FWIW this is the team I would be playing in Sri Lanka (barring any players coming into some awesome shield form in the second half of the season):
Watson
Hughes
Khawaja
Ponting
Clarke(c)
Hussey
Haddin
Johnson
Hauritz
Siddle
Bollinger
12th: Copeland
I would have Smith, Copeland, O'Keefe, White and Ferguson in the squad.
It's no use looking to Katich IMO. He's had his day and served the country well. It's time that we give the talented young Hughes an extended run (maybe pick him for more than four tests in a row FFS).
Unfortunately we have to keep Watson, despite him being on warning for his running between wickets. Ponting should get another two series to get back into form. If he's not hit another hundred by the end of South Africa then he should be gone for good. Clarke should be the permanant captain now.
Given the woes of both Hussey and Clarke at 4, I would like to see Ponting there in the mid term. I think he'd provide very nice stability in the middle order, should he regain form.
Khawaja should be persisted with at #3, I really think that he can pay off within a year or two. Hussey should get the tap on the shoulder as soon as he goes for another three to five tests without a hundred. I put him at two tests right now, which means he should only have a guaranteed spot for the Sri Lanka tour.
Bowling-wise, I think that Siddle has done enough to be retained for now. Johnson too has enough credit in the bank to continue to get a gig. That leaves Hilfenhaus and Beer. Hilfy has had too many chances and needs to go. Beer would be a nice pick if we had a strong side and could afford to develop him over a period of ten tests. We don't. We need a spinner who has a proven record of wicket taking at the first class and/or test match level. At the moment that player is Hauritz (who is still very young for a spinner). Hauritz also aids our batting. Not having him in our side contributed to the huge losses we faced in the Ashes. If we absolutely must not pick Hauritz because he is hated by every single person at CA, then we must pick O'Keefe. We absolutely must not develop a spinner to the point where they are quite a good bowler at the international level and then drop them. The point of developing a player is that it pays off when you get a good 40+ tests of their peak form. Dropping Hauritz as he was nearing this point was utter absurdity.
Bollinger should have enough fitness and has enough credit to get picked to play in Sri Lanka. If any of our bowlers fail for a couple of tests in a row I think Copeland should get a run - and probably a few tests to prove himself.
These are the Australian problems right now:
1) Our batting is poor
2) Our bowling is poor
3) Our fielding is poor
4) Our batting is full of players who are 34 and older. There can be no orderly transition from this. When we replace the 34+ year old players we have to bring in players based on state form who are younger than 34. If this means that Rogers is the man in form then he should get a game (not that I am advocating him).
To correct all of these flaws we really must start:
a) picking batsmen based on state form
b) look primarily to players in the 25-29 age bracket unless a 20 year old comes out and smashes all kinds of records (Maddison, I'm looking at you).
So to reiterate:
Hughes must get an extended run to develop. He really is a longer term prospect and should be given a year in the test side. If he's still crap then get rid of him until he has piled on the runs ala Hayden.
Ponting, Hussey, Katich and Haddin should all be phased out over the next 3-4 years. Around one per year. Whichever has been performing the worst or is of the least value to the team. At the moment, that is the injured Katich. A sad way to go and he has served us well, but Ponting and Hussey are better players.
New players must be picked first on form then on age (with the exception of those who fall in the Haddin+ age bracket).
We need to strengthen the bowling by bringing in a capable wicket taking threat to replace Hilf and a capable wicket taking threat as a spinner. Beer did a reasonable job but needs time to develop at state level.