TELSTRA GROUP LIMITED — Management Reports 2006

Oct 5, 2006

6 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

CEO Letter to Shareholders

In accordance with the listing rules, I attach an announcement for release to the market.

Yours sincerely and brake

Douglas Gration Company Secretary

Telstra Corporation Limited ABN 33 051 775 556

Office of the CEO 242 Exhibition Street MELBOURNE VIC 3000 Mail to: Locked Bag 5639 MELBOURNE VIC 3001

6 October 2006

Dear Shareholder

Today was an historic day for Telstra - we switched on our powerful new nation-wide mobile broadband network and updated the market on how our team's hard work since our strategy announcement last year has delivered significant progress on our transformation. I am now writing to share this good news with you:

• Our transformation to the New Telstra is working as we invest to cut costs, improve service delivery metrics, $\bullet$ and increase revenues from new products and services - many of which come from the integration of content and functions from BigPond, Sensis and Telstra's other business units.
• Our performance metrics have turned the corner. More specifically, headcount that was increasing is now decreasing. Productivity that was falling is now growing. Service quality that was declining is now improving. In short, most of the performance trajectories are pointing in the right direction.
• Our Plan for Australia has moved from the drawing board to reality. With today's launching of our new, $\bullet$ nation-wide NEXT G™ wireless network, high-speed broadband from Telstra can now be accessed by 98 percent of the people of Australia.
• The New Telstra is achieving one "first" after another meeting our promises from 15 November 2005 as we build new platforms and new services to create a new foundation for serving customers, advancing the national interest, and growing the value of your investment in Telstra.

In short, the die is cast; the results are coming in; and you should be encouraged by the results detailed in the attached Progress Report. Let me summarise briefly below:

• . Earlier today, we turned on Telstra's new turbo-charged NEXT G™ wireless network. We achieved this milestone ahead of schedule in world record time - creating Australia's first nationwide broadband service. NEXT G™ is a major milestone because it will change Australia's communications landscape forever by providing peak network speeds of 3.6 Mbps today, 14.4 Mbps early in 2007 and 40 Mbps by early 2009 available over a handset or computer. These speeds will enable new bandwidth-hungry applications, improve business productivity, and expand choices in people's lives. NEXT G™ will also create many new opportunities for Telstra to earn new, high-marqin revenues because we offer new services that are fast, simple, and easy to use.
• Earlier today, we advised the market that investments we are making in the transformation are already having a positive impact on our financial performance. Revenues in the second half of calendar 2006 are already increasing primarily because of increases in new product revenues. Costs, now at the top of the curve owing to transformation costs, should soon come down. In fact, costs are already coming out as we streamline procurement, consolidate real estate, and improve business support systems. Over-all revenue growth remains strong as we slow the decline in PSTN revenues. As you will see in the attached details, our financial trajectory is on track.
• As we have already reported, our intention remains to pay a 28 cent full franked dividend for fiscal 2007 subject to normal board considerations.

As you can see in the attached Progress Report, we are focused on initiatives that will drive share price over time, such as cost takeout and revenue acceleration. We have avoided convenient, short term fixes and we are doing what will be right for shareholders, customers and the nation - in the long term. Still, our people have made significant progress in achieving the objectives of our transformation - including the early completion of our NEXT G⁷⁴ network. It was designed as a five-year journey, but the transformation is already delivering.

These results reflect a determined, hard-at-work, and united management team working with employees to deliver on our plan to compete harder, using market based management to give our customers a better experience. World class service and capabilities for our customers is our objective. We aim to become not just the best in Australia but one of the best in the world.

The Board and I remain committed to updating you about the progress in Telstra's transformation. For additional information on the update provided to the market today, please visit our website www.telstra.com.au/abouttelstra/ investor. Please contact us with any questions or comments at investor.relations@team.telstra.com and enjoy our new public website designed in part to promote shareholder feedback at www.nowwearetalking.com.au

Yours sincerely

Aline J. Sindy

Solomon D Trujillo Chief Executive Officer

PROGRESS REPORT ON TELSTRA'S TRANSFORMATION AND ITS PLAN FOR AUSTRALIA - 6 OCTOBER 2006

Telstra's Transformation - we are making significant and measurable progress in our five-year strategy to create a new and more satisfying customer experience, streamline our operations, strengthen IT systems and ultimately deliver long-term shareholder value. Both operationally and financially we are on or ahead of plan.

m El Tre

A financial upturn is nearly here and performance will improve further each year

Building the New Telstra has required significant investment upfront but the results we are showing are not just operational; they are positively impacting our financial performance. Improved performance will kick in during the second half of 2006-07 and further in subsequent years. We told the market today:

• Fiscal 2007 guidance is unchanged with reported EBIT expected to increase in the range of plus 2 to 4 per cent (pc). Due to the start of the transformation in the second half of fiscal 2006 and the later distribution of the Melbourne Yellow pages directory in the second half of fiscal 2007, EBIT for the first half of fiscal 2007 is expected to fall in the range of minus 17 to 20pc. EBIT in the second half is expected to grow in the range of 37 to 40pc, more than compensating for the decline in the first half.
• Operating performance is improving with our EBIT before transformation costs expected to decline by minus 2pc to minus 4pc, an improvement on the minus 7pc for fiscal 2006.
• . Paying a 28 cent fully franked dividend remains our intention for fiscal 2007 subject to normal board considerations.

We revised our longer term management objectives to fiscal 2010 which are used to measure implementation of the transformation plan. The revisions were necessary for two reasons. Our fibre to the node network plan remains on hold and we have assumed that the ACCC's recent interim decision to reduce ULL band 2 pricing to \$17.70 a month for competitor access will remain in place and flow on to lower retail pricing for Telstra's customers. We advised the market that our 2010 management objectives are:

• Revenue growth in the range of 2 to 2.5pc and EBITDA growth expected of between 2 and 2.5pc;
• EBITDA margins maintained between 46 and 48pc. EBITDA margins during the five year transformation plan are expected to fall in the early years of the plan and improve in later years;
• A reduction in the size of our workforce by 12,000 over the 5 years to fiscal 2010;
• Capex to be substantially reduced post transformation to a range of to 10 to 12pc of sales; $\bullet$
• Free cash flow of between \$6 billion and \$7 billion by fiscal 2010; and
• Compound growth rates use fiscal 2005 as the base year, consistent with those issued on 15 November 2005.

Transforming a phone company into a media communications company ranking among the world's best

Key operational milestones have been achieved on budget and on or ahead of plan:

• . New network and systems infrastructure is being built our wireline transformation, creating a new single IP core platform that is cheaper, simpler and 77 times faster, is ahead of schedule;
• Complexity in our infrastructure and processes is being reduced. We're right on schedule. We've exited 115 IT applications with another 75 underway. We're six months ahead of schedule towards capping or exiting 65pc of our 330 network platforms. This cuts costs and enables faster implementation of new services to our customers;
• New training and tools are having an impact, enabling staff to deliver better service at lower cost. The Telstra Technical Learning Academy was established in August, ahead of schedule, to train our field, technical and marketing staff to do their jobs more effectively;
• Thirty-six commercial sites have been exited. By June 2007 we'll be out of 60. Annual savings: \$38 million.

Procurement - savings tell the story

• . Our procurement initiatives -misrepresented in some quarters are bearing fruit for shareholders. We've selected world class partners to work with us. Our mobile device sourcing relationship with Brightstar alone banked us \$70 million of savings in fiscal 2006. By June 2007, this contract will have saved us \$220 million.
• Our data centre contract with IBM, a major part of our IT transformation, will deliver savings of almost \$300 million over six years; and last month we signed a seven-year supply chain agreement with IBM that will create savings of \$500 million over the life of the contract.

Customer service improvements: better for customers, better for shareholders

In the past year, we have improved our network reliability and service to record levels in some areas:

• . A key service metric is the percentage of time we meet appointments for installations or fix faults without having to reschedule. A year ago, we were rescheduling installations over 15pc of the time - this has fallen by more than 40pc to about 9pc. With faults, we were rescheduling visits more than 16pc of the time. This has dropped by more than 50pc to about 8pc. This represents Telstra's best performance since the Customer Service Guarantee standard was introduced eight years ago;
• Our field workforce is getting the job done properly, the first time, better than ever; the rate of second visits to customers within seven days is at an all time low;
• . The backlog of unsatisfied ADSL orders plummeted from 19,000 in August 2005 to less than 4,500 now despite large increases in orders for this broadband service in that time;
• Overtime is down 60pc year on year through better management of our resources; and
• These service and operational achievements mark a turning point in the New Telstra. Higher productivity is being achieved with a smaller workforce - down by 3,859 full time equivalents in fiscal 2006 (excluding the impact of our CSL-New World merger) and by a further 1000-plus during July and August 2006.

Market based management - improving customer sales

Our new customer segmentation approach is showing outstanding results. New market based management techniques have been used in eight customer sales programs where our sales success rate has improved by an average of 74pc - rising from Telstra's historical average of 11pc up to 19pc of customer contacts - meaning new sales and customer retention.

Telstra's turbo-charged, NEXT G™ mobile network - switched on ahead of schedule in world record time

We've launched Australia's first nationwide mobile broadband service months ahead of schedule - in less than a year. This next generation, 3G 850MHz network - called NEXT G™ - removes the mobile divide between city and country, bringing video calling, content and features, as well as super-fast mobile internet services to more Australians than ever before, with many regional, rural and remote areas getting broadband for the first time.

• Our \$1 billion investment in a single network will deliver better returns via economies of scale, reduced $\bullet$ replication costs and lower capital costs. The investment of your capital in this new technology also provides Telstra with clear differentiation from our competitors, new revenue streams and a lower cost base.
• NEXT G™ will make businesses more cost effective, productive and internationally competitive. We will offer new by wireless business applications that improve management of vehicle fleets and assets. NEXT G™ will be life-changing in its speed and mobility for distance education and for health care professionals accessing patient files, test results and online medical systems via a laptop or handheld device.
• NEXT G™ is designed to take advantage of next generation technologies as they evolve and deliver new bandwidth-hungry business applications. It will bring peak network speeds of 14.4Mbps early in 2007 and 40Mbps by early 2009.

For Telstra customers, we've integrated our business assets so that NEXT G™ delivers numerous, demonstrable advantages over our competitors:

• It is Australia's largest mobile broadband network, larger than all other Australian 3G networks combined;
• NEXT GT¹⁶s combination of coverage and speed is unmatched being 100 times bigger and up to five times faster than competitors' 3G services;
• NEXT G™'s exclusive services include Australia's first Foxtel by Mobile service, offering 12 channels; BigPond's 1-click dual download of music to both a mobile and a computer; and Sensis' "locate me" technology, which matches locations with information requests through its wide range of content services;
• NEXT G™s exclusive content includes BigPond's premium line-up such as AFL, NRL, V8 motor-racing and, for the first time, some of the best BBC TV;
• . Telstra's My Place mobile phone menu means that all this is only one click away.

NEXT G™ is part of Telstra's Plan for Australia to bring high-speed broadband to all Australians at the earliest possible date. While two plans to 'hotwire' Australia were dropped when governmental and requlatory authorities insisted that your investments should be used to subsidise our foreign-owned competitors, your management team has focused the investment of shareholder capital where value destroying regulation has not been implemented - in mobile broadband. This will enable you to get the returns from the success of this wireless transformation strategy and will minimise the risk that earnings from your capital investment will be sent to overseas based competitors.