Regional diversity is a hot topic in Australia's policy agenda. The economic and social circumstances of Australians vary significantly by region. Analyses of income inequality in Australia have generally focussed on the national outcomes. In contrast, this paper uses regional modelling techniques to examine the incomes of households in regional Australia and how the distribution changed between 1991 and 1996. It considers the changes at three levels: regions, states and local government areas. The results suggest that there is a large and growing gap between the incomes of those Australians living in the capital cities and those living in the rest of Australia. However, regional Australia is not uniformly disadvantaged and not uniformly declining, with very different experiences in particular states and regions. The study also found that the proportion of households living in the middle income ranges has been declining across most regions.