CHALLENGER FINANCIAL SERVICES GROUP LIMITED RESULTS FOR 12 MONTHS TO 30 JUNE 2005

CGF LIFTS STATUTORY PROFIT AFTER TAX BY 44 PER CENT

29 August 2005, Sydney - Challenger Financial Services Group Limited (CGF) today announced a statutory Margin on Services net profit after tax of \$111 million, an increase of 44¹ per cent. Profit before tax and goodwill was \$184 million.

On a historic cost basis, net profit after tax and before goodwill was \$94 million, an increase of 100 per cent over last year.

Statutory earnings per share before goodwill were 25.7 cents and 17.9 cents per share on a historic cost basis.

The full year result to 30 June 2005 highlights the synergies that are being achieved from the Challenger Group model.

Historic cost highlights include:

Revenue up 36 per cent $\bullet$
Costs up 23 per cent controllable costs grew at 4 per cent year on year due to tight cost control and significant reductions in headcount
EBIT margin grew by 55 per cent from 11 per cent to 17 per cent year on year
Historic cost EBIT was up 107 per cent to \$122 million $\bullet$
Net debt was reduced by \$1.5 billion down to \$601 million

Dividend

Challenger has declared a fully franked dividend of five cents for the 12 months to 30 June 2005 payable on 21 October 2005.

RONA

Challenger Wholesale Finance and Challenger Life both exceeded their target of 18 per cent return on net assets (RONA) (before the change in reporting for corporate costs). Challenger Life delivered its target 12 months ahead of expectations. Challenger Wealth Management turned profitable 12 months ahead of schedule and remains on track to achieve its target in 2007.

Challenger Life

Challenger Life reported a statutory profit before tax of \$155 million, \$100 million on a historic cost basis up 61 per cent. Challenger Life significantly improved its capital position during the year. Debt was reduced by \$1.3 billion.

The Challenger Life balance sheet was diversified into three core asset classes - property, infrastructure and fixed income. During the year, Challenger Life has established its capabilities and credentials in the infrastructure sector, culminating in the successful launch of the Challenger Infrastructure Fund (CIFCA).

Annuity sales were \$666 million on the back of the September 2004 legislative changes. Sales are expected to return to levels of at least \$300 million per annum in the coming year. In the first two months of the new financial year, sales are achieving a run rate that would achieve this target.

Challenger Life achieved a RONA of 20.7 per cent, 12 months ahead of schedule.

Challenger Wholesale Finance

Residential loan book growth was 16 per cent for the year, which is 38 per cent above system growth. Margins on the residential book grew by 43 per cent from 23 to 33 basis points. Commercial margins remained constant.

Challenger Wholesale Finance achieved RONA of 20 per cent in the year.

Challenger Wholesale Finance reported a profit before tax of \$65 million - up 76 per cent from 2004. Challenger Wholesale Finance was rated the top Australian residential mortgage backed securitiser by Standard and Poor's for the year ending 30 June 2005 ahead of other large financial institutions including the major banks.

Challenger Wealth Management

Challenger Wealth Management achieved profitability a year ahead of expectations, reporting a profit before tax of \$6 million. This compares to a loss of \$5 million in 2004.

Challenger Wealth Management realised the benefits of its product and process investments, completing the closure or integration of legacy products and systems.

Financial planning has been profitable since the acquisition of Associated Planners in August 2004.

Challenger Wealth Management continued to extend its product range through the acquisition of HSBC Asset Management (Australia) Limited; the formation of a strategic alliance with the Queensland Investment Corporation (QIC) and the establishment of Kinetic Investment Partners Limited, a specialist small companies fund manager.

Outlook

The company does not provide forecasts. In the absence of new opportunities, the company is confident of positive growth in revenues and profit in 2006 as synergies from the Challenger Group model continue to be realised.

¹ Excludes \$280 million write-off of goodwill as at 30 June 2004.

ENDS

Note to editors:

Margin on Services and Historic cost (modified) accounting: Life companies are required to be accounted for a Margin on Services basis consistent with Life
company accounting. Margin on Services is actuarial accounting and Challenger has chosen to also present its results on a historic cost basis to help the market better understand the underlying profit and cashflow generated by the Life company.

Further enquiry: Tanya Atkins, Head of Shareholder & Media Relations, Challenger Financial Services Group. 02 9994 7125 Angela Warburton, Senior Manager, Media Relations, Challenger Financial Services Group. 02 9994 7509

CHALLENGER FINANCIAL SERVICES GROUP LIMITED FULL YEAR RESULT TO 30 JUNE 2005

SUMMMARY OF FINANCIAL PERFORMANCE
		Full year to 30 June
	2005	2004	Change
	\$m	\$m	%
Profit before interest, tax and goodwill
Statutory "MoS" basis	207	160	29
Historic cost basis	152	91	67
Profit after tax before goodwill
Statutory "MoS" basis	135	97	39
Historic cost basis	94	47	100
Profit/(loss) after tax and goodwill:
Statutory "MoS" basis	111	$(203)^1$
Historic cost basis	70	$(253)^1$
EPS (adjusted for LTIP shares yet to vest)
Statutory	21.1	$(41.6)^3$ cents
Historic cost	13.3	$(51.9)^{1}$ cents
Statutory before goodwill	25.7	$19.8$ cents	30
Historic cost before goodwill	17.9	$9.6$ cents	86
Corporate Charges	(47)	(323)	85
Total assets	4,601	5,676	$-19$
Total liabilities	3.300	4.591	$-28$
Net debt	601	2,066	$-71$
		Historic cost
	≴ու	\$m
EBIT	122	59	107
Net profit before tax	105	48	119
Profit after tax	70	27	159
EBIT margin	17%	11%	55

After \$280 million write~off of goodwill as at 30 June 2004.

June 2004 figures are based on the Pro-forma Statement of Financial Performance as reported in the 2004 Annual Report. The pro-forma provided an aggregation of the results and cash flow statements for the two discrete statutory periods noting that prior to 22 December 2003, Challenger Financial Services Group operated as a listed trust.

HISTORIC COST HIGHLIGHTS

Revenue up 36% $\bullet$
Costs up 23% controllable costs up 4%
EBIT margin up 55% from 11% to 17%
Historic cost EBIT up 107%
18% return on net assets achieved in Life and Wholesale Finance. Wealth Management profitable a year ahead of expectations Statutory EPS before goodwill up 30% to 25.7 cents,
historic cost up 86% to 17.9 cents
Debt down by \$1.5b gearing 12%
Five cent dividend declared fully franked

Challenger Life

Significantly improved capital position including the repayment of \$1.3 billion in debt.
Balance sheet diversified into three asset classes property, infrastructure, fixed income.
Infrastructure strategy implemented and Challenger Infrastructure Fund launched.

Challenger Wholesale Finance

38% above systems growth in the residential loan book.
Margins up 43% from 23 to 33 basis points.

Challenger Wealth Management

Profitability achieved 12 months ahead of expectations following the closure and integration of legacy products and systems.
Financial planning business profitable since the acquisition of Associated Planners.
Product range expanded.

29 August 2005

The Manager Company Announcements Australia Stock Exchange Limited 20 Bridge Street Sydney NSW 2000

Sydney

Level 41, Aurora Place 88 Phillip Street Sydney NSW 2000 Australia www.challenger.com.au

telephone 02 9994 7000 facsimile 02 9994 7777

Dear Sir

Challenger Financial Services Group Limited RE: Appendix 4E - Year ended 30 June 2005

The directors of Challenger Financial Services Group Limited (Challenger) are pleased to announce the audited consolidated results of the group and its subsidiaries for the year ended 30 June 2005 as follows:

The Appendix 4E is to be read in conjunction with Challenger's announcement to the market, the attached audited financial report and the pro-forma financial report.

Results for announcement to the market

Extracted from 30 June Year End Financial Report	\$′000′s
Revenue from ordinary activities	908,708
Profit from ordinary activities after tax attributable to members	110,634
Net Profit for the period attributable to members	110,634

Melbourne

Brisbane

Level 10, 101 Collins Street PO Box 297, Flinders Lane Melbourne VIC 3000 telephone 03 8616 1800 facsimile 03 8616 1899

Level 9, CUA Building 175 Eagle Street GPO Box 3234 Brisbane QLD 4001 telephone 07 3218 8000 facsimile 07 3220 3132

Perth Level 3, 55 St Georges Terrace PO Box 25065, St Georges Terrace Perth WA 6831 telephone 08 9223 7800 facsimile 08 9221 2499

Adelaide

Level 1 212 Pirie Street Adelaide SA 5000 telephone 08 8211 7777 facsimile 08 8212 1661

Challenger Financial Services Group Limited ABN 85 106 842 371 Challenger Managed Investments Limited ABN 94 002 835 592 AFSL 234668 Challenger Securities Limited ABN 28 009 568 496 AFSL 234674 Challenger Life No.2 Limited ABN 44 072 486 938 AFSL 234670 Challenger Commercial Lending Limited ABN 65 000 033 143 Challenger Funds Management Limited ABN 34 004 778 545 AFSL 232594

Dividends

Dividends	Amount per security	Franked amount per security
Interim dividend	Nil	Nil
Final dividend - Record date 5 October 2005	5c	5c
- Payable 21 October 2005
A dividend reinvestment plan is operational

A full explanation of the above figures is documented in Challenger's announcement to the market and audited financial report.

The 2004 comparative figures cover a 191 day period as Challenger only traded from 22 December 2003 to 30 June 2004. The Company has therefore not included a comparative table as this would provide a misleading comparison of the Company's results.

Additional Information

The net tangible asset per security is $$1.25$ (30 June 2004: $$1.12$ ).
All other information requiring disclosure to comply with listing rule 4.3A is $\bullet$ contained in Challenger's announcement to the market, audited financial report and pro-forma financial report for the year ended 30 June 2005.

Further information regarding Challenger is available on the company's website at www.challenger.com.au.

Yours faithfully

hon

Chris Robson Company Secretary

Challenger Financial Services Group Limited and its controlled entities

Pro-Forma Financial Report

For the Year Ended 30 June 2005

$\bar{z}$

$\mathcal{L}^{(1,2)}$

OVERVIEW

Challenger Financial Services Group Limited ("Challenger") commenced operations on 23 December 2003 when it acquired 100% of the issued units in Challenger Financial Services Group ("CFSG Trust") and its controlled entities. The Pro-Forma Statement of Financial Performance, Pro-Forma Statement of Financial Position and Pro-Forma Statement of Cash Flows present the results of the operations of the combined group for the year ended 30 June 2004 to enable comparatives with results for the year ended 30 June 2005.

The Challenger consolidated Pro-Forma reported net profit after tax for the year ended 30 June 2005 was \$110,634,000 (2004: Proforma loss (\$202,838,000)).

The Pro-Forma Financial Report has been prepared to report the financial performance and financial position of Challenger Financial Services Group Limited and its controlled entities for the year ended 30 June 2005. Comparative figures in the notes to the Pro-Forma Financial Report combine the statutory reported results of CFSG Trust for the period ended 22 December 2003 and Challenger for the period ended 30 June 2004, which have been subject to audit review and audit, respectively.

The comparative figures in the Pro-Forma Financial Report provides an aggregation of the results and cashflow statements for the two discrete statutory reporting periods noting that prior to 22 December 2003 Challenger did not trade, and accordingly its individual contribution to the Pro-Forma net profit after tax is for the period from 23 December 2003 to 30 June 2004. The Pro-Forma Statement of Financial Position as at 30 June 2005 and comparative figure at 30 June 2004 is a direct extract from the statutory (audited) Statement of Financial Position of Challenger.

The accounting policies used in the preparation of the Pro-Forma Financial Report are the same as those used in the preparation of the audited 30 June 2005 Challenger Financial Services Group Limited annual financial report.

$\bar{z}$

$\mathbb{R}^2$

Pro-Forma Statement of Financial Performance For the year ended 30 June 2005

$\mathcal{F}^{\text{max}}_{\text{max}}$

		Consolidated
		2005	2004
	Notes	SOOO's	\$000's
Revenue from ordinary activities		908,708	818,261
Expenses from ordinary activities		(634, 860)	(552, 303)
Borrowing costs		(115,952)	(152, 515)
Write-down in goodwill and investment in controlled entities			(280,000)
Share of net profits of associates accounted for using the equity method		2,090	3,857
Profit /(Loss) from ordinary activities before income tax expense		159,986	(162,700)
Income tax expense		(49,352)	(40, 138)
Net profit attributable to shareholders after tax from ordinary activities		110.634	(202, 838)
Total revenue, expenses and valuation adjustments attributable to shareholders recognised directly in equity
Total changes in shareholders' funds from non-shareholder transactions		110,634	(202, 838)
Basic earnings per share *		21.09 cents	$(41.58)$ cents
Diluted earnings per share *		17.56 cents	$(35.02)$ cents

*Effective 25 November 2004, the share capital of the Company was consolidated by converting every five Challenger shares on issue into one Challenger Share. The comparative earnings per share figures have been restated as a result of the share consolidation.

The above Pro-Forma Statement of Financial Performance should be read in conjunction with the notes to the Pro-Forma Financial Report.

$\bar{z}$

$\ddot{\phantom{a}}$

Pro-Forma Statement of Financial Position

As at 30 June 2005

$\hat{\mathcal{A}}$

$\cdot$

$\frac{1}{1}$

	Consolidated
	2005	2004
	\$000's	\$000's
Assets
Cash assets	496,401	626,388
Receivables	288,949	420,021
Debt securities	753,897	1,217,687
Other financial assets	334	332
Equity securities	270,064	204,641
Infrastructure assets	344,426
Investment properties	1,678,202	2,535,134
Fixed assets	29,228	21,947
Deferred tax assets	7,696	7,530
Investment in associates	2,812	17,788
Intangible assets	571,435	255,974
Other assets	157,124	143,800
Excess of net market value of the interests of Challenger Life
No.2 Limited in its subsidiaries over their net assets		224,381
Total assets	4,600,568	5,675,623
Liabilities
Payables	276,551	374,069
Interest bearing liabilities	600,713	2,066,151
Provisions	57,989	39,531
Deferred tax liabilities	92,527	58,921
Life insurance policy liabilities	2,271,946	2,052,003
Total liabilities	3,299,726	4,590,675
Net assets	1,300,842	1,084,948
Shareholders' equity
Contributed equity
Reserves	1,363,953	1,258,693
	61,700	61,700
Retained (Loss)	(124, 811)	(235, 445)
Total shareholders' equity	1,300,842	1,084,948

The above Pro-Forma Statement of Financial Position should be read in conjunction with the notes to the Pro-Forma Financial Report.

Pro-Forma Statement of Cash Flows For the year ended 30 June 2005

		Consolidated
		2005	2004*
	Notes	SOOO's	\$000's
Cash flows from operating activities
Receipts from customers (inclusive of GST)		649,923	610,588
Premiums received		716,305	555,582
Payments to suppliers and employees (inclusive of GST)		(506, 218)	(482, 013)
Claim payments		(639, 319)	(478, 641)
Dividends received		26,643	22,807
Interest received		158,391	93,288
Borrowing costs		(155, 783)	(150, 417)
Income taxes paid		(5,703)	(8, 471)
Net cash inflow from operating activities		244,239	162,723
Cash flows from investing activities
Purchase of investments		(695, 792)	(348, 686)
Acquisition of controlled entities, net of cash acquired		(8,732)	(122,960)
Advances of loans			(3, 729)
Repayment of loan advances			1,351
Purchase of fixed assets		(14,741)	(15, 530)
Restructure costs		(9,817)
Capitalised costs of acquisitions paid			(11, 662)
Proceeds from sale of investments		1,841,898	230,257
Net cash inflow / (outflow) from investing activities		1,112,816	(270, 959)
Cash flows from financing activities
Proceeds from borrowings		7,276	193,254
Repayment of borrowings		(1,494,318)	(141, 051)
Net cash inflow / (outflow) from financing activities		(1,487,042)	52,203
Net decrease in cash held		(129, 987)	(56, 033)
Cash at the beginning of the period		626,388	660,421
Prior year reclassification of cash held by controlled Property Trusts			19,344
Effects of exchange rates on cash			2,656
Cash at the end of the financial year		496,401	626,388

* Aggregate of Challenger Financial Services Group (CFSG) Statutory Interim Financial Report for the period ended 21 December 2003 & Challenger Financial Services Group Limited Statutory Financial Report for the period ended 30 June 2004. Note that the Statutory Financial Report was prepared for the period beginning 6 November 2003 (date of incorporation) to 30 June 2004, however no transactions were entered into by Challenger until the acquisition of CFSG on 22 December 2003

The above Pro-Forma Statement of Cash Flows should be read in conjunction with the notes to the Pro-Forma Financial Report.

Notes to the Pro-Forma Financial Report

Note 1. Reconciliation to statutory net profit

	Year ended 30/06/2005	Year ended 30/06/2004*
	\$000's	\$000's
Revenue from ordinary activities
Rental income	176,401	245,894
Management fee income	403,787	228,978
Interest income	129,361	94,091
Dividend income	26,642	26,651
Change in net market value of investments held by the Life Company of its subsidiaries
- Properties (excluding exchange fluctuations)	83,172	22,593
- Infrastructure (net of exchange fluctuations)	36,663
- Property valuation movement attributable to exchange fluctuations	(334)	7,327
- Interest rate derivatives and forward foreign exchange contracts	(56, 152)	70,929
- Trading securities	(1,116)	21,671
Net realised gains on sale of offshore properties	45,797
Net realised gains on sale of investments and subsidiaries	50,379	25,909
Net realised foreign exchange gains Other income	(1, 524) 15,632	36,294 37,924
Revenue from ordinary activities	908,708	818,261

Borrowing costs
Interest expense
- incurred by controlled Property Trusts	(81, 150)	(124, 850)
- incurred by other entities	(32, 330)	(19,758)
Other borrowing costs	(2, 472)	(7,907)
	(115,952)	(152, 515)
Expenses from ordinary activities
Increase in net policy liabilities	(139, 167)	(172, 238)
Provision for unrealised loss on investments		(6, 286)
Responsible entity fee		(3,366)
Property management expenses incurred by Property Trusts controlled by Challenger Life No.2
Limited Goodwill amortisation	(28, 664) (23, 301)	(24,985) (19, 827)
Amortisation of deferred portfolio and origination costs	(62, 141)	(26, 818)
Depreciation	(6, 793)	(3,049)
Employee expenses	(128, 177)	(103,920)
Commission expense	(176, 375)	(110, 845)
Occupancy expense - operating lease	(8,380)	(11,480)
Professional fees	(11,668)	(13, 327)
Communications	(5, 457)	(6, 485)
Other expenses	(44, 737)	(49, 677)
Total expenses from ordinary activities	(634, 860) (750, 812)	(552, 303) (704, 818)

Share of net profits of associates accounted for using the equity method	2,090	3,857
Profit from ordinary activities before income tax expense	159,986	117,300
Write-down in goodwill		(280,000)
Income tax expense	(49, 352)	(40, 138)
Net profit attributable to shareholders after tax from ordinary activities	110,634	(202, 838)

* Aggregate of Challenger Financial Services Group (CFSG) Statutory Interim Financial Report for the period ended 21 December 2003 & Challenger Financial Services Group Limited Statutory Financial Report for the period ended 30 June 2004. Note that the Statutory Financial Report was prepared for the period beginning 6 November 2003 (date of incorporation) to 30 June 2004. However no transactions were entered into by Challenger until the acquisition of CFSG on 22 December 2003

Notes to the Pro-Forma Financial Report

Note 2. Segment information

The consolidated entity operates predominantly in one geographical area, being Australia.

The primary business segments of the Group have been identified as follows:

	Wholesale Finance			Life Wealth Management*			Corporate **		Eliminations		Total Consolidated
	2005	2004	2005	2004	2005	2004	2005	2004	2005	2004	2005	2004
	\$000's	\$000's	S000's	\$000's	S000's	\$000s	SOOD's	\$000's	SOOO's	5000s	\$000's	\$000's
Revenue
Revenue from external customers	238,273	150,998	194,366	141,248	468,911	492,480	7,158	33,535		-	908,708	818,261
Inter-segment revenue	7,196		4,313		795				(12, 304)
Share of net profits of associates			74		2,016	3,857					2,090	3,857
Total segment revenue	245,469	150,998	198,753	141,248	471,722	496,337	7,158	33,535	(12, 304)	$\blacksquare$	910,798	822,118
Expenses
Other expenses	(180, 303)	(114,019)	(192, 610)	(146, 381)	(317, 047)	(365, 145)	(73, 156)	(79,273)	12,304	$\bullet$	(750, 812)	(704, 818)
Net profit/(loss) before tax and before goodwill
writedown	65,166	36,979	6,143	(5,133)	154,675	131,192	(65,998)	(45, 738)			159,986	117,300
Goodwill write-down					ъ.	(280,000)				٠	$\blacksquare$	(280,000)
Net profit/(loss) before tax	65,166	36,979	6,143	(5, 133)	154,675	(148, 808)	(65,998)	(45, 738)			159,986	(162,700)
Income tax expense											(49,352)	(40, 138)
Net profit after tax											110,634	(202, 838)

Segment assets	455,717	569,059	310,058	316,851	3,380,550	4,585,793	454,243	203,920			4,600,568	5,675,623
Segment liabilities	(95,395)	(151,198)	(35, 307)	(189,949)	(2,672,107)	(3,960,204)	(496,917)	(289, 324)			(3,299,726)	(4,590,675)
Net assets	360,322	417,861	274,751	126,902	708,443	625,589	(42, 674)	(85,404)			,300,842	1,084,948

* Represents Funds Management, Administration & Financial Planning.

** Corporate segment relates to non-core activities of the Group (including businesses to be restructured or sold as previously announced to the Australian Stock Exchange). Corporate expenses consists of costs that fall outside the day-to-day operations of Challenger Life, Challenger Wholesale Finance and Challenger Wealth Management. These costs include the costs of the Group CEO and CFO, shared services across Challenger, Directors' fees, goodwill amortisation, corporate borrowings and associated borrowing costs and shareholder registry services for the Challenger Group.

Challenger Financial Services Group Limited and its controlled entities ACN 106 842 371

Annual Report

for the year ended 30 June 2005

$\cdot$

$\hat{\mathcal{A}}$

Principal registered office in Australia	Level 41
	Aurora Place
	88 Phillip Street
	SYDNEY NSW 2000
	Tel (02) 9994 7000
	Fax (02) 9994 7777
Directors	Peter Leith Polson (Chairman)
	Michael Tilley (Chief Executive Officer)
	Graham Allan Cubbin
	Russell Richard Roberts Hooper
	Ashok Peter Jacob
	James Douglas Packer
	James Glen Service
	Brenda Mary Shanahan
Secretary	Chris Robson
Share Register	Computershare Investor Services Pty Limited
	Level 3, Carrington Street
	SYDNEY NSW 2000
	Tel (02) 8234 5000
	Fax (02) 8234 5050
	Website: www.computershare.com.au
Auditor	Ernst & Young
	680 George Street
	SYDNEY NSW 2000
Internet Address	www.challenger.com.au

2. Principal Activities

The principal activities of the Group are the provision of financial services, in particular:

Challenger Life predominantly an annuities business;
Challenger Wholesale Finance commercial and residential lending business;
Challenger Wealth Management funds administration, financial planning and funds management.
A more detailed description of Challenger's business operations is contained in the chairman's report.

3. Consolidated Results

The consolidated net profit after tax attributable to the members of Challenger was \$110,633,976 (2004 loss: 5235,445,067).

Comparatives are based on the financial period from 6 November 2003 to 30 June 2004 in which period the company traded from 23 December 2003 onwards.

4. Dividends

No dividend has been paid during the reporting period. A final dividend of 5 cents per share from current year profits was declared on 26 August 2005.

5. Review of Operations

A review of the operations and the results for the Group for the reporting period are contained in the Chairman's Report to shareholders.

6. State of Affairs

There have been no significant changes to the Company's state of affairs during the year that are not otherwise disclosed in this report or the financial report.

7. Likely Developments

Further information on likely developments in the operations of the consolidated entity and the expected results of operations have not been included in this report because the directors believe it would be likely to result in unreasonable prejudice to Challenger.

8. Environmental Performance

The Challenger Group acts as responsible entity for a number of property trusts, which have major properties throughout the country. These properties are subject to environmental regulations under both Commonwealth and state legislation. The Directors are satisfied that adequate systems are in place for the management of its environmental responsibilities and compliance with various legislative, regulatory and licence requirements. Further, the Directors are not aware of any breaches to these requirements and to the best of their knowledge all activities have been undertaken in compliance with environmental requirements.

9. Indemnification of Directors and Officers

In accordance with its Constitution, and where permitted under relevant legislation or regulation, Challenger indemnifies the directors and officers of Challenger, against all liabilities to another person that may arise from their position as directors or officers of Challenger and its subsidiaries, except where the liability arises out of conduct involving lack of good faith, wilful misconduct, gross negligence, reckless misbehaviour or fraud. The indemnity provides for the full amount of any claim, including costs and expenses.

10. Insurance of Directors and Officers

$\mathcal{L}$ $\sim 100$

In accordance with the provisions of the Corporations Act 2001, Challenger has insured the directors and officers against liabilities incurred in their role as directors and officers of the Challenger Group. The terms of the insurance policy, including the premium are subject to confidentiality clauses and as such Challenger is prohibited from disclosing the nature of the liabilities covered and the premium. Challenger has not given or agreed to give any indemnity to an auditor of the Challenger Group and has not paid any premium for insurance against those auditors' liabilities for legal costs.

DIRECTORS' REPORT (Cont'd)

11. Subsequent events

The following significant events have occurred post 30 June 2005:

On 19 August 2005, the Group listed the Challenger Infrastructure Fund on the Australian Stock Exchange. As part of the seeding for the Challenger Infrastructure Fund, subsequent to year end the Group sold its investments in the NTL Broadcast, North DN and the Wales and the West DN infrastructure assets to the Challenger Infrastructure Fund. The Group has purchased 50% of the issued units in the Challenger Infrastructure Fund. The financial effect of this transaction has not been recognised in the 30 June 2005 financial statements.

On 26 August the directors of Challenger declared a final dividend on ordinary shares in respect of the 2005 financial year. The total amount of the dividend is \$28,911,552 which represents a fully franked dividend of 5 cents per share from current year profits. The dividend has not been provided for in the 2005 financial statements.

No other matter or circumstance has arisen that has affected or may significantly affect:

the consolidated entity's operations in future financial years; or $(a)$
$(b)$ the results of those operations in future financial years; or
the consolidated entity's state of affairs in future financial years. $\left( c\right)$

12. REMUNERATION REPORT

This report outlines the remuneration arrangements in place for Challenger's directors and executives. Section 12.1 to 12.7 (inclusive) of this report have been audited by Ernst & Young.

12.1 Remuneration Philosophy

The performance of the Company depends upon the quality of its directors and executives. To prosper, the company must attract, motivate and retain highly skilled directors and executives.

To this end, the company embodies the following principles in its remuneration framework:

Provide competitive rewards to attract and retain high calibre executives
Link executive rewards to shareholder value
Significant portion of executive remuneration 'at risk', dependent upon meeting pre-determined performance benchmarks
Establish appropriate, demanding performance hurdles in relation to variable executive remuneration

12.2 Remuncration Committee

The objective of the Remuneration Committee is to assist the Board discharge its responsibilities by ensuring the Group:

Has coherent remuneration policies and practices to attract, retain and motivate executives and directors who will create value for shareholders:
Observes those remuneration policies and practices;
Fairly and responsibly rewards executives having regard to the performance of the Group, the performance of the executives and the general pay environment; and
Complies with the provisions of the ASX Listing Rules, the ASX Corporate Governance Council's Principles of Good Corporate Governance and Best Practice Recommendations and the Corporations Act.

12.3 Non-Executive Director Remuneration

Challenger's remuneration policy for non-executive directors aims to ensure that the Company can attract and retain suitably skilled, experienced and committed people to serve on the Board. Total remuneration for non-executive directors is required to be approved by shareholders, the current maximum approved by shareholders to be paid to non-executive directors amounts to \$950,000.

Non-executive directors are not entitled to receive performance related remuneration or to receive shares through participation in any Challenger incentive plan. There are no schemes for retirement benefits with the exception of statutory superannuation for non-executive directors.

The nature and amount of remuneration paid to each non-executive director of Challenger for the year ended 30 June 2005 is set out below. "Salary & Fees" includes service fees as directors, as members of relevant board committees, as members of subsidiary external Compliance Committees and as directors of other controlled entities, as may be applicable to each director.

DIRECTORS' REPORT (Cont'd) REMUNERATION REPORT (Cont'd)

	Salary & Fees	Super- annuation	Total
	Ś	s	s
P L Polson (Chairman)
2005	262,114	11,584	273,698
Period from 6 November 2003 to 30 June 2004	72,355	5,727	78.082
G A Cubbin*
2005
Period from 6 November 2003 to 30 June 2004
R R R Hooper
2005	182.914	2,896	185,810
Period from 6 November 2003 to 30 June 2004	77,561	5,727	83,288
A P lacoh*
2005
Period from 6 November 2003 to 30 June 2004
J D Packer*
2005
Period from 6 November 2003 to 30 June 2004
J G Service ^o
2005	115,000		115,000
Period from 6 November 2003 to 30 June 2004	59.863		59,863
B M Shanahan
2005	138.415	11.585	150,000
Period from 6 November 2003 to 30 June 2004	72,535	5,727	78,262
Total remuneration
2005	698,443	26,065	724,508
Period from 6 November 2003 to 30 June 2004 ⁶	282.314	17.181	299.4951

Acts as a director in connection with discharging their duries as an executive of CPH and consequently do not currently take fees for

their services. The time of Mr J G Service was made available by J G Service Pty Limited. Mr Service is not personally paid any directors' fees. The amounts paid to J G Service Pty Limited, in respect of those services, are included in the above figures.

Group totals in respect of the financial period ended 2004 do not necessarily equal the sum of amounts disclosed for 2004 for individuals specified in 2005, as different individuals were specified in 2004.

Details of directors' and senior executives' holdings in Challenger shares and schemes are set out in Note 27 to the accounts.

Directors service contracts may be summarised as follows:

The duration of contracts is from 6 November 2003 until terminated. If Directors retire and are reappointed at an Annual General Meeting the appointment is deemed to be continuous.
No period of notice by either Director or the Company are required to terminate a director's service contract.
· No termination payments are stipulated in the service contracts. However, Challenger's constitution allows payments to directors on their retirement subject to the restrictions of the law and the ASX Listing Rules.

12.4 Chief Executive Officer (CEO)

The Committee is responsible for reviewing the remuneration of the CEO, which must be approved by the full Board.

12.5 CEO Remuneration

Under the terms of his appointment as CEO, Mr Tilley is entitled to:

A base salary of \$675,000;
A short-term incentive of up to 150% of the base salary package, subject to achieving qualitative and quantitative hardles set by the Board:
A \$500,000 interest free loan for the purpose of investing in Challenger investment products, other than Challenger shares;
A retention bonus of \$250,000 after 3 years of employment as CEO and a further retention bonus of \$250,000 at the end of year 5.

DIRECTORS' REPORT (Cont'd) REMUNERATION REPORT (Cont'd)

Mr Tilley is not entitled to participate in the Challenger Long Term Incentive Plan (LTIP). However, following shareholder approval at the Company Annual General meeting on 23 November 2004 Mr Tilley was allocated 1,000,000 restricted post share consolidation Challenger shares, funded via limited recourse loan and issued at \$2.65. These shares were issued substantially on the same terms as the long-term incentive plan limited recourse loan and escrow conditions, with a reference date of 2 August 2004, the date Mr Tilley became CEO. In addition, subject to shareholder approval, within two years of 2 August 2004 3,000,000 further post share consolidation Challenger shares will be issued to Mr Tilley. These shares will be issued at \$2.65 with a reference date of 2 August 2004 and on substantially the same terms as the Long Term incentive plan limited recourse loan and escrow conditions.

Mr Tilley may terminate his service agreement by giving 12 months notice to Challenger, in which event he will receive accrued statutory and contractual entitlements, but he will not be entitled to any termination payment, short term incentive payments, unvested shares or future retention payments. Challenger may terminate Mr Tilley's service agreement, in which event (other than in the case of termination for cause, poor performance or incapacity). Mr Tilley will be entitled to a payment of \$2 million, if termination is within the first 3 years; a \$1.75 million payment if termination is during years $3-5$ or a $$1.5$ million payment if termination is after year $5$ , in all cases, in addition to accrued entitlements.

Where termination is for cause or poor performance, Mr Tilley will be entitled to accrued entitlements, but he will not be entitled to a termination payment, except where termination is due to incapacity in which case he will be entitled to a termination payment of \$750,000.

12.6 Senior Executives

Executive remuneration and incentive policies and practices are performance based and aligned with the Group's vision, values and overall business objectives. Challenger's ability to attract and retain talented executives, and to align their interests with those of shareholders, is critically important to Challenger's ability to deliver sustained shareholder value. At the same time, the Board recognises that it has a responsibility to ensure that executive remuneration is fair and reasonable, and is effectively structured to produce superior results for shareholders. Accordingly, the Board has adopted remuneration policies designed to achieve these important objectives.

Remuneration packages for senior executives typically comprise three components: a fixed pay component, a short-term bonus component and a component related to longer-term performance and retention.

The fixed pay component is calculated on the basis of total cost, including employee benefits together with fringe benefits tax applicable to those benefits. Short-term bonus incentives at Challenger are based on the achievement of specific individual annual goals and objectives related to the performance of the Group as a whole and its operating divisions. As part of the Group's budget process each year, the Board approves a basis (in line with best practice) for formulating the annual bonus pool from which short-term bonuses may be paid in cash. The payment of bonuses is entirely at the discretion of the Board regardless of performance.

Senior and other key executives have been granted long-term incentives designed to retain the loyalty of those executives over the medium to long term. In general, the long term variable element will take the form of a grant of shares under the LTIP described in more detail in the section of this teport titled Long Term Equity Based Incentive Plan.

The employment contracts of senior executives other than the CEO (whose details are provided above), who have the greatest authority for managing the operations of Challenger during the year ended 30 June 2005, are summarised as follows:

C.E. Cuffe:

Term 2 August 2004 to 9 April 2008
26 weeks notice by either party required to terminate
Under termination (except for under grounds of gross misconduct) the following payments would apply
- Good leaver who would maintain LTIP shares, or if leaves by own choice on or after 30 June 2006 ゝ
- Ý. Pro-rata bonus based on a maximum payment being awarded

B. Benari:

Permanent Full Time
26 weeks notice required by both parties
Under termination (except for under grounds of gross misconduct) the following payments would apply Good leaver who would maintain LTIP shares ý
Þ Pro-rata bonus based on a maximum payment being awarded
Post termination restraint: 26 weeks non-compete and non solicitation

DIRECTORS' REPORT (Cont'd) REMUNERATION REPORT (Cont'd) TH Foster:

Permanent Full Time

$\bullet$

13 weeks notice required by Mr Foster, 26 weeks notice required by Company
Under termination (except for under grounds of gross misconduct) the following payments would apply
- Good leaver who would maintain LTIP shares Þ
- $\ddot{\phantom{1}}$ Pro-rata employee incentive plan based on a maximum payment being awarded
- $\mathbf{r}$ If unable to find work in the period between 26 weeks and 52 weeks from the date of notice of termination by the Company, the Company will pay an additional amount equal to the Base Salary (less applicable tax) for the additional amount of time not worked (subject to evidence deemed satisfactory by the Company being presented). This additional amount would be payable at the end of the period in which Mr Foster was not employed elsewhere
· Post termination restraint: 26 weeks non-solicitation

R. Woods:

Permanent Full Time
26 weeks notice required by both parties
Under termination (except for under grounds of gross misconduct) the following payments would apply: $\bullet$
Good leaver who would maintain LTIP shares $\triangleright$
Post termination restraint: 26 weeks non-compete and non solicitation

D. Stevens

$\blacksquare$

Permanent Full Time
13 weeks notice required by both parties
Under termination (except for under grounds of gross misconduct) the following payments would apply: Good leaver who would maintain LTIP shares ٦p
$\star$ Pro-rata bonus based on a maximum payment being awarded
Post termination restraint: 26 weeks non-solicitation

The nature and amount of each component of remuneration paid and accrued to the CEO and each of the five executive officers who have the greatest authority for managing the operations of Challenger and the highest remunerated company executives of Challenger in the year ended 30 June 2005 is set out below. Challenger Financial Services Group Limited was incorporated on 6 November 2003 and commenced trading on 23 December 2003. Therefore, the comparative period is for the 6 months and one week period from 23 December 2003 to 30 June 2004. The year to 30 June 2005 has not been a normal remuneration year given the change in CEO.

	Primary
Senior Executives	Salary & Fees ¹	Cash Bonus	Super- annuation	Cash LTIP Paid ²	Fair Value of LTIP ²⁴	Other	Tetal
	s	s	s	\$	\$	s.	s
M Titley (Chief Executive Officer)
2005	663,415		11,535		52,103	136.515	863.618
Period from 6 November 2003 to 30 June 2004	64.547		5,727				70,274
B Benari (Chief Executive - Wholesale Finance)
2005	396.415	50,000	11.585	325,000	553,133		1,336,133
Period from 6 November 2003 to 30 June 2004	202.492	300,000	5,727		238,813		747,032
C E Culle (Chief Executive - Wealth Management)
2005	594,665	1,096,875	11,585		477,786	$\mathbf{v}_i$	2,180,911
Period from 6 November 2003 to 30 June 2004	345,643		5,727		531,044		882,414
R. Woods (Chief Executive - Life)
2005	388,415	170,000	11,585		366,169		936,169
Period from 6 November 2003 to 30 June 2004 ⁸
T H Foster (Chief Financial Officer)
2005	313,415	243,750	11,585	195,000	267,999		1,031,749
Period from 6 November 2003 to 30 June 2004	163,451		5,727		109,998	190,000	469,176
D Stevens (Executive General Manager - Capital, Risk & Strategy)
2005	488,415	250,000	11,585		842,141		1,592,141
Period from 6 November 2003 to 30 June 2004	254,547		5,727		375,325		635,599
Total remuneration
2005	2,844,740	1.810.625	69,510	520,000	2,539,331	136,515	7,940,721
Period from 6 November 2001 to 10 June 2004 E	1.030.680	300.000	28.635		1.255.1801	190.000	2.804.495

DIRECTORS' REPORT (Cont'd)

REMUNERATION REPORT (Cont'd)

Prior to Mr Tilley becoming CEO on 2 August 2004 he was paid non-executive director's fees. $\mathbf{1}$
Prior to corporatisation, certain executives were entitled to inceptive payments under a cash based shadow scheme. Following the b. approval of the LTIP the executives continue to have an entitlement to receive cash payments capped between 3c and 13c per (preconsolidation) share granted. The amount of this remuneration paid in the period has been disclosed as Cash LTIP paid. The accrued fair value of this remuneration in the period has been included under the heading Fair Value of LTIP.
Represents amortised fair value during the period. Fair value of cash LTIP is hased on reporting date fair value. Equity LTIP fair value. 3 has been determined in accordance with the principles outlined in Note 28 to the financial statements. Executive Director & Senior Executives' total holdings in Challenger Shares and managed investment schemes are set out in Note 27 to the accounts.
The fair value of LTIP shares released to specified executives during the period was as follows: B Benari \$246,703. CE Cuffe 4 \$686,952. TH Foster \$98,849.
Mr Tilley's other payment in 2005 represents on-going rental payments following relocation. ç,
In respect of Mr Benari's cash bonus in 2004 the amount represented a guaranteed bonus amount that was negotiated as part of his 6 executive remuneration package. In 2005 Mr Benari's cash bonus relates to the amount paid over and above the guaranteed amount.
$\mathcal{I}$ Mr Foster's other payment in 2004 represented a compensation payment made by a related party in respect of previously foregone employment retention rights.
Group totals in respect of the financial period ended 2004 do not necessarily equal the sums of amounts disclosed for 2004 for $\mathbf{R}$ individuals specified in 2005, as different individuals were specified in 2004.

12.7 Long Term Equity Based Incentive Plan (LTIP)

The Board considered it necessary and appropriate to establish the LTIP for senior Challenger executives to retain key individuals and encourage behaviour in the long term best interests of Challenger. The Board considered that a reward strategy for senior executives with a heavy weighting on long term incentives was essential in aligning executive and shareholder interests. The LTIP was approved at the time of Corporatisation by unitholders.

The LTIP design principles seek to satisfy the following requirements:

· to incentivise senior executives within Challenger Group and reward them in alignment with growing share prices over the long term;
to attract and retain an outstanding executive team with a proven track record in a scarce skills labour market;
for Challenger to keep abreast of its competitors in providing suitable long term incentive arrangements for its senior executives; and
to follow through on the intentions expressed at the time of the Merger between CPH Investment Corp and Challenger International Limited.

Under the terms of the LTIP, eligible employees may acquire Challenger shares, with the cost being financed by a non-recourse loan from Challenger which is repayable when the shares vest. Dividends paid on the shares issued under the plan are to be paid to the Company as interest on the nonrecourse loan.

There are two types of participants of Challenger's LTIP:

Participants: and
· Initial Participants.

The performance hurdles in respect of Participants are summarised as follows:

With the exception of Mr Cuffe, subject to performance hurdles being met, 20% of the participating shares issued to participants will be released on each of the second, third and fourth anniversaries of the date the shares are issued with the remaining 40% balance released on the fifth anniversary;

LTIP Shares Granted to Specified	Grant date	Granted	First Vest	Last Vest Date
Executives			Date
B Benan	23/02/2004	3,000,000	10/04/2005	10/04/2008
R Woods	23/02/2004	3,000,000	1/12/2005	1/12/2008
T Foster - First Issue	23/02/2004	1.200.0001	10/04/2005	10/04/2008
- Second issue	15/03/2005	400,000	15/03/2007	15/03/2010
D Stevens	23/02/2004	5,500,000	1/08/2005	1/08/2008

Mr Cuffe has voluntarily reduced his participating share entitlement on two occasions, upon stepping down as CEO on 2 August 2004 (4.4 million reduction in post share consolidation shares) and subsequently in March 2005 (395,000 reduction in post share consolidation shares). Therefore Mr Cuffe has an interest in 3,205,000 participating shares, subject to performance hurdles being met, these shares will be released as follows:
1,600,000 released on 10 April 2005 ゝ
× 500,000 to be released on 10 April 2006
$\mathbf{v}$ S00,000 to be released on 10 April 2007
$\blacktriangleright$ 605,000 to be released on 10 April 2008

DIRECTORS' REPORT (Cont'd) REMUNERATION REPORT (Cont'd)

The performance hurdle is 15% per annum compounded annually, based on total shareholder return (TSR). The TSR is determined by reference to the 20 day volume weighted average share price (VWAP) for Challenger shares adjusted for capital restructures and distributions (dividends, capital returns and other distributions excluding franking credits);
If the TSR for a period equals or exceeds the performance hurdle for that period, the relevant proportion of participating shares will be immediately released. This may include participating shares that have not been released in an earlier period because the TSR for that earlier period was not achieved; and
Unreleased participating shares are forfeited upon the resignation of participants except in the case of Mr Cuffe who would maintain his LTIP shares if he leaves by his choice on or after 30 June 2006.

On the release of participating shares (once vesting and performance hurdles have been met) participants may, but are not obliged to sell the shares.

The Board has identified a number of Initial Participants for whom special conditions will apply, having regard to:

The improvement in the share price since the relevant senior executives were recruited;
The significant efforts made to date by the relevant senior executives in restructuring the Challenger business to prepare for future erowth: and
The fact that Challenger continues to be in a significant development phase for the next few years and the Board wishes to ensure that absolute performance hurdles do not drive short-term behaviour at the expense of long-term planning and decision-making.

The special conditions to apply to Initial Participants are as follows:

The release dates of shares will be calculated from a reference date which is nominated by the Board (rather than the date of issue of shares), being no earlier than April 2003;
The issue price for the initial participating shares to be allocated to the initial participants was \$2.65 (as adjusted for the share consolidation on 25 November 2005) rather than the market price at the date of issue;
· No performance hurdle was required to be met for the initial 20% of the participating shares which were released after two years from the reference date: and
A 15% per annum compound TSR performance hurdle will be required to be met for the release of shares after the third, fourth and fifth anniversaries from the reference date, with the starting price for that calculation being \$2.65 (post share consolidation) and the starting date for that calculation being the second anniversary of the reference date.

Any unreleased participating LTIP shares will be sold by the Custodian to reduce any outstanding loan, bought back under the LTIP or cancelled by Challenger, subject to compliance with the Law.

12.8 Relationship between remuneration and Challenger's performance

Challenger's executive remuneration policy links "at risk" remuneration to Challenger's short term and long term performance. Short term bonus incentives are based on the achievement of specific annual goals and linked to Challenger's profits for the period. The Long Term Incentive Plan is based on the achievement of TSR performance hurdles of cumulative 15% per annum designed to align executive remuneration with growing share prices over the long term. Dividends, changes in share price, and capital returns are included in the TSR calculation.

The remuneration committee considers this performance-linked remuneration structure is generating the desired outcome. The graph below shows the total return to shareholders of Challenger and ASX 100 for the period from incorporation to 30 June 2005

For the period from 31 December 2003 to 30 June 2005 Challenger's total shareholder return was approximately 29%.

CHALLENGER FINANCIAL SERVICES GROUP LIMITED AND CONTROLLED ENTITIES

DIRECTORS' REPORT (Cont'd)

13. Shares Under Option

Unissued ordinary shares of Challenger Financial Services Group Limited under option plans at 30 June 2005 are set out in the following table;

	Expiry	Exercise	Number
	Date .	Price
Consolidated Press Holdings Limited	22/12/2013	\$3,250	60,000,000

Options issued to Consolidated Press Holdings Limited are non-transferable call options and may be exercised at any time within ten years from their grant date (22 December 2003).

No options were granted to employees of the Group during the year. No options were exercised during the year ended 30 June 2005.

14. Rounding

The amounts contained in this report and in the financial statements have been rounded off to the nearest \$1,000 under the option available to Challenger under ASIC Class Order 98/0100. Challenger is an entity to which the Class Order applies.

15. Auditor's Independence and Non-Audit Services

The directors received the following declaration from the auditor of Challenger Financial Services Group Limited.

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Auditor's Independence Declaration to the Directors of Challenger Financial Services Group Limited

In relation to our audit of the financial report of Challenger Financial Services Group Limited for the financial year ended 30 June 2005, to the best of my knowledge and belief, there have been no contraventions of the auditor independence requirements of the Corporations Act 2001 or any applicable code of professional conduct.

Brian Long Partner Sydney

Ernst & Young

Liability limited by the Accountants Scheme, approved under the Professional Standards Act 1994

26 August 2005

Non-Audit Services

The following non-audit services were provided by the entity's auditor, Ernst & Young. The directors are satisfied that the provision of non-audit services is compatible with the general standard of independence for auditors imposed by the Corporations Act. The nature and scope of each type of non-audit service provided means that auditor independence was not compromised.

Ernst & Young received or are due to receive the following amounts for the provision of non-audit services;

	S'OUO
Tax compliance services	990
Due diligence services	390
Actuarial	44
Other assurance services including sale of properties and IFRS	438

CHALLENGER FINANCIAL SERVICES GROUP LIMITED AND CONTROLLED ENTITIES

DIRECTORS' REPORT (Cont'd)
Signed in agrordange with a resolution of the Directors of Challenger.

M filley Director

$\bar{u}$

Sydney 26 August 2005

$\sim$

$\mathcal{A}$

$\label{eq:2.1} \frac{1}{\sqrt{2}}\sum_{i=1}^n\frac{1}{\sqrt{2\pi}}\sum_{i=1}^n\frac{1}{\sqrt{2\pi}}\sum_{i=1}^n\frac{1}{\sqrt{2\pi}}\sum_{i=1}^n\frac{1}{\sqrt{2\pi}}\sum_{i=1}^n\frac{1}{\sqrt{2\pi}}\sum_{i=1}^n\frac{1}{\sqrt{2\pi}}\sum_{i=1}^n\frac{1}{\sqrt{2\pi}}\sum_{i=1}^n\frac{1}{\sqrt{2\pi}}\sum_{i=1}^n\frac{1}{\sqrt{2\pi}}\sum_{i=1}^n\frac{$

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G A Cubbin

Director

Sydney 26 August 2005

1. Challenger's Approach to Corporate Governance

The Board and Management of Challenger Financial Services Group Limited ("Challenger") recognise their duties and obligations to stakeholders to implement and maintain a robust system of corporate governance. Challenger believes that the adoption of good corporate governance measures adds real value to stakeholders and adds investor confidence.

Challenger acknowledges the ASX Corporate Governance Council's Principles of Good Corporate Governance and Best Practice Recommendations ("Guidelines"). This report provides details of Challenger's compliance with those recommendations or, where appropriate, indicates a departure from the Guidelines with an explanation as to why. In preparing this report, the requirements of the amendments to the Corporations Act under CLERP 9 have also been addressed.

This statement reflects Challengers corporate governance system as at 26 August 2005.

This report applies to Challenger and its subsidiaries, however some subsidiaries have adopted their own policies and procedures to deal with specific issues relevant to their business, for instance investment management compliance. Where such policies and procedures have been adopted they have been developed in line with the standards referred to throughout this report.

2. The Board of Directors

2 (a) The Role of the Board and Delegations

The Board is accountable to shareholders for the activities and performance of Challenger by overseeing the development of sustainable shareholder value within an appropriate framework of risk and regard for all stakeholder interests.

The Board has identified the key functions which it has reserved for itself. These duties are outlined below and set out in the Board Charter, a copy of which is available on Challenger's web site:

Establishment, promotion and maintenance of the strategic direction of Challenger;
Approval of business plans, budgets and financial policies;
Consideration of management recommendations on strategic business matters;
Establishment, promotion and maintenance of proper processes and controls to maintain the integrity of accounting and financial records and reporting;
Fairly and responsibly rewarding executives, having regard to the interests of shareholders, the performance of executives, market conditions and Challenger's performance;
Adoption and oversight of implementation of appropriate corporate governance practices;
Oversight of the establishment, promotion and maintenance of effective risk management policies and processes;
Determination and adoption of Challenger's dividend policy,
Review of the board's composition and performance;
Appointment, evaluation, duration and remuneration of the CEO and approval of the appointment of the Chief Financial Officer, the General Counsel and the Company Secretary;
Determination of the extent of the CEO's delegated authority.

The Board has delegated to the CEO the authority and powers necessary to implement the strategies approved by the Board and to manage the business affairs of Challenger within the policies and specific delegation limits specified by the Board from time to time. The CEO may further delegate within those specific policies and delegation limits, but remains accountable for all authority delegated to management. fGuideline 1.1]

2 (b) Membership of the Board

(1) Board Members

Challenger's constitution provides for a minimum of 3 directors and a maximum of 12 directors. The chart below summarises the current composition of the Board.

Name	Position	First Appointed
Peter Polson	Chairman	2003
Mike Tilley	Chief Executive Director	2003
Graham Cubbin	Non-Executive Director	2004
Russell Hooper	INon-Executive Director	2003
Ashok Jacob	Non-Executive Director	2003
James Packer	Non- Executive Director	2003
Liames Service	Non-Executive Director	2003
IRrands Shanahan	Non-Executive Director	2003

The members of the Board, and details of their experience including directorships for the last 3 years, independent status and committee membership is set out below. The Chairman is selected by non executive Directors of the Board. The roles of Chairman and Chief Executive Officer are not exercised by the same person.

[Guidelines 2.2 and 2.3; and explanation re Guideline 2.1]

Peter Polson

Chairman (from 10 June 2004)

Independent

Peter Polson retired from the Commonwealth Bank in October 2002, where he held the position of Group Executive, Investment and Insurance Services, responsible for all investment and insurance services for the group, including the funds management, master funds, superannuation, insurance and third party support services for brokers, agents and financial advisers. Mr Polson joined the Colonial group in 1994 prior to its acquisition by the Commonwealth Bank, Previously, Mr Polson was Managing Director of National Mutual Funds Management (International) Limited. Mr Polson was previously a director of the previously listed company Australian Leisure and Hospitality Group Limited.

Other Directorships

Mr Polson is also a director of AWB Limited, AWB International Limited, and Professional and Indemnity Company Australia Limited.

Committens

Mr Polson is Chairman of the Remuneration Committee and a member of the Nomination Committee. [Guidelines 2.2 and 2.3]

Michael Tilley

Chief Executive Officer (from 2 August 2004)

(Mr Tilley was an independent director until his appointment as Chief Executive Officer on 2 August 2004)

Most recently, Michael Tilley was Vice-Chairman, Investment Banking Group, JP Morgan, a position he resigned from upon his appointment as Chief Executive Officer (CEO) of Challenger. Until 31 March 2003, Mr Tilley was a Director of Incitee Limited. Up until February 2002, Mr Tilley was employed with investment bank Merrill Lynch where he held the positions of Executive Chairman, Merrill Lynch (Australasia), Head of Mergers and Acquisitions in the Asia Pacific region, and was a member of the Merrill Lynch Asia Executive Committee. Prior to joining Merrill Lynch in 1997, Mr Tilley was principal and a managing partner of Centaurus Corporate Finance Pty Limited and before that a partner at Deloitte Touche Tehmatsu. Mr Tilley is a past member of the Australian Takeovers Panel.

Other Directorships

Mr Tilley is also a non-executive director of Orica Limited.

Committees

Mr Tilley was a member of the Remuneration Committee and a member of the Nomination Committee. He resigned from both of these positions upon becoming CEO.

Graham Cubbio

Non-Executive Director

Graham Cubbin was a senior executive with Consolidated Press Holdings Limited (CPH) from 1990 until September 2005, including Chief Financial Officer for 13 years. Prior to joining CPH, Mr Cubbin held senior finance positions with a namber of major companies including Capita Financial Group and Ford Motor Company.

Other Directorships

Within the last 3 years, Mr Cubbin has also been a director of Publishing and Broadcasting Limited.

Committees

Mr Cubbin is a member of the Group Audit and Compliance Committee and the Nomination Committee.

Russell Hooper

Non-Executive Director

Independent

Russell Hooper was previously a director of and chairman of the audit committee for Commonwealth Insurance Limited, a subsidiary of the Commonwealth Bank. Mr Hooper was also previously Chief General Manager, Funds Management at St George Bank Limited and prior to that held various positions within the financial services group at St George Bank Limited and Advance Bank Limited for more than thirteen years. He has experience at chief executive level in life insurance, wealth management and listed investment trusts.

Mr Hooper is a Fellow of the Australian Institute of Company Directors, the Australian Society of Certified Practicing Accountants and the Australian Institute of Banking and Finance.

Changes to the Board in the 2004 / 2005 year

Mr Christopher Cuffe resigned from the Board on 2 August 2004.

Company Secretary

Christopher Robson

Mr Robson is the Group Company Secretary and General Counsel. Mr Robson has been qualified as a solicitor for over 20 years, with 13 years experience in the financial services industry.

(ii) Nominations and Appointment of New Directors

Recommendations for nominations of new directors are made by the Nomination Committee and considered by the Board as a whole. If a new director is appointed during the year, that person will stand for election by shareholders at the next annual general meeting. Shareholders are provided with appropriate information to judge the adequacy of candidates. All new directors are provided with an appropriate induction into Challenger's business. A copy of the Nominations Committee Charter can be found on the Challenger website. [Guideline 2.4]

(iii) Retirement and Re-election of Directors

Challenger's constitution requires that, excluding the CEO, one third of the remaining directors must retire each year. In addition, any director who is appointed during the year must retire at the next annual general meeting.

(iv) Succession Planning

In conjunction with the Nomination Committee, the Board considers the succession of its members, the CEO, the Chief Financial Officer, the Chief Executives of each of the 3 Challenger businesses, and the Executive General Manager - Capital, Risk & Strategy as required.

(v) Review of Board and Senior Management Performance

The Board Charter sets out the requirement for a formal review of the Board's performance at least every two years. A formal review of the Board's performance was conducted in May 2005. Senior Management performance is assessed annually as part of Challenger's annual formal Performance Reviews. [Guideline 8.1]

2 (c) Director Independence

The Board has adopted an Independence Policy that states that a Challenger independent director is independent of management and free from any business or other relationship that could materially interfere with, or could reasonably be perceived to materially interfere with, the exercise of their unfettered and independent judgement.

The Board will regularly consider and assess the independence of each director in light of the interests and information which directors disclose. In accordance with the Corporations Act, directors are required to advise the Company of any material personal interests they have in a matter.

In assessing independence, the Board will have regard to whether the director or an immediate family member has any of the following relationships with Challenger or any Challenger group company:

a substantial shareholder (as defined by section 9 of the Corporations Act) of Challenger, or within the last three years has been a director or $\mathbf{1}$ officer of, or otherwise associated directly with, a substantial shareholder of Challenger;
within the last three years, employment in an executive capacity by Challenger or been a director of Challenger after ceasing employment with $2.$ Challenger;
з. within the last three years, been a principal of a material professional adviser or a material consultant to Challenger, or an employee materially associated with the service provided;
a material supplier or customer of Challenger, or an officer of or otherwise associated directly or indirectly with a material supplier or customer of 4. Challenger:
a material contractual relationship with Challenger other than as a director or committee member of Challenger; 5.
has served on the Board of Challenger for a period in excess of 12 years or which having regard to all the circumstances could, or could reasonably 6. be perceived to, materially interfere with the director's ability to act in the best interests of Challenger; or
has an interest or a business or other relationship which could, or could reasonably be perceived to, materially interfere with the director's ability to $\overline{7}$ . act in the best interests of Challenger.

The Board will state its reasons if it considers a director to be independent notwithstanding the existence of a relationship of the kind referred to in paragraphs 1 - 7 above.

Under the terms of the Company's Constitution, in situations where there is a deadlock in a decision of the Board of Directors, the Chairman shall have a casting vote. Challenger currently has a balance of independent and non-independent directors. However, as the Chairman is independent, the Board considers that Independent Directors control a majority of voting rights on the Board.

Determination of Materiality

The materiality of a relationship is assessed on a case-by-case basis after having regard to each director's individual circumstances.

In line with the Challenger Independence Policy, Messis Packer and Jacob are not considered independent due to their association with a major shareholder. Mr Cubbin is also not considered independent due to his continuing association with a substantial shareholder, and also by reason of the fact that within the last 3 years he has been a director and executive officer of a substantial shareholder.

Following the appointment of Mr Tilley as CEO from 2 August 2004, the Board no longer has a majority of independent directors, and therefore does not comply with ASX Guideline 2.1. The Board, with the assistance of the Nomination Committee, has considered this departure from the Guidelines and believes it is appropriate for Challenger in the immediate future. The Board believes that shareholder interests are best served by a Board which has the relevant mix of skills and experience, and is of optimal size for effective decision making and has determined its current configuration as meeting that criteria. Further, the Board has determined that independent directors hold the balance of voting power on the Board as a result of the Independent Chairman holding a casting vote in the case of a deadlock. [Guideline 2.2 explanation]

Conflicts of Interest

In accordance with the Board Charter and the Corporations Act 2001 (Cth), any Director with a material personal interest in a matter being considered by the Board must declare such an interest and may only be present when the matter is being considered at the Board's discretion. Directors with a material interest may not vote on any matter in which they have declared a personal interest.

Meetings of the Board

During the year the Board generally met formally monthly. In addition, the Board may meet whenever necessary to deal with specific matters needing attention between scheduled meetings. The CEO, in consultation with the Chairman establishes the meeting agendas to ensure adequate coverage of strategic, financial and material risk areas throughout the year. Senior executives are invited to attend Board meetings and are available for contact by non-executive directors between meetings. The non-executive directors hold a private session without any executive involvement as part of each board meeting.

Board Access to Information and Advice

All directors have unrestricted access to Challenger records and information. The Company Secretary provides directors with guidance on corporate governance issues and developments and on all other matters reasonably requested by the directors and monitors compliance with the Board Charter. The Board or each individual director has the right to seek independent professional advice at Challenger's expense to assist them to discharge their duties. Whilst the Chairman's prior approval is required, it may not be unreasonably withheld or delayed.

Board Committees

To assist it in undertaking its duties, during the year the Board established the following committees:

the Audit and Compliance Committee
the Nomination Committee
the Remuneration Committee

Each committee has its own charter, copies of which are available on Challenger's web site at www.challenger.com.au. The Charters specify the composition, responsibilities, duties, reporting obligations, meeting arrangements, authority and resources available to the committees and the provisions for review of the charter. Details of directors' membership of each committee and their attendance at meetings throughout the period is set ont below. [Guldelines 2.4, 4.2, 9.2]

Director	Board		Audit and Compliance Remuneration Committee Committee				Nominations Committee
	Eligible to attend	Attended	Eligible to iattend	Attended	Eligible to lattend	Attended	Eligible to attend	Attended
P Polson	u	11
M Tilley	н	l E
G Cubbin	Н		я	8
R Hooper	Ħ	п	я	8
A Jacob	11	R
J Packer	Ħ					3
J Service	Н	٠
B Shanahan	11	10	8	8

Integrity of Challenger Financial Reporting

In accordance with its charter, Challenger's Audit and Compliance Committee must have at least 3 members and is comprised of all non-executive directors and a majority of independent members. A principal aim of the Audit and Compliance Committee is to assist the Board in overseeing the integrity of Challenger's financial reporting. The committee makes recommendations to the Board in relation to the appointment, review and removal of an external auditor, assessment of the external auditor's independence and the appropriateness of non-audit services that the external auditor may provide. A copy of the Audit and Compliance Committee Charter is available on the company's website.

The CEO and CFO periodically provide formal assurance statements to the Board that:

Challenger's financial statements present a true and fair view of Challenger's financial condition and operational results; and
The risk management and internal compliance and control systems are sound, appropriate and operating efficiently and effectively.

Independent Audit

Challenger requires its independent audits to:

provide stakeholders with true and fair financial reports; and
ensure accounting practices comply with applicable accounting rales and policies.

Challenger's independent external auditor is Ernst & Young (E&Y). E&Y were appointed upon constitution of the Company in November 2003, and this appointment was ratified by members at the annual general meeting held in November 2004.

External auditors will be required to rotate the engagement partner assigned to Challenger on a 5 year basis.

The Board has requested that E&Y attend Challenger's annual general meeting, and that they be available to answer questions arising in relation to the conduct of their audit. [Guidelines 4.1, 4.2, 4.3 4.4 and 6.2]

Risk Management and Compliance

The management of risks is fundamental to Challenger's business and to building shareholder value. The Board recognises the broad range of risks which apply to a participant in the financial services industry, including, but not limited to, market risk, liquidity risk, credit risk, legal risk, operational risk and reputational risk. The Board is responsible for determining Challenger's risk management strategy. Management is responsible for implementing the Board's strategy and for developing policies and procedures to identify, manage and mitigate risks across the whole of Challenger's operations.

The Board has adopted an Operational Risk Framework and formal policies in respect of Compliance and Operational Risk Management. The framework and policies were developed and approved by management, reviewed and approved by the Audit and Compliance Committee, and then made available to all staff of Challenger and its subsidiaries. Training sessions are held with all business teams to ensure the Operational Risk Framework is understood and applied in a consistent manner throughout the group. Challenger has implemented an Operational Risk Management function which has day to day responsibility for monitoring the implementation of the framework and policy and reporting regularly to the Audit and Compliance Committee on the adequacy and effectiveness of management controls for risk. The Committee reports regularly to the Board on compliance with the framework and policy. A copy of the Operational Risks Policy can be found at the Company's website. [Guideline 7.1]

Code of Conduct

The Board has adopted a Code of Conduct which applies to all Directors, executives, management and employees of Challenger and its subsidiaries. The Code articulates the standards of honest, ethical and law-abiding behaviour expected by Challenger. Employees are actively encouraged to bring any problems to the attention of management or the Board, including activities or behaviour which may not comply with the Code of Conduct, other policies and procedures in place, or other regulatory requirements or laws. A copy of the Code can be found at the Company's website. [Guidelines 3.1 and 10. II

Staff Trading Policy

Directors and staff are subject to restrictions under the law relating to dealing in securities, including the securities issued by Challenger if they are in possession of insider information. The Board has approved Chailenger's Staff Trading Policy which prescribes the manner in which staff can trade in Challenger shares. A summary of the policy is available on Challenger's web site. The policy applies to all Directors and staff and places restrictions and reporting requirements on staff, including limiting trading in Challenger (or other listed entities within the Group) to specific trading windows and in a specified manner. Those staff designated as potentially having access to insider information are required to seek prior approval to trade in other securities. [Guideline 3.2]

Continuous Disclosure Policy and Shareholder Communication Processes

Challenger is committed to providing relevant information about its operations to all shareholders and to fulfill its duties to comply with its continuous disclosure obligations to the market generally.

The Board approved and implemented its Continuous Disclosure Policy. The policy is designed to ensure compliance with the Corporations Act and ASX Listing Rules continuous disclosure requirements. Challenger has a Continuous Disclosure Committee which is responsible for:

making decisions on what should be disclosed publicly under the Continuous Disclosure Policy; $\bullet$
maintaining a watching brief on information; and

$\ddot{\phantom{a}}$

ensuring disclosure is made in a timely and efficient manner.

Challenger also publishes annual and half yearly reports, announcements, media releases and other relevant information on its web site at www.challenger.com.au . Internet web-casting and teleconferencing facilities are provided for market briefings to encourage participation from all stakeholders, regardless of their location. Challenger is also intending to encourage greater use of electronic media by providing shareholders with greater access to the electronic receipt of reports and meeting notices. Challenger also provides a facility to ask questions about the Company and have them answered directly via electronic means. [Guidelines 5.1 and 6.1]

Financial Report

30 June 2005

Contents	Page


Statement of financial performance	19.
Statement of financial position	20
Statement of cash flows	21
Notes to the financial statements	22
Directors' Declaration	74
Independent audit report	75

This financial report covers both Challenger Financial Services Group Limited and its controlled entities ("the Group").

Statement of financial performance Year ended 30 June 2005

		Consolidated		Parent Entity
	Notes	\$000's	Period from 6 Year ended November 2003 30 June 2005 to 30 June 2004 \$000's	\$000's	Period from 6 Year ended November 2003 30 June 2005 to 30 June 2004 \$000's
Revenue from ordinary activities Dividends received from controlled entities	2	908,708	446,475	805 33,000
Expenses from ordinary activities Borrowing costs Write-down in goodwill & investment in controlled	3 3	(634, 860) (115,952)	(297, 832) (81, 815)		(1,620)
entities Share of net profits of associates accounted for using the equity method	4 33	2,090	(280,000) 1,452		(280,000)
Profit/(Loss) from ordinary activities before income tax expense		159,986	(211, 720)	33,805	(281, 620)
Income tax expense	5	(49, 352)	(23, 725)	(218)
Profit/(Loss) attributable to shareholders after tax from ordinary activities		110,634	(235, 445)	33,587	(281, 620)
Total revenues, expenses and valuation adjustments attributable to shareholders recognised directly in equity
Total changes in shareholders' funds from non- shareholder transactions		110,634	(235, 445)	33,587	(281, 620)
Basic earnings per share*	23	21.09 cents	$(48.27)$ cents
Diluted earnings per share*	23	17.56 cents	$(40.65)$ cents

*Effective 25 November 2004, the share capital of the Company was consolidated by converting every five Challenger Shares on issue into one Challenger Share. The comparative earnings per share figures have been restated as a result of the share consolidation.

The above statement of financial performance should be read in conjunction with the accompanying notes.

Statement of financial position

As at 30 June 2005

		Consolidated		Parent Entity
	Notes	2005	2004	2005	2004
		\$000's	\$000's	\$000 ^t s	\$000's
Assets
Cash assets	6	496,401	626,388
Receivables	7	288,949	420,021	379,446	177,093
Debt securities	8	753,897	1,217,687
Other financial assets	8	334	332
Equity securities	8	270,064	204,641
Infrastructure assets	8	344,426
Investment properties	9	1,678,202	2,535,134
Fixed assets	10	29,228	21,947
Deferred tax assets	11	7,696	7,530	7,696	7,530
Investment in controlled entities	32			922,221	922,221
Investment in associates	33	2,812	17,788
Intangible assets	12	571,435	255,974
Other assets	13	157,124	143,800
Excess of net market value of the interests of
Challenger Life No.2 Limited in its subsidiaries
over their net assets	14		224,381
Total assets		4,600,568	5,675,623	1,309,363	1,106,844
Liabilities
Payables	15	276,551	374,069	39,216	9,150
Interest bearing liabilities	16	600,713	2,066,151
Provisions	17	57,989	39,531
Deferred tax liabilities	18	92,527	58,921	92,527	58,921
Life insurance policy liabilities	19	2,271,946	2,052,003
Total liabilities		3,299,726	4,590,675	131,743	68,071
Net assets		1,300,842	1,084,948	1,177,620	1,038,773

Shareholders' equity
Contributed equity	20 21	1,363,953 61,700	1,258,693 61,700	1,363,953 61,700	1,258,693 61,700
Reserves	22	(124, 811)	(235, 445)	(248, 033)	(281, 620)
Retained (Loss)		1,300,842	1,084,948	1,177,620	1,038,773
Total shareholders' equity

The above statement of financial position should be read in conjunction with the accompanying notes.

Statement of cashflows Year ended 30 June 2005

		Consolidated		Parent Entity
			Period from 6
			November		Period from 6
		Year ended	2003 to 30		Year ended November 2003
		30 June 2005	June 2004		30 June 2005 to 30 June 2004
	Notes	S000's	\$000's	\$000's	\$000's
Cash flows from operating activities
Receipts from customers (inclusive of GST)		649,923	318,227
Premiums received		716,305	262,783
Payments to suppliers and employees (inclusive of GST)		(506, 218)	(226, 210)
Claim Payments		(639,319)	(224, 414)
Dividends received		26,643	11,198	33,000
Interest received		158,391	48,999
Borrowing costs		(155,783)	(75, 152)
Income taxes paid		(5,703)	(1,759)	(10)
Net eash inflow/(outflow) from operating activities	29	244,239	113,672	32,990	$\bullet$
Cash flows from investing activities
Purchase of investments		(695, 792)	(28, 877)
Acquisition of controlled entities, net of cash acquired		(8, 732)
Advances of loans			(2,873)
Repayments of loan advances			1,006
Purchase of fixed assets		(14, 741)	(13,983)
Restructure Costs		(9, 817)
Capitalised costs of acquisition paid			(111)
Proceeds from sale of investments		1,841,898	179,976
Net cash inflow/(outflow) from investing activities		1,112,816	135,138
Cash flows from financing activities
Proceeds from borrowings		7,276	119,646
Repayment of borrowings		(1, 494, 318)	(93, 275)
Advances to controlled entities				(32,990)
Net cash inflow/(outflow) from financing activities		(1,487,042)	26,371	(32,990)

Net increase/(decrease) in cash held		(129, 987)	275,181
Cash at the beginning of the period		626,388
Effects of exchange rates on cash			3,328
Cash acquired upon corporatisation of CFSG			347,879
Cash at the end of the financial year	6	496,401	626,388	$\blacksquare$

The above statement of cash flows should be read in conjunction with the accompanying notes.

$\bar{z}$

Note		Page
1	Summary of significant accounting policies	23
2	Revenue from ordinary activities	32
3	Expenses from ordinary activities	32
4	Write-down in goodwill	33
5	Income tax	33
	Assets
6	Cash assets	34
7	Receivables	35
8	Investment assets	35
9	Investment properties	35
10	Fixed assets	38
11	Deferred tax assets	39
$12 \overline{ }$	Intangible assets	39
13	Other assets	39
14	Excess of net market value over net book value of life insurance subsidiaries	40
	Liabilitics
15	Payables	41
16	Interest bearing liabilities	41
17	Provisions	42
18	Deferred tax liabilities	42
19	Life insurance business	43
	Total equity
20	Contributed equity	45
21	Reserves	46
22	Retained profits	46
23	Earnings per share	47
24	Segment information	48
25	Financial instruments	49
26	Commitments for expenditure	54
27	Related parties	55
28	Employee entitlements	57
29	Statement of cashflow	59
30	Remuneration of auditors	60
31	Acquisitions and disposals of controlled entities	61
32	Investments in controlled entities	63
33	Investments in associates	67
34	Deed of cross guarantee	68
35	Contingent liabilities	69
36	Subsequent events	70
37	International Financial Reporting Standards	71

$\mathbb{R}^2$

$\Box$

CHALLENGER FINANCIAL SERVICES GROUP LIMITED AND CONTROLLED ENTITIES

NOTES TO THE FINANCIAL STATEMENTS

Note 1. Summary of significant accounting policies

This general purpose financial report has been prepared in accordance with the requirements of Accounting Standards, other authoritative pronouncements of the Australian Accounting Standards Board, Urgent Issues Group Consensus Views and the Corporations Act 2001.

The financial report is prepared in accordance with the historical cost convention except for all life insurance assets and liabilities and certain other assets and liabilities which are stated at valuation as described in the summary of significant accounting policies.

The statement of financial position is presented in order of liquidity.

Principles of consolidation $(a)$

The consolidated financial statements incorporate the assets and liabilities of all entities controlled by Challenger Financial Services Group Limited ("Parent Entity") as at 30 June 2005 and the results of all controlled entities for the period then ended. Challenger Financial Services Group Limited and its controlled entities together are referred to in this financial report as the Consolidated Entity. The effects of all transactions between entities in the Consolidated Entity are eliminated in full.

Where control of an entity is obtained during a financial year, its results are included in the consolidated statement of financial performance from the date on which control commences. Where control of an entity ceases during a financial year its results are included for that part of the year during which control existed.

Life Insurance Controlled Entities

Both the shareholders' and policy owners' interests in the life insurance funds of the controlled entities are consolidated.

Some aspects of generally accepted Australian accounting practices applicable to life insurers, in particular net market value accounting, differ from generally accepted practices for non-life insurers. Where a life insurer consolidates a subsidiary, any differences between the values consolidated line by line and the market value of the controlled entity recorded in the life insurer's financial statements is shown as "Excess of the net market values of its interests in its subsidiaries over their net assets".

Non-Life Insurance Controlled Entities

Where controlled entities of non-life insurance companies are consolidated the excess of the purchase price over the fair value of net assets of controlled entities is goodwill and is amortised as described in 1(m).

Investments in Associates

Investments in Associates are carried at the lower of equity accounted amount or recoverable amount in the consolidated financial report.

Life Insurance financial reporting $(b)$

Assets, liabilities, revenues and expenses are measured on the following basis.

Premiums are separated into their revenue and liability components. Premium amounts received which are akin $(i)$ to deposits, are recognised as an increase in policy liabilities.
Claims are separated into their expense and liability components. Claims paid that are akin to withdrawals are $(ii)$ recognised as a decrease in policy liabilities.

CHALLENGER FINANCIAL SERVICES GROUP LIMITED AND CONTROLLED ENTITIES

NOTES TO THE FINANCIAL STATEMENTS

Note 1. Summary of significant accounting policies (Cont'd)

Investment assets (including infrastructure investments) within Challenger Life No.2 Limited have been recorded $(iii)$ at net market value including an allowance for estimated realisation costs. Where no quoted market values exist, various methods determined by the Directors have been adopted. They include the following:
Investments in unit trusts that are not controlled entities are recorded at their latest available market value.
Investments in controlled property trusts consist of income units (entitlements to rental income less financing and hedging costs) and capital units (entitlements to residual net assets upon the maturity of the income units).

The values of investments in income and capital units are derived from net market valuations on the underlying properties, undertaken annually by independent accredited valuers, less the costs of related debt and foreign exchange hedging contracts.

Revaluation gains and losses on property investments arise where the net market value differs to carrying value. Net market value (fair value) is the most probable price reasonably obtainable in the market from a willing and knowledgeable buyer. The cost of acquired properties includes its purchase price, and any directly attributable expenditure including professional fees for legal services, property transfer taxes and other related transaction costs.

Investments in controlled infrastructure trusts consist of income units (entitlements to dividend income less financing and hedging costs) and capital units (entitlements to the residual net assets of the trust on maturity of the income unit). The value of the income and capital units are based on the Directors valuation of the underlying infrastructure assets. The Directors obtained an independent valuation of the market value of the infrastructure assets, on which their valuation is based.
Investments in controlled entities and associates that do not have a market price are recorded at fair value as determined by the Directors.
Interest-bearing securities listed on exchanges are shown at quoted prices at balance date.
Loans are recorded at market value based on discounting the estimated recoverable amount using prevailing interest rates.

Gains and losses arising from the revaluation of investments are included as part of investment income in the statement of financial performance.

Overview of Margin on Services (MoS) methodology $(iv)$

MoS is the financial reporting methodology for Australian life insurance companies as prescribed in the Life Insurance Act 1995 ("the Act"). MoS is designed to recognise profits on life insurance as services are provided to policyholders and income is received. Services used to determine profit recognition include the cost of the expected claims, maintaining policies, and investment management. Policy liabilities are valued by the Life Insurance Actuarial Standard 1.03 "Valuation of Policy Liabilities" issued by the Life Insurance Actuarial Standards Board under the Life Insurance Act 1995.

Policy liabilities are amounts which, when taken together with future premiums and investment earnings:

are required to meet the payment of future benefits and expenses; and
incorporate profit margins on existing business to be released when earned in future periods.

Life insurance policy liabilities are not categorised as current or non-current which is consistent with the presentation of investment assets backing those liabilities.

On the basis of an actuarial assessment under the MoS methodology the excess of net assets over policy liabilities accrues to the benefit of Challenger Financial Services Group Limited.

MoS profit can be analysed in the following categories:

Planned margins of revenues and expenses. At the time of writing a policy and at each balance date, best estimate assumptions are used to determine all expected future payments and premiums. Where actual experience replicates best estimate assumptions, the expected profit margins will be released to profit over the life of the policy.

Note 1. Summary of significant accounting policies (Cont'd)

The difference between actual and assumed experience. Experience profits/(losses) are realised where actual experience differs from best estimate assumptions. Instances giving rise to experience profits/(losses) include variations in claims, expenses, mortality, discontinuance and investment returns. For example, an experience profit will emerge when the expenses of maintaining all in-force business in a year are lower than the best estimate assumption in respect of those expenses.
Changes to underlying assumptions.

Assumptions used for measuring policy liabilities are reviewed each period by the appointed actuary. Where the review leads to a change in assumptions, the change is deemed to have occurred from the end of the financial year.

The financial effect of changes to the assumptions underlying the measurement of policy liabilities made during the reporting period are recognised in the statement of financial performance over the future reporting periods during which services are provided to policyholders. However, if based on best estimate assumptions, written business for a group of related products is expected to be unprofitable, the whole expected loss for that related product group is recognised in the statement of financial performance immediately. When loss making business becomes profitable, it is necessary to reverse previously recognised losses.

$(v)$ Basis of expense apportionments

Direct expenses are allocated on the basis of statutory fund, class and category of business. Other expenses have been apportioned between statutory funds, classes and categories of business in accordance with Division 2 of Part 6 of the Life Insurance Act 1995, with general management expenses being apportioned on a similar basis.

Apportionment between policy acquisition, policy maintenance and investment management has been made in line with principles set out in the Life Insurance Actuarial Standards Board (LIASB) Valuation Standard (Actuarial Standard AS 1.03).

(vi) Policy acquisition costs are the fixed and variable costs of acquiring new business and include the related commission, policy issuing and underwriting costs, agency expenses and other sales costs. The actual acquisition costs incurred in the life business are recorded in the statement of financial performance.

In determining life insurance policy liabilities, the Appointed Actuary takes account of the deferral and the future recovery of acquisition costs. The acquisition costs deferred are determined as the greater of actual costs incurred and any explicit policy charges for the recovery of those costs, subject to an overall limit that the value of future profits at inception cannot be negative. Acquisition losses are recognised at inception to the extent the latter situation arises.

(vii) Creditors, other liabilities and borrowings.

Interest bearing liabilities and other payables relating to life insurance operations are measured at net present values, and changes to those net present values, as well as borrowing costs, are recognised as expenses (and, in some cases, revenues) of the period.

The borrowings and other liabilities relating to the non-life operations are measured at their face values with only borrowing costs recognised as expenses of the period.

Note 1. Summary of significant accounting policies (Cont'd)

$(c)$ Income tax

Tax effect accounting is applied using the balance sheet liability method, which focuses on the tax effect of transactions and other events that affect amounts recognised in either the statement of financial position or tax based balance sheet.

The income tax expense or revenue for the period is the tax payable on the current period's taxable income adjusted by changes in deferred tax assets and liabilities attributable to amounts recognised as assets or liabilities, and to unused tax losses.

Deferred tax assets and liabilities are recognised for temporary differences between the earrying amount of assets and liabilities for accounting purposes and the tax bases of those assets and liabilities, and for unused tax losses. The tax rates expected to apply when the assets are recovered or liabilities are settled, based on those tax rates which are enacted or substantively enacted for each jurisdiction, are applied to the cumulative amounts of deductible and assessable temporary differences to measure the deferred tax asset or liability.

A deferred tax asset is recognised for the carry forward of unused tax losses and temporary differences in respect of unrealised capital losses to the extent, and only to the extent, that it is probable that future taxable amounts within the company or consolidated entity will be available against which the unused losses can be utilised.

$(d)$ Foreign currency translation

Transactions $\omega$

Foreign currency transactions are initially translated into Australian currency at the rate of exchange at the date of the transaction. At balance date amounts payable and receivable in foreign currencies are translated to Australian currency at rates of exchange current at that date. Resulting exchange differences are brought to account in determining the profit or loss for the year.

Foreign controlled entities $(ii)$

As the foreign controlled entities are integrated, their assets and liabilities are translated into Australian currency at the balance date exchange rate, while their revenues and expenses are translated at the average of rates ruling during the year. Resulting exchange differences arising on translation are brought to account in determining the profit or the loss for the year.

$(e)$ Acquisitions of assets

The purchase method of accounting is used for all acquisitions of assets, except for those assets held by Challenger Life No 2 Limited which are held at fair value, regardless of whether shares or other assets are acquired. Cost is determined as the fair value of the assets given up, shares issued or liabilities undertaken at the date of acquisition plus costs incidental to the acquisition. Where shares are issued in an acquisition, the value of the shares is determined having reference to the assessed fair value of the assets or net assets acquired, including goodwill or discount on acquisition where applicable.

Goodwill is brought to account on the basis described in note $l(m)$ .

The fair value of acquired tax losses is determined via their recoverability in the hands of the acquirer and probability of recognition in future periods.

$(f)$ Revenue

Revenue is recognised to the extent that it is probable that the economic benefits will flow to the entity and the revenue can be reliably measured. Revenue and expenses are generally recognised on an accruals basis.

Revenue from fees and commissions is income derived from the provision of investment management services to Challenger's managed investment products and fee and distribution income from managed loan securitisation trusts. Revenue is recognised when the services are provided, or when the fee or commission in respect of services provided is receivable.

Interest income is recognised as it accrues taking into account the effective yield of the financial asset.

Revenue received relating to financial planning in the form of brokerage from life companies and fund managers is recognised on an accruals basis.

Dividends are recognised as income on the date the share is quoted ex-dividend. Dividends from unlisted companies are recognised when the dividend is received.

Rents are shown net of outgoings.

Note 1. Summary of significant accounting policies (Cont'd)

Receivables $(g)$

All trade debtors are recognised at the amounts receivable. Trade debtors are due for settlement no more than 120 days from the date of recognition, and other debtors no more than 30 days from the date of recognition.

The recoverability of trade debtors is reviewed on an ongoing basis. Debtors which are known to be uncollectable are written off. A provision for doubtful debts is raised where it is probable the debt will not be fully recoverable.

Bills of exchange have been purchased in the market at a discount to face value. The bills are carried at an amount representing cost and a portion of the discount recognised as income on an effective yield basis. The discount brought to account each period is accounted for as interest income.

(h) Recoverable amount of non-current assets

The recoverable amount of an asset is the net amount expected to be recovered through the net cash inflows arising from its continued use and subsequent disposal.

Where the carrying amount of a non-current asset is greater than its recoverable amount, the asset is written down to its recoverable amount. Where net cash inflows are derived from a group of assets working together, recoverable amount is determined on the basis of the relevant group of assets.

$(i)$ Investments

Investments held outside Challenger Life No 2 Limited in listed and unlisted securities, other than investments in controlled entities and associates, are brought to account at the lower of cost or net realisable value. Controlled entities and associates are accounted for in the consolidated financial statements as set out in note $1(a)$ .

$\ddot{\mathbf{U}}$ Depreciation of fixed assets

Depreciation is calculated on a straight line basis to write off the net cost or revalued amount of each item of property, plant and equipment (excluding land) over its expected useful life to the consolidated entity. Estimates of remaining useful lives are made on a regular basis for all assets, with annual reassessments for major items. The expected useful lives are as follows:

Plant and equipment 3 to 5 years
Core operating software 5 years

$(k)$ Leasehold improvements

The cost of improvements to or on leaschold properties is amortised over the unexpired period of the lease or the estimated useful life of the improvement to the consolidated entity, whichever is the shorter. Leasehold improvements held at the reporting date are being amortised over 5 years.

$\left($ l Leased assets

Leases are classified as either operating leases or finance leases at the date of inception of the lease.

A distinction is made between finance leases which effectively transfer from the lessor to the lessee substantially all of the risks and benefits incident to ownership of leased non-current assets, and operating leases under which the lessor effectively retains substantially all such risks and benefits.

Finance leases are capitalised. A lease asset and liability are established at the present value of minimum lease payments. Lease payments are allocated between the principal component of the lease liability and the interest expense.

The lease asset is amortised on a straight line basis over the term of the lease, or where it is likely that the consolidated entity will obtain ownership of the asset, the life of the asset. Lease assets held at the reporting date are being amortised over periods ranging from 3 to 5 years.

Incentives received on entering into operating leases are recognised as liabilities and amortised over the life of the lease.

Other operating lease payments are charged to the statement of financial performance in the periods in which they are incurred, as this represents the pattern of benefits derived from the leased assets.

Surplus lease space

The present value of future payments for surplus leased space under non-cancellable operating leases is recognised as a liability, net of sub-leasing revenue, in the period in which it is determined that the leased space will be of no future benefit to the Consolidated Entity.

Note 1. Summary of significant accounting policies (Cont'd)

$(m)$ Intangible assets

On acquisition of some, or all, of the assets of another entity or, in the case of an investment in a controlled entity, on acquisition of some, or all, of the equity of that controlled entity, the identifiable net assets acquired are measured at fair value. The excess of the fair value of the cost of acquisition over the fair value of the identifiable net assets acquired, including any liability for restructuring costs, is brought to account as goodwill and amortised on a straight line basis over the period during which the benefits are expected to arise, being no more than twenty years.

$(n)$ Deferred portfolio and origination costs

Deferred portfolio costs

Portfolio costs represent the costs associated with establishing securitised mortgage backed pools of funds which are funded via the issue of residential mortgage backed securities (RMBS) to investors. When incurred these costs are recognised as an asset and subsequently amortised over the life of the future economic benefits expected to be received.

The amortisation policy is to match the portfolio costs with the expected repayment profile of each securitised pool so that the amortisation charge as a proportion of the outstanding securitisation pool is consistent over the life of the securitisation, creating an effective yield. The amortisation rate is determined based on the forecast prepayment rate of the loans underlying the RMBS. This is calculated on a trust by trust basis, thereby matching each pool of relevant costs with the forecast prepayment rate of the 'issue' they relate to.

Deferred origination costs

Deferred origination costs are costs associated with origination of loans including commissions paid to mortgage originators and Lenders Mortgage Insurance (LMI) premiums. Deferred origination costs incurred are recognised as an asset and subsequently amortised over the life of the future economic benefits expected to be received.

The amortisation policy is to match the amortisation of the origination costs with the average repayment profile of a loan so that the amortisation charge as a proportion of the outstanding loan balance is consistent over the average life of a loan, creating an effective yield. The basis of amortisation is determined by the amortisation of the loan book or Cumulative Prepayment Rates (CPR) curve (excluding discharges). Any origination costs (remaining written down value) associated with a loan which has discharged during the period is written off immediately. This policy ensures that total deferred origination costs are not carried at an amount above their recoverable amount.

$\left( 0\right)$ Payables

These amounts represent unsecured liabilities for goods and services provided to the Consolidated Entity prior to the end of the financial year and short term financing of deferred origination costs by managed warehouse trusts.

Interest bearing liabilities $(p)$

Loans are carried at their principal amounts which represent the present value of future cash flows associated with servicing the debt. Interest is accrued over the period it becomes due and is recorded as part of payables.

Derivative financial instruments $(q)$

The Consolidated Entity is exposed to changes in interest rates and foreign exchange rates and may use interest rate swaps, forward foreign exchange contracts and futures to hedge these risks. Derivative financial instruments are held for risk management purposes and not for the purpose of speculation. The Group does not hold a derivative trading portfolio.

Other than in the life insurance group, costs arising at the time of entering into hedge transactions are brought to account in the statement of financial performance over the lives of the hedge contracts. For the life insurance company and its controlled entities, costs arising at the time of entering into hedge transactions are recognised in the statement of financial performance in the period in which the costs are incurred.

Derivative financial instruments designated as hedges are accounted for on the same basis as the underlying exposure. Derivatives not meeting the definition of a hedge, or held within the life insurance group, are accounted for on a fair value basis and changes in value are recorded in the statement of financial performance in the period in which they arise. Where futures contracts are a hedge of interest rate risk, the gain or loss on those contracts is deferred and recognised in the period for which the underlying interest rate risk has been hedged.

Note 1. Summary of significant accounting policies (Cont'd)

$(r)$ Goods and services tax

Revenues, expenses and assets are recognised net of the amount of goods and services tax (GST), except where the amount of the GST incurred is not recoverable from the taxation authority. In these circumstances, the GST is recognised as part of the cost of the acquisition of the asset or as part of the expense.

Receivables and payables are stated with the amount of GST included.

The net amount of GST recoverable from, or payable to, the ATO is included as an asset or liability in the statement of financial position.

Cash flows are included in the statement of cash flows on a gross basis. The GST components of cash flows arising from investing and financing activities which are recoverable from, or payable to, the ATO are classified as operating cash flows.

$(s)$ Employee entitlements

$\omega$ Wages and salaries, and annual leave

Liabilities for wages and salaries and annual leave expecting to be settled within 12 months of the reporting date are recognised in provisions in respect of employees' services up to the reporting date and are measured at the amounts expected to be paid when the liabilities are settled.

Long service leave $(ii)$

A liability for long service leave is recognised, and is measured as the present value of expected future payments to be made in respect of services provided by employees up to the reporting date. Consideration is given to expected future wage and salary levels, experience of employee departures and periods of service. Expected future payments are discounted using interest rates on national government guaranteed securities with terms to maturity that match, as closely as possible, the estimated future cash outflows.

$(ii)$ Termination benefits

Liabilities for termination benefits relating to an acquired entity or operation that arise as a consequence of acquisition are recognised as at the date of acquisition if, at or before the acquisition date, the main features of the termination were planned. These liabilities are disclosed in aggregate with other restructuring costs as a consequence of the acquisition.

Liabilities for termination benefits expected to be settled within 12 months are measured at the amounts expected to be paid when they are settled.

(f) Restructuring costs

Liabilities for the cost of restructuring entities or operations acquired are recognised as at the date of acquisition of an entity, or part thereof, if the main features of the restructuring were planned and there was a demonstrable commitment to the restructuring at the acquisition date.

The cost of restructurings provided for, other than related employee termination benefits, is the estimated cash flows, having regard to the risks of the restructuring activities.

Liabilities for employee termination benefits associated with restructurings are brought to account on the basis described in the accounting policy note for employee entitlements (note 1 (s)). Liabilities for costs of restructurings and related employee termination benefits are disclosed in aggregate where the restructuring occurs as a consequence of an acquisition.

Restatement of part or all of a provision for restructuring relating to an acquisition due to changes in the costs associated with the restructuring activity are adjusted against goodwill on acquisition.

Note 1. Summary of significant accounting policies (Cont'd)

$(u)$ Borrowing costs

Borrowing costs are recognised as expenses in the period in which they are incurred.

Borrowing costs include:

interest on bank overdrafts and short-term and long-term borrowings; $\ddot{\phantom{a}}$
amortisation of ancillary costs incurred in connection with the arrangement of borrowings;
finance lease charges.

Cash $(v)$

For purposes of the statement of cash flows, cash includes deposits at call which are readily convertible to cash on hand and are subject to an insignificant risk of changes in value, net of outstanding bank overdrafts.

Earnings per share $(w)$

$\left( i\right)$ Basic earnings per share

Basic earnings per share is determined by dividing net profit after income tax attributable to members of the Company by the weighted average number of shares outstanding during the financial period. Shares issued as part of the Long Term Equity Based Incentive Plan (LTIP) are included only when released.

Diluted earnings per share $(ii)$

Diluted earnings per share adjusts the figures used in the determination of basic earnings per share by taking into account amounts unpaid on shares and any reduction to earnings per share that will probably arise from the exercise of options outstanding during the financial year.

Funds under management $(x)$

Within the economic entity certain controlled entities act as the single responsible entity/manager for a number of registered schemes and property syndicates.

Registered schemes and property syndicates have not been consolidated in the financial statements, as individual entities within the economic entity do not have control of the schemes and syndicates as defined by AASB 1024 "Consolidated Accounts".

$(y)$ Restrictions on assets

Investments held in Challenger Life No.2 Limited can only be used within the restrictions imposed under the Life Insurance Act 1995. The main restrictions are that the assets in a Fund can only be used to meet the liabilities and expenses of that Fund, to acquire investments to further the business of the Fund or as distributions when solvency and capital adequacy requirements are met. Participating policyholders can receive a distribution when solvency requirements are met, whilst shareholders can only receive a distribution when the higher level of capital adequacy requirements are met.

$(z)$ Dividends

Provision is made for the amount of any dividend declared, determined or publicly recommended by the directors of the Company on or before the end of the financial year but not paid at balance date.

Long Term Equity Based Incentive Plan $(aa)$

Shares issued to employees under Challenger's Long Term Equity Based Incentive Plan that have not yet vested have been recognised in equity as "Long Term Equity Based Incentive Plan" and have been included in "Shares on Issue".

Non-recourse loans issued to employees to finance the purchase of shares in accordance with the terms of the Long Term Equity Based Incentive Plan (LTIP), have been recognised as an asset in the Statement of Financial Position. Nonrecourse loans are not carried at an amount above their recoverable amount. The recoverable amount of non-recourse loans is assessed at each balance date by reference to the fair value of the underlying unvested shares issued under the LTIP. Fair value has been determined in accordance with the principles outlined in Note 28.

Note 1. Summary of significant accounting policies (Cont'd)

$(bb)$ Contributed equity

Issued and paid up capital is recognised at the fair value of the consideration received by the Company. Shares issued in respect of the LTIP are recognised at the amount receivable under the terms of the LTIP. Any transaction costs arising on the issue of ordinary shares are recognised directly in equity as a reduction of the share proceeds.

Rounding of amounts $(ce)$

The entity is of a kind referred to in Class Order 98/0100, issued by the Australian Securities & Investment Commission, relating to the "rounding off" of amounts in the financial report. Amounts in the financial report have been rounded off in accordance with the class order to the nearest thousand dollars, or in certain cases, to the nearest dollar.

Note 2. Revenue from ordinary activities

	Consolidated		Parent
	Year ended	Period from 6 November 2003	Year ended	Period from 6 November 2003
	30 June 2005 S000's	to 30 June 2004 \$000's	30 June 2005 S000's	to 30 June 2004 \$000's
Rental income	176,401	129,654
Management fee income	403,787	147,250
Change in net market value of investments held by the Life Company or its subsidiaries
- Properties (excluding exchange fluctuations)	83,172	23,180
- Infrastructure (net of exchange fluctuations)	36,663
- Property valuation movement attributable to exchange fluctuations	(334)	23,877
- Interest rate derivatives and forward foreign exchange contracts	(56, 152)	(31,401)
- Trading securities	(1,116)	20,143
Net realised gains on sale of offshore properties	45,797
Net realised gains on sale of investments and subsidiaries	50,379	17,267
Net realised foreign exchange gains	(1,524)	36,006
Dividend income	26,642	11,789
Interest income	129,361	49,501
Other income	15,632	19,209	805
Revenue from ordinary activities	908,708	446,475	805

Note 3. Expenses from ordinary activities

	Consolidated			Parent
	Year ended 30 June 2005 S000's	Period from 6 November 2003 to 30 June 2004 \$000's	Year ended 30 June 2005 S000's	Period from 6 November 2003 to 30 June 2004 S000's
Borrowing costs
Interest expense
- incurred by Property Trust subsidiaries of the Life Company	81,150	66,426
- incurred by other entities within the wholly owned group	32.330	11,449
Other borrowing costs	2,472	3,940
	115,952	81,815	-
Expenses from ordinary activities, excluding borrowing costs
Increase in net policy liabilities	139,167	75,549
Provision for unrealised loss on investments		6,286
Property management expenses incurred by Property Trusts controlled by
Challenger Life No.2 Limited	28,664	11,623
Goodwill amortisation	23,301	11,297
Amortisation of deferred portfolio and origination costs	62,141	18,690
Depreciation	6,793	1,933
Employee expenses	128,177	58,441
Commission expense	176,375	62,336
Occupancy expense - operating lease	8,380	5.945
Professional fees	11,668	6,386
Communications	5,457	3,628
Other expenses	44,737	35,718		1,620
	634,860	297,832	-	1,620
Total expenses from ordinary activities	750,812	379,647	٠	1,620

Note 4. Write-down in Goodwill

The Board of directors of Challenger approved a write-down of \$280,000,000 for the year ended 30 June 2004 in the Parent Entity's investment in the Challenger Group subsidiaries. The Directors have undergone a full assessment of the Consolidated Entity's goodwill at 30 June 2005 and do not believe any further write down is required.

Impact on net profit		Consolidated	Parent Entity
		Period from 6		Period from 6
	Year ended	November 2003 to	Year ended	November 2003 to
	30 June 2005	30 June 2004	30 June 2005	30 June 2004
	\$000's	\$000's	\$000's	\$000's
Impact on net profit before tax		(280,000)	$\bullet$	(280,000)
Tax expense/benefit attributable to write-down
Impact on net profit after tax		(280.000)		(280.000)

Note 5. Income tax

		Consolidated Parent Entity
		Period from 6		Period from 6
	Year ended	November 2003 to	Year ended	November 2003 to
	30 June 2005	30 June 2004	30 June 2005	30 June 2004
	\$000's	\$000's	S000's	\$000's
The income tax expense for the financial year differs from the amount calculated on the profit/(loss). The differences are reconciled as follows:
Profit/(Loss) from ordinary activities before income tax
expense	159,986	(211, 720)	33,805	(281, 620)
Income tax calculated $@30\%$	47,996	(63, 516)	10,142	(84, 486)
Tax effect of amounts that are not deductible/(assessable) in
calculating the taxable amount:
Utilisation of brought forward losses	(19, 361)
Non-allowable expenses
- Write-down in goodwill		84,000
- Write-down in investment in controlled entities				84,000
- Other Non-assessable items	8,436 (3,927)	6,564 (3,827)	(9,924)	486
Provision for potential overseas tax on sale of properties	8,848
Other items	7.360	504
Income tax expense	49.352	23,725	218
Income tax expense comprises:
Deferred income tax (credit) / expense	49,352	23,725	218
	49.352	23,725	218
Tax Insses
Potential tax losses not brought to account estimated by the
directors	49,489	69.739	49,489	69.739

This benefit for tax losses will only be obtained if:

(i) the consolidated entity derives future assessable income of a nature and of an amount sufficient to enable the benefit from the deductions for the losses to be realised; and

(ii) the consolidated entity continues to comply with the conditions for deductibility imposed by tax legislation; and

(iii) no changes in tax legislation adversely affect the consolidated entity in realising the benefit from the deductions for the losses.

$\lambda$

Note 5. Income tax (cont'd)

Deferred tax liabilities

Deferred tax liabilities have not been recognised for amounts relating to investments in subsidiaries where the Company controls the timing of distributions and dividends, and it is probable that temporary differences will not reverse in the foreseeable future.

Tax consolidation legislation

Effective 1 July 2002, for the purposes of income taxation, Challenger Financial Services Group Limited and its 100% owned eligible subsidiaries have formed a tax consolidated group. Members of the group will enter into a tax sharing agreement in order to allocate income tax expense to the wholly-owned subsidiaries on a pro-rata basis. In addition, the agreement will provide for the allocation of income tax liabilities between the entities should the head entity default on its tax payment obligations. At balance date, the possibility of default is remote. The head entity of the tax consolidated group is Challenger Financial Services Group Limited.

Challenger Financial Services Group Limited, as the head entity of the tax consolidated group, has recognised current and deferred tax amounts relating to transactions, events and balances of the wholly-owned Australian subsidiaries in the group as if those transactions, events and balances were its own, in addition to the current and deferred tax balances arising in relation to its own transactions, events and balances. Amounts receivable or payable under the proposed tax sharing agreement have been recognised separately by Challenger Financial Services Group Limited as tax-related amounts receivable or payable.

Under the revised AASB 1020 Income Taxes, the balances of deferred tax assets and deferred tax liabilities have been adjusted as a consequence of resetting tax values of the assets and liabilities of wholly owned subsidiaries.

Challenger Financial Services Group Limited has formally notified the Australian Tax Office of its adoption of the tax consolidation regime.

Franking credits	Consolidated		Parent Entity
	2005	2004	2005	2004
	\$000's	\$000's	\$000's	\$000's
Franking credits available for subsequent financial years based
on a tax rate of 30%	36,692	35,136	36.692	35,136

The above amount represents the balance of the franking account as at the end of the financial year, adjusted for:

(a) franking credits that will arise from the payment of the current tax liability

(b) franking debits that will arise from the payment of dividends recognised as a liability at the reporting date

(d) franking credits that may be prevented from being distributed in the subsequent year.

Note 6. Cash assets

		Consolidated		Parent Entity
	2005	2004	2005	2004
	SOOO's	S000's	SOOO's	\$000's
Cash at bank and on hand	226,431	144.796	$\ddot{\phantom{1}}$
Deposits at call	269.970	481.592	$\overline{\phantom{0}}$	-
	496.401	626.388	$\overline{\phantom{0}}$	-

Note 7. Receivables

		Consolidated		Parent Entity
	2005	2004	2005	2004
	\$000's	S000's	\$000's	\$000's
Secured loans	10,595	190.304		$\blacksquare$
Trade debtors	43,887	10,817	$\ddot{}$
Bills of exchange	11.866	9,570
Non-recourse LTIP loans to employees*	128,023	118,172	128.023	118,172
Amounts recoverable from managed trusts	13.844	12.512
Dividends receivable	1.133	2.540		$\bullet$
Interest receivable	4.785	7.085
Other debtors	74,816	69.021
Amount receivable from related parties
- controlled entities		٠	251,423	58,921
	288,949	420,021	379.446	177,093

$\overline{a}$

*Refer Note 28 for further information in respect of the terms and conditions attaching to the non-recourse LTIP loans to employees.

Bills of exchange

The Bills of exchange have a face value of \$12,023,848 (2004: \$9,635,000) and mature at various dates over the three months following balance date. The average interest rate is 5.67% (2004:5.51%).

Note 8. Investment assets

	Consolidated		Parent Entity
	2005	2004	2005	2004
	SUOO's	\$000's	\$000's	\$000's
Debt Securities
Fixed Interest Notes	10,149	628,117
Preference Shares	173,221	191,824
Bonds	405,564	221,226
Other	164,963	176,520
	753,897	1,217,687	$\blacksquare$
Other Financial Assets	334	332
	334	332
Equity Securities
Shares in listed corporations	118,711	70,380
Unit trusts and managed funds	51,693	46,180
Shares in listed corporations held in relation to endowment warrants*	86,349	75,031
Other equity investments including foreign exchange forwards at fair value	13,311	13,050
	270,064	204,641
Infrastructure Assets	344,426
	344,426		۰

*Benefits derived from this asset have been assigned to a third party and accordingly do not accrue to the benefit of Challenger, refer Note 32(b) for further information.

Note 9. Investment properties

	Consolidated		Parent Entity
	2005	2004	2005	2004
	\$000's	\$000's	\$000's	5000's
Unit trusts at fair value	12,526	11,441	$\blacksquare$
Land & buildings at fair value	1,665,676	2,523,693
	1,678,202	2,535,134
Reconciliation
Opening balance	2,535,134
Additions through acquisition of entity		2,558,902
Acquisitions	24,020
Capital Expenditure	9.679	15.345
Sale of properties	(946, 414)	(134,212)
Net revaluation	55,783	95,099
Closing balance	1,678,202	2,535,134

Note 9. Investment properties (Cont'd)

Consolidated Entity	Acquisition Price	Total Cost Including Additions	Carrying Value* 30/06/2005	Carrying Value* 30/06/2004
	S000's	\$000's	\$000's	\$000's






				255,614

				13,250
				15,933
				29,183

				230,000






				263,782





				18,711
				6,536
				4,905







				70,000

				102,737
				65,027
				628,637


Total Australia	1,198,301	1,369,926	1,596,045	1,504,820

Note 9. Investment properties (Cont'd)

Consolidated Entity	Acquisition Date	Acquisition Price S000's	Total Cost Including Additions S000's	Carrying Value* 30/06/2005 S000's	Valuer	Date of Latest Valuation	Carrying Value* 30/06/2004 SOOO's
United Kingdom - Office
3 World Business Centre, Heathrow	22-Mar-02	63,724			N/A	N/A	67,726
Hayes Park	8-Oct-01	192,791	٠	÷	N/A	N/A	182,339
Minster Court	7-Jul-01	224,228			N/A	NA.	225,918
Senator House	$3-May-01$	218,074	$\blacksquare$	۰.	N/A	NA	223,170
Sub-sector UK Office Total		698,817	u.		N/A	N/A	699,153
United States - Office					N/A	N/A
Las Cimas II & III, USA	$15 - Ju1 - 02$	86,619		۰	N/A	N/A	91.631
50 Milk Street, Boston, USA	15-Oct-02	154,472	$\overline{\phantom{a}}$	-	N/A	N/A	155,630
Invesco, Denver, USA	$31 - Dec - 02$	83.069	83,638	82,157	CBRE	1-Dec-04	83,900
Sub-sector US Office Total		324,160	83,638	82,157			331,161
Grand Total		2,221,278	1,453,564	1,678,202			2,535,134

* The carrying value of all properties reflects their latest independent valuation net of provision for selling costs with the exception of the following properties:

	Independent Valuation S000's**	Capitalised costs subsequent to valuation SOOO's	Carrying Value 30/06/2005 \$000's
Jam Factory, VIC	110,000	359	110,359
Goodman Fielder, North Ryde, NSW	44.392	3	44.395
Heidelberg, Waterloo, NSW	14,836	30	14,866
Rexel, North Ryde, NSW	20,086	71	20.157
Auto Group, Enfield, NSW	20.736	27	20.763
ABS Building, ACT	123,800	134	123,934
Discovery House, ACT	36.500	77	36,577
417 St Kilda Rd, Melbourne, VIC	66.500	1,075	67,575
The Forum, Cisco, NSW	108,000	54	108,054
The Forum, UUNet, NSW	69,000	16	69,016
	613,850	1.846	615,696

** Net of provision for selling costs

Qualifications of Valuers
The Valuer or Valuation Practice are authorised to practice as a Valuer under the law of the relevant jurisdiction where the valuation takes place. The Valuer performing the valuation has at least five years of continuous experience in the valuation of property of a similar type to the property being valued. Neither the Valuer or Valuation Practice has a pecuniary interest that could conflict with the valuation of the property. The Valuer and Valuation Practice comply with the Australian Property Institute (API) Code of Ethics and Rules of Conduct.

Methodology

Valuations are prepared on the basis of Market Value as defined by The International Assets Valuation Standards Committee (TIAVSC) and endorsed by the API, being:

Market value is the estimated amount for which an asset could exchange on the date of valuation between a willing buyer and willing seller in an arms length transaction after property marketing costs wherein the parties had each acted knowledgeably, prudently and without compulsion.

In determining Market Value, Valuers have examined available market evidence and applied this analysis to both the traditional capitalisation approach and discounted cashflow approach.

Fixed assets Note 10.

Consolidated		Parent Entity
2005	2004*	2005	2004
\$000's	\$000's	SOOO's	\$000's
24,737	12,800
(13,788)
10,949	6,037
23,722	17,254
(5,452)	(2,080)
18,270	15,174

4,059	3,964
(4,050)	(3,228)
	736
29,228	21,947
		(6,763)

*Where necessary, comparative figures have been amended to conform with the changes in classification in the current year.

Reconciliations

Reconciliations of the consolidated entity carrying amounts of each class of property, plant and equipment at the beginning and end of the current financial period are set out below.

	Plant & equipment	Fixed assets Software under finance lease		Total
	S000's	S000's	\$000's	S000's
Consolidated
Opening balance	6,037	15,174	736	21,947
Additions through acquisition of entity	637		9	646
Additions	8,650	5,452		14,102
Disposals	(666)	(8)		(674)
Depreciation / amortisation expense	(3,709)	(2,348)	(736)	(6,793)
Closing balance	10,949	18,270	9	29,228

Note 11. Deferred tax assets

	Consolidated		Parent Entity
	2005	2004	2005	2004
	\$000's	\$000's	\$000's	\$000's
The balance arises as a result of temporary differences attributable to:
Surplus lease space	3,602	3.946	3,602	3,946
Restructure provision	3	1,042	3	1,042
Provision for doubtful debts	1,740	1.135	1,740	1,135
Employee entitlements	2,351	1,407	2,351	1,407
	7,696	7,530	7,696	7,530

Note 12. Intangible assets

		Consolidated		Parent Entity
	2005	2004	2005	2004
	S000's	\$000's	S000's	\$000's
Goodwill
Opening balance	255,974
Goodwill on corporatisation		401,953
Goodwill on acquisition of controlled entities and businesses	111,516
Re-appraisal of fair value of net assets acquired	(2,789)	(5,482)
Transfer from EMVONA*	224,381	150,800
Deferred acquisition costs	5.654
Amortisation	(23, 301)	(11, 297)
Written down value prior to write-down	571,435	535,974
Write-down (refer Note 4)	÷	(280,000)
	571,435	255,974

*Effective 31 December 2004 Challenger completed a corporate restructure, the effect of which was to transfer outside the Life Group, several companies that were previously owned by Challenger Life No 2 Limited. The purpose of this restructure was to create a corporate structure where the Group's Companies are more aligned with the three core business areas. As a result of this restructure \$224.4m of EMVONA was transfered outside the Life Group and has been recognised on the Group's consolidated balance sheet as goodwill. In 2004 the Part 9 merger of Challenger Life Limited and Challenger Life No.2 Limited resulted in \$150.8m of EMVONA being transferred to goodwill.

Other assets Note 13.

		Consolidated		Parent Entity
	2005	2004	2005	2004
	S000's	$$000$ 's	\$000's	\$000's
Deferred portfolio & origination costs	143,852	125,204
Prepayments	11,601	14.665	$\,$
Other	1,671	3,931		-
	157,124	143,800	$\blacksquare$

Note 14. Excess of net market values over the net book value of life insurance subsidiaries (EMVONA)

		Consolidated		Parent Entity
	2005* \$000's	2004 \$000's	2005 \$000's	2004 \$000's
Controlled entities
Management rights Howard Mortgage Trust	۰	175,000	$\overline{\phantom{0}}$	w
Management rights Garrisons & Synergy	۰	38,881	$\overline{a}$
Other controlled entities		10,500	-
		224,381

* Effective 31 December 2004 Challenger completed a corporate restructure, the effect of which was to transfer outside the Life Group, several companies that were previously owned by Challenger Life No 2 Limited. The purpose of this restructure was to create a corporate structure where the Group's Companies are more aligned with the three core business areas. As a result of this restructure \$224.4m of EMVONA was transfered outside the Life Group and has been recognised on the Group's consolidated balance sheet as goodwill.

Note 15. Payables

		Consolidated		Parent Entity
	2005	2004	2005	2004
	\$000's	\$000's	\$000's	\$000's
Trade creditors and accruals	146,981	145.954
Unsettled trades payable	1,669	84,515	-
Warrant liability*	87.544	75,658	$\mathbf{w}$
Swaps and forwards at fair value	$\blacksquare$	10,824
Funded expenses **	6.747	18.282	$\blacksquare$
Other creditors	33,610	38,836	m.	1,620
Amounts payable to controlled entities			39,216	7,530
	276,551	374,069	39.216	9,150

* Does not represent an in substance liability of Challenger, refer Note 32(b) for additional information.

** Funded expenses represent origination costs initially funded by trusts managed by Challenger. The liabilities are non interest bearing, and repayable on terms as agreed between parties.

Where necessary, comparative figures have been amended to conform with the changes in classification in the current year.

Note 16. Interest bearing liabilities

		2005			2004
	Outstanding	Facility	Unused	Outstanding	Facility	Unused
	\$000's	\$000's	S000's	\$000's	\$000's	\$000's
Bank Loans
Corporate	70,000	350,000	280,000	85,000	100,000	15,000
Interstar				149,994	150,000	6
Controlled property trusts	348,677	348,677	۰	1,187,445	1,195,086	7,641
Total bank loans	418,677	698,677	280,000	1,422,439	1,445,086	22,647
Non-Bank Loans
Controlled property trusts				502,000	502,000
Interstar	180,000	180,000	-			٠
Share finance			٠	138,800	180,000	41,200
Total non-bank loans	180,000	180,000	$\blacksquare$	640,800	682,000	41,200
Lease liabilities	2,036	2,036	٠	2,912	2,912
Total interest bearing liabilities	600,713	880,713	280,000	2,066,151	2,129,998	63,847

Security for borrowings

The corporate bank facility amounting to \$350,000,000 is secured by fixed and floating charges granted by Challenger Treasury Limited, Challenger Group Holdings Limited and Challenger Life Holdings Pty Limited; a fixed charge over the rights of Challenger Managed Investments Limited and Challenger Commercial Lending Limited in the Howard Mortgage Trust; and an Equitable Mortgage of Shares from Challenger Group Holdings Limited over all its shares in Challenger Commercial Lending Limited. In addition, there are cross guarantees in place between certain Group companies.

Working capital for Interstar was raised via a Net Interest Margin Bond securitisation through the NIM Master Trust Series 2004-1. The Interstar facility is limited in its recourse to the manager to the extent of \$1 and holds security over the residual incomes of all Australian securitised trusts. The NIM represents a long term financing alternative. It is anticipated principal will be repaid within 3 years of 2005, Interest is fixed and payable monthly.

Bank loans and non-bank loans in the controlled property trusts are secured solely by first mortgages over properties.

Lease liabilities are effectively secured as the rights to the leased asset revert to the lessor in the event of default.

Interest on bank loan facilities accrues at a floating interest rate based on market index rates plus a margin of between 0.35% and 0.55% (2004: 0.50% and 1.65%) per annum.

Interest on non-bank loan facilities accrues at a fixed interest rate of 6.49% (2004: floating interest rate based on market index rates plus a margin of between 0.1% and 1% per annum)

Note 17. Provisions

		Consolidated		Parent Entity
	2005	2004	2005	2004
	\$000's	\$000's	\$000's	\$000's
Restructuring on acquisition	23,775	19,254
Deferred acquisition consideration	21,154	15,500
Employee entitlements (Note 28)	6,977	4,777
Other provisions	6,083		w.
	57,989	39,531
Movements in provisions		Consolidated		Parent Entity
	2005	2004	2005	2004
Restructuring on acquisition:	SOOO's	\$000's	\$000's	\$000's
Opening balance	19,254		м.	٠
Provisions acquired on acquistions	16,109	25,345
Amounts utilised	(11,588)	(8,015)
Additional provisions		1,924	æ.
Carrying amount at 30 June 2005	23,775	19,254

Restructuring provision on acquisition includes provisions for corporate entity restructuring, surplus lease space and employee termination benefits. Employee entitlements excludes termination benefits.

		Consolidated		Parent Entity
	2005	2004	2005	2004
Deferred acquisition consideration:	SOOO's	\$000's	\$000's	\$000's
Opening balance	15,500
Provisions acquired on acquistions		12.707	۰
Restatement in provision	5.654	2.793	$\bullet$
Carrying amount at 30 June 2005	21,154	15.500

Provision for deferred acquisition consideration is in respect of the acquisition of Interstar Securities Holdings Pty Limited and its controlled entities ("Interstar") which was acquired as part of the acquisition of Zed Capital Markets Australia Structured Finance Pty Limited and its controlled entities on 29 September 2003.

The consideration payable in respect of this acquisition is contingent upon the future performance of Interstar. The contingent consideration payable in respect of this acquisition is outlined as follows:

A one off performance payment which is calculated by reference to the excess of the loan portfolio over \$4.9 billion, the EBIT margin being achieved by the business and the average duration of the loan book as at 30 June 2006; and
Trailer based payment of 3.5 basis points per annum of the outstanding value of all new loans settled between 30 June $\bullet$ 2006 and 31 December 2011.

This consideration is revised annually by reference to the above noted variables. Restatements in this provision are adjusted against goodwill on acquisition.

Note 18. Deferred tax liabilities

	Consolidated		Parent Entity
	2005	2004	2005	2004
	SOOO's	\$000s	\$000's	\$000's
The balance arises as a result of temporary differences attributable to:
Revaluation of properties	45,582	28,488	45,582	28,488
Other	46,945	30,433	46.945	30,433
	92,527	58.921	92.527	58.921

Note 19. Life insurance business

(a) Actuarial policies and methods

The amount of policy liabilities has been determined in accordance with methods and assumptions disclosed in this financial report and with the requirements of the Life Insurance Act 1995.

Policy liabilities

These amounts, together with future premiums and investment earnings, are required to:

(i) meet the payment of future benefits and expenses; and

(ii) provide for future profits.

The policy liabilities have been calculated using the Margin on Services ("MoS") method in accordance with the requirements of Actuarial Standard 1.03 "Valuation of Policy Liabilities" under section 114 of the Life Insurance Act 1995. The Actuarial Standard requires the policy liabilities to be calculated in a manner that allows for the systematic release of planned margins as services are provided to policyholders and premiums are received.

Most expenses of statutory funds 1 & 3 are paid out of the Shareholder's Fund, however an explicit liability for future maintenance expenses has been adopted in Statutory Funds where a projection approach has been used. This is considered to be consistent with the principles underlying the actuarial standards.

The methods and profit carriers for particular policy types are as follows:

Business Type	Method (projection or other)	Profit Carrier
Individual
Investment linked	Accumulation
Investment account	Projection and	Account balance
Annuity	Projection	Annuity
Allocated Pension	Projection	Account balance

Investment earnings/discount rate

The assumption is based on the proportion of the fund that each asset sector represents. Expected earnings rates for each sector are then applied to these proportions with an appropriate allowance for tax dependent on the class of the business being valued. The expected earnings rates are reviewed annually for changes in the market environment and asset mix changes. Where the products being valued are matched by a fixed interest portfolio, the earnings rate is determined with reference to the actual yield to maturity of those assets, allowing for an assessed credit risk and asset mix changes.

Maintenance expenses

The assumption is based on budgeted maintenance expenses for the year ended 30 June 2006. These expenses are converted to a per policy unit cost based on an expense analysis for the funds.

Inflation

The assumption is based on long term expectations of inflation and is reviewed annually for changes in the market environment. The current assumption is 2.5% (2004: 2.5%).

Voluntary discontinuances

The assumption is based on past experience investigations. The current assumption range is 0.5% to 1.5% (2004: 0.5% to 5.0%).

Surrender values

Current and future surrender values have been calculated using the surrender bases under the products. Where appropriate, surrender values have taken into account the requirements of the AS4.02 "Minimum Surrender Values and Paid Up Values" standard issued by the Life Insurance Actuarial Standards Board.

Note 19. Life insurance business (Contd)

Mortality - annuity products

The mortality assumption is based on IM/IF90 (mortality tables developed by the Institute of Actuaries and the Faculty of Actuaries based on United Kingdom annuitant lives experience from 1990 to 1992) and adjusted for future mortality improvements.

Shareholder tax

Tax has been projected in a manner consistent with the tax environment applying from 30 June 2000. The corporate tax rate of 30% has been used.

Solvency position of the life insurers

These are amounts required to meet the prudential standards specified by the Life Insurance Act 1995 to provide protection against the impact of fluctuations and unexpected adverse circumstances on the Company.

The methodology and bases for determining Solvency Requirements are in accordance with the requirements of Actuarial Standard 2.03 "Solvency Standard" under section 65 of the Life Insurance Act 1995 and 6.02 "Management Capital Standard" under section 73B of the Life Insurance Act 1995.

As at 30 June 2005 the statutory funds of Challenger Life No.2 Limited satisfied the requirements of the solvency standard.

(b) Policy holder liabilities

	Consolidated		Parent Entity
	2005	2004	2005	2004
	S000's	\$000's	SOOO's	\$000's
Policy holder liabilities	2,271,946	2,052,003
Made up of:
Value of future policy benefits	2,057,845	1.908.509
Value of future expenses	138.178	114,449
Value of future premiums			$\blacksquare$
Planned margins of revenues over expenses	75,923	29,045
	2,271,946	2,052,003

Note 20. Contributed equity

		Consolidated and Parent entity		Consolidated and Parent Entity
		2005	2005	2004	2004
		Shares	\$000's	Shares	\$000's
(a)	Shares on issue
	Ordinary shares*	529,891,048	1,235,114	2,439,035,735	1,140,521
	Long Term Equity Based Incentive Plan * ^	48.340.000	128,839	224,400,000	118,172
		578,231,048	1,363,953	2,663,435,735	1.258.693

* Effective 25 November 2004, the share capital of the Company was consolidated by converting every five Challenger Shares on issue into one Challenger Share. Where the consolidation of the Company's share capital resulted in a shareholder having a fractional entitlement to a Challenger Share, the Company rounded up any such fractional entitlement to the next whole number.

^ Shares issued under the LTIP are ordinary shares subject to certain restrictions and hurdles described at note 28.

		Consolidated and Parent entity		Consolidated and Parent Entity
		2005 Shares	2005 \$000's	2004 Shares	2004 \$000's
(b)	Movement in shares on issue
	Ordinary shares
	Opening balance	2,439,035,735	1,140,521
	-Issue of share on incorporation *
	-Issue of shares as part of corporatisation equity restructure **			2,439,035,734	1,140,521
	-Purchase of Associated Planners Group Limited	203,146,130	91,416
	Less transaction costs		(1,295)
	Balance prior to share consolidation	2,642,181,865	1,230,642	2,439,035,735	1,140,521
	Share consolidation***	(2,113,740,817)
	Sale of forfeited LTIP shares on the open market	1,450,000	4,474
	Less transaction costs		(2)
	Closing Balance	529,891,048	1,235,114	2,439,035,735	1,140,521
	Long Term Equity Based Incentive Plan
	Opening balance	224,400,000	118,172
	Share consolidation***	(179, 520, 000)
	Shares issued and held on trust	4,910,000	15,141	224,400,000	118,172
	Redeem shares forfeited by leavers	(1,450,000)	(4, 474)
	Closing balance	48,340,000	128,839	224,400,000	118,172

* Issued at consideration of \$1.

** Represents shares issued in respect of the corporatisation equity restructure which was approved by unitholders on 22 December 2003.

*** Effective 25 November 2004, the share capital of the Company was consolidated by converting every five Challenger Shares on issue into one Challenger Share. Where the consolidation of the Company's share capital resulted in a shareholder having a fractional entitlement to a Challenger Share, the Company rounded up any such fractional entitlement to the next whole number.

(c) Terms and conditions of shares

Ordinary shares

A holder of a share is entitled to certain rights, including rights:

(a) to receive dividends as declared;
(b) to be provided with copies of annual reports and other information in respect of the Company;
(c) to receive notice of, and vote at, meetings of holders of shares, either in person or by proxy;
(d) after liquidation of the Company, to receive the distribution of the net proceeds of Company assets according to the number of shares registered at termination; and
(e) to transfer shares and on death, to pass the shares to a surviving joint holder, or by will or otherwise to the holder's estate.

A holder of a share is entitled to one vote on a show of hands and on a poll, each shareholder will have one vote for each fully paid share, determined from the sale of such shares on the ASX on the trading day immediately before the day on which the poll is taken.

Shares issued under LTIP

The terms and conditions of shares issued under the LTIP are disclosed in Note 28 of the financial report.

Note 21. Reserves

	Consolidated		Parent Entity
	2005	2004	2005	2004
	SOOO's	\$000's	SOOO's	S000's
Equity option premium reserve	61,700	61,700	61.700	61.700
	61,700	61,700	61.700	61,700
Movements in reserves
Equity option premium reserve
Opening balance	61,700		61,700
Issue of options to previous option holders of CFSG		1.700		1,700
Issue of options to related party as part of corporatisation equity		60,000		60,000
Closing balance	61.700	61.700	61.700	61,700

* Represents the fair value at grant date (as determined by an Independent Expert) of 60,000,000 non-transferable call options over ordinary shares of Challenger that have been issued to Consolidated Press Holdings Limited. These options have an exercise price of \$3.25, a ten year term and may be exercised at any time within ten years from their grant date (22 December 2003).

Nature and purpose of reserves

Equity option premium reserve

Represents the valuation assigned to options that were issued to previous option holders of CFSG and Consolidated Press Holdings Limited as a result of the equity restructure of the parent entity.

Note 22. Retained Profits/(losses)

	Consolidated		Parent Entity
	- 4 2005	2004		2004
	\$000's	S000's	\$000's	S000's
Opening balance	(235, 445)		(281, 620)	$\overline{\phantom{a}}$
Net profit $/$ (loss)	110,634	(235, 445)	33,587	(281, 620)
Closing balance	(124, 811)	(235, 445)	(248, 033)	(281, 620)

Earnings per share Note 23.

	Consolidated
	Year ended	Period from
	30 June 2005	6 November 2003
		to 30 June 2004**
	Cents	Cents
Basic earnings per share*	21.09	(48.27)
Diluted earnings per share*	17.56	(40.65)
	Consolidated
	Year ended	Period from
	30 June 2005	6 November 2003
		to 30 June 2004**
	Number	Number
Weighted average number of ordinary shares used in calculating basic earnings per share*	524,638,103	487,811,487
Effect of dilutive securities:
Long term incentive plan	45,361,024	30,947,329
Share options issued as part of corporatisation (see note $21$ )*	60,000,000	60,483,337
Adjusted weighted average number of ordinary shares used in calculating	629,999,127	579,242,153
diluted earnings per share

	Consolidated
	Year ended	Period from
	30 June 2005	6 November 2003
		to 30 June 2004
	\$000's	\$000's
Reconciliations of earnings used in calculating earnings per share
Earnings per share
Earnings used in calculating basic earnings per share	110,634	(235, 445)
Earnings used in calculating diluted earnings per share	110,634	(235, 445)

**Comparatives have been amended to conform with the change in basic earnings per share calculations which now include only released LTIP shares and issued share capital.

Note 24. Segment information

The primary business segments of the Group as at 30 June 2005 have been identified as follows:

		Wholesale Finance		Wealth Management**		Life		Corporate*	Eliminations			Total Consolidated
	Year ended 30 June 2005 SOOD's	Period from 6 Year ended November 2003 to 30 June 2004 S000's	2005 \$000's	Period from 6 Year ended 30 June November 2003 to 30 Jame 2004 \$000's	2005 SOOU'S	Period from 6 Year ended 30 June November 2003 to 30 June 2004 \$000's	30 June 2005 \$000's	Period from 6 November 2003 to 30 June 2004 \$000's	Year ended 30 June 2005 SOO0's	Period from 6 November 2003 to 30 June 2004 30 June 2005 \$000's	\$000's	Period from 6 Year ended November 2003 to 30 June 2004 \$000's
Revenue Revenue from external customers Inter-segment revenue	238,273 7,196	93,689	194,366 4,313	86,081	468,911 795	253,668	7,158	13,037	(12,304)		908,708	446,475
Share of net profits of associates Total segment revenue	245,469	93,689	74 198,753	86,081	2,016 471,722	1.452 255,120	7,158	13,037	(12, 304)		2,090 910,798	1,452 447,927
Expenses Depreciation & amortisation Other expenses Total segment expenses	(3, 125) (177, 175) (180, 303)	(1,358) (69.058) (70, 416)	(318) (192, 292) (192, 610)	(462) (86,689) (87, 151)	(725) (316,322) (317, 047)	(113) (185, 673) (185, 786)	(23,370) (49,786) (73, 156)	(11, 297) (24, 997) (36, 294)	12,304 12,304	$\cdot$	(27, 541) (723, 271) (750, 812)	(13,230) (366, 417) (379, 647)
Net profit/(loss) before tax and before goodwill writedown Goodwill write-down	65,166	23,273	6,143	(1,070)	154,675	69,334 (280,000)	(65,998)	(23, 257)			159,986	68,280 (280,000)
Net profit/(loss) before tax	65,166	23,273	6,143	(1,070)	154,675	(210, 666)	(65,998)	(23, 257)			159,986	(211, 720)
Income tax expense Net profit after tax											(49,352) 110.634	(23, 725) (235, 445)
Segment assets	455,717	569,059	310,058	316,851	3,380,550	4,585,793	454,243	203,920			4,600,568	5,675,623
Segment liabilities	(95, 395)	(151,204)	(35,307)	(189,950)	(2,672,107)	(3,960,204)	(496, 917)	(289, 317)			(3,299,726)	(4,590,675)
Net assets	360.322	417,855	274,751	126,901	708.443	625.589	(42.674)	(85, 397)			1,300,842	1,084,948
Acquisition of non current assets	128	8,562	1.456	5,135	7	286	13,157	$\tilde{\phantom{a}}$	$\blacksquare$		14,748	13,983

* Corporate segment relates to non-core activities of the Group (including businesses to be restructured or sold as previously amounced to the Australian Stock Exchange). Corporate expenses consists of costs that fall outs operations of Challenger Life, Challenger Wholesale Finance and Challenger Wealth Management. These costs include the costs of the Group CEO and CFO, shared services across Challenger, Directors' fees, goodwill amortisatio borrowings and associated borrowing costs and shareholder registry services for the Challenger Group.

$\sim$

** Represents Funds Management, Administration & Financial Planning.

$\bar{\mathbf{v}}$

The consolidated entity operates predominantly in one geographical area, being Australia.

Note 25. Financial instruments

$(a)$ Derivative instruments

Certain controlled entities of Challenger Financial Services Group Limited are parties to derivative financial instruments in the normal course of business in order to hedge exposure to fluctuations in interest rates and foreign currencies.

Interest rate derivatives

Derivative transactions undertaken by life insurance controlled entities as part of life insurance operations The consolidated entity has entered into interest rate derivatives as part of its policy to protect certain borrowings from exposure to movements in interest rates.

The contracts require settlement of net interest receivable or payable between $30 - 120$ days (2004: 60 - 120 days). The settlement dates coincide with the dates on which interest is payable on the underlying debt.

Interest rate derivatives currently in place cover approximately 17% (2004: 91%) of the loan principal outstanding and are timed to expire as each loan repayment falls due. The fixed interest rates range between 5.65% and 6.34% (2004: 2.6% and 7.6%). The 180 day bank bill rate at balance date was 5.58% (2004: 5.5%). The remaining exposures are hedged on a portfolio basis with futures contracts.

The notional principal amounts and periods of expiry of the interest rate derivatives were as follows:

	Consolidated
	2005	2004
	S000's	\$000's
Less than I year	÷	183,124
$1-2$ years	$\overline{\phantom{a}}$	109,444
$2 - 3$ years	$\blacksquare$	160,091
$3 - 4$ years	10,440	212,233
$4 - 5$ years	٠	111.505
Greater than 5 years	106,790	1,445,871
	117,230	2,222,268

Interest rate derivatives are accounted for on a fair value basis. The unrealised loss on the interest rate derivatives outstanding at 30 June 2005 amounted to \$0.8m (2004: \$30.7 million).

Derivative transactions undertaken by non life insurance controlled entities

The principal of using derivative financial instruments is for hedging to minimise financial risk from movements in interest rates. To achieve this, swaps and futures in the interest rate markets are used. A swap transaction obliges the two parties to the contract to exchange a series of cash flows at specified intervals known as payment or settlement dates. A futures contract obliges its owner to buy a specific underlying commodity or financial instrument at a specified price on the contract maturity date (or to settle the value for eash). Futures contracts are exchange traded.

At 30 June 2005, Challenger held swaps with a net notional value of \$50m (2004: \$230m).

The futures are accounted for on an accruals basis and are receivable/payable within one year. The notional value of the futures at year end is as follows:

	Financial assets 2005	Financial liabilities 2005	Financial assets 2004	Financial liabilities 2004
	S000's	S000's	\$000's	\$000s
$0-3$ months	900.000	(65,000)	$\overline{\phantom{a}}$	$\blacksquare$
$3-6$ months	382,000	(385,000)	٠	$\overline{\phantom{a}}$
6-9 months	268,000	(300.000)		$\overline{\phantom{a}}$
$9-12$ months	$\ddot{}$		÷	-

Note 25. Financial instruments (Cont'd)

Forward foreign exchange contracts

Challenger Life No. 2 Limited owns infrastructure assets and property in the United Kingdom and the United States. In order to protect against exchange rate movements Challenger Life has entered into forward foreign exchange contracts. The contracts are timed to mature when major cashflows from the investment properties (held in controlled property trusts) are scheduled to be paid.

Forward foreign exchange contracts are accounted for on a fair value basis. The net unrealised gain for the period ended 30 June 2005 on the forward exchange contracts outstanding at 30 June 2005 amounted to \$2.2m (2004: \$39.8 million).

At balance date, the details of the outstanding contracts are:

	Consolidated		Consolidated
	Buy Australian	Average	Buy Australian	Average
	Dollars	Exchange	Dollars	Exchange
	2005	Rate	2004	Rate
Sell GBP Sterling	\$000's	2005	\$000's	2004
Less than 1 year	220,426	0.4188	57,820	0.3751
$1 - 2$ years	25,465	0.4127	10,095	0.3571
$2 - 3$ years	28.141	0.4127	9.379	0.3544
$3 - 4$ years	43,320	0.4127	8.950	0.3513
$4 - 5$ years	35,402	0.4127	9,645	0.3482
Greater than 5 years	3,388	0.4127	123,600	0.3281
	356,142		219.489

	Consolidated		Consolidated
	Buy Australian	Average	Buy Australian	Average
	Dollars	Exchange	Dollars	Exchange
	2005	Rate	2004	Rate
Sell US Dollars	\$000's	2005	\$000's	2004
Less than 1 year	85,771	0.7554	15,985	0.4805
$1 - 2$ years	4,281	0.5525	19,264	0.5240
$2 - 3$ years	2,744	0.5489	16,221	0.5218
$3 - 4$ years	3,447	0.5466	14,695	0.5104
$4 - 5$ years	3,127	0.5454	17.708	0.5060
Greater than 5 years	23,533	0.5509	116,030	0.5071
	122.903		199.903

	Consolidated		Consolidated
	Buy Australian	Average	Buy Australian	Average
	Dollars	Exchange	Dollars	Exchange
	2005	Rate	2004	Rate
Sell EURO	\$000's	2005	S000's	2004
Less than 1 year	28,557	0.6111
	28,557
	Consolidated		Consolidated
	Buy Australian	Average	Buy Australian	Average
	Dollars	Exchange	Dollars	Exchange
	2005	Rate	2004	Rate
Sell SEK Krona	\$000's	2005	\$000's	2004
Less than 1 year	6,428	5.8957
	6,428

Note 25. Financial instruments (Cont'd)

ው) Credit risk exposures

The credit risk on financial assets of the consolidated entity which have been recognised on the statements of financial position, other than investments in shares, is generally the carrying amount, net of any provisions for doubtful debts.

Bills of exchange which have been purchased at a discount to face value, are carried on the statements of financial position at an amount less than the amount realisable at maturity. The total credit risk exposure of the consolidated entity could also be considered to include the difference between the carrying amount and the realisable amount.

$\left( c\right)$ Interest rate risk exposures

The consolidated entity's exposure to interest rate risk and the effective weighted average interest rate by maturity period is set out in the following table. For interest rates applicable to each class of asset or liability refer to individual notes to the financial statements.

Exposures arise predominantly from assets and liabilities bearing variable interest rates as the consolidated entity intends to hold fixed rate assets and liabilities to maturity.

Note 25. Financial instruments (Cont'd)

Note	2005 ₩	2004 %	2005 S000's	2004 S000's	2005 \$000's	2004 S000's	2005 \$000's	2004 \$000's	2005 5000's	2004 \$000's	2005 \$000's		2005 S000's	2004 \$000's

6.	5.1%	4.8%	494,844	618,639	1,557					٠		7,749	496,401	626,388
7	4.0%	7.6%	10,593	207,607	3,114	20,864	10,654	4,147		$\overline{a}$	264,587	187.403	288,948	420,021
	6.7%	6.4%	436,138	8,194	137,981	418,116	134,606	643,625	45,172	146,087		1,665	753,897	1,217,687
				$\overline{\phantom{0}}$						$\blacksquare$	344,426		344,426
											,951,413	2,757,895	1,951,413	2,757,895
			941,575	834,440	142,652	438,980	145,260	647,772	45,172	146,087	2,560,426		3,835,085	5,021,991

15										$\overline{\phantom{a}}$	276,551		276,551	374,069
16.	6.5%	6.8%	70,000	147,000	1.982	784.007	180,081	865,612	348,650	266,538		2,994	600.713	2,066,151
					$\cdot$	183.124	н	593,273		188,457,
			70,000	(1,817,854)	1,982	967,131	180,081	,458,885	348,650	1,454,995	276,551	377,063	877,264	2,440,220
														2,581,771
			Weighted average interest rate	871,575	Floating interest rate $-$ (1,964,854) 2,652,294		1 year or less (528,151) 140.670	(34, 821)	Between 1 to 5 years (811, 113)	Fixed interest maturing in: (303, 478)	More than 5 years (1,308,908)	2,283,875	Non-interest bearing 2,954,712 374,069	Total 2004 SOO0's 2,577,649 2,957,821

"Notional principal amounts (excludes forward dated swaps).

The entity has financial assets and liabilities that are subject to a right of set off. The interest rate for both counterparties financial assets and liabilities are matched and fixed for the term of the deals. Accordingl rise to interest rate risk.

Financial instruments (Cont'd) Note 25.

	Consolidated
Reconciliation of net financial assets to net assets per statement of financial position	2005 SOOO's	2004 SOOO's
Net financial assets as above	2,957,821	2,581,771
Non-financial assets and liabilities:
Plant and equipment	29.228	21.947
Intangibles	571,435	255,974
Deferred tax assets	7.696	7.530
Excess of net market values over the net book value of life insurance subsidiaries		224,381
Other assets	157,124	143,800
Deferred tax liabilities	(92, 527)	(58, 921)
Provisions	(57,989)	(39, 531)
Policy liabilities	(2,271.946)	(2,052,003)
Net assets per statement of financial position	1,300,842	1.084.948

Net fair value of financial assets and liabilities

The net fair value of cash and cash equivalents and non-interest bearing monetary financial assets and financial liabilities of the consolidated entity approximates their carrying amounts.

The net fair value of financial assets or financial liabilities arising from interest rate swap agreements and forward exchange contracts have been determined as the carrying amount, which represents the amount currently receivable or payable at the reporting date, and the present value of the estimated future cash flows.

$\overline{\phantom{a}}$

Commitments for expenditure Note 26.

	Consolidated		Parent entity
	2005	2004	2005	2004
	SOOO's	\$000's	\$000's	\$000's
Lease commitments
Commitments in relation to leases contracted for at the reporting date but not recognised as liabilities, payable:
Not later than one year	7,578	8,684
Later than one year but not later than 2 years	7,156	6,520
Later than 2 years but not later than 5 years	17,048	15,656
Later than 5 years	19,058	23,864
	50,840	54,724
Representing:
Non-cancellable operating leases	50,708	54,384
Future finance charges on finance leases	132	340
Operating leases	50,840	54,724
Commitments for minimum lease payments in relation to non-cancellable operating leases are payable as follows:
Not later than one year	8,721	9,828
Later than one year but not later than 2 years	8,300	7,663
Later than 2 years but not later than 5 years	20,479	19,087
Later than 5 years	25,217	30,959
Less: Liability recognised for surplus lease space and estimate of sub lease liabilities
on relocation	(12,009)	(13, 153)
Commitments not recognised in the financial statements	50,708	54,384
Finance leases
Commitments in relation to finance leases are payable as follows:
Not later than one year	2,086	1,165
Later than one year but not later than 5 years	82	2,087
Later than 5 years			$\overline{\phantom{a}}$
Minimum lease payments	2,168	3,252
Less: Future finance charges	(132)	(340)
Total lease liabilities	2,036	2,912
Capital expenditure commitments:
Commitments in relation to capital expenditure commitments contracted for at the
reporting date but not recognised as liabilities, payable:
Not later than one year	5,398
Later than one year but not later than 5 years		3,452
Later than 5 years

$5,398$

$3,452$

$\frac{1}{2}$

$\overline{a}$

Note 27. Related parties

Directors The directors of Challenger Financial Services Group Limited at any time during the financial year are as follows: Peter Leith Polson (Chairman) Michael Tilley (Chief Executive Officer) Christopher Edgar Cuffe (resigned 2 August 2004) Graham Allan Cubbin Russell Richard Roberts Hooper Ashok Peter Jacob James Douglas Packer James Glen Service Brenda Mary Shanahan

Transactions with related parties in the wholly owned group:

Transactions with related parties (except otherwise disclosed) are conducted on an arms length basis under normal commercial terms and conditions. Amounts payable and receivable in respect of transactions between entities in the consolidated group are disclosed in Notes 7 and 15.

Ultimate parent entity

Challenger Financial Services Group Limited is the ultimate parent entity.

Shareholdings in Challenger Financial Services Group Limited of directors and senior executives

Details of the Directors and Senior Executives shareholdings in the Company as at 30 June 2005 and their affiliates are set out below:

Shares held in Challenger Financial Services Group		Units in registered schemes
Limited	Balance at 1 July 2004* Number	Granted as remuneration Number	Net change other Number	Balance 30 June 2005 Number	Balance 30 June 2005 Number
Directors
Peter Leith Polson (Chairman)	22,000		60.000	82,000
Michael Tilley (Chief Executive Officer)	22,999	1,000,000	1,000,000	2,022,999
Graham Allan Cubbin	177,702			177,702
Russell Richard Roberts Hooper	60.000			60,000	206,984
Ashok Peter Jacob	20,000			20,000
James Douglas Packer			800,000	800,000
James Glen Service	36,543		13,458	50,001
Brenda Mary Shanahan	1,150,854			1,150,854
Senior Executives
C E Cuffe (Executive - Wealth Management)	8,200,000		(4,995,000)	3,205,000
B Benari (Executive - Wholesale Finance)	3,000,000			3,000,000	53,184
T H Foster (Chief Financial Officer)	,200,000	400,000		1,600,000
R Woods (Executive - Life)	3,000,000			3,000,000
D Stevens (Executive - Capital, Risk & Strategy)	5,500,000			5,500,000
Total	22,390,098	1,400,000	(3,121,542)	20,668,556	260,168

$\ddot{\bullet}$ Opening balances of shares issued under LTIP have been adjusted for the 5 for 1 share consolidation on 25 November 2004

Shareholdings of directors at 30 June 2005 were acquired at arms length prices. There were no dividends paid/payable to the directors and their affiliates.

Leans to directors and senior executives

The following table outlines total loans made to directors and specified executives as at 30 June 2005.

	Balance at 1 July 2004	Balance at 30 June 2005	Market Interest Differential*	Number in Group 30 June 2005

Total Directors		2,650,000	225,250	2,650,000
Total Specified Executives	54.855.000	43,424,250	3.712.1031	43,424,250
Total	54.855,000	46.074.250	3.937.353	46.074.250

*represents the difference between market interest rates and interest paid/payable on loans.

Related parties (Cont'd) Note 27.

Loans in excess of \$100,000 that were outstanding as at 30 June 2005, were issued to the following directors and specified executives:

	Balance at 1 July 2004	Balance at 30 June 2005	Market Interest Differential*	Maximum balance during the period

Directors
M Tilley (Chief Executive Officer)		2,650,000	225,250	2,650,000

Senior Executives
CE Cuffe (Executive - Wealth Management)	21,200,000	8,493,250	818,596	21,200,000
B Benari (Executive - Wholesale Finance)	7,950,000	7,950,000	675.750	7,950,000
ITH Foster (Chief Financial Officer)	3.180.000	4,456,000	303,132	4,456,000
R Woods (Executive - Life)	7,950,000	7,950,000	675,750	7,950,000
D Stevens (Executive - Capital, Risk & Strategy)	14,575,000	14.575.000	1.238.875	14,575,000
l Total	54,855,000	46.074.250	3.937.353	58,781,000

*represents the difference between market interest rates and interest paid/payable on Icans.

Loans made to specified executives were advanced in accordance with the terms of the LTIP which have been disclosed in Note 28 to the financial statements. They are non-recourse in nature and interest payable is determined in line with the dividends paid on shares issued under the LTIP.

The Company has applied the exemption under Corporations Amendments Regulation 2005 which exempts listed Companies from providing remuneration disclosures in relation to their specified directors and specified executives in their annual financial report under AASB 1046 Directors and Executives Disclosures by Disclosing Entities! These remuneration disclosures are provided in the directors report at sections 12.1 to 12.7 inclusive which were subject to andit.

Note 28. Employee entitlements

		Consolidated		l'arent entity
	30 June	30 June	30 June	30 June
	2005	2004	2005	2004
	5000's	S000's	\$000's	S000's
Employee entitlements:	6.977	4.777	$\bullet$

Employees of the Group totalled 901 (2004: 904) at balance date.

Long Term Equity Based Incentive Plan (LTIP)

The LTIP was approved by unitholders as part of the equity restructure resolutions of Challenger as part of the corporatisation of Challenger. These resolutions were approved at a meeting of unitholders of CFSG on 22 December 2003.

$\cdots$

والمعدود والموارد

Under the terms of the LTIP, eligible employees may acquire Challenger shares, with the cost being financed by a non-recourse, interest bearing loan from Challenger which is repayable on the carlier of the sixth anniversary of the reference date and the date when the participating shares are sold. The reference date is the date of issue of the participating shares, a date determined by the Board not being earlier than 10 April 2003.

Dividends received on shares that have been issued under the LTIP must be paid to the Company as interest on the associated non-recourse loans. All grants of shares during the period were issued and placed on Trust on behalf of the employee.

There are two types of participants of Challenger's LTIP:

· Participants; and
· Initial Participants.

The performance hurdles in respect of Participants are summarised as follows:

. With the exception of Mr Cuffe, subject to performance hurdles being met, 20% of the participating shares issued to participants will be released on each of the second, third and fourth anniversaries of the date the shares are issued with the remaining 40% balance released on the fifth anniversary:
Mr Cuffe has voluntarily reduced his participating share entitlement on two occasions, upon stepping down as CEO on 2 August 2004 (4.4 million reduction in post share consolidation shares) and subsequently in March 2005 (395,000 reduction in post share consolidation shares). Therefore Mr Cuffe has an interest in 3,205,000 participating shares, subject to performance hurdles being met, these shares will be released as follows:
1,600,000 released on 10 April 2005 ⋗
$\geq$ 500,000 to be released on 10 April 2006
$\blacktriangleright$ 500,000 to be released on 10 April 2007
605,000 to be released on 10 April 2008 $\mathbf{z}$
The performance hurdle is 15% per annum compounded annually, based on total shareholder return (TSR). The TSR is determined by reference to the 20 day volume weighted average share price (VWAP) for Challenger shares adjusted for capital restructures and distributions (dividends, capital returns and other distributions excluding franking credits);
If the TSR for a period equals or exceeds the performance hurdle for that period, the relevant proportion of participating shares will be immediately released. This may include participating shares that have not been released in an earlier period because the TSR for that earlier period was not achieved; and
Unreleased participating shares are forfeited upon the resignation of participants except in the case of Mr Cuffe who would maintain his LTIP shares if he leaves by his choice on or after 30 June 2006

On the release of participating shares (once vesting and performance hurdles have been met) participants may, but are not obliged to sell the shares.

The Board has identified a number of Initial Participants for whom special conditions will apply, having regard to:

The improvement in the share price since the relevant senior executives were recruited;
The significant efforts made to date by the relevant senior executives in re-structuring the Challenger business to prepare for future growth; and
The fact that Challenger continues to be in a significant development phase for the next few years and the Board wishes to ensure that absolute performance hardles do not drive short-term behaviour at the expense of long-term planning and decision-making.

Note 28. Employee entitlements (Cont'd)

The special conditions to apply to Initial Participants are as follows:

44,880,000

The release dates of shares will be calculated from a reference date which is nominated by the Board (rather than the date of issue of shares), being no earlier than April 2003;
The issue price for the initial participating shares to be allocated to the initial participants was \$2.65 (as adjusted for the share consolidation on 25 November 2004) rather than the market price at the date of issue;
No performance hurdle was required to be met for the initial 20% of the participating shares which were released after two years from the reference date; and
A 15% per annum compound TSR performance hurdle will be required to be met for the release of shares after the third, fourth and fifth anniversaries from the reference date, with the starting price for that calculation being \$2.65 (post share consolidation) and the starting date for that calculation being the second anniversary of the reference date.

Any unreleased participating LTIP shares will be sold by the Custodian to reduce any outstanding loan, bought back under the LTIP or cancelled by Challenger, subject to compliance with the Law.

Under the terms of the LTIP, Participants and Initial Participants are not entitled to voting rights until the shares have vested and the associated loan has been repaid to the Company.

Details of the movement and fair value of employee shares under the LTIP are detailed in the following table: Anonina

9,705,000

Grant Date	. . balance *	Granted	Issue	Vested	Forfeited /	Balance at	Grant fair value ⁴⁰
	1-Jul-04		price **		Modified ^	30-Jun-05	30-Jun-05	30-Jun-04
	Number	Number	5	Number	Number	Number	5
Initial Participants
22 January 2004	8,000,000		2.65	(1.600.000)	(4,795,000)	1,605,000	689,099	3,434,759
23 February 2004	31,080,000		2.65	(2,698,000)	(1,800,000)	26.582,000	10,942,800	12,794,970
1 April 2004	400,000		2.65	(80,000)		320,000	120,257	150,321
15 March 2005		1,100,000	3.19			1,100,000	462,759
Participants
3 March 2004	4,550,000	۰	2.50			4,550,000	1,505,664	1,505,664
1 April 2004	850,000		2.50		(300,000)	550,000	176,218	272,336
15 September 2004		5,000,000	2.24		(350,000)	4.650.000	1.323.051
15 March 2005		1.805.000	3.19		۰	1,805,000	759,346
26 April 2005		.800.000	3.20			1,800,000	741,460

$(4,378,000)$

42,962,000

$(7,245,000)$

16,720,654

18.158.050

CEO Remuneration

Total

Mr Tilley is not entitled to participate in the Challenger LTIP. However, following shareholder approval at the Company Annual General meeting on 23 November 2004 Mr Tilley was allocated 1,000,000 restricted post share consolidation Challenger shares, funded via limited recourse loan and issued at \$2.65. These shares were issued substantially on the same terms as the long-term incentive plan limited recourse loan and escrow conditions, with a reference date of 2 August 2004, the date Mr Tilley became CEO.

Grant Date	Opening balance	Grauted	Issue	Vested	Forfeited.	Balance at	Grant fair value^^
	1-Jul-04		price **		Modified ^	30-Jun-05	30-Jun-05	30-Jun-04
	Number	Number		Number	Number	Number
23 December 2004	-	.000.000	2.65		$\blacksquare$	.000.000	193,292

Opening balances of shares issued under LTIP have been adjusted for the 5 for 1 share consolidation on 25 November 2004

ak di The issue price of grants in respect of Participating shares is the VWAP of the shares over the five trading days up to and including the date of issue of that Participating share.

Mr Cuffe voluntarily reduced his participating share entitlement on two occasions, upon stepping down as CEO on 2 August 2004 (4.4 million reduction in post share consolidation shares) and subsequently in March 2005 (395,000 reduction in post share consolidation shares)

Grant fair value represents the fair value of the shares issued at grant date calculated after taking into account all relevant factors including $\wedge\wedge$ vesting timeframes, performance hurdles, share price volatility, dividend rates and interest rates.

Employee Option Plans

No options were granted to employees of the Group during the year ended 30 June 2005. No options were exercised during the year ended 30 June 2005.

Note 29, Statement of cashflows

Reconciliation of operating profit after income tax to net cash inflow from operating activities

	Consolidated		Parent
	30 June 2005 SOOD's	Period from 6 Year ended November 2003 to 30 June 2004 \$000's	30 June 2005 \$000's	Period from 6 Year ended November 2003 to 30 June 2004 \$000's
Operating $profit(\text{loss})$ after income tax	110,634	(235, 445)	33,587	(281,620)
(Profit) / loss on sale of investments	(94, 652)	(53, 273)
Write-down in goodwill		280,000		280,000
Net unrealised losses on investments	(62, 333)	(29, 513)
Equity accounted profits	(2,090)	(1, 452)
Amortisation and depreciation	92,235	31,920
Other	139,139	80,264		1,620
Change in operating assets and liabilities, net of effects from purchase of controlled entity:
Decrease / (increase) in receivables	138,542	64,259		(58,921)
Decrease / (increase) in other assets	(13,324)	(10, 589)	(805)
Increase / (decrease) in trade creditors	(97,518)	(5,080)		7,530
Decrease/(increase) in deferred tax assets/liabilities	33,606	(7,419)	208	51,391
Net cash inflow from operating activities	244,239	113,672	32.990

Note 30. Remuneration of auditors

	Consolidated		Parent Entity
	Year ended November 2003 30 June 2005 to 30 June 2004	Period from 6	30 June 2005	Period from 6 November Year ended 2003 to 30 June 2004
	s	£	3	\$
Amounts received or due and receivable by Ernst & Young for:
Audit or review of the financial report of the consolidated entity	1,101,000	782,000
Other audit services - audit of trusts and finds	787.000	503,000
Other services in relation to the consolidated entity and its controlled entities;
Taxation services	990.000	490,000
Due Diligence services	390,000	311.000		٠
Actuarial	44,000	733,000
Other assurance services	438.000	104.000	$\overline{\phantom{a}}$
	3.750.000	2,923,000

Amounts received or due and receivable by auditors other than Ernst & Young for:

Audit or review of the financial report of subsidiary entities	15.000	4.000. .
	15.000 ____	8.000

Auditors' remuneration for the consolidated entity is paid by Challenger Group Services Limited, a wholly owned subsidiary of Challenger Financial Services Group Limited.

$\ddot{\phantom{a}}$

NOTES TO THE FINANCIAL STATEMENTS Acquisitions and disposals of controlled entities Note 31.

(a) Acquisitions of Associated Planners Group

On 13 August 2004, Challenger Financial Services Group Limited acquired 100% of Associated Planners Group Limited (Associated Planners) and its controlled entities.

Under the scheme of arrangement, each ordinary and Z class Associated Planners shareholder received 5.69 Challenger shares for each Associated Planners share they held. Half of the Challenger shares issued to Associated Planners shareholders are subject to a trading lock, which is similar to an escrow arrangement. These shares will be released in two tranches, 18 months (30 per cent) and three years (70 per cent) after issue.

Challenger shares that were issued to Zurich Financial Services Australia Limited, which held all Z class shares and accounted for approximately 30 per cent of Associated Planners Group Limited, were fully vested on issue.

The number of shares issued under the schemes represented approximately seven per cent of the issued capital of Challenger.

The consideration was calculated on the 203,146,130 shares (40,629,226 post share consolidation) issued as outlined in the relevant 3B notice, by reference to Challenger's share price on 13 August 2004.

The components of the acquisition cost were:

	\$'000's
Consideration
Equity issued	91,416
Cash consideration (stamp duty)	491
	91,907
Net assets acquired
Cash	3,320
Receivables	4,462
Investments	4,211
Fixed Assets	547
Deferred Tax Assets	3,588
Investment in Associates	767
Other assets	265
Payables	(4, 879)
Interest bearing liabilities	(925)
Provisions	(9,061)
Deferred tax liabilities	(691)
	1,604
Goodwill	90,303

(b) Acquisition of HSBC Asset Management

On 31 March 2005, Challenger Financial Services Group acquired 100% of HSBC Asset Management (Australia) Limited from HSBC International Investments (Australia) Pty Limited for a purchase price of \$21.7m paid fully in cash. HSBC Asset Management (Australia) Limited was subsequently renamed Challenger Funds Management Limited.

NOTES TO THE FINANCIAL STATEMENTS Note 31. Acquisitions and disposals of controlled entities (Cont'd)

The components of the acquisition cost were:

	\$'000's
Consideration
Cash consideration	21,713
Acquisition costs	1,302
	23,015
Net assets acquired
Cash	13,757
Receivables	3,396
Other assets	75
Fixed assets	99
Intangible assets	400
Deferred tax assets	5,363
Payables	(3,483)
Provisions	(15, 452)
Deferred tax liabilities	(120)
	4,035
Goodwill	18,980

(c) Disposal of controlled entities

During the financial year, the consolidated entity disposed of its entire interests in the following wholly controlled entities: -Challenger Senator House Holdings Limited (13 September 2004) -Heathrow Business Centre Limited (13 September 2004) -Minster Court Property Limited (13 September 2004) -Hayes Park Property Limited (1 November 2004)

Details of the disposals are as follows:

		Consolidated 2005 \$'000
	Challenger Senator Minster Court House Holdings Limited	Property Limited	Hayes Park Property Limited	Heathrow Business Centre Limited
Consideration*	69.660	52,123	42,722	16,581
Net assets disposed	50,763	50,254	37,938	13,849
Profit on disposal	18.897	1.869	4,784	2,732

*Consideration is disclosed net of debt repayments, settlement of swap break costs and associated selling costs.

The operating results of the controlled entities to the date of disposal have been included in the consolidated operating profit.

Note 32. Investments in controlled entities

(a) Controlled entities

$\mathcal{A}_\mathrm{c}$

			Equity holding 30 June	Equity holding 30 June
Name of entity	Country of incorporation	Class of shares	2005 ℅	2004 %
Directly controlled by Challenger Financial Services Group Limited:
Challenger Financial Services Group	Australia	Ordinary	100	100
CFSG Holdings No.2 Victoria Pty Limited	Australia	Ordinary	100	100
Directly controlled by FXF Holdings Pty Limited:
FXF Investments Pty Limited	Australia	Ordinary	50	50
FXF Finance Pty Limited	Australia	Ordinary	100	100
Directly controlled by FXF Finance Pty Limited:
FXF Investments Pty Limited	Australia	Ordinary	50	50
Directly controlled by CFSG Holdings No.2 Victoria Pty Limited:
Challenger Group Holdings Limited	Australia	Ordinary	100	100
FXF Holdings Pty Limited	Australia	Ordinary	100	100
Directly controlled by Challenger Group Holdings Limited:
Challenger Group Services Pty Ltd	Australia	Ordinary	100	100
Challenger Property Capital Ltd	Australia	Ordinary	100	100
Challenger International Nominees Ltd (i)	Australia	Ordinary	100	100
Challenger Superannuation Pty Limited (v)	Australia	Ordinary	100	T.
Challenger Equity Lending Ltd	Australia	Ordinary	100	100
Challenger Treasury Ltd	Australia	Ordinary	100	100
Challenger Commercial Lending Limited (formerly Challenger Mortgage Management
$Limited$ $(v)$	Australia	Ordinary	100
Challenger Group Pty Ltd (i)	Australia	Ordinary	100	100
Endowment Warrants Limited (formerly Challenger Equities Limited) (i) (v)	Australia	Ordinary	100	$\blacksquare$
Garrisons Pty Limited (v)	Australia	Ordinary	100
Genesys Group Limited (formerly Associated Planners Group Limited)	Australia	Ordinary	100
Challenger Margin Lending Limited (v)	Australia Australia	Ordinary	100
Challenger Portfolio Management Limited (v) Challenger Funds Management Limited (formerly HSBC Asset Management (Australia)		Ordinary	100
Limited)	Australia	Ordinary	100	٠
Challenger Wholesale Finance Holdings Pty Limited (formerly Challenger Mortgage
Finance Pty Limited)	Australia	Ordinary	100	100
Beston Pacific Vineyard Management Ltd (ii)	Australia	Ordinary	100	٠
Challenger Life Holdings Pty Limited (formerly IROKA Pty Limited) Challenger Wealth Management Pty Limited (formerly CFSG Holdings No. 1 (Victoria)	Australia	Ordinary	100	100
Pty Limited) (iii)	Australia	Ordinary	100
Directly controlled by Challenger Group Services Pty Ltd:
Challenger Group Services (UK) Ltd	UK	Ordinary	100	100
Challenger America Inc (US)	USA	Ordinary	100	100
Directly controlled by Challenger Group Pty Ltd:
Kinetic Investment Partners Limited (formerly Challenger Securities Ltd)	Australia	Ordinary	100	100
Challenger Freeholds Ltd (i)	Australia	Ordinary	100	100
Challenger Hedging Ltd	Australia	Ordinary	100	100

$\hat{\boldsymbol{\beta}}$

$\hat{\mathcal{L}}$

$\bar{z}$

Note 32. Investments in controlled entities (Cont'd)

Name of entity	Country of incorporation	Class of shares	Equity holding 30 June 2005 %	Equity holding 30 June 2004 %
Directly controlled by Challenger Hedging Ltd:
Challenger Lending No. 1 Pty Ltd	Australia	Ordinary	100	100
Directly controlled by Challenger Treasury Limited: Challenger Property Finance Limited	Australia	Ordinary	100	100
Directly controlled by Challenger Wholesale Finance Holdings Pty Limited: ZCM Australia Asset Holdings Ltd	Bermuda	Ordinary	100	100
Interstar Non-Conforming Finance Management Pty Limited (formerly TMA Management Pty Limited) (iv)	Australia	Ordinary	100	٠
Interstar Non-Conforming Finance Pty Limited (formerly The Mortgage Alternative Pty Limited) (tv)	Australia	Ordinary	100
Interstar Special Servicing Pty Limited (formerly TMA Special Servicing Pty Limited) (iv)	Australia	Ordinary	100	$\blacksquare$
Challenger Inventory Finance Servicing Pty Limited (formerly The Mortgage Alternative Holdings Pty Limited)	Australia	Ordinary	100	100 ₁
Directly controlled by ZCM Australia Asset Holdings Ltd: Interstar Wholesale Finance Holdings Pty Ltd (formerly Interstar Securities Holdings Pty Limited)	Australia	Ordinary	100	100
Directly controlled by Interstar Wholesale Finance Holdings Pty Ltd: Interstar Wholesale Finance Pty Ltd (formerly Interstar Securities (Australia) Pty Limited)
	Australia Australia	Ordinary	100 100	100 100
Interstar Securities (International) Pty Ltd Interstar Securities (NZ) Pty Ltd	Australia	Ordinary Ordinary	100	100

Directly controlled by Interstar Wholesale Finance Pty Ltd:
Interstar Home Loan Corporation Pty Ltd	Australia	Ordinary	100	100
Interstar Securitisation Management Pty Limited (vii)	Australia	Ordinary	100	۰.
Directly controlled by Interstar Securities (NZ) Pty Ltd:
Interstar Home Loan Corporation NZ Ltd	New Zealand	Ordinary	100	100
Interstar Wholesale Finance NZ Ltd	New Zealand	Ordinary	100	100
Interstar Mortgage Management Pty Limited	Australia	Ordinary	106	100
Directly controlled by Challenger Life Holdings Pty Ltd:
Challenger Life Pty Ltd (formerly Challenger Life Limited)	Australia	Ordinary	100	100
Challenger Listed Investments Limited (formerly Challenger Beston Limited) (v)	Australia	Ordinary	100
Challenger Property Funds Management Limited (v)	Australia	Ordinary	100
Challenger Property Asset Management Pty Limited (v)	Australia	Ordinary	100
Challenger Management Services Limited (formerly Challenger Biotech Management Limited) (v)		Ordinary	100
	Australia
Directly controlled by Challenger Life Pty Limited:
Challenger Life No. 2. Ltd	Australia	Ordinary	100	100

$\bar{\lambda}$

Note 32. Investments in controlled entities (Cont'd)

			Equity holding	Equity holding
Name of entity	Country of incorporation	Class of shares	30 June 2005 %	30 June 2004 %
Directly controlled by Challenger Life No.2 Limited:
Challenger Corporate Superannuation Pty Ltd	Australia	Ordinary	100	100
e-Financial Capital Ltd	Australia	Ordinary	100	100
Challenger Property Nominees Pty Ltd	Australia	Ordinary	100	100
Challenger Capital Markets Ltd	Australia	Ordinary	100	100
Challenger Life (UK) Ltd	United Kingdom	Ordinary	100	100
CPHIC Investments Pty Limited Challenger Inventory Finance Pty Limited (formerly CPHIC Financial Services Pty	Australia	Ordinary	100	100
Limited) (vi)	Australia	Ordinary	100	$\tilde{\phantom{a}}$
Allfine Holdings Pty Ltd	Australia	Ordinary	100	100
Bluezen Pty Ltd	Australia	Ordinary	100	100
Directly controlled by Challenger Listed Investments Limited: Beston Financial Management Pty Limited	Australia	Ordinary	100	100
Directly controlled by Challenger Portfolio Management Limited:
Challenger International (New Zealand) Limited	New Zealand	Ordinary	100	100
Directly controlled by Challenger International (New Zealand) Limited:
Challenger Securities (New Zealand) Limited Challenger Group Services (New Zealand) Limited	New Zealand New Zealand	Ordinary Ordinary	100 100	100 100
Directly controlled by Challenger Commercial Lending Limited:
Challenger Managed Investments Ltd	Australia	Ordinary	100	100
Howard Pacific Ltd	Australia	Ordinary	100	100
HFH Staff Pty Ltd	Australia	Ordinary	100	100
Directly controlled by Challenger Funds Manangement Limited:
Challenger Funds Management (Nominees) Pty Limited (formerly HSBC Asset
Management (Nominees) Pty Limited)	Australia	Ordinary	100
Directly controlled by Challenger Margin Lending Limited:
Challenger ML Nominees Pty Limited	Australia	Ordinary	100	100
Directly controlled by Challenger Property Nominees Pty Limited:
Sabrand Limited	Cyprus	Ordinary	100	100
Mawbury Pty Limited	Australia	Ordinary	100	100
TLG Services Pty Limited	Australia	Ordinary	100	100
TLGH Pty Limited	Australia	Ordinary	100	100
Talaverra Herring Pty Limited (v)	Australia	Ordinary	100	$\overline{\phantom{0}}$
Directly controlled by TLGH Pty Limited:
The Liberty Group Consortium Pty Limited	Australia	Ordinary	100	100
Directly controlled by Mawbury Pty Limited:
Cescade Pty Limited	Australia	Ordinary	100	100
Directly controlled by Sabrand Limited:
Challenger Hungary International Capital Investment & Management Limited	Hungary	Ordinary	100	100
Directly controlled by Challenger Hungary International Capital Investment &
Challenger REIT Number 1 Limited	USA	Ordinary	100	100
Directly controlled by Challenger REIT Number 1 Limited:
Challenger Las Cimas LLC (US)	USA	Ordinary	100	100
Challenger Las Cimas LP (US)	USA	Ordinary	100	100
Challenger Milk Street LLC (US)	USA	Ordinary	100	100
Challenger Services Inc (US) (vi)	USA	Ordinary	100	$\overline{\phantom{a}}$
Challenger South Monaco LLC (US).	USA	Ordinary	100	100

Note 32. Investments in controlled entities (Cont'd)

Name of entity	Country of incorporation	Class of shares	ովսոյ holding 30 June 2005 %	тинги holding 30 June 2004 $\%$
Directly controlled by Garrisons Pty Limited:
Synergy Capital Management Ltd	Australia	Ordinary	100	100
Northstar Lending Pty Ltd	Australia	Ordinary	100	100
Garrisons (Rosny) Pty Ltd	Australia	Ordinary	100	100
Challenger IT Pty Ltd	Australia	Ordinary	100	001
Directly controlled by Synergy Capital Management Limited:
Galaxy Investment Wrap Pty Ltd	Australia	Ordinary	100	100
Directly controlled by Genesys Group Limited:
Genesys Wealth Advisers Limited (formerly Associated Planners Financial Services
Limited)	Australia	Ordinary	100
AP Adviser Strategies Pty Limited	Australia	Ordinary	100
AP Strategic Finance (WA) Pty Ltd	Australia	Ordinary	100
Associated Planners Strategic Finance Pty Ltd	Australia	Ordinary	100
Solar Risk Pty Limited	Australia	Ordinary	100
Bain Financial Group Pty Ltd	Australía	Ordinary	100
Associated Planners Asia Ptv Ltd	Australia	Ordinary	90

Conter

$E$ anist

These controlled entities have been granted relief from the necessity to prepare financial reports in accordance with Class Order 98/1418 issued by the $(i)$ Australian Securities & Investments Commission. For further information see Note 34.

At 30 June 2004, this entity was 100% controlled by Challenger Beston Limited. $(i)$

$(iii)$ At 30 June 2004, this entity was 100% controlled by Challenger Financial Services Group Limited.

$(iv)$ At 30 June 2004, this entity was 100% controlled by The Mortgage Alternative Holdings Pty Limited.

At 30 June 2004, these entities were 100% controlled by Challenger Life No. 2 Limited. $(v)$

At 30 June 2004, this entity was 100% controlled by CPHIC Investments Pty Limited. $(v)$

At 30 June 2004, this entity was 100% controlled by Interstar Securities (International) Pty Limited. (vii)

Additionally, Challenger Life No. 2 Limited owns 100% of the units in 59 (2004: 48) property trusts.

(b) Assignment of Warrants Business

In an agreement dated 30 April 2004, Challenger entered into a Deed of Assignment with Westpac Banking Corporation ("WBC") whereby, all legal and beneficial rights, title and interests in respect of the following assets and liabilities were assigned to WBC.

		Consolidated	Consolidated
		2005	2004
	Note	\$'000	\$'000
Shares in listed corporations held in relation to endowment warrants	8	86.349	75,031
Dividends receivable*		1.195	627
Warrant liability	15	(87.544)	(75,658)
		$\overline{\phantom{a}}$
* Included in other debtors

Note 33. Investments in associates

		Ownership Interest		Consolidated
	Principal	2005	2004	2005	2004
Name of Company	Activity	%	₩	\$000's	\$000's
AVC Holdings Ltd	PVC Resin Manufacturer	$\bullet$	50	۰	15,585
Garrisons (Toowong) Pty Ltd	Financial Planning	40	40	272	272
Carter Bax	Financial Planning	40	40	٠	$\blacksquare$
Barbacan Benefits	Financial Planning		$\blacksquare$	$\overline{a}$	485
Garrisons (Burnie) Pty Ltd	Financial Planning	49	49	166	141
Its Your Money Pty Limited (formerly Central Coast)	Financial Planning	40	40	466	466
DVG Pty Limited	Financial Planning	50	50	1,423	1,350
EPIC Asset Management Limited	Distribution	33	33		800
Pension Transfers Direct Pty Ltd	Pension transfers business	25	$\blacksquare$	163
PowerState Financial Services Pty Ltd	Financial Planning	25	$\overline{a}$	59
Synergy Consolidated Pty Ltd	Financial Planning Dealer	46	୷	539	٠
Less: Provision for diminution in value				(276)	(1,311)
				2,812	17,788

				Consolidated
Movements in carrying amount of investments in associates				2005	2004
				\$000's	\$000's
Carrying amount at the beginning of the financial year				17,788	$\blacksquare$
Investment in associates acquired on acquisition/corporatisation of CFSG				٠	20,123
Investment in associates acquired on acquisition of Genesys Limited Sale of interest in associates				767
Increase in provision for diminution				(17, 833)	(52)
Share of associates net profit				2,090	(235) 1,452
Investment in associates share buy back
Carrying amount at the end of the financial year				2,812	(3,500) 17,788

Results attributable to associate Profits from ordinary activities before related income tax				2,985	2,022
Income tax expense				(895)	(570)
Profits from ordinary activities after related income tax expense				2.090	1,452
Retained profits attributable to associates at the beginning of the financial year				1,452
Retained profits attributable to associates at the end of the financial year				3,542	1,452
Summary of the share of associate's financial position
Assets				1,569	52,327
Liabilities				(779)	(26, 478)
Net assets				790	25,849

$\hat{\boldsymbol{\epsilon}}$

Note 34. Deed of cross guarantee

The following wholly owned companies are parties to a Deed of Cross Guarantee under which each company guarantees the debts of the others. By entering in the deed, the wholly owned companies have been relieved from the requirement to prepare a financial report and director's report under Class Order 98/1418 (as amended by Class Order 98/2017 and 00/0321) issued by the Australian Securities & Investment Commission.

Challenger Group Pty Limited $\bullet$
Challenger International Nominees Limited .
Endowment Warrants Limited (formerly Challenger Equities Limited) ٠
Challenger Freeholds Limited ă

The above companies represent a 'Closed Group' for the purposes of the Class Order, and as there are no other parties to the Deed of Cross Guarantee that are controlled by the Company, they also represent the 'Extended Closed Group'.

Set out below is a consolidated statement of financial performance of the Closed Group for the year ended 30 June 2005.

		Period from 6
	Year ended	November 2003
	30 June 2005	to 30 June 2004
	\$'000s	S'000s
Revenue from ordinary activities		1,716
Other expenses from ordinary activities		407
Loss from ordinary activities before income tax benefit		1,309
Income tax expense	391	(186)
Total changes in equity other than these resulting from transactions with owners as
owners	(391)	1,123

Set out below is a summary of the movements in consolidated retained profits for the year ended 30 June 2005.

		Period from 6
	Year ended	November 2003
	30 June 2005	to 30 June 2004
	\$'000s	S'000s
Retained losses at the beginning of the financial period	(17,611)	(18, 734)
Profit from ordinary activities after income tax expense	(391)	1.123
Retained losses at the end of the financial period	(18,002)	(17,611)

Set out below is a consolidated statement of financial position of the Closed Group as at 30 June 2005.

	2005	2004
	\$'000s	\$'000s

Assets
Cash assets	107	280
Receivables	3,572	3,412
Equity securities	86,524	75,204
Total assets	90,203	78,896
Liabilities
Payables	62,471	50,374
Interest bearing liabilities	41,248	41,647
Provisions	280	280
Total Liabilities	103,999	92,301
Net assets	(13,796)	(13,405)
Equity
Contributed equity	4,206	4,206
Retained losses	(18,002)	(17,611)
Total equity	(13,796)	(13, 405)

Note 35. Contingent liabilities

A controlled entity, Challenger Property Nominees Pty Limited has received an assessment of stamp duty in connection with the acquisition of an interest in a property at 417 St Kilda Road, Melbourne of \$5.8m. A ruling was handed down in favour of Challenger on 6 December 2004, however an appeal was heard on 13 April 2005 with the judgement reserved.

A controlled entity, Challenger Group Holdings Limited (formerly Challenger International Limited), has under the terms of a deed of cross guarantee entered into in accordance with the ASIC Class Order dated 19 December 1991, undertaken to meet any shortfall which might arise on the winding up of controlled companies which are party to the deed. (Refer note 34).

A claim for fees relating to the acquisition of Associated Planners was lodged during the year against Challenger Financial Services Group Limited. The company has denied liability and the directors are of the opinion that no material loss will be incurred. The claim is for the amount of \$2.1m.

The group has over the course of its corporate rationalisation activity, given warranties to the purchasers on several agreements which are still outstanding at 30 June 2005. At the date of this report no material claims against these warranties have received by the Group.

The ATO released GST Ruling 2004/4 on the Assignment of Payment Streams including under a Securitisation Arrangement. The ruling describes the ATO's view of how a securitisation works and the application of GST in relation to a number of areas specifically affecting the securitisation, which could impact on Challenger Wholesale Finance subsidiary Interstar Securities (Australia) Pty Limited. In particular the ruling now prescribes that taxpayers are not able to claim a reduced input tax credit (RITC) for servicing fees, contrary to previous draft rulings. Previous accepted practice has been to claim a RITC for servicing fees. The ruling applies from 1 July 2000 for all taxpayers. In response to the release of GSTR 2004/4, there has been significant lobbying by the securitisation industry and as a result the ATO has agreed to consult further with industry on GSTR 2004/4 before taking steps to implement the approach adopted by the ATO ruling. At the date of this report significant uncertainty surrounds the applicability of the treatments described in the ATO ruling due to:

Interstar's method of arranging financing of mortgages via securitisation differing from that described in the ruling;
Uncertainty over whether the courts would allow the ruling to have retrospective effect given certain contrary draft rulings; and
Potential aspects of the ruling being amended as a result of continued industry interaction with the ATO and Treasury.

In the normal course of business, CFSG enters into various types of business contracts that could give rise to contingent liabilities in relation to performance obligations under those contracts by certain members of the group.

Note 36. Subsequent events

The following significant events have occurred post 30 June 2005:

On 26 August 2005 the directors of Challenger declared a final dividend on ordinary shares in respect of the 2005 financial year. The total amount of the dividend is \$28,911,552 which represents a fully franked dividend of 5 cents per share from current year profits. The dividend has not been provided for in the 30 June 2005 financial statements.

No other matter or circumstance has arisen that has affected or may significantly affect:

(a) the consolidated entity's operations in future financial years; or
(b) the results of those operations in future financial years; or
(c) the consolidated entity's state of affairs in future financial years.

Note 37. International financial reporting standards

Overview

Challenger is required to comply with Australian equivalents to International Financial Reporting Standards (AIFRS) as issued by the Australian Accounting Standards Board from 1 July 2005. The first financial statements prepared in accordance with AIFRS will be for the half-year ending 31 December 2005 and the financial year ending 30 June 2006.

Transition Management

In 2004, Challenger established a separate project (sponsored by the Group Audit and Compliance Committee) to assess the impact of AIFRS and to manage the transition to reporting under all applicable AIFRS from 1 July 2005. This project is now well advanced and on schedule with planned milestones. In addition, Challenger continues to monitor all AIFRS developments, emerging industry interpretations and relevant regulatory body guidance papers.

Key Differences in Accounting Policies

Set out below are the key areas identified where accounting policies are expected to change upon adoption of AIFRS and our best estimate of the quantitative impact of these changes as at the date of transition. Further changes could arise from ongoing work being performed by the project team as well as potential amendments to AIFRS and interpretations thereof being issued by the standard setters and the International Financial Reporting Interpretation Council (IFRIC).

Challenger has elected to apply the exemption provided in AASB 1 "First Time Adoption of Australian Equivalents to International Financial Reporting Standards" which permits entities not to apply the requirements of AASB 132 "Financial Instruments: Presentation and Disclosures", AASB 139 "Financial Instruments: Recognition and Measurement", AASB 4 "Insurance Contracts" and AASB 1038 "Life Insurance Contracts" for the financial year ended 30 June 2005. Consequently, the changes in accounting policies as a result of these standards (described below in section B) will not impact the statement of financial position at 30 June 2005 or the statement of financial performance for the year ended 30 June 2005. Challenger's AIFRS project team is in the process of determining the impact of adopting these standards and therefore cannot reliably estimate the impact of these issues at the date of preparing this financial report.

(A) Changes in accounting policies with effective date of 1 July 2004

Consolidation of Special Purpose Entities $\left( n\right)$

Challenger's Wholesale Finance business establishes and services special purpose vehicles which fund pools of residential mortgage loans via the issuance of residential mortgage backed securities in its normal course of business. While Challenger Wholesale Finance does not provide funding to the special purpose vehicles and all borrowings are limited in recourse to the assets of the securitised trusts, it is the residual beneficiary of the fund loans via a nominal investment.

A difference in the interpretation of the consolidation rules under AIFRS will require these special purpose vehicles to be consolidated in the Challenger financial statements. This is expected to result in a gross up of assets and liabilities recognised on the balance sheet of approximately \$14,300m as at 1 July 2004 with no impact to retained earnings.

The AIFRS balance sheet as at 30 June 2005 is expected to have gross assets of approximately \$16,480m and gross liabilities of \$16,484m. Reported pre-tax profits are expected to be reduced by approximately \$4m as a result of climinating the gain on sale of loans at a premium to securitised trusts for the businesses' non conforming securitisation programme which will be consolidated under AIFRS.

Share Based Payments (ii)

AASB 2 "Share-Based Payments" requires an expense to be recognised for the non-recourse employee share purchase loans issued under the Challenger Long Term Incentive Plan (LTIP).

Under existing accounting standards, Challenger recognises on balance sheet shares issued to employees and an associated LTIP loan receivable. No expense is recognised for equity-based compensation. Under AIFRS however, the employee share purchase loans meet the definition of share options rather than shares issued. Therefore an expense will be recognised in the profit and loss account for the fair value of the options issued at grant date, amortised evenly over the relevant vesting period. These expenses will be offset by a matching entry to a new 'option reserve' account within equity.

On transition to AIFRS Challenger will derecognise the issued LTIP shares of \$118m and the associated LTIP loan receivable. It is likely that there will be an adjustment to retained carnings for the amount required to be amortised during the period from grant date to 30 June 2004 of \$5m with a corresponding entry to the new option reserve account.

The new accounting policy in this area is expected to reduce reported profits for the 2005 financial year under AIFRS by a similar or smaller amount.

Note 37. International financial reporting standards (Cont'd)

(iii) Excess of Market Value over Net Assets (EMVONA) & Goodwill

At 30 June 2004 Challenger recognised as a separate asset the excess of the net market value of interests of Challenger Life No. 2 Limited in its subsidiaries over the net assets (referred to as EMVONA). This was subsequently transferred to goodwill as part of the business asset transfer during the current financial year.

On transition to AIFRS, EMVONA to the extent it comprises of purchased goodwill is reclassified as goodwill on the face of the balance sheet. The component of EMVONA arising from internal valuation increases is considered internally generated goodwill and is required to be derecognised against retained earnings.

The adjustments required at 1 July 2004 are expected to increase goodwill by \$200m with an offsetting reduction in EMVONA of an equivalent amount and a write off of the internally generated component of approximately \$25m to retained earnings.

On transition to AIFRS, the amortisation of goodwill acquired in business combinations is prohibited, however it is required to be tested annually for impairment to ensure the carrying amount is not greater than the recoverable amount. No goodwill impairment adjustment is expected to arise as a result of adopting AIFRS.

As permitted by AASB 1 "First Time Adoption of Australian Equivalents to International Financial Reporting Standards" Challenger has elected not to apply AASB 3 "Business Combinations" retrospectively and as a result prior year's amortisation of goodwill will not be written-back as at the date of transition.

The removal of the goodwill amortisation charge will increase reported profits for the 2005 financial year under AIFRS by approximately \$23m.

(B) Changes in accounting policies with effective date of 1 July 2005

Insurance and Investment Contracts 6D

AIFRS requires life insurers to classify insurance policies between Life Insurance Contracts and Life Investment Contracts. The majority of life insurance policies (annuities) issued by Challenger Life No. 2 Limited are not expected to contain 'significant' insurance risk and are expected to be classified as Life Investment Contracts under the revised version of AASB 1038 "Life Insurance Contracts¹³.

AASB 1038 requires Life Investment Contracts to be measured in accordance with the fair value principles set forth in AASB 139 "Financial Instruments: Recognition and Measurement" and AASB 118 "Revenue". Measuring policy liabilities under AASB 139 and AASB 118 will result in changes in the valuation principles currently applied by Challenger Life No. 2 Limited as follows:

o Fair Value of Life Investment Contracts

The fair value of Life Investment Contracts is currently an area of uncertainty because there is little practical industry experience in how to determine the fair value of policy liabilities for amulty products under AASB 139. Given there is no active market for trading life investment contracts, AASB 139 requires the use of discounted cash flow valuation techniques to determine fair value. This will involve the projection of expected future cash flows discounted at an appropriate rate of return, which will reflect prevailing risk free rates with adjustments to reflect the particular characteristics of the cash flow.

o Deferred Acquisition Costs

Under the current version of AASB 1038 most costs of acquiring new business may be accounted for as deferred acquisition costs. However, AIFRS introduces a stricter definition where only acquisition costs that are incremental and directly attributable to acquiring new business may be deferred and amortised over the life of the investment contract.

Upon adoption of the revised version of AASB 1038 "Life Insurance Contracts" on 1 July 2005, only commission costs will be deferred for life investment business.

Those contracts containing significant insurance risk will continue to be accounted for using "Margin on Services" (MoS) principles pending the outcome of Phase II of the International Accounting Standards Board (IASB) insurance contracts project. The only significant change from existing practice is the requirement to apply a risk free discount rate rather than using discount rates that reflect market returns on investments supporting the life insurance contract.

Note 37. International financial reporting standards (Cont'd)

$(ii)$ Revenue Recognition

AASB 118 'Revenue' requires certain upfront financial service fees to be recognised as either fees integral to the effective interest rate of a loan or spread over the period of the service. Fees that are integral to the effective interest rate of a loan must be recognised using the effective interest method outlined in AASB 139 'Financial Instruments: Recognition and Measurement'. Fees deemed as service fces are to be amortised over the period of service.

At 1 July 2005, upfront fees of approximately \$7m previously recognised by the commercial lending business through profit and loss. will be capitalised with a corresponding adjustment to retained earnings. This deferred revenue will be amortised using the effective interest rate method and recognised within service fee income.

(iii) Recognition of Derivative Financial Instruments and Hedge Accounting

AASB 139 "Financial Instruments: Recognition and Measurement" requires all derivatives to be recognised on balance sheet and measured at fair value. Gains and losses arising from changes in fair value will be recognised in the profit and loss account, unless hedge accounting is applied.

Currently all derivatives transacted within the Challenger Life No. 2 Limited are accounted for on a fair value basis with changes in fair value recorded in the profit and loss account. Therefore the treatment of derivatives in Challenger Life No. 2 Limited is not expected to be significantly affected by the introduction of AIFRS.

The Special Purpose Vehicles in the Wholesale Finance business hedge exposure to interest rate and exchange rate risk using derivative financial instruments. All derivatives in these Special Purpose Vehicles are expected to be designated as cash-flow hedges thereby protecting the profit and loss account from significant volatility however some equity volatility is expected.

Other controlled entities also transact in derivatives in the normal course of business for risk management purposes only. Challenger expects to manage the majority of its exposures by designating these derivatives as cash-flow hedges.

The adoption of AASB 139 in this area will result in derivative assets and liabilities recognised on balance sheet measured at fair value and a new cash-flow hedge reserve account created within equity.

CHALLENGER FINANCIAL SERVICES GROUP LIMITED AND CONTROLLED ENTITIES

DIRECTORS' DECLARATION

In the opinion of the Directors of the Company of Challenger Financial Services Group Limited:

(a) The financial statements and notes and the additional disclosures included in the directors report designated as audited, of the Company and of the Consolidated Entity are in accordance with the Corporations Act 2001, including;
(i) giving a true and fair view of the Company and Consolidated Entity's financial position as at 30 June 2005 and of their performance as represented by the results of their operations and their cashflows for the period ended on that date; and
(ii) complying with Accounting Standards and Corporations Regulations 2001.
(b) There are reasonable grounds to believe that the Company will be able to pay its debts as and when they become due and payable; and

This declaration has been made after receiving the declarations required to be made to the directors in accordance with section 295A of the Corporations Act 2001 for the financial period ending 30 June 2005.

In the opinion of the directors, as at the date of this declaration, there are reasonable grounds to believe that the members of the Extended Closed Group indentified in Note 34 will be able to meet any obligations or liabilities to which they are or may become subject to, by virtue of the deed of Cross Guarantee.

On behalf f the Boar Tilley м

Director

Sydney 26 August 2005

G A Cubbin Director

Sydney 26 August 2005

ELLERNST & YOUNG

Ernst & Young Centre 680 George Street Sydney NSW 2000 Australia

■ Tel 61 2 9248 5555 Fax 61 2 9248 5959 DX Sydney Stock Exchange 10172

GPO Box 2646 Sydney NSW 2001

Independent audit report to members of Challenger Financial Services Group Limited

Scope

The financial report and directors' responsibility

The financial report comprises the statement of financial position, statement of financial performance, statement of cash flows, accompanying notes to the financial statements, and the directors' declaration for Challenger Financial Services Group Limited (the company) and the consolidated entity, for the year ended 30 June 2005. The consolidated entity comprises both the company and the entities it controlled during that year.

The directors of the company are responsible for preparing a financial report and the additional disclosures included in the directors report and designated as audited ('the additional disclosures'). numbered 12.1 to 12.7, that gives a true and fair view of the financial position and performance of the company and the consolidated entity, and that complies with Accounting Standards in Australia. in accordance with the Corporations Act 2001. This includes responsibility for the maintenance of adequate accounting records and internal controls that are designed to prevent and detect fraud and error, and for the accounting policies and accounting estimates inherent in the financial report and the additional disclosures.

Audit approach

We conducted an independent audit of the financial report and the additional disclosures in order to express an opinion on them to the members of the company. Our audit was conducted in accordance with Australian Auditing Standards in order to provide reasonable assurance as to whether the financial report and the additional disclosures is free of material misstatement. The nature of an audit is influenced by factors such as the use of professional judgement, selective testing, the inherent limitations of internal control, and the availability of persuasive rather than conclusive evidence. Therefore, an audit cannot guarantee that all material misstatements have been detected.

We performed procedures to assess whether in all material respects the financial report and the additional disclosures present fairly, in accordance with the Corporations Act 2001, including compliance with Accounting Standards in Australia, and other mandatory financial reporting requirements in Australia, a view which is consistent with our understanding of the company's and the consolidated entity's financial position, and of their performance as represented by the results of their operations and cash flows.

We formed our audit opinion on the basis of these procedures, which included:

examining, on a test basis, information to provide evidence supporting the amounts and disclosures in the financial report and the additional disclosures; and
assessing the appropriateness of the accounting policies and disclosures used and the $\bullet$ reasonableness of significant accounting estimates made by the directors.

While we considered the effectiveness of management's internal controls over financial reporting when determining the nature and extent of our procedures, our audit was not designed to provide assurance on internal controls.

Ell ERNST & YOUNG

We performed procedures to assess whether the substance of business transactions was accurately reflected in the financial report and the additional disclosures. These and our other procedures did not include consideration or judgement of the appropriateness or reasonableness of the business plans or strategies adopted by the directors and management of the company.

Independence

We are independent of the company, and have met the independence requirements of Australian professional ethical pronouncements and the Corporations Act 2001. We have given to the directors of the company a written Auditor's Independence Declaration a copy of which is included in the Directors' Report. In addition to our audit of the financial report and the additional disclosures, we were engaged to undertake the services disclosed in the notes to the financial statements. The provision of these services has not impaired our independence.

Audit opinion

In our opinion, the financial report and the additional disclosures included in the directors report designated as audited of Challenger Financial Services Group Limited are in accordance with:

the Corporations Act 2001, including: $(a)$
giving a true and fair view of the financial position of Challenger Financial Services $(i)$ Group Limited and the consolidated entity at 30 June 2005 and of their performance for the year ended on that date; and
complying with Accounting Standards in Australia and the Corporations Regulations $(ii)$ $2001$ ; and
other mandatory financial reporting requirements in Australia. $(b)$

Ernit & Young

Brian Long Partner Sydney 26 August 2005

AI assistant

CHALLENGER LIMITED — Earnings Release 2005

64641_rns_2005-08-28_3c63d011-6820-4634-a5a3-f2f33dbf98da.pdf

CHALLENGER FINANCIAL SERVICES GROUP LIMITED RESULTS FOR 12 MONTHS TO 30 JUNE 2005

CGF LIFTS STATUTORY PROFIT AFTER TAX BY 44 PER CENT

Historic cost highlights include:

Dividend

RONA

Challenger Life

Challenger Wholesale Finance

Challenger Wealth Management

Outlook

Note to editors:

CHALLENGER FINANCIAL SERVICES GROUP LIMITED FULL YEAR RESULT TO 30 JUNE 2005

HISTORIC COST HIGHLIGHTS

Challenger Life

Challenger Wholesale Finance

Challenger Wealth Management

29 August 2005

Challenger Financial Services Group Limited RE: Appendix 4E - Year ended 30 June 2005

Results for announcement to the market

Dividends

Additional Information

Challenger Financial Services Group Limited and its controlled entities

OVERVIEW

Pro-Forma Statement of Financial Performance For the year ended 30 June 2005

Pro-Forma Statement of Financial Position

Pro-Forma Statement of Cash Flows For the year ended 30 June 2005

Notes to the Pro-Forma Financial Report

Note 1. Reconciliation to statutory net profit

Notes to the Pro-Forma Financial Report

Note 2. Segment information

Challenger Financial Services Group Limited and its controlled entities ACN 106 842 371

DIRECTORY

DIRECTORS' REPORT

1. Company Information

2. Principal Activities

3. Consolidated Results

4. Dividends

5. Review of Operations

6. State of Affairs

7. Likely Developments

8. Environmental Performance

9. Indemnification of Directors and Officers

10. Insurance of Directors and Officers

DIRECTORS' REPORT (Cont'd)

11. Subsequent events

12. REMUNERATION REPORT

12.1 Remuneration Philosophy

12.2 Remuncration Committee

12.3 Non-Executive Director Remuneration

DIRECTORS' REPORT (Cont'd) REMUNERATION REPORT (Cont'd)

Directors service contracts may be summarised as follows:

12.4 Chief Executive Officer (CEO)

12.5 CEO Remuneration

DIRECTORS' REPORT (Cont'd) REMUNERATION REPORT (Cont'd)

12.6 Senior Executives

C.E. Cuffe:

B. Benari:

DIRECTORS' REPORT (Cont'd) REMUNERATION REPORT (Cont'd) TH Foster:

R. Woods:

DIRECTORS' REPORT (Cont'd)

REMUNERATION REPORT (Cont'd)

12.7 Long Term Equity Based Incentive Plan (LTIP)

DIRECTORS' REPORT (Cont'd) REMUNERATION REPORT (Cont'd)

12.8 Relationship between remuneration and Challenger's performance

CHALLENGER FINANCIAL SERVICES GROUP LIMITED AND CONTROLLED ENTITIES

DIRECTORS' REPORT (Cont'd)

13. Shares Under Option

14. Rounding

15. Auditor's Independence and Non-Audit Services

Auditor's Independence Declaration to the Directors of Challenger Financial Services Group Limited

Non-Audit Services

1. Challenger's Approach to Corporate Governance

2. The Board of Directors

2 (a) The Role of the Board and Delegations

2 (b) Membership of the Board

(1) Board Members

Peter Polson

Independent

CHALLENGER LIMITED Earnings Release 2005