This paper reports the results of comprehensive laboratory surveillance of invasive pneumococcal disease (IPD) in Australia during 2001 and 2002. The 7-valent conjugate pneumococcal vaccine was introduced for high risk paediatric groups, including Indigenous children, in late 2001. Of 1,355 isolates from non-Indigenous children, 86 per cent belonged to serotypes and 93 per cent to serogroups represented in the 7-valent pneumococcal conjugate vaccine. Thirteen per cent and 24 per cent of isolates had reduced susceptibility to penicillin and erythromycin, respectively and of these, more than 99 per cent belonged to serogroups represented in the 7-valent vaccine. Of the 1,504 isolates from non-Indigenous adults, 96 per cent belonged to serotypes included in the 23-valent polysaccharide vaccine; 14 per cent and 15 per cent had reduced susceptibility to penicillin and erythromycin, respectively and more than 95 per cent of these belonged to serotypes included in the 7-valent conjugate vaccine. In Western Australia and the Northern Territory (the only states for which Indigenous status was consistently available), there were 29 cases of IPD in Indigenous children, of which 21 were due to 7-valent vaccine serotypes in 2001, compared with 24 cases, including 10 due to vaccine serotypes, in 2002. This represents a statistically significant increase in the proportion of total isolates due to non-vaccine serotypes (chi2 = 3.93, p = 0.048) following the introduction of the 7-valent conjugate vaccine, principally due to serotypes 7F and 12F. The number of episodes due to penicillin resistant isolates decreased from nine in 2001 to two in 2002. Ninety per cent of isolates from Indigenous adults were included in the 23-valent polysaccharide vaccine and six per cent and five per cent had reduced susceptibility to penicillin and erythromycin, respectively. Conjugate pneumococcal vaccines can be expected to reduce the incidence of IPD due to vaccine serotypes in vaccinated children and potentially, their adult contacts. It may also impact favourably on the incidence of IPD due to penicillin and erythromycin resistant strains. Continued surveillance of both serotype distribution and antibiotic susceptibility are required to identify serotype replacement by non-vaccine serotypes and to monitor the overall impact of current and future vaccine programs on invasive pneumococcal disease in Australia.