Leaves and phyllodes of A. melanoxylon were compared in several aspects of their physiology. Changes in gas exchange and water use efficiency (WUE) under controlled conditions of vapour pressure deficit (vpd) and foliar water potential were examined. Water use efficiency in phyllodes remained constant under a wide range of evaporative demand due to high stomatal sensitivity to vpd. Leaf stomata were less sensitive to changes in vpd causing decreased WUE with increased vpd. Under water stress phyllodes survived longer and produced higher WUE than leaves. Maximum photosynthetic rates per unit foliar area were higher in phyllodes than leaves. Thus, phyllodes have a number of advantages over leaves under conditions of long and short term water stress and high irradiance. Leaves had a higher photosynthetic rate per unit of photosynthetic investment than phyllodes, suggesting that their function is to maximise growth during the seedling phase.