A teenager accused of having Islamic State material will be released back into the community after prosecutors lost their bid to keep him in custody.
The now-18-year-old was granted bail in a children's court on July 16 but he has remained in custody to allow prosecutors to appeal the decision in the Victorian Supreme Court.
That appeal was dismissed on Monday, when Justice Diana Piekusis found the children's court magistrate had not made an error.
The judge told the teen he must follow the bail conditions carefully, even if they were stringent.
"I expect any breach, doesn't matter how minor, will have you back before the court," Justice Piekusis told the teen.
The teen, who appeared in court via video link, only responded to confirm he understood.
He was charged in March with collecting manuals, guides and material promoting IS-inspired terrorism and importing a prohibited item, namely an IS flag.
An investigation was launched after intelligence indicated the flag was imported into Australia destined for a Melbourne address.
The teen was unmasked as the flag's alleged intended recipient, leading counter-terrorism detectives to search the property.
A USB, mobile phone and laptop were seized.
The USB contained a photo of a bomb in a backpack, as well as instructional materials for the preparation of explosives which set out ingredients required and steps to assemble devices, police allege.
A video depicting a balaclava-clad man conducting an explosives demonstration while Arabic music played in the background was also allegedly found on his laptop.
Magazines promoting jihad, martyrdom, extremist interpretations of Islam and multiple photos of IS flags were also allegedly discovered.
An analysis of the boy's iPhone allegedly showed searches for train derailment operations, including texts, photos and methods to derail trains and targeting other means of transportation.
His search history allegedly also extended to IS, IS wallpapers, locations of synagogues and the busiest intersections in Melbourne.
Investigators also allegedly found videos of IS and al-Qaeda propaganda, terrorist attacks and extremist cleric sermons advising on martyrdom, jihad and lone attacks.
The magistrate granted the teen bail on strict conditions including a nightly curfew, tri-weekly reporting to police and a ban on being within 100 metres of a synagogue.
Justice Piekusis found it was open for the magistrate to have granted the teen bail with those conditions.
He is expected to be released from custody later on Monday.
