SECURITIES AND EXCHANGE COMMISSION

Washington, D.C.

FORM 20-F

(Mark One)

o		REGISTRATION STATEMENT PURSUANT TO SECTION 12(b) OR 12(g) OF THE SECURITIES EXCHANGE ACT OF 1934

þ		ANNUAL REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE FISCAL YEAR ENDED JUNE 30, 2006

o		TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES AND EXCHANGE ACT OF 1934

TELSTRA CORPORATION LIMITED

(Exact name of Registrant as specified in its charter)

AUSTRALIAN CAPITAL TERRITORY, AUSTRALIA

(Jurisdiction of incorporation or organization)

242 EXHIBITION STREET, MELBOURNE, VICTORIA 3000 AUSTRALIA

(Address of principal executive offices)

Securities registered or to be registered
pursuant to section 12 (b)of the Act.

Title of each Class		Name of Exchange on which Registered
Ordinary Shares(1) American Depositary Shares(2)		New York Stock Exchange New York Stock Exchange

Securities registered or to be registered pursuant to Section 12(g) of the Act.

None

Securities for which there is a reporting obligation pursuant to Section 15(d) of the Act.

None

Indicate the number of outstanding shares of each of the issuer’s classes of capital or common stock as of the close of the period covered by the annual report.

Ordinary Shares		12,443,074,357

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act:

Yes þ            No o

If this is an annual report or transition report, indicated by check mark if the registrant is not required to file reports pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934:

Yes o            No þ

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.

Yesþ            No o

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer. See definition of “accelerated filer and large accelerated filer” in Rule 12b-2 of the Exchange Act.

Large Accelerated Filer þ      Accelerated Filer o      Non-Accelerated Filer o

Indicate by check mark which financial statement item the registrant has elected to follow.

Item 17 o           Item 18 þ

If this is an annual report, indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).

Yes o           No þ

(1) Not for trading but only in connection with the listing of the American Depositary Shares.

(2) Evidenced by American Depositary Receipts, each American Depositary Share representing five Ordinary Shares.

 

 

Form 20-F Cross Reference Index

Form 20-F Item Number and Caption				Page
Item 1: Identity of Directors, Senior Management and Advisers				Not applicable to annual reports on Form 20-F
Item 2: Offer Statistics and Expected Timetable				Not applicable to annual reports on Form 20-F
Item 3: Key Information
		A. Selected Financial Data		7-9
		B. Capitalization and Indebtedness		Not applicable to annual reports on Form 20-F
		C. Reasons for the Offer and Use of Proceeds		Not applicable to annual reports on Form 20-F
		D. Risk Factors		10-17
Item 4: Information on the Company
		A. History and Development of the Company		94,104
		B. Business Overview		94-109,113-124
		C. Organizational Structure		94-97,104 Notes 29 and 30 to the Financial Statements
		D. Property, Plant and Equipment		109
Item 5: Operating and Financial Review and Prospects
		A. Operating Results		29-89
		B. Liquidity and Capital Resources		77-80
		C. Research and Development, Patents and Licenses, etc.		84-85
		D. Trend Information		29-31,33-34
		E. Off-balance sheet arrangements		82
		F. Tabular disclosure of contractual obligations		81-82
Item 6: Directors, Senior Management and Employees
		A. Directors and Senior Management		125-131
		B. Compensation		191-217 Note 32 to the Financial Statements
		C. Board Practices		125-145,191-217
		D. Employees		63-64,110-112
		E. Share Ownership		132,191-217, Note 31 to the Financial Statements
Item 7: Major Shareholders and Related Party Transactions
		A. Major Shareholders		22-26

Form 20-F Item Number and Caption				Page
		B. Related Party Transactions		82-84, Note 33 to the Financial Statements
		C. Interests of Experts and Counsel		Not applicable to annual reports on Form 20-F
Item 8:		Financial Information
		A. Consolidated Statements and Other Financial Information		10,109-110, Financial Report
		B. Significant Changes		30-31
Item 9: The Offer and Listing				20-21
Item 10: Additional Information
		A. Share Capital		Not applicable to annual reports on Form 20-F
		B. Memorandum and Articles of Association		152-158
		C. Summary of Material Contracts		None
		D. Exchange Controls		146-151
		E. Taxation		159-164
		F. Dividends and Paying Agents		Not applicable to annual reports on Form 20-F
		G. Statement of Experts		Not applicable to annual reports on Form 20-F
		H. Documents on Display		158
		I. Subsidiary Information		Notes 29 and 30 to the Financial Statements
Item 11: Quantitative and Qualitative Disclosures about Market Risk				90-93 Note 35 to the Financial Statements
Item 12: Description of Securities other than Equity Securities				Not applicable to annual reports on Form 20-F
Item 13: Defaults, Dividend Arrearages and Delinquencies				Not applicable
Item 14: Material Modifications to the Rights of Security Holders and Use of Proceeds				Not applicable
Item 15: Controls and Procedures
		A. Disclosure controls and procedures		141
		B. Management’s annual report on internal control over financial reporting		Not applicable
		C. Attestation report of the registered public accounting firm		Not applicable
		D. Changes in internal control over financial reporting		141
Item 16:
		A. Audit committee financial expert		137
		B. Code of ethics		142
		C. Principal Accountant Fees and Services		Note 8 to the Financial Statements
		D. Exemptions from Listing Standards for Audit Committees		Not applicable
		E. Purchasers of Equity Securities by the Issuer and Affiliated Purchasers		Not applicable

Form 20-F Item Number and Caption				Page
Item 17: Financial Statements				Not applicable
Item 18: Financial Statements				Financial Report
Item 19: Exhibits				424

Cautionary Statement Regarding Forward-Looking Statements

     Some of the information contained in this Form 20-F 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 Form 20-F 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 Form 20-F 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 Form 20-F are set forth under the caption “Risk Factors” and elsewhere in this Form 20-F, 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.

TABLE OF CONTENTS

Summary Overview			3
Summary Consolidated Financial & Statistical Data			7
Risk Factors			10
Dividends			18
Exchange Rates			19
Listing Information			20
Major Shareholders and Related Parties			22
Relationship with the Commonwealth			24
Operating and Financial Review and Prospects			27
Quantitative and Qualitative Disclosures about Market Risk			90
Information on the Company			94
Competition			113
Regulation			116
Directors and Management			125
Exchange Controls and Foreign Ownership			146
Description of Shares and our Constitution			152
Taxation			159
Glossary			165
Directors’ Report			170
Financial Report			218
Index of Exhibits			424
Exhibit 1 – Constitution of Telstra Corporation Ltd			425
Exhibit 8 – Subsidiaries			501
Exhibit 12 – 302 – Certifications pursuant to Rule 13(a)-14(a)/Rule 15(d)-14(a) of the US Securities Exchange Act			502
Exhibit 13 – 906 – Certifications pursuant to 18 U.S.C. section 1350			504
Exhibit 15 – Consent of Ernst & Young			506

Summary Overview

     This summary highlights key aspects of this Form 20-F. This summary is not a substitute for the more detailed information contained in the rest of this Form 20-F. 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(R), 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, 1-button, 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(TM) 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(TM) — 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(TM) 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(TM) 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(R), 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(R) 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.

T3 Global Offering

     In November 2006, the Commonwealth of Australia completed the third stage of its privatization of Telstra through a global offering of a total of 4,248,049,190 of its shares in Telstra (including the over-allocation option exercised in December 2006) (the “T3

Global Offering”). The T3 Global Offering was conducted in Australia and New Zealand as a retail offering, in the United States as an institutional offering, in Japan as public offer without listing and as an institutional offering in several other jurisdictions. Payment will be made for the shares sold in the T3 Global Offering in two instalments. Upon payment of the first instalment, purchasers of the shares will be issued instalment receipts. Each instalment receipt will evidence beneficial ownership in a particular share, subject to a security interest in favor of the Commonwealth securing payment of the final instalment for that share.

     Upon payment of the first instalment, the underlying shares are transferred to the instalment receipt trustee, Telstra Sale Company Limited, under a trust deed among the Commonwealth, the trustee and the holders of instalment receipts. The trustee will be the registered holder of the shares and will hold them in trust for the benefit of the holders of instalment receipts until payment of the final instalment, subject to a security interest in favour of the Commonwealth securing payment of the final instalment.

     The trust deed allows for the holder of the instalment receipt to exercise the voting rights attached to the share underlying each instalment receipt and to receive all dividends and other benefits paid or given on that share. Upon payment of the final instalment, the instalment receipts will be cancelled and investors will become registered holders of the underlying shares.

Summary Consolidated Financial and Statistical Data

     The following summary 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 Form 20-F. 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$				US$				A$
		(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)			13,516				10,032				11,978
Depreciation and amortisation			4,087				3,034				3,529
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)			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				17,196				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			5,569				4,134				5,536
Equity/net assets			12,832				9,525				13,658

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)
		A$				US$				A$				A$				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 accounting principle			2,718				2,019				4,204				1,265				3,847				3,922
Cumulative effect of change in accounting principle(2)			(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)			(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			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

Statistical Data as at the end of the period (except for traffic data)

		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

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 Form 20-F and the cautionary statement regarding forward-looking statements in this Form 20-F.

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. Since the draft interim decisions were issued, three further SSS arbitrations have been filed against us claiming that our charges for SSS are too high.
	•		Mandated access to Telstra networks: A key part of our transformation strategy involves deploying next-generation networks, including our recently launched NEXT G(TM) 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(TM) 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(TM) 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(TM) 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(TM) 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 next-generation 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(TM) wireless network’s geographic and in-building 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.

     For more information on our workforce, see “Directors and Management”.

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 indicated it will transfer its Telstra shares not sold in the T3 Global Offering to the Future Fund, a Commonwealth investment fund. Following the T3 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 election as a director of Mr Geoffrey Cousins.

     Telstra’s annual general meeting was held on 14 November 2006 shortly before the completion of the T3 Global Offering, at which time the Commonwealth still owned approximately 51.8% of Telstra shares. The Commonwealth sought the nomination of Mr Geoffrey Cousins for election as a director of Telstra at the annual general meeting and voted its shares 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 is a director of the Cure Cancer Australia Foundation.

     Mr Cousins was a part-time consultant to the Prime Minister for nine years resigning upon his nomination for the Board.

     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 will 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 gave 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.

There are limits on foreign ownership of our shares

     The Telstra Corporation Act 1991 imposes limitations on the ownership of shares by “foreign persons”. Foreign persons and their “associates” may not in total have interests in more than 35% of our shares not held by the Commonwealth, and no single foreign person and its associates may have an interest in more than 5% of our shares not held by the Commonwealth. If either of these limitations is exceeded, the person who acquired shares or instalment receipts which resulted in the limits being exceeded may be subject to fines.

     Under the trust deed and our constitution, we and the trustee have the power to compel the sale of the shares or instalment receipts held by foreign persons or their associates that exceed these limits. We or the Commonwealth may also seek relief from the courts, which could include:

	•		directing the disposal of shares or instalment receipts;
	•		restraining the exercise of any rights attaching to shares or instalment receipts; and
	•		prohibiting or deferring receipt of sums payable on shares or instalment receipts.

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 or similar rules are adopted, we intend to deregister from the SEC and to delist our ADRs from the NYSE at the earliest opportunity. 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.

Exchange Rates

     Our consolidated financial statements are shown in Australian dollars (“A$”) except where another currency is specified. For convenience, this Form 20-F has translations of certain A$ into US dollars (“US$”) at an exchange rate as at 30 June 2006 of A$1.00 = US$0.7423. These translations are indicative only and do not mean that the A$ amounts could be converted to US$ at the rate indicated.

     The following tables show, for the periods and dates indicated, information concerning the rates of exchange at the noon buying rate in New York City for cable transfers in foreign currencies as certified for customs purposes by the Federal Reserve Bank of New York. On 27 November 2006, the noon buying rate was A$1.00 = US$0.7785.

		High				Low
June 2006			0.7527				0.7284
July 2006			0.7664				0.7407
August 2006			0.7699				0.7568
September 2006			0.7704				0.7461
October 2006			0.7743				0.7434
November 2006			0.7896				0.7629

Year Ended 30 June		At Period End				Average Rate(1)				High				Low
2002			0.5628				0.5240				0.5748				0.4841
2003			0.6713				0.5884				0.6729				0.5280
2004			0.6952				0.7155				0.7979				0.6930
2005			0.7618				0.7568				0.7974				0.6880
2006			0.7423				0.7472				0.7781				0.7056

     Fluctuations in the A$ to US$ exchange rate will affect the US$ equivalent of the A$ price of the shares and the instalment receipts on the ASX.

Listing Information

Markets in which our shares are traded

     We are listed on the ASX and the NZSX. We also have ADRs listed on the NYSE.

     In December 2005, the SEC proposed rules that, if adopted, would make it easier for foreign companies to terminate their SEC registration. If the SEC’s proposed deregistration rules are adopted, we intend to deregister from the SEC ongoing reporting obligations and to delist our ADRs from the NYSE at the earliest opportunity, which may be accomplished by the end of fiscal 2007.

     The stock market operated by the ASX is the principal stock exchange in Australia. The exchange operates by way of the Stock Exchange Automated Trading System (“SEATS”), which is a fully computerised system.

     Trading on SEATS takes place each business day between the hours of 10:00am and 4:05pm, Australian Eastern Standard Time or Australian Eastern Daylight Time. At 4:05pm each day, the ASX subsequently matches any buy and sell orders in the system that satisfy both buyers and sellers. The prices of all listed shares are continuously quoted while the market is open and the system prioritises orders first by price and second by time of placement in the system. Exchange participants can cross stock between buying and selling orders, at the buy or sell quote, provided those quotes are no more than one marketable bid apart and can cross outside this range in amounts of A$1 million or more. Transactions on the ASX are settled on the third business day following the trade date.

     Our securities were initially listed on 17 November 1997. This followed the sale by the Commonwealth of 33.3% of its shares in Telstra. This initial sale by the Commonwealth was followed by a further two share offerings to the public. The first being on 18 October 1999 (T2), when the Commonwealth sold an additional 16.6% of shares and the second when the Commonwealth sold an additional 34.1% of shares in Telstra in November 2006 in the Telstra T3 Global Offering.

Price history of our shares

     The following tables give the price history of our shares and ADSs as derived from the daily official list of the ASX and NYSE.

High and low closing price for shares and ADSs — on an annual basis — for a period of five years or time of trading if less than five years

		A$ per Share								US$ per ADS
Period		High				Low				High				Low
Fiscal 2002			5.68				4.48				14.85				12.10
Fiscal 2003			5.04				3.96				15.25				11.84
Fiscal 2004			5.15				4.45				19.17				14.87
Fiscal 2005			5.49				4.63				21.61				16.35
Fiscal 2006			5.14				3.63				19.62				12.77
(1) Each ADS represents 5 ordinary shares

High and low closing price for shares and ADSs — on a quarterly basis for the two most recent full financial years

		A$ per Share								US$ per ADS
Period		High				Low				High				Low
2004
1 July — 30 September			5.05				4.63				18.45				16.35
1 October — 31 December			4.94				4.63				19.42				16.77
2005
1 January — 31 March			5.49				4.81				21.61				18.30
1 April — 30 June			5.17				4.79				20.01				18.37
1 July — 30 September			5.14				4.04				19.62				15.36
1 October — 31 December			4.32				3.76				16.10				14.10
2006
1 January — 31 March			4.10				3.63				15.58				12.77
1 April — 30 June			3.97				3.64				15.33				13.35
1 July — 30 September			3.94				3.45				14.98				13.12

High and low closing prices for the most recent six months

		A$ per Share								US$ per ADS(1)
Period		High				Low				High				Low
2006
April			3.94				3.65				14.75				13.37
May			3.97				3.71				15.33				14.07
June			3.82				3.64				14.21				13.35
July			3.87				3.67				14.59				13.76
August			3.94				3.45				14.98				13.12
September			3.71				3.53				14.05				13.23
October			3.97				3.57				15.45				13.52
November			3.97				3.63				15.40				14.12

     There were 10,338,416,428 shares and instalment receipts issued and available for trading on the market as at 29 November 2006. At that date, 32,699,544 ADS’s (equivalent to 163,497,720 shares were held by 51 record holders and 2,409,272 ordinary shares were held by 1,283 US record holders. At that date there were 1,445,208 Australian record holders, representing 99.24% of all record holders.

     We successfully completed a A$1 billion off-market share buy-back in November 2003, and a A$750 million off-market share buy-back in November 2004.

     Before the buy-backs, we had 12,866,600,200 shares outstanding, including those held by the Commonwealth. As a result of the 2003 buy-back, the number of shares outstanding reduced to 12,628,359,026 and the number of shareholders reduced from approximately 1.805 million to 1.769 million. Following the 2004 buy-back, the number of shares outstanding reduced to 12,443,074,357 and the number of shareholders reduced to 1.634 million. The Commonwealth did not participate in the buy-backs.

     On 30 November 2006, the number of shareholders was 1,589,369.

     The closing price for our shares on the ASX on 30 November 2006 was A$3.77.and the closing price of our ADSs on the NYSE was US$14.92.

Major Shareholders and Related Parties

Major shareholders

     The following table shows the number of unlisted shares and listed shares and installment receipts (IRs) on issue at 29 November 2006. The table also shows, as a group, the shareholdings of our directors and officers:

Title of Class		Identity of Person or Group			Amount Owned			% of Class
Shares		The Commonwealth			2,104,657,933				16.9
Shares/IRs		Listed shareholders			10,338,416,424				83.1
					12,443,074,357				100.0
Shares/IRs		Directors and officers as a group			1,626,665	(2)

     The shareholdings of each person known by us to be the owner of more than 5% of our voting securities, as at 29 November 2006, is shown in the table titled “Twenty largest registered securityholders as at 29 November 2006”. As at 29 November 2006, we are not aware of any individual beneficial holder, other than the Commonwealth, whose securities represent more than 5% of the issued and outstanding securities. The Commonwealth has equal voting rights with all other securityholders.

Distribution of shares

     The following table summarises the distribution of our public listed shares and IRs as at 29 November 2006:

		Number of Registered
		Securityholders(1)								Shares
Size of Holding		Number				%				Number				%
1-1,000			885,250				60.33				542,025,234				5.24
1,001-2,000			271,310				18.49				423,907,496				4.10
2,001-5,000			216,052				14.72				683,677,241				6.61
5,001-10,000			61,155				4.17				441,544,944				4.27
10,001-100,000			32,698				2.23				691,129,267				6.69
100,001 and over			960				0.07				7,556,132,242				73.09
Total			1,467,425				100				10,338,416,424				100

Twenty largest registered securityholders as at 29 November 2006

     The following table sets out the top 20 securityholders other than the Commonwealth when multiple holdings are grouped together:

				Number of			% of Issued
Shareholders					Shares		Shares(1)
1		Telstra Sale Company			4,341,549,190			41.79	%
2		National Nominees Limited			681,302,404			6.56	%
3		Westpac Custodian Nominees Ltd.			523,423,174			5.04	%
4		J P Morgan Nominees Australia Ltd.A			453,793,122			4.37	%
5		Citicorp Nominees Pty Limited			246,287,067			2.37	%
6		ANZ Nominees Limited.			212,795,112			2.05	%
7		HSBC Custody Nominees (Australia) Limited			126,783,002			1.22	%
8		Cogent Nominees Pty Limited			101,584,556			0.98	%
9		RBC Global Services Australia Nominees Pty Ltd			89,832,268			0.86	%
10		UBS Nominees Pty Ltd			62,092,201			0.60	%
11		Telstra ESOP Trustee Pty Ltd.			51,461,125			0.50	%

				Number of			% of Issued
Shareholders					Shares		Shares(1)
12		Queensland Investment Corporation			45,002,879			0.43	%
13		AMP Life Limited			42,936,363			0.41	%
14		Warbont Nominees Pty Ltd			34,871,657			0.34	%
15		Australian Foundation Investment Company Limited			32,928,338			0.32	%
16		Westpac Financial Services Ltd.			26,204,988			0.25	%
17		Australian Reward Investment Alliance			19,222,034			0.19	%
18		Argo Investments Limited			18,954,800			0.18	%
19		Telstra Growthshare Pty Ltd.			17,508,460			0.17	%
20		Questor Financial Services Limited			13,087,092			0.13	%
		Total			7,141,619,832			68.75	%

Substantial shareholders

     As at 27 November 2006, other than the Commonwealth we did not have any substantial shareholders. Except as described in ‘Relationship with the Commonwealth’, Telstra is not directly or indirectly controlled by another entity or person or any foreign government and there are no arrangements known to Telstra, the operation of which may, after the date of this Form 20-F, result in a change in control of Telstra.

Relationship with the Commonwealth

     We have a number of distinct relationships with the Commonwealth, including as shareholder, regulator and customer. Until the recently completed T3 Global Offering, the Commonwealth was our controlling shareholder. 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

     The Commonwealth has sold down its original 100% equity holding in us in three tranches: it sold 33.3% of its shares in November 1997; it sold an additional 16.6% of shares in October 1999 and a further 34.1% of shares in November 2006. Once the transfer of its remaining shares to the Future Fund is complete (which we expect to occur by February 2007), the Commonwealth will cease to hold any shares in the Company.

     T3 Global Offering

     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 remaining stake in Telstra.

     In November 2006, the Commonwealth sold approximately 34% of its shares in a global offering, taking its equity holding in us from 51.8% to 17.8%. The sale was completed when the 30 day over-allocation option given by the Commonwealth to the banks who conducted the sale on its behalf was exercised, in December 2006. The remaining shares in us held by the Commonwealth will then be transferred to the Future Fund. See “The Future Fund” and “Risk Factors”. After a two year lock up period (which is subject to several exceptions), the Future Fund is expected to sell down its Telstra shareholding over the medium term to a market-weight holding.

     The Commonwealth 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 T3 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 indemnified us and our directors and senior management for certain liabilities in relation to the T3 Global Offering, and to reimburse us for our reasonable costs incurred in relation to the T3 Global Offering.

     Consequences of the T3 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 have ceased or 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 T3 Global Offering will not be considered to be owned by the Commonwealth. This means that these thresholds either have already or will be triggered a short time after the completion of the T3 Global Offering.

     The Commonwealth’s ownership of Telstra fell below 50% on completion of the T3 Global Offering (excluding the over-allotment option) on 24 November 2006. As a result, we have lost 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 T3 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 having fallen 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 T3 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 T3 Global Offering and the transfer of the Commonwealth’s remaining shares to the Future Fund has required and may require further regulatory or governmental approval under regulatory licenses of Telstra’s international operations. For more information, refer to “Regulation — Offshore subsidiaries”.

     Following completion of the T3 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 long-term 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”.

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, which are included with this Form 20-F. 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 U.S. generally accepted accounting principles (“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 forward-looking 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 Form 20-F 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 G(TM) 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(TM) 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 high-speed 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(R) and White Pages(R) printed and online advertising solutions. This was predominantly driven by product innovation and customer demand. In addition, we have continued to grow our Yellow(R) and White Pages(R) 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(R) 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.

Events after the end of fiscal 2006

     Except as described below and in “Directors Report – Events occurring after the end of the financial year” and Note 34 to our Financial Statements, there have been no events that have occurred since the end of the 2006 financial year that have significantly affected or may significantly affect Telstra’s operations, the results of Telstra’s operations or the state of Telstra’s affairs.

     On 31 August 2006, we announced our acquisition of a 51.0% shareholding (on a fully diluted basis) in SouFun Holdings Limited (SouFun) for a total cash consideration of US$254 million (approximately A$334 million plus acquisition costs). 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$235 million, giving rise to a profit on sale of A$55 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(TM) 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(TM) 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(R) 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(TM) 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 high-margin 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 million, 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(TM) 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 lower-margin 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(R) 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 Yellowwas 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(R) 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(R) 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(R). 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(R) and White Pages(R) 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(R) and White Pages(R) 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(R) 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 two-year 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			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 paid)			14.0				14.0
Special dividend to be paid with final dividend (2005 paid)			—				6.0