By Phil Mercer
BBC correspondent in Sydney
"Good intelligence is arguably more important to government now than at any time since World War II," concluded Philip Flood in his report into Australia's spy agencies.
The Bali bomb attacks took Australia by surprise
But the former diplomat went on to detail critical failures by the country's frontline defenders in the global campaign against terror.
There were mistakes, he said, over Iraq's weapons of mass destruction, and also in intelligence-gathering prior to the Bali bombings.
The report found that pre-war information on Iraq was "thin, ambiguous and incomplete".
But it cleared the government of manipulating intelligence to justify its involvement in the conflict - no doubt to the intense relief of Prime Minister John Howard, who is expected to call federal elections later this year.
Lack of information
The revelations about both Iraq and Bali are certain to cause alarm among Australians, but the latter will provoke particular concern.
More than 200 people died in the Bali attacks less than two years ago - almost half of them Australian tourists.
The Flood report decided that accurate assessments should have been made of Jemaah Islamiah (JI), the radical Islamic organisation blamed for the attack, prior to the attacks taking place.
"Australia and regional countries should have known much more about Jemaah
Islamiah, its development of terrorist capabilities and its
intentions towards Western targets," the report concluded.
A concerted effort to investigate the group was only made when a plot to bomb the American and Australian embassies in Singapore was exposed in late 2001.
While it did not go as far as to say the bombings could have been prevented, the report did conclude that the delay in properly targeting JI's activities had contributed to the lack of warning.
Erik de Haart was on the holiday resort of Bali on the fateful night of 12 October 2002.
He lost six friends in the bombings, and he himself was outside the Sari nightclub when it was torn apart by explosives.
He told BBC News Online that he was "extremely disappointed" in the intelligence
community following the release of the Flood dossier.
"Right from day one I've had a feeling that Australia really got caught by
surprise, and I now know why. Our spooks just weren't up to it," he said.
As for the families of his dead friends, Mr de Haart believes many will be troubled
by what the Flood investigation has revealed.
"I think there'll be extreme anger
and disgust at our spy agencies. They were paid to protect us but they
failed," he said.
The Australian newspaper agreed. "The end of the Cold War lulled Australia
into a false sense of security... and left us unprepared
for the challenges of the age of terror," the paper said in an editorial.
Prime Minister John Howard has now emerged almost unscathed from two
high-level investigations into the intelligence services.
In March a parliamentary committee cleared the government of deliberately
lying about the threat posed by Iraq's weapons capabilities.
The report cleared John Howard of 'politicising' intelligence
Now his administration has been cleared of manipulating intelligence used to justify Canberra's involvement in the war.
The Flood inquiry is another good result for Mr Howard, on the eve of his
65th birthday and with a federal election expected by the end of the year.
Mr Howard has so far avoided any deep and damaging political potholes over
his Iraq policy, and he has performed strongly in recent opinion polls.
But the future of around 900 Australian soldiers still in the Gulf will be a key issue
in the election campaign.
While Mr Howard lives to fight another day, Philip Flood's findings are likely to cause a shake-up in Australia's intelligence apparatus.
The report said that future failures could be catastrophic.
"JI's rise demonstrates the crucial importance of Australian agencies being alert to shifts in the regional security environment and the emergence of new
threats," the Flood dossier said.
"On South East Asia and the South Pacific, Australia needs to be an
unquestionable global leader," it concluded.
But there is unlikely to be a complete overhaul of the intelligence system. The criticism levelled at Australia's spy network is tempered by general praise that it is performing well in other areas.
The report said there had been "intelligence successes" which receive scant
publicity because of their secretive nature.
These are said to include "uncovering terrorist networks in South East Asia and helping
to disrupt planned terrorist attacks".