in this category of calls, but large customers are being won or retained at lower prices resulting in reduced revenues. This is offset by higher call volumes on our Priority^® One3 and 1300 A Party products after calls from our ISDN and Siteline products to these numbers were reclassified in the current year to inbound calling. This amounted to A\$13 million in fiscal 2006. There is also an increasing trend for calls to these numbers from mobile phones which are recorded as mobiles revenue.

Revenue from Freecall^™ 1800 has declined mainly due to intense price competition leading to reduced price and a declining customer base. Our other inbound calling products, such as Enterprise Speech Solutions, have continued to grow strongly throughout fiscal 2006.

Solutions management

Our operating revenue from solutions management is derived from managing all or part of a customer's communications and IT solutions and services covering:

• managed network services, which is network based voice and data products, including IP based networks and IP telephony, CPE management, radio networks and new wireless based technologies;
• IT services, which is managed customer infrastructure (e.g. desktop and end user devices), managed storage and security services, in addition to hosting and application development. IT services also includes the provision of professional consulting and deployment services; and
• other refers to our eBusiness solutions and global data centre.

Solutions management

	Year Ended 30 June
	2006	2005	Change	2006/2005
		(In A\$ millions)	$(\%$ change)
Managed network services		-337-
IT services			60	10.5%
Other			(2)	$(9.1)\%$
Solutions management revenue		- 931	58	6.2%

In fiscal 2006, solutions management revenue increased 6.2% or A\$58 million mainly due to increases in IT services.

IT services grew by 10.5% or A\$60 million in the current year, mainly due to our wholly owned entity KAZ winning major contracts, one of which was a five-year contract for an estimated A\$200 million to provide the Department of Defence's Central Office IT Infrastructure Support Services. Fiscal 2006 IT services revenue also included an additional A\$12 million due to a full 12 months of results for KAZ compared to only 11 months in the

previous fiscal year. Managed professional services revenue also contributed to the growth in IT services, with an increase of A\$16 million due mainly to increased project work on an existing contract.

In addition to increases in IT services, managed data, managed WAN and managed radio, which are in 'managed network services', all contributed positively to the revenue growth due mainly to increases in a number of contracts. Managed voice however offset this growth in revenue, declining due to a reduction in contracts in this area.

Offshore controlled entities

The offshore controlled entities category relates to our offshore subsidiaries, which provide a variety of products and services within their various regions of operation. Included in this category are the following significant offshore controlled entities:

• CSLNW, which generates its revenues from the Hong Kong mobiles market. CSLNW was formerly known as CSL. In March 2006, this entity merged with Hong Kong based mobile company New World PCS. As result of this transaction, we now own 76.4% of the merged entity;
• TelstraClear, which generates its revenues from providing full integrated services to the New Zealand market; and
• other offshore controlled entities predominantly in the Telstra Enterprise and Government segment, which mainly generate revenues from the provision of global communication solutions to multinational corporations through our interests in the United Kingdom, Asia and North America.

Offshore controlled entities - revenue

	Year Ended 30 June
	2006 2005		Change	2006/2005
	(In A\$ millions)	$(\%$ change)
CSL New World	-830	734	96	13.1%
TelstraClear	620	-625	(5)	$(0.8)$ %
Other offshore controlled entities $\ldots$ , , , , , 295		-252.	43	17.1%
Total offshore controlled entities revenue		1.611	134	83%

Consolidated revenue from offshore controlled entities increased in fiscal 2006 by 8.3% to A\$1,745 million primarily due to the following factors:

• CSLNW experienced revenue growth across the majority of its revenue streams, except for local voice which continues to be impacted by sustained pricing pressure. The merger between CSL and New World PCS resulted in increased revenue in the current year of A\$64 million. Excluding this component, revenue has grown in both prepaid and postpaid categories after increased subscribers and handset revenue due to recent promotional activity. Revenue growth was also assisted by a A\$11 million favourable foreign exchange rate impact.
• TelstraClear experienced a net decline in revenue of 0.8% to A\$620 million. There were significant declines in calling revenues largely due to price erosion and pricing plan reductions in the Internet and IP business due to heavy retail competition. Revenue was also negatively impacted by the NZ\$/A\$ exchange rate, causing a A\$22 million decline. These declines were mostly offset by strong growth in the business sector and an increased contribution from a full year's ownership of the Sytec business. There were also a number of one-off implementation revenues from the provision of new and/or additional services to a number of key customers.
• The 17.1% growth in revenue to A\$295 million from other offshore controlled entities was mainly due to growth in Europe, Asia and the US. In Europe, the inclusion of a full 12 months ownership of PSINet contributed A\$15 million in revenue growth. Both Telstra Singapore and Telstra Hong Kong started to grow revenue by selling the full suite of international data products in the Asian market. KAZ also exhibited strong

growth in the same region due to the synergies gained by combining this business with our telecommunications business in one bundle to customers. Growth in the US of A\$15 million was mainly the result of a major contract to provide telecommunications solutions over an integrated global IP-based network, contributing A\$12 million to revenue growth.

For further detail regarding our major off shore subsidiaries CSLNW and TelstraClear refer to the business summaries that follow.

Payphones

		Year Ended 30 June
	2006	2005	Change	2006/2005
		(In A\$ millions)	$(\%$ change)
Payphone revenue	104	-121	(17)	$(14.0)\%$
Telstra owned and operated payphones (thousands)	-30	31	(1)	$(3.2)\%$
Privately owned and operated payphones (thousands)	- 27	-30	(3)	$(10.0)\%$
Total number of payphones (in thousands)		6 I	$^{(4)}$	$(6.6)\%$

Note: statistical data represents management's best estimates.

Payphone revenue declined by 14.0% to A\$104 million in fiscal 2006, impacted by substitution to other products, particularly prepaid mobile phones and competitors' prepaid calling cards. As a result of this migration, we removed a number of low usage phones resulting in a $3.2\%$ reduction in the number of Telstra owned and operated payphones.

There has also been a decline in privately owned and operated payphones of 10.0%, as private operators removed their support for unprofitable payphones. Telstra owned and operated payphones also reduced due to the loss of some payphones to private operators and lower demand in new growth locations.

Pay TV bundling

	Year Ended 30 June
	2006	2005	Change	2006/2005
		(In A\$ millions)		$(\%$ change)
Pay TV Bundling revenue $\ldots \ldots \ldots \ldots \ldots \ldots \ldots \ldots$ 320		263	57	21.7%
FOXTEL Pay TV Bundling subscribers (thousands) $\ldots \ldots$ 292		280	12	4.3%
Austar Pay TV Bundling subscribers (thousands)		55	(4)	$(7.3)\%$
Total Pay TV Bundling subscribers (thousands).	- 343 $=$	335	-8	2.4%

Note: statistical data represents management's best estimates.

Total pay TV bundling revenue grew by A\$57 million, comprising increases in revenue for FOXTEL of A\$46 million and AUSTAR of A\$11 million.

FOXTEL bundled services revenue grew by 20.0% or A\$46 million during fiscal 2006 after an increase in subscribers and higher revenue per user. As customers have migrated from analogue to digital services, discount plans have been phased out and customers are upgrading their packages. It is intended that full customer migration will be completed by March 2007. The growth in subscribers was driven by low price installation/upgrade offers made to the market along with the FOXTEL 10th Anniversary promotion, which targeted both new customers and existing customers through digital migration. FOXTEL IQ, an interactive digital feature available to all FOXTEL digital subscribers also performed well, aided by a low installation price point campaign. At 30 June 2006, analogue services in operation represented 14.7% of FOXTEL bundled customers compared with 36.8% at the start of the year.

Austar bundled services revenue growth for fiscal 2006 of A\$11 million was driven by an increase in the average revenue per user after a change in the subscription offerings. Subscriptions, however, fell due to lower advertising activity, which resulted in slower sales rates while the disconnection rate remained consistent.

Customer premises equipment

			Year Ended 30 June
	2006	2005	Change	2006/2005
	(In A\$ millions)			$(\%$ change)
Customer premises equipment revenue		231	43	18.6% ==

CPE revenue increased by 18.6% to A\$274 million during fiscal 2006 mainly driven by strong growth in the sales of PBX equipment and communication packages known as Telstra Business Systems (TBS) packages. TBS sales more than tripled in the current fiscal year due to an expansion of the vendor base combined with new carriage pricing plans and investment made in support tools that enabled improved processing and reduced transaction time.

The current year's revenue also includes a full 12 months of operations for Telstra Business Systems Pty Ltd (formerly known as Damovo (Australia) Pty Ltd) as it was acquired September 2004. We also acquired Converged Networks Pty Ltd, Western Australia's largest CPE dealer in April 2006.

This growth was partially offset by an A\$11 million decline in first phones/extensions due to continued substitution of rental phones due to sales of CPE and mobiles.

Other sales and services

	Year Ended 30 June
	2006	2005	Change	2006/2005
	(In A\$ millions)			$(\%$ change)
Telstra information and connection services $\ldots$ ,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,	120	134	(14)	$(10.4)\%$
Customnet and spectrum	110.	112	(2)	$(1.8)\%$
Virtual private network	17	15	2	13.3%
Card services	-50	59.	(9)	$(15.3)\%$
Security products	34	33		3.0%
HFC cable usage $\ldots \ldots \ldots \ldots \ldots \ldots \ldots \ldots \ldots \ldots \ldots$	84	65	19	29.2%
Conferlink	48	47		2.1%
Commercial and recoverable works $\ldots$ , $\ldots$ , $\ldots$ , $\ldots$ , $\ldots$	-57	58	(1)	$(1.7)\%$
External construction	108	85	23	27.1%
Other.	131	133	(2)	$(1.5)\%$
Total other sales and services revenue	759	741	-18	2.4%

In fiscal 2006, operating revenue from other sales and services increased by 2.4% or A\$18 million mainly due to HFC cable usage and external construction revenue.

HFC cable usage includes revenue received from FOXTEL for carriage services, cable installations and service calls. Revenue increased by A\$19 million this year due to FOXTEL promotional activity which resulted in an increase in services in operation. There was also a scheduled FOXTEL contract rate increase during the period.

External construction, which delivers communications network infrastructure solutions, had revenue growth of 27.1% or A\$23 million in fiscal 2006. This growth can be mainly attributed to increased activity relating to the construction of the 3G 2100 network in conjunction with our joint venture partner, Hutchison.

The above increases were partially offset by a A\$14 million decline in information and connection services revenue as a result of lower call volumes. Also, card services declined by 15.3% or A\$9 million. This was due to products such as Homelink 1800 and telecard being mature products and impacted by substitution to more cost effective convenient products such as pre-paid cards and mobiles.

Other income

	Year Ended 30 June
	2006	2005	Change	2006/2005
	(In A\$ millions)			$(\%$ change)
Proceeds from sale of property, plant and equipment	46.	51	(5)	$(9.8)\%$
Proceeds from sale of investments	- 93	252	(159)	$(63.1)\%$
Asset/investment sales	-139	303	(164)	$(54.1)\%$
Cost of property, plant & equipment	(23)	(42)	19	$(45.2)\%$
Cost of investment	(31)	(173)	-142	$(82.1)\%$
Cost of asset/investment sale	(54)	(215)	-161	$(74.9)\%$
Net gain/loss on assets/investment sale	- 85	88	(3)	$(3.4)\%$
USO Levy Receipts.	58.	63	(5)	(7.9)%
Government subsidies	135	71	64	90.1%
Miscellaneous income	50	39	$\mathbf{1}$	28.2%
Other income $\ldots, \ldots, \ldots, \ldots, \ldots, \ldots, \ldots, \ldots, \ldots, \ldots$	243	173	70	40.5%
Total other income $\dots \dots \dots \dots \dots \dots \dots \dots \dots \dots \dots$	328	261	67	25.7%

In fiscal 2006, total other income increased by 25.7% or A\$67 million.

In fiscal 2006 proceeds from sale of investments of A\$93 million were due mainly to the sale of Xantic B.V and Fundi Software Pty Ltd, with Xantic yielding a net gain of approximately A\$58 million. In fiscal 2005, proceeds from the sale of our investments was mainly made up of the sale of our interests in Intelsat Limited, Infonet Services Corporation and the redemption of the convertible note issued by PCCW.

The majority of the growth in government subsidy revenue was sourced from Higher Bandwidth Incentive Scheme (HiBIS) receipts and the broadband Connect Australia scheme, which can be attributed to an increase in the provision of broadband services to regional, rural and remote areas of Australia. Refer to the Internet and IP products section for further details regarding HiBIS.

Operating expenses

	Year Ended 30 June
	2006	2005	Change	2006/2005
	(In A\$ millions)		$(\%$ change)
Labour expense	4.364	3.858	506	13.1%
Goods and services purchased	4.730	4.211	519	12.3%
Other expenses	4,427	3,815	612	16.0%
	13.521	11,884	1,637	13.8%
Share of net (gain)/loss from jointly controlled and associated
entities.	(5)	94	- (99)	$(105.3)\%$
	13.516	11.978	1.538	12.8%
Depreciation and amortization	4,087	3.529	558	$15.8\%$
Total operating expenses	17.603	15.507	2.096	13.5%

In fiscal 2006, our total operating expenses (including share of net (gain)/loss from jointly controlled and associated entities) was A\$17,603 million, compared with A\$15,507 million in fiscal 2005. One of the major drivers of the 13.5% increase was the inclusion of a restructuring and redundancy provision of A\$427 million, which has impacted all three of the expense categories. Our operating expenses have been impacted by the following factors:

• costs associated with transformational initiatives and certain project write-offs;

• increased costs associated with network rehabilitation;
• higher redundancy expense as a result of reduced staff numbers as efficiencies have been implemented;
• higher goods and services purchased costs due to increased marketing campaign activities and new offers aiming to stimulate sales growth in a range of our products and services;
• the benefit of ongoing cost control programs, including the consolidation of vendors and IT systems;
• growth in our communications plant asset base, along with the impact of a service life review of our asset base to align with the transformation program, has increased our depreciation and amortisation expense during fiscal 2006; and
• the consolidation of additional operating expenses of A\$68 million in fiscal 2006 from our acquisition activity, including the merger between CSL and New World PCS, as well as the inclusion of a full fiscal year of expenses relating to entities we acquired in fiscal 2005. These included Universal Publishers from December 2004, Telstra Business Systems (formerly Damovo (Australia) Pty Ltd) from September 2004, PSINet from August 2004, and KAZ from July 2004.

Labour expense

• · salary, wages and related on-costs, including superantuation costs, share based payments, workers' compensation, leave entitlements and payroll tax;
• costs of engaging contractor labour and agency costs; and
• restructuring costs, including redundancy expenses.

In the table below, our domestic full time employees include domestic full time staff, domestic fixed term contracted staff and expatriate staff in overseas subsidiary entities. Domestic full time employees do not include employees in our offshore subsidiary entities, or casual and part time employees. Our full time employees and equivalents include the total of our domestic and offshore full time employees, and casual and part time employees measured on an equivalent basis. Our total workforce includes domestic and offshore full time, casual and part time employees as well as contractors and staff employed through agency arrangements measured on an equivalent basis.

Labour expense

	Year Ended 30 June
	2006	2005	Change	2006/2005
	(In A\$ millions)		$(\%$ change
Labour expense	4,364	3,858	-506	13.1%
Domestic full time employees (whole numbers) $(1)$	37.599	39,680	(2.081)	(5.2)%
Full-time employees and employed equivalents (whole numbers $(2)$	44.452	46.227	(1.775)	(3.8)%
Total workforce, including contractors and agency staff (whole numbers $(3)$	49,443	52.705	(3.262)	(6.2)%
Reduction in total workforce in fiscal 2006	(3,262)
Reduction in total workforce in fiscal 2006 excluding impact of New World merger

Note: statistical data represents management's best estimates

(1) Excludes offshore, casual and part time employees.

(2) Includes all domestic and offshore employees, including those of our subsidiary entities.

(3) Includes all domestic and offshore employees, including subsidiary entities as well as contractors and agency staff.

During fiscal 2006, our total workforce decreased by 6.2% or 3,262 full time equivalent staff, contractors and agency staff. This decrease is predominantly due to specific efforts across the business to rationalise the number of people working for the Telstra Group as part of our business transformation initiatives. During the year, CSL merged with New World PCS, which resulted in the Telstra Group acquiring 597 new employees. Excluding the impact of the New World PCS merger on staff numbers, our total full time equivalent staff, contractors and agency staff reduced by 3,859 full time equivalent staff.

We incurred redundancy expenses of A\$348 million in fiscal 2006 compared with A\$91 million in fiscal 2005. The higher redundancy expense reflects the implementation of cost control initiatives to improve the efficiency of our operational structure. In addition, a further A\$186 million of redundancy expense is included as part of a restructuring and redundancy provision as at year end to account for redundancies expected to occur as part of the restructuring over the next two vears.

Our labour expense increased by 13.1% in fiscal 2006 mainly due to:

• the increased levels of redundancy and the redundancy provision referred to above;
• salary increases averaging between 2% and 4% for employees as specified in our enterprise agreements and as per the normal annual salary review process; and
• a full year of ownership of several subsidiaries acquired part way through fiscal 2005 (such as KAZ and Telstra Business Systems), and acquisition of new entities such as the New World Mobility group and a controlling interest in Adstream.

The above increases in labour expense were partially offset by cost reductions associated with the 6.2% decrease in the number of employed staff, contractors and agency staff.

Excluding the impact of redundancy expense, labour expense increased by 1.7%.

Based on the latest detailed actuarial report provided on the financial position of Telstra Super as at 30 June 2003, we have reported that a surplus in this superannuation fund continues to exist. In accordance with the recommendations within the actuarial investigation, we were not expected to, and did not make employer contributions to Telstra Super during fiscal 2006 and fiscal 2005. The detailed actuarial report is undertaken every three years. The next detailed actuarial investigation of Telstra Super is due to be completed by 30 June 2007 based on the scheme's financial position as at 30 June 2006.

As at 30 June 2006, the vested benefits index (the ratio of fund assets to members' vested benefits) of the defined benefit divisions of Telstra Super was 115%. Our contributions to Telstra Super will recommence when the vested benefit index of the defined benefit divisions falls to 103%. The continuance of our contribution holiday is dependent on the performance of the fund and the level of contributions required to meet employer obligations, and we are monitoring the situation on a monthly basis. Based on the latest actuarial advice, we do not expect to make any contributions to Telstra Super during fiscal 2007.

In fiscal 2006, we recognised A\$185 million of pension costs in our labour expenses compared with A\$203 million in fiscal 2005. This expense is due to the relevant A-IFRS standard requiring us to recognise the actuarially determined movement in our defined benefit pension plans in our operating results.

Goods and services purchased

Goods and services purchased includes core costs of our business that vary according to business activity. The largest component of this expense category is network payments, which are payments made to other carriers to terminate international and domestic outgoing calls and international transit traffic. Other significant items include the costs of mobile handsets and Internet modems, costs of mobile sales (including subsidy costs, usage commissions and dealer incentives), managed services costs (including service contractors, sub-contractors and leases), service fees (predominantly in relation to our pay television services) and paper purchases and printing costs.

Goods and services purchased

	Year Ended 30 June
	2006	2005	Change	2006/2005
	(In A\$ millions)	(% change)
Cost of goods sold	917	726.	191	26.3%
Usage of commissions	281	289	(8)	$(2.8)\%$
Handset subsidies	504.	424	80	18.9%
Network payments	2.002	1.904	98	5.1%
Service fees	319.	273	46	16.8%
Managed Services	242	190.	52.	27.4%
Dealer performance commissions	113	41	72	175.6%
Paper purchases and printing	147	159.	(12)	$(7.5)\%$
Other.	205	205	$\equiv$
Total goods and services purchased		4,211	519	12.3%

Our goods and services purchased increased by 12.3% to A\$4,730 million in fiscal 2006 mainly due to higher cost of goods sold, mobile handset subsidies, network payments and dealer performance commissions. Increases were experienced across most categories within goods and services purchased except for usage commissions and paper costs. Additionally, a restructuring provision of A\$54 million has been raised in relation to the replacement of EVDO cards and additional customer and dealer costs associated with the shut down of our CDMA network in the future.

Our goods and services purchased increased by 12.3% to A\$4,730 million in fiscal 2006 due to the following factors:

• the inclusion of the full financial year of expenses relating to our subsidiary entities acquired part way through the prior fiscal year, including KAZ, Telstra Business Systems (formerly Damovo (Australia) Pty Ltd), PSINet and Universal Publishers. In fiscal 2006, CSL merged with New World PCS, the consolidation of which has caused an increase of goods and services purchased expense of A\$29 million;
• a rise in cost of goods sold mainly due to higher sales volumes for mobile handsets, primarily driven by increased market campaign activity, strong BigPond® broadband demand, costs of supporting the Commonwealth Games, together with sales growth in other product categories such as EVDO, CPE for small business customers, Managed WAN equipment and voice related products. Also contributing to the increase are payments made to Brightstar, in accordance with our procurement agreement with them to centrally source wireless devices from global suppliers with a view to achieving cost savings. Inclusive of these payments, the Brightstar arrangement has provided net savings of approximately A\$70 million, primarily relating to handset costs;
• an increase in mobile handset subsidies, attributable to a rise in the take up of handsets on subsidised plans as well as higher average subsidies offered, especially following a significant campaign undertaken in the last quarter, whereby a greater range of handsets are being subsidised. As a result, our average subscriber acquisition cost has increased from A\$120 to A\$137. In addition, the CSLNW has implemented a more aggressive handset subsidy policy in order to increase handset sales. In fiscal 2006, we have also made an A-IFRS accounting policy change to expense handset subsidies as incurred, as opposed to previously deferring and amortising them over the contract period. The prior year comparative figure has been adjusted to allow a like for like comparison;
• network payments continued to grow due to volume increases of domestic mobile and SMS traffic terminating on other carriers' networks, partially offset by a reduction in the average mobile terminating rate. Additionally, expansion and growth in our UK, USA and Asian operations, which drove both growth in our offshore outpayments and higher outbound roaming revenue, partly offset by a reduction of costs through routing traffic to overseas carriers that offer lower prices and favourable foreign exchange variations

in our New Zealand operations. Additional Network Access Charges were also incurred as a result of our 3G 2100 partnership activities with Hutchison:

• service fees increased by 16.8% to A\$319 million in fiscal 2006 led by a rise in bundling of pay TV services due to growth in bundled FOXTEL subscribers;
• managed services costs grew by 27.4% to A\$242 million in fiscal 2006, mainly attributable to increased third party maintenance and service costs for the support of customer contracts. There are also a number of reclassifications from other expenses such as service contracts, service fees and consultancy amounting to A\$26 million. Offsetting these increases are decreases due to lease renegotiations;
• increase in dealer performance commissions, mainly attributable to increased proactive sales activity in our personal calling program. New dealer payments resulting from the implementation of the new dealer remuneration model have also contributed to the growth; and
• an increase in other goods and services purchased due to the inclusion of a restructuring provision of A\$54 million in fiscal 2006, offset by a decrease in commercial project payments as described below.

These increases were partially offset by a decrease in other goods and services expenses such as usage commissions, commercial project payments and paper purchases and printing costs.

• usage commissions decreased by A\$8 million mainly as a result of the discontinuation of commission payments to Keycorp following our acquisition of their Transaction Network Solutions business during the year. This was partly offset by increased dealer commissions mainly associated with non-mobile related products, including BigPond® products;
• commercial project payments declined from A\$59 million in fiscal 2005 to A\$34 million in fiscal 2006 mainly relating to a lower level of deferral and amortisation of its basic access installation costs. The expense fluctuates in accordance with our installations over the five prior years. An equivalent amount is amortised into revenue and hence there is no EBIT impact. Also contributing to the decline was a change in the line usage billing arrangement for outsourced faxstream costs; and
• paper purchase and printing costs decreased from A\$159 million in fiscal 2005 to A\$147 million in fiscal 2006 due to savings achieved through printing contract discounts, together with a reclassification of expenses into cost of goods sold. There was also a reduction in printing costs relating to superannuation industry contracts after a push towards the use of online notifications.

Other expenses

	Year Ended 30 June
	2006	2005	Change	2006/2005
	(In A\$ millions)	$(\%$ change)
Property and IT rental expense	559.	572	(13)	(2.3)%
Net foreign currency conversion losses/(gains)	-2	(40)	42	$(105.0)\%$
Audit fees	8	7		14.3%
Service contracts and other agreements	1.836	1.556	280	$18.0\%$
Promotion and advertising	356.	330	26	7.9%
General and administration	793.	806	(13)	(1.6)%
Other operating expenses	544.	394	150	38.1%
Impairment and diminution expenses	- 329	190	139	73.2%
Total other expenses	4.427	3.815	612	16.0%

Our other expenses were A\$4,427 million in fiscal 2006 and A\$3,815 million in fiscal 2005, representing a 16.0% increase year on year. A restructuring provision of A\$137 million was raised at year end mainly relating to property rationalisation, cancellation of server leases, the decommissioning of certain IT platforms and operational and business support systems and related stock obsolescence. Excluding the impact of the provision, our total other expenses grew by 12.5% to A\$4,290 million.

Our other expenses in fiscal 2006 include an additional A\$17 million of expenses attributable to the merger of CSL with New World PCS during the period. In addition, a full twelve months of expenses have been included in fiscal 2006 for KAZ, PSINet, Universal Publishers, and Telstra Business Systems (formerly Damovo (Australia) Pty Ltd), which were acquired part way through fiscal 2005.

The movement in the significant categories of other expenses is discussed below.

The largest component within this expense category is service contracts and other agreements. This expense increased from A\$1,556 million in fiscal 2005 to A\$1,836 million in fiscal 2006, mainly driven by the following factors:

• increased network maintenance and rehabilitation activity;
• costs associated with transformational initiatives;
• maintenance of the existing 3G 2100 MHZ network and the operational expenditure relating to the construction of our new NEXT G^TM wireless network;
• volume based increases including installations for digital pay television, as well as increased activations and fault rectifications for BigPond^® products due to product growth; and
• a rise in consultancy costs associated with our transformation strategy and increased market research activity due to a focus on understanding customer needs.

The above increases are partly offset by savings from the renegotiation of a major vendor contract, a reduction in mainframe server lease charges as well as the completion of consulting work from fiscal 2005.

General and administration expenses decreased from A\$806 million in fiscal 2005 to A\$793 million in fiscal 2006. This was driven by lower IT costs resulting from savings achieved in repairs and maintenance through continued infrastructure consolidation. The closure of an IT system and the decommissioning of an IT platform have also contributed to reduced IT related costs. Discretionary costs such as seminars and conferences, travel and entertainment costs have decreased in fiscal 2006 as a result of a strong focus on cost reduction. Legal costs have however risen in the year due to increased litigation and other legal work, especially around the C7 case (refer to note 27 of the annual report for further details), operational separation issues and various project initiatives.

Other operating expenses increased from A\$394 million to A\$544 million during fiscal 2006 primarily due to the provision for restructuring of A\$105 million raised in this category. Excluding the impact of the provision, our other operating expenses increased by A\$45 million. This was largely driven by lower construction activity resulting in higher operations and maintenance activity being expensed.

Property and IT rental expense decreased by 2.3% to A\$559 million during fiscal 2006, mainly due to reduced PC leasing costs driven through a consolidation of server leases, which has enabled us to negotiate contracts at a more competitive rate. The decommissioning of an old IT platform and the consolidation of various vendor contracts have also contributed to the decrease in IT rental costs.

Our promotion and advertising costs increased by 7.9% to A\$356 million during fiscal 2006 mainly due to increased spend during the Commonwealth Games, as well as more marketing activity in the face of increased competition and efforts to stimulate revenue.

Our impairment and diminution expense has increased from A\$190 million in fiscal 2005 to A\$329 million in fiscal 2006, mainly attributable to the retirement of a number of IT assets and increased costs associated with the cancellation of partially completed capital projects after a review of project direction as part of our transformation strategy. Also included in fiscal 2006 was a provision relating to business restructure of A\$32 million. Our inventory write down expense also rose due to increased write-offs in our construction business, as well as the impact of our active promotion of mobile handsets, causing slow moving stock to be written off more quickly. This increase was partly offset by the decrease in our bad and doubtful debts, which decreased from A\$150 million in fiscal 2005 to A\$139 million in fiscal 2006. Improved credit management performance has led to lower provision requirements and write-offs, as well as fewer payments to external debt collection agents.

Net foreign currency conversion costs represents the remaining foreign currency exposure after taking into account our hedging activities. The loss of A\$2 million in fiscal 2006 compared with a gain of A\$40 million in fiscal 2005 is mainly due to an A-IFRS accounting adjustment relating to the REACH capacity prepayment, which was processed in fiscal 2005.

Share of net (gain)/loss from jointly controlled and associated entities

	Year Ended 30 June
	2006	2005	Change	2006/2005
	(In A\$ millions)			$(\%$ change)
Share of net (gain)/loss from jointly controlled and associated
entities		94	(99)	$(105.3)\%$

Our share of net (gain)/loss from jointly controlled and associated entities includes our share of both profits and losses from equity accounted investments.

In fiscal 2005, we entered into an agreement with our joint venture entity, REACH, which included a commitment to fund half of REACH's committed capital expenditure for a period until 2022. Under A-IFRS, this transaction was deemed to be part of our investment in REACH and resulted in equity accounted losses being recognised in fiscal 2005. REACH contributed A\$102 million in equity accounted losses in fiscal 2005.

The current year equity accounting gain has arisen after improved performance from our joint venture entity Xantic prior to its sale.

Depreciation and amortisation

Our depreciation and amortisation expense remains a major component of our cost structure, reflecting our expenditure on capital items.

Depreciation and amortisation

	Year Ended 30 June
	2006	2005	Change	2006/2005
	(In A\$ millions)	$(\%$ change)
Depreciation			-307	10.7%
Amortisation		653	-251	38.4%
Total depreciation and amortization $\ldots \ldots \ldots \ldots \ldots$ 4,087		3.529	-558	15.8%

Our depreciation and amortisation expense has risen by 15.8% to A\$4,087 million in fiscal 2006. During fiscal 2006, we have undertaken a strategic review of the service lives of our assets as part of the transformation strategy. As a result, we have accelerated depreciation and amortisation by A\$422 million mainly in relation to adjusting service lives of the CDMA network, our switching systems, certain business and operational support systems and related software.

Excluding the impact of the accelerated depreciation, our depreciation and amortisation grew by 3.9% to A\$3,665 million, mainly attributable to:

• growth in our communications plant asset base, which is consistent with our level of capital expenditure over recent years; and
• consolidation of A\$16 million of depreciation and amortisation expenses from our newly merged entity, CSLNW, along with the inclusion of a full 12 months of depreciation and amortisation expenses relating to entities acquired in fiscal 2005.

Net finance costs

	Year Ended 30 June
	2006	2005	Change	2006/2005
	(In A\$ millions)			$(\%$ change)
Finance costs			- 39	$-4.0%$
Finance income			$(83)$ 17	(20.5)%
Net finance costs	- 936	880	56	64%

Our borrowing costs are influenced by:

• our debt level:
• interest rates:
• our debt maturity profile;
• our interest payment profile; and
• our level of cash assets (affects net debt).

In fiscal 2006, our net debt levels increased from A\$11,772 million to A\$13,057 million. This increase was driven by our cash requirements to fund the payment of the fiscal 2005 final dividend and the fiscal 2006 interim dividend, both of which included a 14c per share ordinary dividend and a 6c per share special dividend. This level of dividend payments is higher than in previous periods and hence, required an increase in our borrowing levels.

The higher level of net debt has driven an increase in our net finance costs despite the fact that our net cost of debt has declined marginally during the year. The reason for the decline in average cost of debt is that long term bonds which were issued at historically high interest rates are maturing and being refinanced at the current, comparatively lower, interest rates.

Income tax expense

		Year Ended 30 June
	2006		2005 Change 2006/2005
Income Tax Expense
Effective Tax Rate

In fiscal 2006, our income tax expense decreased by 21.0% to A\$1,380 million. The primary driver of the reduction in tax expense is lower profits for the year compared to fiscal 2005.

In fiscal 2006, the effective tax rate increased to 30.3% compared with the effective tax rate of 28.8% in fiscal 2005. The higher effective tax rate is due to a change in the taxation adjustments for items that have different treatments for accounting and taxation purposes, such as equity accounted FOXTEL losses and the depreciation of certain items of plant and equipment. In addition, the current year tax expense includes an amount for under provision of tax in the prior year that is A\$34 million higher than the amount included in fiscal 2005 for under provision in fiscal 2004.

Major subsidiaries - financial summaries

Below is a summary of the major reporting lines for our three largest subsidiaries: Sensis, TelstraClear and CSLNW. This information is in addition to the product analysis previously provided in the document and is intended to show these businesses as stand alone entities.

Sensis financial summary

	Year Ended 30 June
	2006	2005	Change	2006/2005
	(In A\$ millions)			$(\%$ change)
Sales revenue $\ldots \ldots \ldots \ldots \ldots \ldots \ldots \ldots \ldots \ldots \ldots \ldots$ 1.826		-1.708-	- 118	$6.9\%$
Total income		1.708	119	7.0%
Total expenses		(863)	(54)	6.3%
EBITDA		908	92	10.2%
$EBIT$	910	845	65	7.7%
CAPEX	100	83	17	20.5%
EBITDA margin	54.8%	53.2%		$1.6\%$

Amounts included for Sensis represent the contribution included in Telstra's consolidated result.

We are a leading provider of advertising and search services through our advertising business Sensis and its respective subsidiaries. Sensis provides advertising and local search solutions through a print, online, voice, wireless and satellite navigation network.

The 6.9% increase in sales revenue to A\$1,826 million during fiscal 2006 has primarily been driven by advertising and directories revenue as described in the Advertising and Directories product discussion. The growth in this area has been driven by good performance in White Pages and Yellow print and online. The inclusion of acquired entities in fiscal 2006 has also contributed to growth in the current year.

Operating expenses increased by $6.3\%$ due mainly to the following:

• Labour expenses grew by A\$18 million during fiscal 2006 due to organic growth of the workforce, redundancy costs and a A\$10 million write back of a deferred expense provision.
• Cost of goods sold increased by A\$14 million after the inclusion of a full 12 months of results from Universal Publishers acquired mid way through fiscal 2005; and
• Increased depreciation and amortisation expense by A\$27 million after commissioning new software, the inclusion of amortisation for Universal Publishers and Adstream and the revision of certain software service lives as part of our transformation strategy.

Cost management and growing yields and margins in print and online led to underlying EBITDA growth of 10.2% in fiscal 2006.

CSL New World Mobility Group financial summary

In February 2001, we acquired a 60% ownership interest in CSL. We paid US\$1,694 million (A\$3,085 million), including incidental acquisition costs, to acquire this controlling interest. In June 2002, we acquired the remaining 40% ownership interest in CSL as part of our redemption of a convertible note from PCCW. In March 2006, we merged the CSL entity with New World PCS to form CSLNW. This transaction involved us exchanging a 23.6% share in CSL and receiving a controlling interest in the merged entity of 76.4%.

CSLNW operates in the highly competitive Hong Kong mobile market and has delivered revenue growth in fiscal 2006 despite a difficult operating environment, characterised by significant market competition and local voice price erosion. CSL and New World PCS have retained their own brandings as they target different market segments. CSL remains Hong Kong's premium provider of mobile voice and data services while New World PCS targets value conscious customers with a low cost business model. The merged entity provides a much broader customer base for growth.

CSL New World financial summary

	Year Ended 30 June		Year Ended 30 June
	2006	2005	Change	2006	2005	Change
	A\$m	A\$m	$\mathscr{D}_{\mathcal{O}}$	HK\$m	HK\$m	$\mathscr{R}$
Total income $\ldots$ , $\ldots$ , $\ldots$ , $\ldots$ , $\ldots$ , $\ldots$ , 833		-735	13.3\% 4.831		4.308	$12.1\%$
Total expense $\ldots \ldots \ldots \ldots \ldots \ldots \ldots \ldots$ (757)		(648)		$16.8\%$ $(4.145)$	(3.583)	15.7%
EBITDA		-217	$10.6\%$	-1.390	1.272	$9.3\%$
$EBIT.$		-87	$(11.5)\%$	686.	-725	(5.4)%
$CAPEX.$	98	128.	$(23.4)\%$	568	755	$(24.8)\%$
EBITDA margin $\ldots \ldots \ldots \ldots \ldots \ldots \ldots$ 28.8% 29.5%			$(0.7)\%$	28.8%	29.5%	(0.7)%

Note: Amounts presented in HK\$ have been prepared in accordance with A-IFRS.

Amounts presented in A\$ represent amounts included in our consolidated result including additional depreciation and amortisation arising from consolidation fair value adjustments.

Amounts include three months of New World PCS in fiscal 2006.

Total income increased by 12.1% or HK\$523 million in fiscal 2006. The majority of the increase resulted from the inclusion of the New World PCS business from March 2006. This resulted in an 8.7% increase in total income year on year. The remaining revenue growth was driven by rising data, international voice, and prepaid revenues offset by a decline in local voice revenues after sustained pressure on prices. Mobile handset revenue also increased after recent handset promotions.

Total operating expenses increased by 15.7% mainly due to the following:

• the incorporation of costs after the merger with New World PCS;
• increased subsidies as part of heightened promotional activity to drive sales; and
• higher offshore outpayments associated with higher international voice revenues.

Depreciation and amortisation expense increased as CSLNW is now carrying higher network assets due to the roll out of its 3G network. EBITDA increased by 9.3% or HK\$118 million while EBIT decreased by 5.4% or HK\$39 million due to the impact of higher depreciation.

CSLNW continues to enhance its 3G network and promote 3G services through the deployment of pioneering technology and innovative applications. In February 2006, we announced the launch of Hong Kong's first 3G Mobile TV service enabling customers to enjoy a variety of news and "infotainment" stations.

TelstraClear financial summary

TelstraClear, the second largest full service carrier in New Zealand, has been operating in its current form since December 2001. In December 2001, we merged our 50% owned joint venture, TelstraSaturn and CLEAR Communications, to form TelstraClear. As part of this transaction, we acquired an additional 8.4% interest in the merged entity and began the consolidation of 58.4% of TelstraClear's results. In April 2003, we acquired the remaining 41.6% interest in TelstraClear and consolidated 100% of TelstraClear's results from that date.

TelstraClear financial summary

	Year Ended 30 June			Year Ended 30 June
	2006	2005	Change	2006	2005	Change
	A\$m	A\$m	$\mathscr{A}_0$	HK\$m	HK\$m	$\frac{q_e}{q_e}$
Total income		-625	$(0.8)\%$	-693-	676	2.5%
Total expense $\ldots \ldots \ldots \ldots \ldots \ldots \ldots \ldots$ (645)		(648)	$(0.5)\%$	(713)	(695)	2.6%
$EBITDA$		-112	(0.9)%	124	122	$1.6\%$
EBIT.		(24)	$4.2\%$	(20)	(19)	5.3%
CAPEX		115	9.6%	141	125	$12.8\%$
EBITDA margin					- 18.0%	(0.1)%

Note: Amounts presented in NZ\$ represent the New Zealand business excluding intercompany transactions and have been prepared in accordance with A-IFRS.

Amounts presented in A\$ represent amounts included in our consolidated result and include the Australian dollar value of adjustments to consolidate TelstraClear into the Group result.

In fiscal 2006, revenue increased by 2.5% to NZ\$693 million for the following reasons:

• the full year impact of the national HomePlan offering in the consumer segment; and
• the current year included the first whole year of Sytec Resources Limited and its controlled entities (Sytec) revenue after its acquisition in November 2004.

These increases were offset by:

• access and call revenue declines in the wholesale and small to medium enterprise segments due to price erosion caused by competition in the market. This was moderated by growth in our customer bases in those segments; and
• Internet revenues have declined, particularly in the second half, as reduced pricing plans have impacted yield in the consumer segment.

Total operating expense increased by 2.6% to NZ\$713 million due to the following:

• an increase in outpayments due to higher revenue; and
• a small increase in labour expenses driven by the inclusion of a full year of Sytec costs.

TelstraClear's acquisition of local ICT service provider, Sytec in November 2004 and its controlled entities was an important step to leverage TelstraClear's existing service capability and provided growth and opportunities in this segment in fiscal 2006. New Zealand is a strategically important market for our trans-Tasman customers and the combination of TelstraClear and Telstra enables us to provide customers on both sides of the Tasman with seamless communication and IT solutions.

REACH

REACH is primarily focused on meeting the increasing needs of its shareholders, Telstra and PCCW, as well as third party voice and satellite services. We are the premier provider of international voice and satellite services in Asia via the operation and management of the most diverse high-speed network in the region.

In February 2001, we sold our global wholesale business, including certain offshore controlled entities, to REACH in exchange for 50% ownership in REACH.

Since the original transaction, REACH has been operating in a difficult environment. Prices for international voice and data carriage have fallen, but growth in usage has not been sufficient to compensate for the loss in revenue caused by the price reductions. Consequently, we have previously been required to write down our investment, reducing the carrying value to nil. Equity accounting was suspended at that date and remains suspended. As a result, our share of net profits/(losses) in relation to REACH are not booked in the Telstra Group results.

Fiscal 2006 operational performance of the business continued to track according to plan with a focus on consolidation of a new operating model. Data volumes continue to grow strongly and voice business volumes are stable. REACH has also recently signed a memorandum of understanding (MOU) with a consortium of entities to plan and develop a proposal to build an international undersea cable linking South East Asia with the United States of America. In addition, in October 2005, REACH announced the launch of the first stage of its international IP enabled Next Generation Network.

Cash flow

			Year Ended 30 June
	2006	2005	Change	2006/2005
		(In A\$ millions)		$(\%$ change)
Receipts from customers $\ldots$ ,	25,229	24,526	703	2.9%
Payments to suppliers/employees	(14, 785)	(13, 848)	(937)	$6.8\%$
Net cash generated by operations	10.444	10,678	(234)	$(2.2)\%$
Income tax paid	(1,882)	(1,718)	(164)	9.5%
Net cash provided by operating activities $(1)$	8,562	8.960	(398)	$(4.4)\%$
Net cash used in investing activities $(1)$ (see table
below).	(4,012)	(3,766)	(246)	$6.5\%$
Operating cash flow less investing cash flow $(1)$	4,550	5,194	(644)	$(12.4)\%$
Movements in borrowings/finance leases	493	1.393	(900)	$(64.6)\%$
Employee share loans	24	19	5	26.3%
Dividends paid	(4.970)	(4, 124)	(846)	20.5%
Share buy-back		(756)	756.	$\hspace{0.1mm}-\hspace{0.1mm}$
Finance costs paid	(940)	(879)	(61)	6.9%
Purchase of shares for employee share plans	(6)		(6)
Net cash used in financing activities $(1)$	(5,399)	(4,347)	(1,052)	24.2%
Net increase/(decrease) in cash $\ldots$	(849)	847	(1,696)	$(200.2)\%$

(1) Due to the implementation of A-IFRS, we have revised the presentation of the cash flow summary and our statutory reported statement of cash flows. This has resulted in some reclassifications between our key cash flow totals (net cash provided by operating activities, net cash used in investing activities and net cash used in financing activities). Consequently, the 2005 comparative totals disclosed for these lines have changed from the amounts disclosed as at 30 June 2005. The most significant change is the reclassification of our finance costs paid from operating into financing, and the reclassification of interest received from operating into investing.

Net cash provided by operating activities

Our primary source of liquidity is cash generated from our operations. Net cash provided by operating activities includes receipts from trade and other receivables, payments to suppliers and employees, income tax paid, and GST received, paid and remitted to the Australian Taxation Office.

During fiscal 2006, net cash provided by operating activities decreased by 4.4% to A\$8,562 million. Higher revenue and lower working capital items were offset by higher expense payments. The key drivers of our increased revenue were our mobiles and broadband products. Our higher expense payments were mainly due to increased labour costs, in particular redundancy payments, our variable operating expenditure items that increase with revenue and our service contracts and agreements expenditure.

In addition, our cash paid to the Australian Taxation Office was A\$164 million higher in fiscal 2006 than in fiscal 2005 due to a low tax instalment rate requiring us to make a larger final tax payment in respect of fiscal 2005. The final payment in respect of fiscal 2005 was made in fiscal 2006.

Net cash used in investing activities

Net cash used in investing activities represents amounts paid for capital assets and investments, offset by cash receipts from the sale of capital assets and investments, and other cash receipts from our investing activities.

Net cash used in investing activities

		Year Ended 30 June
	2006	2005	Change	2006/2005
		(In A\$ millions)		$(\%$ change)
Switching	452	338	114	33.7%
Transmission	426	358	68	19.0%
Customer access	800	870	(70)	(8.0)%
Mobile telecommunications networks	1.043	497	546	109.9%
International assets	338	279	59	21.1%
Capitalised software $\ldots \ldots \ldots \ldots \ldots \ldots \ldots \ldots \ldots$	556	523	33	6.3%
Specialised network functions	237	291	(54)	$(18.6)\%$
Other	340	377	(37)	(9.8)%
Operating capital expenditure	4.192	3,533	659	18.7%
Other intangibles	63	- 6	-57	950.0%
Capital expenditure before investments	4.255	3.539	716	20.2%
Add: investment expenditure	48	590	(542)	(91.9)%
Capital expenditure and investments	4.303	4.129	174	4.2%
Sale of capital equipment, investments and other proceeds	(139)	(244)	105	$(43.0)\%$
Proceeds from other investments	(86)	(76)	(10)	13.2%
Repayment of loans to jointly controlled and associated
entities		37	(37)
Interest received	(66)	(78)	12	(15.4)%
Dividend received		(2)	2
Net cash used in investing activities	4.012	3.766	246	6.5%

In fiscal 2006, our expenditure on operating capital, intangibles and investments amounted to A\$4,303 million, an increase of 4.2% on the previous fiscal year. This growth was driven by our next generation network transformation program, which is part of our ongoing strategy of transforming the business.

The increases in our operating capital expenditure were across most capital expenditure categories, with the exception of minor decreases in customer access and specialised network functions. The drivers of our operating capital expenditure for fiscal 2006 were as follows:

• higher domestic switching as a result of our fixed line transformation program, which involves building a new IP core and the next generation ethernet transmission network. Further expenditure was also incurred to cater for increasing demand for broadband ADSL and specialised wideband services;
• higher transmission expenditure to support the new NEXT $G^{TM}$ wireless network and to provide capacity to support increased broadband demand for digital subscriber line (DSL) technology;
• lower expenditure on customer access due to the achievement of operational efficiencies and the use of new IP ADSL technology at a lower unit cost;
• significantly higher expenditure on our mobile networks, primarily due to two items: payments to Hutchison amounting to A\$312 million for the purchase of a 50% share of its 3G 2100 network, acquired in fiscal 2005 with payments deferred until fiscal 2006 and fiscal 2007; and costs incurred in relation to the roll out of our NEXT $G^{m}$ wireless network. Most of the expenditure incurred on the NEXT $G^{m}$ wireless network relates to

installing and updating our base stations to enable them to carry the new network. During fiscal 2006 we installed 3.500 base stations out of an intended long term program in excess of 5.000 base stations:

• higher expenditure on international assets, predominantly related to the purchase of additional international transmission capacity to facilitate increased Internet traffic with the United States;
• marginally higher expenditure on capitalised software as we embark on a three to five year program of transformation projects. In this early stage of the program we have been through a process of rationalising and streamlining our software applications; and
• lower expenditure on specialised network functions due to the postponement of a number of projects as we undergo a review to ensure that each project is aligned to our transformation initiatives. The expenditure we incurred during the year was mainly in relation to improving the reliability and robustness of the network and on improving the IP telephony network infrastructure platform.

Our expenditure on investments and other intangibles amounted to A\$111 million in fiscal 2006, compared with A\$596 million in fiscal 2005. Investment expenditure was significantly higher in fiscal 2005 predominantly due to our acquisitions of KAZ and PSINet.

In fiscal 2006 our cash payments for investments and intangibles resulted from the following items:

• A\$56 million for the acquisition of the TNS business assets and customer bases from our associated entity Keycorp Limited;
• A\$21 million for the acquisition of a further 25% of the issued share capital of Adstream Australia Limited. to increase our shareholding to 58% making Adstream a controlled entity;
• A\$5 million cash contribution to our joint venture entity FOXTEL; and
• other minor investments.

In fiscal 2005, our cash payments for investments resulted from the following items:

• A\$340 million for the acquisition of 100% of the issued share capital of KAZ;
• A\$124 million for the acquisition of 100% of the issued share capital of PSINet;
• A\$66 million for the acquisition of 100% of the issued share capital of ESA Holding Pty Ltd and its controlled entity Damovo (Australia) Pty Ltd (now known as Telstra Business Systems), and Damovo HK Limited; and
• A\$46 million for the acquisition of 100% of the issued share capital of Universal Publishers.

Our proceeds from the sale of capital equipment, sale of investments and other proceeds amounted to A\$139 million in fiscal 2006, compared with A\$244 million in fiscal 2005.

Our cash proceeds from asset sales in fiscal 2006 included the following:

• the sale of our share of Xantic B.V. of A\$89 million; and
• sale of property, plant and equipment amounting to A\$50 million.

Our cash proceeds from asset sales in fiscal 2005 included the following:

• the sale of our 1.7% shareholding in Intelsat Limited for A\$69 million;
• proceeds from sale of property, plant and equipment of A\$68 million; and
• the sale of our 5.3% shareholding in Infonet Services Corporation for A\$65 million.

During fiscal 2006 and fiscal 2005 we also received cash from other investment transactions. These included:

• receipt of A\$42 million as part of the settlement of the merger transaction with New World PCS in fiscal 2006:

• receipt of A\$18 million from a share buy-back performed by Xantic prior to our disposal of our interest in Xantic in fiscal 2006;
• receipt of A\$16 million from our associated entity Keycorp, due to a return of capital in fiscal 2006; and
• the redemption of the converting note issued by PCCW with a cash consideration of A\$76 million in fiscal 2005.

Our capital expenditure in fiscal 2007 is expected to be between A\$5,400 million and A\$5,700 million. This is significantly higher than our traditional expenditure levels which is largely due to transformational expenditure, including further construction of our new NEXT $G^{m}$ wireless network, and upgrading our customer access network by delivering a new fixed line IP core in the 5 major capital cities.

We also expect to incur future capital expenditure in the following areas:

• meeting ongoing customer demand for existing products and services, while ensuring service levels are improved;
• developing new products and services to meet the changing needs of our customers;
• asset lifecycle management:
• further development of our broadband and online infrastructure to meet future growth;
• providing telecommunications services to rural and remote areas; and
• internal business support infrastructure to ensure continued productivity improvements, operational efficiencies and customer relationship process improvements.

We believe our cash flow from operating activities and available borrowings will be sufficient to meet our anticipated capital expenditure and investment requirements.

Net cash used in financing activities

Our net cash used in financing activities increased in fiscal 2006 by 24.2%.

A significant portion of our net financing cash outflows related to the payment of dividends and, in fiscal 2005, a share buy-back. The amount paid to shareholders in fiscal 2006 was largely consistent with the combined amount paid by way of dividends and the share buy-back in fiscal 2005. In fiscal 2006, shareholders received the payment of two special dividends of A\$0.06 each per share, amounting to A\$1,494 million, one was the final dividend for fiscal 2005 and the other was the interim dividend for fiscal 2006.

We also receive and repay significant amounts in relation to our borrowings to fund our working capital requirements and other business needs.

The net increase in cash used in financing activities is due to higher dividends and a share buy-back in fiscal 2005, partially offset by a higher net level of proceeds from our debt issuances in fiscal 2005. Our net proceeds from debt were high during fiscal 2005 due to the refinancing of debt which matured during the year and our need to increase our level of liquidity to fund working capital.

During the year, we received A\$8,641 million in borrowed funds and repaid A\$8,141 million. In fiscal 2005, we received A\$7,416 million in borrowed funds and repaid A\$6,007 million. This resulted in a net increase in cash of A\$1,909 million over the two-year period, which assisted in funding the outflows from the payment of dividends and finance costs.

Balance Sheet

	2006	2005	Change	2006/2005
		(In A\$ millions)		$(\%$ change)
Current assets
Cash and cash equivalents $\dots \dots \dots \dots \dots \dots \dots$	689	1.548	(859)	$(55.5)\%$
Other current assets	4,190	4,034	156	3.9%
Total current assets $\ldots, \ldots, \ldots, \ldots, \ldots, \ldots, \ldots, \ldots$	4,879	5,582	(703)	$(12.6)\%$
Non current assets
Property, plant and equipment	23,622	22,891	731	3.2%
Intangibles $-$ goodwill $\ldots \ldots \ldots \ldots \ldots \ldots \ldots$	2,073	2.037	36	1.8%
Intangibles — other $\dots \dots \dots \dots \dots \dots \dots \dots \dots$	4,050	4.292	(242)	(5.6)%
Other non current assets	1,551	409	1,142	279.2%
Total non current assets $\ldots$ ,	31,296	29,629	1.667	5.6%
Total assets	36,175	35,211	964	2.7%
Current liabilities
Borrowings	1,969	1,507	462	30.7%
Other current liabilities	-5,917	4,905	1,012	20.6%
Total current liabilities	-7,886	6,412	1,474	23.0%
Non current liabilities
Borrowings	11.409	10.941	468	4.3%
Other non current liabilities	4,048	4,200	(152)	(3.6)%
Total non current liabilities $\ldots, \ldots, \ldots, \ldots, \ldots, \ldots$	15,457	15,141	316	2.1%
Total liabilities	23,343	21,553	1,790	8.3%
Net assets	12,832	13,658	(826)	(6.0)%
Equity
Telstra Entity	12,586	13.656	(1,070)	(7.8)%
Minority interests	246	-2	244
Total equity	12,832	13.658	(826)	$(6.0)\%$

We continue to maintain a strong financial position with net assets of A\$12,832 million as at 30 June 2006 and A\$13,658 million as at 30 June 2005. The decrease in net assets in fiscal 2006 of A\$826 million was due to an increase in total liabilities of A\$1,790 million, offset by higher total assets of A\$964 million.

The movement in total assets of A\$964 million was primarily due to:

• cash assets decreased by A\$859 million partially due to the proceeds on our EUR1 billion bond issue being received just prior to 30 June 2005, which was subsequently invested in the short term money market. The current level of cash is more reflective of our normal cash holdings;
• our property, plant and equipment increased by A\$731 million, largely due to high capital expenditure on our network and our new fixed line IP core driven by our next generation network transformation projects;
• other intangibles decreased by A\$242 million, due mainly to the amortisation of our software assets exceeding expenditure on new software during the year as we rationalised and streamlined many of our software applications as part of our business transformation; and

• other non current assets increased by A\$1,142 million mainly due to an increase in the actuarially determined value of our defined benefit pension asset.

The movement in total liabilities of A\$1,790 million was primarily due to:

• total borrowings, current and non-current, increased by A\$930 million. This increase reflected our need to increase our level of liquidity to fund our working capital and business requirements, along with two special dividend payments made during the fiscal year;
• other current liabilities increased by A\$1,012 million primarily due to an increase in our trade creditors and accruals, reflecting the large amount of activity, in particular construction activity, undertaken close to the end of the fiscal year. In addition, current and non-current liabilities include a provision for restructuring and redundancy expenses planned to be incurred as part of our transformation of the business mainly over the next two years; and
• other non-current liabilities decreased by A\$152 million primarily due to a change in our cross currency swap position in line with currency movements and our hedging requirements.

Liquidity and capital resources

Capitalisation

		As at 30 June 2006
	A\$ million	$US\$ million(1)
Cash and cash equivalents	689	511
Short term debt $(2)(3)$
Bank loans	111	82
Bills of exchange and commercial paper	1.457	1.082
Other loans	394	293
Finance leases	7	5
Derivative financial instruments $(\text{net})(4)$	(9)	(7)
Short term debt	1.960	1,455
Long term $\text{debt}(3)$
Telstra bonds $\ldots \ldots \ldots \ldots \ldots \ldots \ldots \ldots \ldots \ldots \ldots \ldots \ldots \ld$	2.613	1.939
Other loans (unsecured)	8.748	6.494
Finance leases	48	36
Derivative financial instruments $(\text{net})(4)$ ,	377	280
Total long term debt	11,786	8,749
Equity
Share capital	5.569	4,134
Reserves	(160)	(119)
Retained profits(5)	7.177	5.327
Minority interests	246	-183
Total equity	12,832	9,525
Total capitalisation(6)	26,578	19,729

(1) Translated at the noon buying rate on 30 June 2006 of $A$1.00 = US$0.7423$ .

(2) Includes the current portion of long term debt.

⁽³⁾ No borrowings are guaranteed by third parties. All of our significant borrowings were unsecured, except for finance leases which are secured, as the rights to the leased assets revert to the lessor in the event of default.

• (4) The presentation of our short term and long term debt is consistent with note 18 to our consolidated financial statements, except for derivative financial instruments which are separately disclosed in note 16 and note 20 respectively.
• (5) On 10 August 2006, we declared a fully franked final dividend of A\$1,739 million, payable on 22 September 2006. This dividend was not deducted from retained profits as at 30 June 2006 and was disclosed as a post balance date event, refer to note 34 to our consolidated financial statements for further detail.
• (6) Total capitalisation consists of short term debt, long term debt and equity, including minority interests.

Cash and cash equivalents as at 30 June 2006 was A\$689 million compared with A\$1,548 million as at 30 June 2005. Cash and cash equivalents are predominantly held in Australian dollars. As at 30 June 2006, our total debt (including derivative financial instruments) was A\$13,746 million compared with A\$13,319 million as at 30 June 2005. After deducting cash and cash equivalents, net debt as at 30 June 2006 was A\$13,057 million compared with A\$11,660 million as at 30 June 2005. In fiscal 2006, the net debt position increased largely due to higher debt holdings to fund our working capital requirements. We believe our balance sheet continues to have strong capital settings.

The majority of our total debt consisted of foreign currency denominated borrowings sourced from a variety of foreign currency markets. These borrowings are generally swapped into Australian dollars at draw down through to maturity to generate Australian dollar obligations. Our current borrowings (including derivative financial instruments) that mature in less than 12 months amount to A\$1,960 million maturing within the fiscal 2007 year, representing approximately 14.3% of our total debt.

As at 30 June 2006, we had access to A\$625 million, HK\$45 million and US\$200 million of committed standby bank lines. These comprise bilateral arrangements of approximately one year duration with ten major banks that fall due for renewal at various times throughout the year.

We have four commercial paper programs with a total nominal borrowing capacity of A\$2 billion, US\$4 billion, EUR4 billion and NZ\$0.5 billion (the New Zealand dollar facility is technically unlimited, but we estimate a practical limit of around NZ\$0.5 billion based on the efficient capacity of the New Zealand market). In each case, we issue commercial paper through dealers on a quotation (non underwritten) basis. Our commercial paper facilities are not committed and do not provide guaranteed access to funds. As at 30 June 2006, we had borrowed A\$1,123 million under our Australian dollar facility and NZ\$406 million under our New Zealand dollar facility. We had no borrowings under our United States dollar and Euro commercial paper facilities at year end. Generally, our facilities are operational unless we default on any terms applicable under the relevant agreements or we become insolvent.

A key objective with our short term facilities is to provide ready and efficient access to substantial borrowings capacity in order to ensure that we can comfortably meet any reasonable unforeseen demands for funding. We have established commercial paper programs as outlined above that provide diverse and reliable sources of funding. The maturity of our total debt portfolio is generally structured in consideration of expected cash flows from business investments and activities.

Our current liabilities are typically in excess of our current assets, as is common with most incumbent telecommunications companies. We had negative working capital of A\$3,007 million as at 30 June 2006 compared with A\$830 million as at 30 June 2005. We define our working capital as the difference between current assets and current liabilities. We believe that our negative working capital position does not create a liquidity risk because we can delay the timing of discretionary capital expenditure should cash inflows from our diverse customer base diminish at any point in time. In addition, our commercial paper programs and standby bank lines provide us with readily available sources of liquidity at short notice when the need arises. As a result, these contributing factors and our existing working capital enables us to meet our present and future expenditure obligations, including the potential realisation of any contingencies, as required.

In fiscal 2006, the increase in our negative working capital position to A\$3,007 million was mainly due to a decrease in our cash and cash equivalents, together with an increase in our trade and other payables. The decrease in cash and cash equivalents was mainly due to a higher cash position at 30 June 2005 after the receipt of a substantial Euro borrowing late in June 2005, which generated a one off large cash surplus. This borrowing just prior to year end was not repeated in fiscal 2006. The increase in trade and other payables reflects additional accrued expenditure associated with the roll out of the NEXT $G^TM$ wireless network.

In fiscal 2006, net cash provided by operating activities amounted to A\$8,562 million compared with A\$8,960 million in fiscal 2005. Operational cash flows continue to be our primary source of liquidity and generate funding for capital expenditure, investment acquisitions and dividend payments to our shareholders. Our operating cash flows continue to remain strong and relatively consistent each month. The major spikes in cash flows across our business arise from significant receipts such as asset and investment sales, and from significant outgoings such as the acquisition of large assets and investments, dividend payments and tax instalments. In general, we use our cash generated and other liquid assets, as well as our short term debt, to cover our major outgoings. Refer to "Operating and Financial Review and Prospects — Cash flow" for further discussion.

The majority of our funding is generated by the operations of Telstra Corporation Limited, the parent entity in the group. As a result, we are not reliant on dividends from controlled entities for our liquidity needs. We are not aware of any restrictions on the payment of dividends apart from those specified in the Corporations Act 2001, common law requirements or through local jurisdictional obligations.

During fiscal 2006, we undertook several new long term private placement borrowings that included:

• a JPY5 billion loan that will mature in September 2013;
• JPY1 billion, JPY4 billion and JPY3 billion note that will mature in November 2012, November 2015 and June 2016 respectively; and
• a USD\$20 million and USD\$150 million note that will mature in December 2011 and December 2015 respectively.

During fiscal 2005, we undertook several new long term borrowings that included:

• a EUR500 million ten year bond that will mature in July 2014;
• two A\$500 million domestic bonds of eight and ten years duration that will mature in November 2014 and April 2015 respectively;
• two NZD\$100 million bonds of seven and ten years that will mature in November 2011 and November 2014 respectively;
• a CHF300 million eight year bond that will mature in April 2013; and
• a EUR1,000 million bond, comprising a EUR500 million tranche that will mature in June 2010 and a further EUR500 million tranche that will mature in July 2015.

In future reporting periods, we believe capital expenditure will continue to be financed largely from our cash flow from operations. Maturing long term debt of A\$401 million in fiscal 2007 is expected to be principally refinanced by new debt. While borrowings will increase in fiscal 2007 to fund our working capital requirements, including dividend payments, we continue to be confident of remaining within our financial parameters.

Our borrowings profile is managed centrally by our treasury department, which is part of our Finance and Administration business unit. For additional information regarding our borrowings profile, refer to note 18 to our consolidated financial statements.

Our activities result in exposure to a number of financial risks including market risk (interest rate risk, foreign currency risk and other price risk), credit risk, operational risk and liquidity risk. Our overall risk management program seeks to mitigate these risks and reduce overall volatility on our financial performance. We enter into derivative transactions in accordance with Board approved policies to manage our exposure to market risks and volatility of financial outcomes that arise as part of our normal business operations. These derivative instruments create an obligation or right that effectively transfers one or more of the risks associated with an underlying financial instrument, asset or obligation.

We maintain a portfolio of derivative contracts to manage risks that arise from our business. The derivatives are principally forward foreign currency contracts, interest rate swaps and cross currency swaps. Under A-IFRS, these

instruments are consolidated on our balance sheet. As at 30 June 2006, our net derivative financial instruments resulted in a net liability of A\$368 million recorded in our consolidated financial statements.

Our derivative instruments are managed centrally by our treasury department, which is part of our Finance and Administration business unit. For additional information regarding the nature, business purposes and importance of our derivative instruments, see "Quantitative and qualitative disclosures about market risk" and note 35 to our consolidated financial statements.

Our credit ratings by the three major rating agencies are currently:

	Long Term Short Term Outlook
Standard and Poors
Moody's
Fitch

During fiscal 2006, Standard and Poors, and Moody's Investors Service both adjusted their long term ratings down by one grade to reflect the decline in PSTN revenues, the uncertain regulatory outlook and the repositioning of target key financial parameters during the financial year (detailed below). All three rating agencies have Telstra on a negative outlook. Ratings are not a recommendation to purchase, hold or sell securities, and may be changed, superseded or withdrawn at any time.

We continually review our capital structure and associated financial flexibility in light of our environment, overall operating conditions and future outlook. Factors considered include:

• the strength of our operating eash flows;
• requirements for capital expenditure and investments;
• access to funding from the capital markets;
• our gearing and associated credit rating; and
• the regulatory environment and its potential impact.

The Board has approved a set of target levels for selected key financial parameters, which indicate comfort zones that we consider consistent with the financial flexibility required in light of our overall business and objectives. These parameters are continually reviewed and subject to change at any point. The parameters were last changed at our strategic review announcement on 15 November 2005 and are detailed below:

• debt servicing of 1.7 to 2.1 times, representing our net debt divided by earnings before interest, income tax expense, depreciation and amortisation (EBITDA);
• net debt gearing of 55.0% to 75.0%, representing net debt divided by total capitalisation (net debt plus equity); and
• interest cover of greater than 7 times, representing EBITDA divided by net finance costs.

Under our previous capital management policy, the Board intended to return an additional A\$1,500 million to shareholders for three consecutive fiscal years ending fiscal 2007 through special dividends and share buy-backs, subject to us maintaining our target financial parameters. In November 2005 as part of our company wide strategic review, we decided not to proceed with the A\$1,500 million capital return in the third year of the program. We are now directing those funds to our transformation program.

During the two-year period, we returned the following additional capital returns to our shareholders, in addition to our ongoing ordinary dividends:

• during fiscal 2006, we paid a special dividend of A\$0.06 per share (A\$746 million) in March 2006 with our interim dividend for fiscal 2006;

• during fiscal 2006, we paid a special dividend of A\$0.06 per share (A\$746 million) in October 2005 with our final dividend for fiscal 2005;

• during fiscal 2005, we paid a special dividend of A\$0.06 per share (A\$746 million) in April 2005 with our interim dividend for fiscal 2005; and

• during fiscal 2005, we completed an off-market share buy-back of 185,284,669 ordinary shares in November 2004. The cost of the share buy-back comprised purchase consideration of A\$750 million and associated transaction costs of A\$6 million.

It is the current intention of the Board to declare ordinary dividends of A\$0.28 per share for fiscal 2007. This assumes that we continue to be successful in implementing our transformation strategy and there are no further material adverse regulatory outcomes during fiscal 2007. The Board will make their final decision on the future amount of dividends in its normal cycle having regard to our earnings and cash flow as well as future regulatory impacts and all other factors that affect our operations.

Contractual obligations and commercial commitments

In the ordinary course of business we enter into agreements for the supply of products and services to support our business needs. While the liability under these agreements only arises on supply, we have a commitment to acquire the particular products and services under the relevant agreements. In addition, we are obligated to meet our long term debt requirements.

Contractual obligations and commercial commitments as at 30 June 2006

			Amount of Expiration per Period
	Total Amounts Committed	Within 1 Year	Within $1-2$ Years	Within $2 - 3$ Years	Within $3 - 4$ Years	Within 4.5 Years	After 5 Years
				(In A\$ millions)
Expenditure commitments:(1)
Property, plant and equipment expenditure	776	665	62	32	9	6	2
Intangible commitments	305	159	130	16
Non-cancellable operating $leases(2)$	1,530	424	290	201	139	118	358.
Finance leases	55	7	7	7	4	2	28
FOXTEL commitments $(3)$	1,677	144	113	93	95	92	1,140
Other expenditure commitments	704	337	123	83	120	19	22
Total contractual obligations and commercial commitments $\dots \dots$	5,047	1,736	725	432	367	237	1,550
Long term debt obligations: (4)
Long term debt obligations $\dots \dots \dots$	11.791	394	1,373	581	1,315	2,642	5,486
Unamortised discount	(36)			(2)	(2)		(32)
	11,755	394	1,373	579	1,313	2,642	5,454
Total contractual obligations and commercial commitments (including long term debt obligations) $\ldots \ldots$	16,802	2,130	2,098	1,011	1,680	2.879	7.004

(1) The presentation of our commitments is consistent with note 26 to our consolidated financial statements.

(2) In addition to our non-cancellable leases, we have commitments under cancellable operating leases amounting to A\$356 million.

(3) On 31 July 2006, FOXTEL entered into a new A\$600 million syndicated secured term loan facility to fund the refinancing of previous loan facilities. Refer to "Operating and Financial Review and Prospects - Related party transactions - FOXTEL" for further details. As a result, we no longer have a share of FOXTEL's commitments relating to digital set top box units, which reduced our share of the commitments by A\$141 million.

(4) Our long term debt obligations include the current portion of long term debt, however it excludes our derivative financial instruments and our finance leases. Our finance lease commitments are included separately in the above table. Additional details regarding the split of our long term debt obligations is provided in note 18 to our consolidated financial statements. Refer to "Liquidity and capital resources" for further discussion regarding our debt obligations.

Our property, plant and equipment expenditure commitments mainly relate to committed expenditure to build and improve our networks, enhance our network software and meet our future hardware requirements. Our commitments for intangibles mainly relate to committed expenditure for future business software requirements and license obligations. Our commitments include expenditure relating to our transformation program.

Our operating lease commitments primarily relate to lease agreements we have entered into for the following:

• rental of land and buildings, over an average term of seven years;
• rental of motor vehicles, caravan huts, trailers and mechanical aids over an average term of between two and twelve years, depending on the type of vehicle; and
• rental of personal computers and related equipment over an average term of three years.

Our finance lease commitments mainly relate to capitalised property leases and leases for IT equipment to support our client requirements for managed service solutions. In addition to our finance lease commitments, we have previously entered into US finance leases with several entities incorporated in the Cayman Islands relating to communications exchange equipment. We have provided guarantees over the performance of these entities under defeasance arrangements, whereby lease payments are made on our behalf by the entities over the remaining term of the finance leases. Refer to note 26 and note 27 to our consolidated financial statements for further details.

The FOXTEL commitments primarily relate to our 50% share of the FOXTEL partnership's commitment to acquire subscription television programming that is subject to minimum subscriber guarantee levels. The minimum subscriber payments fluctuate in accordance with price escalation/reduction formulae contained in the agreements, as well as foreign currency movements. In addition, FOXTEL has other commitments for satellite transponder costs and digital set top box units. Due to the joint and several nature of the FOXTEL partnership agreements, we are also contingently liable to the extent of our FOXTEL partners' share of certain commitments should FOXTEL and/or the other FOXTEL partners default on their payment obligations under these agreements.

Our other expenditure commitments of A\$704 million relate to various commitments for engineering and operational support services, information technology services and building maintenance. In particular, these commitments include the following items:

• commitments relating to service contracts for general maintenance and support of our hardware and software:
• commitments relating to the purchase of wavelengths to enhance our international operational capabilities, amounting to A\$70 million;
• commitments to provide our call centre partners with a minimum number of calls during the duration of our contracts with these partners, amounting to A\$133 million; and
• commitments for future sponsorship and advertising expenditure in our marketing area, amounting to A\$44 million.

Off balance sheet arrangements

As at 30 June 2006, we had provided indemnities, performance guarantees, financial support and other arrangements to various entities. Our off balance sheet arrangements include:

• arrangements with our joint venture entities such as REACH, FOXTEL and the 3GIS Partnership; and

• guarantees over the performance of third parties incorporated in the Cayman Islands under defeasance arrangements, whereby finance lease payments for communications exchange equipment are made on our behalf by the third parties.

The features and counterparties involved in our indemnities, performance guarantees, financial support and other arrangements are detailed in note 27 to our consolidated financial statements. We do not have any other significant off balance sheet arrangements, other than those disclosed in note 27 to our consolidated financial statements.

Related party transactions

The following discussion summarises our significant transactions with related parties, other than our controlled entities and key management personnel. For discussion on our related party transactions with controlled entities and key management personnel, refer to note 33 to our consolidated financial statements.

REACH

In fiscal 2001, we formed REACH, a 50/50 joint venture with PCCW Limited (PCCW), which merged our respective international infrastructure assets. REACH is a major carrier of international voice traffic. It provides outsourcing services in support of Telstra's and PCCW's international voice and data services. In addition, it also provides third party voice and satellite services to customers other than PCCW and us. Upon the formation of REACH, we agreed with PCCW to enter into contractual arrangements with the jointly controlled entity for the provision of voice, data and Internet connectivity services. We use these services primarily in connection with our retail international telecommunications business.

Our purchases from REACH were A\$198 million in fiscal 2006 compared with A\$226 million in fiscal 2005. These amounts were mainly for both the purchase of, and entitlement to, capacity and connectivity services. The purchases were made in line with market prices. We also made sales to REACH for international inbound call termination services, construction and consultancy of A\$61 million in fiscal 2006 and A\$71 million in fiscal 2005. These transactions are in the ordinary course of business and are on normal commercial terms and conditions.

During fiscal 2005, REACH made several improvements to its operating model including the decision that its data capacity would be consumed entirely by its shareholders. PCCW and Telstra continue to experience significant traffic growth in recent years, which will see both companies utilising virtually all of REACH's capacity. REACH continues to provide its third party voice and satellite services to consumers other than PCCW and us.

As part of these improvements, REACH allocated its international cable capacity between PCCW and us, via an indefeasible right of use (IRU) agreement. As consideration for the IRU, we discharged our rights under a previous capacity prepayment arrangement and the accrued interest on the prepayment. As a result, the total consideration amounted to A\$205 million (US\$157 million). For the Telstra Group, the IRU is deemed to be an extension of our investment in REACH resulting in the IRU having a carrying value of A\$nil in the consolidated financial statements reflecting the recognition of equity accounted losses in REACH. Over the period of the IRU, we pay REACH an outsourcing fee for managing our cable usage on a cost plus mark up basis.

As part of the acquisition of the IRU, we agreed to fund half of the committed capital expenditure that REACH is contractually obliged to pay to its capacity providers until fiscal 2022. We have recognised a provision in our balance sheet of A\$52 million in fiscal 2006 and A\$90 million in fiscal 2005. In fiscal 2006, the decrease in the provision was due to amounts drawn down by REACH for expenditure and the unwinding of the discount rate arising from the passage of time. PCCW has committed to fund the other half of REACH's capital expenditure. In the event that PCCW fails to make the payments under their commitment, we have no obligation to fund PCCW's share of the commitment.

Together with PCCW, we previously bought out a loan facility owed to a banking syndicate by REACH and its controlled entity, Reach Finance Ltd. Our share of the acquisition cost was US\$155.5 million, which was recognised as a receivable at the date of the transaction. We provide for the non recoverability of this receivable as we do not consider that REACH is in a position to repay the loan in the medium term. Due to the restructuring of our arrangements with REACH in fiscal 2005, the terms of the maturity were altered such that the facility is now an

interest free loan and repayable on or after 31 December 2010 upon the giving of 6 months notice by both PCCW and us.

In addition, we previously agreed with PCCW to provide a US\$50 million revolving working capital facility to REACH to assist it in meeting their ongoing operational requirements. Our share of this facility is US\$25 million. Draw downs under this facility must be repaid at the end of each interest period and fully repaid by 31 December 2007. As at 30 June 2006, REACH had not made any draw down under this facility. We have no joint or several liability relating to PCCW's US\$25 million share of the working capital facility.

The revised loan facilities and working capital arrangements in fiscal 2005 provided REACH with greater flexibility and a more viable capital structure. It also certified our ongoing ownership of this core infrastructure. ensuring that we have the continued capacity to meet our international carriage service requirements.

FOXTEL

Our 50% owned pay television joint venture FOXTEL uses capacity on our HFC cable network. As part of the arrangements with our joint venture partners. News Corporation Limited, and Publishing and Broadcasting Limited, we are the exclusive long term supplier of cable distribution services for FOXTEL's subscription television services in our cabled areas. We also receive a share of FOXTEL's cable subscription television revenues. Further details about our arrangements with FOXTEL are included in the "Information on the Company — Subscription television".

We have entered into arrangements with FOXTEL, whereby we are able to bundle and resell FOXTEL services to our customers, including pay television content, as part of our ongoing product bundling initiatives. Our purchases from FOXTEL of pay television services were A\$250 million in fiscal 2006 compared with A\$218 million in fiscal 2005. The increase in fiscal 2006 was primarily driven by growth in bundled FOXTEL subscribers. The purchases enabled us to resell FOXTEL services to our customers and facilitate product bundling initiatives. In fiscal 2006, we generated HFC cable related revenue from FOXTEL of A\$84 million compared with A\$65 million in fiscal 2005, which includes revenue for carriage services, cable installations and service calls. The increase in fiscal 2006 was mainly due to additional promotional activity which increased services in operation and a scheduled FOXTEL contract rate increase. These transactions are in the ordinary course of business and are on normal commercial terms and conditions.

FOXTEL has other commitments amounting to A\$3,354 million as at 30 June 2006 of which we have a 50% share amounting to A\$1,677 million. The majority of these commitments relate to minimum subscriber guarantees for pay television programming agreements, as well as the partnership commitments for satellite transponder costs and digital set top box units. Due to the joint and several nature of the FOXTEL partnership agreements, we are also contingently liable to the extent of our FOXTEL partners' share of the commitments for minimum subscriber guarantees and satellite transponder costs should FOXTEL and/or the other FOXTEL partners default on their payment obligations under these agreements. Our contingent liability as at 30 June 2006 amounted to A\$1,531 million. During the two-year period, FOXTEL has continued to meet its obligations under these arrangements and as a result, we have not paid any significant amounts to meet the minimum subscriber guarantees and other FOXTEL commitments. Refer to "Operating and Financial Review and Prospects - Contractual obligations" and "Operating and Financial Review and Prospects — commercial commitments" and note 26 and note 27 to our consolidated financial statements for further information.

Previously, FOXTEL entered into a A\$550 million bank facility arrangement to fund its full digital conversion and launch of new digital services. As part of this arrangement, we and FOXTEL's other ultimate shareholders entered into an Equity Contribution Deed (ECD) whereby FOXTEL is required to call on a maximum of A\$200 million in equity contributions in certain specified circumstances, as necessary, to avoid default of a financial covenant. These equity contributions are based on ownership interests and as a result, our maximum contingent liability is A\$100 million. We have no joint and several liability relating to our partners' obligations under the ECD.

On 31 July 2006, FOXTEL entered into a new A\$600 million syndicated secured term loan facility to fund the refinancing of previous loan facilities (including the A\$550 million syndicated facility previously detailed), and to enable it to meet future cash flow and expenditure requirements.

The ECD entered into by us and FOXTEL's other ultimate shareholders has been terminated. Under this new arrangement, recourse to our controlled entity Telstra Media Pty Ltd, as a FOXTEL partner, is limited to the assets of the FOXTEL Partnerships.

3GIS Partnership

During fiscal 2005, we established a joint venture partnership with Hutchison 3G Australia Pty Ltd (H3GA), a subsidiary of Hutchison Telecommunications (Australia) Limited, to jointly own and operate H3GA's existing 3G radio access network (RAN) and fund network development. The H3GA RAN is the core asset of the joint venture, known as the 3GIS partnership. In return for 50% ownership of the asset, we paid H3GA A\$450 million in instalments over two years ending 3 July 2006. We paid A\$312 million in fiscal 2006 and A\$22 million in fiscal 2005 for the acquisition of these assets. The balance outstanding as at 30 June 2006 was settled on 3 July 2006 and is reflected in our trade and other payables at 30 June 2006.

During the two-year period, we provided interest free funding to 3GIS for operational expenditure purposes. As a result, we have recognised our share of the loan outstanding by the 3GIS partnership amounting to A\$14 million as at 30 June 2006 and A\$32 million as at 30 June 2005. The loan is classified as a non current receivable in our consolidated financial statements.

Research and development

Our research and development activities cover diverse areas of our business and focus on developing:

• new competitive products for our customers;
• product innovation and differentiation;
• service quality improvements; and
• long term strategic positioning.

Our research and development expenditure includes amounts expensed in the income statement and amounts capitalised in software developed for internal use and property, plant and equipment. Items include:

• research and development carried out directly by us in our research laboratories;
• research and development expenditure contracted out by us, for which the resultant intellectual property is owned by the contractor;
• research and development expenditure incurred in the development of certain software; and
• support and other research and development expenditures.

For the purposes of this 2006 Supplemental Information, we estimate the amount of research and development expenditure incurred over the past year. The amount of the actual expenditure is not determined until we complete our research and development assessment process in the following April of each fiscal year. For fiscal 2005, we estimated expenditure of A\$148 million, which later was determined to be A\$157 million. For fiscal 2006, we estimate that we have spent A\$146 million. We have included A\$23 million in fiscal 2006 and A\$29 million in fiscal 2005 of this total amount spent in the income statement as research and development expenses.

In future years, we expect our research and development to include expenditure on the following key activities:

• broadband access provision (both fixed and mobile);

• convergence of mobile and online services;

• IP networks: and

• network and service management

Segment information

Business segments

Our business is organised and managed by business unit, as described under "Information on the Company — Organisational structure". This internal structure provides the initial basis for determining our business segments. Our business segments are predominantly distinguishable by the different type of customers we deliver our key products and services to.

The main adjustments from our internal management reporting structure to our reported business segments are in relation to certain offshore operations. For internal management reporting purposes, our TelstraClear group (TelstraClear) is included with Telstra Enterprise and Government, CSLNW is a business unit in its own right, and the International Head Office group is included with Strategic Marketing. For segment reporting purposes, these offshore operations are reported as part of a segment that we have called Telstra International.

Our reportable business segments as at 30 June 2006 were:

• Telstra Consumer Marketing and Channels;
• Telstra Business;
• Telstra Enterprise and Government:
• Telstra Wholesale;
• Sensis:
• Telstra International; and
• Telstra Operations.

In addition, various business units that do not qualify as business segments in their own right have been aggregated into an "Other" category for segment reporting purposes. The 'Other' category consists of Telstra Country Wide®, Telstra BigPond®, Telstra Media and the Strategic Marketing business units, as well as our corporate areas. Please refer to note 5 to our consolidated financial statements for details of the major products and services provided by each of our business segments.

During fiscal 2006, we have restructured our business segments as follows:

• we created a new business segment named Telstra Business. The Telstra Business group was drawn from the Telstra Consumer Marketing and Channels (formerly known as Telstra Consumer and Marketing), Telstra Country Wide^® and the Telstra Enterprise and Government (formerly known as Telstra Business and Government) business segment;
• we created a new business segment named Telstra Operations. This group combined Telstra Services (formerly known as Infrastructure Services), Telstra Technology, Innovation and Products, and Operations Support which moved from being reported within our corporate areas; and
• we created a new business unit named Strategic Marketing. This group was drawn from various business units across Telstra comprising mainly Telstra Consumer Marketing and Channels. This business unit forms part of the Other category.

In addition, we restructured our existing business unit, Telstra Country Wide^® during fiscal 2006. In prior years, our segment policy was to recognise the results of our consumer, small business, enterprise and some government customers residing outside the mainland state capital cities, in outer metropolitan areas, and in Tasmania and Northern Territory in the Telstra Country Wide^® business segment. In fiscal 2006, the results of Telstra Country Wide® were allocated to the Telstra Consumer Marketing and Channels, Telstra Business and Telstra Enterprise and Government business units depending on the type of customer served.

Analysis of segment results

We have discussed the segment results of each reportable segment separately over the two-year period. A detailed discussion and analysis of the changes in revenue for each of our major product groups and principal operating expense categories is provided in "Operating revenue" and "Operating expenses" respectively.

The following table provides a summary of our revenue and EBIT for each of our business segments. For additional detailed financial information on our business segment results, including intersegment revenues, see note 5 to our consolidated financial statements.

During fiscal 2006, we changed our segment accounting policy on interconnection revenue. In previous financial years, our segment accounting policy was to recognise revenue relating to interconnection entirely in our Telstra Wholesale business segment. In fiscal 2006, some parts of the revenue earned from interconnection were allocated to the Telstra Consumer Marketing and Channels, Telstra Business and Telstra Enterprise and Government business segments to match the revenue recognised with the associated expense. As a result, revenue in Telstra Wholesale decreased by A\$633 million and revenue increased in Telstra Consumer Marketing and Channels by A\$500 million. Telstra Business by A\$52 million and Telstra Enterprise and Government by A\$81 million in fiscal 2005 to reflect this change in policy.

We have restated all our comparative information to reflect the current reporting position as if all our new business segments and segment accounting policies existed in the prior year.

For segment reporting purposes, we have reallocated certain items between the respective business segments pursuant to the definitions of segment revenues and segment expenses contained in the applicable accounting standard, where a reasonable allocation basis exists. Where no reasonable allocation basis exists, we have not reallocated individual items to alternative segments as outlined below. For segment reporting purposes, these items are reported within the same business segment as for internal management reporting.

Currently, sales revenue associated with mobile handsets for Telstra Consumer Marketing and Channels, Telstra Business and Telstra Enterprise and Government are allocated totally to the Telstra Consumer Marketing and Channels segment, with the exception of some products sold in relation to small to medium enterprises which are allocated to Telstra Business. Ongoing prepaid and postpaid mobile revenues derived from our mobile usage is recorded in Telstra Consumer Marketing and Channels, Telstra Business and Telstra Enterprise and Government depending on the type of customer serviced. In addition, the majority of goods and services purchased associated with our mobile revenues are allocated to the Telstra Consumer Marketing and Channels segment. These allocations reflect management's accountability framework and internal reporting system and accordingly no reasonable basis for reallocation to the respective business segments exist.

In addition, revenue derived from our BigPond® Internet products is recorded in the customer facing business units of Telstra Consumer Marketing and Channels, Telstra Enterprise and Government and Telstra Business. Certain distribution costs in relation to these products are also recognised in these business segments. Telstra Operations recognises expenses in relation to the installation and running of the HFC cable network. In accordance with our application of the definition of business segment per the applicable accounting standard, we have not reallocated these items to the Telstra BigPond^® business segment.

Segment summary results

		Year Ended 30 June
	2006	2005	2006/2005
		(In A\$ millions)	(% change)
Revenue from external customers
Telstra Consumer Marketing and Channels	8.897	8.931	(0.4)
Telstra Business	3.053	3.099	(1.5)
Telstra Enterprise and Government	4.607	4.570	0.8
Telstra Wholesale	2.607	2.267	15.0
Sensis.	1,826	1.708	6.9
Telstra International	1.450	1.360	6.6
Telstra Operations	226	161	40.4
Other(1)	106	85	24.7
Total revenue $\ldots \ldots \ldots \ldots \ldots \ldots \ldots \ldots \ldots \ldots \ldots \ldots \ldots \ld$	22,772	22,181	2.7
Earnings/(loss) before interest and income tax expense $(EBIT)(2)(3)$
Telstra Consumer Marketing and Channels	5.721	6.248	(8.4)
Telstra Business	2.412	2.488	(3.1)
Telstra Enterprise and Government	2,706	2.812	(3.8)
Telstra Wholesale	2.693	2.283	18.0
Sensis.	864	812	6.4
Telstra International et al.,	156	11	1,318.2
Telstra Operations	(4.175)	(3,371)	(23.9)
Other(1)	(4.909)	(4.351)	(12.8)
Eliminations	-29	-3	866.7
Total EBIT	5,497	6,935	(20.7)

• (1) Revenue for our "Other" segment primarily relates to revenue earned by Telstra Media for our share of FOXTEL cable subscriber revenue and for services provided to FOXTEL. The Asset Accounting Group is the main contributor to the segment result for this segment, which is primarily depreciation and amortisation charges. The Asset Accounting Group centrally manages all of the Telstra Entity's fixed assets, including network assets. EBIT loss grew for the "Other" segment mainly due to increased deprecation and amortisation reflecting the strategic review of the service lives of our assets as part of the transformation strategy.
• (2) Most internal charges between business segments are charged on a direct cost recovery basis. For segment reporting purposes, transfer pricing is not used within Telstra. EBIT reflects our intercompany and external charges.
• (3) During fiscal 2006, we recognised a one off restructuring and redundancy provision of A\$427 million to be incurred as part of the business transformation, as we have provided in this year for future restructuring. This provision was mainly recorded in Telstra Consumer Marketing and Channels of A\$171 million and Telstra Operations of A\$236 million.

Telstra Consumer Marketing and Channels

Telstra Consumer Marketing and Channels revenue decreased by 0.4% to A\$8,897 million in fiscal 2006. This segment experienced revenue increases in mobile services, primarily international roaming, mobile data usage and handset sales. In addition, strong growth in BigPond® broadband and pay television services were experienced due to increased marketing activities and improved retention of existing customers through bundling initiatives. Offsetting this growth in revenue was a decline in PSTN revenue as a result of competition, product substitution and decreased consumer usage.

Telstra Consumer Marketing and Channels EBIT decreased by 8.4% to A\$5,721 million in fiscal 2006 driven by increased use of BigPond^® broadband and a reduced use of high margin PSTN services. The change in customer mix and use of products and a continued shift to higher use of mobiles resulted in expense growth in mobile handsets, dealer costs, network payments and labour in line with revenue and customer growth in emerging products and services. In addition, EBIT was impacted by meeting competition and adjusting to customer needs in line with customer preferences, and one off costs associated with renegotiating dealer contracts and redundancy and restructuring costs resulting from our transformation initiatives.

Telstra Business

Telstra Business revenue declined by 1.5% to A\$3,053 million in fiscal 2006 primarily due to a decline in PSTN revenue. This segment experienced growth in mobile products including voice, data, MessageBank® and international roaming, which partially offset the decrease in PSTN revenues. In addition, Internet and IP products revenue grew in fiscal 2006 reflecting the increase in broadband subscribers.

Telstra Business EBIT decreased by 3.1% to A\$2,412 million in fiscal 2006 predominantly due to a decline in revenues and an increase in expenses. Expenses grew mainly due to a rise in network payments, cost of goods sold and other directly variables costs associated with product offerings. This segment continues to be adversely impacted by a change in product mix from higher margin products such as PSTN to lower margin products such as broadband.

Telstra Enterprise and Government

Telstra Enterprise and Government revenue increased by 0.8% to A\$4,607 million in fiscal 2006 due to strong growth in domestic information and communication technology (ICT) services, Internet and IP products, and offshore revenues. This increase has been partially offset by reductions in sales revenue from the underlying core carriage business, consisting mainly of a decline in traditional PSTN and ISDN revenues. This segment continues to experience change in usage patterns with traditional product usage migrating to alternative access offerings such as wireless, broadband and other IP product offerings.

Telstra Enterprise and Government EBIT decreased by 3.8% to A\$2,706 million in fiscal 2006 reflecting a changing product mix, which resulted in reductions in sales volumes of higher margin core access technologies, and growth in lower margin ICT services and offshore revenues.

Telstra Wholesale

Telstra Wholesale revenue increased by 15.0% to A\$2,607 million in fiscal 2006 driven by continuing demand for broadband and data services and an increase in wholesale basic access revenues. Telstra Wholesale experienced significant revenue growth in several products such as facilities access as a variety of carriers extend their DSL capabilities in preparation for building their own infrastructure via unconditioned local loop and spectrum sharing. Data and Internet service revenues also showed solid growth, which was mainly driven by wholesale broadband offerings and associated ISP related data carriage and transmission services. Growth in revenue was partly offset by a decrease in local call revenues due to ongoing product substitution to mobiles and broadband.

Telstra Wholesale EBIT increased by 18.0% to A\$2,693 million in fiscal 2006 driven by revenue growth and a decrease in expenses. The expense decline consisted of a decrease in Telstra Wholesale's allocated share of domestic outpayments, reflecting lower rates and a decrease in international voice traffic expenses, which was assisted by an appreciating Australian dollar. Lower labour costs were due to the decrease in staff numbers as part of our transformation project and the movement of staff to other areas in Telstra as part of overall business restructure. In addition, service contract costs were lower due to the discontinuation of a number of contracted activities. The expense decline was partly offset by increased IT professional services costs driven by growth in system support and automation costs to deliver ongoing operational productivity and revenue growth.

Sensis

Sensis' revenue increased by 6.9% to A\$1,826 million in fiscal 2006 driven by growth in White Pages® and Yellow^® print and online services. Growth in Sensis' emerging businesses included strong results from Whereis^® and Mediasmart, and a full year of results for Universal Publishers. Overall, online sites continued their improved growth driven by rising usage and customer numbers, leading to increased vields. This growth was partially offset by a decline in revenue from classifieds driven by competition and economic weakness in the Sydney and Melbourne markets.

Sensis' EBIT increased by 6.4% to A\$864 million in fiscal 2006 as the improved revenue was partly offset by growth in expenses. EBIT growth was supported by higher revenue, strategic re-alignment and a renewed focus on costs. An increase in labour expenses was attributable to growth in staff numbers, higher redundancy costs and a reversal of a deferred expense provision. In fiscal 2006, amortisation expense was also higher as a result of the revision of certain software service lives reflecting the transformation initiatives. For further information, refer to "Operating and Financial Review and Prospects — Sensis financial summary".

Telstra International

Telstra International revenue increased by 6.6% to A\$1,450 million mainly due to the CSLNW merger partially offset by a small decline in revenues from TelstraClear, CSLNW revenues grew due to the inclusion of the New World PCS business from March 2006, and rising data, international voice, mobile handset and prepaid mobile revenues partially offset by decreased local voice revenues reflecting sustained competitive pressure on prices. TelstraClear's revenue primarily decreased as a result of adverse foreign exchange movements. TelstraClear recorded increases in revenue reflecting the full year impact of their national HomePlan offering in the consumer segment, and their controlled entity, Sytec after its acquisition in November 2004. The increase was partially offset by access and call revenue declines in the wholesale and small to medium enterprise segments due to price erosion caused by competition, which was moderated by growth in our customer bases in those segments, and a decline in Internet revenues as reduced pricing plans have impacted business yield in the consumer segment.

Telstra International EBIT improved by A\$145 million to A\$156 million due to increased EBIT in our International Head Office Group partially offset by a decline in the CSLNW and TelstraClear. The growth in the International Head Office Group was due to the sale of our shareholding in Xantic B.V. in fiscal 2006 and the recognition of a provision for Reach's committed capital expenditure in fiscal 2005. Expenses increased in the CSLNW following the incorporation of costs after the merger with New World PCS, increased subsidies as part of heightened promotional activity to drive sales, and larger offshore outpayments associated with higher international voice revenues. In addition, depreciation and amortisation expense was higher due to the rollout of their 3G network. Expenses increased in TelstraClear due to larger outpayments due to higher revenue, and growth in labour expenses driven by the inclusion of a full year of Sytec costs. For further information regarding our significant offshore controlled entities, refer to "Operating and Financial Review and Prospects - CSL New World Group financial summary" and "Operating and Financial Review and Prospects — TelstraClear financial summary".

Telstra Operations

Telstra Operations revenue increased by 40.4% to A\$226 million in fiscal 2006 driven by additional revenue received for maintenance activities, revenue for digital migration of FOXTEL subscribers from analogue to digital services and higher fees for overdue accounts. Operations revenue is essentially limited to cost recovery as afforded by regulatory and commercial arrangements. Product revenue is earned by the customer facing segments.

Telstra Operations EBIT is a net cost as this segment does not recover all the costs it incurs on behalf other segments. This reflects our "one factory" approach to delivering the infrastructure, services and systems which support the customer experience. EBIT loss grew by 23.9% to A\$4,175 million in fiscal 2006 due to significant redundancy and restructuring costs being recognised in the current year associated with our concerted effort to reduce staff numbers and planning for the transformation of our future business. Also, there were other one off transformation costs in the current year associated with the closure of old platforms and project write offs due to the cancellation of certain capital program initiatives. Additionally, expenses grew due to the increased sales activity of our growth products such as broadband, as well as increased costs associated with the FOXTEL digital expansion. The expense increase was partly offset by management's continued focus on lower discretionary spending and cost reduction initiatives.

Quantitative and Qualitative Disclosures about Market Risk

The potential for change in the market value of our financial assets and liabilities is referred to as "financial" market risk". We sometimes enter into financial instruments to manage our exposure to financial market risk such as interest rates and foreign currency rates that arise as part of our normal business operations.

Derivatives are financial instruments such as interest rate swaps, futures, foreign exchange forwards, options, and cross-currency swaps that derive their value from specified assets, indices, reference rates or a combination of these factors. We use derivative financial instruments, in accordance with Board-approved policies, to hedge the market risks and volatility of financial outcomes arising from the underlying physical business or balance sheet exposure.

We are exposed to interest rate risk due to our borrowings

Our borrowings are generally for maturities of up to ten years and we manage our debt in accordance with targeted, currency, interest rate, liquidity and debt portfolio maturity profiles.

Our target currency is principally A\$ matching our principal currency of operation. Our borrowings are derived both from A\$ and foreign currency sources with foreign currency borrowings in most cases swapped into A\$ at commencement through to maturity. A relatively small proportion of our foreign currency borrowings are not swapped into A\$, principally where they are used as natural hedges against our translation foreign exchange risk to offshore business investments.

Where the actual interest rate profile on the physical debt differs substantially from our desired target, we use derivatives, principally interest rate swaps, to adjust the net interest rate position towards the target. Our net debt portfolio includes both physical borrowings (such as bonds and commercial paper) and associated derivative instruments (such as cross-currency and interest rate swaps).

Our interest rate risk is assessed as the interest rate exposure on our total net debt portfolio, after offsetting any holdings of financial assets whose value is sensitive to interest rates and after applying related derivatives.

The interest rates on a proportion (approximately A\$3.1 billion equivalent face value) of our borrowings is subject to the possibility of a limited increase through "coupon step-up" clauses that would be triggered by credit ratings downgrades from Standard & Poor's and/or Moody's Investor Service. The interest rates on this debt will increase by 0.25% up to a maximum of 0.50% per annum if our minimum credit rating falls to A- or below ( $S\&P$ ) and A3 or below (Moodys) depending on the particular trigger points of each borrowing and the extent of the rating change. The interest rate increase will step-down again for some borrowings if the minimum credit rating was to subsequently increase above the previously mentioned trigger points. Our current ratings are A Negative Outlook (S&P) and A2 Negative Outlook (Moodys).

We have exposure to foreign currency risk due to our normal business operations and borrowings

Foreign currency exchange risk arises from:

• firm or anticipated transactions for receipts and payments for international telecommunications services settled in or dependent on foreign currencies;
• purchase commitments for material and supplies with prices dependent on foreign currencies; investments (both business and financial) denominated in foreign currencies; and
• borrowings that are denominated in foreign currencies.

We manage the foreign exchange risk on the major part of our foreign currency-denominated borrowings by effectively converting them to A\$ borrowings at drawdown by applying cross-currency swaps to maturity. Where foreign currency borrowings are used to hedge a specific underlying foreign exchange exposure, they are not swapped to A\$ (e.g. to hedge financial investments in foreign currency-denominated securities and borrowings raised for offshore ventures).

Foreign exchange risks that arise from the purchase of goods and services are managed principally through the use of forward foreign currency derivatives.

We manage our translation foreign exchange risk to offshore business investments with a combination of foreign currency denominated borrowings (either physical or synthetic) in the currency of the entity concerned and forward foreign currency derivatives. Our economic foreign exchange risk is assessed for each individual currency, calculated by aggregating the net exposure for that currency.

Our economic exposure to movements in market risks is assessed and measured on a market value basis

Two methods used to assess and present our overall estimated market risk are:

• sensitivity analysis; and
• value-at-risk or "VaR".

These are undertaken to assess the potential impacts of adverse movements in the market value of the relevant portfolio at the reporting date as shown below. Since market rates move in both directions, these can be advantageous as well as adverse. Hedging to protect against a downside risk can, in its establishment, remove or diminish the potential for upside benefits.

Sensitivity analysis

We undertake a sensitivity analysis on our net debt and foreign exchange exposure portfolios after application of all hedging transactions. This is based on an instantaneous adverse proportional movement of 10% in interest rates and exchange rates.

The probability of this occurring is not factored into this sensitivity analysis. Also, the diverse nature of the portfolios is not taken into account and concurrent adverse movements in all exchange rates and interest rates are assumed.

For these reasons, the analysis may be conservative and may not represent likely market volatility since based on historical movements it is unlikely that there would in the future be a concurrent adverse movement across all factors.

The numbers in the following tables represent market value movement in the areas concerned after all underlying exposures and related hedges are taken into account. Market value movements can contain profit and loss statement or balance sheet movements or a combination of both.

Adverse proportional movement of 10% across risk categories

Market Value Risk	2006	As at 30 June 2005 $(A\$ m approximate)
Risk Categories
Interest rates	-238	286
Foreign currency rates	-264	118
Total .	502	$\frac{404}{ }$

The foreign currency rate numbers include the translation exposure movements generated from our overseas investments which include CSL New World Mobility Group ("CSL New World") and TelstraClear. A proportion of both these exposures is hedged using a combination of foreign currency borrowings and foreign currency derivatives. This sensitivity analysis assumes that the HKD and USD are free to move in opposite directions against the AUD (i.e., that the "peg", where the HKD is held to approximately 7.8 to the USD, no longer is in place). If it is assumed that the HKD and USD peg continues and the USD and HKD both move in the same direction against the AUD, then the foreign currency sensitivity quoted in the table above drops from A\$264m to A\$152m.

VaR

VaR is used to assess the potential adverse economic outcome due to market movements over a defined time horizon and with a specified confidence level based on historical volatilities. This potential component is calculated using the current statistical volatility relevant to the particular instrument derived from representative market wide data.

For the VaR numbers reported below, a one month time horizon and a 99% confidence level were used. This one-month time horizon differs from many financial institutions who hedge for trading purposes and where a shorter one day period may be more appropriate. We consider a one-month holding period appropriate since our hedging activities are of a non-trading nature.

The monthly figures quoted can be approximately converted to daily assessments by multiplying by $0.22$ or to 12 monthly estimates by multiplying by 3.5, these conversion factors assume that the portfolio continues with the same basic profiles such as maturity and debt mix. For example, the VaR monthly result for foreign exchange of \$61 million converts to an annual equivalent of approximately \$214 million. We derive the potential market value impact by applying historical volatility measures to the identified current market risk.

Unlike the sensitivity analysis, our overall VaR analysis takes into account the diversified nature of our net debt and net foreign exchange exposure portfolios and incorporates historical correlation between the markets. This projection based on historical volatility is, however, only an estimation of future volatility. The actual future volatility may be substantially different.

We arrived at the VaR numbers by using a Monte Carlo simulation model developed by our consulting actuaries, Mercer Finance & Risk Consulting which is part of Mercer Human Resources Consulting Pty Ltd, which uses recognised market wide based data sets and volatility calculation methodology. The data sets comprise:

• interest rate and foreign exchange rate volatilities; and
• correlations between and within interest rates and foreign exchange rates.

The simulation model determines the distribution of the market value of our debt portfolio and foreign exchange portfolio plus related hedges at future rates. This is undertaken by simulating interest and foreign exchange movements against our actual transaction portfolio. In deriving the VaR numbers, 50,000 simulations have been undertaken to ensure the production of stable, robust results.

The VaR is the difference between the median expected value of the portfolio and the value at the 99% confidence level assuming an adverse movement (i.e., there is a 1% chance that the result arising from an adverse movement will be more adverse than the VaR).

VaR

	As at 30 June
Market Value Risk — (One-month holding period)	2006 2005	$\overline{(A\$ m $)}$
Risk categories
Interest rates		- 175
Foreign currency rates
Sub-total
Diversification effect(1)		(17)
Total

(1) Equals the difference between the "total composite" monthly VaR and the "sum of the monthly VaRs for the two risk categories assessed independently".

VaR calculations were undertaken for portfolio balances (which dynamically change throughout the year) at the end of each quarter during fiscal 2006. The following table shows the high, low and average amounts of the

combined total portfolio of interest rates and foreign currency rates at these quarterly points through the year. Note that the compositions of the individual portfolios change throughout the year and that the high or low for each of the two component portfolios (i.e., interest rate or foreign exchange rate) may not arise at the same time that the overall combined portfolio is at a high or low value.

VaR analysis

		As at 30 June 2006
Market Value Risk — (One-month holding period)	High	Low	Average(2)
		$($ A\$m $)$
Risk categories
Interest rates $\ldots \ldots \ldots \ldots \ldots \ldots \ldots \ldots \ldots \ldots \ldots \ldots \ldots \ld$		- 130	148
Foreign currency rates			- 67
Sub-total $\ldots \ldots \ldots \ldots \ldots \ldots \ldots \ldots \ldots \ldots \ldots \ldots \ldots \ld$		- 191	215
Diversification effect(1)		(31)	(37)
Total		-160	178

(1) Equals the difference between the" total composite" monthly VaR and the "sum of the monthly VaRs for the two risk categories assessed independently.

(2) The high and low quarterly portfolio is defined at the total portfolio level and therefore there may be instances where the average for individual risk categories is either higher than the high or lower than the low for that category.

Additional information regarding our market risks is provided in note 35 to our consolidated financial statements.

Information on the Company

History and development of the Company

Our origins date back to 1901, when the Postmaster-General's Department was established by the Commonwealth to manage all domestic telephone, telegraph and postal services, and to 1946, when the Overseas Telecommunications Commission was established by the Commonwealth to manage international telecommunications services. Since then, we have undergone many changes and been renamed several times as follows:

• the Australian Telecommunications Commission, trading as Telecom Australia, in July 1975;
• the Australian Telecommunications Corporation, trading as Telecom Australia, in January 1989;
• the Australian and Overseas Telecommunications Corporation Limited in February 1992;
• Telstra Corporation Limited in April 1993, trading internationally as Telstra; and
• trading domestically as Telstra in 1995.

We were incorporated as an Australian public limited liability company in November 1991. Following the opening of Australia's telecommunications markets to full competition in July 1997, we underwent a partial privatisation in November 1997 under which the Commonwealth sold approximately 33.3% of our issued shares to the public. Following the initial privatisation, those of our shares that are not held by the Commonwealth are quoted on the ASX and NZSX. A further global offering by the Commonwealth of up to 16.6% of our issued shares was launched in September 1999.

Organisational structure

Our organisational structure has evolved over recent years to meet our business needs and the needs of our customers. The organisational structure currently consists of strategic business units and corporate centre business units as outlined below.

Strategic business units

• Telstra Consumer Marketing and Channels is responsible for serving our consumer customers with our full range of products and services including fixed lines, mobiles, Internet access and pay TV services. It also has responsibility for mass marketing channels including Telstra's call centres, Telstra shops and the dealer network.
• Telstra Business is responsible for serving the needs of Australia's small to medium enterprises with fixed line, mobile, broadband, as well as data and Internet solutions tailored for business.
• Telstra Enterprise and Government is responsible for providing innovative ICT solutions to large corporate and government customers in Australia and New Zealand. It is also responsible for KAZ and TelstraClear. KAZ and Telstra service our Enterprise and Government customers' IT needs. TelstraClear is New Zealand's second largest full service telecommunications company, providing innovative market leading products and services to the business, government, wholesale and residential sectors. Telstra Enterprise and Government is also responsible for our Global Business operations, recently renamed Telstra International.
• Telstra Country Wide® provides telecommunications and information technology services to customers in outer metropolitan, regional, rural and remote parts of Australia.
• Telstra BigPond^® is responsible for the management and control of our retail Internet products, BigPond^® brand and marketing, services and content, contact centres, customer relations and associated functions, for broadband and dial-up delivery.
• Sensis is our advertising, search and information services business. Sensis manages three important Telstra brands — Yellow^TM (formerly Yellow Pages^®), White Pages^® and Trading Post^®, along with the CitySearch^® online city guide, the Whereis^® online, mobile and satellite navigation services, the GoStay^™ print guide and

complementary website, the sensis.com.au search engine, the Sensis® 1234 voice service, and the 51% owned SouFun investment, a real estate and home furnishings website in China.

• Strategic Marketing is responsible for Corporate Strategy, Mergers & Acquisitions, and our overall marketing, pricing, brand, sponsorship, promotions and advertising direction. Strategic Marketing is also responsible for Telstra Asia, which manages our international interests in the region and directs our offshore strategy, with a current focus on enhancing the value of our existing investments, profitably rationalising non-core-assets and positioning us to capture high growth opportunities, particularly in China and South East Asia.
• Telstra Media is responsible for our FOXTEL investment.
• Telstra Operations has responsibility for the core or shared elements of our infrastructure and related support units. Using a "one factory" approach to improve our customer service delivery and customer satisfaction, the group includes Telstra Services, Network and Technology, Wireless, IT Services, Product Management, Procurement, Strategic Supplier Relations, Credit Management, Billing and the corporate Program Office. The Program Office identifies and prioritises opportunities for streamlining, implementing and coordinating all aspects of our transformation strategy.
• Telstra Wholesale provides a wide range of wholesale products and services to the Australian domestic market, including fixed, wireless, data and Internet, transmission and IP, interconnection, access to our network facilities, and retail/rebill products. It also serves global wholesale markets to satisfy growing Internet and high bandwidth needs.

Corporate centre business units

• Finance & Administration is responsible for corporate policy and support functions including finance, risk management and assurance, shared services for processing functions, treasury, company secretary, investor relations and other administration services. It is also responsible for the financial management of the majority of our fixed assets, including network assets.
• Legal Services provides operational and strategic legal support and advice across Telstra, with lawyers from Legal Services serving clients in all strategic and corporate centre business units.
• Public Policy and Communications manages corporate communications and public affairs across Telstra including media relations, employee communications, corporate social responsibility (including the Telstra Foundation), corporate content on the Telstra website (www.telstra.com), Telstra's website (www.nowwearetalking.com.au) and external relations. Its external relations responsibility includes government relations and regulatory positioning and negotiation, including assessment of regulatory risks, advice and counsel to business units, preparation of submissions to industry regulators, and the facilitation of regulatory compliance through advisory services and the management of a regulatory compliance assurance program.
• Human Resources is responsible for developing and implementing our people, culture and capability strategy and providing strategic and operational support and advice to business managers about all human capital matters. This includes organisational design, culture change, employee engagement, leadership development, talent management, performance management, policy, employment, recruitment and health, safety and environment.

A list of our controlled entities is provided in note 29 to our consolidated financial statements. Our jointly controlled and associated entities are listed in note 30 to our consolidated financial statements.

Marketing and customer service

We use customer analytics to formulate marketing strategies based on customer needs. This provides a better understanding of customer behaviour and improved customer relationships. Overall, we believe needs-based marketing will provide us with a competitive advantage in the market.

Market-based management puts customers at the core of our business focus. We have conducted extensive research that informs us about customers' needs, priorities and expectations. As a result of this knowledge, we have grouped our residential and small-medium business customers into segments which reflect their specific characteristics. This knowledge forms the basis of a relationship with our customers around which we organise our processes and procedures. Market-based management is used to formulate our marketing strategies for our various strategic business units, and to offer and deliver products and services tailored to customers' needs across these business units.

Residential customers and small-medium businesses

We have organised the management structures of Telstra Consumer Marketing and Channels and Telstra Business by those segments.

We segment our residential customers based upon their usage and lifestyle patterns. We segment our smallmedium enterprise customers according to the type of business they operate and the way they interact with their customers. This information on customers by segment is used to tailor our marketing campaigns.

This information on customers by segment is then used to tailor segment specific value propositions by product sets and applications, by channels and by service experience which results in microsegments around each of our product and service areas.

We are also implementing customer relationship management ("CRM") technologies to deliver these segment differentiated value propositions. The combination of detailed understanding of customer needs with CRM capabilities enables a customer to experience a personalised and meaningful experience at every touch point, from initial investigation of service through ongoing care.

We enable customers to interact with us online, through door-to-door sales representatives, telephone sales channels and face to face via our account managed sales team. Telstra shops and Telstra licensed stores as well as indirectly through approximately 4,000 retail outlets nationwide in conjunction with our retail partners.

We anticipate that changing from a product to a customer segment focus will enable us to uncover previously unseen growth potential as we drive segment-related benefits across product lines that were previously operated in silos.

Enterprise and government customers

The Enterprise and Government customer base comprises some of our largest customers. All of Telstra Enterprise and Government customers are sophisticated users of ICT. We segment these customers into Integrated (Large ICT outsourcing customers), Multinational and Industry and Government customers with a predominant Trans Tasman or Australian domestic focus. Further customer segmentation in Industry and Government is on the basis of geography and industry verticals. The verticals include Retail, Finance & Insurance, Manufacturing, Media, Business Services & IT, Resource & Utilities, Health, Public Safety & Justice and Local Government. We provide account management and customised solution development along with enhanced service delivery. Our sales team takes a consultative approach with our customers, focusing on delivering enhanced business results through ICT solutions, leveraging the capabilities of KAZ, our ICT services arm.

We have 20 offices around the world including Asia Pacific, Europe and the USA supporting the global telecommunications requirements of our multi-national customers and global service providers. We provide our customers with managed network solutions including Global WAN, Internet, Back-up and Storage, Security, Mobility, Enhanced voice solutions and more. Other value added solutions include managed CPE, network reporting, consulting, planning, project management and customer support seven days a week.

Regional, rural and remote customers

Telstra Country Wide^® was established to improve service levels, business performance and to strengthen relations with customers and communities in regional, rural and remote areas of Australia. In 2003, this area was expanded to include outer metropolitan areas. In addition, the local management model was further extended in January 2006 to incorporate the metropolitan cities of Adelaide, Brisbane and Perth. Area General Managers are located throughout Australia to address the sales, marketing and service needs of our customers.

Wholesale customers

Our wholesale customers include licensed carriers, CSPs and ISPs. Telstra Wholesale provides products and services to more than 500 customers, including more than 400 ISPs (about 80 of which offer broadband digital subscriber line ("DSL") services).

Wholesale customers typically buy products and services from Telstra Wholesale, add their own inputs and then sell to the retail market under their own brand.

Advertising customers

Sensis provides advertising solutions to more than 400,000 Australian businesses (small and medium enterprises ("SMEs") and large corporates) and Government through a network of print, online, voice and wireless services. Sensis also serves the advertising needs of personal sellers through its print and online classifieds business.

Products and services

We offer a broad range of telecommunications and information products and services to a diverse customer base. The following table shows our total income by major product and service category and as a percentage of total income for the last two fiscal years. See also "Operating and Financial Review and Prospects" for a discussion of the performance of our products and services during the last two fiscal years.

Income by product and service category, including the percentage of total income contributed by each product and service category

		Year Ended 30 June
		2006		2005
	A\$m	% of Total	A\$m	% of Total
PSTN products
Basic access	3.318	14.4	3,362	15.0
Local calls $\ldots \ldots \ldots \ldots \ldots \ldots \ldots \ldots \ldots \ldots$	1.023	4.4	1,284	5.7
PSTN value added services	246	1.1	250	1.1
National long distance calls	913	4.0	1,013	4.5
Fixed to mobile $\ldots \ldots \ldots \ldots \ldots \ldots \ldots \ldots$	1.491	6.5	1.566	7.0
International direct	201	0.9	234	1.0
Fixed interconnection	286	1.1	309	1.4
	7,478	32.4	8.018	35.7
Mobiles
Mobile services $\ldots$ , $\ldots$ , $\ldots$ , $\ldots$ , $\ldots$ , $\ldots$ , $\ldots$	4,505	19.5	4.307	19.2
Mobile handsets	467	2.0	381	1.7
	4,972	21.5	4.688	20.9
Data and Internet services
Internet and IP Solutions $\ldots$ , $\ldots$ , $\ldots$ , $\ldots$ , $\ldots$	1.907	8.3	1.377	6.1
ISDN products	807	3.5	890	4.0
Specialised data	884	3.8	966	4.3
	3,598	15.6	3.233	14.4

			Year Ended 30 June
		2006		2005
	A\$m	% of Total	A\$m	% of Total
Other products and services
Advertising and directories	1.711	7.4	1.585	7.1
Customer premises equipment	274	1.2	231	1.0
Payphones	104	0.5	121	0.5
Intercarrier services	351	$1.5\,$	290	1.3
Inbound calling products	449	1.9	449	2.0
Solutions management	989	4.3	931	4.1
Offshore controlled entities	1.745	7.6	1.611	7.2
Pay TV bundling	320	$1.4\,$	263	$1.2\,$
Other sales and services	759	3.2	741	3.3
	6,702	29.0	6,222	27.7
Total sales revenue	22,750	98.5	22,161	98.7
Other revenue $(1)$ (excluding finance income)	22	0.1	20	0.1
Other income	328	$1.4\,$	261	$1.2\,$
Total income (excluding finance income) $\dots \dots \dots$	23,100	100.0	22,442	100.0

(1) Other revenue excludes finance income, which is included in net finance costs.

Sales revenues are derived from domestic and international sales as follows:

	Year Ended 30 June
	2006 Y.	2005 $\overline{g}$
Australia		- 92.7
Hong Kong		3.3
New Zealand		-28.
Other International		1.2

PSTN products

PSTN includes basic fixed-line access, local calls, value added services, national long distance, fixed-to-mobile and international direct.

Basic Access

Our Basic Access service includes installing and maintaining connections between customers' premises and our Public Switched Telephone Network ("PSTN") and providing basic voice, facsimile and Internet services. Basic Access does not include enhanced products like Integrated Services Digital Network ("ISDN") access and Asymmetric Digital Subscriber Line ("ADSL") services.

Along with basic access services, we provide handsets for sale and rental to help customers use our services more effectively. The latest rental phones have single button access to features such as 3-way chat, Messagebank^®, call forward and SMS. We also develop products to assist our customers with disabilities. This ranges from the very popular "big button" phone to Teletypwriter ("TTY") and TeleBraille products.

Local calls (including PSTN value-added services)

We provide local call services to more residential and business customers than any other service provider in Australia, generally charging for calls on an untimed fee basis. The geographical reach of our untimed local call zones, combined with our packages, access and pricing offers, extend the value of our local call service. In addition, we provide value-added services such as voicemail, call waiting, call forwarding, call conferencing and call return.

National long distance calls

We are the leading provider of national long distance services for residential and business customers in Australia. This comprises national long distance calls made from our PSTN network to a fixed network. Calls are generally charged on a timed basis after a call connection fee. Call details such as duration, destination, time of day and day of the week generally determine charges which are also offered on a fixed or capped price basis. We also offer options that let customers choose between a range of offers to suit individual needs, including the recent addition of subscription plans with included features and calls.

Fixed to mobile

Fixed to mobile are calls made from our PSTN/ISDN to a mobile network and are charged on a timed basis after a call connection fee. Charges usually depend on the duration of the call and whether the call is to a Telstra mobile service. Calls made within a capped calling option are charged according to duration, time of day, day of week and terminating carrier. Capped calling offers predominantly apply to calls to Telstra mobiles.

International direct

We are the leading provider of international telephone services in Australia, offering international telephone services to more than 230 countries and territories. Calls are typically charged on a per-second basis after a call connection fee, depending on the duration and destination of the call. REACH provides the connections we use to supply international services to both our retail and wholesale customers. For more information regarding our arrangements with REACH, refer to "Operating and Financial Review and Prospects — International business ventures".

Mobile telecommunications services

We offer a wide range of mobile services to our customers, including voice calling and messaging, text and multimedia messaging and a range of information, entertainment and connectivity services.

NEXT G™ Wireless Network

In 2005, we announced that we would build a 3GSM 850 Mhz wireless network with our strategic partner Ericsson. We launched this network, called NEXT G™, on 6 October 2006, and it provides 3G coverage to 98% of the Australian population. It is the largest 3G network in Australia.

Using multi-band handsets, customers will be able to access both our NEXT $G^{m}$ wireless network as well as our existing 3GSM 2100 MHz network.

3GSM 2100

Our existing 3GSM 2100 MHz network allows additional functionality such as video calling and higher speed data access within its coverage boundary while offering access to the GSM network and services outside of the 3G area. Our 3GSM 2100 MHz network sharing arrangement with Hutchinson covers over 50% of the Australian population in a number of mainland capital cities including Canberra.

GSM digital service

Our digital GSM network covers around 96% of the Australian population and we continue to improve existing areas of coverage and expand this network, where commercially justified. We have also improved depth of coverage in major cities, particularly in-building and underground coverage, as well as offering international roaming in more than 140 countries and 300 networks.

CDMA digital service

Our existing CDMA network currently provides Australia's largest cellular mobile phone coverage, spanning more than 1.6 million square kilometres and covering around 98% of the Australian population. The CDMA network will remain in place until our new NEXT GTM wireless service has the same or better coverage as CDMA and until at least January 2008. Our CDMA 1X technology service ("IXRTT") which was Australia's first commercial mobile network based on CDMA 1X technology was launched in December 2002. By the end of 2005, CDMA 1X, was made available across the entire CDMA network footprint of over 1.6 million square km covering around 98% of the population.

We will continue to operate our CDMA network until our NEXT G™ wireless network provides the same or better coverage than the CDMA network, and in any event at least until January 2008, and the software upgrades are complete and any necessary Government approvals have been obtained.

Telstra Mobile Satellite

In 2002, we launched Telstra Mobile Satellite, a hand-held mobile satellite voice and data service for people living, working or travelling in rural and remote Australia. The service operates off the Iridium Low Earth Orbit satellite system which provides global mobile satellite phone coverage wherever there is a clear view of the sky. We have a service partner agreement to sell the Iridium service.

BigPond®

We offer a range of Internet products and packages under our BigPond® brand. Telstra BigPond® Dial-Up offers dial-up modern and ISDN Internet services to residential and small and medium business customers across Australia. Telstra BigPond® Broadband provides broadband Internet services to consumer and small and medium business customers via hybrid fibre coaxial cable, satellite, ADSL and wireless technologies.

BigPond^® Mobile Services

With BigPond® Mobile Services customers can browse and purchase a broad range of up-to-date information and entertainment. With a 3G video mobile, customers can access 3D games, receive news bulletins, stock quotes or sport scores, download ringtones, find directions, watch music videos and send and receive emails.

Wireless Broadband Expansion

In August 2005, we introduced the BigPond® Wireless Broadband product and have expanded our CDMA 1xEVDO network to provide greater coverage for our Wireless Broadband customers. The BigPond® focus on the consumer market provides an addition to the existing business-oriented Telstra Mobile Broadband solution. These two products provide solutions for wireless broadband access. As we move towards closing our CDMA network, we plan to migrate customers from this service to the wireless broadband services provided over our new NEXT G^TM wireless network.

Content services

Telstra BigPond® provides online and mobile content services (including BigBlog™ and BigPond® Movies, BigPond® Sport, BigPond® Games, BigPond® Kids, News and BigPond® TV). These services include music, movies, games, sports entertainment, video on demand and DVD rental offerings. All of these services are available from BigPond.com.

Internet and IP Services

In addition to our BigPond^® services, we provide new generation data and Internet services including:

• business grade Internet solutions;
• IP Solutions:
• Business DSL, that offers a broadband data service with symmetric data rates and business grade service levels:
• Connect IP solution range which is a standardised, end-to-end, IP-based WAN offering that integrates network management and data connectivity with Customer Premises Equipment ("CPE"), allowing for seamless data transfer between customer sites: and
• IP Telephony, an open standard IP communications suite, which delivers hosted IP telephony and IP applications to our corporate customers.

Data Services

We also provide data and specialised services, including ISDN, digital data services, voice grade dedicated lines, transaction/EFTPOS services and video and audio network services, as well as domestic and international frame relay and ATM products.

Telstra Internet Direct also provides business customers with dedicated Internet access within Australia at access transmission rates up to one gigabyte per second ("Gbps").

We also provide wholesale Internet access products for use by licensed carriers, ISPs and CSPs.

Other services

We offer other data services, in some cases with business partners, including:

• collaboration services that provide audio, video and web-based conferencing (including the Conferlink^® product range);
• e-commerce solutions including e-trading, e-payments, EFTPOS/ATM network services and straightthrough processing services;
• Online Customer Management Facility ("OCMF") providing a self-service capability for customers to manage user access to their IP networks;
• Digital Video Network ("DVN") initiative allowing our media customers to share content such as news or sporting arena access;
• Managed Wide Area Networks services ("WANs") including design, CPE sales and installation, network establishment and maintenance.

Advertising and directories

We are a leading provider of advertising and search services through our advertising business and wholly owned subsidiary, Sensis. Sensis' popular information services include Yellow^TM, White Pages^®, Trading Post^®, CitySearch^® and Whereis^®.

The Yellow^7M print directory is Australia's leading business directory, while White Pages^® print directory maintains its position as a leading information source. The Yellow^7M and White Pages^® print directories also feature comprehensive Information Pages, providing valuable information about emergency and community services, activities and resources within the area of coverage. The Yellow^TM OnLine site and the White Pages^® OnLine site extend the print directory's capabilities.

Whereis^® maps and directions complement and combine with other Sensis products-including Yellow^™ OnLine and White Pages^® OnLine directories, and the CitySearch^® site-to deliver location orientated services across Internet and WAP channels.

The CitySearch^® site provides a range of editorial content, business listings and entertainment and event information in major cities around Australia.

The Trading Post ^$\phi$ is published throughout Australia, providing a classifieds service to most of the Australian population. In addition to print editions, the Trading Post^® also has an online site located at tradingpost.com.au.

During fiscal 2006. Sensis has continued to focus on developing and providing solutions to meet the needs of both consumers and advertisers. In April 2006, Sensis entered the travel and accommodation market with the launch of GoStay^TM. With more than 5,500 ads and a national distribution to 3 million households, the GoStay^TM print guide has the largest distribution of any printed Australian travel guide. Complementing the GoStay^™ Accommodation Guide is a comprehensive website - gostay.com.au - where consumers can search, select and book and pay for accommodation at thousands of properties across Australia.

In February 2006, Sensis became a majority shareholder of Adstream Australia. This has opened up new advertising options for Sensis' small and medium enterprise ("SME") customers, helping Adstream Australia's customers reach a wider audience through the joint Sensis and Telstra online network, and extending Sensis' advertising agency relationships to a much deeper level.

On 31 August 2006, we purchased a 51 per cent shareholding in SouFun, a leading real estate and home furnishings web-site in China.

Wholesale services (including inter-carrier services)

In addition to providing products for resale, we provide a range of other products specifically tailored for wholesale customers. These include:

• interconnection services, including originating and terminating access to our fixed and mobile networks, preselection services and access to our network facilities such as ducts, towers and exchange space;
• domestic and international transmission services;
• broadband, IP backbone and traditional data services; and
• both GSM and CDMA mobile products and services. Telstra Wholesale has advised customers of the closure of the CDMA network, with the earliest possible closure date being 28 January 2008.

We also manage and deliver a range of customer processes for wholesale customers. These include product and service provisioning, ordering and activation, billing, fault reporting and end-user and product transfer. In addition, we provide a range of web-based business-to-business services to our customers.

Inbound calling products

We offer inbound call services including:

• Telstra Freecall® 1800, a reverse-charge call service used widely by small and large businesses to extend market reach and attract sales;
• Priority® One3, a shared-cost service offering a six-digit national number used by larger businesses as a front-door to contact centres and franchise operations for service calls;
• Priority® 1300 services, a shared-cost service offering a 10-digit number, similar to the Priority® One3 service, where a short-number format is not required;

• Contact centre enablement services, including network-based speech recognition and interactive voice response solutions, computer telephony integration, call routing services and speech recognition;

• InfoCall^® 190, a telephone premium-rate service where we bill the calling customer for both content and carriage on our bill and receive a fee from the content provider for these payment and carriage services; and

• Phone Words, an inbound number derived from the alphabetic translation of a number, provided by 1300 Australia Pty Ltd.

ICT Solutions, Services and Outsourcing

KAZ, a wholly owned subsidiary, partners with us in the market to service our medium and large Enterprise and Government customers in Australian and Asia Pacific markets. The combination of KAZ's IT capabilities and our telecommunications strengths gives us capabilities in the provision of end-to-end ICT services and solutions from within our own group of companies.

The repositioning of KAZ over the past two years as our ICT Services arm has enabled the business to achieve revenue growth from services such as:

• Applications development, management and maintenance;
• Systems Integration: particularly focusing on the integration of our ICT solutions and partner applications in the client environment;
• ICT and Business Process Outsourcing: covering servers, desktops, peripherals and other portable devices for some of Australia's largest companies as well as non core business processes such as credit card processing and cheque processing;
• ICT Consulting: designed to support our core business and focusing on ICT Strategy, Network Consulting & Integration, Mobility & Wireless and Security & Business Continuity as well as Information Intelligence and Business Process;
• The provision of ICT services supporting our managed voice, data and mobility solutions including IP-based networks and IP Telephony; and
• Managed IT Services: covering a range of solutions such as security, hosting, data centre management and managed storage.

On 31 August 2006, we sold AAS, the superannuation administration business of our KAZ Group subsidiary to Link Market Services Limited for A\$215 million. In addition, we took out A\$35.5 million in cash from AAS prior to settlement. The transaction was completed after a competitive public sale process had been undertaken. A decision was made to sell AAS after it was determined that it was no longer strategic and not a core part of our business. KAZ continues to be a crucial part of our Information and Communication Technology strategy and service delivery.

Payphones

We are the leading provider of payphones in Australia. As at 30 June 2006, we operated approximately 30,000 public payphones. Our Universal Service Obligation requires us to make payphone services reasonably accessible throughout Australia including in non-metropolitan and rural areas.

Customer premises equipment

As part of our customer voice, data, mobile and service solutions, we provide customer premises equipment for rental or sale to our residential, consumer, business and Government customers. In relation to Telstra rental phones, modern new standard and "calling number display" rental phones are available, making phones and phone features easier to use.

We acquired the Converged Networks Group ("CN") in March 2006. CN services the Western Australian market as Telstra Business Sales" exclusive franchise in Western Australia. CN's principal product sets are Ericsson Enterprise (its core business) and more recently, IBM and Nortel. The acquisition effectively allows us to operate in our own right in Western Australia - rather than as a reseller to CN.

Other sales and services

The principal components of operating revenue that we record in other sales and services relate to information and connection services, external construction and various other minor products and services.

Subscription television

We own 50% of FOXTEL, with Publishing & Broadcasting Ltd ("PBL") and The News Corporation Limited ("News Corporation") each owning 25%. The FOXTEL partners have committed, with very limited exceptions, to confine their involvement in the provision of subscription television services in Australia to participation in FOXTEL. PBL and News Corporation have also made programming commitments to FOXTEL. Each of these commitments expires in November 2008.

FOXTEL is Australia's leading provider of subscription television services, with over one and a quarter million subscribers (including our resale subscribers and those receiving FOXTEL programming through Optus Television and others). FOXTEL markets its services to more than 5 million homes, split approximately equally between those homes passed by our hybrid fibre co-axial cable ("HFC") and those covered by a satellite distribution.

FOXTEL Digital™ offers customers access to around 130 digital channels, superior picture and sound quality, a comprehensive and easy to use electronic program guide ("EPG"), interactive sports and news applications and FOXTEL Box Office® (near video on demand). FOXTEL continues to enhance FOXTEL Digital™, launching new channels and interactive features, including additional news, sports and weather applications, as well as launching the FOXTEL $iQ^{TM}$ in February 2005. The FOXTEL $iQ^{TM}$ is a personal digital recorder ("PDR") designed to change the way viewers watch television by enabling subscribers to record two programs simultaneously, even while watching a previously recorded program.

Under arrangements with the FOXTEL partners, FOXTEL may provide, in addition to subscription television services, a range of information and other services. FOXTEL currently only provides subscription television services.

We are the exclusive long-term supplier of cable distribution services for FOXTEL's cable subscription television services in our cabled areas and we receive a share of FOXTEL's cable subscription television revenues. We can independently, or through partnerships and alliances, provide a broad range of communications, data and information services to other parties using our broadband network.

FOXTEL has entered into various program supply arrangements, including some with minimum subscriber fee commitments. Refer to "Operating and Financial Review and Prospects — Contractual obligations and commercial commitments" for further details regarding our exposure to these commitments.

We also resell Austar United Communications Limited ("AUSTAR") subscription television services, which are eligible for inclusion in the Telstra Rewards Options plan. The bundling and reselling of both the FOXTEL and AUSTAR services broadens the range of telecommunication and entertainment services we offer to our customers. These arrangements allow us to provide a residential subscription television package to most areas in Australia regardless of geography.

A discussion of competition in the subscription television services market is contained in "Competition — Subscription television".

International investments

Our major international investments include:

• CSL New World Mobility Group, Hong Kong's leading mobile operator of which we own 76.4%. It has around 2.6 million customers, equating to approximately 32% of Hong Kong's mobile market. CSL New World Mobility has retained all CSL and New World brands thereby addressing all mobile market segments;
• · TelstraClear, our wholly-owned subsidiary, is the second largest full-service carrier in New Zealand. TelstraClear provides voice, data, Internet, mobile resale, managed services and cable television products

and services to the New Zealand market. New Zealand is a an important market for our trans-Tasman customers, and this investment enables these customers to receive end-to-end services;

• REACH, a 50/50 joint venture with PCCW, which provides outsourcing services in support of Telstra's and PCCW's international voice and data services. REACH is also one of the world's top carriers of international voice traffic. REACH operates and maintains or uses voice and data switching platforms, satellite earth stations and a network of over a network of over forty submarine cable and international satellite systems, together with associated landing rights, backhaul, operating licences and bilateral agreements in most international markets:

Last year Telstra and PCCW reported a number of improvements to the REACH operating model, whereby REACH would provide voice and data services to the two shareholders in return for an outsourcing fee on a cost plus mark-up basis. This year has focused on a consolidation of the new operating model. Data volumes continue to grow strongly and voice business volumes are stable.

Telstra and REACH will continue to focus on a range of initiatives aimed at securing comprehensive international voice and data services at low unit cost; and

• SouFun, a leading real estate and home furnishing website in China, which we purchased a 51 per cent shareholding in on 31 August 2006 as part of our growth strategy for Sensis.

We also have a 46.9% equity interest in Australia-Japan Cable Holdings Limited, a network cable provider, which owns and operates a fibre optic cable between Australia and Japan.

Our 35% equity interest in the satellite communications operator, Xantic B.V. (formerly Station 12 B.V.) was divested in fiscal 2006.

Capital Expenditures and Divestitures

For a discussion of the significant capital expenditures and divestitures we made in the preceding two-year period, refer to "Operating and Financial Review and Prospects - Cash flow".

Research and development

We continue to make significant investment in research and development. In fiscal 2006, the estimated spend was A\$146 million. We review our project expenditure annually to determine its actual spend on research and development. The expenditure was determined to be A\$157 million in fiscal 2005. For a detailed discussion of our research and development, refer to "Operating and Financial Review and Prospects - Research and development".

Networks and systems

Transformation - Simplifying our infrastructure

Next-generation network ("NGN")

In November 2005, we outlined our plans to build a next-generation network and rationalise the more than 300 different network platforms provided by an array of vendors. On 7 August 2006 we announced that we had reached an impasse with the ACCC and as a result the FTTN component of the NGN remains on hold.

Our current plan is to reduce our network platforms by 60% in three years and 65% in five years. As at 30 June 2006, we had capped or exited 48 of our network platforms exceeding our December 2006 target.

Over the next five years the NGN initiative aims to remove network duplication and the high level of complexity by transforming our network infrastructure in Australia's five major cities of Melbourne, Sydney, Adelaide, Brisbane and Perth. The transformation will include:

• an Internet Protocol ("IP") core network which will replace today's dual cores and add new capacity, greater capability, improved reliability and lower cost per unit;

• an Ethernet network which will aggregate all traffic onto the new IP core supporting what we anticipate to be high throughout demands of next-generation applications and services:
• a multi service edge, providing common services for customers regardless of access network and connectivity for business services including Frame Relay, ATM and Ethernet;
• high capacity soft switch platforms which will support voice services and features over the common IP core, provide high capacity and high flexibility platforms.

We believe the NGN will provide customers a simpler experience, fewer outages, faster services and a consistent experience across multiple devices and networks. This new network will also enable customer access to new and innovative services such as broadband Internet access many times faster than current speeds, multi-channel TV delivered over the Internet and video conferencing.

This "next-generation network" will continue to be monitored and supported through a largely centralised global operations centre, which has a recovery plan that enables network management to be transferred to an alternate location in the event of an unforeseen disaster.

Mobile telecommunications networks

We currently own and operate two mobile network platforms, GSM and CDMA. Together, these cover around 98% of the Australian population and serve more than 8 million SIOs. Through CSL New World Mobility Group we also operate mobile services in Hong Kong.

In November 2005, we committed to simplify our Australian mobile infrastructure and announced the plan to build a national 3GSM 850 MHz wireless network and, therefore, remove duplicate cost of maintaining and upgrading two networks. We launched our 3GSM 850 MHz or NEXT G™ wireless network on 6 October 2006.

The NEXT G™ wireless network operates on our GSM platform and uses the 850 MHz radio frequency spectrum. The GSM platform will provide access to higher data speeds, better applications and provide economies of scale. The CDMA network will remain in place until the national NEXT G^TM wireless network has the same or better coverage than the CDMA network coverage and until at least January 2008. The new network provides coverage to 98% of the Australian population.

Our GSM digital network operates in the 900MHz and 1800MHz spectrum bands. As at 30 June 2006, our GSM network had approximately 4,750 base stations nationally. We are continuing to expand the capacity and coverage of the GSM network, with just under 500 new base stations established in fiscal 2006.

Our existing 3GSM service operates in the 2100 MHz spectrum band and with multi-band handsets it is compatible with our NEXT G™ wireless network.

Other current networks & infrastructure

Transmission infrastructure

Our national transmission infrastructure consists of both terrestrial and non-terrestrial transmission systems. Our domestic terrestrial systems are almost exclusively digital and use approximately 4 million kilometres of optical fibre. Our major transmission routes incorporate Synchronous Digital Hierarchy ("SDH") technology.

Our international switching and transmission requirements are provided by REACH, which owns international gateway switches in Sydney and an expanding network of switches across Asia, North America and Europe to augment its state-of-the-art global data/IP system. REACH uses satellite communication systems to supplement international traffic capacity where undersea cables are not feasible and to provide route diversity and circuit redundancy, as well as specialist satellite-based applications. REACH utilises satellite earth stations in Australia and Hong Kong, including the largest satellite teleport in Asia.

Public Switched Telephone Network ("PSTN")

Our PSTN or fixed network supports voice, facsimile and dial-up data products and we continue to deploy new infrastructure as residential and business areas expand.

Australia's geographic characteristics provide unique challenges for the provision of nationwide digital PSTN coverage, overcome by our innovative application of a range of modern technologies. Some 286 digital switching nodes connect customers with each other through a combination of copper, fibre optic, radio and satellite technologies.

Our network supports a range of switch features which include features such as Call Waiting, Call Return, Abbreviated Dialling and Virtual Private Networks ("VPN"). New types of telephones and customer premises equipment which make these features more accessible and easy to use are continually entering the market.

The PSTN supports many operator assisted service products such as directory assistance and CallConnect. We are planning to enhance these services with higher levels of automation including the latest in advanced voice recognition technology. The PSTN is also Australia's lifeline to Emergency 000 services.

Our PSTN infrastructure in the five major capital cities is expected to evolve over the next five years, from the current technologies to increasingly utilising an IP core network and IP access switching to replace our traditional exchanges.

We utilise CDMA-based wireless local loop technology in regional Australia as part of our contract with the Commonwealth to improve communications in extended zones. With the deployment of 3G mobile network technology we will have a similar capability after the CDMA network is phased out in early 2008 to ensure continuation of this type of service. In more remote areas satellite will continue to be used for providing calling and internet services.

Integrated Services Digital Network ("ISDN")

ISDN is a flexible, switched digital network. The integrated nature of this network means that ISDN can support many applications at the same time while using a single access point to the network, including traditional telephony as well as various data applications such as videoconferencing, Internet access and EFTPOS.

The ISDN network is available to approximately 96% of the Australian population. ISDN provides an end-to-end digital connection that allows us to deliver minimum 64Kbps connections to customers.

Intelligent Network ("IN") platforms

We operate a number of IN platforms that support a range of services across fixed, mobile and messaging services including:

• inbound services such as Telstra Freecall^® 1800, Priority^® One3, Priority^® 1300 and InfoCall^® 190;
• Telstra prepaid mobile, Pre-paid Plus;
• calling cards (Telecard^®):
• prepaid cards (Phoneaway®, Say G'day®);
• information services numbers;
• number portability;
• mobile VPN, mobile voicemail;
• advanced network routing; and
• screening functions.

Our inbound services are important to our major business customers because they support their call centre and customer service operations. Our Contact centre enablement services, include network-based speech recognition. interactive voice response solutions, computer telephony integration and advanced call routing services.

Data networks

We operate a number of data networks including a:

• Switched Data Network ("SDN");
• National Transaction Switching Network; and
• Digital Data Network ("DDN").

Our SDN comprises approximately 857 switches linked to access multiplexers at more than 130 sites around Australia. It is the backbone for numerous IP WAN services, supporting a range of access types from the fixed ATM and frame services for domestic and global use to Dynamic Dial, ADSL, wireless services and value-added features including firewalls, hosting, Messenger, IP Voice and IP Video.

Our retail customers use ATM and frame relay data services on the SDN to build wide-area corporate data networks. Our wholesale customers use the SDN as an element of their own retail offerings.

Our National Transaction Switching Network is suitable for electronic funds transfer and inventory applications. This network provides dedicated and dial-up access in a secure environment, suitable for transmitting transactions.

Our DDN, with its fully integrated management system, provides dedicated secure site-to-site transmission at speeds ranging from 1200bps up to 2Mbps. This network has extensive coverage, with more than 2,500 points of presence nationally across Australia for both Telstra retail DDS and Telstra Wholesale Data Access Radial ("DAR") products.

In addition, the DDN is the underlying access infrastructure for our Accelerated Frame Relay product using our large network reach over multiple access technologies such as G.Shdsl, HDSL and optic fibre to enable customer access into the SDN core network.

The DDN and SDN will be replaced and customers migrated to new products as part of our transformation strategy.

Internet Protocol / Multiprotocol Label Switching ("IP/MPLS") networks

We operate a national Internet full IP routed network, which provides the backbone for all of our Telstra Internet Direct services and all Telstra BigPond® Internet offerings, as well as Telstra Wholesale's Internet products. Our Internet backbone network connects to the rest of the Internet via the international links provided by REACH and connects domestically via peering links with peer ISPs.

We also operate an MPLS (Multiprotocol Label Switching) based Routed Data Network ("RDN") which supports both our internal IP network as well as our suite of IP Products under the name of IP Solutions. The RDN is also used to deliver IP Metropolitan Area Network ("IPMAN") and Ethernet MAN services along with our interstate IP Wide Area Network ("IPWAN"). We offer a Government IP solution providing a direct fibre-based IP Network for use by Government agencies in Metropolitan and regional locations.

The RDN supports the delivery of retail and wholesale Ethernet based products nationally.

As part of the transformation, our Internet backbone network and the RDN will be replaced by a single IP/ MPLS core.

IP Voice Solutions

We have provided a hosted open-standards IP Telephony solution for our corporate customers since 2003.

The IP Voice Solutions are delivered using a common Internet Protocol network utilising a Next-generation Network architecture.

Broadband network

We deliver broadband capability through HFC, ADSL, Wireless and satellite services. Our HFC broadband network passes approximately 2.8 million homes and businesses. The optic fibre component of this broadband network consists of two forward and one return path fibre. The HFC network is designed to provide two-way transmission for interactive services and high-speed data downloads, currently up to 17Mbps via BigPond® Cable Extreme service.

ADSL is a broadband technology using the existing copper line technology that also delivers PSTN services. ADSL deployment commenced in August 2000 and we achieved our target coverage for fiscal 2006 with over 2,300 ADSL enabled exchanges sites.

We also offer satellite broadband services via both a two-way satellite service and a satellite download/dial-up backchannel in areas of Australia for customers who are unable to access broadband via cable. ADSL or Wireless.

Digital Video Network

Our Digital Video Network is an optical fibre network used by video broadcasters and aggregators for the transmission and distribution of their content. The capabilities of the network allow for seamless sharing of content between approved broadcasters as well as transmission of the content by means of high grade encoding techniques.

Electromagnetic energy ("EME")

Certain reports have suggested that EME emissions from mobile phone base stations and radio communications facilities (including handsets) may have adverse health consequences for users and the community. We rely on the expert advice of national and international health authorities such as the Australian Radiation Protection and Nuclear Safety Agency ("ARPANSA") and the World Health Organisation ("WHO") for overall assessments of health and safety impacts of EME. The current consensus is that there is no substantiated scientific evidence of health effects from the EME generated by radio frequency technology, including mobile phones and base stations, when used in accordance with applicable standards.

We are committed to being open and transparent on all issues relating to EME emissions. We comply with all relevant radio frequency standards and have comprehensive policies and procedures to protect the health and safety of the community and our employees.

Together with other Australian mobile carriers, through the Mobile Carriers Forum ("MCF"), we have implemented a process to help ensure compliance with the Australian Communications Media Authority ("ACMA") electromagnetic radiation framework and the Australian Communications Industry Forum ("ACIF") code of practice for radio communications infrastructure deployment. We developed tools to assist compliance, such as the National Site Archive and National Antenna database, which have been adopted by the MCF.

We have developed base station EME software that calculates environmental emission levels in a matter of seconds. Our RF-MAP^TM software enables operators, local authorities and community groups to assess the environmental impacts of mobile phone base stations and confirm compliance with safety standards. We have given copies of our RF-MAP^TM software to national and international health authorities as well as community and Government organisations, reflecting our commitment to sharing expertise and providing the community with easy to use solutions.

We are also active participants on national and international EME standards bodies and research institutions.

Property, plant and equipment

Overview

A large part of our network is constructed on land occupied under our statutory powers and immunities. We also own and occupy land that includes strategic sites, such as the properties on which our telephone exchanges are located. As at 30 June 2006, we owned 5,233 freehold sites and occupied 8,870 sites on a leasehold or other basis. Most of our sites are related directly to our telecommunications operations and are used for housing network equipment of various types, such as telephone exchanges, transmission stations, microwave radio equipment and mobile radio repeater equipment. Some of our operational sites are on leased land or land that we have access to by statutory right or other formal or informal arrangement. In addition to our operational sites, we own or lease a range of properties used for office accommodation, storage and other miscellaneous purposes which are discussed in "Operating and Financial Review and Prospects-Contractual obligations and commercial commitments".

Land access powers and immunities

The land access powers and immunities conferred on carriers by the Telecommunications Act 1997 (Cwth) (Telecommunications Act) are limited specific activities involving inspection and survey of land, maintenance of facilities and installation of "low impact" facilities as prescribed by the Telecommunications Low Impact Facilities Determination 1997. For activities not covered by the land access powers and immunities regime, we must obtain all necessary consents, including the consent of the relevant town planning authority as well as from the owner of the land, before network construction activities may commence. Where the network-related activities are to occur in areas of indigenous cultural heritage or on land where native title exists the relevant stakeholders are consulted. In areas of environmental significance, the Department of Environment and Heritage are also consulted and notified. The consultation period must be considered when determining activity timeframes. We have comprehensive land access procedures and systems to enable staff and contractors to comply with relevant legislation when undertaking network related activities.

Environmental issues

Environmental aspects covering the handling and storage of dangerous goods, noise from fixed plant, visual amenity and disposal of waste (including obsolete and decommissioned equipment) are required to be managed as part of operating and maintaining plant and equipment on occupied sites. We manage the potential risks associated with these environmental aspects through various control procedures. Incident processes are in place to minimise the potential impacts of environmental incidents. New equipment undergoes an environment assessment before being implemented into the network. Sites to be divested undergo environmental assessment and, if appropriate, remediation, prior to sale.

We are aware of no current significant environmental issues that impede the utilisation or integrity of our network operation.

Legal Proceedings

C7 litigation

In November 2002, Seven Network Limited and C7 Pty Limited ("Seven") commenced litigation against us and various other parties ("the respondents") in relation to the contracts and arrangements between us and some of those other parties relating to the right to broadcast the Australian Football League and National Rugby League, the contract between FOXTEL and us for the provision of broadband HFC cable services (the "Broadband Cooperation Agreement") and other matters.

Seven seeks damages and other relief, including that some of these contracts and arrangements are void. Seven also seeks orders which would, in effect, require a significant restructure of the subscription television/sports rights markets in Australia. Expert reports filed by Seven were at one time used to suggest that Seven sought total damages of around A\$1.1 billion. However, some significant components of this expert evidence have since been ruled inadmissible by the trial judge and many of the facts on which Seven's loss claim is based are contested. In addition to denying liability at all, the respondents have filed expert reports to the effect that, even if liability were found to exist, damages should be assessed at a very significantly lesser amount. If Seven obtained any order for damages or legal costs affecting us, the liability arising from that order may subsequently be apportioned between the relevant respondents, with us bearing only a portion of the total liability. Final oral submissions were completed in early October and we are awaiting judgement. In light of the progress of this case to date, we consider that it is unlikely to have any material effect on our overall business or financial position.

Shareholder class action

In January 2006, a shareholder commenced a representative proceeding in the Federal Court against us. The statement of claim alleges that we breached the Corporations Act and the ASX Listing Rules between 11 August and 7 September 2005 by failing to disclose to the ASX or in our fiscal 2005 full year accounts (1) that our CEO, Mr Trujillo had formed an opinion that there had been past deficiencies in operating expenditure and capital expenditure on telecommunications infrastructure, (2) that our CEO had forecast a significant and accelerating decline in our PSTN business, and (3) that we had communicated these matters to the Commonwealth. The claim seeks orders for compensation for the class of shareholders who bought shares between 11 August and 7 September 2005. The proceeding is at an early stage, and is considered unlikely to have any material effect on our overall business or financial position. We are vigorously defending the claim.

Competition notice regarding line access

Refer "Regulation - Conduct regulation".

Other

We are also involved in routine litigation. Governmental authorities and other parties threaten and issue legal proceedings against us from time to time.

We do not consider that there are any current proceedings that could materially adversely affect our overall business or financial position.

Employees

We are one of Australia's largest employers. As at 30 June 2006, the Telstra Group employed 40,996 full-time employees. We also engage employees under flexible work arrangements including casual, supplementary and parttime employees. As at 30 June 2006, the Telstra Group had engaged the equivalent of 3,456 full-time employees under these flexible arrangements. In total, as at 30 June 2006, the Telstra Group's full-time equivalent (FTE) employee total was 44,452 which is 1,775 less than at the same time in 2005, where the equivalent FTE employee number totalled 46.227.

We also use contractors and agency arrangements to round out our total workforce. Including IT contractors, non-IT contractors, staff on agency arrangements, full-time employees and employed equivalents, we had a total workforce of 49,443 as at 30 June 2006 and a total workforce of 52,705 as at 30 June 2005.

More than 90% of our employees work in Australia. However, we also have international interests, with employees in New Zealand, Asia and other locations as follows:

	As at 30 June
		2006 2005
New Zealand
Asia
Other		- 298

The following table summarises full-time employees and equivalents in Australia and overseas for the past five financial years: $\sim$ as $\pi$

	As at M June
	2006	2005	2004	2003	2002
Full-time Australian based employees of the
Telstra Group		39.680 35.774		- 36.781	40.084
Full-time equivalent total for the Telstra Group $44,452$ $46,227$ $41,488$ $41,620$					44.595

Superannuation

Our employees receive superannuation contributions that are either more generous than or comply with our legal obligations. The majority of our Australian employees are members of the Telstra Superannuation Scheme. our default fund, or in the case of some employees who were employed prior to 1990, the Commonwealth Superannuation Scheme. Refer "Relationship with the Commonwealth — The Commonwealth as shareholder".

During fiscal 2006, we implemented Choice of Superannuation Fund in accordance with the legislation, which came into effect in July 2005. While the legislation allows for certain categories of our employees to be exempted, we extended this flexibility to as many employees as possible, subject to other legislative restrictions.

Employee Relations

In September 2005, a new Enterprise Agreement ("EA") was certified by the Australian Industrial Relations Commission. This EA covers approximately 50% of our employees, has a nominal expiry date of September 2008 and provides pay increases of 2.5% each year over a three-year period.

Amendments to the Workplace Relations Act 2006 (Work Choices) were enacted on 27 March 2006. We have adjusted relevant terms and conditions of employment in accordance with the new Work Choices requirements.

Occupational Health and Safety

We believe that the successful prevention of work-related injury and illness is achieved through a balance of robust management systems, engaged employees and committed managers. Telstra Care, our health and safety management system, focuses on leadership in safety, together with measurable accountabilities, through all levels of management. Each year we undertake an extensive schedule of occupational health and safety audits with the aim of continually improving safety at work. For the last nine years, the results have shown year-on-year improvement, which has a high correlation to our decrease in Lost Time Injuries.

Under our Telstra Care health and safety management system, in fiscal 2006 we have:

• completed more than 57 external occupational health and safety audits across office and field based areas throughout Australia, taking the total to over 723 since the audit program commenced in December 1997;
• included in this are 8 audits of our contractor management systems
• further enhanced and simplified our successful office health, safety and environment planning to assist managers in achieving safe workplaces;

As a result of the continuous improvement through the Telstra Group's activities, during fiscal 2006:

• Lost-Time Injuries ("LTIs") reduced by 21% to 157;
• The 12 month moving average of Lost-Time Injury Frequency Rate (measured by the number of LTIs per million hours worked) reduced from 3.2 to 2.7; and
• The number of open claims has been reduced to 1796. This is a significant milestone as it is the first time since 1988, when we became a self-insurer that the number of open claims has fallen below 2000.

In line with Commonwealth OHS Reporting, the following work-related incidents were reported in fiscal 2006:

• 42 employees were absent from work as a result of an incident for more than a month;
• 68 employees required emergency medical treatment or treatment in a hospital; and
• 201 dangerous occurrences were reported. These are work-related incidents that could have caused death, serious injury or incapacity to a person, but did not. Notably, we have a policy of reporting incidents quickly and often investigation reveals that the potential severity of an incident was less than initially estimated.

Our focus is to rigorously identify the risks to our people and to manage those risks appropriately.

Annual general meeting

Telstra's annual general meeting will be held on 14 November 2006. The following items of business will be considered at that meeting:

• Chairman and CEO presentations;
• Remuneration Report;
• discussion of financial statements and reports;
• election and re-election of directors; and
• proposed new constitution

In its notice of the annual general meeting, the Telstra Board recommends the re-election of the four serving directors, and does not recommend the election of the five external candidates, including Mr Geoffrey Cousins.

Due to the timing of the Global Offering, purchasers under the Global Offering will not have the right to attend and vote at Telstra's annual meeting on 14 November 2006 unless they are existing shareholders.

At the time of the annual general meeting, the Commonwealth will hold approximately 51.8% of Telstra's shares.

The Commonwealth expects to exercise its voting rights at the forthcoming annual general meeting on 14 November 2006 in the following manner:

• to support the resolution that the remuneration report be adopted;
• in relation to the election and re-election of directors, to vote for Mr Macek, Dr Stocker, Mr Willcox, Mr Zeglis and Mr Cousins and to vote against Mr Vogt, Mr Mayne, Mr Cooper and Mr Kenos; and
• to support the special resolution to adopt a new constitution.

Competition

Overview

Telstra operates in a number of highly competitive markets. There is no restriction on the number of carriers or carriage service providers ("CSPs") in the Australian market, or on the types of products and services they may supply. Many of our competitors are subsidiaries of large, foreign-owned multinationals. Their presence in the Australian market, along with a myriad of smaller players (notably hundreds of ISPs), contributes to rigorous competition. There is not only competition within specific product offerings, but between them, as customers are substituting one method of communication for another, such as mobile for basic access at home. While the overall communication market has grown in size, our market share has declined due to competition. Further, the traditionally high-margin PSTN market is shrinking.

In summary, as at 30 June 2006, we estimate our retail market shares in the products and services we provide to be as follows:

	Retail Market Share
	2006	2005	2004
Basic access services	71%	-73%	75%
Local calls $\ldots \ldots \ldots \ldots \ldots \ldots \ldots \ldots \ldots \ldots \ldots \ldots \ldots$	71%	-73%	74%
Domestic long distance minutes		-62%	65%
International long distance minutes		51%	52%
Mobile services(1) $\ldots$		45%	46%
Internet services (retail broadband) $(2)$		41%	41%
Data revenue(3)		-62%	64%
Subscription television services(4)		-60%	58%
Sensis advertising(5)		13%	13%

(1) Based on Telstra, Optus, Vodafone and Hutchinson data.

• (2) Retail broadband includes BigPond® Broadband and retail business broadband services like Telstra Mobile Broadband, Internet Direct and Hyperconnect.
• (3) Excludes ISDN but includes some wholesale revenues.
• (4) FOXTEL excludes services provided on a wholesale basis to other providers such as Optus TV.

(5) 2006 data not available as of the date of this 2006 Supplemental Information. Figures are for 31 December.

Basic access and local calls

Historically, we faced limited competition in basic access and local calls services. Today we compete for business and residential customers primarily in large cities, because our competitors have built networks or have access to networks in those areas. Local number portability has contributed to facilities and network-based competition. We also face increasing competition from fixed Voice over Internet Protocol ("VoIP") call operators.

National long distance and international services

Our market share for national long distance and international telephone services has been eroded by fierce competition as competitors build switching and build or lease transmission capacity. In most cases, the PSTN originating and terminating access is purchased from us on a wholesale basis. We also compete in this market with a number of operators who sell international calling cards direct to the public via retail outlets.

Mobile telecommunications services

The mobile telecommunications market is highly competitive. Optus, Vodafone and Hutchison own networks, and several CSPs specialise in the resale of mobile services. We estimate that market penetration as of 30 June 2006 was 96%. The rate of growth in voice services in operation is slowing considerably. Mobile service providers are

looking to future growth in revenue from high speed data usage by existing subscribers. We expect that our new high speed NEXT $G^nt$ wireless network will provide differentiation in the mobile market, through greater coverage. faster speeds and new value-added services.

Spectrum is required for mobile services and is auctioned by ACMA from time to time. Limits may be imposed upon the amounts of spectrum we or other bidders may purchase.

Data access services

The Australian data access market is competitive. Customer demand for new growth data services based on DSL, Ethernet or IP-based solutions is increasing. Competition is intense in these growth areas, particularly across niche product solutions and specific geographic areas. Several DSL network providers are offering DSL based VPN services as an alternative to frame relay or leased line data connections. Others are offering Voice over DSL ("VoDSL") and in the future will likely offer integrated voice and data bundles. Nine of our competitors have outlined for consideration a model to build a jointly owned FTTN network to deliver broadband services to a large number of customers. The Commonwealth has announced a A\$878 million scheme to subsidise Internet service providers to supply broadband services in regional, remote and rural Australia. This scheme is likely to increase facilities and network-based competition.

Internet access services

The ISP market in Australia is diverse and highly competitive with over 700 ISPs, ranging in size from very small to substantial. For Internet access services, differentiation includes quality of service, price, speed, voice bundles, value added services, content and availability of local call access and associated information or transaction services.

We provide both dial-up and broadband Internet access services using a range of ADSL, cable, wireless and satellite technologies.

Online services

We compete with domestic and international companies for online, content and web hosting services. We seek to differentiate ourselves through factors including brand recognition and the entertainment, educational and commercial value of our content. In response to increasing competition in the market for content, we have formed alliances with providers of content such as sport and music to deliver additional value to our customers.

Wholesale services

The wholesale market is becoming more competitive with 30 carriers including Optus and PowerTel having invested in infrastructure which enables them to offer wholesale products and services. Telstra Wholesale has more than 500 customers, including approximately 400 ISPs. Telstra Wholesale is focused on the delivery of communication services to intermediaries operating in Australia and offers approximately 40 wholesale-only products. Competition is strong in the wholesale provision of transmission services. Wholesale prices are generally falling as new competitors enter the wholesale services market.

Subscription television

FOXTEL (of which we own 50%) and Optus are the main providers of subscription television services over cable in largely overlapping areas.

AUSTAR distributes subscription television through digital satellite systems in regional areas. FOXTEL and AUSTAR compete only in limited areas.

FOXTEL is the leading subscription television provider in Australia. It has more than 1.25 million subscribers using both cable and satellite (aggregating FOXTEL's retail and wholesale customers). In fiscal 2006, FOXTEL increased its subscribers by more than 10%. Digital services provide more choice to subscribers and greater revenue to FOXTEL. All FOXTEL services will be digital by March 2007.

Subscription television providers compete with free-to-air television operators. Free-to-air television operators are given priority in the telecasting of most major sports programs. From 2007, they will be allowed to broadcast an additional channel each.

Advertising, Directories and Information Services

Sensis, our directories and search business, operates within the highly competitive Australian advertising market. We face competition in automotive, travel and general merchandise markets from a number of print and online businesses. We also face competition from a variety of print and online directories and search businesses. The brands and intellectual property of Sensis are very important to its business and Sensis will consider all avenues open to it to defend those rights.

Competing directory providers have access to CSP subscriber contact details from the Integrated Public Number Database ("IPND") which we maintain as a requirement of our carrier licence.

Payphones

Our payphones business faces increasing competition from new entrants, the increasing use of calling cards that erode payphones revenues, and increased mobile usage.

Regulation

Overview

Current regulations were largely set in 1997 when the structure of the Australian telecommunications market was substantially different than it is today. In our view, those regulations significantly diminish shareholder value by increasing our costs and reducing the opportunity for us to earn revenue and grow, and undermine the development of a sustainably competitive and financially healthy industry. We face substantial regulatory risks in our business which have had, and we expect will continue to have, a significant adverse effect on our operations and financial performance. This is an issue with which management is seriously concerned and committed to seek reform on behalf of our shareholders.

There are three key areas of regulatory impact:

• Access regulation: the ACCC can require compulsory competitor access to our networks at prices arbitrated by the ACCC if the parties fail to agree. We believe that those prices have been significantly less than our calculations of the efficient costs of supply and effectively provide our competitors with heavily subsidised access to our investments. There is no right to a merits review of ACCC decisions to require access or arbitrate prices. The ACCC may hold a public inquiry at any time into whether compulsory competitor access to our NEXT G^TM wireless network should be required. In addition, the uncertainty associated with the access regime meant that we decided we were not able to build our proposed A\$3 billion fibre to the node ("FTTN") network despite the substantial operational savings and incremental revenues for us and the significant benefits for Australia in the widespread availability of high speed broadband services;
• Conduct regulation: Telstra and the ACCC differ in critical instances in their views as to what amounts to anti-competitive conduct in breach of the TPA. For example, the ACCC has stated that it has reason to believe that, by raising our basic access prices to competitors without a similar increase in retail prices, we have engaged in anti-competitive conduct. In our view, an increase in access prices to allow a greater recovery of our costs is not anti-competitive conduct. We believe that should the ACCC allege that we have engaged in anti-competitive conduct, it will rely on the potential of very large fines in an endeavour to have us modify what we consider to be normal commercial behaviour.

The ACCC may in the future regard other of our conduct as a breach of the TPA. In addition, the Communications Minister has a broad power to vary our operational separation plan subject only to the aims and objects of the legislation which are very broad. Any such variation could allow the Minister to determine the way we conduct our business; and

• Social regulation: as the former national telecommunications carrier, some regulations are specific to us and do not apply to our competitors. For example, we are subject to retail price controls and are obliged to make certain uneconomic services available in rural and remote areas without in our view receiving a fair contribution to costs from our competitors.

We are regulated as a carrier and as a carriage service provider ("CSP"). A description of principal industry regulators is set out at the end of this Regulation section.

Access regulation

Part XIC of the TPA is an access regime specific to the telecommunications industry.

Declaration of services

The ACCC may declare that a particular telecommunications service of a carrier or CSP is a declared service and so must be supplied to access seekers upon request. A carrier or CSP is not able to seek a merits review of such declarations.

The main services declared by the ACCC are:

• PSTN originating and terminating access ("PSTN OTA");

• mobile terminating access service ("MTAS");

• transmission capacity (except links between mainland capital cities and some routes between capital cities and regional centres) on various bandwidths:

• certain digital data access service;
• an unconditioned local loop service ("ULLS") allowing access seekers exclusive use of copper wires which connect customer premises:
• a spectrum sharing service ("SSS") allowing an access seeker to supply broadband services to customers while the access provider supplies voice services to the customer;
• local carriage services ("LCS") (except in central business districts);
• wholesale line rental ("WLR") (except in central business districts); and
• an analogue subscription television broadcast service.

FTTN

On 15 November 2005, we announced our next-generation network including an extensive FTTN network to provide high speed broadband services in Australia's five largest cities. The rollout of the FTTN network was, however, subject to obtaining what we viewed a reasonable regulatory outcome including acceptable guarantees about what services would have to be provided to competitors under the access regime and how much they would be required to pay. No such outcome was achieved, and accordingly, on 7 August 2006, we announced that the discussions with the ACCC to allow this investment to proceed had failed. We have made clear that we would not invest in an FTTN network unless we were satisfied that our costs would be recognised (especially those we incur in providing services to rural, regional and remote Australia) and could be recovered.

$3G$

The ACCC may hold a public inquiry at any time into whether mandated competitor roaming on or other access to our NEXT G^7M wireless network should be required, despite the market for mobile services being highly competitive. If roaming or other access were mandated, we would lose the competitive advantage of the wider coverage of our NEXT G^TM wireless network, despite having made a substantial investment in that network. A loss of this ability would have a substantial impact on our mobile revenues. In fiscal 2006, we grew mobile revenues by A\$284 million. We believe future growth in mobile revenues would be severely compromised by mandated roaming as would our ability to grow or even hold mobile market shares. Further, depending on the extent to which competitors acquire mandated roaming rather than invest in their own 3G network, this could result in significant additional mobile and transmission network capital expenditure requirements on us.

LCS

In July 2006, the ACCC extended the declaration of LCS by three years and declared WLR for the first time for the same period — despite the growing level of facilities and network-based competition and the fact that line rental had for many years been available from us on a commercial basis.

Future declarations

If the ACCC believes that it would promote the long-term interests of consumers, it may declare other services. such as a high-speed broadband service using ADSL2+ or HFC cable network. We believe that such declarations would be unwarranted.

Terms and conditions of access

Part XIC of the TPA also empowers the ACCC to determine the terms of access to the declared services, taking into account such criteria as the long term interests of consumers. For example, the ACCC has issued Model Terms and Conditions (price and non-price) for core declared services, such as the ULLS, PSTN OTA and LCS. It has also

published pricing principles for various declared services informing the industry of how prices for these services are likely to be determined by the ACCC in an arbitration.

In most cases, the ACCC proposes that the prices of declared services should be cost based to reflect the total service long run incremental cost ("TSLRIC") of providing the service. In applying the TSLRIC methodology, we have often disagreed with the ACCC's calculation of our TSLRIC costs of providing declared services. For some services, such as the LCS and WLR, the ACCC has adopted a Retail Minus Retail Costs ("RMRC") approach. which has for some services the potential to deliver a price that is below our calculation of the TSLRIC of the service.

The legislation also allows the Minister to make a pricing determination setting out compulsory principles for establishing access prices that must be followed by the ACCC. To date, no Ministerial pricing determination has ever been issued.

In relation to bilateral negotiations, Part XIC gives primacy to commercial negotiations; however, if negotiations are unsuccessful, the ACCC has the power to arbitrate the terms and conditions of access which are in dispute. The ACCC can issue interim and final determinations in an arbitration. Final determinations may be backdated to the date negotiations between the parties commenced. In addition, while arbitration proceedings are confidential between the parties, the ACCC has the ability to publish any determination it makes.

An adverse outcome in an arbitration would harm us in terms of lower wholesale revenues and a greater ability for our wholesale customers to be competitive in retail markets. It would also weaken our position in negotiating access prices with other wholesale customers.

An access provider of a declared service may also lodge an undertaking with the ACCC, setting out the terms and conditions upon which it proposes to provide a declared service. If that undertaking is accepted by the ACCC, then any determination made by the ACCC in an arbitration must be consistent with the terms of the accepted undertaking. While it is not possible to apply to the Australian Competition Tribunal ("ACT") for a merits review of an arbitral decision of the ACCC, we have the right to a merits review by the ACT of a rejection by the ACCC of an access undertaking.

Unconditioned Local Loop Service ("ULLS")

ULLS allows our competitors to install their equipment in our exchanges and provide voice and broadband services to retail customers, bypassing much of our network and allowing them to compete aggressively in the retail market place. As at 30 June 2006, our competitors had installed equipment in over 80% of exchanges in band 2, giving them coverage of around 92% of PSTN lines in band 2 exchanges. We estimate that this coverage in band 2 will increase to around 95% by 30 June 2007. In total, competitors have installed equipment in around 555 exchanges across Australia, and we estimate that by 30 June 2007, this number will increase to over 1,000 exchanges across Australia.

The ACCC has over time reduced the prices it believes we should charge for ULLS, although many of our costs of providing ULLS (such as fuel, copper and labour) have increased significantly over that time. In addition, the ACCC has indicated that we should charge different prices in different areas for ULLS, despite the fact that we are effectively required to charge the same residential and business retail prices for a basic line rental service throughout Australia. This will enable our competitors to target customers in higher density areas where access prices are low, leaving us to provide services to many customers in high cost, low density areas at the same retail price as in metropolitan areas — without what Telstra believes to be adequate compensation from the universal service obligation regime (see below).

In December 2005, we submitted a ULLS access undertaking with a single (or averaged) price of A\$30 per month for all areas. On 28 August 2006, the ACCC issued a final decision, rejecting the undertaking on the basis that it was not satisfied that our costs and the averaging of those costs were reasonable. The ACCC did not give an indication of what prices it would regard as reasonable. We have appealed that rejection to the ACT.

In addition, Primus, Optus, Chime, PowerTel, XYZed, Request and Macquarie are each in arbitration with us claiming that our charges for ULLS are too high. In August 2006, the ACCC made binding interim decisions in several of these arbitrations that prices remain deaveraged and that the price in band 2 (the metropolitan area where the greatest number of ULLS services will be provided) be reduced from A\$22 per month to A\$17.70 per month. There is a risk of the final decisions setting a lower price. We will consider all avenues open to us to challenge any such outcome.

Following these decisions, we revised our earnings outlook for fiscal 2007, with EBIT growth revised to between 2% and 4% from between 4% and 6% (subject to various assumptions), illustrating that adverse regulatory decisions by the ACCC can have an immediate and significant adverse effect on Telstra's business. Refer "Operating and Financial Review and Prospects — Outlook".

As an illustration of the longer term impact of such an adverse regulatory decision, management estimates that ULLS implemented in band 2 in accordance with the ACCC's interim pricing would lead to an estimated A\$2.5 billion reduction in Telstra's enterprise value. This estimate assumes that 20% of PSTN customers are served by ULLS by 2015 and a band 2 access price of A\$17.70 per month as compared with the earlier price of A\$22 per month. The calculation considers the first order impacts of the price reduction for wholesale services and assumes a full flow through of the reduced access price to retail PSTN and broadband prices by us and our competitors.

The impact of such ACCC pricing in subsequent years would be greater due to increased uptake of ULLS by access seekers.

Spectrum Sharing Service ("SSS")

The ACCC has applied TSLRIC pricing principles to the SSS. In December 2005, the ACCC rejected our SSS monthly charges undertaking of A\$9, which was consistent with the range of indicative prices previously published by the ACCC for the service. We unsuccessfully appealed this rejection to the ACT.

Primus, Chime and Request are each in arbitration with us claiming that our charges for SSS are too high. The issues covered by these arbitrations relate to the appropriate price payable for the monthly charge for SSS, the connection price for SSS, as well as some non-price terms. On 6 October 2006, the ACCC issued two draft interim decisions reducing the monthly charge to A\$3.20. If this significant reduction is confirmed, we believe there will be accelerated growth in SSS enabling our competitors to provide broadband and VoIP services, placing retail pricing pressure on us, while we are restricted to supplying basic access services.

PSTN Originating & Terminating Access ("PSTN OTA")

The ACCC has published pricing principles for PSTN OTA, stating TSLRIC as the appropriate methodology for determining the price of the service. We had an access undertaking accepted by the ACCC for the price of PSTN OTA, which expired on 30 June 2006.

In March 2006, we filed a new undertaking with the ACCC, seeking new prices and a new pricing structure for the service. The undertaking sets out new prices which would operate for two years from 1 July 2006. The prices propose an increase from the previous prices that applied, reflecting our efficient costs of providing the service, and recognizing the falling volume of traffic on the network. In July 2006, the ACCC indicated in its draft indicative prices that the headline rate should be A\$0.01 per minute compared to a headline rate in our proposed undertaking of A\$0.0218 per minute. In September 2006, the ACCC gave a draft decision rejecting the undertaking.

Optus has notified an access dispute to the ACCC in relation to the price payable to us for PSTN OTA.

Local Carriage Service ("LCS") and Wholesale Line Rental ("WLR")

In June 2005, our accepted undertaking for the price of the LCS expired. We filed a new undertaking with the ACCC in conjunction with its PSTN OTA price, setting out a lower price for the LCS, which would apply from 1 July 2006. The LCS price reflects our view of the RMRC approach the ACCC might adopt in determining the LCS price for the period of the undertaking.

In July 2006, the ACCC indicated its draft view that the price of LCS should be A\$0.1769 per call, calculated on an RMRC basis, pending the implementation of a cost based pricing approach. While this compares well with the price in our proposed undertaking of A\$0.0928 per call, the LCS is usually provided in conjunction with WLR and the ACCC has indicated its draft view that the price of WLR should be A\$23.57 per month residential and

A\$26.30 per month business, calculated on an RMRC basis (pending the implementation of a cost based pricing approach) compared with our price charged of A\$27.60 residential and A\$31.77 business per month. Rebalancing in this way by reducing fixed charges and increasing usage charges would be detrimental to us. In September 2006, the ACCC gave a draft decision rejecting the LCS undertaking.

Optus has notified access disputes to the ACCC in relation to the terms and conditions of access for the supply by Telstra of LCS and WLR.

Mobile terminating access service ("MTAS")

The ACCC has published pricing principles for MTAS of A\$0.15 per minute for calendar 2006 and A\$0.12 per minute for the first six months of 2007. MTAS is an input into the fixed-to-mobile and mobile-to-mobile services provided by us to our customers. The ACCC has rejected undertakings by Optus, Vodafone and Hutchison, each of which seek to claim prices in excess of the indicative prices published by the ACCC (for example, Optus has sought A\$0.17 per minute for calendar 2007). Optus and Vodafone have appealed the ACCC's rejection of their undertakings to the ACT. We have intervened in these proceedings, and the hearings commenced in August 2006.

We are also engaged in arbitrations against Optus, Vodafone and Hutchison, claiming that the MTAS prices they are seeking to charge for calendar 2006 are too high. Recently, the ACCC issued draft final decisions broadly consistent with the ACCC's pricing principles.

Transmission capacity

Chime has filed an arbitration against us, claiming our transmission capacity charges are too high.

Conduct regulation

Competition rule

In addition to the general requirements of trade practices law, a carrier must not engage in anti-competitive conduct in breach of the competition rule. A carrier may be in breach of the competition rule if it:

• contravenes general trade practices rules relating to anti-competitive conduct in respect of a telecommunications market (including the use of market power for an anti-competitive purpose); or
• has a substantial degree of market power and takes advantage of that power with the effect or likely effect of substantially lessening competition in any telecommunications market, taking into account other conduct with such an effect.

The ACCC can issue a Part A competition notice if it has reason to believe that a carrier has contravened the competition rule.

The ACCC can also issue a Part B competition notice which will be more detailed than a Part A notice; and it is the presumptive evidence of the information in it that can be used in court proceedings against the carrier.

Any person (including competitors) may apply at any time to the Federal Court for an injunction to restrain a contravention of the competition rule, whether or not a competition notice has been issued.

A carrier may be liable to pay penalties imposed by the Federal Court of up to A\$10 million plus A\$1 million per day of contravention or, if the contravention lasts for more than 21 days, up to A\$31 million plus A\$3 million per day (up to a maximum period of one year), and may also be liable for compensatory damages to affected competitors, if:

• it continues to engage in conduct that is the subject of a competition notice after the notice comes into effect; and
• the Federal Court finds that the conduct is in breach of the competition rule.

In Telstra's view, the amount of any penalty imposed by the Federal Court is likely to be significantly less than the maximums set.

In December 2005, we increased our prices for line access provided to our competitors without a similar increase in our retail prices, in order to price closer to our average costs of providing that access. The ACCC appears to allege that these increases left insufficient margin for our competitors in the retail market even though there is still a profit margin for our competitors in reselling line rental as a part of a bundled package along with local, long distance and fixed-to-mobile calls. The ACCC has argued that our conduct is taking advantage of substantial market power which has or is likely to have the effect of substantially lessening competition in the retail market, and that therefore we are in breach of the competition rule. On 12 April 2006, the ACCC issued a competition notice against us to this effect. The ACCC may take us to the Federal Court for this alleged breach. The maximum potential penalties that the Federal Court could impose exceed A\$470 million as at 30 September 2006 and are increasing at A\$3 million per day. Optus Networks Pty Ltd (ACN 008 570 330) has issued proceedings in the Federal Court which, in part, rely on the competition notice and seek damages, a refund and an injunction preventing us from charging the increased prices and recovering our costs. We will vigorously defend these proceedings and any enforcement proceedings which may be brought by the ACCC, on the basis that we have not breached the competition rule simply by moving our prices closer to our average cost of providing access.

We have also claimed that the competition notice should be set aside for uncertainty and that the ACCC did not accord us procedural fairness by failing to properly consult with us prior to the issue of the notice. The ACCC argues that it has complied with all of its duties of procedural fairness and natural justice. If this challenge is successful, the ACCC will still be able to issue a fresh competition notice but only after proper consultation.

Record-keeping rules

We are required by the ACCC to keep detailed financial statements in respect of several wholesale and retail services. We must report periodically to the ACCC on imputation testing to establish the adequacy of the margin, between our wholesale and retail prices as part of the accounting separation provisions. If there is an inadequate margin the ACCC can investigate to see if we have breached the competition rule. We are also required to keep detailed records and report to the ACCC comparing our performance in providing and maintaining basic access and ADSL services to retail and wholesale customers. Our imputation tests and performance reports are published by the ACCC.

We estimate that compliance with the ACCC record-keeping rules costs us A\$2.3 million per annum. Most of this expense is associated with accounting separation. To date, there has been no indication whether this requirement will be removed in light of the introduction of operational separation.

Operational separation

While the Commonwealth has firmly rejected calls for the Telstra wholesale and resale businesses to be placed in separate ownership, in September 2005, legislation was passed mandating the operation of separate retail, wholesale and network business units (operational separation). We prepared an operational separation plan which was adopted by the Communications Minister in June 2006. In general, the plan covers:

• the requirement to keep various business units separate;
• measures we have adopted to ensure that the standard of delivery of services and information to wholesale customers is equivalent to that for retail customers;
• a price equivalence framework directed towards providing assurance that we are behaving legitimately in the pricing of particular services; and
• provisions to ensure that we provide equivalent operational quality, fault detection and rectification and service activation and provisioning for retail and wholesale customers of those services.

We are also required to establish and publish notional contracts between our network services, wholesale and retail business units as a means of achieving equivalence in operational quality, fault detection and rectification and service activation and provisioning.

The operational separation provisions place an additional burden on us with numerous restrictions imposed on the way we run our business. An important risk with operational separation lies in the power of the Communications Minister to make such variations to our operational separation plan as could allow the Communications Minister to

determine the way we conduct our business, subject only to the aims and objects of the legislation which are very broad.

Social Policy Regulations

Retail price restrictions

The Communications Minister has set retail price controls on some of our services that apply until 30 June 2009. These price controls do not apply to our competitors.

A basket of our line rentals, local, national, international and fixed-to-mobile calls is subject to an overall price freeze. Up to 30 June 2007, some services are subject to a price cap of $1.5 \times$ CPI, and, between 1 July 2007 and 30 June 2009 our basic line rental products and connection services may be increased only by the rate of inflation. These caps may limit our ability to increase line rental charges to recover their full cost and to rebalance our charging between line rentals and call charges. We are required to offer a basic line rental service to residential and business customers at the same price throughout Australia. In addition, we must offer a standard line rental to residential customers, charity customers and schools.

In addition, we are subject to the following regulations:

• The ACCC has powers to monitor and report on our compliance with price controls and has broad discretion to determine methodologies that specify how the price controls to which we are subject are to operate.
• We are not permitted to charge more than A\$0.50 (including GST) for a local call from a public payphone or (in most cases) more than A\$0.22 (including GST) for an untimed local call from any other service.
• Our price for local calls provided in non- metropolitan areas must not exceed the price charged by us in metropolitan areas.
• We cannot charge more than A\$0.22 (including GST) for certain calls made to an Internet service provider using an 0198 access number.
• We cannot impose or alter a charge for a directory assistance service without notifying the Communications Minister who may disallow such changes.

All CSPs must offer untimed calls to residential and charity customers for all local calls and to business customers for local voice calls.

The extent to which we face facilities or network-based competition varies significantly across the country. In many areas there is substantial alternative network investment reflecting higher population densities. We are effectively required to charge the same price for a basic line rental service for all retail customers across Australia. without what we believe to be adequate compensation from the universal service obligation regime (see below).

Carrier licences

All carriers must as a condition of their carrier licence comply with the Telecommunications Act, the Telecommunications (Consumer Protection and Service Standards) Act and their access obligations under the TPA. The Communications Minister has broad powers to impose further conditions on any carrier licence. Any breach of a licence condition is subject to a penalty of up to A\$10 million imposed by the Federal Court.

Local presence licence condition

In 2005, the Communications Minister issued a licence condition requiring us to maintain a local presence in regional, rural and remote Australia, to the extent that this is broadly compatible with our overall commercial interests and does not impose undue financial or administrative burdens on us. The licence condition requires us to prepare a plan setting out how we will fulfil the condition for approval by the Communications Minister. We are required to take all reasonable steps to comply with our approved plan.

Universal service and digital data service obligations

We have an obligation to fulfil the universal service obligation ("USO") and the Digital Data Service Obligation ("DDSO") throughout the whole of Australia. We must ensure that standard voice services, payphones and a digital data service with a speed broadly equivalent to 64kbps are reasonably accessible to all people in Australia on an equitable basis, wherever they reside or carry on business. We must also take into account the needs of customers with disabilities. We are required to submit plans to ACMA and the Communications Minister for their approval which set out how we will fulfil the USO and DDSO throughout Australia.

Our net losses that result from supplying services under the USO and DDSO are required to be shared among all carriers according to their size by revenue. The other participating carriers typically pay around 30% of the net USO cost. The universal service subsidies are determined by the Communications Minister and historically have been significantly less than our actual costs in meeting the USO and DDSO and the costs last modelled by ACMA. The last time ACMA undertook a detailed costing of the USO, it estimated the total USO cost to be A\$548 million per annum, although we estimate the cost to be significantly higher. The capped costs for fiscal 2006 to fiscal 2008 are A\$171.4 million, A\$157.7 million and A\$145.1 million respectively.

Customer service guarantee ("CSG")

ACMA has made mandatory standards for CSPs in relation to the connection and repair of standard voice telephone services and the keeping of customer appointments. From 31 October 2006, the damages payable for CSG breach include: up to A\$24.20 for a missed appointment and up to A\$24.20 for each working day of delay up to five working days and up to A\$48.40 per working day of delay after that for delayed connection or repair. Damages cannot exceed A\$25,000 per customer for each contravention.

We alone must also comply with a network reliability framework set by the Communications Minister which imposes obligations for the monitoring, prevention and remedying of CSG faults.

Principal industry regulators

The Communications Minister is primarily responsible for telecommunications industry policy and legislation and has very broad discretionary powers to make rules and licence conditions and to give directions, a breach of which is subject to a penalty imposed by the Federal Court of up to A\$10 million.

The ACCC administers the TPA which regulates competition generally and includes specific provisions governing conduct in the telecommunications industry and mandated access to certain telecommunications services. The ACCC also administers retail price control arrangements that apply only to us.

ACMA was formed on 1 July 2005, assuming the functions previously held by the Australian Communications Authority and the Australian Broadcasting Authority. ACMA is responsible for regulating the technical aspects of the telecommunications industry. Importantly, ACMA also administers spectrum use policy and the issuing of spectrum licences, which are of critical importance to mobile telecommunications.

ACMA may give written directions to carriers and CSPs requiring them to comply with various provisions of the Telecommunications Act, the Telecommunications (Consumer Protection and Service Standards) Act and their licence conditions. Breach of such a direction is subject to a penalty imposed by the Federal Court of up to A\$10 million.

The ACCC and ACMA are independent statutory agencies and the ACCC is in general not subject to ministerial oversight or direction. The Telecommunications Industry Ombudsman is an industry-funded body established to investigate and resolve retail customer complaints about telecommunications services and carrier land access disputes. Participation is mandatory for all carriers and most CSPs.

The industry also self-regulates through codes and standards. An industry body, the Australian Communications Industry Forum ("ACIF"), has developed many codes regulating detailed technical and operational aspects of the telecommunications industry in areas such as billing accuracy, churn, credit management and customer transfer. On 1 September 2006, ACIF merged with the Service Providers Association Incorporated ("SPAN") and formed the Communications Alliance.

ACMA registers ACIF codes under the Telecommunications Act and has the power to direct carriers or CSPs in breach of a code to comply. Breach of a direction is subject to a penalty of up to A\$250,000 imposed by the Federal Court.

Offshore subsidiaries

Our international operations are subject to regulation and licensing requirements in Hong Kong, Japan, Singapore, New Zealand and the United Kingdom. We are also subject to regulation and licensing requirements by the US Federal Communications Commission and state regulators in the states of New York, Texas and California.

Some of these licenses may require notification or approvals from the relevant regulators and related governmental departments in respect of any change in control resulting from the completion of the Global Offering and the Commonwealth's transfer of its shares in Telstra to the Future Fund. Some of the consents required in relation to our United States and Singapore regulatory licenses and related agreements may not be obtained when required, in which case fines and other penalties may be imposed. There is a risk that these licenses and related arrangements may also be cancelled. While we do not believe that the relevant businesses make a significant contribution to our financial results, if one or more of REACH's licenses were cancelled, this could have a significant effect on the carriage of our international voice and data traffic.

Directors' and Senior Executives' Shareholdings in Telstra

As at 1 September 2006, the directors' and key management personnel's shareholdings in Telstra are:

Directors

	Number of Shares Held
	Direct Interest	Indirect Interest(1)	Total
Donald G McGauchie	1.866	68.278	70,144
Sol Trujillo
Belinda J Hutchinson	38.912	40,426	79.338
Catherine B Livingstone	11.637	27.800	39.437
Charles Macek		53,704	53.704
John W Stocker	2.953	99.985	102.938
Peter J Willcox		31,897	31,897
John D Zeglis		1.897	1.897

(1) Shares in which the director does not have a relevant interest, including shares held by director related entities, are excluded from indirect interests.

Key Management Personnel

	Number of Shares Held
	Direct Interest	Indirect Interest(1)	Total
Bruce Akharst $\ldots \ldots \ldots \ldots \ldots \ldots \ldots \ldots \ldots$	4.880	17.000	21,880
Kate McKenzie
David Moffatt	167.022		167,022
Deena Shiff $\ldots \ldots \ldots \ldots \ldots \ldots \ldots \ldots \ldots \ldots$	5.680		5,680
John Stanhope	75.715		75,715
David Thodey	138.342	-800-	139.142
Greg Winn

(1) Shares in which the director does not have a relevant interest, including shares held by director related entities, are excluded from indirect interests.

Glossary
1xRTT	(One Times Radio Transmission Technology) a 3G development of CDMA technology for high speed packet switched data
2.5G.	technology designed to expand the bandwidth and data handling capacity of existing mobile telephony systems such as GSM using GPRS
3G:	third generation technology designed to further expand the bandwidth and functionality of existing mobile telephony systems beyond 2.5G
AS:	Australian Dollars
ACCC:	Australian Competition and Consumer Commission
ACIF:	Australian Communications Industry Forum
ACMA:	Australian Communications and Media Authority
ACT:	Australian Capital Territory
ADR:	American Depositary Receipt
ADS:	American Depositary Share
ADSL:	(Asymmetric Digital Subscriber Line) a technology for transmitting digital information at a high bandwidth on existing phone lines
AGM:	Telstra Annual General Meeting
$A-IFRS:$	Australian accounting standards equivalent to International Financial Reporting Standards
ARPANSA:	(Australian Radiation Protection and Nuclear Safety Agency) a Commonwealth agency responsible for protecting the health and safety of people and the environment from the harmful effects of radiation
ASX:	Australian Stock Exchange Limited
ATM:	(Asynchronous Transfer Mode) a high bandwidth, low delay technology for transmitting voice, data and video signals
AUSTAR:	Austar United Communications Limited
Bandwidth:	the capacity of a communication link
Broadband
network:	a network to support subscription television and online services
Carriage service
provider:	a supplier of a telecommunications services to the public using Carrier network infrastructure
Carrier:	a licenced owner of certain specified transmission infrastructure that is used to supply telecommunications carriage services to the public; any person holding a carrier licence
CDMA:	(Code Division Multiple Access) a mobile telephone system based on digital transmission
Churn:	(where expressed as a rate) the rate at which subscribers to a service disconnect from the service, which is usually expressed as total disconnects for a period divided by the average number of customers for that period
Churn:	(where expressed as an activity) the transfer of a customer's telecommunications service from one supplier to another — in the case of a transfer involving a resale arrangement, no disconnection occurs and a churn relates to a change in the legal entity responsible for a telecommunications service or account
CGT:	Australian capital gains tax
CN:	Converged Networks Group
Communications Minister:	the Commonwealth Minister for Communications, Information Technology and the Arts
Commonwealth:	the Commonwealth of Australia

Corporations Act
and Australian
Corporations Act.	Corporations Act 2001 (Cwth)
CPE:	customer premises equipment
CRM:	customer relationship management
CSG:	customer service guarantee
CSL
CSL New World:	Hong Kong CSL Limited
CSP	CSL New World Mobility Group carriage service providers
DAR:	Telstra Wholesale Data Access Radial
DDN:	digital data network
DDS:	digital data service
DDSO:	digital data service obligation
Declared
Services:	a particular telecommunications service, or other service that facilitates the supply of services, that is subject to the regulated access regime — the ACCC has the responsibility for determining declared services, based on public inquiries
DSL:	digital subscriber line
DVN:	Digital Video Network
e-commerce:	e-commerce includes buying and selling electronically over a network
EFTPOS:	electronic funds transfer at point of sale
EME:	electromagnetic energy
EPG:	electronic program guide
EVDO:	(Evolution Data Optimised) additional service for mobiles supporting high speed packet data transmission
FASTER:	Fully Automated Screen Trading and Electronic Registration System
FIN:	FASTER Identification Number
Finance Minister:	The Minister for Finance and Administration
Frame relay:	a packet switching technology for voice, data and video signals which uses packets of varying length, or frames that can be used with any data protocol
FTTN:	(Fibre to the Node) an access infrastructure that brings fibre close to the customer with the last few hundred metres to the customer premises being fed by copper and delivers telephony, broadband data and potentially television services to customer premises
Gbps:	gigabyte per second
GPRS:	(General Packet Radio Service) a service that will allow compatible mobile phones and mobile data devices to access Internet and other data networks on a packet basis and remain connected to the net and send or receive data information and email at any time
GSM:	(Global System for Mobile Communications) a mobile telephone system based on digital transmission
HFC:	hybrid-fibre coaxial
HIN:	holder identification number
HSDPA:	high speed downlink packet access
IASB:	International Accounting Standards Board
ICT:	information and communication technology

IN.	intelligent network
INP:	inbound number portability
IP:	internet protocol
IPND:	Integrated Public Number Database
IPMAN:	IP Metropolitan Area Network
IP/MPLS:	Internet Protocol / Multiprotocol Label Switching
$IP-VPN$ :	Internet protocol virtual private network
ISDN:	(Integrated Services Digital Network) a digital service providing switched and dedicated integrated access to voice, data and video
ISP:	(Internet Service Provider) an Internet service provider provides the link between an end user and the Internet by means of a dial-up or broadband service is likely to provide help desk, web hosting and email services to the end user and ISP may connect to the Internet via their own backbone or via services acquired from an Internet access provider
LCS:	local carriage services
LTIs:	lost-time injuries
MAN:	metropolitan area network
MCF:	Mobile Carriers Forum
MPLS:	multi-protocol label switching
MTAS:	mobile terminating access service
$NEXT$ $G^{TM}$ wireless network:	our recently launched 3GSM 850Mhz national wireless broadband network
News
Corporation:	The News Corporation Limited
NGN:	next-generation network
Number portability:	the ability of end users to keep their telephone number when they change their telephone service provider
NYSE:	New York Stock Exchange
NZSX:	the main board equity security market operated by the NZX
NZX:	New Zealand Exchange Limited
OCMF:	Online Customer Management Facility
OTA:	PSTN originating and terminating access
PBL.	Publishing & Broadcasting Ltd
PDR:	personal digital recorder
Preselection:	the ability of a customer to choose a service provider to provide a basket of services including national and international long distance and fixed-to-mobile services which is on a "permanent" basis when the customer selects a provider for all calls placed without an override code
PSTN:	(Public Switched Telephone Network) our national fixed network delivering basic and enhanced telephone service
RDN:	routed data network
REACH:	Reach Ltd, a 50:50 joint venture with PCCW Limited
Reseller:
	providers of telecommunications services who are not carriers

SDH:	synchronous digital hierarchy
SDN:	switched data network
SEATS:	Stock Exchange Automated Trading System
SEC:	US Securities and Exchange Commission
Securities Act:	US Securities Act of 1933, as amended
Seven:	Seven Network Limited and C7 Pty Limited
SIO:	services in operation
SME:	small and medium enterprises
SMS:	short messaging service
SPAN:	Service Providers Association Incorporated
SRN:	security holder reference number
SSS:	spectrum sharing service
Telecommunica- tions Act:	Telecommunications Act 1997 (Cwth)
Telstra or Telstra
Group:	Telstra Corporation Limited and its controlled entities as a whole
Telstra Act:	Telstra Corporation Act 1991 (Cwth)
TelstraClear:	TelstraClear Limited, the second largest full service service carrier in New Zealand
Telstra Entity:	Telstra Corporation Limited
TPA:	Trade Practices Act 1974 (Cwth)
TSLRIC:	total service long run incremental cost
TTY:	Teletypwriter
ULLS:	(Unconditioned Local Loop service) one or more twisted copper pairs between the exchange and the network boundary at a customer's premises
US:	United States of America
US\$:	US Dollars
US-GAAP:	generally accepted accounting principles in the US
USO:	(Universal Service Obligation) obligation imposed on carriers to ensure that standard telecommunications services are reasonably available to all persons in the universal service area
VoDSL :	voice over DSL
VoIP:	voice over internet protocol
VPN:	virtual private network
WAN:	wide area network
WAP:	wireless application protocol
WHO:	World Health Organisation
Wireless Local
Loop:	a range of radio technologies used to provide fixed access to customers in lieu of copper
WLR:	wholesale line rental