Apple may, believe it or not, be your friend here....
My guess, is you need to take the router out of the loop, remember the Airport Extreme is a very good router as well as just providing wireless...
I assume that your router is an ADSL modem/router? Or do you have cable with TelstraClear? Doesn't matter as it sounds like you have the internet bit sorted i.e. your router is happily piping the internet out.
You need to plug things in like this,
Internet/Router ---> WAN Port Airport 1.
PC ----> LAN Port Airport 1 (
not your router, this is the bit that may be tripping you up).
If your router is supplying the internet then your Airport 1 can supply that on it's own DHCP server to all of the clients in your house. Anything else you had plugged into your router can instead be plugged into your Airport 1 LAN ports.
If you have things this way (i think) you will find that the Airport Utility will behave more as you expect.
So, steps to take.
1. Hard reset both Airports. Turn off Airport 2.
2. Plug things in as above.
3. Setup Airport 1 via Airport Utility to create wireless network and allow extending. I would recommend using the auto configuration (Apple is your friend)
This will ensure that your setup is vanilla and as expected by the next part of the process.
Despite the fact they are for the OS X version , follow the instructions from step 16 of this page (windows version will be the same, just not as pretty looking...)
http://www.iclarified.com/entry/index.php?enid=147
4. Check you have wireless internet with your iPhone.
If all is well then you can now try and setup the network extension stuff.
5. Turn on Airport 2.
6. Rescan with Airport Utility.
7. Hopefully you will now see your Airport 2.
Now at this point I am going on memory. Apple may allow you to have the option of "Join an existing wireless network" for the Extreme on their auto config screens, i.e if you just press continue.
If they do then follow the instructions from that point.
If not then you will have to dive into the manual setup again, but you should hopefully find things work this time.
If the autoconfig doesn't allow "join an existing network" then in the manual settings of Airport 2 you should double check your channels are the same and make sure you enter the network name of your Airport 1 network exactly right and any passwords exactly right.
9. Update settings.
10. Cross fingers. And toes. Wait for the green light of love on Airport 2.
Hopefully this info helps.
To be honest, the best option is to return the second Extreme and swap it for one of the Airport Express (n) versions. Not sure who told you it was appropriate to get a second extreme. For what you seem to be wanting to do it's probably overkill...
The utility is more designed to use the Expresses to extend an Extreme network and you will definitely find things go smoother.
Best of luck