Two central features of Australian universities are a strong research base and a structural organisation which reflects a close relationship between teaching and research. Current policy deliberations have produced recommendations in the "national interest" for the future development of Australian university research which are incompatible with these two central features. The recommendations consolidate the recent trend towards greater centralisation, co-ordination, selectivity and concentration of university research and its funding. Although certain sectors of Australian university research will benefit from the changes, the recommendations reflect neither a longer term view of the total higher education system, nor a sufficient concern with preserving the excellent and productive qualities of the current system. Their implementation will mean the adoption of research goals inimical to the fundamental purposes of universities; a less flexible and more conservative research system; a re-orientation of the research role of universities so that it is less harmonious with their teaching role; and a potentially harmful differentiation of academic staff, subject areas and institutions. In responding to the new demands of government, universities face a challenge in preserving their current strengths and core functions.