Iinet LIMITED ABN 48 068 628 937

iiNET LIMITED ABN 48 068 628 937

NOTICE OF GENERAL MEETING AND INFORMATION MEMORANDUM

For the General Meeting to be held on 29 September 2010 at 10am (WST) at Level 2, 502 Hay Street, Subiaco, Western Australia

This Notice of Meeting and the accompanying Information Memorandum should be read in its entirety. If Shareholders are in doubt as to how they should vote, they should seek advice from their accountant, solicitor or other professional adviser prior to voting.

In this document you will find:

1. A letter from the Non-executive Chairman of the Company outlining the proposed resolutions to be considered at the General Meeting and a recommendation as to how you should vote.

2. Notice of Meeting.

3. An Information Memorandum containing an explanation of, and information about, the proposed resolutions to be considered at the Meeting.

4. An Independent Expert's Report as to the fairness and reasonableness of the terms of the acquisition of the AAPT Consumer Division (the Proposed Transaction the subject of Resolution 3).

5. Proxy Form.

CHAIRMAN'S LETTER

Dear Shareholder

General Meeting

On behalf of the Directors of iiNet, I invite you to a General Meeting (Meeting) of iiNet to approve the acquisition of the AAPT Consumer Division from AAPT Limited, a subsidiary of Telecom New Zealand Limited. Enclosed is the Notice of Meeting setting out the business of the Meeting, together with the Information Memorandum, Independent Expert's Report, as required by the ASX Listing Rules, and a Proxy Form.

At our last shareholders' meeting I highlighted that iiNet was well placed to take advantage of opportunities that would enable iiNet to strengthen its position as the clear leading challenger brand in the Australian telecommunications market. As announced on 30 July 2010, iiNet has entered into a binding agreement to acquire the AAPT Consumer Division from AAPT which, if approved by iiNet Shareholders, will consolidate iiNet’s position as the leading challenger in residential retail telecommunications in Australia.

On 30 July 2010 Telecom New Zealand Limited also sold their 18.2% shareholding in iiNet to institutional shareholders. Since Telecom New Zealand Limited was a substantial shareholder in iiNet, the acquisition of the AAPT Consumer Division by iiNet is subject to iiNet Shareholder approval (see Resolution 3).

The AAPT Consumer Division comprises approximately 113,000 broadband subscribers and over 251,000 other active services. The Proposed Transaction represents a unique opportunity to acquire a business of scale in an increasingly consolidated market and significantly strengthens iiNet’s presence in the eastern states of Australia. Significant synergies are expected to be generated when the division is integrated with iiNet, and a contribution of $20 million to EBITDA is expected in the first full year following acquisition. If approved by iiNet Shareholders, the enlarged iiNet group will serve more than 652,000 broadband subscribers and provide 1,326,000 total active services

The AUD$60m acquisition price represents an attractive 3x expected post-synergies EBITDA multiple and the Proposed Transaction is expected to be accretive on an earnings per share basis in this financial year. The Proposed Transaction will be funded from cash on hand and debt, thus avoiding Shareholder dilution. iiNet will retain a comfortable and conservative debt position post acquisition.

Lonergan Edwards & Associates, the appointed Independent Expert, has deemed the Proposed Transaction to be fair and reasonable to iiNet Shareholders who are not associated with AAPT. In addition, Amcom Telecommunications Limited and Perth Internet Pty Ltd (who collectively own 35.3% of the outstanding iiNet shares) have both advised iiNet that their intention is to vote in favour of the Proposed Transaction at the Meeting, subject to there being no material adverse change to iiNet or the AAPT Consumer Division.

The iiNet Board has unanimously approved the Proposed Transaction and recommends that all Shareholders vote in favour of Resolution 3, the approval of the Proposed Transaction.

The Notice of Meeting also includes:

(a) Resolution 1, which is required to enable the Netspace Group Members to guarantee iiNet's obligations to its bankers, Westpac, in respect of the $100 million cash advance iiNet Limited ABN 48 068 628 937 Notice of General Meeting and Information Memorandum Page 2

and contingent instrument facility provided by Westpac which was drawn down on to finance the acquisition of the Netspace Group; and

(b) Resolution 2 which adopts a new constitution to reflect the changes in law that have occurred since the existing Constitution was adopted in 1999, including the recent amendments to the Corporations Act regarding the payment of dividends.

The Board unanimously recommends that Shareholders also vote in favour of these Resolutions. iiNet’s Meeting will be held on Wednesday 29 September 2010 commencing at 10:00 am (WST) at iiNet's office, Level 2, 502 Hay Street, Subiaco, Western Australia. If you decide to attend the Meeting, please bring this letter with you to facilitate registration and entry into the Meeting. If you are unable to attend the Meeting, I encourage you to vote by proxy, or if you are a company by corporate representative. The Notice of Meeting contains details of these methods of voting.

Further details relating to the Resolutions proposed at the Meeting are set out in the Information Memorandum, which also contains the Independent Expert’s Report. I urge all Shareholders to read this material carefully before voting on the proposed Resolutions.

I look forward to seeing you at the Meeting and would like to take this opportunity to thank you for your continued support of iiNet.

Yours sincerely

Mr Michael Smith Non-executive Chairman iiNet Limited

iiNet Limited ABN 48 068 628 937 Notice of General Meeting and Information Memorandum Page 3

Notice of General Meeting NOTICE OF GENERAL MEETING

Notice is hereby given that a General Meeting (Meeting) of Shareholders of iiNet Limited (Company) will be held on 29 September 2010 at 10am Western Standard Time (WST) at Level 2, 502 Hay Street, Subiaco, Western Australia, 6008.

The attached Information Memorandum is provided to supply Shareholders with information to enable them to make an informed decision regarding the Resolutions. The Information Memorandum is intended to be read in conjunction with, and forms part of, this Notice. Terms defined in the Glossary to the Information Memorandum have the same meaning when used in this Notice of Meeting.

AGENDA

RESOLUTION 1 – APPROVAL OF FINANCIAL ASSISTANCE To consider and, if thought fit, pass the following resolution as a special resolution: “That, in accordance with section 260B(2) of the Corporations Act, approval is given for financial assistance to be provided by each Netspace Group Member (each a wholly-owned subsidiary of the Company) either directly or indirectly, to the Company in connection with the acquisition by the Company of the issued share capital of Netspace Online Systems Pty Ltd, Spacecentre Pty Ltd and Aspry Pty Ltd, as described in the Information Memorandum.”

RESOLUTION 2 – ADOPTION OF REPLACEMENT CONSTITUTION To consider and, if thought fit, to pass the following resolution as a special resolution: "That in accordance with section 136 of the Corporations Act, the constitution tabled at the Meeting, and signed by the Chairman of the Meeting for the purposes of identification, be adopted as the constitution of the Company, in place of the present Constitution, with effect from the close of this Meeting." ______

RESOLUTION 3 – APPROVAL OF PROPOSED TRANSACTION To consider and, if thought fit, pass the following resolution as an ordinary resolution: "That for the purposes of Listing Rule 10.1 and for all other purposes, the Proposed Transaction involving the acquisition by the Company from AAPT of the AAPT Consumer Division in consideration for the payment of AUD$60 million (as adjusted in accordance with the Business Sale Agreement) and otherwise on the terms set out in the Business Sale Agreement, as more particularly described in the Information Memorandum, be and is hereby approved."

Voting Exclusion Statement

The Company will disregard any votes cast on Resolution 3 by AAPT and any associate of AAPT unless:

the vote is cast as proxy for a person who is entitled to vote, in accordance with the directions on the Proxy Form specifying how the proxy is to vote; or

the vote is cast by the Chairman as proxy for a person who is entitled to vote, in accordance with a direction on the Proxy Form to vote as the proxy decides.

iiNet Limited ABN 48 068 628 937 Notice of General Meeting and Information Memorandum Page 4

Notice of General Meeting VOTING AND PROXIES Required Majority

In accordance with the Corporations Act and the Company's Constitution:

an ordinary resolution must be passed by a simple majority of the total votes cast by Shareholders entitled to vote on the resolution (whether in person or by proxy, attorney or representative); and

a special resolution must be passed by at least 75% of the total votes cast by Shareholders entitled to vote on the resolution (whether in person or by proxy, attorney or representative).

Voting Entitlements

The Company has determined, in accordance with regulation 7.11.37 of the Corporations Regulations 2001 (Cth), that shares quoted on the ASX at 10am (WST) on 27 September 2010 shall be taken, for the purposes of the Meeting, to be held by the persons who held them at that time. Accordingly, those persons are entitled to attend and vote at the Meeting, unless, in the case of Resolution 3, they are excluded from voting.

How to Vote

You may vote by attending the Meeting in person, authorised corporate representative, or by proxy.

Voting in Person

To vote in person, attend the Meeting on the date and at the place set out above. The Meeting will commence at 10am (WST).

Voting by Corporate Representative

A corporation may elect to appoint a representative to attend and vote at the Meeting in accordance with the Corporations Act in which case the Company will require a Certificate of Appointment of Corporate Representative executed in accordance with the Corporations Act. The Certificate is to be lodged with the Company before the Meeting or at the registration desk on the day of the Meeting.

Voting by Proxy

To vote by proxy electronically you must complete the proxy form online at either:

www.investorvote.com.au; or

for Intermediary Online subscribers only (custodians): www.intermediaryonline.com, so that it is received not later than 10am (WST) on 27 September 2010. To vote by proxy using the proxy form enclosed with this Notice of Meeting you must complete and sign the proxy form as soon as possible and either:

return the proxy form by post to Computershare Investor Services Pty Limited, GPO Box 242, Melbourne VIC 3001; or

send the proxy form by fax to Computershare Investor Services Pty Limited on 1800 783 447 if sent within Australia or +61 3 9473 2555 if sent from outside of Australia, so that it is received not later than 10am (WST) on 27 September 2010.

iiNet Limited ABN 48 068 628 937 Notice of General Meeting and Information Memorandum Page 5

Notice of General Meeting Proxy Information

A Shareholder who is entitled to vote at the Meeting may appoint:

one proxy if the Shareholder is only entitled to one vote, or

one or two proxies if the Shareholder is entitled to more than one vote.

Where a Shareholder appoints two proxies, the appointment may specify the proportion or number of votes that each proxy may exercise. If the appointment does not specify a proportion or number, each proxy may exercise one-half of the votes, in which case any fraction of votes will be disregarded.

A proxy need not be a Shareholder.

If you require an additional proxy form, the Company will supply it on request. The proxy form and the power of attorney or other authority (if any) under which it is signed (or a certified copy) must be received by the Company no later than 10am (WST) on 27 September 2010. A proxy form received after that time will not be valid for the Meeting.

Proxies given by corporate Shareholders must be executed in accordance with their constitutions, or signed by a duly authorised attorney.

A proxy may decide whether to vote on any Resolution, except where the proxy is required by law or the Constitution to vote, or abstain from voting, in their capacity as proxy. If a proxy is directed on how to vote on a Resolution, the proxy may vote on that Resolution only in accordance with that direction. If a proxy is not directed how to vote on a Resolution, a proxy may vote as he or she thinks fit.

Voting Intentions of the Chairman

If a Shareholder appoints the Chairman as the Shareholder’s proxy and does not specify how the Chairman is to vote on a Resolution, the Chairman will vote, as proxy for that Shareholder, in favour of that Resolution on a poll.

Meeting Materials

You should read the Meeting Materials in their entirety before making a decision as to how to vote on the Resolutions.

The Meeting Materials do not take into account the investment objectives, financial situation or particular needs of individual Shareholders or any other person. If you are in doubt as to what you should do, you should consult your legal, investment or other professional adviser.

Key Dates

All times are WST.

Event Date

Deadline for lodgment of proxy forms 10am, 27 September 2010

Date and time for determining eligibility to vote (being the 10am, 27 September 2010 date and time you must own Shares)

General Meeting of Shareholders 10am, 29 September 2010

If Resolution 3 is approved, expected date of completion of 30 September 2010 the acquisition of the AAPT Consumer Division

iiNet Limited ABN 48 068 628 937 Notice of General Meeting and Information Memorandum Page 6

Notice of General Meeting Role of ASIC and ASX

A copy of the Meeting Materials has been provided to ASIC and ASX. Neither ASIC nor ASX nor any of their respective officers takes any responsibility for the contents of the Meeting Materials.

Responsibility Statement

Lonergan Edwards has prepared the Independent Expert's Report (Annexure B of the Information Memorandum) and has no responsibility for any other part of the Meeting Materials.

Forward Looking Statements

Certain statements in the Meeting Materials relate to the future. Such statements involve known and unknown risks, uncertainties and other important factors that may cause the actual results, performance or achievements of the Company to be materially different from the results, performance or achievements expressed or implied by such statements. These statements reflect views held only as at the date of this Notice. The Company makes no representation and gives no assurance or guarantee that the occurrence of the events expressed or implied in such statements will actually occur. You are cautioned not to place undue reliance on any forward looking statement.

By order of the Board

David Buckingham Company Secretary 24 August 2010

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Information Memorandum INFORMATION MEMORANDUM

This Information Memorandum and all attachments (including the Independent Expert's Report in Annexure B) are important documents. They should be read carefully.

This Information Memorandum is intended to provide Shareholders with sufficient information to assess the merits of the Resolutions in the accompanying Notice of Meeting. In this Information Memorandum certain terms are defined as set out in the Glossary to this Information Memorandum. RESOLUTION 1 – APPROVAL OF FINANCIAL ASSISTANCE Background to Resolution 1

On 29 March 2010 the Company announced that it had entered into the Netspace Acquisition Agreement to acquire the whole of the issued share capital of NOS, Spacecentre and Aspry for $40 million (the Netspace Acquisition). The Netspace Acquisition was completed on 30 April 2010.

A copy of the Company’s announcement to the ASX about the Netspace Acquisition is attached as Annexure A to this Information Memorandum.

Funding for the Netspace Acquisition was provided by a drawdown under the Westpac Facility.

The terms of the Westpac Facility require the Company to procure that each Netspace Group Member:

enter into a guarantee for amounts payable by the Company under the Westpac Facility; and

grant security to Westpac over all its assets and undertakings to support its guarantee obligations (Netspace Guarantee and Security).

To do this, the Company and each Netspace Group Member must comply with the provisions of the Corporations Act relating to the provision of financial assistance in connection with the Netspace Acquisition. Resolution 1 is relevant to this process. Summary

It is proposed that a resolution be passed as a special resolution of the Shareholders to approve each Netspace Group Member giving financial assistance to the Company in connection with the Netspace Acquisition.

Resolution 1 is required under the Corporations Act to enable the Company to comply with undertakings made by it under the Westpac Facility to assist the Company with the Netspace Acquisition, including the provision by each Nestpace Group Member of the Netspace Guarantee and Security.

Shareholders are asked to approve Resolution 1, which approves these arrangements with the Netspace Group Members. Resolution 1 has no adverse effect on the Company.

Financial Assistance

The provision of the Netspace Guarantee and Security by each Netspace Group Member constitutes financial assistance by the Netspace Group Members to the Company for the Netspace Acquisition.

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Information Memorandum Shareholder Approval

Section 260B of the Corporations Act allows a company to give financial assistance to a person to acquire its own shares or shares in its holding company (if it does not cause the company to become insolvent and would not otherwise result in the directors breaching their duties) if, in this case, it is approved by:

unanimous resolution by the shareholders of each Netspace Group Member; and

a special resolution of the Company as the ultimate Australian holding company of each Netspace Group Member after the Netspace Acquisition.

Shareholder approval of the Company is sought because it is the ultimate holding company of each Netspace Group Member.

If Shareholder approval is given to Resolution 1, the Company, in its capacity as the sole shareholder of NOS, Spacecentre and Aspry will immediately resolve to approve the provision of the Netspace Guarantee and Security by the relevant Netspace Group Member to Westpac

Advantages of approving Resolution 1

The Directors believe that drawdown under the Westpac Facility was the most efficient form of financing available to assist the Company to complete the Netspace Acquisition.

If Resolution 1 is not approved, Westpac may exercise its rights to demand repayment of all money owing or contingently owing by the Company under the Westpac Facility, and this may have the effect of triggering further defaults in the Company’s other material contracts.

If Resolution 1 is not approved the Company may have to negotiate alternative refinancing and would expect to incur break costs and additional transaction fees.

Disadvantages of approving Resolution 1

The Directors do not believe there is any disadvantage to the Company in approving Resolution 1 and consider that the Company is not, and will not, as a result of the transactions contemplated the Resolution 1, become, insolvent.

Recommendation

The Board unanimously recommends that Shareholders vote in favour of Resolution 1.

RESOLUTION 2 – ADOPTION OF REPLACEMENT CONSTITUTION

This is a special resolution proposing the adoption of a replacement constitution as the Constitution of the Company.

Since the initial adoption of the Constitution in 1999, the law governing corporations has been substantially re-written, including a change from the Corporations Law (Law) to the Corporations Act. As a consequence, the numerous cross-references to the sections of the

iiNet Limited ABN 48 068 628 937 Notice of General Meeting and Information Memorandum Page 9

Information Memorandum Law in the existing Constitution need to be updated to cross reference the appropriate sections of the Corporations Act. These changes are administrative only or relatively minor.

In two respects, however, the proposed replacement constitution includes substantive changes, in the areas relating to dividends and proportional takeover bids.

You can request a copy of the proposed constitution by contacting the Company Secretary on 9214 2222.

Dividend Payment

The replacement constitution includes changes to the provisions regarding the payments of dividends (refer to rules 27.2 and 27.3 of the proposed replacement constitution). The proposed changes to the rules governing the payment of dividends arise as a result of a recent amendment to section 254T of the Corporations Act, pursuant to the Corporations Amendment (Corporate Reporting Reform) Act 2010 (Cth) (Amending Act).

The nature of the amendment is as follows:

(a) Under the former section 254T of the Corporations Act a company could only pay dividends out of its profits (the profits test).

(b) The Amending Act replaces the profits test with a new 3 tiered test, which provides that a company must not pay a dividend unless:

i. the company's assets exceed its liabilities immediately before the dividend is declared and the excess is sufficient for the payment of the dividend;

ii. the payment of the dividend is fair and reasonable to the company's shareholders as a whole; and

iii. the payment of the dividend does not materially prejudice the company's ability to pay its creditors.

Rule 27.2 of the Constitution mirrors the former section 254T of the Corporations Act by providing that the Company "must not pay a dividend except out of the profits of the Company". The effect of this is that the Company will only be able to pay a dividend where it satisfies the new 3 tiered test in section 254T of the Act as well as the requirement that dividends only be paid out of the profits of the Company.

This may lead to a situation where, for example, the Company makes an operating loss in a particular financial year but nevertheless has assets exceeding liabilities and satisfies the new 3 tiered test in section 254T of the Act. In those circumstances, the Company would be restricted from paying a dividend by the Constitution despite satisfying the requirements in section 254T of the Act.

The proposed amendment to the Constitution, removes the requirement that dividends only be paid out of the profits of the Company. The effect of this is that the Company will be able to pay a dividend provided that it satisfies the new 3 tiered test in section 254T of the Act.

Proportional Takeover Provisions

The replacement constitution includes a new rule, rule 36, which contains proportional takeover approval provisions. These provisions are in accordance with the requirements of the Corporations Act. The Corporations Act requires that shareholders are provided with

iiNet Limited ABN 48 068 628 937 Notice of General Meeting and Information Memorandum Page 10

Information Memorandum sufficient information to make an informed decision on whether to support or oppose the resolution.

In a proportional takeover bid, the bidder offers to buy a proportion only of each shareholder's shares in the target company. If the bid is successful control of the company may pass without shareholders having the chance to sell all their shares to the bidder who may thereby take control of the target company without necessarily having to pay an adequate amount for gaining control.

The Corporations Act allows a company to provide in its constitution that if a proportional takeover bid is made for its shares, shareholders must have the opportunity to vote on whether to accept or reject the offer; the decision of the shareholders in general meeting is binding on all shareholders. In this way shareholders are able to decide collectively whether the proportional offer is acceptable in principle and this may have the effect of ensuring that the offer is appropriately priced.

The key terms of the points of the proportional takeover approval provisions in the Company's replacement constitution are as follows:

(a) if a proportional takeover bid is made, the Directors must ensure that Shareholders vote on an ordinary resolution to approve the bid more than 14 days before the bid period closes (approving resolution);

(b) the approving resolution must be passed by a simple majority of the total votes cast by Shareholders entitled to vote (whether in person or by proxy, attorney or corporate representative);

(c) each Shareholder who, as at the end of the day on which the first offer under the proportional takeover bid was made, held bid class securities, is entitled to vote, but the bidder and its associates are excluded from voting;

(d) if the approving resolution is not passed, each transfer of bid class securities resulting from an acceptance of the bid will not be registered and the proportional takeover bid will be taken to have been withdrawn;

(e) if the proportional takeover bid is approved (or taken to have been approved), each transfer of bid class securities must be registered if it complies with the Corporations Act and the Constitution;

(f) the Directors will breach the Corporations Act if they fail to ensure the approving resolution is voted on. However, if the approving resolution is not voted on, the proportional takeover bid will be taken to have been approved;

(g) these provisions do not apply to full takeover bids; and

(h) these provisions will apply for 3 years after the date of adoption of the new constitution and may be renewed by shareholders in general meeting by a special resolution.

At the date of the Information Memorandum, no Director is aware of a proposal by a person to acquire, or to increase, a substantial interest in the Company.

The Directors do not consider that the proportional takeover approval provisions have potential advantages or disadvantages for the Directors, as their ability to make a recommendation on whether an offer under a proportional takeover bid should be accepted is unaffected. iiNet Limited ABN 48 068 628 937 Notice of General Meeting and Information Memorandum Page 11

Information Memorandum The Directors consider that the proportional takeover approval provisions have potential advantages and disadvantages for Shareholders.

(a) The potential advantages include:

i. Shareholders will have the right to decide by majority vote whether an offer under a proportional takeover bid should proceed;

ii. the provisions may help Shareholders avoid being locked in as a minority and avoid the bidder acquiring control of the Company without paying an adequate control premium (that is, not being required to pay for all of the Shares on issue);

iii. the provisions may increase the bargaining power of Shareholders and ensure that a potential bidder structures its offer in a way that is attractive to a majority of Shareholders, including ensuring that any partial offer is adequately priced; and

iv. Shareholders may be better equipped to decide how to deal with the offer if they are aware of the view of the majority of Shareholders through the approving resolution.

(b) The potential disadvantages include:

i. proportional takeover bids for Shares may be discouraged;

ii. a Shareholder may lose an opportunity to dispose of some of their Shares at a premium;

iii. it may reduce any speculative element in the market price of the Shares arising from the possibility of a takeover offer being made;

iv. it may be considered to be an unwarranted additional restriction of the ability of members to freely deal with their shares; and

v. the prospects of a proportional takeover bid being successful may be reduced.

The Board considers that the potential advantages for Shareholders of the proportional takeover approval provisions far outweigh the potential disadvantages, particularly, as the majority of Shareholders will be in a position to determine whether or not a proportional takeover bid is successful.

The Board unanimously recommend the approval of Resolution 2 and the adoption of the proposed replacement constitution.

RESOLUTION 3 – APPROVAL OF PROPOSED TRANSACTION

Background

On 30 July 2010, the Company announced that it had entered into a binding agreement to acquire the AAPT Consumer Division for AUD$60 million.

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Information Memorandum The AAPT Consumer Division provides residential and small home office consumer services to AAPT customers being:

(a) internet services delivered via broadband and dial up connections; and

(b) telecommunication services including home phone and mobile telephony services.

As part of the Proposed Transaction, the Company will purchase the following assets which are used in connection with the AAPT Consumer Division:

(a) the goodwill of the AAPT Consumer Division;

(b) plant and equipment;

(d) customer contracts;

(e) customer information;

(f) bank accounts; and

(g) intellectual property.

For further detail on the AAPT Consumer Division assets, please refer to the Independent Expert's Report in Annexure B.

In addition, as part of the Proposed Transaction AAPT has agreed to:

(a) provide certain services to be used in connection with the AAPT Consumer Division for a transitional period of up to 12 months;

(b) vary the Alliance Agreement; and

The acquisition of the AAPT Consumer Division is consistent with the Company’s stated intention to grow through consolidation. The AAPT Consumer Division serves approximately 113,000 broadband subscribers and over 251,000 other active services. If the Proposed Transaction is approved, the Company will serve more than 652,000 broadband subscribers and 1,326,000 total active services.

Reason for seeking approval

ASX Listing Rule10.1 prohibits the Company, and each of its subsidiaries and controlled entities, from acquiring a "substantial asset" from, or disposing of a "substantial asset" to (amongst other persons) a substantial shareholder (where the substantial shareholder and its associates had a relevant interest in at least 10% of the shares at any time in the six months before the transaction) or any of its associates, without the approval of shareholders.

An asset is a "substantial asset" if its value, or the value of the consideration for it, is 5% or more of the equity interests of the Company as set out in its latest accounts given to the ASX under the ASX Listing Rules.

The assets the subject of the Proposed Transaction are a "substantial asset" for the purposes of this test. iiNet Limited ABN 48 068 628 937 Notice of General Meeting and Information Memorandum Page 13

Information Memorandum In the six months prior to the anticipated date of completion of the Proposed Transaction, Powertel, a Related Body Corporate of AAPT, held 27,621,091 Shares (comprising approximately 18.2% of the Company's issued share capital), and is therefore a "substantial shareholder" within the meaning of ASX Listing Rule 10.1.3. AAPT and Powertel are members of the Telecom New Zealand Group and are under common control of TCNZ.

Accordingly, the Company is seeking approval of Non-associated Shareholders for the Proposed Transaction.

Summary of Business Sale Agreement

The terms of the Proposed Transaction are set out in the Business Sale Agreement entered into on 30 July 2010. The key terms of the Business Sale Agreement are summarised below.

Acquisition

The Company has agreed to acquire the AAPT Consumer Division from AAPT on the terms and conditions set out in the Business Sale Agreement. AAPT's obligations are guaranteed by Telecom New Zealand.

Consideration

The consideration for the Proposed Transaction is AUD$60 million payable by the Company as follows:

(a) a deposit of $5 million which was paid on 30 July 2010 to AAPT's solicitors (Deposit) who are holding it in escrow on the terms and conditions of an escrow agreement; and

(b) the balance on completion of the Proposed Transaction.

Following completion of the Proposed Transaction, AAPT will prepare an audited completion statement setting out the working capital of the AAPT Consumer Division as at the date of completion. If that completion statement demonstrates that:

(a) the amount of the working capital is positive, the Company must pay the absolute value of the amount of the working capital to AAPT by way of an addition to the cash consideration paid;

(b) the amount of the working capital is negative, AAPT must pay the absolute value of the amount of the working capital to the Company by way of a repayment of the cash consideration paid; or

Deposit

The Company will forfeit the Deposit if the Business Sale Agreement is terminated by AAPT as a result of the Company failing to comply with a material term of the Business Sale Agreement.

The Deposit will be refunded to the Company if:

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Information Memorandum (a) completion of the Proposed Transaction does not occur because AAPT is unable to complete the Proposed Transaction and the Company is willing and able to complete; or

(b) the Business Sale Agreement is terminated by the Company by reason of a material adverse effect occurring directly as a result of a default by AAPT under a key contract, and the parties are unable to agree a workable solution. Under the Business Sale Agreement, a material adverse effect means an event or occurrence or series of events or occurrences that reduce the annual revenue of the AAPT Consumer Division by more than 10%, or a global event or occurrence that prevents the Company and the market from drawing down financing facilities.

Where the Business Sale Agreement is terminated in other circumstances, including a failure of the conditions precedent to be satisfied or waived, or the termination of the Business Sale Agreement by the Company if a material adverse effect occurs (other than by reason of a default by AAPT under a key contract) and the parties are unable to agree a workable solution, the Company and AAPT will each be entitled to 50% of the Deposit.

Conditions Precedent

The conditions precedent to completion of the Proposed Transaction of the AAPT Consumer Division under the Business Sale Agreement are:

(a) the Company making an application for and receiving, either unconditionally or on conditions that are acceptable to the Company acting reasonably, written advice from the ACCC stating that it has no objection to or does not intend to oppose or take any action in respect of the Proposed Transaction (ACCC Condition);

(b) Shareholders approving the Proposed Transaction (this condition precedent will be satisfied if Resolution 3 is passed at the Meeting) (Shareholder Approval Condition); and

(c) execution of deeds of novation or assignment of key contracts, together with consent of the relevant counterparties to any deeds of assignment (Assignment Condition).

The ACCC Condition has been satisfied. The ACCC has advised that it does not propose to undertake a public review of the Proposed Transaction. The ACCC has reserved its rights to reconsider its decision if it becomes aware that any information upon which it has based its view is incorrect or incomplete.

The Assignment Condition can only be waived by the Company. The Shareholder Approval Condition cannot be waived.

The time limit for satisfaction of the conditions precedent to the extent not yet satisfied or waived is 31 December 2010 or any later date agreed by the parties in writing.

Either the Company or AAPT may terminate the Business Sale Agreement before completion of the Proposed Transaction has occurred if any of the conditions precedent are not fulfilled or waived, or the parties agree that they are incapable of being fulfilled, on or before 31 December 2010. A party may only terminate if they have co-operated in obtaining satisfaction of the conditions precedent and the Company has held the Meeting.

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Information Memorandum Allocation of Liabilities

AAPT will remain responsible for all liabilities of AAPT in connection with the AAPT Consumer Division arising before completion of the Proposed Transaction and AAPT must indemnify the Company against all such liabilities.

The Company will be responsible for all liabilities incurred by it in connection with the AAPT Consumer Division arising after completion of the Proposed Transaction and the Company must indemnify AAPT against all such liabilities.

Conduct pending completion of the Proposed Transaction

Prior to completion of the Proposed Transaction AAPT must, unless consented to in writing by the Company (which cannot be unreasonably withheld or delayed):

(a) manage and conduct the AAPT Consumer Division in the ordinary course consistent with usual business practices;

(b) not dispose of, or agree to dispose of, encumber or grant any right, title or option over, or declare itself trustee of any of the assets of the AAPT Consumer Division other than in the ordinary course of business;

(d) not enter into any new contracts that are material in the context of the conduct of the AAPT Consumer Division as a whole.

In complying with these obligations, AAPT is not required to do anything which would, in AAPT's reasonably opinion:

(a) unreasonably disrupt or impact on AAPT or the operation of any aspect of the AAPT Consumer Division or any of the businesses of the Telecom New Zealand Group;

(b) breach any obligations (including obligations of confidentiality) which AAPT or any Telecom New Zealand Group member owes to any third party that relate to the AAPT Consumer Division or the relevant business of the Telecom New Zealand Group; or

Warranties

AAPT has given (and will give on the date of completion of the Proposed Transaction) certain warranties of the type commonly found in agreements of this kind including in respect to:

(a) AAPT"s and Telecom New Zealand's status, capacity, power and authority to enter into the Business Sale Agreement;

(b) information disclosed to the Company not containing any untrue material fact;

(d) possession of all material licences necessary to carry on the AAPT Consumer Division;

(e) compliance with material laws;

iiNet Limited ABN 48 068 628 937 Notice of General Meeting and Information Memorandum Page 16

Information Memorandum (f) compliance with material contracts;

(g) title to the assets of the AAPT Consumer Division (including that the assets of the AAPT Consumer Division are free of encumbrances);

(h) the terms of the customer contracts;

(i) no material litigation or claims (other than normal debt collection matters);

(j) employee matters including related material disputes or claims;

(k) superannuation;

(l) intellectual property; and

(m) material environmental liabilities.

The Company's ability to claim under these warranties is subject to certain limitations and exclusions commonly found in agreements of this kind, including:

(a) a time limit for claims running from completion of the Proposed Transaction for a period of 18 months;

(b) an exclusion from liability unless the amount for an individual claim exceeds a threshold of $250,000 or together with the amounts of all warranty claims under Business Sale Agreement, exceeds a threshold of $1,750,000;

(c) a cap on AAPT's liability for all claims under the Business Sale Agreement equal to the purchase price (as adjusted in accordance with the Business Sale Agreement);

(d) an exclusion from liability for any claim connected with a complaint made to the Telecommunications Industry Ombudsman involving a customer of the AAPT Consumer Division (TIO Complaint), whether arising before, on or after completion of the Proposed Transaction.; and

(e) an indemnity by the Company in favour of AAPT for any TIO Complaint arising before completion of the Proposed Transaction up to a cap of $50,000 in aggregate.

The Company has given (and will give on the date of completion of the Proposed Transaction) certain representations and warranties of the type commonly found in agreements of this kind in respect of the Company's status, capacity, power and authority to enter into the Business Sale Agreement.

AAPT Branding

Other than in respect of the Permitted Branding, the Company will not obtain any rights in the AAPT name or associated logos as part of the Proposed Transaction (other than an assignment of the Domain Name aapt.net.au, which may only be used for customer email addresses).

The Company must use the Permitted Branding:

(a) only in connection with the AAPT Consumer Division;

(b) for no longer than 24 months after completion of the Proposed Transaction; and

iiNet Limited ABN 48 068 628 937 Notice of General Meeting and Information Memorandum Page 17

Information Memorandum (c) in accordance with reasonable directions from AAPT as to brand usage.

Employees

Before completion of the Proposed Transaction, the Company must make offers of employment to certain employees (which have been agreed to by the Company and AAPT) employed in connection with the AAPT Consumer Division on terms and conditions substantially similar to and no less favourable to the employee than those under which it is employed by AAPT on the date of completion of the Proposed Transaction.

Transitional Services Agreement

At completion of the Proposed Transaction under the Business Sale Agreement, the Company must deliver to AAPT an executed counterpart of the Transitional Services Agreement. The key terms of the Transitional Services Agreement are summarised below.

Provision of Services

AAPT will provide the following services to the Company from the date of completion of the Proposed Transaction:

(a) office accommodation;

(b) IT/LAN/WAN services;

(d) payroll services; and

(e) customer email.

The Company will provide AAPT the option to take up access to a billing platform and services and provide hosting, support and maintenance of AAPT’s billing system.

Termination

The provision of a particular service:

(a) may be terminated by the service provider on the relevant service termination date; and

(b) must be terminated upon receiving a notice from the service recipient stating that the particular service is no longer required.

Variation to Powertel Alliance

As disclosed to ASX on 26 May 2006, iiNet and Powertel formed a strategic alliance, whereby, relevantly:

(a) iiNet agreed to provide access to its network under an exclusive wholesale agreement; and

(b) Powertel agreed to provide iiNet with wholesale network services.

iiNet Limited ABN 48 068 628 937 Notice of General Meeting and Information Memorandum Page 18

Information Memorandum iiNet and Powertel have agreed to amend the Alliance Agreement to, amongst other things, extend the term of the alliance for a further three years and to vary the commercial terms of the wholesale services provided.

Variation to AAPT Wholesale Agreement

As part of the Proposed Transaction iiNet has negotiated with AAPT a variation to the AAPT Wholesale Agreement to include the wholesale services supplied to the AAPT Consumer Division and to provide an extension for the services provided under the AAPT Wholesale Agreement.

The wholesale services will be provided for a 12 month term which will be automatically renewed for successive periods of 30 days unless terminated by either party giving notice.

Independent Expert's Report

Under ASX Listing Rule 10.10.2 the Meeting Materials must include a report on the Proposed Transaction from an independent expert. The report must state whether the Proposed Transaction is fair and reasonable to Non-associated Shareholders.

The Company has appointed Lonergan Edwards to prepare the Independent Expert's Report on the Proposed Transaction, and this is included at Annexure B to this Information Memorandum. The Independent Expert's Report contains a detailed assessment of the Proposed Transaction and sets out information to enable Non-associated Shareholders to assess the merits of, and decide whether to approve, the Proposed Transaction.

Based on its review of the Proposed Transaction, and on the assumptions set out in its report, Lonergan Edwards has concluded that, in its opinion, the Proposed Transaction is fair and reasonable to the Non-associated Shareholders.

In section 8 of the Independent Expert's Report, Lonergan stated that the consideration being paid by the Company is within the Independent Expert's range of estimates of the fair market value of the assets being acquired pursuant to the Proposed Transaction.

Non-associated Shareholders should carefully read the Independent Expert's Report in its entirety to understand the scope of the report, the methodology of assessment, the sources and bases of information and the assumptions made.

Advantages and Disadvantages

Advantages of voting in favour of the transaction

EPS Accretion

As a result of the Proposed Transaction the Company’s earnings per Share (EPS) is likely to increase for financial year ended 30 June 2011 and subsequent financial years.

Synergies

There are a number of synergies which will be available from the integration of the AAPT Consumer Division, including:

(a) rationalised marketing, billing and other operating expenditure;

iiNet Limited ABN 48 068 628 937 Notice of General Meeting and Information Memorandum Page 19

Information Memorandum (b) the migration of approximately 25,000 subscribers to the Company's network, leveraging the success of Westnet and Netspace on-net migrations;

(d) other network cost synergy opportunities over the longer term.

Scale

The Proposed Transaction presents a unique opportunity to acquire a business of scale in an increasingly consolidated market. The AAPT Consumer Division will bring to the Company a significant broadband subscriber base of 113,000 subscribers and over 364,000 total active services with good bundling rates.

As a result of the Proposed Transaction, the Company will become a larger company with greater revenues and increased levels of profitability and will grow the Company's east coast subscriber base. If the Proposed Transaction is approved and the Proposed Transaction is completed, the Company's market position will be strengthened.

Contributions to Earnings

The Company expects a post-synergies EBITDA of $20 million in the first full year after completion of the Proposed Transaction from the AAPT Consumer Division. Further potential contributions to the Company’s earnings from additional cost efficiencies and customer retention strategies may be available to the Company.

Independent Expert's opinion

The Independent Expert is of the opinion that the Proposed Transaction is fair and reasonable to Non-associated Shareholders.

Disadvantages of voting in favour of the transaction

Increased level of gearing

If the Proposed Transaction is approved, in order to fund the payment of the consideration for the Transaction, the Company will draw down on existing bank facilities to the amount of $60 million. As a result the Company expects it will be substantially fully drawn on its existing banking facilities and will therefore seek to refinance its existing facilities to provide additional funding head room.

The success of the Proposed Transaction and, in particular, the ability to realise cost and revenue synergies will be dependent, among other things, on the integration of the AAPT Consumer Division being completed effectively, efficiently and in a timely manner, without material disruption to the business. There is no guarantee that the integration process will be carried out as planned.

Disadvantages of not voting in favour of the Proposed Transaction

Loss of deposit

The Business Sale Agreement provides that the Company will be refunded 50% of the Deposit (being $2.5 million) if the Business Sale Agreement is terminated as a result of Shareholders not

iiNet Limited ABN 48 068 628 937 Notice of General Meeting and Information Memorandum Page 20

Information Memorandum approving Resolution 3. Please refer to the section entitled "Deposit" of this Information Memorandum for further details.

Costs associated with the Proposed Transaction

In addition to the loss of 50% of the Deposit if Resolution 3 is not approved, the Company will be responsible for its own costs in conducting due diligence and negotiating the Business Sale Agreement, without the benefits of any of the potential advantages of the Proposed Transaction.

Smaller size

As a smaller company, iiNet will remain vulnerable to targeted competition by larger companies.

Directors' Recommendation

The Board of the Company, having considered the potential advantages and disadvantages of the Proposed Transaction together with the conclusion of the Independent Expert, are unanimously of the opinion that the Proposed Transaction is in the best interests of the Company and the Non-associated Shareholders.

The Board therefore unanimously recommends that Non-associated Shareholders vote in favour of Resolution 3.

The Directors intend to vote their own Shares in favour of Resolution 3.

Voting Exclusion

AAPT, TCNZ and any associate of AAPT and TCNZ (including Powertel) will be excluded from voting on Resolution 3.

Enquiries Shareholders are invited to contact the Company Secretary, David Buckingham on +61 8 9214 2222 if they have any queries in respect of the matters set out in the Meeting Materials.

iiNet Limited ABN 48 068 628 937 Notice of General Meeting and Information Memorandum Page 21

Glossary

AAPT means AAPT Limited ACN 052 082 416.

AAPT Consumer Division means the business of providing residential and small home office consumer services being:

(a) internet services delivered via broadband and dial up connections; and

(b) telecommunications services including home phone and mobile telephony services.

AAPT Wholesale Agreement means the agreement dated 9 January 2006 for the provision of certain services between AAPT and the Company.

ACCC means the Australian Competition and Consumer Commission.

Alliance Agreement means the alliance agreement dated 26 May 2006 between PowerTel and the Company.

Aspry means Aspry Pty Ltd ACN 070 567 421.

ASX means ASX Limited ABN 98 008 624 691.

ASX Listing Rules means the listing rules of the ASX.

AUD or $ means Australian dollars.

Business Sale Agreement means the business sale agreement dated 30 July 2010 between AAPT, Telecom New Zealand and the Company, the key terms of which are summarised in the Information Memorandum.

Board means the board of directors of the Company.

Chairman means the chairman of the Meeting.

Company or iiNet means iiNet Limited ABN 48 068 628 937.

Constitution means the Company’s constitution.

Corporations Act means the Corporations Act 2001 (Cth).

Directors means directors of the Company.

Independent Expert's Report means Lonergan Edwards' report included as Annexure B to this Information Memorandum.

Information Memorandum means this information memorandum attached to the Notice, which provides information to Shareholders about the Resolutions and includes the Independent Expert's Report.

Listing Rules means the listing rules of ASX.

Lonergan Edwards means Lonergan Edwards & Associates Limited ACN 095 445 560.

Meeting means the meeting convened by the Notice.

Meeting Materials means the Notice of Meeting and Information Memorandum.

Netspace Acquisition Agreement means the Sale and Purchase Deed dated 28 March 2010 between SM Tech Co No. 1 Pty Ltd ACN 118 266 434 as trustee for the SP Marburg Family Trust,

iiNet Limited ABN 48 068 628 937 Notice of General Meeting and Information Memorandum Page 22

Glossary SM Tech Co No. 2 Pty Ltd ACN 118 368 737 as trustee for the SP Marburg Family Trust No. 2, RP Tech Co No. 1 Pty Ltd ACN 118 266 292 as trustee for the RN Preen Family Trust, RP Tech Co No. 2 Pty Ltd ACN 118 368 728 as trustee for the RN Preen Family Trust No. 2, Stuart Peter Marburg, Richard Nicholas Preen and the Company.

Netspace Communications means Netspace Communications Pty Ltd ACN 128 570 721.

Netspace Group means each of:

(a) NOS;

(b) Spacecentre;

(d) Netspace Networks; and

(e) Netspace Communications.

Netspace Group Member means any member of the Netspace Group.

Netspace Networks means Netspace Networks Pty Ltd ACN 083 170 834.

NOS means Netspace Online Systems Pty Ltd ACN 067 116 269.

Non-associated Shareholders means Shareholders other than AAPT and its associates (including Powertel).

Notice or Notice of Meeting means the notice of general meeting which accompanies this Information Memorandum.

Permitted Branding means customer facing websites, webmail, invoicing, call centre scripts and protocols, existing email domain names or telephone directory listings using the name AAPT.

Powertel means Powertel Limited ACN 001 760 103.

Proposed Transaction means the proposed acquisition of the AAPT Consumer Division the subject of the Business Sale Agreement, described and summarised in the Information Memorandum.

Related Body Corporate has the meaning given to it in the Corporations Act.

Resolution means a resolution included in the Notice.

Share means an ordinary share in the capital of the Company.

Shareholder means a holder of a Share.

Spacecentre means Spacecentre Pty Ltd ACN 097 794 655.

TCNZ means Telecom Corporation of New Zealand Limited (ARBN 050 611 277).

Telecom New Zealand means Telecom New Zealand Limited.

Telecom New Zealand Group means TCNZ and its Related Bodies Corporate.

Telecom New Zealand Group Member means any member of the Telecom New Zealand Group.

iiNet Limited ABN 48 068 628 937 Notice of General Meeting and Information Memorandum Page 23

Glossary Transitional Services Agreement means the agreement for the provision of certain services between AAPT and the Company to be entered into at completion of the Proposed Transaction.

Westpac means Westpac Banking Corporation ABN 33 007 457 141.

Westpac Facility means the $100 million revolving cash advance facility and contingent instrument facility with an unconfirmed facility limit provided by Westpac to the Company

iiNet Limited ABN 48 068 628 937 Notice of General Meeting and Information Memorandum Page 24

Annexure A - Announcement ASX Release

iiNet announces the acquisition of Netspace

29 March 2010 - iiNet Limited (ASX: IIN) is pleased to announce that it has entered into a binding agreement to acquire Netspace. iiNet Chief Executive Officer, Michael Malone, said the acquisition would consolidate the company’s position as the leading challenger brand in the Australian telecommunications market.

Acquisition highlights

Acquisition of Netspace is consistent with iiNet’s strategy to grow through consolidation

Lifts iiNet’s market share to 12.4%, and towards its 15% target, with an increase of over 70,000 broadband customers to more than 520,000 broadband customers, and an increase of over 120,000 active services to around 920,000 total active services

Netspace has a strong business with high historic subscriber growth rates and low churn

Strengthens iiNet’s market position in the key markets of Victoria, New South Wales, and Tasmania

iiNet and Netspace have complementary geographical footprints with significant potential to migrate Netspace customers on-net

Significant potential to generate substantial synergies given the complementary nature of both businesses

EPS accretive (pre-synergies) from the first full year for iiNet shareholders.

Compelling strategic rationale that delivers on iiNet’s growth and consolidation strategy

“This acquisition will bring iiNet closer to our target of fifteen percent market share in the fixed line broadband market prior to the commencement of the National Broadband Network,” Mr Malone said.

“Netspace is a natural fit for iiNet given the strong alignment of the companies’ products, networks and cultures. It is a great business, having grown strongly in the residential market, and has a loyal customer base given its customer service focus.

WINNER WINNER Commitment to Customer Australian Service Excellence Award WINNER Service – Consumer WA Call Centre Manager of the Year Best Broadband Service (Fixed or Wireless) ACOMMS Communications Alliance National Customer Service CEO of the Year Chief Executive of the Year & CommsDay Awards 2009 Customer Service Institute of Australia (CSIA) Australian Telecom Awards 2009

“In addition, the geographic footprint of Netspace is very complementary to iiNet, extending our presence in the key markets of Victoria, New South Wales, and Tasmania.

Mr Malone said it had been two years since iiNet’s acquisition of Westnet, which was a great success and demonstrated iiNet’s ability to undertake successful acquisitions.

“Our strong balance sheet has placed us in a unique position to remain at the forefront of industry consolidation. We are committed to delivering on our growth strategy, and Netspace is a logical and sensible acquisition for us.” iiNet expects to realise significant potential synergies through the migration of Netspace customers to iiNet’s network and through lower bandwidth costs. Potential synergies are expected to be $2 million in the first year, and $5 million in the second year of iiNet’s ownership.

Acquisition overview

Under the sale and purchase agreement, iiNet will pay $40 million for Netspace. The acquisition consideration will be 100% debt funded. Completion is subject to a number of procedural conditions and is expected to be achieved by 30 April 2010.

Earnings accretion

The transaction is expected to be immediately earnings per share accretive (pre-synergies) in the first full financial year, FY11, for iiNet shareholders, with significant opportunity to generate substantial synergies going forward. iiNet expects Netspace to generate over $70 million of revenue and $8 million of EBITDA in FY11 before synergies.

- ENDS -

For further investor and analyst information please contact: Michael Malone David Buckingham CEO CFO & Company Secretary iiNet iiNet P: +61 8 9214 2207 P: +61 8 9213 1358

For further media information and interviews, please contact: Tim Grau - Springboard Australia E: tim (dot) grau (at) springboard (dot) net (dot) au M: +61 438 044 598

About iiNet iiNet was established in 1993 and listed on the ASX in 1999, growing from a small Perth business into the third largest Internet Service Provider in Australia. The company supports around 800,000 broadband, telephony and dialup services nationwide, with annualised revenues of over $450m, and proudly employs over 1200 people in Perth, Sydney, Auckland and Cape Town.

iiNet’s goal is to lead the market with the best internet access products and then differentiate with genuine, plain speaking customer service. The company has its own high speed ADSL2+ network reaching around 4 million households across Australia, the largest Voice over IP network in the country, and is delighted to have led yet again with Naked DSL, recognised by PC User Magazine as the 2007 Product of the Year along with taking out the Australian Telecommunications User Group’s coveted ‘Carrier of the Year Award’ in 2010 for the second time.

About Netspace

Netspace was established in 1992 and provides more than 105,000 services, including broadband, ADSL, ADSL2+, Naked DSL, Midband Ethernet, Wireless and VPN internet access as well as fixed line telephony services. It has more than 180 staff located in Victoria, Tasmania and Western Australia.

Annexure B – Independent Expert's Report

The Directors iiNet Limited Level 1 502 Hay Street Subiaco WA 6008

18 August 2010

Subject: Acquisition of the AAPT Consumer Division

Dear Directors

Introduction 1 On 30 July 2010 iiNet Limited (iiNet) announced that it had entered into a binding agreement, subject to iiNet shareholder approval, to acquire the AAPT Consumer Division from AAPT Limited (AAPT), a wholly subsidiary of Telecom Corporation of New Zealand Limited (TCNZ) for $60 million in cash (the Proposed Acquisition). As at 30 June 2010 AAPT’s Consumer Division had 113,000 broadband subscribers and over 251,000 other active services.

2 In addition to the sale of the AAPT Consumer Division, TCNZ sold its 18.2% shareholding in iiNet to institutional and sophisticated investors by way of a block-trade.

Scope 3 As TCNZ’s subsidiary, PowerTel Limited (PowerTel), owned 18.2% of iiNet there is a requirement under the Australian Securities Exchange (ASX) Listing Rules for an independent expert’s report (IER) to be prepared on the Proposed Acquisition.

4 The Directors of iiNet have requested Lonergan Edwards & Associates Limited (LEA) to prepare an IER in accordance with ASX Listing Rule 10.10.2 stating whether, in our opinion, the Proposed Acquisition is fair and reasonable to the holders of ordinary shares in iiNet.

5 The LEA report will accompany the Notice of Extraordinary General Meeting and Explanatory Memorandum to be sent by iiNet to its shareholders in connection with the Proposed Acquisition. LEA is independent of iiNet and TCNZ and has no other involvement or interest in the transaction.

Liability limited by a scheme approved under Professional Standards legislation Annexure B – Independent Expert's Report

Summary of opinion 6 In LEA’s opinion, the proposed acquisition of the AAPT Consumer Division is fair and reasonable to the shareholders of iiNet not associated with TCNZ. This is primarily because:

(a) we have assessed the value of the AAPT Consumer Division (on the basis of the purchase of the subscriber base and related assets on a standalone basis by a hypothetical purchaser 1) to be in the range of $59.6 million to $69.9 million (b) the agreed purchase price of $60 million sits at the low end of our valuation range (c) as a result of (a) and (b) the Proposed Acquisition is fair when assessed under Australian Securities & Investments Commission (ASIC) Regulatory Guide 111 - Content of expert reports (RG 111) (d) under ASIC RG 111 the Proposed Acquisition is reasonable if it is fair. Consequently, in our opinion, the Proposed Acquisition is also reasonable.

7 We also note that:

(a) the market has reacted positively to the announcement of the Proposed Acquisition. In particular, iiNet’s share price increased 13.2% from the date of the announcement to 11 August 2010 compared with a 1.5% decrease in the ASX/S&P 200 index over the same period (b) the iiNet Board have unanimously approved the Proposed Acquisition and two major shareholders with 34.2% of the voting rights have announced they intend to vote in favour of the shareholder resolution (c) iiNet management expect a significant level of synergies to arise from improvements in customer service, migration of the broadband subscriber base on-net and integration of the subscriber base into the iiNet business. Accordingly, iiNet management expect to realise significant additional value for iiNet shareholders over and above the purchase price. This provides additional benefit to iiNet shareholders over and above the value of the AAPT Consumer Division business on a standalone basis (d) the Proposed Acquisition will increase iiNet’s market share of the Digital Subscriber Line (DSL) (fixed broadband) market to 14.9%.

General 8 The ultimate decision whether to approve the Proposed Acquisition should be based on each shareholder’s assessment of the Proposed Acquisition. If shareholders are in doubt about the action they should take in relation to the Proposed Acquisition or matters dealt with in this report, shareholders should seek independent professional advice.

1 It should be noted that this value represents the value of the acquired AAPT Consumer Division’s subscriber base and related assets rather than their value to iiNet which would be significantly higher.

2 Annexure B – Independent Expert's Report

9 For our full opinion on the Proposed Acquisition, and the reasoning behind our opinion, we recommend that iiNet shareholders read the remainder of our report.

Yours faithfully

Craig Edwards Julie Planinic Authorised Representative Authorised Representative

3 Annexure B – Independent Expert's Report

Table of contents

Section Page

I Key terms of the acquisition 6 Terms 6

II Scope of our report 8 Purpose 8 Basis of assessment 8 Limitations and reliance on information 9

III Profile of iiNet 11

IV Profile of AAPT Consumer Division 13 AAPT 13 AAPT Consumer Division 13 Fixed line voice (home and small business phone services) 13 Internet 13 Mobile phones 14 2-in-1 bundles 14 AAPT brand 14 Financial performance of AAPT Consumer Division 15

V Industry considerations 16 Overview 16 Internet service providers 16 Telecommunication resellers 19 National Broadband Network 21 Key success factors 22

VI Valuation approach 23 Methodology 23 Methodology selected 24

VII Valuation of 100% of the AAPT Consumer Division 25 Valuation methodology 25 Cash flow projections 25 Major assumptions 26 Implied earnings multiples 29 Cross-check against acquisition cost per subscriber 30

4 Annexure B – Independent Expert's Report

Section Page

VIII Evaluation of the purchase of the AAPT Consumer Division 32 Fairness 32 Other qualitative factors 32 Share prices reaction 32 Recommendation / acceptance of the Proposed Acquisition 33 Potential synergies available to iiNet 33 Market share 34 Other matters 34

Appendices A Financial Services Guide

B Qualifications, declarations and consents

C Assessment of appropriate discount rate

D Transaction multiples

E Listed company multiples

F Glossary

5 Annexure B – Independent Expert's Report

I Key terms of the acquisition Terms 10 On 30 July 2010, AAPT, Telecom New Zealand Limited (Telecom NZ) and iiNet entered into a binding agreement for the purchase of the AAPT Consumer Division.

11 The AAPT Consumer Division is in the business of delivering services to residential and small home office consumer services to customers being:

(a) Fixed line voice – home and small business phone services (b) Internet – Broadband internet (including ADSL and ADSL 2+) (c) Mobile – mobile phone services (d) 2-in1 bundles – Broadband and phone bundles.

12 The Business Sale Agreement dated 30 July 2010 is between AAPT, Telecom NZ and iiNet. The purchase price under the agreement is $60 million in cash. The completion date of the Business Sale Agreement is 30 September 2010, subject to the following conditions precedent:

(a) application for and receipt of advice from the ACCC stating that it has no objection to the acquisition (b) iiNet shareholder approval in accordance with ASX Listing Rules 10.1 and 10.23 (c) execution and novation of the Key Contracts 2.

13 The assets used in the AAPT Consumer Division business which are to be acquired under the Business Sale Agreement are as follows:

(a) goodwill of the business (b) plant and equipment (principally inventory and computer equipment) (c) the benefit of the Contracts 3 (d) Customer Contracts (e) customer information (f) bank accounts for receipt of customer payments 4 (g) intellectual property including advertising material and certain domain names and trademarks.

2 As identified in the Business Sale Agreement. 3 Being contracts required for the operation of the Business. 4 The balance of these accounts will be cleared to nil by the vendor prior to completion.

6 Annexure B – Independent Expert's Report

14 iiNet will acquire the AAPT Consumer Division’s subscriber base and:

(a) the contracts for the operation of the Hyperbaric billing system (b) certain AAPT Consumer Division staff in Sydney (predominantly call centre staff) (c) a contract for the call centre operations in Manilla.

15 iiNet and AAPT have also entered into a new Wholesale Agreement 5 for one year and Transitional (Consumer) Services Agreement. These agreements provide for access to the AAPT Network and the provision of certain services to iiNet on a transitional basis in order to facilitate the ongoing operation of the AAPT Consumer Division business.

16 Under the terms of the Business Sale Agreement, iiNet does not obtain any rights to the AAPT name with the exception of using the AAPT name for customer interface for a period of 24 months (which will include an assignment of the Domain Name aapt.net.au, which may only be used for customer email addresses).

5 Variation Agreement to the Wholesale Master Services Agreement dated 9 January 2006.

7 Annexure B – Independent Expert's Report

II Scope of our report Purpose 17 ASX Listing Rule 10.1 states that an entity must ensure that it does not acquire a substantial asset from, or dispose of a substantial asset to, a substantial holder (of > 10% of the voting rights) or an associate of a substantial holder without the approval of holders of the entity’s ordinary securities. Approval is required by resolution at a general meeting.

18 ASX Listing Rule 10.2 states that an asset is substantial if its value, or the value of the consideration for it, is 5% or more of the equity interests of the entity.

19 ASX Listing Rule 10.10 requires that the notice of general meeting includes a report from an independent expert stating whether the transaction is fair and reasonable to the holders of ordinary shares.

20 The Directors of iiNet have requested LEA to prepare an IER to assist iiNet shareholders making a decision whether or not to approve the Proposed Acquisition. Accordingly, the IER sets out an independent assessment of whether the Proposed Acquisition is fair and reasonable to iiNet shareholders not associated with TCNZ, together with the reasons for this opinion.

21 This report has been prepared by LEA for the benefit of iiNet shareholders to assist them in considering the resolution to approve the Proposed Acquisition. Our report will accompany the Notice of Extraordinary General Meeting and Explanatory Memorandum to be sent to iiNet shareholders. The sole purpose of our report is to determine the opinion referred to above.

22 The ultimate decision whether to approve the Proposed Acquisition should be based on each iiNet shareholder’s assessment of the Proposed Acquisition. If in doubt about the Proposed Acquisition or matters dealt with in this report, shareholders should seek independent professional advice.

Basis of assessment 23 In preparing our report we have given due consideration to the ASX Listing Rules and Regulatory Guidelines issued by the ASIC, particularly RG 111.

24 The ASX Listing Rule requirements for acquisition and disposal of assets to related parties are triggered by circumstances that give rise to the potential for conflict of interest. 6

25 Pursuant to RG 111, the Proposed Acquisition is “fair” if the value of the assets acquired is equal to or greater than the consideration paid.

26 Pursuant to RG 111 the Proposed Acquisition is “reasonable” if it is fair. The Proposed Acquisition may also be reasonable if, despite not being “fair” but after considering other significant factors, shareholders as a whole will be better off if the Proposed Acquisition is completed.

27 In LEA’s opinion the most appropriate basis upon which to evaluate the Proposed Acquisition is to consider:

6 Paragraph 31 of ASX Guidance Note 24 – Acquisition and disposal of assets between related parties: Listing Rules 10.1 – 10.10

8 Annexure B – Independent Expert's Report

(a) the market value of the AAPT Consumer Division assets (on the basis of the purchase of the subscriber base and related assets on a standalone basis by a hypothetical purchaser 7) (b) the purchase price of $60 million as per the Business Sale Agreement (c) the difference between (a) and (b), in order to determine whether the Proposed Acquisition is fair.

28 In addition we have had regard to:

(a) the movement in iiNet’s share price following the announcement of the Proposed Acquisition (b) statements made by major iiNet shareholders as to the merits of the Proposed Acquisition and related voting intentions in connection with the Proposed Acquisition (c) the level of synergy benefits which iiNet expects to achieve as a result of integrating AAPT’s Consumer Division into its existing operations (d) other advantages and disadvantages of the Proposed Acquisition.

Limitations and reliance on information 29 Our opinion is based on the economic, market and other conditions prevailing at the date of this report. Such conditions can change significantly over relatively short periods of time.

30 Our report is also based upon financial and other information provided by or on behalf of iiNet. We have considered and relied upon this information and believe that the information provided is reliable, complete and not misleading and we have no reason to believe that material facts have been withheld. The information provided was evaluated through analysis, enquiry and review for the purpose of forming an opinion as to whether the Proposed Acquisition is fair and reasonable. However, in assignments such as this, time is limited and we do not warrant that our enquiries have identified or verified all of the matters which an audit, extensive examination or “due diligence” investigation might disclose. None of these additional tasks have been undertaken.

31 We understand the accounting and other financial information that was provided to us has been prepared in accordance with the Australian equivalent to International Financial Reporting Standards (AIFRS).

32 An important part of the information base used in forming an opinion of the kind expressed in this report is the opinions and judgement of management of the relevant companies. This type of information has also been evaluated through analysis, enquiry and review to the extent practical. However, it must be recognised that such information is not always capable of external verification or validation.

33 We in no way guarantee the achievability of budgets or forecasts of future profits. Budgets and forecasts are inherently uncertain. They are predictions by management of future events which cannot be assured and are necessarily based on assumptions of future events, many of

7 It should be noted that this value represents the value of the acquired AAPT Consumer Division’s subscriber base and related assets rather than their value to iiNet which would be significantly higher.

9 Annexure B – Independent Expert's Report

which are beyond the control of management. Actual results may vary significantly from forecasts.

34 We have assumed that the forecasts have been prepared fairly and honestly, based on reasonable grounds and the information available to management at the time and within the practical constraints and limitations of such forecasts. We have assumed that management have reasonable grounds for the forecasts and the forecasts do not reflect any material bias. We have no reason to believe that these assumptions are inappropriate.

10 Annexure B – Independent Expert's Report

III Profile of iiNet

35 iiNet was established in 1993 and listed on the ASX in 1999 and is currently the third largest internet service provider (ISP) in Australia. iiNet has some 900,000 broadband, telephony and dial-up services in Australia with revenues of over $500 million. The company has over 1,700 employees in offices located in Sydney, Melbourne, Auckland (New Zealand) and Cape Town (South Africa).

36 iiNet prides itself on product innovation and customer service. The company has its own high speed ADSL2+ network reaching around 4 million households in Australia and the largest voice over IP network in Australia.

37 The Proposed Acquisition will strengthen iiNet’s market position from some 12.4%8 of the fixed line Broadband market to some 14.9% and make it the second largest market participant as follows:

DSL subscribers

000s 2,500 2,244

2,000

1,500

1,000

650 553 460 500

180 165 43 0 Telstra iiNet + AAPT Optus TPG Internode Primus EFTel

Source: iiNet Investor Presentation 30 July 2010. Excludes HFC customers.

8 As per iiNet’s ASX Announcement with respect to the Netscape acquisition. Annexure B – Independent Expert's Report

38 The relative position of iiNet and other ISPs with respect to customer satisfaction is shown below:

Customer satisfaction survey

100%

93%

90% 90%

83%

80% 80% 77% 76% 75% 73%

70% 70% 67% 66% 66%

60%

50% Intemode iiNet Westnet TPG Optusnet 3 AAPT iPrimus Vodafone Telstra Dodo Other BigPond

Source: Roy Morgan Single Source (December 2009 - May 2010). Total Australians 14+ who named their Internet provider (n=7,040). “% Satisfied” is the proportion of all customers who are “Very” or “Fairly” satisfied with their overall service with that Internet service provider (on a five point scale). Total industry figure excludes those who ‘can’t say’ their provider. http://www.roymorgan.com/news/press-releases/2010/1138/.

39 Industry analyst, Andrew Braun, Director Mobile, Internet and Technology, Roy Morgan Research, says:

“The areas where Internode and iiNet are seen as being well ahead of their competitors include innovation, customer focus, competitive pricing and having enthusiastic and friendly staff.”

12 Annexure B – Independent Expert's Report

IV Profile of AAPT Consumer Division AAPT 40 AAPT is one of the three largest telecommunications companies in Australia providing a carrier-grade voice, data and internet network. In addition to their own network, AAPT uses third party networks to provide services to their residential, small and home office and business customers.

41 AAPT has been providing telecommunication services to Australians since 1991. Initially AAPT serviced the retail segment via its stake in AOL 7 and later in February 2004 AAPT launched its own broadband service under the Smartchat brand.

AAPT Consumer Division 42 The AAPT Consumer Division comprises services provided to residential, small and home office users. The services comprise:

Fixed line voice (home and small business phone services) 43 The AAPT Consumer Division has a range of phone plans for callers on non-contract terms and 12 or 24 month contracts. Phone plans include line rental and an included call value 9 based on plan rates for local community, national, mobile and international calls. Line rental only plus pay as you go call plans are also available.

44 The current subscriber base for public switched telephone network (PSTN) services is approximately 199,400.

Internet 45 The AAPT Consumer Division provides customers with:

(a) dial-up internet access for light users (e.g. email access) (b) ADSL broadband access (c) super fast ADSL2+ access.

46 The AAPT Consumer Division provides fast internet access with fixed prices. There are 17 unlimited plans with no excess usage charges 10 . Overall, AAPT’s unlimited plans are profitable. However, iiNet will be reviewing the profitability of 24X7 unlimited plans post acquisition. There are 15 other internet access plans available to customers of AAPT.

9 The included call value excludes special service calls (such as operator-assisted service and information calls), telecard calls, data calls and recurring monthly charges. 10 If a customer exceeds their download allowance, the speed is reduced.

13 Annexure B – Independent Expert's Report

47 The current number of internet subscribers is as follows:

Internet subscribers 000 Dial-up 10.1 DSL 77.1 ADSL2+ 35.8 Total 123.0

48 The number of AAPT contracted customers has been increasing since late 2009. Contract terms are generally 12 or 24 months.

Mobile phones 49 The AAPT Consumer Division provides mobile phone plans including:

(a) mSim plans, for customers who have their own handset (b) Mobile ClearCap, a mobile capped plan with a basic handset (c) mCap plans, three levels of mobile plans with included calls and selected latest mobile handsets.

50 There are currently some 42,300 mobile customers.

51 Mobile contract plans are generally for 24 months and must be bundled with AAPT home phone or broadband plans.

2-in-1 bundles 52 Customers receive savings by bundling their home phone and broadband plans providing one bill and contact point for phone and internet services.

53 In addition customers may bundle their mobile phone plan with a home phone and/or broadband plan.

AAPT brand 54 Whilst AAPT has strong brand recognition in the consumer space, it has experienced higher churn rates than other industry participants (due to the size of the non-contracted customer base and levels of customer service). Whilst the AAPT brand will not be acquired (other than an assignment of the Domain Name aapt.net.au, which may only be used for customer email addresses), the brand will be available for use by iiNet in customer interaction for a period of not more than 24 months and existing AAPT customers will initially be billed under the AAPT billing system (Hyperbaric), which will be acquired by iiNet as part of the Proposed Acquisition.

14 Annexure B – Independent Expert's Report

Financial performance of AAPT Consumer Division 55 AAPT did not separately report results for the Consumer Division. However, we note that:

(a) revenue for the Consumer Division in the year ended 30 June 2010 was some $261.9 million (b) forecast revenue for the Consumer Division for the year ending 30 June 2011 was some $243.7 million (c) TCNZ has stated that the Proposed Acquisition will have a net negative impact on AAPT’s FY11 earnings before interest, tax, depreciation and amortisation (EBITDA) of around $10 million 11 .

56 AAPT has recently been acquiring the majority of its new subscribers on contracts which has resulted in lower churn rates due to the early termination fees charged.

57 Sales by product for the FY10 June quarter were as follows:

Sales by product April – June 2010

Dial-up 1%

DSL Mobile voice 20% 28%

ADSL2+ 9%

PSTN 42%

Source: iiNet analysis.

11 Telecom NZ ASX announcement on 29 July 2010.

15 Annexure B – Independent Expert's Report

V Industry considerations Overview 58 iiNet is Australia’s third largest fixed line internet service provider (ISP) while AAPT’s Consumer Division is both an ISP as well as a telecommunication reseller. This section of the report therefore focuses on the ISP and telecommunications reseller industries.

Internet service providers 59 The Australian ISP sector is the fastest growing of the telecommunications industry. Internet services can be provided by fixed lines via broadband or the antiquated dial-up process. Dial- up services provide slower connections and require the user to dial in to the network for the cost of a local call. Broadband services can be accessed via a range of technologies, which are listed below:

(a) ADSL is the most commonly used broadband technology and allows users to access the internet over a copper wire network, with speeds reducing as the distance from the exchange increases. The maximum speed is around 8 megabits per second (Mbps) (b) ADSL2 also operates over copper wire networks, however it provides faster internet access than ADSL with speeds up to 20 Mbps. In order to use this technology ISPs must install digital subscriber line access multipliers into Telstra-owned exchanges (c) HFC cable (optical fibre and coaxial cable) provides broadband internet and other services to around 2.7 million premises in major cities. HFC typically offers speeds of 17 Mbps, but in Brisbane, Melbourne and Sydney speeds are generally 20 to 30 Mbps (d) Satellite broadband provides 100% coverage over Australia’s land mass, thus predominantly providing internet access to rural and remote customers at speeds similar to ADSL (e) Broadband over power lines (BPL) is an emerging technology that provides broadband internet over existing electricity power lines. Issues still to be addressed include potential interference with other radio communications services. BPL can allow broadband internet access at speeds up to 25 Mbps (f) 3G network access available via Australia’s 3G providers – Telstra, Optus, and A3GA 12 . Current 3G broadband speeds are up to a maximum 14.4 Mbps however Telstra’s NextG network (which is often referred to as 3.5G) offers internet access at speeds up to a maximum of 21Mbps by February 2009 and were planned to reach 42 Mbps later in 2009.

Market segmentation 60 Broadband currently represent 93% of sector revenue, with the largest product segment being internet speeds of 1.5 Mbps to less than 8 Mbps. The sector’s largest source of revenue is households, representing 83% of revenue. The following chart provides a break-down of sector revenue:

12 A joint venture between Vodafone Group Plc and Hutchinson Telecommunications (Australia) Limited.

16 Annexure B – Independent Expert's Report

Sector revenue segmentation

Dial-up 7% Business & Broadband: government 256kbps to 17% less than Broadband: 1.5Mbps 8Mbps or 25% greater 32%

Broadband: Households 1.5Mbps to less 83% than 8Mbps 36%

Source: IBISWorld, Internet Service Providers in Australia, June 2010.

Demand 61 Demand is influenced by economic conditions, including incomes of households and the level of economic activity. The growth in the number of households and household computer penetration rates also impacts the total size of the potential subscriber market. Prices are particularly important in creating demand with the recent commoditisation of services, serving to increase subscriber numbers.

Competition 62 Competition in the ISP industry is driven by price, quality and level of service, product range and branding. Price is the major basis of competition, with other factors such as download volumes and speeds being generally comparable. For the smaller ISPs retail prices are a function of the wholesale price that Telstra or other infrastructure owners charge. Help desk and support services can be a differentiating factor, particularly for new internet users. Many ISPs do not report service outages so comparing technical services can be difficult.

63 The ability to offer the latest value-added features is important in differentiating the various providers. As prices fall users tend to migrate to faster services. In addition, some ISPs now offer voice over internet protocol (VoIP) and internet protocol television (IPTV). The success of iiNet’s introduction of naked DSL, which resulted in an activation of 35,000 subscribers within a year, highlights the importance of product innovation.

64 Service is becoming more important with customers placing more importance on reliable services and fast problem resolution. This is driving a greater reliance on the role of customer relationship management (CRM) in an attempt to provide a superior level of customer care as a point of differentiation. Bundling is also becoming an increasing significant point of competition, with full service companies encouraging customers to take up multiple services.

17 Annexure B – Independent Expert's Report

Major market participants 65 The Australian fixed line ISP industry is highly fragmented with over 400 ISPs operating, most of which are small businesses 13 . However, a few large fixed line ISPs dominate the market, with the top four providers forecast to account for 63% of total revenue for year ended 30 June 2010 14 . The following chart provides an overview of market share in the industry:

Market share by revenue

Other 36% Telstra 44%

TPG SingTel 4% Optus iiNet 8% 8%

Source: IBISWorld, Internet Service Providers in Australia, June 2010.

Historical performance 66 As of December 2009 there were over 9 million internet subscribers in Australia. The majority of these (over 6 million accounts) are currently on fixed line services, with the remainder wireless. Wireless broadband technologies have vastly improved growth of the overall internet market in recent times, largely at the expense of the fixed line broadband sector.

67 The fixed line ISP sector experienced revenue growth for the 10 years to 2010. For the period to 2005, dial-up connections were the common form of growth. From 2005 and 2008 the move of consumers towards the greater revenue generating broadband connections provided additional growth. However, from 2008 onwards, the fixed line ISP sector changed significantly. The advancement of wireless broadband networks hindered further fixed internet subscriber growth, with consumers opting for the mobility offered by wireless broadband. These trends are illustrated in the following chart:

13 This excludes wireless operators. 14 IBISWorld, Internet Service Providers in Australia, June 2010.

18 Annexure B – Independent Expert's Report

Historical revenue Year ended 30 June Millions $6,250

$5,000

$3,750

$2,500

$1,250

40% Growth

0% 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010e

Source: IBISWorld, Internet Service Providers in Australia, June 2010.

68 In just a six month period, from June 2009 to December 2009, wireless broadband services increased some 40% to 2.8 million subscribers.15 This growth can be attributed to the considerable upgrading of 3G networks and comparable priced mobile internet connections. As shown above this has significantly lessened growth for fixed line operators.

69 IBISWorld estimated that for the year ended 30 June 2009, penetration of internet access was 72% for households and 95% for businesses. 16

Telecommunication resellers 70 Telecommunication resellers provide fixed, mobile and data telecommunications services over third-party-owned networks. Businesses operating in this sector purchase network capacity from network providers (e.g. Telstra), and on-sell it through their own channels.

71 The majority of revenue from this channel is derived from the corporate sector. The primary service segments include data services, mobile services and wired services. The following graphs provide a break-down of these market segments:

15 ABS 8153, Internet Activity Australia, December 2009. 16 IBISWorld, Internet Service Providers in Australia, June 2010. Annexure B – Independent Expert's Report

Market segmentation

Government 5% Phone cards 8% Data services Wired 33% services 28% Household 37% Corporate 58%

Mobile services 31%

Source: IBISWorld, Telecommunications Resellers in Australia, June 2010.

Market share 72 The telecommunications reseller sector is highly fragmented, with the top four participants’ only accounting for approximately 30% of industry revenue. M2 Telecommunications Group is the largest reseller, followed by TCNZ (brands include AAPT and PowerTel). The following chart provides an overview of market share by revenue:

Market share by revenue

M2 14%

TCNZ 10% TPG 4%

SingTel Other Optus 69% 3%

Source: IBISWorld, Telecommunications Resellers in Australia, June 2010.

20 Annexure B – Independent Expert's Report

Historical performance 73 The emergence of the telecommunication reseller sector, which essentially transpired due to falling barriers to entry, has prompted increased telecommunications industry competition and led to falling telecommunication service prices. In comparison to the ISP industry, the telecommunication reseller sector performance has been poor, either declining or recording marginal growth for the 10 years to 2010. Intense and increasing competition has placed pressure on pricing and has led to the deterioration of margins. In addition, weak economic conditions post the global financial crisis (GFC) has placed further pressure on industry profitability, as illustrated by the following chart:

Telecommunication reseller industry revenue Year ended 30 June Millions $4,500

$3,600

$2,700

$1,800

$900

20% Growth 0%

-20% 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010e

Source: IBISWorld, Telecommunications Resellers in Australia, June 2010.

National Broadband Network 74 The Australian Government announced on 7 April 2009 it would establish a new company to build and operate a high speed National Broadband Network (NBN). The NBN plans to deliver 17 universal superfast broadband to all Australian households and businesses via the creation of NBN Co. Limited.

17 Subject to the result of the Federal Election on 21 August 2010. Annexure B – Independent Expert's Report

75 On 20 June 2010, NBN Co. Limited and Telstra announced they had entered into an agreement in the roll-out of the NBN. The NBN will change the structure of the telecommunications industry and will potentially impact iiNet’s business model. The scale of an ISP will be important in the context of operating in an NBN environment as access to appropriate content will be key to its success.

Key success factors 76 The key success factors in the ISP / Telecommunications Resellers industry are:

(a) maintenance of customer relations, the provision of a superior level of customer care is a point of differentiation (b) development of a symbiotic relationship with related telecommunications industries (c) access to niche markets for new or small operators (d) innovative marketing strategies due to the highly competitive environment (e) access to required utility infrastructure (f) value added services to gain market acceptance and bolster profit margins (g) maintenance of reputation (h) a loyal customer base is essential given the highly competitive nature of the industry and the level of customer churn.

22 Annexure B – Independent Expert's Report

VI Valuation approach Methodology 77 RG 111 outlines the appropriate methodologies that a valuer should consider when valuing assets or securities for the purposes of, amongst other things, share buy-backs, selective capital reductions, schemes of arrangement, takeovers and prospectuses. These include:

(a) the discounted cash flow (DCF) methodology (b) the application of earnings multiples appropriate to the businesses or industries in which the company or its profit centres are engaged, to the estimated future maintainable earnings or cash flows of the company, added to the estimated realisable value of any surplus assets (c) the amount that would be available for distribution to shareholders in an orderly realisation of assets (d) the quoted price of listed securities, when there is a liquid and active market and allowing for the fact that the quoted market price may not reflect their value on a 100% controlling interest basis (e) any recent genuine offers received by the target for any business units or assets as a basis for valuation of those business units or assets.

78 Under the DCF methodology the value of the business is equal to the net present value (NPV) of the estimated future cash flows including a terminal value. In order to arrive at the NPV the future cash flows are discounted using a discount rate which reflects the risks associated with the cash flow stream.

79 Methodologies using capitalisation multiples of earnings or cash flows are commonly applied when valuing businesses where a future “maintainable” earnings stream can be established with a degree of confidence. Generally, this applies in circumstances where the business is relatively mature, has a proven track record and expectations of future profitability and has relatively steady growth prospects. Such a methodology is generally not applicable where a business is in start-up phase, has a finite life, or is likely to experience a significant change in growth prospects and risks in the future.

80 Capitalisation multiples can be applied to either estimates of future maintainable operating cash flow, earnings before interest, tax, depreciation and amortisation (EBITDA), earnings before interest, tax and amortisation (EBITA), earnings before interest and tax (EBIT) or net profit after tax. The appropriate multiple to be applied to such earnings is usually derived from stock market trading in shares in comparable companies which provide some guidance as to value and from precedent transactions within the industry. The multiples derived from these sources need to be reviewed in the context of the differing profiles and growth prospects between the company being valued and those considered comparable. When valuing controlling interests in a business an adjustment is also required to incorporate a premium for control. The earnings from any non-trading or surplus assets are excluded from the estimate of the maintainable earnings and the value of such assets is separately added to the value of the business in order to derive the total value of the company.

23 Annexure B – Independent Expert's Report

81 An asset based methodology is applicable in circumstances where neither a capitalisation of earnings nor a DCF methodology is appropriate. It can also be applied where a business is no longer a going concern or where an orderly realisation of assets and distribution of the proceeds is proposed. Using this methodology, the value of the net assets of the company is adjusted for the time, cost and taxation consequences of realising the company’s assets.

Methodology selected 82 The valuation of the AAPT Consumer Division has been made on the basis of assessing the market value the subscriber base and related assets on a standalone basis by a hypothetical purchaser 18 . Given the fact that the DCF methodology is the superior valuation methodology from a technical perspective and the availability of five years cash flow projections (which we have reviewed in detail and amended where appropriate) the primary valuation methodology used to value the AAPT Consumer Division is the DCF methodology.

83 The value of the AAPT Consumer Division has then been cross-checked by reference to the capitalisation of earnings methodologies and other acquisition metrics including acquisition cost per subscriber.

18 It should be noted that this value represents the value of the acquired AAPT Consumer Division’s subscriber base and related assets.

24 Annexure B – Independent Expert's Report

VII Valuation of 100% of the AAPT Consumer Division Valuation methodology 84 As stated in Section VI we have adopted the DCF method as our primary valuation method to value the AAPT Consumer Division. Given the availability of five years cash flow projections for the AAPT Consumer Division, iiNet management’s assumptions with respect to the growth of the business and the historical customer churn in the business, we have concluded that the DCF method of valuation should be used as the primary method to value the AAPT Consumer Division.

85 Under the DCF methodology the value of the business is equal to the NPV of the estimated future cash flows including a terminal value. In order to arrive at the NPV the future cash flows are discounted using a discount rate which reflects the risks associated with the cash flow stream.

86 The resulting business value has also been cross-checked by reference to the capitalisation of earnings method and acquisition cost per subscriber.

Cash flow projections 87 Our DCF valuation is based on the free cash flow projections prepared by iiNet management, which we have adjusted where considered necessary.

88 It should be noted that in respect of these projections:

(a) the major assumptions underlying the projections were formulated in the context of current economic, financial and other conditions (b) the projections and the underlying assumptions have not been reviewed by an investigating accountant for reasonableness or accuracy of compilation and application of assumptions (c) future profits and cash flows are inherently uncertain (d) the achievability of these projections is not warranted or guaranteed by iiNet or LEA, as they are predictions by iiNet management of future events that cannot be assured and are necessarily based on assumptions, many of which are beyond the control of iiNet and its management; and (e) actual results may be significantly more or less favourable.

89 Free cash flow represents the operating cash flows on an ungeared basis (i.e. before interest) less taxation payments 19 , capital expenditure and working capital requirements. The free cash flow on an ungeared basis is adopted to enable the value of the business to be determined irrespective of the level of debt funding employed.

90 iiNet management’s free cash flow projections cover the period from 1 October 2010 20 to 30 June 2015. A terminal value has also been adopted at the end of the forecast period.

19 Also calculated on an ungeared basis. 20 After the Completion Date.

25 Annexure B – Independent Expert's Report

91 As the detailed cash flow projections are commercially sensitive they have not been set out in our report. However, we set out below information on the major assumptions underlying the free cash flow projections.

Major assumptions

Subscriber numbers 92 The DCF adopts the following subscriber numbers per service as at 30 June 2010:

Subscribers 000 Dial-up 10.1 DSL 77.1 ADSL2+ 35.8 PSTN 199.4 Mobile 42.3 364.7

93 Growth rates in new subscribers are forecast to decline from historical levels 21 to zero by 30 September 2012. Sales of new plans are expected to occur from the AAPT website or word of mouth over this time. No active marketing has been assumed.

94 AAPT Consumer Division’s customer churn rates have been historically higher than those experienced by iiNet 22 . Historically churn was a function of the level of non-contracted customers and the quality of customer service 23 . AAPT Consumer Division’s actual churn rates have reduced in recent quarters as the level of contracted customers has increased.

95 The churn rates in the DCF are based on historic AAPT trends and increase in the first two quarters post acquisition as a result of potential customer reaction to the acquisition. Thereafter quarterly churn returns to historical levels and trends down to a constant percentage per quarter in June 2013. 24

96 One of the key risks associated with the acquisition of the subscriber base and related assets is the retention of customers by reducing the historically high customer churn rates experienced by AAPT.25 Whilst the cash flow projections include additional costs for the provision of increased levels of customer service, to reflect the sensitivity to the level of customer churn our DCF valuation includes the following adjustments to reflect the impact of deviations in the projected quarterly churn rates:

Increase / (decreased) churn rates

21 As generated by AAPT in the quarter ended 30 June 2010. 22 iiNet’s churn is some 1.5% per month and industry churn is approximately 2% per month. 23 More than 35% of AAPT customers rated customer service as “below average” or “awful” in the Australian Broadband Survey 2009. 24 We have not disclosed iiNet management’s assumed churn rates as they are considered commercially sensitive. 25 Whilst AAPT churn rates had been trending down in the year ending 30 June 2010 and in excess of 40% of the subscriber base is now under contract, the churn rates are still in excess of the industry average and those experienced by iiNet.

26 Annexure B – Independent Expert's Report

Low High % % Adjustment to projected quarterly churn 0.25 (0.25)

Revenue 97 The DCF model assumes a slight decline in average revenue per user (ARPU). That is, no growth is assumed in either real or nominal terms.

Direct costs 98 The average costs per user (ACPU) for broadband have been derived from the wholesale rates applicable to the operations. Bandwidth costs are assumed to increase in line with increases in bandwidth usage. No allowance has been made for the cost savings which would be generated by migrating AAPT Consumer Division subscribers onto the iiNet network, as these synergies would not be available to all potential purchasers of the AAPT Consumer Division.

99 ACPU estimates for mobile and PSTN are based on the AAPT rate plans with the wholesale providers and recent customer call / usage patterns. The gross margins for these services in the DCF are consistent with the average gross margins historically achieved by AAPT.

Overheads 100 The DCF model assumes a level of overheads associated with the operation of the AAPT Consumer Division including customer call centres in Sydney and Manilla, some initial advertising and marketing costs, operation of the Hyperbaric billing system and other general overheads.

Capital expenditure 101 Sustaining capital expenditure is assumed to be 2% of revenues.

102 In addition, capital expenditure will be incurred in FY11 in respect of migration of the Hyperbaric billing system onto iiNet’s Rumba billing system 26 .

103 No allowance has been made for the migration costs of subscribers to iiNet’s own network as the synergies generated by this capital expenditure would not be available to all potential purchasers of the AAPT Consumer Division.

Corporate tax rate 104 The DCF adopts the current corporate tax rate of 30%. Whilst both major political parties have indicated their intention to reduce the corporate tax rate post 30 June 2013, the outcome of the election and implementation of policies is uncertain.

26 We have assumed that a potential purchaser operating in the telecommunications reseller sector would migrate customers to their in-house billing system.

27 Annexure B – Independent Expert's Report

Discount rate 105 As set out in Appendix C we have applied a discount rate of 10.52% per annum (after tax). This discount rate reflects:

(a) a risk-free rate of 5.14 % per annum, equivalent to the average yield to maturity currently prevailing on 10 year Australian Government bonds for the month of July 2010 (b) a market risk premium (MRP) of 6.5% per annum, reflecting our view on the additional return above the risk-free rate sought by equity investors in Australia in the current market conditions (c) a beta of 0.95, which reflects the risks associated with the operation of the AAPT Consumer Division (d) a cost of debt of 8.64% per annum, which reflects an appropriate borrowing margin of 3.5% over the risk-free rate (e) the prevailing corporate tax rate of 30% 27 (f) an assumption that over the life of the project the operations are financed by a combination of 85% equity and 15% debt.

106 Based on the above our adopted discount rate for the AAPT Consumer Division subscriber base and related assets is derived as follows:

WACC for AAPT Consumer Division % Risk-free rate 5.14 MRP 6.50 Beta 0.95 Cost of equity 11.32

Cost of debt Pre-tax 8.64 After-tax 6.05

Gearing 15.00

WACC (1) 10.52

Note: 1 Weighted average cost of capital.

27 Both the Labor and Coalition parties have flagged their intentions to reduce the corporate tax rate post 30 June 2013. The adoption of the proposed corporate tax rates in the calculation of the discount rate does not significantly alter the assessed discount rate.

28 Annexure B – Independent Expert's Report

Terminal value 107 We have estimated the terminal value of the AAPT Consumer Division as at 30 June 2015 based on the free cash flow projected in the quarter ending 30 June 2015.

108 A negative growth rate over the terminal value period of 12% (low case) and 8% (high case) per annum has been assumed after 2015. The adoption of a negative growth rate reflects the assumed basis of valuation (i.e. of a subscriber base and related assets) and decline in earnings from the continued run-off of the subscriber base.

109 On this basis, the terminal value of the AAPT Consumer Division as at 30 June 2015 represents 1.3 to 1.7 times projected EBITDA for the year ending 30 June 2015 (which we consider reasonable in the context of valuing the subscriber base and related assets).

DCF value 110 Based on the above the DCF value of the AAPT Consumer Division (on an ungeared basis) ranges from $59.6 million to $69.9 million. This represents the standalone value of the AAPT Consumer Division’s subscriber base and related assets on a 100% controlling interest basis.

Implied earnings multiples 111 TCNZ 28 stated that the sale of the AAPT Consumer Division would reduce the FY11 EBITDA by $10 million. The forecast earnings disclosed by TCNZ are a function of the costs incurred by AAPT in running the AAPT Consumer Division business. Based on iiNet management’s review of the cost structure, many of these costs would not be incurred by a hypothetical purchaser thus increasing the forecast earnings.

112 iiNet has stated that it expects to generate “post-synergies EBITDA of $20m ”29 in the first full year after acquisition. These synergies include operating cost synergies. On this basis, the implied EBITDA multiple for the transaction is 3.0 times EBITDA.

113 In our opinion, a potential purchaser would be prepared to pay away a portion of the cost synergies which could be generated from the AAPT Consumer Division business. For the purpose of our cross-check we have assumed forecast EBITDA of $15 million (incorporating 50% of the expected synergies identified by iiNet).

114 Our value of the AAPT Consumer Division business therefore represents an EBITDA multiple of 4.0 to 4.7 times, as follows:

Implied EBITDA multiple Low High $m $m AAPT Consumer Division business value 59.6 69.9 EBITDA including 50% of identified synergies 15.0 15.0 Implied EBITDA multiple 4.0 4.7

28 In the ASX Announcement dated 30 July 2010. 29 Investor presentation - Acquisition of AAPT Consumer Division dated 30 July 2010.

29 Annexure B – Independent Expert's Report

115 A summary of the implied EBITDA multiples from the Australasian telecommunications transactions (Appendix D) as well as the implied EBITDA multiples for the small to medium sized listed Australian telecommunications companies are set out below:

EBITDA multiples EBITDA multiples Historical Forecast Telecommunications transactions Range 3.4 – 22.9 4.1 – 9.9 Average 7.7 6.1 Median 5.9 5.2

Telecommunications listed companies (1) Range 5.5 – 9.9 4.7 – 7.1 Average 7.9 6.2 Median 8.8 6.5

Note: 1 Based on their listed market prices (prior to reflecting a premium for control).

116 The listed telecommunications company multiples are based on the listed market price of each company’s shares (and therefore exclude a premium for control). Empirical evidence undertaken by LEA indicates that the average premium paid above the listed market price in successful takeovers in Australia ranges between 30% and 35% (assuming the pre-bid market price does not reflect any speculation of the takeover). This broadly translates to a premium of 20% to 25% at the EBITDA multiple or enterprise value level, although this varies depending on the level of debt funding employed in each company.

117 Having regard to the above, the current churn rates in the AAPT Consumer Division subscriber base and the level of synergies available to potential purchasers, we consider that the EBITDA multiples implied by our valuation range are reasonable.

Cross-check against acquisition cost per subscriber 118 As AAPT Consumer Division’s earnings are a function of its subscriber base, it is appropriate to cross-check the purchase price against the acquisition cost per subscriber.

119 The acquisition cost divided by the number of broadband subscribers is as follows:

Acquisition cost per broadband subscriber

Acquisition cost ($m) 60

Number of broadband subscribers (000) 113

Acquisition cost per subscriber $531

30 Annexure B – Independent Expert's Report

120 The acquisition cost per broadband subscriber compares favourably to recent iiNet and industry transactions:

Cost per Broadband subscriber Acquisition $ iiNet Netspace 571 Westnet 572 Other TPG Holdings Limited 1,150

Source: LEA calculations, see Appendix D.

121 As the AAPT Consumer Division has a large number of PSTN subscribers, we have also had regard to the acquisition cost divided by the number of broadband and PSTN subscribers is as follows:

Acquisition cost per broadband and PSTN subscriber

Acquisition cost ($m) 60

Number of broadband and PSTN subscribers (000) 312

Acquisition cost per subscriber $192

122 The acquisition cost per broadband and PSTN subscriber also compares favourably to recent iiNet transactions:

Cost per Broadband subscriber Acquisition $ iiNet Netspace 394 Westnet 469

Source: iiNet calculations.

31 Annexure B – Independent Expert's Report

VIII Evaluation of the purchase of the AAPT Consumer Division

123 In our opinion, the Proposed Acquisition is fair and reasonable to the shareholders of iiNet. The reasons for this opinion are set out below.

Fairness 124 As noted in Section VII, LEA has valued 100% of the AAPT Consumer Division (on the basis of the purchase of the subscriber base and related assets on a standalone basis by a hypothetical purchaser 30 ) at between $59.6 million and $69.9 million (refer paragraph 110).

125 The purchase price of $60 million sits at the low end of the above range. We therefore consider that the price payable for the acquisition of the AAPT Consumer Division is fair when assessed based on guidelines set out in RG 111.

Other qualitative factors 126 Pursuant to RG 111, a transaction is reasonable if it is fair. Consequently, in our opinion, the Proposed Acquisition is also “reasonable”.

127 In assessing whether the Proposed Acquisition is reasonable LEA has also considered:

(a) the listed market price of iiNet shares subsequent to the announcement of the Proposed Acquisition (b) statements made by major iiNet shareholders as to the merits of the Proposed Acquisition and related voting intentions in connection with the Proposed Acquisition (c) the potential synergies likely to arise to iiNet upon acquisition of the AAPT Consumer Division (d) other advantages and disadvantages of the Proposed Acquisition.

128 These issues are discussed below.

Share prices reaction 129 Shareholders should note that iiNet shares have traded in the range of $2.66 to $3.13 per share since the Proposed Acquisition was announced and the block of shares held by PowerTel was sold. The volume weighted average price (VWAP) for the 30 day period to 29 July 2010 was $2.71. On 11 August 2010 the shares last traded at $3.00 per share. The iiNet share price movement compares to the S&P/ASX 200 index as follows:

30 It should be noted that this value represents the value of the acquired AAPT Consumer Division’s subscriber base and related assets rather than their value to iiNet which would be significantly higher.

32 Annexure B – Independent Expert's Report

iiNet S&P ASX 200 Closing price 11 August 2010 $3.00 4,455.5 Closing price 29 July 2010 $2.65 4,524.1 30 day VWAP to 29 July 2010 $2.71

Increase Closing price on 11 August 2010: Against price on 29 July 2010 13.2% (1.5%) Against 1 month VWAP 10.7% n/a

n/a – not applicable.

130 Whilst the announcement of the Proposed Acquisition was also accompanied by the announcement of the block trade of shares held by PowerTel and record FY10 earnings, the movement in share price suggest that the market consensus view is that the Proposed Acquisition is positive.

Recommendation / acceptance of the Proposed Acquisition 131 The iiNet Board in conjunction with its advisers undertook a detailed review of the AAPT Consumer Division and have unanimously recommended the Proposed Acquisition. The iiNet Board has also recommended that all iiNet shareholders vote in favour of the resolution.

132 Two of iiNet’s major shareholders, Amcom Telecommunications Limited and Perth Internet Pty Ltd 31 , have also indicated they intend to vote in favour of the resolution. These two shareholders collectively hold some 34.2% of the voting rights.

Potential synergies available to iiNet 133 We have assessed the value of the AAPT Consumer Division on a standalone basis, assuming a run-off of the existing subscriber base and a cost structure which would be incurred by a hypothetical purchaser.

134 However, iiNet is likely to be able to generate significant synergy benefits by the migration of DSL service subscribers to iiNet’s network. The forecast savings resulting from migration of subscribers to the iiNet network (net of necessary capital expenditure) significantly increases the value of the AAPT Consumer Division to iiNet.

135 There are also a number of potentially conservative assumptions in the DCF valuation including (inter alia):

(a) minimal new subscriber growth across all products (b) forecast churn at levels above those exhibited by iiNet (c) declining ARPU in nominal terms (d) minimal levels of other revenue from direct debt payments, early termination fees etc post 31 December 2010 (e) increasing bandwidth costs.

31 An entity associated with CEO, Mr Michael Malone.

33 Annexure B – Independent Expert's Report

136 If iiNet can reduce the forecast levels of customer churn by improving customer satisfaction through customer service levels and retain customers once acquired contracts expire, there is significant upside to be derived from the acquisition of the AAPT Consumer Division. Opportunities also exist with respect to marketing of the AAPT Consumer Division services (e.g. by direct mail) and cross selling opportunities to the existing AAPT Consumer Division subscriber base (e.g. to those AAPT Consumer Division subscribers with only a PSTN service) which could generate subscriber growth and significantly increase the value of the AAPT Consumer Division to iiNet.

137 iiNet’s recent experience with the Westnet integration demonstrates its ability to successfully integrate acquired businesses into the iiNet business model.

Market share 138 The Proposed Acquisition also provides iiNet with an increased subscriber base to assist in achieving its targeted market share of the broadband market of 15%.

Other matters 139 The ultimate decision whether to approve the proposed acquisition should be based on each shareholder’s assessment of the Proposed Acquisition. If shareholders are in doubt about the action they should take in relation to the Proposed Acquisition or matters dealt with in this report, shareholders should seek independent professional advice.

34 Annexure B – Independent Expert's Report

Appendix A

Financial Services Guide Lonergan Edwards & Associates Limited 1 Lonergan Edwards & Associates Limited (ABN 53 095 445 560) (LEA) is a specialist valuation firm which provides valuation advice, valuation reports and independent expert’s reports (IER) in relation to takeovers and mergers, commercial litigation, tax and stamp duty matters, assessments of economic loss, commercial and regulatory disputes.

2 LEA holds Australian Financial Services Licence No. 246532.

Financial Services Guide 3 The Corporations Act 2001 (Cth) authorises LEA to provide this Financial Services Guide (FSG) in connection with its preparation of an IER to accompany the Explanatory Memorandum to be sent to iiNet Limited shareholders in connection with the proposed acquisition of the AAPT Consumer Division.

4 This FSG is designed to assist retail clients in their use of any general financial product advice contained in the IER. This FSG contains information about LEA generally, the financial services we are licensed to provide, the remuneration we may receive in connection with the preparation of the IER, and if complaints against us ever arise how they will be dealt with.

Financial services we are licensed to provide 5 Our Australian Financial Services Licence allows us to provide a broad range of services to retail and wholesale clients, including providing financial product advice in relation to various financial products such as securities, derivatives, interests in managed investment schemes, superannuation products, debentures, stocks and bonds.

General financial product advice 6 The IER contains only general financial product advice. It was prepared without taking into account your personal objectives, financial situation or needs.

7 You should consider your own objectives, financial situation and needs when assessing the suitability of the IER to your situation. You may wish to obtain personal financial product advice from the holder of an Australian Financial Services Licence to assist you in this assessment.

Fees, commissions and other benefits we may receive 8 LEA charges fees to produce reports, including this IER. These fees are negotiated and agreed with the entity who engages LEA to provide a report. Fees are charged on an hourly basis or as a fixed amount depending on the terms of the agreement with the person who engages us. In the preparation of this IER, LEA is entitled to receive a fixed fee of $55,000 plus GST and disbursements.

9 Neither LEA nor its directors and officers receives any commissions or other benefits, except for the fees for services referred to above.

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Appendix A

10 All of our employees receive a salary. Our employees are eligible for bonuses based on overall performance and the firm’s profitability, and do not receive any commissions or other benefits arising directly from services provided to our clients. The remuneration paid to our directors reflects their individual contribution to the company and covers all aspects of performance. Our directors do not receive any commissions or other benefits arising directly from services provided to our clients.

11 We do not pay commissions or provide other benefits to other parties for referring prospective clients to us.

Complaints 12 If you have a complaint, please raise it with us first, using the contact details listed below. We will endeavour to satisfactorily resolve your complaint in a timely manner.

13 If we are not able to resolve your complaint to your satisfaction within 45 days of your written notification, you are entitled to have your matter referred to the Financial Ombudsman Services Limited (FOS), an external complaints resolution service. You will not be charged for using the FOS service.

Contact details 14 LEA can be contacted by sending a letter to the following address:

Level 27 363 George Street Sydney NSW 2000 (or GPO Box 1640, Sydney NSW 2001)

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Appendix B

Qualifications, declarations and consents Qualifications 1 LEA is a licensed investment adviser under the Corporations Act. LEA’s authorised representatives have extensive experience in the field of corporate finance, particularly in relation to the valuation of shares and businesses and have prepared more than 100 Independent Expert’s Reports to shareholders.

2 This report was prepared by Mr Craig Edwards and Mrs Julie Planinic, who are each authorised representatives of LEA. Mr Edwards and Mrs Planinic have over 16 years and 12 years experience respectively in the provision of valuation advice.

Declarations 3 This report has been prepared at the request of the Directors of iiNet Limited to accompany the Explanatory Memorandum to be sent to iiNet Limited shareholders. It is not intended that this report should serve any purpose other than as an expression of our opinion as to whether or not the proposed acquisition of the AAPT Consumer Division is fair and reasonable and in the best interests of iiNet shareholders.

Interests 4 At the date of this report, neither LEA, Mr Edwards nor Mrs Planinic have any interest in the outcome of the Proposed Acquisition. LEA is entitled to receive a fixed fee for the preparation of this report. With the exception of the fee shown in Appendix A, LEA will not receive any other benefits, either directly or indirectly, for or in connection with the preparation of this report.

5 LEA has had no prior business or professional relationship with iiNet Limited prior to the preparation of this report.

Indemnification 6 As a condition of LEA’s agreement to prepare this report, iiNet Limited agrees to indemnify LEA in relation to any claim arising from or in connection with its reliance on information or documentation provided by or on behalf of iiNet Limited which is false or misleading or omits material particulars or arising from any failure to supply relevant documents or information.

Consents 7 LEA consents to the inclusion of this report in the form and context in which it is included in the Explanatory Memorandum.

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Appendix C

Assessment of appropriate discount rate

1 The determination of the discount rate or cost of capital for an asset requires identification and consideration of the factors that affect the returns and risks of that asset, together with the application of widely accepted methodologies for determining the returns demanded by the debt and equity providers of the capital employed in the asset.

2 The discount rate applied to the projected cash flows from an asset represents the financial return that will be demanded before an investor would be prepared to acquire (or invest in) the asset.

3 Businesses are normally funded by a mix of debt and equity. The weighted average cost of capital (WACC) is a widely used and accepted basis to calculate the “representative” rate of returns required by debt and equity investors. The required rate of return for equity is frequently evaluated using the capital asset pricing model (CAPM) and the required rate of return for debt funding is determined having regard to various factors such as current borrowing costs and prevailing credit ratings. The cost of equity and the cost of debt are weighted by the respective proportions of equity and debt funding to arrive at the WACC.

4 Consequently, we set out below an explanation of:

(a) the WACC and its elements (including the CAPM, its application in determining the cost of equity, the cost of debt and debt equity mix) (b) our assessment of the appropriate parameters to be used in determining the discount rate to apply.

Weighted average cost of capital 5 The generally accepted WACC formula is the post-tax WACC, without adjustment for imputation 32 as shown below:

WACC formula

E D WACC = R + R ()1− t e V d V Where: Re = expected equity investment return or cost of equity in nominal terms Rd = interest rate on debt (pre-tax) t = corporate tax rate E = market value of equity D = market value of debt V = market value of debt plus equity

32 Given free capital flows between developed countries and the small size of the Australian stock market (as a percentage of global markets), the cost of capital of listed companies (other than perhaps regulated infrastructure assets) should be assessed in a global context ignoring Australian imputation. This is the approach generally adopted by independent experts.

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Appendix C

CAPM and the cost of equity 6 The CAPM stems from the theory that a prudent investor would price an investment so that the expected return is equal to the risk-free rate of return plus an appropriate premium for risk. The CAPM assumes that there is a positive relationship between risk and return. That is, rational investors are risk adverse and demand higher returns for accepting higher levels of risk.

7 The CAPM is based on the concept of non-diversifiable risk and calculates the cost of equity as follows:

Cost of equity calculation

Re = R f + βe[E(R m) – Rf] Where: Re = expected equity investment return or cost of equity in nominal terms Rf = risk-free rate of return E (R m) = expected market return E (R m) - Rf = market risk premium (MRP) βe = equity beta

8 The individual components of the CAPM are discussed below.

Risk-free rate 9 The risk-free rate is normally approximated by reference to a long-term government bond with a maturity equivalent to the timeframe over which the returns from the assets are expected to be received. Typically in the Australian context, the yield on 10-year Commonwealth Government Bonds is used as a proxy for the long-term risk-free rate. For the purpose of our report, we have adopted the prevailing yield on 10-year Commonwealth Government bonds during July 2010 of 5.14% per annum.

Market risk premium

10 The market risk premium (MRP), [E(R m)-Rf], represents the additional return above the risk- free rate that investors require in order to invest in a well diversified portfolio of equity securities, i.e. the equity market as a whole. Strictly speaking, the market risk premium is equal to the expected return from holding shares over and above the return from holding risk- free government securities. Since expected returns are generally not observable, a common method of estimating the market risk premium is based on average realised (ex-post) returns.

11 Because realised rates of return, especially for shares, are highly volatile over short periods, short-term average realised rates of return are unlikely to be a reliable estimate of the expected rate of return or market risk premium. Consequently the market risk premium is measured over a long period of time. It should also be noted that the standard error of the estimate of the mean for longer periods is typically lower than the standard error of the mean where a shorter period is used. This supports more reliance being placed on the average market risk premium calculated over the longer term.

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Appendix C

12 A number of studies on historical market risk premiums have been carried out using long periods of historical data from the Australian as well as overseas markets. The following table summarises the empirical evidence on the market risk premium in the United States:

Market risk premium – empirical evidence Period over which Market risk premium US studies MRP measured % Siegel 1802 – 1992 5.0 Pastor and Stambaugh 1834 – 1999 5.8 Fama and French 1872 – 2000 5.6 Ibbotson Associates 1926 – 2000 7.7 Fama and French 1951 – 2000 7.4

Source : Siegel J., 1992, The Equity Premium: Stock and Bond Returns Since 1802, Financial Analysts Journal, pp. 28-38. Pastor L. and R. Stambaugh, 2001, The Equity Premium and Structural Breaks, Journal of Finance, 56(4), pp. 1207-1239. Ibbotson Associates, 2001, Stocks, Bonds, Bills, and Inflation. Fama E. and K. French, 2002, The Equity Premium, Journal of Finance, 57(2), pp. 637-659.

13 The most recent market risk premium study in Australia was by Brailsford, Handley and Maheswaran (2008) who analysed data for the period from 1883 to 2005 (inclusive). The following table reports the market risk premium in nominal terms as measured by this data set, for different time periods up to 2005.

Historical Australian Market Risk Premium - 1883 to 2005 (1) Time period Arithmetic mean Geometric mean Standard deviation From To Years % % % Relative to bills (2) 1883 – 2005 123 6.6 5.3 16.0 1937 – 2005 69 6.4 4.6 19.1 1958 – 2005 48 6.8 4.5 22.1 1980 – 2005 26 6.2 3.9 21.9 1988 – 2005 18 5.2 4.2 15.2 1883 – 1987 105 6.8 5.5 16.2

Relative to bonds (3) 1883 – 2005 123 6.2 4.9 16.0 1937 – 2005 69 5.8 4.0 19.1 1958 – 2005 48 6.3 4.0 22.0 1980 – 2005 26 6.0 3.8 21.7 1988 – 2005 18 5.1 4.0 15.0 1883 – 1987 105 6.4 5.1 16.2

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Appendix C

Note: 1 The first four periods have increasing data quality but decreasing sample size. The fifth period begins from the introduction of the imputation tax system in Australia. 2 Various types of bill returns were used due to the lack of a continuous government bill issue covering the study period. The majority of the bill return data is yield on three month Commonwealth Government securities. 3 Historical bond returns were also collected from a number of sources. Most of the bond returns are Commonwealth Government bond yields with a maturity of 10 years or more. Source : Brailsford, T., J. Handley, and K. Maheswaran, 2008, Re-examination of the historical equity risk premium in Australia, Accounting and Finance, 48(1), pp. 73-97.

14 Various academic studies put the historical market risk premium of the Australian equity market in a wide range from 4% to 7% depending on the historical period chosen, whether the market risk premium is measured relative to bills or bonds, and whether arithmetic or geometric mean is used. However, the authors note the concern regarding the poor quality of the data prior to 1958. The arithmetic average market risk premiums relative to bonds and bills over the 1958-2005 period are 6.3% and 6.8% respectively. The corresponding geometric measures over the same period are significantly lower at 4% to 4.5%.

15 In summary, Australian and overseas empirical evidence shows (not surprisingly) that the historical market risk premiums vary across markets. Historical market risk premiums for the Australian market are generally in line with the overall range of the market risk premiums of developed countries, but are slightly higher than the world average.

16 Regulatory authorities in Australia generally adopt a market risk premium of 6%. However, in recent decisions the Australian Energy Regulator revised upward the market risk premium to 6.5%, which is required to be used in determining allowable revenue for electricity transmission and distribution network service providers 33 . Prior to the global financial crisis regulators and independent experts in Australia generally adopted a market risk premium of around 6%.

17 The global financial crisis, originating from the sub-prime mortgage crisis in the US, has had a significant impact on investors’ perception of overall market risk. Associated with the crisis was a very substantial increase in credit margins, significant equity market volatility and a substantial decrease in liquidity in capital markets. Although the economic fundamentals of the Australian economy remain strong, overseas market conditions have had a substantial adverse impact on domestic financial markets. However, in the longer term, credit margins, equity market volatility and market risk premiums are expected to revert to their long-term historical levels.

18 As the MRP is an estimate of the additional market return above the risk-free rate over the relevant investment horizon (i.e. the period over which cash flows have been forecast), it should be determined having regard primarily to the long-term historical market risk premium. However, short to medium term risk factors do have an impact on investors’ perception of market risk and their demand for an appropriate market risk premium.

33 Australian Energy Regulator, Review of weighted average cost of capital parameters, Final decision, May 2009.

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Appendix C

19 Having regard to all of the above, we have adopted a market risk premium of 6.5% which is slightly above the widely used market risk premium prior to the global financial crisis.

Equity beta

Description 20 Beta is a measure of the expected volatility of the return on an investment relative to the market as a whole. The CAPM assumes that beta is the only reason expected returns on an asset differ from the expected return on the market as a whole. A beta greater than one suggests that an investment’s returns are expected to be more volatile and risky than average (and accordingly a higher return than the market is required), whereas a beta less than one suggests that future returns will be less volatile and risky.

21 Similar to market risk premiums, expected equity betas are not observable. Historical betas are usually estimated and used as a reference to determine the appropriate forward-looking betas. In addition, factors such as betas of comparable companies and relevant industry sectors and a qualitative assessment of the systematic risks of the subject business are also considered. The determination of the appropriate beta to apply is, therefore, ultimately a matter of judgment.

22 In determining the appropriate equity beta for the AAPT Consumer Division we have considered:

(a) the risks faced by Australian telecommunications companies generally and the AAPT Consumer Division (b) the beta estimates for the listed telecommunications companies.

Telecommunications 23 In assessing the appropriate beta attributable to businesses with consumer telecommunications operations in Australia the following risks and factors are relevant:

(a) consumer demand is a function of the general economic environment including employment and levels of disposable income (b) competition is primarily based on price and quality of customer service (c) the size of the subscriber base relative to industry participants (d) earnings are affected by the level of new subscribers and customer churn (e) the defensive nature of telecommunications companies generally.

24 Considering the above factors, in our opinion, the level of systematic risk associated with consumer telecommunications operations in Australia approximates the level of systematic risk of the market as a whole.

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Appendix C

Betas of comparable companies 25 In order to assess the appropriate equity beta for the AAPT Consumer Division, we have also had regard to the equity betas of small to mid-cap telecommunications companies listed on the ASX, as shown below:

Beta – listed companies Market cap Gearing Bloomberg AGSM A$m (1) %(2) beta (3) RSQ (4) beta (5) RSQ (4) TPG Telecom Ltd 1,382.1 (0.3) 2.01 0.16 0.52 – 1.87 0.16 – 0.18 iiNet 422.3 3.8 0.92 0.08 0.84 – 1.18 0.05 – 0.12 M2 Telecom. Group Ltd 248.0 7.4 1.24 0.18 0.28 – 0.89 0.01 – 0.11 Amcom Telecom. Ltd 240.1 (7.0) 1.12 0.19 0.91 – 1.18 0.15 – 0.26 Macquarie Telecom. Group Ltd (6) 108.7 (79.3) 0.68 0.05 0.11 – 0.64 0.00 – 0.05 Newsat Ltd 31.4 (8.9) 2.48 0.18 1.26 – 2.23 0.08 – 0.20 Hostech Ltd (6 ) 23.6 (9.3) 1.67 0.07 1.53 – 1.85 0.07 – 0.08 BigAir Group Ltd (6 ) 17.7 (14.6) 0.68 0.02 n/m – 0.61 0.00 – 0.02 Average 1.35 0.12 0.78 – 1.31 0.07 – 0.13 Median 1.46 0.12 0.84 – 1.18 0.06 – 0.12

Note: 1 Market capitalisation as at 4 August 2010. 2 Gearing calculated as net debt divided by enterprise value. A negative gearing ratio indicates that the company had net cash as at the most recent reporting date. 3 Betas obtained from Bloomberg using 4 years of monthly data as at 4 August 2010. 4 R-square (RSQ) is a statistical measure of how well the regression line approximates the real data points. It has a value between zero and 1. The closer R-square is to 1 the more reliable the beta estimate. 5 Betas obtained from the Australian Graduate School of Management (AGSM) using 4 years of monthly data. The range for AGSM data is from 31 December 2008 to 31 March 2010. 6 Macquarie Telecom Group, Hostech and BigAir Groups betas are not included in the “average” and “median” calculations due to the large estimation error, (as evidenced by the low R squared values). n/m – not meaningful.

26 The above listed company betas vary which reflects differences in size, leverage, stage of development and operational risks. None of the comparable companies are directly comparable to the AAPT Consumer Division’s subscriber base and related assets. Further, the listed companies also have low R-squared (RSQ) 34 values indicating a low level of reliability.

27 It should be noted that as the equity beta is a function of both business risk and financial risk (being the level of financial leverage or gearing), the above equity betas are levered betas and theoretically would need to be adjusted to reflect the different levels of gearing. However, this adjustment is subject to considerable estimation error. For example, gearing ratios are normally calculated at a point in time and therefore may not reflect the target or optimal capital structures of comparable companies in the long run. In addition, gearing ratios typically change over time. Further, the practice of adjusting equity betas for the difference in

34 RSQ values range between 0% and 100%. The closer to 100% the more reliable the beta estimate.

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Appendix C

financial leverage also gives a misleading impression that the process provides precise comparable beta estimates.

Conclusion 28 Having regard to the above, we have adopted an equity beta of in the range of 0.9 to 1.0 for the AAPT Consumer Division.

Gearing 29 The gearing level adopted should represent the level of debt that the asset can reasonably sustain and is not necessarily equivalent to the gearing level of the entity owning the asset. The factors that affect the “optimum” level of gearing will differ between assets. Generally, the major issues to address in determining this optimum level will include:

(a) the variability in earnings stream (b) working capital requirements (c) the level of investment in tangible assets (d) the nature and risk profile of the tangible assets.

30 In general, the lower the expected volatility of cash flows (i.e. risk), the higher the debt levels which can be supported (and vice versa). Furthermore, as the equity beta is a function of both business risk and financial risk (being the level of financial leverage or gearing), it is important to adopt in the WACC calculation a level of gearing which is consistent with the gearing ratios of the listed companies for which equity betas were used to assess the appropriate beta. If this is not done then the equity beta must be adjusted to reflect the different level of gearing adopted. However, this adjustment is subject to considerable estimation error and is therefore not preferred. Consequently, when assessing the appropriate gearing level it is appropriate to consider the gearing levels of comparable listed companies over the period over which the beta estimates were calculated.

31 Whilst the AAPT Consumer Division has no significant tangible assets to provide security for debt funding, the level of cash generated by the operations would enable some debt funding to be obtained.

32 Accordingly we have adopted a gearing ratio of 15% debt to 85% equity (at the lower end of the range of debt / equity levels) which we consider appropriate. This gearing ratio also recognises the respective debt servicing capacity of the AAPT Consumer Division.

Cost of debt 33 A cost of debt of 8.64% per annum has been adopted. This reflects a borrowing margin of around 3.50% above the risk-free rate. In establishing the appropriate cost of debt we have considered the following:

(a) the availability of debt financing in the global market at present (b) the ability to refinance facilities in the medium term.

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Appendix C

34 Having regard to the above, we consider a long-term debt margin of 3.50% for AAPT Consumer Division is appropriate.

Calculation of nominal WACC 35 Based on the above we have adopted a discount rate of 10.52% per annum (after tax) for the AAPT Consumer Division:

Calculation of WACC Parameters Beta 0.95 Market risk premium (%) 6.50 Risk free rate (%) 5.14 Cost of equity (%) 11.32

Debt margin (%) 3.50 Cost of pre-tax debt (%) 8.64 Tax rate (1) 30% Cost of post tax debt (%) 6.05

Gearing 15% After tax nominal WACC (%) 10.52

Note: 1 For the purposes of assessing the discount rate we have adopted the current tax rate of 30%. Both the Labor and Coalition parties have flagged their intentions to reduce in the income tax rate post 30 June 2013. The adoption of a 29% tax rate (as proposed by Labor) or 28.5% tax rate (as proposed by the Coalition) does not significantly alter the assessed discount rate.

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Appendix D

Transaction multiples

1 There have been a number of transactions involving businesses operating in the Australasian telecommunications industry. The implied multiples from these transactions, and a brief description of the company’s activities at the date of the acquisition, are set out below:

Enterprise EBITDA multiples EV / subscribers Value (2) Historical Forecast Total Broadband Date (1) Target Acquirer $m x x $ $ Mar 10 Netspace iiNet 40.0 n/a 5.0 381 571 Nov 09 PIPE Networks SP Telemedia 425.4 22.9 9.9 n/m n/a Jun 08 People Telecom M2 Telecom.Group 13.2 4.3 n/a 313 n/a May 08 Westnet Pty Ltd iiNet 79.0 6.8 n/a 367 572 Feb 08 TPG Holdings SP Telemedia 230.0 10.9 4.7 n/a 1,150 Jun 07 Orion Telecom. M2 Telecom.Group 10.4 5.6 n/a 416 n/a Oct 06 ihug Vodafone NZ 36.0 5.3 n/a 300 n/a Mar 07 PowerTel TCNZ 308.1 7.7 7.6 n/a n/a Sep 06 B Digital SP Telemedia 127.0 4.4 5.8 254 n/a Feb 05 OzEmail iiNet 110.0 5.5 n/a 373 n/a Sep 04 Damovo Telstra 64.3 n/a 5.0 n/m n/a Sep 04 Newtel Orion Telecom. 35.3 9.3 4.1 n/a n/a Nov 04 Kooee B Digital 64.9 n/m 5.2 n/a n/a Communications May 04 Uecomm Singtel 244.7 11.1 8.0 n/m n/a Mar 04 People Telecom Swiftel Limited 39.2 6.1 n/a n/a n/a Nov 03 DigiPlus B Digital 62.1 3.4 n/a 400 n/a Mar 03 RSL COM Commander 59.9 4.8 n/a 244 n/a Communications Average 7.7 6.1 339 764 Median 5.9 5.2 367 572

Note: 1 Date of acquisition. 2 Enterprise value, is inclusive of net debt (or net cash) and nets off the value of any surplus assets. Source: LEA analysis using data from ASX announcements, analyst reports and company financial reports. n/a – not available. n/m – not meaningful.

Netspace Limited 2 Netspace is a telecommunications service provider based in Melbourne. As of March 2010, when acquired by iiNet, Netspace operated in the business and consumer telecommunication markets, providing broadband, Ethernet and wireless internet access as well as fixed line telephony services. Netspace had over 105,000 subscribers including 70,000 broadband subscribers.

PIPE Networks Limited 3 PIPE Networks is an Australian telecommunications network infrastructure owner and operator. PIPE Networks derives revenues from internet exchange, dark fibre leasing and co- location services. The company owns and operates Australia’s largest internet exchange, with network locations in Brisbane, Sydney, Melbourne, Adelaide and Hobart.

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Appendix D

People Telecom Limited 4 People Telecom is a provider of a broad range of telecommunications products and services with offices in New South Wales and Victoria. At the date of the acquisition by M2 Telecommunications Group Limited (December 2008), the company provided all access voice services, mobile services and business solutions, broadband and Ethernet internet services and a complete suite of data and co-location solutions to some 42,000 customers.

Westnet Pty Limited 5 Westnet is a national telecommunications service provider based in Western Australia. As of May 2008, when it was acquired by iiNet, Westnet offered dial-up, ADSL, mobile and satellite broadband, telephony, web hosting, domain registration and business telecommunications solutions across Australia. Westnet was Australia’s sixth largest internet service provider with over 200,000 customers, including some 140,000 broadband subscribers.

TPG Holdings Limited 6 TPG Holdings was a telecommunications company, retailing and wholesaling products and services to some 200,000 customers across Australia. When SP Telemedia Limited acquired TPG Holdings, the company offered dial-up and broadband internet solutions to consumers and small businesses, with a focus on the high speed, high volume segment of the broadband market.

Orion Telecommunications Limited 7 Orion was an telecommunications service provider with operations in Australia, Ireland and the UK. At the date the company was acquired (June 2007) the company was involved with purchasing network capacity on a wholesale basis and reselling voice, mobile and data communications services to residential and small to medium business customers. Orion had over 25,000 customers, primarily through its largest subsidiary Southern Cross Telco. ihug 8 ihug was a internet service provider based in New Zealand. The company was New Zealand’s third largest internet service provider with over 100,000 subscribers when acquired by Vodafone New Zealand Limited in late 2006.

PowerTel Group Limited 9 PowerTel is a telecommunications infrastructure and service provider in Australia. As of March 2007, when TCNZ announced its takeover offer, the company provided voice and data transmission services and internet solutions for small and medium businesses, corporates, carriers and service providers in Australia.

B Digital Limited 10 B Digital was a provider of residential telecommunications services for mobile, home phone and internet. B Digital purchased access and air-time on the Optus network at wholesale rates and resold it together with standard mobile handsets. The company was acquired by SP Telemedia Limited in September 2006.

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Appendix D

OzEmail Limited 11 OzEmail was a leading provider of comprehensive internet services, with an extensive network, regionally-focused content, internet implementation services and a sophisticated virtual private network. OzEmail had approximately 295,000 subscribers when it was acquired by iiNet in February 2005.

Damovo (Australia) Pty Ltd 12 Damovo was an IP customer premises equipment maintenance provider for brands such as Ericsson, NEC, Fujitsu, Nortel, Mitel, Cisco, Siemens and Alcatel. Telstra acquired the business solutions provider Damovo for $64.3 million in September 2004.

NewTel Holdings LLC 13 NewTel provided telecommunications services in Australia, Ireland, the UK and Spain. NewTel was acquired by Orion Telecommunications in September 2004 prior to Orion’s listing on the ASX.

Kooee Communications 14 Kooee Communications was a reseller of telecommunication services, offering products and services to the residential and corporate market segments. The company had been providing local, long distance, international and mobile telephony to consumers since October 2000, before being acquired by B Digital Limited in late 2004.

Uecomm Limited 15 Uecomm provided broadband data services using fibre optic technology and internet solutions. Prior to the Singtel acquisition in mid-2004, Uecomm was at the forefront of networking, providing the infrastructure, products and solutions necessary to harness the power of fibre broadband including a broad range of services such as fibre optic links, managed network services, telehousing services and broadband and dial-up internet services.

DigiPlus 16 DigiPlus was established in 1996 and provided some 150,000 residential customers with mobile, internet service provider, national, local and fixed to mobile telecommunication services prior to the acquisition by Swiftel Limited in 2004.

RSL COM 17 RSL COM was established in 1996 and was a provider of fixed activated voice and data telecom services to business and residential customers through direct, indirect and wholesale channels. The company had approximately 45,000 business customers prior to the acquisition by Commander Communications in early 2003.

48 Annexure B – Independent Expert's Report

Appendix E

Listed company multiples

1 We have had regard to small to medium sized stock exchange listed companies that operate in the telecommunications industry in Australasian markets. The EBITDA multiples for these companies and a brief description of their activities are set out below:

Listed company multiples (1) EBITDA Enterprise Historical (3 ) Forecast (4 ) Forecast (4) value (2) FY10 FY11 FY12 A$m x x x TPG Telecom Ltd 1,591.9 9.9 7.0 6.1 iiNET Ltd 454.6 6.3 4.7 4.3 M2 Telecom. Group Ltd 248.9 8.8 6.0 6.7 Amcom Telecom. Ltd 224.4 9.0 7.1 6.5 BigAir Group Ltd 16.4 5.5 n/a n/a Average 7.9 6.2 5.9 Median 8.8 6.5 6.3

Note: 1 Multiples and enterprise value calculated as at 4 August 2010. 2 Enterprise value includes net debt (interest bearing liabilities less cash), net derivative liabilities, market capitalisation adjusted for material option dilution, share placements and excludes surplus assets. 3 Historical earnings is based on latest statutory full year accounts and excludes non-recurring items. 4 Forecast earnings is based on Bloomberg broker average forecast (excluding outliers and outdated forecasts). Source: Bloomberg, latest full year statutory accounts, latest interim accounts, company announcements, LEA analysis. n/a - not available.

TPG Telecom Limited 2 TPG Telecom, formerly SP Telemedia Limited, is a multi-media full service telecommunications company providing voice, internet and data solutions to consumers, small medium enterprises, corporate and government sectors. After the merger with TPG Holdings Limited in 2008 subscriber numbers increased to over 700,000 customers, including some 460,000 broadband subscribers.

3 In March 2010, TPG finalised the acquisition of Pipe Networks Limited, providing the company with access to an Australian fibre optic network, including the wholly owned Pipe Pacific Cable link between Sydney and Guam with onwards connectivity to the USA and Japan.

49 Annexure B – Independent Expert's Report

Appendix E iiNet Limited 4 iiNet is an Australian based internet service provider supporting over 900,000 broadband, telephony and dial-up services across Australia, New Zealand and Cape Town (South Africa). The company’s products include internet access, phone, domains and hosting, telecommunication hardware and software, and a wireless modem-and-phone-in-one, namely BoB. iiNet’s acquisition of Netspace in April 2010 places the company as the third largest provider with some 650,000 broadband subscribers.

M2 Telecommunications Limited 5 M2 Telecommunications is an Australian and New Zealand telecommunications service provider. The company offers fixed line voice services, mobile voice and data services, full services information technology, terrestrial dial-up and high speed broadband internet services as well as mobile telephone hardware. In the second half FY10, M2 completed the acquisition of Clever Communications Australia Limited’s off-net fixed, mobile, data and virtual private network and also acquired the business assets of Bell Networks Voice & Data Pty Limited.

Amcom Telecommunications Limited 6 Amcom is a Western Australia-based fibre, DSL, broadband and internet provider to the corporate, government, small to medium enterprises and retail sectors. The company operates two divisions being, the fibre division which provides high speed data links to clients through its own extensive fibre network in Perth, Adelaide and Darwin and the Amnet division which provides a comprehensive range of communications products focussed principally on broadband services.

BigAir Group Limited 7 Bigair Group is a provider of wireless broadband services in Australia. The company offers both high-speed fixed wireless broadband services to businesses and residences and high speed mobile wireless broadband services. Bigair Group owns and operates Australia’s largest metropolitan fixed wireless broadband network, providing near blanket coverage across Sydney, Melbourne, Brisbane, Perth, Adelaide and the Gold Coast. It also sells broadband and data services through channel partners including internet service providers, carriers and other information technology service companies.

50 Annexure B – Independent Expert's Report

Appendix F

Glossary

Term Meaning AAPT AAPT Limited ACPU Average costs per user AIFRS Australian equivalent to International Financial Reporting Standards ARPU Average revenue per user ASIC Australian Securities and Investment Commission ASX Australian Securities Exchange BPL Broadband over power lines CAPM Capital Asset Pricing Guide CRM Customer relationship management DCF Discount cash flow DSL Digital Subscriber Line EBIT Earnings before interest and tax EBITA Earnings before interest, tax and amortisation EBITDA Earnings before interest, tax, depreciation and amortisation FOS Financial Ombudsman Services Limited FSG Financial Services Guide FY Financial year GFC Global financial crisis Hyperbaric AAPT’s billing system IER Independent expert’s report iiNet iiNet Limited IPTV Internet protocol television ISP Internet service provider LEA Lonergan Edwards & Associates Limited Mbps Megabits per second MRP Market risk premium NBN National Broadband Network NPV Net present value PowerTel PowerTel Limited Proposed Acquisition Proposed acquisition of the AAPT Consumer Division from AAPT Limited (AAPT), a wholly subsidiary of TCNZ for $60 million in cash PSTN Public switched telephone network RG 111 Regulatory Guide 111 – content of expert reports Rumba iiNet’s billing system TCNZ Telecom Corporation of New Zealand Limited Telecom NZ Telecom New Zealand Limited VoIP Voice over internet protocol WACC Weighted average cost of capital

51 Lodge your vote: Online: www.investorvote.com.au

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916CR_0_Sample_Proxy/000001/000001 MR SAM SAMPLE Change of address. If incorrect, FLAT 123 mark this box and make the 123 SAMPLE STREET THE SAMPLE HILL correction in the space to the left. *I9999999999* SAMPLE ESTATE Securityholders sponsored by a SAMPLEVILLE VIC 3030 broker (reference number commences with ’X’) should advise your broker of any changes. I 9999999999 I ND

Proxy Form Please mark to indicate your directions

Appoint a Proxy to Vote on Your Behalf XX I/We being a member/s of iiNet Limited hereby appoint PLEASE NOTE: Leave this box blank if the Chairman you have selected the Chairman of the OR of the meeting Meeting. Do not insert your own name(s). or failing the individual or body corporate named, or if no individual or body corporate is named, the Chairman of the Meeting, as my/our proxy to act generally at the meeting on my/our behalf and to vote in accordance with the following directions (or if no directions have been given, as the proxy sees fit) at the General Meeting of iiNet Limited to be held at Level 2, 502 Hay Street, Subiaco, Western Australia on Wednesday, 29 September 2010 at 10:00am (WST) and at any adjournment of that meeting.

PLEASE NOTE: If you mark the Abstain box for an item, you are directing your proxy not to vote on your Items of Business behalf on a show of hands or a poll and your votes will not be counted in computing the required majority.

Special Resolutions

Resolution 1 Approval of Financial Assistance

Resolution 2 Adoption of Replacement Constitution

Ordinary Resolution

Resolution 3 Approval of Proposed Transactions

The Chairman of the Meeting intends to vote undirected proxies in favour of each item of business.

Signature of Securityholder(s) This section must be completed. Individual or Securityholder 1 Securityholder 2 Securityholder 3

Sole Director and Sole Company Secretary Director Director/Company Secretary

Contact Contact Daytime Name Telephone Date / /

I I N 9 9 9 9 9 9 A