The “Millennium Drought” (2001–2009) can be described as the worst drought on record for southeast Australia. Adaptation to future severe droughts requires insight into the drivers of the drought and its impacts. These were analyzed using climate, water, economic, and remote sensing data combined with biophysical modeling. Prevailing El Niño conditions explained about two thirds of rainfall deficit in east Australia. Results for south Australia were inconclusive; a contribution from global climate change remains plausible but unproven. Natural processes changed the timing and magnitude of soil moisture, streamflow, and groundwater deficits by up to several years, and caused the amplification of rainfall declines in streamflow to be greater than in normal dry years. By design, river management avoided impacts on some categories of water users, but did so by exacerbating the impacts on annual irrigation agriculture and, in particular, river ecosystems. Relative rainfall reductions were amplified 1.5–1.7 times in dryland wheat yields, but the impact was offset by steady increases in cropping area and crop water use efficiency (perhaps partly due to CO2 fertilization). Impacts beyond the agricultural sector occurred (e.g., forestry, tourism, utilities) but were often diffuse and not well quantified. Key causative pathways from physical drought to the degradation of ecological, economic, and social health remain poorly understood and quantified. Combined with the multiple dimensions of multiyear droughts and the specter of climate change, this means future droughts may well break records in ever new ways and not necessarily be managed better than past ones.