SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

Form 20-F

ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 20032004Commission file number 1-14406

Perusahaan Perseroan (Persero)
P.T. Telekomunikasi Indonesia Tbk.
(Exact name of Registrant as specified in its charter)

Telecommunications Indonesia
(a state-owned public limited liability company)
(Translation of Registrant’s name into English)

Republic of Indonesia
(State or other jurisdiction of incorporation or organization)

Jalan Japati, 1
Bandung 40133
IndonesiaBandung 40133
Indonesia
(62) (22) 452-1510
(62) (21) 521-5109*
(Address of Registrant’s principal executive offices)

Securities registered or to be registered pursuant to Section 12(b) of the Act.
     
Name of each exchange on
Title of Each classwhich registered
American Depositary Shares representing Series B Shares, par value 500250 Rupiah per share  New York Stock Exchange 
Series B Shares, par value 500250 Rupiah per share  New York Stock Exchange** 

Securities registered or to be registered pursuant to Section 12(g) of the Act.
None

Securities for which there is a reporting obligation pursuant to Section 15(d) of the Act.
None

Indicate the number of outstanding shares of each of the issuer’s classes of capital or common stock as of the close of the period covered by the annual report:
   
Series A Shares, par value 500250 Rupiah per share 1
Series B Shares, par value 500250 Rupiah per share 10,079,999,63920,159,999,279

     Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports) and (2) has been subject to such filing requirements for the past 90 days.

Yes X     No 

     Indicate by check mark which financial statement item the Registrant has elected to follow.

Item 17     Item 18 X 

  * Investor Relations Unit, Graha Citra Caraka, Jl. Gatot Subroto, No. 52, 5th Floor, Jakarta 12570.
** The Series B Shares were registered in connection with the registration of the American Depositary Shares. The Series B Shares are not listed for trading on the New York Stock Exchange.

TABLE OF CONTENTS
       
Page
DEFINITIONS  1Page
FORWARD LOOKING STATEMENTS  6 
 CONVENTIONSDEFINITIONS  62
FORWARD LOOKING STATEMENTS7
CONVENTIONS7 
 PART I    
 Item    1.
  IDENTITY OF DIRECTORS, SENIOR MANAGEMENT AND ADVISERS*  78 
 Item    2.
  OFFER STATISTICS AND EXPECTED TIMETABLE*  78 
 Item    3.
  KEY INFORMATION  78 
 Item    4.
  INFORMATION ON THE COMPANY  2225 
 Item    5.
  OPERATING AND FINANCIAL REVIEW AND PROSPECTS  7277 
 Item    6.
  DIRECTORS, SENIOR MANAGEMENT AND EMPLOYEES  125135 
 Item    7.
  MAJOR STOCKHOLDERS AND RELATED PARTY TRANSACTIONS134
Item    8.
FINANCIAL INFORMATION  143 
Item    8.
FINANCIAL INFORMATION152
 Item    9.
  THE OFFER AND LISTING  145154 
 Item   10.
  ADDITIONAL INFORMATION  148158 
 Item   11.
  QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK  163173 
 Item   12.
  DESCRIPTION OF SECURITIES OTHER THAN EQUITY SECURITIES*  167176 
 PART II    
 Item   13.
  DEFAULTS, DIVIDEND ARREARAGES AND DELINQUENCIES*  167176 
 Item   14.
  MATERIAL MODIFICATIONS TO THE RIGHTS OF SECURITY HOLDERS AND USE OF PROCEEDS*  167177 
 Item   15.
  CONTROL AND PROCEDURES  167177 
 Item   16.
  RESERVED  169191 
 Item 16A.
  AUDIT COMMITTEE FINANCIAL EXPERT  169191 
 Item 16B.
  CODE OF ETHICS  170192 
 Item 16C.
  PRINCIPAL ACCOUNTANT FEES AND SERVICES  170192 
 Item 16D.
  EXEMPTIONS FROM THE LISTING STANDARDS FOR AUDIT COMMITTEES*COMMITTEES  171193 
 Item 16E.
  PURCHASES OF EQUITY SECURITIES BY THE ISSUER AND AFFILIATED PURCHASERS*  171193 
 PART III    
 Item   17.
  CONSOLIDATED FINANCIAL STATEMENTS*  172194 
 Item   18.
  CONSOLIDATED FINANCIAL STATEMENTS  172194 
 Item   19.
  EXHIBITS  172194 
 EX-4.10 First Amend Contract DD Dec 15, 2003Ex-1 The Articles of Incorporation of TELKOM
 EX-4.22 Co-operation Agreement DD Jan 14, 2003EX-4.43 MEDIUM TERM NOTES ISSUANCE AGREEMENT
 EX-4.28 Amend#6 to Dev't Contract DD Oct 9, 2003EX-4.44 INDEMNITY AGREEMENT DATED APRIL 25, 2005
 Ex-4.29 Amend#7 to Dev't Contract DD Dec 4, 2003
Ex-4.36 Amend#3 Partnership Agmt DD Dec 11, 2003
Ex-4.42 Supply Contract DD May 14, 2004
Ex-4.43 Loan Agreement DD Jan 28, 2004
Ex-4.44 Letter Agreement DD Dec 11, 2003
Ex-4.45 Indemnity Agreement dated June 29, 2004
Ex-12.1 Certification to SectionEX-12.1 CERTIFICATION PURSUANT TO SECTION 302
 Ex-12.2 Certification to SectionEX-12.2 CERTIFICATION PURSUANT TO SECTION 302
 Ex-13.1 Certification to SectionEX-13.1 CERTIFICATION PURSUANT TO SECTION 906
 Ex-13.2 Certification to SectionEX-13.2 CERTIFICATION PURSUANT TO SECTION 906

* Omitted because the item is not applicable.

i1

DEFINITIONS
“ADS”American Depositary Share, which is a certificate (known as an ADR) being traded on a U.S. securities market (such as New York Stock Exchange) representing a number of foreign shares. One ADS of TELKOM represents twenty40 of TELKOM’s Series B shares. The ratio of shares to ADS is 20:40:1.
 
“ADSL”(Asymmetric Digital Subscriber Line) is a technology that allows combinations of services including voice, data and one way full motion video to be delivered over existing copper feeder distribution and subscriber lines.
 
“AMPS”(Advanced Mobile Phone System) is an analog mobile cellular system standard.
 
“ARPU”(Average Revenue Per User) serves as an evaluation statistic in connection with a network operator’s subscriber base.
 
“ASR”(Answer to Seizure Ratio). See “Call Completion Rate”.
 
“ATM”(Asynchronous Transfer Mode) is a transfer mode in which the information is organized into cells. It is asynchronous in the sense that the recurrence of cells containing information from an individual user is not necessarily periodic.
 
“B2B”(Business-to-Business Electronic Commerce) is a technology-enabled application environment to facilitate the exchange of business information and automate commercial transaction designed to automate and optimize interactions between business partners.
 
“backbone”refers to the main telecommunications network consisting of transmission and switching facilities connecting several network access nodes. The transmission links between nodes and switching facilities include microwave, submarine cable, satellite, optical fiber and other transmission technology.
 
“bandwidth”refers to the capacity of a communications link.
 
“BTS”(Base Transceiver Station) refers to equipment that transmits and receives radio telephony signals to and from other telecommunication systems.
 
“call completion rate”is the percentage of calls that are successfully completed, as measured by the number of calls successfully answered divided by the number of call attempts that are recognized by the caller’s local exchange, in the case of call completion rates for local calls and call attempts that are recognized by the trunk exchange, in the case of call completion rates for long-distance calls. Call completion rate is measured by the answer to seizure ratio, or “ASR”.
 
“capacity utilization”refers to the ratio of lines in service to local exchange capacity or installed lines.
 
“CDMA”(Code Division Multiple Access) is a wide-band spread-spectrum network technology.

12

“DCS 1800”(Digital Communication System) is a mobile cellular system using GSM technology operating in the 1800Mhz frequency band.
 
“DGPT”is the Director General of Post and Telecommunications.
 
“distribution point”is the point of interconnection between the dropwire and the secondary cable running to a cabinet and/or a local exchange.
 
“DLD”refers to domestic long-distance telecommunications services such as long-distance telephone calls and leased lines services.
 
“downlink”refers to the receiving portion of a satellite circuit extending from the satellite to the Earth.
 
“dropwire”is the wire connecting the subscriber’s premises to the distribution point.
 
“DTR”(Distributable TELKOM Revenues) is the monthly revenue share payable by each KSO Unit to TELKOM under the KSO Agreements, being a specified percentage of total KSO revenues in a KSO Unit after deduction of specified KSO operating expenses and MTR.
 
“dual band”refers to the capability of a mobile cellular network and mobile cellular handsets to operate across two frequency bands, for example GSM 900 and GSM 1800.
 
“duopoly system”is a system allowing only two national operators, which in Indonesia’s case are TELKOM and Indosat, to provide fixed-linefixed line telecommunication services.services including domestic long-distance and international long-distance.
 
“earth station”is the antenna and associated equipment used to receive or transmit telecommunication signals via satellite.
 
“existing installations”refer to telecommunications facilities, including telephone lines, network infrastructure and related assets in existence in each KSO Division as of the beginning of each KSO Period plus certain facilities and equipment constructed or installed by TELKOM in the KSO Units after such dates to be managed by a KSO Investor.
 
“fixed cellular”refers to a form of fixed wireless technology which uses conventional cellular network configurations to link a subscriber at a fixed location to a local exchange.
 
“fixed wireless”refers to a local wireless transmission link using cellular, microwave or radio technology to link a subscriber at a fixed location to a local exchange.
 
“fixed wireline”refers to a fixed path (wire or cable) linking a subscriber at a fixed location to a local exchange, usually with an individual phone number.
 
“frame relay”is a packet-switching protocol (in which messages are divided into packets before they are sent) for connecting devices on a computer network that spans a relatively large geographical area.

3

“Government”refers to the Government of the Republic of Indonesia.

2

“GPRS”(General Packet Radio Service) is a data packet switching technology that allows information to be sent and received across a mobile network and only utilizes the network when there is data to be sent.
 
“GSM”(Global System for Mobile Telecommunication) is a European standard for digital cellular telephone.
 
“IDD”(International Direct Dialing) is a service that allows a subscriber to make an international call without the assistance or intervention of an operator from any telephone terminal.
 
“installed lines”refer to complete lines fully built-out to the distribution point and ready to be connected to subscribers.
 
“intelligent network” or “IN”is a service-independent telecommunications network where the logic functions are taken out of the switch and placed in computer nodes distributed throughout the network. This provides the means to develop and control services more efficiently allowing new or advanced telephony services to be introduced quickly.
 
“ISDN”(Integrated Services Digital Network) is a network that provides end-to-end digital connectivity and allows simultaneous transmission of voice, data and video and provides high-speed Internet connectivity.
 
“Kbps”(Kilobits per second) is a measure of speed for digital signal transmission expressed in thousands of bits per second.
 
“KSO”(Kerjasama Operasi) or Joint Operating Scheme, is a unique type of Build, Operate and Transfer arrangement with a consortium of partners in which the consortium invests and operates TELKOM facilities in regional divisions. The consortium partners are owned by international operators and private domestic companies, or in cases where TELKOM has acquired the consortium partner, by TELKOM.
 
“KSO Agreements”refer to the agreements, as amended from time to time, governing the operation of the network in the relevant KSO region for the KSO Period.
 
“KSO Period”refers to period covered by the KSO Agreement.
 
“KSO Unit”refers to a regional division of TELKOM managed and operated — pursuant to the relevant KSO Agreement.
 
“leased line”is a dedicated telecommunications transmissions line linking one fixed point to another, rented from an operator for exclusive use.
 
“lines in service”refer to revenue-generating lines connected to subscribers, including payphones, but not including mobile cellular subscribers or lines used internally by TELKOM.
 
“local call”is the call among subscribers in the same numbering area without any prefix number being required.

4

“local exchange capacity”refers to the aggregate number of lines at a local exchange connected and available for connection to outside plant.

3

“MHz”(Megahertz) is a unit of measure of frequency. 1 MHz is equal to one million cycles per second.
 
“microwave transmission”is a transmission consisting of electromagnetic waves in the radio frequency spectrum above 890 million cycles per second and below 20 billion cycles per second.
 
“MoC”refers to the Ministry of Communications.Communication, from which telecommunications regulatory responsibility was transferred to the MoCI in February 2005.
“MoCI”refers to the Ministry of Communication and Information, to which telecommunications regulatory responsibility was transferred from the MoC in February 2005.
 
“Modern License”is an operational license, contemplated in the Telecommunication Law, which replaces the existing operational license for basic telecommunications services.
 
“MoF”refers to the Ministry of Finance.
 
“MTR”(Minimum TELKOM Revenues) is the specified minimum amount payable monthly by each KSO Unit to TELKOM under the KSO Agreements.
 
“NMT-450”(Nordic Mobile Telephone) is a form of analog mobile cellular service primarily installed in vehicles.
 
“optical fiber”refers to cables using optical fiber and laser technology whereby modulating light beams representing data are transmitted through thin filaments of glass.
 
“outside plant”is the equipment and facilities used to connect subscriber premises to the local exchange.
 
“PBH” or “Revenue Sharing“Revenue-Sharing Arrangement”(Pola Bagi Hasil) is a type of Build, Operate and Transfer arrangement scheme between TELKOM and domestic private companies. Under this scheme the private company invests in the telecommunication facilities to be operated by TELKOM.
 
“PSDN”(Packet Switched Data Networks) is a network using a switch device and sending packets of data through the network to some remote location.
 
“PSTN”(Public Switched Telephone Network) is a telephone network operated and maintained by TELKOM and the KSO Units for and on behalf of TELKOM.
 
“RUIM” or “RUIM card”(Removable UnitUser Identity Card)Module) is a “smart” card designed to be inserted into a fixed wireless telephone that uniquely identifies a CDMA network subscription and that contains subscriber-related data such as phone numbers, service details and memory for storing messages.

5

“satellite transponder”is the radio relay equipment embedded on a satellite that receives signals from earth and amplifies and transmits the signal back to earth.
 
“SIM” or “SIM card”(Subscriber Identity Module) is a “smart” card designed to be inserted into a mobile cellular telephone that uniquely identifies a GSM network subscription and that contains subscriber-related data such as phone numbers, service details and memory for storing messages.

4

“SMS”Short Messaging Service, a technology allowing the exchange of text messages between mobile cellular phones and between fixed wireless phones.
 
“switch”is a mechanical, electrical or electronic device that opens or closes circuits, completes or breaks an electrical path, or selects paths or circuits, used to route traffic in a telecommunications network.
 
“trunk exchange”is a switch that has the function of connecting one telephony switch to another telephony switch, which can be either a local or trunk switch.
 
“USO”(Universal Service Obligation) is the service obligation imposed by the Government on all providers of telecommunications services for the purpose of providing public services in Indonesia.
 
“VoIP”(Voice over Internet Protocol) is a means of sending voice information using the Internet Protocol.
 
“VPN”(Virtual Private Network) is a secure private network connection, built on top of publicly-accessible infrastructure, such as the Internet or the public telephone network. VPNs typically employ some combination of encryption, digital certificates, strong user authentication and access control to provide security to the traffic they carry. They usually provide connectivity to many machines behind a gateway or firewall.
 
“VSAT”(Very Small Aperture Terminal) is a relatively small antenna, typically 1.5 to 3.0 meters in diameter, placed in the user’s premises and used for two-way communications by satellite.
 
“WAP”(Wireless Application Protocol) is an open and global standard of technology platform that enables mobile users to access and interact with mobile information services such as e-mail, Web sites, financial information, on-line banking, information and entertainment (infotainment), games and micro payments.

56

FORWARD LOOKING STATEMENTS

This document contains certain forward looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended (the “Securities Act”) and Section 21E of the Securities Exchange Act of 1934, as amended (the “Exchange Act”) and the Private Securities Litigation Reform Act of 1995, with respect to the financial condition, results of operations and business of Perusahaan Perseroan (Persero) P.T. Telekomunikasi Indonesia Tbk. (“TELKOM” or the “Company”) and its subsidiaries and certain plans and objectives of the Company or the Company and its subsidiaries, wherever applicable, with respect to these items — in particular, among other statements, certain statements in Item 5. “Operating and Financial Review and Prospects” including, without limitation, those concerning the Company’s expectations and plans, strategy, management’s objectives, trends in market shares, market standing, overall market trends, risk management, exchange rates and revenues and general and administration expenses and forward looking statements concerning the Company’s operations, performance and financial condition. Such statements can be generally identified by the use of terms such as “believes,” “expects,” “may,” “will,” “would,” “could,” “plans,” or “anticipates,” and the negatives of such terms or comparable terms. By their nature, forward looking statements involve risk and uncertainty because they are related to events which depend on circumstances that will occur in the future. There are a number of factors that could cause actual results and developments to differ materially from those expressed or implied by these forward looking statements. Important information regarding risks and uncertainty is set forth elsewhere in this annual report, including in Item 3. “Key Information — D. Risk Factors,” Item 5. “Operating and Financial Review and Prospects — E. Off-Balance Sheet Arrangements,” Item 5. “Operating and Financial Review and Prospects — F. Tabular Disclosure of Contractual Obligations” and Item 11. “Quantitative and Qualitative Disclosures About Market Risk.”

CONVENTIONS

      In this Annual Report, unless otherwise specified or the context otherwise requires, all references to “Indonesia” are references to the Republic of Indonesia and all references to the “U.S.” and “United States” are references to the United States of America. All references to the “Government” herein are references to the government of the Republic of Indonesia. References herein to “Rupiah” and “Rp.” are to the lawful currency of Indonesia and all references to “US Dollars” or “US$” are to the lawful currency of the United States of America. For convenience, unless otherwise specified, certain Rupiah amounts have been translated into US Dollar amounts, based on the prevailing exchange rate of Rp.8,440Rp.9,290 = US$1.00, being the middle market spot rate of exchange for Rupiah against US Dollar quoted by Reuters on December 31, 2003.2004. Such translations should not be construed as representations that the Rupiah or US Dollar amounts referred to could have been, or could be, converted into Rupiah or US Dollars, as the case may be, at that or any other rate or at all. The average middle market spot rate of exchange for Rupiah against US Dollar quoted by Bank Indonesia on December 31, 20032004 was Rp.8,465Rp.9,290 to US$1.00. See Item 3. “Key Information — A. Selected financial data — Exchange Rate Information” for further information regarding rates of exchange between Rupiah and US Dollars.

67

PART I

ITEM 1.     IDENTITY OF DIRECTORS, SENIOR MANAGEMENT AND ADVISERS

Not applicable.

ITEM 2.     OFFER STATISTICS AND EXPECTED TIMETABLE

Not applicable.

ITEM 3.     KEY INFORMATION

A.     Selected financial data

     TELKOM’s consolidated financial statements for the year 1999 were audited by KAP Prasetio, Utomo & Co., the member firm of Arthur Andersen & Co. SC in Indonesia.

      The Company’s consolidated financial statements for the years 2000 and 2001 were audited by KAP Hans Tuanakotta Mustofa & Halim (formerly KAP Hans Tuanakotta & Mustofa), the member firm of Deloitte Touche Tohmatsu in Indonesia.Indonesia (“Deloitte”). The Company’s consolidated financial statements for the year 2002 have been audited by KAP Drs. Haryanto Sahari & Rekan (formerly KAP Drs. Hadi Sutanto & Rekan), the member firm of PricewaterhouseCoopers in Indonesia.Indonesia (“PwC”). The Company’s consolidated financial statements for the yearyears 2003 and 2004 have been audited by KAP Siddharta Siddharta & Widjaja, the member firm of KPMG International in Indonesia.Indonesia (“KPMG”). All such consolidated financial statements were prepared in accordance with Indonesian GAAP, which differs in certain significant respects from U.S. GAAP. See Item 5. “Operating and Financial Review and Prospects — Summary of Significant Differences between Indonesian GAAP and U.S. GAAP” and Note 5856 to the Company’s consolidated financial statements, which provide a description of the significant differences between Indonesian GAAP and U.S. GAAP and a reconciliation to the amount of U.S. GAAP net income and stockholders’ equity of TELKOM for and as of the end of each of the periods indicated in the consolidated financial statements.

     Following the dissolution of Andersen Worldwide in 2002, KAP Prasetio, Utomo & Co. ceased business operations in Indonesia in August 2002. As a consequence, KAP Prasetio, Utomo & Co. has not reissued an audit opinion in respect of the 1999 consolidated financial statements and, therefore, the information included in the relevant selected financial information for 1999 is derived from unaudited consolidated financial statements.

      For the year 2003,2004, ten companies were consolidated into the Company’s consolidated financial statements, namely: PT AriaWest International (“AriaWest”, 100.00%100%), PT Multimedia Nusantara (“Metra”, 100.00%100%), PT Graha Sarana Duta (“GSD”, 99.99%100%), PT Pramindo Ikat Nusantara (“Pramindo”, 100.00%100%), PT Indonusa Telemedia (“Indonusa”, 90.39%90%), PT Dayamitra Telekomunikasi (“Dayamitra”, 90.32%100%), PT Telekomunikasi Selular (“Telkomsel”, 65.00%65%), PT Napsindo Primatel Internasional (“Napsindo”, 60.00%60%), PT Infomedia Nusantara (“Infomedia”, 51.00%51%) and PT Pro Infokom Indonesia (“PII”, 51.00%51%).

78

The following tables set forth a summary of the financial information of TELKOM as of and for the years specified. This information should be read in conjunction with Item 5. “Operating and Financial Review and Prospects” and is qualified in its entirety by reference to TELKOM’s consolidated financial statements and the related notes thereto included elsewhere in this Annual Report.
                     
Year Ended December 31,
                  
199920002001200220032003  Year Ended December 31,
   
(unaudited)(audited)(audited)(audited)(audited)  2000 2001 2002 2003 2004 2004
            
(Rp. in billion, except for data relating to shares,(US$ million)    (US$ million)
 (Rp. in billion, except for data relating to shares,  
Dividends and ADS)  dividends and ADS)  
Consolidated Income Statement Data
Consolidated Income Statement Data
 
Consolidated Income Statement Data
                   
Indonesian GAAPIndonesian GAAP Indonesian GAAP                   
Operating revenues(1)
 Operating revenues                   
 Telephone  Telephone                   
 Fixed lines  Fixed lines                   
 Local and domestic long-distance usage 3,571 4,097 5,226 5,448 6,562 777  Local and domestic long-distance usage  4,097  5,226  5,448  6,562  7,439  801 
 Monthly subscription charges 799 887 998 1,475 1,949 231  Monthly subscription charges  887  998  1,475  1,949  2,935  316 
 Installation charges 68 75 98 130 223 27  Installation charges  75  98  130  223  201  22 
 Others 91 119 93 211 163 19  Others  119  93  211  163  70  7 
 
 
 
 
 
 
               
 Total fixed lines revenues 4,529 5,178 6,415 7,264 8,897 1,054  Total fixed lines revenues  5,178  6,415  7,264  8,897  10,645  1,146 
 Cellular  Cellular                   
 Air time charges 1,458 2,484 3,988 5,454 7,678 910  Air time charges  2,484  3,988  5,454  7,678  9,826  1,058 
 Monthly subscription charges 236 356 581 593 581 68  Monthly subscription charges  356  581  593  581  448  48 
 Features 4 7 10 8 6 1  Features  7  10  8  6  91  10 
 Connection fee charges 51 43 129 172 194 23  Connection fee charges  43  129  172  194  56  6 
 
 
 
 
 
 
               
 Total cellular revenues 1,749 2,890 4,708 6,227 8,459 1,002  Total cellular revenues  2,890  4,708  6,227  8,459  10,421  1,122 
 Total telephone revenues 6,278 8,068 11,123 13,491 17,356 2,056  Total telephone revenues  8,068  11,123  13,491  17,356  21,066  2,268 
 Joint Operation Schemes  Joint Operation Schemes                   
 Minimum TELKOM Revenues (MTR) 1,453 1,557 1,474 1,320 900 107  Minimum TELKOM Revenues (MTR)  1,557  1,474  1,320  900  296  32 
 Share in Distributable KSO Revenues (DKSOR) 209 695 733 801 583 69  Share in Distributable KSO Revenues (DKSOR)  695  733  801  583  350  38 
 Amortization of unearned initial investor payments 15 15 13 7 3 0  Amortization of unearned initial investor payments  15  13  7  3  11  1 
 
 
 
 
 
 
               
 Total revenue under Joint Operation Schemes 1,677 2,267 2,220 2,128 1,486 176  Total revenue under Joint Operation Schemes  2,267  2,220  2,128  1,486  657  71 
 Interconnection — Net 706 981 1,424 2,831 4,162 493  Interconnection  981  1,424  2,831  4,162  6,188  666 
 Network 343 340 415 316 518 62  Network  340  415  316  518  654  70 
 Data and Internet 54 108 673 1,552 3,109 368  Data and Internet  108  673  1,552  3,109  4,809  518 
 Revenue-Sharing Arrangement 360 288 264 264 258 31  Revenue-Sharing Arrangements  288  264  264  258  281  30 
 Other telecommunications-related services 19 138 165 221 227 27  Other telecommunications services  138  165  221  227  293  31 
 
 
 
 
 
 
               
 Total Operating Revenues 9,437 12,190 16,284 20,803 27,116 3,213  Total Operating Revenues  12,190  16,284  20,803  27,116  33,948  3,654 
 
 
 
 
 
 
               
Operating expenses Operating expenses                   
 Personnel 1,349 1,770 2,281 4,388 4,440 526  Personnel  1,770  2,281  4,388  4,440  5,571  600 
 Depreciation 2,627 2,419 2,870 3,474 4,779 566  Depreciation  2,419  2,870  3,474  4,779  6,438  693 
 Operations, maintenance and telecommunication services 1,146 1,386 2,150 2,290 3,339 396  Operations, maintenance and telecommunication services  1,386  2,150  2,290  3,339  4,530  487 
 General and administrative 571 872 1,343 1,146 2,079 246  General and administrative  872  1,343  1,146  2,079  2,600  280 
 Marketing 76 147 220 375 503 60  Marketing  147  220  375  503  882  95 
 
 
 
 
 
 
               
 Total Operating Expenses 5,769 6,594 8,864 11,673 15,140 1,794  Total Operating Expenses  6,594  8,864  11,673  15,140  20,021  2,155 
 
 
 
 
 
 
               

89

                    
Year Ended December 31,
                 
199920002001200220032003  Year Ended December 31,
   
(unaudited)(audited)(audited)(audited)(audited)  2000 2001 2002 2003 2004 2004
            
(Rp. in billion, except for data relating to shares,(US$ million)    (US$ million)
 (Rp. in billion, except for data relating to shares,  
Dividends and ADS)  dividends and ADS)  
Operating IncomeOperating Income 3,668 5,596 7,420 9,130 11,976 1,419 Operating Income  5,596  7,420  9,130  11,976  13,927  1,499 
Other income (expense)Other income (expense) Other income (expense)                   
Gain on sale of long-term investment in Telkomsel — — — 3,196 — — Gain on sale of long-term investment in Telkomsel  —  —  3,196  —  —  — 
Interest expense (1,492) (817) (1,330) (1,583) (1,383) (164)Interest expense  (817)  (1,330)  (1,583)  (1,383)  (1,270)  (137)
Interest income 762 692 572 480 366 44 Interest income  692  572  480  366  318  34 
Gain (loss) on foreign exchange — net 326 (944) (379) 557 126 15 Gain (loss) on foreign exchange — net  (944)  (379)  557  126  (1,221)  (131)
Equity in net income (loss) of associated companies 137 (232) (86) 5 3 0 Equity in net income (loss) of associated companies  (232)  (86)  5  3  3  0 
Other — net 101 313 353 (36) 364 43 Other — net  313  353  (36)  364  331  36 
             
Other Income (Expense) — netOther Income (Expense) — net (166) (988) (870) 2,619 (524) (62)Other Income (Expense) — net  (988)  (870)  2,619  (524)  (1,839)  (198)
             
Income Before TaxIncome Before Tax 3,502 4,608 6,550 11,749 11,452 1,357 Income Before Tax  4,608  6,550  11,749  11,452  12,088  1,301 
Tax expenseTax expense (1,004) (1,520) (2,007) (2,899) (3,861) (458)Tax expense  (1,520)  (2,007)  (2,899)  (3,861)  (4,003)  (431)
             
Income before minority interest in net income of subsidiariesIncome before minority interest in net income of subsidiaries 2,498 3,088 4,543 8,850 7,591 899 Income before minority interest in net income of subsidiaries  3,088  4,543  8,850  7,591  8,085  870 
Minority interest in net income of Subsidiaries (162) (313) (475) (810) (1,503) (178)
Minority interest in net income of subsidiaries, netMinority interest in net income of subsidiaries, net  (313)  (475)  (810)  (1,504)  (1,956)  (210)
             
Net IncomeNet Income 2,336 2,775 4,068 8,040 6,087 721 Net Income  2,775  4,068  8,040  6,087  6,129  660 
Weighted average shares outstanding (millions) 9,644 10,080 10,080 10,080 10,080 
             
Weighted average shares outstanding (millions)(1)
Weighted average shares outstanding (millions)(1)
  20,160  20,160  20,160  20,160  20,160    
Net income per share 242.26 275.30 403.61 797.59 603.89 
Net income per share(1)
  137.65  201.81  398.80  301.95  304.03    
Net income per ADS 4,845.29 5,505.96 8,072.20 15,951.80 12,077.83 
Net income per ADS(1)
  5,505.96  8,072.20  15,951.80  12,077.83  12,161.13    
Dividend declared per share 50.99 107.76 88.16 210.82 331.16 
Dividends declared per share(2)
  53.88  44.08  105.41  165.58  158.09    
U.S. GAAP(2)
 
U.S. GAAP(3)
U.S. GAAP(3)
                   
Net income 2,679 2,216 4,298 8,587 5,791 Net income  2,216  4,298  8,587  5,791  6,468    
Net income per share 277.80 219.87 426.41 851.91 574.47 
Net income per share(1)
  109.94  213.20  425.96  287.23  320.86    
Net income per ADS 5,555.90 4,397.47 8,528.17 17,038.21 11,489.40 
Net income per ADS(1)
  4,397.47  8,528.17  17,038.21  11,489.40  12,834.47    
                   
As of December 31,                    
  As of December 31,
199920002001200220032003   
  2000 2001 2002 2003 2004 2004
(unaudited)(audited)(audited)(audited)(audited)             
   (US$ million)
(Rp. in billion)(US$ million)  (Rp. in billion)  
Consolidated Balance Sheet Data
Consolidated Balance Sheet Data
 
Consolidated Balance Sheet Data
                   
Indonesian GAAPIndonesian GAAP Indonesian GAAP                   
Total assets 28,574 32,019 33,036 44,307 50,283 5,957 Total assets  32,019  33,036  44,307  50,283  56,269  6,057 
Current liabilities(3)
 4,058 4,138 9,543 9,708 11,201 1,327 
Current liabilities(4)
  4,138  9,543  9,708  11,170  11,677  1,257 
Other liabilities 2,630 3,048 3,447 5,383 6,227 738 Other liabilities  3,048  3,447  5,383  6,258  6,178  665 
Long-term debt 8,541 9,546 9,730 12,006 11,834 1,402 Long-term debts  9,546  9,730  12,006  11,834  13,214  1,422 
Total liabilities 15,229 16,732 22,720 27,097 29,262 3,467 Total liabilities  16,732  22,720  27,097  29,262  31,069  3,344 
Minority interest 534 814 1,235 2,596 3,708 439 Minority interest  814  1,235  2,596  3,708  4,938  532 
Capital stock(4)
 5,040 5,040 5,040 5,040 5,040 597 
Capital stock(5)
  5,040  5,040  5,040  5,040  5,040  543 
Total stockholders’ equity 12,810 14,473 9,081 14,614 17,313 2,051 Total stockholders’ equity  14,473  9,081  14,614  17,313  20,261  2,181 
U.S. GAAP(2)
 
U.S. GAAP(3)
U.S. GAAP(3)
                   
Total assets 27,236 30,900 32,449 44,623 51,347 6,084 Total assets  30,900  32,449  44,623  51,347  56,702  6,104 
Total stockholders’ equity 11,419 12,928 7,766 13,911 16,285 1,929 Total stockholders’ equity  12,928  7,766  13,911  16,285  19,571  2,107 

(1) Beginning 2002, TELKOM reclassified its revenue into eight major revenue categories: fixed-line, cellular, joint operation schemeThe prior years’ weighted average shares, net income per share and net income per ADS have been restated to reflect a two-for-one stock split as resolved in the Annual General Meeting of Shareholders (“KSO”AGMS”), interconnection, network, data and Internet, revenue-sharing arrangements and other telecommunications services. For purposes of comparability, TELKOM has also reclassified its revenues for prior periods. on July 30, 2004.

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(2)Dividends declared per share in 2000, 2001, 2002 and 2003 represents dividends per share after adjusting for the stock split that was effected in 2004. Dividends declared per share in 2004 comprised cash dividends for 2003 of Rp.150.98 per share and interim cash dividends declared in December 2004 of Rp.7.11 per share.
(3) U.S. GAAP amounts reflect adjustments resulting from differences in the accounting treatment of termination benefits, foreign exchange differences capitalized to property under construction, interest capitalized on property under construction, revenue-sharing arrangements, revaluation of property, plant and equipment, pension, equity in net income or loss of associated companies, land rights, equipment to be installed, revenue recognition, goodwill, capital leases, acquisition of Dayamitra, reversal of difference due to change of equity in associated companies, asset retirement obligations, and deferred

9

income taxes. See Item 5. “Operating and Financial Review and Prospects — A. Operating Results — Summary of Significant Differences between Indonesian GAAP and U.S. GAAP” and Note 58(1)56(1) to the Company’s consolidated financial statements.
(3)(4) Includes current maturities of long-term debt.
(4)
(5) Issued and Paid-Up Capital Stock consists of one Series A Dwiwarna share having a par value of Rp.500Rp.250 and 10,079,999,63920,159,999,279 Series B shares having a par value of Rp.500Rp.250 from an authorized capital stock comprising one Series A Dwiwarna share and 39,999,999,99979,999,999,999 Series B shares.shares, after the stock split.

Exchange Rate Information

     Prior to August 14, 1997, Bank Indonesia maintained the value of the Rupiah based on a basket of currencies of Indonesia’s main trading partners. In July 1997, the exchange rate band was widened and on August 14, 1997, Bank Indonesia announced it would no longer intervene in maintaining the exchange rate at any pre-determined level.

The following table shows the exchange rate of Rupiah to US Dollar based on the middle exchange rates at the end of each month for the periods indicated. The Rupiah middle exchange rate is calculated based on Bank Indonesia buying and selling rates. No representations are made that the Rupiah or US Dollar amounts referred to herein could have been or could be converted into US Dollar or Rupiah, as the case may be, at any particular rate or at all.
                                 
At period  At period      
YearYearendAverage(1)High(2)Low(2)Year end Average(1) High(2) Low(2)
         
 (Rp. per US$1.00)
(Rp. per US$1.00)
1999 7,100 7,809 8,950 6,726 
20002000 9,595 8,534 9,595 7,425 2000  9,595  8,534  9,595  7,425 
First Quarter 7,590 7,507 7,590 7,425 First Quarter  7,590  7,507  7,590  7,425 
Second Quarter 8,735 8,433 8,620 7,945 Second Quarter  8,735  8,433  8,620  7,945 
Third quarter 8,780 8,691 9,003 8,290 Third quarter  8,780  8,691  9,003  8,290 
Fourth quarter 9,595 9,507 9,595 9,395 Fourth quarter  9,595  9,507  9,595  9,395 
20012001 10,400 10,266 11,675 8,865 2001  10,400  10,266  11,675  8,865 
First Quarter 10,400 9,895 10,400 9,450 First Quarter  10,400  9,895  10,400  9,450 
Second Quarter 11,440 11,391 11,440 11,058 Second Quarter  11,440  11,391  11,440  11,058 
Third quarter 9,675 9,355 9,675 10,350 Third quarter  9,675  9,355  9,675  10,350 
Fourth quarter 10,400 10,422 10,435 10,400 Fourth quarter  10,400  10,422  10,435  10,400 
20022002 8,940 9,316 10,473 8,460 2002  8,940  9,316  10,473  8,460 
First Quarter 9,655 10,192 10,473 9,542 First Quarter  9,655  10,192  10,473  9,542 
Second Quarter 8,730 9,109 9,775 8,460 Second Quarter  8,730  9,109  9,775  8,460 
Third quarter 9,015 8,949 9,218 8,695 Third quarter  9,015  8,949  9,218  8,695 
Fourth quarter 8,940 9,058 9,326 8,815 Fourth quarter  8,940  9,058  9,326  8,815 
20032003 8,465 8,573 9,120 8,165 2003  8,465  8,573  9,120  8,165 
First Quarter 8,919 8,907 9,120 8,836 First Quarter  8,919  8,907  9,120  8,836 
Second Quarter 8,285 8,488 8,906 8,165 Second Quarter  8,285  8,488  8,906  8,165 
Third Quarter 8,389 8,427 8,665 8,166 Third Quarter  8,389  8,427  8,665  8,166 
Fourth Quarter 8,465 8,471 8,583 8,365 Fourth Quarter  8,465  8,471  8,583  8,365 
20042004  9,290  8,935  9,430  8,323 
First Quarter  8,587  8,465  8,465  8,323 
Second Quarter  9,415  8,992  9,430  8,574 
Third Quarter  9,170  9,151  9,389  8,825 
Fourth Quarter  9,290  9,126  9,355  8,960 

1011

                                 
At period  At period      
YearYearendAverage(1)High(2)Low(2)Year end Average(1) High(2) Low(2)
         
 (Rp. per US$1.00)
(Rp. per US$1.00)
2004 
20052005             
First Quarter 8,587 8,460 8,645 8,323 January  9,165  9,204  9,305  9,133 
January 8,441 8,386 8,574 8,323 February  9,260  9,245  9,300  9,166 
February 8,447 8,425 8,452 8,390 March  9,480  9,371  9,520  9,250 
March 8,587 8,569 8,645 8,442 April  9,570  9,539  9,755  9,475 
April 8,661 8,608 8,661 8,574 May  9,495  9,480  9,545  9,435 
May 9,210 8,965 9,225 8,679 June  9,713  9,616  9,713  9,528 
June 24, 2004 9,410 — — — July (through July 13, 2005)  9,750  9,785  9,860  9,740 

(1) The average of the middle exchange rate announced by Bank Indonesia applicable for the period.
(2) The high and low amounts are determined based upon the daily middle exchange rate announced by Bank Indonesia during the applicable period.
Source: Bank Indonesia

     The exchange rates used for translation of monetary assets and liabilities denominated in foreign currencies are the buy and sell rates published by Bridge Telerate in 2001 and Reuters in 2002, 2003 and 2003. The buy and sell rates published by Bridge Telerate were Rp.10,400 and Rp.10,450 to US$1 as at December 31, 2001.2004. The Reuters buy and sell rates, applied respectively to monetary assets and liabilities, were Rp.8,940 and Rp.8,960 to US$1 as of December 31, 2002, and Rp.8,430 and Rp.8,450 to US$1 as of December 31, 2003.2003 and Rp.9,280 and Rp.9,300 to US$1 as of December 31, 2004. The Company does not guarantee that assets and liabilities denominated in foreign currencies can be converted into Indonesian Rupiah at the rates of exchange as of December 31, 2003.

2004.

      The consolidated financial statements are stated in Rupiah. The translations of Rupiah amounts into US Dollars are included solely for the convenience of the readers and have been made using the average of the market buy and sell rates of Rp.8,440Rp.9,290 to US$1 published by Reuters on December 31, 2003.2004. The convenience translations should not be construed as representations that the Rupiah amounts have been, could have been, or can in the future be, converted into US Dollars at this or any other rate of exchange.

B.     Capitalization and Indebtedness

      Not applicable.

C.     Reason for the Offer and Use of Proceeds

      Not applicable.

D.     Risk Factors
TELKOM did not file a fully compliant 2002 Annual Report on Form 20-F until February 9, 2004 and may face an SEC enforcement action, or other legal liability or adverse consequences.

      TELKOM was unable to meet its June 30, 2003 deadline to file a fully compliant Annual Report on Form 20-F for the fiscal year ended December 31, 2002 (“2002 Annual Report on Form 20-F”) because the audit firm it had originally appointed to perform its 2002 audit was not qualified for SEC purposes, and TELKOM’s SEC-qualified 2002 auditors, KAP Drs. Haryanto Sahari & Rekan (formerly KAP Drs. Hadi Sutanto & Rekan), the member firm of PricewaterhouseCoopers in Indonesia,PwC, did not begin their audit work until their appointment in July 2003. TELKOM filed a non-compliantnon- compliant 2002 Annual Report on Form 20-F on April 17, 2003 and then filed an amendeda non-compliant Amendment No. 1 to the Annual Report on Form 20-F/ A for the fiscal year ended December 31, 2002 (“Amendment No. 1 to 2002 Annual Report on Form 20-F/ A”) on June 11, 2003 to:

 • remove the 2002 reports of TELKOM’s prior auditors, KAP Eddy Pianto, and the auditors of TELKOM’s subsidiary, Telkomsel;

1112

 • identify the consolidated financial statements therein for 2002 as “unaudited” and indicate that TELKOM’s consolidated financial statements therein for 2002 had not been audited by an independent accounting firm qualified in accordance with SEC requirements;
 
 • furnish an explanation of the foregoing;
 
 • describe the review by the SEC’s Division of Corporation Finance of TELKOM’s 2002 Annual Report on Form 20-F for 2002 and of TELKOM’s public statements regarding its annual report, and the referral of those matters to the SEC’s Division of Enforcement;
 
 • discuss the material consequences of the deficiencies in its 2002 Annual Report on Form 20-F, of TELKOM’s public statements regarding such Annual Report and of an SEC enforcement action regarding the same; and
 
 • describe TELKOM’s plan to bring its 2002 Annual Report on Form 20-F into full compliance with applicable SEC regulations.

      TELKOM did not file Amendment No. 2 to itsthe 2002 Annual Report on Form 20-F/ A for the fiscal year ended December 31, 2002 (“Amendment No. 2 to 2002 Annual Report on Form 20-F/ A”) until February 9, 2004, which was over 7 months past the June 30, 2003 filing deadline. Amendment No. 2 to TELKOM’s 2002 Annual Report on Form 20-F/ A contained audited consolidated financial statements as of and for the years ended December 31, 2000, 2001 and 2002 which restated previously filed audited consolidated financial statements as of and for the years ended December 31, 2000 and 2001 and previously filed unaudited consolidated financial statements as of and for the year ended December 31, 2002, and revised or updated various disclosures. Such restated consolidated financial statements (and the related selected financial information) reflected certain adjustments and modified certain disclosures for several items under Indonesian GAAP and with respect to the reconciliation of those items to US GAAP.

      Because of the foregoing and because TELKOM did not file a compliant 2002 Annual Report on Form 20-F until after the June 30, 20022003 deadline, TELKOM may face an SEC enforcement action under U.S. securities law and incur other legal liability and adverse consequences such as a delisting of its ADSs from the New York Stock Exchange. In addition, the staff of the SEC described a press release that TELKOM issued and furnished to the SEC on Form 6-K in May 2003 as “grossly understating the nature and severity of the staff’s concerns” regarding matters related to TELKOM’s filing of a non-compliant 2002 Annual Report.Report on Form 20-F. Such press release could also form the basis of an SEC enforcement action and other legal liability. TELKOM cannot at this time predict the likelihood or severity of an SEC enforcement action or any other legal liability or adverse consequences.

      As a result of TELKOM’s failure to timely file a compliant 2002 Annual Report on Form 20-F for 2002 with the SEC by the June 30, 2003 deadline and the May 2003 press release relating thereto, TELKOM may have beenwas in breach of certain covenants in its Citibank and Bank Central Asia (BCA) debt facilities that require TELKOM, among other things, to comply with all laws and regulations applicable to it and deliver financial statements to the lenders. TELKOM has obtained written waivers from both Citibank, acting as agent for the lenders under the relevant facility agreements, and BCA with respect to such breaches. During the period prior to obtaining such waivers, neither Citibank nor BCA issued any notice of acceleration of the debt under the relevant facility agreements. Nevertheless, any of the adverse consequences referred to in the immediately preceding paragraph (such as, but not limited to, an SEC enforcement action) could give rise to defaults under one or more of TELKOM’s debt facilities and cross defaults under other debt facilities with respect to such defaults. If TELKOM were unable to obtain waivers of any such defaults, indebtedness outstanding under such debt facilities could become immediately due and payable, which could have a material adverse effect on TELKOM’s financial condition and results of operations.

Risks Relating to Indonesia13

TELKOM had a number of material weaknesses in its internal control over financial reporting and concluded that as of December 31, 2003 and 2004, its disclosures and controls were ineffective, which could cause investors to lose confidence in its reported financial results and have an adverse effect on the trading price of its securities.
      In the course of the audit of TELKOM’s consolidated financial statements as of and for the year ended December 31, 2002 by PwC, TELKOM identified certain errors in and made certain adjustments to its consolidated financial statements as of and for the year ended December 31, 2002 that had been previously filed with the SEC. These errors were identified during the seven-month period ended on January 29, 2004, resulting in TELKOM’s making adjustments during that seven-month period to its consolidated financial statements as of and for the year ended December 31, 2002. Following discussions between TELKOM and Deloitte, the auditor of TELKOM’s consolidated financial statements as of and for the years ended December 31, 2000 and 2001, TELKOM also identified certain errors in and made certain adjustments to, its previously issued consolidated financial statements as of and for the years ended December 31, 2000 and 2001. These errors were identified during the seven-month period ended on January 29, 2004, resulting in TELKOM’s making adjustments during that seven-month period to its consolidated financial statements as of and for the years ended December 31, 2000 and 2001.
      Reportable conditions (as defined under standards established by the American Institute of Certified Public Accountants) relating to TELKOM’s internal control over financial reporting (as defined in Rules 13a-15(f) and 15d-15(f) of the Exchange Act) were also identified and communicated by PwC in their report dated January 9, 2004 in connection with its audit of the consolidated financial statements as of and for the year ended December 31, 2002, and by KPMG in connection with its audit of the consolidated financial statements as of and for the years ended December 31, 2003 and 2004. Both PwC and KPMG identified the same material weaknesses as part of their respective audits. As part of their communications, both PwC and KPMG informed the Audit Committee that they had identified “reportable conditions” each of which constituted a “material weakness” (as each such term is defined under standards established by the American Institute of Certified Public Accountants) in TELKOM’s internal control over financial reporting. TELKOM’s principal executive officer and principal financial officer concluded that because of the “material weaknesses” identified, TELKOM’s disclosure controls and procedures as of December 31, 2003 and 2004 were not effective to ensure that information required to be disclosed by TELKOM in the reports that TELKOM files or submits under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the Commission’s rules and forms and is accumulated and communicated to TELKOM’s management, including TELKOM’s principal executive officer and principal financial officer, as appropriate to allow timely decisions regarding required disclosure. See Item 15. “Control and Procedures”.
      Since November 2003, TELKOM has been working to improve its internal control over financial reporting, including those needed to enable it to comply with Section 404 of the Sarbanes-Oxley Act of 2002, as well as its disclosure controls and procedures, and has taken a number of steps to address these issues. See Item 15. “Control and Procedures”. TELKOM cannot provide any assurance that the steps that it has taken and is continuing to take will result in all material weaknesses being identified and corrected. TELKOM expects that its internal controls over financial reporting and disclosure controls and procedures will continue to evolve in the future. Any control system, regardless of how well designed, operated and evaluated, can provide only reasonable, not absolute, assurance that its objectives will be met. Any failure to implement required new or improved controls, or difficulties encountered in their implementation, could adversely affect TELKOM’s ability to report financial results on a timely and accurate basis or cause TELKOM to fail to meet its reporting obligations. Inadequate internal controls could also cause investors to lose confidence in TELKOM’s reported financial information, which could have an adverse effect on the trading price of TELKOM’s securities.

14

Risks Relating to Indonesia
Current political and social events in Indonesia may adversely impact business activity in Indonesia.

      Since 1998, Indonesia has experienced a process of democratic change, resulting in political and social events that have highlighted the unpredictable nature of Indonesia’s changing political land-

12

scape.landscape. These events have resulted in political instability, as well as general social and civil unrest on a number of occasions in the past few years. For example, in June 2001, demonstrations and strikes affected at least 19 cities after the Government mandated a 30% increase in fuel prices. Similar demonstrations occurred in January 2003, when the Government again tried to increase fuel prices, as well as electricity and telephone charges. In both instances, the Government was forced to drop or substantially reduce such proposed increases.

     Recently, hostilities

      Actions by separatist movements and clashes between religious and ethnic groups have also resulted in social and civil unrest in parts of Indonesia. In the provinces of Aceh and Papua (formerly Irian Jaya), there have been numerous clashes between supporters of separatist movements and the Indonesian military. In the province of AcehMaluku, clashes between religious groups have reached new heights. A prior peace pact, known as the Cessationresulted in thousands of Hostilities Agreement,casualties and displaced persons in recent years. The Government has failedattempted to maintain peace between the Free Aceh Movement (GAM) militia and the Government and the Joint Security Committee formed by the two sides has been disbanded. Increasing tensionresolve problems in Aceh has led to a recent military build-up in the province and continued outbreaks of violence, arson and social unrest. Human rights violators, including those from high-ranking military positions, have recently begun to be more actively prosecuted in Indonesia. However, the success of these prosecutions has been mixed.

     During the years 2002 and 2003, several bombing incidents took place in Indonesia, including in Bali, at the JW Marriott hotel in Jakarta and at the airport, shopping centers and places of worship. Terrorist acts may be directed at foreigners in Indonesia or in relation to political matters such as the July 2004 Presidential and Vice-Presidential elections.

     In April 5, 2004, Indonesians for the first time directly elected representatives to the Indonesian parliament via proportional votingtroubled regions with an open list of candidates. As of the date hereof, the tallying of votes and the overall results of the parliamentary election have been generally peaceful, and business and investment activity in Indonesia do not appear to have been adversely affected. We expect, however, that in the lead-up to the July 2004 Presidential and Vice-Presidential elections, increased political activity and campaigning may result in a degree of political and social uncertainty with regard to Indonesia and economic activity may be adversely affected, as both foreign and domestic investors may become cautious and scale down or postpone business activity during this period.

limited success.

Political and related social developments in Indonesia have been unpredictable in the past and there can be no assurance that social and civil disturbances will not occur in the future and on a wider scale, or that any such disturbances will not, directly or indirectly, have a material adverse effect on us or on an investment in the ADSs or Common Stock. Further, these social and civil disturbances could continue to have a material adverse effect on investment and confidence in and the performance of, the Indonesian economy and in turn our business.
Terrorist activities in Indonesia could destabilize Indonesia, which could adversely affect TELKOM’s business.
      Bombings have occurred in recent years, at government buildings, foreign diplomatic facilities, night clubs and other locations, including the Jakarta Stock Exchange building, the Police Function Building in Jakarta, the departure lounge of Jakarta’s Soekarno-Hatta International Airport, the parliament building in Jakarta and a shopping mall in Jakarta. A bombing campaign struck religious buildings throughout Indonesia in 2000. On October 12, 2002, over 200 people were killed in a bombing at a tourist area in Bali. This terrorist attack resulted in a significant decline in international tourism. On August 5, 2003 a bomb exploded at the J.W. Marriott Hotel in Jakarta killing at least 12 people and injuring more than 150 people. On September 9, 2004, a bomb exploded outside the Australian embassy in Jakarta’s central business district, killing at least nine people and injuring over 180 people. On May 28, 2005, two bombs exploded in a crowded market in Tentena in central Indonesia, killing at least 20 people and injuring at least 40. Indonesian and United States government officials have indicated that some of these bombings may be the responsibility of Jemaah Islamiya, a Southeast Asian-based terrorist network allegedly linked to the international terrorist organization, Al-Qaeda. In May 2005, the United States also closed its embassy in Indonesia for a few days following an unspecified threat.
      There can be no assurance that further terrorist acts will not occur in the future. A number of governments have from time to time issued warnings to their citizens in relation to a perceived increase in the possibility of terrorist activities in Indonesia, targeting foreign, particularly United States, interests. Such acts could destabilize Indonesia and increase internal divisions within the Government as it considers responses to such instability and unrest. Violent acts arising from and leading to instability and unrest have in the past had, and could continue to have, a material adverse effect on investment and confidence in, and the performance of, the Indonesian economy and our business.

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Declines or volatility in Indonesia’s currency exchange rates can have a material adverse impact on business activity in Indonesia.

      The Government’s exchange rate policies and any future changes in the value of the Rupiah against the US Dollar or other currencies could adversely affect TELKOM’s financial condition and results of operations. On August 14, 1997, Bank Indonesia permitted the exchange rate for the Rupiah to float without announcing a level at which it would intervene. From August 1997 to mid-1998, the month-end value of the Rupiah relative to the US Dollar declined from approximately Rp.2,600 per US Dollar to as low as approximately Rp.15,000 per US Dollar. There can be no assurance that: (a) the Rupiah will not be subject to continued depreciation or volatility; (b) the current exchange rate policy will remain the same; (c) the Government will act when necessary to stabilize, maintain or increase the value of the Rupiah, or that any such action, if taken, will be successful.

      Continued depreciation or volatility of the Rupiah against the US Dollar or other currencies could adversely affect general economic conditions in Indonesia. Rupiah depreciation would also drive up the Rupiah cost of TELKOM’s capital expenditure program since most of the equipment to be used in the expansion of TELKOM’s network capacity is sourced off-shore and priced in foreign currencies, mainly in US Dollars and Euros, while almost all of TELKOM’s revenues are in Rupiah. Changes in the current exchange rate policy may result in significantly higher domestic interest rates, liquidity shortages, capital or exchange controls or the withholding of additional financial assistance by multilateral

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institutions. The foregoing consequences, if they occur, could have a material adverse effect on TELKOM’s business. As of December 31, 2003,2004, the average exchange rate of Rupiah to US Dollar, based on the Reuters middle buy and sell rates, was Rp.8,440Rp.9,290 per US Dollar.

Fluctuations in the exchange rate between the Rupiah and the US Dollar could affect, among other things, the dollar value of any amounts a holder or beneficial owner of ADSs will receive in the event we issue dividends, the US Dollar value of the proceeds a holder or beneficial owner would receive upon the sale in Indonesia of shares of the Common Stock and the secondary market price of the ADSs.
Indonesia ended its Extended Financing Facility with the International Monetary Fund and the consequences thereof are unpredictable.

In December 2003, the Government ended its Extended Financing Facility (“EFF”) program with the International Monetary Fund (“IMF”) and began to drawdown on its gross foreign reserves, as well as on its outstanding balances at the IMF. Considering the Government’s current fiscal deficit and modest foreign exchange reserves, the end of the EFF has raised concerns about the ability of the Government to fund subsidies for staples such as food and fuel, which, in turn, could have extremely serious political and social consequences. The end of the EFF also brings with it the end of the Government’s ability to reschedule Indonesia’s Paris Club bilateral foreign loans. Other consequences of ending the EFF are not known at this stage. While the Government has sought to address these concerns by issuing a White Paper setting forth its fiscal strategy and policy objectives for 2004, there can be no assurance that the Government’s strategy will be successful or that its objectives will be met in full or in part.
Indonesia no longer has access to the Paris Club but continues to rely on loans from official creditors.

      Since the financial crisis of 1997, the members of the Paris Club have been an important source of funding for the Government. The Paris Club is an informal voluntary group of 19 creditor countries that coordinates solutions for payment difficulties experienced by debtor nations. As of December 31, 2003, lending from the Paris Club members to the Government accounted for approximately 36% of the Government’s total foreign debt. The last debt rescheduling took place in April 2002 when the Paris Club rescheduled approximately US$5.4 billion of principal and interest due from the Government between April 2002 and December 2003. This was done by extending the period within which the amounts could be repaid.

In addition to the Paris Club, the World Bank and the Asian Development Bank have been major sources of financing. As of December 2003, these Banks had outstanding loans to the Indonesian government of approximately US$18.3 billion. Disbursements from these sources have been slower than expected in recent years

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due to the slow pace of institutional reforms in Indonesia and concerns regarding the Government’s decentralization plan. Currently,As of the date of this Annual Report, regional governments in Indonesia are not allowed to borrow in foreign currency and any change to Indonesian law allowing them to borrow in foreign currency could be a source of potential debt service problems. The World Bank and Asian Development Bank lending programs are subject to regular compliance reviews and can be reduced or withdrawn at any time. The impact of any elimination of lending cannot be assessed but is likely to be materially adverse.
Indonesia’s high level of sovereign debts may result in it being unable to service its debt obligations when they become due.

      Indonesia’s high level of sovereign debts has forced it to negotiate with its major creditors several times since the 1997 financial crisis. For example, the Government held a round of talks with the Paris Club donor countries and the IMF in April 2002 to discuss the rescheduling of Indonesia’s debt due in 2002. In these talks, the Government sought to restructure not just debt principal, but interest payments as well, totaling US$2.6 billion. The meeting resulted in the rescheduling of debt principal payments

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only, but no assurance can be given as to Indonesia’s capacity to meet these rescheduled debt payments. While no further rescheduling has taken place, future decisions to renegotiate Indonesia’s existing sovereign indebtedness cannot be ruled out. Such decisions may affect Indonesia’s sovereign credit rating and could have a material adverse impact on investor confidence in Indonesia.
Indonesia’s sovereign debt rating continues to be reviewed and revised by international rating agencies.

      Beginning in 1997, certain recognized statistical rating organizations, including Moody’s Investors Service, Inc. (“Moody’s”) and Standard & Poor’s Rating Services (“S&P”), downgraded Indonesia’s sovereign rating and the credit ratings of various credit instruments of the Government and a large number of Indonesian banks and other companies. As of April 2, 2004,July 13, 2005, the Government’s long-term foreign currency debt and its short-term foreign currency debt were rated “B2” and “B2”“NP”, respectively, by Moody’s and rated “B”“B+” and “B”, respectively, by S&P. These ratings reflect an assessment of the Government’s overall ability to pay its obligations and its willingness to meet its financial commitments as they come due. No assurance can be given that Moody’s, S&P or any other international credit rating agency will not downgrade the credit ratings of Indonesia or Indonesian companies. Any such downgrade would have an adverse impact on liquidity in the Indonesian financial markets and the ability of Indonesian companies, including TELKOM, to raise additional financing and the interest rates at which such additional financing is available.
Indonesia is vulnerable to natural disasters and other events beyond TELKOM’s control, which could severely disrupt the normal operation of TELKOM’s business and adversely affect TELKOM’s operating results.
      TELKOM’s existing operations are primarily in Indonesia, parts of which are vulnerable to natural disasters. Disruption of operations for any reason, including earthquakes, tsunamis, floods, volcanic eruptions, droughts, power outages or other events beyond TELKOM’s control, could cause disruptions to operations and damage to equipment which would adversely affect TELKOM’s financial condition and results of operations.
      In 2002, a major flood in Jakarta affected TELKOM’s operations in Jakarta, where a significant portion of its revenues are derived. In December 2004, northern parts of the Indonesian island of Sumatra, and particularly the province of Aceh, suffered severe damage following a massive earthquake estimated to be of magnitude 9.3 on the Richter scale and a series of tsunami waves on December 26, 2004. The tsunami resulted in 18 TELKOM employees being killed or missing, caused an estimated Rp.54.9 billion (US$5.9 million) of damage to TELKOM’s assets and equipment in the Aceh province, including 22 out of 44 switching facilities and transmission facilities and disrupted over 35,000 telephone lines out of approximately 99,000 lines.

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      On March 28, 2005, a major earthquake estimated to be of magnitude 8.7 on the Richter scale struck off the western coast of Sumatra. Scientists and seismic experts believe that rather than relieving stresses along the Sunda fault, located to the south of Sumatra, the seismic stresses along the Sunda fault continue unabated or have increased, and warned of the possibility of further earthquakes and tsunamis. The increased seismic activity has also coincided with a volcano in Sumatra spewing ash in April 2005, as well as increased volcanic activity and build up of gases in a volcano in Sumatra and another one near Bandung, where TELKOM’s headquarters is based.
      While TELKOM maintains several insurance policies relating to TELKOM’s assets which covered the losses resulting from tsunami damage, it does not maintain business interruption insurance, and there can be no assurance that the insurance coverage will be sufficient to protect TELKOM from potential losses resulting from natural disasters and other events beyond its control. In addition, there can be no assurance that the premium payable for these insurance policies upon renewal will not increase substantially, which may adversely affect TELKOM’s financial condition and results of operations.
Risks relating to TELKOM and its subsidiaries
TELKOM’s expansion plans may strain key resources and thereby adversely affect its business, financial condition and prospects.

To remain competitive and position TELKOM in gaining market share, TELKOM has identified its primary business objective as becoming a full service and network provider. To achieve this objective, TELKOM has determined that it should increase its focus on multimedia and other types of services in addition to its present core business concentration on local, domestic long-distance and mobile cellular services. TELKOM has also received its commercial license to provide IDD services and has begun offering IDD services beginning June 7, 2004. The implementation of measures designed to achieve these objectives could strain TELKOM’s managerial, financial and other resources, which could adversely affect TELKOM’s business, financial condition and prospects.
Failure to amicably resolve KSO disputes may in some areas result in limited network expansion in some regions and impede TELKOM’s access to subscribers and ability to compete effectively.

     As a result of the Indonesian economic crisis that began in 1997, certain KSO partners experienced substantial difficulties in fulfilling their obligations to TELKOM under the KSO Agreements, leading to disputes between TELKOM and certain KSO partners. TELKOM has explored various options to resolve the KSO issues and has negotiated the acquisition of all or a majority of shares of certain KSO partners. In 2001, TELKOM acquired a 90.32% equity interest in PT Dayamitra Telekomunikasi Indonesia (“Dayamitra”), the KSO partner for KSO VI. On April 19, 2002, TELKOM entered into a conditional sale and purchase agreement for the purchase of all of the outstanding equity interests in PT Pramindo Ikat Nusantara (“Pramindo”), the KSO partner for KSO I, to be completed in three stages. As part of the initial closing, it acquired legal ownership of 30% of the shares of Pramindo in August 2002 and obtained control over Pramindo, subject to certain conditions, including that TELKOM continues to meet its payment obligations under the terms of the promissory notes issued as consideration for the purchase price and the protective rights retained by the selling stockholders. Under the agreement, the legal ownership of TELKOM in Pramindo increased by a further 15% (from 30% to 45%) on September 30, 2003 and the legal ownership to the remaining 55% was transferred to TELKOM on March 15, 2004. On July 31, 2003, TELKOM purchased all of the outstanding equity interests in PT AriaWest International (“AriaWest”), the KSO partner for KSO III. As a result of these

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acquisitions, TELKOM resolved its disputes with its former KSO partners for KSO I, KSO III and KSO VI. TELKOM now has full operational and management control over these KSO regions.

     On January 20, 2004, TELKOM and PT Mitra Global Telekomunikasi Indonesia (“MGTI”) entered into an agreement to amend and restate the KSO Agreement with respect to Regional Division IV. Under this amendment agreement, for the remaining KSO period, TELKOM will be entitled at its sole discretion and expense to construct new telecommunications facilities in Regional Division IV and MGTI will receive fixed monthly payments derived from revenues generated by the Regional Division IV operations.

TELKOM continues to have a KSO partner for KSO VII, PT Bukaka SingTel International (“Bukaka SingTel”). As of the date of this Annual Report, there are no disputes between TELKOM and Bukaka SingTel. However, because Bukaka SingTel continues to be responsible for network development in KSO VII and has operational responsibility, should any issues or disputes arise that are not amicably resolved network expansion may be limited and this would impede TELKOM’s access to subscribers and its ability to compete effectively in KSO VII.

TELKOM’s controlling stockholder’s interests may differ from those of TELKOM’s other stockholders.

The Government has an aggregate interest of approximately 51.19% of the issued and outstanding shares of TELKOM and has control of TELKOM and the ability to determine the outcome of substantially all actions requiring the approval of TELKOM shareholders. The Government is also the holder of the Dwiwarna share of TELKOM, which has special voting rights and veto rights over certain matters, including the election and removal of the Directors and Commissioners of TELKOM. Through the MoC,Ministry of Communication and Information (“MoCI”), the Government also exercises regulatory power over the Indonesian telecommunications industry. There might be situations where the objectives of the Government, as TELKOM’s regulator and its controlling shareholder, conflict with TELKOM’s business goals. In addition, there can be no assurance that the Government will not direct opportunities to other telecommunications service providers in which it holds an interest.
Certain systems failures could, if they occur, adversely affect TELKOM’s results of operations.

      TELKOM’s telecommunications services are currently carried through its fixed-line,fixed line, cellular and data networks. All types of networks use last mile access, regional metro junction and long haul transmission networks as a common network resource. For last mile access, TELKOM operates Copper Access Network, Optical Access Network and Wireless Access Network. The regional metro junction and long haul transmission network operated by TELKOM consists of optical fiber cable, microwave, submarine cable and satellite transmission links.

Any failure of this integrated network, TELKOM’s servers, or any link in the transmission chain that results in an interruption in TELKOM’s operations or the provision of any service, whether from

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operational disruption, natural disaster or otherwise, could damage TELKOM’s ability to attract and retain subscribers and adversely affect its results of operations, financial condition and prospects.
TELKOM’s regulatorsRegulators and other telecommunications operators may challenge TELKOM’s ability to apply PSTN tariffs to its new CDMA-based fixed wireless phone service, which is marketed under the brand name TELKOMFlexi.

      In December 2002, TELKOM introduced new CDMA-based fixed wireless phone service, which is marketed under the brand name TELKOMFlexi.TELKOMFlexi for both fixed and portable handsets. As of December 31, 2003,2004, this service was offered in 38192 cities, 25130 of which are financed entirely by TELKOM (in non-BOT areas) and the remaining 1362 are financed through the Build, Operate and Transfer (BOT) scheme (in BOT areas)revenue sharing-arrangements (“RSAs”). CDMA-based fixed wireless technology enables rapid development of telephone networks and reduces the capital expenditures per line by obviating the need for the installation of underground cables. TELKOMFlexi offers customers the ability to use a wireless handset with limited mobility (within a local code area)the same area code).

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Customers generally have all features offered by cellular services except roaming to other local area codes.codes and internationally. Postpaid TELKOMFlexi customers are charged tariffs that are similar to PSTN tariff rates for this service while prepaid customers are charged tariffs slightly higher than PSTN tariffpostpaid rates and inbut with no monthly fees. In each case, theboth TELKOMFlexi postpaid and prepaid tariffs are substantially lower than tariffs for cellular services. Telecommunications regulators, cellular operators and cellular trade associations have sought and may in the future seek to impose limitations on TELKOM’s ability to provide fixed wireless services at PSTN rates. If any such limitations are imposed, TELKOM could lose part or all of the benefit of its investment in the network that supports the TELKOMFlexi service. TELKOM may also be subject to disputes with its regulators or competitors.
TELKOM may need to raise funds required for certain future expenditure requirements and the terms of any debt financing may subject TELKOM to restrictive covenants.

TELKOM may need to raise significant additional funds in order to support its growth, undertake acquisitions, meet unexpected contingencies and develop new or enhanced services and products. It may also need to respond to competitive pressures, acquire complementary businesses or technologies or take advantage of opportunities. TELKOM cannot be certain that such additional funding, if needed, will be available on acceptable terms.terms, if at all. Furthermore, any debt financing, if available, may involve restrictive covenants, which may limit TELKOM’s operating flexibility with respect to certain business matters. If adequate funds are not available on acceptable terms, TELKOM may be unable to develop or enhance its services. It may also be unable to take advantage of future opportunities or respond to competitive pressures, any of which could have a material adverse effect on TELKOM’s business, results of operations and financial condition.
TELKOM’s ability to develop adequate financing arrangements is critical to support its capital expenditures.

The telecommunications industry is capital intensive in nature. In order to satisfy customer demand and provide service and technology that is comparable to and compatible with, other telecommunications service providers, TELKOM must continue to expand and modernize its network, which involves substantial capital investment. TELKOM historically has relied heavily on two-step loans obtained through the Government and third-party financing, including vendor financing, to support the development of its fixed line network. If TELKOM is unable to obtain adequate vendor or other third-party financing for its planned capital expenditures or otherwise fund such expenditures through other financing arrangements, including free cash flows, TELKOM may have to forego, delay or postpone certain of its planned capital expenditures. This may prevent TELKOM from being able to expand sufficiently and upgrade its network.

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Employee unions may negatively affect TELKOM’s business.

      Laws permitting the formation of labor unions, combined with weak economic conditions, have resulted and may continue to result, in labor unrest and activism in Indonesia. On February 25, 2003, the Indonesian Parliament passed a new employment law, Law No. 13 of 2003 (the “Employment Law”), which took effect on March 25, 2003. The Employment Law covered the increment of severance amount, service and compensation payment payable to terminated employees as well as to allow employees to unionize without intervention from employers. The Employment Law and new implementation regulations that may be issued thereunder may substantially affect labor relations in Indonesia. In May 2000, TELKOM employees formed a union named “Serikat Karyawan TELKOM” or “SEKAR”. Membership with SEKAR is not compulsory. TELKOM believes that its relations with SEKAR are good. However, there can be no assurance that the activities of employee unions will not materially and adversely affect TELKOM’s business, financial condition and prospects.

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New technologies may adversely affect TELKOM’s ability to remain competitive.

The telecommunications industry is characterized by rapid and significant changes in technology. TELKOM may face increasing competition from technologies currently being developed or that may be developed in the future. New technologies, services or standards could require significant changes to its business model, the development of new products or the provision of additional services. In addition, TELKOM may need to substantially upgrade itsto a next generation network to implement convergent technologies and update and expandupgrade its billing and credit control systems to accommodate growth in its business and the adoption of new technologies and services. New products and services may be expensive to develop and may result in the introduction of additional competitors into the marketplace. TELKOM cannot accurately predict how emerging and future technological changes will affect its operations or the competitiveness of its services. Similarly, TELKOM cannot provide any assurances that the technologies it adopts will not soon thereafter become obsolete or subject to intense competition from new technologies in the future.
TELKOM operates in a legal and regulatory environment that is undergoing significant reforms and such reforms may adversely affect TELKOM’s business.

      There are a number of uncertainties in the current regulatory environment for the Indonesian telecommunications industry. In particular, the Telecommunications Law No. 36 of 1999 (“Telecommunications Law”) provides key guidelines for industry reforms, including industry liberalization, facilitation of new entrants and changes to the industry’s competitivecompetition structure. The Telecommunications Law only outlines the framework and substantive principles for the liberalization of the telecommunications industry. TELKOM believesconsiders that there is uncertainty in the Indonesian regulatory environment with regard to, among other things:

 • Interconnection:TELKOM is obligated to allow other operators to interconnect their networks with those of TELKOM subject to entering into interconnection agreements with those other operators. Currently,As of the date of this Annual Report, TELKOM’s ability to negotiate such interconnection agreements is limited by the provisions set forth in various Ministerial Decrees governing interconnection rates. Following the enactment of the Telecommunications Law, a restructuring of the interconnection policy was proposed based upon a cost-based tariff approach as mutually determinedagreed by the operators rather than the revenue sharing scheme as currently implemented. AsOn March 11, 2004, the Ministry of Communication (“MoC”), the date of this Annual Report, the MoC hasformer telecommunications regulator, issued a decree stating that cost-based interconnection will commence beginning January 1, 2005 and2005. In connection with the implementation of cost-based interconnection, the MoC is in the process of appointingappointed an independent consultant that willto assist in determining the basis for the new cost-based tariffs. The MoC is also drafting detailed regulations that will implementAs of the date of this new policy.Annual Report, the MoCI has not issued implementing regulations. TELKOM expects that the current interconnection fees may be adjusted as a result of the new cost-based interconnection scheme but TELKOM can give no assurance regarding the impact, if

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any, of such adjustment on TELKOM’s business, financial condition, results of operations and prospects.
 
 • Licenses:The Government is in the process of amending certain TELKOMTELKOM’s separate licenses to comply with the Telecommunications Lawprovide fixed line services, DLD services and to establish the so-called Modern License.IDD services were replaced and combined into a single license issued on May 13, 2004. TELKOM also has a multimedia license that includes services such as Internet service provider, data communication and VoIP. The Government, with due regard to prevailing laws and regulations, may amend the terms of TELKOM’s licenses and business authority at its discretion. It may also impose certain mandatory obligations on the license holders. See Item 4.B. “Business Overview — Regulation — Modern License”. Any breach of the terms and conditions of its licenses or business authority or failure to comply with applicable regulations may result in such licenses or business authority being revoked. Any revocation or unfavorable amendment of the licenses or business authority, or any failure to renew them on comparable terms, could have a materially adverse effect on TELKOM’s business, financial condition, results of operations and prospects.
 
 • Tariffs:In 1995, the Government implemented regulations providing a formula to establish the tariff adjustment for domestic fixed line telecommunications services. However, such annual tariff review adjustment has not been applied on a consistent basis. In addition, amendments to the current price cap policy allow operators to calculate yearly tariff adjustments beginning

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January 1, 2002, based on a formula to be stipulated by the Government. On January 29, 2002, the Government issued a letter to TELKOM stipulating a 45.49% increase in domestic fixed line telephone tariffs to be implemented over three years. For the year 2002 a tariff increase, with a weighted average of 15% increase, was implemented. In January 2003, the Government postponed the second tariff increase due to numerous public protests. However, on March 30, 2004, the Government, throughas recommended by the ITRB, announced that it would allow operators to rebalance their tariffs, with the resulting weighted average of tariffs increasing by 9%. ThereThe Government did not effect the remaining tariff increases by January 2005, and there is no assurance as to when or whether the remaining tariff increases will be implemented by the Government.
 
 • Indonesian Telecommunications Regulatory Body (“ITRB”):The Telecommunications Law contemplates the establishment of a new independent regulatory bodyallows Government to delegate its authority to regulate, monitorsupervise and control the telecommunications sector in Indonesia to an independent regulatory body, while maintaining the authority to formulate policies over the industry. Such delegation of authority to the ITRB was implemented under Decree of the Minister of Communications No. 31/2003, dated July 11, 2003. The ITRB comprises officials from the Directorate General of Post and Telecommunication and the Committee of Telecommunications Regulations and was officially established on July 11, 2003.Regulations. There can be no assurance that the ITRB will not take actions that may be detrimental to TELKOM’s business or prospects.
 
 • Competition in the Fixed Line Domestic Telecommunications Market:Historically, TELKOM has had the exclusive right to provide fixed line domestic telecommunications services in Indonesia. Pursuant to regulations introduced to implement the Telecommunications Law, the Government plans to terminateterminated TELKOM’s monopoly in providing fixed line domestic telecommunications services. It hasThe MoC issued Indosat a principal license to provide local telephone services from August 2002, an operational license for local telephone services.2002. On May 13, 2004, Indosat received its commercial license to provide domestic long-distance telephone services. As ofIndosat launched its CDMA fixed wireless access service under the date of this Annual Report, TELKOM cannot provide any assurance as to when Indosat will commence offering domestic long-distance services to customers,brand name “StarOne” in Surabaya on May 29, 2004 and in Jakarta on July 25, 2004, thereby creating a “duopoly system” in Indonesia’s fixed line domestic telecommunications market. In JuneAs of December 31, 2004, Indosat launched its own CDMA fixed wireless service, called “StarOne.” As of the date of this Annual Report, Indosat only offersoffered this service in Jakarta, Surabaya, butMalang and their surrounding areas. Based on amendment to the interconnection agreement between TELKOM and Indosat dated March 31, 2005, TELKOM has agreed to open interconnection with Indosat’s local fixed line service in certain areas such as Batam, Bandung, Medan, Balikpapan and Malang. Therefore, Indosat is expected to expand its service coverage to other cities in Indonesia. Indosat also commenced offering limited domestic long-distance services for calls within its network in late

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2004. This greater competition in the fixed line market, including fixed wireless, could lead to a decline in TELKOM’s existing subscriber base as subscribers choose to receive services from other providers.
 
 • DLD and IDD Services:On March 11, 2004, the MoC issued Decree No. 28/2004, Decree No. 29/2004 and Decree No. 30/2004 regarding DLD and IDD services. These Decreesthat further implement the Government’s policy of encouraging competition in the markets for DLD and IDD services. Among other matters, the Decrees state that consumers will be able to choose their DLD and IDD providers among various competitors, including TELKOM and Indosat, and require operators to createutilize separate 3-digitthree digit access codes for DLD and IDD services. Based on Decree No. 28/2004, TELKOM, which currently uses “0” as the access code for its DLD service, was required by March 1, 2005 to cease using the “0” access code and to implement a three digit access code in the form of “01X” for access to its DLD service. However, TELKOM has not within the given deadline implemented, and does not expect to in the near future to implement, a three digit access code, as extensive installation or upgrade of equipment will be required. TELKOM expects to incur significant costs in connection with thesethe new requirement to establish three digit DLD and IDD requirements (including establishing DLD and IDD access codes), such ascodes, including expenditures required to install or upgrade new switching facilities, create a new routing database, costs relating to customer education and other marketing costs. In addition, competitionresponse to the MoC Decree No. 28/2004, in June 2004, TELKOM submitted a letter to the ITRB highlighting the technical difficulties in implementing the three digit DLD access codes within the given deadline and the substantial costs involved, and requesting that TELKOM be allowed to continue using the “0” prefix for its DLD access prefix and that it be given an additional five year period to implement the three digit DLD access codes. On April 1, 2005, the MoCI, to which telecommunications regulatory responsibility was transferred, announced that it would make available to Indosat the “011” DLD access in five major cities that were technically ready for interconnection, including Jakarta, and progressively extend it to all other area codes within five years. TELKOM has also been assigned “017” as its DLD access code. However, interconnection between Indosat and TELKOM in these five cities would still be subject to the parties reaching agreement on technical and business arrangements and entering into an interconnection agreement. In the five-year interim period and thereafter, the “0” prefix may continue to be used by all operators, including TELKOM, as default codes for each operator’s customers to access the DLD service selected by the respective operator.

Competition in the market for DLD services could lead to a decline in TELKOM’s DLD revenues as subscribers choose to receive DLD services from other providers, such as Indosat. With regard to IDD services, on May 13, 2004 TELKOM received its commercial license from the Government to provide IDD services and began offering such services to customers on June 7, 2004. Nevertheless, competition among IDD service providers may limit TELKOM’s ability to generate significant IDD revenues. TELKOM is currently in the process of negotiating with Indosat to allow TELKOM’s customers to access Indosat’s DLD services, and for Indosat’s customers to access TELKOM’s IDD services.
 
 On May 17, 2005, the MoCI issued decree No.6/2005. According to Decree No.6/2005, the three digit access code in the form of “01X” and “0” access code for access to DLD services may be used. The “0” access code is being used to accommodate customers who prefer not to choose their long-distance carrier, while the “01X” access code has to be implemented gradually in local areas in which TELKOM has technical capabilities to support such services. By April 1, 2010, the “01X” long-distance services must be commenced in all TELKOM’s local areas to accomodate customers who prefer to choose their long-distance carrier. TELKOM is in the process of negotiating with Indosat to allow TELKOM’s customers to access Indosat’s DLD services and for Indosat’s fixed and mobile customers to access TELKOM’s IDD services.
• Compensation Risk:The Telecommunications Law provides that TELKOM and Indosat will be compensated for the early termination of their exclusive rights. TELKOM previously had exclusive rights to provide fixed local and domestic long-distance services in Indonesia.

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TELKOM’s exclusive right to provide fixed local telecommunications services was terminated by the Government in August 2002 and TELKOM’s exclusive right to provide domestic long-distance services was terminated on March 30, 2004. The Government has determined the scheme of compensation for the termination of TELKOM’s exclusive rights, which will consist of

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(i) expedited issuance of an IDD license to TELKOM, which was issued on May 13, 2004; (ii) approval of the reissuance and transfer of TELKOM’s DCS 1800 license to Telkomsel, which took place on July 12, 2002; and (iii) a net cash payment to TELKOM and its KSO partners of Rp.478 billion (after taxes). While the amount of the compensation payable to TELKOM and its KSO partners has been determined, payment is contingent on appropriations to the State Budget for the MoC,MoCI, which requires approval by Parliament. As of the date of this Annual Report, TELKOM can provide no assurance with regard to when Parliament will approve the necessary appropriations or as to the effects the net cash payment will have on TELKOM’s financial condition, results of operations and prospects.
 
 • USO Risk:All telecommunications network operators and service providers are bound by a Universal Service Obligation, or USO, which requires provision of certain telecommunications facilities and infrastructure in rural and remote areas. As a local network provider, TELKOM is obligated to build and operate telecommunications networks in the USO areas. Historically, TELKOM has been obligated to contribute 5% of its capital expenditures to its USO requirements. TELKOM has typically experienced financial losses in providing such network capacity in rural and remote areas.The MoC Decree No. 34/2004 issued on March 11, 2004 sets out certain minimum requirements that USO facilities must meet. On March 30, 2004, the GovernmentMoC issued a new regulationAnnouncement No. PM.2/2004, which sets forth the basic policies underlying the USO program and requires telecommunications operators in Indonesia to contribute 0.75% of gross revenues (with due consideration for bad debt and interconnection charges) for USO development. As of the date of this Annual Report, there has been no implementing regulations or announcement as to when such contribution will take effect. The Government is also in the process of drafting detailed regulations that will fully implement the USO program for telecommunications operators in Indonesia.

There can be no assurance that the amendment or interpretation or implementation of current laws and regulations, or the introduction of additional laws or regulations, will not adversely affect TELKOM’s business, financial condition and prospects.
TELKOM’s increasingly important cellular operations face significant constraints and competitive pressures.

      TELKOM provides cellular telecommunications services primarily through its subsidiary Telkomsel (GSM 900 Mhz and 1800 Mhz). Telkomsel has experienced rapid growth in its subscriber-base in recent years and its revenue has become an increasingly large component of TELKOM’s consolidated revenue. Telkomsel’s future growth depends upon its ability to manage capacity and spectrum constraints. Telkomsel has experienced such constraints in the past and may face such constraints in the future, which may result in network congestion, reduced service quality and an inability to increase and retain its subscriber-base and as a result may impede future growth. Telkomsel is seeking to substantially increase the capacity of its cellular network over the next three years. However, spectrum and capacity are subject to regulatory approval and allocation.

The Indonesian cellular telecommunications market is highly competitive. Currently, Telkomsel competes primarily with Indosat and Excelcomindo in attracting and retaining subscribers for its mobile cellular telecommunications services. There are also several other new competitors, including new CDMA cellular operators. Competition between Telkomsel and all of these operators is based on various factors such as pricing, network quality and coverage, range of services offered and customer service.

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TELKOM’s satellites have a limited life and substantial risk exists for TELKOM-1, and Palapa B-4 and its to be launched TELKOM-2 to be damaged or interrupted during operation and satellite loss or reduced performance may adversely affect our financial condition, results of operations and ability to provide certain services.

      TELKOM’s TELKOM-1, and Palapa B-4 and to be launched TELKOM-2 satellites have a limited operational life.lifespans. A number of factors affect the operational liveslivespans of satellites, including the quality of their construction, the durability of their component parts, the amount of fuel on board, the launch vehicle used and the manner in which the satellite is monitored and operated. The satellites could fail before the end of their useful

20

lives and repairing these satellites while in orbit is not feasible. TELKOM currently maintains in-orbit insurance covering the loss of the TELKOM-1 and Palapa B-4 satellites, providing for payments of US$57.2 millioncoverage for TELKOM-1 andsatellite. As of December 31, 2004, such coverage was US$2.351.6 million, for Palapa B-4 in the event of a total loss of the satellite. In connection with its planned launch of the TELKOM-2 satellite, TELKOM planshas procured insurance coverage to cover both the satellite and the launch services. With regard to the TELKOM-2 satellite, TELKOM has procured (i) a satellite launch and in-orbit insurance providing coverage of US$79.3 million to cover the event of a total loss of the satellite in the period between lift-off and up to one year in orbit, and (ii) post separation and in-orbit insurance coverage of US$71.0 million to cover the event of a total loss in the period between the separation of the satellite from the launcher up to one year in orbit. With regard to launch its new TELKOM-2 satelliteservices, TELKOM has procured a launch risk guarantee from Arianespace that provides reflight in the event of a launch failure in the period between November 30, 2004lift-off and December 30, 2004. TELKOM-2 will replaceseparation. However, the existing Palapa B-4 satellite (which is expected to be taken out of service around the end of 2004). The loss of existingits satellites and the failure to launch the new satellite may have a material adverse effect on ourTELKOM’s financial condition, results of operations and ability to provide certain services, particularly in the eastern parts of Indonesia which currently relies largely on satellite coverage for telecommunication services.
TELKOM is subject to Indonesian accounting and corporate disclosure standards that differ in significant respects from those applicable in other countries.

There may be less publicly-available information about Indonesian public companies, including TELKOM, than is regularly disclosed by public companies in countries with more mature securities markets. TELKOM’s audited consolidated financial statements have been prepared in accordance with Indonesian GAAP, which differs in certain material respects from U.S. GAAP. See Item 5. “Operating and Financial Review and Prospects — A. Operating Results — Summary of Significant Differences between Indonesian GAAP and U.S. GAAP” and Note 58(1)56(1) to TELKOM’s consolidated financial statements.
You are unable to pursue claims against Prasetio, Utomo & Co., a member firm of Arthur Andersen, which was the former auditor for Telkomsel.

Prasetio, Utomo & Co., formerly a member firm of Arthur Andersen, no longer exists as a legal entity in Indonesia following its dissolution in 2002. Accordingly, you will not be able to seek or recover damages from Prasetio, Utomo & Co. or Arthur Andersen in connection with its audit report for Telkomsel.

TELKOM is incorporated in Indonesia and it may not be possible for investors to effect service of process or to enforce judgments obtained in the United States against TELKOM.

      TELKOM is a limited liability company incorporated in Indonesia, operating within the framework of Indonesian laws relating to public companies and all of TELKOM’s significant assets are physically located in Indonesia. In addition, the majority of TELKOM’s Commissioners and Directors reside in Indonesia and a substantial portion of the assets of such persons is located outside the United States. As a result, it may not be possible for investors to effect service of process, including judgments, on TELKOM or such persons within the United States, or to enforce against TELKOM or such persons in the United States judgments obtained in United States courts, including judgments predicated upon the civil liability provisions of the United States federal securities laws or the securities laws of any state within the United States, or upon other bases.

TELKOM has been advised by its Indonesian legal advisor that judgments of United States courts, including judgments predicated upon the civil liability provisions of the United States federal securities laws, are not enforceable in Indonesian courts, although such judgments could be admissible as non-conclusive evidence in a proceeding on the underlying claim in an Indonesian court. There is doubt as to whether Indonesian courts will enter judgments in original actions brought in Indonesian courts predicated solely upon the civil liability provisions of the United States federal securities laws. As a

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result, holders of ADSs or Common Stock would be required to pursue claims against TELKOM or its Commissioners and Directors in an Indonesian court.
Forward-looking statements reflect current expectations and may not be correct.

      This document contains various forward-looking statements, including statements regarding our expectations and projections for future operating performance and business prospects. The words “believe”, “expect”, “anticipate”, “estimate”, “project” and similar words identify forward-looking

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statements. In addition, all statements other than statements of historical facts included herein are forward-looking statements. These statements reflect TELKOM’s current expectations. Although TELKOM believes that the expectations reflected in the forward-looking statements are reasonable, TELKOM can give no assurance that such expectations will prove to be correct. They are subject to a number of risks and uncertainties, including changes in the economic, social and political environments in Indonesia. In light of the many risks and uncertainties surrounding Indonesia, investors in the ADSs or the common shares should bear in mind that TELKOM cannot guarantee that the forward-looking statements described herein will transpire. All subsequent written and oral forward-looking statements attributable to TELKOM or persons acting on our behalf are expressly qualified in their entirety by reference to these risks.

ITEM 4.     INFORMATION ON THE COMPANY

A.  History and development of the Company

     Perusahaan Perseroan (Persero) P.T. Telekomunikasi Indonesia Tbk. (“TELKOM” or the “Company”),

      TELKOM, a majority state-owned company, is the principal provider of fixed-linefixed line services in Indonesia. TELKOM’s majority-owned subsidiary Telkomsel is also the largest Indonesian mobile cellular operator, as measured by subscribers and revenues. The Company also provides a wide range of other telecommunications services including interconnection, network, data and Internet services and other telecommunications services. Pursuant to its Articles of Association, TELKOM was established for an unlimited period of time. The Company’s purposes and objectives are to operate telecommunications networks and provide telecommunications and information services.

      In 1884, the Dutch colonial government established a private company to provide postal services and domestic telegraph services and, subsequently, international telegraph services. Telephone services were first made available in Indonesia in 1882 and, until 1906, were provided by privately-owned companies pursuant to a 25-year government license. In 1906, the Dutch colonial government formed a government agency to assume control of all postal and telecommunications services in Indonesia. In 1961, most of these services were transferred to a newly-established state-owned company to provide postal and telecommunications services in Indonesia, apart from services in Sumatera, which were transferred in the 1970’s. The Government separated postal and telecommunications services in 1965 into two state-owned companies, PN Pos and Giro and PN Telekomunikasi. In 1974, PN Telekomunikasi was further divided into two state-owned companies, Perusahaan Umum Telekomunikasi (“Perumtel”) to provide domestic and international telecommunications services and PT INTI,Industri Telekomunikasi Indonesia Tbk (“PT INTI”), to provide telecommunications equipment manufacturing. In 1980, the international telecommunications business was transferred to Indosat.

      In 1991, Perumtel was transformed into a “Persero”, or state-owned limited liability corporation with commercial purposes and renamed Perusahaan Perseroan (Persero) P.T. Telekomunikasi Indonesia, known as TELKOM. Prior to 1995, TELKOM’s business operations were segregated into twelve regional operating units, known as “Witels,” which were centrally controlled from TELKOM’s headquarters in Bandung, West Java. Each Witel had a management structure responsible for all aspects of TELKOM’s business in their respective regions, from the provision of telephone services to property management and security. The Company has its place of domicile in Indonesia and its registered office at No. 1, Jalan Japati, Bandung, 40133, Indonesia, Tel. No. (62) (22) 452-1510.

      During 1995, TELKOM restructured its operations by converting all twelve Witels into seven regional divisions (Division I Sumatera; Division II Jakarta and the surrounding areas; Division III West

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Java; Division IV Central Java; Division V East Java; Division VI Kalimantan; and Division VII Eastern part of Indonesia) and one Network Division. The Company also entered into KSO Agreements pursuant to which it transferred the right to operate five of its seven regional divisions (regional divisions I, III, IV, VI and VII) to private sector consortia, each of which involved one or more prominent international telecommunications operators. The KSO Agreements provided for the relevant KSO partner to manage and operate the regional division for a fixed term, undertake the construction of

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a specified number of fixed lines and, at the end of the fixed term, transfer the existing and new telecommunications facilities in the region to TELKOM for an agreed amount of compensation. The KSO Agreements also provided for TELKOM and the KSO partner to share revenues generated during the term of the agreement.

      On November 14, 1995, the Government sold TELKOM shares through an initial public offering. TELKOM shares are listed on the Jakarta Stock Exchange and the Surabaya Stock Exchange and its shares, in the form of ADSs, are listed on the New York Stock Exchange and the London Stock Exchange. Its shares have also been publicly offered without listing on the Tokyo Stock Exchange. TELKOM is currently one of the largest companies by market capitalization in Indonesia, with a market capitalization of approximately Rp.68,040Rp.97,272 billion as of December 31, 20032004 and of approximately Rp.72,576.0Rp.93,740 billion as of June 24, 2004.May 31, 2005. The Government currently has an aggregate interest of approximately 51.19% of the issued and outstanding shares of TELKOM. The Government also holds the Dwiwarna share of TELKOM, which has special voting and veto rights over certain matters.

      Following the Indonesian economic crisis that began in mid-1997, certain KSO partners experienced difficulties in fulfilling their obligations to TELKOM leading to certain disputes. As a result, TELKOM has in recent years acquired or entered into agreements to acquire control of its KSO partners in regions I, III and VI. In 2001, TELKOM acquired 90.32%VI, and amended the terms of the shares of its KSO partner for Regional Division VI, PT Dayamitra Telekomunikasi (“Dayamitra”) and purchased a call option and granted a put optionagreement with respect to the remaining shares of Dayamitra. In 2002, TELKOM entered into an agreement to acquire 100% of the shares of its KSO partner in Regional Division I, PT Pramindo Ikat Nusantara (“Pramindo”). Under the termsregion IV to obtain legal right to control financial and operating decisions of its agreement with Pramindo, TELKOM agreed to acquire the shares of Pramindo in three tranches, beginning August 2002 (30%), with TELKOM also obtaining management control of Pramindo in August 2002. TELKOM acquired a further 15% in September 2003 and the remaining 55% was acquired on March 15, 2004. As of the date of this Annual Report, TELKOM legally owns 100% of Pramindo. In 2003, TELKOM acquired 100% of the shares of its KSO partner for Regional Division III, PT AriaWest International (“AriaWest”) and settled its arbitration proceeding with AriaWest. On January 20, 2004, TELKOM and PT Mitra Global Telekomunikasi Indonesia (“MGTI”) entered into an agreement to amend and restate the KSO Agreement with respect to Regional Division IV. Under this amendment agreement, for the remaining KSO period, TELKOM will be entitled at its sole discretion and expense to construct new telecommunications facilities in Regional Division IV and MGTI will receive fixed monthly payments derived from revenues generated by the Regional Division IV operations.
• In 2001, TELKOM acquired 90.32% of the shares of its KSO partner for Regional Division VI, Dayamitra, purchased a call option and granted a put option with respect to the 9.68% remaining shares of Dayamitra and subsequently, on December 14, 2004, exercised the call option to acquire such remaining shares.
• In 2002, TELKOM entered into an agreement to acquire 100% of the shares of its KSO partner in Regional Division I, Pramindo. Under the terms of its agreement with Pramindo, TELKOM agreed to acquire the shares of Pramindo in three tranches, beginning August 2002 (30%), with TELKOM also obtaining management control of Pramindo in August 2002. TELKOM acquired a further 15% in September 2003 and the remaining 55% was acquired on March 15, 2004. As of the date of this Annual Report, TELKOM legally owns 100% of Pramindo.
• In 2003, TELKOM acquired 100% of the shares of its KSO partner for Regional Division III, AriaWest and settled its arbitration proceeding with AriaWest.
• On January 20, 2004, TELKOM and PT Mitra Global Telekomunikasi Indonesia (“MGTI”) entered into an agreement to amend and restate the KSO Agreement with respect to Regional Division IV. Under the amended and restated KSO agreement, the rights to operate fixed-line telecommunication services in KSO IV region are transferred to TELKOM and KSO IV is operated under the management, supervision, control and responsibility of TELKOM. In addition, for the remaining KSO period, TELKOM is entitled at its sole discretion and expense to construct new telecommunication facilities in Regional Division IV. MGTI receives fixed monthly payments, while TELKOM is entitled to the balance of the KSO revenues after the monthly amounts due to MGTI and operating expenses. If the KSO IV unit is unable to or does not for any reason pay MGTI the fixed monthly payments due to it, TELKOM is obligated to make up any deficiency. At the end of the KSO period (December 31, 2010), all rights, title and interest of MGTI in existing property, plant and equipment (including new additional installations) and inventories shall be transferred to TELKOM at no cost. As a result of the amended and restated KSO agreement, TELKOM obtained the legal right to control financial and

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operating decisions of Regional Division IV for a purchase price of US$390.7 million, or Rp.3,285 billion, which represents the present value of the fixed monthly payments (totaling US$517 million) to be paid by TELKOM to MGTI from 2004 through 2010 plus direct cost of the business combination.

For a more complete description of the foregoing transactions and TELKOM’s KSO arrangements, see Item 10. “Additional Information — C. Material Contracts” and Item 4. “Information on the Company — B. Business Overview — Joint Operation Scheme (KSO).”

      In 1999, the Government passed Telecommunications Law No. 36 which became effective in September of 2000. The Telecommunications Law provides key guidelines for industry reforms, including industry liberalization, facilitation of new entrants and enhanced competition. Under the prior telecommunications law, TELKOM and PT Indonesian Satellite Corporation (“Indosat”) maintained joint ownership in most telecommunications companies in Indonesia. The Governments reforms called for the progressive elimination of these joint shareholdings to promote competition. As a result, in 2001, TELKOM acquired Indosat’s 35% interest in Telkomsel, resulting in TELKOM owning 77.72% of the shares of Telkomsel and Indosat acquired TELKOM’s 22.5% interest in Satelindo and 37.7% interest in Lintasarta. In 2002, TELKOM sold 12.72% of Telkomsel to Singapore Telecom Mobile Pte Ltd (“SingTel Mobile”), resulting in TELKOM’s ownership being reduced to 65% of the shares of Telkomsel. For a more complete description of the foregoing transactions, see Item 10. “Additional Information — C. Material Contracts.”

      Pursuant to the Telecommunications Law, the Government as of August 1, 2001 terminated the exclusive rights of TELKOM to provide fixed-linefixed line services in Indonesia and Indosat to provide international direct dial services. TELKOM’s exclusive right to provide domestic local service was terminated in August 2002 and TELKOM’s exclusive right to provide domestic long-distance service

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was likewise terminated in August 2003. The full implementation of the termination of these exclusive rights is expected to result in TELKOM and Indosat providing new telecommunications services in competition with each other. On May 13, 2004, TELKOM received its commercial license to provide IDD fixed-linefixed line services and began offering such services on June 7, 2004. The MoC issued Indosat is expecteda license to enter the domestic long-distance market and onprovide local telephone services from August 2002. On May 13, 2004, Indosat received its commercial license to provide domestic long-distance telephone services. Indosat launched its CDMA fixed wireless access service under the brand name “StarOne” in Surabaya on May 29, 2004 and in Jakarta on July 25, 2004, thereby creating a “duopoly system” in Indonesia’s fixed line domestic telecommunications market. As of the date of this Annual Report, Indosat only offers this service in limited areas, but is expected to expand service coverage to additional cities in Indonesia. Indosat also commenced offering limited domestic long-distance services for calls within its network in late 2004.

      For a description of the important events in the development of the Company’s business since the beginning of the Company’s last three financial years to the date of this Annual Report, see Item 5. “Operating and Financial Review and Prospects — A. Operating Results — Overview”. A description of the Company’s principal capital expenditures and divestitures, since the beginning of the Company’s last three financial years to the date of this Annual Report is set forth in Item 5. “Operating and Financial Review and Prospects — B. Liquidity and Capital Resources”. Information concerning the principal capital expenditures and divestitures currently in progress is also described in Item 5. “Operating and Financial Review and Prospects — B. Liquidity and Capital Resources”.

B.  Business Overview

General

      TELKOM is the main provider of fixed-linefixed line telecommunications services in Indonesia and is the majority owner of Telkomsel, which is the largest Indonesian mobile cellular operator, as measured by subscribers and revenue. The Company also provides a wide range of other telecommunications

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services including interconnection, network, data and Internet services and other telecommunications services. TELKOM reports revenues in the following categories:

 • Fixed-lineFixed lines (which consists of fixed wireline and fixed wireless);
 
 • Cellular;
 
 • Joint Operation SchemeSchemes (KSO);
 
 • Interconnection;
 
 • Network;
 
 • Data and Internet;
 
 • Revenue SharingRevenue-Sharing Arrangements; and
 
 • Other Telecommunications-relatedTelecommunications Services (including revenues from telephone directory services and building management services).

     These revenue categories are all reported as part of the “Fixed Line”

      For segment inreporting purposes, TELKOM has three segments: (i) fixed lines, (ii) cellular and (iii) other. See Note 48 to the consolidated financial statements with the exceptionstatements. The fixed line segment provides local, domestic long-distance and international (starting 2004) telephone services, and other telecommunications services (including among others, leased lines, telex, transponder, satellite and Very Small Aperture Terminal-VSAT) as well as ancillary services. The cellular segment provides basic telecommunication services, particularly mobile cellular telecommunication services. Operating segments that do not individually represent more than 10% of the cellular business which is reportedCompany’s revenues are presented as a separate segment.

“Other” comprising the telephone directories and building management businesses.

      For 2003,2004, no single customer, other than interconnection customers, accounted for more than 1% of TELKOM’s total operating revenues and TELKOM’s top 100 customers, other than interconnection customers, together accounted for more than 5% of its total operating revenues. For the purpose of calculating operating revenues, TELKOM treats each state-owned enterprise owned by the Government as a single customer.

      TELKOM’s business does not experience significant seasonality.

Fixed-LineFixed Line Services

     Fixed-line

      Fixed line services are comprised mainly of local and domestic long-distance services. TELKOM is the principal provider of fixed-linefixed line services in Indonesia. In 2003,2004, TELKOM provided fixed-linefixed line services in Divisions I, II, III, IV, V and VI. In 2003,2004, revenues from fixed-linefixed line services in these divisions contributed Rp.8,896.9Rp.10,645.0 billion (US$1,054.11,145.9 million), or 32.8%31.4% of total operating revenues. Beginning July 31, 2003,January 20, 2004, when TELKOM acquired KSO investor, PT AriaWest International (“AriaWest”),Regional Division IV, TELKOM began

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providing fixed-linefixed line services in Division III. Fixed-lineIV. Fixed line services in Divisions IV andDivision VII continue to be provided through KSO, a joint venture arrangementsoperation arrangement, and revenue to TELKOM from these KSOs areKSO VII is reported under Joint Operation Scheme.Schemes. See “— Joint Operation Scheme” below.

     Fixed-line

      Fixed line subscribers pay one-time installation charges, ongoing monthly subscription charges and usage charges for local and domestic long-distance services. Usage charges are generally uniform nationwide and are based on call distance, call duration and the time of day at which calls are made. In addition, subscribers are provided with a number of value-added features, such as voicemail and information services and billing and directory assistance, which are billed on a monthly basis.

      TELKOM has historically been the principal provider of fixed-linefixed line services and Indosat has historically been the principal provider of international direct dial services in Indonesia. However, the Government as of August 1, 2002 has terminated TELKOM’s exclusive rights to provide local fixed-linefixed line services and Indosat’s exclusive rights to provide international direct dial services.services, and the MoC issued Indosat a license to provide local telephone services from August 2002. On May 13, 2004, the Government issued TELKOM’s commercial license to provide IDD fixed-linefixed line services and Indosat’s

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commercial license to provide DLD fixed-linefixed line services. As a result, TELKOM and Indosat are or are expected to be engagednow engage in competition with each other in the markets for these two services.

CDMA Fixed Wireless

      In December 2002, TELKOM began offering a limited mobility (within a local area code) CDMA-based fixed wireless phone service under the brand name “TELKOMFlexi” for both fixed and portable handsets. TELKOM’s rollout of this service began in the three cities of Surabaya, Denpasar and Balikpapan and, as of December 31, 2003,2004, was available in 38192 cities. TELKOM’s rollout of this limited mobility fixed wireless service is occurring concurrently with its use of CDMA fixed wireless technology for the development of its fixed-linefixed line network. CDMA-based fixed wireless technology enables rapid development of telephone networks and the reduction of capital expenditures per line by reducing and often eliminating the need for layout of cables. TELKOM intends to continue to rapidly develop its CDMA-based fixed wireless network and expand its TELKOMFlexi service to other cities and regions in Indonesia. As of December 31, 2003,2004, TELKOM had 3961,139 BTSs and 815,6472,470,929 line units deployed, of which 3801,057 BTSs and 775,6472,213,579 line units were financed by TELKOM and 1682 BTSs and 40,000257,350 line units were established under the BOT scheme (instead of the 53,900 that were originally planned).RSA scheme. As of December 31, 2003,2004, TELKOM had achieved sales of 467,9331,429,368 TELKOMFlexi Line Units (consisting of 459,725 Line Unitssubscribers (including 63,005 subscribers in non-BOT areas and 8,208 Line Units in BOT areas)financed by RSA schemes).

      TELKOMFlexi revenues are reported under fixed-linefixed line services. These revenues are being reported as fixed-linefixed line revenues because this business is being conducted pursuant to TELKOM’s fixed-linefixed line license. See “— Regulation” below.

      TELKOMFlexi subscribers have the option of postpaid and prepaid services. Postpaid subscribers pay one-time activation charges, ongoing monthly subscription charges and usage charges for local domestic-long distance and international services, which charges are generally the same as those paid by fixed-linefixed line subscribers. Prepaid subscribers are required to purchase starterpacks containing RUIM cards and refill vouchers in amounts of Rp.50,000, Rp.100,000 and Rp.150,000or refills, and pay only usage charges, which are typically higher than those paid by postpaid subscribers. For prepaid services,Prepaid subscribers may purchase a customer purchasing a Rp.80,000 RUIM card orRp.35,000 starterpack, which include a Rp.50,000 refill voucher, is counted as a subscriber for two months,or Rp.80,000 starterpack, which includes a Rp.100,000 voucher. Refills are made through purchasing vouchers, or through voucherless electronic and ATM channels, in amounts ranging from Rp.10,000 to Rp.500,000, depending on the refill method used. Vouchers and refills purchased remain active for limited periods from the date of purchase, ranging from 15 days for a Rp.10,000 voucher or refill is counted asto 210 days for a subscriber for three months and a Rp.150,000Rp.500,000 voucher or refill is counted asrefill. TELKOM generally provides a subscriber for four months. Each time a customer purchases a refill30-day grace period after the aforementioned two, three and four month periods are recalculated asexpiry of the date the refill is activated.

active period in which only incoming calls are allowed.

      TELKOMFlexi subscribers are also provided with a number of value-added features, such as SMS, WAP, a web portal, voicemail and information services, such as billing, directory assistance and directory assistance.other content services. The revenues from these services are reported in the Data and Internet category. See “— Data and Internet Services” below.

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IDD Services

Customers generally have all features offered by cellular services except roaming to other local area codes and internationally. In June 2004, TELKOM launched a “FlexiCombo” service which allows each subscriber to have up to three telephone numbers, with each number assigned for use in one of three different cities, but without local area code or international roaming. As of December 31, 2004, the “Flexicombo” service was available in 130 cities.

IDD Services
      TELKOM received its commercial license from the Government to provide IDD services on May 13, 2004. TELKOM began offering IDD fixed-line services, under the brand name “Telkom International Call 007”, or “TIC 007,” on June 7, 2004. TELKOM reports its IDD revenues will be reported asunder international interconnection revenues becauseas this service relies onrequires interconnection between TELKOM and network operators in other countries. See ‘—“— Interconnection Services” below. Through its VoIP service, which is known as “TelkomGlobal 017”, TELKOM already provides international call services althoughbased on VoIP technology. TELKOM records its revenues from the VoIP service are recorded under “Data and Internet Services,” becauseServices” as this service relies on data transmission over the Internet.uses IP and data-based infrastructure. See “— Data and Internet Services” below.

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Cellular Services

     TELKOM provides its mobile cellular services mainly through its 65%-owned subsidiary Telkomsel. Cellular revenues grew by 35.9% from Rp.6,226.8 billion (US$695.7 million), or 29.9% of TELKOM’s total operating revenues, for the year ended December 31, 2002 to Rp.8,458.8 billion (US$1,002.2 million), or 31.2% of TELKOM’s total operating revenues, for the year ended December 31, 2003. Over the same period, the total number of Telkomsel’s mobile cellular subscribers (pre-paid and post-paid) increased by 60% from approximately 6.0 million at the end of 2002 to approximately 9.6 million as of December 31, 2003. Of the total subscribers as of December 31, 2003, approximately 8.6 million were pre-paid and approximately 1 million were post-paid. Based on data developed by Telkomsel from various sources, Telkomsel had an estimated 51% share of the GSM cellular market in Indonesia as of December 31, 2003, compared to an estimated 52.8% market share as of December 31, 2002.

     Telkomsel provided GSM cellular services in Indonesia through its own network and internationally through 217 international roaming partners in 135 countries as of the end of 2003. Telkomsel currently has the largest network of any of the cellular operators in Indonesia, providing coverage to over 85% of Indonesia’s population and more than 600 cities.

     Telkomsel provides its subscribers with the option of a prepaid service under the brand name “SimPATI Nusantara,” or a postpaid service under the brand name “KartuHALO.” In May 2004, Telkomsel launched a new prepaid brand “Kartu As,” which will target customers who travel frequently within Indonesia by offering free domestic roaming and lower tariffs on local and domestic long-distance calls, with no difference between tariffs for calls during peak and off-peak hours. Telkomsel also offers tailor-made postpaid services for corporate customers and a postpaid family service under the brand name “HALOkeluarga.”

     Generally, postpaid subscribers pay one-time activation charges, ongoing monthly subscription charges and usage charges for roaming, SMS, local, domestic-long distance and international services. Beginning April 2004, postpaid subscribers can also choose among the following options: (a) free national roaming; (b) 150 free SMS per month; or (c) waiver of the monthly subscription charge.

      TELKOM provides its mobile cellular services through its 65%-owned subsidiary Telkomsel. Cellular revenues grew by 23.2% from Rp.8,458.8 billion (US$1,002.2 million), or 31.2% of TELKOM’s total operating revenues, for the year ended December 31, 2003 to Rp.10,421.3 billion (US$1,121.8 million), or 30.7% of TELKOM’s total operating revenues, for the year ended December 31, 2004. Over the same period, the total number of Telkomsel’s mobile cellular subscribers (pre-paid and post-paid) increased by 69.8% from approximately 9.6 million at the end of 2003 to approximately 16.3 million as of December 31, 2004. Of the total subscribers as of December 31, 2004, approximately 15.0 million were pre-paid and approximately 1.3 million were post-paid. Based on data developed by Telkomsel from various sources, Telkomsel had an estimated 54% share of the GSM cellular market in Indonesia as of December 31, 2004, compared to an estimated 51% market share as of December 31, 2003.
      Telkomsel provided GSM cellular services in Indonesia through its own network and internationally through the networks of 356 international roaming partners in 145 countries as of the end of 2004. As of December 31, 2004, Telkomsel had the largest network of any of the cellular operators in Indonesia, providing coverage to over 90% of Indonesia’s population and more than 650 cities.
      Telkomsel provides its subscribers with the option of a prepaid service under the brand name “SimPATI Nusantara,” or a postpaid service under the brand name “KartuHALO.” In May 2004, Telkomsel launched a new prepaid brand “Kartu As,” which is intended to target the lower segment of the market as well as customers who travel frequently within Indonesia, by offering free domestic roaming and lower tariffs on local and domestic long-distance calls, with no difference between tariffs for calls during peak and off-peak hours. Telkomsel also offers tailor-made postpaid services for corporate customers and a postpaid family service under the brand name “HALOkeluarga.”
      Generally, postpaid subscribers pay one-time activation charges, ongoing monthly subscription charges and usage charges for roaming, SMS, local, domestic-long distance and international services. Beginning April 2004, postpaid subscribers can also choose among the following options: (a) free national roaming; (b) 150 free SMS per month; or (c) waiver of the monthly subscription charge.
      Prepaid customers purchase a starter package, the price of which starts at Rp.25,000 for Kartu As customers and Rp.25,000 for Kartu As customers and Rp.50,000 for SimPATI customers, depending on the value of the pre-paid voucher included in the package. For Kartu As customers, the Rp.25,000 starter package contains a SIM card and a voucher worth Rp.25,000. For SimPATI customers, the Rp.25,000 starter package contains a SimPATI SIM card and a voucher worth Rp.15,000. SimPATI subscribers can buy pre-paid vouchers ranging in value from Rp.20,000 to Rp.1,000,000 to increase the value of their SIM cards, while Kartu As subscribers can buy prepaid vouchers of either Rp.20,000 or Rp.50,000. The customer’s prepaid account can be topped up electronically or by supplemental refill vouchers. When refill vouchers are purchased, subscribers call an automated telephone number and enter a 14-digit code printed on their voucher in order to activate or supplement their account with the new prepaid amount. Kartu As and SimPATI starter packages and refill vouchers may be purchased at any of Telkomsel’s service centers and distribution outlets. Electronic refills may also be purchased at selected automatic teller machines, via telephone banking and over the Internet. In June 2004, Telkomsel introduced a new electronic refill service called “M-KIOS” which allows prepaid customers to refill with a mobile handset as the transaction terminal through secure means. In September 2004, Telkomsel introduced an automatic refill service that permits payments through VISA credit cards, pursuant to which a prepaid customer can elect to have a prepaid account refilled automatically in one of the following ways: (i) whenever the prepaid account balance falls below Rp.10,000; (ii) a fixed amount monthly; or (iii) on demand, through SMS. The prepaid customer credits generally have a predetermined expiry date and irrespective of usage will expire on such date, although in August 2004, Telkomsel introduced a “Kartu As always On” package under which prepaid customer credits do not expire but a minimum monthly usage of Rp.25,000 is required, or failing which a charge amounting to the shortfall is imposed.

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      Provided that they meet certain credit-related eligibility requirements, SimPATI customers may sign up for Telkomsel’s post-paid KartuHALO services at any time without having to change their telephone numbers. While Kartu As and SimPATI customers do not pay an activation fee or monthly subscription charges, they pay higher usage charges than postpaid subscribers.
      Telkomsel also offers cellular users value added services such as SMS, international roaming, GPRS, MMS, multi-party calling, call forwarding, call waiting, caller number display and non-display, ring back tone (which allows callers to the subscriber of the ring back tone service to hear a pre-selected ringing tone), mobile banking, SMS to e-mail services and other personal mobile data services, the revenues from which are reported in the Data and Internet category. See “— Data and Internet Services” below.
      The following table sets forth selected historical information on Telkomsel’s subscriber base for the periods indicated:
              
  As of or for the
  Year Ended December 31,
   
  2002 2003 2004
       
Cellular subscribers(1)
            
 KartuHALO (Postpaid)  923,005   1,007,034   1,327,549 
 SimPATI (Prepaid)  5,087,767   8,581,773   11,557,758 
 Kartu As (Prepaid)  —   —   3,405,201 
Deactivations(2)
            
 KartuHALO (Postpaid)  279,648   265,355   317,020 
 SimPATI (Prepaid)  470,298   2,823,025   8,470,819 
 Kartu As (Prepaid)  —   —   824,489 
Average monthly churn rate(3)
            
 KartuHALO (Postpaid)  2.5%  2.3%  2.3%
 SimPATI (Prepaid)  1.1%  4.0%  6.8%
 Kartu As (Prepaid)  —   —   5.0%
ARPU(4)
            
 KartuHALO (Postpaid) (Rp.’000)  298   314   304 
 SimPATI (Prepaid) (Rp.’000)  103   95   84 
 Kartu As (Prepaid)  —   —   48 
(1) Prepaid subscribers may purchase SIM-cards and refill vouchers with values ranging from Rp.20,000 to as much as Rp.1,000,000. For Kartu As, customers, the Rp.25,000 starter package contains a SIM cardvoucher values are Rp.20,000 and a voucher worth Rp.25,000. For SimPATI customers, the Rp.50,000 starter package contains a SimPATI SIM card and a voucher worth Rp.35,000. SimPATI subscribers can buy pre-paid vouchers ranging in value from Rp.50,000 to Rp.1,000,000 to increase the value of their SIM cards, while Kartu As subscribers can buy prepaid vouchers of either Rp.20,000 or Rp.50,000. The customer’s prepaid account can be topped up electronically or by supplemental refill vouchers. When refill vouchers are purchased, subscribers call an automated telephone number and enter a 14-digit code printed on their voucher in order to activate or supplement their account with the new prepaid amount. The prepaid customer credits have a predetermined expiry date and irrespective of usage will expire on such date. Kartu As and SimPATI starter packages and refill vouchers may be purchased at any of Telkomsel’s service

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centers and distribution outlets. Electronic refills may also be purchased at selected automatic teller machines, via telephone banking or over the Internet.

     Provided that they meet certain credit-related eligibility requirements, SimPATI customers may sign up for Telkomsel’s post-paid KartuHALO services at any time without having to change their telephone numbers. While Kartu As and SimPATI customers do not pay an activation fee or monthly subscription charges, they pay higher usage charges than postpaid subscribers.

     Telkomsel also offers cellular users value added services such as SMS, international roaming, GPRS, MMS, multi-party calling, call forwarding, call waiting, caller number display and non-display, mobile banking, SMS to e-mail services and other personal mobile data services, the revenues from which are reported in the Data and Internet category. See “— Data and Internet Services” below.

The following table sets forth selected historical information onshows the respective active periods for Telkomsel’s subscriber base for the periods indicated:

              
As of or for the year ended
December 31,
200120022003
Cellular subscribers(1)
            
 KartuHALO (Postpaid)  865,211   923,005   1,007,034 
 SimPATI (Prepaid)  2,386,821   5,087,767   8,581,773 
Deactivations(2)
            
 KartuHALO (Postpaid)  177,514   279,648   265,355 
 SimPATI (Prepaid)  120,403   470,298   2,823,025 
Average monthly churn rate(3)
            
 KartuHALO (Postpaid)  2.0%  2.5%  2.3%
 SimPATI (Prepaid)  0.7%  1.1%  4.0%
ARPU(4)
            
 KartuHALO (Postpaid) (Rp.’000)  287   298   314 
 SimPATI (Prepaid) (Rp.’000)  111   103   95 

SimPATI prepaid packages:
(1) Prepaid subscribers may purchase SIM-cards and refill vouchers with values ranging from Rp.50,000 to as much as Rp.1,000,000. The following table shows the respective active periods for Telkomsel’s SimPATI prepaid packages:

Period during which
subscribers will have
Value of Voucher or SIM Cardaccess to services
Period during which
subscribers will have
SimPATI Value of Voucheraccess to services
Rp.20,00045 days
Rp.50,000 60 days
Rp.100,000 90 days
Rp.150,000 150 days
Rp.200,000 180 days
Rp.300,000 210 days
Rp.500,000 240 days
Rp.1,000,000 270 days
(2) Includes voluntary and involuntary deactivations.
(3) The average monthly churn rate for a year is computed by adding the monthly churn rates during the year and dividing by 12. The monthly churn rate is computed by dividing the number of subscribers deactivated during the month by the number of subscribers at the beginning of the month.
(4) Refers to Average Revenue per User which is calculated by taking the sum of the ARPU for each month of the year and dividing by 12. ARPU is computed by dividing total cellular revenues for either postpaid or prepaid subscribers (excluding connection fees, interconnection revenues, international roaming revenues from visitors and dealer discounts) for each month by the respective average number of postpaid or prepaid cellular subscribers for that month.

    In February 2004, Telkomsel began technical testing in Jakarta of a new service called “EDGE,” for Enhanced Data rates for GSM Evolution,

(4) Refers to Average Revenue per User which offers enhanced data transmission speed. Asis calculated by taking the sum of the dateARPU for each month of this Annual Report, Telkomsel expects to commercially launch EDGE in a limited number of cities sometime during the second half of 2004.

27year and dividing by 12. ARPU is computed by dividing total cellular revenues for either postpaid or prepaid subscribers (excluding

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Joint Operation Scheme

     TELKOM and its KSO partner, PT Mitra Global Telekomunikasi Indonesia, provide fixed-line and other services in Regional Division IV and TELKOM and its KSO partner, PT Bukaka SingTel International, provide fixed-line and other services in Regional Division VII. Until July 31, 2003, when TELKOM acquired AriaWest, TELKOM and AriaWest provided fixed-line and other services in Regional Division III. In 2003, TELKOM’sconnection fees, interconnection revenues, international roaming revenues from KSO divisions in Regional Divisions III, IVvisitors and VII (including amortizationdealer discounts) for each month by the respective average number of unearned initial investor payments) contributed Rp.1,486.3 billion (US$176.1 million),postpaid or 5.5%, of total operating revenues.

TELKOM’s portion of KSO revenuesprepaid cellular subscribers for the last three years (2001 — 2003) are indicated in the following table:

                          
200120022003
KSO DivisionMTRDTRMTRDTRMTRDTR
(Rp. in billion)(Rp. in billion)(Rp. in billion)
Division I (Sumatera)(1)
  497.9   259.8   296.3   197.3   —   — 
Division III (West Java and Banten)(2)
  366.3   117.8   390.1   157.8   242.4   90.0 
Division IV (Central Java)  371.3   133.6   387.5   183.2   404.3   184.6 
Division VI (Kalimantan)(3)
  —   —   —   —   —   — 
Division VII (Eastern Indonesia)  238.7   221.8   245.8   262.7   253.2   308.4 
   
   
   
   
   
   
 
 Total  1,474.2   733.0   1,319.7   801.0   899.9   583.0 
   
   
   
   
   
   
 
that month.
     In June 2004, Telkomsel introduced an enhanced data transmission technology known as “EDGE,” or Enhanced Data rates for GSM Evolution, which offers enhanced data transmission speeds for handsets equipped to handle EDGE. As of December 31, 2004, EDGE was available in Jakarta and Surabaya.
Joint Operation Scheme
      TELKOM and its remaining KSO partner, PT Bukaka SingTel International, provide fixed line and other services in Regional Division VII. Until January 20, 2004, when TELKOM acquired Regional Division IV, TELKOM and its KSO partner, MGTI, provided fixed line and other services in Regional Division IV. In 2004, TELKOM’s revenues from KSO divisions in Regional Division VII and Regional Division IV before its consolidation (including, in each case, amortization of unearned initial investor payments) contributed Rp.656.6 billion (US$70.7 million), or 1.9% of total operating revenues.
      TELKOM entered into agreements to establish the KSOs in 1995 and pursuant to such agreements transferred the right to operate Regional Divisions I, III, IV, VI and VII to private sector consortia, each of which involved one or more prominent international telecommunications operators. TELKOM then retained the right to operate divisions II and V, its two largest divisions. The KSO Agreements provided for the relevant KSO partner to manage and operate the Regional Division for a fixed term, undertake the construction of a specified number of fixed lines and, at the end of the fixed term, transfer the existing and new telecommunications facilities in the region to TELKOM for a pre-determined agreed amount of compensation. The KSO Agreements also provided for TELKOM to receive the following: (a) a one-time initial payment from the KSO partners; (b) guaranteed minimum monthly payments or Minimum TELKOM Revenues (“MTR”); and (c) additional monthly revenue sharing payments or Distributable TELKOM Revenues (“DTR”) from the revenues of the KSO Unit after payments of MTR and certain operating expenses. The KSO partners were granted licenses to provide fixed line services in the respective regions.
      Following the Indonesian economic crisis that began in mid-1997, certain KSO partners experienced difficulties in fulfilling their obligations to TELKOM. In order to assist the KSO partners in meeting their obligations and to maintain the continuity of the KSO Agreements, all of the KSO partners entered into a Memorandum of Understanding with TELKOM on June 5, 1998 which reduced the minimum line construction obligations of the KSO partners, decreased TELKOM’s share of KSO revenues for 1998 and 1999 and cancelled TELKOM’s option to purchase the assets of the KSO before the end of the KSO period. Beginning January 1, 2000, the parties reverted to the terms of the original KSO agreements with respect to MTR and DTR payments. Due to the severity of the crisis, these measures did not solve the significant difficulties faced by the KSO partners and TELKOM has in recent years acquired or entered into agreements to acquire control of its KSO partners in Regional Divisions I, III and VI, and amended the terms of the KSO Agreement with respect to Regional Division IV to acquire control of the KSO IV operations.

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      TELKOM’s portion of KSO revenues for the last three years (2002 — 2004) are indicated in the following table:
                         
  2002 2003 2004
       
KSO Division MTR DTR MTR DTR MTR DTR
             
  (Rp. in billion) (Rp. in billion) (Rp. in billion)
Division I (Sumatera)(1)
  296.3   197.3   —   —   —   — 
Division III (West Java and Banten)(2)
  390.1   157.8   242.4   90.0   —   — 
Division IV (Central Java)(3)
  387.5   183.2   404.3   184.6   35.2   15.7 
Division VI (Kalimantan)(4)
  —   —   —   —   —   — 
Division VII (Eastern Indonesia)  245.8   262.7   253.2   308.4   260.8   333.8 
                   
Total  1,319.7   801.0   899.9   583.0   296.0   349.5 
                   
(1) TELKOM consolidated Regional Division I (Sumatera) from August 2002, following an agreement to acquire 100% of the equity interest in and control of Pramindo on August 15, 2002. For 2002, the numbers included in this table for Regional Division I (Sumatera) represent the revenues generated by Regional Division I from January 1, 2002 to July 31, 2002. TELKOM consolidated Rp.364.4 billion and Rp.1,252.7 billion of operating revenues from Regional Division I (Sumatera) in 2002 and 2003, respectively.
(2) For 2003, MTR and DTR are from January 1 to July 31, 2003. TELKOM consolidated Regional Division III (West Java and Banten) as of and for the year ended December 31, 2003 following the acquisition of a 100% equity interest in AriaWest on July 31, 2003. TELKOM consolidated Rp.482.3 billion of operating revenues from Regional Division III (West Java and Banten) from July 31, 2003 through December 31, 2003.
(3) TELKOM consolidated Regional Division VI (Kalimantan) as of and for the year ended December 31, 2001, following the acquisition of a 90.32% equity interest in Dayamitra on May 17, 2001. TELKOM consolidated Rp. 260.3 billion, Rp. 323.4 billion and Rp.449.2 billion of operating revenues from Regional Division VI (Kalimantan) in 2001, 2002 and 2003, respectively.

    TELKOM entered into agreements to establish the KSOs in 1995 and pursuant to such agreements transferred the right to operate Regional Divisions  I, III, IV, VI and VII to private sector consortia, each of which involved one or more prominent international telecommunications operators. TELKOM retained the right to operate divisions II and V, its two largest divisions. The KSO Agreements provided for the relevant KSO partner to manage and operate the Regional Division for a fixed term, undertake the construction of a specified number of fixed lines and, at the end of the fixed term, transfer the existing and new telecommunications facilities in the region to TELKOM for a pre-determined agreed amount of compensation. The KSO Agreements also provided for TELKOM and the KSO partner to share revenues generated during the term of the agreement.

     Following the Indonesian economic crisis that began in mid-1997, certain KSO partners experienced difficulties in fulfilling their obligations to TELKOM. In order to assist the KSO partners in meeting their obligations and to maintain the continuity of the KSO Agreements, all of the KSO partners entered into a Memorandum of Understanding with TELKOM on June 5, 1998 which reduced the minimum line construction obligations of the KSO partners, decreased TELKOM’s share of KSO revenues for 1998 and 1999 and cancelled TELKOM’s option to purchase the assets of the KSO before the end of the KSO period. Beginning January 1, 2000, the parties reverted to the terms of the original KSO agreements with respect to MTR and DTR payments. Due to the severity of the crisis, these

28

measures did not solve the significant difficulties faced by the KSO partners and TELKOM has in recent years acquired or entered into agreements to acquire control of its KSO partners in regions I, III and VI.

     On May 17, 2001, TELKOM acquired 90.32% of the shares of its KSO partner for Regional Division VI, PT Dayamitra Telekomunikasi (“Dayamitra”) and purchased a call option and granted a put option with respect to the remaining shares of Dayamitra, for an aggregate consideration of approximately US$130.8 million (excluding consultants’ fees of approximately US$3.3 million, which was capitalized as part of the acquisition cost). An initial payment of US$18.3 million was made on May 17, 2001, US$8.9 million was paid on August 10, 2001 as a post-closing, working capital adjustment to the purchase price and the balance of US$103.6 million was paid in eight quarterly installments of approximately US$13.0 million between August 17, 2001 and May 17, 2003.

     On April 19, 2002, TELKOM entered into a Conditional Sale and Purchase Agreement to acquire 100% of the issuedequity interest in and paid up share capitalcontrol of its KSO partnerPramindo on August 15, 2002. For 2002, the numbers included in this table for Regional Division I PT Pramindo Ikat Nusantara (“Pramindo”). Underrepresent the termsMTR and DTR generated by Regional Division I from January 1, 2002 to July 31, 2002. TELKOM consolidated Rp.364.4 billion, Rp.2,022.5 billion and Rp.2,176.8 billion of the agreement,operating revenues from Regional Division I in 2002, 2003 and 2004, respectively.(2) For 2003, MTR and DTR are from January 1 to July 31, 2003. TELKOM agreed to acquire the shares of Pramindo in three tranches: in August 2002 (30%), September 2003 (15%)consolidated Regional Division III (West Java and December 2004 (55%). TELKOM has provided US$384.4 million in its accounts as the aggregate consideration for this transaction. Of the US$384.4 million, TELKOM made an initial payment of US$9.3 million (Rp.82 billion) in August 2002 and issued promissory notes (series I and II) dated August 2002 for the remaining amount. The agreement grants the selling shareholders a number of protective rights and is conditional upon TELKOM meeting its payment obligations under the promissory notes. The series I promissory notes had a face value of approximately US$372.2 million, while the aggregate amount of the series II promissory notes is estimated to be approximately US$2.9 million. The promissory notes were payable in ten unequal quarterly installments through December 2004 which were funded by monthly amounts transferred by TELKOM to an escrow account. Under the agreement, TELKOM also provided a loan of US$86 million (Rp.765 billion) to Pramindo which was used to repay loansBanten) from the IFC, one of the selling shareholders. TELKOM also made an additional payment of Rp.250 billion in respect of a working capital reimbursement to the selling shareholders. TELKOM obtained control of Pramindo as of the closing in August 2002. On January 28, 2004, TELKOM signed a short-term loan agreement with ABN AMRO Bank N.V. Jakarta in the amount of approximately US$130 million and on March 15, 2004 TELKOM used the loan proceeds to repurchase the outstanding promissory notes that were due on June 15, 2004, September 15, 2004 and December 15, 2004. This allowed TELKOM to accelerate the purchase of the remaining 55% of Pramindo that it did not yet own. As of the date of this Annual Report, TELKOM owns 100% of Pramindo.

     On July 31, 2003 following the acquisition of a 100% equity interest in AriaWest on July 31, 2003. TELKOM acquired 100%consolidated Rp.377.9 billion of the shares of its KSO partner foroperating revenues from Regional Division III PT AriaWest International (“AriaWest”) for an aggregate consideration of US$38.67 million in cash (US$20 million of which was paid when the purchase agreement was signed on May 8, 2002(West Java and the remaining US$18.67 million was paid on July 31, 2003) and US$109.1 million in promissory notes. The promissory notes, which are interest-free, are payable in 10 semi-annual installments. At the same time, in consideration of the release of AriaWest’s outstanding obligations to its lenders, TELKOM also repaid approximately US$99 million of AriaWest’s debt (including interest of US$25.0 million) on behalf of AriaWest and entered into a new loan agreement for approximately US$197 million with AriaWest’s lenders. TELKOM and AriaWest also entered into a settlement agreement pursuant to which TELKOM and AriaWest irrevocably settled, discharged and released claims and counterclaims in their ICC arbitration proceeding and TELKOM agreed to pay a settlement amount of US$20 million. As a result of the acquisition of AriaWest and the settlement of the ICC arbitration in 2002, for the year ended December 31, 2002 TELKOM reversed the provision of Rp.511.9 billion which was previously made with respect to certain receivablesBanten) from KSO Unit III and accrued the settlement amount of Rp.179.0 billion in its consolidated financial statements for the year ended December 31, 2002.

     The ICC arbitration proceeding, which was settled as of July 31, 2003 involved claims by AriaWest that TELKOM was in material breach of provisions of the KSO Agreement with AriaWest based on, among other things, (i) the alleged loss of certain exclusive rights granted to AriaWest by the Government with respect to the provision of certain telecommunication services in West Java; (ii) the

29

alleged failure of TELKOM to transfer control of the KSO Unit’s finances, employeesthrough December 31, 2003 and management to AriaWest and TELKOM’s alleged interference with AriaWest’s efforts to exercise management control over the KSO Unit; (iii) the alleged failure of TELKOM to pay amounts identified in a forensic audit for AriaWest as being unaccounted for, lost or otherwise unreasonably disbursed by the KSO Unit during the period December 1, 1995 through September 11, 2000; (iv) TELKOM’s acts and omissions which allegedly caused the Government to reduce telecommunications tariffs in 1999 and to impose a zero tariff increase in 2000; (v) the alleged wrongful termination by TELKOM of the KSO Agreement with AriaWest and, subsequent to termination, alleged wrongful imposition of interim management measures; (vi) TELKOM’s alleged failure to negotiate the terms of certain construction projects proposed by AriaWest and certain amendments to the KSO Agreement requested by AriaWest; and (vii) TELKOM’s alleged failure to cause the KSO Unit to pay AriaWest certain disputed sums as reimbursement for cash outlays by AriaWest or other funds claimed by AriaWest. AriaWest sought at least US$1.3Rp.1,016.8 billion in damages in the arbitration, although it did not specify the amount of damages associated with most of its claims. TELKOM objected to the ICC’s jurisdiction over AriaWest’s claims relating to the alleged loss of AriaWest’s exclusive rights and tariff adjustment and, wholly apart from its jurisdictional objections, TELKOM denied all of AriaWest’s claims. TELKOM also asserted claims against AriaWest for material breaches of the KSO Agreement. Although TELKOM had not completed estimating the amount of its losses, damages and costs, TELKOM was seeking damages in connection with two of its counterclaims of at least Rp.412 billion in Minimum TELKOM Revenue and more than Rp.98 billion in Distributable KSO Revenue due to TELKOM as of July 9, 2001, the date TELKOM terminated the KSO Agreement, exclusive of late payment fees and interest.

     In 2001, TELKOM entered into an agreement with Indosat pursuant to which Indosat agreed, subject to the satisfaction of certain conditions precedent, to acquire TELKOM’s assets in Regional Division IV for US$375 million. This agreement was part of the cross-ownership transaction in 2001. In February of 2002, TELKOM and Indosat announced the cancellation of the acquisition as certain conditions precedent had not been satisfied. As a result of the cancellation of the acquisition, TELKOM paid US$198 million to Indosat.

2004.(3) On January 20, 2004, TELKOM and PT Mitra Global Telekomunikasi Indonesia (“MGTI”)MGTI entered into an agreement to amend and restate the KSO Agreement with respect to Regional Division IV. Under the amended agreement, for the remaining KSO period, TELKOM will be entitled at its sole discretion and expense to construct new telecommunications facilities in Regional Division IV and MGTI will receive fixed monthly payments derived from revenues generated by the Regional Division IV operations.

     On June 11, 2002, TELKOM and its KSO partner for Regional Division VII, PT Bukaka SingTel International (“Bukaka SingTel”), entered into a Memorandum of Understanding pursuant to which they agreed to cooperate in providing infrastructure for fixed wireless access using CDMA 2000 IX in KSO VII region. On January 14, 2003, TELKOM and Bukaka SingTel entered into a Co-Operation Agreement on Fixed Wireless CDMA Facilities Construction in KSO Regional Division VII (the “Co-Operation Agreement”) that implemented the terms of the Memorandum of Understanding. Under the terms of the Co-Operation Agreement, TELKOM, through its Fixed Wireless Division, will invest US$30.2 million and Rp. 28.4 billion for the construction of fixed wireless CDMA facilities for 146,700 line units in Denpasar, Makasar, Manado, Kupang and Mataram, which facilities will be managed, operated and maintained by Bukaka SingTel. The new facilities are expected to be completed by 2006, with TELKOM and Bukaka SingTel sharing the revenues generated by these new facilities.(Central Java). See Item 1010. “Additional Information — C. Material Contracts.Contracts — PT Mitra Global Telekomunikasi Indonesia.”

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The following table sets forth certain information regarding the KSOs as of December 31, 2003, which has been derived from the KSO Agreements, amendments to the KSO Agreements and other related sources.

           
Division I(1)Division IIIDivision IVDivision VIDivision VII(3)
KSO Partner Pramindo Ikat Nusantara AriaWest International Mitra Global Telekomunikasi Indonesia Dayamitra Telekomunikasi Bukaka SingTel International
 
Shareholders in the KSO:          
Foreign          
telecommunications          
operator France Cables et Radio SA (22%) N/A Telstra Global Ltd. (20.37%); Nippon Telegraph and Telephone Corporation (15.27%) TM Communications (H.K.) Ltd. (9.68%) Singapore Telecom International Pte. Ltd. (40.00%)
Indonesian and Other          
Shareholders PT Telekomunikasi Indonesia, Tbk (45.00%); PT Astratel Nusantara (19.25%); Indosat (7.15%); Marubeni Corporation (4.40%); International Finance Corporation (1.65%); NMP Singapore Pte. Ltd. (0.55%) PT Telekomunikasi Indonesia, Tbk (100.00%) PT Widya Duta Informindo (31.31%); Indosat (30.55%); Itochu Corporation (1.25%); Sumitomo Corporation (1.25%) PT Telekomunikasi Indonesia, Tbk (90.32%) PT Bukaka Telekomindo International (60.00%)
MTR (in Rp. billions)(2) 518.0 415.5 404.3 143.4 253.2
Revenue Sharing          
(TELKOM: KSO          
Partners) 30 : 70 95 : 5 30 : 70 30 : 70 35 : 65
End of KSO Period 2010 2010 2010 2010 2010

(1) Under Indonesian GAAP, TELKOM was required to consolidate Pramindo Ikat Nusantara from August 2002 due to TELKOM’s control of the company, even though TELKOM’s legal ownership in Pramindo was only 45% as of December 31, 2003. On March 15, 2004, TELKOM purchased the remaining 55% of Pramindo that it did not own as of December 31, 2003. Following this transaction, TELKOM owned 100% of Pramindo. Subsequent to December 21, 2003, one share in Pramindo has been transferred to TELKOM’s corporate secretary in order to comply with the legal requirement that Indonesian limited liability companies should have more than one shareholder and TELKOM currently owns 99.99% of Pramindo.
(2) The numbers included here are gross MTR revenues before elimination for consolidation purposes of MTR revenues from Pramindo (Regional Division I), AriaWest (Regional Division III) and Dayamitra (Regional Division VI).
(3) On January 27, 2004, Transpac Capital acquired an 8.5% ownership interest in Bukaka SingTel International. As of the date of this Annual Report, the ownership of Bukaka SingTel is as follows: Singapore Telecom International Pte Ltd., 40%; PT Bukaka Telekomindo International, 51.5%; and Transpac Capital, 8.5%.

The KSO Agreements provide for the relevant KSO partner to manage and operate the Division until the end of the KSO period, undertake the construction of a specified number of fixed lines and, at the end of the fixed term, transfer the new telecommunications facilities in the Regional Division to TELKOM for an agreed amount of compensation. The KSO Agreements also provide for TELKOM to receive the following: (a) a one-time initial payment from the KSO partners; (b) guaranteed minimum monthly payments or Minimum TELKOM Revenues (“MTR”); and (c) additional monthly revenue sharing payments or Distributable TELKOM Revenues (“DTR”) from the revenues of the KSO Unit after payment of MTR and certain operating expenses. The KSO partners were granted licenses to enter into KSO arrangements with TELKOM to provide fixed-line services in the respective regions.

Interconnection Services

     TELKOM receives revenues from other telecommunications operators providing fixed-line, cellular, international long-distance and other services that interconnect with TELKOM’s network. In 2003,

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revenues from interconnection services contributed Rp.4,162.1 billion (US$493.1 million), or 15.3% of total operating revenues.

     TELKOM enters into interconnection agreements with one- to three-year terms with other telecommunications network operators, including Indosat and Satelindo, Indonesia’s IDD service providers and cellular operators, establishing the fees payable by the respective operators and the procedures for routing calls through the networks of the respective operators. Most of the short term (one-year) interconnection agreements are entered into with telecommunications network operators. Beginning in 2004, following the merger of Indosat, Indosat Multi Media Mobile (“IM3”) and Satelindo in 2003, Indosat assumed the obligations of Satelindo and IM3 under their respective interconnection agreements with TELKOM.

     In 2004, as a result of new regulations regarding DLDthe amended and IDD services,restated KSO agreement, TELKOM acquired Regional Division IV. TELKOM consolidated Rp.1,398.0 billion of operating revenues from Regional Division IV (Central Java) from February 1, 2004 through December 31, 2004. For 2004, MTR and DTR for Regional Division IV represent MTR and DTR generated by Regional Division IV in January 2004.(4) TELKOM consolidated Regional Division VI (Kalimantan) following the expected implementationacquisition of the cost-based interconnection schemea 90.32% equity interest in Dayamitra on January 1, 2005,May 17, 2001. TELKOM expects to enter into new interconnection agreements with other network operators to adjust, among other provisions, routing procedures, network configurationconsolidated Rp. 323.4 billion, Rp.763.8 billion and interconnection fees.

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TELKOM’s interconnection traffic volumes are set forthRp.802.4 billion of operating revenues from Regional Division VI (Kalimantan) in the following table for the periods indicated:

                       
Year ended December 31,
19992000200120022003
(millions of minutes)
Mobile Cellular Interconnection(1)
                    
Digital                    
 Incoming paid minutes  1,396.8   1,968.6   2,284.9   2,757.9   3,357.7 
 Outgoing paid minutes  873.2   1,687.1   2,645.8   3,807.5   4,848.7 
Analog                    
 Incoming paid minutes  62.9   71.8   70.5   73.0   106.0 
 Outgoing paid minutes  24.7   34.0   43.5   47.0   23.4 
   
   
   
   
   
 
  Subtotal  2,357.6   3,761.5   5,044.7   6,685.4   8,335.8 
Fixed Wireless Interconnection(2)
                    
 Incoming paid minutes  41.9   72.5   83.7   100.2   107.3 
 Outgoing paid minutes  33.1   39.3   30.5   36.3   29.6 
   
   
   
   
   
 
  Subtotal  75.0   111.8   114.2   136.5   136.9 
Fixed Wireline Interconnection
                    
 Incoming paid minutes  26.1   30.1   31.9   28.2   22.8 
 Outgoing paid minutes  2.9   3.3   4.2   3.3   1.3 
   
   
   
   
   
 
  Total paid minutes  29.0   33.4   36.1   31.5   24.1 
Satellite Phone Interconnection
                    
 Incoming paid minutes  —   —   2.4   12.6   16.1 
 Outgoing paid minutes  —   —   0.5   5.6   7.5 
   
   
   
   
   
 
  Total paid minutes  —   —   2.9   18.2   23.6 
International Interconnection(3)
                    
 Incoming paid minutes  403.2   345.8   286.8   303.3   444.1 
 Outgoing paid minutes  251.1   250.6   241.9   200.3   149.7 
   
   
   
   
   
 
  Total paid minutes  654.3   596.4   528.7   503.6   593.8 
Total
                    
 Incoming paid minutes  1,930.9   2,488.8   2,760.2   3,275.2   4,054.0 
 Outgoing paid minutes  1,185.0   2,014.3   2,966.4   4,100.0   5,060.2 
   
   
   
   
   
 
 Total paid minutes  3,115.9   4,503.1   5,726.6   7,375.2   9,114.2 
   
   
   
   
   
 
2002, 2003 and 2004, respectively.
     The following describes the developments in recent years in which TELKOM acquired or entered into agreements to acquire control of its KSO partners in Regional Divisions I, III and VI, and amended the terms of the KSO Agreement with respect to Regional Division IV to acquire control of the KSO IV operations.
      On April 19, 2002, TELKOM entered into a Conditional Sale and Purchase Agreement to acquire 100% of the issued and paid up share capital of its KSO partner in Regional Division I, Pramindo. Under the terms of the agreement, TELKOM agreed to acquire the shares of Pramindo in three tranches: in August 2002 (30%), September 2003 (15%) and December 2004 (55%). TELKOM has provided US$384.4 million in its accounts as the aggregate consideration for this transaction. Of the US$384.4 million, TELKOM made an initial payment of US$9.3 million (Rp.82 billion) in August 2002 and issued promissory notes (series I and II) dated August 2002 for the remaining amount. The agreement granted the selling shareholders a number of protective rights and was conditional upon TELKOM meeting its payment obligations under the promissory notes. The series I promissory notes had a face value of approximately US$372.2 million, while the aggregate amount of the series II promissory notes was estimated to be approximately US$2.9 million. The promissory notes were payable in ten unequal quarterly installments through December 2004 which were funded by monthly amounts transferred by TELKOM to an escrow account. Under the agreement, TELKOM also provided a loan of US$86 million (Rp.765 billion) to Pramindo which was used to repay loans from the IFC, one of the selling shareholders. TELKOM also made an additional payment of Rp.250 billion in respect of a working capital reimbursement to the selling shareholders. TELKOM obtained control of Pramindo as of the closing in August 2002. On January 28, 2004, TELKOM signed a short-term loan agreement with ABN AMRO Bank N.V. Jakarta in the amount of approximately US$130 million and on March 15, 2004 TELKOM used the loan proceeds to repurchase the outstanding promissory notes that were due on

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(1) Includes interconnection with Telkomsel. TELKOM’s paid minutes from Telkomsel for 1999-2003 are set forth in the following table.

                     
Year ended December 31,
19992000200120022003
(millions of minutes)
Incoming paid minutes  706.0   1,025.0   1,289.9   1,672.6   2,011.8 
Outgoing paid minutes  430.0   771.0   1,266.0   2,001.6   2,610.3 

(2) Fixed wireless interconnection minutes are derived from interconnection with the network of PT Bakrie Telecom (formerly PT Radio Telepon Indonesia or Ratelindo).
(3) International interconnection minutes are derived from interconnection with Indosat’s and Satelindo’s international networks, which does not include minutes from mobile cellular and fixed wireless operators that interconnect directly with international gateways.

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On June 7, 2004, TELKOM began offering IDD fixed-line services under the brand name “TIC 007.” Revenues from IDD services will be reported as international interconnection revenues.

June 15, 2004, September 15, 2004 and December 15, 2004. This allowed TELKOM to accelerate the purchase of the remaining 55% of Pramindo that it did not yet own. As of the date of this Annual Report, TELKOM beneficially owns 100% of Pramindo.
Network Services

TELKOM provides satellite transponder leasing, satellite broadcasting, VSAT, audio distribution, satellite-based leased lines, terrestrial-based leased lines, VPN Frame Relay Networks and VPN IPs as network services. In 2003, revenues from network services contributed Rp.517.9 billion (US$61.4 million), or 2.0% of total operating revenues. TELKOM’s customers for network services include businesses and other telecommunications operators. Customers may enter into agreements that can be for services as brief as a few minutes in the case of broadcasts or long-term agreements for services over the course of one to five years.

      On July 31, 2003, TELKOM acquired 100% of the shares of its KSO partner for Regional Division III, AriaWest for an aggregate consideration of US$38.67 million in cash (US$20 million of which was paid when the purchase agreement was signed on May 8, 2002 and the remaining US$18.67 million was paid on July 31, 2003) and US$109.1 million in promissory notes. The promissory notes, which are interest-free, are payable in 10 semi-annual installments. At the same time, in consideration of the release of AriaWest’s outstanding obligations to its lenders, TELKOM also repaid approximately US$99 million of AriaWest’s debt (including interest of US$25.0 million) on behalf of AriaWest and entered into a new loan agreement for approximately US$197 million with AriaWest’s lenders. TELKOM and AriaWest also entered into a settlement agreement settling claims and disputes involving alleged material breaches of the KSO Agreement by each party. Pursuant to the settlement agreement, TELKOM and AriaWest irrevocably settled, discharged and released claims and counterclaims in their ICC arbitration proceeding and TELKOM agreed to pay a settlement amount of US$20 million. As a result of the acquisition of AriaWest and the settlement of the ICC arbitration in 2002, for the year ended December 31, 2002 TELKOM reversed the provision of Rp.511.9 billion which was previously made with respect to certain receivables from KSO Unit III and accrued the settlement amount of Rp.179.0 billion in its consolidated financial statements for the year ended December 31, 2002. The ICC arbitration proceeding was settled as of July 31, 2003. On December 30, 2004, TELKOM fully repaid the balance of the AriaWest loan that it assumed, amounting to US$151.9 million (including principal due in December 2004 of US$24.6 million and interest of US$4.3 million).
Data and Internet Services

     TELKOM provides SMS for fixed line, fixed wireless and cellular phones, multimedia dial-up Internet access and other multimedia services, VoIP services for international calls and ISDN lines. In 2003, revenues from data and Internet services contributed Rp.3,108.6 billion (US$368.3 million), or 11.5% of total operating revenues. TELKOM is also developing a broadband access network utilizing ADSL, hybrid fiber coaxial cables and satellites.

     In 2003, an average of 366,130 telephone subscribers accessed our TELKOMNet Instant dial-up Internet service per month, representing an increase of 23% over the prior year, with the number of subscribers accessing this service reaching 408,026 during December 2003. Subscribers utilized a total of 1.95 billion minutes of dial-up service in 2003.

     In September 2002, TELKOM began offering a premium VoIP international calling service under the name “TELKOMGlobal-017” and a standard VoIP international calling service under the name “TELKOMSave” and TELKOM is currently providing both services in several cities in Indonesia. Its VoIP services currently allow subscribers access to 633 destination points in 235 countries through agreements which TELKOM has entered into with six global carriers and wholesalers that allow TELKOM to access their international networks. VoIP is a low-cost phone service that is accessed by dialing a special international long-distance prefix. Currently, the access code for TELKOM’s VoIP service is “017.” On March 11, 2004, the MoC issued Decree No. 28/2004 and Decree No. 31/2004, which stated that VoIP access codes must be changed from three digits to five digits (“010XY”), although the MoC has given operators, such as TELKOM, up to 2005 to comply with this requirement.

     The Company plans to increase the number of access points in Indonesia and abroad from which its customers are able to access its VoIP services. In 2003, an average of 214,600 telephone subscribers used either TELKOMSave or TELKOMGlobal each month, representing an increase of 225% over the prior year.

Certain information about TELKOM VoIP services is set forth in the following table:

      In 2001, TELKOM entered into an agreement with Indosat pursuant to which Indosat agreed, subject to the satisfaction of certain conditions precedent, to acquire TELKOM’s assets in Regional Division IV for US$375 million. This agreement was part of the cross-ownership transaction in 2001. The closing was subject to several conditions precedent including (i) obtaining necessary approvals of the KSO investors and certain lenders to the KSO; (ii) the resolution to the satisfaction of Indosat of disputes relating to TELKOM’s liabilities to the KSO investors under the KSO agreement and the KSO construction agreement; (iii) Indosat or its nominee obtaining authorization or license from the Government to own and operate a public switching telecommunications fixed line and fixed wireless network in the KSO Territory; (iv) the parties having identified and agreed on the asset register of the KSO; and (v) the parties having agreed on the arrangements for the transfer of employees to Indosat. In February 2002, TELKOM and Indosat announced the cancellation of the acquisition as certain conditions precedent had not been satisfied. The acquisition was cancelled primarily because Indosat and TELKOM were unable to agree on appropriate arrangements for the transfer of TELKOM’s employees to Indosat due to the substantial resistance from TELKOM’s employees. As a result of the cancellation of the acquisition, TELKOM paid US$198 million to Indosat, which represented the net balance of TELKOM’s payment obligations as a result of certain other cross-ownership transactions between TELKOM and Indosat. Such net balance of US$198 million was originally intended to be set off from the US$375 million to be paid by Indosat to TELKOM for the acquisition of TELKOM’s assets in Regional Division IV, but became payable by TELKOM to Indosat as a result of the cancellation of the acquisition. The net balance of US$198 million was calculated as follows:
 
US$’million
Acquisition of Telkomsel by Telkom(945)
Sale of Satelindo to Indosat186
Sale of Lintasarta to Indosat38
Amount paid in advance by Telkom for acquisition and sales of the above entities523
Net amount to be settled by Telkom(198)
    
ItemTELKOMGlobal 017TELKOMSave

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      On January 20, 2004, TELKOM and MGTI entered into an agreement to amend and restate the KSO Agreement with respect to Regional Division IV. Under the amended and restated KSO agreement, the rights to operate fixed-line telecommunication services in KSO IV region are transferred to TELKOM and KSO IV is operated under the management, supervision, control and responsibility of TELKOM. In addition, for the remaining KSO period, TELKOM is entitled at its sole discretion and expense to construct new telecommunications facilities in Regional Division IV. MGTI receives fixed monthly payments, while TELKOM is entitled to the balance of the KSO revenues after the monthly amounts due to MGTI and operating expenses. If the KSO IV unit is unable to or does not for any reason pay MGTI the fixed monthly payments due to it, TELKOM is obligated to make up any deficiency. At the end of the KSO period (December 31, 2010), all rights, title and interest of MGTI in existing property, plant and equipment (including new additional installations) and inventories shall be transferred to TELKOM at no cost. As a result of the amended and restated KSO agreement, TELKOM obtained the legal right to control financial and operating decisions of Regional Division IV for a purchase price of US$390.7 million, or Rp.3,285 billion, which represents the present value of the fixed monthly payments (totaling US$517.1 million) to be paid by TELKOM to MGTI from 2004 through 2010 plus direct cost of the business combination. TELKOM has accounted for this transaction as a business combination using the purchase method of accounting in 2004.
      On May 17, 2001, TELKOM acquired 90.32% of the issued and outstanding shares of its KSO partner for Regional Division VI, Dayamitra, and purchased a call option and granted a put option with respect to the 9.68% remaining shares of Dayamitra, for an aggregate consideration of approximately US$130.8 million (including a US$8.9 million post-closing working capital adjustment to the purchase price, and excluding consultants’ fees of approximately US$3.3 million, which was capitalized as part of the acquisition cost) which was to be paid in installments. TELKOM paid an initial amount of US$18.3 million on May 17, 2001, the US$8.9 million post-closing working capital adjustment to the purchase price on August 10, 2001 and the balance US$103.6 million in eight quarterly installments of approximately US$12.9 million between August 17, 2001 and May 17, 2003. On December 14, 2004, TELKOM exercised its call option to acquire the remaining 9.68% of the shares of Dayamitra with a strike price of US$16.2 million. The purchase price for 9.68% shares of Dayamitra was US$22.1 million (Rp.203 billion), which represents the present value of the option strike price of US$16.2 million to be paid to an escrow account from December 26, 2004 through March 26, 2006, plus the option purchase price of US$6.3 million and payment for Dayamitra’s adjusted working capital of US$1.0 million.
      On June 11, 2002, TELKOM and its KSO partner for Regional Division VII, PT Bukaka SingTel International (“Bukaka SingTel”), entered into a Memorandum of Understanding pursuant to which they agreed to cooperate in providing infrastructure for fixed wireless access using CDMA 2000 1x in KSO VII region. On January 14, 2003, TELKOM and Bukaka SingTel entered into a Co-Operation Agreement on Fixed Wireless CDMA Facilities Construction in KSO Regional Division VII (the “Co-Operation Agreement”) that implemented the terms of the Memorandum of Understanding. Under the terms of the Co-Operation Agreement, TELKOM, through its Fixed Wireless Division, will invest US$30.2 million and Rp. 28.4 billion for the construction of fixed wireless CDMA facilities for 146,700 line units in Denpasar, Makasar, Manado, Kupang and Mataram, which facilities will be managed, operated and maintained by Bukaka SingTel. The new facilities are expected to be completed by 2006, with TELKOM and Bukaka SingTel sharing the revenues generated by these new facilities. See Item 10 “Additional Information — C. Material Contracts.”
      TELKOM consolidated Dayamitra in 2001, Pramindo in 2002 and AriaWest in 2003, upon acquisition of a majority ownership interest or control in those KSO partners. In addition, under the amended and restated KSO Agreement with respect to Regional Division IV entered into on January 20, 2004, TELKOM consolidated the operating results of KSO IV from February 1, 2004, being the nearest convenient balance date. Accordingly, the revenue sharing percentage in those KSOs is no longer relevant. As of December 31, 2004, PT Bukaka SingTel International is the only remaining KSO partner that has not been acquired or is not controlled by TELKOM. The following table sets forth certain

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information regarding KSO VII as of December 31, 2004, which has been derived from the KSO Agreements, amendments to the KSO Agreements and other related sources.
Division VII
KSO PartnerPT Bukaka SingTel International
Shareholders in the KSO partner:
Foreign telecommunications operator		Singapore Telecom International Pte. Ltd. (40.00%)
Indonesian and other shareholdersPT Bukaka Telekomindo International (51.50%); Transpac Capital (8.50%)
Revenue Sharing (TELKOM: KSO Partner)35 : 65
End of KSO Period2010
Interconnection Services
Tariff40% of normal IDD rateUp to 60% of normal IDD rate
DialOne stageTwo stage
Quality/ TechnologyPremium VoIPStandard VoIP
      TELKOM receives revenues from other telecommunications operators providing fixed line, cellular, international long-distance and other services that interconnect with TELKOM’s network. In 2004, revenues from interconnection services contributed Rp.6,188.0 billion (US$666.1 million), or 18.2% of total operating revenues.
      TELKOM enters into interconnection agreements with one- to three-year terms with other telecommunications network operators, including Indosat and Satelindo, Indonesia’s IDD service providers and cellular operators, establishing the fees payable by the respective operators and the procedures for routing calls through the networks of the respective operators. Most of the short term (one-year) interconnection agreements are entered into with telecommunications network operators. Beginning in 2004, following the merger of Indosat, Indosat Multi Media Mobile (“IM3”) and Satelindo in 2003, Indosat assumed the obligations of Satelindo and IM3 under their respective interconnection agreements with TELKOM.
      In 2005, as a result of new regulations regarding DLD and IDD services, and the expected implementation of the cost-based interconnection scheme to be announced by the Government, TELKOM expects to amend all of its interconnection agreements with other domestic network operators to adjust, among other provisions, routing procedures, network configuration and interconnection fees in accordance with the cost-based interconnection scheme.

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      TELKOM’s interconnection traffic volumes are set forth in the following table for the periods indicated:
                       
  Year Ended December 31,
   
  2000 2001 2002 2003 2004
           
  (millions of minutes)
Mobile Cellular Interconnection(1)
                    
 Incoming paid minutes  2,040.4   2,355.4   2,830.9   3,463.7   4,235.1 
 Outgoing paid minutes  1,721.1   2,689.3   3,854.5   4,872.1   6,448.0 
                
  Subtotal  3,761.5   5,044.7   6,685.4   8,335.8   10,683.1 
Fixed Line Interconnection(2)
                    
 Incoming paid minutes  102.6   115.6   128.4   130.1   136.7 
 Outgoing paid minutes  42.6   34.7   39.6   30.9   51.1 
                
  Subtotal  145.2   150.3   168.0   161.0   187.8 
Satellite Phone Interconnection
                    
 Incoming paid minutes  —   2.4   12.6   16.1   14.7 
 Outgoing paid minutes  —   0.5   5.6   7.5   8.2 
                
  Total paid minutes  —   2.9   18.2   23.6   22.9 
International Interconnection(3)
                    
 Incoming paid minutes  345.8   286.8   303.3   444.1   247.1 
 Outgoing paid minutes  250.6   241.9   200.3   149.7   99.6 
                
  Total paid minutes  596.4   528.7   503.6   593.8   346.7 
Total
                    
 Incoming paid minutes  2,488.8   2,760.2   3,275.2   4,054.0   4,633.5 
 Outgoing paid minutes  2,014.3   2,966.4   4,100.0   5,060.2   6,606.9 
                
 Total paid minutes  4,503.1   5,726.6   7,375.2   9,114.2   11,240.4 
                
 
Revenue Sharing Arrangements (PBHs)

     In 2003, revenues from revenue sharing arrangements amounted to Rp.258.5 billion (US$30.6 million)(1) Includes interconnection with Telkomsel.(2) Fixed line interconnection minutes reflect interconnection with the networks of PT Bakrie Telecom (formerly PT Radio Telepon Indonesia or Ratelindo), or 1% of TELKOM’s total operating revenues. As of December 31, 2003, TELKOM had 27 revenue sharing arrangements. Under such arrangements, investors finance the costs of developing and constructing telecommunications facilities and TELKOM and the investors share the revenues from such facilities for a fixed period of time. Generally, during the revenue sharing period

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TELKOM manages and operates the facilities and bears the cost of repairs and maintenance, though the investors retain legal ownership to the property, plant and equipment constructed during this period. At the end of each revenue-sharing period, the investors transfer the ownership of the facilities to TELKOM. The revenue-sharing arrangements generally provide for investors to receive all revenues from installation chargesBBT, and for the investors2004, Indosat.(3) International interconnection minutes are derived from interconnection with Indosat’s international network, which does not include minutes from mobile cellular and fixed wireless operators that interconnect directly with international gateways.
     TELKOM’s paid minutes from Telkomsel for 2000 – 2004 are set forth in the following table.
                     
  Year Ended December 31,
   
  2000 2001 2002 2003 2004
           
  (millions of minutes)
Incoming paid minutes  1,025.0   1,289.9   1,672.6   2,011.8   2,354.1 
Outgoing paid minutes  771.0   1,266.0   2,001.6   2,610.3   3,422.1 
      On June 7, 2004, TELKOM began offering IDD fixed line services under the brand name “TIC 007.” Revenues from IDD services are reported as international interconnection revenues. In order to facilitate interconnection of international calls, TELKOM has entered into international telecommunications service agreements with telecommunications operators in several countries. In addition, as TELKOM does not have agreements with telecommunication operators in each of its IDD destinations, TELKOM has entered into agreements with certain major carriers such as Singapore Telecommunications Limited (“SingTel”), Telekom Malaysia Berhad (“Telekom Malaysia”), MCI WorldCom (“MCI”) and others for such operators to act as hubs to route international calls to their destinations.

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Network Services
      TELKOM provides satellite transponder leasing, satellite broadcasting, VSAT, audio distribution, satellite-based leased lines and terrestrial-based leased lines. In 2004, revenues from network services contributed Rp.654.3 billion (US$70.4 million), or 1.9% of total operating revenues. TELKOM’s customers for network services include businesses and other telecommunications operators. Customers may enter into agreements that can be for services as brief as a few minutes in the case of broadcasts or long-term agreements for services over the course of one to five years.
Data and Internet Services
      TELKOM provides SMS for fixed line, fixed wireless and cellular phones, dial-up and broadband Internet access, data network services (including VPN frame relay and IP VPN), VoIP services for international calls, ISDN lines and other multimedia services. In 2004, revenues from data and Internet services contributed Rp.4,808.7 billion (US$517.6 million), or 14.2% of total operating revenues.
      In October 2004, TELKOM introduced a premium prepaid dial-up Internet access service. In 2004, an average of 456,648 telephone subscribers accessed its TELKOMNet Instan and premium prepaid dial-up Internet service per month, representing an increase of 24.7% over the prior year. Subscribers utilized a total of 2.5 billion minutes of TELKOMNet Instan and premium prepaid dial-up service in 2004, of which 131,673 minutes constituted premium prepaid dial-up Internet access. As of December 31, 2004, TELKOM also had 10,710 broadband Internet access subscribers, which was available in Jakarta and Surabaya.
      In September 2002, TELKOM began offering a premium VoIP international calling service under the name “TELKOMGlobal-017” and a standard VoIP international calling service under the name “TELKOMSave” and TELKOM is currently providing both services in several cities in Indonesia. As of December 31, 2004, TELKOM’s VoIP services allowed subscribers access to 634 destination points in 235 countries through agreements which TELKOM has entered into with five global carriers and wholesalers that allow TELKOM to access their international networks. VoIP is a low-cost phone service that is accessed by dialing a special international long-distance prefix. Currently, the access code for TELKOM’s VoIP service is “017.” On March 11, 2004, the MoC issued Decree No. 28/2004 and Decree No. 31/2004, which stated that VoIP access codes must be changed from three digits to five digits (“010XY”), and on April 1, 2005, the MoCI announced that the five digit VoIP access codes must be implemented by all operators by December 31, 2005.
      The Company plans to increase the number of access points in Indonesia and abroad from which its customers are able to access its VoIP services. In 2004, an average of 9,235,832 minutes call used either TELKOMSave or TELKOMGlobal each month, representing an increase of 55.4% over the prior year.
      Certain information about TELKOM VoIP services is set forth in the following table:
ItemTELKOMGlobal 017TELKOMSave
TariffUp to share revenues from usage and subscription charges, with TELKOM guaranteeing a specific internal40% of normal IDD rateUp to 60% of return (“IRR”) for the investors. However, TELKOM has decided not to enter into additional revenue sharing arrangements on the terms outlined above because of their high cost.normal IDD rate
DialOne stageTwo stage
Quality/ TechnologyPremium VoIPStandard VoIP
Revenue-Sharing Arrangements (PBHs)
      TELKOM has entered into separate agreements with several investors under revenue-sharing arrangements to develop fixed lines, public card-phone booths (including their maintenance) and related supporting telecommunications facilities. In 2004, revenues from revenue-sharing arrangements amounted to Rp.280.6 billion (US$30.2 million), or 0.8% of TELKOM’s total operating revenues.

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      As of December 31, 2004, the Company has 76 revenue-sharing arrangements with 59 partners. The revenue-sharing arrangements were located mostly in Palembang, Pekanbaru, Jakarta, Central Java and Surabaya with concession period ranging from 4 to 176 months.
      Under some revenue-sharing arrangements, the investors finance the costs incurred in constructing telecommunications facilities. Upon completion of the construction, the Company manages and operates the facilities and generally bears the cost of repairs and maintenance during the revenue-sharing period. The investors legally retain the rights to the property, plant and equipment constructed by them during the revenue-sharing periods. At the end of each revenue-sharing period, the investors transfer the ownership of the facilities to the Company.
      Generally, the revenues earned from the customers in the form of line installation charges are allocated in full to the investors. The revenues from outgoing telephone pulses and monthly subscription charges are shared between the investors and the Company based on certain agreed ratio.
      Under revenue-sharing arrangements entered into before October 2002, TELKOM guaranteed a specific internal rate of return for the investors. However, since October 2002, TELKOM’s no longer guarantees an internal rate of return in new revenue sharing arrangements it enters into. In February 2004, TELKOM began entering into new Build, Operate and Transfer (“BOT”) schemes whereby TELKOM no longer guarantees an IRR for the investors but sets forth the revenue percentage to which they are entitled and the period during which such investors are entitled to receive such percentage. TELKOM has also started implementing itsPenyediaan Pengembangan Layanan Telekomunikasi (“PPLT”) program in the Regional Divisions II, III and V.that it controls. Pursuant to the PPLT program, division heads are allowed to enter into agreements for the development of telecommunications facilities with partners within each regional division. In deciding what agreements to enter into, division on terms thatheads are more favorablerequired to TELKOM, with priorityconsider certain business factors and act within specified parameters. Priority is also being given to the development of CDMA facilities.
Other Telecommunications-relatedTelecommunications Services

      TELKOM also provides a variety of other services, such as:

 • telephone directory, which TELKOM provides through its majority-owned subsidiary, Infomedia;
 
 • cable and pay television and related services, which it provides through its majority-owned subsidiary, Indonusa; and
 
 • telex and telegram services.

      In 2003,2004, revenues from other telecommunications-relatedtelecommunications services amounted to Rp.226.9Rp.293.2 billion (US$26.931.6 million), or 0.8%0.9% of TELKOM’s total operating revenues.

Network Infrastructure
Fixed-lineFixed line Network and Backbone

     Fixed-LineFixed Line Network.TELKOM’s fixed-linefixed line network comprises a hierarchy of exchanges ranging from local exchanges through trunk exchanges. Each local exchange is connected to the subscriber’s premises by equipment and facilities called outside plant. Outside plant includes wireline (optical fiber and copper) and wireless local transmission links and the distribution facilities joining them. All of TELKOM’s switching facilities at the local and trunk exchanges are now digital. TELKOM believes that this substantially increases network efficiency, performance and call routing flexibility.

      TELKOM’s total number of fixed-linesfixed lines in service in all divisions, including for fixed wireless access, and those lines in KSO divisions which are owned by the KSO partners and will be transferred to TELKOM at the end of the KSO period, has increased from approximately 7.75 million as of December 31, 2002 to approximately 8.48 million as of December 31, 2003 to approximately 9.99 million as of December 31, 2004, of which approximately 6.316.57 million were for residential customers, approximately 1.742.98 million were for business customers, approximately 14,55913,188 were for social customers (which include churches, hospitals, schools and

39

government offices), and approximately 407,790423,533 were for public telephones, including kiosk phones, or public phones.

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The following table sets forth statistics relating to TELKOM’s fixed-linefixed line network since 1999:2000, which includes both its fixed wireline network, as well as its fixed wireless networks which commenced operations in December 2002:
                      
                      
As of or for the Year Ended December 31,  As of or for the Year Ended December 31,
   
1999(1)2000(1)2001(2)2002(3)2003(4)  2000(1) 2001(2) 2002(3) 2003(4) 2004(5)
           
Operating Statistics
Operating Statistics
 
Operating Statistics
                
Exchange capacityExchange capacity Exchange capacity                
Non-KSO Divisions 4,449,552 4,515,615 5,135,108 6,643,688 8,476,816 Non-KSO Divisions  4,515,615  5,135,108  6,643,688  8,476,816  10,739,531 
KSO Divisions(9)
 3,909,179 3,946,407 3,669,336 2,459,950 1,670,005 
KSO Divisions(10)
  3,946,407  3,669,336  2,459,950  1,670,005  1,134,165 
 
 
 
 
 
             
 Total 8,358,731 8,462,022 8,804,444 9,103,638 10,146,821  Total  8,462,022  8,804,444  9,103,638  10,146,821  11,873,696 
Installed linesInstalled lines Installed lines                
Non-KSO Divisions 3,957,815 4,086,298 4,725,268 6,165,770 7,894,532 Non-KSO Divisions  4,086,298  4,725,268  6,165,770  7,894,532  10,556,211 
KSO Divisions(9)
 3,471,447 3,581,779 3,316,406 2,234,892 1,664,220 
KSO Divisions(10)
  3,581,779  3,316,406  2,234,892  1,664,220  1,111,716 
 
 
 
 
 
             
 Total 7,429,262 7,668,077 8,041,674 8,400,662 9,558,752  Total  7,668,077  8,041,674  8,400,662  9,558,752  11,667,927 
Lines in service(5)
 
Lines in service(6)
Lines in service(6)
                
Non-KSO Divisions 3,256,992 3,610,363 4,270,243 5,710,427 7,030,049 Non-KSO Divisions  3,610,363  4,270,243  5,710,427  7,030,049  9,032,650 
KSO Divisions 2,823,201 3,052,242 2,948,695 2,039,608 1,449,066 
KSO Divisions(10)
  3,052,242  2,948,695  2,039,608  1,449,066  956,068 
 
 
 
 
 
             
 Total 6,080,193 6,662,605 7,218,938 7,750,035 8,479,115  Total  6,662,605  7,218,938  7,750,035  8,479,115  9,988,718 
Lines in service per 100 inhabitantsLines in service per 100 inhabitants Lines in service per 100 inhabitants                
Non-KSO Divisions  5.7  5.6  4.6  4.4  4.3 
Non-KSO Divisions 5.3 5.7 5.6 4.64 4.36 
KSO Divisions(10)
  2.0  2.0  2.0  1.9  2.9 
KSO Divisions(9)
 1.9 2.0 2.0 2.00 1.85             
 
 
 
 
 
  Combined  3.1  3.3  3.5  3.5  4.1 
 Combined 2.9 3.1 3.25 3.45 3.54             
Subscriber linesSubscriber lines Subscriber lines                
Non-KSO Divisions 3,101,885 3,394,075 4,005,106 5,394,940 6,679,173 Non-KSO Divisions  3,394,075  4,005,106  5,394,940  6,679,173  8,636,544 
KSO Divisions(9)
 2,709,066 2,923,223 2,831,168 1,952,226 1,392,152 
KSO Divisions(10)
  2,923,223  2,831,168  1,952,226  1,392,152  928,641 
 
 
 
 
 
             
 Total 5,810,951 6,317,298 6,836,274 7,347,166 8,071,325  Total  6,317,298  6,836,274  7,347,166  8,071,325  9,565,185 
Public telephonesPublic telephones Public telephones                
Non-KSO Divisions 155,107 216,288 265,137 315,487 350,876 Non-KSO Divisions  216,288  265,137  315,487  350,876  395,368 
KSO Divisions(9)
 114,135 129,019 117,527 87,382 56,914 
KSO Divisions(10)
  129,019  117,527  87,382  56,914  28,165 
 
 
 
 
 
             
 Total 269,242 345,307 382,664 402,869 407,790  Total  345,307  382,664  402,869  407,790  423,533 
Leased lines in serviceLeased lines in service Leased lines in service                
Non-KSO Divisions(6)
 2,446 3,300 4,973 8,193 8,213 
Non-KSO Divisions(7)
  3,300  4,973  8,193  8,213  8,887 
KSO Divisions(9)
 2,143 2,702 2,631 1,879 1,162 
KSO Divisions(10)
  2,702  2,631  1,879  1,162  382 
 
 
 
 
 
             
 Total 4,589 6,002 7,604 10,072 9,375  Total  6,002  7,604  10,072  9,375  9,269 
Subscriber Pulse 
Fixed wireline subscriber pulse production(8)(millions)
Fixed wireline subscriber pulse production(8)(millions)
                
Production(7)(8)(millions)
 Non-KSO Divisions  28,231  34,342  44,340  50,848  58,314 
Non-KSO Divisions 25,077 28,231 34,342 44,340 51,062 
KSO Divisions(10)
  24,628  24,047  16,788  11,413  6,838 
KSO Divisions(9)
 22,182 24,628 24,047 16,788 11,417             
 
 
 
 
 
  Total  52,859  58,389  61,128  62,261  65,152 
 Total 47,259 52,859 58,389 61,128 62,479 
Call completion rate (%) 
Fixed wireless subscriber pulse production/ minutes(8)(11)(millions)
Fixed wireless subscriber pulse production/ minutes(8)(11)(millions)
                
Local Non-KSO Divisions  —  —  14  214  1,020 
 Non-KSO Divisions 72.0 77.0 75.8 75.8 76.8 
KSO Divisions(10)
  —  —  —  4  128 
 KSO Divisions 70.1 71.4 72.5 75.5 78.4             
 
 
 
 
 
  Total  —  —  14  218  1,148 
 Combined 70.6 73.0 73.9 75.6 77.3 

3640

                       
As of or for the Year Ended December 31,
1999(1)2000(1)2001(2)2002(3)2003(4)
Domestic long-distance                    
 Non-KSO Divisions  64.0   69.3   65.4   65.5   67.5 
 KSO Divisions  62.4   64.5   85.6   68.1   74.7 
   
   
   
   
   
 
  Combined  63.0   65.8   65.7   66.6   69.5 
Fault rate(8)
                    
 Non-KSO Divisions  0.39   0.42   0.8   4.6   4.4 
 KSO Divisions  2.02   1.69   3.1   8.9   3.5 
   
   
   
   
   
 
  Combined  4.25   4.08   3.94   5.19   4.11 
Lines in service per employee                    
 Non-KSO Divisions  171   191   209   233   290 
 
KSO Divisions(9)
  149   163   174   201   220 
   
   
   
   
   
 
  Combined  160   177   193   223   275 
                        
  As of or for the Year Ended December 31,
   
  2000(1) 2001(2) 2002(3) 2003(4) 2004(5)
           
Call completion rate (%)                    
 Local                    
  Non-KSO Divisions  77.0   75.8   75.8   76.8   78.6 
  
KSO Divisions(10)
  71.4   72.5   75.5   78.4   77.9 
                
   Combined  73.0   73.9   75.6   77.3   78.5 
 Domestic long-distance                    
  Non-KSO Divisions  69.3   65.4   65.5   67.5   70.9 
  
KSO Divisions(10)
  64.5   85.6   68.1   74.7   74.9 
                
   Combined  65.8   65.7   66.6   69.5   71.5 
 
Fault rate(9)
                    
  Non-KSO Divisions  0.4   0.8   4.6   4.4   3.4 
  
KSO Divisions(10)
  1.7   3.1   8.9   3.5   1.9 
                
   Combined  4.1   3.9   5.2   4.1   3.2 
 Lines in service per employee                    
  Non-KSO Divisions  191   209   233   290   350 
  
KSO Divisions(10)
  163   174   201   220   270 
                
   Combined  177   193   223   275   340 

(1) For 1999 and 2000, Non-KSO Divisions refer to Divisions II and V, while KSO Divisions refer to Divisions I, III, IV, VI and VII.
(2) For 2001, Non-KSO Divisions refer to Divisions II, V and VI, while KSO Divisions refer to Divisions I, III, IV and VII.
(3) For 2002, Non-KSO Divisions refer to Divisions I, II, V and VI, while KSO Divisions refer to Divisions III, IV and VII.
(4) For 2003, Non-KSO Divisions refer to Divisions I, II, III, V and VI, while KSO Divisions refer to Divisions IV and VII.
(5)For 2004, Non-KSO Divisions refer to Divisions I, II, III, IV, V and VI, while KSO Divisions refer to Division VII.
(6) Lines in service comprise subscriber lines (including fixed wireless) and public telephone lines and include the following number of lines in service operated by TELKOM pursuant to revenue sharingrevenue-sharing arrangements as of December 31, 1999: 405,643, 2000: 409,818, 2001: 430,477, 2002: 443,316, 2003: 519,316 and 2003: 519,316.2004: 459,931.
(6)(7) Excludes leased lines for TELKOM’s network and multimedia businesses.
(7)(8) Consists of pulses generated from local and domestic long-distance calls, excluding calls made from pay phones and mobile cellular phones.
(8)(9) Faults per 100 connected lines per month. The calculation formula was changed in January 2002 to include indoor installation and mass fault. The previous measure of fault consisted of exchange and outdoor cable fault.
(9) Includes lines in
(10) Divisions classified as KSO Divisions I, III, IV, VIdiffer by year due to acquisitions in certain years. See footnotes (1) to (5) above.
(11) Fixed wireless use was measured in subscriber pulse before 2004, and VII whichin minutes beginning 2004 due to the installation of new equipment, and are owned by the KSO partnerstherefore not comparable between 2004 and will be transferred to TELKOM at the end of the KSO period. Total for 2003 excludes 40,000 CDMA fixed wireless line units established under BOT scheme.previous years.

The following table sets forth certain information relating to the Company’s (including KSOs) fixed-linefixed line network in each of its operating divisions as of December 31, 2003:2004:
                                 
Division IDivision IIDivision IIIDivision IVDivision VDivision VIDivision VII
(West Java
and(Central(East(East
(Sumatera)(Jakarta)Banten)Java)Java)(Kalimantan)Indonesia)Total
Local Exchange Capacity  1,467,674   3,697,273   976,854   770,289   1,875,112   459,903   899,716   10,146,821 
Total Lines in Service  1,239,409   3,036,372   733,462   668,261   1,594,827   425,979   780,805   8,479,115 
Capacity Utilization (%)  84.45   82.12   75.08   86.75   85.05   92.62   86.78   83.56 
Installed Lines(1)
  1,428,831   3,429,529   867,912   792,527(5)  1,714,351   453,909   871,693   9,558,752 
Utilization Rate  86.74   88.54   84.51   84.32   93.16   97.50   89.70   88.90 
Employees(2)
  4,689   7,527   2,308   2,802   3,470   1,218   3,812   25,826 
Population (millions)(3)
  53.53   29.83   26.15   45.53   37.75   14.11   32.74   239.66 
Line Penetration(%)(4)
  2.32   10.18   2.80   1.47   4.22   3.02   2.38   3.54 
                                 
        Division        
  Division I Division II Division III IV Division V Division VI Division VII  
                 
      (West Java (Central (East   (East  
  (Sumatra) (Jakarta) and Banten) Java) Java) (Kalimantan) Indonesia) Total
                 
Local exchange capacity  1,712,845   4,086,004   1,142,816   1,027,529   2,198,677   571,660   1,134,165   11,873,696 
Total lines in service  1,450,512   3,314,659   872,455   874,583   2,018,409   501,294   956,806   9,988,718 
Capacity utilization (%)  84.68   81.12   76.34   85.12   91.80   87.69   84.36   84.12 
Installed lines(1)
  1,765,940   3,910,413   1,120,743   1,009,495   2,120,910   628,710   1,111,716   11,667,927 
Utilization rate  82.14   84.76   77.85   86.64   95.17   79.73   86.07   85.61 
Employees(2)
  3,947   6,805   2,117   2,170   2,990   1,011   3,538   22,578 
Population (millions)(3)
  54.33   30.27   26.54   46.21   38.32   14.32   33.23   243.23 
TELKOM line penetration (%)(4)
  2.67   10.95   3.29   1.89   5.27   3.50   2.88   4.11 

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(1) Total for 2003 excludes 40,0002004 includes 257,350 CDMA fixed wireless line units established under BOTRSA scheme.
(2) Includes employees seconded to KSOsKSO in Divisions IV andDivision VII. Does not include employees for support divisions, such as TELKOM’s long distance, fixed wireless, multimedia and construction divisions.
(3) Source:Indonesian Central Bureau of Statistics (estimated figures).
(4) BasedTELKOM’s penetration based on the estimated population figures.
(5) Includes installed lines that utilize exchange capacity from Division V. Does not include Indosat’s fixed lines.

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    CDMA Fixed Wireless.TELKOM began offering a limited mobility CDMA-based fixed wireless phone service under the brand name “TELKOMFlexi” in December 2002. As of December 31, 2004, TELKOMFlexi service was available in 192 cities. TELKOM’s rollout of this limited mobility fixed wireless service is occurring concurrent with its use of CDMA fixed wireless technology for the development of its fixed line network. CDMA-based fixed wireless technology enables rapid development of telephone networks and the reduction of capital expenditures per line by reducing and often eliminating the need for layout of cables. TELKOM intends to continue to rapidly develop its CDMA-based fixed wireless network. As of December 31, 2004, TELKOM had 1,139 BTSs and 2,470,929 line units deployed for its CDMA fixed wireless service, of which 1,057 BTSs and 2,213,579 line units were financed by TELKOM and 82 BTSs and 257,350 line units were established under the RSA scheme. As of December 31, 2004, TELKOM had 1,429,368 TELKOMFlexi subscribers (consisting of 1,366,363 subscribers in non-RSA areas and 63,005 subscribers in RSA areas).
Backbone.TELKOM’s telecommunications network consists of transmission and switching facilities connecting several network access nodes. The transmission links between nodes and switching facilities include microwave, submarine cable, satellite, optical fiber and other transmission technology. The following table sets forth certain information on the transmission capacity of TELKOM’s backbone transmission facilities as of December 31, 2003.2004.
                  
CapacityPercentage  Capacity Percentage
(number ofof total  (number of of total
Transmission mediumTransmission mediumcircuits)capacityTransmission medium circuits) capacity
     
Optical fiber cableOptical fiber cable 253,050 50.5 Optical fiber cable  369,270  66.5 
MicrowaveMicrowave 194,100 38.8 Microwave  109,980  19.8 
Submarine cableSubmarine cable 24,180 4.8 Submarine cable  46,860  8.4 
SatelliteSatellite 29,590 5.9 Satellite  29,590  5.3 
 
 
       
Total 500,920 100.0 Total  555,700  100.0 
 
 
       

For more information on TELKOM’s satellites, see “Other Network Infrastructure” below.
WirelessMobile Cellular Network

     Telkomsel.Since its incorporation in 1995, Telkomsel has been providing GSM cellular services throughout Indonesia through its own network. Telkomsel has the largest network coverage of any of the cellular operators in Indonesia, providing coverage to more than 85%90% of Indonesia’s population and more than 600 cities.650 cities as of December 31, 2004. Telkomsel currently operates a nationwide GSM/DCS cellular network using a total of 30 MHz of radio frequency bandwidth. This consists of 7.5 MHz in the 900 MHz band and 22.5 MHz in the 1800 MHz band, including the additional 15 MHz that was transferred from TELKOM to Telkomsel.band. Both networks operate as a single integrated dual band network. Telkomsel has rolled out GPRS services in several major cities in Sumatera, Java, Bali, Kalimantan and Sulawesinationwide since October 2002. In February 2004, Telkomsel commenced technical testing in Jakarta of itsintroduced an enhanced data transmission service calledtechnology known as “EDGE,” foror Enhanced Data rates for GSM Evolution, which offers enhanced data transmission speeds for handsets equipped to handle EDGE. As of December 31, 2004, EDGE was available in Jakarta and Telkomsel expects to commercially launch EDGE in a limited number of cities sometime during the second half of 2004.

Surabaya.

      The Telkomsel network is an integrated network of (i) base transceiver stations containing transmitters, receivers and other equipment that communicate by radio signals with cellular telephone handsets within the range of the base transceiver station, (ii) digital switch centers that route calls to the proper destinations and (iii) transmission facilities that link the digital switch centers to other cell sites. The various components of the network are connected primarily by microwave transmission, trunk lines owned by Telkomsel and other fixed lines. In addition, through agreements with TELKOM,

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Telkomsel leases certain of TELKOM’s facilities, including leased lines, integrated management system and information system facilities, land, sites and towers.

     In 2003, Telkomsel expanded its network capacity by adding, among other equipment, 1,337 BTSs and 10,563 transmitting and receiving exchanges. As of December 31, 2003,2004, Telkomsel’s digital network had 4,8206,205 BTSs, 5184 cellular switching centers, (with the capacity to handle 14.5 million subscribers), 166195 base station controllers and 38,62449,332 transmitting and receiving exchanges.

exchanges, with an overall network capacity capable of supporting 17.9 million subscribers.

      For each of the years ended December 31, 2001, 2002, 2003 and 20032004 Telkomsel made capital expenditures for the development and expansion of its cellular network of approximately US$351.2 million, US$536.8 millionRp.4,531.0 billion, Rp.5,348.8 billion and US$633.7 million, respectively, based on the middle market spot rate for the Rupiah against the U.S. Dollar on December 31, 2003 of Rp.8,440= US$1.00. During 2003, Telkomsel budgeted capital expenditures for the development and expansion of its cellular network totaling approximately Rp.6,338.0Rp.4,982.7 billion (US$704.2536.4 million), against actual capital expenditures of approximately US$633.7 million.

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respectively.

      Prior to 2002, TELKOM (through its business division, TELKOM Mobile) and Telkomsel, had been independently working on the construction of separate DCS 1800 networks. TELKOM had been granted 15 MHz of radio frequency bandwidth in the 1800 MHz band. In January 2002, Telkomsel entered into a co-operation agreement with TELKOM (the “Telkomsel Co-operation Agreement”), the purpose of which was to set the framework for the transfer of TELKOM’s mobile telecommunications business and its DCS 1800 license to Telkomsel and for Telkomsel to assume certain obligations and assets of TELKOM connected with the DCS 1800 network, including the assumption of TELKOM’s rights and obligations under a supply contract with Siemens. On April 3, 2002, pursuant to the Telkomsel Co-operation Agreement, Telkomsel purchased TELKOM’s assets relating to TELKOM Mobile and TELKOM transferred its TELKOM Mobile employees to Telkomsel. Telkomsel also assumed all of TELKOM’s rights and obligations under various contracts connected with its TELKOM Mobile business.

      Under the terms of the Telkomsel Co-operation Agreement, TELKOM procured to have its DCS 1800 license cancelled and re-issued to Telkomsel so that Telkomsel would have 15 MHz of radio frequency in addition to its own 7.5 MHz of radio frequency in the 1800 MHz band. The MoC re-issued the license to Telkomsel on July 12, 2002.

CDMA Fixed Wireless.TELKOM began offering a limited mobility CDMA-based fixed wireless phone service under the brand name “TELKOMFlexi” in December 2002. As of December 31, 2003, TELKOMFlexi service was available in 38 cities. TELKOM’s rollout of this limited mobility fixed wireless service is occurring concurrent with its use of CDMA fixed wireless technology for the development of its fixed-line network. CDMA-based fixed wireless technology enables rapid development of telephone networks and the reduction of capital expenditures per line by reducing and often eliminating the need for layout of cables. TELKOM intends to continue to rapidly develop its CDMA-based fixed wireless network.

     As of December 31, 2003, TELKOM had 396 BTSs and 815,647 line units deployed, of which 380 BTSs and 775,647 line units were financed by TELKOM and 16 BTSs and 40,000 line units were established under the BOT scheme (instead of the 53,900 that were originally planned). As of December 31, 2003, TELKOM had achieved sales of 467,933 TELKOMFlexi Line Units (consisting of 459,725 Line Units in non-BOT areas and 8,208 Line Units in BOT areas).

     Data Networks

Data Networks
      TELKOM began operating data network services in 1997 and has since continued to develop and expand its network progressively. As of December 31, 2003,2004, TELKOM’s IP-based network covered most of the metropolitan areas of Indonesia, with points of presence (POP)routers in 132 locations.175 nodes nationwide. The IP-based network serves as the backbone network for high quality VPNs, VoIP and for Internet service providers. TELKOM has installed remote access servers in 8887 locations in Indonesia and offersused for its “TELKOMNet Instan” dial-up Internet services under the name of “TELKOMNet Instant”.services. For corporate customers requiring high performance and secured virtual private network,networks, TELKOM provides a premium service known as VPN Gold.Frame Relay.
International Network
      TELKOM received its commercial license from the Government to provide IDD services on May 13, 2004 and began offering IDD fixed line services under the brand name “TIC 007” on June 7, 2004. To route outgoing IDD and incoming international calls, TELKOM has three international gateways, in Batam, Jakarta and Surabaya.
      To connect its domestic network to the global network, TELKOM primarily relies on the following microwave, international cable and satellite links: (i) microwave link between Batam and Johor (Malaysia); (ii) TIS (Thailand-Indonesia-Singapore) cable system, which is an international submarine fiber optic cable system deployed by TELKOM, SingTel and CAT Telecom Public Company Limited and completed in November 2003, which connects Indonesia (Batam), Singapore (Changi) and Thailand (Songkhla) and was extended to Hong Kong in July 2004; (iii) Intelsat satellite. TELKOM completed developing the ground segment to link its network to the Intelsat satellite in December 2004; and (iv) Dumai Melaka cable system, which is an international submarine fiber optic cable system deployed by TELKOM and Telekom Malaysia to connect Dumai (Indonesia) to Melaka (Malaysia) and completed in December 2004. These multiple international links provide flexibility for TELKOM to interconnect with foreign operators.

     Other Network Infrastructure43

     The

      In order to facilitate interconnection of international calls, TELKOM has entered into international telecommunications service agreements with telecommunications operators in several countries, In addition, as TELKOM does not have agreements with telecommunication operators in each of its IDD destinations, TELKOM has entered into agreements with SingTel, Telekom Malaysia, MCI and other entities for such operators to act as hubs to route international calls to their destinations. TELKOM plans to enter into additional international telecommunications service agreements with telecommunications operators for direct interconnection, particularly operators in the top 20 destinations for its outgoing IDD traffic.
Other Network Infrastructure
      As of December 31, 2004, the Company also operatesoperated the TELKOM-1 and the Palapa B-4 satellites and 173 earth stations, including one satellite control system. TELKOM also commissioned the development and manufacture of a new satellite, TELKOM-2, the manufacture of which was completed in November 2004, and expects to launch TELKOM-2 around September 2005 and to retire its Palapa B-4 after the launch of TELKOM-2. TELKOM-1 has 36 transponders including 12 extended C-band transponders and 24 standard C-band transponders, while Palapa B-4 hasand the to-be-launched TELKOM-2 each have 24 standard C-band transponders. TELKOM uses its satellites for the following purposes:

 • Network backbone transmission;
 
 • Rural telecommunications services;
 
 • Back-up transmission capacity for the national telecommunications network;
 
 • Satellite broadcasting, VSAT and multimedia services;

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 • Satellite transponder capacity leasing;
 
 • Satellite-based lease line; and
 
 • Teleport (earth station satellite uplinking and downlinking services to and from other satellites).

Network Development.

     Fixed-line Network Development

Fixed line Network Development
      TELKOM continues to develop and expand its network infrastructure. In December 2002, TELKOM signed agreements with a consortium led by Samsung Electronics in October 2002 and a consortium led by Ericsson andin December 2002, with Motorola, Inc. in March 2003, TELKOM signed an agreement with Motorola, Inc.and PT INTI in August 2003, for the development of a total of 1.6 million1,656,300 base station subsystem lines and network and switching subsystem lines based on CDMA fixed wireless technology. These projects are expectedwere originally scheduled to be completed by the middle of 2006.2006, but were accelerated and completed in 2005 to meet demand. See Item 10. “Additional Information — C. Material Contracts.”

In 2004, TELKOM also hassubstantially completed the expansion of its Java fiber optic backbone. TELKOM entered into an agreement on June 10, 2005 with a consortium consisting of NEC and Siemens AG to further develop its Java-Sumatra-Kalimantan network by the end of 2006.

      TELKOM also had several network developments projects that were ongoing as of December 31, 2004, which includeincluded the development of:

 • fiber optic backbone infrastructure in Sumatera to provide additional backbone capacity and to extend the backbone to the island of Batam, which will facilitate connections in the future from Batam to nearby Singapore;Singapore. This was completed in January 2005;
 
 • fiber optic backbone infrastructure in Kalimantan (Borneo) and Sulawesi; andfrom Banjarmasin to Samarinda;
 
• fiber optic backbone infrastructure in Sulawesi from Makasar to Palu;

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 • fiber optic regional junction in greater Jakarta, Surabaya (East Java) and Bandung — Cirebon (West Java).;

      To further develop its communications services, TELKOM also plans to:

 • Implementcontinue to implement soft switch technologies to move towards a next generation network;
 
 • Expand its broadband access network utilizing ADSL, which currently covers Division II (Jakarta) and Division V (East Java);
• Enhancecontinue to enhance its network through the progressive replacement of its old copper access network with optical access network;
• Develop and promote additional advanced telephony services and features; and
 
 • Continuecontinue network integration and quality improvement.

     Data Network Development

Mobile Cellular Network Development
      In 2003,2004, Telkomsel extended its GSM coverage to cover all counties in Indonesia. It also continued to improve the quality of its coverage in Jakarta, Surabaya and other major cities through the addition of microcells and expansion of its fiber optic transmission backbone. In 2004, Telkomsel added, among other equipment, 1,385 BTSs and 10,708 transmitting and receiving exchanges. Telkomsel plans to continue to install additional BTSs to further expand its coverage, further expand its fiber optic transmission backbone for major cities in Java, install additional microcells and install additional transmitting and receiving exchanges, particularly in provincial areas, to further improve the quality of its coverage, upgrade its switching equipment to increase network capacity, and expand its intelligent network used in connection with its prepaid products.
Data Network Development
      In 2004, TELKOM continued to improve the quality of its data network by adding capacity and coverage, increasing the capacity and coverage area of its Network Management System,network management system, as well as improving its billing system, security and access to its data network. TELKOM also expanded the coverage of its high performance IP backbone and Remote Access Server with a viewrelated IP infrastructure to expanding the coverage ofincrease its IP VPN dial-up services. On August 20, 2003traffic capacity. TELKOM introduced wireless hotspot technologyappointed a consortium consisting of Juniper Networks (Hong Kong), Ltd, PT Siemens Indonesia and PT Datacom Diangraha to develop its IP core network for Rp.29.8 billion, through a letter agreement in business districts in JakartaDecember 2004 and Batam, giving customersformalized by a high-speed Internet access option in addition to TELKOM’s ADSLcontract dated April 1, 2005. The project was awarded after holding an e-auction, and Optical Fiber Access Network.

     IDD Network Development

     TELKOM received its commercial license from the Government to provide IDD services on May 13, 2004. TELKOM began offering IDD fixed-line services under the brand name “TIC 007” on June 7, 2004. TELKOM has also upgraded switches in Batam, Jakarta and Surabaya to have international gateway capabilities. Since 2002, TELKOM has operated microwave links to connect Batam Island (Indonesia), Sentosa Island (Singapore) and Johor (Malaysia). Due to the high demand for international bandwidth in the ASEAN region, TELKOM, Singapore Telecom (“SingTel”) and CAT Telecom agreed to build a submarine fiber optic cable to connect Indonesia (Batam), Singapore (Changi) and Thailand (Songkhla), which is known as TIS Cable System and the cable was ready for

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service in November 2003. TELKOM has also signed an agreement with Telekom Malaysia Berhad (“Telekom Malaysia”) for the deployment and maintenance of a new submarine optical cable to connect Dumai (Indonesia) to Melaka (Malaysia), which is expected to be completed byin the endthird quarter of 2004.2005.
      In 2004, TELKOM also extendedimproved the quality and coverage of its international cablebroadband Internet access network by purchasing bandwidth capacitycontinuing to connect with Hong Kongexpand its ADSL broadband access network, which currently covers Division II (Jakarta) and utilizes this capacity to connect to other countries from Hong Kong, such as the United States.Division V (East Java). TELKOM is developingplanning to deploy a nationwide ADSL broadband Internet access network, and expects to enter into a contract in the ground segment to connectnear future for the Intelsat Satellite. These stepsdevelopment of this network, which it expects will provide more flexibility forbe completed around the third quarter of 2005.
TELKOM-2 Satellite
      TELKOM to interconnect with foreign operators. In order to allow interconnection with foreign operators, TELKOM has entered into international telecommunications service agreements with dominant operators in several countries, such as SingTel, Telekom Malaysia, MCI and SK Telink.

     TELKOM-2 Satellite

     TELKOM has signed a US$73.1473.1 million contract with Orbital Sciences Corporation to build the TELKOM-2 satellite based on Orbital’s STAR-2 platform, to replace TELKOM’s existing Palapa B-4 satellite, whosewhich is expected to be taken out of service after the TELKOM-2 satellite is launched and the operational lifespan expiresof which expired in late 2004. The TELKOM-2 satellite is to havehas a capacity of 24 standard C-band transponders, with transponder specifications similar to those of the TELKOM-1 satellite. TELKOM-2 is to be designed forhas a 15 years in-orbit life and is expected to provide increased coverage of the Asian region and the Indian subcontinent compared to Palapa B-4. TELKOM believes that the satellite will support TELKOM’s network for voice, video and data communications.

The Company plans

      TELKOM expects to launch TELKOM-2 between November 30, 2004 and December 30, 2004.around September 2005. On November 8, 2002, TELKOM signed a US$62.9 million agreement with Arianespace S.A., which covers the cost of launching TELKOM-2.

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Capital Expenditures

      For more information on TELKOM’s principal capital expenditures, see Item 5. “Operating and Financial Review and Prospects — B. Liquidity and Capital Resources — Capital Expenditures”.

Business Strategy

      The Company’s vision is to become a leading InfoCom“InfoCom” player in the region, with a mission to provide one-stop services with excellent quality and competitive price to customers and to manage its business using best practices, utilizing competitive advantages and maximizing synergies.

      TELKOM believes that Indonesia’s telecommunications market remains underdeveloped with alow penetration rate of approximately 3.54rates for both fixed lines per 100 inhabitants for fixed-lines and approximately 9mobile cellular lines per 100 inhabitants for cellular as of December 31, 2003 based on projected population figures from the Central Bureau of Statistics.compared to other countries in Southeast Asia. TELKOM believes that the strong demand for telecommunications services has largely been responsible for the growth of its fixed-linefixed line and wireless business in recent years and will continue to offer favorable growth opportunities in the future. TELKOM expects that fixed-linefixed line and wireless services will continue to providecontribute the substantial majority of its operating revenues in the near term, although it plans to increase the proportion of its revenues derived from its other communications services.term. It has developed broad strategies to retain its existing customers, to acquire new and lost customers and to further penetrate the market through customer relationship management (such as the setting up of its enterprise service division and account management teams), product leadership and diversification, competitive pricing and one-gate distribution channels.

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The key elements of TELKOM’s strategy are:
Strengthening the Fixed-lineFixed line Business

Indonesia has one of the lowest fixed-line penetrationsfixed line penetration rates in Southeast Asia. The following table sets forth the penetration rate for each Division as of December 31, 2003:
                                 
Division IDivision IIDivision IIIDivision IVDivision VDivision VIDivision VIITotal
LIS  1,239,409   3,036,372   733,462   668,261   1,594,827   425,979   780,805   8,479,115 
Population (millions)  53.53   29.83   26.15   45.53   37.75   14.11   32.74   239.66 
Penetration (per 100)  2.32   10.18   2.80   1.47   4.22   3.02   2.38   3.54 

As of December 31, 2003, approximately 51%2004, a majority of total lines in service were in the major metropolitan areas of Jakarta, Surabaya, Semarang, Bandung, Medan and Denpasar.

      TELKOM aims to strengthen its fixed-linefixed line business by:

 • increasing its fixed-linefixed line penetration rate more quickly and with lower capital expenditure per line through the rapid roll-out of fixed wireless technology, revenue sharing arrangements, new partnership agreements and pay as you grow schemes;
 
 • increasing ARPU through the use of TELKOMFlexi and value added services;
 
 • concentrating on its top 20 products in the top 40 cities and targeting the top 20% of its customers with ARPUs of more than Rp.150,000 by providing multiservice bundling,bundled services, broadband access, a customer care service center for business customers price packaging and other benefits;
 
 • strengthening its interconnection business by establishing a service center dedicated to telecommunications operators and other interconnection customers, opening more gateways to other telecommunications operators, offering more attractive pricing and providing enhanced billing services;
 
 • strengthening PlasaTELKOM as a point of sale for TELKOM’s services; and
 
 • developing and expanding its IDD fixed-linefixed line business, which TELKOM began offering to customers on June 7, 2004.
Strengthening its Backbone Network

In order to provide a better quality of service to its customers, TELKOM intends to continue to increase the capacity, reachcoverage and quality of its network by, among other things, using an optical network for high speed backbone transmission infrastructure such as its Java optical backbone, HPBT Sumatera (2002-2003), Trans Borneo and Trans Sulawesi (2004-2005) and by launchingits planned launch of the new TELKOM-2 satellite to replace the existing Palapa B-4 satellite (which ends its operational life around the end of 2004).satellite. In addition, TELKOM aims to manage

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synergies among utility providers in order to enhance backbone capacity and access network penetration, expanding its optical network, upgrading to a next generation network with the installation of advanced switching systems, constructing international microwave and submarine links and upgrading its systems to provide integrated billing for new services.
Maintaining Telkomsel’s DominantLeading Position in the Industry

      The Company regards the cellular business as having the greatest opportunity for revenue growth. The Company provides its cellular services primarily through Telkomsel, a market leader in the cellular business in Indonesia. Based on industry statistics, Telkomsel had an estimated market share as of December 31, 20032004 of approximately 51%,54% of the GSM mobile cellular market, maintaining its position as the largest nationwide licensed GSM mobile cellular operator in Indonesia despiteand representing a slight declineincrease from its estimated market share of 52.8%51% as of December 31, 2002.2003. TELKOM intends to promote the further development of Telkomsel’s business by, among other things, offering bundling of and one-stop shopping for, TELKOM’s and

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Telkomsel’s products and services, and approvingexpanding Telkomsel’s capital expenditure program which will provide for expansion of network capacity andto enable Telkomsel to meet the projected needs of its growing customer base through 2005. In order to focus on Telkomsel and GSM technology, TELKOM has sold its interests in cellular operators Telesera, MetroselPT Telekomindo Selular Raya (“Telesera”), PT Metro Selular Nusantara (“Metrosel”) and KomselindoPT Komunikasi Selular Indonesia (“Komselindo”) which utilize analog and other first generation non-GSM technologies. In February 2004, Telkomsel began technical testing in Jakarta
      TELKOM believes that the 35% equity interest of a new enhanced data transmission service called “EDGE,” for Enhanced Data rates for GSM Evolution. Telkomsel expects to commercially launch EDGE sometime during the second half of 2004.

Singapore Telecom Mobile Pte Ltd (“SingTel Mobile”) has a 35% interest in Telkomsel. TELKOM believes that SingTel Mobile’s equity interest in Telkomsel increases Telkomsel’s ability to access SingTel Mobile’s technological and commercial expertise in the cellular business and increases opportunities for cooperation between Telkomsel and SingTel Mobile in the development of new products, thereby strengthening and better positioning Telkomsel to face competition from other mobile cellular operators.

      The key elements of Telkomsel’s strategy for its business include:

 • taking advantage of commercial, operational and network synergies with TELKOM and sharing best-practices and know-how with SingTel Mobile;
 
 • ensuring that Telkomsel has the necessary networkcontinuous capacity and coverage expansion at predefined quality levels to handle subscriber growth;
 
 • maintaining or improving market share ARPU and churn rates by continuously aligning the characteristics and features of Telkomsel’s service offerings to the evolving needs of its customer, enhancing its products and services portfolio (including its EDGE and GPRS services), expanding network capacity and improving service quality;
 
 • ensuring that Telkomsel has the IT infrastructure in place to fulfill its vision and mission, with special focus on areas such as billing, service delivery and customer service; and
 
 • achieving service levels at par with world class mobile service providers through its call center footprint and aggressive pursuit of service oriented goals.
Developing its Fixed Wireless Business

TELKOM began offering a limited mobility CDMA-based fixed wireless phone service under the brand name “TELKOMFlexi” in December 2002. TELKOM’s rollout of this service began in the three cities of Surabaya, Denpasar and Balikpapan and, as of December 31, 2003,2004, was available in 38192 cities throughout Indonesia, including Jakarta, Malang, Batam, Makasar, Banjarmasin, Medan and Palangkaraya. TELKOM plans to continue to expand its CDMA-based fixed wireless networks in all of its regional divisions by constructing CDMA-based fixed wireless networks. Compared to fixed wireline networks, CDMA-based networks are generally faster and easier to construct and provide customers with greater flexibility and mobility. TELKOM believes the deployment of a CDMA-based fixed

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wireless network and its TELKOMFlexi business will provide TELKOM with a competitive advantage in the face of liberalization and increased competition in the fixed-linefixed line market.
Developing its Data and Internet Business

      TELKOM intends to grow its data and Internet business by, among other things:

 • increased investment in TELKOM’s broadband infrastructure (such as ADSL, Hybrid Fiber/ CoaxCoaxial and satellite);
 
 • focusing on retaining and acquiring customers with high demand for data services by offering competitive pricing for high-speed data and Internet services (including value-added services) and full VPN IPs, and by expanding TELKOM’s backbone and network access technology;

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 • giving customers greater Internet access options, such as through wireless hotspot technology and the bundling of Internet access services with TELKOMFlexi and Telkomsel products;
 
 • developing and offering new value-added services and products, such as e-payment services for banks and other financial institutions and wireless data content for GPRS and MMS users; and
 
 • expanding the international coverage of TELKOM’s data and Internet services by entering into agreements with additional global carriers and wholesalers.wholesalers; and
• expanding the coverage and quality of its Internet Protocol backbone to increase data and Internet traffic capacity.

Reducing Cost of Capital

      TELKOM recognizes that the increasingly competitive Indonesian telecommunications market requires TELKOM to develop additional network capacity, improve operational efficiency and diversify its sources of financing. TELKOM’s internally generated cash flows and direct borrowing from banks and other lenders may not be sufficient to fund aggressive plans to grow its business. As a result, TELKOM has sought to implement innovative financing techniquesa “pay as you grow” scheme starting from the end of 2002 for its additional network capacity in order to:

• reduce capital expenditures per subscriber, its cost of capital and the demands placed on its cash flows;
 • share investment risks with its suppliers;
 
 • reduce its asset base and outsource non-core businesses; and
 
 • mitigate financing, commercial, operational, technical and capacity risks.

     TELKOM calls such financing techniques “pay as you grow.” As currently formulated, “pay

      “Pay as you grow” involves arrangements in which TELKOM and its equipment suppliers agree that a percentage of the contract cost will be paid up front (for example, 25%) and the balance will be paid once lines are put into service. TELKOM and its suppliers also agree to work together to plan and design networks, assess capacity requirements and determine timetables for procurement. The “pay as you grow” scheme allows TELKOM to pay the equipment vendors based on the attainment of a certain number of customers in the related area/facility or within one year from completion date, whichever is earlier. Vendors participating in this “pay as you grow” scheme have assessed the risk of entering into such scheme and, up to the date of this Annual Report, have only been willing to enter into this scheme for projects that they believe have high customer potential. Accordingly, vendors have always been paid by TELKOM within a few months after the equipment has been delivered. TELKOM expects that only a relatively small number of equipment vendors will be invited to participate in “pay as you grow” programs and supply a substantial portion of TELKOM’s infrastructure and other equipment needs.

Customer Service

Increasing TELKOM and Telkomsel Synergy
      TELKOM seeks to increase its synergy with Telkomsel, and seeks to promote the sharing of facilities and information, the combining of resources and increased coordination. These resources

48

include network, marketing, infrastructure support (such as information technology, logistics, human resources development and procurement) as well as products and services (such as new product development, bundling/packaging of services and interconnection), and specific examples include:
• joint corporate account handling to be able to offer a complete suite of services to relevant corporate customers;
• utilizing the group’s combined customer base to deliver each other’s relevant products (such as the offering of TELKOM’s 007 IDD service to Telkomsel’s customers with specific benefits and joint promotion campaign);
• joint promotion and marketing activities on case by case basis whenever this generates additional benefits to the group;
• consolidated procurement program and processes to obtain competitive prices for common purchases and implement an e-auction process as a standard price bid mechanism;
• sharing of operational facilities (such as sites, towers, mechanical and electrical facilities); and
• information sharing and in certain cases joint deals with content providers for mobile data services.
Customer Service
TELKOM
      TELKOM provides the following means of accessing customer services:

services through:

 • Walk-in customer services points.Customer service points provide convenient and comprehensive access to TELKOM’s customer services and handle product and service information requests and complaints, activation of services, customer billing, payments, account suspensions, service features and marketing promotions. As of December 31, 2004, TELKOM hashad more than 100795 customer service points in total, including eight51 large centers in Jakarta twoand 49 in Surabaya, and including customer service points operated by its KSO Units.
 
 • Call centers and Internet.TELKOM operates call centers in many cities in Indonesia, including in the KSO regions. Customers are provided a tollnumber 08001 TELKOM (toll free numberfor corporate customers) to speak directly to customer service operators who are trained to handle customer requests and complaints and to provide up-to-date information on matters such as customer bills, promotions and service features. Billing information may also be obtained through the Internet for customers in Jakarta.Divisions I to VI. Since December 2004, TELKOM has also introduced on a trial basis SMS as a service point for customers in Jakarta and Jawa Timur in East Java and charges such customers at the regular SMS rates. Customers are also provided access to directory services for which a charge is levied. TELKOM intends to promote the use of call centers, SMS and the Internet over walk-in customer service points for its retail customers.
 
 • Enterprise centerservice and account management teams.TELKOM regardsTo focus on the top 20% of its corporate customers, particularly corporations with national operations, as its most important customers.

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To focus on these customers, TELKOM has set up an enterprise centerservice division in Jakarta, which seeks to develop its business in this segment of the market. TELKOM provides these customers with account management teams, each comprising an account manager supported by personnel from the relevant operational departments, to provide a single point of contact for all of the customer’s communications needs.needs, including integrated communications solutions. TELKOM has also divided its enterprise service and account management teams into six segments, namely, (i) Financial and Banking, (ii) Government, Army & Police, (iii) Manufacturing, (iv) Mining & Construction, (v) Trade & Industrial Park, and (vi) Trading & Service. To cater to such customers, the enterprise centerservice division works on integrating various product and service offerings to provide total communicationstelecommunications solutions, including Internet accessvoice telecommunications services, multimedia services and customized data communications-related products certain office automation

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and network monitoring and controlling services. TELKOM has also set up similar account management teams at the regional level to focus on corporations with regional operations within Indonesia. As of December 31, 2004, TELKOM currently has over 74had 137 national-level account management teamsmanagers and over 101497 regional-level account management teamsmanagers that cover Divisions III to VI and V.KSO VII. It plans to further increase the number of such teams.
 
 • TELKOM has had a service level guarantee program for its fixed-linefixed line customers in Divisions II and V since May 2001 and has been implementing a service level guarantee program on a national basis since June 2002. The service level guarantee program provides guarantees of certain minimum levels of service relating to, among others, new line installations, restoration of disconnected lines and billing complaints, and provides for non-cash compensation, such as free subscription for a certain period, to be awarded to customers where such minimum service levels are not met.

Telkomsel

      Telkomsel provides the following means of accessing customer services:

services through:

 • GraPARI Customer Services Centers:Telkomsel’sAs of December 31, 2004, Telkomsel had 62 GraPARI customer serviceservices centers (“GraPARI centers”). Telkomsel’s GraPARI centers provide convenient and comprehensive access to Telkomsel’s customer services. GraPARI centers handle product and service information requests and complaints and typically focus on activation of services, customer billing, payments, account suspensions, service features, network coverage, IDD, roaming information and marketing promotions. See “— Sales, Marketing and Distribution”.
 
 • Caroline:“Caroline”, or Customer Care On-Line, is a 24 hour toll-free telephone service. Telkomsel’s customers may speak directly to customer service operators who are trained to handle customer requests and complaints and to provide up-to-date information on matters such as customer bills, payments, promotions and service features.
 
 • Anita:“Anita”, or Aneka Informasi dan Tagihan, is an SMS service available only to Telkomsel’s KartuHALO subscribers. Subscribers may use dedicated Anita telephone lines to obtain billing information as well as usage information through SMS.

      Subscribers may use dedicated Anita telephone lines to obtain billing information as well as usage information through SMS.
Sales, Marketing and Distribution
TELKOM

      TELKOM distributes and sells its principal products and services, including fixed wireless services but excluding mobile cellular services, through six primary distribution channels:

 • Walk-in customer service points.Customers have access to certain products and services in these walk-in customer service points. See “— Customer Service” above.
 
 • Account management teams.Account management teams promote TELKOM’s products and services in an integrated manner to TELKOM’s larger business customers. See “— Customer Service” above.
 
 • Public telecommunications kiosks.Small businesses in cooperation with TELKOM have established public telecommunications kiosks throughout Indonesia. Customers can access basic telecommunications services, including local, domestic long-distance and international telephony, send facsimiles, telex and telegrams, access the Internet and purchase phone-cards.phone-cards and TELKOMFlexi starter packs and vouchers. TELKOM generally provides discounts to such kiosks ranging from 20% toof 30% compared with

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subscriber telephone rates. Kiosks operate on a non-exclusive basis and may provide products and services of other operators.

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 • Authorized dealers and retail outlets.These are located throughout Indonesia and primarily sell phone-cards and TELKOMFLexi subscriptions.subscriptions, starter packs and vouchers. Independent dealers and retail outlets pay a discount to face value for all products they receive, operate on a non-exclusive basis and may also sell products and services of other operators.
 
 • Website.Through its website, customers can obtain information on TELKOM’s major products and services and gain access to certain of its multimedia products.
 
 • Public telephones.Customers can make local, domestic long-distance and international telephone calls through public telephones.

TELKOM’s marketing communications program includes the use of print and television advertising, customer service and distribution personnel, infrastructure and special promotional campaigns to strengthen its brand name, increase its profile and educate the general public about itself and its products and services. TELKOM is developingcontinuing to develop its marketing communications program to promote all of its core businesses as it seeks to evolve into a full service telecommunications provider.
Telkomsel

      Telkomsel sells its cellular services through three primary distribution channels: (i) its 61 GraPARI centers, (ii) a network of authorized dealers (operating over 6,000 retail outlets throughout Indonesia) selling primarily SimPATI SIM cards and pre-paid vouchers and (iii) other outlets such as banks and photo shops. Independent dealers and other outlets pay a discount to face value for all products they receive, such as starter packs and pre-paid vouchers. Independent dealers sell Telkomsel’s cellular services on a non-exclusive basis and may also sell products and services of other cellular operators.

(i)its 62 GraPARI centers (as of December 31, 2004),
(ii)a network of authorized dealers (operating over 12,000 retail outlets throughout Indonesia) selling primarily prepaid SIM cards and vouchers, and
(iii)other outlets such as banks and photo shops. Independent dealers and other outlets pay a discount to face value for all products they receive, such as starter packs and prepaid vouchers. Independent dealers sell Telkomsel’s cellular services on a non-exclusive basis and may also sell products and services of other cellular operators.
      Telkomsel markets its KartuHALO product and services to specific target groups, focusing on corporate end-users, HALOkeluarga, and professionals who tend to generate higher usage and, therefore, higher revenues. Telkomsel has established dedicated corporate account teams to market its services to large corporate customers and to manage on-going client relationships. Its SimPATIprepaid products and services are targeted at a much broader customer base.

      Telkomsel advertises through a variety of media for strategic branding and promotions. In addition, Telkomsel employs marketing methods such as bill inserts and point-of-sale displays in order to target programs, events and promotions at particular segments of the market. Telkomsel’s marketing strategy also includes conducting on-going market analysis to better understand its targeted subscribers and to gather feedback on customer preferencespreferences. It conducts such analysis with a view to improving and introducing new services to cater to the requirements of existing customers and to attract new subscribers.

Billing, Payment and Collection

      TELKOM’s customers are billed on a monthly basis. Customers are billed according to the regional division in which they are located, although they may request bills from several regions to be combined. The billing process is computerized within each region. Payment can be made within the respective regions, through designated automated teller machines, at post offices and banks that act as collecting agents and in certain areas by direct deposit via telephone transfer or by automatic debit through banks and Internet banking. However, for overdue payments, customers are required to make such payments only at TELKOM’s customer service points. TELKOM issues bills on the fifth day of each month and payment of the bill is due by the 20th day of that same month. If payment is not received by the due date of the bill, customers are provided with reminders by way of automated telephone calls and reminder letters, nominal late fees are levied and increasing levels of call barring are implemented. Services will be terminated if no payment is received after three months from the due

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date, although TELKOM does not cut off service to its Government subscribers. After an account is

46

terminated, the customer may only re-subscribe for services after making the overdue payment, including payment of late fees, and by completing a new application.

The following is a summary of TELKOM’s overdue payment policy:
       
StageOverdue PaymentChargePenalty
I 1-10 days 5% of the total outstanding receivables, subject to the minimum charge of Rp.5,000 Not isolated
II 11-40 days 10% of overdue bill subject to minimum charge of Rp.10,000 Out-going isolation (i.e., restricted to receiving incoming calls only)
III 41-70 days 15% of overdue bill subject to minimum charge of Rp.15,000 Out-goingTotal isolation (i.e., restricted to receivingno outgoing or incoming calls only)calls)
IV More than 70 days Customer must fulfill overdue payment, 100% of installation fee Terminated

TELKOM currently provides billing services for Indosat in connection with their IDD services, for which it charges a flat fee for each bill, although it may start billing directly after Indosat enters the domestic market and when TELKOM enters the IDD market.bill.
Management of Customer Receivables

      TELKOM does not screen its customers for creditworthiness and does not collect deposits from subscribers, althoughsubscribers. TELKOM has historically been the only provider of fixed line telecommunication services in Indonesia and has more than 9 million subscriber lines on its fixed line network. A delinquent subscriber, except for Government, police and military customers, is subject to late fees, increasing levels of call barring proceduresand, eventually, disconnection of the service after approximately 3 months of delinquency. Since the monthly bill for non-paymentthe average customer is insignificant and the customer is required to pay a reinstallation fee, the overdue payment and all late fees when the customer intends to resubscribe, there is no incentive for the customer not to pay his outstanding bill. In addition, TELKOM screens potential customers for fixed line by reviewing identity card and electricity billing statements and by visiting the residence of bills have contributed towardssuch potential customers. Accordingly, TELKOM believes that the reductioncollectibility of bad debt.

its receivables is reasonably assured.

In the case of private retail customers, TELKOM generally provides for 100% of the outstanding debt where the amount has been outstanding for more than three months. In the case of Government, police and military customers, TELKOM generally provides for 25% of the outstanding debt where the amount has been outstanding between 7 and 12 months, 50% where the amount has been outstanding between 13 and 24 months and 100% where the amount has been outstanding for more than 24 months.
Telkomsel

      Telkomsel bills its KartuHALO post-paid subscribers on a monthly basis, in arrears based onon: (i) the minutes of use for cellular services; (ii) any additional, chargeable value-added services utilized during the period; and (iii) subscription charges for basic and other services included in their subscription plan. Beginning March 2004, postpaid subscribers can choose among three options: (a) free national roaming; (b) 150 free SMS per month; or (c) waiver of the monthly subscription charge.

      Telkomsel offers its KartuHALO post-paid subscribers a variety of payment options, including payment by cash, cheque, credit card, direct deposit via telephone transfer or automatic debit through banks and participating credit card companies. Payments may be made at any of Telkomsel’s GraPARI

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centers, designated automatic-teller machines or through over-the-counter facilities (mostly at post offices and banks with whom Telkomsel has an arrangement).

      Telkomsel issues bills to retail customers on the fifth day of each month and payment of the bill is due by the 20th day of that same month.month (corporate customers can choose the day of the month that they would like their bill due and Telkomsel issues the bill approximately 15 days prior to such date). If payment is not received by the due date of the bill, subscribers are provided with reminders by way of automated telephone calls or SMS, and the customer will be barred from making any outgoing calls or receiving any incoming roaming calls. If there is no payment of the overdue sum within one month from the due date of the relevant bill, the customer will be further

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barred from receiving all incoming calls. If no payment is received within two months of the due date of payment, the customer’s account will then be terminated, although Telkomsel will continue to seek payment and may seek the assistance of a debt collection agency. After an account is terminated, the customer may only re-subscribe for services after making the overdue payment and by completing a new application. Telkomsel does not charge any late fees or interest on its overdue accounts.

Insurance

      As of December 31, 2003,2004, TELKOM’s property, plant and equipment, including optical fibers but excluding multi-pair cables, were insured against the risk of fire, theft and other specified risks for an aggregate coverage value of Rp.19.6Rp.19.3 trillion (US$2.32.1 billion). AdditionalTELKOM maintained additional insurance coverage as of such date of US$51.6 million in the event of a total loss of the TELKOM-1 satellite. In connection with its planned launch of the TELKOM-2 satellite, TELKOM has procured insurance to cover both the satellite and launch services. With regard to the TELKOM-2 satellite, TELKOM has procured (i) a satellite launch and in-orbit insurance providing coverage of US$79.3 million to cover the event of a total loss of the satellite in the period between lift-off and up to one year in orbit, and (ii) post separation and in-orbit insurance coverage of US$2.371.0 million to cover the event of a total loss in the period between the separation of the satellite from the launcher up to one year in orbit. With regard to launch services, TELKOM has procured a launch risk guarantee from Arianespace that provides reflight in the event of a launch failure in the period between lift-off and US$57.2 million exists, respectively, for the Palapa B-4 and TELKOM-1 satellites.separation. As of December 31, 2004, TELKOM also maintainsmaintained general insurance coverage for motor vehicles of Rp.121Rp.107.7 billion (US$14.311.6 million). TELKOM does not maintain business interruption insurance.

TELKOM’s subsidiaries separately insure their property in such amounts and in accordance with the policies determined and implemented by the subsidiaries themselves.
Telkomsel

      Telkomsel has an electronic equipment and industrial all-risk insurance policy underwritten by a consortium led by PT Asuransi Ramayana Tbk.Tbk in the amount of US$2.4 billion. The policy provides cover for Telkomsel’s network equipment, facilities, infrastructure and buildings although it excludes losses suffered as a result of war, civil war, rebellion, revolution, terrorism, insurrection or military or usurped power, amongst other exclusions. Telkomsel also has general insurance for motor vehicle liabilities and comprehensive general liabilities. Telkomsel does not maintain business interruption insurance.

Indonesian Telecommunications Industry
Overview

      Since 1961, telecommunications services in Indonesia have been provided by a succession of state-owned companies. As in other developing economies, the expansion and modernization of telecommunications infrastructure play an important role in Indonesia’s general economic development. Moreover, the nation’s large population and rapid economic growth have led to significant unmet demand for telecommunications services.

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      The Government has extensive regulatory authority and supervisory control over the telecommunications sector, primarily through the MoC.MoCI. The Government has historically maintained a monopoly over telecommunications services within Indonesia. Recent reforms have attempted to create a regulatory framework to promote competition and accelerate the development of telecommunications facilities and infrastructure. The regulatory reforms embodied in new regulations, which came into effect on September 8, 2000, are intended to increase competition by removing monopolistic controls, increase the transparency and predictability of the regulatory framework, create opportunities for strategic alliances with foreign partners and facilitate the entrance of new participants to the industry. The deregulation of the telecommunications sector is closely linked to the national economic recovery program supported by the IMF.

     Fixed-line

      Fixed line and cellular penetration are low in Indonesia by international standards. As of December 31, 2003,2004, Indonesia had an estimated fixed-linefixed line penetration (excluding Indosat’s fixed wireless subscribers) of 3.54%4.11% and an estimated cellular penetration of 9%14%, based on estimatedprojected population figures for 2003.

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from the Indonesian Central Bureau of Statistics.

      TELKOM believes that there are a number of trends in the telecommunications industry in Indonesia which include:

 • Continued growth.TELKOM believes the telecommunications industry will continue to grow, as continued development of Indonesia’s economy is expected to increase demand for telecommunications services.
 
 • Migration to wireless networks.TELKOM anticipates that wireless services will become increasingly popular as a result of wider coverage areas and improving wireless network quality, declining handset costs and the proliferation of prepaid services.
 
 • Increasing competition.TELKOM anticipates an increasingly competitive Indonesian telecommunications market as a result of the Government’s regulatory reforms.

Regulations
Overview

      The Government exercises both regulatory authority and supervisory control over the telecommunications industry in Indonesia. The legal framework for the telecommunications industry is based on specific laws, government regulations and ministerial decrees enacted and issued from time to time. The Government currently regulates the telecommunications sector through the MoC.MoCI. The MoCMoCI is responsible for the overall supervision and regulation of the industry. Within the MoC,MoCI, various directorates and bureaus carry out specific regulatory duties. The MoCMoCI has authority to issue implementing decrees, which are typically broad in scope, thereby giving the MoCMoCI considerable latitude. Pursuant to such decrees, the MoCMoCI defines the scope of exclusivity, formulates and approves tariffs, determines USOs and controls many factors affecting TELKOM’s competitive position, operations and financial condition. The MoC,MoCI, as regulator, has the authority to grant new licenses for the establishment of new joint ventures and other arrangements, particularly in the telecommunications sector.

      Prior to March 1998, the Ministry of Tourism, Post and Telecommunications (the “MTPT”) was responsible for the regulation of telecommunications in Indonesia, but, with reorganization of the Government following the 1999 General Elections, the MoC was given the regulatory responsibilities. In 2005, pursuant to a presidential decree, such regulatory responsibilities were transferred to the MoCI. Through the DGPT, a directorate under the MoC,MoCI, the Government regulates the radio frequency spectrum allocation for all operators, including TELKOM, which are required to obtain a license from the MoCMoCI for each of their services utilizing radio frequency spectrum. All telecommunications operators are also required to pay for radio frequency spectrum usage. The Government also requires all telecommunications operators to pay a concession license fee of 1% of its collected operating revenues.

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      The overall program of telecommunications sector deregulation is closely linked to the national economic recovery program supported by the IMF. The national plan is documented in the Memorandum of Economic and Financial Policies (the “MEFP”), as further clarified in the Letters of Intent to the IMF in January and May 2000. The main focus of the MEFP is to stabilize the economy and regain trust through a comprehensive plan based on:

 • Deregulation;
 
 • Promoting competition;
 
 • Liberalization;
 
 • Restructuring;
 
 • Improving market access; and
 
 • Introducing market-oriented regulations.

      The Government’s telecommunications reform policy is formulated in its “Blueprint of the Indonesian Government’s Policy on Telecommunications”, as contained in the MoC’s Decree

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No. KM 72 of 1999 dated July 20, 1999 (the “Blueprint”). The policies stated in the Blueprint are intended to:

 • Increase the sector’s performance in the era of globalization;
 
 • Liberalize the sector with a competitive structure by removing monopolistic controls;
 
 • Increase transparency and predictability of the regulatory framework;
 
 • Create opportunities for national telecommunications operators to form strategic alliances with foreign partners; and
 
 • Create business opportunities for small and medium enterprises; and
 
 • Facilitate new job opportunities.

      The recent regulatory reforms of the Indonesian telecommunications sector have their foundation in Telecommunications Law No. 36 of 1999, which came into effect on September 8, 2000 (the “Telecommunications Law”).

On September 15, 2003 the Government issued the Economic Policy Package pursuant to Presidential Instruction No. 15 dated September 15, 2003. The Government intends to improve efficiency, capacity and equity in telecommunications by putting in place the infrastructure for an additional 3 million fixed lines and 43,000 fixed lines in remote areas. Further, on March 30, 2004, the MoC issued Announcement No.PM.2 2004 regarding the Implementation of the TelecommunicationTelecommunications Sector Restructuring, which stated, among other matters, that the Government will require operators to install a minimum of 1.4 million lines in 2004 and 10.7 million lines by 2008.
Telecommunications Law

      The Telecommunications Law provides key guidelines for industry reforms, including industry liberalization, facilitation of new entrants and enhanced transparency and competition. Under the Indonesian regulatory framework, the Telecommunication Law only outlines the substantive principles of the subject matter. Detailed provisions implementing the Telecommunications Law will be provided in the implementation regulations consisting of Government regulations, ministerial decrees and decrees of the Director General of Post and Telecommunication.

DGPT.

      The new Telecommunications Law eliminates the concept of “organizing entities”, thus ending TELKOM’s and Indosat’s status as organizing entities with responsibility for coordinating domestic and international telecommunications services, respectively, for the industry. To enhance competition, the

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Telecommunications Law specifically prohibits monopolistic practices and unfair competition among telecommunications operators.

The role of the Government is to become that of an impartial policy maker and supervisor of the telecommunications sector. As stipulated in the Telecommunications Law and in order to ensure transparency in the regulatory process, an independent regulatory body was established on July 11, 2003 to regulate, monitor and control the telecommunication industry. The Indonesian Telecommunications Regulatory Body (“ITRB”) is comprised of officials from the DGPT and the Committee of Telecommunication Regulations and is headed by the Director General of PortPost and Telecommunication Services. Members of the Committee of Telecommunication Regulations were appointed on December 19, 2003.
      MoC Decree No. 67/2003 stipulates the relationship between the MoC, from which telecommunications regulatory responsibility was transferred to the MoCI in February 2005, and ITRB. As part of its regulatory function, ITRB is authorized to (i) carry out the selection or evaluation for licensing of telecommunications networks and services in accordance with the MoCI’s policy, and (ii) propose to the MoCI the operation performance standards for telecommunications networks and services, service quality standards, interconnection charges and equipment standardization. As part of its monitoring function, the ITRB is authorized to monitor and is required to report to the MoCI on (i) the implementation of the operation performance standards for telecommunications networks and services, (ii) the competition among network and service operators, and (iii) compliance on the utilization of telecommunication equipment in accordance to the applicable standards. As part of its controlling function, the ITRB is also authorized and required to report to the MoCI regarding (i) the facilitation of any dispute resolution among network and service operators, and (ii) the control of the use of telecommunications equipment and implementation of service quality standards. Decisions of the ITRB are in the form of a DGPT decree.
New Service Categories

      The Telecommunications Law classifies telecommunications providers into three categories: (i) telecommunications network providers; (ii) telecommunications services providers; and (iii) special telecommunications providers. Under these categories, telecommunications network operations and/or provision of telecommunications services may be carried out by any legal entity established for that purpose.

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Under the Telecommunications Law, licenses are required for each category of telecommunications service. A telecommunications network provider is licensed to own and/or operate a telecommunications network. A telecommunications service provider is licensed to provide services by leasing network capacity from other network providers. Special telecommunications licenses are required for providers of private telecommunications services for purposes relating to broadcasting and national security interests. MoC Decree No. KM 20/2001 (as amended by Decree No. KM 29/2004) and MoC Decree No. KM 21/2001 (as amended by Decree No. KM 30/2004) implement the provisions of the Telecommunications Law regarding these new categories of telecommunications network and services operations.
Modern License

Under

      Pursuant to the Telecommunications Law the existing licenses for telecommunication services will beis in the process of being replaced with the so-called “Modern License.”Licenses”. In addition to granting the license holder the right to provide telecommunication services, the Modern License also imposes certain mandatory obligations on the license holder. These obligations include, among others, construction obligations, service obligations, network performance obligations and contributing 0.75% of their gross revenues for Universal Service Obligations (“USO”). The license holder is required to fulfill the mandatory obligations set forth in its Modern License and the failure to comply with such obligations may result in the revocation of its Modern License. The draft implementation regulations relating to the Modern License have been proposed but not yet enacted. Once the regulations have been enacted, TELKOM’s separate licenses to provide fixed-line fixed line

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services, DLD services and IDD services will bewere replaced and combined into a single license.license issued on May 13, 2004. TELKOM also has a multimedia license that includes services such as Internet service provider, data communication and VoIP.
Exclusivity

      Under the previous regulatory regime that precedes the Telecommunications Law, TELKOM was granted a monopoly to provide domestic local fixed-linefixed line telecommunications services until December 31, 2010 and domestic long-distance telecommunications services until December 31, 2005. Indosat and Satelindo (prior to the merger of Satelinto into Indosat in November 2003) were granted a duopoly for exclusive provision of basic international telecommunications services until 2004.

      The Telecommunications Law did not expressly terminate the existing exclusivity rights of TELKOM Indosat and Satelindo.Indosat. In an effort to support the undertakings of TELKOM and Indosat during their respective initial public offerings and to maintain the Government’s credibility among foreign investors, the Government announced that termination of the exclusivity rights will be subject to agreement between the relevant incumbents and the Government, whereby incumbents will be eligible for compensation in exchange for early termination of these exclusivity rights.

      On August 1, 2001, the Government through the DGPT, announced the early termination of TELKOM’s and Indosat’s exclusivity rights for local and domestic-long distance telecommunications services (in the case of TELKOM) and IDD (in the case of Indosat), through MoC Decree No. 21/2001 (“Operation of Telecommunications Services”). The announcement stated that it is the Government’s intention that Indosat would receive a license to provide local telephone services and a license to provide domestic long-distance and that TELKOM would receive a license to provide IDD services at the end of 2003. The Government appointed an appraiser to resolve differences of opinion regarding the amount of compensation to be provided to TELKOM and Indosat for early termination of their exclusivity rights. On March 30, 2004, the MoC announced that the Government shall pay to TELKOM (including its KSO Partners) Rp.478 billion (net of taxes) as compensation, which amount shall be paid gradually from funds allocated in the State Budget for the MoC subject to approval by Parliament.

As of the date of this annual report, TELKOM has not received any payments of the Rp.478 billion compensation. See “Item 3. Key Information — D. Risk Factors — Risks Relating to TELKOM and its Subsidiaries — TELKOM operates in a legal and regulatory environment that is undergoing significant reforms and such reforms may adversely affect TELKOM’s business.”

      As affirmed by the Government, TELKOM would receive a commercial license to provide IDD services, which was issued on May 13, 2004. Indosat would receive a license to provide local telephone service commercial license, which was issued in August 2002, and a commercial license to provide domestic long-distance services by the end of 2003, which was issued on May 13, 2004.

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Competition

Despite the termination of exclusivity rights, the Government does not prohibit or discourage operators from attaining a dominant position with regard to telecommunications services. The Government, however, does prohibit operators from abusing a dominant position. On March 11, 2004, the MoC issued Decree No. 33/2004, which sets forth measures to prohibit the abuse of their dominant position by network and service providers. Dominant providers are determined by the MoC based on factors such as their scope of business, coverage area of services and whether they control a particular market. Specifically, the Decree prohibits a dominant provider from engaging in practices such as dumping, predatory pricing, cross-subsidies, compelling consumers to use such provider’s services (to the exclusion of competitors) and hampering mandatory interconnection (including discriminating against specific providers).
Interconnection

      Pursuant to the express prohibitions on activities that may create monopolistic practices and unfair business competition, the Telecommunications Law provides for fair interconnection of networks to

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allow “any to any connectivity”. Interconnection fees are to be agreed by each network provider and calculated in a transparent manner. The Telecommunications Law provides guidance with respect to the interconnection scheme between telecommunication network providers. Currently, interconnection costs paid for interconnection with TELKOM’s fixed-linefixed line network vary, depending on the type of interconnectioninterconnected operator (e.g., IDD, cellular, fixed wireline, fixed wireless or satellite), and are determined in accordance with MoC Decree No. 37/1999 (IDD)No. 46/1998 (IDD and IDD, DLD and DLD, cellular and DLD, cellular and cellular, cellular and IDD), as amended by MoC Decree No. 46/1998 (Cellular),37/1999 (DLD and IDD) and MoC Decree No. KU506/1997 (Fixed Wireline(fixed wireline and Fixed Wireless) and MoC Decree No. 30/2000.fixed wireless). For IDD and satellite operators, interconnection costs are based on termination and origination charges. Interconnection costs for fixed wireline and fixed wireless operators are based on revenue sharing fixed under Decree No. KU506/1997. Interconnection costs paid by mobile cellular operators are based principally on negotiations between the network providers and in the event no agreement is reached by the providers, the interconnection costs are to be determined in accordance with MoC Decree No. 46/1998.

On March 11, 2004, the MoC issued Decree No. 32/2004, which stated that cost-based interconnection fees shall be applicable beginning January 1, 2005. The MoCAs of the date of this Annual Report, the MoCI, to which telecommunications regulatory responsibility was transferred in February 2005, is still in the process of preparing regulations for the adjustment of interconnection arrangements with the assistance of independent consultants. These preparations include: determining the amount of interconnection fees, cost accounting standards, reference interconnection offer (RIO) and the procedure for resolving interconnection disputes.
DLD and IDD Services

      Historically, DLD and IDD services could only be offered by TELKOM and Indosat, respectively (See — “Exclusivity”). After the Government terminated the exclusivity rights of TELKOM and Indosat, it stated its intention to allow TELKOM to offer IDD services and Indosat to offer DLD services, as well as allowing greater competition in the market for DLD and IDD services. On March 11, 2004, the MoC issued Decree No. KM 28/2004, Decree No. KM 29/2004 and Decree No. KM 30/2004, which implementimplemented the new policy regarding IDD and DLD services. Under these Decrees:

 • DLD and IDD network operators may offer DLD and IDD service as part of basic telephony service;
 
 • Each DLD and IDD operator must use a distinct 3-digit access code for its DLD and IDD service;
 
 • Customers may freely select their DLD and IDD providers; and
 
 • DLD and IDD fixed telecommunication network operators (currently only TELKOM and Indosat) may now provide DLD and IDD basic telephony services; andservices.

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• DLD and IDD service providers are entitled to determine retail rates for customers and provide such services to their customers.

TELKOM has been granted authority to use “007” as its IDD access code and is in the process of determining the 3-digit access code for its DLD services. Based on Decree No. 28/2004, TELKOM, which currently uses “0” as the access code for its DLD service, was required by March 1, 2005 to cease using the “0” access code and to implement a three digit access code in the form of “01X” for access to its DLD service. However, TELKOM has not within the given deadline implemented, and does not expect to in the near future to implement, a three digit access code, as extensive installation or upgrade of equipment will be required. TELKOM expects to incur significant costs in connection with the new requirement to establish three digit DLD access codes, including expenditures required to install or upgrade new switching facilities, create a new routing database, costs relating to customer education and other marketing costs. In response to the MoC Decree No. 28/2004, in June 2004, TELKOM submitted a letter to the ITRB highlighting the technical difficulties in implementing the three digit DLD access codes within the given deadline and the substantial costs involved, and requesting that TELKOM be allowed to continue using the “0” prefix for its DLD access prefix and that it be given an additional five year period to implement the three digit DLD access codes. On April 1, 2005, the MoCI announced that it would make available to Indosat the “011” DLD access in five major cities that were

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technically ready for interconnection, including Jakarta, and progressively extend it to all other area codes within five years. TELKOM has also been assigned “017” as its DLD access code. However, interconnection between Indosat and TELKOM in these five cities would still be subject to the parties reaching agreement on technical and business arrangements and entering into an interconnection agreement. In the five-year interim period and thereafter, the “0” prefix may continue to be used by all operators, including TELKOM, as default codes for each operator’s customers to access the DLD service selected by the respective operator.
      On May 17, 2005, the MoCI issued decree No. 6/2005. According to Decree No. 6/2005, the three digit access code in the form of “01X” and “0” access code for access to DLD services may be used. The “0” access code is being used to accommodate customers who prefer not to choose their long-distance carrier, while the “01X” access code has to be implemented gradually in local areas in which TELKOM has technical capabilities to support such services. By April 1, 2010, the “01X” long-distance services must be commenced in all TELKOM’s local areas to accommodate customers who prefer to choose their long-distance carrier. TELKOM is in the process of negotiating with Indosat to allow TELKOM’s customers to access Indosat’s DLD services and for Indosat’s fixed and mobile customers to access TELKOM’s IDD services.
Indonesian Telecommunications Regulatory Body

      On July 11, 2003, the Indonesian Telecommunications Regulatory Body (“ITRB”) was established as the implementing agency of the Telecommunications Law. Under MoC Decree No. KM 31/2003, the ITRB is authorized to regulate, monitor and control the operations of the telecommunications sector. The ITRB is composed of officials from the Directorate General Postal and TelecommunicationDGPT and the Committee of Telecommunication Regulations. Combined with further privatization of TELKOM and Indosat, the establishment of such an independent regulatory body is intended to reduce the Government’s role in the telecommunications industry from that of being the telecommunications industry’s financier, operator, regulator and licenser to becoming primarily the industry’s licenser and regulator.

In 2003 the MoC also announced the establishment of the Telecommunication Traffic Clearing System (“SKTT”), which will assist the ITRB in the performance of its functions and which will be responsible for all interconnection matters. It is expected that through the SKTT, the ITRB will obtain accurate data about the profile of interconnection traffic among operators and calculate interconnection traffic so as to ensure transparency in the charging of interconnection fees. The actual operation of the SKTT will be undertaken by PT Pratama Jaringan Nusantara, a private entity selected by the MoC on February 18, 2004, which will act under the supervision and control of the ITRB. The terms and conditions regarding the operations and activitiesAs of the date of this Annual Report, the SKTT are currently being negotiated among the MoC, the ITRB and the operators.has not commenced operations.
Consumer Protection

Under the Telecommunications Law, each operator must provide guarantees for consumer protection in relation to quality of services, usage or service fees, compensation and other matters. The law also allows customers injured or damaged by negligent operations to file claims against negligent providers.
Universal Service Obligations

      Under the Telecommunications Law, all telecommunications network operators and service providers are bound by a Universal Service Obligation, (“USO”), which requires such network operators and telecommunication service providers to make contribution towards providing universal telecommunication facilities and infrastructure or other forms of compensation. On September 3, 2003, the DGPT issued a letter stating that telecommunications operators in Indonesia will be required to contribute 0.75% of gross revenues (with due consideration for bad debt and interconnection charges) for USO development. On March 11, 2004, the MoC issued Decree No. 34/2004, which sets forth the basic policies underlying the USO program. The decree stated that USO facilities must meet the following minimum requirements: (a) the facilities should meet the standards of basic

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telephony services, including facsimile and dial-up Internet services; (b) the facilities should provide basic public telephony services, with domestic long distance,long-distance, international and mobile access; (c) the facilities should provide telecommunication services that are capable to transmit and receive data; (d) the facilities should be accessible for emergency services; and (e) the facilities should utilize equipment that has been certified by the Director General of Post and Telecommunication.DGPT. Tariffs for services provided under the USO program must beare based on the same as those for similar services provided outside ofapplicable PSTN tariffs. On March 30, 2004, the MoC issued Announcement No. PM. 2/2004, which sets forth the basic policies underlying the USO program. Further,program and required telecommunications operators in Indonesia are now required to contribute 0.75% of gross revenues (with due consideration for bad debt and interconnection charges) for USO development. As of the date of this Annual Report, there has been no implementing regulations or announcement as to when such contribution will take effect. The MoCMoCI is in the process of drafting detailed regulations to further implement the USO program.

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Implementing Regulations

To date, the Government has issued several implementing regulations relating to the Telecommunications Law, including Government Regulation No. 52/2000 (“Operation of Telecommunications”) and Government Regulation No. 53/2000 (“Utilization of Radio Frequency Spectrum and Satellite Orbit”), as well as ministerial decrees, including No. KM 20/2001 (“Operation of Telecommunications Networks”), No. KM 21/2001 (“Operation of Telecommunications Services”), No. KM 12/2002 (“Completing MPPT Decree No. KM. 79/PR-301/MPPT-95 on Procedures for the Tariff Adjustment of Domestic Basic Telecommunications Services”), No. KM 40/2002 (“Guidance for Tariff Implementation of State Revenue on Tax from Cost of Utilization Right of Radio Frequency Spectrum”), No. KM 23/2002 (“Internet Telephony Service for Public”), No. KM 31/2003 (“Indonesian Telecommunication Regulatory Body”), No. KM 28/2004 (“Amendments to the Decree of the Minister of Communication No. KM. 4/2001 of Fundamental Technical Plan National 2000), No. KM 29/2004 (“Amendments to the Decree of the Minister of Communication No. 20 of 2001 on the Provision of Telecommunication Network”), No. KM 30/2004 (“Amendments to the Decree of the Minister of Communication No. 21 of 2001 on the provision of Telecommunication Services”), No. KM 31/2004 (“Amendment to the Decree of the Minister of Communication No. 23/2002 on the Provisions of Internet Telephony Services for Public Needs”), No. KM 32/2004 (“Interconnection Charges for Telecommunication”), No. KM 33/2004 (“Supervision of Fair Competition in the Provision of Fixed Network and Basic Telephony Services”), No. KM 34/2004 (“Universal Service Obligation”) and No. KM 35/2004 (“Provision of Wireless Local Fixed Network with Limited Mobility”). The MoCMoCI and DGPT are in the process of finalizing a number of additional ministerial decrees that are intended to implement other aspects of the Telecommunications Law, including decrees relating to special telecommunications operations and implementation of the cost-based interconnection system.
Satellite regulation

The international satellite industry is highly regulated. In addition to being subject to domestic licensing and regulation in Indonesia such as for the use of orbital slots and radio frequencies, the placement and operation of TELKOM’s satellites are also subject to registration with the Radio Communications Bureau of the International Telecommunications Union and the Intelsat consultation process.
Fixed Wireless Access regulation

      On March 11, 2004, the MoC issued Decree No. 35/2004, which provides that only fixed network operators holding licenses issued by the MoC and using radio frequency access networks may offer fixed wireless access service. In addition, the decree states that each fixed wireless access provider must provide basic telephony services. However, a fixed wireless access provider can only provide fixed wireless access service within its designated area code. Further, fixed wireless access service may not incorporate roaming and auto mutation features. Accordingly, customers cannot use their fixed wireless

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access phones to make or receive calls when they are located outside their respective area codes. Fixed wireless access providers are also required to charge rates that are the same as the rates for fixed line operators.

Competition
Fixed-lineFixed line

      Historically, TELKOM ishad the main provider of fixed-line services in Indonesia. Generally, all customers must obtain fixed-line services from TELKOM and telecommunications operators must interconnect with TELKOM’s fixed-line network in order to provide access to fixed-line and cellular subscribers. With the enactment of the Telecommunications Law and the announced intention of the Government to terminate TELKOM’s exclusive right to provide fixed-linefixed line domestic telecommunications services it is expected thatin Indonesia. Pursuant to regulations introduced to implement the market will be open to full competition.

     On August 1, 2001,Telecommunications Law, the Government through the MoC, announced the early termination ofterminated TELKOM’s exclusivity rights for local and domestic-long distancemonopoly in providing fixed line domestic telecommunications services. The

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announcement stated that the Government’s intention was for MoC issued Indosat to receive a license to provide local telephone services from August 2002 and a2002. On May 13, 2004, Indosat received its commercial license to provide domestic long-distance services from August 2003. As of the date of this Annual Report, Indosat has already been granted both an in-principle and a commercial license for the development of local fixed-line telecommunications.

     In June 2004,telephone services. Indosat launched its own CDMA fixed wireless access service under the brand name “StarOne.”“StarOne” in Surabaya on May 29, 2004 and in Jakarta on July 25, 2004, thereby creating a “duopoly system” in Indonesia’s fixed line domestic telecommunications market. As of the date ofDecember 31, 2004, Indosat only offers this Annual Report, Indosat was only offering this new service in Jakarta, Surabaya, but wasMalang and their surrounding areas. Based on amendment to the interconnection agreement between TELKOM and Indosat dated March 31, 2005, TELKOM has agreed to open interconnection with Indosat’s local fixed line service in certain areas such as Batam, Bandung, Medan, Balikpapan and Malang. Therefore, Indosat is expected to expand its service coverage to other Indonesian cities.

     The end of TELKOM’s exclusive right to provide fixed-linecities in Indonesia. Indosat also commenced offering limited domestic long-distance services is expected to resultfor calls within its network in direct competition between TELKOM and Indosat for fixed-line customers and over time reduce the need for other telecommunications operators to interconnect with TELKOM’s fixed-line network.

late 2004.

TELKOM also faces direct and indirect competition from mobile cellular services, fixed cellular services, SMS, VoIP services and e-mail. TELKOM expects that the increasing uses of these services may adversely affect future demand for its fixed-linefixed line services.
Cellular

     The

      As of the date of this Annual Report, the cellular market in Indonesia is currently dominated by Telkomsel, Indosat and Excelcomindo. As of December 31, 2003,2004, these nationwide GSM operators collectively had over 98%90% of the Indonesian cellular market. The number of cellular subscribers in Indonesia totaled approximately 11.4 million at the end of 2002 and 18.8 million at the end of 2003 and approximately 30.4 million at the end of 2004, representing an annual growth rate of 65%approximately 62% during that period. Despite this rapid growth, the cellular penetration rate in Indonesia, at approximately 9%14% at the end of 2003,2004, has remained relatively low compared to many other countries. During the last two years, competition among cellular operators has intensified.

      As part of the elimination of TELKOM’s and Indosat’s cross-shareholdings in several telecommunications companies in 2001, TELKOM sold its 22.5% interest in Satelindo to Indosat and Indosat sold its 35% interest in Telkomsel to TELKOM. This has resulted in the cellular market becoming more competitive as contemplated by the Blueprint and the Telecommunications Law.

      GSM mobile cellular operators compete principally on the basis of pricing, brand, network coverage, distribution, technology, value-added services and service quality. TELKOM believes that Telkomsel is able to compete effectively in the Indonesian cellular market due to the quality and coverage of its mobile cellular network and the strength of its brand name.

      TELKOM’s new CDMA-based fixed wireless phone service, TELKOMFlexi, which offers limited mobility and charges customers at PSTN tariff rates that are substantially lower than tariffs for cellular services, may over time offer a competitive alternative to GSM services and attract Telkomsel customers that prefer lower tariff rates in exchange for limited mobility.

      As of December 31, 2003,2004, Telkomsel remained the largest national licensed provider of GSM services in Indonesia, with approximately 9.616.3 million cellular subscribers and a market share of approximately 51.0%,54% of the GSM mobile cellular market, which was slightly less thanrepresented a slight increase compared to its approximately 52.8%51% market share as of December 31, 2002.2003. Indosat, as a result of its merger with

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Satelindo, was the second largest provider with approximately 5.999.8 million cellular subscribers and a market share of approximately 31.9%32% as of December 31, 2003.2004. Excelcomindo had approximately 2.953.9 million subscribers and a market share of approximately 15.7%13% as of December 31, 2003.2004. Since 2003, Mobile 8 has also operated a nationwide CDMA mobile cellular service. Mobile 8 had approximately 0.1 million subscribers and a market share of approximately 0.3% as of December 31, 2004. In addition to the nationwide GSM operators, a number of smaller regional GSM, analog and CDMA cellular providers operate in Indonesia.

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      The following table sets forth summary information as of December 31, 20032004 on each of the three dominantleading nationwide licensed GSM mobile cellular operators:

Nationwide Licensed GSM Mobile Cellular Operators Inin Indonesia
        
        
Operator Operator
  
TelkomselIndosatExcelcomindo Telkomsel Indosat Excelcomindo
      
Launch date May 1995 November 1994(2) October 1996 May 1995 November 1994(2) October 1996
Licensed frequency bandwidth (GSM 900 & 1800) 30 MHz 15 MHz 15 MHz 30 MHz 30 MHz 25 MHz
Licensed coverage Nationwide Nationwide Nationwide  Nationwide Nationwide Nationwide
Network coverage Nationwide Major cities in Significantly populated areas of Java and Bali, as well as major cities in Sumatera, Sulawesi and Kalimantan Jakarta and primary business cities in Java, Bali, Lombok, Medan and Batam  Nationwide Information not available Information not available
Market share (as of December 31, 2003)(1)
 51.0% 31.9% 15.7%
Subscribers (as of December 31, 2003)(1)
 9.6  million 5.99 million 2.95 million
Market share (as of December 31, 2004)(1)
  54% 32% 13%
Subscribers (as of December 31, 2004)(1)
 16.3  million 9.8 million 3.9 million

(1) BasedEstimated, based on statistics compiled by TELKOM.
(2) In November 2003, Indosat and Satelindo merged, and Indosat has taken over Satelindo’s cellular operations.
IDD

On August 1, 2001, the Government through the DGPT, announced the early termination of Indosat’s exclusivity rights for IDD. The announcement stated the Government’s intention that TELKOM would receive a commercial license to provide IDD services by the end of 2003. Although TELKOM only received its commercial license on May 13, 2004, it had already made necessary preparations to provide IDD services even prior to the receipt of such license and on June 7, 2004 TELKOM began offering IDD fixed-linefixed line services to customers. TELKOM has upgraded some switching to have International Gateway capabilities in Batam, Jakarta and Surabaya. These gateways have received certificates of operation (sertifikat ULO) from the DGPT. In order to connect with overseas operators, TELKOM has built two microwave links to connect Batam-Singapore and Batam-Pangerang (Malaysia). In addition, TELKOM, SingTel and CAT developed the TIS submarine cable system in 2003 connecting Batam, Singapore and Thailand. TELKOM has also signed an agreement with Telekom Malaysia Berhad for the deployment and maintenance of a new submarine optical cable to connect Dumai (Indonesia) to Melaka (Malaysia), which is expected to bewas completed by the end ofin December 2004. TELKOM also extended its international cable by purchasing bandwidth capacity to connect with Hong Kong and TELKOM utilizes this capacity to connect to other countries, such as the United States. TELKOM isalso completed developing the ground segment to connect to the Intelsat Satellite.Satellite in December 2004. As a new player in IDD, TELKOM cooperates with some global operators to get direct or indirect connection to reach all offshore destinations. All these preparations have allowed TELKOM to begin offering customers IDD fixed-linefixed line services on June 7, 2004.
VoIP

      TELKOM formally launched its VoIP services in September 2002. VoIP uses data communications to transfer voice traffic over the Internet, which usually provides substantial cost savings to subscribers. In addition to TELKOM, Excelcomindo, Indosat, Atlasat, Gaharu and PT Swaguna Widya Pratama

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provide VoIP services in Indonesia. Other unlicensed operators also provide VoIP services that may be accessed through the Internet as well as from software that allows PC-to-PC voice communications

56

through the Internet. VoIP operators offering international services also compete with IDD operators, such as Indosat and, beginning on June 7, 2004, TELKOM.

VoIP operators compete primarily on the basis of pricing and service quality. Certain VoIP operators have started offering services such as budget calls and prepaid calling cards, which is expected to result in greater competition among VoIP operators.
Satellite

In recent years, competition in the Asia-Pacific satellite business has been intense. Companies in this business compete primarily on coverage power, product offerings and price. The Indonesian satellite industry is loosely regulated and in practice operates in accordance with an “open-sky” policy. This means that Indonesian satellite operators must compete with foreign satellite operators.
Other

      During the last three years, competition with respect to multimedia, Internet and data communications-related services has intensified principally due to the issuance of new licenses as a result of the deregulation of the Indonesian telecommunications industry. TELKOM expects competition to continue to intensify. Multimedia, Internet and data communications-related service providers in Indonesia compete principally on the basis of price, range of services provided, network quality, network coverage and customer service quality.

Licenses

      The Telecommunications Law requires telecommunication network operators and telecommunication service operators, including TELKOM, to obtain licenses to operate telecommunications networks and provide telecommunications services.

     Fixed-line.Fixed line.Currently, TELKOM providesprovided local and domestic long-distance fixed-linefixed line services based on Government Regulation No. 25/1991 and Government Regulation No. 8/1993, which permits TELKOM to provide basic and non-basic fixed-line telecommunications.fixed line telecommunications services. Based on MoC Decree No. KM 39/1993 concerning basic telecommunication operation, TELKOM was permitted to enter into joint operation schemes (KSO) with its existing KSO partners for the provision of fixed-linefixed line services in their respective regions. The Government has amended certain of TELKOM’s fixed-linefixed line licenses to comply with the new Telecommunication Law, and TELKOM has also received its Modern License.License to provide fixed line services, DLD services and IDD services on May 13, 2004. TELKOM also provides its fixed wireless services pursuant to its authorization to provide fixed-linefixed line services and applies PSTN tariffs for this service, which are substantially lower than those for cellular services. TELKOM’s ability to provide fixed wireless services at PSTN tariff rates may be challenged by regulators, other cellular operators and cellular trade associations. See Item“Item 3. “KeyKey Information — D. Risk Factors — TELKOM’s regulatorsRisks relating to TELKOM and its subsidiaries — Regulators and other telecommunications operators may challenge TELKOM’s ability to apply PSTN tariffs to its new CDMA-based fixed wireless phone service, which is marketed under the brand name TELKOMFlexi.”

     Cellular.Telkomsel currently holds licenses to operate a nationwide GSM mobile cellular telephone network, to use 7.5 MHz of radio frequency bandwidth in the 900 MHz band and to use 22.5 MHz of radio frequency bandwidth in the 1800 MHz band. Telkomsel also holds licenses from the Indonesian Investment Coordinating Board that permit Telkomsel to develop cellular services with national coverage, including the expansion of its network capacity. In addition, Telkomsel holds permits and licenses from and registrations with certain regional governments and/or governmental agencies, primarily in connection with its operations in such regions, the properties it owns and/or the construction and use of its base transceiver stations.

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     IDD.TELKOM received, as part of its Modern License, its commercial license to provide IDD services on May 13, 2004 pursuant to the terms of MoC Decree No. KP 162/2004.

57

     VoIP.VoIP and ISP.TELKOM also holds a comprehensive licenseModern License to provide VoIP and ISP services, pursuant to a DGPT Decree No. SK01/dirjen/2004, which it received in May 2002.

also permits TELKOM to provide data communications services.

Tariffs and Interconnection Charges

      The Government divides tariffs into two categories:

 • Tariffs for the provision of telecommunications services; and
 
 • Tariffs for provision of telecommunications networks.
Tariffs for the Provision of Telecommunications Services

Generally, the MoC setsMoCI regulates prices and the maximum tariffs thatamount TELKOM can be chargedcharge is based on a tariff formula for telecommunications services in Indonesia. Telecommunications operators may charge customers at rates belowset the maximum tariff, although most operators tend to charge at the maximum rate.amount of tariff. In this regard, TELKOM’s operating divisionsbusiness units have authority to make adjustments to prices based on specific guidelines fixed by the MoC.directors of TELKOM.
Fixed-lineFixed line Tariffs

     Fixed-line

      Fixed line tariffs consist of installation, monthly subscription and usage charges. Notwithstanding the Government’s intention to increase fixed-line tariffs in recent years, public opposition has led to TELKOM maintaining its fixed-line tariffs at the levels established on February 1, 2002. Fixed-line tariffs were also not changed in 2000 and 2001 but were reduced from the announced tariff increase of 24% to 15% in 1999 due to public opposition. See Item 3. “Key Information — D. Risk Factors — TELKOM operates in a legal and regulatory environment that is undergoing significant reforms and such reforms may adversely affect TELKOM’s business.”

The Government establishes fixed-linefixed line tariffs by reference to a price cap formula that calculates the maximum average percentage increase in fixed-linefixed line tariffs for a particular year. The maximum increase typically equals the Indonesian Consumer Price Index (CPI) for the preceding year, as published by the Indonesian Central Bureau of Statistics, minus an efficiency factor (the “X-factor”), which the Government determines by taking into consideration certain factors including improvements in the cost efficiency of the services resulting from technological improvements, management efficiency, changes in the Rupiah-U.S. Dollar exchange rate, the interests of affected telecommunications operators and the purchasing power of customers.

      In calculating the maximum total percentage increase in tariffs for a particular year, the tariff components for installation, monthly charges and usage charges are weighted in proportion to the contribution made to total revenue of those services (basket revenues) in the prior year. The weighted average increase in prices charged for the services for any year must be equal to or less than the price cap percentage. In addition to tariff increases, the tariff components can also be “rebalanced” from time to time such that the tariffs for monthly and usage charges increase at different rates or certain tariffs decrease while others increase.

      On January 29, 2002, the MoC announced that fixed-linefixed line tariffs would be increased by an average of 45.49% over three years. Effective February 1, 2002, the MoC increased fixed-linefixed line tariffs by a weighted average of 15%. Although fixed-linefixed line tariffs were expected to be increased again effective January 1, 2003, public opposition following the announcement by TELKOM of tariff increases led to the suspension on January 16, 2003 of the implementation of such increases.

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     The actual tariffs chargeable by See Item 3. “Key Information — D. Risk Factors — Risks relating to TELKOM from February 1, 2002 to March 31, 2004, were:

Tariff Rate Structure (February 1, 2002 to March 31, 2004):

Installation and Monthly Charges:

Access chargesBusinessResidentialSocial
(Rp.)(Rp.)(Rp.)
its subsidiaries — TELKOM operates in a legal and regulatory environment that is undergoing significant reforms and such reforms may adversely affect TELKOM’s business.”
Installation
175,000 – 450,00075,000 – 295,00050,000 – 205,000
Monthly Subscription
30,700 – 46,10016,500 – 26,10011,100 – 16,500

Usage charges:

Beginning February 1, 2002
Price per PulsePulse Duration
(Rp.)
Local
Up to 20 km1953 min (off peak)
and 2 min (peak)
Over 20 km1952 min (off peak)
and 1.5 min (peak)
Rounding Time
Price Per MinuteBlock Duration
(Rp.)
Domestic Long-distance
0-20 km69 – 1021 min
20-30 km102 – 1361 min
30-200 km327 – 1,6276 sec
200-500 km463 – 2,2716 sec
Over 500 km570 – 2,8426 sec

      On March 30, 2004, the Government through the ITRB, announced that it would allow operators to rebalance their tariffs, with the resulting weighted average of tariffs increasing by 9%. As a result, TELKOM has adjusted its fixed-linefixed line and fixed wireless tariffs, with local charges increasing by 28.2%, DLD tariffs decreasing by an average of 10%10.6% and monthly subscription charges increasing by varying amounts from 12%12.1% to 25%25.1%.

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      The current tariffs chargeable by TELKOM, which became effective on April 1, 2004, are as follows:

Tariff Rate Structure (effective April 1, 2004):

Installation and Monthly Charges:
             
Access chargesBusinessBusinessResidentialResidentialSocial
Social
(Rp.)
(Rp.)
(Rp.)
(Rp.)(Rp.)(Rp.)
Installation
  175,000 – 450,000   75,000 – 295,000   50,000 – 205,000 
Monthly Subscription
  38,400 – 57,600   20,600 – 32,600   12,500 – 18,500 

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Usage charges:
         
Price per PulsePulse Duration
Beginning April 1, 2004
Price per PulsePulse Duration
(Rp.)
(Rp.)
Local
        
Up to 20 km  250  3 min (off peak)
and 2 min (peak)
Over 20 km  250  2 min (off peak)
and 1.5 min (peak)
         
Rounding Time
Price Per MinuteBlock Duration
(Rp.)
Price Per MinuteBlock Duration
(Rp.)
Domestic Long-distance
        
0-20 km  83 – 122   1 minute 
20-30 km  122 – 163   1 minute 
30-200 km  325 – 1,290   6 sec 
200-500 km  460 – 1,815   6 sec 
Over 500 km  570 – 2,270   6 sec 

There

      The Government did not carry out its plan to further increase fixed line tariffs to reach the 45.49% average increase announced in January 2002 by January 2005. In an announcement by the MoCI on April 1, 2005 regarding access codes, the MoCI indicated that there would be another rebalancing of tariffs in the future. However, there has been no indication by the MoC whether fixed-line tariffs will be increased after 2004 or whetherMoCI when the Government intends to carry out its plan to increase fixed-line tariffs by 45.49% within three years of January 2002.the plan.
CDMA Fixed Wireless Tariffs

      Tariffs charged to CDMA fixed wireless subscribers are reported as fixed-linefixed line revenues. TELKOM offers both postpaid and prepaid fixed wireless services.

     Postpaid.Postpaid subscribers pay a one-time activation charge of Rp.25,000 and a monthly charge of Rp.30,000. Usage charges for postpaid subscribers beginning April 1, 2004 are as follows:

Usage charges:
Price Per PulsePulse Duration
(Rp.)
Local
2502 min (off peak) and 1.5 min (peak)

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Price Per PulsePulse Duration
(Rp.)
Local
  250Rounding Time
  2 min (off peak)
and 1.5 min (peak)Price Per Minute		Block Duration
     
(Rp.)  
Rounding Time
Price Per MinuteBlock Duration
(Rp.)
Domestic Long DistanceLong-distance
        
0-200 km  325 – 1,290   6 sec 
200-500 km  460 – 1,815   6 sec 
Over 500 km  570 – 2,270   6 sec 

      For SMS, postpaid subscribers are charged Rp.250 per message. Postpaid subscribers who use TELKOM Internet access via wireless dial-up are charged Rp.165 per minute.

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Postpaid subscribers who use Public Data Network based dedicated lines for Internet access is Rp.5 per KBps.

     Prepaid.Effective February 10, 2004, all of the usage charges for prepaid subscribers are chargedincluding VAT of 10%, summarized as follows:

Usage charges:
         
Rounding Time
Price Per MinuteBlock Duration
(Rp.)
Price Per MinuteBlock Duration
(Rp.)
Flexi to Flexi/Fixed Wireline:
        
Local
  260   30 sec 
Domestic Long-distance
        
0-200 km  700 – 1,100   30 sec 
Over 200 km  1,600 – 2,500   30 sec 
Flexi to mobile cellular:
        
Local
  650 – 810   30 sec 
Domestic Long-distance
        
0-200 km  1,100 – 1,540   30 sec 
Over 200 km  2,250 – 3,150   30 sec 

For SMS, prepaid subscribers are charged Rp.350 per message. Prepaid subscribers who use TELKOM Internet access via wireless dial-up are charged Rp.350 per minute.
IDD Tariffs

TELKOM commenced offering IDD fixed line services on June 7, 2004. Tariffs for IDD calls are set by service providers, subject to specified maximum limits established by the Government. As of the date of this Annual Report, TELKOM’s IDD tariffs are as follows:
         
Rounding Time
RegionPrice Per MinuteBlock Duration
(Rp.)
(Rp.)
Africa  5,090 – 6,440   6 sec 
Americas and Caribbean  5,090 – 7,470   6 sec 
Asia and Oceania  4,410 – 9,630   6 sec 
Europe  5,090 – 9,630   6 sec 
Middle East  5,090 – 8,460   6 sec 
Cellular Tariffs

      The Indonesian cellular telecommunications market generally operates on a “calling party pays” system, which requires that the originators of telephone calls pay for calls. Cellular operators in Indonesia set their own tariffs, subject to specified maximum limits established by the Government. The Government has announced that it intends to move towards a formula-basedcost-based tariff structure for

66

cellular services however,as of January 1, 2005. However, it has not announced a proposed framework for such a formula.

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ITRB has submitted a regulation draft to MoCI, and it is expected that the Government will announce the proposed framework in the near future. As cellular operators generally need a lead time of approximately six months to prepare for such a change, it is expected that the new regulation will likely be implemented in January 2006.

     Postpaid Tariffs.The cellular tariffs for postpaid subscription services consist of activation, monthly subscription and usage charges. The following table sets forth the maximum cellular tariffs for postpaid services, effective February 25, 1998:

Mobile Cellular Tariff (maximum postpaid tariff):
    
Activation Rp.200,000
Monthly Charge (including frequency charge) Rp.65,000/month
Usage Charge:  
 Air Time Rp.325/minute
 Roaming Rp.1,000/call plus incoming charge/minute
 Local Cellular Conversation PSTN local tariff
 DLD Cellular Conversation PSTN DLD tariff

      Prior to the amendments in 1998 to implement the current cellular tariff structure, the Government amended the cellular tariff structure in 1997 and 1994.

Telkomsel charges new postpaid subscribers a maximum one-time connection fee of Rp.150,000 for service activation, although discounts may be granted. After initial connection, Telkomsel charges a monthly subscription fee ranging from Rp.0 (provided minimum monthly usage reaches Rp.25,000) to Rp.65,000 per month (depending on the chosen tariff plan). Usage charges are as follows:
         
Rounding Time
Price Per MinuteBlock Duration
(Rp.)
Price Per MinuteBlock Duration
(Rp.)
Mobile cellular to mobile cellular:
        
Local
  650 – 938   1 min 
Domestic Long-distance
        
30-200 km  1,110 – 2,628   1 min 
Over 200 km  1,220 – 3,083   1 min 
Mobile cellular to fixed line:
        
Local
  450 – 531   1 min 
Domestic Long-distance
        
30-200 km  650 – 1,696   1 min 
200-500 km  785 – 2,221   1 min 
Over 500 km  895 – 2,676   1 min 
International Long-distance:
        
Group I  7,500 – 8,000   1 min 
Group II  11,000 – 12,000   1 min 

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     Prepaid Tariffs.For prepaid cellular services, activation charges may be freely determined by cellular operators while usage charges are limited to a maximum of 140% above the peak usage chargecharges for postpaid services. Telkomsel charges its prepaid customers (both SimPATI and KARTU As) usage charges as follows:
         
Rounding Time
Price Per MinuteBlock Duration
(Rp.)
Price Per MinuteBlock Duration
(Rp.)
Calls to mobile cellular:
        
Local
  1,000300 – 1,9001,600   1 min 
Domestic Long-distance
Zone 1300 – 4,0001 min
Zone 2300 – 4,5001 min
Calls to fixed line:
Local
400 – 9501 min
Domestic Long-distance
        
30-200 km  1,000 – 4,0001 min
Over 200 km1,000 – 4,5001 min
Calls to fixed line:
Local
700 – 9901 min
Domestic Long-distance
30-200 km2,0001,200 – 2,300   1 min 
200-500 km  3,2001,200 – 3,720   1 min 
Over 500 km  3,2001,200 – 4,150   1 min 
International Long-distance:
        
Group I  7,500 – 8,000   1 min 
Group II  11,000 – 12,000   1 min 
Leased Line Tariffs

      The Government determines the maximum tariffs for leased lines. The Government reduced leased line tariffs substantially in 1997 and 1998. On January 1, 1997, the Government decreased tariffs for leased lines by an average of 52%. Leased line tariffs for other telecommunications operators and Government bodies were further reduced by up to 30% effective January 1, 1998. The Government has announced that it intends to move towards a formula-based tariff structure for leased line services, however, it has not announced a proposed framework for such a formula.

The following table sets forth the maximum leased line tariffs, effective January 1, 1998 and still valid as of the date hereof
     
Maximum tariff
Maximum Tariff
(Rp.)
Installation charge
  
Customer access 600,000 – 700,000(1)
Other operator access 900,000
Monthly subscription charge
  
 
Analog line  
 
 Local (or up to 25 km) 60,000 – 250,000(2)
 Inter-local (over 25 km) 779,400 – 3,557,750(3)
Digital line  
 
 Local (or up to 25 km) 380,000 – 172,268,000(4)
 Inter-local (over 25 km) 1,009,850 – 2,308,628,250(5)

(1) Price differs by equipment provided by TELKOM.
(2) Price differs by user (private, other licensed operator, or government) and equipment provided by TELKOM.
(3) Price differs by user (private, other licensed operator, or government) and distance.

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(4) Price differs by user (private, other licensed operator, or government) and speed.
(5) Price differs by user (private, other licensed operator, or government), speed and distance.

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VoIP Tariffs

Charges for VoIP services may be freely determined by VoIP operators.operators, based on cost. TELKOM has launched its VoIP services, which currentlyas of the date of this Annual Report consists of TELKOM Global-017 and its cheaper alternative, TELKOMSave. TELKOM believes that the tariff for TELKOM Global-017 service and the TELKOMSave service are approximately 40% and 60%, respectively, of the tariff charged by IDD operators in Indonesia.
Kiosk phone Tariffs

      Charges for kiosk phones may be freely determined by operators. Kiosk phones are public phones that are operated by third-parties. TELKOM gains 70% of basic tariff charged by operators to its customers on calls placed from kiosk phones.

On August 7, 2002, the Government enacted a new regulation, MoC Decree No. 46/2002, relating to the kiosk-phone business. The Decree provides that (i) local and long distancelong-distance domestic phone calls shall generate at a minimum 30% of the kiosk phones’ revenue; (ii) international phone calls shall generate at a minimum 8% of the kiosk phones’ revenue; and (iii) airtime from the cellular operators shall generate at a minimum 10% of the kiosk phones’ revenue.
Satellite Tariffs

TELKOM generally charges an annual tariff of between US$1.251.15 million to US$1.5 million per transponder, although in some instances TELKOM may offer a discounted tariff.tariffs for long-term commitments or loyal customers.
Broadband Access

The following table sets for the tariffs for TELKOM’s broadband access services:
                            
TELKOMLink ADSL(1)Activation FeeMonthly FeeFree Usage
       Fees for Usage in
     Monthly Excess of
SpeedyLink ADSL(1) Activation Fee Monthly Fee Usage Allowance(1) Monthly Allowance
        
(Rp.)(Rp.) (Rp.) (Rp.)   (Rp.)
Limited 384 kbps 250,000 250,000 500 MB   200,000  200,000  500 MB – 1.0 GB(2)  500/MB 
Limited 512 kbps 250,000 300,000 1.0 GB   200,000  350,000 2.0 GB  500/MB 
Unlimited 512 kbps 500,000 1,200,000 Unlimited 
Unlimited 384 kbps  2,500,000  1,520,000  Unlimited  — 
             
AstiNet MMA(2)Activation FeeMonthly FeeFree Usage
(Rp.)(Rp.)
Limited 384 kbps  500,000   350,000   500 MB 
Limited 512 kbps  600,000   1,100,000   1.0 GB 
Unlimited Silver  2,500,000   3,800,000   Unlimited 
Unlimited Gold  4,000,000   11,500,000   Unlimited 
                 
        Fees for Usage in
      Monthly Excess of
Speedy High Speed ADSL Internet Access Activation Fee Monthly Fee Usage Allowance Monthly Allowance
         
  (Rp.) (Rp.)   (Rp.)
Limited 384 kbps  200,000   300,000   500 MB   1,200/MB 
Limited 384 kbps  200,000   450,000   1.0 GB   1,200/MB 
Limited 512 kbps  200,000   800,000   2.0 GB   1,200/MB 
Unlimited 384 kbps  2,500,000   3,800,000   Unlimited   — 

(1) DoesProvides access only to the Internet service provider’s node and does not include Internet access. The subscriber is responsible for obtaining Internet access with an Internet service provider.
(2) IncludesDepending on the Internet access.service provider plan.
Tariffs for Other Services

The amount of the tariffs for telephony and other multimedia services are determined by the service provider by taking into account the expenditures and market price. The Government only

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determines the tariff formula for basic telephony services, while there is no stipulation for the tariff of other services.
Tariffs for Interconnection and Access

     The

      As of the date of this Annual Report, the Government currently establishes the percentage of tariffs to be received by each operator in respect of calls that transit multiple networks. The Telecommunications Law and Government Regulation No. 52 of 2000 provides for the implementation of a new policy to replace the current revenue sharing policy. Under the new policy, which has not yet been implemented, the operator of

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the network on which calls terminate would determine the interconnection charge to be received by it based on a formula to be mandated by the Government, which would be intended to have the effect of requiring that operators charge for calls based on the costs of carrying such calls. On March 11, 2004, the MoC issued Decree No. 32/2004, which stated that cost-based interconnection fees shall be applicable beginning January 1, 2005. The MoCAs of the date of this Annual Report, the MoCI is still in the process of preparing regulations for the adjustment of interconnection arrangements, which preparations include: determining the amount of interconnection fees, cost accounting standards, reference interconnection offer (RIO) and interconnection dispute resolutions.resolutions, and has not issued such regulations.
Interconnection with Fixed-lineFixed line Network

Currently, the

      The Government’s National Fundamental Technical Plan set forth in Decree 4 of 2000, as amended by Decree 28 of 2004, sets out the technical requirements, routing plans and routingnumbering plans for interconnection of the networks of various telecommunications operators among themselves and with TELKOM’s fixed-linefixed line network. Under the National Fundamental Technical Plan, all operators are permitted to interconnect with TELKOM’s fixed-linefixed line network for access thereto and to other networks, such as international gateways and the networks of other cellular operators. In addition, cellular operators may interconnect directly with other networks without connecting to TELKOM’s fixed-linefixed line network. TheAs of the date of this Annual Report, the fees for interconnection within TELKOM’s fixed-linefixed line network are currently set forth in Decree No. 506/1997, Decree No. 46/1998, Decree No. 37/1999 and Decree No. 30/2000, although cost-based2000.
Local Fixed line Interconnection with Indosat.In September 2002, TELKOM and INDOSAT signed an agreement for local fixed line interconnection. Pursuant to the agreement, for interconnection feesof local calls, the operator of the network on which the calls terminate receives an agreed amount per minute. In addition, with respect to interconnection for domestic long-distance calls from or to Indosat, pending the implementation of the duopoly system for long-distance calls, the retail revenue is kept by TELKOM and Indosat will receive for the local originating or local terminating calls an agreed amount per minute.
Fixed Wireless Interconnection.Fixed wireless networks may interconnect to TELKOM’s fixed line network at TELKOM’s gateway. As of the date of this Annual Report, other than TELKOM and Indosat, PT Bakrie Telecom (formerly Ratelindo) also operates a fixed wireless network in Indonesia. Local calls between TELKOM’s fixed line network and PT Bakrie Telecom’s network are to be charged beginning Januaryoperated on a “sender-keeps-all” basis. For DLD calls that originate on PT Bakrie Telecom’s network and terminate on TELKOM’s fixed line network, TELKOM receives 35% of the prevailing DLD tariff from such calls. For DLD calls that originate on TELKOM’s fixed line network, TELKOM retains 65% of the revenue from such calls. Since April 1, 2005, the interconnection scheme for interconnection has been changed to:
• Local calls. The operator of the network on which the calls terminate receives an agreed amount per minute.
• DLD calls that originate on TELKOM’s fixed line network. TELKOM shall pay certain amount per minute to PT Bakrie Telecom.

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• DLD calls that terminate on TELKOM’s network. TELKOM receives a certain percentage of the prevailing DLD tariff.
Other Fixed Wireline Interconnection.Since September 1, 1998, TELKOM has been receiving a share of the tariffs from Batam Bintan Telekomunikasi (“BBT”), which is a local operator with a special coverage area on Batam Island, for each successful call that transits or terminates on TELKOM’s fixed line network. Under the interconnection agreement, TELKOM receives 75% of the prevailing DLD tariff for DLD calls that originate and terminate on TELKOM’s fixed line network. For local interconnection calls, revenues are shared on a “sender-keeps-all” basis. For calls originating from BBT and terminating on a cellular network and vice versa which transit through TELKOM’s fixed line network, TELKOM expectsreceives a fixed amount for each minute for local calls and 60% to 63.75% of the prevailing DLD tariff for DLD calls. For DLD calls that originate from BBT terminating at a fixed wireless network which transit through TELKOM’s fixed line network, TELKOM receives 75% of the current fees may be adjusted.prevailing DLD tariff. In addition, BBT is to receive certain fixed amount for each minute of incoming and outgoing international calls from and to BBT that transit through TELKOM’s fixed line network and use TELKOM’s IDD service, and certain fixed amount for each successful call and each minute of incoming and outgoing international calls that transit through TELKOM’s fixed line network and use Indosat’s IDD service.
Cellular Interconnection

      In respect of local interconnection calls between a cellular network and TELKOM’s fixed-linefixed line network, TELKOM receives a share of the local interconnection call tariff equal to the local fixed-linefixed line usage tariff (50% of the prevailing tariff for local pulse per minute).

The current Interconnection Decree, effective April 1, 1998, assumes that it is possible for long-distance calls to be carried by more than one network. Pursuant to the Interconnection Decree, for domestic long-distance (“DLD”)DLD calls which originate on TELKOM’s fixed-linefixed line network, TELKOM is entitled to retain a portion of the prevailing DLD tariff, which ranges from 40% of the tariff in cases where the entire DLD portion is carried by a cellular operator up to 85% of the tariff in cases where the entire DLD portion is carried by TELKOM’s fixed-linefixed line network. For DLD calls that originate from a cellular subscriber, TELKOM is entitled to retain a portion of the prevailing DLD tariff, which ranges from 25% of the tariff in cases where the call originates from a cellular subscriber, transits TELKOM’s fixed-linefixed line network and terminates with another cellular subscriber with the entire DLD portion carried by a cellular operator, up to 85% of the tariff in cases where the entire DLD portion is carried by TELKOM’s fixed-linefixed line network and terminates on TELKOM’s fixed-linefixed line network. As discussed above, however, cost-based interconnection fees will be charged beginning on January 1, 2005 and TELKOM expects that the current fees may be adjusted. At present, the manner in which such cost-based charges will be computed is being determined by the MoC.
Fixed WirelessInternational Interconnection

     Fixed wireless networks may interconnect to TELKOM’s fixed-line network at TELKOM’s gateway. Currently, PT Bakrie Telecom (formerly Ratelindo) is the only other fixed wireless operators in Indonesia. Local calls between TELKOM’s fixed-line network and Ratelindo’s network are operated on a “sender keeps all” basis. For DLD calls that originate on Ratelindo’s network and transit TELKOM’s fixed-line network, TELKOM receives 35% of the prevailing DLD tariff from such calls. For DLD calls that originate

      Interconnection on TELKOM’s fixed-linedomestic fixed line network TELKOM retains 65% of the revenue from such calls. However, cost-based interconnection fees will be charged beginning on January 1, 2005 and TELKOM expects that the current fees may be adjusted.

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Fixed Wireline Interconnection

Since September 1, 1998, TELKOM has been receiving a share in Batam Bintan Telekomunikasi (“BBT”), which is a local operator with a special coverage area on Batam Island, for each successful call that transits or terminates on TELKOM’s fixed-line network. Under the interconnection agreement, TELKOM receives 75% of the prevailing DLD tariff for DLD calls that originate and terminate on TELKOM’s fixed-line network. For local interconnection calls, revenues are shared on a “sender keeps all” basis. For calls originating from BBT and terminating at a cellular network and vice versa which transit through TELKOM’s fixed-line network, TELKOM receives 50% of the local interconnection call tariff which amounts to 50% of the prevailing tariff for local pulse per minute for local calls and 60% of the prevailing DLD tariff for DLD calls. For DLD calls that originate from BBT terminating at a fixed cellular network which transit through TELKOM’s fixed-line network, TELKOM receives 50% of the prevailing DLD tariff. In addition, BBT is to receive 50% of TELKOM’s interconnection revenue (access and usage), for all incoming and outgoing international calls from and to BBT that transit through TELKOM’s fixed-line network. As discussed above, however, cost-based interconnection fees will be charged beginning on January 1, 2005 and TELKOM expects that the current fees may be adjusted.

International Interconnection

Interconnection for international calls consists of access charges, usage charges and charges for Universal Service Obligations. The following table sets forth the current international interconnection tariff, effective as of December 1, 1998, for IDD calls which are routed through Indosat’s international gateways and which originate, transit or terminate on TELKOM’s fixed-linedomestic fixed line network, pursuant to Ministerial Decree No. 37 of 1999:

     
DescriptionTariff
Access Charge  Rp.850/successful call 
Usage Charge  Rp.550/successful paid minute 
USO  Rp.750/successful call 
      In addition, since June 2004, TELKOM has provided IDD services. As of the date of this Annual Report, TELKOM’s IDD service can be accessed by subscribers of all telecommunication operators in Indonesia except Indosat as it has not reached agreement with Indosat with regard to interconnection tariffs. Interconnection and access charges payable by TELKOM to domestic operators for originating calls using TELKOM’s IDD service or terminating incoming international calls routed through

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TELKOM’s international voice telecommunications gateway are negotiated with each respective domestic operator.
      However, interconnection fees are expected to MoC Decree No. 32/2004, beginning on January 1, 2005be adjusted when cost-based interconnection charges will go into effect and TELKOM expects that the current fees may be adjusted. At present, TELKOM is awaiting the detailed regulations from the MoC regarding the manner in which the new cost-based charges will be computed.are implemented, as discussed above.
Local Fixed-line Interconnection with Indosat

In September 2002, TELKOM and INDOSAT signed an agreement for local fixed-line interconnection. Pursuant to the Agreement, for interconnection local calls, the operator of the network on which the calls terminate receives Rp.57 per minute. In addition, with respect to interconnection long distance calls from or to Indosat, pending the implementation of the duopoly system for long distance calls, the retail revenue is kept by TELKOM and Indosat will receive for the local originating or local terminating calls, Rp.240 per minute.

Satellite Phone Interconnection

Since the fourth quarter of 2001, TELKOM has been receiving a share of revenues arising from interconnection transactions with PSN, a national satellite operator. Under the agreement, in respect of the interconnection of calls between TELKOM and PSN, TELKOM receives Rp.800 per minute for network charges and an additional Rp.300 per minute origination fee if the call originates from TELKOM’s fixed-linefixed line network. However, cost-based interconnection charges will be imposed beginning on January 1, 2005 and TELKOM expects that the current fees may be adjusted.
VoIP Interconnection

      Previously, MoC Decree No. 23 of 2002 provided that access charges and network lease charges for the provision of VoIP services were to be agreed between network operators and VoIP operators. On

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March 11, 2004, the MoC issued Decree No. 31/2004, which stated that interconnection charges for VoIP would follow the interconnection charges regulation which are to be fixeddetermined by the MoC. As of the date of this Annual Report, the MoCMoCI, to which telecommunications regulatory responsibility was transferred in February 2005, has not yet determined what the new VoIP interconnection charges will be. Until such time as the new charges are fixed, TELKOM will continue to receive connection fees per minute for calls that originate, terminate or terminatetransit on TELKOM’s fixed-line network as follows:fixed line network.

• For calls originating on TELKOM’s network: Rp.240 per minute;
• For calls terminating on TELKOM’s network: Rp.240 per minute; and
• For calls transiting on TELKOM’s network: Rp.525 per minute (zone 1), Rp.870 per minute (zone 2) and Rp.1,170 per minute (zone 3).

Trademarks, Copyrights and Patents

      TELKOM has a number of registered intellectual property rights consisting of trademarks and copyrights. TELKOM has registered with the Directorate General of Intellectual Property Rights of the Ministry of Justice and Human Rights of the Republic of Indonesia (i) trademarks for its corporate name, logo and certain services including the names of TELKOM’s products and (ii) copyrights of books and artworks. TELKOM is also in the process of registering a number of patents for technologies relating to, among others, cellular phones and network, PSTN, switching systems and related administration systems. These intellectual property rights are important to TELKOM’s business.

C.  Business and Organizational Structure

Information on Subsidiaries and Associated Companies
Subsidiaries

      As of December 31, 2003,2004, TELKOM had ownership interests in 16 companies, ten of which are10 consolidated subsidiaries and the remaining 6 aresix unconsolidated associated companies. The business activities of the ten consolidated subsidiaries (as further described below) are described as part of TELKOM’s business in this Form 20-F.20-F, as well as in Note 1c to the consolidated financial statements. For a description of the activities of TELKOM’s unconsolidated associated companies, please see “Unconsolidated Associated Companies” below.below and Note 10 to the consolidated financial statements.

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The following table sets forth TELKOM’s direct ownership interest in companies as of December 31, 2003.2004. TELKOM’s ownership interests in associated companies may be increased or diluted as a result of TELKOM’s planned restructuring of its legal ownership interests in these companies to focus on phone, mobile and multimedia businesses.
          
 Legal   
           Ownership (%)   
Legal Ownership (%) As of   
As of December 31,   
CompanyDecember 31, 2003NotesBusiness Operations 2004 Notes Business Operations
      
Where TELKOM owns more than 50% or fully controls the company:
Consolidated subsidiaries:
       
PT AriaWest International (“AriaWest”) 100.00 (1) Fixed-phone (KSO-III W. Java & Banten)  100  (1) Fixed-phone (KSO-III West Java & Banten)
PT Multimedia Nusantara (“Metra”) 100.00 (2) Multimedia, special pay TV  100  (2) Multimedia, pay TV
PT Graha Sarana Duta (“GSD”) 99.99 Real estate, construction and services  100    Real estate, construction and services
PT Indonusa Telemedia (“Indonusa”) 90.39 (3) Interactive multimedia, special pay TV  90  (3) Interactive multimedia, special pay TV
PT Dayamitra Telekomunikasi (“Dayamitra”) 90.32 Fixed-phone (KSO-VI Kalimantan)  100  (4) Fixed-phone (KSO-VI Kalimantan)
PT Telekomunikasi Selular (“Telkomsel”) 65.00 ��GSM cellular phone services  65    GSM cellular phone services
PT Napsindo Primatel Internasional (“Napsindo”) 60.00 (4) Network Access Point  60  (5) Network Access Point, Voice Over Data
PT Infomedia Nusantara (“Infomedia”) 51.00 Telephone directory and other information services (electronic based business, call center and data segment)  51    Telephone directory and other information services (electronic based business, call center and data segment)
PT Pro Infokom Indonesia (“PII”) 51.00 (5) Telecommunication & information services, especially e-Government, e-Indonesia programs and B2B  51  (6) Telecommunication & information services, especially e-Government, e-Indonesia programs and B2B
PT Pramindo Ikat Nusantara (“Pramindo”) 45.00 (6) Fixed-phone (KSO-I Sumatera)  100  (7) Fixed-phone (KSO-I Sumatera)
Where TELKOM owns between 20% to 50%:Where TELKOM owns between 20% to 50%:       
PT Patra Telekomunikasi Indonesia (“Patrakom”) 30.00 VSAT services  30.00    VSAT services
PT Citra Sari Makmur (“CSM”) 25.00 VSAT and other telecommunications services  25.00    VSAT and other telecommunications services
PT Pasifik Satelit Nusantara (“PSN”) 22.57 (7) Satellite transponder & communications  43.69  (8) Satellite transponder & communications
Where TELKOM owns less than 20%:Where TELKOM owns less than 20%:Where TELKOM owns less than 20%:
PT Mobile Selular Indonesia (“Mobisel”) 7.44 (8) NMT-450 cellular and CDMA services
PT Batam Bintan Telekomunikasi (“Babintel”) 5.00 Fixed-phone (in Batam & Bintan islands)
PT Pembangunan Telekomunikasi Ind. (“Bangtelindo”) 3.18 Construction and consulting
PT Mandara Selular Indonesia (previously PT Mobile Selular Indonesia) (“Mobisel”)  3.63  (9) NMT-450 cellular and CDMA services

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Legal Ownership (%)
As of
CompanyDecember 31, 2003NotesBusiness Operations
PT Telekomindo Selular Raya (“Telesera”)  0.00   (9)  AMPS cellular phone services
PT Komunikasi Selular Indonesia (“Komselindo”)  0.00   (10)  AMPS cellular services
PT Menara Jakarta (“MJ”)  0.00   (11)  Infrastructure for multimedia services
PT Metro Selular Nusantara (“Metrosel”)  0.00   (12)  AMPS cellular services
Legal
Ownership (%)
As of
December 31,
Company2004NotesBusiness Operations
PT Batam Bintan Telekomunikasi (“Babintel”)5.00Fixed-phone (in Batam & Bintan islands)
PT Pembangunan Telekomunikasi Indonesia (“Bangtelindo”)3.18Construction and consulting
Bridge Mobile Pte. Ltd14.29Regional mobile services

(1) On July 31, 2003, TELKOM and the shareholders of PT AriaWest International (“AriaWest”) consummated the sale and purchase of AriaWest, pursuant to which TELKOM acquired 100% of AriaWest from PT Aria Infotek (52.50%), MediaOne International I B.V. (35%) and The Asian Infrastructure Fund (12.50%). One share in AriaWest was transferred to Mr. Woeryanto Soeradji in order to comply with the legal requirement that Indonesian limited liability companies should have more than one shareholder.
 
(2) On April 8, 2003, TELKOM increased its ownership in PT Multimedia Nusantara (“Metra”)Metra to 100% by acquiring 69% (1,725,000) of the shares of Metra from PT Indocitra Grahabawana under a share swapshare-swap transaction. TELKOM intends to use Metra to operate multimedia services in line with TELKOM’s strategy to focus on phone, mobile and multimedia services. One share in Metra was transferred to Mr. Woeryanto Soeradji in order to comply with the legal requirement that Indonesian limited liability companies should havebe owned by more than one shareholder.
 
(3) On August 8, 2003, TELKOM and PT Centralindo Pancasakti Cellular (“CPSC”) signed a share swapshare-swap agreement pursuant to which TELKOM received an additional 30.58% (1,712,370) of the shares of PT Indonusa Telemedia (“Indonusa”) from CPSC. Following this transaction, TELKOM’s ownership in Indonusa increased from 57.50% to 88.08%. Pursuant to an EGMextraordinary general meeting of the shareholders of Indonusa on October 29, 2003, all of the shareholdersstockholders agreed to convert an additional Rp.13,500 million of debt owed by Indonusa to TELKOM into newly issued shares of Indonusa. Following such conversion, TELKOM’s ownership in Indonusa increased from 88.08% to 90.39%. As of December 31, 2004, CPSC did not hold any shares in Indonusa. CPSC is not a major customer of TELKOM.
 
(4)On December 14, 2004, TELKOM acquired 9.68% shares of Dayamitra from TM Communications (HK) Ltd., which increased TELKOM’s ownership in Dayamitra from 90.32% to 100%. One share in Dayamitra was transferred to Mr. Robby Rubama in order to comply with the legal requirement that Indonesian limited liability companies should have more than one shareholder.
(5) TELKOM increased its ownership in PT Napsindo Primatel Internasional (“Napsindo”) from 32% to 60% by acquiring 28% of the shares of Napsindo from PT Info Asia Sukses Makmur Mandiri (“InfoAsia”). The agreement between TELKOM and InfoAsia was signed on December 30, 2002. The purchase price was paid on 28 January 2003, on which date TELKOM acquired control of Napsindo.
 
(5)(6) In January 2003, TELKOM, PT Indonesia Comnets Plus, (“ICON+”), a subsidiary of Perusahaan Perseroan (Persero) PT Perusahaan Listrik Negara (“PLN”) and PT Prima Infokom Indonesia established PT Pro Infokom Indonesia (“PII”)PII to provide B2B, e-Government and e-Indonesia services. On January 20, 2005, TELKOM currently holds 51%, while ICON+ holds 25% and Prima Infokom Indonesia holds 24%. Pursuantsold all of its shares in PII to an Executive General Meeting of the shareholders of PII on October 9, 2003, ICON+ and PT Prima Infokom Indonesia stated their intention to dispose of their shareholding in PII to TELKOM. Following that date, TELKOM has been negotiating with the other two shareholders for a fair price of the shares.Indonesia.
 
(6)(7) On April 19, 2002, TELKOM and the shareholders of PT Pramindo Ikat Nusantara (“Pramindo”) signed a Conditional Sale and Purchase Agreement for the sale of the Pramindo shares. TELKOM received 30% of the shares of Pramindo in August 2002 and in September 2003 received an additional 15%, while the remaining 55% was to be transferred to TELKOM on December 15, 2004, subject to certain conditions, including that TELKOM continues to meet its payment obligations under the terms of the promissory notes issued as consideration for the purchase price and protective rights granted to the selling shareholders. TELKOM obtained control of Pramindo at the closing on August 15, 2002 and consequently has consolidated 100% of Pramindo from that date even though its ownership in Pramindo was only 30% as of December 31, 2002. On January 29, 2004, TELKOM signed a short-term loan agreement with ABN AMRO Bank N.V. Jakarta in the amount of approximately US$130 million and on March 15, 2004, TELKOM used the loan proceeds to repurchase the promissory notes that were due on June 15, 2004, September 15, 2004 and December 15, 2004, and so accelerated the acquisitionpurchase of the remaining 55%. Following this transaction, TELKOM owned 100% of Pramindo. One share in Pramindo has been transferred to TELKOM’s corporate secretaryMr. Adek Julianwar in order to comply with the legal requirement that Indonesian limited liability companies should havebe owned by more than one shareholder.
 
(7)(8) As part of the agreement signed on August 8, 2003 between TELKOM and PT Centralindo Pancasakti Cellular (“CPSC”),CPSC, TELKOM was entitled to receive CPSC’s 21.12% (16,641,637 shares) interest in PT Pasifik Satelit Nusantara (“PSN”)PSN within a period of one year from the date the agreement was signed. During this period, all of CPSC’s rights in relation to the shares arewere granted to TELKOM. When TELKOM receivesreceived the shares of CPSC in PSN on August 9, 2004, increasing its legal ownership interest in PSN will increase to 43.69%. PSN and its creditors; PT Bank Mandiri, PT Bank Merincorp, PT Danareksa, PT Bank Rakyat Indonesia and Credit Suisse First Boston International (CSFBI),creditors have agreed to a debt-to-equity conversion, pursuant to which PSN is required to issue approximately 20 million new shares to the creditors. The conversion will in effect dilute the shareholding percentage of the existing shareholders of PSN, including TELKOM. As of the date of this Annual Report, the debt-to-equity conversion has not been effected. Once the conversion is effected, TELKOM’s ownership interest in PSN will be reduceddiluted to 18%approximately 35%.

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(8)(9) Pursuant to an Extraordinary General Meeting held on July 28, 2003, the shareholders of Mobisel agreed to restructure Mobisel. The restructuring program includes: (i) a debt to equity conversion involving accrued interconnection expenses owed by Mobisel to TELKOM; (ii) a new class of Series B shares being issued to the new shareholders while shares held by the existing shareholders are reclassified as Series A shares; and (iii) an equity investment of approximately US$2 million by PT Multi Investama. Following the completion of this restructuring program, TELKOM’s ownership in Mobisel was diluted from 25% to 7.44%. Effective on December 22, 2003, PT Mobile Selular Indonesia changed its corporate name to PT Mandara Selular Indonesia. In January 2004, Mobisel’s shareholders enacted resolutions approving the conversion of Mobisel’s debt to PT Property Java, Boston Investment Limited and Inquam (Indonesia) Limited Company to Series B shares. As a result, TELKOM’s ownership in Mobisel has beenwas diluted to 6.40%. Effective onOn December 22, 2003, PT Mobile Selular Indonesia changed its corporate name to PT Mandara Selular Indonesia (“MSI”).
(9) TELKOM delivered 100% (25,000) of its shares in PT Telekomindo Selular Raya to CPSC20, 2004, pursuant to an agreement signed on August 8, 2003 between TELKOM and CPSC. TELKOM no longer owns anyshareholders’ resolutions, Mobisel issued 306 million new Series B shares, resulting in this company.
(10) PursuantTELKOM’s interest being diluted from 6.40% to the agreement signed on August 8, 2003 between TELKOM and CPSC, TELKOM sold and delivered 14.20% (29,069,250 shares) of PT Komunikasi Selular Indonesia (“Komselindo”) to CPSC. TELKOM no longer owns any shares in this company.
(11) On April 8, 2003, TELKOM sold its 21.34% interest in PT Menara Jakarta (10,000 shares) to PT Indocitra Grahabawana as part of the share swap transaction with PT Indocitra Grahabawana. TELKOM no longer owns any shares in this company.
(12) As part of the agreement signed on August 8, 2003 between TELKOM and CPSC, TELKOM sold and delivered 20.17% (2,612,015 shares) of PT Metro Selular Nusantara (“Metrosel”) to CPSC. TELKOM no longer owns any shares in this company.3.63%.
Unconsolidated Associated Companies
PT Patra Telekomunikasi Indonesia (“Patrakom”)

Patrakom was established in September 1995 and as of the date of this Annual Report is currently owned by TELKOM (30%), Indosat (10%), PT Elnusa (40%) and PT Tanjung Mustika (20%). Patrakom provides satellite communication (VSAT) and related services and facilities to companies in various industries. As part of a continuous process of evaluation and restructuring by TELKOM of the status of its affiliates, as well as the Government’s policy to eliminate cross-ownership between TELKOM and Indosat, TELKOM is in the process of negotiation with other shareholders regarding a possible decrease or increase of ownership in Patrakom.
PT Citra Sari Makmur (“CSM”)

CSM was established in February 19961986 and as of the date of this Annual Report is currently owned by TELKOM (25%), PT Tigatra (38.29%) and Media Trio (L) Inc. Malaysia (36.71%). CSM is incorporated in Indonesia and provides telecommunications services relating to VSAT applications and other telecommunications technology and related facilities.
PT Pasifik Satelit Nusantara (“PSN”)

      PSN was established in July 1991 and as of December 31, 2003,the date of this Annual Report, PSN wasis legally owned by TELKOM (22.57%), Centralindo Pancasakti Cellular (“CPSC”) (21.12%(43.69%), Skaisnetindo Teknotama (10.92%), Primaupaya Lintasswara (7.71%), Hughes Space and Communications International (7.23%), Telesat Canada (7.23%) and others (23.20%) (including holders of American Depositary Shares of PSN who own 19.68%19.46% of PSN). PSN provides satellite leasing and satellite-based communication services to countries within the Asia Pacific region. PSN conducted an initial public offering of its common stock and listing on NASDAQ in June 1996, but was delisted on November 6, 2001 due to its failure to meet certain NASDAQ National Market Listing requirements.

      As part of the agreement signed on August 8, 2003 between TELKOM and PT Centralindo Pancasakti Cellular (“CPSC”),CPSC, TELKOM was entitled to receive CPSC’s 21.12% (16,641,637 shares) interest in PT Pasifik Satelit Nusantara (“PSN”)PSN within a period of one year from the date the agreement was signed. During this period, all of CPSC’s rights in relation to the shares arewere granted to TELKOM. When TELKOM receivesreceived the shares of CPSC in PSN on August 9, 2004, increasing its legal ownership interest in PSN will increase to 43.69%.

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Currently

      As of the date of this Annual Report, TELKOM is evaluating the benefits associated with an increase of its ownership in PSN to develop a retail satellite based service such as cellular via satellite and to support the government program for providing telecommunications lines to remote areas.
PT Mandara Selular Indonesia (previously PT Mobile Selular Indonesia (“Mobisel”)Indonesia)

      Mobisel was established on November 30, 1995 by TELKOM, TELKOM’s Pension Fund and PT Rajasa Hazanah Perkasa (“Rajasa”).

      As of the date of this Annual Report, Mobisel currently provides NMT-450 services formerly provided by TELKOM and Rajasa pursuant to a PBH in Java, Bali, Lombok, Sumatera and Lampung. Mobisel also

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launched a CDMA-based network in Lampung in mid-February 2004. As of December 31, 2003,2004, Mobisel had approximately 4,58710,000 subscribers.

      Pursuant to an Extraordinary General Meeting held on July 28, 2003, the shareholders of Mobisel agreed to restructure Mobisel. The restructuring program includes (i) a debt to equity conversion involving accrued interconnection expenses owed by Mobisel to TELKOM; (ii) a share split with a new class of Series B shares being issued to the new shareholders while shares held by the existing shareholders are reclassified as Series A shares; and (iii) the equity investment of approximately US$2 million by PT Multi Investama. Following the completion of this restructuring program, TELKOM’s ownership in Mobisel was diluted from 25% to 7.44%.

      In January 2004, Mobisel’s shareholders enacted resolutions approving the conversion of Mobisel’s debt to PT Property Java, Boston Investment Limited and Inquam (Indonesia) Limited Company into equity. As a result, TELKOM’s ownership in Mobisel has beenwas diluted to 6.40%. On December 20, 2004, pursuant to shareholders resolutions, Mobisel issued 306 million new Series B shares, resulting in TELKOM’s interest being diluted from 6.40% to 3.44%. TELKOM has decided to divest its ownership in Mobisel and is in the process of identifying purchasers for its existing stake.

Effective December 22, 2003, Mobisel’s corporate name was changed to PT Mandara Selular Indonesia (“MSI”).

PT Batam Bintan Telekomunikasi (“Babintel”)

Babintel was established in June 1996 and as of the date of this Annual Report is currently owned by TELKOM (5%) and Batamindo Investment (95%). BBT provides telephony fixed line telecommunications services at Batamindo Industrial Park in Muka Kuning, Batam Island and at Bintan Beach International Resort and Bintan Industrial Estate in Bintan Island which are special economic and tourist development zones on those islands. As at December 31, 2003,2004, Babintel had approximately 2,5752,590 subscribers.
PT Pembangunan Telekomunikasi Indonesia (“Bangtelindo”)

Bangtelindo was established in December 1993 in Indonesia. The shareholders of Bangtelindo are TELKOM (3.18%), TELKOM’s Pension Fund (82%) and others (14.82%). Bangtelindo’s primary business is providing telecommunications network maintenance services and consultancy services on the installation and maintenance of telecommunications facilities.
     Bridge Mobile Pte. Ltd
      On November 3, 2004, Telkomsel together with six other international mobile operators in Asia Pacific established Bridge Mobile Pte. Ltd. (Singapore), a company that is engaged in providing regional mobile services in the Asia Pacific region.
      Telkomsel contributed US$1.0 million (Rp.9,290 million) which represents a 14.286% ownership interest.
D.PT Komunikasi Selular Indonesia (“Komselindo”)Property, Plant and Equipment

     Komselindo was established on January 25, 1995 by TELKOM (35%) and PT Elektrindo Nusantara (“Elektrindo”) (65%) to operate an AMPS mobile cellular network which was previously operated pursuant to a revenue sharing arrangement between TELKOM and Elektrindo.

     On June 14, 2002, Komselindo proposed a settlement plan to its creditors for debt restructuring through a debt to equity conversion. The debt to equity conversion included Komselindo liabilities to TELKOM amounting to Rp19.4 billion. Pursuant to an Extraordinary General Meeting held on August 30, 2002, the shareholders of Komselindo agreed to a rights issue. TELKOM did not exercise its right to subscribe for additional shares pursuant to the rights issue and as such, its ownership in Komselindo has been reduced to 14.20%.

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Following a share swap agreement signed on August 8, 2003 between TELKOM and PT Centralindo Pancasakti Cellular (“CPSC”), TELKOM transferred its 14.20% shareholding in Komselindo to CPSC. As a result of such transfer, TELKOM no longer owns any shares in Komselindo.

     
PT Metro Selular Nusantara (“Metrosel”)

     Metrosel was established in November 1995. As of December 31, 2002, Metrosel was owned by TELKOM (20.17%), CPSC (37.03%), Asia Link BV (35.00%), TELKOM’s Pension Fund (3.00%) and PT Dwimarga Dwi Utama (4.80%). Metrosel provides the AMPS services previously provided by TELKOM and CPSC pursuant to a revenue sharing arrangement in Central and East Java.

TELKOM transferred its switching operations to Metrosel in 1996 as payment for the purchase price of its equity interest in the company. Prior to 1996, TELKOM and Metrosel had a revenue sharing arrangement. Following the transfer in 1996, the revenue sharing arrangement was terminated. Under an agreement dated August 8, 2003 between TELKOM and CPSC, TELKOM transferred its 20.17% stake in Metrosel to CPSC. As a result of such transaction, TELKOM no longer owns any shares in Metrosel.

PT Menara Jakarta (“MJ”)

     MJ was established on November 29, 1996. As of December 31, 2002, MJ was owned by TELKOM (21.34%), PT Indocitra Grahabawana (“Indocitra”) (54.44%), PT Indosat Mega Media (21.34%) and Yayasan Televisi Republik Indonesia (2.88%). MJ planned to construct and operate building towers and related telecommunications facilities. Since 1999, MJ has terminated its construction projects, pending improvement in the economic and social situation in Indonesia.

TELKOM sold its 21.34% ownership in MJ to Indocitra through a share-swap transaction in exchange for Indocitra’s 69.0% equity interest in Metra. The process was completed on April 8, 2003. As a result, TELKOM no longer owns any shares in MJ.

PT Telekomindo Selular Raya (“Telesera”)

     TELKOM increased its ownership interest in Telesera to 100% by acquiring 30.23% of Telesera shares from TELKOM Pension Fund on September 29, 2002. On August 8, 2003, TELKOM and CPSC signed a share-swap agreement pursuant to which TELKOM delivered 100% (25,000) of its shares in Telesera to CPSC. As a result of this share swap, TELKOM no longer owns any shares in Telesera.

D.     Property, Plant and Equipment

Except for ownership rights granted to individuals in Indonesia, the title to land rests with the Indonesian State under the Basic Agrarian Law No. 5/1960. Land use is accomplished through landrights, notably rights to build (Hak Guna Bangunan) and rights to use (Hak Pakai), whereby the holder of the landright enjoys the full use of the land for a stated period of time, subject to renewal and extensions. In most instances, the landrights are freely tradeable and may be pledged as security under loan agreements.

      As of December 31, 2004, TELKOM, excluding its subsidiaries, currently ownsowned approximately 2,000 properties. TELKOM holds registered rights to build for the majority of its real property. Pursuant to Government Regulation No. 40 of 1996, the maximum initial periods for rights to build are 30 years and may be extended for an additional 20 years. Most of TELKOM’s real property is used to host equipment for the provision of telecommunications operations including exchanges, transmission stations and

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microwave radio equipment. None of TELKOM’s properties are mortgaged. TELKOM is not aware of any environmental issues which may affect the utilization of its properties.
ITEM 5.OPERATING AND FINANCIAL REVIEW AND PROSPECTS

     The following discussion and analysis should be read in conjunction with the consolidated financial statements of TELKOM for the three years ended December 31, 2001, 2002, 2003 and 20032004 included elsewhere in

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this Annual Report. These consolidated financial statements were prepared in accordance with Indonesian GAAP, which differs in certain significant respects from U.S. GAAP. See Note 5856 to the consolidated financial statements for our reconciliation to U.S. GAAP.

A.Operating Results
A.     Operating ResultsOverview

Overview

      TELKOM is the principal provider of local and domestic telecommunications services in Indonesia, as well as the leading provider of mobile cellular services through its majority owned subsidiary Telkomsel. TELKOM’s objective is to become a leading full service and network provider in Indonesia through the provision of a wide range of communications services. OnAs of December 31, 2003,2004, TELKOM had approximately 8.59.9 million fixed lines in service and Telkomsel had approximately 9.616.3 million mobile cellular subscribers. TELKOM also provides a wide range of other communication services, including telephone network interconnection services, multimedia, data and Internet communication-related services, satellite transponder leasing, leased line, intelligent network and related services, cable television and VoIP services.

2002
      TELKOM believes that the Indonesian economic and industry factors that have materially affected TELKOM, as well as the environment in which it operates, during the two-year period from 2001 through 2002 are (i) the general economic situation in Indonesia, (ii) the limited increases in tariffs, (iii) the growth in the Indonesian mobile cellular market and the corresponding increase in Telkomsel’s revenues, (iv) the sale of a 12.72% equity interest in Telkomsel to SingTel and (v) were:
• the general economic situation in Indonesia, particularly continued high interest rates during 2002;
• an increase in fixed line tariffs by 15%;
• the growth in the Indonesian mobile cellular market and the corresponding increase in Telkomsel’s revenues;
• the growth in TELKOM’s revenues from interconnection, data and Internet services;
• the sale of a 12.72% equity interest in Telkomsel to SingTel;
• the acquisition and subsequent consolidation of Pramindo (KSO I) in August 2002; and
• the implementation of an early retirement program.
2003
      TELKOM believes that its operating results in 2003 were significantly affected by (i) limited increasesby:
• the increase in TELKOM’s interconnection revenues;
• the continued growth of the Indonesian mobile cellular market and the corresponding increase in Telkomsel’s revenues;
• the growth in TELKOM’s revenues from interconnection, data and Internet services;
• the acquisition and subsequent consolidation of AriaWest (KSO III) in July 2003;
• the continuation of TELKOM’s early retirement program; and

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• increased depreciation expense and operations and maintenance expenses associated with Telkomsel’s expansion of its network capacity.
2004
      Telkom believes that its operating results in tariffs, (ii) the increase in TELKOM’s interconnection revenues, (iii) the continued growth of the Indonesian mobile cellular market and the corresponding increase in Telkomsel’s revenues, (iv) the increase in TELKOM’s revenues from data and Internet services and (v) increased depreciation expense and operations and maintenance expenses associated with Telkomsel’s expansion of its network capacity.

2004 were significantly affected by:

• the general economic situation in Indonesia, particularly the devaluation of the Rupiah during 2004;
• an increase in fixed line tariffs by 9%;
• increased competition among cellular operators, particularly in the prepaid market;
• the growth in the Indonesian cellular market and the corresponding increase in Telkomsel’s revenues;
• the growth in TELKOM’s revenues from interconnection, data and Internet services;
• the amendment of KSO agreement with MGTI on January 20, 2004 which resulted in TELKOM obtaining the legal right to control financial and operating decisions of KSO IV, and subsequent consolidation of KSO IV;
• the continuation of TELKOM’s early retirement program; and
• increased depreciation expense and operations and maintenance expenses associated with Telkomsel’s expansion of its network capacity and an increase in TELKOM’s fixed assets due to TELKOM’s aggressive deployment of fixed wireless.
TELKOM’s operating results, discussed below under “Results of Operations”, for the three-year period from 20012002 through 20032004 reflected significant growth in operating revenues, particularly in the fixed line, businesscellular, interconnection and cellular business.data and Internet businesses. The growth in operating revenues in the fixed line business reflectsreflected both increased fixed lines in service in the non-KSO and KSO regions and to some extent, the acquisition and subsequent consolidation of KSO IV in January 2004, AriaWest (KSO III) in July 2003 and Pramindo (KSO I) in 2002 and Dayamitra in 2001.August 2002. The growth of revenues in the cellular business primarily reflectsreflected growth in the number of Telkomsel’s cellular subscribers. The growth of revenues in data and Internet services primarily reflectsreflected the increase in SMS traffic from Telkomsel subscribers and increased usage of TELKOM’s international VOIP service.multimedia services. Interconnection revenues have also increased as a result of greater interconnection charges received from mobile cellular operators. Theoperators and from the launch of its international long-distance services (TIC-007) in June 2004, which is classified under interconnection revenue. KSO revenues have declined in the three-year period from 2002 through 2004 due to the acquisitions of KSO I, III and IV discussed above.
      TELKOM’s operating results for the three-year period from 2002 to 2004 also reflected significant growth in operating expenseexpenses. From 2002 to 2003, the growth in operating expenses was primarily driven by increases in personnel expense in 2002 and by an increase in depreciation expense, general and administrative expenses and operations, maintenance and telecommunications services expense in 2003. The increase in personnel expense in 2002 was driven principally by the implementation of an early retirement program in 2001. In 2002, TELKOM also recorded a gain on long-term investment of Rp.3,196.4 billion arising from the sale of a 12.72% shareholding in Telkomsel to SingTel Mobile.expenses and general and administrative expenses. The increase in depreciation expense and operations, maintenance and telecommunications services expenseexpenses in 2003 was principally due to expenses arising from Telkomsel’s expansion of its network capacity. General and administrative expenses grew in 2003 primarily due to amortization of intangible assets from the acquisition of AriaWest and Pramindo, as well as the increase in TELKOM’s provisions for doubtful accounts in 2003. From 2003 to 2004, the growth of operating expenses was primarily driven by an increase in depreciation expense, personnel expenses and operations, maintenance and telecommunications services expenses. The increase in depreciation expense and operations, maintenance and telecommunications services expenses in 2004 was principally due to expenses arising from Telkomsel’s expansion of its network capacity and an increase in TELKOM’s fixed assets due to its deployment of fixed wireless. Personnel expenses grew in 2004 primarily due to a significant increase in net periodic

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pension cost and increases in salaries and related benefits and vacation pay, incentives and other benefits.
      TELKOM had a significant gain and loss charged to other income (charges) during the three-year period from 2002 through 2004. In 2002, TELKOM recorded a gain on sale of long-term investment of Rp.3,196.4 billion arising from the sale of a 12.72% shareholding in Telkomsel to SingTel Mobile. In 2004, TELKOM recognized loss on foreign exchange of Rp.1,220.8 billion due to the devaluation of the Rupiah during 2004, primarily related to foreign exchange loss on its US Dollar borrowings.
Economic Situation in Indonesia

      TELKOM has beenwas significantly affected by a severe economic crisis that Indonesia hasand other Asian countries experienced sincebeginning in the second half of 1997. As a result of the Asian financial crisis, the Rupiah has depreciated significantly and has experienced periods of significant volatility. From August 1997 to mid 1998, the month-end

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value of the Rupiah relative to the US Dollar declined from approximately Rp.2,600 per US Dollar to a low of approximately Rp.15,000 per US Dollar. In the three-year period from 2002 through 2004, the Rupiah experienced the following (based on Bank Indonesia’s middle exchange rate):
• in 2002, an appreciation from Rp.10,400 per US Dollar at December 31, 2001 to Rp.8,940 per US Dollar at December 31, 2002;
• in 2003, an appreciation from Rp.8,940 per US Dollar at December 31, 2002 to Rp.8,465 per US Dollar at December 31, 2003;
• in 2004, a depreciation from Rp.8,465 per US Dollar at December 31, 2003 to Rp.9,290 per US Dollar at December 31, 2004;
As of December 31, 2003 and June 24, 2004,July 13, 2005, Bank Indonesia’s middle exchange rate was Rp.8,465 and Rp.9,430, respectively,Rp.9,750 per US$1.00.
      Indonesia has also experienced higher rates of inflation and interest rates in recent years.from the second half of 1997 through 2002. For the years ended December 31, 2001, 2002, 2003 and 20032004, the annual inflation rate was 12.55%10.03%, 10.03%5.1% and 5.1%6.4%, respectively, while therespectively. The interest rate on a one-month Bank Indonesia Certificate (SBI) atas of December 31, 2001, 2002, 2003 and 20032004 was 17.6%12.9%, 12.9%8.3% and 8.3%7.4%, respectively. See Item 3. “Key Information — D. Risk Factors — Risks relating to Indonesia — Declines or volatility in Indonesia’s currency exchange rates can have a material adverse impact on business activity in Indonesia” and Item 3. “Key Information — A. Selected Financial Data — Exchange Rate Information.”
Limited Increases in Tariffs

      Since 1995, Indonesian law has provided for domestic fixed line tariff adjustments to be determined by a price cap formula that calculates the maximum total percentage increase in tariffs for a particular year. The maximum increase equals the Indonesian inflation rate (referred to by the Government as the Consumer Price Index (“CPI”)) typically for the preceding year,last two years, as published by the Indonesian Central Bureau of Statistics, minus an efficiency factor (the “X-factor”), which the Government determines by taking into consideration certain factors including improvements in the cost efficiency of the services resulting from technological improvements, the interests of affected telecommunications operators and the purchasing power of customers. Although the regulations provide for an annual tariff review and adjustment, economic conditions in Indonesia led to tariffs being frozen in 2000 and 2001. See Item 3D. “Risk Factors — Risk Relating to TELKOM and its subsidiaries — TELKOM operates in a legal and regulatory environment that is undergoing significant reforms and such reform may adversely affect TELKOM’s business.”

On January 29, 2002, the MoC announced that fixed-linefixed line tariffs would be increased by an average of 45.49% over three years. Effective February 1, 2002, the MoC increased fixed-linefixed line tariffs by an average of 15%. Although fixed-linefixed line tariffs were expected to be increased again effective January 1, 2003, public opposition following the announcement by TELKOM of tariff increases led to the suspension on

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January 16, 2003 of the implementation of such increases. On March 30, 2004, the Government, throughas recommended by the ITRB, announced that it would allow operators to rebalance their tariffs, with the resulting weighted average of tariffs increasing by 9%. As a result, on April 1, 2004, TELKOM has adjusted its fixed-linefixed line tariffs and fixed wireless tariffs, with local charges increasing by 28.2%, DLD tariffs decreasing by an average of 10%10.6% and monthly subscription charges increasing by varying amounts from 12%12.1% to 25%25.1%, depending on the type of subscription. ThereThe Government did not carry out its plan to further increase fixed line tariffs to reach the 45.49% average increase announced in January 2002 by January 2005. In an announcement by the MoCI on April 1, 2005 regarding access codes, the MoCI indicated that there would be another rebalancing of tariffs in the future. However, there has been no indication by the MoC whether fixed-line tariffs will be further increased in 2004 or whetherMoCI when the Government intends to carry out its plan to increase fixed-line tariffs by 45.49% by January 2005.the plan.
Increase in TELKOM’s interconnection revenues

TELKOM’s interconnection revenues accounted for approximately 15.3% of TELKOM’s consolidated operating revenues for the year ended December 31, 2003, compared to 13.6% for the year ended December 31, 2002. The increase in interconnection revenues was primarily due to a 64.0% increase in interconnection charges paid to TELKOM by mobile cellular operators to Rp.3,908.3 billion. This more than offset a 46.6% decline in interconnection revenue from international calls to Rp.184.1 billion.

Growth of Indonesian Cellular Market and Increase in Telkomsel’s revenues

      The Indonesian cellular market has increased significantly in recent years. Telkomsel, a subsidiary of TELKOM engaged in the cellular telephone business, experienced a 60%32.3% growth in net operating revenues from 2003 to 2004, due to a 69.8% growth in its total number of cellular subscribers, from 2002 to 2003, due toas a result of the increased usage of mobile cellular phones in Indonesia and a corresponding increase in revenues from air time charges. Telkomsel experienced a 47.3% growth in net operating revenues from 2002 to 2003, due to a 60% growth in its total number of cellular subscribers. Telkomsel’s revenues from cellular accounted for approximately 31.2%30.7% of TELKOM’s consolidated total operating revenues for the year ended December 31, 2003,2004, compared to 31.2% for the year ended December 31, 2003 and 29.9% for the year ended December 31, 2002.

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      Due to the growth in the cellular market, competition has increased among cellular operators, particularly in the prepaid market. These cellular operators also compete to a lesser extent with fixed wireless operators, with fixed wireless lines in service increasing significantly in 2004.
Increase in TELKOM’s interconnection revenues
      TELKOM’s interconnection revenues accounted for approximately 18.2% of TELKOM’s consolidated operating revenues for the year ended December 31, 2004, compared to 15.3% for the year ended December 31, 2003 and 13.6% for the year ended December 31, 2002. From 2003 to 2004, the 48.7% increase in interconnection revenues was primarily due to a 36.9% increase in interconnection charges paid to TELKOM by mobile cellular operators to Rp.5,351.6 billion and a 248.3% increase in interconnection revenue from international calls to Rp.641.2 billion. This international interconnection revenue included international long-distance revenue from TELKOM’s IDD service (TIC-007) since the launch in June 2004. From 2002 to 2003, the increase in interconnection revenues was primarily due to a 74.4% increase in interconnection charges paid to TELKOM by mobile cellular operators to Rp.3,908.3 billion, partially offset by a 52.7% decrease in interconnection revenue from international calls to Rp.184.1 billion.
Increase in TELKOM’s data and Internet revenues

      Data and Internet revenues accounted for approximately 14.2% of TELKOM’s consolidated operating revenues for the year ended December 31, 2004, compared to 11.5% for the year ended December 31, 2003 and 7.5% for the year ended December 31, 2002. TELKOM’s revenues from its data and Internet services for the year ended December 31,increased by 54.7% from 2003 were Rp.3,108.6 billion, anto 2004 and by 100.3% from 2002 to 2003. The increase of approximately 100.3% overin data and Internet revenues in 2004 was primarily due to a 61.6% increase in revenues generated from SMS services and a 64.4% increase in revenues for the year ended December 31, 2002. Thisfrom multimedia services. The increase in 2003 was primarily due to a 121.1% increase in revenues generated from SMS services and a 115.7% increase in revenues from TELKOM’s international VoIP services. Data and Internet revenues accounted for approximately 11.5% of TELKOM’s consolidated operating revenues for the year ended December 31, 2003, compared to 7.5% for the year ended December 31, 2002.

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Sale of 12.72% equity interest in Telkomsel to SingTel

On July 30, 2002, TELKOM completed the sale of a 12.72% shareholding in Telkomsel to Singapore Telecom Mobile Pte Ltd (“SingTel Mobile”).Mobile. Following the sale, TELKOM’s ownership in Telkomsel reduced from 77.72% to 65%, while SingTel Mobile’s ownership interest increased from 22.28% to 35%. TELKOM received US$429 million in cash for the sale. As a result, TELKOM booked an accounting gain of Rp.3,196.4 billion related to the transaction, representing the difference between transaction value over the book value of the shares in Telkomsel. The taxable gain from this transaction was much lower than the accounting gain as the shares sold to SingTel Mobile had a tax basis equal to their market value at the time such shares were acquired from Indosat in 2001 as part of the cross-ownership transaction.
Acquisition and Consolidation of KSO IV, III and I
      TELKOM’s operating revenues and expenses for the three-year period from 2002 through 2004 have been affected by the acquisition and subsequent consolidation of KSO IV in January 2004 and the acquisition and subsequent consolidation of AriaWest (KSO III) in July 2003 and Pramindo (KSO I) in August 2002. Prior to consolidation of KSO IV, III and I, TELKOM received revenues from these KSO regions in the form of guaranteed minimum monthly payments and additional monthly revenue sharing payments from the revenues of the KSO regions after payment of the minimum monthly payments and certain operating expenses. TELKOM was not directly allocated any of the operating expenses for the KSO regions. See “Item 4. Information on the Company — B. Business Overview — Joint Operation Scheme.” Upon consolidation, TELKOM no longer receives the minimum monthly payments and revenue sharing payments and instead consolidates all of the revenues and expenses of such KSO regions on its books. As a result, KSO revenues have declined in the three-year period from 2002 through 2004 due to the acquisitions of KSO I, III and IV discussed above. Following these acquisitions, KSO VII is the only remaining KSO region under the joint operation scheme.
      In connection with the acquisition of KSO IV in January 2004, TELKOM recognized the full amount of the liability for the purchase price of approximately US$390.7 million or equivalent to Rp.3,285.4 billion, which represents the present value of fixed monthly payments (totaling US$517.1 million) to be paid to MGTI (the investor in KSO IV) beginning in February 2004 through December 2010 using a discount rate of 8.3% plus direct costs of the business combination. The allocation of the acquisition cost consisted of Rp.2,377.1 billion for property, plant and equipment and Rp.908.2 million for intangible assets. The allocation of the acquisition cost was based on an independent appraisal of fair values. Intangible assets identified from this acquisition represent the right to operate the business in the KSO area and the amount is being amortized over the remaining term of the KSO agreement of 6.9 years. As of December 31, 2004, the remaining monthly payments to be made to MGTI, before unamortized discount, amounted to US$462.9 million (Rp.4,305.1 billion) and is presented in TELKOM’s balance sheet as “Liabilities of Business Acquisitions.”
Early Retirement Program

      In 2001, TELKOM implemented a voluntary early retirement program for certain eligible employees. TELKOM continued its voluntary early retirement program forduring 2002, 2003 and 2003. TELKOM expects that an aggregate2004 and made lump-sum payments to participating employees based on years of approximately 7,000service, age and salary. A total of 7,269 employees will take early retirement overretired under the program during the three-year period from 2002-2004, with 2,288 retiring in 2002, to 2004, depending on the availability of excess cash to pay early retirement. In 2002,4,177 retiring in 2003 and 804 retiring in 2004. TELKOM accrued Rp.717.3 billion, Rp.355.7 billion and Rp.243.5 billion (US$26.2 million) in 2002, 2003 and 2004, respectively, for costs associated with its early retirement program.
Depreciation Expense and Operations and Maintenance Expense
      TELKOM’s depreciation expense and operations and maintenance expense has increased significantly during the three-year period from 2002 through 2004. These increases have primarily related to Telkomsel’s expansion of its network capacity due to the growth in its subscriber base and an increase

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in TELKOM’s fixed assets due to deployment of fixed wireless. Telkomsel’s subscriber base has increased from 6,010,772 subscribers as of December 31, 2002 to 9,588,807 subscribers as of December 31, 2003 and to 16,290,508 subscribers as of December 31, 2004. In December 2002, TELKOM introduced new CDMA-based fixed wireless phone service, which is marketed under the brand name TELKOMFlexi for both fixed and portable handsets. TELKOM’s subscribers for this fixed wireless service grew from 264,285 subscribers as of December 31, 2003 to 1,429,368 subscribers as of December 31, 2004. In particular, TELKOM accrued Rp.355.7 billion (US$42.1 million) for such costs.

began an aggressive deployment of fixed wireless in KSO III and KSO IV following TELKOM’s acquisitions of KSO III in July 2003 and KSO IV in January 2004.

Restatement of Information Previously Reported

Subsequent to the filing of ourthe consolidated financial statements in ourTELKOM’s 2002 Annual Report on Form 20-F for the year ended December 31, 2002 and Amendment No. 1 to the2002 Annual Report on Form 20-F/ A that was filed with the SEC on June 11, 2003, weTELKOM made certain adjustments to the Indonesian GAAP and the related reconciliation with U.S. GAAP amounts previously disclosed for 2001 and 2002 and prior years which were required to be made pursuant to Indonesian GAAP and U.S. GAAP. These adjustments were set forth in Amendment No. 2 to the2002 Annual Report on Form 20-F/ A that was filed with the SEC on February 9, 2004 under the heading “Item 5. Restatement of Information Previously Reported.” Please see “Item 15. Controls and Procedures — Restatement of Information Previously Reported.”
Reclassifications
     
Changes in Indonesian GAAP Information Previously Reported

     The adjustments to our Indonesian GAAP consolidated financial statements for the years ended December 31, 2001 and 2002 set forth in Amendment No. 2 to our 2002 Annual Report on Form 20-F primarily related to the accounting for long service awards, deferred income taxes, and business acquisitions, as well as the assumptions underlying TELKOM’s post-retirement healthcare plan. As a result of the adjustments to our Indonesian GAAP financial statements, as set forth in Amendment No. 2 to our 2002 Annual Report on Form 20-F, our consolidated net income for the year ended December 31, 2001 was adjusted downward from Rp.4,250.1 billion to Rp.4,068.4 billion, while consolidated net income for the year ended December 31, 2002 was adjusted downwards from Rp.8,345.3 billion to Rp.8,039.7 billion. We also restated the amount of our stockholders’ equity as of December 31, 2001 from Rp.9,323.6 billion to Rp.9,081.0 billion, and as of December 31, 2002 from Rp.15,899.2 billion to Rp.14,613.6 billion.

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Changes in U.S. GAAP Information Previously Disclosed

     In addition to the restatements to TELKOM’s Indonesian GAAP financial statements described above, certain additional adjustments were required for U.S. GAAP purposes primarily relating to our accounting for revenue recognition, deferred income taxes, revenue sharing arrangements and business acquisitions, these adjustments are set forth in Amendment No. 2 to our 2002 Annual Report on Form 20-F. As a result of such adjustments, our consolidated net income under U.S. GAAP for the year ended December 31, 2001 was adjusted from Rp.4,036.6 billion to Rp.4,298.2 billion, while consolidated net income for the year ended December 31, 2002 was adjusted from Rp.9,274.2 billion to Rp.8,587.3 billion. Our stockholders’ equity under U.S. GAAP as of December 31, 2001 was adjusted from Rp.8,240.6 billion to Rp.7,765.5 billion, and as of December 31, 2002 from Rp.15,745.2 billion to Rp.13,910.9 billion.

Reclassifications

     WeTELKOM also described in Amendment No. 2 to our 2002 Annual Report on Form 20-F20-F/ A the reclassification of certain accounts to conform with Indonesian GAAP and U.S. GAAP presentation requirements, but these reclassifications did not affect ourTELKOM’s consolidated net income for the yearsyear ended 2001 and 2002. Please refer to Amendment No. 2 to our 2002 Annual Report on Form 20-F for further information.

see “Item 15. Controls and Procedures — Reclassifications.”

Basis of Presentation
Consolidation of TELKOM’s Financial Statements

      TELKOM consolidates its financial statements and those of subsidiaries in which TELKOM has direct ownership interest of more than 50% or where TELKOM controls the subsidiaries.

TELKOM consolidated Pramindo’s financial statements into its 2002 financial statements from August 2002 when it acquired a controlling interest in Pramindo. TELKOM initially acquired 30% of Pramindo in 2002 and held 45% as of December 31, 2003. TELKOM obtained the legal title to the remaining balance of the shares in Pramindo on March 15, 2004. TELKOM consolidated 100% of Pramindo from the time it acquired 30% of Pramindo in 2002 because it had full control over the management and operations of Pramindo (including the right to vote 100% of Pramindo’s shares and the right to nominate all of Pramindo’s board members) and the right to obtain all of the future economic benefits of ownership of Pramindo as though it owned 100% of the shares, in each case pursuant to the Conditional Sale and Purchase Agreement with the selling shareholders of Pramindo.
      TELKOM consolidated AriaWest’s financial statements into its 2003 financial statements from July 31, 2003, the date of acquisition of 100% equity interest in AriaWest.
      TELKOM consolidated the revenues and expenses of KSO IV from February 2004 after it obtained the legal right to control financial and operating decisions of KSO IV on January 20, 2004.
Foreign Exchange Translations

      The functional currency of TELKOM and its subsidiaries is the Indonesian Rupiah and the books of accounts of TELKOM and its subsidiaries are maintained in Indonesian Rupiah. Transactions in foreign currencies are translated into Indonesian Rupiah at the rates of exchange rate prevailing at the transaction date. At the balance sheet date, the exchange rates used for translation of monetary assets and monetary liabilities denominated in foreign currencies are the buying and selling rates quoted by Reuters.

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Reuters prevailing at the balance sheet date. The Reuters buy and sell rates, applied respectively to translate monetary assets and monetary liabilities, were Rp.8,940 and Rp.8,960 to U.S.$US$1.00 as of December 31, 2002, and Rp.8,430 and Rp.8,450 to U.S.$US$1.00 as of December 31, 2003.2003 and Rp.9,280 and Rp.9,300 to US$1.00 as of December 31, 2004. These rates differ from the rates used for convenience translations in this Annual Report, including in the tables appearing in the discussion and analysis below. See Note 2(e) to the consolidated financial statements.

      The resulting foreign exchange gains and losses, realized and unrealized, are credited or charged to income of the current year, except for foreign exchange differences incurred on borrowings during the construction of qualifying assets which are capitalized to the extent that the borrowings can be attributed to the construction of those qualifying assets.
      The consolidated financial statements are stated in Indonesian Rupiah. The translations of Indonesian Rupiah amounts for 20032004 into United States Dollars are included solely for the convenience of the readers and have been made using the average of the market buy and sell rates of Rp.8,440Rp.9,290 to US$1.00 published by Reuters on December 31, 2003.2004. The convenience translations should not be construed as representations that the Rupiah amounts have been, could have been, or cancould in the future be, converted into United States Dollars at this or any other rate of exchange. See Note 3 to the consolidated financial statements.

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TELKOM’s Operating Revenues

The following table sets out TELKOM’s operating revenues, itemized according to TELKOM’s main products and services, for the three years 20012002 through 2003,2004, with each item also expressed as a percentage of total operating revenues:
                       
Year ended December 31,                       
  Year Ended December 31,
  
2001200220032003  2002 2003 2004 2004
         
Rp. (billion)%Rp. (billion)%Rp. (billion)%US$ (million)  Rp. (billion) % Rp. (billion) % Rp. (billion) % US$ (million)
Operating Revenues
Operating Revenues
 
Operating Revenues
                      
TelephoneTelephone Telephone                      
Fixed lines 6,415.1 39.4 7,264.1 34.9 8,896.9 32.8 1,054.1 Fixed lines  7,264.1  34.9  8,896.9  32.8  10,645.0  31.4  1,145.9 
Cellular 4,708.0 28.9 6,226.8 29.9 8,458.8 31.2 1,002.2 Cellular  6,226.8  29.9  8,458.8  31.2  10,421.3  30.7  1,121.8 
Revenue under Joint Operation Schemes 2,219.5 13.6 2,128.1 10.2 1,486.3 5.5 176.1 
Interconnection revenues 1,423.7 8.7 2,831.3 13.6 4,162.1 15.3 493.1 
Joint Operation SchemesJoint Operation Schemes  2,128.1  10.2  1,486.3  5.5  656.6  1.9  70.7 
InterconnectionInterconnection  2,831.3  13.6  4,162.1  15.3  6,188.0  18.2  666.1 
Data and InternetData and Internet 673.2 4.1 1,551.6 7.5 3,108.6 11.5 368.3 Data and Internet  1,551.6  7.5  3,108.6  11.5  4,808.8  14.2  517.6 
NetworkNetwork 415.0 2.6 316.1 1.5 517.9 1.9 61.4 Network  316.1  1.5  517.9  1.9  654.3  1.9  70.4 
Revenue sharing arrangement 264.3 1.6 263.8 1.3 258.5 1.0 30.6 
Other telecommunications-related services 165.0 1.1 221.0 1.1 226.9 0.8 26.9 
Revenue-sharing arrangementsRevenue-sharing arrangements  263.8  1.3  258.5  1.0  280.6  0.8  30.2 
Other telecommunications servicesOther telecommunications services  221.0  1.1  226.9  0.8  293.2  0.9  31.5 
 
 
 
 
 
 
 
                 
Total Operating Revenues 16,283.8 100.0 20,802.8 100.0 27,116.0 100.0 3,212.7 Total Operating Revenues  20,802.8  100.0  27,116.0  100.0  33,947.8  100.0  3,654.2 
 
 
 
 
 
 
 
                 

Subsequent to an announcement by the DGPT in August 2001 that the Government intended to terminate TELKOM’s exclusive right to provide local and domestic long-distance services, TELKOM’s exclusive right to provide domestic local service was finally terminated in August 2002 and TELKOM’s exclusive right to provide domestic long-distance service was likewise terminated in August 2003. TELKOM, however, received its commercial license to provide IDD fixed-linefixed line services on May 13, 2004. As a result of the termination of TELKOM’s exclusive right to provide local and domestic long-distance service, Indosat, a competitor of TELKOM, will be entering the domestic long-distance market and on May 13, 2004 Indosat received its commercial license to provide domestic long-distance services.services on May 13, 2004 and began offering fixed wireless services in August 2004. TELKOM believes Indosat will enter the domestic long-distance market in the future. TELKOM expects that revenues from providing interconnection services to new entrants in the domestic local and domestic long-distance markets will increase and its market share of fixed line services will decrease slightly in the future because of the liberalization of these market.markets. With regard to IDD fixed-linefixed line services,

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TELKOM began offering these services to its customers on June 7, 2004 under the “TIC 007” brand. TELKOM currently recognizes these international long-distance revenues as interconnection revenues. Although TELKOM expects its IDD fixed-linefixed line service to be competitive, as of the date of this Annual Report TELKOM can give no assurance as to how these services or the liberalization of the local call and domestic long-distance markets will affect TELKOM’s financial condition and resultresults of operations.
Fixed Line Telephone Revenues

      The components of fixed line revenues are local and domestic long-distance usage charges, monthly subscription charges, installation charges, phone cards and others. Local and domestic long-distance usage charges, monthly subscription charges and installation charges relate to both fixed wireline and fixed wireless telephones.

      Local and domestic long-distance usage and monthly subscription charges are determined by telecommunications operators based on a formula set by the Government that determines maximum tariff levels. The maximum tariff levels apply uniformly throughout Indonesia. TELKOM’s monthly subscription charges are based on a uniform schedule of charges that vary according to the type of user and the type of services provided. Local and domestic long-distance usage charges vary depending on the distance called, duration and time band, while installation charges, phone cards and other services

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charges are set by individual operators. See Item 5. “Operating Results — A. Overview — Limited Increases in Tariffs.”

      Most fixed line revenues are recognized as services as provided, except the installation charges are recognized as revenue when a fixed line (referred to as an “installation” in the consolidated financial statements) is placed in service. Revenues from phone cards are recognized as deferred income when the phone card sales occur and transferred to revenue upon usage of the units stored on the card or when the card expires, whichever is the earlier.

Fixed line telephone revenues for the three years 20012002 through 20032004 are set out below, with each item also expressed as a percentage of operating revenues:
                       
Year ended December 31,
                       
2001200220032003  Year Ended December 31,
   
 2002 2003 2004 2004
Rp.%Rp. %Rp. %US$ (million)         
(billion)(billion)(billion)  Rp. (billion) % Rp. (billion) % Rp. (billion) % US$ (million)
Fixed Line Telephone Revenues
Fixed Line Telephone Revenues
 
Fixed Line Telephone Revenues
                      
Local and domestic long-distance usageLocal and domestic long-distance usage 5,225.7 32.1 5,447.9 26.2 6,561.8 24.2 777.5 Local and domestic long-distance usage  5,447.9  26.2  6,561.8  24.2  7,439.3  21.9  800.8 
Monthly subscription chargesMonthly subscription charges 997.7 6.2 1,474.8 7.1 1,948.8 7.2 230.9 Monthly subscription charges  1,474.8  7.1  1,948.8  7.2  2,934.9  8.6  315.9 
Installation chargesInstallation charges 98.0 0.6 130.2 0.6 223.1 0.8 26.4 Installation charges  130.2  0.6  223.1  0.8  201.3  0.6  21.7 
Phone cardsPhone cards 25.4 0.1 29.3 0.1 34.4 0.1 4.1 Phone cards  29.3  0.1  34.4  0.1  15.6  0.1  1.7 
OthersOthers 68.3 0.4 181.9 0.9 128.8 0.5 15.2 Others  181.9  0.9  128.8  0.5  53.9  0.2  5.8 
 
 
 
 
 
 
 
                 
Total 6,415.1 39.4 7,264.1 34.9 8,896.9 32.8 1,054.1 Total  7,264.1  34.9  8,896.9  32.8  10,645.0  31.4  1,145.9 
 
 
 
 
 
 
 
                 
Cellular Telephone Revenues

      The main componentscomponent of cellular telephone revenues areis air time charges and monthly subscription charges, which totaled Rp.7,677.9 billion (US$909.7 million) and Rp. 580.6 billion (US$68.8 million), respectively, in 2003.charges. Cellular telephone revenues also include features andmonthly subscription charges, connection fee charges.

charges and features.

      Air time charges and monthly subscription charges are determined by telecommunications operators based on maximum tariff levels fixed by the Government. The maximum tariff levels apply uniformly throughout Indonesia. See Item 5. “Operating Results — A. Overview — Limited Increases in Tariffs”. Connection fee charges are determined by individual operators. Only postpaid subscribers pay connection and monthly subscription fees, while prepaid customers generally pay higher air time usage charges. In TELKOM’s consolidated statements of income, a portion of revenues from sales of prepaid starter packs is also recorded as connection fees.

In the case of postpaid subscribers, monthly subscription charges are recognized when earned (i.e., in the month to which they apply), while connection fee revenue is recognized as income when connections take place. In the case of prepaid subscribers, revenues from “starter packs” are recognized

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upon delivery to distributors, dealers or directly to customers, while revenues from pulse refill vouchers are recognized initially as unearned income and thereafter recognized proportionately as revenue based on successful calls made using the stored value of the voucher or when the unused stored value has expired. Revenues recognized are net of dealer discounts.

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Cellular telephone revenues for the three years 20012002 through 20032004 are set out below, with each item also expressed as a percentage of operating revenues:
                       
Year ended December 31,
                       
2001200220032003  Year Ended December 31,
   
 2002 2003 2004 2004
Rp.%Rp.%Rp.%US$ (million)         
(billion)(billion)(billion)  Rp. (billion) % Rp. (billion) % Rp. (billion) % US$ (million)
Cellular Telephone Revenues
Cellular Telephone Revenues
 
Cellular Telephone Revenues
                      
Air time chargesAir time charges 3,987.8 24.4 5,453.6 26.1 7,677.9 28.3 909.7 Air time charges  5,453.6  26.2  7,677.9  28.3  9,825.7  28.9  1,057.7 
Monthly subscription chargesMonthly subscription charges 581.6 3.6 593.3 2.9 580.5 2.2 68.8 Monthly subscription charges  593.3  2.9  580.5  2.2  448.5  1.3  48.3 
Connection fee chargesConnection fee charges 128.5 0.8 172.3 0.8 194.1 0.7 23.0 Connection fee charges  172.3  0.8  194.1  0.7  55.8  0.2  6.0 
FeaturesFeatures 10.1 0.1 7.6 0.1 6.3 0.0 0.7 Features  7.6  0.0  6.3  0.0  91.3  0.3  9.8 
 
 
 
 
 
 
 
                 
Total 4,708.0 28.9 6,226.8 29.9 8,458.8 31.2 1,002.2 Total  6,226.8  29.9  8,458.8  31.2  10,421.3  30.7  1,121.8 
 
 
 
 
 
 
 
                 
Joint Operation Scheme (“KSO”) Revenues

      KSO revenues consist of:

 • Initial payment made by the KSO partners, which is amortized over the life of the KSO Agreement;
 
 • Minimum TELKOM Revenues (“MTR”), being a specified minimum payment, which is payable monthly; and
 
 • Distributable TELKOM Revenues (“DTR”), being a specified percentage of KSO revenues after deduction of operating expenses and MTR obligation, which is payable monthly.

KSO Revenues for the three years 20012002 through 20032004 are set out below, with each item also expressed as a percentage of operating revenues:
                         
Year ended December 31,
                           
2001200220032003  Year Ended December 31,
   
 2002 2003 2004 2004
Rp.%Rp.%Rp.%US$ (million)         
(billion)(billion)(billion)  Rp. (billion) % Rp. (billion) % Rp. (billion) % US$ (million)
KSO Revenues
KSO Revenues
 
KSO Revenues
                      
Minimum TELKOM RevenuesMinimum TELKOM Revenues 1,474.2 9.0 1,319.7 6.3 899.9 3.3 106.6 Minimum TELKOM Revenues  1,319.7  6.3  899.9  3.3  296.0  0.9  31.9 
Share in distributable KSO RevenuesShare in distributable KSO Revenues 732.9 4.5 801.0 3.9 583.0 2.2 69.1 Share in distributable KSO Revenues  801.0  3.9  583.0  2.2  349.5  1.0  37.6 
Amortization of unearned initial investor payments under Joint Operation SchemesAmortization of unearned initial investor payments under Joint Operation Schemes 12.4 0.1 7.4 0.0 3.4 0.0 0.4 Amortization of unearned initial investor payments under Joint Operation Schemes  7.4  0.0  3.4  0.0  11.1  0.0  1.2 
 
 
 
 
 
 
 
                 
Total 2,219.5 13.6 2,128.1 10.2 1,486.3 5.5 176.1 Total  2,128.1  10.2  1,486.3  5.5  656.6  1.9  70.7 
 
 
 
 
 
 
 
                 
Interconnection Revenues

      The components of interconnection revenues are revenues from cellular interconnection, international interconnection and other interconnection. Interconnection revenues consist primarily of fees charged to other domestic and international carriers when calls originating in their networks interconnect with TELKOM’s fixed line network and Telkomsel’s mobile cellular network. Interconnection revenues also include international roaming by overseas operators to Telkomsel’s mobile cellular network.network and a retail fee charged to TELKOM’s subscribers for an outgoing call. This international interconnection revenue included international long-distance revenue from TELKOM’s IDD service (TIC-007) since the launch in June 2004.

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      Fees charged for interconnection are determined contractually between operators, subject to maximum fee levels established by Government regulation. Revenues from interconnection with other domestic and international telecommunications carriers are recognized as incurred and are presented net of interconnection expenses.expenses paid to other operators. Interconnection revenues are typically accrued initially and settled among operators quarterlymonthly and can fluctuate significantly as a result of adjustments among operators to accrued amounts at the time of settlement. BeginningOn March 11, 2004, the MoC issued a decree stating that cost-based interconnection will commence beginning January 1, 2005. However, as of the date of this annual report, the MoCI, to which telecommunications regulatory responsibility was transferred in February 2005, however, interconnection fees will be cost-based, in accordance with MoC regulations, andhas not issued implementing regulations. TELKOM expects that the current interconnection fees willmay be adjusted.

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adjusted as a result of the new cost-based interconnection scheme but TELKOM can give no assurance regarding the impact, if any, of such adjustment on TELKOM’s business, financial condition, results of operations and prospects.

Interconnection revenues for the three years 20012002 through 20032004 are set out below, with each item also expressed as a percentage of operating revenues:
                              
Year ended December 31,
2001200220032003
Rp.%Rp.%Rp.%US$ (million)
(billion)(billion)(billion)
Interconnection Revenues
                            
TELKOM(1)
  1,212.3   7.4   2,740.7   13.3   4,069.1   15.0   482.1 
Telkomsel(2)
  211.4   1.3   90.6   0.3   93.0   0.3   11.0 
   
   
   
   
   
   
   
 
 Total  1,423.7   8.7   2,831.3   13.6   4,162.1   15.3   493.1 
   
   
   
   
   
   
   
 
                              
  Year Ended December 31,
   
  2002 2003 2004 2004
         
  Rp. (billion) % Rp. (billion) % Rp. (billion) % US$ (million)
Interconnection Revenues
                            
Cellular  2,241.5   10.8   3,908.3   14.4   5,351.6   15.7   576.1 
International  389.3   1.9   184.1   0.7   641.2   1.9   69.0 
Other  200.5   0.9   69.7   0.2   195.2   0.6   21.0 
                      
 Total  2,831.3   13.6   4,162.1   15.3   6,188.0   18.2   666.1 
                      

(1) After elimination of unconsolidated net interconnection revenues with Telkomsel.
(2) After elimination of unconsolidated net interconnection revenues (expense) with TELKOM.

Data and Internet Revenues

      The components of data and Internet revenues are revenues from SMS, multimedia, VoIP and ISDN services. Data and Internet revenue for the three years 20012002 through 20032004 are set out below, with each item also expressed as a percentage of operating revenues:
                           
Year ended December 31,
                         
2001200220032003  Year Ended December 31,
   
 2002 2003 2004 2004
Rp.%Rp.%Rp.%US$ (million)         
(billion)(billion)(billion)  Rp. (billion) % Rp. (billion) % Rp. (billion) % US$ (million)
Data and Internet Revenue
Data and Internet Revenue
 
Data and Internet Revenue
                      
SMSSMS 344.6 2.1 997.2 4.9 2,205.1 8.2 261.3 SMS  997.2  4.9  2,205.1  8.2  3,562.7  10.5  383.5 
MultimediaMultimedia 218.3 1.3 337.8 1.6 494.7 1.8 58.6 Multimedia  337.8  1.6  494.7  1.8  813.3  2.4  87.5 
VoIPVoIP 25.6 0.2 152.2 0.7 328.3 1.2 38.9 VoIP  152.2  0.7  328.3  1.2  318.9  0.9  34.3 
ISDNISDN 84.7 0.5 64.4 0.3 80.5 0.3 9.5 ISDN  64.4  0.3  80.5  0.3  113.9  0.4  12.3 
 
 
 
 
 
 
 
                 
Total 673.2 4.1 1,551.6 7.5 3,108.6 11.5 368.3 Total  1,551.6  7.5  3,108.6  11.5  4,808.8  14.2  517.6 
 
 
 
 
 
 
 
                 
Network Revenues

      The components of network revenues are revenues from satellite transponder leases and leased lines. Network revenue for the three years 20012002 through 20032004 are set out below, with each item also expressed as a percentage of operating revenues:
                             
Year ended December 31,
                             
2001200220032003  Year Ended December 31,
   
 2002 2003 2004 2004
Rp.%Rp.%Rp.%US$ (million)         
(billion)(billion)(billion)  Rp. (billion) % Rp. (billion) % Rp. (billion) % US$ (million)
Network Revenue
Network Revenue
 
Network Revenue
                      
Satellite transponder leaseSatellite transponder lease 203.6 1.3 190.2 0.9 270.9 1.0 32.1 Satellite transponder lease  190.2  0.9  270.9  1.0  210.9  0.6  22.7 
Leased line 211.4 1.3 125.9 0.6 247.0 0.9 29.3 
Leased linesLeased lines  125.9  0.6  247.0  0.9  443.4  1.3  47.7 
 
 
 
 
 
 
 
                 
Total 415.0 2.6 316.1 1.5 517.9 1.9 61.4 Total  316.1  1.5  517.9  1.9  654.3  1.9  70.4 
 
 
 
 
 
 
 
                 

8086

Revenues under Revenue SharingRevenue-Sharing Arrangements

Revenue

      The components of revenues under Revenue Sharing Arrangementsrevenue-sharing arrangements are net share in revenue earned under revenue-sharing arrangements and amortization of unearned income under revenue-sharing arrangements. Revenues under revenue-sharing arrangements for the three years 20012002 through 20032004 are set out below, with each item also expressed as a percentage of operating revenues:
                              
Year ended December 31,
2001200220032003
Rp.%Rp.%Rp.%US$ (million)
(billion)(billion)(billion)
Revenues Under Revenue Sharing Arrangements
                            
Net share in revenue earned under Revenue Sharing Arrangement  191.5   1.2   211.5   1.0   200.1   0.8   23.7 
Amortization of unearned income under Revenue Sharing Arrangement  72.8   0.4   52.3   0.3   58.4   0.2   6.9 
   
   
   
   
   
   
   
 
 Total  264.3   1.6   263.8   1.3   258.5   1.0   30.6 
   
   
   
   
   
   
   
 
                              
  Year Ended December 31,
   
  2002 2003 2004 2004
         
  Rp. (billion) % Rp. (billion) % Rp. (billion) % US$ (million)
Revenues Under Revenue-Sharing Arrangements
                            
Net share in revenue earned under Revenue-Sharing Arrangements  211.5   1.0   200.1   0.8   198.6   0.6   21.4 
Amortization of unearned income under Revenue-Sharing                            
 Arrangements  52.3   0.3   58.4   0.2   82.0   0.2   8.8 
                      
 Total  263.8   1.3   258.5   1.0   280.6   0.8   30.2 
                      
Other Telecommunications-relatedTelecommunications Services Revenues

      Other telecommunications-relatedtelecommunications services revenues primarily represent telex and telegram revenues, revenues from the telephone directory business and revenues from cable television service.services. TELKOM’s revenues from cable television services and telephone directory services have been increasing. However, due to the rapid growth of technology development, telex and telegram revenues are in decline.

TELKOM’s Operating Expenses

The following table sets out TELKOM’s operating expenses for the three years 20012002 through 2003,2004, with each item also expressed as a percentage of operating revenues:
                       
Year ended December 31,
                       
2001200220032003  Year Ended December 31,
   
 2002 2003 2004 2004
Rp.%Rp.%Rp.%US$ (million)         
(billion)(billion)(billion)  Rp. (billion) % Rp. (billion) % Rp. (billion) % US$ (million)
Operating Expenses
Operating Expenses
 
Operating Expenses
                      
DepreciationDepreciation 2,869.8 17.6 3,473.4 16.7 4,779.5 17.6 566.3 Depreciation  3,473.4  16.7  4,779.5  17.6  6,438.5  19.0  693.1 
Operations, maintenance and telecommunications servicesOperations, maintenance and telecommunications services 2,149.9 13.2 2,290.2 11.0 3,338.7 12.3 395.6 Operations, maintenance and telecommunications services  2,290.2  11.0  3,338.7  12.3  4,529.6  13.3  487.6 
PersonnelPersonnel 2,281.2 14.0 4,387.6 21.1 4,440.1 16.4 526.1 Personnel  4,387.6  21.1  4,440.1  16.4  5,570.8  16.4  599.7 
General and administrativeGeneral and administrative 1,343.5 8.3 1,146.3 5.5 2,078.8 7.7 246.3 General and administrative  1,146.3  5.5  2,078.8  7.7  2,599.8  7.7  279.8 
MarketingMarketing 220.0 1.3 375.1 1.8 502.9 1.9 59.6 Marketing  375.1  1.8  502.9  1.8  881.9  2.6  94.9 
 
 
 
 
 
 
 
                 
Total Operating Expenses 8,864.4 54.4 11,672.6 56.1 15,140.0 55.8 1,793.9 Total Operating Expenses  11,672.6  56.1  15,140.0  55.8  20,020.6  59.0  2,155.1 
 
 
 
 
 
 
 
                 
Depreciation Expense

      Depreciation expense relates to TELKOM’s property, plant and equipment. TELKOM depreciates its property, plant and equipment, except land, using the straight-line method, based on the useful lives of the assets, commencing in the month such assets were placed into service. See notesNotes 2k, 2l, 2m, 1311 and 1512 to the consolidated financial statements.

      In accordance with Indonesian GAAP, TELKOM capitalizes interest costs and foreign exchange gains or losses for assets under construction and depreciates these amounts over the useful lives of the assets to which they relate. In 2001, 2002, 2003 and 2003,2004, TELKOM capitalized interest costs for assets under construction of Rp.8.1 billion, Rp.20.1 billion, and Rp.22.9 billion and Rp.57.7 billion (US$2.76.2 million), respectively.

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TELKOM capitalized foreign exchange losses (gain)(gains) for assets under construction of Rp.1.7(Rp.27.6 billion), nil and Rp.74.3 billion (Rp.27.6 billion)(US$8.0 million) in 2002, 2003 and nil in 2001, 2002 and 2003,2004, respectively.

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Operations, Maintenance and Telecommunications Services ExpenseExpenses

Operations, maintenance and telecommunications services expenseexpenses for the three years 20012002 through 20032004 are set out below, with each item also expressed as a percentage of operating revenues:
                                              
 Year Ended December 31,
Year ended December 31,   
  2002 2003 2004 2004
        
2001200220032003  Rp. (billion) % Rp. (billion) % Rp. (billion) % US$ (million)
Rp. %Rp. %Rp. %US$
(billion)(billion)(billion)(million)
Operations, Maintenance and Telecommunications Services Expense
 
Operations, Maintenance and Telecommunications Services Expenses
Operations, Maintenance and Telecommunications Services Expenses
                      
Operations and maintenanceOperations and maintenance 891.4 5.5 1,042.6 5.0 1,744.8 6.4 206.7 Operations and maintenance  1,042.6  5.0  1,744.8  6.4  2,398.2  7.1  258.1 
Radio frequency usage chargesRadio frequency usage charges 101.3 0.6 292.7 1.4 371.7 1.4 44.1 Radio frequency usage charges  292.7  1.4  371.7  1.4  492.6  1.5  53.0 
Electricity, gas and waterElectricity, gas and water 157.1 1.0 219.9 1.1 300.4 1.1 35.6 Electricity, gas and water  219.9  1.1  300.4  1.1  385.7  1.1  41.5 
Cost of phone cardsCost of phone cards 173.4 1.1 197.7 1.0 181.3 0.7 21.5 Cost of phone cards  197.7  1.0  181.3  0.7  366.7  1.1  39.5 
Concession feesConcession fees 63.6 0.4 163.9 0.8 239.0 0.9 28.3 Concession fees  163.9  0.8  239.0  0.9  314.7  0.9  33.9 
InsuranceInsurance 67.8 0.4 142.9 0.7 157.1 0.6 18.6 Insurance  142.9  0.7  157.1  0.6  151.3  0.4  16.3 
Leased line 82.9 0.5 103.6 0.5 127.0 0.5 15.1 
Motor vehicles 38.2 0.2 80.0 0.3 115.7 0.4 13.7 
Travel 15.7 0.1 16.5 0.1 29.8 0.1 3.5 
Telephone kiosks’ commissions 520.9 3.2 — — — — — 
Leased linesLeased lines  103.6  0.5  127.0  0.5  132.8  0.4  14.3 
Vehicles and supporting facilitiesVehicles and supporting facilities  80.0  0.3  115.7  0.4  181.7  0.5  19.6 
TravelingTraveling  16.5  0.1  29.8  0.1  42.2  0.1  4.5 
OthersOthers 37.6 0.2 30.4 0.1 71.9 0.2 8.5 Others  30.4  0.1  71.9  0.2  63.7  0.2  6.9 
 
 
 
 
 
 
 
                 
Total 2,149.9 13.2 2,290.2 11.0 3,338.7 12.3 395.6 Total  2,290.2  11.0  3,338.7  12.3  4,529.6  13.3  487.6 
 
 
 
 
 
 
 
                 
Personnel ExpenseExpenses

      The main components of personnel expenses in 20032004 were salaries and related allowances,benefits, which were Rp.1,574.2Rp.1,796.9 billion (US$186.5193.4 million) and, vacation pay, incentives and other allowances,benefits, which were Rp.816.1Rp.1,156.1 billion (US$96.7124.4 million), and net periodic pension cost, which was Rp.1,034.8 billion (US$111.4 million).

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Personnel expenseexpenses for the three years 20012002 through 20032004 are set out below, with each item also expressed as a percentage of operating revenues:
                                              
 Year Ended December 31,
Year ended December 31,   
  2002 2003 2004 2004
        
2001200220032003  Rp. (billion) % Rp. (billion) % Rp. (billion) % US$ (million)
Rp. %Rp. %Rp. %US$
(billion)(billion)(billion)(million)
Personnel Expense
 
Salaries and related allowances 883.4 5.4 1,410.7 6.8 1,574.2 5.8 186.5 
Vacation pay, incentives and other allowances 364.7 2.2 655.5 3.2 816.1 3.0 96.7 
Severance for early retirement plan 140.0 0.9 717.3 3.4 355.7 1.3 42.1 
Personnel Expenses
Personnel Expenses
                      
Salaries and related benefitsSalaries and related benefits  1,410.7  6.8  1,574.2  5.8  1,796.9  5.3  193.4 
Vacation pay, incentives and other benefitsVacation pay, incentives and other benefits  655.5  3.2  816.1  3.0  1,156.1  3.4  124.4 
Early retirementsEarly retirements  717.3  3.4  355.7  1.3  243.5  0.7  26.2 
Long service awardsLong service awards 94.5 0.6 289.9 1.4 207.1 0.8 24.5 Long service awards  289.9  1.4  219.2  0.8  159.3  0.5  17.2 
Net periodic pension costNet periodic pension cost 86.2 0.5 362.3 1.7 190.9 0.7 22.6 Net periodic pension cost  362.3  1.7  191.0  0.7  1,034.8  3.1  111.4 
Employee income taxEmployee income tax 132.9 0.8 201.5 1.0 468.8 1.7 55.5 Employee income tax  201.5  1.0  468.8  1.7  523.8  1.5  56.4 
Net periodic post-retirement benefit costNet periodic post-retirement benefit cost 374.5 2.3 616.5 3.0 641.4 2.4 76.0 Net periodic post-retirement benefit cost  616.5  3.0  641.4  2.4  492.2  1.5  53.0 
HousingHousing 93.3 0.6 89.5 0.4 116.9 0.4 13.9 Housing  89.5  0.4  116.9  0.4  103.5  0.3  11.2 
MedicalMedical 81.7 0.5 28.2 0.1 9.7 0.0 1.2 Medical  28.2  0.1  9.7  0.1  12.2  0.0  1.3 
Other employee benefitsOther employee benefits  —  —  4.4  0.0  11.5  0.0  1.2 
OthersOthers 30.0 0.2 16.2 0.1 59.3 0.2 7.0 Others  16.2  0.1  42.7  0.2  37.0  0.1  4.0 
 
 
 
 
 
 
 
                 
Total 2,281.2 14.0 4,387.6 21.1 4,440.1 16.3 526.1 Total  4,387.6  21.1  4,440.1  16.4  5,570.8  16.4  599.7 
 
 
 
 
 
 
 
                 

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General and Administrative ExpenseExpenses

      The main components of general and administrative expenses in 20032004 were amortization of goodwill and other intangible assets, which totaled Rp.730.7Rp.872.3 billion (US$86.693.9 million), arising from the acquisitions of GSD, Dayamitra, Pramindo, and AriaWest and provisionsKSO IV, collection expenses, which totaled Rp.359.0 billion (US$38.6 million), and provision for doubtful accounts and inventory obsolescence, which totaled Rp.326.4Rp.357.7 billion (US$38.738.5 million).

General and administrative expenseexpenses for the three years 20012002 through 20032004 are set out below, with each item also expressed as a percentage of operating revenues:
                                                          
 Year Ended December 31,
Year ended December 31,   
  2002 2003 2004 2004
        
2001200220032003  Rp. (billion) % Rp. (billion) % Rp. (billion) % US$ (million)
Rp. %Rp. %Rp. %US$
(billion)(billion)(billion)(million)
General and Administrative Expense
 
General and Administrative Expenses
General and Administrative Expenses
                      
Provision for doubtful accounts and inventory obsolescenceProvision for doubtful accounts and inventory obsolescence 342.9 2.1 31.1 0.1 326.4 1.2 38.7 Provision for doubtful accounts and inventory obsolescence  31.1  0.1  326.4  1.2  357.7  1.1  38.5 
Professional feesProfessional fees 325.3 2.0 219.0 1.0 115.6 0.4 13.7 Professional fees  219.0  1.0  115.6  0.4  137.3  0.4  14.8 
Collection expensesCollection expenses 181.9 1.1 224.8 1.1 273.8 1.0 32.4 Collection expenses  224.8  1.1  273.8  1.0  359.0  1.1  38.6 
Training, education and recruitmentTraining, education and recruitment 147.3 0.9 122.1 0.6 126.9 0.5 15.0 Training, education and recruitment  122.1  0.6  126.9  0.5  228.5  0.7  24.6 
TravelTravel 92.8 0.6 111.4 0.5 144.7 0.5 17.1 Travel  111.4  0.5  144.7  0.6  192.6  0.6  20.7 
Amortization of intangible assets 55.7 0.4 188.0 0.9 730.7 2.7 86.5 
Amortization of goodwill and other intangible assetsAmortization of goodwill and other intangible assets  188.0  0.9  730.7  2.7  872.3  2.6  93.9 
Security and screeningSecurity and screening 48.8 0.3 77.1 0.4 110.3 0.4 13.1 Security and screening  77.1  0.4  110.3  0.4  143.9  0.4  15.5 
Printing and stationeryPrinting and stationery 37.6 0.2 43.5 0.2 50.5 0.2 6.0 Printing and stationery  43.5  0.2  50.5  0.2  81.0  0.2  8.7 
MeetingsMeetings 26.5 0.2 31.7 0.2 42.8 0.2 5.1 Meetings  31.7  0.2  42.8  0.2  58.3  0.2  6.3 
Research and developmentResearch and development 39.5 0.2 10.5 0.1 9.1 0.0 1.1 Research and development  10.5  0.1  9.1  0.0  13.2  0.0  1.4 
General and social contributionGeneral and social contribution 36.8 0.2 69.4 0.3 113.8 0.4 13.5 General and social contribution  69.4  0.3  113.8  0.4  111.8  0.3  12.0 
OthersOthers 8.4 0.3 17.7 0.1 34.2 0.1 4.1 Others  17.7  0.1  34.2  0.1  44.2  0.1  4.8 
 
 
 
 
 
 
 
                 
Total 1,343.5 8.3 1,146.3 5.5 2,078.8 7.6 246.3 Total  1,146.3  5.5  2,078.8  7.7  2,599.8  7.7  279.8 
 
 
 
 
 
 
 
                 

89

Marketing ExpenseExpenses

Marketing expense consistsexpenses consist of advertising, customer education promotions and customer researchother marketing expenses.
                                                        
 Year Ended December 31,
Year ended December 31,  
 2002 2003 2004 2004
        
2001200220032003 Rp. (billion) % Rp. (billion) % Rp. (billion) % US$ (million)
Rp. %Rp. %Rp. %US$
(billion)(billion)(billion)(million)
Marketing Expense
 
Marketing Expenses
                      
Advertising 169.8 1.0 310.3 1.5 381.7 1.4 45.2   310.3  1.5  381.7  1.4  699.6  2.1  75.3 
Customer education 40.6 0.2 52.3 0.2 102.2 0.4 12.1   52.3  0.2  102.2  0.3  152.4  0.4  16.4 
Others 9.6 0.1 12.5 0.1 19.0 0.1 2.3   12.5  0.1  19.0  0.1  29.9  0.1  3.2 
 
 
 
 
 
 
 
                
Total 220.0 1.3 375.1 1.8 502.9 1.9 59.6   375.1  1.8  502.9  1.8  881.9  2.6  94.9 
 
 
 
 
 
 
 
                

Results of Operations
Year ended December 31, 2004 compared to year ended December 31, 2003
Operating Revenues.
      Total operating revenues increased by Rp.6,831.8 billion, or 25.2%, from Rp.27,116.0 billion in 2003 to Rp.33,947.8 billion in 2004. Operating revenues increased in 2004 for fixed lines, cellular, interconnection, network, data and Internet, revenue-sharing arrangements and other telecommunications services. KSO revenues decreased from 2003 to 2004.
Fixed Lines Telephone Revenues.
      Fixed lines revenues increased by Rp.1,748.1 billion, or 19.6%, from Rp.8,896.9 billion in 2003 to Rp.10,645.0 billion in 2004. The increase in fixed lines revenues was primarily due to increases in local and domestic long-distance revenues and monthly subscription charges in 2004. Local and domestic long-distance revenues increased by Rp.877.5 billion, or 13.4%, from Rp.6,561.8 billion in 2003 to Rp.7,439.3 billion in 2004. Monthly subscription charges increased by Rp.986.1 billion, or 50.6%, from Rp.1,948.8 billion in 2003 to Rp.2,934.9 billion in 2004.
      The increases were primarily attributable to:
• The consolidation of KSO IV revenues following the acquisition of KSO IV in January 2004, which contributed Rp.969.2 billion (US$104.3 million) to the increase in fixed lines revenues.
• The 439.8% growth in the number of subscribers for fixed wireless, from 264,787 subscribers as of December 31, 2003 to 1,429,368 subscribers as of December 31, 2004, particularly the 454.2% growth in the number of lines in service in the non-KSO regions, resulting from the introduction of post-paid fixed wireless services only in the first quarter of 2003 and pre-paid fixed wireless service only in the third quarter of 2003.
• TELKOM’s increase in fixed line tariffs in 2004 by a weighted average increase of 9%, with local charges increasing 28.2%, DLD tariffs decreasing by an average of 10% and monthly subscription charges increasing by varying amounts from 12.1% to 25.1%.
Cellular Telephone Revenues.
      Cellular telephone revenues increased by Rp.1,962.5 billion, or 23.2%, from Rp.8,458.8 billion in 2003 to Rp.10,421.3 billion in 2004. The increase in cellular telephone revenues was primarily due to an increase in air time charges, partially offset by a decrease in monthly subscription charges and connection fee charges. Air time charges increased by Rp.2,147.8 billion, or 28.0%, from Rp.7,677.9 billion in 2003 to Rp.9,825.7 billion in 2004. Monthly subscription charges decreased by Rp.132.0 billion, or 22.7%, from Rp.580.5 billion in 2003 to Rp.448.5 billion in 2004 due to price competition among cellular operators and the increase in prepaid subscribers as discussed below.

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Connection fee charges decreased by Rp.138.3 billion, or 71.3%, from Rp.194.1 billion in 2003 to Rp.55.8 billion in 2004 due to price competition among cellular operators.
      The increase in cellular telephone revenues was primarily attributable to 69.9% growth in Telkomsel’s total cellular subscribers, from 9,588,807 subscribers as of December 31, 2003 to 16,290,508 subscribers as of December 31, 2004. This increase was caused by a 87.3% growth in net-additional subscribers from 3,578,035 subscribers as of December 31, 2003 to 6,701,701 subscribers as of December 31, 2004. In 2004, Telkomsel marketed its new Kartu As prepaid cards with lower denominations than Telkomsel’s other prepaid cards at the time. The Kartu As prepaid cards have a flat rate, which generally is lower than Telkomsel’s other prepaid cards with rates that vary by time of day. Postpaid subscribers grew by 31.8% to 1,327,549 subscribers and prepaid subscribers grew by 74.4% to 14,962,959 subscribers, in each case as of December 31, 2004.
      As a result of the higher rate of growth in the number of prepaid subscribers, the proportion of prepaid subscribers to total subscribers increased from 89.5% as of December 31, 2003 to 91.9% as of December 31, 2004. As a result of the change in the subscriber mix, with the increased number of prepaid subscribers as a percentage of total subscribers, blended monthly ARPU decreased from approximately Rp.123,000 in 2003 to approximately Rp.102,000 in 2004. Despite the decrease in overall ARPU for voice, the SMS/non-voice ARPU for postpaid increased (approximately 37% growth average per month) due to the increase in premium SMS, mobile banking transactions, and average number of SMS per subscribers per month.
Interconnection Revenues.
      Net interconnection revenues increased by Rp.2,025.9 billion, or 48.7%, from Rp.4,162.1 billion in 2003 to Rp.6,188.0 billion in 2004. Net interconnection revenues comprises net interconnection revenues from TELKOM’s fixed line network (after eliminating net interconnection revenues for interconnections with Telkomsel’s mobile cellular network) and net interconnection revenues from Telkomsel’s mobile cellular network (after eliminating net interconnection expense from interconnections with TELKOM’s fixed line network). Interconnection revenue included international long-distance revenue from TELKOM’s IDD service (TIC-007) since the launch in June 2004.
      Cellular interconnection revenues increased by Rp.1,443.3 billion, or 36.9%, from Rp.3,908.3 billion in 2003 to Rp.5,351.6 billion in 2004, primarily due to the growth of Telkomsel’s cellular subscribers. International interconnection revenues increased by Rp.457.1 billion, or 248.3%, from Rp.184.1 billion in 2003 to Rp.641.2 billion in 2004, primarily due to an increase in incoming and outgoing IDD traffic. IDD traffic has increased significantly primarily due to the launch of TELKOM’s IDD service in June 2004. Other interconnection revenues increased by Rp.125.5 billion, or 180.1%, from Rp.69.7 billion in 2003 to Rp.195.2 billion in 2004, primarily due to interconnection with Indosat’s local fixed wireless services which was launched in 2004.
      TELKOM’s interconnection revenues accounted for approximately 18.2% of TELKOM’s consolidated operating revenues for the year ended December 31, 2004, compared to 15.3% for the year ended December 31, 2003.
KSO Revenues (Joint Operation Scheme Revenues).
      KSO revenues decreased by Rp.829.7 billion, or 55.8%, from Rp.1,486.3 billion in 2003 to Rp.656.6 billion in 2004. The decrease in KSO revenues was primarily due to a significant decrease in MTR and DTR in 2004. MTR decreased by Rp.603.9 billion, or 67.1%, from Rp.899.9 billion in 2003 to Rp.296.0 billion in 2004. DTR decreased by Rp.233.5 billion, or 40.1%, from Rp.583.0 billion in 2003 to Rp.349.5 billion in 2004. Amortization of unearned initial payments increased slightly by Rp.7.7 billion, or 226.5%, from Rp.3.4 billion in 2003 to Rp.11.1 billion in 2004 due to the recognition in 2004 of the remaining portion of unearned initial payments for KSO IV following the acquisition of KSO IV.

91

      The decrease in KSO revenues was attributable to the acquisition of KSO IV in 2004 and primarily reflected TELKOM’s share in distributable KSO IV revenues and TELKOM’s right to receive MTR that were no longer received by TELKOM following the acquisition of KSO IV. All KSO IV revenues have been consolidated to TELKOM under fixed lines revenues since February 1, 2004.
      As a result of the acquisition of operational control of KSO IV, fixed lines in service in the KSO regions decreased 34.0% from 1,449,066 lines as of December 31, 2003 to 956,806 lines as of December 31, 2004. Following this acquisition, KSO VII is the only remaining KSO region under the joint operation scheme.
Data and Internet Revenues.
      Data and Internet revenues increased by Rp.1,700.2 billion, or 54.7%, from Rp.3,108.6 billion in 2003 to Rp.4,808.8 billion in 2004. The increase in data and Internet revenues was primarily due to significant increases in SMS revenues and multimedia revenues and a smaller increase in ISDN revenues, partially offset by a slight decrease in VoIP revenues. SMS revenues increased by Rp.1,357.6 billion, or 61.6%, from Rp.2,205.1 billion in 2003 to Rp.3,562.7 billion in 2004 mainly attributed to the significant growth in SMS traffic from Telkomsel subscribers. Multimedia revenues increased by Rp.318.6 billion, or 64.4%, from Rp.494.7 billion in 2003 to Rp.813.3 billion in 2004 due to increased usage of the dial-up Internet in Indonesia and the general growth in the data communications market in Indonesia including use of frame relay, VPN and international leased line services. ISDN revenues increased by Rp.33.4 billion, or 41.5%, from Rp.80.5 billion in 2003 to Rp.113.9 billion in 2004 due to an increase in monthly and usage charges for one of its ISDN services, following the tariff rebalancing. VoIP revenues decreased by Rp.9.4 billion, or 2.9%, from Rp.328.3 billion in 2003 to Rp.318.9 billion in 2004 due to the decrease in traffic of VoIP.
Network Revenues.
      Network revenues increased by Rp.136.4 billion, or 26.3%, from Rp.517.9 billion in 2003 to Rp.654.3 billion in 2004. A decrease in satellite revenues was offset by an increase in leased line revenues. Satellite transponder revenues decreased by Rp.60.0 billion, or 22.1%, from Rp.270.9 billion in 2003 to Rp.210.9 billion in 2004 primarily due to a price decrease made in 2004 to reflect market conditions. Leased lines revenues increased by Rp.196.4 billion, or 79.5%, from Rp.247.0 billion in 2003 to Rp.443.4 billion in 2004 as a result of an increase in the number of telecommunications operators, particularly cellular operators due to significant increases in cellular subscribers.
Revenues under Revenue-Sharing Arrangements (“PBHs”).
      Revenues under revenue-sharing arrangements increased by Rp.22.1 billion, or 8.6%, from Rp.258.5 billion in 2003 to Rp.280.6 billion in 2004. The increase in revenue under revenue-sharing arrangements was due to an increase in amortization of unearned income under revenue-sharing arrangements, partially offset by a slight decrease in net share in revenue earned under revenue-sharing arrangements. Amortization of unearned income under revenue-sharing arrangements increased by Rp.23.6 billion, or 40.4%, from Rp.58.4 billion in 2003 to Rp.82.0 billion in 2004 due to amortization of unearned income from TELKOM’s new revenue-sharing arrangement projects. Net share in revenue earned under revenue-sharing arrangements decreased by Rp.1.5 billion, or 0.8%, from Rp.200.1 billion in 2003 to Rp.198.6 billion in 2004 due to the expiration of some of the revenue-sharing arrangement contracts. Although the total number of revenue-sharing arrangements increased from 27 contracts as of December 31, 2003 to 79 contracts as of December 31, 2004, many of these new revenue-sharing arrangements did not generate significant pulse (and corresponding revenue to TELKOM) in 2004 due to the respective assets being placed into service during the fourth quarter of 2004.

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Other Telecommunications Services Revenues.
      Other telecommunications services revenues increased by Rp.66.3 billion, or 29.2%, from Rp.226.9 billion in 2003 to Rp.293.2 billion in 2004. The increase in revenue from other telecommunications services was primarily due to an increase in revenue from telephone directory services resulting from an increase in advertising and an increase in revenue from cable television services resulting from increased marketing.
Operating Expenses.
      Total operating expenses increased by Rp.4,880.7 billion, or 32.2%, from Rp.15,140.0 billion in 2003 to Rp.20,020.7 billion in 2004. The increase in total operating expenses was attributable to substantial increases in depreciation, operations, maintenance and telecommunications services expenses and personnel expenses and smaller increases in general and administrative expenses and marketing expenses.
Personnel Expenses.
      Personnel expenses increased by Rp.1,130.7 billion, or 25.5%, from Rp.4,440.1 billion in 2003 to Rp.5,570.8 billion in 2004. The main contributor to the increase was KSO IV personnel cost following Telkom’s acquisition of KSO IV. TELKOM incorporated 2,802 employees from KSO IV in 2004. The increase in employees from KSO IV was partially offset by a decrease of 804 employees that participated in TELKOM’s early retirement program in 2004. In addition, in April 2004 TELKOM increased the basic salary, basic allowance and position allowance of its employees. These reasons led to an increase in recurring employee expenses, as follows:
• salaries and related benefits increased by Rp.222.7 billion, or 14.2%, from Rp.1,574.2 billion in 2003 to Rp.1,796.9 billion in 2004; and
• vacation pay, incentives and other benefits increased by Rp.340.0 billion, or 41.7%, from Rp.816.1 billion in 2003 to Rp.1,156.1 billion in 2004.
      In addition, net periodic pension cost increased by Rp.843.8 billion, or 441.8%, from Rp.191.0 in 2003 to Rp.1,034.8 billion in 2004, primarily due to the recognition of actuarial loss of Rp.417.0 billion in 2004 compared to the recognition of actuarial gain of Rp.205.0 billion in 2003.
      These increases offset declines in early retirements costs and net periodic post-retirement benefit cost. Early retirements costs decreased by Rp.112.2 billion, or 31.5%, from Rp.355.7 billion in 2003 to Rp.243.5 billion in 2004, due to a decline in the number of employees retiring under TELKOM’s early retirement program. Net periodic post-retirement benefit cost declined by Rp.149.2 billion, or 23.3%, from Rp.641.4 billion in 2003 to Rp.492.2 billion in 2004, due to decreases in service cost and recognized actuarial loss.
      Other components of personnel expenses did not contribute significantly to operating expenses in 2004.
Depreciation Expense.
      Depreciation expense increased by Rp.1,659.0 billion, or 34.7%, from Rp.4,779.5 billion in 2003 to Rp.6,438.5 billion in 2004. The increase in depreciation expenses was primarily due to significant increases in depreciation expense for both TELKOM and Telkomsel. TELKOM’s increase in depreciation expenses reflected continued capital expenditures in TELKOM’s transmission network and backbone, as well as its access network, particularly for fixed wireless. Telkomsel’s increase in depreciation expense reflected continued capital expenditures for Telkomsel’s network infrastructure.

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Operations, Maintenance and Telecommunications Services Expenses.
      Operations, maintenance and telecommunications services expenses increased by Rp.1,190.9 billion, or 35.7%, from Rp.3,338.7 billion in 2003 to Rp.4,529.6 billion in 2004. The increase in operations, maintenance and telecommunications services expenses was mainly attributable to:
• an increase in operations and maintenance expenses by Rp.653.4 billion to Rp.2,398.2 billion, an increase of 37.5%, due to an increase in Telkomsel’s operations and maintenance expenses arising from the growth in the Telkomsel’s overall capacity from 10.8 million subscribers as of December 31, 2003 to 17.9 million subscribers as of December 31, 2004. The number of Telkomsel’s BTSs grew by 28.7% from 4,820 units in 2003 to 6,205 units in 2004. Telkomsel also increased the number of its transmitting and receiving stations and switching and Intelligent Network equipment;
• cost of phone cards increased by Rp.185.4 billion to Rp.366.7 billion in 2004, an increase of 102.3%, due to increases in expenses for TELKOM and Telkomsel prepaid cards. TELKOM’s prepaid card expenses included cost of fixed wireless cards (staterpack/voucher/replacement) of Rp.32.9 billion that contributed Rp.26.5 billion to the increase in cost of phone cards after TELKOM began its TELKOMFlexi prepaid program in September 2003. Telkomsel’s prepaid card expenses of Rp.316.5 billion contributed Rp.143.6 billion to the increase in cost of phone cards due to a substantial increase in subscribers, particularly prepaid subscribers;
• total radio frequency usage charges increased by Rp.120.9 billion to Rp.492.6 billion in 2004, an increase of 32.5%, primarily due to a 22.0% increase in frequency usage charges by Telkomsel of Rp.77.8 billion from Rp.353.6 billion in 2003 to Rp.431.4 billion in 2004, in line with the 28.7% increase in the number of BTSs from 4,820 in 2003 to 6,205 in 2004;
• electricity, gas and water charges increased by Rp.85.3 billion, or 28.4%, from Rp 300.4 billion in 2003 to Rp 385.7 billion in 2004, reflecting primarily the consolidation of the gas electricity and water charges of KSO IV, as well as an increase in electricity and gas rates in 2004 compared to 2003; and
• total concession fees increased by Rp.75.7 billion to Rp.314.7 billion in 2004, an increase of 31.7%, which is in line with the increase in operating revenues.
      Other components of operations, maintenance and telecommunications services expenses did not contribute significantly to operating expenses in 2004.
General and Administrative Expenses.
      General and administrative expenses increased by Rp.521.0 billion, or 25.1%, from Rp.2,078.8 billion in 2003 to Rp.2,599.8 billion in 2004. In particular, in 2004:
• amortization of goodwill and other intangible assets increased by Rp.141.6 billion to Rp.872.3 billion, or 19.4%, mainly due to amortization of additional intangible assets arising from the acquisitions of AriaWest in July 2003, KSO IV and the remaining 9.68% interest in Dayamitra;
• training, education and recruitment expenses increased by Rp.101.6 billion to Rp.228.5 billion, or 80.1%, following an increase in employees training programs. TELKOM increased its employee training programs primarily due to an organizational transformation towards more of a customer centric approach, additional training to improve internal controls as discussed in Item 15, “Controls and Procedures”, additional training and education expenses resulting from the acquisition of KSO IV and the necessary training because of new technologies;
• collection expenses increased by Rp.85.2 billion to Rp.359.0 billion, an increase of 31.1%, generally in line with the growth in TELKOM’s fixed line subscriber base and Telkomsel’s mobile cellular subscriber base, but also reflecting higher fees charged by third party collection agents used in some regional divisions;

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• travel expenses increased by Rp.47.9 billion, or 33.1%, to Rp 192.6 billion in 2004, primarily due to an increase in domestic travel cost by Rp.35.2 billion;
• security and screening expenses increased by Rp.33.6 billion, or 30.5%, to Rp.143.9 billion in 2004, primarily due to an increase in the salary of security guards by Rp.29.3 billion;
• provision for doubtful accounts and inventory obsolescence increased by Rp.31.3 billion, or 9.6%, to Rp.357.7 billion in 2004, primarily due to an increase in TELKOM and Telkomsel customer defaults as subscriber numbers increased; and
• printing and stationery expenses increased by Rp.30.5 billion, or 60.4%, to Rp.81.0 billion in 2004, primarily due to an increase in printing and photocopy expenses by Rp.20.0 billion, as well as an increase in stationery expenses by Rp.10.0 billion.
      Other components of general and administrative expenses did not contribute significantly to operating expenses in 2004.
Marketing Expenses.
      Marketing expenses increased by Rp.379.0 billion, or 75.4%, from Rp.502.9 billion in 2003 to Rp.881.9 billion in 2004. The increase in marketing expenses was primarily due to TELKOM’s marketing campaign for its new services, primarily for TELKOMFLexi and Telkom’s IDD service (TIC-007) and an increase in Telkomsel’s marketing expenses (Rp.174.1 billion or 95.8%), primarily for sales support and advertising and promotion programs due to significant competition in the cellular market.
Operating Income and Operating Margin
      As a result of the foregoing, operating income increased by Rp.1,951.2 billion, or 16.3%, from Rp.11,975.9 billion in 2003 to Rp.13,927.1 billion in 2004. TELKOM’s operating margin decreased from 44.2% in 2003 to 41.0% in 2004 due to the higher growth of operating expenses (32.2%) compared to the growth of operating revenues (25.2%).
Other Income (Charges)
      Other charges increased by Rp.1,314.4 billion, or 250.8%, from Rp.524.1 billion in 2003 to Rp.1,838.5 billion in 2004. The increase in other charges was primarily due to a significant loss on foreign exchange of Rp.1,220.8 billion in 2004 compared to a gain on foreign exchange of Rp.126.1 billion in 2003.
Interest Income.
      Interest income decreased by Rp.48.1 billion, or 13.1%, from Rp.366.0 billion in 2003 to Rp.317.9 billion in 2004, primarily due to the decrease in floating interest rates for both Rupiah and U.S. Dollar-denominated deposits and the decrease in average balance of TELKOM’s time deposits from Rp.5,037.8 billion in 2003 to Rp.4,471.4 billion in 2004. See Note 5 to the consolidated financial statements.
Interest Expense.
      Interest expense decreased by Rp.113.3 billion, or 8.2%, from Rp.1,383.4 billion in 2003 to Rp.1,270.1 billion in 2004, reflecting primarily the decrease in floating interest rates for TELKOM’s Rupiah and U.S. Dollar-denominated debt in 2004.
Gain (Loss) on Foreign Exchange-net.
      Gain (loss) on foreign exchange-net decreased by Rp.1,346.9 billion from a net gain of Rp.126.1 billion in 2003 to a net loss of Rp.1,220.8 billion in 2004, primarily due to depreciation of the Rupiah from Rp.8,440 to US$1.00 in December 2003 to Rp.9,290 to US$1.00 in December 2004, where a

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loss of Rp.342.1 billion resulted from liabilities of business acquisition of KSO IV due to the acquisition cost being denominated in US dollars.
Others (Net).
      Others (net) decreased by Rp.33.2 billion, from other income (net) of Rp.364.3 billion in 2003 to other income (net) of Rp.331.1 billion in 2004. In 2004, the significant other income (net) included income from fines from late-paying subscribers of Rp.280.3 billion.
      Other components of Others (Net) did not contribute significantly to Other Income (Charges) in 2004.
Income Before Tax and Pre-Tax Margin
      As a result of the foregoing, income before tax increased by Rp.636.8 billion, or 5.6%, from Rp.11,451.8 billion in 2003 to Rp.12,088.6 billion in 2004. Pre-tax margin decreased from 42.2% in 2003 to 35.6% in 2004.
Income Tax Expense
      Income tax expense increased by Rp.142.0 billion, or 3.7%, from Rp.3,861.1 billion in 2003 to Rp.4,003.1 billion in 2004. The effective tax rate slightly decreased from 33.7% of income before tax in 2003 to 33.1% of income before tax in 2004.
Minority Interest in Net Income of Subsidiaries
      Minority interest in the net income of subsidiaries increased by Rp.452.8 billion, or 30.1%, from Rp.1,503.5 billion in 2003 to Rp.1,956.3 billion in 2004. The increase was primarily due to the significant increase in the net income of Telkomsel for 2004.
Net Income
      As a result of the foregoing, net income increased by Rp.42.0 billion, or 0.7%, from Rp.6,087.2 billion in 2003 to Rp.6,129.2 billion in 2004. TELKOM’s net income margin decreased from 22.4% in 2003 to 18.1% in 2004. The higher net income resulted in an increase in basic earnings per share from Rp.302.0 in 2003 (after restatement to reflect a two-for-one stock split as resolved in the AGMS on July 30, 2004) to Rp.304.0 in 2004.
Equity
      Total shareholders’ equity increased by Rp.2,948.4 billion, or 17.0%, from Rp.17,312.9 billion in 2003 to Rp.20,261.3 billion in 2004. The increase in total shareholders’ equity was primarily due to the increase in retained earnings from net income for the year 2004 of Rp.6,129.2 billion, partially offset by TELKOM’s cash dividends declared of Rp.3,187.0 billion (comprising cash dividends for 2003 of Rp.3,043.6 billion approved at the 2004 AGMS and interim cash dividends declared in December 2004 of Rp.143.4 billion).
Retained Earnings.
      Appropriated and unappropriated retained earnings increased by Rp.2,942.2 billion, or 16.5%, from Rp.17,878.0 billion in 2003 to Rp.20,820.2 billion in 2004.

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Year ended December 31, 2003 compared to year ended December 31, 2002
Operating Revenues.

      Total operating revenues grew by Rp.6,313.2 billion, or 30.3%, from Rp.20,802.8 billion in 2002 to Rp.27,116.0 billion (US$3,212.7 million) in 2003. Operating revenues increased for fixed line,lines, cellular, interconnection, data and Internet and network.

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      The decline in KSO revenue was primarily due to the elimination of MTR and DTR revenue recognized by TELKOM for KSO III Unit as a result of TELKOM’s acquisition and subsequent consolidation of AriaWest in July 2003.

Fixed LineLines Telephone Revenues.

      Fixed linelines revenues grew by Rp.1,632.8 billion, or an increase of 22.5%, from Rp.7,264.1 billion in 2002 to Rp.8,896.9 billion (US$1,054.1 million) in 2003. Local and domestic long distancelong-distance revenue for 2003 increased by Rp.1,113.9 billion, or an increase of 20.4%, from Rp.5,447.9 billion in 2002 to Rp.6,561.8 billion (US$777.5 million) in 2003. Monthly subscription charges increased by Rp.474.0 billion, or an increase of 32.1%, from Rp.1,474.8 billion in 2002 to Rp.1,948.8 billion (US$230.9 million) in 2003. Installation charges increased by Rp.92.9 billion, or an increase of 71.3%, from Rp.130.2 billion in 2002 to Rp.223.1 billion (US$26.4 million) in 2003.

      The increases were primarily attributable to:

 • increases of 18.0% and 13.0% in usage for DLD and local call services, respectively, which generate revenue based on number of pulses.
 
 • 9.4% growth in the number of fixed lines in service in the non-KSO and KSO regions, including kiosk phones, from 7,750,035 lines as of December 31, 2002 to 8,479,115 lines as of December 31, 2003, particularly 23.1% growth in the number of fixed lines in service in the non-KSO regions, which led to a 71.3% increase in installation fees, to Rp.223.1 billion.
 
 • the consolidation of KSO III Unit revenues, as a result of TELKOM’s acquisition of AriaWest on July 31, 2003, which contributed Rp.482.3 billion (US$47.3 million) to the increase in operating revenues.

      Revenues from phone cards for 2003 increased by Rp.5.1 billion to Rp.34.4 billion, (US$4.1 million), an increase of 17.4% compared to 2002, due to increased usage.

      Revenue from others decreased by Rp.53.1 billion to Rp.128.8 billion, (US$15.3 million), a decline of 29.2% compared to 2002, primarily due to a decline in revenues from coin-operated public telephones.

Cellular Telephone Revenues.

      Cellular telephone revenues grew by Rp.2,232.0 billion, or an increase of 35.8%, from Rp.6,226.8 billion in 2002 to Rp.8,458.8 billion (US$1,002.2 million) in 2003. Air time charges for 2003 increased by Rp.2,224.3 billion to Rp.7,677.9 billion, (US$909.7 million), an increase of 40.8% compared to 2002. Monthly subscription charges decreased by Rp.12.8 billion to Rp.580.6Rp.580.5 billion, (US$68.8 million), a decline of 2.2%. Connection fee charges increased by Rp.21.8 billion to Rp.194.1 billion, (US$23.0 million), an increase of 12.6%.

      The increase was primarily attributable to 60% growth in Telkomsel’s total cellular subscribers, from 6,010,772 subscribers as of December 31, 2002 to 9,588,807 subscribers as of December 31, 2003. This increase was caused by a 38.7% growth in net-additional subscribers from 2,578,740 subscribers as of December 31, 2002 to 3,578,035 subscribers as of December 31, 2003. Postpaid subscribers grew by 9.1% to 1,007,034 subscribers and prepaid subscribers grew by 68.7% to 8,581,773 subscribers, in each case as of December 31, 2003.

      As a result of the higher rate of growth in the number of prepaid subscribers, the proportion of prepaid subscribers to total subscribers increased from 84.6% as of December 31, 2002 to 89.5% as of December 31, 2003. As a result of the change in the subscriber mix, with the increased number of prepaid subscribers as a percentage of total subscribers, and despite an increase in postpaid monthly

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ARPU, blended monthly ARPU decreased from approximately Rp.145,000 in 2002 to approximately Rp.123,000 (US$14.6) in 2003. Increased SMS traffic also contributed to the decline in ARPU.

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Interconnection Revenues.

      Net interconnection revenues grew by Rp.1,330.8 billion, or an increase of 47.0%, from Rp.2,831.3 billion in 2002 to Rp.4,162.1 billion (US$493.1 million) in 2003. Net interconnection revenues comprises net interconnection revenues from TELKOM’s fixed line network (after eliminating net interconnection revenues for interconnections with Telkomsel’s mobile cellular network) and net interconnection revenues from Telkomsel’s mobile cellular network (after eliminating net interconnection expense from interconnections with TELKOM’s fixed line network).

      Net interconnection revenues from TELKOM’s fixed line network increased by Rp.1,328.7 billion to Rp.4,069.1 billion (US$482.1 million) in 2003, an increase of 48.5% compared to 2002. This increase primarily resulted from an increase in cellular phone traffic. Net interconnection revenue from Telkomsel’s mobile cellular network increased slightly by Rp.2.4 billion to Rp.93.0 billion (US$11.0 million) in 2003, an increase of 2.7%.

      Interconnection revenues involving international direct dialing IDD calls decreased by 46.6%52.7%, from Rp.344.5Rp.389.3 billion in 2002 to Rp.184.1 billion (US$21.8 million) in 2003, primarily due to a decrease in incoming IDD traffic. IDD traffic has decreased significantly primarily due to competition from VoIP providers.

KSO Revenues.

      KSO revenues declined by Rp.641.8 billion, or 30.2%, from Rp.2,128.1 billion in 2002 to Rp.1,486.3 billion (US$176.1 million) in 2003. MTR decreased by Rp.419.8 billion, or 31.8%, from Rp.1,319.7 billion in 2002 to Rp.899.9 billion (US$106.6 million) in 2003. DTR decreased by Rp.218.0 billion, or 27.2%, from Rp.801.0 billion in 2002 to Rp.583.0 billion (US$69.1 million) in 2003. Amortization of unearned initial payments decreased by Rp.4.0 billion to Rp.3.4 billion (US$0.4 million) in 2003, a decrease of 53.7%.

      The decrease in KSO revenues was attributable to the acquisition of AriaWest (KSO Unit III) in 2003 and primarily reflected a portion of KSO revenues from AriaWest that were consolidated to TELKOM under fixed line revenues rather than under KSO revenues.

      Fixed lines in service in the KSO regions decreased 28.5%, from 2,039,608 lines as of December 31, 2002 to 1,449,066 lines as of December 31, 2003 due to the exclusion of AriaWest following its acquisition by TELKOM.

Data and Internet Revenues.

      Data and Internet revenues grew by Rp.1,557.0 billion, or 100.3%, from Rp.1,551.6 billion in 2002 to Rp.3,108.6 billion (US$368.3 million) in 2003, mainly attributed to the significant growth in SMS traffic from Telkomsel subscribers, increased usage of TELKOMNet Instant and the increased usage of TELKOM’s VoIP service. SMS revenues for 2003 increased by Rp.1,207.9 billion to Rp.2,205.1 billion, (US$261.3 million), an increase of 121.1%. Multimedia revenues for 2003 increased by Rp.156.9 billion to Rp.494.7 billion, (US$58.6 million), an increase of 46.5% compared to 2002. VoIP revenues for 2003 increased by Rp.176.1 billion to Rp.328.3 billion, (US$38.9 million), an increase of 115.7% compared to 2002. ISDN revenues for 2003 increased by Rp.16.1 billion to Rp.80.5 billion, (US$9.5 million), an increase of 25.0% compared to 2002.

Network Revenues.

      Network revenues increased by Rp.201.8 billion, or 63.8%, from Rp.316.1 billion in 2002 to Rp.517.9 billion (US$61.4 million) in 2003. Satellite transponder revenues for 2003 increased by Rp.80.7 billion to Rp.270.9 billion, (US$32.1 million), an increase of 42.4% compared to 2002, primarily due to an increase in the number of transponder leases. Leased linelines revenues for 2003 increased by Rp.121.1 billion to Rp.247.0 billion, (US$29.3 million), an increase of 96.2% compared to 2002, as a result

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of an increase in the number of customers who took advantage of the absence of any increase in TELKOM’s leased line tariffs.

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Revenues under Revenue SharingRevenue-Sharing Arrangements (“PBHs”).

      Revenues under Revenue SharingRevenue-Sharing Arrangements decreased by Rp.5.3 billion, or 2.0%, from Rp.263.8 billion in 2002 to Rp.258.5 billion (US$30.6 million) in 2003, mainly due to the termination of certain revenue sharingrevenue-sharing arrangements. Net share for revenue earned under revenue sharingrevenue-sharing arrangements for 2003 decreased by Rp.11.4 billion to Rp.200.1 billion (US$23.7 million).billion. Amortization of unearned income under revenue sharingrevenue-sharing arrangements for 2003 increased by Rp.6.1 billion to Rp.58.4 billion, (US$6.9 million), an increase of 11.7% compared to 2002.

Other Telecommunications-relatedTelecommunications Services Revenues.

      Other telecommunications-related servicetelecommunications services revenues increased by Rp.5.9 billion, or 2.7%, from Rp.221.0 billion in 2002 to Rp.226.9 billion (US$26.9 million) in 2003 mainly due to the consolidation of Metra in 2003 and an increase in revenue from cable television services, as well as an increase in revenue from telephone directory services, offset in part by the continued decline in telex and telegram usage.

Operating Expenses.

      Total operating expenses grew by Rp.3,467.4 billion, or 29.7%, from Rp.11,672.6 billion in 2002 to Rp.15,140.0 billion (US$1,793.9 million) in 2003. The increase was mainly attributable to substantial increases in depreciation and operation, maintenance and telecommunications services expense, as well in general and administrative expense.

Personnel Expenses.

      Personnel expenses grew by Rp.52.5 billion, or 1.2%, from Rp.4,387.6 billion in 2002 to Rp.4,440.1 billion (US$526.1 million) in 2003. The main contributor to the increase was the acquisition of AriaWest, as well as the consolidation of subsidiaries, such as Metra, Napsindo and PII. This led to an increase in recurring employee expenses, as follows:

 • salaries and related benefits increased by Rp.163.5 billion to Rp.1,574.2 billion, (US$186.5 million), an increase of 11.6%;
 
 • vacation pay, incentives and other allowancesbenefits increased by Rp.160.6 billion to Rp.816.1 billion, (US$96.7 million), an increase of 24.5%; and
 
 • employee income tax increased by Rp.267.3 billion to Rp.468.8 billion, (US$55.5 million), an increase of 132.7%, primarily due to the payment of significant withholding tax on payments under TELKOM’s early retirement program.

      These increases offset significant declines in early retirementretirements costs, net periodic pension costscost and medical expenses. Early retirementretirements costs decreased by Rp.361.6 billion to Rp.355.7 billion, (US$42.1 million), a decline of 50.4% compared to 2002, due to a decline in the number of employees retiring under TELKOM’s early retirement program. Net periodic pension costscost declined by Rp.171.4Rp.171.3 billion to Rp.190.9Rp.191.0 billion, (US$22.6 million), a decline of 47.3%, reflecting a decline in the number of employees eligible for TELKOM’s pension plan.

      Other components of personnel expenses did not contribute significantly to operating expenses in 2003.

Depreciation Expense.

      Depreciation expense grew by Rp.1,306.1 billion, or 37.6%, from Rp.3,473.4 billion in 2002 to Rp.4,779.5 billion (US$566.3 million) in 2003, primarily as a result of TELKOM’s and Telkomsel’s

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depreciation expense increasing significantly, reflecting continued capital expenditures in TELKOM’s transmission network and backbone, as well as its access network, and Telkomsel’s BTSs and transmitting and receiving exchanges.

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Operations, Maintenance and Telecommunications Services Expense.

Expenses.

      Operations, maintenance and telecommunications services expenses grew by Rp.1,048.5 billion, or 45.8%, from Rp.2,290.2 billion in 2002 to Rp.3,338.7 billion (US$395.6 million) in 2003. The increase was mainly attributable to:

 • an increase in operations and maintenance expenses by Rp.702.2 billion to Rp.1,744.8, (US$206.7 million), an increase of 67.4%, due to an increase in Telkomsel’s operations and maintenance expenses arising from the growth in the number of Telkomsel’s BTSs, which grew by 38.4% to 4,820 in 2003, and the increase in the number of Telkomsel’s transmitting and receiving exchanges;
 
 • total radio frequency usage charges increased by Rp.79.0 billion to Rp.371.7 billion (US$44.0 million) in 2003, an increase of 27.0%, primarily due to a 26.1% increase in usage charges by Telkomsel of Rp.73.2 billion from Rp.280.4 billion in 2002 to Rp.353.6 billion (US$41.9 million) in 2003, in line with the 38.4% increase in the number of BTSs from 3,483 in 2002 to 4,820 in 2003;
 
 • total concession fees increased by Rp.75.1 billion to Rp.239.0 billion (US$28.4 million) in 2003, an increase of 45.8% due to an increase in the revenues of TELKOM and Telkomsel; and
 
 • electricity, gas electricity and water charges increased by 36.6%, from Rp.219.9 billion in 2002 to Rp.300.4 billion (US$35.6 million) in 2003, reflecting primarily the consolidation of the gas electricity and water charges of AriaWest and other subsidiaries, as well as an increase in electricity and gas rates in 2003 compared to 2002.

      Other components of operations, maintenance and telecommunications service expense did not contribute significantly to operating expenses in 2003.

General and Administrative Expense.

Expenses.

      General and administrative expenseexpenses increased by Rp.932.5 billion, or 81.3%, from Rp.1,146.3 billion in 2002 to Rp.2,078.8 billion (US$246.3 million) in 2003. In particular, in 2003:

 • amortization of goodwill and other intangible assets increased by Rp.542.7 billion to Rp.730.7 billion, (US$86.6 million), or 288.7%, mainly due to additional amortization of additional intangible assets arising from the acquisitionsacquisition of AriaWest;AriaWest in July 2003 and Pramindo in August 2002;
 
 • provision for doubtful accounts and inventory obsolescence increased by Rp.295.3 billion to Rp.326.4 billion (US$38.7 million) in 2003, primarily due to an increase in TELKOM and Telkomsel customer defaults and, in addition, the amount for 2003 represented TELKOM’s provisions for doubtful accounts following the reversal in 2002 of certain provisions for doubtful accounts as a result of the settlement of TELKOM’s dispute with AriaWest.
 
 • collection costsexpenses increased by Rp.49.0 billion to Rp.273.8 billion, (US$32.4 million), an increase of 21.8%, generally in line with the growth in TELKOM’s fixed line subscriber base and Telkomsel’s mobile cellular subscriber base, but also reflecting higher fees charged by third party collection agents used in some regional divisions;
 
 • general and social contribution increased by Rp.44.4 billion to Rp.113.8 billion, (US$13.5 million), an increase of 63.9%, reflecting TELKOM’s various charitable donations and community services;
 
 • security and screening increased by Rp.33.2 billion to Rp.110.3 billion, (US$13.1 million), an increase of 43.1%, primarily due to the consolidation of the KSO III Unit; and

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 • professional fees decreased by Rp.103.4 billion, or 47.2%, to Rp.115.6 billion (US$13.7 million) in 2003, principally due to a decline in financial advisory and legal fees in 2003.

      Other components of general and administrative expenses did not contribute significantly to operating expenses in 2003.

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Marketing Expense.

Expenses.

Marketing expenseexpenses grew by Rp.127.8 billion, or 34.1%, from Rp.375.1 billion in 2002 to Rp.502.9 billion (US$59.6 million) in 2003. The increase was primarily due to TELKOM’s marketing campaign for its new services, primarily for TELKOMFLexi, as well as an increase in Telkomsel’s marketing expense, primarily for sales support and customer loyalty programs.
Operating Income and Operating Margin

As a result of the foregoing, operating income grew by Rp.2,845.7 billion, or 31.2%, from Rp.9,130.2 billion in 2002 to Rp.11,975.9 billion (US$1,419.0 million) in 2003. TELKOM’s operating margin increased from 43.9% in 2002 to 44.2% in 2003 due to the higher growth of operating revenues (30.4%) compared to the growth of operating expense (29.7%).
Other Income (Expense)(Charges)

      Other income (net) declined by Rp.3,142.8 billion from a net income of Rp.2,618.7 billion in 2002 to a net expensecharge of Rp.524.1 billion (US$62.1 million) in 2003, primarily due to absence of the one-time gain of Rp.3,196.4 billion on sale of 12.72% of Telkomsel to SingTel. TELKOM’s interest income decreased by 23.7% to Rp.366.0 billion (US$43.4 million).billion. Gain on foreign exchange-net also declined from Rp.556.6 billion in 2002 to Rp.126.1 billion (US$14.9 million) in 2003.

      These decreases offset a 12.6% decline in TELKOM’s interest expense from Rp.1,582.7 billion in 2002 to Rp.1,383.4 billion (US$163.9 million) in 2003, as well as an increase in Others-net to Rp.364.3 billion (US$43.2 million).

billion.

Interest Income.

      Interest income declined by Rp.113.8 billion, or 23.7%, from Rp.479.8 billion in 2002 to Rp.366.0 billion (US$43.4 million) in 2003, primarily due to the decline in floating interest rates for both Rupiah- and U.S. Dollar-denominated deposits in 2003, as well as a 64.2% decline in TELKOM’s short-term investments in 2003.

Interest Expense.

      Interest expenses declined by Rp.199.3 billion, or 12.6%, from Rp.1,582.7 billion in 2002 to Rp.1,383.4 billion (US$163.9 million) in 2003, reflecting primarily the decline in floating interest rates for TELKOM’s Rupiah-and U.S. Dollar-denominated debt in 2003.

Gain (Loss) on Foreign Exchange-net.

      Gain (loss) on foreign exchange-net decreased by Rp.430.5 billion from a net gain of Rp.556.6 billion in 2002 to a net gain of Rp.126.1 billion (US$14.9 million) in 2003, primarily due to the decline in the aggregate amount of TELKOM’s assets that were denominated in foreign currencies, as well as to the greater stability of the Rupiah against such foreign currencies in 2003.

Equity in Net Income (Loss) of Associated Companies.

      TELKOM’s equity in net income (loss) of associated companies decreased by Rp.1.8 billion from a net gainincome of Rp.4.6 billion in 2002 to a net gainincome of Rp.2.8 billion (US$0.3 million) in 2003, primarily due

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to the decrease in equity in the net income of CSM and the decline in TELKOM’s ownership interest in Telesera and Metrosel.

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Others (Net).

      Others (net) increased by Rp.400.3 billion, from other expense (net) of Rp.36.0 billion in 2002 to other income (net) of Rp.364.3 billion (US$43.2 million) in 2003. In 2003, Others (net) included the following significant income and expense items:

 • Rp.248.6 billion (US$29.5 million) in income from fines from late-paying subscribers;
 
 • gain on sale of fixed assets (net), primarily property, plant and equipment, amounting to Rp.182.9 billion (US$21.7 million).billion.

Other components of Others (Net) did not contribute significantly to Other Income (Charges) in 2003.
Income Before Tax and Pre-Tax Margin

As a result of the foregoing, income before tax declined by Rp.297.1 billion, or 2.5%, from Rp.11,748.9 billion in 2002 to Rp.11,451.8 billion (US$1,356.9 million) in 2003. Pre-tax margin decreased from 56.5% in 2002 to 42.2% in 2003.
Income Tax Expense

Income tax expense grew by Rp.962.1 billion, or 33.2%, from Rp.2,899.0 billion in 2002 to Rp.3,861.1 billion (US$457.5 million) in 2003. The effective tax rate increased from 24.7% of income before tax in 2002 to 33.7% of income before tax in 2003. The increase in the effective tax rate was mainly attributable to the absence in 2003 of the one-time adjustment to TELKOM’s taxable income arising from the sale by TELKOM to SingTel in 2002 of a 12.72% interest in Telkomsel. Without the adjustment, TELKOM’s effective tax rate for 2002 would have been 32.9%.
Minority Interest in Net Income of Subsidiaries

Minority interest in the net income of subsidiaries increased by Rp.693.3 billion, or 85.6%, from Rp.810.2 billion in 2002 to Rp.1,503.5 billion (US$178.1 million) in 2003. The increase was primarily due to the significant increase in the net income of Telkomsel for 2003.
     Net Income
     
Net Income

As a result of the foregoing, net income declined by Rp.1,952.5 billion, or 24.3%, from Rp.8,039.7 billion in 2002 to Rp.6,087.2 billion (US$721.2 million) in 2003. TELKOM’s margin decreased from 38.7% in 2002 to 22.5% in 2003. The lower net income resulted in a decrease in basic earnings per share from Rp.797.6Rp.398.8 in 2002 to Rp.603.9Rp.302.0 in 2003. The basic earnings per share for 2003 and the previous years have been restated to reflect a two-for-one stock split as resolved in the AGMS on July 30, 2004.

     Equity
Equity

      Total shareholders’ equity increased by Rp.2,699.3 billion, or 18.5%, from Rp.14,613.6 billion in 2002 to Rp.17,312.9 billion (US$2,051.3 million) in 2003. The increase in total shareholders’ equity was attributable primarily to the increase in retained earnings due to net income for the year 2003 of Rp.6,087.2 billion (US$721.2 million).billion. In May 2003, TELKOM declared a cash dividenddividends of Rp.3,338.1 billion (US$395.5 million).

billion.

Retained Earnings.

      Appropriated and unappropriated retained earnings grew by Rp. 2,749.1 billion, or 18.2%, from Rp.15,128.9 billion in 2002 to Rp.17,878.0 billion (US$2,118.2 million) in 2003.

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Year ended December 31, 2002 compared to year ended December 31, 2001
Operating Revenues.

     Total operating revenues grew by Rp.4,519.0 billion, or 27.8%, from Rp.16,283.8 billion in 2001 to Rp.20,802.8 billion in 2002. Operating revenues increased for fixed line, cellular, interconnection and data and Internet. The decline in KSO revenue was primarily due to the elimination of MTR and DTR revenue recognized by TELKOM for the KSO I Unit as a result of TELKOM’s acquisition and consequent consolidation of Pramindo in 2002.

Fixed Line Telephone Revenues.

     Fixed line revenues grew by Rp.848.9 billion, or an increase of 13.2%, from Rp.6,415.1 billion in 2001 to Rp.7,264.1 billion in 2002. Local and domestic long distance revenue for 2002 increased by Rp.222.2 billion, or an increase of 4.3%, from Rp.5,225.7 billion in 2001 to Rp.5,447.9 billion in 2002. Monthly subscription charges increased by Rp.477.2 billion, or an increase of 47.8%, from Rp.997.7 billion in 2001 to Rp.1,474.8 billion in 2002. Installation charges increased by Rp.32.2 billion, or an increase of 32.9%, from Rp.98.0 billion in 2001 to Rp.130.2 billion in 2002.

     The increases were primarily attributable to:

• 7.4% growth in the number of fixed lines in service in the non-KSO and KSO regions, including kiosk phones, from 7,218,938 lines at December 31, 2001 to 7,750,035 lines at December 31, 2002, particularly 33.7% growth in the non-KSO regions; and
• the consolidation of KSO I Unit revenues, as a result of TELKOM’s acquisition of Pramindo on August 15, 2002, which contributed Rp.364.4 billion to the increase in operating revenues.

     Revenues from phone cards for 2002 increased by Rp.3.8 billion to Rp.29.3 billion, an increase of 15.0% compared to 2001. The increase in phone card revenues was primarily due to a one-time expense incurred by TELKOM in 2001 for the termination of a revenue sharing arrangement with a vendor that previously issued phone cards on behalf of TELKOM, as well as the consolidation of the revenues of Regional Division I in 2002. Revenue from others increased by Rp.113.5 billion to Rp.181.9 billion, an increase of 166.1% compared to 2001. Revenue from others increased significantly due to an increase in revenue from premium-paid calls.

Cellular Telephone Revenues.

     Cellular telephone revenues grew by Rp.1,518.8 billion, or an increase of 32.3%, from Rp.4,708.0 billion in 2001 to Rp.6,226.8 billion in 2002. Air time charges for 2002 increased by Rp.1,465.8 billion to Rp.5,453.6 billion, an increase of 36.8% compared to 2001. Monthly subscription charges increased by Rp.11.8 billion to Rp.593.3 billion, an increase of 2.0%. Connection fee charges increased by Rp.43.8 billion to Rp.172.3 billion, an increase of 34.0%.

     The increases were primarily attributable to:

• 84.8% growth in Telkomsel’s total cellular subscribers, from 3,252,032 subscribers in 2001 to 6,010,772 subscribers in 2002, which was caused by 76.3% growth in net-additional subscribers from 1,564,693 subscribers in 2001 to 2,758,740 subscribers in 2002. In addition, 6.7% growth in postpaid subscribers to 923,005 subscribers and 113.2% growth in prepaid subscribers to 5,087,767 at December 31, 2002; and
• 3.8% growth in postpaid monthly ARPU to Rp.298,000, offset by a 7.2% decline in prepaid monthly ARPU to Rp.103,000 in 2002 due in part to Telkomsel’s attraction of additional low-usage customers and the upgrading of the high-usage prepaid customers to postpaid.

     As a result of the higher rate of growth in the number of prepaid subscribers, the proportion of prepaid subscribers increased from 73.4% in 2001 to 84.6% in 2002. As a result of the change in the

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subscriber mix and despite an increase in postpaid monthly ARPU, blended monthly ARPU decreased from approximately Rp.171,000 in 2001 to approximately Rp.145,000 in 2002.

Interconnection Revenues.

     Net interconnection revenues grew by Rp.1,407.6 billion, or an increase of 98.9%, from Rp.1,423.7 billion in 2001 to Rp.2,831.3 billion in 2002. Net interconnection revenues comprises net interconnection revenues from TELKOM’s fixed line network (after eliminating net interconnection revenues for interconnections with Telkomsel’s mobile cellular network) and net interconnection revenues from Telkomsel’s mobile cellular network (after eliminating net interconnection expense from interconnections with TELKOM’s fixed line network).

     Net interconnection revenues from TELKOM’s fixed line network increased by Rp.1,528.4 billion to Rp.2,740.7 billion, an increase of 126.1% compared to 2001. This increase primarily resulted from an increase in cellular phone traffic and the consolidation of Pramindo. Net interconnection revenue from Telkomsel’s mobile cellular network decreased by Rp.120.8 billion to Rp.90.6 billion, a decrease of 57.1%, due to the additional elimination of revenues related to consolidation of KSO I.

     In 2002 as compared to 2001, interconnection revenues involving international direct dialing IDD calls increased by 195.0%, from Rp.116.8 billion to Rp.344.5 billion primarily due to an increase in incoming IDD traffic.

KSO Revenues.

     KSO revenues declined by Rp.91.5 billion, or 4.1%, from Rp.2,219.5 billion in 2001 to Rp.2,128.1 billion in 2002. MTR decreased by Rp.154.5 billion, or 10.5%, from Rp.1,474.2 billion in 2001 to Rp.1,319.7 billion in 2002. DTR increased by Rp.68.0 billion, or 9.3%, from Rp.732.9 billion in 2001 to Rp.801.0 billion in 2002. Amortization of unearned initial payments decreased by Rp.5.0 billion to Rp.7.4 billion, a decrease of 40.3%.

     The decrease in KSO revenues was attributable to the acquisition of Pramindo (KSO Unit I) in 2002 as well as the acquisition of Dayamitra (KSO Unit VI) in May 2001 and primarily reflected consolidated KSO revenues from these KSO units that were consolidated to TELKOM under fixed line revenues rather than under KSO revenues.

     Fixed lines in service in the KSO regions increased 7.0%, from 3,269,033 lines at December 31, 2001 to 3,497,819 lines at December 31, 2002, if KSO I Unit and KSO VI Unit are included, or 5.1%, from 1,941,227 lines to 2,039,608 lines, if KSO I Unit and KSO VI are excluded.

Data and Internet Revenues.

     Data and Internet revenues grew by Rp.878.4 billion, or 130.5%, from Rp.673.2 billion in 2001 to Rp.1,551.6 billion in 2002, mainly attributed from the significant growth in SMS and VoIP services. SMS revenues for 2002 increased by Rp.652.6 billion to Rp.997.2 billion, an increase of 189.4%. Multimedia revenues for 2002 increased by Rp.119.5 billion to Rp.337.8 billion, an increase of 54.7% compared to 2001 that was driven by additional subscribers. VoIP revenues for 2002 increased by Rp.126.6 billion to Rp.152.2 billion, an increase of 494.8% compared to 2001 as TELKOM only introduced its VoIP services at the end of 2001.

Network Revenues.

     Network revenues declined by Rp.98.8 billion, or 23.8%, from Rp.415.0 billion in 2001 to Rp.316.1 billion in 2002. Satellite transponder revenues for 2002 declined by Rp.13.3 billion to Rp.190.2 billion, a decline of 6.6% compared to 2001, primarily due to a reduction in the number of subscribers resulting from an over-supply of satellite transponders, as well as the impact of Rupiah appreciation against the U.S. Dollar in the U.S. Dollar-denominated tariff. Leased line revenues for 2002 declined by Rp.85.5 billion to Rp.125.9 billion, a decline of 40.5% compared to 2001, as a result of further

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elimination due to the consolidation of Pramindo and, to a lesser degree, from a decrease in demand from some major customers who chose to develop their own network in certain high traffic areas.

Revenues under Revenue Sharing Arrangements (“PBH”).

     Revenues under Revenue Sharing Arrangements decreased by Rp.0.5 billion, or 0.2%, from Rp.264.3 billion in 2001 to Rp.263.8 billion in 2002, mainly due to the termination of certain revenue sharing arrangements. Net share for revenue earned under revenue sharing arrangement for 2002 increased by Rp.20.0 billion to Rp.211.5 billion, an increase of 10.5% compared to 2001 due to an increase in the number of lines in service and the applicable tariffs during 2002. Amortization of unearned income under revenue sharing arrangements for 2002 decreased by Rp.20.5 billion to Rp.52.3 billion, a decline of 28.2% compared to 2001, due to the termination of certain revenue sharing arrangements.

Other Telecommunications-related Services Revenues.

     Other telecommunications-related service revenues increased by Rp.56.0 billion, or 33.9%, from Rp.165.0 billion in 2001 to Rp.221.0 billion in 2002 mainly due to an increase in revenue from call centers, as well as an increase in revenue from telephone directory services. In addition, there was also a decrease in telex and telegram usage due to the increase usage of facsimile.

Operating Expenses.

     Total operating expenses grew by Rp.2,808.2 billion, or 31.7%, from Rp.8,864.4 billion in 2001 to Rp.11,672.6 billion in 2002. The increase was mainly attributable to a substantial increase in personnel expense, as well as increases in marketing, depreciation and operation, maintenance and telecommunications services expense, slightly offset by a decline in general and administrative expense.

Personnel Expenses.

     Personnel expenses grew by Rp.2,106.3 billion, or 92.3%, from Rp.2,281.2 billion in 2001 to Rp.4,387.6 billion in 2002. The main contributor to the increase are:

     (i) The increase of non-recurring employee expenses:

• severance for early retirement plan increased by Rp.577.3 billion to Rp.717.3 billion, an increase of 412.4% compared to 2001, primarily reflecting early retirement that was accrued in 2002; and
• net periodic pension cost increased by Rp.276.1 billion to Rp.362.3 billion, an increase of 320.1%, reflecting the increase of pension benefit.

     (ii) The increase of recurring employee expenses:

• vacation pay (mainly long-leave allowances), incentives and other allowances increased by Rp.290.8 billion to Rp.655.5 billion, an increase of 79.7%, reflecting primarily new bonus scheme introduced in 2002 which amounted to Rp.171.0 billion and the consolidation of KSO I Unit and Pramindo vacation pay, incentives and other allowances;
• long service awards increased by Rp.195.4 billion to Rp.289.9 billion, an increase of 206.7%, due to the introduction of long leave allowance payable by TELKOM to eligible employees; and
• net periodic post-retirement benefit cost increased by Rp.242.0 billion to Rp.616.5 billion, an increase of 64.6%, primarily due to an increased number of pensioners from the early-retirement program.

     Meanwhile, employee income tax increased by Rp.68.6 billion to Rp.201.5 billion, an increase of 51.7%, reflecting primarily increase in salary and the benefits paid under the early-retirement program.

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     Other components of personnel expenses did not contribute significantly to operating expenses in 2002.

Depreciation Expense.

     Depreciation expenses grew by Rp.603.6 billion, or 21.0%, from Rp.2,869.8 billion in 2001 to Rp.3,473.4 billion in 2002, primarily as a result of the consolidation of Pramindo’s depreciation expense amounting to Rp.93.2 billion, as well as the increase of Telkomsel’s depreciation expense amounting to Rp.467.9 billion reflecting continued capital expenditures.

Operations, Maintenance and Telecommunications Services Expense.

     Operation, maintenance and telecommunications services expenses grew by Rp.140.3 billion, or 6.5%, from Rp.2,149.9 billion in 2001 to Rp.2,290.2 billion in 2002. The increase was mainly attributable to:

• the consolidation of relevant Pramindo expenses in the various components of operation, maintenance and telecommunications services expenses in 2002, which amounted to Rp.57.4 billion;
• total radio frequency usage charges increased by Rp.191.4 billion, mainly contributed from the increase in usage charges from Telkomsel by Rp.191.8 billion from Rp.88.6 billion in 2001 to Rp.280.4 billion in 2002, or 216.5%, in line with the 74.6% increase in the number of BTS from 1,995 in 2001 to 3,483 in 2002;
• total concession fees increased by Rp.100.3 billion or 157.8% compared to 2001 due to an increase in the applicable tariff payable by Telkomsel to the Government and an increase in the number of Telkomsel’s BTSs;
• gas, electricity and water charges increased by 40.0% reflecting primarily higher electricity and gas charges as a result of higher rates charged by the Government for these services in 2002;
• total insurance expense increased by Rp.75.1 billion, or 110.9% reflecting higher insurance coverage due to the consolidation of Pramindo and an increase in the number of insurable fixed assets; and
• cost of phone cards increased by Rp.24.3 billion to Rp.197.7 billion, an increase of 14.0%, reflecting higher procurement of phone cards to supply increased sales of SIM cards and refill vouchers for Telkomsel’s prepaid mobile cellular services.

     Distributors and telephone kiosk’ commissions decreased by Rp.520.9 billion due to the change in the Company’s policy for sales through distributors and telephone kiosks. Previously, the Company compensated through the payment of commissions which were proportional to the revenues earned through the kiosk phones. In 2002, the Company changed its policy and implemented the MoC Decree No. KM 46/2002 that provides a maximum of 70% of the phone kiosk basic tariff for domestic calls and up to 92% for international calls.

     Other components of operation, maintenance and telecommunications service expense did not contribute significantly to operating expenses in 2002.

General and Administrative Expense.

     General and administrative expense declined by Rp.197.2 billion, or 14.7%, from Rp.1,343.5 billion in 2001 to Rp.1,146.3 billion in 2002. In particular, the following events took place in 2002:

• allowance for doubtful accounts and inventory obsolescence decreased by Rp.311.8 billion to Rp.31.1 billion, a decrease of 90.9%, as TELKOM reversed a provision applicable to doubtful accounts in the name of KSO III following the execution of a closing agreement with AriaWest on July 31, 2003;

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• amortization of intangible assets from investment in Pramindo, Dayamitra and GSD amounted to Rp.188.0 billion in 2002;
• professional fees declined by Rp.106.3 billion, or 32.7%, from Rp.325.3 billion in 2001 to Rp.219.0 billion in 2002, principally due to higher professional consultant fees in 2001 in relation to the cross-ownership transaction involving the sale of our interest in Satelindo and the acquisition of additional equity in Telkomsel;
• collection costs increased by Rp.42.9 billion to Rp.224.8 billion, an increase of 23.6%, generally in line with the growth in TELKOM’s fixed line subscriber base and Telkomsel’s mobile cellular subscriber base, but also reflecting higher fees charged by third party collection agents used in some regional divisions;
• general and social contribution increased by Rp.32.7 billion to Rp.69.4 billion, an increase of 88.8%, reflecting TELKOM’s implementation of the good corporate citizenship program in 2002; and
• security and screening increased by Rp.28.3 billion to Rp.77.1 billion, an increase of 58.0%, reflecting the consolidation of KSO I Unit in 2002.

     Other components of general and administrative expenses did not contribute significantly to operating expenses in 2002.

Marketing Expense.

Marketing expense grew by Rp.155.1 billion, or 70.5%, from Rp.220.0 billion in 2001 to Rp.375.1 billion in 2002. The main contributors to the increase were the TELKOM Group marketing campaign which also included Telkomsel and Infomedia, the consolidation of Pramindo marketing expense that amounted to Rp.6.1 billion and the increase of marketing expense in several subsidiaries such as Telkomsel, which increased by Rp.59.1 billion, or 70.0% and in Infomedia from zero in 2001 to Rp.87.4 billion in 2002.

Operating Income and Operating Margin

As a result of the foregoing, operating income grew by Rp.1,710.8 billion, or 23.1%, from Rp.7,419.4 billion in 2001 to Rp.9,130.2 billion in 2002. TELKOM’s operating margin decreased from 45.6% in 2001 to 43.9% in 2002 due to the higher growth of operating expense (31.7%) compared to the growth of operating revenue (27.8%).

Other Income (Expense)

     Other income (net) grew by Rp.3,488.2 billion from a net charge of Rp.869.5 billion in 2001 to a net income of Rp.2,618.7 billion in 2002. The main components of other income and charges are gain on sale of long-term investment in Telkomsel and interest expense. TELKOM’s interest expense increased in 2002 from Rp.1,329.6 billion to Rp.1,582.7 billion, an increase of Rp.253.1 billion, or 19.0%, but this increase was offset by a gain on sales of long-term investment in Telkomsel of Rp.3,196.4 billion in 2002 compared to nil in 2001 and a gain on foreign exchange-net of Rp.556.6 billion in 2002 compared to a loss on foreign exchange-net of Rp.378.7 billion in 2001 primarily due to the impact of Rupiah appreciation to TELKOM’s net liability position in foreign currency. There is no assurance that future interest expense will be similarly offset by these gains.

Gain on Sale of Long Term Investment in Telkomsel.

     Gain on sale of long term investment represents the gain by TELKOM on the sale of a 12.72% shareholding in Telkomsel, which amounted to Rp.3,196.4 billion, for which there was no comparable amount in 2001.

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Interest Income.

     Interest income declined by Rp.91.8 billion, or 16.1%, from Rp.571.6 billion in 2001 to Rp.479.8 billion in 2002, reflecting primarily lower average interest rates offered in 2002 compared to 2001.

Interest Expense.

     Interest expenses grew by Rp.253.1 billion, or 19.0%, from Rp.1,329.6 billion in 2001 to Rp.1,582.7 billion in 2002, reflecting primarily: (i) additional interest payable on promissory notes issued to the selling stockholders of Pramindo; (ii) additional interest expense from issuance of IDR bonds, guaranteed notes and other credit facilities obtained, in each case by TELKOM and Telkomsel in 2002; and (iii) interest expense related to the outstanding purchase price owed to Indosat in connection with the cross-ownership transaction.

Gain (Loss) on Foreign Exchange-net.

     Gain (loss) on foreign exchange-net increased by Rp.935.3 billion from a net loss of Rp.378.7 billion in 2001 to a net gain of Rp.556.6 billion in 2002, reflecting primarily Rupiah appreciation during 2002 compared to 2001.

Equity in Net Income (Loss) of Associated Companies.

     TELKOM’s equity in net income (loss) of associated companies increased by Rp.90.3 billion from a net loss of Rp.85.7 billion in 2001 to a net gain of Rp.4.6 billion in 2002. In 2001, TELKOM recognized a loss reflecting the reduction in the value of TELKOM’s investment in Komselindo.

     Other components of equity in net income (loss) of associated companies did not contribute significantly to Other Income and Charges in 2002.

Others (Net).

     Others (net) decreased by Rp.388.9 billion, or 110.2%, from other income (net) of Rp.352.9 billion in 2001 to other expense (net) of Rp.36.0 billion in 2002. In 2002, Others (net) included the following significant income and expense items:

• Rp.171.2 billion in income from fines from subscribers;
• gain on sale of fixed assets net amounting to Rp.130.4 billion;
• Rp.101.5 billion impairment loss from investment in Telesera; and
• Rp.179 billion provision for settlement of AriaWest.

Other components of Others (Net) did not contribute significantly to Other Income (Charges) in 2002.

Income Before Tax and Pre-Tax Margin

As a result of the foregoing, income before tax grew by Rp.5,199.0 billion, or 79.4%, from Rp.6,549.9 billion in 2001 to Rp.11,748.9 billion in 2002. Pre-tax margin increased from 40.2% in 2001 to 56.5% in 2002.

Income Tax Expense

     Income tax expense grew by Rp.892.1 billion, or 44.5%, from Rp.2,006.9 billion in 2001 to Rp.2,899.0 billion in 2002. The effective tax rate declined from 30.6% of income before tax in 2001 to 24.7% of income before tax in 2002. The decrease in effective tax rate was mainly attributable to a low

95

pre-tax gain on the sale of a 12.72% sharing in Telkomsel compared to a substantially higher accounting gain.
Minority Interest in Net Income of Subsidiaries

     Minority interest in the net income of subsidiaries increased by Rp.335.6 billion, or 70.7%, from Rp.474.6 billion in 2001 to Rp.810.2 billion in 2002. The increase was primarily due to the decrease in ownership of Telkomsel as a result of the sale by TELKOM of a 12.72% shareholding in Telkomsel, increasing the minority interest in Telkomsel.

Net Income.

     As a result of the foregoing, net income grew by Rp.3,971.3 billion, or 97.6%, from Rp.4,068.4 billion in 2001 to Rp.8,039.7 billion in 2002 principally due to the gain of Rp.3,196.4 billion through the sale of a 12.72% shareholding in Telkomsel. TELKOM’s margin increased from 25.0% in 2001 to 38.7% in 2002. The higher net income resulted in an increase in basic earnings per share from Rp.403.6 in 2001 to Rp.797.6 in 2002.

Equity.

     Total shareholders’ equity increased by Rp.5,532.6 billion, or 60.9%, from Rp.9,081.0 billion in 2001 to Rp.14,613.6 billion in 2002. The increase in total shareholders’ equity was attributable primarily to net income for the year 2002 of Rp.8,039.7 billion and a decrease in the difference in value of restructuring transactions between entities under common control of Rp.296.0 billion related to the agreement by TELKOM to acquire 100% of Pramindo. In June 2002, TELKOM declared a cash dividend of Rp.2,125.1 billion.

Retained Earnings.

     Appropriated and unappropriated retained earnings grew by Rp.5,944.6 billion, or 64.5%, from Rp.9,214.2 billion in 2001 to Rp.15,128.9 billion in 2002.

Reconciliation to U.S. GAAP

TELKOM prepares its consolidated financial statements in accordance with Indonesian GAAP and prepares a reconciliation of consolidated net income and equity in accordance with U.S. GAAP pursuant to the requirements of the U.S. Securities and Exchange Commission. The following table sets out consolidated net income for the years ended and consolidated stockholders’ equity as of December 31, 2001, 2002, 2003 and 20032004 in accordance with Indonesian GAAP and U.S. GAAP:
                
                
Year Ended December 31, Year Ended December 31,
  
2001200220032003 2002 2003 2004 2004
        
Rp. (billion)Rp. (billion)Rp. (billion)US$ (million) Rp. (billion) Rp. (billion) Rp. (billion) US$ (million)
Net income in accordance with
              
Indonesian GAAP 4,068.4 8,039.7 6,087.2 721.2   8,039.7  6,087.2  6,129.2  659.8 
U.S. GAAP 4,298.2 8,587.3 5,790.6 686.1   8,587.3  5,790.6  6,468.6  696.3 
                
                
Year Ended December 31, Year Ended December 31,
  
2001200220032003 2002 2003 2004 2004
        
Rp. (billion)Rp. (billion)Rp. (billion)US$ (million) Rp. (billion) Rp. (billion) Rp. (billion) US$ (million)
Equity in accordance with
              
Indonesian GAAP 9,081.0 14,613.6 17,312.9 2,051.3   14,613.6  17,312.9  20,261.3  2,181.0 
U.S. GAAP 7,765.5 13,910.9 16,284.7 1,929.5   13,910.9  16,284.7  19,570.9  2,106.7 

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Summary of Significant Differences Between Indonesian GAAP and U.S. GAAP

The Company’s consolidated financial statements have been prepared in accordance with Indonesian GAAP, which differs in certain significant respects from U.S. GAAP. The significant differences are summarized below and are described in Note 58(1)56(1) to the Company’s consolidated financial statements.
Termination Benefits

      Under Indonesian GAAP, termination benefits are recognized as liabilities when certain criteria are met (e.g. the enterprise is demonstratively committed to provide termination benefits as a result of an offer made in order to encourage early retirement).

      Under U.S. GAAP, termination benefits are recognized as liabilities when the employees accept the offer and the amount can be reasonably estimated.

As a result, on a U.S. GAAP basis, the Company’s consolidated income before tax would have been Rp.140.0 billion higher in 2001, Rp.531.0 billion higher in 2002, and Rp.671.0 billion lower in 2003.2003 and no change in 2004.
Foreign Exchange Differences Capitalized to Property under Construction

      Under Indonesian GAAP, the foreign exchange differences resulting from borrowings used to finance property under construction are capitalized. Capitalization of foreign exchange differences cease when the construction of the qualifying assets is substantially completed and the constructed property is ready for its intended use.

      Under U.S. GAAP, foreign exchange differences are charged to current operations.

Consequently, on a U.S. GAAP basis, the Company’s consolidated income before tax would have been Rp.75.0 billion higher in 2001, Rp.107.4 billion higher in 2002, and Rp.76.8 billion higher in 2003.2003 and Rp.1.6 billion higher in 2004.
Interest Capitalized on Property under Construction

Under Indonesian GAAP, qualifying assets, to which interest cost can be capitalized, for qualifying assets. Qualifying assets areshould be those that take a substantial period of time to constructget ready for theirits intended use or sale (i.e., minimum of 12 months).months. To the extent that funds are borrowed specifically for the purpose of obtaining a qualifying

103

asset, the amount of interest cost eligible for capitalization on that asset must be determined based on the actual interest cost incurred on that borrowing during the period of construction less any investment income on the temporary investment of those borrowings.

      Under U.S. GAAP, there is no minimum limit (i.e. 12-month requirement) on the length of the construction period in which the interest cost cancould be capitalized to an asset.capitalized. The interest income arising from any unused borrowings is recognized directly to current operations.

As a result, on a U.S. GAAP basis, the Company’s consolidated income before tax would have been Rp.19.7 billion higher in 2001, Rp.43.0 billion higher in 2002, and Rp.39.1 billion higher in 2003.2003 and Rp.26.8 billion higher in 2004.
Revenue-Sharing Arrangements

      Under Indonesian GAAP, property, plant and equipment built by an investor under revenue-sharing arrangements are recognized as property, plant and equipment under revenue-sharing arrangements in the books of the party to whom ownership in such properties will be transferred at the end of the revenue-sharing period, with a corresponding initial credit to unearned income. The property, plant and equipment are depreciated over their useful lives, while the unearned income is amortized over the revenue-sharing period. The Company records its share of the revenues earned net of amounts due to the investors.

      Under U.S. GAAP, the revenue-sharing arrangements are recorded in a manner similar to capital leases where the fixed assets and obligation under revenue-sharing arrangements are recorded and, correspondingly, an obligation underreflected on the balance sheet. All the revenues generated from the revenue-sharing arrangements is recorded. Aare recorded as a component of operating revenues, while a portion of the investor’sinvestors’ share

97

in of revenue from the revenue-sharing arrangements is recorded as interest expense based on the implicit rate of return and the balance is treated as a reduction of the obligation. Revenues are recorded on a gross basis.obligation under revenue-sharing arrangements.

In connection with the different treatment of revenue sharingrevenue-sharing arrangements under U.S. GAAP and Indonesian GAAP, the Company’s consolidated income before tax under U.S. GAAP would have been Rp.44.0 billion higher in 2001, Rp.68.0 billion higher in 2002, and Rp.23.2 billion higher in 2003 respectively.and Rp.155.4 billion higher in 2004.
Revaluation of Property, Plant and Equipment

      While Indonesian GAAP does not generally allow companies to recognize increases in the value of property, plant and equipment that occur subsequent to acquisition, an exception is provided for revaluations made in accordance with Government regulations. The Company revalued its property, plant and equipment that were used in operations as of January 1, 1979 and January 1, 1987.

      Under U.S. GAAP, asset revaluations are not permitted. The effects of the previous revaluations have been fully depreciated in 2002, such that there ishas been no difference in equity as ofsince December 31, 2002.

In connection with the different treatment of revaluation of property, plant and equipment under U.S. GAAP and Indonesian GAAP, the Company’s consolidated income before tax under U.S. GAAP would have been Rp.4.1 billion higher in 2001, Rp.3.9 billion higher in 2002, andwith no change in 2003.both 2003 and 2004.
Pension

      In 1994 and 1998, the Company provided increases in pension benefits for pensioners. Under Indonesian GAAP, the prior service costs attributable to the increases in pension benefits for pensioners were directly charged to expense in those years. Under U.S. GAAP, because the majority of plan participants are still active, such prior service costs are deferred and amortized systematically over the estimated remaining service period for active employees.

      Under Indonesian GAAP, the Company amortizes the cumulative unrecognized actuarial gain or loss over four years. Under U.S. GAAP, any cumulative unrecognized actuarial gain or loss exceeding

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10% of the greater of the projected benefit obligation or the fair value of plan assets is recognized in the income statement on a straight-line basis over the expected average remaining service period.

      Under U.S. GAAP, the Company would be required to recognize an additional minimum liability when the accumulated benefit obligation exceeds the fair value of the plan assets, and an equal amount would be recognized as an intangible asset, provided that the asset recognized does not exceed the amount of unrecognized prior service cost.

The Company’s consolidated income before tax under U.S. GAAP would have been Rp.19.6 billion lower in 2001, Rp.111.4 billion higher in 2002, and Rp.109.3 billion lower in 2003 under U.S. GAAP reporting.and Rp.313.9 billion higher in 2004.
Equity in Net Income (Loss)or Loss of Associated Companies

      The Company records its equity in net income or loss of associated companies based on the associates’ financial statements that have been prepared under Indonesian GAAP.

      For U.S. GAAP reporting purposes, the Company recognizedrecognizes the effect of the differences ofbetween U.S. GAAP and Indonesian GAAP at the investee level in the investment accounts and its share of the net income or loss of those associates.

As a result, on a U.S. GAAP basis, the Company’s consolidated income before tax would have been Rp.3.8 billion lower in 2001, Rp.0.2 billion lower in 2002, Rp.0.2 billion lower in 2003 and Rp.0.2 billion lower in 2003.2004.
Land rights

      In Indonesia, the title of land rests with the State under the Basic Agrarian Law No. 5 of 1960. Land use is accomplished through land rights whereby the holder of the right enjoys the full use of the land

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for a stated period of time, subject to extensions. The land rights generally are freely tradable and may be pledged as security under borrowing agreements. Under Indonesian GAAP, land ownership is not depreciated unless it can be foreseen that the possibility for the holder to obtain an extension or renewal of the rights is remote.

      Under U.S. GAAP, the cost of acquired land rights is amortized over the economic useful life which represents the contractual period the holder is expected to retainof the land rights.

The Company’s consolidated income before tax would have been Rp.6.4 billion lower in 2001, Rp.11.8 billion lower in 2002, and Rp.10.2 billion lower in 2003 and Rp.13.9 billion lower in 2004 under U.S. GAAP reporting.
Equipment to be Installed

      Under Indonesian GAAP, temporarily idle equipment or equipment that is awaiting installation is not depreciated.

      Under U.S. GAAP, temporarily idle equipment should continue to be depreciated. In 2002, prior year equipment to be installed was fully installed and their carrying values have been reclassified to property, plant and equipment.

Consequently the Company’s consolidated income before tax under U.S. GAAP would have been Rp.9.7 billion higher in 2002, with no change in both 20012003 and 2003.2004.
Revenue Recognition

      Under Indonesian GAAP, revenue from cellular and fixed wireless services connection fees are recognized as income when the connection takes place (for postpaid service) or at the time of delivery of starter packs to distributors, dealers or customers (for prepaid service). Installation fees for wire line services are recognized at the time of installation. The revenue from calling cards (“Kartu Telepon”) is also recognized when the Company sells the card.

105

      Under U.S. GAAP, revenue from front-end fees and incremental cost up to, but not exceeding such fees, are deferred and recognized over the expected term of the customer relationship. Direct incremental cost was not significant. Revenues from calling cards are recognized upon usage or expiration.

Consequently, the Company’s consolidated income before tax under U.S. GAAP would have been Rp.81.4 billion higher in 2001, Rp.89.3 billion lower in 2002, and Rp.53.2 billion lower in 2003.2003 and Rp.54.2 billion higher in 2004.
Goodwill

      Under Indonesian GAAP, goodwill is amortized over a period, not exceeding 20 years, that it is expected to benefit the Company.

      Under U.S. GAAP, effective January 1, 2002, goodwill is no longer amortized but rather subjected to a test for impairment.

Consequently, the Company’s consolidated income before tax under U.S. GAAP would have been Rp.21.3 billion higher in 2002, Rp.21.3 billion higher in 2003 and Rp.21.3 billion higher in 2003, with no change in 2001.2004.
Capital Leases

      Under Indonesian GAAP, a leased asset is capitalized only if all of the following criteria are met: (a) the lessee has an option to purchase the leased asset at the end of the lease period at a price agreed upon at the inception of the lease agreement, and (b) the sum of periodic lease payments, plus the residual value, will cover the acquisition price of the leased asset and related interest, and (c) there is a minimum lease period of 2 years.

      Under U.S. GAAP, a leased asset is capitalized if one of the following criteria is met: (a) there is an automatic transfer of ownership at the end of the lease term; or (b) the lease contains a bargain

99

purchase option; or (c) the lease term is for 75% or more of the economic life of the asset; or (d) the lease payments are at least 90% of the fair value of the asset. Certain leased assets that are accounted for as operating leases under Indonesian GAAP are accounted for as capital leases under U.S. GAAP.

Consequently the Company’s consolidated income before tax under U.S. GAAP would have been Rp.14.2 billion higher in 2002, and Rp.6.9 billion higher in 2003.2003 and Rp.3.4 billion lower in 2004.
Acquisition of Dayamitra

     The

      On May 17, 2001, the Company acquired a 90.32% interest in Dayamitra and contemporaneously acquired a call option to buy the other 9.68% at a fixed price at a stated future date, and provided to the minority interest holder a put option to sell the other 9.68% to the Company under those same terms; meaning that the fixed price of the call is equal to the fixed price of the put option.

      Under U.S. GAAP, the Company should account for the option contracts on a combined basis with the minority interest and account for it as a financing of the purchase of the remaining 9.68% minority interest. As such, under U.S. GAAP, the Company has consolidated 100% of Dayamitra and attributed the stated yield earned under the combined derivative and minority interest position to interest expense.

expense since May 17, 2001.

      On December 14, 2004, the Company exercised the option to acquire the 9.68% interest in Dayamitra.
      Under Indonesian GAAP, prior to December 14, 2004, the Company accountsaccounted for the remaining 9.68% of Dayamitra as a minority interest. In addition, the option price that has been paid by the Company iswas presented as “Advance payments for investments in shares of stock.” The Company started consolidating the remaining 9.68% of Dayamitra on December 14, 2004 following the exercise of the option.
      The difference in the timing of the 9.68% ownership interest recognition gives rise to differences in the timing and amounts of purchase consideration and liability recognized under Indonesian GAAP and U.S. GAAP.

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Consequently the Company’s consolidated income before tax under U.S. GAAP would have been Rp.4.2 billion lower in 2001, Rp.9.3 billion lower in 2002, and Rp.24.5 billion lower in 2003.2003 and Rp.72.4 billion lower in 2004.
Reversal of Difference Due to Change of Equity in Associated Companies

      Under Indonesian GAAP, differences previously charged directly to equity as a result of equity transactions in associated companies are released to the statement of income upon the sale of an interest in the associate in proportion with the percentage of the interest sold.

      Under U.S. GAAP, it is the Company’s policy to include differences resulting from equity transactions in associated companies in equity. Such amounts cannot be released to the statement of income and consequently remain in equity indefinitely.

Consequently, TELKOM’sthe Company’s consolidated income before tax under U.S. GAAP would have been Rp.65.2 billion lower in 2002, and Rp.38.4 billion lower in 2003.2003 and no change in 2004.
Asset Retirement Obligations

      Under Indonesian GAAP, legal obligations associated with the retirement of long-lived assets that result from the acquisition, construction, development and/or the normal operation of long-lived assets are charged to current operations as incurred.

      Under U.S. GAAP, the obligations are capitalized to the related long-lived assets and depreciated over the useful life of the assets.

The Company and its subsidiaries identified their Asset Retirement Obligations by reviewing contractual agreements to identify whether the Company and its subsidiaries are required to settle any obligations as a result of the prevailing laws, statute, ordinance, written or by legal construction of a contract under the doctrine of promissory estoppel.

Consequently, the Company’s consolidated income before tax under U.S. GAAP would have been the same in 2002, Rp.0.9 billion lower in 2003.2003 and Rp.0.9 billion lower in 2004.
Deferred Income Taxes

      Under Indonesian GAAP, the Company does not recognize deferred taxes on temporary differences between the financial statement carrying amounts and tax bases of equity method investments when it is not probable that these differences will be reversedreverse in the foreseeable future.

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      Under U.S. GAAP, deferred taxes are recognized in full on temporary differences between the financial statement carrying amounts and tax bases of equity method investments.

Consequently, the Company’s consolidated net income before tax would have been no change in 2002, Rp.119.5 billion higher in 2003.2003 and Rp.11.2 billion lower in 2004.
Impairment of Assets

      Under Indonesian GAAP, an impairment loss is recognized whenever the carrying amount of an asset or its cash-generating unit exceeds its recoverable amount. The recoverable amount of fixed assets is the greater of its net selling price or value in use. In assessing value in use, the estimated future cash flows are discounted to their present value using a pre-tax discount rate that reflects current market assessments of the time value of money and the risks specific to the asset. An impairment loss can be reversed if there has been a change in the estimates used to determine the recoverable amount. An impairment loss is only reversed to the extent that the asset’s carrying amount does not exceed the carrying amount that would have been determined, net of depreciation, if no impairment loss had been recognized.

      Under U.S. GAAP, an impairment loss is recognized whenever the sum of the expected future cash flows (undiscounted and without interest charges) is less than the carrying amount of the asset. An impaired asset is written down to its estimated fair value based on quoted market prices in active

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markets or discounting estimated future cash flows. ReversalReversals of previously recognized impairment losses isare prohibited.

There were no impairment charges recognized by the Company and therefore, there are no differences between Indonesian GAAP and U.S. GAAP for impairment of assets.GAAP.
Gain (Loss)(loss) on Sale of Property, Plant and Equipment

      Under Indonesian GAAP, the Company classifies gain (loss) on saledisposal of property, plant and equipment as a component of other income (expenses) thatwhich is excluded from the determination of operating income.

      Under U.S. GAAP, gain (loss) on saledisposal of property, plant and equipment is classified as a component of operating expenses and is thereforehence included in the determination of operating income.

      Consequently, the Company’s operating income under U.S. GAAP would have been Rp.10.9 billion higher in 2001, Rp.130.5 billion higher in 2002, and Rp.182.9 billion higher in 2003 and Rp.26.1 billion lower in 2004, and other income (expenses) would have been lower (higher) by the same amounts in each of 2001, 2002, 2003 and 2003, respectively.

2004, respectively, due to the inclusion of the gain (loss) on disposal of property, plant and equipment in the determination of operating income.

      The amounts included in the reconciliation below show the income tax effects of the differences between Indonesian GAAP and U.S. GAAP as described above.

A summary of the significant adjustments to consolidated net income for the years ended December 31, 2001, 2002, 2003 and 20032004 and to consolidated stockholders’ equity as of December 31, 20022003 and 20032004 which would be required if U.S. GAAP had been applied, instead of Indonesian GAAP, in the consolidated financial statements are set forth below:
                        
200120022003 2002 2003 2004
      
Rp. millionRp. millionRp. million Rp. million Rp. million Rp. million
Net income according to the consolidated statements of income prepared under Indonesian GAAP 4,068,391 8,039,709 6,087,227   8,039,709  6,087,227  6,129,209 
 
 
 
        
U.S. GAAP adjustments — increase (decrease) due to:           
Termination benefits 140,000 530,981 (670,981)  530,981  (670,981)  — 
Capitalization of foreign exchange differences, net of related depreciation of (76,732) million, (79,797) million and (76,756) million, respectively 74,987 107,365 76,756 
Capitalization of foreign exchange differences, net of related depreciation of (Rp.79,797) million, (Rp.76,756) million and (Rp.75,870) million, respectively  107,365  76,756  1,587 
Interest capitalized on property under construction, net of related depreciation of (Rp.3,061) million, (Rp.8,787) million and (Rp.13,392) million, respectively  43,045  39,077  26,802 
Revenue-sharing arrangements  67,959  23,159  155,369 
Revaluation of property, plant and equipment  3,929  —  — 
Pension  111,415  (109,334)  313,870 
Equity in net income (loss) of associated companies  (182)  (170)  (177)
Amortization of land rights  (11,781)  (10,212)  (13,907)
Depreciation of equipment to be installed  9,706  —  — 
Revenue recognition  (89,274)  (53,226)  54,159 
Goodwill  21,269  21,270  21,270 
Capital leases  14,241  6,882  (3,435)
Adjustment for consolidation of Dayamitra  (9,270)  (24,476)  (72,361)
Reversal of difference due to change of equity in associated companies  (65,158)  (38,425)  — 
Asset retirement obligations  —  (848)  (848)

101108

              
200120022003
Rp. millionRp. millionRp. million
Interest capitalized on property under construction, net of related depreciation of (nil), (3,061) million and (8,787) million, respectively  19,690   43,045   39,077 
Revenue-sharing arrangements  43,999   67,959   23,159 
Revaluation of property, plant and equipment  4,095   3,929   — 
Pension  (19,640)  111,415   (109,334)
Equity in net income/(loss) of associated companies  (3,786)  (182)  (170)
Amortization of landrights  (6,409)  (11,781)  (10,212)
Depreciation of equipment to be installed  —   9,706   — 
Revenue recognition  81,429   (89,274)  (53,226)
Goodwill  —   21,269   21,270 
Capital leases  —   14,241   6,882 
Adjustment for Dayamitra accounted at 100%  (4,191)  (9,270)  (24,476)
Reversal of difference due to change of equity in associated companies  —   (65,158)  (38,425)
Asset retirement obligations  —   —   (848)
Deferred income tax:            
 Deferred income tax on equity method investments  —   —   119,456 
 Deferred income tax effect on U.S. GAAP adjustments  (100,942)  (220,724)  323,089 
   
   
   
 
   229,232   513,521   (297,983)
Minority interest  577   34,029   1,396 
   
   
   
 
Net adjustments  229,809   547,550   (296,587)
   
   
   
 
Net income in accordance with U.S. GAAP  4,298,200   8,587,259   5,790,640 
   
   
   
 
Net income per share — in full Rupiah amount  426.41   851.91   574.47 
   
   
   
 
Net income per ADS (20 Series B shares per ADS) — in full Rupiah amount  8,528.17   17,038.21   11,489.40 
   
   
   
 
              
  2002 2003 2004
       
  Rp. million Rp. million Rp. million
Deferred income tax:            
 Deferred income tax on equity method investments  —   119,456   (11,234)
 Deferred income tax effect on U.S. GAAP adjustments  (220,724)  323,089   (113,712)
          
   513,521   (297,983)  357,383 
Minority interest  34,029   1,396   (18,019)
          
Net adjustments  547,550   (296,587)  339,364 
          
Net income in accordance with U.S. GAAP  8,587,259   5,790,640   6,468,573 
          
Net income per share — in full Rupiah amount(1)
  425.96   287.23   320.86 
          
Net income per ADS (40 Series B shares per ADS) — in full Rupiah amount(1)
  17,038.21   11,489.40   12,834.47 
          

(1) The prior years’ net income per share has been restated to reflect a two-for-one stock split as resolved in the AGMS on July 30, 2004.
The changes in consolidated stockholders’ equity in accordance with U.S. GAAP for the years ended December 31, 20022003 and 20032004 are shown below:
                  
20022003  2003 2004
     
Rp. millionRp. million  Rp. million Rp. million
Equity according to the consolidated balance sheets prepared under Indonesian GAAPEquity according to the consolidated balance sheets prepared under Indonesian GAAP 14,613,617 17,312,877 Equity according to the consolidated balance sheets prepared under Indonesian GAAP  17,312,877  20,261,342 
 
 
       
U.S. GAAP adjustments — increase (decrease) due to:U.S. GAAP adjustments — increase (decrease) due to: U.S. GAAP adjustments — increase (decrease) due to:       
Early retirement benefits 670,981 — 
Capitalization of foreign exchange differences — net of related depreciationCapitalization of foreign exchange differences — net of related depreciation (627,229) (550,473)Capitalization of foreign exchange differences — net of related depreciation  (550,473)  (548,886)
Interest capitalized on property under construction — net of related depreciationInterest capitalized on property under construction — net of related depreciation 62,735 101,812 Interest capitalized on property under construction — net of related depreciation  101,812  128,614 
Revenue-sharing arrangementsRevenue-sharing arrangements (470,855) (447,696)Revenue-sharing arrangements  (447,696)  (292,327)
Revaluation of property, plant and equipment:Revaluation of property, plant and equipment: Revaluation of property, plant and equipment:       
Increment (664,974) (664,974)Increment  (664,974)  (664,974)
Accumulated depreciation 664,974 664,974 Accumulated depreciation  664,974  664,974 
PensionPension 231,490 122,156 Pension  122,156  436,026 
Equity in net loss of associated companies (18,082) (18,252)
Equity in net income (loss) of associated companiesEquity in net income (loss) of associated companies  (18,252)  (18,429)
Amortization of land rightsAmortization of land rights  (65,211)  (79,118)
Revenue recognitionRevenue recognition  (768,548)  (714,389)
GoodwillGoodwill  42,539  63,809 
Capital leasesCapital leases  21,123  17,688 
Adjustment for consolidation of DayamitraAdjustment for consolidation of Dayamitra  (38,718)  (61,728)
Asset retirement obligationsAsset retirement obligations  (848)  (1,696)

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20022003
Rp. millionRp. million
Amortization of land rights  (54,999)  (65,211)
Revenue recognition  (715,322)  (768,548)
Goodwill  21,269   42,539 
Capital leases  14,241   21,123 
Adjustment for Dayamitra accounted at 100%  (14,242)  (38,718)
Asset retirement obligations  —   (848)
Deferred income tax:        
 Deferred income tax on equity method investments  —   52,186 
 Deferred income tax effect on U.S. GAAP adjustments  132,736   455,825 
   
   
 
   (767,277)  (1,094,105)
Minority interest  64,524   65,920 
   
   
 
Net adjustments  (702,753)  (1,028,185)
   
   
 
Equity in accordance with U.S. GAAP  13,910,864   16,284,692 
   
   
 
          
  2003 2004
     
  Rp. million Rp. million
Deferred income tax:        
 Deferred income tax on equity method investments  52,186   39,343 
 Deferred income tax effect on U.S. GAAP adjustments  455,825   334,900 
       
   (1,094,105)  (696,193)
Minority interest  65,920   5,763 
       
Net adjustments  (1,028,185)  (690,430)
       
Equity in accordance with U.S. GAAP  16,284,692   19,570,912 
       

B. Liquidity and Capital Resources

B.Liquidity and Capital Resources
      TELKOM expects to have substantial liquidity and capital resources requirements in 20042005 and 20052006 as it continues to develop and expand its existing businesses, including entering into new businesses. TELKOM expects that these expenditures will be important factors in preparing to face tight competition as the Indonesian telecommunications market has been deregulated and maintaining its current position as the leading Indonesian telecommunications and full-service network provider.

      In 20042005 and 2005,2006, TELKOM expects its principal liquidity and capital resources requirements, aside from its requirements for working capital and to make payments of dividends and taxes, will at least consist of the following:

 • capital expenditures for existing and new network and backbone infrastructure, including a backbone transmission network on Ring JASUKA (Jawa, Sumatra and Kalimantan), the expansion of TELKOM’s CDMA network, a satellite,wireless access networks, fiber optic transmission network from Kalimantan and Sulawesi, an additional ground satellite segment in east Indonesia, fiber optic transmission networks in Jakarta, Surabaya and Bandung-Cirebon, a submarine optical cable to connect Dumai (Indonesia) to Melaka (Malaysia),network Medan-Pekanbaru, installation and upgrading of fixed lines and increased capacity in its mobile cellular service conducted through Telkomsel (see “— Capital Expenditures”);
 
 • debt service requirements relating to existing indebtedness, including two-step loans, and indebtedness of subsidiaries;subsidiaries, its short-term loan with ABN AMRO Bank N.V. Jakarta and Bank Central Asia, and its Rp.1.1 trillion medium-term notes due between June 2005 and June 2007;
 
 • installment payments of the purchase price for shares of AriaWest in 2003;AriaWest;
 
 • payments under the Short-Term Loan Agreement with ABN AMRO Bank N.V. Jakarta which financed the payment of the outstanding installments of the purchase price for shares in Pramindo;
• payment ofcontribution to TELKOM’s defined benefit pension plan, post-retirement benefitshealth care plan and long-service awards in 2004; and2005;
 
 • fixed monthly payments to MGTI pursuant to the amended and restated agreement for KSO IV, commencing MarchFebruary 2004 and terminating in 2010.2010; and
• payment of call option price through monthly payment beginning in December 2004 and ending March 2006 relating to the acquisition of 9.68% shares of Dayamitra.

     While still uncertain, liquidity

      Liquidity and capital resources may be required in 2004 and 2005 to finance the acquisition of all or some of the equity interests held by shareholders of KSO Investors other than those that TELKOM has previously purchased or is in the process of purchasing (see “Business Overview — Joint Operation Schemes (KSO)”). Further, liquidity and capital resources maywill also be required in the eventfor TELKOM is mandated to change its current DLD access code resulting fromas a result of the

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end of TELKOM’s exclusive right to provide DLD services, with possible expenditures for the creation of a new routing database and costs for customer education and marketing. As of the date of this Annual Report, it is still uncertain whether or when the GovernmentTELKOM will require TELKOMbe required to fully implement this change in its DLD access code.code by April 1, 2010. See Item 4. Information on the Company — B. Business Overview — Regulations — DLD and IDD Services.”

      Primary sources of financing available to TELKOM consist of: (i) cash flow from operating activities; (ii) financing from the bondbonds issuance; (iii) financing from banks or export credit agencies (including financing procured by vendors); and (iv) deferred vendor payment terms.

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      TELKOM believes that these sources of financing will be sufficient to fund planned capital expenditures, anticipated working capital needs and likely contractual obligations and commitments in 20042005 and 2005.2006. Nonetheless, if global or Indonesian economic conditions worsen or do not improve, competition or product substitution accelerates beyond current expectations or the value of the Rupiah depreciates significantly against the U.S. Dollar, TELKOM’s net cash flow from operating activities may decrease and negatively impact its liquidity.

      TELKOM manages the liquidity for all of its businesses, including KSOs controlled by TELKOM, on a total group basis. TELKOM is also responsible for managing the liquidity and capital resources of the KSO units, other than the KSO VII. See “Business Overview — Joint Operation Scheme (KSO).” However, Telkomsel manages its own liquidity and accesses capital resources independently of TELKOM.

With regard to Telkomsel, in 20042005 and 20052006 its management expects to continue focusing on enhancing and expanding Telkomsel’s network capacity and infrastructure. It is expected that these expenditures will allow Telkomsel to maintain its position as the leading provider of mobile cellular services in Indonesia in an increasingly competitive market for such services. In recent years, Telkomsel’s primary source of financing has been cash flow from operating activities and Telkomsel’s management believes that Telkomsel will continue to generate sufficient cash flow from operating activities to fund planned capital expenditures in 20042005 and 2005.2006.
Defaults and Waivers of Defaults under our Debt Facilities

      As a result of our failure to file a fully compliant 2002 Annual Report on Form 20-F for 2002 with the SEC by the June 30, 2003 filing deadline and our May 2003 press release relating thereto, we may have beenwere in breach of certain covenants in our Citibank and Bank Central Asia (BCA) debt facilities that require us, among other things, to comply with all laws and regulations applicable to us and deliver financial statements to the lenders. We have obtained written waivers from both Citibank, acting as agent for the lenders under the relevant facility agreements, and BCA with respect to such breaches.

      As discussed in Item 3.D. “— Risk Factors”, our failure to file a fully compliant 2002 Annual Report on Form 20-F for 2002 with the SEC by the June 30, 2003 filing deadline, could give rise to an SEC enforcement action or other legal liability and other adverse consequences such as a related de-listing of TELKOM’s ADSs from the New York Stock Exchange. Any of the foregoing could give rise to defaults under one or more of our debt facilities and cross defaults under other debt facilities with respect to such defaults. If we were unable to obtain waivers of any such defaults, indebtedness outstanding under such debt facilities could become immediately due and payable, which could have a material adverse effect on our financial condition and results of operations.

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Net Cash Flows

The following table sets forth information concerning TELKOM’s consolidated cash flows, as set out in (and prepared on the same basis as) the consolidated financial statements, except for foreign exchange convenience translations (see “— Basis of Presentation — Foreign Exchange Translations”):
                  
Year Ended December 31,
2001200220032003
Rp.Rp.Rp.US$
(billion)(billion)(billion)(million)
Net cash flows:                
 from operating activities  7,012.6   10,864.5   12,852.5   1,522.8 
 from investing activities  (6,115.8)  (6,050.0)  (7,305.9)  (865.6)
 from financing activities  (1,662.8)  (2,670.2)  (6,177.4)  (731.9)
   
   
   
   
 
Change in cash and cash equivalents  (766.0)  2,144.3   (630.8)  (74.7)
Effect of foreign exchange changes  76.6   (89.5)  26.2   3.1 
Cash and cash equivalents, beginning of period  4,333.7   3,644.3   5,699.1   675.2 
Cash and cash equivalents, end of Period  3,644.3   5,699.1   5,094.5   603.6 
                  
  Year Ended December 31,
   
  2002 2003 2004 2004
         
  Rp. (billion) Rp. (billion) Rp. (billion) US$ (million)
Net cash flows:                
 from operating activities  10,864.5   12,852.5   16,051.5   1,727.8 
 from investing activities  (6,050.0)  (7,305.9)  (9,598.1)  (1,033.2)
 from financing activities  (2,670.2)  (6,177.4)  (6,904.9)  (743.2)
             
Change in cash and cash equivalents  2,144.3   (630.8)  (451.5)  (48.6)
Effect of foreign exchange changes on cash and cash equivalents  (89.4)  26.2   213.1   22.9 
Cash and cash equivalents, beginning of year  3,644.2   5,699.1   5,094.5   548.4 
Cash and cash equivalents, end of year  5,699.1   5,094.5   4,856.1   522.7 
Net Cash Flows from Operating Activities

TELKOM’s primary source of liquidity in recent years was cash flows from operating activities and from financing activities. Net cash flows from operating activities totaled Rp.7,012.6 billion in 2001, Rp.10,864.5 billion in 2002, and Rp.12,852.5 billion in 2003 and Rp.16,051.5 billion (US$1,522.81,727.8 million) in 2003. The2004. In 2003, the growth in operating cash flows principally resulted from higher cash receipts from operating revenues as a result of the expansion of TELKOM’s fixed wireline business, growth in its mobile cellular business conducted through Telkomsel, higher interconnection revenues from mobile cellular operators and greater data and Internet revenues due to increased SMS usage, as well as the acquisitionsacquisition of Dayamitra in 2001, Pramindo in 2002 and AriaWest in 2003. TheseIn 2004, the growth in operating cash flows principally resulted from higher cash receipts from operating revenues as a result of an increase in other services (data and Internet revenues), the expansion of TELKOM’s fixed wireline business as well as the acquisition of KSO IV, growth in its mobile cellular business conducted through Telkomsel and higher interconnection revenues from mobile cellular operators. In both 2003 and 2004, these higher cash receipts were partially offset by rising cash payments for operating expenses.
Year ended December 31, 2004 compared to year ended December 31, 2003.
      In 2004 compared to 2003, net cash flows from operating activities increased by Rp.3,199.0 billion, or 24.9%, primarily due to:
• an increase of Rp.2,731.4 billion, or 69.5%, in cash receipts from other services, primarily due to an increase in cash receipts from data and Internet services, particularly from greater SMS usage among Telkomsel subscribers;
• an increase of Rp.1,882.7 billion, or 23.0%, in cash receipts from fixed lines telephone services, primarily from the increase in the number of subscribers for fixed wireline and fixed wireless services, as well as from the acquisition of KSO IV;
• an increase of Rp.1,562.6 billion, or 37.2%, in cash receipts from interconnection, primarily due to an increase in interconnection fees collected from mobile cellular operators; and
• an increase of Rp.1,572.3 billion, or 17.6%, in cash receipts from cellular, due to growth in mobile cellular business conducted through Telkomsel.

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      This increase was partially offset by:
• an increase of Rp.3,408.8 billion, or 38.5%, in cash payments for operating expenses, which is in line with the increase in operating expenses (excluding depreciation); and
• a decrease of Rp.648.1 billion, or 54.2%, in cash receipts from joint operation schemes, primarily due to the acquisition of KSO IV.
Year ended December 31, 2003 compared to year ended December 31, 2002.

      In 2003 compared to 2002, net cash flows from operating activities increased by Rp.1,988.0 billion, or 18.3%, primarily due to:

 • an increase of Rp.2,798.5 billion, or 19.5%, in cash receipts from telephone services, primarily from the increase in the number of subscribers for cellular and fixed wireless services, as well as from the acquisition of AriaWest;
 
 • an increase of Rp.2,506.7 billion, or 147.7%, in cash receipts from interconnection, primarily due to an increase in interconnection fees collected from mobile cellular operators; and
 
 • an increase of Rp.2,800.0 billion, or 247.3%, in cash receipts from other services, primarily due to an increase in cash receipts from data and Internet services, particularly from greater SMS usage among Telkomsel subscribers; andsubscribers.
      This increase was partially offset by:
 • an increase of Rp.3,061.3 billion, or 52.8%, in cash payments for operating expenses, which had the effect of increasing cash outflows from operating activities.
Year ended December 31, 2002 compared to year ended December 31, 2001.

     In 2002 compared to 2001, net cash flows from operating activities increased by Rp.3,929.1 billion, or 56.0%, primarily due to:

• an increase of Rp.2,781.8 billion, or 24.1%, in cash receipts from telephone services primarily cellular services resulting from an increased number of subscribers as well as an increase in cash

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receipts from fixed line due to the consolidation of Pramindo in 2002, which enhanced cash inflows from operating activities;
• an increase of Rp.569.5 billion or 50.5% in cash receipts from interconnection primarily resulting from the acquisition of Pramindo;
• a decrease of Rp.139.2 billion or 8.1%, in cash receipts from Joint Operation Schemes, primarily due to a reclassification of cash receipts from KSO I from Joint Operation Schemes to Fixed Lines following the acquisition of Pramindo; and
• an increase of Rp.478.6 billion, or 9.0%, in cash payments for operating expenses, which had the effect of increasing cash outflows from operating activities.

On balance, the foregoing movements in cash flows were partially attributable to the consolidation of Dayamitra’s cash flows into TELKOM’s consolidated financial statements in 2001 and Pramindo’s in 2002. Cash inflows in 2002 were also partly offset by a reduction in interest received of Rp.110.7 billion, or 18.7%.

Net Cash Flows from Investing Activities

      Net cash flows used in investing activities totaled Rp.6,115.8 billion, Rp.6,050.0 billion, and Rp.7,305.9 billion and Rp.9,598.1 billion (US$865.61,033.2 million) in 2001, 2002, 2003 and 2003,2004, respectively. In 2001, sizeable2002, net cash flows wereused in investing activities was used for capital expenditures and acquisition of subsidiaries for cross-ownership transaction with Indosat, which were partly financed by reduced investments in marketable securities and time deposits. In 2002, the increase reflected cash flow for capital expenditure and amounts due on the cross-ownership transactions closed in 2001 netted against sizeable cash receipts from the sale of a 12.72% shareholding in Telkomsel. In 2003 and 2004, the net cash flowsused in investing activities were primarily used for capital expenditures.

Apart from cash on hand and cash in banks, TELKOM invests substantially allthe majority of its excess cash from time to time in time deposits. Since May 14, 2004, TELKOM also has been investing a part of its excess cash in mutual funds. At December 31, 2003, only Rp.4.02004, Rp.120.9 billion of time deposits had a maturity greater than three months and theseRp.14.9 billion (US$1.6 million) of mutual funds were denominated in Rupiah.outstanding.
Year ended December 31, 2004 compared to year ended December 31, 2003.
      In the year ended December 31, 2004 compared to the year ended December 31, 2003, net cash flows used in investment activities increased by Rp.2,292.2 billion, or 31.4%, primarily due to:
• a decrease of Rp.1,609.9 billion, or 84.9%, in the cash proceeds from investments and the maturity of time deposits; and
• an increase of Rp.1,063.4 billion for payments of advances for purchase of property, plant and equipment.

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Year ended December 31, 2003 compared to year ended December 31, 2002.

      In the year ended December 31, 2003 compared to the year ended December 31, 2002, net cash flows used in investment activities increased by Rp.1,255.9 billion, or 20.8%, primarily due to:

 • an increase of Rp.2,381.9 billion, or 36.0%, in cash used for capital expenditures;
 
 • an increase of Rp.397.3 billion, or 26.5%, in the cash proceeds from investments and the maturity of time deposits; and
 
 • a decrease of Rp.1,542.7 billion, or 69.4%, in cash used for the purchase of marketable securities and placements in time deposits.
Year ended December 31, 2002 compared to year ended December 31, 2001.

     In the year ended December 31, 2002 compared to the year ended December 31, 2001, net cash flows used in investment activities slightly decreased by Rp.65.8 billion, or 1.1%, primarily due to:

• an increase of Rp.3,033.8 billion of cash out for capital expenditure;
• a cash receipt of Rp.3,948.9 billion from the sale of a 12.72% shareholding in Telkomsel;
• an increase in net cash out of Rp.4,246.4 billion from a net cash in of Rp.3,522.1 billion in 2001 to a net cash out of Rp.724.3 billion in 2002 for the investment in time deposits and medium term notes; and
• a decrease in cash out for cross-ownership transactions of Rp.3,561.1 billion as the liability for cross-ownership transactions have been fully paid in 2002.

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In 2002, payment of advance for investment in shares of stock of Rp.230.2 billion reflects the payment for option of Tomen’s share in Dayamitra (Rp.33.7 billion) and payment to AriaWest’s shareholders related to the CSPA (Rp.196.5 billion) for the acquisition of AriaWest.

Net Cash Flows from Financing Activities

Net cash flows used in financing activities totaled Rp.1,662.8 billion, Rp.2,670.2 billion, and Rp.6,177.4 billion and Rp.6,904.9 (US$731.9743.2 million) in 2001, 2002, 2003 and 2003,2004, respectively. In all three years, net cash flows from financing activities were driven primarily by repaymentrepayments of currentoutstanding indebtedness and by payments of cash dividends. In 2003,2004, cash flow used in financing activities increased by Rp.3,507.2Rp.727.5 billion, or 131.4%11.8%, primarily resulting from a 96.2%288.0% increase in the payment for promissory notes to Rp.1,513.1 billion and a 60.6% increase in paymentrepayment of cash dividends to Rp.3,738.6 billion. These increases offset a Rp.956.8 billion decrease in payment for long-term indebtedness to Rp.1,536.9Rp.5,963.7 billion. This increase was partially offset by a Rp.2,453.0 billion increase in proceeds from borrowings and a Rp.1,080.0 billion increase in proceeds from medium-term notes.
RepaymentRepayments of Current Indebtedness.

      At December 31, 2001, 2002, 2003 and 2003,2004, approximately 63.2%68.5%, 68.5%89.2% and 89.2%72.7%, respectively, of TELKOM’s current indebtedness for borrowed money (consisting of current maturities of long-term liabilities and short-term bank loans) were denominated in foreign currencies, principally the USU.S. Dollar, such that the Rupiah amount of TELKOM’s cash flows used for the repayment of long-term liabilities was significantly affected by the appreciation of the Rupiah in 2002 compared to 2001 and in 2003 compared to 2002.

In 2001, 2002 and depreciation of the Rupiah in 2004 compared to 2003.

      In 2002, 2003 and 2004, TELKOM made net repayments of current indebtedness for borrowed money of Rp.1,233.0 billion, Rp.3,342.0 billion, Rp.3,050.0 billion and Rp.3,210.5Rp.7,601.6 billion (US$380.4818.3 million), respectively. Cash outflows in 20032004 reflected payments for: (a) two-step loans of Rp.813.9 billion; (b) liability for the acquisition of AriaWest, Pramindo and Dayamitra of Rp.1,513.1 billion; (c) Rp.843.3 billion for payment of bank loans; (d) Rp. 160.5 billion for payments of guaranteed notes and bonds; and (e) Rp.152.6 billion for payment of Dayamitra’s suppliers’ credit loans.
• two-step loans of Rp.2,180.2 billion;
• liabilities of business acquisitions of AriaWest, Pramindo, Dayamitra and KSO IV of Rp.1,893.4 billion;
• Rp.3,293.9 billion for payment of bank loans;
• Rp.172.5 billion for payment of Dayamitra’s suppliers’ credit loans;
• Rp.52.5 billion for payment of Dayamitra’s bridging loan; and
• Rp.9.1 billion for payment of other long-term debts.

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Payment of Cash Dividends and General Reserve.

TELKOM paid cash dividends and set up general reserve, as determined by the company’sCompany’s annual shareholder meeting, as follows:
                 
DividendTotal CashDividendGeneral
Date of AGMYearDividendper ShareReserve
(Rp. Billion)(Rp.)(Rp. Billion)
May 10, 2001  2000   888.654   88.16   127.0 
June 21, 2002  2001   2,125.055   210.81   425.0 
May 9, 2003  2002   3,338.109   331.16   813.7 
                 
  Dividend Total Cash Dividend General
Date of AGMS Year Dividends per Share(1) Reserve
         
    (Rp. Billion) (Rp.) (Rp. Billion)
June 21, 2002  2001   2,125.1   210.81   425.0 
May 9, 2003.  2002   3,338.1   331.16   813.7 
July 30, 2004  2003   3,043.6   301.95   121.7 

In

(1) Dividend per share for 2001, 2002 and 2003 were prior to the two-for-one stock split as resolved in the AGMS on July 30, 2004.
     In 2002, 2003 and 2004, the amount of cash dividends paid was effectively determined by the Government, which holds a majority of TELKOM’s issued and outstanding common shares. TELKOM believes that the Government considers various factors, including the views of TELKOM’s board of directors and the Government’s own funding needs, in determining the portion of each year’s net income to be paid out as cash dividends.
      On December 7, 2004, TELKOM’s board of directors approved an interim cash dividends for the year 2004 in the amount of Rp.7.112 per share for an aggregate total cash dividends of Rp.143.4 billion. The interim cash dividends were paid to the Government on December 29, 2004 and to other shareholders on January 6, 2005.
Escrow Account.Accounts.

      In 2003,2004, TELKOM recorded a net increasedecrease in escrow accountaccounts of Rp.224.2Rp.485.9 billion (US$26.6 billion)52.3 million), which represented the fundingrepayments of aindebtedness related to the acquisition of Dayamitra funded from the contractually-required escrow accounts established on May 17, 2001 and August 14, 2002payments to Samsung Electronic Co. Ltd. for financing the repayment of indebtedness related to the acquisition of Dayamitra and Pramindo, respectively.

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CDMA project starting in July 2004.

Working Capital

Net working capital, calculated as the difference between current assets and current liabilities, was positive Rp.838.9negative Rp.2,227.2 billion at December 31, 20022003 and negative Rp.1,969.8Rp.2,473.1 billion (US$233.4266.2 million) at December 31, 2003.2004. The decrease in net working capital was principally due to the use of proceeds received from a prior issuance of bonds and the sale of a 12.72% interestsignificant increase in Telkomsel, for payment of cash dividends to TELKOM shareholders, capital expenditures and payments arising from TELKOM’s early retirement program. In addition, TELKOM also had higher current liabilities relatedsuch as short-term bank loans, trade accounts payable to capital expendituresthird parties and current maturities of long-term liabilities.unearned income.
Current Assets

      Current assets were Rp.10,547.0Rp.8,942.6 billion at December 31, 20022003 and Rp.9,230.8Rp.9,203.9 billion (US$1,093.7990.7 million) at December 31, 2003,2004, reflecting a decreasean increase of Rp.1,316.2Rp.261.3 billion, or 12.5%2.9%. The decreaseincrease in current assets was primarily due to:
• an increase in trade accounts receivable from third parties of Rp.478.0 billion, or 19.7%, from Rp.2,422.0 billion at December 31, 2003 to Rp.2,900.0 billion (US$312.2 million) at December 31, 2004;
• an increase in prepaid expenses of Rp.198.4 billion, or 46.2%, from Rp.429.7 billion at December 31, 2003 to Rp.628.1 billion (US$67.6 million) at December 31, 2004; and
• an increase in inventories of Rp.49.1 billion, or 31.9%, from Rp.154.0 billion at December 31, 2003 to Rp.203.1 billion (US$21.9 million) at December 31, 2004;

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      These increases were partially offset by:
 • a decrease in cash and cash equivalents of Rp.604.6Rp.238.4 billion, or 10.6%4.7%, from Rp.5,699.1Rp.5,094.5 billion at December 31, 20022003 to Rp.5,094.5Rp.4,856.1 billion (US$603.6522.7 million) at December 31, 2003;2004;
 
 • a decrease in trade receivables from related partiesprepaid taxes of Rp.475.9Rp.135.1 billion, or 53.7%63.6%, from Rp.886.8Rp.212.3 billion at December 31, 20022003 to Rp.410.9Rp.77.2 billion (US$48.78.3 million) at December 31, 2003;
• a decrease in temporary investments of Rp.569.0 billion, or 99.3%, from Rp.573.0 billion at December 31, 2002 to Rp.4.0 billion (US$0.5 million) at December 31, 2003;2004; and
 
 • a decrease in other current assets, which primarily consistedaccounts receivable of restricted time deposits, of Rp. 646.7Rp.114.3 billion, or 93.5%67.2%, from Rp.691.8Rp.170.1 billion at December 31, 20022003 to Rp. 45.1Rp.55.8 billion (US$5.36.0 million) at December 31, 2003.2004;

     The decrease in cash and cash equivalents, temporary investments and other current assets primarily reflected use of the proceeds from the sale by TELKOM of a 12.72% shareholding in Telkomsel and the issuance by TELKOM of IDR bonds for the payment of a cash dividend to TELKOM shareholders, capital expenditures and disbursements related to TELKOM’s early retirement program.

At December 31, 2001, 2002, 2003 and 2003,2004, approximately 13.3%34.0%, 34.0%19.4% and 18.8%22.3%, respectively, of TELKOM’s current assets were denominated in foreign currencies, principally the U.S. Dollar in 2002 and 2003 and the Euro in 2004, such that the movements of Rupiah exchange rate against U.S. dollarDollar and Euro across these years would affect TELKOM’s current assets.
Trade Accounts Receivable.

      Trade accounts receivable from related parties (net of allowance for doubtful accounts) decreasedincreased by Rp.475.9Rp.8.2 billion, or 53.7%2.0%, from Rp.886.8Rp.410.9 billion atas of December 31, 20022003 to Rp.410.9Rp.419.1 billion (US$48.745.1 million) at December 31, 2003.2004. Trade accounts receivable from third parties (net of allowance for doubtful accounts) increased by Rp.502.1Rp.478.0 billion, or 26.2%19.7% from Rp.1,919.9Rp.2,422.0 billion at December 31, 20022003 to Rp.2,422.0Rp.2,900.0 billion (US$287.0312.2 million) at December 31, 2003,2004, primarily due to an increase in customer defaults.the number of mobile cellular, fixed wireless subscribers and the consolidation of KSO IV. In the case of trade accounts receivable from related parties, the decreaseincrease was primarily due to increase in number of related party customers following the consolidationacquisition of KSO Unit III and the consequent decline in DTR and MTR receivable in 2003, as well as the sale by TELKOM of its ownership interest in associated companies, such as Komselindo and Metrosel.

IV.

      The allowance for doubtful accounts for trade accounts receivable from related parties increased Rp.15.2decreased Rp.46.0 billion, or 15.9%41.5%, from Rp.110.9 billion at December 31, 20022003 to Rp.64.9 billion (US$7.0 million) at December 31, 2004, primarily due to a larger bad debts from related parties being written off in 2004.
      At December 31, 2004 compared to December 31, 2003, from Rp.95.7 billion at to Rp.110.9 billion (US$13.1 million), primarily due to an increase in the number of delinquent accounts of related parties.

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At December 31, 2003 compared to December 31, 2002, the allowance for doubtful accounts for trade receivables from third parties decreased Rp.74.3increased Rp.124.1 billion, or 18.2%37.3%, from Rp.407.3Rp.333.0 billion to Rp.333.0Rp.457.1 billion (US$39.549.2 million), primarily due to the effectan increase in number of a significant write-off in 2003delinquent accounts of receivables from defaulted customers.third parties.

Other Current Assets and Escrow Accounts.Assets.

At December 31, 2003, Rp.45.12004, Rp.44.6 billion (US$5.34.8 million) of TELKOM’s deposits were restricted for security interests in favor of other parties and for bank guarantees, of which US$Rp.42.7 billion (US$4.6 millionmillion) was used to secure Napsindo’s borrowings, an associated companya subsidiary, and recorded as other current assets. TELKOM also had a balance of Rp.239.7 billion (US$28.4 million) in escrow account to be funded from time to time for payments of the purchase price for the 90.32% equity interest in Dayamitra acquired in 2001 and for the repayment of indebtedness owed by Dayamitra to former shareholders and a balance of Rp.276.4 billion (US$32.8 million) for payments of the purchase price for a 100% equity interest in Pramindo acquired in 2002. See “— Indebtedness — Acquisition Indebtedness and Option Purchase Price — Dayamitra”.
Current Liabilities

      Current liabilities were Rp.9,708.2Rp.11,169.8 billion at December 31, 20022003 and Rp.11,200.7Rp.11,677.0 billion (US$1,327.11,256.9 billion) at December 31, 2003,2004, reflecting an increase of Rp.1,492.5Rp.507.2 billion, or 15.4%4.5%. The increase in current liabilities primarily arose from increaseincreases in the following: (a) amountsshort-term bank loans; (b) trade accounts payable to suppliers primarily due to capital expenditures;third parties; and (b) current maturities of long term liabilities.

(c) unearned income.

At December 31, 2001, 2002, 2003 and 2003,2004, approximately 19.5%17.2%, 17.2%42.5% and 42.5%31.6%, respectively, of TELKOM’s current liabilities were denominated in foreign currencies, principally the U.S. Dollar, such that the movement of Rupiah exchange rate against U.S. dollarDollar across these years significantly affected TELKOM’s current liabilities.

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Current Maturities of Long-term Liabilities.

Current maturities of long-term liabilities increaseddecreased by Rp.853.3Rp.1,142.7 billion, or 32.9%33.2%, from Rp.2,590.2Rp.3,443.5 billion at December 31, 20022003 to Rp.3,443.5Rp.2,300.8 billion (US$408.0247.7 million) at December 31, 2003.2004. This increasedecrease was primarily due to current maturitythe decrease in liabilities of bank loans and amounts due on the acquisition of Pramindo and AriaWest.business acquisitions.
Accrued Expenses.

      Accrued expenses decreased by Rp.734.0Rp.133.8 billion, or 37.6%11.3%, from Rp.1,949.9Rp.1,185.2 billion at December 31, 20022003 to Rp.1,215.9Rp.1,051.4 billion (US$144.1113.2 million) at December 31, 2003.2004. The declinedecrease was primarily due to realization ofthe decrease in early retirement benefits of Rp.671.0from Rp.132.8 billion and the absence of anat December 31, 2003 to nil at December 31, 2004 as accrued expense relating to the litigation settlement fee for the dispute with AriaWest, which totaled Rp.179.0 billion in 2002 and which wasearly retirement benefits were fully paid in 2003.

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2004.

Indebtedness

Consolidated total indebtedness (consisting of long-term liabilities, current maturities of long-term liabilities and liability for cross-ownership transactions and short-term bank loan)loans) at December 31, 2001, 2002, 2003 and 2003,2004, was as follows:
                  
At December 31,
2001(1)2002(1)2003(1)2003(1)
(Rp. in billion)(US$ in million)
Indonesian Rupiah  6,805.7   4,294.1   4,485.1   531.4 
U.S. Dollar(2),(3)
  5,660.7   8,766.4   8,764.7   1,038.5 
Japanese Yen(4)
  1,452.1   1,358.9   1,377.7   163.2 
French Franc(5)
  190.9   —   —   — 
NLG(6)
  70.3   —   —   — 
EURO(7)
  —   215.7   890.7   105.5 
   
   
   
   
 
 Total  14,179.7   14,635.1   15,518.2   1,838.6 
   
   
   
   
 
                  
  At December 31,
   
  2002 2003 2004 2004
         
    (US$ in million)
  (Rp. in billion)  
Indonesian Rupiah(1)
  4,294.1   4,485.1   4,550.0   489.8 
U.S. Dollar(2),(3)
  8,766.4   8,562.2   9,904.2   1,066.1 
Japanese Yen(4)
  1,358.9   1,377.7   1,512.4   162.8 
EURO(5)
  215.7   890.7   649.7   69.9 
             
 Total  14,635.1   15,315.7   16,616.3   1,788.6 
             

(1) Including imputed interest on liabilitiesAmounts at December 31, 2004 include debt issuance costs for the acquisitionmedium term notes of a 90.32% equity interest in Dayamitra, a 100% equity interest in PramindoRp.2.3 billion. In addition for 2002, 2003 and a 100% equity interest in AriaWest.2004, amounts also include bond issuance costs for TELKOM bonds of Rp.24.0 billion, Rp.18.7 billion and Rp.13.4 billion.
(2) Amounts at December 31, 2001, 2002, 2003 and 20032004 translated into Rupiah at Rp.10,450, Rp.8,950Rp.8,960, Rp.8,450 and Rp.8,440Rp.9,300 = US$1, respectively, being the prevailing exchangeReuters sell rates for buying and selling U.S. Dollars at each of those dates.
(3) Amounts at December 31, 2002 includes imputed interest on liability for acquisitionliabilities of subsidiarybusiness acquisitions (which relates to Dayamitra and Pramindo) of US$1.1 million (Rp.10.0 billion) and US$31.1 million (Rp.278.1 billion), respectively, being imputed interest for installment payments of the liability. Amounts at December 31, 2003 includes imputed interest on liability for the acquisitionliabilities of subsidiarybusiness acquisitions (which relates to Pramindo and AriaWest) of US$9.5 million (Rp.80.2 billion) and US$14.5 million (Rp.122.4 billion), respectively, being imputed interest for installment payments of the liability. Amounts at December 31, 2004 includes imputed interest on liabilities of business acquisitions (which relates to AriaWest, the remaining 9.68% interest in Dayamitra and KSO IV) of US$9.7 million (Rp.90.2 billion), US$1.3 million (Rp.11.9 billion) and US$101.0 million (Rp.938.7 billion), respectively, being imputed interest for installment payments of the liability.
(4) Amounts at December 31, 2001, 2002, 2003 and 20032004 translated into Rupiah at Rp.79.6, Rp.75.5, Rp.79.05 and Rp.79.05Rp.90.6 = Yen 1, respectively, being the prevailing exchange rates for buying yenYen at each of those dates.
(5) Amount at December 31, 2001 translated into Rupiah at Rp.1,409.3 = FRF 1, respectively, being the prevailing exchange rates to buy French francs at such date.
(6) Comprises amounts expressed in Netherland Guilders translated into Rupiah.
(7) Amounts at December 31, 2002, 2003 and 20032004 translated into Rupiah at Rp.9,377.5, Rp.10,663.9 and Rp.10,663.9Rp.12,666.9 = EURO 1, respectively, being the prevailing exchange rate for buying Euros at each of thesethose dates.

     Of total indebtedness at December 31, 2003, Rp.3,601.02004, Rp.3,402.4 billion, Rp.1,846.2Rp.2,213.0 billion and Rp.10,071.0Rp.11,000.9 billion was scheduled for repaymentrepayments in 2004, 2005, 2006-2025,2006, 2007-2024, respectively. Of these amounts, Rp.190.2 billion of the indebtedness wereTelkomsel was scheduled to be repaid in 2004, Rp.190.2repay Rp.329.5 billion to be repaid in 2005, Rp.190.2Rp.329.5 billion to be repaid in 2006, Rp.1,311.5Rp.992.3 billion to be repaid in 2007 and Rp.95.1Rp.256.1 billion in 2008 by Telkomsel.2008. Further, Rp.226.9Rp.43.9 billion and Rp.14.3 billion was to be repaid by Dayamitra in 2004.

2005 and 2006, respectively.

      TELKOM expects scheduled repayments of indebtedness to be financed primarily from net cash flows from operating activities of and re-financing by TELKOM, Telkomsel and Dayamitra, respectively.

      At December 31, 2003,2004, approximately 56.5%51.0% of TELKOM’s Rupiah-denominated indebtedness and approximately 37.7%24.6% of its U.S. Dollar-denominated indebtedness bore interest at floating rates. TELKOM’s Rupiah-denominated floating rate indebtedness bore interest rates between 11.6%8.3% and 15.0%11.1%, with rates generally based on interest rates on three-month Certificates of Bank Indonesia (SBI) plus a

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margin of 1.0%. The weighted average interest rate on Rupiah-denominated floating rate indebtedness at December 31, 20032004 was 11.9%8.5%. TELKOM’s U.S. Dollar-denominated floating rate indebtedness was subject to interest rates between 1.9%3.0% and 7.1%6.0%, with rates generally based on floating interest rate offered by the lenders or LIBOR plus a margin of between 0.8%0.5% and 4.5%0.8%. The weighted average interest rate on U.S. Dollar denominated floating rate indebtedness at December 31, 20032004 was 5.7%5.3%. TELKOM’s Rupiah-denominated fixed rate indebtedness at that date bore a weighted average interest rate of 15.4%12.5%, while its U.S. Dollar denominated fixed rate indebtedness bore a weighted average interest rate of 7.3%6.4%. All of

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TELKOM’s Japanese yenYen denominated indebtedness was fixed rate and bore a weighted average interest rate at December 31, 20032004 of 3.1%.

      At December 31, 2003,2004, TELKOM had the following outstanding significant indebtedness:

 • Rp.7,691.0Rp.6,018.7 billion (US$911.3647.9 million) (including current maturities) in two-step loans through the Government;
 
 • Rp.1,121.2Rp.736.2 billion (US$132.579.2 million) (after discount) in guaranteed notes which is owed by Telkomsel;
 
 • Rp.981.3Rp.986.6 billion (US$116.3.0106.2 million) (after discount)bond issuance costs) IDR bonds issued by TELKOM;
 
 • US$172.3 million (Rp.1,456.1 billion) representing a loan of AriaWest that was assumed by TELKOM; and
• Rp.2,334.7Rp.822.9 billion (US$276.688.6 million) (including current maturities) in acquisition indebtedness relating to TELKOM’s acquisition of 100% equity interest in eachAriaWest (after discount);
• Rp.127.9 billion (US$13.8 million) from exercising the call option agreement with TM Communication (HK) Ltd. to purchase 9.68% of PramindoDayamitra shares (after discount);
• Rp.3,366.4 billion (US$362.4 million) representing the present value of fixed monthly payments to be paid to MGTI in respect of the acquisition of KSO IV; and AriaWest.
• Rp.1,077.7 billion (US$116.0 million) medium-term notes (net of debt issuance costs and TELKOM’s MTN owned by Telkomsel) issued by TELKOM.

      In addition, TELKOM, on its own and through its subsidiaries, entered into several new bank facilities in 20022003 and 20032004 and owes amounts under various otherthese bank facilities. These amounts were approximately Rp.1,732.4Rp.3,480.0 billion (US$205.3374.6 million) in aggregate as of December 31, 2003.2004. These included:

 • Rp.857.0Rp.1,171.2 billion (US$101.5126.1 million) (including current maturities) fromof Telkomsel’s loan facilities;
• Rp.255.9 billion (US$30.3 million) (including current maturities) from Dayamitra’s supplier credit loansCitibank N.A. through its Hermes Export facility (Rp.649.8 billion) and bridgeEKN-Backed facility (see “Dayamitra’s Indebtedness” below)(Rp.521.4 billion);
 
 • Rp.458.6Rp.590.6 billion (US$54.363.6 million) (including current maturities) from loan facilities relating to TELKOM’s Sumatera backbone network and Regional Division V junction project;
 
 • Rp.160.8Rp.108.5 billion (US$19.111.7 million) (including current maturities)maturities and short-term loans) from other loan facilities for other subsidiaries, including GSD,namely Infomedia, Napsindo and Napsindo.Dayamitra;
• Rp.549.5 billion (US$59.1 million) from The Export-Import Bank of Korea to finance the CDMA procurement from the Samsung Consortium; and
• Rp.1,060.2 billion (US$114.1 million) from ABN AMRO and Bank Central Asia short-term loan facilities.
Two-Step Loans

      Since 1982, TELKOM has entered into a series of two-step loans in which the Government borrows money from supranational lenders and foreign export credit agencies, such as the World Bank and the U.S. Export-Import Bank, for on-lending to TELKOM to fund investment in property, plant and equipment. TELKOM obtained its last two-step loan in 1994 and, as a public company, is no longer eligible to obtain Government-assisted financing of this type. For a table of scheduled repayments of two-step loans, see “— Liquidity and Capital Resources — Contractual Obligations and Commitments” in Item 5.

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      At December 31, 2003,2004, TELKOM’s outstanding principal indebtedness under the two-step loans totaled Rp.7,691.0Rp.6,018.7 billion (US$911.3647.9 million), of which US$348.7257.8 million (Rp.2,946.7(Rp.2,397.4 billion) was denominated in U.S. Dollars EURO18.8 million (Rp.200.0 billion) was denominated in Euro and Japanese Yen 17.416.7 billion (Rp.1,377.7(Rp.1,512.4 billion) was denominated in Japanese Yen. As of December 31, 2003,2004, TELKOM has used all facilities of two-step loans and the draw period for the two-step loan has expired.

      Two-step loans bear fixed or floating rates. Floating rates are determined by reference to interest rates on the average of 3 month Certificates of Bank Indonesia (SBI) during the six months preceding the installment due date plus 1.0% per annum or the interest rate offered by lenders plus 5.25% for two-step loanloans which are payable in Rupiah and the interest rate offered by offshore lenders plus 0.5% for two-step loanloans which are payable on foreign currencies. Repayments of principal are due on the loans at various dates through 2025.2024. For the years 20042005 through 2008,2009, aggregate scheduled repayments of principal range from Rp.578.3Rp.444.9 billion to Rp.843.3Rp.655.4 billion per year and average Rp.707.7Rp.526.6 billion per year.

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      The Company must maintain financial ratios as follows:

 • Projected net revenue to projected debt service ratio should exceed 1.5:1 and 1.2:1 for two-step loans originating from World Bank and Asian Development Bank (“ADB”), respectively; and
 
 • Internal financing (earnings before depreciation and interest expenses) should exceed 50% and 20% compared to capital expenditures for loans originally from the World Bank and ADB, respectively.

As of December 31, 2003,2004, the Company was in compliance with the above covenants. Also see “— Guaranteed Notes”.
Guaranteed Notes

      In April 2002, Telekomunikasi Selular Finance Limited (“TSFL”), Telkomsel’s wholly-owned subsidiary, issued US$150 million in guaranteed notes (“Notes”Guaranteed Notes (the “Notes”). The notesNotes bear interest at 9.75%, payable semi-annually on April 30 and October 30 of each year and will mature on April 30, 2007.

      On April 23, 2002, TSFL entered into subscription agreements with UBS AG (“UBS”) whereby UBS agreed to subscribe and pay for the notesNotes at an issue price equal to 99.709% of the principal amount of the Notes, less any fees. TSFL has further authorized UBS to have the Notes listed in the Singapore Exchange Securities Trading Limited (the “Singapore Exchange”).

      Based on the “On-Loan Agreement” dated April 30, 2002, between Telkomsel and TSFL, the proceeds from the subscription of the Notes were lent to Telkomsel at an interest rate of 9.765% per annum, payable on the same terms as above.

      TSFL may, on the interest payment date falling on or about the third anniversary of the issue date, redeem the Notes, in whole or in part, at 102.50% of the principal amount of such Notes, together with interest accrued up to the date fixed for redemption. If only part of the Notes are redeemed, the principal amount of the Notes outstanding after such redemption must be at least US$100 million.

      On September 8, 2003, the agreement was amended such that if any Notes are cancelled, the outstanding principal amount of the remaining Notes will be reduced by the principal amount represented by the cancelled Notes.

In 2003, Telkomsel purchased US$17.3 million (Rp.145.4 billion) of the Notes from Deutsche Bank. Subsequent to December 31, 2003,In 2004, Telkomsel purchased US$52.053.4 million (Rp.438.5 billion) of the Notes from Deutsche Bank. Telkomsel redeemed the entire outstanding principal amount of US$79.4 million of the Notes from Deutsche Bank on April 30, 2005.
IDR Bond Issuance

      On July 16, 2002, TELKOM issued bonds denominated in Rupiah amounting to Rp.1,000 billion (US$118.5 million).billion. The bonds were issued at par value and have a term of five years. The bonds bear interest at a fixed rate

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of 17% per annum, payable quarterly beginning October 16, 2002. The bonds are traded on the Surabaya Stock Exchange and will mature on July 15, 2007. Net proceeds after expensesbond issuance costs of Rp.19.2 billion from the bond issued amounted to Rp.980.8 billion (US$116.2 million) while the total bond issuance cost was Rp.19.2 billion (US$2.3 million).

billion.

      As of December 31, 2003, the usage of bond proceeds was Rp.504.7 billion (US$59.8 million) or 51.5% of bond proceeds. The planned usage2004, all of the bond proceeds were approximately 84%have been used, primarily for the CDMA project and approximately 16%with the remainder for the access network.

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      The Company must maintain the following consolidated financial ratios:

 • Debt service coverage ratio must exceed 1.5:1;
 
 • Debt to equity ratio must not exceed (i) 3:1 for the period January 1, 2002 to December 31, 2002; (ii) 2.5:1 for the period January 1, 2003 to December 31, 2003; and (iii) 2:1 for the period January 1, 2004 to the date the bonds are redeemed; and
 
 • Debt to EBITDA ratio must not exceed 3:1.

As of December 31, 2003,2004, the Company was in compliance with these covenants.
Medium-Term Notes
      On December 15, 2004, TELKOM issued unsecured medium-term notes (“MTN”) in the principal amount of Rp.1.125 trillion in four series, pursuant to a Medium-Term Notes Issuance Agreement dated December 13, 2004. Series A is in the principal amount of Rp.290 billion, matures on June 15, 2005 and bears interest at the rate of 7.7% per annum, Series B is in the principal amount of Rp.225 billion, matures on December 15, 2005 and bears interest at the rate of 7.95% per annum, Series C is in the principal amount of Rp.145 billion, matures on June 15, 2006 and bears interest at the rate of 8.2% per annum, and Series D is in the principal amount of Rp.465 billion, matures on June 15, 2007 and bears interest at the rate of 9.4% per annum. Interest on the outstanding MTN is payable on June 15, 2005, December 15, 2005, June 15, 2006, December 15, 2006 and June 15, 2007. The MTN were offered at their principal amounts.
      Under the term and conditions of the MTN, TELKOM cannot, without prior approval of holders of a majority of the outstanding principal amount of the MTN, take certain actions, including (i) to encumber, pledge or charge any part of its assets, with certain exceptions; (ii) provide, or to cause its subsidiaries to provide, any corporate guarantee to any third party, except corporate guarantees relating to the obligations of its subsidiaries, or the purpose of tendering or acquiring assets through export credit etc; (iii) to merge or consolidate with other companies which results in a material adverse effect to the operations and financial condition of TELKOM; and (iv) to dispose of assets which is in aggregate more than 5% of TELKOM’s net fixed assets.
      TELKOM is required at the end of each calendar quarter during the life of the MTN to maintain certain financial ratios, namely: (i) debt service coverage ratio of not less than 1.5 to 1; (ii) debt to equity ratio of not more than 2 to 1; and (iii) debt to EBITDA ratio of not more than 3 to 1. TELKOM is in compliance with these ratios.
Acquisition Indebtedness and Option Purchase Price
Dayamitra

On May 17, 2003, TELKOM paid in full the unpaid portion of the purchase price for its 90.32% equity interest in Dayamitra and the unpaid portion of the option purchase price payable to TM Communications (HK) LtdLtd. (“TM Communications”) for the right to purchase the remaining 9.68% equity interest in Dayamitra held by TM Communications. As of December 31, 2003,2004, TELKOM no longer had any obligations relating to the acquisition of its 90.32% equity interest in Dayamitra.
      On December 14, 2004, TELKOM exercised the option to buy the remaining 9.68% shares owned by TM Communication in Dayamitra. Payment for the shares in the amount of US$16.2 million will be paid on March 26, 2006 through an escrow account in Citibank Singapore. TELKOM will make monthly

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payments of US$787,390 to the escrow account starting from December 26, 2004 until March 26, 2006. TELKOM issued a non-transferable promissory note to TM Communications as a guarantee to buy the shares on March 26, 2006, during which TM Communications will concurrently transfer the 9.68% share certificate of Dayamitra to TELKOM. As a result, TELKOM currently controls 100% of the Dayamitra.
Pramindo

      At December 31, 2003, TELKOM owed the following amountsUS$191.2 million (before unamortized discount) to the former shareholders of Pramindo.

• US$76.5 million (Rp.646.1 billion), representing the unpaid portion of the purchase price for France Cable et Radio;
• US$66.9 million (Rp.565.5 billion), representing the unpaid portion of the purchase price for Astratel;
• US$24.9 million (Rp.210.0 billion), representing the unpaid portion of the purchase price for Indosat;
• US$15.3 million (Rp.129.2 billion), representing the unpaid portion of the purchase price for Marubeni;
• US$5.7 million (Rp.48.5 billion), representing the unpaid portion of the purchase price for IFC USA; and
• US$1.9 million (Rp.16.2 billion), representing the unpaid portion of the purchase price for NMP Singapore.

Pramindo, representing the unpaid portion of the purchase price for France Cable et Radio, Astratel, Indosat, Marubeni, IFC USA and NMP Singapore.

      On January 29,28, 2004, TELKOM signed a short-term loan agreement with ABN-AMRO Bank N.V. Jakarta (“ABN AMRO”) in the amount of approximately US$130 million. The loan proceeds were thereafter placed in escrow and were subsequently released to TELKOM on March 15, 2004, when TELKOM exercised its option to repurchase the remaining outstanding promissory notes TELKOM issued to Pramindo’s shareholders as payment for their shares in Pramindo. This allowed TELKOM to accelerate the purchase of the remaining 55% of Pramindo that it did not own. Following this transaction, TELKOM owned 100% of Pramindo. Subsequently, one share in Pramindo was transferred to TELKOM’s corporate secretary in order to comply with the legal requirement that Indonesian limited liability companies should have more than one shareholder and TELKOM now owns 99.99% of Pramindo.

      Principal and interest on the ABN AMRO loan will bewas repaid in 10 monthly payments starting March 31, 2004 through December 31, 2004, with interest payable at one month LIBOR plus 2.75%.

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The final installment payment was made in December 2004.

AriaWest

On July 31, 2003, TELKOM acquired all the shares of AriaWest. As a result of the acquisition, TELKOM owes the former shareholders of AriaWest US$109.1 million, which will be repaid in ten semi-annual installments from July 31, 2004 through January 31, 2009. As of December 31, 2004, the amount payable to AriaWest’s former shareholders, before unamortized discount, totaled US$98.2 million. In addition, TELKOM owes AriaWest’s former lenders US$196.97 million, which is being repaid in installments starting December 31, 2003 through June 30, 2007, with interest payable at six month LIBOR plus 3.5%. AfterAs of December 31, 2004, TELKOM has repaid the paymententire outstanding balance using the proceeds from the issuance of TELKOM’s medium-term notes.
KSO IV
      On January 20, 2004, TELKOM and MGTI entered into an agreement to amend and restate the KSO Agreement with respect to Regional Division IV. Under the amended and restated KSO agreement, the rights to operate fixed-line telecommunication services in KSO IV region are transferred to TELKOM and KSO IV is operated under the management, supervision, control and responsibility of TELKOM. In addition, for the remaining KSO period, TELKOM is entitled at its sole discretion and expense to construct new telecommunications facilities in Regional Division IV. MGTI receives fixed monthly payments, while TELKOM is entitled to the balance of the first installment onKSO revenues after the monthly amounts due to MGTI and operating expenses. If the KSO IV unit is unable to or does not for any reason pay MGTI the fixed monthly payments due to it, TELKOM is obligated to make up any deficiency. At the end of the KSO period (December 31, 2010), all rights, title and interest of MGTI in existing property, plant and equipment (including new additional installations) and inventories shall be transferred to TELKOM at no cost. As a result of the amended and restated KSO agreement, TELKOM obtained the legal right to control financial and operating decisions of Regional Division IV for a purchase price of US$390.7 million, or Rp.3,285 billion, which represents the present value of the fixed monthly payments (totaling US$517.1 million) to be paid by TELKOM to MGTI from 2004

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through 2010 plus direct cost of the business combination. TELKOM has accounted for this transaction as a business combination using the purchase method of accounting in 2004.
      At December 31, 2003,2004, the amount payableremaining monthly payments to AriaWest’s former lenders totaledbe made by TELKOM to MGTI, before unamortized discount, amounted to US$172.3 million.462.9 million (Rp.4,305.1 billion).
Sumatera backbone network

On April 10, 2002, TELKOM entered into four term loan facilities to finance the construction of the Sumatera high performance backbone network. These four facilities are entered into with (i) Bank Central Asia, for Rp.173 billion; (ii) Citibank, N.A., for US$6,950,000; (iii) Citibank International plc as agent for certain lenders to a syndicated loan, for US$23,400,000 (supported by an export credit guarantee of Hermes Kreditversicherungs AG); and (iv) Citibank International plc as agent for certain lenders to a syndicated loan, for US$21,000,000 (supported by an export credit guarantee of Istituto per I Servizi Assicurativi del Commercio Estero). As of December 31, 2003,2004, all of these facilities have been fully or partially utilized, with the US$6,950,000 loan to Citibank, N.A. being fully repaid in May 2003.
      Under the facility with Bank Central Asia, TELKOM is required at the end of each calendar quarter during the life of the facility to maintain certain financial ratios, namely: (i) debt to EBITDA ratio of not more than 3 to 1; (ii) EBITDA to interest expense ratio of not greater than 4 to 1; and (iii) EBITDA to interest expense and principal ratio of not more than 1.5 to 1. TELKOM is in compliance with these ratios. TELKOM has also covenanted in this facility that it will not guarantee or collateralize its assets for an amount exceeding Rp.500 billion.
      Under the other outstanding facilities, during the period when the subject loans are outstanding, TELKOM is required to maintain the following financial ratio:
      (i) debt service coverage ratio of not less than 1.5 to 1; (ii) debt to equity ratio of not more than: (a) 3 to 1 for the period of April 10, 2002 to January 1, 2003, (b) 2.75 to 1 for the period of January 2, 2003 to January 1, 2004, (c) 2.5 to 1 for the period of January 2, 2004 to January 1, 2005 and (d) 2 to 1 for the period of January 2, 2005 to the full repayment date of the loans (iii) debt to EBITDA ratio of not more than: (a) 3.5 to 1 for the period of April 10, 2002 to January 1, 2004 (b) 3 to 1 for the period of January 2, 2004 to the full repayment date of the loans.
Regional Division V Junction Project

On June 21, 2002, TELKOM entered into a loan agreement with a consortium of banks for a Rp.400 billion facility in order to finance the Regional Division V junction project. The original loan was to be repaid in 14 quarterly installments starting from April 2004. The loan agreement was amended on April 4, 2003 to reduce the facility amount to Rp.150 billion and provide for repayments to be made in 14 quarterly installments starting on May 21, 2004. As of December 31, 2003, the facility had not been drawn down. As of May 31, 2004, TELKOM had drawn down a total of Rp.114.6Rp. 148.9 billion and Japanese Yen 428.9 million (Rp.34.3 billion) of this loan. As of December 31, 2004, the outstanding amount of the loan was Rp.117.2 billion.
      Under this loan agreement, TELKOM is required at the end of each calendar quarter during the life of the facility to maintain certain financial ratios, namely: (i) debt to equity ratio of not more than 3 to 1; and (ii) EBITDA to interest expense ratio of not less than 5 to 1. TELKOM is in compliance with these ratios.
Telkomsel’s Indebtedness (including facilities)

      In April 2002, Telekomunikasi Selular Finance Limited (“TSFL”), Telkomsel’s wholly-owned subsidiary, issued US$150 million in guaranteed notesGuaranteed Notes (“Notes”) which are guaranteed by Telkomsel. The Notes bear interest at 9.75% per annum, payable semi-annually on April 30 and October 30 of each year, and will be due on April 30, 2007. In 2003 and 2004, as part of TELKOM’s plan to minimize foreign exchange exposure and reduce interest charges, Telkomsel purchased US$17.3 million worthand US$53.4 million (Rp.459.5 billion), respectively, of Notes from Deutsche Bank. Telkomsel redeemed

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the entire outstanding principal amount of US$79.4 million of the Notes from Deutsche Bank on April 30, 2005.
      On July 12, 2002, Telkomsel entered into an Opening L/C and Trust Receipt Loan Facility Agreement with Citibank NA providing a total facility of US$40 million to issue letters of credit in connection with the procurement contracts with strategic partners. Telkomsel has the option of deferring settlement of any letter of credit once it has been drawn upon, in which case the outstanding amounts bear interest at a rate equal to the bank’s cost of funds plus 2.5% per annum. The facility was originally scheduled to mature on July 12, 2003 but the maturity date has been extended to July 31, 2004 pursuant to an amendment to the agreement. AsSubsequently, on July 31, 2004, the maturity date was extended to July 31, 2005, with changes to the cost of December 31, 2003, open lettersfunds from 2.5% to 2.0% above the bank’s cost of credit under this facility totaled US$14.6 million. In 2003, totalfunds. Total loans drawn from the facility amounted to US$32.431.0 million which was fully repaid asin 2003 and nil in 2004. As of December 31, 2003.

2004, the loan had been repaid.

      On July 19, 2002, Telkomsel entered into a Letter of Credit Agreement with Standard Chartered Bank, Jakarta. The agreement required Telkomsel to deposit an amount equal to the LC amount prior to the issuance of the LC.

      On October 29, 2002, Telkomsel entered into a Banking Facilities Credit Agreement with Standard Chartered Bank, which includes import facilities (US$25 million), local LC facility (Rp.100 billion), Bank Guaranteebank guarantee (US$25 million) and other foreign exchange facilities. Outstanding amounts (once the

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letters of credit are drawn upon the bank) bear interest at a rate equal to SIBOR plus 2.5% per annum for US Dollar amounts and of the indicative three-month SBI plus 2.0% per annum for Indonesia Rupiah amounts. As of December 31, 2003, open letters of credit2004, loans under this facility totaled US$17.4 million.have been fully repaid.
Hermes Export Facility

      On December 2, 2002, pursuant to the Partnership Agreement with Siemens Aktiengesellschaft (AG), Telkomsel entered into a Hermes Export Facility Agreement with Citibank International plc (as Arranger and Agent) providing a total facility of EURO76.2EUR 76.2 million divided into several tranches. The agreement was subsequently amended with the latest amendment on October 15, 2003, to change the facility amount to EUR 73.4 million, the availability period and the first repayment date. The interest rate on this facility is the aggregate of 3 monthsapplicable margin (0.75%) EURIBOR plus 0.75%.and mandatory cost, if any. Interest is paid semi-annually, starting on the date amounts are drawn. The total amountTotal loans drawn down from thisthe facility amounted to EUR 72.2 million (Rp.712.4 billion) in 2003 was EURO72.2and EUR 1.1 million and as(Rp.12.2 billion) in 2004. As of December 31, 2003,2004, the outstanding balance was EURO64.9EUR 51.4 million.

In addition to the interest due on this facility, in 2003, Telkomsel was also charged an insurance premium for the insurance guarantee given by Hermes in favor of Telkomsel for each loan utilization. The total amount of the premiums for 2003 was EURO6.1 million,utilization amounting to EUR 6,089,149, 15% of which 15% was paid by Telkomsel in cash and thecash. The remaining balance was settled through utilization of the facility.
EKN-Backed Facility

On December 2, 2002, pursuant to the partnership agreement with PT Ericsson Indonesia, Telkomsel entered into the EKN-Backed Facility Agreement with Citibank International plc (as ArrangerOriginal Lender and Agent) covering a total facility amount of US$70.5 million divided into several tranches. In December 2004, the agreement was amended to reduce the total facility to US$68.9 million. The interest rate on the facility is fixed atbased on the aggregate of the applicable margin, commercial interest reference rate and mandatory cost, if any (i.e., 4.27% per annum.and 4.02% as of December 31, 2003 and 2004, respectively). Interest is paid semi-annually, starting on the date amounts are drawn. As of December 31, 2003,2004, Telkomsel hashad drawn down US$21.769.0 million from this facility.facility and the outstanding balance was US$56.1 million.

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Dayamitra’s Indebtedness

      As of December 31, 2003,2004, Dayamitra had the following significant indebtedness outstanding:

 • US$5.96 million (Rp.50.3 billion), representing a bridging loan payable by Dayamitra to Cable and Wireless Plc. The bridging facility is repayable in ten semi-annual installments from 2000 through 2004. Aggregate scheduled annual repayment of principal under the loans in 2004 is US$5.96 million. This loan is secured by an assignment of KSO revenues and bank accounts, fiduciary transfer of Dayamitra’s movable assets, assignment of Tomen construction contract, assignment of proceeds of early termination of the KSO license by TELKOM and assignment of insurance proceeds. The loan bears interest at LIBOR plus 4% per annum;
• US$19.6 million (Rp.165.4 billion), representing supplier’s loan payable by Dayamitra to Cable and Wireless Plc. and Tomen. The supplier’s credit loans are repayable in ten semi-annual installments commencing December 15, 2000. Aggregate scheduled annual repayment of principal under the loans in 2004 and 2005 is US$19.5 million and US$0.1 million, respectively. This loan is secured proportionally with collateral for bridging loan facility Cable & Wireless Plc. The loan bears interest at LIBOR plus 4.5% per annum; and
• Rp.39.9Rp.58.3 billion (US$4.76.3 million), representing a loan payable by Dayamitra tofacilities from Bank Mandiri pursuant to the terms of a loan agreementagreements entered into on November 20, 2003 and December 20, 2003. The loan isloans are payable on a quarterly basis until the fourth quarter of 20052006 and bearsbear interest at 14.5%11.25% per annum.

     In 2003, Dayamitra paid in full the US$7.0 million (Rp.62.7 billion) long-term bank loan payable by Dayamitra to the Export-Import Bank of Japan.

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Capital Expenditures

      At December 31, 2003,2004, TELKOM (unconsolidated) incurred capital expenditures of Rp.4,106.1Rp.3,715.6 billion (US$486.5400.0 million), which was slightly less than the Rp.4,393.5Rp.5,019.8 billion originally budgeted in its capital expenditure plan. In addition, Telkomsel incurred capital expenditures of Rp.5,348.8 billion (US$633.7 million) for network infrastructure and other investments and TELKOM’s other subsidiaries incurred capital expenditures of Rp.270.0 billion (US$32.0 million).

      TELKOM groups its capital expenditures into the following categories for planning purposes:

 • Infrastructure, which consists of the transmission network, access network (including fixed wireless networks), data backbone and fixed line network backbone infrastructure;
 
 • Phone, which is essentially fixed wireline and fixed wireless;
 
 • Mobile, which consists of GSM mobile wireless telephone services and is presently conducted principally through Telkomsel;
 
 • Multimedia, which consists of cable and satellite direct to home (DTH) television, Internet access, VoIP services and data services and B2B commerce;services; and
 
 • Service-Net, which consists of various commercial services intended to increase traffic on TELKOM’s network, including interconnection, Internet network and third-party call centers.

      In addition, Telkomsel incurred capital expenditures of Rp.4,982.7 billion (US$536.4 million) for network infrastructure and other investments and TELKOM’s other subsidiaries incurred capital expenditures of Rp.122.1 billion (US$13.2 million).
The following table sets out TELKOM’s historical and planned capital expenditure requirements for the periods indicated, including historical and planned capital expenditures for Telkomsel, Dayamitra and TELKOM’s other consolidated subsidiaries:
                       
Year ended December 31,
2001(1)2002(1)2003(1)2004(2)2005(2)
Rp. (billion)
TELKOM:
                    
Infrastructure:                    
 
Transmission Network and Backbone(3)
  78.2   337.1   1,767.4   1,653.4   3,363.3 
 Access Network  661.0   862.9   1,849.6   2,517.4   1,530.9 
  Subtotal Infrastructure  739.2   1,200.0   3,617.0   4,170.8   4,894.2 
Commercial Services:                    
 
Phone(4)
  285.5   523.6   161.9   305.6   381.3 
 
Mobile Cellular(5)
  263.9   —   —   —   — 
 
Multimedia(6)
  113.7   154.7   76.2   197.4   179.4 
 Services-Net  275.6   59.8   99.9   32.2   235.4 
  Subtotal Commercial Services  938.7   738.1   338.0   535.2   796.1 
 Supporting Services  196.3   140.2   151.1   313.8   433.3 
  Subtotal TELKOM  1,874.2   2,078.3   4,106.1   5,019.8   6,123.6 
Long Term Investment(7)
  12,614.6   3,752.1   3,914.6   3,906.0   — 
Subtotal for TELKOM (unconsolidated)  14,488.8   5,830.4   8,020.7   8,925.8   6,123.6 
   
   
   
   
   
 
TELKOM’s Subsidiaries:
                    
Telkomsel
  2,964.0   4,531.0   5,348.8   5,000.0   5,000.0 
Dayamitra
  30.2   40.6   109.5   76.5   157.3 
Infomedia Nusantara
  —   25.9   44.6   78.0   61.0 
Pramindo Ikat Nusantara
  —   109.4   37.4   25.0   — 
Indonusa Telemedia
  —   2.6   0.8   3.4   — 
                       
  Year Ended December 31,
   
  2002(1) 2003(1) 2004(1) 2005(2) 2006(3)
           
  Rp. (billion)
TELKOM:
                    
Infrastructure:                    
 Transmission Network and Backbone  337.0   1,595.1   560.4   752.1   2,989.0 
 Access Network  863.0   1,849.6   1,831.2   2,247.7   1,515.0 
  Subtotal Infrastructure  1,200.0   3,444.7   2,391.6   2,999.8   4,504.0 
Commercial Services:                    
 Phone  523.6   161.9   901.5   683.7   1,196.5 
 Mobile Cellular  —   —   —   —   — 
 Multimedia  154.7   76.2   92.7   802.4   563.2 
 Services-Net  59.8   99.9   34.2   164.5   738.3 
  Subtotal Commercial Services  738.1   338.0   1,028.4   1,650.6   2,498.0 
 Supporting Services  140.2   151.1   295.6   922.0   564.0 
                
Subtotal for TELKOM (unconsolidated)  2,078.3   3,933.8   3,715.6   5,572.4   7,566.0 
                

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 Year Ended December 31,
Year ended December 31,  
 2002(1) 2003(1) 2004(1) 2005(2) 2006(3)
2001(1)2002(1)2003(1)2004(2)2005(2)          
 Rp. (billion)
Rp. (billion)
TELKOM’s Subsidiaries:
                
Telkomsel
  4,531.0  5,348.8  4,982.7  7,153.0  5,323.9 
Dayamitra
  40.6  109.5  50.4  108.9  95.8 
Infomedia Nusantara
  25.9  44.6  63.0  63.5  11.6 
Pramindo Ikat Nusantara
  109.4  37.4  1.7  38.5  23.1 
Indonusa Telemedia
  2.6  0.8  1.4  —  4.1 
Graha Sarana Duta
 — 0.8 17.0 19.2 21.2   0.8  17.0  3.7  21.3  28.7 
PT Pro Infokom Indonesia
 — — 0.6 9.0 —   —  0.6  0.6  —  10.8 
PT Metra (Holding)
 — — 6.1 0.2 88.4   —  6.1  0.9  12.6  — 
AriaWest
 — — 0.2 — —   —  0.2  0.1  0.1  — 
Napsindo
 — — 53.8 2.2 2.9   —  53.8  0.3  1.3  — 
 
 
 
 
 
            
Subtotal for subsidiaries 2,994.2 4,710.3 5,618.8 5,213.5 5,330.8   4,710.3  5,618.8  5,104.8  7,399.2  5,498.0 
           
Total for TELKOM (consolidated) 17,483.0 10,540.7 13,639.5 14,139.3 11,454.4   6,788.6  9,552.6  8,820.4  12,971.6  13,064.0 
 
 
 
 
 
            

(1) Amounts for 2001, 2002, 2003 and 20032004 are actual capital expenditures.
(2) Amounts for 2004 and 2005 are planned capital expenditures included in TELKOM’s budgets for the years 2004 and 2005, respectively,budget and are subject to upward or downward adjustment.
(3) Consists of data backbone and fixed-line network backbone.
(4) Consists of capital expenditures by TELKOM and subsidiaries other than Dayamitra and Pramindo.
(5) Consists of capital expenditures by TELKOM and subsidiaries other than Telkomsel. TELKOM’s investment in its GSM mobile cellular business has been entirely through Telkomsel since April 3, 2002.
(6) Consists of VoIP, Internet and, from 2003 onwards, includes hybrid fiber/coax (HFC) and cable television (CATV) systems.
(7) Planned long term investmentsAmounts for 2004 consist only of2006 are projected capital expenditures for the takeover of KSO IV operations.such year, and actual capital expenditures may be significantly different from projected amounts.

Actual future capital expenditures may differ from the amounts indicated above due to various factors, including but not limited to the Indonesian economy, the availability of vendor or other financing on terms acceptable to TELKOM, technical or other problems in obtaining or installing equipment and whether TELKOM enters any new lines of business. In particular, TELKOM’s ability to make substantial future capital expenditures will depend on whether it is successful in implementing one or more forms of an innovative approach to financing, which TELKOM refers to asincluding “pay as you grow”. See Item 3.D. “Risk Factors — Capital Expenditures — Financing” and Item 4.B. “Business Overview — Business Strategy — Reducing Cost of Capital.”
Planned Investments in 20042005

In 2004,2005, TELKOM plans to make capital investments in infrastructure, commercial services and supporting services.
Planned Investments in Infrastructure

      TELKOM’s planned capital investments in infrastructure in 20042005 total Rp.4,170.8Rp.2,999.8 billion, allocated as follows:

 • Rp.1,653.4Rp.752.1 billion for capital investments in transmission infrastructure, which are expected to include investments in a fiber optic transmission network, in the city of Surabaya, a backbone transmission network on the island of Kalimantan and Sulawesi and an additional ground satellite segment in Jakarta;Jakarta and a submarine cable system between Batam-Jakarta; and
 
 • Rp.2,517.4Rp.2,247.7 billion for capital investments in access infrastructure, which are expected to include investments in fiber optic cable fixed line, copper wire fixed line and CDMA wireless access networks.

      For a more complete discussion of TELKOM’s planned infrastructure investments, see Item 4.B. “Business Overview.”

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Planned Investments in Commercial Services

      In 2004,2005, TELKOM also plans to spend Rp.535.2Rp.1,650.6 billion for capital investments in commercial services, allocated as follows:

 • Rp.305.6Rp.683.7 billion for capital investments in fixed-linefixed line commercial services (including fixed wireless services), which include additional capacity, service enhancements and upgrades, including to its value added services and software and mechanical and electrical systems;
 
 • Rp.197.4Rp.802.4 billion for capital investments in multimedia (including Internet,core network of IP transport, HFC and CATV services), which include increases in the number of VoIP access points, Internet multiplexing (IMUX) systems for Internet and data access, Internet value added services such as B2B e-commerce, broadband access (xDsl), and improving TELKOM’s HFC and CATV systems;
 
 • Rp.32.2Rp.164.5 billion for capital investments in customer support and customer care,service-net, including the establishment of call center facilities, billing systemsfixed wireless services, e-commerce, internet connectivity and TELKOM’s business enterprise project, which caters to the largest 20% by value of TELKOM’s corporate clients, as well as better network management and management information systems.added services.
Planned Investments in Supporting Services

TELKOM plans to spend Rp.313.8Rp.922.0 billion in 20042005 for capital investments in supporting services, including research and development, building facilities and office facilities.
      Telkomsel’s planned capital investments in infrastructure in 2005 total Rp.7,322.0 billion relating to:
• investments in BTS stations to expand network coverage and TRX and microcells to improve quality;
• switching equipment;
• IN equipment used for prepaid products; and
• fiber optic transmission for large cities in Java.
Financing

In common with many Indonesian state-owned enterprises, TELKOM has historically relied on two-step loans financed by the Government and revenue sharing with co-investors to fund investment in property, plant and equipment. In recent years, however, TELKOM has funded its capital investments largely through internally generated cash flows from operating activities and direct borrowing from commercial banks. In addition, TELKOM has in recent years accessed the debt capital markets for a portion of its financing needs. On July 16, 2002, TELKOM issued a fixed rate IDR Bond in the amount of Rp.1,000 billion with tenormaturity of five years with fixed interest rate of 17% per annum. On December 15, 2004, TELKOM issued unsecured medium-term notes (“MTN”) in the principal amount of Rp.1.125 trillion in four series with interest rates ranging from 7.7% to 9.4% per annum. TELKOM is presently in the process of exploring alternative sources of financing for capital investment, including vendor-procured and other bank financing, as well as other potential sources of borrowed funds.
Two-Step Loans

Since 1982, TELKOM has entered into a series of two-step loans in which the Government borrows money from supranational lenders and foreign export credit agencies for on-lending to TELKOM to fund investment in property, plant and equipment. TELKOM obtained its last two-step loan in 1994 and, as a public company, is no longer eligible to obtain Government-assisted financing of this type. See “— Liquidity and Capital Resources — Indebtedness — Two-Step Loans”.

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Revenue Sharing

      Until recently, TELKOM made use of revenue sharingrevenue-sharing arrangements to develop fixed line networks in heavily populated urban areas of Indonesia, public card-phone booths and its analog mobile cellular networks. Under these revenue sharingrevenue-sharing arrangements, investors finance the costs incurred in procuring and installing equipment, while TELKOM manages and operates the equipment, and bears the cost of repairs and maintenance, after installation and until the end of the revenue sharingrevenue-sharing period. The investors legally retain rights to the equipment during the revenue sharingrevenue-sharing period but transfer ownership to TELKOM at the end of such period. See Item 4.B. “Business Overview — Revenue Sharing Arrangements (PBHs).”

      TELKOM did not fund any capital investments (other than capital investments in fixed line telephone services) through revenuerevenue- sharing arrangements in 2001, 2002, 2003 or 20032004 and does not intend to fund any such capital investments (other than capital investments in fixed line telephone services)

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through such arrangements in the future, except in the context of its efforts to promote the “pay as you grow” program to fund capital investments. See “Pay as You Grow” below. Beginning in 2004, TELKOM intends to replace existing revenue sharingrevenue-sharing arrangements with new partnership schemes on more favorable terms.
Direct BorrowingBorrowings

      Beginning in 2002, TELKOM began funding a significant portion of its capital expenditures through vendor-procured and other direct borrowingborrowings from banks and other lenders, including the capital markets. On February 25, 2002, TELKOM borrowed US$4.0 million and Rp.90.0 billion from a consortium of Indonesian banks to finance the development of an Internet protocol backbone. TELKOM had never previously borrowed directly from a commercial bank to finance capital expenditures. As of December 31, 2003,2004, the outstanding amount under these facilities arewas US$1.90.4 million and Rp.34.3Rp.8.1 billion.
      On April 10, 2002, TELKOM borrowed US$44.451.4 million and Rp.173.0 billion from Citibank N.A. and PT Bank Central Asia to finance the development of a high performance backbone in Sumatera. As of December 31, 2003,2004, the outstanding amount under these facilities arewere US$31.829.8 million and Rp.139.8Rp.143.5 billion.
      On June 21, 2002, TELKOM entered into a loan agreement with several Indonesian banks in which Bank Bukopin acting as facility agent with loan facility, as amended, amounting to Rp.150 billion to fund the development of regional junction Regional Division V project. A substantial portion of these loans were supported by export credit agency guarantees procured by the equipment vendors for the project. Prior to this transaction, TELKOM had not previously borrowed with the support of export credit agency guarantees, except in the two-step loans extended through the Government.

As of December 31, 2004, the outstanding amount under these facilities were Rp.117.2 billion.

On August 27, 2003 TELKOM entered into a Loan Agreement with The Export-Import Bank of Korea for approximately US$124 million, with a portion of the loan amount to be used by TELKOM to finance its obligations under the Master of Procurement Partnership Agreement (“MPPA”) it had entered into with a consortium led by Samsung Corporation. As of December 31, 2003,2004, the outstanding amount under this facility was US$59.1 million
      On January 28, 2004, TELKOM had not yet drawn downsigned a short-term loan agreement with ABN-AMRO Bank N.V. Jakarta (“ABN AMRO”) in the amount of approximately US$130 million. The loan proceeds were thereafter placed in escrow and subsequently released to TELKOM on this loan. However,March 15, 2004 when TELKOM exercised its option to purchase the remaining outstanding promissory notes TELKOM issued to Pramindo’s shareholders as of Maypayment for their shares in Pramindo. Principal and interest on the ABN AMRO loan will be repaid in 10 monthly payments starting March 31, 2004, through December 31, 2004, with interest payable at one month LIBOR plus 2.75%. As of December 31, 2004, the outstanding amount under this facility was nil.

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      On December 21, 2004, TELKOM had drawn downentered into a totalUS$65.0 million short-term loan facility agreement with ABN AMRO to be used for working capital purposes. The principal amount of US$40.630 million frommatured on March 31, 2005 and was repaid and US$35 million matured on June 30, 2005 and was repaid. The loan bore interest at LIBOR plus 2.5%. As of December 31, 2004, the outstanding amount under this loan. See Item 10. “Additional Information — C. Material Contracts.”facility was US$65.0 million.
      On December 27, 2004, TELKOM entered into a short-term loan agreement with Bank Central Asia in the amount of US$49 million to be used for working capital purposes. The loan matured on June 28, 2005 and was repaid and bore interest at LIBOR plus 2.85%. As of December 31, 2004, the outstanding amount under this facility was US$49.0 million.
Pay as You Grow

The Pay as You Grow program involves arrangements in which TELKOM and its equipment suppliers agree that a percentage of the contract cost will be paid upfront (typically 25%) and the balance will be paid once the lines are put into service. TELKOM and its suppliers also agree to work together to plan and design networks, assess capacity requirements and determine timetable for procurement. The “pay as you grow” scheme allows TELKOM to pay the equipment vendors based on the attainment of a certain number of customers in the related area/facility or within one year from completion date, whichever is earlier. Vendors participating in this “pay as you grow” scheme have assessed the risk of entering into such scheme and, up to the date of this Annual Report, have only been willing to enter into this scheme for projects that they believe have high customer potential. Accordingly, vendors have always been paid by TELKOM within a few months after the equipment has been delivered. TELKOM expects that only a relatively small number of equipment suppliers will be invited to participate in pay as you grow programs and supply a substantial portion of TELKOM’s infrastructure and other equipment needs. See Item 4.B. “Business Overview — Business Strategy — Efficient Use of Capital Liquidity through New Term of Payment Alternatives with Lower Risk.”
IDR Bond Issuance

      See Item 5.B. “Liquidity and Capital Resources — Indebtedness.”

Medium-Term Notes
      See Item 5.B. “Liquidity and Capital Resources — Indebtedness.”
Critical Accounting Policies, Estimates and Judgments

      The preparation of TELKOM’s consolidated financial statements in conformity with Indonesian GAAP, as well as the reconciliation to U.S. GAAP, requires TELKOM to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and revenue and expenses for the years reported. Management continually evaluates its estimates and judgments including those related to useful lives of plant and equipment, pension and other post-retirement benefits, income taxes and legal contingencies. Management bases its estimates and judgments on historical experience and other factors that are

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believed to be reasonable under the circumstances. For a complete discussion of the application of these and other significant accounting policies, see Note 2 to the Company’s consolidated financial statements. Actual results could differ from those estimates under different assumptions and conditions. TELKOM believes that of our significant accounting policies, the following may involve a higher degree of judgment or complexity or are areas where assumptions and estimates are particularly critical to the financial statements:
Consolidation/ Equity method

      The consolidated financial statements include the financial statements of the Company and entitiesits subsidiaries in which the Company directly or indirectly has ownership of more than 50%, as well as entitiesor the Company has the ability to control the entity, even though the ownership is less than or equal to 50%. These entities

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Subsidiaries are consolidated from the date on which effective control is obtained and are no longer consolidated from the date of disposal. The Company does not consolidate an entity if control is expected to be temporary.

      All significant inter-company balances and transactions have been eliminated in consolidation.

      In the case of Pramindo, we havethe Company has evaluated the scope and terms of this investment and havehas concluded that we haveit has the ability to exercise control over Pramindo and the right to obtain all of the future economic benefits of ownership as though wethe Company owned 100% of the shares. The factors that wethe Company considered include, among others, the fact that the purchase price is fixed, ourits ability to vote 100% of the shares at general stockholders meetings, subject to certain protective rights retained by the selling stockholders, ourits ability to appoint all of the board members and management and ourits consequent ability to exclusively determine the financial and operating policies of Pramindo subject to certain protective rights, ourits issuance of irrevocable and unconditional promissory notes in settlement of the purchase consideration to the selling stockholders, the placement of the remaining 55%70% of Pramindo shares not yet transferred to the Company’sCompany in an escrow account as of December 31, 2003 by the selling stockholdersshareholders and the protective provisions in the various agreements for the Company to take over all shares (including powers of attorney issued by the selling stockholders) or collapse the KSO arrangement once the full amount payable for the shares has been paid.

      In addition to its operating subsidiaries, TELKOM has a number of investments in other associated companies. Such investments were intended to give TELKOM the ability to influence the business activities, such as the choices of technologies, of these associated companies. TELKOM’s general policy is to invest in companies that are associated with the following business sectors: fixed line telecommunications, cellular, television, Internet and shared services. In the majority of cases, our investments are in the range between 20 and 50 per centpercent of the equity interest of the investees such that they provide us with the ability to significantly influence the operating and financial policies of such investees.

      We reflect our influence with these investee affiliates by accounting for our interests in them using the equity method of accounting, which prescribes that TELKOM record its share of the earnings and losses of such investees. The carrying amount of the investments is written down to recognize any permanent decline in the value of individual investments. Any such write down is charged directly to current operations.

      Investments in shares of stock with ownership interest of less than 20% that do not have readily determinable fair values and are not intended for long-term investments are stated at cost. The carrying amount of the investments is written down to recognize any moreother than temporary declines in the value of the individual investments. Any such write down is charged directly to current operations.

      TELKOM periodically reviews each of its affiliate investee relationships to determine its amount of share ownership in its associated companies. TELKOM’s policy is to make its investment decision based on the performance and business prospects of the relevant associated company.

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Revenue Recognition

      Revenues arising from fixed line voice transmission services, data communications facility services, leased circuit services and other transmission services are recognized at the time we provide these services to customers.

      We recognize revenue from fixed line installation services at the time the installations are placed in service.

Revenue from usage charges are recognized as customers incur the charges.

      Revenues from cellular service connections (connection fee) are recognized as income at the time the connection takes place, while those from airtime (for cellular) and monthly subscription charges are recognized whenas accessed and as earned. Revenues from prepaid card customers, which consist of the

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sale of starter packs, which includeconsist of a Subscriber Identification Module (“SIM”)SIM card in the case of cellular services and RUIM in the case of fixed wireless telephone, and pulse reload voucher, are recognized as follows:

 • Sales of starter packs are recognized as revenue upon delivery of the starter packs to distributors, dealers or directly to customers; and
 
 • Sales of pulse reload vouchers are recognized initially as unearned income and recognized proportionately as revenue based on successful calls made by the subscribers or whenever the unused stored value of the voucher has expired.

      Other operating revenues such as revenue from network interconnection with other domestic and international telecommunication carriers are recognized as incurred and are presented net of interconnection expenses (expenses are recognized on a net basis.

an accrual basis).

      We are required to interconnect our networks with other telecommunications operators. In certain instances we rely on other operators to measure the traffic flows interconnecting with our networks. We use estimates in these cases to determine the amount of income receivable from or payments we need to make to these other operators. The prices at which these services are charged are regulated and may be subject to retrospective adjustment. We use estimates in assessing the likely effect of these adjustments.

      The Company records assets under revenue-sharing agreements as “Property, plant and equipment under revenue-sharing arrangements” (with a corresponding initial credit to “Unearned income on revenue-sharing arrangements” presented in the Liabilities section of the balance sheet) based on the cost incurred by the investors as agreed upon in the contracts entered into between the Company and the investors. Property, plant and equipment are depreciated over their estimated useful lives using the straight-line method.
      Unearned income related to the acquisition of the property, plant and equipment under revenue-sharing arrangements is amortized over the revenue-sharing period using the straight-line method. At the end of the revenue-sharing period, the respective property, plant and equipment under revenue-sharing arrangements are reclassified to the “Property, plant and equipment” account. Revenue earned under revenue-sharing arrangements is recognized on the basis of TELKOM’s share as provided in the agreement.

TELKOM’s share of distributable KSO revenue (revenue earned under Joint Operation Schemes) includes

      Revenue from joint operation schemes include amortization of the investor’s initial payments, Minimum TELKOMTelkom Revenues (“MTR”) and the Company’s share of Distributable KSO Revenues (“DKSOR”). The unearned
      Unearned initial investor payments received as compensation from the KSO Investorsinvestors are presented net of all direct costs incurred in connection with the KSO agreement and are amortized using the straight-line method over the KSO period.period of 15 years starting from January 1, 1996.
      MTR are recognized on a monthly basis based upon the contracted MTR amount for the current year, in accordance with the KSO agreement.
      The Company’s share of distributable KSO revenuesDKSOR is recognized on the basis of the Company’s percentage share of the KSO revenues, net of MTR and operational expenses of the KSO Units, as provided in the KSO agreements.
Allowances for Doubtful Accounts

TELKOM provides services to certain of its customers on credit terms. We maintain allowances

      The allowance for doubtful accounts for estimatedis the Company’s best estimate of the amount of probable credit losses in the Company’s existing accounts receivable. The Company determines the allowance based on our expected levelhistorical write-off experience. The Company reviews its allowance for doubtful accounts monthly. Past due balances over 90 days for retail customers are fully provided, and past due balance for non-retail customers over a specified amount are reviewed individually for collectibility. Account balances are charged off against the allowance after all means of recoverability of accounts receivable, collection have been exhausted and

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the aging of the accounts receivable balances and a review of status of individual receivables account.potential for recovery is considered remote. The Company does not have any off-balance sheet credit exposure related to its customers.
Estimated Useful LivesCarrying Amount of Property, Plant and Equipment — Direct Acquisitionsand Goodwill and Other Intangible Assets

      TELKOM estimates the useful lives of property, plant and equipment and goodwill and other intangible assets in order to determine the amount of depreciation and amortization expense to be recorded during any reporting period. The useful lives are estimated at the time the asset is acquired and are based on historical experience with similar assets as well as taking into account anticipated technological or other changes.changes and, in the case of rights to operate intangible assets, the remaining term of the KSO agreement. When the book

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value of long-lived assets exceeds the recoverable valuecarrying amount of the asset exceeds its recoverable value due to, among others, technological changes, significant adverse change in legal factors or business climate, unanticipated competition, industry changes or physical damage, the useful lives assigned to these assets may either need to be shortened, resulting in the recognition of increased depreciation and amortization expense in future periods or these changes could result in the recognition of an impairment charge to reflect the write-down in value of the asset. TELKOM reviews these types of assets for impairment periodically, when events or circumstances indicate that the carrying amount may not be recoverable over the remaining lives of the assets. Assessment of the timing and/or the amount of such impairment is a matter of significant judgment. In assessing impairments, TELKOM uses discounted cash flows that take into account management’s estimates of future operations. The most important estimates that we use in projecting our future cash flows involve our expectations of the future prices at which our services will be charged, the number of access lines that we will have in service and the discount rate that is used to arrive at the discounted present value of the projected future cash flows. The prices at which our services are charged are subject to government regulation and may be subject to retrospective adjustment.regulation. The number of access lines that we will have in service will depend upon our ability to source sufficient, affordable financing to build new access lines.
Acquisitions and Business Divestitures

      The cross-ownership transactions with Indosat and a portion of the Pramindo acquisition representing Indosat’s interest in Pramindo have been accounted for as a reorganization of entities under common control because TELKOM and Indosat (at the dates of the relevant transactions) were both controlled by the Government. These transactions have been recorded at historical cost in a manner similar to that in pooling of interests accounting.

      The difference between the consideration paid or received and the related historical carrying amount, after considering income tax effects, has been charged to equity as “Difference in value of restructuring transactions between entities under common control”.

The acquisition of a subsidiary from a third party is accounted for using the purchase method. The excess of the acquisition cost over TELKOM’s interest in the fair value of identifiable assets and liabilities acquired is recorded as goodwill and amortized using the straight-line method over a period generally not expected to be more than five years.
Pension and Post-retirement Benefits

      We have a commitment, mainly through TELKOM’s pension fund, to pay pension and other post-retirement benefits to our employees and former employees who reach 56 years of age. The cost of these benefits and the present value of our pension and other post-retirement liabilities depend on a number of factors which we determine on an actuarial basis utilizing a number of assumptions. The assumptions used in determining the net periodic cost (income) for pension and post-retirement benefits include the expected long-term rate of return on the relevant plans assets and the discount rate. In the case of the post-retirement healthcare plan, the expected rate of increase in medical costs is also used. Any changes in these assumptions will impact the net periodic cost (income) recorded for pension and post-retirement benefits.

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      TELKOM uses long-term historical actual return information and estimated future long-term investment return information by reference to external sources to develop its expected rate of return on plan assets.

      At the end of each year, TELKOM determines the appropriate discount rate, which represents the interest rate that should be used to determine the present value of future cash flows currently expected to be required to settle the pension and post-retirement benefit obligations. In determining the appropriate discount rate we considered the current yields on high quality corporate fixed-income investments. We were not able to identify suitable investments in Indonesia with a corresponding maturity to the expected duration of the benefit obligations so we have used a numberthe yield-to-maturity of sources to extrapolate to match the timing of maturity. These sources include current and historical relationships

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between government bond yields and inflation and the current yields available on high quality Indonesian debt securities.Government Bonds at year end. At December 31, 2003,2004, TELKOM’s discount rate was 11%.

      The expected rate of medical cost has been determined by comparing the historical relationship of our actual medical cost increases with the rate of general inflation in the Indonesian economy. Past experience has shown that our actual medical costs have on average increased by a factor of 1.5 times the general rate of inflation. We have decreasedmaintained our projected medical cost inflationat 12% from 14% at December 31, 2002 to 12% at December 31, 2003 to December 31, 2004 to reflect the decreasea steady growth in our medical cost trend experience which is in line with reducinga constant general inflationary trends in Indonesia.

      Assumed health care cost trends have a significant effect on the amounts reported for the health care plan. A one-percentage-point change in assumed health care cost trend rates would have the following effects:
         
  1-Percentage- 1-Percentage-
  Point Increase Point Decrease
     
Effect on total of service and interest cost components  128,311   (99,603)
Effect on post-retirement benefit obligation  916,961   (720,657)
      Other assumptions include life expectancy of the members, the rate of increase in compensation levels and the average remaining years of service.

Early retirement benefits are recognized at the time TELKOM makes a commitment to provide early retirement benefits as a result of an offer made in order to encourage voluntary redundancy. TELKOM is demonstrably committed to a termination when and only when, TELKOM has a detailed formal plan for the early retirement and such plan is without realistic possibility of withdrawal.
Income Taxes

     The actual tax we pay on our profits is determined according to complex tax laws and regulations. Where the effect of these laws and regulations is unclear, we use estimates in determining the liability for the tax to be paid on our past profits which we recognize in our financial statements.

      Deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the amounts of assets and liabilities recognized for financial reporting purposes and the amounts recognized for income tax purposes. Deferred tax liabilities are recognized for all taxable temporary differences and deferred tax assets are recognized for deductible temporary differences to the extent that it is probable that taxable income will be available in future periods against which the deductible temporary differences can be utilized or the tax asset will crystallize in future periods.

      Under Indonesian tax regulations as of the date of this Annual Report, a dividend distributed by a company to a corporate shareholder, that has a minimum share ownership of 25% and has businesses other than as a holding company, is currentlynot subject to a zero percent tax rate whereas a capital gain on the sale of shares is subject to tax at the normal corporate tax rate. As long as we continue to hold our investments in our affiliated companies with a minimum share ownership of 25% and the tax rate applicable tohave businesses other than as a holding company, and dividend distributions from a company to a corporate shareholder that meets the criteria described above continues to be 0%,not subject to tax, we do not need to record a deferred tax liability in respect of the undistributed earnings of these affiliated companies.

      A change in our intention to hold an investment or other facts and circumstances may lead TELKOM to determine that we no longer expect to realize our interest in the undistributed earnings of

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the particular affiliated company in a manner which enables us to take advantage of the zero percent tax rate applicable to dividend distributions. Such a change in the future would require us to recognize a deferred tax liability with a commensurate charge to our income statement.

Deferred tax is calculated at the tax rates that have been enacted or substantively enacted at the balance sheet date. If enacted tax rates changed, TELKOM would adjust its deferred tax assets and liabilities, through the income tax expense in the period of change, to reflect the enacted (or substantively enacted) tax rate expected to be in effect when the deferred tax items reverse.
Legal Contingencies

     We

      As of the date of this Annual Report, we are currently involved in certain legal proceedings and have accrued amounts that represent our estimate of the probable outcome of these matters. Such estimates of outcome are derived from consultation with outside counsel, as well as an assessment of litigation and settlement strategies. WhilstWhile we believe that our current accruals are adequate, a future event or change in the facts and circumstances may require us to make additional accruals whichthat would be charged to our income

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statement in the future. See Note 5553 to the consolidated financial statements and Item 8. “Financial Information — Material Litigation.”

In addition, we may face SEC enforcement action and other legal liability in connection with our failure to timely file a compliant 2002 Annual Report on Form 20-F for 2002 by the June 30, 2003 filing deadline. See Item 3. “Risk Factors — TELKOM did not file a fully compliant 2002 Annual Report on Form 20-F until February 9, 2004 and may face an SEC enforcement action, or other legal liability or adverse consequences.”
C.Research and Development and Intellectual Property

      TELKOM makes investments to improve its product and service offerings. Such expenditure amounted to approximately Rp.3.1 billion in 2001, Rp.11.2 billion in 2002, and Rp.2.1 billion in 2003 and Rp.27.8 billion (US$0.23.0 million) in 2003.

2004. In 2004, these expenditures related to video conferencing, SMS development, CMS system and CDMA lab.

      TELKOM is in the process of registering a number of patents for technologies relating to, among others, cellular phones and network, PSTN, switching systems and related administration systems. It has also registered or is in the process of registering its trade and service marks in Indonesia.

D.  Trend information

D.Trend information
      A number of developments have had and may have in the future a material impact on TELKOM’s results of operations, financial condition and capital expenditures. These developments include:

 • ongoing consequences related to TELKOM’s failure to file a compliant Form 20-F for 2002 by June 30, 2003;
 
 • upgrading of the network with soft switching technology;
 
 • increasing relative contribution of Telkomsel to our consolidated revenues;
 
 • higher domestic fixed line tariffs beginning in 2004 and ability of Government to implement additional planned tariff increases;
 
 • the ability of the Government to implement regulatory changes regarding interconnection, access codes and licenses for 3G services;
• changes in foreign exchange rates and interest rates;
• implementation of TELKOM’s early retirement program;
 
 • ongoing issues with KSO Investors;
• acquisition of control in Pramindo;

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 • acquisition of AriaWest;
 
 • acquisition of KSO IV;
• competition in the market for DLD services; and
 
 • commencement of TELKOM’s IDD fixed-line services.services;
• fixed wireless development and deployment;
• implementation of competence-based human resource management; and
• acquisition of the remaining 9.68% shares in Dayamitra.

      See Item 5.A. “Operating Results.”

E.  Off-Balance Sheet Arrangements

     During 2002, TELKOM entered into two foreign exchange facilities agreements with the intention of hedging its foreign currency liabilities. These agreements were made with Bank Mandiri and HSBC to cover TELKOM’s foreign exchange liabilities for US$120 million and US$1 million, respectively. The Bank Mandiri agreement expired on April 4, 2004 while the HSBC agreement will expire on August 31, 2004.

E.Off-Balance Sheet Arrangements
      TELKOM is party to a number of operating leases, all of which are cancelable on less than one month’s notice at the option of TELKOM. These operating leases relate principally to vehicles and computers. TELKOM does not believe these operating leases are material to its business.

      TELKOM has entered into a partnership agreement with Motorola, Inc., Ericsson Radio A.B., Siemens Aktiengesellschaft (AG) and Nokia Oyj whereby TELKOM is obligated to purchase certain

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cellular equipment and services. In addition, TELKOM has entered into agreements pursuant to which TELKOM is committed to pay for services relating to the launch of the TELKOM-2 Satellite and the construction of a PSTN network for each of Regional Division II and V. For more details relating to these agreements, please see Item 10. “Additional Information — C. Material Contracts”.

Except as disclosed above, TELKOM does not have off-balance sheet arrangements that are material.
F.Tabular Disclosure of Contractual Obligations

The following summarizes TELKOM’s contractual obligations at December 31, 20032004 and the effect such obligations are expected to have on liquidity and cash flow in future periods:
                   
                   
Payments Due by Period  Payments Due by Period
   
Less than    Less than  
Contractual ObligationsContractual ObligationsTotal1 year1-3 years4-5 yearsAfter 5 yearsContractual Obligations Total 1 year 1-3 years 4-5 years After 5 years
           
 (Rp. billion)
(Rp. in billion)
Short Term Loans(1)
 37.6 37.6 — — — 
Long Term Debt(2)
 15,480.7 3,563.4 3,511.6 4,276.3 4,129.4 
Short Term Loans(1)(5)
Short Term Loans(1)(5)
  1,101.6  1,101.6  —  —  — 
Long Term Debts(2)(5)
Long Term Debts(2)(5)
  15,514.7  2,300.8  6,215.4  2,822.3  4,176.2 
Capital Lease Obligations(3)
Capital Lease Obligations(3)
 — — — — — 
Capital Lease Obligations(3)
  —  —  —  —  — 
Operating Leases(3)
Operating Leases(3)
 219.0 101.1 107.9 — — 
Operating Leases(3)
  247.5  —  247.5  —  — 
Unconditional Purchase Obligations(4)
Unconditional Purchase Obligations(4)
 12,797.8 12,138.1 659.6 — — 
Unconditional Purchase Obligations(4)
  4,373.2  3,500.3  872.9  —  — 
Other Long Term Obligations(5)
 2,536.9 2,536.9 — — — 
 
 
 
 
 
             
Total Contractual Cash Obligations 31,072.0 18,377.1 4,279.1 4,276.3 4,129.4 Total  21,237.0  6,902.7  7,335.8  2,822.3  4,176.2 
 
 
 
 
 
             

(1) Relates to liabilityliabilities under a short term loanloans obtained by Napsindo from Bank Mandiri.Mandiri, ABN AMRO Bank and Bank Central Asia. See Note 2220 to the Company’s consolidated financial statements included elsewhere in this Annual Report.
(2) See “— Liquidity and Capital Resources — Indebtedness” and Notes 22, 23, 24, 25, 26 27, 28 and 2927 to the Company’s consolidated financial statements included elsewhere in this Annual Report.
(3) Relates primarily to leases of motor vehicles and computers.
(4) Relates to commitments of TELKOM’sTELKOM to suppliers and vendors to providefor the purchase of telecommunications-related equipment and infrastructure.
(5) Relates to the present value asExcludes contractually committed rate of December 31, 2003 of TELKOM’s long term liabilities for post-retirement benefits and long service awards.interest.
     In addition to the above contractual obligations, as of December 31, 2004, Telkom had long-term liabilities for post-retirement benefits and long service awards. Telkom expects to contribute Rp.516.5 billion to its post-retirement benefits plan in 2005. In addition, Telkom also expects to

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contribute Rp.697.5 billion to its defined benefit pension plan in 2005. See Notes 44, 45, 46 and 56.3.e to the consolidated financial statements.
ITEM 6.DIRECTORS, SENIOR MANAGEMENT AND EMPLOYEES

A.  Directors and Senior Management

A.Directors and Senior Management
      In accordance with Indonesian law, the Company has a two-tier board structure, consisting of a Board of Commissioners and a Board of Directors. The executive management functions are carried out by the Board of Directors, whose members are comprised of the top executives of the Company, comparable to the chief executive officer, chief financial officer and other such officers of corporations incorporated under the laws of many of the States in the United States of America.

Board of Commissioners

      TELKOM’s Articles of Association (the “Articles”), referring to the Indonesian Company Law, states that the principal statutory duties of the Board of Commissioners are to supervise the policies of the Board of Directors in the operation and management of the Company and to give advice to the Board of Directors. In carrying out its supervisory activities, the Board of Commissioners is accountable to the stockholders of the Company.

      The Board of Commissioners, which supervises the management of TELKOM and the implementation of TELKOM business plan by the Board of Directors, does not have day-to-day management functions or authority, except in limited circumstances where all members of the Board of Directors have been suspended for any reason.

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      The current Board of Commissioners of TELKOM consists of five members, two of whom are independent commissioners.

      Pursuant to the Articles, each Commissioner is appointed for a term commencing from the date of the appointment by the general meeting of stockholders until the closing of the third annual general meeting of stockholders following the date of appointment, without prejudice to the right of the general meeting of stockholders to discharge a Commissioner at any time before his or her term of office expires. If the position of a Commissioner becomes vacant for any reason, the Articles further provide that within 60 days of the occurrence of such vacancy, an announcement that there will be notice for a general meeting of stockholders must be made to nominate a successor.

      Pursuant to the Articles, meetings of the Board of Commissioners are presided over by the President Commissioner. If the President Commissioner is absent, another member of the Board of Commissioners chosen from the Commissioners present presides over the meeting.

      Meetings of the Board of Commissioners must be held at least once every three months and at any other time (i) upon request of the President Commissioner, (ii) upon request of one-third of the members of the Board of Commissioners, (iii) upon written request of the Board of Directors, or (iv) upon request of a shareholder or a group of stockholders holding at least one-tenth of the outstanding shares of TELKOM with valid voting rights. The quorum for all Board of Commissioners meetings is more than one-half of the total number of the Commissioners then represented in person or by proxy granted to one of the other Commissioners of TELKOM at such meeting.

      Resolutions of a meeting of the Board of Commissioners shall be by consensus. If consensus cannot be reached, it shall be by the affirmative vote of a majority of the members of the Board of Commissioners present or represented at the meeting. In the event of a tie, the proposed resolution shall be deemed to have been rejected.

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The members of the Board of Commissioners as of December 31, 20032004 were:
         
Age as of
NameJanuary 1, 2004TitleSince
Bacelius Ruru  56
NameJanuary 1, 2005TitleSince
Tanri Abeng63  President Commissioner April 7, 2000March 10, 2004
P. Sartono  5960  Independent Commissioner June 21, 2002
Arif Arryman  48Independent CommissionerJune 21, 2002
Agus Haryanto52CommissionerJune 21, 2002
Djamhari Sirat58CommissionerJune 21, 2002

At the Extraordinary General Meeting of TELKOM’s shareholders held on March 10, 2004, three new Commissioners were elected, replacing Messrs. Ruru, Haryanto and Sirat. As such, the members of the Board of Commissioners as of the date of this Annual Report are as follows:

Age as of
NameJanuary 1, 2004TitleSince
Tanri Abeng62President CommissionerMarch 10, 2004
P. Sartono59Independent CommissionerJune 21, 2002
Arif Arryman4849  Independent Commissioner June 21, 2002
Anggito Abimanyu  4142  Commissioner March 10, 2004
Gatot Trihargo  4344  Commissioner March 10, 2004
Tanri Abeng

      Mr. Abeng has been President Commissioner of TELKOM since March 10, 2004. From 1980 to 1998, Mr. Abeng served as President Director (1980-1991) and President Commissioner (1991-1998) of PT Multi Bintang Indonesia, Indonesia’s largest brewery. He also served as President Director of PT Bakrie & Brothers from 1991 to 1998, was President Commissioner of PT B.A.T. Indonesia from 1993

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to 1998 and was a Commissioner of PT Sepatu BATA from 1989 to 1998. He was also a member of Parliament from 1993 to 1999 and was Minister of State-Owned Enterprises from 1998 to 1999. Mr. Abeng holds a degree from the University of Hasanudin, a masters degree in business administration from the State University of New York, Buffalo and has completed the Advanced Management Program at the Claremont Graduate School in Los Angeles.
P. Sartono

Mr. P. Sartono has been an Independent Commissioner of TELKOM since June 21, 2002. In addition, as of the date of this Annual Report, he currently serves as the Senior Adviser of the Board of Commissioners of PT Telekomindo Primabhakti and as a Commissioner of PT Excelcomindo. Mr. P. Sartono became an employee of TELKOM in 1972 and has served in various management positions, including as Corporate Secretary from 1991 to 1995, until his retirement in 2000. During his tenure at TELKOM, he also held various positions at Directorate General of Post and Communications from 1972 to 1985 and served as President Director of PT Telekomindo Primabhakti. Mr. P. Sartono holds a degree in law from the University of Indonesia and a Master of Management (Marketing) degree from IPWI Jakarta and a Master of Law degree from the Institute Business Law and Management (Sekolah Tinggi Ilmu Hukum IBLAM) in Jakarta.
Arif Arryman

Mr. Arryman has been an Independent Commissioner of TELKOM since June 21, 2002. In addition he has served as Independent Commissioner of PT Bank BNI since 2001. Previously, he served as an advisor to the Coordinating Minister for Economy and a member of the assistance team to the Ministry of Finance. Mr. Arryman graduated with a degree in Industrial Engineering from Bandung Institute of Technology, a masters degree in Engineering from Asia Institute of Technology, Bangkok, Diploma d’Etude Approfondie from University Paris-IX Dauphine France and a Ph.Ddoctoral degree in Economics from University of Paris-IX Dauphine France.
Anggito Abimanyu

Mr. Abimanyu has been a Commissioner of TELKOM since March 10, 2004. HeAs of the date of this Annual Report, he is currently the Acting Head of the Agency for Fiscal Analysis of the Ministry of Finance and has been a member of the expert staff to the Finance Minister since 2000. Mr. Abimanyu previously served as a member of the Board of Commissioners of Bank Lippo and of Bank Internasional Indonesia. Mr. Abimanyu is also a lecturer in the Faculty of Economics of Gadjah Mada University. Mr. Abimanyu holds both a bachelor and a master degree in economics from Gadjah Mada University, a master in science degree in International Development from the University of Pennsylvania and a Ph.D. degree in Environmental Economics from the University of Pennsylvania.

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Gatot Trihargo

      Mr. Trihargo has been a Commissioner of TELKOM since March 10, 2004. He currentlyAs of the date of this Annual Report, he serves as a member of the Special Staff of the Ministry of State-Owned Enterprises. Mr. Trihargo holds a degree in accounting from Sekolah Tinggi Akuntansi Negara, Jakarta, and a masters degree in Accountancy and Financial Information Systems from Cleveland State University in Ohio.

Board of Commissioners’ Committees

The

      As of the date of this Annual Report, the Board of Commissioners has currently twothree standing committees: the Audit Committee, and the Review and Planning Committee and the Nomination and Renumeration Committee. An Independent Commissioner chairs each committee, while the other members consist entirely of independent external members (i.e., not members of either the Board of Commissioners or the Board of Directors) not affiliated with TELKOM, its Board of Commissioners and its Board of Directors.committee. In addition, external members to the Audit Committee, in order to be considered independent: (a) must not be a member of any Indonesian registered public accountant that

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has provided audit and/or non-audit services to TELKOM within one year prior to his appointment to the Audit Committee; (b) must not have been a TELKOM employee within one year prior to his appointment to the Audit Committee; (c) does not own, directly or indirectly, any shares in TELKOM; and (d) does not have any business relationship that relates to TELKOM’s businesses; and (e) is not a memberbusinesses.
      As of the audit committeedate of another publicly listed company.

     Thethis Annual Report, the Audit Committee of the Board of Commissioners is currently composed of sixseven members: (i) Mr. Arif Arryman, an Independent Commissioner and the Chairman; (ii) Mr. P. Sartono, an Independent Commissioner; (iii) Mr. Mohammad Ghazali Latief; (iv) Mr. Salam; (v) Mr. Dodi Syaripudin; and (vi) Mr. Sahat Pardede.Pardede and (vii) Mr. Gatot Trihargo. All of the members of the Audit Committee (except for Mr. Arif Arryman, Mr. Sartono and Mr. Sartono)Trihargo) are independent external members and Mr. Pardede is an accounting and financefinancial expert. An Audit Committee Charter (the “Charter”) that has been adopted by the Board of Commissioners and the Board of Directors governs the committee. The Charter outlines the committee’s purpose, function and responsibilities and specifies that the committee is responsible for:

 • Overseeing the Company’s financial reporting process on behalf of the Board of Commissioners. As part of its responsibilities, the committee will recommend to the Board of Commissioners, subject to shareholder approval, the selection of TELKOM’s external auditor;
 
 • Discussing with TELKOM’s internal and external auditors the overall scope and specific plans for their respective audits. The committee will also discuss TELKOM’s consolidated financial statements and the adequacy of TELKOM’s internal controls;
 
 • Meeting regularly with TELKOM’s internal and external auditors, without management present, to discuss the results of their examinations, their evaluation of TELKOM’s internal controls and the overall quality of TELKOM’s financial reporting; and
 
 • Carrying out additional tasks that are assigned by the Board of Commissioners, especially on financial and accounting related matters.

      The Review and Planning Committee was established on August 1, 2003. There are six members on this committee, consisting of: (i) Mr. Arif Arryman (the Chairman); (ii) Mr. P. Sartono; (iii) Mr. Wisnu Marantika; (iv) Mr. Kindy Syahrir; (v) Mr. Adam Wirahadi; and (vi) Mr. Arman Soeriasoemantri. The objective of this committee is to review the company’s long-term plans, as well as annual business budget plans, following which recommendations would be made by this committee to the Board of Directors. The committee is also responsible for supervising and monitoring the implementation of the business plans of the company. As of the date of this Annual Report, the Review and Planning Committee consists of nine members: (i) Mr. Anggito Abimanyu (the Chairman); (ii) Mr. Arif Arryman (the Vice Chairman); (iii) Mr. Yuki Indrayadi (Secretary); (iv) Mr. P. Sartono; (v) Mr. Kindy Syahrir; (vi) Mr. Ario Guntoro; (vii) Mr. Adam Wirahadi; (viii) Mrs. Widuri M. Kusumawati; and (ix) Mr. Arman Soeriasoemantri. All of the members of the Review and Planning Committee (except for Mr. Abimanyu, Mr. Arryman and Mr. Sartono) are independent external members.

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      On May 20, 2003, following TELKOM’s 2003 Annual General Meeting of stockholders, the Board of Commissioners re-established the Nomination and Remuneration Committee. As of the date of this Annual Report, the Nomination and Remuneration Committee withis composed of: (i) Mr. Tanri Abeng, the President Commissioner and the Chairman; (ii) Mr. P. Sartono, an Independent Commissioner asand the committee chairman. Pursuant to the decree of the Board of Commissioners,Secretary; and (iii) Mr. Sartono appointed the following as committee members: (i) Dr. Budi W. Soetjipto; (ii) Dr. Ferdinand T Siagian; and (iv) Dra. Psi. Wustari H. Mangunwidjaja.Gatot Trihargo, a Commissioner. The committee was tasked with formulating:with: (a) formulating selection criteria and nomination procedures for Commissioners and Directors; andstrategic positions in the Company based on good corporate governance principles; (b) a compensation system for Commissioners and Directors for the 2003 fiscal year. In accordance with its mandate fromassisting the Board of Commissioners and consulting with the committee will deliverBoard of Directors in candidate selection for strategic positions in the Company; and (c) formulating a report regarding its activities duringremuneration system for the 2004 Annual General MeetingBoard of TELKOM’s stockholders.

Directors based on fairness and performance.

      The Commissioners’ business address is 5th Floor, Grha Citra Caraka Building, Jalan Gatot Subroto Kav. 52, Jakarta 12710, Indonesia.

Board of Directors

      The Board of Directors is comprised of one President Director and foursix Directors. Directors are elected and dismissed by stockholder resolutions at a general meeting of stockholders at which the holder of the Series A Dwiwarna Share is present and such holder approves the aforementioned

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stockholder resolutions. In order to be eligible for election, candidates for Director must be nominated by the holder of the Series A Dwiwarna Share. Each Director is appointed for a term commencing from the date of appointment by the general meeting of stockholders until the closing of the fifth annual general meeting of stockholders after the date of appointment, without prejudice to the right of the general meeting of stockholders to discharge a Director at any time before his/her term of office expires.

      The principal functions of the Board of Directors are to lead and manage TELKOM and to control and manage TELKOM’s assets. The Board of Directors is responsible for the day-to-day management of TELKOM under the supervision of the Board of Commissioners. The Articles provide that the Board of Directors shall consist of at least two Directors, one of whom shall be the President Director.

      The President Director, or in case of his absence, another Director as provided for in the Articles shall have authority to represent TELKOM and execute documents on behalf of TELKOM, subject to the provisions of the Articles. The President Director shall preside over meetings of the Board of Directors or in his absence, any other member of the Board of Directors appointed from among and by those present may preside over such meetings.

      The Articles provide that meetings of the Board of Directors may be held whenever considered necessary upon the request of (i) the President Director, (ii) at least one-third of the members of the Board of Directors, (iii) the Board of Commissioners, or (iv) written notice from any shareholder or group of shareholders holding at least one-tenth of the outstanding shares of TELKOM with valid voting rights. The Articles further provide that the quorum for all Directors’ meetings is more than one-half of the members of the Board of Directors present or represented in person or by proxy granted to another Director of TELKOM in such meeting. At Directors’ meetings, each Director shall have one vote and one additional vote for each other Director he represents as proxy.

      Resolutions of a meeting of the Board of Directors shall be by consensus. If consensus cannot be reached, it shall be by the affirmative vote of a majority of the members of the Board of Directors present or represented at the meeting. In the event of a tie, the matter shall be determined by the Chairman of the meeting.

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The members of the Board of Directors as of December 31, 2003June 25, 2005 were:
Age as of
NameJanuary 1, 2004TitleSince
Kristiono49President DirectorJune 21, 2002
Agus Utoyo51Director of Human Resources and Support BusinessJune 21, 2002
Guntur Siregar53Director of FinanceJune 21, 2002
Garuda Sugardo54Director of Telecommunications Service BusinessJune 21, 2002
Suryatin Setiawan49Director of Telecommunications Network BusinessJune 21, 2002

     At the Extraordinary General Meeting of TELKOM’s shareholders held on March 10, 2004, three new Directors were elected, replacing Messrs. Utoyo, Siregar and Sugardo, and Mr. Setiawan was

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appointed as Director of Telecommunications Service Business. As such, the members of the Board of Directors as of the date of this Annual Report are as follows:
         
Age as of
NameJanuary 1, 2004TitleSince
Kristiono  49
NameJanuary 1, 2005TitleSince
Arwin Rasyid47  President Director June 21, 200224, 2005
Woeryanto SoeradjiGaruda Sugardo55Chief Operating Officer
and Vice President Director		June 24, 2005
Rinaldi Firmansyah44Director of FinanceMarch 10, 2004
Arief Yahya43Director of Enterprise & WholesaleJune 24, 2005
Abdul Haris  49  Director of Human Resources and Support BusinessNetwork & Solution March 10, 2004
Rinaldi FirmansyahJohn Welly  4350  Director of FinanceMarch 10, 2004
Suryatin SetiawanHuman Resource Development  49June 24, 2005
Guntur Siregar53  Director of Telecommunications Service BusinessMarch 10, 2004
Abdul HarisConsumer  48June 24, 2005 Director of Telecommunications Network BusinessMarch 10, 2004
     Arwin Rasyid
Kristiono

Mr. Kristiono has beenRasyid was appointed the President Director of TELKOM on June 24, 2005. He previously served as Deputy President Director of PT Bank Negara Indonesia from 2003 to 2005, President Director of Bank Danamon Indonesia from 2000 to 2003, Deputy Head of Badan Penyehatan Perbankan Nasional (the Indonesian Banks Restructuring Agency) in 2000, Deputy President Director of Bank Niaga from 1988 to 1999 as well in several positions in Bank Niaga since 1987. Mr. Rasyid graduated with a degree in economy from the University of Indonesia. He also holds a Master of Arts degree in International Economics and a Master of Business Administration degree in International Business from University of Hawaii, USA.
     Garuda Sugardo
      Mr. Sugardo was appointed the Chief Operating Officer and Vice President Director of TELKOM on June 21, 2002.24, 2005. He joined TELKOM in 19781977 and has held several positions in various departments. He previously served as Senior Consultant Marketing in the Management Consulting Center of TELKOM, Director of Technology and Planning of TELKOM and Head of Regional Division V Surabaya. Mr. Kristiono graduated with a degree in electrical engineering from Surabaya Institute of Technology.
Woeryanto Soeradji

Mr. Soeradji has been Director of Human Resources and SupportTelecommunication Service Business of TELKOM since March 10, 2004. He joined TELKOM in 1990from 2002 to 2004, Director of Operation and has held several positions in various departments. He previously served as TELKOM’s Vice President for Marketing, headTechnical of TELKOM’s Business Development Group and Corporate Secretary of TELKOM,Indosat as well as Directora number of Marketing for Telkomsel.positions in TELKOM from 1977-2000. Mr. Soeradji hasSugardo graduated with a degree in Electrical Engineering from the Bandung InstituteUniversity of Technology and a masters degree in business administration from the Indonesian Institute of Management Development, Jakarta.Indonesia.

     Rinaldi Firmansyah
     
Rinaldi Firmansyah

Mr. Firmansyah has been Director of Finance of TELKOM since March 10, 2004. He currentlyAs of the date of this Annual Report, he serves as the Vice President Commissioner of PT Bahana Securities and is also a Commissioner and headHead of the Audit Committee of PT Semen Padang. He previously served as the Vice President for Finance of PT Tirtamas Comexindo. Mr. Firmansyah graduated with a degree in electrical engineering from the Bandung Institute of Technology and a mastersMasters degree in business administration from the Indonesian Institute of Management Development, Jakarta. Mr. Firmansyah is also a Chartered Financial Analyst (CFA).

     Arief Yahya
     
Suryatin Setiawan

Mr. Setiawan has beenYahya was appointed the Director of Telecommunications Service BusinessEnterprise & Wholesale of TELKOM since March 10, 2004.on June 24, 2005. He joined TELKOM in 1986 and has held several positions in various departments. Previously, he served as headTELKOM’s Head of TELKOM’s Research and Information TechnologyRegional Division from 1995 to 2000 and as Director of Telecommunications and Network Business from June 2002 to March 2004. In addition,V (East Java). Mr. Setiawan previously served as the President Commissioner for Telkomsel. Mr. SetiawanYahya graduated with a degree in electrical engineering from Bandung Institute of Technology.Technology and a Masters degree in Telecommunication Engineering from University of Surrey.

     Abdul Haris
Abdul Haris

      Mr. Haris was appointed the Director of Network & Solution of TELKOM on June 24, 2005. He joined TELKOM in 1980 and has been held several positions in various departments. He previously served as

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Director of Telecommunications and Network Business of TELKOM since March 10, 2004. Previously, he servedfrom 2004 to 2005, and as deputy headDeputy Head of TELKOM’s Regional Division II (Jakarta) and deputy head of TELKOM’s Regional Division V (East Java). Mr. Haris has a degree in electrical

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engineering from North Sumatra University and a mastersMasters degree in business administration from Prasetya Mulya Management Institute.

     John Welly
      Mr. Welly was appointed the Director of Human Resources Development of TELKOM on June 24, 2005. He joined TELKOM in 1981 and has held several positions in various departments. He previously served as President Director of PT INTI, Director of Operations and Marketing of TELKOM from 1998 to 2000, Commissioner of Telkomsel in 1998, Director of Human Resources and Support Divisions/Senior Executive Vice President for Human Resources and Support of TELKOM from 1995 to 1998, and Commissioner of PT Aplikanusa Lintasarta from 1995 to 1996. Mr. Welly graduated with a degree in Electrical Engineering from the Bandung Institute of Technology and a Masters degree in telecommunication and information from Essex University, UK.
     Guntur Siregar
      Mr. Siregar was appointed the Director of Consumer of TELKOM on June 24, 2005. He joined TELKOM in 1975 and has held several positions in various departments. He previously served as Senior Consultant Financial Management in Management Consulting Center of TELKOM, Director of Finance of TELKOM from 2002 to 2004, Head of Regional Division II (Jakarta) from 2000 to 2002 and Director of Commerce of Indosat from 1996 to 2000. Mr. Siregar graduated with a degree in Electrical Engineering from the Bandung Institute of Technology.
      None of the Directors has a service contract with the Company nor are any such contracts proposed. The Directors’ business address is Jalan Japati, 1, Bandung 40133, Indonesia. None of the Directors or Commissioners isare related to one another.

B.  Compensation

Each Commissioner is granted a monthly honorarium and certain other allowances and is paid an annual bonus if TELKOM surpasses certain financial and operating targets, the amounts of which are determined by the stockholders at the general meeting of stockholders. Each Commissioner also receives a lump-sum bonus paid at the end of the Commissioner’s term pursuant to an MoF letter which applies to all state-owned companies. Each Director is granted a monthly salary and certain other allowances (including a pension if such Director is otherwise eligible). Each Director also receives an annual bonus (tantiem) if TELKOM surpasses certain financial and operating targets, the amounts of which are determined by the stockholders at the general meeting of the stockholders. Bonuses and incentives are budgeted annually and are based on the recommendation of the Board of Directors which recommendation must be approved by the Board of Commissioners before submission to the stockholders. No fees are paid to the Commissioners or Directors for their attendance at their respective board meetings. In addition, Directors receive certain other in-kind benefits, such as housing, car and driver. For the year ended December 31, 2003,2004, the aggregate compensation paid by TELKOM and its consolidated subsidiaries to all of their Commissioners and Directors was Rp.67.8Rp.73.0 billion (US$8.07.9 million), while the amount paid by TELKOM (unconsolidated) to all its Commissioners and Directors was approximately Rp.30.9Rp.29.9 billion (US$3.663.2 million), in each case including bonuses and the cost of benefits provided to Directors, such as housing facilities.

C.  Board practices

      Individual Directors are charged with specific responsibilities. In the event that a vacancy occurs in the Board of Directors, so long as the position remains vacant, one of the other directors will be nominated by the Board of Commissioners to perform the work of the absent director. If, for any reason, the Company ceases to have any Directors, the Board of Commissioners is to assume the

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ongoing obligations of the Board of Directors and must convene a general meeting of stockholders to elect a new Board of Directors within 60 days.

      The Board of Directors is required to obtain the written approval of the Board of Commissioners for the following actions: (i) buying or selling the shares of listed companies in excess of the amount stipulated by the Board of Commissioners; (ii) participating in or disposing of other capital investments; (iii) establishing, transferring its interests in or dissolving subsidiaries; (iv) transferring, trading, disposing or acquiring any business segments; (v) entering into licensing agreements, management contracts or similar agreements with other entities for a period of more than one year; (v)entities; (vi) selling or otherwise disposing of fixed assets; (vi)assets in excess of the amount stipulated by the Board of Commissioners; (vii) ceasing to collect or writing off bad debts from the Company’s books or inventory in excess of the amount stipulated by the Board of Commissioners; (vii)(viii) binding the Company as surety in excess of the amount stipulated by the Board of Commissioners; and (viii)(ix) assuming or granting intermediatemedium or long-term loans and assuming short-term loans not in the ordinary course of business in excess of the amount stipulated in the Company’s work plan and budget, as approved by the Board of Commissioners. In addition, any of the above transactions which involves 10% or more of the Company’s revenues or 20% or more of stockholders’ equity or such other amount as specified in Indonesian capital market regulations must be authorized by the stockholders at the general meeting of stockholders. In the performance of its duties, the Board of Directors must act in the interests of the Company.

      The Articles provide that members of the Board of Directors are prohibited from assuming the following: (i) a position as director of another state-owned corporation or private companies, (ii) any position within the structural or functional department of the central or district government, or

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(iii) other positions outside TELKOM which may directly or indirectly raise conflicts of interest with TELKOM and/or which violate the provisions of applicable laws and regulations. The Articles further provide that if members of the Board of Directors wish to assume any other position not prohibited above or wish to obtain an exemption from the foregoing prohibitions, such Director would require permission from the Board of Commissioners. In addition, such appointment shall be reported to the general meeting of stockholders.

      In addition, the Articles prohibit a Director with conflicting interests representing TELKOM in the issues causing such conflict of interest. In such cases, TELKOM shall be represented by another member of the Board of Directors with the consent of the Commissioners. In the event that TELKOM faces a conflict of interest with all members of its Board of Directors, TELKOM shall be represented by the Board of Commissioners or a member of the Board of Commissioners chosen by the Commissioners in the issues causing such conflict.

      None of the Directors or Commissioners has any substantial interest, direct or indirect, in any company carrying on a similar trade as TELKOM.

D.  Employees

      As of December 31, 2004 the Company had 29,375 employees, of which 25,823 were employed in TELKOM regions and 3,552 were employed in KSO VII. As of December 31, 2003 the Company had 30,820 employees, of which 24,206 were employed in TELKOM and 6,614 were employed in KSO regions.regions respectively. As of December 31, 2002, the Company had 34,678 employees, of which 24,543 and 10,135 personnel were employed in TELKOM and KSO Regionsregions respectively. As of December 31, 2001, the Company had 37,422 employees, of which 18,926 and 18,496 personnel were employed in TELKOM and KSO Regions respectively.

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The table below sets forth a breakdown of TELKOM’s employees by position as at December 31, 2003:2004:
                  
TELKOM regionsKSO regions  TELKOM regions KSO region VII
as atas at  as at as at
December 31,December 31,  December 31, December 31,
20032003(1)  2004 2004
     
Senior managementSenior management 175 — Senior management  154  — 
Middle managementMiddle management 2,027 164 Middle management  2,136  87 
SupervisorsSupervisors 6,445 1,478 Supervisors  7,982  796 
OthersOthers 15,559 4,972 Others  15,551  2,669 
 
 
       
Total 24,206 6,614 Total  25,823  3,552 
 
 
       

(1) This includes employees in KSO IV and KSO VII.

      TELKOM’s KSO employees remain employees of TELKOM and are subject to all employment rules and policies of TELKOM in force at that time, except to the extent that rules and policies are supplemented, in favor of the employee, by the rules and policies of the KSO Unit. Additional KSO employees are the employees of the KSO partner and TELKOM has no obligation to continue their employment at the end of the KSO period.

      In general, TELKOM employees receive a base salary and salary-related allowances, a bonus and various benefits, including a pension plan and a post-retirement health care plan, medical benefits for themselves and certain members of their immediate family, housing allowance, other allowances and certain other benefits, including those related to performance of the employee’s working unit.

      Bonuses are budgeted in advance by the Board of Directors and the Board of Commissioners and are paid out in the year following the year in which they are earned. Over the past five years, the size of the annual bonus pool has ranged from Rp.135 billion to Rp.232Rp.304.42 billion. In 2003,2004, bonuses were paid by TELKOM to all employees including TELKOM’s employees in KSO and Non-KSO divisions. After the size of the bonus pool is determined, management allocates the pool among the Divisions depending

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upon their respective performances and uniform bonuses for employees at each staff level for each Division are then determined.

Pursuant to TELKOM’s Initial Public Offering

      Except in connection with its initial public offering in 1995, 116,667,000 shares of Common Stock were reserved for mandatory sale to employees of the Company. The Company paid for such shares (which were sold at the same per share price as the public offering price of shares of Common Stock sold in Indonesia pursuant to the Initial Public Offering (i.e., Rp.2,050 per share)) on behalf of its employees as follows: 90% of the purchase price was deducted from employee cash bonuses that had been previously allocated but not paid; the Company paid the balance of the purchase price plus taxes payable by its employees on the purchase of such shares (amounting to approximately 15% of the purchase price) and reported those payments as additional vacation pay, employee incentives and other allowances. TELKOM does not otherwise maintain an employee share scheme for any of its employees or senior management.

      TELKOM’s mandatory retirement age for all employees is 56. Upon reaching 56, employees and their dependents are entitled to a pension underTELKOM sponsors a defined benefit pension plan depending on their length of serviceand a defined contribution pension plan. The defined benefit pension plan is for permanent employees hired prior to TELKOM.July 1, 2002. The amount of the pension entitlement under the defined benefit pension plan is based on the employee’s years of service and salary level upon retirement and is transferable to dependents upon the employee’s death. The main sources of pension fund are the contributions from the employees and TELKOM. The participating employees contribute 18% of basic salary (prior to March 2003 the employee contribution rate was 8.4%) and TELKOM contributes the remaining amount required to fund the plan. TELKOM’s contributions to the pension fund were Rp.129.3 billion, Rp.297.4 billion, Rp.486.3 billion and Rp.460.6Rp.840.0 billion (US$54.690.4 million), for the years ended December 31, 2001, 2002, 2003 and 2003,2004, respectively. See Note 4644 to the consolidated financial statements.

      Effective January 1, 2003, TELKOM (a) increased the minimum pension benefit for retired employee to approximately Rp.425,000 per month and (b) increased pension benefits for employees who retired prior to August 1, 2000 by 50%. Current employees who effectively retired on or after July 1, 2002 receive an increase of monthly pension benefit amounting to twice the amount of their basic monthly salary. This policy applied to employees who retired at the normal pension age of 56.
      The defined contribution plan is provided for employees hired with permanent status on or after July 1, 2002. The plan is managed by a financial institution pension fund (Dana Pensiun Lembaga Keuangan). The Company’s annual contribution to the defined contribution plan is determined based

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on a certain percentage of the participants’ salaries and amounted to Rp124 million and Rp399 million in 2003 and 2004, respectively.
      The Company’s employees are entitled to receive certain cash awards based on length of services and after completing certain years of services which are either paid at the time the employee reaches a certain anniversary date or upon retirement or at the time of termination if the employee has met the required number of years of service.

      TELKOM also provides post-retirement healthcare benefits for all of its retired employees, including their immediate family. There are two types of funding for post-retirement healthcare benefits: (i) for employees hired before November 1, 1995 who retired prior to June 3, 1995 or who have 20 years of service for those retired after June 3, 1995, such benefits are funded by the TELKOM Healthcare Foundation; and (ii) for employees hired after November 1, 1995, such benefits will be granted in the form of an insurance allowance by TELKOM. TELKOM’s contributions (including contributions paid by all KSO units) to the plan for employees hired before November 1, 1995 and who have had 20 years of service were Rp.56.4 billion, Rp.75.4 billion, Rp.188.5 billion and Rp.188.4Rp.724.5 billion (US$22.378.0 million), for the yearyears ended December 31, 2001, 2002, 2003 and 2003,2004, respectively.

     The post-retirement health care plan for employees hired after November 1, 1995 is accounted for in accordance with U.S. GAAP (SFAS 106). TELKOM’s actuary, in consultation with management, re-evaluated the key assumptions used in previous calculations, principally the medical cost trend projections and determined that it was necessary to make adjustments to original reports because the previous calculations contained certain errors and the assumptions used did not provide for all of the assumptions required to calculate TELKOM’s obligation. TELKOM, therefore, determined that adjustments were required to be made to its 2001, 2002 and prior years consolidated financial statements.

      In May 2000, TELKOM employees formed a union named “Serikat Karyawan TELKOM” or “SEKAR”. The formation of SEKAR is in accordance with the Presidential Decree No. 83 of 1998

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regarding ratification of ILO Convention No. 87 of 1948 concerning the freedom to form a union and the protection of the right to form an organization. Membership with SEKAR is not compulsory. TELKOM believes that its relations with SEKAR are good. However, there can be no assurance that the activities of employee unions will not materially and adversely affect TELKOM’s business, financial condition and prospects.

E.  Commissioners’ and Directors’ Remuneration

      The Company and its subsidiaries provide honoraria and facilities to support the operational duties of the Board of Commissioners. The total of such benefits amounted to Rp.7.2 billion, Rp.8.7 billion, and Rp.14.0 billion and Rp.22.7 billion in 2001, 2002, 2003 and 20032004 respectively, which reflected 0.1%, 0.1% and 0.1% of total operating expenses in 2001, 2002, 2003 and 2003,2004, respectively.

      The Company and its subsidiaries provide salaries and facilities to support the operational duties of the Board of Directors. Total of such benefits amounted to Rp.30.3 billion, Rp.35.1 billion, Rp.45.6 billion and Rp.45.6Rp.50.3 billion in the year ended December 31, 2001, 2002, 2003 and 2003,2004, respectively, which reflected 0.3%, 0.3% and 0.3% of total operating expenses in the year ended December 31, 2001, 2002, 2003 and 2003,2004, respectively.

F.  Share ownership

All the directors and commissioners individually beneficially own less than one percent of the shares of the Company and their respective beneficial share ownership in the Company has not been disclosed to stockholders or otherwise made public.
ITEM 7.     MAJOR STOCKHOLDERS AND RELATED PARTY TRANSACTIONS
ITEM 7.
MAJOR STOCKHOLDERS AND RELATED PARTY TRANSACTIONS

A.  Major stockholders

General

      At January 1,December 31, 2004, to the Company’s knowledge, apart from the Government, there were no stockholders beneficially owning more than 5% of the Company’s Common Stock.

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The following table sets forth certain information as of December 31, 20032004 with respect to (1) persons known to the Company to be the owner of more than 5% of the Company’s Common Stock (whether directly or beneficially through ADSs); and (2) the total amount of any class of the Company’s Common Stock owned by the Commissioners and Directors of the Company as a group.
                    
Title of ClassIdentity of Person or GroupAmount OwnedPercent of Class Identity of Person or Group Amount Owned Percent of Class
      
Series A Government 1 100.00%  Government  1  100.00% 
Series B Government 5,160,235,355 51.19%  Government  10,320,470,711  51.19% 
Series B JPMCB US Resident (Norbax Inc.) 896,045,651 8.89%  JPMCB US Resident (Norbax Inc.)  1,378,468,925  6.84% 
Series B The Bank of New York (BoNY) 657,263,408 6.52%  The Bank of New York (BoNY)  1,568,517,736  7.78% 
Series B Board of Directors and Commissioners 63,180 0.0006%  Board of Directors and Commissioners  82,728  <0.01% 

      As of December 31, 2003,2004, a total of 38,317,04645,126,420 American Depositary Shares (“ADSs”) and 10,079,999,63920,159,999,279 Series B shares (including the Series B shares represented by these ADSs) and 1 Series A share were outstanding.

      The Government holds a majority of the outstanding Series B shares of TELKOM. In addition, the Government is the holder of the Series A Dwiwarna share, which has special voting rights. See Item 7. “Major Stockholders and Related Party Transactions — Relationship with the Government — Government as Shareholder.”

      The Government holds a majority of the outstanding Common Stock of the Company and so retains control of the Company and has the power to elect all of its Board of Commissioners and all of

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its Board of Directors and to determine the outcome of substantially all actions requiring the approval of the stockholders. In addition, the Company’s Common Stock is also owned by Pension Funds, Insurance Funds and other institutions, owned or controlled, directly or indirectly, by the Government.

      The Government is also the holder of the Series A Dwiwarna Share, which has special voting rights. The material rights and restrictions which are applicable to the Common Stock are also applicable to the Dwiwarna Share, except that the Government may not transfer the Dwiwarna Share and it has a veto with respect to (i) election and removal of Directors; (ii) election and removal of Commissioners; and (iii) amendments to the Articles of Association, including amendments to merge or dissolve the Company prior to the expiration of its term of existence, increase or decrease its authorized capital and reduce its subscribed capital. Accordingly, the Government will have effective control of these matters even if it were to beneficially own less than a majority of the outstanding shares of Common Stock.

      TELKOM’s total number of shares immediately prior to its Initial Public Offering was 8,400,000,000, which consisted of 8,399,999,999 Series B shares and 1 Series A Dwiwarna share, all of which were owned by the Government. On November 14, 1995, the Government sold some of its TELKOM shares through an initial public offering on the Jakarta Stock Exchange and Surabaya Stock Exchange. The shares offered consisted of 933,333,000 new Series B shares and 233,334,000 Series B shares owned by the Government. The Government also conducted a global share offering listed on the New York Stock Exchange and the London Stock Exchange for 700 million Series B shares owned by the State of the Republic of Indonesia, which were converted into 35 million ADSs. Each ADS representsrepresented 20 Series B shares.

shares at that time.

      In December 1996, the Government of the Republic of Indonesia completed a block sale of 388 million Series B shares. In 1997, the Government distributed 2,670,300 Series B shares as an incentive to stockholders who did not sell their shares within one year from the date of the initial public offering.

      In May 1999, the Government completed another block sale of 898 million Series B shares.

      Under Law No.1/1995 on Limited Liability Companies, the minimum total par value of TELKOM’s issued share capital has to be at least 25% of the total par value of TELKOM’s authorized share capital,

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or in TELKOM’s case, Rp.5 trillion. To comply with the law, it was resolved at the annual general meeting of stockholders on April 16, 1999 to increase the issued share capital by way of capitalization of certain additional paid in capital. The bonus shares were distributed to the then existing stockholders in August 1999.

      In December 2001, the Government conducted another block-sale of 1,200 million shares (or 11.90% of the total outstanding Series B shares).

     In

      On July 16, 2002, the Government sold 312 million Series B shares (3.1% of the Series B shares) through an accelerated placement of TELKOM’s shares to institutional investors in Indonesia and globally at Rp.3,635 per share.

      At TELKOM’s annual general meeting of shareholders in July 2004, the shareholders approved the split of nominal value of the Series A Dwiwarna share and Series B Shares of the Company from Rp.500 per share to Rp.250 per share. The number of authorized shares increased from 40,000,000,000 shares to 80,000,000,000 shares while the number of outstanding shares as of such date increased from 10,079,999,640 shares to 20,159,999,280 shares. As a result of the split of the nominal value, the previous one Series A Dwiwarna Share became two shares with the following criteria: (i) one Series A Dwiwarna share was preserved as a Series A Dwiwarna share owned by the Government with a nominal value of Rp.250 per share and (ii) the other share was issued as one Series B Share owned by the Government.
Relationship with the Government

     Government as Shareholder

Government as Shareholder
      As of December 31, 2003,2004, the Government held approximately 51.19% of TELKOM’s Common Stock and the Series A share (the “Dwiwarna Share”), which carries special voting rights. As its largest shareholder, the Government is interested in TELKOM’s performance both in terms of the benefits it provides to the nation as well as its ability to operate on a commercial basis. The material rights and restrictions that are applicable to the Common Stock are also applicable to the Dwiwarna Share, except that the Government may not transfer the Dwiwarna Share and as the holder of the Dwiwarna Share has a veto with respect to (i) the nomination, election and removal of Directors; (ii) the nomination, election and removal of Commissioners; (iii) the issuance of new shares; and (iv) amendments to the

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Articles, including actions to merge or dissolve TELKOM, increase or decrease its authorized capital, or reduce its subscribed capital. Accordingly, the Government will have effective control of these matters even if it were to beneficially own less than a majority of the outstanding shares of Common Stock. The Government’s rights with respect to the Dwiwarna Share will not terminate unless the Articles of Association of the Company are amended, which would require the consent of the Government as holder of such Dwiwarna Share.

      It is the policy of the Company not to enter into transactions with affiliates unless the terms thereof are no less favorable to the Company than those, which could be obtained by the Company on an arm’s-length basis from an unaffiliated third party. The State Minister of State-owned Enterprise (“SMSOE”) has advised the Company that the MoF, in its capacity as controlling shareholder of the Company, will not cause the Company to enter into transactions with other entities under its control unless the terms thereof are consistent with the Company’s policy set forth in the preceding sentence. The Company anticipates that the SMSOE will adopt a similar policy.

Under regulations ofBadan Pengawas Pasar Modal (“BAPEPAM”), Indonesia’s capital markets supervisory agency, because the Company is listed on Indonesia’s stock exchanges, any transaction in which there is a conflict of interest (as defined below) must be approved by a majority of the holders of shares of Common Stock who do not have a conflict of interest in the proposed transaction, unless the conflict existed before the Company was listed and was fully disclosed in the offering documents. A conflict of interest is defined in BAPEPAM regulations to mean the difference between the economic interests of the Company and its stockholders, on the one hand and the personal economic interests of

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the members of the board of commissioners, board of directors or principal stockholders (a holder of 20% or more of the issued shares) and their respective affiliates jointly or separately on the other. A conflict of interest also exists when members of the board of commissioners, board of directors or a principal shareholder of the Company or their respective affiliates is involved in a transaction in which their personal interests may be in conflict with the interest of the Company. BAPEPAM has powers to enforce this rule; stockholders of the Company may also be entitled to seek enforcement or bring enforcement action based on this rule.

      Transactions between TELKOM and other state-owned or controlled enterprises could constitute “conflict of interest” transactions under the BAPEPAM regulations and the approval of disinterested stockholders would have to be obtained if a conflict of interest were to exist. TELKOM believes that many transactions conducted with state-owned or controlled enterprises in the ordinary course of their businesses and TELKOM’s business are on an arms-length, commercial basis and do not constitute “conflict of interest” transactions for which a disinterested stockholder vote would be required. Such transactions might include the sale by TELKOM of telephone services to state-owned or controlled enterprises or the purchase by TELKOM of electricity from a state-owned enterprise. Moreover, the BAPEPAM regulations do not require TELKOM to obtain disinterested shareholder approval of any transaction, the principal terms of which were disclosed in the Indonesian prospectus for the Initial Public Offering. TELKOM expects, however, in light of the substantial presence enterprises owned or controlled by the Government, through the MoF, SMSOE, or one of its or their affiliates have in Indonesia, it may be desirable, in connection with the development and growth of TELKOM’s business, for TELKOM to enter into joint ventures, arrangements or transactions with such enterprises from time to time. Under such circumstances, TELKOM may seek to consult BAPEPAM in determining whether the proposed joint venture, arrangement or transaction would require a vote of disinterested stockholders under the terms of the BAPEPAM regulations. If BAPEPAM were of the view that the proposed joint venture, arrangement or transaction would not require a vote of disinterested stockholders under its regulations, TELKOM would proceed without seeking disinterested stockholders approval. If, however, BAPEPAM were to take the position that the proposal would require a vote of disinterested stockholders under its rule, TELKOM would either seek to obtain the requisite disinterested stockholder approval or abandon the proposal.

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Government as Regulator

The Government regulates the telecommunications sector through the MoC.MoCI. In particular, the MoCMoCI has authority to issue decrees implementing laws, which are typically broad in scope, thereby giving the Ministry considerable latitude in implementing and enforcing regulatory policy. Pursuant to such decrees, the MoCMoCI defines the industry structure, determines the tariff formula, determines TELKOM’s USO obligations and otherwise controls many factors that may affect TELKOM’s competitive position, operations and financial condition. Through the DGPT, the Government regulates frequency and bandwidth allocation and TELKOM must obtain a license from the DGPT for each of its services as well as the utilization of frequency and bandwidths. The Company and other operators are also required to pay radio frequency usage fees. Telkomsel also holds several licenses issued by the MoCMoCI (or previously issued by the MoC) for the provision of its cellular services and from the Indonesian Investment Coordinating Board relating to investment by Telkomsel for the development of cellular phone line services with national coverage, including the expansion of its network coverage. The Government through the MoC,MoCI, as regulator has the power to grant new licenses for the establishment of new joint ventures and other arrangements, particularly in the telecommunications sector.
Government as Lender

As of December 31, 2003,2004, the Government had sub-loaned borrowings from foreign lenders to TELKOM as “two-step loans” amounting to Rp.7,691.0Rp.6,018.7 billion (US$911.3647.9 million), including current maturities. TELKOM is obligated to pay to the Government interest and principal repayment that is

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subsequently remitted by the Government to the respective lenders. At the end of December 2003,2004, foreign currency loans represented 58.8%65% of the outstanding total of such loans. The remaining 41.2%35.0% of such outstanding loans is denominated in Rupiah. In 2003,2004, the annual interest rates charged on loans repayable in Rupiah range from 1.86%8.3% to 13.25%13.3%, on those repayable in U.S. Dollar range from 4.0% to 7.98%8.0%, on those repayable in EURO range from 7.3% to 8.5% and on those repayable in Japanese Yen range from 3.1% to 3.2%.
Government as Customer

      The Government purchases services from the Company on a commercial basis. Government entities, in the aggregate, constitute the largest user of the Company’s services. The Company, however, deals with the various departments and agencies of the Government as separate customers and the provision of services to any single department or agency does not constitute a material part of TELKOM’s revenues. The Government and government agencies are treated for tariff purposes as “residential”., which rates are lower than the business service rates.

Other
Proportion of securities of TELKOM held in Indonesia and outside Indonesia

As of December 31, 2003, 13,807 people,2004, 15,947 persons, including the Government, were registered as holders of 10,079,999,64020,159,999,279 Series B shares of TELKOM’s Common Stock in Indonesia. There were a total of 38,317,04645,126,420 ADSs held by 169154 registered holders as of December 31, 20032004. The ADSs are traded on the NYSE and the LSE.
Change in Control

      There are no arrangements which are known to the Company which may result in a change in control to the Company.

B.  Related party transactions

      TELKOM is a party to certain agreements and engages in transactions with a number of entities that are related to the Company, such as joint venture companies, cooperatives and foundations, as well as the Government and entities that are related to or owned or controlled by the Government,

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such as state-owned entities. See Note 4947 to the Company’s consolidated financial statements. The most significant of these transactions include:
Government of the Republic of Indonesia

      The Company obtained “two-step loans” from the Government of the Republic of Indonesia, the Company’s majority stockholder. Interest expense fromon two-step loans amounted to Rp.960.4 billion, Rp.969.0 billion, and Rp.755.5 billion and Rp.489.2 billion (US$52.7 million) in 2001, 2002, 2003 and 2003,2004, respectively. Interest expense fromon two-step loans reflected 72.2%61.2%, 61.2%54.6% and 54.6%38.5% of interest expense in 2001, 2002, 2003 and 2003,2004, respectively.

The Company and its subsidiaries pay concession fees for telecommunication services provided and radio frequency usage charges to the Ministry of Communication (formerly, Ministry of Tourism, Post and Telecommunication) of the Republic of Indonesia.MoC. Concession fees amounted to Rp.63.6 billion, Rp.163.9 billion, and Rp. 239.0 billion and Rp.314.7 billion (US$33.9 million) in 2001, 2002, 2003 and 2003,2004, respectively. Concession fees reflected 0.7%accounted for 1.4%, 1.4%1.6% and 1.6% of total operating expenses in 2001, 2002, 2003 and 2003,2004, respectively. Radio frequency usage charges amounted to Rp 101.3 billion, Rp 292.7 billion, and Rp.371.7 billion and Rp.492.6 billion (US$53.0 million) in 2001, 2002, 2003 and 2003,2004, respectively. Radio frequency usage charges reflected 1.1%accounted for 2.5%, 2.5% and 2.5% of total operating expenses in 2001, 2002, 2003 and 2003,2004, respectively.

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Indosat (including Satelindo and IM3)

      At the time TELKOM acquired Pramindo in August 2002, 13% of the issued and paid up share capital of Pramindo was owned by Indosat, a company that, at that time, was majority owned and controlled by our major shareholder, the Government of Indonesia. As such, Indosat is considered as a related party.

      Following the merger of Indosat, PT Indosat Multimedia Mobile (“IM3”), Satelindo and PT Bimagraha Telekomindo on November 20, 2003, with Indosat as the surviving entity, all the rights and obligations of Satelindo and IM3 arising from their agreements with TELKOM and Telkomsel, as the case may be, were transferred or assumed by Indosat.
      The Company has an agreement with Indosat for the provision of international telecommunication services to the public. The principal matters covered by the agreement are as follows:

 • The Company provides a local network for customers to make or receive international calls. Indosat provides the international network for the customers, except for certain border towns, as determined by the Director General of Post and Telecommunication of the Republic of Indonesia. The international telecommunication services include telephone, telex, telegram, package switched data network, television, teleprinter, Alternate Voice/Data Telecommunication (AVD), hotline and teleconferencing. The Company receives compensation for the services, based on the interconnection tariff determined by the Minister of Tourism, Post and TelecommunicationCommunications of the Republic of Indonesia;
 
 • The Company has also entered into an interconnection agreement between the Company’s PSTN network and Indosat’s STBScellular network in connection with the implementation of Indosat Multimedia Mobile services and the settlement of the related interconnection rights and obligation. Pursuant to the Minister of Communication Decree regarding the transfer of license of Indosat’s mobile cellular network operation from Indosat to PT Indosat Multimedia Mobile (“IM3”), the Company agreed to transfer all interconnection rights and obligations to IM3 based on Interconnection Cooperation Agreement, as regulated in the Amendment of Agreement in the side letter No. 656 dated March 18, 2002;obligations.
 
 • The Company’s compensation relating to leased lines/ channel services, such as IBS,International Broadcasting System, AVD and bill printing is calculated at 15% of Indosat’s revenues from such services. Indosat also leasesleased circuits from the Company to link Jakarta, Medan and Surabaya;Surabaya in 2003, but did not use this service in 2004; and
 
 • The Company has been handling customer billing and collection for Indosat. Indosat is gradually taking over the activities and performing its own direct billing and collection. The Company receives compensation from Indosat computed at 1% of the collections made by the Company beginning January 1, 1995, plus the billing process expenses which are fixed at a certain amount per record.
      The Company leased international circuits from Indosat (originally from Satelindo). Payments made in relation to the lease amounted to Rp.32.9 billion and Rp.30.2 billion in 2002 and 2003, respectively (2002 payments were made to Satelindo), which were 0.3% and 0.2% of total operating expenses for 2002 and 2003, respectively.
      In 1994, the Company transferred to Satelindo (now Indosat) the right to use a parcel of Company-owned land located in Jakarta that had been previously leased to PT Telekomindo Primabhakti. Based on the transfer agreement, Satelindo is given the right to use the land for 30 years and can apply for the right to build properties thereon. The ownership of the land is retained by the Company. Satelindo agreed to pay Rp.43.0 billion to the Company for the thirty-year right. Satelindo paid Rp.17.2 billion in 1994 and the remaining Rp.25.8 billion was not paid because the Utilization Right (“Hak Pengelolaan Lahan”) on the land could not be delivered as provided in the transfer agreement. In 2000, the Company and Satelindo agreed on an alternative solution by accounting for the above payment as lease expense up to 2006. In 2001, Satelindo paid an additional amount of Rp.59.9 billion as lease expense up to 2024.

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      Telkomsel also entered into an agreement with Indosat for the provision of international telecommunication services to GSM mobile cellular customers. The principal matters covered by the agreement are as follows:

 • Telkomsel’s GSM mobile cellular telecommunication network is connected with Indosat’s international gateway exchanges to make outgoing or receive incoming international calls through Indosat’s international gateway exchanges;
 
 • Telkomsel receives as compensation for the interconnection, a specific percentage of Indosat’s revenues from the related services made through Indosat’s international gateway exchanges;
 
 • Billings for international calls made by Telkomsel’s customers of GSM mobile cellular telecommunication are handled by Telkomsel. Telkomsel is obliged to pay Indosat’s share of revenue althoughregardless whether billings to customers have not been collected; and
 
 • The agreement dated March 29, 1996, was initially valid for one year, but extendable for one-year periods as agreed by both parties. The latest extension expired on February 29, 2004. Pending negotiations on a new agreement, Telkomsel and Indosat have entered into an interim agreement with terms similar to those set forth above. Under the terms of the interim agreement, Telkomsel will receive 27% of the applicable tariff for outgoing international calls from Telkomsel subscribers and Rp.800 per minute for incoming international calls to Telkomsel subscribers. The interim agreement will be effective from March 1, 2004 until such date that Telkomsel and Indosat enter into a new agreement.

      Telkomsel also has an agreement for the usage of Indosat’s telecommunication facilities. The agreement, which was made in 1997, is valid for eleven years and subject to change based on an annual review and agreement by both parties. The charges for the usage of the facilities amounted to Rp.13.4 billion, Rp.12.7 billion, and Rp. 17.9 billion and Rp.19.1 billion (US$2.1 million) in 2001, 2002, 2003 and 2003,2004, respectively, reflecting 0.2%or 0.1%, 0.1% and 0.1% of total operating expenses in 2001, 2002, 2003 and 2003,2004, respectively.

      Other agreements between Telkomsel and Indosat are as follows:

     Agreement on Construction and Maintenance for the Jakarta-Surabaya Cable System (“J-S Cable System”)

Agreement on Construction and Maintenance for the Jakarta-Surabaya Cable System (“J-S Cable System”)
      Telkomsel, Lintasarta, Satelindo and Indosat entered into the Construction and Maintenance for J-S Cable System Agreement. The parties formed a management committee consisting of a chiefchairman and a representative of the respective parties, to direct the developmentconstruction and operation of the cable system. The construction of the cable system that was completed in 1998. Based on the agreement, Telkomsel share of the total construction cost was 19.325%. Telkomsel shares the total cost of operation and maintenance based on an agreed formula.

      Telkomsel’s share of the cost of operation and maintenance amounted to Rp.0.9 billion, Rp.1.4 billion Rp.0.9and Rp.2.1 billion (US$0.2 million) in 2002, 2003 and Rp.1.4 billion in 2001, 2002 and 2003,2004, respectively.

     Indefeasible Right of Use Agreement

Indefeasible Right of Use Agreement
      On September 21, 2000, Telkomsel entered into an agreement with Indosat for the use of SEA — ME — WE 3 and tail link in Jakarta and Medan. Based on the agreement, Telkomsel was granted an irrevocableindefeasible right to use a certain capacity of the network commencing from September 21, 2000 to 2015 by prepaying compensation amounting to US$2,727,273. BesidesIn addition to the aforementioned prepayment, Telkomsel is also charged annual operation and maintenance costs amounting to US$136,364.

     Interconnection Agreement

     On November 1, 2001, Telkomsel entered into an interconnection agreement with Indosat (on behalf of IM3, a subsidiary of Indosat). Based on this agreement, Telkomsel’s GSM cellular mobile network is connected to IM3’s network and through this arrangement, Telkomsel’s customers can make or receive calls from or to IM3’s customers.

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• Supply and installation of interconnection tools needed is Telkomsel’s responsibility; and
• The agreement is effective upon the signing date and extendable for a period agreed by both parties.Interconnection Revenues

     Based on the amendment upon the above agreement, since December 14, 2001, Telkomsel’s customers are able to send and receive short message services from IM3’s customers.

     The Company and its subsidiaries earned net interconnection revenue from IM3 of Rp.156.9 million and Rp.50.9 billion in 2001 and 2002, respectively. Interconnection revenues earned from IM3 in 2003 are included in the total amount of interconnection revenues earned from Indosat in 2003. See “Interconnection Revenues” below.

     Agreements with Satelindo

     On November 20, 2003, Indosat, IM3, Satelindo and PT Bimagraha Telekomindo merged, with Indosat as the surviving entity. Pursuant to the terms of the merger, all the rights and obligations of Satelindo and IM3, respectively, arising from their agreements with TELKOM and Telkomsel, as the case may be, were assumed by Indosat.

     The Company has an agreement with Satelindo, a subsidiary of Indosat, whereby both parties agreed, among other matters, on the following:

• Interconnection of the Company’s PSTN with Satelindo’s international gateway exchange, enabling the Company’s customers to make outgoing or receive incoming international calls through Satelindo’s international gateway exchange; and
• Billings for the international telecommunication services used by domestic customers through Satelindo’s international gateway exchange will be handled by the Company.

     The Company also has an agreement with Satelindo for the interconnection of Satelindo’s GSM mobile cellular telecommunication network with the Company’s PSTN, enabling the Company’s customers to make outgoing calls to or receive incoming calls from Satelindo’s customers.

     Telkomsel also has an agreement with Satelindo for interconnection on substantially the same terms as TELKOM.

     Interconnection revenues earned from Satelindo were Rp.293.7 billion and Rp.625.1 billion in 2001 and 2002, respectively, reflecting 1.8% and 3.0% of total operating revenue for 2001 and 2002, respectively. Interconnection revenues earned from Satelindo in 2003 are included in the total amount of interconnection revenues earned from Indosat in 2003. See “Interconnection Revenues” below.

     The Company leases international circuits from Satelindo. Payments made in relation to the lease amounted to (2003 payments were made to Indosat) Rp.28.1 billion, Rp.32.9 billion and Rp.30.2 billion in 2001, 2002 and 2003, respectively, which was 0.3%, 0.3% and 0.2% of total operating expenses for 2001, 2002 and 2003, respectively.

     Based on an agreement entered into among the Company, PT Bimagraha Telekomindo and Indosat in 1993, at the time of Satelindo’s establishment, the Company agreed to transfer to Satelindo, its so-called B-2P, B-2R and B-4 Palapa satellites and other assets relating to the Company’s satellite control station located in Jakarta. These transfers are to be covered in a separate agreement between Satelindo and the Company. The separate agreement regarding the transfers of these satellites and other assets has not been made. However, the useful life of the B-2P and B-2R Palapa satellites had expired. In November 2000, the Company entered into an agreement with a third party, in which the Company agreed to sell the expired B-2R Satellite, or to lease the satellite to such third party if the sale is not consummated.

     In 1994, the Company transferred to Satelindo the right to use a parcel of Company-owned land located in Jakarta that had been previously leased to Telekomindo, an associated company. Based on

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the transfer agreement, Satelindo is given the right to use the land for 30 years and can apply for the right to build properties thereon. The ownership of the land is retained by the Company. Satelindo agreed to pay Rp.43.0 billion to the Company for the thirty-year right. Satelindo paid Rp.17.2 billion in 1994 and the remaining Rp.25.8 billion has not been paid because the Utilization Right (“Hak Pengelolaan Lahan”) on the land could not be delivered as provided in the transfer agreement. In 2000, the Company and Satelindo agreed on an alternative solution by accounting for the above payment as lease expense up to 2006. In 2001, Satelindo paid the remaining amount of Rp.59.9 billion as lease expense up to 2024. As of December 31, 2003, the prepaid portion is reflected in the Company’s consolidated balance sheet as “Advances from customers and suppliers.”

     Interconnection Revenues

      The Company and its subsidiaries earned net interconnection revenues from Indosat (including Satelindo and IM3 in 2003)before their merger with Indosat) of Rp.54.0Rp.950.7 billion, Rp.274.7 billion and Rp.235.7 billion in 2001, 2002 and 2003, respectively, reflecting 0.3%, 1.3%or 4.6% and 0.9% of total operating revenues in 2001, 2002 and 2003, respectively. The

     Agreement149

Company and its subsidiaries were charged net interconnection charges from Indosat of Rp.158.3 billion (US$17.0 million) in 2004, or 0.5% of total operating revenues in 2004.
Leased Lines
      The Company provides leased lines to Indosat and its subsidiaries, namely Indosat Mega Media and Lintasarta. The leased lines can be used by those companies for telephone, telegraph, data, telex, facsimile or other telecommunication services. Revenue earned from these transactions amounted to Rp.43.6 billion and Rp109.8 billion (US$11.8 million) in 2003 and 2004, respectively, or 0.2% and 0.3% of total operating revenues in 2003 and 2004, respectively.
Satellite Transponder Lease
      Lintasarta utilizes the Company’s Palapa B4 and Telkom-1 satellite transponders or frequency channels. Revenue earned from these transactions amounted to Rp.15.8 billion, Rp.23.7 billion and Rp.14.5 billion (US$1.6 million) in 2002, 2003 and 2004, respectively, or 0.1%, 0.1% and less than 0.1% of total operating revenues in 2002, 2003 and 2004, respectively.
Data communication network
      Telkomsel has an agreement with Lintasarta and PT Artajasa Pembayaran Elektronis (“Artajasa”) for the usage of data communication network system. The charges from Lintasarta and Artajasa for the services amounted to Rp.11.0 billion and Rp.21.4 billion (US$2.3 million) in 2003 and 2004, respectively, or 0.1% and 0.1% of total operating expenses in 2003 and 2004, respectively.
Agreement with Government agencies and associated companies
      The Company provides telecommunication services to Government agencies and associated companies

agencies.

      The Company has entered into agreements with Government agencies and associated companies, Lintasarta,namely, CSM and Patrakom, for utilization of the Company’s Palapa B-4 and TELKOM-1 satellite transponders or frequency channels. Revenues earned from these transactions amounted to Rp.89.5Rp.28.3 billion, Rp.44.1Rp.73.2 billion and Rp.96.9Rp.51.0 billion (US$5.5 million) in 2001, 2002, 2003 and 2003,2004, respectively, which was 0.5%or 0.1%, 0.2%0.3% and 0.4%0.2% of total operating revenues in 2001, 2002, 2003 and 2003,2004, respectively.

      The Company provides leased lines to CSM Lintasarta, Satelindo,and PSN (including to Komselindo, Mobisel and Metrosel and PSN (2003 total excludes Satelindo, Komselindo and Metrosel)in 2002). The leased lines can be used by these companies for telephone, telegraph, data, telex, facsimile or other telecommunication services. Revenue earned from these transactions amounted to Rp.19.8 billion, Rp.75.7 billion, Rp.44.7 billion and Rp.69.4Rp.25.7 billion (US$2.8 million) in 2001, 2002, 2003 and 2003,2004, respectively, which was 0.1%0.4%, 0.4%0.2% and 0.3%0.1% of total operating revenues in 2001, 2002, 2003 and 2003.

     The Company provides a data communication network system for Lintasarta, an Indosat subsidiary and operates a telemetry tracking and command station for PSN. Revenues earned by the Company from these transactions amounted to Rp.28.0 billion in 2001, which was 0.2%, of total operating revenues in 2001. There was no revenue earned from these transactions in 2002 and 2003.

2004, respectively.

      The Company purchases property and equipment including construction and installation services from a number of related parties. These related parties include PT Industri Telekomunikasi Indonesia (“PT INTI”), Lembaga Elektronika Nasional, PT Adhi Karya, PT Pembangunan Perumahan, PT Nindya Karya, PT Boma Bisma Indra, PT Wijaya Karya, PT Waskita Karya which are all state-owned companies, PT Gratika, Telekomindo, Bangtelindo, Telesera which arean associated companiescompany and Koperasi Pegawai Telekomunikasi, a related party cooperative. Purchases made from these related parties amounted to Rp.100.5 billion, Rp.154.8 billion, and Rp.127.0 billion and Rp.268.9 billion (US$28.9 million) in 2001, 2002, 2003 and 2003,2004, respectively, reflectingor 2.1%, 1.1% and 2.4%, 2.1% and 1.1% of total fixed assets purchases in 2001, 2002, 2003 and 2003,2004 respectively.

      PT INTI wasis also a major contractor and supplier providing equipment, including construction and installation services, for Telkomsel. Total purchases from PT INTI in 2001, 2002, 2003 and 20032004 amounted to Rp.663.6 billion, Rp.34.7 billion, and Rp.52.3 billion and Rp.217.7 billion (US$23.4 million), respectively, reflecting 15.7%or 0.5%, 0.5% and 0.5%1.9% of total fixed assets purchases in 2002, 2003 and 2004, respectively.

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      Telkomsel has an agreement with PSN for lease of PSN’s transmission link. Based on the agreement, which was made on March 14, 2001, 2002the minimum lease period is 2 years since the operation of the transmission link and is extendable subject to agreement by both parties. The lease charges amounted to Rp.40.5 billion and Rp.49.7 billion (US$5.4 million) in 2003 and 2004, respectively, or 0.3% and 0.2% of TELKOM’s total operating expenses in 2003 and 2004, respectively.

      The Company and its subsidiaries carry insurance (on their property, plant and equipment against property losses, inventory and on employees’ social security) obtained from PT Asuransi Jasa Indonesia, PT Asuransi Tenaga Kerja and PT Persero Asuransi Jiwasraya, which are state-owned insurance companies. Insurance premiums amounted to Rp.83.9 billion, Rp.131.4 billion, and

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Rp.159.5 billion and Rp.148.3 billion (US$16.0 million) in 2001, 2002, 2003 and 2003,2004, respectively, reflecting 0.9%or 1.1%, 1.1% and 1.1%0.7% of total operating expenses in 2001, 2002, 2003 and 2003,2004, respectively.

      The Company and its subsidiaries maintain current accounts and time deposits in several state-owned banks. In addition, some of those banks are appointed as collecting agents for the Company. As of December 31, 2001, the Company also had an investment in mutual funds managed by Danareksa, a state-owned company. Total placements in form of current accounts and time deposits, and mutual funds in state-owned banks and mutual funds amounted to Rp.3,779.9 billion, Rp.6,161.2 billion, and Rp.3,130.4 billion and Rp.2,116.0 billion (US$227.8 million) as of December 31, 2001, 2002, 2003 and 2003,2004, respectively, reflecting 11.4%or 13.9%, 13.9%6.2% and 6.2%3.8% of total assets as of December 31, 2001, 2002, 2003 and 2003,2004, respectively. Interest income recognized during 2003 and 2004 was Rp.274.0Rp. 274.0 billion reflectingand Rp.150.4 billion (US$16.2 million), or 74.9% and 47.3% of total interest income.

income, respectively.

      The Company’s subsidiaries have loans from a state-owned bank. Interest expense on the loans for 2004 amounted to Rp.9.1 billion (US$1.0 million), or 0.7% of total interest expense in 2004.
      The Company (a) leases buildings, (b) purchases materials and construction services and (c) utilizes maintenance and cleaning services from Dana Pensiun Telkom and PT Sandhy Putra Makmur, a subsidiary of Yayasan Sandikara Putra Telkom (a foundation managed by Dharma Wanita Telkom). Total charges from these transactions amounted to Rp.18.7 billion, Rp14.6 billion, and Rp.32.8 billion and Rp.24.9 billion (US$2.7 million) in 2001, 2002, 2003 and 2003,2004, respectively, which wasor 0.1%, 0.2%, and 0.1% and 0.2% of total operating expenses in 2001, 2002, 2003 and 2003,2004, respectively.

      The Company purchased encoded phone cards from Perusahaan Umum Percetakan Uang Republik Indonesia, a state-owned company. Expenses arising from this transactionThe cost of the phone cards amounted to Rp.1.8 billion, Rp.1.4 billion, and Rp.7.7 billion and nil in 2001, 2002, 2003 and 2003,2004, respectively, which was 0.02%or 0.01%, 0.01%0.05% and 0.05%0% of total operating expenses for 2001, 2002, 2003 and 2003,2004, respectively.

     In 1991, the Company granted loans to Koperasi Telekomunikasi (“Koptel”) amounting to Rp.1 billion to support Koptel’s activities in providing housing loans to the Company’s employees. The balance of the loans amounted to Rp.0.2 billion, as of December 31, 2001, Rp.0.1 billion as of December 31, 2002 and nil as of December 31, 2003, which is immaterial to the Company’s total assets as of December 31, 2001, 2002 and 2003.

      The Company and its subsidiaries earned interconnection revenues from Komselindo, Metrosel, Mobisel, BBT,Babintel and PSN and Patrakom (2003 totals exclude Komselindo and Metrosel), which are associated companies, totaling Rp.345.3 billion,in 2002 of Rp.78.0 billion, and Rp.21.0from PSN in 2003 of Rp.19.0 billion, which was 0.4% and 0.1%, respectively, of total operating revenues in 2001, 2002 and 2003, respectively,2003. The Company and its subsidiaries were charged interconnection charges by PSN in 2004 in the amount of Rp.5.5 billion (US$0.6 million), which was 2.1%, 0.4% andless than 0.1% of total operating revenues in 2001, 2002 and 2003, respectively.

2004.

      In addition to revenues earned under the KSO Agreement, the Company also earned income from building rental, repairs and maintenance services and training services provided to the KSO Units, amounting to Rp.114.2 billion, Rp.73.7 billion, and Rp.23.1 billion and Rp.18.4 billion (US$2.0 million) in 2001, 2002, 2003 and 2003,2004, respectively, which was 0.7%or 0.4%, 0.4%0.1% and 0.1% of total operating revenues in 2001, 2002, 2003 and 2003,2004, respectively.
      The Company has a revenue-sharing arrangement with Koperasi Pegawai Telkom (“Kopegtel”). Kopegtel’s share of revenues from this arrangement amounted to Rp.20.6 billion (US$2.2 million) in 2004, or 0.1% of total operating revenues.
      Infomedia provides electronic media and call center services to KSO Unit VII based on an agreement dated March 4, 2003. Revenue earned from these transactions in 2004 amounted to Rp.5.5 billion (US$0.6 million), or less than 0.1% of total operating revenues.

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      The Company provides a defined benefit pension plan and a postretirementpost-retirement health care plan for its pensioners through Dana Pensiun Telkom and Yayasan Kesehatan Pegawai Telkom. See Notes 4644 and 4846 to the consolidated financial statements in Item 18.

      The Company has also seconded a number of its employees to related parties to assist them in operating their business. In addition, the Company provides certain of its related parties with the right to use its buildings free of charge.

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C.Interest of experts and counsel

Not applicable.
ITEM 8.FINANCIAL INFORMATION
A.Consolidated statements and other financial information

      See Item 18. “Consolidated Financial Statements,” which is incorporated herein by reference.

Material Litigation
Aria West

      On July 31, 2003, TELKOM acquired 100% of the shares of its KSO partner for Regional Division III, PT AriaWest, International (“AriaWest”) for an aggregate consideration of US$38.67 million in cash (US$20 million of which was paid when the purchase agreement was signed on May 8, 2002 and the remaining US$18.67 million was paid on July 31, 2003) and US$109.1 million in promissory notes. The promissory notes, which are interest-free, are payable in 10 semi-annual installments. At the same time, in consideration of the release of AriaWest’s outstanding obligations to its lenders, TELKOM also repaid approximately US$99 million of AriaWest’s debt (on behalf of AriaWest) and entered into a new loan agreement for approximately US$197 million with AriaWest’s lenders. TELKOM and AriaWest also entered into a settlement agreement pursuant to which TELKOM and AriaWest irrevocably settled, discharged and released claims and counterclaims in their ICC arbitration proceeding and TELKOM agreed to pay a settlement amount of US$20 million.

The ICC arbitration proceeding which was settled as of July 31, 2003 involved claims by AriaWest that TELKOM was in material breach of provisions of the KSO Agreement. AriaWest sought at least US$1.3 billion in damages in the arbitration, although it did not specify the amount of damages associated with most of its claims. TELKOM objected to the ICC’s jurisdiction over AriaWest’s claims relating to the alleged loss of AriaWest’s exclusive rights and tariff adjustment and, wholly apart from its jurisdictional objections, TELKOM denied all of AriaWest’s claims. TELKOM also asserted claims against AriaWest for material breaches of the KSO Agreement.
KAP Eddy Pianto

      On February 19, 2004, KAP Eddy Pianto, the auditor initially appointed by TELKOM to audit TELKOM’s 2002 financial statements, commenced a legal suit in the South Jakarta District Court against KAP Drs. Haryanto Sahari & Rekan (member firm of PricewaterhouseCoopers in Indonesia, formerly known as KAP Drs. Hadi Sutanto & Rekan and TELKOM’sPwC (TELKOM’s auditor for the reaudit of TELKOM’s 2002 financial statements), TELKOM, KAP Hans Tuanakotta Mustofa & Halim (formerly KAP Hans Tuanakotta & Mustofa) (member firm of Deloitte Touche Tohmatsu in Indonesia and TELKOM’s(TELKOM’s 2001 auditor) and BAPEPAM (collectively, the “Defendants”), alleging that the Defendants, through the reaudit of TELKOM’s 2002 financial statements, had conspired to engage in an illegal action against KAP Eddy Pianto, tarnishing the reputation of KAP Eddy Pianto in the public accounting profession. KAP Eddy Pianto seekssought to recover approximately Rp.7,840.0 billion in damages from the Defendants. The court decided in the Defendants’ favor and KAP Eddy Pianto appealed. On March 9, 2005, KAP Eddy Pianto withdrew its appeal and on March 14, 2005, the District Court granted its request to withdraw its appeal.

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     Commissions for Business Competition Watch (Komisi Pengawas Persaingan Usaha) (“KPPU”)
      On August 13, 2004, the KPPU issued its verdict in Commission Court, which determined that the Company had breached several articles of Law No. 5/1999 on Anti Monopolistic Practices and Unfair Business Competition (“Competition Law”). In addition, KPPU also indicated that the Company should allow Warung Telkom (“kiosks”) to channel international calls to other international call operators, and abolish the clause in agreements between the Company and Warung Telkom providers which limit Warung Telkom to sell telecommunication services of other operators. The Company filed an appeal to the Bandung District Court which on December 7, 2004, issued its verdicts in favor of the Company. Subsequently, KPPU has filed an appeal to the Indonesian Supreme Court.
     Recent Press Reports
      There have recently been reports in the Indonesian media that a special government agency may be investigating possible financial wrongdoing, including graft, at TELKOM. Such reports have not indicated the persons that may be the subject of investigation or the nature of the wrongdoing. As of the date of this Annual Report, each DefendantTELKOM has filed its responsenot received any formal notice of any investigation but, if notified, intends to KAP Eddy Pianto’s allegations, as well as its respective rejoinder to certain replies of KAP Eddy Pianto to such response. The court is now in the process of examining the evidence and witnesses presented by KAP Eddy Pianto and each of the Defendants. TELKOM is contesting this legal suit vigorously because it does not believe that the claim of KAP Eddy Pianto hasfully cooperate with any merit or that KAP Eddy Pianto has any legal basis to claim damages. As of the date of this Annual report, however, TELKOM can give no assurance regarding the possible outcome of the legal suit.

     Apart from the above, TELKOM is not a party to any other litigation or legal proceedings which it believes would, individually or taken as a whole, have a material adverse effect on its business, financial condition and results of operations.

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investigation.

B.Significant changes

      See the important disclosures made in Item 3. “Key Information — D. Risk Factors — TELKOM did not file a fully compliant 2002 Annual Report on Form 20-F until February 9, 2004 and may face an SEC enforcement action, or other legal liability or adverse consequences.”

      On May 13, 2004, TELKOM received its commercial license to provide IDD fixed-linefixed line services. On June 7, 2004, TELKOM began offering IDD fixed-linefixed line services to customers under the brand name “ TIC“TIC 007.”

      See the important disclosures regarding changes in the regulations governing the Indonesian telecommunications industry in Item 4. “Information on the Company — B. Business Overview — Regulations.”

      See Note 5755 to the Company’s consolidated financial statements in Item 18 for information relating to material subsequent events occurring after December 31, 2003.2004.

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ITEM 9.THE OFFER AND LISTING
A.Offer and listing details

      The table below sets forth, for the periods indicated, the reported high and low quoted prices for the currently outstanding Common Stock on the JSX.

SHARE PRICE INFORMATION
           
 Price per
Price per Share Share*
  
Calendar YearHighLow High Low
    
 (in Rupiah)
(in Rupiah)
1999
 4,629 2,407 
2000
 4,350 2,025   4,350  2,025 
First Quarter 4,350 3,325   4,350  3,325 
Second Quarter 3,775 2,675   3,775  2,675 
Third Quarter 3,325 2,600   3,325  2,600 
Fourth Quarter 2,890 2,025   2,890  2,025 
2001
 3,400 1,825   3,400  1,825 
First Quarter 3,150 1,775   3,150  1,775 
Second Quarter 3,200 2,175   3,200  2,175 
Third Quarter 3,525 2,650   3,525  2,650 
Fourth Quarter 3,250 2,425   3,250  2,425 
2002
        
First Quarter 4,300 2,825   4,300  2,825 
Second Quarter 4,725 3,700   4,725  3,700 
Third Quarter 3,900 3,125   3,900  3,125 
Fourth Quarter 4,000 2,350   4,000  2,350 
2003
        
First Quarter 3,725 3,225   3,725  3,225 
Second Quarter 4,950 3,650   4,950  3,650 
Third Quarter 6,000 4,125   6,000  4,125 
Fourth Quarter 6,750 5,650   6,750  5,650 
2004
       
First Quarter  4,025  3,300 
Second Quarter  4,350  3,300 
Third Quarter  4,225  3,650 
Fourth Quarter  5,200  4,175 
October  4,400  4,175 
November  5,100  4,350 
December 6,900 5,850   5,200  4,600 
2004
 
2005
       
January 8,050 6,700   5,125  4,800 
February 7,800 7,000   4,825  4,425 
March 7,550 6,350   4,625  4,300 
April 8,800 7,000   4,725  4,275 
May 8,100 6,600   4,600  4,175 
June 24, 2004 7,250 7,100 
June   5,350  4,700 
July (through July 13, 2005)  5,250  4,950 

      * On October 1, 2004, TELKOM effected a two-for-one split of its Common Stock from Rp.500 par value per share to Rp.250 par value per share as resolved in the AGMS on July 30, 2004. The price per share reflects this split for all periods shown.
      On December 30, 2003, (at2004, (the last trading day in 2004 on the JSX), the closing price for a share of Common Stock was Rp.6,750.Rp.4,825.

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      The table below sets forth, for the periods indicated, the reported high and low quoted prices of the ADSs on the NYSE and LSE.

ADS PRICE INFORMATION
            
            
Price per ADSPrice per ADS Price per ADS Price per ADS
(NYSE)(LSE) (NYSE) (LSE)
    
Calendar YearHighLowHighLow High Low High Low
        
 (in US Dollars) (in US Dollars)
(in US Dollar)(in US Dollar)
1999
 13.63 5.27 13.17 5.37 
2000
 12.00 4.13 12.15 4.27   12.00  4.13  12.15  4.27 
First Quarter 12.00 9.1 12.1 9.2   12.00  9.1  12.1  9.2 
Second Quarter 9.7 6.4 9.6 6.4   9.7  6.4  9.6  6.4 
Third Quarter 8.0 5.9 7.9 6.1   8.0  5.9  7.9  6.1 
Fourth Quarter 6.3 4.1 6.4 4.3   6.3  4.1  6.4  4.3 
2001
 7.06 3.65 7.05 3.80   7.06  3.65  7.05  3.80 
First Quarter 6.7 4.0 6.5 3.9   6.7  4.0  6.5  3.9 
Second Quarter 5.6 3.7 5.6 3.8   5.6  3.7  5.6  3.8 
Third Quarter 7.1 5.5 7.1 5.5   7.1  5.5  7.1  5.5 
Fourth Quarter 5.8 4.7 6.1 4.8   5.8  4.7  6.1  4.8 
2002
 9.77 5.56 9.82 5.27   9.77  5.56  9.82  5.27 
First Quarter 8.6 5.5 8.6 5.5   8.6  5.5  8.6  5.5 
Second Quarter 9.8 8.4 9.8 8.4   9.8  8.4  9.8  8.4 
Third Quarter 8.7 7.0 8.7 7.1   8.7  7.0  8.7  7.1 
Fourth Quarter 8.9 5.6 8.9 5.3   8.9  5.6  8.9  5.3 
2003
 8.44 7.30 8.53 7.27   8.44  7.30  8.53  7.27 
First Quarter 8.44 7.30 8.53 7.27   8.44  7.30  8.53  7.27 
Second Quarter 12.09 8.19 11.78 8.33   12.09  8.19  11.78  8.33 
Third Quarter 13.73 9.85 13.90 9.60   13.73  9.85  13.90  9.60 
Fourth Quarter 16.42 13.13 16.05 13.40   16.42  13.13  16.05  13.40 
2004
             
First Quarter  19.45  15.13  18.97  15.29 
Second Quarter  19.91  14.13  20.27  14.08 
Third Quarter  18.55  15.81  19.00  15.73 
Fourth Quarter  23.33  18.30  23.21  19.37 
October  19.66  18.30  19.70  18.38 
November  22.45  19.30  23.21  19.37 
December 16.42 13.64 16.05 14.35   23.33  19.35  22.96  19.64 
2004
 
2005
             
January 19.48 16.60 18.50 16.15   21.96  20.60  21.95  20.47 
February 18.58 16.75 18.15 16.95   20.95  19.21  20.88  19.05 
March 17.75 15.00 17.55 14.75   19.40  18.11  20.05  18.66 
April 20.19 17.10 19.95 16.55   19.82  17.75  20.24  18.02 
May 19.15 15.15 18.55 14.55   19.75  16.85  20.18  18.01 
June 24, 2004 15.65 14.85 14.95 14.95 
June 30, 2005  21.96  19.46  22.36  19.86 
July (through July 13, 2005)  21.30  20.29  21.42  20.55 

      On December 31, 2003,30, 2004, the closing price for an ADS was US$ 16.1421.02 on the NYSE and US$ 16.0520.73 on the LSE.

B.     Plan of distribution155

B.Plan of distribution
      Not applicable.

C.     Markets

C.Markets
      TELKOM’s Common Stock is listed on the Jakarta Stock Exchange (“JSX”) and the Surabaya Stock Exchange (“SSX”). The JSX is the principal non-U.S. trading market for the Company’s Common

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Stock. In addition, American Depositary Shares (“ADSs”), each representing twenty40 shares of Common Stock, are listed on the New York Stock Exchange (“NYSE”) and the London Stock Exchange (“LSE”). TELKOM’s Common Stock has also been publicly offered without listing in Japan.

The Indonesian Securities Market

Currently

      As of the date of this Annual Report, there are two stock exchanges in Indonesia. The primary market is the JSX located in Jakarta and the other is the SSX located in Surabaya, East Java. The JSX is the larger and more prominent of the two exchanges, with an aggregate equity market capitalization of Rp.460.4Rp.679.95 trillion at year end 20032004 as compared to Rp.405.0Rp. 605.39 trillion for the SSX. Total trading value on the JSX during 20032004 was Rp.125.4Rp.247.01 trillion, compared with Rp.3.1Rp.8.12 trillion on the SSX.
Overview of the JSX

      As of December 31, 2004, the JSX comprised of 125 members. Trading rules on the JSX are, at present, generated in the form of decisions by the JSX. There are currently two daily trading sessions for regular market and negotiated market from Monday to Thursday, 9:30a morning session from 9.30 a.m. to 12:0012.00 noon, and 1:30followed by an afternoon session from 1.30 p.m. to 4:004.00 p.m. There are two trading sessions on Friday, from 9:309.30 a.m. to 11:3011.30 a.m. and from 2:002.00 p.m. to 4:004.00 p.m.

There is only one cash market trading session from Monday to Thursday, 9.30 a.m. to 12.00 noon, and on Friday, 9.30 a.m. to 11.30 a.m.

      Trading of securities is divided into three market segments: regular market, negotiationnegotiated market and cash market.market (except for right issues which may only be traded in the cash and negotiated markets). The regular market is the mechanism for trading stock in standard lots on a continuous auction market during exchange hours. With respect to theRegular market and cash market trading of stock, the roundis generally carried out in unit lots consist of 500 shares for non-banking sector shares and of 5,000 shares for banking sector shares. The price movements and the limits for such movements in one trading session are determined in accordance with the market price of the respective traded shares. For shares with the market price of less than Rp.500 the movement are in multiples of Rp.5 and each price movement is limited to Rp.50. For shares with market prices ranging from Rp.500 to Rp.5,000 movements are in multiples of Rp.25 and each price movement is limited to Rp.250. For shares with a market price of Rp.5,000 or more movements are in multiples of Rp.50 with a maximum of Rp.500 for each price movement.movements:
• for shares with previous price under Rp.500, in multiples of Rp.5 and each price movement should be no more than Rp.50;
• for shares with previous price between the range of Rp.500 up to Rp.5,000, in multiples of Rp.25 and each price movement should be no more than Rp.250; and
• for shares with previous price of Rp.5,000 or more, in multiples of Rp.50 and each price movement should be no more than Rp.500.
      Auctioning takes place according to both price priority and time priority. Price priority givesrefers to the giving of priority to buying orders at a higher price or selling orders at a lower price. If buying or selling orders are placed at the same price, priority is given to the buying or selling order placed first (time(i.e. time priority).

      The negotiationnegotiated market trading consistsis carried out by (i) direct negotiation between members of (i) blockJSX or (ii) between clients through one member of JSX or (iii) between client and member of JSX or (iv) between member of JSX with Kustodi Penjaminan Efek Indonesia (Indonesian Clearing Guarantee Corporation) (“KPEI”). The negotiated market trading i.e. lots of 200,000 shares or more; (ii) odd lot trading withdoes not use round lots of less than 500 shares or less than 5000 shares for banking companies; (iii) crossing by an exchange member receiving buying and selling orders for the same number of shares at the same price; and (iv) foreign board trading in stocks where foreign ownership has reached 49% of listed shares. Odd lots may not be traded more than 5% above or below the latest price on the regular market. Odd lot dealers may set prices within a range of not more than 7% above or below the regular market price and must buy or sell stock directly to and from customers in crossing without charging commission. In the case of newly listed or newly traded shares which have yet to establish a market price, the price referred to is the initial public offering price.

lots.

      Transactions on the JSX regular and negotiation marketsmarket are required to be settled no later than the fourththird trading day after the transactions except for cross trading. Transactions on the negotiated market are settled based on agreement between the selling exchange member and the buying exchange member, and are settled

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per transaction. Transactions on the JSX cash market are required to be settled on the trading day of the transactions. In case of a default by an exchange member on settlement, upon the due date, the Indonesian Clearing and Guarantee Corporation, PT Kliring Penjaminan Efek Indonesia (“KPEI”) may perform the obligations or rights of such a defaulting exchange member, by, for example, buying and/or selling shares in the cash market in ordertrading takes place, pursuant to settle the defaulted transaction. Any such actionwhich trading of securities by KPEI does not eliminate the liabilitiesmeans of the defaulting party which effected the transaction.direct negotiation on cash and carry terms will be conducted. All cash market transactions must be reported to the JSX. An exchange member defaultingis obliged to pay a transaction cost as regulated by the JSX, delay in settlement is liablepayment of the transaction cost will be subject to a fine of 0.25% for the first day and thereafter a fine of 0.5%1.0% of the transaction value payableoutstanding amount for each day of delay. For any violation on JSX rules, JSX may impose to his counterpart inexchange member, sanctions: (i) fine up to Rp.500 million; (ii) a written warning; (iii) suspension; or (iv) revocation of license as an exchange member.
      All transactions involving shares listed only on the transactionJSX which use the services of brokers must be conducted through the JSX. In order for a trade (except a block trade) to be made on the JSX, both the cash and shall alsosecurities settlement must be issued with a warning. Delay in paymentconducted through the facilities of the fineJSX. Engaging in short selling is also liable to a penalty equal to 1% ofprohibited under the fine for each calendar day of delay.

     Theapplicable regulations. Furthermore, the JSX board of directors may cancel a transaction if proof exists of fraud, market manipulation or the use of insider information. The JSX board of directors may also suspend trading if there are indications of bogusfraudulent transactions or jacking upartificial inflation of share prices, misleading information, use of insider information,

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counterfeit securities or securities blocked from trading, uponor any other material event. The JSX may suspend trading of certain securities or suspend certain members of the occurrencestock exchange. For transactions involving shares listed on both the JSX and the SSX, either exchange may be used to effect the trade.
      Members of other important events that may affect investment decisions.

     Exchange members maythe JSX charge a brokerage fee for their services, based on an agreement with the clientstheir client, up to a maximum of 1%1.0% of the transaction value. When conducting stockshare transactions on the JSX, exchange members are required to pay a transaction fee equal tocost in the cumulativeamount of 0.03% of the transaction value for each month(for transactions in the regular and cash markets) and a transaction cost in the amount of 0.03% of the transaction value or based on 0.04% (subjectthe exchange policy (for transactions in the negotiated markets). The transaction cost is minimum Rp.2 million per month as contribution for the provision of stock exchange’s facilities (which continues to apply for stock exchange members in suspension). The clients are also responsible for paying a minimum10.0% value added tax on the amount of brokerage fee and transaction cost. Also, Indonesian sellers are required to pay a withholding tax of Rp.250,000)0.1% (0.6% for founder shares) of the total transaction for stocksvalue. Additionally, stamp duty of Rp.3,000 is payable on any transaction with a value between Rp.250,000 and other registered securities.

StockholdersRp.1,000,000 and stamp duty of Rp.6,000 is payable on every transaction with a value of more than Rp.1,000,000.

      Shareholders or their appointees may request the issuer or a Securities Administration Bureau appointed by the issuer at any time during working hours, the issuer or a securities administration bureau appointed by the issuer of such shares to register their shares in the issuer’s Registryregistry of Stockholders.shareholders. Reporting of share ownership to BAPEPAM is mandatory for shareholders whose ownership has reached 5.0% or more of issued and fully paid up capital, upon meeting such share ownership level or upon changes of such ownership.
Trading on the NYSE and LSE

      The Bank of New York serves as depositary (the “Depositary”) with respect to the ADSs traded on the NYSE and the LSE. Each ADS represents twenty40 shares of Common Stock. As of December 31, 2003, 38,317,0462004, 45,126,420 ADSs were outstanding in the United States and there were 169154 registered holders of ADSs.

D.  Selling Stockholders

      Not applicable.

E.  Dilution

      Not applicable.

F.  Expenses of the issue

Not applicable.

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ITEM 10.ADDITIONAL INFORMATION
ITEM 10.     ADDITIONAL INFORMATION

A.  Share capital

      Not applicable.

B.  Memorandum and Articles of Association

      The Company’s articles of association (“Articles”) have been registered with the Ministry of Justice in accordance with the Limited Liability Company Law No. 1 Year 1995 (“Indonesian Company Law”) and was announced by Ministerial Decree number C2-7468.HT.01.04.TH.97 year 1997. According to article 3, the objectives and purposes of the Company are to operate telecommunications networks and provide telecommunications and information services.

      In accordance with Indonesian company law, TELKOM has a Board of Commissioners and a Board of Directors. The two Boards are separate and no individual may be a member of both Boards. See Item 6. “Directors, Senior Management and Employees — A. Directors and Senior Management.” The Articles states that any transaction involving a conflict of interest between the Company and its directors, commissioners and stockholders should be approved by a stockholders meeting, in which approval is required from a majority of independent stockholders.

      Each director also receives an annual bonus and other incentives if TELKOM surpasses certain financial and operating targets, the amounts of which are determined by the stockholders at the general meeting of stockholders. Bonuses and incentives are budgeted annually and are based on the recommendation of the Board of Directors which recommendation must be approved by the Board of Commissioners before submission to the stockholders. Each commissioner is granted a monthly

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honorarium and certain other allowances and is paid an annual bonus if TELKOM surpasses certain financial operating targets, the amounts of which are determined by the stockholders at the general meeting of stockholders. Each commissioner also receives a lump sum bonus paid at the end of the commissioner’s term pursuant to a letter of the Ministry of Finance which applies to all state-owned companies. No fees are paid to the Commissioners or Directors for attendance at their respective board meetings.

      The Board of Directors are tasked with the responsibility of leading and managing the Company in accordance with its objectives and purposes and to control, preserve and manage the assets of the Company. Within such broad scope of responsibility, the Board of Directors are authorized to cause the Company to borrow such sums as it may require from time to time subject to the limitations set forth in the Articles. The borrowing powers of the Board of Directors may only be varied through an amendment to the Articles.

      The Articles do not contain any requirement for (i) the directors to retire by a specified age, or (ii) the directors to own any or a specified number of shares of the Company. The rights, preferences and restrictions attaching to each class of the shares of the Company in respect of specified matters are set forth below:

 • dividend rights.Dividends are to be paid based upon the financial condition of TELKOM and in accordance with the resolution of the stockholders in a general meeting, which will also determine the form of and time for payment of the dividend;
 
 • voting rights.The holder of each voting share is entitled to one vote at a general meeting of stockholders;
 
 • rights to share in the Company’s profits.See dividend rights;
 
 • rights to share in any surplus in the event of liquidation.Stockholders are entitled to surplus in the event of liquidation in accordance with their proportion of shareholding, provided the nominal value of the Common Stock that they hold is fully paid-up;

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 • redemption provisions.There are no stock redemption provisions in the Articles. However, based on Article 30 of Indonesian Company Law, TELKOM may buy back at the maximum 10% of its issued shares;
 
 • reserved fund provisions.Retained earnings up to a minimum of 20% of the issued capital of the Company is to be set aside to cover potential losses suffered by the Company. If the amount in the reserved fund exceeds 20% of the issued capital of the Company, general meeting of stockholders may authorize the Company to utilize such excess funds as dividends;
 
 • liability to further capital calls.Stockholders of the Company may be asked to subscribe for new shares in the Company from time to time. Such right is to be offered to stockholders prior to being offered to third parties and may be transferred at the option of the shareholder. The Board of Directors of the Company is authorized to offer the new shares to third parties in the event that the existing shareholder is unable or unwilling to subscribe for such new shares; and
 
 • provisions discriminating against any existing or prospective holder of such securities as a result of such shareholder owning a substantial number of shares.The Articles do not contain any such provision.

      In order to change the rights of holders of stock, an amendment to the relevant provisions of the Articles would be required. Any amendment to the Articles requires the approval of the holder of the Series A Dwiwarna share and two thirds of the holders of the Series B shares present at a general meeting. Such meeting must also be attended by the holder of the Series A Dwiwarna share.

      General meetings of stockholders may only be convened upon the issuance of the requisite notice by the Company. The notice is to be published in at least 2 newspapers having general circulation within Indonesia, one of which must be in Indonesian and the other in English. The notice period for

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convening annual general meetings and extraordinary general meetings is 21 days (not including the date the meeting was called and the date of the meeting) and 14 days (not including the date the meeting was called and the date of the meeting) respectively. The quorum for the general meeting is stockholders representing at leastmore than 50% of the outstanding share capital of the Company. In the event that quorum is not achieved, another meeting is to be held, which meeting does not require the issue of a notice. At the second meeting, the quorum for the meeting is stockholders representing one third of the outstanding share capital of the Company. In the event that quorum is not achieved at the second meeting, a third meeting may be held, the quorum for which shall be determined by the Head of the District Court that has a judicial jurisdiction over TELKOM. Stockholders may vote by proxy. All resolutions are to be passed by consensus. If consensus cannot be reached, resolutions are passed by simple majority, unless a larger majority is required by the Articles.

      The Articles do not contain any limitations on the right of any person, to own shares of the Company. Indonesian capital market regulations do not contain any limitation on the right of any person, whether local or foreign, to own shares in a company listed on an Indonesian stock exchange.

      Any takeover of the Company is required to be approved by the holder of the Series A Dwiwarna share and a majority constituting 75% of the holders of the Series B shares at a general meeting of stockholders that must be attended by the holder of the Series A Dwiwarna share. There are no other provisions in the Articles that would have the effect of delaying, deferring or preventing a change in control of the Company.

      Each director and commissioner has an obligation to report to BAPEPAM with regard to their ownership and the changes of their ownership in the Company and this obligation also applies to stockholders who have an ownership of 5% or more in the paid up capital of the Company. TELKOM believes that the Articles are not significantly different from those generally prevailing in Indonesia in respect of public companies listed on an Indonesian stock exchange. TELKOM also believes that the provisions in the Articles relating to changes in the capital of TELKOM are not more stringent than that required by Indonesian law.

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Summary of significant differences between Indonesian corporate governance practices and the NYSE’s corporate governance standards

The following sets forth a brief, general summary of significant differences between the corporate governance practices followed by Indonesian companies, such as TELKOM, and those required by the listing standards of the New York Stock Exchange (the “NYSE”) of U.S. companies that have common stock listed on the NYSE. The NYSE listing standards are available on the NYSE’s website at http://www.nyse.com.
Overview of Indonesia law

      Indonesian public companies are required to observe and comply with certain good corporate governance practices. The requirements and the standards for good corporate governance practices for public companies are mainly embodied in the following regulations: Law No. 1 of 1995 on Limited Liability Companies (“Company Law”); the Law No. 8 of 1995 on Capital Market (“Capital Market Law”); the Regulations of the Indonesian Capital Market Supervisory Board (“BAPEPAM Regulations”); and the rules issued by the Indonesian stock exchanges, namely Jakarta Stock Exchange (“JSX”) and Surabaya Stock Exchange (“SSX”). In addition to the above statutory requirements, the articles of association (“Articles”) of the public companies commonly incorporate provisions directing the corporate governance practices in such companies.

      Similar to the laws of the United States, Indonesian laws require public companies to observe and comply with standards of corporate governance practices that are more stringent than those applied to privately-owned companies. It should be noted that in Indonesia, the term “public company” does not necessarily refer to a company whose shares are listed on a securities exchange. Under the Capital Market Law, a non-listed company may be deemed a public company, and subjected to the laws and

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regulations governing public companies, if such company meets or exceeds the capital and shareholder requirements applicable to a publicly-listed company.

In 2000, the Government established the National Committee on Corporate Governance (“NCGI”), an informal committee that was tasked with formulating good corporate governance standards for Indonesian companies. As a result, the NCGI formulated the Code for Good Corporate Governance (“Code”) which recommended setting more stringent corporate governance standards for Indonesian companies, such as the appointment of independent audit and compensation committees by the Boards of Commissioners, as well as increasing the scope of Indonesian companies’ disclosure obligations. Although the NCGI recommended that the Code be adopted by the Government as a basis for legal reform, as of the date of this Annual Report the Government has not enacted regulations that fully implement the provisions of the Code. For example, while public companies such as TELKOM are now required to have independent audit committees, they are not yet required to have independent compensation committees. Accordingly, many of the Code’s provisions have not been implemented by Indonesian companies.
Composition of Board of Directors; Independence

      The NYSE listing standards provide that the board of directors of a U.S. listed company must consist of a majority of independent directors and that certain committees must consist solely of independent directors. A director qualifies as independent only if the board affirmatively determines that the director has no material relationship with the company, either directly or indirectly.

      Unlike companies incorporated in the United States, the management of an Indonesian company consists of two organs of equal stature, the Board of Commissioners (“BoC”) and the Board of Directors (“BoD”). Generally, the BoD is responsible for the day-to-day business activities of the company, while the BoC acts as the representatives of the company’s shareholders and is authorized and responsible for the supervision of the BoD and is statutorily mandated to provide advice to the BoD.

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      With regard to the BoC, the Company Law requires a public company’s BoC to have at least two members. Although the Company Law is silent as to the composition of the BoC, Listing Regulation No. 1A issued by the JSX states that at least 30% of the members of the BoC of a public company (such as TELKOM) must be independent.

As to the BoD, the Company Law states that the BoD has the authority to manage the daily operation of the company and must have at least two members, each of which must meet the minimum qualification requirements set forth in the Company Law. Given the difference between the role of the members of the BoD in an Indonesian company to that of their counterparts in a U.S. company, Indonesian law does not require that certain members of the BoD must be independent and neither does it require the creation of certain committees composed entirely of independent directors.
Committees

      The NYSE listing standards require that a U.S. listed company must have an audit committee, a nominating/ corporate governance committee and a compensation committee. Each of these committees must consist solely of independent directors and must have a written charter that addresses certain matters specified in the listing standards.

      The Company Law does not require Indonesian public companies to form any of the committees described in the NYSE listing standards. However, Listing Regulation No. 1A issued by the JSX does require the BoC of a listed public company (such as TELKOM) to form committees that will oversee the company’s audit process (which committee must be headed by an independent member of the BoC).

     TELKOM’s BoC

      TELKOM has formed an audit committee composed of sixseven members: two independent commissioners, and four members who are not affiliated with TELKOM.TELKOM and a non-independent commissioner with no right to vote as he is affiliated with the Government. The NYSE listing standards

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and the charter of TELKOM’s audit committee share the goal of establishing a system for overseeing the company’s accounting that is independent from management and of ensuring the auditor’s independence. However, unlike the requirements set forth in the NYSE listing standards, TELKOM’s audit committee does not have direct responsibility for the appointment, compensation and retention of TELKOM’s external auditor. TELKOM’s audit committee can only recommend the appointment of the external auditor to the BoC, and the BoC’s decision is subject to shareholder approval.

      TELKOM’s BoC also re-established TELKOM’s nomination and renumeration committee on May 20, 2003. The committee was tasked with formulating: (a) selection criteria and nomination procedures for Commissioners and Directors; and (b) a compensation system for Commissioners and Directors for the 2003 fiscal year. In accordance with its mandate from the BoC, the committee will deliver a report regarding its activities during the 2004 Annual General Meeting of TELKOM’s stockholders.

For more information on TELKOM’s BoC committees, see Item 6. “Directors, Senior Management and Employees — A. Directors and Senior Managers — Board of Commissioners’ Committees.”
Disclosure regarding corporate governance

The NYSE listing standards require U.S. companies to adopt, and post on their websites, a set of corporate governance guidelines. The guidelines must address, among other things: director qualification standards, director responsibilities, director access to management and independent advisers, director compensation, director orientation and continuing education, management succession, and an annual performance evaluation itself. In addition, the CEO of a U.S. company must certify to the NYSE annually that he or she is not aware of any violations by the company of the NYSE’s corporate governance listing standards. The certification must be disclosed in the company’s annual report to shareholders. There are no disclosure requirements in Indonesian law similar to the NYSE listing standards described above. However, the Capital Market Law generally requires Indonesian public

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companies to disclose certain types of information to shareholders and to BAPEPAM, particularly information relating to changes in the public company’s shareholdings and material facts that may affect the decision of shareholders to maintain their share ownership in such public company.
Code of Business Conduct and Ethics

      The NYSE listing standards require each U.S. listed company to adopt, and post on its website, a code of business conduct and ethics for its directors, officers and employees. There is no similar requirement under Indonesian law. However, companies that are required to submit periodic reports to the SEC, including TELKOM, must disclose in their Annual Reports whether they have adopted a code of ethics for their senior financial officers. Although the requirements as to the contents of the code of ethics under SEC rules are not identical to those set forth in the NYSE listing standards, there are significant similarities. Under SEC rules, the code of ethics must be designed to promote: (a) honest and ethical conduct, including the handling of conflicts of interest between personal and professional relationships; (b) full, fair, accurate and timely disclosure in reports and documents filed with or submitted to the SEC; (c) compliance with applicable laws and regulations; (d) prompt internal reporting of violations of the code; and (e) accountability for adherence to the code. Furthermore, shareholders must be given access to physical or electronic copies of the code. See Item 16B. “Code of Ethics.”

C.  Material contracts

Transfer of DCS 1800 License to Telkomsel

     Prior to 2002, TELKOM had been working on the construction of a DCS 1800 network and the setting up of a DCS 1800 mobile cellular business through its TELKOM Mobile unit and had been granted 15 MHz of radio frequency bandwidth in the 1800 MHz band. On April 3, 2002, TELKOM and Telkomsel entered into an agreement for the sale and purchase of TELKOM’s assets relating to the

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TELKOM Mobile unit. Under the agreement, TELKOM, for a consideration of approximately Rp.135.5 billion (i) transfer to Telkomsel specified assets of TELKOM relating to the business of the TELKOM Mobile unit; (ii) transfers its TELKOM Mobile unit employees to Telkomsel; and (iii) transfers or novates to Telkomsel TELKOM’s rights and obligations under certain TELKOM Mobile assets and contracts. In connection with such transaction the MoC has approved the reissuance and transfer of DCS 1800 license from TELKOM to Telkomsel on July 12, 2002.

Acquisition of AriaWest

      On July 31, 2003, TELKOM acquired 100% of the shares of its KSO partner for Regional Division III, PT AriaWest, International (“AriaWest”) for an aggregate consideration of US$38.67 million in cash (US$20 million of which was paid when the purchase agreement was signed on May 8, 2002 and the remaining US$18.67 million was paid on July 31, 2003) and US$109.1 million in promissory notes. The promissory notes, which are interest-free, are payable in 10 semi-annual installments. At the same time, in consideration of the release of AriaWest’s outstanding obligations to its lenders, TELKOM also repaid approximately US$99 million of AriaWest’s debt (on behalf of AriaWest) and entered into a new loan agreement for approximately US$197 million with AriaWest’s lenders.lenders, which was fully prepaid in December 2004. TELKOM and AriaWest also entered into a settlement agreement pursuant to which TELKOM and AriaWest irrevocably settled, discharged and released claims and counterclaims in their ICC arbitration proceeding and TELKOM agreed to pay a settlement amount of US$20 million.

Sale of Shares in Telkomsel

     On July 30, 2002, TELKOM sold a 12.72% shareholding in Telkomsel to Singapore Telecom Mobile Pte, Ltd (“SingTel Mobile”), a wholly-owned subsidiary of SingTel, for US$429 million in cash pursuant to a Sale and Purchase Agreement dated April 3, 2002. As a result of this transaction, TELKOM reduced its ownership in Telkomsel to 65%, while SingTel Mobile increased its ownership to 35%.

Acquisition of Pramindo

      Pursuant to a Conditional Sale and Purchase Agreement dated April 19, 2002, TELKOM agreed to acquire 100% of its KSO partner in Regional Division I, PT Pramindo Ikat Nusantara (“Pramindo”) and obtained management control over Pramindo. Upon the closing of the agreement on August 15, 2002, TELKOM acquired a 30% interest in Pramindo. In September 2003, TELKOM acquired a further 15% of the shares of Pramindo. The total purchase price for 100% of Pramindo was US$384.4 million. Of this amount, US$95.4 million was paid in August and September of 2002, with TELKOM acquiring full control over Pramindo. The balance of the purchase price was payable in ten unequal quarterly installments from September 2002 through December 2004. Under the agreement, TELKOM also agreed to repay loans to the International Finance Corporation amounting to US$86.2 million.

      On January 29, 2004, TELKOM signed a short-term loan agreement with ABN AMRO Bank N.V. Jakarta in the amount of approximately US$130 million and on March 15, 2004, TELKOM used the loan to repurchase the remaining outstanding promissory notes that TELKOM had issued as consideration for the purchase of Pramindo’s shares. This allowed TELKOM to accelerate the purchase of the remaining 55% of Pramindo that it did not yet own and as of the date of this Annual Report TELKOM owns 100% of Pramindo.

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Interconnection Agreement with Indosat

      On September 3, 2002, TELKOM signed an Interconnection Agreement with Indosat. This agreement provides for the interconnection of TELKOM’s fixed-linefixed line network with the local fixed-linefixed line network to be established by Indosat. The Interconnection Agreement only regulates local fixed wireline in Jakarta and Surabaya area.

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Contract with Orbital Sciences Corporation

      On October 24, 2002, TELKOM signed a contract with Orbital Sciences Corporation, a U.S. company which develops and manufactures affordable space systems for commercial, civil government and military customers, to develop the TELKOM-2 satellite.satellite, a geosynchronous communication satellite based on Orbital’s STAR-2 platform. Pursuant to an amendment to this agreement dated December 15, 2003, the total fixed cost payable by TELKOM was increased from US$73 million to US$ 73.1473.1 million, which is expected to be fully paid by TELKOM by JanuaryJuly 2005. TELKOM expects to replace its existing Palapa B-4 satellite with the TELKOM-2 satellite around September 2005. The TELKOM-2 satellite is a geosynchronous communication satellite which will be manufactured based on Orbital’s state-of-the-art STAR-2 platform. TELKOM-2 will replace TELKOM’s existing Palapa B-4 satellite, the operational life of which expires in late 2004. The TELKOM-2 satellite will havehas a capacity of 24 standard C-band transponders with transponder specifications similar to those of the TELKOM-1 satellite. The TELKOM-2 satellite will behas been designed for 15 years of in-orbit life. TELKOM expects that the satellite will support its national as well as regional communications network for voice, video and data communications. The satellite willis planned to be launched into geo-synchronous orbit 22,300 miles above the earth and it will be operatedto operate in geostationary orbit position located at 118 degrees east longitude.

Contract with Arianespace

      On November 8, 2002, TELKOM signed a US$62.9 million fixed price contract with Arianespace S.A. for the launch of the TELKOM-2 satellite using an Ariane-5 launch vehicle with double launch. Payments will bePayment was made in 4 installments between January 2004 anduntil September 2004. AsOn October 15, 2004, the parties amended the contract to allow TELKOM to exercise a reflight option, which allows TELKOM a reflight in the event of a launch failure or a certain amount of compensation in the dateevent of this Annual Report, TELKOM has paid US$56.5 million to Arianespace, with the remaining balance of US$6.4 million to be paid in September 2004.

a partial launch failure.

Master of Procurement Partnership Agreement (MPPA) with Consortium led by Samsung

      On December 23, 2002, TELKOM signed a Master of Procurement Partnership Agreement (“MPPA”) with a consortium led by Samsung Corporation. PT Samsung Telecommunication Indonesia became a member of the consortium pursuant to an amendment dated December 31, 2002 to this MPAA. The MPPA provides planning, manufacturing, delivery and construction of 1.6 million lines based on CDMA fixed wireless technology, as well as a service level agreement. Under the MPPA, work related to network deployment shall be carried out and completed within 42 months (six months after end of fiscal year 2005). The MPPA between TELKOM and Samsung consists of construction of 1,656,300 network switching subsystem (NSS) lines of NSS for nationwide and 802,000 base station subsystem (BSS) lines of BSS for Regional Division III, IV, V, VI and VII for US$116 per base station subsystem line for BSS and US$34 per line for NSS.network switching subsystem line. This project has been financed in part by The Export-Import Bank of Korea pursuant to a Loan Agreement dated August 27, 2003, for approximately US$124 million. This loan is repayable in ten semi-annual installments.

Master of Procurement Partnership Agreement (MPPA) with Ericsson CDMA Consortium

      TELKOM and the Ericsson CDMA Consortium have entered into a Master of Procurement Partnership Agreement (“MPPA”) on December 23, 2002. This MPPA is also intended to provide planning, manufacturing, delivery and2002 for the construction of 1.6 million631,800 base station subsystem lines as well as a service level agreement.for US$116 per line. Under the MPPA, the work related to network deployment should be carried out and completed within 42 months (six months after the end of fiscal year 2005). MPPA between TELKOM and Ericsson consists of constructing 631,800 lines of BSS for US$116 per line.

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Master of Procurement Partnership Agreement (MPPA) with PT INTI

      TELKOM and PT INTI signed a Master of Procurement Partnership Agreement on August 26, 2003, whereby PT INTI is appointed to construct a CDMA fixed wireless access network and integrate such network with TELKOM’s existing network and all ancillary services relating thereto in West Java and Banten. The Agreement provides for the construction of 222,300 base station subsystem lines. Under the terms of this Agreement, PT INTI must deliver the CDMA 2000 IX1x system within thirty-four months of August 26, 2003, and will be paid a total of US$22.932.3 million and

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Rp.61.4 Rp.105.9 billion. PT INTI will service and maintain the CDMA 2000 IX1x system pursuant to a service level agreement dated the same date in return for an annual consideration of US$2.3 million. As of December 31, 2004, the Company has paid and/or accrued a total of US$30.6 million plus Rp.103.5 billion.

Partnership Agreement with Siemens Consortium

      TELKOM entered into a Partnership Agreement with a consortium led by Siemens AG on September 24, 2003, for the development, procurement and construction of a backbone transmission network in Kalimantan and Sulawesi, a related network management system and the provision of maintenance services in connection with this network. Other members of the consortium include PT Siemens Indonesia, PT LEN Industri and Corning Cable System Gmbh & Co. K.G. The consideration payable by TELKOM for the fiber optic networks arewas US$3.8 million plus Rp.74.0 billion (for the network located within Kalimantan) and US$3.8 million plus Rp.70.7 billion (for the network located within Sulawesi).

On March 31, 2004, the parties amended the contract with respect to the work schedule and location, and agreed to an increased Rupiah portion of the consideration from Rp.144.7 billion to Rp.157.7 billion.

PSTN Regional Junction in Jakarta Area

      On February 8, 2002, TELKOM signed an agreement with Olex-Lucent-Brimbun for the award of the PSTN Regional Junction Regional Division II Work, which encompasses of SDH Transmission System, Optical Fibre, NMS and other services. The agreement has been amended several times, the latest being on December 4, 2003. As of the latest amendment to the agreement, the total cost of services and equipment is set at US$28.8 million and Rp.123.2 billion, respectively.

Master of Procurement Partnership Agreement (MPPA) with Motorola

      On March 24, 2003, TELKOM has signed a Master of Procurement Partnership Agreement (“MPPA”) with Motorola, Inc. Under the MPPA, Motorola shall be obligated to undertake and be jointly responsible for the demand forecast and solely responsible for the survey, design, development, manufacture, delivery, supply, installation, integration and commissioning of the network, including all project management, training and other related services.

      MPPA between TELKOM and Motorola consists of 225,500 lines of BSS (radio system) for Regional Division I Sumatera for a total of approximately US$20.743.2 million and Rp.61.3Rp.167.1 billion. The agreed unit price does not include service level agreement, training for technical staff and documentation. The NSS system will use nationwide Samsung’s NSS as contracted on December 23, 2002. The period of the agreement is 42 months until approximately mid-2006.

Metro Junction and Optical Network Access Agreement for Regional Division III with PT INTI

      On November 12, 2003, TELKOM entered into an agreement with PT INTI for the construction and procurement of an optical network, as well as a network management system and other related services and equipment, with respect to Regional Division III (West Java). Under this agreement, TELKOM is obligated to pay PT INTI a total consideration of US$6.56.6 million and Rp.112.4Rp.111.7 billion.

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Agreement for the Procurement of Softswitch System Class 4 with a consortium led by Santera-Olex

      On December 18, 2003, TELKOM entered into an agreement with a consortium led by Santera-Olex for the construction and procurement of a softswitch system (class 4) and the improvement of switching capacity in the existing switching system in Jakarta, Bandung and Surabaya. Pursuant to the terms of this agreement, TELKOM will pay US$4.0 million and Rp.2.5 billion.

On March 4, 2004, the parties amended the agreement with respect to the scope of work and work schedule, and agreed to reduce the Rupiah portion of the consideration to Rp.2.2 billion.

Co-Operation Agreement on Fixed Wireless CDMA Facilities Construction in KSO Divre VII Area

      On January 14, 2003, TELKOM and Bukaka SingTel entered into a Co-Operation Agreement on Fixed Wireless CDMA Facilities Construction in KSO Divre VII Area (the “Co-Operation Agreement”)

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that implemented the terms of the June 11, 2002 Memorandum of Understanding between TELKOM and Bukaka SingTel. Under the terms of the Co-Operation Agreement, TELKOM, through its Fixed Wireless Division, will invest US$30.8 million for the construction of fixed wireless CDMA facilities for 146,700 line units in Denpasar, Makasar, Manado, Kupang and Mataram, which facilities will be managed, operated and maintained by Bukaka SingTel. The new facilities are expected to be completed by 2006, with TELKOM and its Fixed Wireless Division receiving 95% of net revenues generated by the new facilities until such time as an internal rate of return of 28% is achieved, after which TELKOM and Bukaka SingTel will each receive 50% of net revenues. The Co-Operation Agreement will expire on December 31, 2010, at which time ownership of the new facilities will vest in TELKOM.

Partnership Agreement for the Construction and Provision of High Performance Backbone in Sumatera

      On November 30, 2001, TELKOM signed a partnership agreement with a consortium consisting of PT Pirelli Cables Indonesia and PT Siemens Indonesia for the construction and provision of a high performance backbone network in Sumatera. The agreement became effective as of June 10, 2002. The scope of work includes the provision of an optical fiber cable, together with transmission equipment and network management systems. TELKOM is obligated to pay US$46.349.2 million and Rp.172.7Rp.174.4 billion (together with value-added tax thereon) as consideration. On June 12, 2003, the parties agreed to amend this agreement to reflect additional work being carried out by the consortium in consideration for an additional US$2.8 million and Rp.1,699.1 millionRp.1.7 billion payable by TELKOM to the consortium. The amount due under the agreement was fully paid in April 2004.

In June 2005, the parties agreed to amend this agreement further for some additional minor works.

Partnership Agreement for the Development of a PSTN Regional Junction for Regional Division V (East Java)

      On December 5, 2001, TELKOM entered into a partnership agreement with a consortium consisting of Sumitomo Corporation, NEC Corporation and PT Nasio Karya Pratama for the development of a high quality PSTN Regional Junction for Regional Division V (East Java). The scope of work includes the development of a SDH transmission system, as well as the provision of ancillary fiber optic and other related equipment. TELKOM was initially obligated to pay Japanese Yen 3,670.9 million and Rp.125.5 billion (which is inclusive of value-added tax). The parties agreed to add another partner to the consortium, PT Communication Cable System Indonesia, on September 27, 2002. In accordance with an amendment agreement dated December 11, 2003, the parties agreed to amend the contract price payable by TELKOM to Japanese Yen 1,258.8 million and Rp.188.8 billion (which is exclusive of value-added tax).

Supply Contract for Thailand-Indonesia-Singapore (TIS) Cable Network165

     On November 27, 2002, TELKOM entered into a supply contract with NEC Corporation, the Communication Authority of Thailand (the “CAT”) and Singapore Telecommunications Limited (“SingTel”) whereby NEC Corporation has agreed to construct a submarine fiber optic network linking Thailand, Indonesia and Singapore. Under the terms of this agreement, TELKOM, SingTel and the CAT were to contribute equally to a payment of US$32.7 million (inclusive of value-added tax). Due to several contract variations entered into during 2003, the total amount payable by TELKOM, SingTel and CAT was increased to US$33.4 million.

Agreement for Dumai-Melaka Cable System

      On May 14, 2004, TELKOM entered into a Cooperation Agreement with Telekom Malaysia Berhad (“Telekom Malaysia”) pursuant to which TELKOM and Telekom Malaysia formed a consortium for the deployment and maintenance of the Dumai-Melaka Cable System. On the same date, the consortium entered into a Supply Contract with NEC Corporation for the deployment of the 160150 km optical submarine cable between Indonesia and Malaysia, which iswas scheduled to be completed by the

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end of 2004.2004 and was completed in January 2005. TELKOM and Telekom Malaysia were to contribute equally to a payment to NEC Corporation of US$8.7 million (inclusive of value-added tax).million.

Acquisition of Dayamitra

      On May 17, 2001, TELKOM acquired 90.32% of the issued and fully paid shares of Dayamitra, the KSO VI Investor, for US$134.2 million (including consultant’s fee of US$3.3 million) and also purchased a call option and granted a put option with respect to the remaining 9.68% partner shares of Dayamitra.Dayamitra for the amount of US$6.3 million which was fully paid in 2003. An initial payment of US$18.3 million was paid on the closing date of the transaction on May 17, 2001, US$8.9 million was paid on August 10, 2001 as an adjustment to the purchase price based on Dayamitra’s adjusted working capital and the balance of US$103.6 million was and is to be paid through an escrow account in eight quarterly installments of US$13.012.9 million each beginning on August 17, 2001 and TELKOM paid the last quarterly installment on May 17, 2003.

On December 14, 2004, TELKOM exercised its call option to purchase, and acquired, the remaining 9.68% of the shares of Dayamitra, for an aggregate consideration of approximately US$22.1 million which represents the present value of the option strike price of US$16.2 million plus the option purchase price of US$6.3 million and payment for Dayamita’s adjusted working capital of US$1.0 million. TELKOM is required to pay the option strike price less funds available in the escrow account on November 30, 2004 in 16 equal installments, the last of which is required to be made on March 26, 2006.

PT Mitra Global Telekomunikasi Indonesia

      On January 20, 2004, TELKOM and PT Mitra Global Telekomunikasi Indonesia (“MGTI”)MGTI entered into an agreement to amend and restate the KSO Agreement with respect to Regional Division IV. Under this amendment,the amended and restated KSO agreement, the rights to operate fixed-line telecommunication services in KSO IV region are transferred to TELKOM and KSO IV is operated under the management, supervision, control and responsibility of TELKOM. In addition, for the remaining KSO period, TELKOM will beis entitled at its sole discretion and expense to construct new telecommunication facilities in Regional Division IV andIV. MGTI will receivereceives fixed monthly payments, derived fromwhile TELKOM is entitled to the balance of the KSO revenues generated byafter the monthly amounts due to MGTI and operating expenses. If the KSO IV unit is unable to or does not for any reason pay MGTI the fixed monthly payments due to it, TELKOM is obligated to make up any deficiency. At the end of the KSO period (December 31, 2010), all rights, title and interest of MGTI in existing property, plant and equipment (including new additional installations) and inventories shall be transferred to TELKOM at no cost. As a result of the amended and restated KSO agreement, TELKOM obtained the legal right to control financial and operating decisions of Regional Division IV operations.

for a purchase price of US$390.7 million, or Rp.3,285 billion, which represents the present value of the fixed monthly payments (totaling US$517 million) to be paid by TELKOM to MGTI from 2004 through 2010 plus direct cost of the business combination.

Indemnity given to KAP Hans Tuanakotta Mustofa & Halim (formerly KAP Hans Tuanakotta & Mustofa)

      TELKOM has entered into twothree indemnity agreements with KAP Hans Tuanakotta Mustofa & Halim (formerly KAP Hans Tuanakotta & Mustofa), the member firm of Deloitte Touche Tohmatsu in Indonesia (“Deloitte”).Deloitte. Under the first agreement, dated February 9, 2004, TELKOM agreed to indemnify Deloitte against reasonable legal costs incurred in successfully defending any legal proceedings brought against Deloitte on the basis of the inclusion of the audited 2000 and 2001 financial statements in Amendment No. 2 to TELKOM’s 2002 Annual Report on Form 20-F20-F/A that was filed on February 9, 2004, provided however that the indemnity will be void and

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inoperative if a court, after adjudication, determines that Deloitte is liable for professional malpractice. If this situation were to arise, Deloitte has agreed to immediately reimburse TELKOM for all amounts paid by TELKOM under this indemnity.
      Under the second agreement, dated June 29, 2004, TELKOM has agreed to indemnify Deloitte against reasonable legal costs incurred in successfully defending any legal proceedings brought against Deloitte on the basis of the inclusion of the audited 2001 financial statements in its 2003 Annual Report on Form 20-F, provided however that the indemnity will be void and inoperative if a court, after adjudication, determines that Deloitte is liable for professional malpractice. If this situation were to arise, Deloitte has agreed to immediately reimburse TELKOM for all amounts paid by TELKOM under this indemnity.

      Under the third agreement, dated April 25, 2005, TELKOM provided a similar indemnity to the second agreement, dated June 29, 2004, TELKOM has agreedbut with respect to indemnify Deloitte against reasonable legal costs incurred in successfully defending any legal proceedings brought against Deloitte on the basis of the inclusion of the audited 2001 financial statements in thisits Amendment No. 1 to 2002 Annual Report provided however that the indemnity will be void and inoperative if a court, after adjudication, determines that Deloitte is liable for professional malpractice. If this situation were to arise, Deloitte has agreed to immediately reimburse TELKOM for all amounts paid by TELKOM under this indemnity.

on Form 20-F/A.

Short-Term Loan Agreement with ABN AMRO Bank N.V. Jakarta

      On January 28, 2004, TELKOM signed a short-term loan agreement with ABN-AMRO Bank N.V. Jakarta (“ABN AMRO”) in the amount of approximately US$130 million. The loan proceeds were thereafter placed in escrow and subsequently released to TELKOM on March 15, 2004 when TELKOM exercised its option to purchase the remaining outstanding promissory notes TELKOM issued to Pramindo’s shareholders as payment for their shares in Pramindo. Principal and interest on the ABN AMRO loan will bewere repaid in 10 monthly payments starting March 31, 2004, through December 31, 2004, with interest payable at one month LIBOR plus 2.75%. As of December 31, 2004, the loan was fully repaid.
Medium-Term Notes Issuance Agreement
      On December 15, 2004, TELKOM issued unsecured Medium-Term Notes (“MTN”) in the principal amount of Rp.1.125 trillion in four series, pursuant to a Medium-Term Notes Issuance Agreement dated December 13, 2004. Series A is in the principal amount of Rp.290 billion, matures on June 15, 2005 and bears interest at the rate of 7.7% per annum, Series B is in the principal amount of Rp.225 billion, matures on December 15, 2005 and bears interest at the rate of 7.95% per annum, Series C is in the principal amount of Rp.145 billion, matures on June 15, 2006 and bears interest at the rate of 8.2% per annum, and Series D is in the principal amount of Rp.465 billion, matures on June 15, 2007 and bears interest at the rate of 9.4% per annum. Interest on the outstanding MTN is payable on June 15, 2005, December 15, 2005, June 15, 2006, December 15, 2006 and June 15, 2007. The MTN were offered at their principal amounts.
      Under the term and conditions of the MTN, TELKOM cannot, without prior approval of holders of a majority of the outstanding principal amount of the MTN, take certain actions, including (i) to encumber, pledge or charge any part of its assets, with certain exceptions; (ii) provide, or to cause its subsidiaries to provide, any corporate guarantee to any third party, except corporate guarantees relating to the obligations of its subsidiaries, or the purpose of tendering or acquiring assets through export credit etc; (iii) to merge or consolidate with other companies which results in a material adverse effect to the operations and financial condition of TELKOM; and (iv) to dispose of assets which is in aggregate more than 5% of TELKOM’s net fixed assets.
      Telkom is required at the end of each calendar quarter during the life of the MTN to maintain certain financial ratios, namely: (i) debt service coverage ratio of not less than 1.5 to 1; (ii) debt to equity ratio of not more than 2 to 1; and (iii) debt to EBITDA ratio of not more than 3 to 1. Telkom is in compliance with these ratios.
      See Exhibit 4.45 for an English summary of the terms and conditions of the MTN.

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D.  Exchange controls

Foreign Equity Ownership Restrictions

      Prior to September 1997, foreign investors were only permitted to purchase up to 49% of shares offered in a public offering and up to 49% of the publicly listed shares of any Indonesian listed company regardless of the nature of their activities. On September 4, 1997, such restrictions were removed for most Indonesian companies, including TELKOM.

Foreign Exchange

      Foreign exchange controls were abolished in 1971 and Indonesia now maintains a liberal foreign exchange system that permits the free flow of foreign exchange. Capital transactions, including remittances of capital, profits, dividends and interest, are free of exchange controls. A number of regulations, however, have an impact on the exchange system. For example, only banks are authorized to deal in foreign exchange and execute exchange transactions related to the import and export of goods. In addition, Indonesian banks (including branches of foreign banks in Indonesia) are required to report to Bank Indonesia (the Indonesian Central Bank) any fund transfers exceeding US$10,000. As a state-owned company, TELKOM, based on the decree of the Head of Foreign Commercial Loan Coordinating Team (“PKLN”), is required to obtain an approval from PKLN prior to acquiring foreign commercial loans and must submit periodical reports to PKLN during the term of the loans.

      Bank Indonesia holds the authority to issue Rupiah currency and has responsibility for maintaining the stability of the Rupiah. Prior to August 14, 1997, Bank Indonesia maintained stability of the Rupiah through a trading band policy, pursuant to which Bank Indonesia would enter the foreign currency market and buy or sell Rupiah, as required, when trading in the Rupiah exceeded bid and offer prices announced by Bank Indonesia on a daily basis. On August 14, 1997, Bank Indonesia terminated the trading band policy, effectively free floating the Rupiah against other currencies. Since that date, the Rupiah has depreciated significantly against world currencies.

      During the past 25 years, the value of the Rupiah has been devalued three times against the U.S. Dollar. These downward adjustments occurred in November 1978, when the exchange rate was realigned from Rp.415 to Rp.623 to the U.S. Dollar; in March 1983, when the rate went from Rp.703 to Rp.970 to the U.S. Dollar; and in September 1986, when the rate fell from Rp.1,134 to Rp.1,644 to the U.S. Dollar. Between the time of the 1986 devaluation and August 14, 1997 the value of the Rupiah has gradually adjusted downward in value against the U.S. Dollar by about 4% annually. Since the free-floating regime was implemented in August 1997, the Rupiah fluctuation has been significant. During 2003,2004, the average rate of Rupiah to the U.S. Dollar was Rp.8,573.40,Rp.8,935, with the highest and lowest rates being Rp.9,120Rp.9,430 and Rp.8,165Rp.8,323 respectively.

E.  Taxation

      THE FOLLOWING SUMMARY OF INDONESIAN AND UNITED STATES FEDERAL INCOME TAX MATTERS CONTAINS A DESCRIPTION OF THE PRINCIPAL INDONESIAN AND U.S. FEDERAL TAX CONSEQUENCES OF THE PURCHASE, OWNERSHIP AND DISPOSITION OF ADSs OR SHARES OF COMMON STOCK. INVESTORS SHOULD CONSULT THEIR TAX ADVISORS ABOUT THE INDONESIAN AND UNITED STATES FEDERAL, STATE AND LOCAL TAX CONSEQUENCES TO THEM OF THE PURCHASE, OWNERSHIP AND DISPOSITION OF ADSs OR SHARES OF COMMON STOCK.

Indonesian Taxation

      The following is a summary of the principal Indonesian tax consequences of the ownership and disposition of Common Stock or ADSs to a non-resident individual or non-resident entity that holds Common Stock or ADSs (a “Non-Indonesian Holder”). As used in the preceding sentence, a “non-resident individual” is a foreign national individual who is not physically present in Indonesia for

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183 days or more during any twelve month period or present for any period with the intent to reside in Indonesia, during which period such non-resident individual receives income in respect of the ownership or disposition of Common Stock or ADSs and a “non-resident entity” is a corporation or a non-corporate body that is established, domiciled or organized under the laws of a jurisdiction other than Indonesia and does not have a fixed place of business or otherwise conducts business or carries out activities through a permanent establishment in Indonesia during an Indonesian tax year in which such non-Indonesian entity receives income in respect of the ownership or disposition of Common Stock or ADSs. In determining the residency of an individual or entity, consideration will be given to the provisions of any applicable double taxation treaty to which Indonesia is a party.
Dividends

Dividends declared by the Company out of retained earnings and distributed to a Non-Indonesian Holder in respect of Common Stock or ADSs are subject to Indonesian withholding tax, currentlywhich, as of the date of this Annual Report is at the rate of 20%, on the amount of the distribution (in the case of cash dividends) or on the stockholders’ proportional share of the value of the distribution. A lower rate provided under double taxation treaties may be applicable provided the recipient is the beneficial owner of the dividend and has provided to the Company (with a copy to the Indonesian Office of Tax Services where the Company is registered) a Certificate of Tax Residence issued by the competent authority, or its designee, of the jurisdiction where the Non-Indonesian Holder is domiciled (the “Certificate of Residence”). Indonesia has concluded double taxation treaties with a number of countries, including Australia, Belgium, Canada, France, Germany, Japan, Malaysia, Mauritius, The Netherlands, Singapore, Sweden, Switzerland, the United Kingdom and the United States of America. Under the U.S.-Indonesia double taxation treaty, the withholding tax on dividends is generally, in the absence of a 25% voting interest, reduced to 15%.
Capital Gains

      The sale or transfer of Common Stock through an Indonesian stock exchange is subject to a final withholding tax at the rate of 0.1% of the value of the transaction. The broker executing the transaction is obligated to withhold such tax. The holding of founder shares or the sale or transfer of founder shares through an Indonesian stock exchange may, under current Indonesian tax regulations, be subject to additional 0.5% final income tax.

      Subject to the promulgation of implementing regulations (which have not yet been issued to date), the estimated net income received or accrued from the sale of movable assets in Indonesia, which may include Common Stock not listed on an Indonesian stock exchange or ADSs, by a Non-Indonesian holder (with the exception of the sale of assets under Article 4 paragraph (2) of the Indonesian income tax law) may be subject to Indonesian withholding tax at the rate of 20%. In 1999, the Ministry of Finance issued a Decision that stipulates the estimated net income for the sale of shares in a non-public company to be 25% of the sale price, resulting in an effective withholding tax rate of 5% of the sales price. This is a final withholding tax and the obligation to pay lies with the buyer (if it is an Indonesian taxpayer) or the Company (if the buyer is a non-resident taxpayer). Exemption from withholding tax on income from the sale of shares in a non-public company may be available to non-resident sellers of shares depending on the provisions of the relevant double taxation treaties. In order to benefit from the exemption under the relevant double taxation treaty, the non-resident seller must provide the Certificate of Tax Residence to the buyer or the Company and to the Indonesian Tax Office that has jurisdiction over the buyer or the Company (if the buyer is a non-resident taxpayer).

      In cases where a purchaser or Indonesian broker will be required under Indonesian tax laws to withhold tax on payment of the purchase price for Common Stock or ADSs, that payment may be exempt from Indonesian withholding or other Indonesian income tax under applicable double taxation treaties to which Indonesia is a party (including the U.S.-Indonesia double taxation treaty). However, except for the sale or transfer of shares in a non-public company, the current Indonesian tax regulations do not provide specific procedures for removing the purchaser’s or Indonesian broker’s obligation to

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withhold tax from the proceeds of such sale. To take advantage of the double taxation treaty relief,

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Non-Indonesian Holders may have to seek a refund from the Indonesian Tax Office by making a specific application accompanied by a Certificate of Residence issued by the competent tax authority, or its designee; of the jurisdiction in which the Non-Indonesian Holder is domiciled.
Stamp Duty

      Any documents that are prepared in the transactions in common stock in Indonesia, which documents will be used as evidence in Indonesia, are subject to stamp duty of Rp.6,000. Generally, the stamp duty is due at the time the document is executed.

United States Federal Income Taxation

      The following is a general description of the principal United States federal income tax consequences to a U.S. Holder, as defined below, of the purchase, ownership and disposition of the ADSs or shares of Common Stock. This description is for general information purposes only and is based on the United States Internal Revenue Code of 1986, as amended (the “Code”), Treasury regulations promulgated thereunder, and judicial and administrative interpretations thereof, all as in effect on the date hereof and all of which are subject to change, possibly retroactively. The tax treatment of a holder of ADSs or shares of Common Stock may vary depending upon his particular situation. Certain holders (including, but not limited to, insurance companies, tax-exempt organizations, financial institutions, persons subject to the alternative minimum tax, broker-dealers, persons that have a “functional currency” other than the U.S. Dollar and persons owning, directly or indirectly, 10% or more of the voting shares of the Company) may be subject to special rules not discussed below. The following summary is limited to U.S. Holders, as defined below, who will hold the ADSs or shares of Common Stock as “capital assets” within the meaning of Section 1221 of the Code and not as part of a “hedge,” “straddle” or “conversion transaction” within the meaning of Sections 1221, 1092 and 1258 of the Code and the regulations thereunder. The discussion below also does not address the effect of any United States state, local or foreign tax law or any United States federal estate, gift or alternative minimum tax law on a holder of the ADSs or shares of Common Stock.

      As used herein, the term “U.S. Holder” means a holder of ADSs or shares of Common Stock who is (i) a citizen or resident of the United States for United States federal income tax purposes, (ii) a corporation, or other entity treated as a corporation, created or organized under the laws of the United States or any political subdivision thereof, (iii) an estate the income of which is subject to United States federal income tax without regard to its source, or (iv) a trust if a court within the United States is able to exercise primary supervision over the administration of the trust and one or more United States persons have the authority to control all substantial decisions of the trust.

      If a partnership (including any entity treated as a partnership for United States federal income tax purposes) holds ADSs or shares of Common Stock, the tax treatment of a partner in such partnership will depend upon the status of the partner and the activities of the partnership. Partners in such a partnership should consult their tax advisors as to the particular United States federal income tax consequences applicable to them.

      Holders of ADSs evidencing Common Stock will be treated as the owners of the Common Stock represented by those ADSs. Accordingly, no gain or loss will be recognized upon the exchange of ADSs for the holder’s proportionate interest in the shares of Common Stock, a holder’s tax basis in the withdrawn shares of Common Stock will be the same as his tax basis in the ADSs surrendered therefor, and the holding period in the withdrawn shares of Common Stock will include the period during which the holder held the surrendered ADSs.

      You are urged to consult your tax advisor concerning the particular United States federal, state, local and foreign income and other tax considerations regarding the ownership and disposition of the ADSs or shares of Common Stock.

160170

Taxation of Distributions

     The

      Subject to the passive foreign investment company (“PFIC”) rules discussed below, the gross amount of a distribution with respect to ADSs or shares of Common Stock (other than certain pro rata distributions of ADSs or shares of Common Stock or rights to subscribe for ADSs or shares of Common Stock), without reduction for Indonesian taxes withheld, will be treated as a dividend subject to tax as ordinary income on the date of receipt by the Depositary or the holder of such ADSs or shares of Common Stock, respectively, to the extent of the Company’s current and accumulated earnings and profits as determined for U.S. federal income tax purposes. A non-corporate recipient of dividend income will generally be subject to tax on such dividend income at a maximum U.S. federal rate of 15% rather than the marginal tax rates generally applicable to ordinary income so long asprovided certain holding period requirements are met. Dividends received from “qualified foreign corporations” generally qualify for the reduced rate. A non-U.S. corporation (other than a foreign personal holding company, foreign investment company, or passive foreign investment company)PFIC) will generally be considered to be a qualified foreign corporation (i) if it is eligible for the benefits of a comprehensive tax treaty with the United States which the Secretary of Treasury determines is satisfactory for purposes of this provision and which includes an exchange of information program or (ii) with respect to any dividend it pays on stock which is readily tradable on an established securities market in the United States. The Treasury Department has determined that the income tax treaty between Indonesia and the United States as currently in effect as of the date of this Annual Report meets the requirements described in clause (i) above.above and the Company believes that it would be eligible for the benefits of such treaty. In addition, because the ADSs are expected to be readily tradablelisted on the New York Stock Exchange, an established securities market in the United States.States, they would under Treasury Department guidelines be considered to be readily tradeable on that exchange. Distributions, if any, in excess of current and accumulated earnings and profits will constitute a return of capital and will be applied against and reduce such holder’s tax basis in such ADSs or shares of Common Stock. To the extent that such distributions arethe remaining portion of the distribution is in excess of such basis, the distributionsthat amount will constitute capital gain as discussed below. U.S. corporate holders will generally not be eligible for the dividends received deduction otherwise allowed under Section 243 of the Code for distributions to domestic corporations in respect of distributions on ADSs or shares of Common Stock.

      If a distribution is paid with respect to ADSs or shares of Common Stock in Rupiah, the amount of the distribution will generally equal the U.S. Dollar value of the Rupiah distribution, including the amount of any Indonesian tax withheld, calculated by reference to the exchange rate in effect on the date the distribution is actually or constructively received by the Depositary or the holder of such shares of Common Stock, respectively, regardless of whether the payment is in fact converted into U.S. Dollars on that date. Any subsequent gain or loss in respect of such Rupiah arising from exchange rate fluctuations will be ordinary income or loss. This exchange gain or loss will generally be treated as United States source income for United States foreign tax credit limitation purposes. If the Depositary converts the Rupiah to U.S. Dollars on the date it receives such Rupiah, U.S. Holders will not recognize any such gain or loss.

Subject to the limitations and conditions set forth in the Code, U.S. Holders may elect to claim a credit against their United States federal income tax liability for Indonesian tax withheld from dividends received in respect of the ADSs or shares of Common Stock. The rules relating to the determination of the foreign tax credit are complex and prospective purchasers should consult their personal tax advisors to determine whether and to what extent they would be entitled to such credit. U.S. Holders that do not elect or are not permitted to claim foreign tax credits may instead claim a deduction for Indonesian tax withheld.
Taxation of Capital Gains

     The

      Subject to the PFIC rules discussed below, the sale or other disposition of ADSs or shares of Common Stock by a U.S. Holder will generally result in the recognition of U.S. source gain or loss in an amount equal to the difference between the amount realized on the sale or other disposition and the holder’s adjusted basis in such ADSs or shares of Common Stock. This will result in a long-term or short-term capital gain or loss, depending on whether the ADSs or shares of Common Stock have been

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held for more than one year. Long-termAs of the date of this Annual Report, long-term capital gain of a non-corporate holder is currently subject to a maximum tax rate of 15% in respect of

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property with a holding period of more than one year. The deductibility of a capital loss is subject to limitations.
Passive Foreign Investment Company Status

     Special adverse

      Adverse United States federal income tax rules apply to holders of equity interests in a corporation classified as a passive foreign investment company (“PFIC”)PFIC under the Code. A foreign corporation will constitute a PFIC for United States federal income tax purposes if 75% or more of its gross income for a taxable year consists of passive income (generally, interest, dividends, rents, royalties and net gain from the disposition of assets that give rise to such income) or 50% or more of the average value of its average assets held during adetermined quarterly for the taxable year consists of passive assets. Passive assets are defined as assets that give rise, or that reasonably could give rise during the reasonably foreseeable future, to passive income.

      Based on the Company’s existing and anticipated future operations, the Company believes that it is not and anticipates that it will not become in the foreseeable future, a PFIC. If the Company is not operated in the manner currently anticipated as of the date of this Annual Report, however, the Company may be considered a PFIC for the current or for a subsequent year depending upon the composition of the Company’s income or assets.

      If the Company is or becomes a PFIC, any gain upon sale or other disposition or any “excess distribution”certain distributions realized by a U.S. Holder with respect to its ADSs or shares of Common Stock would be allocated ratably over the entire period during which the U.S. Holder held such ADSs or shares of Common Stock and would be subject to the highest ordinary income tax rate for each taxable year (other than the amounts allocable to the current year of the U.S. Holder) in which the items were treated as having been earned, regardless of the rate otherwise applicable to the U.S. Holder. Such U.S. Holder would also be liable for an additional tax equal to an interest charge on the tax liability attributable to income that is treated as allocated to prior years as if such liability had actually been due in each such prior year.

     In general, an “excess distribution” is any distribution with respect to the Company’s ADSs or shares of Common Stock to the extent it exceeds 125% of the average annual distributions with respect to such ADSs or shares of Common Stock received by the U.S. Holder over the prior three years or, if shorter, the U.S. Holder’s holding period for the ADSs or shares of Common Stock.

      If the Company is classified as a PFIC, it may be possible to avoid the adverse tax consequences associated therewith but only if (i) the U.S. Holder elects to annually mark-to-market the ADSs or shares of Common Stock and recognize ordinary gain or loss therefrom, or (ii) assuming certain conditions are met (which is not likely to be the case with respect to the Company), the U.S. Holder elects to include in income annually its share of the ordinary earnings and capital gain of the Company. Should the Company ever be classified as a PFIC, U.S. Holders are advised to consult their tax advisors concerning the United States federal income tax consequences of holding ADSs or shares of Common Stock and of making the mark-to-market election. A U.S. Holder who owns ADSs or shares of Common Stock during any year that the Company is a PFIC must file with the IRS Form 8621.

     Further, if the Company is classified as a PFIC, a U.S. Holder would not be eligible for a reduced tax rate on dividends paid on, and on gain realized with respect to dispositions of, ADSs or shares of Common Stock. See “Taxation of Distributions” above.

F.  Dividends and paying agents

      Not applicable.

G.  Statement by experts

      Not applicable.

162

H.  Documents on display

TELKOM files reports, including annual reports on Form 20-F and other information with the SEC pursuant to the rules and regulations of the SEC that apply to foreign private issuers. You may read and copy any materials filed with the SEC at the Public Reference Room at 450 Fifth Street, N.W., Washington, D.C. 20459. You may obtain information on the operation of the Public Reference Room by calling the SEC at 1-800-SEC-0330. Subject to some exceptions, TELKOM is required to file its periodic reports electronically through the SEC’s EDGAR system. Any filings TELKOM makes electronically will be available to the public over the Internet at the SEC’s Website athttp://www.sec.gov.

I.   Subsidiary Information

Not applicable.

172

ITEM 11.     QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK

A.  Disclosure About Market Risk

General

The Company is exposed to market risks primarily from changes in foreign currency exchange rates, changes in interest rates and equity price risk on the value of its long-term investments. The Company does not generally hedge its long-term foreign currency liabilities as it believes that the expenses associated with fully hedging such liabilities are not justified. Instead the Company hedged its obligations for the current year. As of December 31, 2003,2004, foreign currency time deposits provided approximately 30%46% coverage against foreign currency denominated current liabilities. The Company’s exposure to interest rate risk is managed through maintaining a mix of fixed and variable rate liabilities and assets, including short termshort-term fixed rate assets, rates for which are reset periodically. The Company’s exposure to such market risks fluctuated significantly during 2001, 2002, 2003 and 20032004 as the Indonesian economy has been affected by a significant fluctuation of the Rupiah and interest rates. The Company is not able to predict whether such conditions will continue during the remainder of 20042005 or thereafter.
Interest Rate Risk

      The Company’s exposure to interest rate fluctuations results primarily from floating rate long-term debt pursuant to loans under the Government on-lending program which have been used to finance the Company’s capital expenditures which bears interest at rates for the Rupiah portion based on the average for the preceding six months for three month certificates issued by Bank Indonesia plus 1% or based on floating interest rate offered by the lenders plus 5.25% and fromfor the non-Rupiah portion based on floating interest rate long-term debts ofoffered by the Company’s consolidated subsidiary, Dayamitra, which bear interests at LIBORlenders plus a certain margin of 4% per annum.0.5%. See Notes 24 and 29Note 22 to the Company’s consolidated financial statements. To the extent interest rates in Indonesia fluctuate significantly, as they did from 10.95% in early 2003 to approximately 8.00% in early 2004, the Company’s interest obligations under its long-term debt could increase.

163

The table below provides information about the Company’s material financial instruments, some of which are sensitive to changes in interest rates. For debt obligations and time deposits, the table presents principal cash flows and related weighted average interest rates by expected maturity dates. The information is presented in Rupiah equivalents, which is the Company’s reporting currency. The instrument’s actual cash flows are denominated in Rupiah, U.S. Dollar, Euro and Japanese Yen, as appropriate and as indicated in the table. The information presented in the table has been determined based on the following assumptions: (i) fixed interest rates on Rupiah time deposits are based on average interest rates offered in effect as of December 31, 20032004 by the banks where such deposits were located; (ii) variable interest rates on Rupiah denominated long-term liabilities are calculated as of December 31, 20032004 and are based on contractual terms setting interest rates based on average rates for the preceding six months on three month certificates issued by Bank Indonesia;Indonesia or based on the average 3-month deposit rate offered by the lenders; (iii) variable interest rates on U.S. Dollar deposits are based on interest rates offered by the various lending institutions to the Republic of Indonesia as of December 31, 2003;2004; and (iv) the value of marketable securities is based on the value of such securities at December 31, 2003.2004. However, no assurance can be given that such assumptions will be correct for future periods. Such assumptions and the information described in the table may be influenced by a number of factors, including changes in interest rates in Indonesia and other monetary and macro economic factors affecting Indonesia. Such assumptions are different from the rates used in the

173

Company’s consolidated financial statements and accordingly amounts shown in the table may vary from amounts shown in the Company’s consolidated financial statements.
                                                                 
 Outstanding Balance as at              
Outstanding Balance as at  December 31, 2004    
December 31, 2003    Expected Maturity Date  
Expected Maturity Date  Foreign Rp.      
ForeignRp.
  Currency Equivalent Rate 2005 2006 2007 2008 2009 2010-2024 Fair Value
CurrencyEquivalentRate200420052006200720082009-2025                     
                    (Rp. in
   (Rp. in     million)
(In thousand)(Rp. in million)(%)(Rp. in million)  (in millions) million) (%) (Rp. in million)  
ASSETS
ASSETS
 
ASSETS
                               
Fixed Rate
Fixed Rate
 
Fixed Rate
                               
Cash and Cash equivalentsCash and Cash equivalents Cash and Cash equivalents                               
Time deposit Rupiah Time deposit                               
 Principal 3,253,587 3,253,587 — — — — — Rupiah                               
 Interest 6.90 — — — — —  Principal  —  2,564,200     2,564,200  —  —  —  —  —  2,564,200 
U.S. Dollar  Interest        6.5                      
 Principal 118,903 1,002,349 1,002,349 — — — — — U.S. Dollar                               
 Interest 1.00 — — — — —  Principal  66.79  620,452     620,452  —  —  —  —  —  620,452 
Euro  Interest        1.9                      
 Principal 39,454 420,726 420,726 — — — — — Euro                               
 Interest 1.90 — — — — —  Principal  85.49  1,081,568     1,081,568  —  —  —  —  —  1,081,568 
 Interest        1.9                      
Temporary InvestmentsTemporary Investments Temporary Investments                               
Time deposits Rupiah Time deposits                               
 Principal — 4,006 4,006 — — — — — Rupiah                               
 Interest 6.00 — — — — —  Principal  —  5,065     5,065  —  —  —  —  —  5,065 
Available-for-Sale  Interest        6.4                      
 Securities Available-for-Sale Securities Rupiah  —  14,884     14,884  —  —  —  —  —  14,884 
LIABILITIES
LIABILITIES
                               
Short Term Bank Loan
Short Term Bank Loan
                               
Variable Rate
Variable Rate
                               
 Rupiah — — — — — — — — — U.S. Dollar                               
 Principal  118.46  1,101,633     1,101,633  —  —  —  —  —  1,101,633 
 Interest        5.0  24,161  —  —  —  —  —    
Long-term debt(1)
Long-term debt(1)
                               
Variable Rate
Variable Rate
                               
Rupiah                               
 Principal  —  2,319,218     364,086  301,631  249,265  189,326  190,831  1,024,079  2,482,933 
 Interest        8.5  185,951  155,459  129,941  112,662  96,827  427,816    
U.S. Dollar                               
 Principal  232.83  2,164,717     321,752  317,660  290,713  290,713  134,840  809,039  2,460,961 
 Interest        5.3  109,664  94,646  80,301  66,408  54,246  156,711    
Euro                               
 Principal  51.24  649,751     185,645  185,645  139,234  139,227  —  —  659,090 
 Interest        3.0  17,419  11,918  6,876  2,750  —  —    
Fixed Rate
Fixed Rate
                               
Rupiah                               
 Principal  —  2,230,739     565,925  170,087  1,461,060  9,097  8,806  15,764  2,515,573 
 Interest        12.5  264,155  220,857  126,966  166  70  13    
U.S. Dollar                               
 Principal  713.68  6,637,829     759,726  1,134,305  1,758,460  913,916  789,127  1,282,295  7,634,989 
 Interest        6.4  423,814  402,260  273,636  181,782  116,466  161,584    
Japanese Yen                               
 Principal  16,670.50  1,512,396     103,688  103,688  103,688  86,677  69,666  1,044,989  1,934,863 
 Interest        3.1  46,191  42,943  39,695  36,446  34,014  251,058    

164174

                                       
Outstanding Balance as at
December 31, 2003
Expected Maturity Date
ForeignRp.
CurrencyEquivalentRate200420052006200720082009-2025
(In thousand)(Rp. in million)(%)(Rp. in million)
LIABILITIES
                                    
Short Term Bank
                                    
 
Loan
                                    
 U.S. Dollar                                    
  Principal  4,455   37,642   —   37,642   —   —   —   —   — 
  Interest          3.00   753   —   —   —   —   — 
Long-term debt(1)
                                    
Variable Rate
                                    
 Rupiah                                    
  Principal  —   2,535,279       335,721   347,732   257,531   190,058   189,326   1,214,911 
  Interest          11.90   301,766   261,449   219,506   189,083   166,543   144,088 
 U.S. Dollar                                    
  Principal  388,836   3,285,660       800,190   579,577   574,678   351,090   122,516   857,609 
  Interest          5.69   186,965   146,126   117,173   88,409   69,687   60,976 
 Euro                                    
  Principal  64,765   690,646       153,477   153,477   153,477   153,477   76,738     
  Interest          2.98   20,581   16,008   11,434   6,860   2,287     
Fixed Rate
                                    
 Rupiah                                    
  Principal  —   1,949,838       160,353   113,968   72,688   1,053,966   72,688   476,175 
  Interest          15.40   298,803   273,678   256,351   246,852   70,535   61,035 
 U.S. Dollar                                    
  Principal  643,954   5,441,410       2,013,056   515,943   471,450   1,524,910   311,985   604,066 
  Interest          7.29   211,647   194,175   175,458   159,431   38,013   30,945 
 Japanese Yen                                    
  Principal  17,429,464   1,377,726       55,266   90,183   90,183   90,183   75,361   976,550 
  Interest          3.13   43,169   41,437   38,611   35,786   32,960   30,599 
 Euro                                    
  Principal  18,756   200,014       45,333   45,333   45,333   37,968   26,047   — 
  Interest          7.64   15,285   11,821   8,356   4,892   1,991   — 

(1) Long-term debt consists of loans which are subject to interest; namely two-step loans, guaranteed notes and bonds, liabilities for acquisition of subsidiaries, suppliers’ credit loans, bridging loansbusiness acquisitions and long-term bank loans, in each case including their current maturities. Long-term debt, for the purpose of this table, includes liability for acquisitionliabilities of a subsidiary and incorporated deferred interest.business acquisitions.
Exchange Rate Risk

      The Company’s exposure to exchange rate fluctuations results primarily from long-term debt obligations and accounts receivable and payable, which are primarily paid for through draw downs under the Government on-lending program and are expressed in U.S. Dollar, Japanese Yen, French Franc, Euro, Singapore Dollar and NetherlandsNetherland Guilder. For a description of the Company’s foreign currency assets and liabilities, see Note 5654 to the Company’s consolidated financial statements. Part of these obligations might be offset by increases in the value of foreign currency time deposits and by increases in the value of foreign currency accounts receivable, assuming that the counter-parties are able to meet their foreign currency obligations to TELKOM at market rates.

165

The table below provides information about the Company’s financial instruments by functional currency and presents such information in Rupiah equivalents, which is the Company’s reporting currency. The information on instruments and transactions that are sensitive to foreign exchange rates, including U.S. Dollar, NetherlandsNetherland Guilder, French Franc, Euro, Singapore Dollar and Japanese Yen debt obligations and term deposits and the Company’s accounts payable and receivable. The table presents principal cash flows by expected maturity dates. The information presented in the table has been determined based on the assumptions the exchange rates for U.S. Dollar as well as other currencies are based on the selling and buying rates quoted by Reuters on December 31, 2003,2004, applied respectively to monetary assets and liabilities. The buying and selling rates as of December 31, 20032004 were Rp. 8,430Rp.9,280 and Rp.8,450Rp.9,300 to US$1, respectively. Telkomsel applied the Bank Indonesia middle buy and sell rate for its monetary asset and liabilities which was Rp.8,465Rp.9,290 to US$1.00 as of December 31, 2003.2004. However, no assurance can be given that such assumptions will be correct for future periods. Such assumptions and the information described in the table may be influenced by a number of factors, including a fluctuation and/or depreciation of the Rupiah in future periods.
                                   
Outstanding Balance as at
December 31, 2003
Expected Maturity Date
ForeignRp.
CurrencyEquivalent200420052006200720082009-2025
(in thousand)(Rp. in million)(Rp. in million)
ASSETS
                                
Cash and cash equivalents                                
 U.S. Dollar  123,536   1,043,400   1,043,400   —   —   —   —   — 
 Japanese Yen  454   35   35   —   —   —   —   — 
 Euro  39,583   421,288   421,288   —   —   —   —   — 
Trade accounts receivable                                
 U.S. Dollar  13,332   112,559   112,559   —   —   —   —   — 
Other accounts receivable                                
 U.S. Dollar  12,605   106,258   106,258   —   —   —   —   — 
 Japanese Yen  5,441   429   429                     
 French Franc  4,805   5,447   5,447                     
 Netherland Guilder  814   2,745   2,745                     
 Euro  21   224   224                     
Other current assets                                
 U.S. Dollar  4,658   39,269   39,269   —   —   —   —   — 
Advances and other noncurrent assets                                
 U.S. Dollar  12,290   103,651   103,651   —   —   —   —   — 
Escrow account                                
 U.S. Dollar  61,302   516,128   516,128   —   —   —   —   — 
LIABILITIES
                                
Trade accounts payable                                
 U.S. Dollar  106,544   900,408   900,408   —   —   —   —   — 
 Japanese Yen  126,925   10,033   10,033   —   —   —   —   — 
 Great Britain Pound                                
  Sterling  61   916   916   —   —   —   —   — 
 Euro  2,768   29,463   29,463   —   —   —   —   — 
 Singapore Dollar  144   717   717   —   —   —   —   — 
Other accounts payable                                
 U.S. Dollar  —   —   —   —   —   —   —   — 
Accrued expenses                                
 U.S. Dollar  28,946   244,925   244,925   —   —   —   —   — 
 Japanese Yen  14,135   1,117   1,117   —   —   —   —   — 
 Euro  40,698   433,155   433,155   —   —   —   —   — 
 French Franc  710   808   808                     
 Great Britain Pound                                
  Sterling  46   689   689   —   —   —   —   — 
 Netherland Guilder  482   1,631   1,631   —   —   —   —   — 
 Singapore Dollar  189   940   940   —   —   —   —   — 
Advance from customers and suppliers                                
 U.S. Dollar  3,041   25,701   25,701   —   —   —   —   — 
 Japanese Yen  23,940   1,892   1,892                     
 Great Britain Pound                                
  Sterling  1   7   7   —   —   —   —   — 
Short term bank loans                                
 U.S. Dollar  4,462   37,642   37,642   —   —   —   —   — 
                                      
  Outstanding Balance as at              
  December 31, 2004    
    Expected Maturity Date  
  Foreign      
  Currency Rp. Equivalent 2005 2006 2007 2008 2009 2010-2024 Fair Value
                   
  (in millions) (Rp. in million)    
      (Rp. in million) (Rp. in
        million)
ASSETS
                                    
Cash and cash equivalents                                    
 U.S. Dollar  74.80   694,116   694,116   —   —   —   —   —   694,116 
 Japanese Yen  0.98   89   89   —   —   —   —   —   89 
 Euro  88.10   1,114,704   1,114,704   —   —   —   —   —   1,114,704 
Trade accounts receivable                                    
 U.S. Dollar  20.11   186,598   186,598   —   —   —   —   —   186,598 
Other accounts receivable                                    
 U.S. Dollar  1.12   10,355   10,355   —   —   —   —   —   10,355 
Other current assets                                    
 U.S. Dollar  4.61   42,792   42,792   —   —   —   —   —   42,792 
 Euro  0.01   157   157   —   —   —   —   —   157 
Advances and other non current assets                                    
 U.S. Dollar  6.90   64,056   64,056   —   —   —   —   —   64,056 
Escrow account                                    
 U.S. Dollar  3.24   30,059   30,059   —   —   —   —   —   30,059 

166175

                                  
Outstanding Balance as at
December 31, 2003
Expected Maturity Date
ForeignRp.
CurrencyEquivalent200420052006200720082009-2025
(in thousand)(Rp. in million)(Rp. in million)
Long term debt(1)
                                
 U.S. Dollar  1,032,526   8,727,070   2,813,246   1,095,520   1,046,128   1,876,000   434,501   1,461,675 
 Japanese Yen  17,429,464   1,377,726   55,266   90,183   90,183   90,183   75,361   976,550 
 Euro  83,647   890,660   198,810   198,810   198,810   191,444   102,786   — 
                                      
  Outstanding Balance as at              
  December 31, 2004    
    Expected Maturity Date  
  Foreign      
  Currency Rp. Equivalent 2005 2006 2007 2008 2009 2010-2024 Fair Value
                   
  (in millions) (Rp. in million)    
      (Rp. in million) (Rp. in
        million)
LIABILITIES
                                    
Trade accounts payable                                    
 Related parties                                    
 U.S. Dollar  19.13   177,892   177,892   —   —   —   —   —   177,892 
 Myanmar  0.01   20   20   —   —   —   —   —   20 
 Singapore Dollar  —   1   1   —   —   —   —   —   1 
 Third parties                                    
 U.S. Dollar  49.57   460,969   460,969   —   —   —   —   —   460,969 
 Great Britain Pound Sterling  0.06   1,092   1,092   —   —   —   —   —   1,092 
 Japanese Yen  7.88   715   715   —   —   —   —   —   715 
 Singapore Dollar  0.03   146   146   —   —   —   —   —   146 
Accrued expenses         ��                          
 U.S. Dollar  24.08   223,931   223,931   —   —   —   —   —   223,931 
 Japanese Yen  20.41   1,852   1,852   —   —   —   —   —   1,852 
 Singapore Dollar  0.37   2,135   2,135   —   —   —   —   —   2,135 
 Australian Dollar  0.07   507   507   —   —   —   —   —   507 
 Netherland Guilder  0.48   1,795   1,795   —   —   —   —   —   1,795 
 Euro  26.54   336,572   336,572   —   —   —   —   —   336,572 
Advance from customers and suppliers                                    
 U.S. Dollar  0.42   3,947   3,947   —   —   —   —   —   3,947 
Short term bank loans                                    
 U.S. Dollar  118.46   1,101,633   1,101,633   —   —   —   —   —   1,101,633 
Long term debt(1)
                                    
 U.S. Dollar  946.51   8,802,546   1,081,478   1,451,965   2,049,173   1,204,629   923,967   2,091,334   10,095,950 
 Japanese Yen  16,670.50   1,512,396   103,688   103,688   103,688   86,677   69,666   1,044,989   1,934,863 
 Euro  51.24   649,751   185,645   185,645   139,234   139,227   —   —   659,090 

(1) Long-term debt for the purpose of this table consists of loans denominated in foreign currencies namely, two-step loans, suppliers’ credit loan, bridging loan, liabilities for acquisition of subsidiaries,business acquisitions, long-term bank loanloans, notes and guaranteed notes,bonds, in each case including their current maturities.
Equity Price Risk

The Company’s long-term investments consist primarily of minority investments in the equity of private Indonesian companies. With respect to the Indonesian companies in which the Company has investments, the financial performance of such companies may be affected by the fluctuation of macro economic and social conditions such as the level of economic activity, Rupiah exchange rates against other currencies, inflation and interest rates.
ITEM 12.     DESCRIPTION OF SECURITIES OTHER THAN EQUITY SECURITIES
      Not applicable.
PART II
ITEM 13.     DEFAULTS, DIVIDEND ARREARAGES AND DELINQUENCIES
      Not applicable.

176

ITEM 12.DESCRIPTION OF SECURITIES OTHER THAN EQUITY SECURITIES

Not applicable.

PART II

ITEM 13.DEFAULTS, DIVIDEND ARREARAGES AND DELINQUENCIES

Not applicable.

ITEM 14.MATERIAL MODIFICATIONS TO THE RIGHTS OF SECURITY HOLDERS AND USE OF PROCEEDS

Not applicable.
ITEM 15.     CONTROL AND PROCEDURES
ITEM 15.CONTROL AND PROCEDURES

      In the course of the audit of TELKOM’s consolidated financial statements as of and for the year ended December 31, 2002 by KAP Drs. Haryanto Sahari & Rekan (formerly KAP Drs. Hadi Sutanto & Rekan), the member firm of PricewaterhouseCoopers in Indonesia (“PwC”),PwC, TELKOM identified certain errors in and made certain adjustments to its consolidated financial statements as of and for the year ended December 31, 2002 that had been previously filed with the SEC. These errors were identified during the seven-month period ended on January 29, 2004, resulting in TELKOM’s making adjustments during that seven-month period to its consolidated financial statements as of and for the year ended December 31, 2002. Following discussions between TELKOM and KAP Hans Tuanakotta Mustofa & Halim (formerly KAP Hans Tuanakotta & Mustofa), the member firm of Deloitte, Touche Tohmatsu in Indonesia (“Deloitte”), the auditor of TELKOM’s consolidated financial statements as of and for the years ended December 31, 2000 and 2001, TELKOM also identified certain errors in and made certain adjustments to, its previously issued consolidated financial statements as of and for the years ended December 31, 2000 and 2001.

     Our principal executive officer and principal These errors were identified during the seven-month period ended on January 29, 2004, resulting in TELKOM’s making adjustments during that seven-month period to its consolidated financial officer carried out an evaluation of the effectiveness of our disclosure controls and procedures (as defined in Rule 13a-15(e) and 15d-15(e) of the Securities Exchange Act of 1934, as amended (“Exchange Act”))statements as of and for the years ended December 31, 2003.

     In making this evaluation, our principal executive officer2000 and principal financial officer considered matters relating2001. The identified errors and adjustments made to the restatement of our previously issuedTELKOM’s consolidated financial statements as of and for the years ended December 31, 2000, 2001 and 2002 includingare outlined below.

Restatement of Information Previously Reported
      Subsequent to the substantial process that was undertaken during the period from December 2003 through the date hereof to ensure that all material adjustments necessary to restate such previously issuedfiling of our consolidated financial statements in our 2002 Annual Report on Form 20-F that was filed with the SEC on April 17, 2003 and Amendment No. 1 to 2002 Annual Report on Form 20-F/ A that was filed with the SEC on June 11, 2003, TELKOM made certain adjustments to the Indonesian GAAP amounts and the related reconciliation with U.S. GAAP amounts previously disclosed for 2000, 2001 and 2002 and prior years which were recorded. TELKOMrequired to be made pursuant to Indonesian GAAP and U.S. GAAP. These adjustments were set forth in Amendment No. 2 to 2002 Annual Report on Form 20-F/ A that was filed with the SEC on February 9, 2004 under the heading “Item 5. Restatement of Information Previously Reported.”
      Set forth below are the effects of the restatements on the previously reported consolidated net income and stockholders’ equity for the years ended December 31, 2000, 2001 and 2002, respectively. The corrections of the Indonesian GAAP consolidated financial statements primarily relate to the accounting for long service awards, deferred income taxes, and business acquisitions, as well as the assumptions underlying TELKOM’s post-retirement healthcare plan. Certain additional corrections were required for U.S. GAAP purposes primarily relating to TELKOM’s accounting for revenue recognition, deferred income taxes, revenue sharing arrangements and business acquisitions.

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believes that certain
(a)Changes in Indonesian GAAP Information Previously Reported
      The effect of the restatements on net income for the years ended December 31, 2000, 2001 and 2002 is set forth in the table below. Restatements of Rp.205,610 million relating to periods prior to 2000 were recorded as a reduction of the respective equity accounts as of January 1, 2000.
                
    2000 2001 2002
         
    Rp. million Rp. million Rp. million
Net income under Indonesian GAAP as previously reported    3,010,003   4,250,110   8,345,274 
Adjustments:              
 Long service awards (i)  (19,116)   (65,675)   (151,773) 
 Post-retirement healthcare benefits (ii)  (141,160)   (186,758)   (414,564) 
 Deferred income taxes (iii)  (54,027)   66,723   (286,213) 
 Acquisition accounting (iv)  —   (2,008)   (55,763) 
 Operating revenues (v)  (20,695)   (27,359)   18,975 
 Trade accounts payable (vi)  —   36,323   22,167 
 Correction of loan balance (vii)  —   —   117,078 
 Correction of taxes payable (viii)  —   —   75,796 
 Telkomsel equity transactions (ix)  —   —   65,158 
 Other items (x)  —   —   (65,503) 
 Corporate tax (xi)  —   (2,965)   36,144 
Subsequent event:              
 AriaWest (xii)  —   —   332,933 
Net adjustments    (234,998)   (181,719)   (305,565) 
Net income under Indonesian GAAP as restated    2,775,005   4,068,391   8,039,709 
Basic earnings per share (full amount)              
 As previously reported    298.61   421.64   827.90 
 As restated    275.30   403.61   797.59 
Basic earnings per ADS (full amount)              
 As previously reported    5,972.23   8,432.76   16,558.08 
 As restated    5,505.96   8,072.20   15,951.80 

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      The effect of the restatements on stockholders’ equity as of December 31, 2000, 2001 and 2002 is set forth in the table below:
                
    2000 2001 2002
         
    Rp. million Rp. million Rp. million
Stockholders’ equity under Indonesian GAAP as previously reported    14,909,176   9,323,575   15,899,183 
Adjustments:              
 Long service awards (i)  (210,159)   (275,834)   (427,607) 
 Post-retirement healthcare benefits (ii)  (341,106)   (527,864)   (942,428) 
 Deferred income taxes (iii)  83,588   525,528   (136,875) 
 Acquisition accounting (iv)  —   (2,008)   (353,810) 
 Operating revenues (v)  31,565   4,206   23,181 
 Trade accounts payable (vi)  —   36,323   58,490 
 Correction of loan balance (vii)  —   —   117,078 
 Correction of taxes payable (viii)  —   —   75,796 
 Telkomsel equity transactions (ix)  —   —   — 
 Other items (x)  —   —   (65,503) 
 Corporate tax (xi)  —   (2,965)   33,179 
Subsequent event:              
 AriaWest (xii)  —   —   332,933 
Net adjustments    (436,112)   (242,614)   (1,285,566) 
Stockholders’ equity under Indonesian GAAP as restated    14,473,064   9,080,961   14,613,617 
      These adjustments necessary to correct such previously issuedwere reflected in the restated audited consolidated financial statements occurred becauseincluded in Item 18 of Amendment No. 2 to 2002 Annual Report on Form 20-F/ A and are summarized as follows:
(i)   Long service awards. TELKOM’s employees are entitled to receive certain cash awards, such as long service, housing, transport and other allowances, based on length of service. Depending on the type of award, they are either paid at the time an employee reaches a certain anniversary date or upon termination or retirement if the employee has met the requisite number of years of service. TELKOM had not previously made provision for these liabilities and was only accounting for the awards at the time payments were made to the employees. TELKOM determined that these awards should have been accounted for under the accrual method.
(ii)  Post-retirement healthcare benefits. TELKOM provides a post-retirement healthcare plan for pensioners who were employed by TELKOM for over 20 years. As described in Notes 2r and 47 to the consolidated financial statements in Item 18 of Amendment No. 2 to 2002 Annual Report on Form 20-F/ A, these costs are accounted for in accordance with U.S. GAAP applying SFAS 106. TELKOM had been recognizing the benefit obligations and the related benefit costs based on actuarial calculations.
      TELKOM requested the Company’s actuary to review the actuarial calculations in respect of disclosures for the post-retirement healthcare plan for the years 2000 and 2001. As a consequence of this review, the Company’s actuary in consultation with the Company’s management deemed it necessary to withdraw its original reports and substitute revised reports.
      TELKOM determined that the change in actuarial calculations represents the correction of an error and therefore requires retroactive restatement of its 2000 and 2001 financial statements. The Company

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did not previously engage an actuary for 2002 but did so for the purposes of the restated financial statements.
(iii) Deferred income taxes. TELKOM identified the need to make adjustments to correct errors to prior calculations of deferred income taxes to reflect certain temporary differences between the tax bases of assets and liabilities and their reported amounts in the consolidated financial statements. TELKOM also concluded it should remove the deferred tax liability previously recorded in relation to the undistributed earnings of its subsidiaries and associates, principally those relating to Telkomsel, because the Company did not correctly determine the amount of the temporary difference. (See “Adjustments related to Stockholders’ Equity” below).
(iv) Acquisition accounting. In respect of the acquisition of Pramindo in August 2002, the Company previously consolidated a 30% interest in Pramindo in accordance with the 30% legal ownership interest in the shares held by the Company. The Company had not, however, previously considered other factors affecting its ability to exercise control over Pramindo and its right to obtain all of the future economic benefits of ownership as though the Company owned 100% of the shares. The factors that the Company now considered include, among others, the fact that the selling price is fixed, its ability to vote 100% of the shares at general stockholders meetings, subject to certain protective rights retained by the selling stockholders, its ability to appoint all of the board members and management and its consequent ability to exclusively determine the financial and operating policies of Pramindo subject to certain protective rights, its issuance of irrevocable and unconditional promissory notes in settlement of the purchase consideration to the selling stockholders, the placement of the 70% of Pramindo shares not yet transferred to the Company in an escrow account by the selling stockholders, the protective provisions in the various agreements for the Company to take over all shares (including powers of attorney issued by the selling stockholders) or collapse the KSO arrangement once the full amount payable for the shares has been paid. (See Note 6b to the consolidated financial statements for 2000, 2001 and 2002 filed in Amendment No. 2 to 2002 Annual Report on Form 20-F/ A). As a consequence, the Company determined that consolidation of a 100% interest in Pramindo from the date of acquisition is appropriate.
      In addition, in connection with the acquisition of Pramindo in August 2002 and Dayamitra in May 2001, TELKOM did not properly allocate the purchase consideration to certain acquired assets. The restated consolidated financial statements for 2001 and 2002 reflect adjustments to record such assets at their fair values as of the date of acquisition and subsequent depreciation thereof.
      TELKOM previously presented the consolidation of newly acquired subsidiaries from the beginning of the year of acquisition, consistent with the principles of U.S. GAAP set out in “Accounting Research Bulletin 51: Consolidated Financial Statements”. In 2002, the Company changed the manner in which it presents acquisitions to a presentation starting from the date of acquisition in accordance with PSAK 4. This change did not affect the reported net income in any of the years presented.
      The Company also should have reflected an element of this transaction as a transaction between entities under common control processes(see “Adjustments Related to Stockholders’ Equity” below).
(v)  Operating revenues. As a result of a review of certain terms of the revenue sharing agreements and other telecommunication service agreements, TELKOM determined that there were certain errors in previous calculations relating to the amortization of unearned revenue which resulted in a net overstatement of revenues recorded in the consolidated financial statements for 2001 and an understatement of such revenue in 2002.
(vi) Trade accounts payable. As a result of the reconciliation of balances with other telephone operators in 2002, TELKOM determined that there were some errors in trade accounts

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payable balances that resulted in an overstatement of the payables recorded in the consolidated financial statements for 2001 and 2002.
(vii) Correction of loan balance. As a result of reconciliation of outstanding loans at the end of 2002, TELKOM determined that there was a double recording of a loan balance which had a corresponding effect of overstating the foreign exchange loss in the consolidated financial statements for 2002.
(viii) Correction of taxes payable. As a result of reconciliation of taxes payable at the end of 2002, TELKOM determined that there was an over-accrual of value-added tax payable.
(ix) Telkomsel equity transactions. As a result of the sale of a 12.72% interest in Telkomsel (see Note 1b to the consolidated financial statements for 2000, 2001 and 2002 filed in Amendment No. 2 to 2002 Annual Report on Form 20-F/ A) in 2002, an adjustment should have been made to stockholders’ equity to reflect the realization of a gain in the 2002 statement of income attributable to past equity transactions in Telkomsel.
(x)  Other items. Other adjustments represented individually insignificant adjustments to correct errors as a result of understatement of depreciation expenses, understatement of allowance for doubtful accounts and amortization of deferred interest and other issues.
(xi) Corporate tax. Certain of the above adjustments also impacted the corporate tax calculation for the 2001 and 2002 tax years. As a result, TELKOM reflected the related adjustments to the corporate tax charge in the restated consolidated financial statements for the respective years.

Subsequent event
(xii) AriaWest. Subsequent to the date on which TELKOM issued the 2002 consolidated financial statements, TELKOM settled its dispute with AriaWest. In the previously issued consolidated financial statements for 2002, TELKOM had made provisions against its trade receivables relating to the dispute with AriaWest and recorded Rp.830 billion received from KSO III as “Advances from customers and suppliers” in the balance sheet pending settlement of the dispute. As a result of the settlement, the Company reversed these provisions (see Notes 9 and 56d to the consolidated financial statements for 2000, 2001 and 2002 filed in Amendment No. 2 to 2002 Annual Report on Form 20-F/ A), applied the advance received against the outstanding trade receivable and accrued the settlement amount (see Note 56d to the consolidated financial statements for 2000, 2001 and 2002 filed in Amendment No. 2 to 2002 Annual Report on Form 20-F/ A).
Adjustments Related to Stockholders’ Equity
a.TELKOM incorrectly recorded an adjustment directly to stockholders’ equity in the previously issued 2002 consolidated financial statements to reverse the deferred tax liability TELKOM had previously recorded in relation to the undistributed earnings of Telkomsel. This balance should have been reversed as part of the accounting for the cross ownership transactions in 2001 (see Note 5 to the consolidated financial statements for 2000, 2001 and 2002 filed in Amendment No. 2 to 2002 Annual Report on Form 20-F/ A) and was adjusted as part of the corrections to the Company’s deferred tax accounting referred to in (iii) above.
b.At the time TELKOM acquired Pramindo in August 2002, 13% of the issued and paid up share capital of Pramindo was owned by Indosat, a company that, at that time, was majority owned and controlled by the Government, the Company’s major stockholder. In the previously issued consolidated financial statements for 2002, the Company did not account for the acquisition of Pramindo recognizing that a portion of the transaction was between entities under common control. As a result, TELKOM made an adjustment as a result of accounting for the acquisition of 13% of Pramindo as a transaction between entities under common control by debiting the “Difference in value from restructuring transactions of

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entities under common control” in stockholders’ equity to reflect the excess of the purchase price over the proportional historical book value of the net assets of Pramindo that were acquired from Indosat.

Reclassifications
      Certain accounts were reclassified to conform with Indonesian GAAP and proceduresU.S. GAAP presentation requirements. These reclassifications did not affect the net income in the years presented. The following items discuss the significant reclassifications that were made:
a.Reclassification of completed constructions in progress of Rp.765,753 million and advances and other non-current assets of Rp.83,608 million to fixed assets in 2002.
b.Reclassification in 2002 of intangible assets amortization of Rp.166,721 million (2001: Rp.42,643 million) and amortization of goodwill of Rp.21,269 million (2001: Rp.13,066 million) from other charges to operating expenses.
c.Reclassification of other accounts receivable to trade accounts receivable of Rp.82,174 million in 2002.
d.Reclassification of related party trade accounts receivable to third party trade accounts receivable of total Rp.27,677 million in 2002.
e.Reclassification of restricted time deposits from non-current assets to current assets of Rp.46,027 million in 2002.
f.Reclassification of billing processing fees revenue of Rp.30,359 million from other income to other operating revenue in 2002.
g.Reclassification of restricted time deposits from temporary investments to other current assets of Rp.500,000 million in 2002.
h.Reclassification of provision for post-retirement benefits from accrued expenses of Rp.1,602,494 million in 2002 (2001: Rp.1,045,525 million).
i.Reclassification in 2002 of revenue of certain subsidiaries from other income (charges) to operating revenues amounting to Rp.98,877 million, Rp.144,055 million and Rp.217,567 million in 2000, 2001 and 2002.

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      A summary of the significant effects of the restatements and reclassifications on the Company’s consolidated balance sheet as of December 31, 2000, 2001 and 2002 are set forth in the table below:
                          
  2000 2001 2002
       
  As   As   As  
  Previously   Previously   Previously  
  Reported As Restated Reported As Restated Reported As Restated
             
  Rp. Million Rp. Million Rp. Million Rp. Million Rp. Million Rp. Million
Temporary investments  3,870,990   3,870,990   348,915   348,915   1,073,000   573,000 
Trade accounts receivable                        
 Related parties  694,074   694,074   1,037,154   1,055,387   1,308,102   886,763 
 Third parties  919,569   919,569   1,415,686   1,389,246   1,890,679   1,919,904 
Other current assets  —   —   139,075   139,075   145,761   691,788 
Total current assets  10,299,704   10,299,704   7,308,519   7,300,312   10,980,544   10,547,030 
Property, plant and equipment — net  20,019,464   20,019,464   22,288,766   22,891,039   27,645,780   28,448,606 
Advances and other non-current assets  867,653   867,653   694,879   677,519   528,568   299,474 
Intangible assets — net  —   —   1,356,144   1,327,868   2,052,126   3,898,817 
Total non-current assets  21,719,236   21,719,236   25,161,761   25,735,758   31,341,623   33,760,066 
Total assets  32,018,940   32,018,940   32,470,280   33,036,070   42,322,167   44,307,096 
Trade accounts payable                        
 Related parties  685,891   685,891   721,009   719,626   1,032,942   790,227 
 Third parties  939,435   939,435   1,056,644   1,039,937   2,356,284   2,272,624 
Other accounts payable  26,357   26,357   49,392   49,392   58,708   215,775 
Taxes payable  732,218   732,218   1,875,023   1,877,988   1,212,575   1,109,632 
Accrued expenses  993,109   621,506   1,437,575   919,914   2,510,402   1,949,914 
Advances from customers and suppliers  123,832   123,832   213,432   213,432   1,132,319   293,522 
Current maturities of long-term liabilities  818,516   818,516   1,542,600   1,542,600   2,012,251   2,590,227 
Total current liabilities  4,509,355   4,137,752   10,075,323   9,542,537   10,854,981   9,708,181 
Deferred tax liabilities — net  1,787,214   1,703,627   1,767,759   1,818,236   1,521,209   3,083,166 
Unearned income on revenue-sharing arrangement  299,409   267,843   225,714   195,068   165,978   142,797 
Provision for long service award  —   210,159   —   275,834   —   489,231 
Provision for post-retirement benefits  —   712,709   —   1,045,525   —   1,602,494 
Liabilities for acquisition of subsidiaries  —   —   260,840   260,840   —   1,618,979 
Total non-current liabilities  11,786,375   12,594,090   11,836,048   13,177,238   12,124,440   17,389,499 
Difference in value of restructuring transactions between entities under common control  —   —   (7,402,343)  (6,992,233)  (7,032,455)  (7,288,271)
Difference due to change of equity in associated companies  426,397   609,139   342,425   489,178   342,425   424,020 
Translation adjustment  177,114   253,020   179,672   256,674   164,966   235,665 
Unappropriated retained earnings  6,777,522   6,082,762   9,770,303   8,893,824   15,565,511   14,383,466 
Total stockholders’ equity  14,909,176   14,473,064   9,323,575   9,080,961   15,899,183   14,613,617 
Total liabilities and stockholders’ equity  32,018,940   32,018,940   32,470,280   33,036,070   42,322,167   44,307,096 

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      A summary of the significant effects of the restatements and reclassifications on the Company’s consolidated statements of income is set forth on the table below:
                         
  2000 2001 2002
       
  As   As   As  
  Previously   Previously   Previously  
  Reported As Restated Reported As Restated Reported As Restated
             
  Rp. Million Rp. Million Rp. Million Rp. Million Rp. Million Rp. Million
Operating revenues  12,111,996   12,190,178   16,130,789   16,283,807   21,399,737   20,802,818 
Operating expenses  (6,433,843)  (6,594,119)  (8,515,089)  (8,864,400)  (11,998,053)  (11,672,603)
Other income/(charges)  (888,953)  (987,830)  (928,411)  (869,516)  2,940,890   2,618,687 
Income before tax  4,789,200   4,608,229   6,687,289   6,549,891   12,342,574   11,748,902 
Tax expense  (1,466,267)  (1,520,294)  (2,070,654)  (2,006,895)  (2,745,857)  (2,898,971)
Pre-acquisition loss (income)  —   —   108,080   —   (142,817)  — 
Minority interest  (312,930)  (312,930)  (474,605)  (474,605)  (1,108,626)  (810,222)
Net income  3,010,003   2,775,005   4,250,110   4,068,391   8,345,274   8,039,709 
Basic and diluted earnings per share (full amount)  298.61   275.30   421.64   403.61   827.90   797.59 
Earnings per ADS (full amount)  5,972.23   5,505.96   8,432.76   8,072.20   16,558.08   15,951.80 
(b) Changes in U.S. GAAP Information Previously Disclosed
      In addition to the matters underlying suchrestatements to TELKOM’s Indonesian GAAP financial statements as of and for the three years ended December 31, 2000, 2001 and 2002 described above, TELKOM also made certain adjustments to the previously reported consolidated stockholders’ equity as of December 31, 2000, 2001 and 2002 and consolidated net income for the years then ended, that only had an impact on previously reported U.S. GAAP amounts. The total impact of these adjustments on consolidated stockholders’ equity as of December 31, 2000, 2001 and 2002 and consolidated net income for the years then ended are presented below. Restatements of Rp.264,192 million relating to periods prior to 2000 were recorded as a reduction to opening retained earnings as of January 1, 2000.

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    2000 2001 2002
         
    Rp. million Rp. million Rp. million
Net income under U.S. GAAP as previously reported      2,952,133   4,036,641   9,274,249 
Impact of Indonesian GAAP restatements on U.S                
 GAAP net income:                
 Aggregate Indonesian GAAP restatements      (234,998)  (181,719)  (305,565)
 Amount which are not restatements for U.S. GAAP  (i)  16,663   (10,632)  (66,456)
       (218,335)  (192,351)  (372,021)
Effect of restatements on previously reported U.S GAAP net income:                
 Installation revenue:  (ii)            
  Cumulative effect of accounting change      (814,799)  —   — 
  Current year amortization      107,322   81,429   (22,870)
 Revenue-sharing arrangements  (iii)  (27,041)  37,650   67,959 
 Deferred taxes  (iv)  214,108   347,333   (337,864)
 Acquisition of Dayamitra  (v)  —   (12,809)  (9,374)
 Others  (vi)  2,937   307   (12,820)
 Net adjustments      (517,473)  453,910   (314,969)
Net income under U.S. GAAP as restated      2,216,325   4,298,200   8,587,259 
Basic earnings per share (full amount)                
 As previously reported      292.87   400.46   920.06 
 As restated      219.87   426.41   851.91 
Basic earnings per ADS (full amount)                
 As previously reported      5,857.41   8,009.21   18,401.29 
 As restated      4,397.47   8,528.17   17,038.21 
Stockholders’ equity under U.S. GAAP as previously reported      14,146,168   8,240,598   15,745,181 
Impact of Indonesian GAAP restatements on U.S                
 GAAP stockholders’ equity:                
 Aggregate Indonesian GAAP restatements      (436,112)  (242,614)  (1,285,566)
 Amounts which are not restatements for U.S. GAAP  (i)  (598)  (11,229)  (12,527)
       (436,710)  (253,843)  (1,298,093)
Effect of restatements on previously reported U.S. GAAP equity:                
 Installation revenue  (ii)  (707,477)  (626,048)  (648,918)
 Revenue-sharing arrangements  (iii)  (166,575)  (128,925)  (60,966)
 Deferred taxes  (iv)  119,561   421,243   93,284 
 Acquisition of Dayamitra  (v)  —   139,342   129,968 
 Others  (vi)  (27,174)  (26,867)  (49,592)
 Net adjustments      (781,665)  (221,255)  (536,224)
Stockholders’ equity under U.S. GAAP as restated      12,927,793   7,765,500   13,910,864 
      These adjustments were not sufficiently effective. TELKOM has also consideredreflected in Note 57(3) to the consolidated financial statements in Item 18 to Amendment No. 2 to 2002 Annual Report on Form 20-F/ A and are summarized as follows:
      (i)   Impact of Indonesian GAAP Restatements
The restatements to the financial position and results of operations under Indonesian GAAP as described above, had the same impact on consolidated stockholders’ equity and net

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income presented under U.S. GAAP, except for restatements with respect to revenue sharing arrangements and related deferred taxes. Accordingly, no restatement of stockholders’ equity or net income under U.S. GAAP was required with respect to these items.

      (ii)  Installation Revenue
TELKOM was required to adopt the provisions of the Securities and Exchange Commission’s (SEC) Staff Accounting Bulletin (SAB) No. 101, “Revenue Recognition in Financial Statements” in 2001, and retroactively apply its provisions as of January 1, 2000. TELKOM did not initially record the full impact of SAB No. 101 on its results. SAB 101 requires TELKOM to defer certain non-recurring fees, such as service activation and installation fees, and recognize those revenues over the expected term of the customer relationship. For 2000, the adjustment presented included an amount which represents the initial impact of adopting SAB 101. For U.S. GAAP purposes this should have been recorded as a cumulative effect of an accounting change.
      (iii) Revenue Sharing Arrangements
Based on further review, TELKOM concluded that the accounting provided for the revenue sharing arrangements under Indonesian GAAP required an adjustment to conform to U.S. GAAP. A discussion of the differences in accounting for the revenue sharing arrangements under the respective GAAPs may be found in Note 57(1)d to the consolidated financial statements for 2000, 2001 and 2002 filed in Amendment No. 2 to 2002 Annual Report on Form 20-F/ A.
      (iv) Deferred Taxes
As discussed above, the deferred tax liability related to investments in consolidated subsidiaries was adjusted in the restated Indonesian GAAP financial statements to conform to SFAS 109. Accordingly, an adjustment was made to eliminate the U.S. GAAP and Indonesian GAAP difference related to the deferred tax liability on the undistributed earnings of subsidiaries and associates.
TELKOM also made adjustments in relation to other restated amounts.
      (v)  Acquisition of Dayamitra
The adjustment reflected the U.S. GAAP requirement, as described in Note 57(1) to the Company’s consolidated financial statements for 2000, 2001 and 2002 filed in Amendment No. 2 to 2002 Annual Report on Form 20-F/ A, to record the Dayamitra acquisition as an acquisition of 100% of the outstanding interest during the year ended December 31, 2001, and the effect of the reversal of foreign exchange capitalized by Dayamitra as the related assets were carried at fair value upon application of purchase accounting.
         
  Effect on  
  Net Income Equity
     
  Rp. million Rp. million
Option  2,050   2,050 
Foreign exchange capitalized  (14,859)  137,292 
   (12,809)  139,342 
      (vi) Others
Other adjustments represented individually insignificant adjustments consisting of land rights amortization and certain capitalized foreign exchange gains and losses.

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Disclosure Controls and Procedures
      In connection with the audit of TELKOM’s financial statements, reportable conditions (as defined under standards established by the American Institute of Certified Public Accountants) relating to ourTELKOM’s internal control over financial reporting as(as defined in Rules 13a-15(f) and 15d-15(f) of the Exchange Act) were also identified and communicated by PwC in their report dated January 9, 2004 and delivered to usTELKOM on January 12, 2004 and ourdiscussed by PwC with the Board of Directors on January 14, 2004 and with the Board of Commissioners and TELKOM’s Audit Committee by PwCon January 16, 2004 in connection with its audit of the consolidated financial statements as of and for the year ended December 31, 2002, and identified and communicated by KAP Siddharta Siddharta & Widjaja, the member firm of KPMG International in Indonesia (“KPMG”),to TELKOM and its Audit Committee on June 29, 2004 and July 14, 2005 in connection with its audit of the consolidated financial statements as of and for the yearyears ended December 31, 2003.2003 and 2004, respectively. Both PwC and KPMG identified the same material weaknesses as part of their respective audits. Both PwC and KPMG informed TELKOM that they were unable to determine when such material weaknesses first arose, as such material weaknesses appeared to exist prior to the commencement of the respective audit periods for which PwC and KPMG performed audits. As part of their communications, both PwC and KPMG informed the Audit Committee that they had identified “reportable conditions” each of which constituted a “material weakness” (as each such term is defined under standards established by the American Institute of Certified Public Accountants) in TELKOM’s internal controlscontrol over financial reporting with respect to: (1) inadequate personnel resources with sufficient knowledge and experience in the application of Indonesian GAAP and US GAAP accounting principles;principles because TELKOM did not have sufficient personnel in its accounting department with expertise in applying Indonesian GAAP to complicated accounting issues or in identifying and applying differences in accounting treatments under Indonesian GAAP and U.S. GAAP; (2) deficiencies in the organizational structure of the accounting department, including the oversight function for accounting and financial reporting;reporting because there was inadequate management, supervision and review for the accounting functions; (3) inadequate internal processes for the assessment of critical, significant and judgmental accounting areas; accordingly, when a set of facts gave rise to critical or significant accounting issues or raised significant issues of judgment, such issues were not always properly identified, or, even if properly identified, the appropriate experts were not always consulted and issues of judgment were not always elevated to the appropriate level of management or the Audit Committee; and (4) insufficient written policies and procedures for the accounting and financial reporting function, insufficient knowledge of and compliance with, existing policies and procedures among relevant personnel and insufficient emphasis by the internal audit function on the foregoing.

     Basedforegoing; in particular, accounting and financial reporting personnel did not have objective written policies and procedures to follow when addressing significant accounting and financial reporting issues and so such issues were not always dealt with in a consistent manner, and the internal audit function did not focus on identifying or identify this issue as well as the evaluation described above and PwC’s and KPMG’s communications to our Audit Committee, our principal executive officer and principal financial officer concluded that these material weaknesses, if not addressed, could result in accounting errors and inadequate disclosures such as those underlying the restatements of TELKOM’s consolidated financial statements for the three years ended December 31, 2002, which related to: (1) our accounting for liabilities for post-employment medical benefits; (2) our accounting for liabilities for long service awards; (3) our calculation of deferred income taxes; (4) our accounting for business acquisitions; (5) our accounting for installation revenues; (6) our accounting for revenue sharing arrangements; and (7) a substantial number of other individually less significant items.

reportable conditions identified herein.

      In response to the matters identified by PwC and KPMG,TELKOM’s external auditors, under the supervision of the Audit Committee, ourin January 2004 TELKOM’s senior management has directed that TELKOM dedicate resources and take steps to strengthen control processes and procedures in order to prevent a recurrence of the circumstances that resulted in the need to restate such consolidated financial statements. These steps include, among others:
(1)an assessment of the organizational structure of the finance department, including to determine additional resources which need to be dedicated to it;
(2)the enhancement of all finance-related policies and procedures covering accounting and financial reporting;
(3)the improvement of standard documentation requirements for the assessment of critical, significant and judgmental accounting areas;
(4)the improvement of understanding of relevant Indonesian GAAP and U.S. GAAP accounting principles and financial reporting responsibilities across all business units through intensive

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and continuing training and proactive consultations with advisors on technical matters as they relate to TELKOM’s business; and
(5)modification of the mandate of TELKOM’s internal audit function to place greater emphasis on the adequacy of, and compliance with, procedures relating to internal control over financial reporting.

      TELKOM, under the supervision of its Audit Committee, has been working to improve its internal control over financial reporting, including those needed to enable it to comply with Section 404 of the Sarbanes-Oxley Act of 2002, as well as its disclosure controls and procedures. TELKOM also prepared on April 7, 2004, an action plan to address the material weaknesses in TELKOM’s internal control over financial reporting identified by PwC and KPMG. The steps set forth in the action plan are specifically aimed at addressing the directives of TELKOM’s senior management described above, as well as enabling TELKOM to comply with Section 404 of the Sarbanes-Oxley Act of 2002, and involve several additional steps which TELKOM intends to take throughout 2005 to address the material weaknesses in its internal control over financial reporting. Due to the pending requirements of Section 404 and to address the “material weaknesses” identified by PwC and KPMG, TELKOM has taken a number of steps directly in response to the steps its senior management directed TELKOM to implement, including the following:
(1) an assessment of the organizational structure of the finance department, including to determine additional resources which need to be dedicated to it; it
•On December 31, 2003, TELKOM, under the supervision of the Human Resources Department, retained a human resources consulting firm, which assisted TELKOM in assessing job competency requirements and the adequacy of the organizational structure throughout TELKOM, including its finance department. The assessment, among other things, assisted TELKOM in preparing a job catalogue and job profile manual that sets out ideal staffing and job descriptions in the various departments in TELKOM.
•TELKOM, initially with the assistance of E&Y, assessed thoroughly the organizational structure of its finance department in 2004. In particular, TELKOM focused on determining the separation of each function and identifying the personnel in charge of such function, such personnel’s effectiveness in performing such function and the need for additional personnel and expertise in performing such function. Since the assessment, TELKOM has been and is still in the process of establishing job descriptions for newly identified functions, searching for additional accounting and financial reporting personnel and identifying the appropriate personnel to fill certain of the positions.
•In 2004, TELKOM carried out a recruitment exercise for fresh accountancy graduates from a prominent university in Indonesia and recruited eight persons. In 2005, TELKOM recruited 15 new employees with either graduate or masters degrees in accounting to support its financial, accounting, and internal audit departments.
•In connection with this step (1) and steps (2) and (3) which TELKOM’s senior management directed TELKOM to implement, on February 27, 2004, TELKOM added a new oversight function to its accounting department organization structure to improve the assessment of critical, significant and judgmental accounting areas. The new oversight function required the hiring of consultants for the accounting department (1) to monitor changes in Indonesian GAAP and U.S. GAAP, and differences between Indonesian GAAP and US GAAP and (2) to train TELKOM’s staff accountants, and on May 1, 2004, TELKOM hired two experienced personnel for such roles.
      As of the date of this Annual Report, TELKOM had over 200 employees in its accounting department, including 28 full-time employees and two part-time employees based at its head office. In

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addition, TELKOM had 76 full-time employees and one part-time employee in its internal audit department as of the date of this Annual Report.
(2) the enhancement of all finance-related policies and procedures covering accounting and financial reporting; and (3) the improvement of standard documentation requirements for the assessment of critical, significant and judgmental accounting areas; areas
•On January 7, 2004, TELKOM established a team comprised of 75 personnel from various departments of TELKOM and chaired by the vice president of TELKOM’s budget department for the purpose of preparing TELKOM for the compliance with Section 404 of the Sarbanes-Oxley Act of 2002.
•In connection with steps (2) and (3) as well as step 1 which TELKOM’s senior management directed TELKOM to implement, on June 7, 2004, TELKOM retained E&Y, under the supervision of the Audit Committee, to assist TELKOM in improving its internal control over financial reporting in two phases. The first phase included the (i) development of an internal control framework, including documentation and evaluation methodology; (ii) establishment of a project team to conduct the evaluation and implementation; (iii) evaluation of internal controls; (iv) identification of internal controls at the various levels; and (v) preparation of a Director’s Decree on internal controls. The first phase of this project was completed at the end of August 2004, and a decree of the Board of Directors was issued on October 29, 2004 to formally implement certain internal control policies and procedures.

The second phase, which began on November 9, 2004, included the (i) dissemination of the Directors’ Decree on internal controls, through sessions to discuss the new internal controls; (ii) evaluation of information technology-related general controls; (iii) evaluation and monitoring of the implementation of the Directors’ Decree on internal controls, including design of an internal control testing program; (iv) selection of a software monitoring tool for the monitoring process. As of the date of this Annual Report, TELKOM is evaluating the choice of software and has not made a selection; and (v) a planned benchmarking visit to a telecommunications company in the United States which has implemented internal controls in accordance with the requirements of the Sarbanes-Oxley Act of 2002. Since December 2004, to evaluate and monitor the implementation of the Directors’ Decree on internal controls, TELKOM has conducted walkthroughs and tests with respect to the implementation of the new internal controls, and taken remedial steps where appropriate. The Board of Directors also set up an internal control integration project on December 14, 2004 to follow up on the integration process of TELKOM’s new internal controls. Since April 12, 2005, as part of an extension of the second phase of E&Y’s program to assist TELKOM in improving its internal control over financial reporting, TELKOM, with the assistance of E&Y, has also been reviewing and designing its internal controls and procedures to ensure compliance with Section 302 of the Sarbanes-Oxley Act of 2002, and strengthening its information technology-related general controls.
(3) the improvement of standard documentation requirements for the assessment of critical, significant and judgmental accounting areas
From April 2004 to June 2004, TELKOM held internal meetings to establish a task force to enhance its finance-related policies and procedures covering accounting and financial reporting. On July 12, 2004, TELKOM formally established such task force with responsibility for enhancing all finance-related policies and procedures covering accounting and financial reporting. The task force collected and reviewed the previously dispersed accounting policies and updated and created new accounting policies. The responsibilities of the team include (i) identifying the accounting policies and the standard operating procedures being applied; (ii) identifying “the best practices” of accounting policies based on Indonesian standards and

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requirements, US GAAP, and IAS; (iii) analyzing the differences between accounting policies being applied and “the best practice”; (iv) preparing a draft of accounting policies and the standard operating procedures, and disseminating it to relevant departments for feedback and comment; and (v) discussing the draft of accounting policies and the standard operating procedures with a GAAP expert; and (vi) preparing a final draft of accounting policies and the standard operating procedures for approval by the Board of Directors. The team prepared a draft for comment in January 2005, and TELKOM expects that the final draft will be completed around or after the end of 2005.

(4) the improvement of understanding of relevant Indonesian GAAP and U.S. GAAP accounting principles and financial reporting responsibilities across all our business units through intensive and continuing training and proactive consultations with advisors on technical matters as they relate to our business;TELKOM’s business
•Since 2004, TELKOM has implemented a new policy to organize regular training programs relating to accounting and auditing matters for all employees in finance-related positions.
•TELKOM held seminars in November and December 2003 and November 2004 involving outside consultants and members of the accounting department at a major Indonesian university, covering relevant accounting and internal control issues and attended by senior management and certain accounting and finance-related personnel.
•TELKOM subscribed to a U.S. GAAP information web-site through E&Y beginning May 2004.
•25 senior employees from TELKOM’s accounting and internal audit department will participate in ongoing US GAAP workshops that will run from June to August 2005 covering topics relating to the reconciliation of Indonesian GAAP and US GAAP. These workshops are being held in cooperation with outside consultants and members of the accounting department at a major Indonesian university.
(5) modification of the mandate of TELKOM’s internal audit function to place greater emphasis on the adequacy of, and compliance with, procedures relating to internal control over financial reporting.

     TELKOM, under the supervisionreporting

•On December 7, 2004, TELKOM modified the mandate of its Audit Committee, has been working to improve its internal audit function to place greater emphasis on the adequacy of and compliance with, procedures relating to internal control over financial reporting. Under the previous Internal Audit Charter, each TELKOM division had an internal auditor which reported to the head of the division. Under the revised Internal Audit Charter, TELKOM centralized the reporting function and the division-based internal auditors report to the Head of the Internal Audit Unit. The Internal Audit Unit reports directly to the President Director but also works with the Audit Committee and the external auditor, and, under the revised charter, is responsible for the assessment of the effectiveness of internal controls. The charter also provides for the internal auditor to have free and broad access to TELKOM’s activities.
•In April 2004, TELKOM hired two consultants for a two year period for its internal audit department with responsibility for (1) improving the role of internal audit for TELKOM, (2) improving the internal control system of TELKOM and (3) reviewing the financial reporting of TELKOM.
•On December 14-16, 2004, all of TELKOM’s employees in its Internal Audit Unit participated in the 8th Communication Forum of Internal Audit Group, an internal audit forum which focused on the application of Sarbanes-Oxley Act Section 404-based internal controls.
•Since April 12, 2005, as part of an extension of the second phase of E&Y’s program to assist TELKOM in improving its internal control over financial reporting, TELKOM, with the

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assistance of E&Y, has also been assessing the roles and functions of TELKOM’s Internal Audit Unit to ensure compliance with the Sarbanes-Oxley Act of 2002.

Additional Steps to Strengthen Disclosure Controls and Procedures
On December 28, 2004, TELKOM informally established a new disclosure committee and held a meeting among the members of the disclosure committee. The disclosure committee is comprised of 14 senior members from various departments and chaired by the CFO, for purposes of supporting TELKOM’s management in designing and evaluating TELKOM’s disclosure controls and procedures including those neededand participating in the disclosure process. TELKOM formally established its disclosure committee on February 18, 2005. Since its formal establishment, the disclosure committee has established internal work procedures relating to enable it to comply with Section 404the preparation of TELKOM’s annual report on Form 20-F, and participated in the review and preparation of TELKOM’s annual report on Form 20-F. The establishment of the Sarbanes-Oxley Act of 2002. Due todisclosure committee formalized the pending requirements of Section 404 and as a result ofprevious disclosure process where designated senior employees from various departments were responsible for assisting with the “material weaknesses” identified by PwC and KPMG, TELKOM has: (1) retained KAP Prasetio, Sarwoko & Sandjaja, the member firm of Ernst & Young in Indonesia (“E&Y”), under the supervision of the Audit Committee, to assist TELKOM in improving its internal controls and procedures; (2) established a task force with responsibility for enhancing all finance-related policies and procedures covering accounting and financial reporting; (3) prepared a draft Action Plan to address the

168

necessary disclosures.

material weaknesses in TELKOM’s internal controls identified by PwC and KPMG; (4) reviewed the organizational structure of TELKOM’s finance department and added a new oversight function to the accounting department organization structure to provide (among others) an additional level of review of critical, significant and judgmental accounting areas; (5) hired additional experienced personnel for TELKOM’s accounting and internal audit departments; and (6) held seminars involving members of the accounting departments at two major Indonesian universities on relevant accounting and internal control issues, attended by senior management and certain accounting and finance-related personnel. TELKOM’s draft Action Plan involves several additional steps which TELKOM intends to take throughout 2004 to address the material weaknesses in its internal controls.

      Other than as described above, there have been no significant changes in TELKOM’s internal control over financial reporting that occurred during the last fiscal quarter period covered by this report, that have materially affected, or are reasonably likely to materially affect, TELKOM’s internal control over financial reporting.

      TELKOM’s principal executive officer and principal financial officer carried out an evaluation of the effectiveness of TELKOM’s disclosure controls and procedures no matter how well designed(as defined in Rules 13a-15(e) and operated, can provide only reasonable, not absolute, assurance of achieving the objectives15d-15(e) of the Exchange Act) as of December 31, 2004.
      In making this evaluation, TELKOM’s principal executive officer and principal financial officer considered matters relating to the restatement of its previously issued consolidated financial statements for the years ended December 31, 2000, 2001 and 2002, including the substantial process that was undertaken during the period from December 2003 through the date of the restatement to ensure that all material adjustments necessary to restate such previously issued consolidated financial statements were recorded. TELKOM has also considered the reportable conditions (as defined under standards established by the American Institute of Certified Public Accountants) relating to its internal control system. As such, disclosure controlsover financial reporting (as defined in Rules 13a-15(f) and 15d-15(f) of the Exchange Act) as identified by PwC in connection with its audit of the consolidated financial statements as of and for the year ended December 31, 2002 and as identified by KPMG in connection with its audit of the consolidated financial statements as of and for the years ended December 31, 2003 and 2004. TELKOM also considered the various steps, summarized above, that it had taken to strengthen its control processes and procedures or internal control systems may not prevent all errorsince November 2003 and all fraud. In addition, the design of a control system must reflect the fact that there are resource constraints and the benefits of controls must be considered relativewhich it is continuing to their costs and our management necessarily was required to apply its judgment in evaluating the cost-benefit relationship of possible controls and procedures. Because of the inherent limitations in all control systems, no evaluation of controls can provide absolute assurance that all control issues and instances of fraud, if any, within TELKOM have been detected.

take.

TELKOM’s principal executive officer and principal financial officer concluded, based on their most recent evaluation, as of internal control over financial reporting,December 31, 2004, that, while Telkom has made improvements, because of the “material weaknesses” in TELKOM’s internal controls materially and adversely impacted the effectiveness of TELKOM’s disclosure controls and procedures relatingidentified above that continue to the disclosure of financial information, financial performance and management’s analysis of such information and performance and that the remedial actions referred to above to address such “material weaknesses” are necessary to ensure the effectiveness of TELKOM’s disclosure controls and procedures as they relate to such information. However, TELKOM’s principal executive officer and principal financial officer further concluded, based on such evaluation, that in all other material respectsexist, the design and operation of TELKOM’s disclosure controls and procedures were not effective to ensure that information required to be disclosed in the reports TELKOM files and submits under the Exchange Act is recorded, processed, summarized and reported as and when required.required, and is accumulated and communicated to TELKOM’s management, including TELKOM’s President Director and Director of Finance, to allow timely decisions regarding required disclosure.

ITEM 16.     RESERVED

ITEM 16A.     AUDIT COMMITTEE FINANCIAL EXPERT

      The Board of Commissioners has determined that Mr. Sahat Pardede, a member of TELKOM’s Audit Committee, qualifies as an Audit Committee Financial Expert in accordance with the requirements of Item 16A of Form 20-F. Mr. Pardede has been a member of TELKOM’s Audit Committee since

191

February 17, 2004, and also serves as a member of the risk and compliance committee of PT Bank BNI. Prior to his appointment as a member of TELKOM’s Audit Committee, Mr. Pardede practiced as a Certified Public Accountant in Indonesia and provided auditing services and other financial services to numerous private companies and public institutions. Mr. Pardede graduated with a degree in accounting from the State College of Accountancy, Jakarta and holds a master degree in business administration from Saint Mary’s University, Canada. He is a Certified Public Accountant and is also a member of the Indonesian Institute of Accountants.

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ITEM 16B.     CODE OF ETHICS

We have adopted a code of ethics in accordance with the provisions of Section 406 of the Sarbanes-Oxley Act of 2002. Our code of ethics applies to our Chief Executive Officer, Chief Financial Officer and persons performing similar functions as well as to our Commissioners, Directors and other officers and employees. Our code of ethics may be viewed on our company web site at www.telkom-indonesia.com/english/hubunganinvestor/index.asp. If we amend the provisions of our code of ethics that apply to our Chief Executive Officer, Chief Financial Officer and persons performing similar functions, or if we grant any waiver of such provisions, we will disclose such amendment or waiver on our company web site at the same address.

ITEM 16C.     PRINCIPAL ACCOUNTANT FEES AND SERVICES

The following table summarizes the aggregate fees billed to us by KAP Eddy Pianto and KAP Drs. Haryanto Sahari & Rekan (formerly KAP Drs. Hadi Sutanto & Rekan), the member firm of PricewaterhouseCoopers in Indonesia (“PwC”),KPMG, during the fiscal year ended December 31, 2002,2003 and by KAP Siddharta Siddharta & Widjaja, the member firm of KPMG International in Indonesia (“KPMG”), during the fiscal year ended December 31, 2003:2004:
        
Year Ended        
December 31, Year Ended
 December 31,
20022003  
 2003 2004
    
(in Rp. billion) (in Rp. million)
Audit Fees 33,578.0 10,715.0   10,715.0  19,274.6 
Audit-Related Fees — —   —  — 
Tax Fees — —   —  — 
Other Fees — —   —  — 

A.  Audit Fees

      Audit fees in the above table are the aggregate fees billed by KAP Eddy Pianto and PwC in 2002, and KPMG in 2003 and 2004, in each case in connection with the audit of our annual financial statements, the review of TELKOM’s quarterly financial statements and statutory and regulatory audits. KAP Eddy Pianto, which was originally appointed to perform TELKOM’s 2002 audit, was not qualified for SEC purposes and TELKOM appointed PwC in July 2003 to perform the re-audit of TELKOM’s 2002 annualconsolidated financial statements.

B.  Audit-Related Fees

      None.

C.  Tax Fees

     None of KAP Eddy Pianto, PwC and

      KPMG performeddid not perform any tax compliance, tax advisory or tax planning services for TELKOM during the fiscal years ended December 31, 20022003 and 2003.

2004.

D.  All Other Fees

     None of KAP Eddy Pianto, PwC and

      KPMG performeddid not perform any other services for TELKOM during the fiscal years ended December 31, 20022003 and 2003.

2004.

E.  Audit Committee Pre-Approval Policies and Procedures

      TELKOM has adopted pre-approval policies and procedures under which all non-audit services provided by its independent public accounting firm must be pre-approved by TELKOM’s audit committee as set forth in the audit committee’s charter. Pursuant to the charter, permissible non-audit

192

services may be performed by TELKOM’s independent registered public accounting firm provided that:

170

(a) TELKOM’s Board of Directors must deliver to the Audit Committee (through the Board of Commissioners) a detailed description of the non-audit service that is to be performed by the independent public accounting firm; and (b) the Audit Committee will determine whether the proposed non-audit service will affect the independence of TELKOM’s independent public accounting firm or would give rise to any conflict of interest.

Consistent with Section 10(i)(1)(B) of the Exchange Act and paragraph (c)(7)(i)(C) of Rule 2-01 of Regulation S-KS-X issued thereunder, the charter of TELKOM’s audit committee waives the pre-approval requirement for permissible non-audit services (x) where the aggregate amount of the fees for such non-audit services constitutes no more than five percent of the total amount of fees paid by TELKOM to its independent registered public accounting firm during the fiscal year in which the services are provided or (y) the proposed services are not regarded as non-audit services at the time the contract to perform the same is signed. In either case, the performance of such non-audit services must subsequently be approved either by a member of the Audit Committee who has been delegated pre-approvalpre- approval authority by the full Audit Committee or by the full Audit Committee itself. Notwithstanding the foregoing, none of TELKOM’s independent public accounting firms performed non-audit services for TELKOM during the fiscal years ended December 31, 2002 and 2003.
ITEM 16D.     EXEMPTIONS FROM THE LISTING STANDARDS FOR AUDIT COMMITTEES
      In accordance with Indonesian law, the Company has a two-tier board structure, consisting of a Board of Commissioners and a Board of Directors. The executive management functions are carried out by the Board of Directors, while the principal statutory duties of the Board of Commissioners are to supervise the policies of the Board of Directors in the operation and management of the Company and to give advice to the Board of Directors.
      Under Jakarta Stock Exchange rules (the “JSX Audit Committee Rule”), TELKOM’s audit committee must consist of at least three members, one of whom must be an Independent Commissioner of TELKOM and concurrently the chairman of the audit committee, while the other two members must be external independent parties of whom at least one such party shall have accounting and/or finance expertise. TELKOM’s audit committee is composed of seven members and is chaired by an Independent Commissioner. Members of Telkom’s audit committee are appointed and dismissed by the Board of Commissioners.
      TELKOM relies on the general exemption under Rule 10A-3(c)(3) of the Securities Exchange Act of 1934 with respect to the composition of its audit committee.
      TELKOM believes that its reliance on the exemption would not materially adversely affect the ability of the audit committee to act independently. TELKOM believes that the intent of the provision in requiring that each member of the audit committee to be a member of the board of directors or commissioners, as applicable, and to be otherwise independent, is to ensure that the audit committee is independent from influence by management and would provide a forum separate from management in which auditors and other interested parties can candidly discuss concerns. The JSX Audit Committee Rule requires that each member of the audit committee be independent. The JSX Audit Committee Rule goes on to require that at least two of the members, the external independent members, in effect be independent not only of the management but also of the Board of Commissioners and Board of Directors and the Company as a whole. TELKOM therefore believes that the standard established by the JSX Audit Committee Rule is at least equally effective in ensuring the ability of the audit committee to act independently.
ITEM 16D.EXEMPTIONS FROM THE LISTING STANDARDS FOR AUDIT COMMITTEES

Not applicable.

ITEM 16E.PURCHASES OF EQUITY SECURITIES BY THE ISSUER AND AFFILIATED PURCHASERS

      Not applicable.

171193

PART III

ITEM 17.     CONSOLIDATED FINANCIAL STATEMENTS

Not applicable.

ITEM 18.     CONSOLIDATED FINANCIAL STATEMENTS

See pages F-1 through F-137.F-142.

ITEM 19.     EXHIBITS

Exhibit 1 — The Articles of Incorporation of TELKOM, amended as of January 10, 2002,July 30, 2004, together with an English translation thereof, are filed with TELKOM’s 2001 Form 20-F on May 30, 2002 and is hereby incorporated by reference.

thereof.

Exhibit 2 — Not applicable.

Exhibit 3 — Not applicable.

Exhibit 4 — Material Contracts Exhibits:
     
 4.1*Agreement for the Sale and Purchase of the Assets Relating to TELKOM Mobile between TELKOM and Telkomsel, dated April 3, 2002.
4.2*  Settlement Agreement between TELKOM and the shareholders of AriaWest, dated July 31, 2003.
 4.3*4.2*  Credit Agreement between TELKOM and the AriaWest lenders, dated July 31, 2003.
 4.4*4.3*  First Amendment to the Conditional Sale and Purchase Agreement between TELKOM and the shareholders of AriaWest, dated July 31, 2003.
 4.5*4.4*  Conditional Sale and Purchase Agreement between TELKOM and the shareholders of AriaWest, dated May 8, 2002.
 4.6*Conditional Sale and Purchase Agreement between TELKOM and Singapore Telecom Mobile Pte. Ltd., dated April 3, 2002.
4.7*4.5*  Conditional Sale and Purchase Agreement between TELKOM and the shareholders of Pramindo, dated April 19, 2002.
 4.8*4.6*  Cooperation Agreement on the Interconnection between TELKOM’s Fixed Network and Indosat’s Local Fixed Network and the Settlement of the Interconnection Financial Rights and Obligations between TELKOM and Indosat, dated September 3, 2002, including an English translation thereof.
 4.9*4.7**  Kontrak Pengadaan Satelit TELKOM-2 (Contract on Procurement of TELKOM-2 Satellite) between TELKOM and Orbital Sciences Corporation, dated October 24, 2002.
 4.104.8+  First Amendment to Contract on Procurement of TELKOM-2 Satellite between TELKOM and Orbital Sciences Corporation, dated December 15, 2003.
 4.11*4.9**  Kontrak Jasa Peluncur Satelit TELKOM-2 (Agreement on Launch Services of TELKOM-2 Satellite) between TELKOM and Arianespace S.A., dated November 8, 2002.
 4.12*4.10*  Master Procurement Partnership Agreement between TELKOM and a consortium led by Samsung Electronics, dated December 23, 2003.
 4.13*4.11*  Amendment No. 1 to the Master Procurement Partnership Agreement between TELKOM and a consortium led by Samsung Electronics, dated December 31, 2003.
 4.14*4.12*  Service Level Agreement between TELKOM and a consortium led by Samsung Electronics, dated December 23, 2002.
 4.15*4.13*  Loan Agreement between TELKOM and The Export-Import Bank of Korea, dated August 27, 2003.

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4.16*4.14*  Master Procurement Partnership Agreement between TELKOM and a consortium led by Ericsson, dated December 23, 2002.
 4.17*4.15*  Service Level Agreement between TELKOM and a consortium led by Ericsson, dated December 23, 2002.

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 4.18*
4.16*  Master Procurement Partnership Agreement between TELKOM and PT Industri Telekomunikasi Indonesia (Persero), dated August 26, 2003, including an English translation thereof.
 4.19*4.17*  Service Level Agreement between TELKOM and PT Industri Telekomunikasi Indonesia Tbk., dated August 26, 2003.
 4.20*4.18*  Partnership Agreement for the Procurement and Construction of Backbone Transmission Network between TELKOM and a consortium led by Siemens AG, dated September 24, 2003.
 4.21*4.19**  Development Contract PSTN Excellence Regional Junction Divre-II between TELKOM and the Olex-Lucent-Brimbun consortium, dated February 8, 2002.
 4.224.20+  Co-Operation Agreement on Fixed Wireless CDMA Facilities Construction in KSO Divre VII Area between TELKOM and PT Bukaka SingTel International, dated January 14, 2003.
 4.23*4.21*  Amendment No. 1 to the Development Contract PSTN Excellence Regional Junction Divre-II between TELKOM and the Olex-Lucent-Brimbun consortium, dated August 22, 2002.
 4.24*4.22*  Amendment No. 2 to the Development Contract PSTN Excellence Regional Junction Divre-II between TELKOM and the Olex-Lucent-Brimbun consortium, dated October 25, 2002.
 4.25*4.23*  Amendment No. 3 to the Development Contract PSTN Excellence Regional Junction Divre-II between TELKOM and the Olex-Lucent-Brimbun consortium, dated December 20, 2002.
 4.26*4.24*  Amendment No. 4 to the Development Contract PSTN Excellence Regional Junction Divre-II between TELKOM and the Olex-Lucent-Brimbun consortium, dated March 20, 2003.
 4.27*4.25*  Amendment No. 5 to the Development Contract PSTN Excellence Regional Junction Divre-II between TELKOM and the Olex-Lucent-Brimbun consortium, dated June 26, 2003.
 4.284.26+  Amendment No. 6 to the Development Contract PSTN Excellence Regional Junction Divre-II between TELKOM and the Olex-Lucent-Brimbun consortium, dated October 9, 2003.
 4.294.27+  Amendment No. 7 to the Development Contract PSTN Excellence Regional Junction Divre-II between TELKOM and the Olex-Lucent-Brimbun consortium, dated December 4, 2003.
 4.30*4.28*  Master Procurement Partnership Agreement between TELKOM and Motorola, Inc., dated March 24, 2003.
 4.31*4.29*  Partnership Agreement for Procurement and Construction of Regional Metro Junction and Optic Access Network for Regional Division III between TELKOM and PT Industri Telekomunikasi Indonesia (Persero), dated November 12, 2003, including an English translation thereof.
 4.32*4.30*  Contract Agreement in connection with the Softswitch System Class-4 Procurement Program Through Buy or Return Scheme between TELKOM and the Santera-Olex consortium, dated December 18, 2003.
 4.33*4.31*  Side Letter to the Partnership Agreement for the Construction and Provision of the High Performance Backbone in Sumatera, dated June 12, 2003.
 4.34*4.32*  Amendment No. 1 to the Partnership Agreement for the Development of a PSTN Regional Junction for Regional Division V (East Java), dated September 27, 2002.

173

 
4.35*4.33*  Amendment No. 2 to the Partnership Agreement for the Development of a PSTN Regional Junction for Regional Division V (East Java), dated December 30, 2002.
 4.364.34+  Amendment No. 3 to the Partnership Agreement for the Development of a PSTN Regional Junction for Regional Division V (East Java), dated December 11, 2003.

195

 4.37*
4.35*  Supply Contract among TELKOM, NEC Corporation, the Communication Authority of Thailand and Singapore Telecommunications Limited, dated November 27, 2002.
 4.38*Thailand-Indonesia-Singapore Cable Network Construction and Maintenance Agreement among TELKOM, NEC Corporation, the Communication Authority of Thailand and Singapore Telecommunications Limited, dated November 27, 2002.
4.39*4.36*  Amended and Restated KSO Agreement between TELKOM and PT Mitra Global Telekomunikasi Indonesia, dated January 20, 2004.
 4.40*4.37*  Service Level Agreement between TELKOM and Motorola, Inc., dated March 24, 2003.
 4.41*4.38*  Indemnity Agreement between TELKOM and KAP Hans Tuanakotta Mustofa & Halim (formerly KAP Hans Tuanakotta & Mustofa), dated February 9, 2004.
 4.424.39+  Supply Contract for the Procurement and Installation of Dumai-Melaka Cable System among TELKOM, Telekom Malaysia Berhad and NEC Corporation, dated May 14, 2004.
 4.434.40+  Loan Agreement and Acknowledgement of Indebtedness between TELKOM and ABN AMRO Bank N.V. Jakarta Branch, dated January 28, 2004.
 4.444.41+  Letter Agreement between Indosat and TELKOM, dated December 11, 2003 (with regard to the merger of PT Indonesian Satellite Corporation Tbk with PT Indosat Multi Media Mobile, PT Satelit Palapa Indonesia and PT Bimagraha Telekomindo), including an English translation thereof.
 4.454.42+  Indemnity Agreement between TELKOM and KAP Hans Tuanakotta Mustofa & Halim (formerly KAP Hans Tuanakotta & Mustofa), dated June 29, 2004.
4.43Medium Term Notes Issuance Agreement dated December 13, 2004 (English summary).
4.44Indemnity Agreement between TELKOM and KAP Hans Tuanakotta Mustofa & Halim (formerly KAP Hans Tuanakotta & Mustofa), dated April 25, 2005.

 * Filed with Amendment No. 2 to the Annual Report of Form 20-F/A for the year ended December 31, 2002 filed February 9, 2004 and incorporated herein by reference.
** Filed with original Annual Report on Form 20-F for the year ended December 31, 2002 filed April 17, 2003 and incorporated herein by reference.

+ Filed with original Annual Report on Form 20-F for the year ended December 31, 2003 filed June 30, 2004 and incorporated herein by reference.
Exhibit 5 — Not applicable.

Exhibit 6 — Earnings per share is computed by dividing net income by the weighted average number of shares outstanding during the year, totaling 10,079,999,64020,159,999,280 shares in 2001, 2002, 2003 and 2003.2004. In connection with a two-for-one stock split in 2004, the prior years’ earnings per share amounts have been restated to reflect the stock split. TELKOM does not have potentially dilutive ordinary shares.

Exhibit 7 — Not applicable.

196

Exhibit 8 — List of subsidiaries as of December 31, 2003:2004:
     
Name Under Which
Jurisdiction ofJurisdiction ofSubsidiary Conducts
Name of SubsidiaryIncorporationIncorporationits Business
its Business
PT AriaWest International Indonesia AriaWest
PT Multimedia Nusantara Indonesia Metra
PT Graha Sarana Duta Indonesia GSD
PT Indonusa Telemedia Indonesia Indonusa
PT Dayamitra Telekomunikasi Indonesia Mitratel
PT Telekomunikasi Selular Indonesia Telkomsel
PT Napsindo Primatel Internasional Indonesia Napsindo
PT Infomedia Nusantara Indonesia Infomedia
PT Pro Infokom Indonesia Indonesia PII
PT Pramindo Ikat Nusantara Indonesia Pramindo

174

Exhibit 9 — Not applicable.

Exhibit 10 — Not applicable.

Exhibit 11 — Not applicable. TELKOM intends to comply with its obligation to disclose its code of ethics by posting a copy of the code of ethics on its company web site at www.telkom-indonesia.com/english/hubunganinvestor/index.asp

Exhibit 12 — See Exhibits 12.1 and 12.2 attached hereto.

Exhibit 13 — See Exhibits 13.1 and 13.2 attached hereto.

Exhibit 14 — Not applicable.

175197

SIGNATURES

      Pursuant to the requirements of Section 12 of the Securities Exchange Act of 1934, as amended, the Registrant hereby certifies that it meets all of the requirements for filing on Form 20-F and that it has duly caused this annual report to be signed on its behalf by the undersigned, there unto duly authorized, in Jakarta, on the 29th14th day of June, 2004.

July, 2005.

PERUSAHAAN PERSEROAN (PERSERO)
P.T. TELEKOMUNIKASI INDONESIA Tbk.

By:/s/ KristionoArwin Rasyid
KRISTIONOARWIN RASYID
President Director
Date: June 29, 2004July 14, 2005

PERUSAHAAN PERSEROAN (PERSERO)
P.T. TELEKOMUNIKASI INDONESIA Tbk AND SUBSIDIARIES

TABLE OF CONTENTS
      
Page
Report of Independent Registered Public Accounting Firms
  F-2 
Consolidated Financial Statements    
 
1. Consolidated Balance Sheets
  F-7F-6 
 
2. Consolidated Statements of Income
  F-10F-8 
 
3. Consolidated Statements of Changes in Stockholders’ Equity
  F-11F-9 
 
4. Consolidated Statements of Cash Flows
F-12
5.  Notes to Consolidated Financial Statements
  F-14 
5. Notes to Consolidated Financial StatementsF-16

F-1

Report of Independent Registered Public Accounting Firm

No. L.03-3737-04/ L.04 — 3737 — 05/US

The Shareholders, Board of Commissioners and Board of Directors
Perusahaan Perseroan (Persero) PT Telekomunikasi Indonesia Tbk.:

We have audited the consolidated balance sheetsheets of Perusahaan Perseroan (Persero) PT Telekomunikasi Indonesia Tbk. and subsidiaries (the “Company”) as of December 31, 2003 and 2004, and the related consolidated statements of income, changes in stockholders’ equity, and cash flows for the yearyears then ended. These consolidated financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these consolidated financial statements based on our audit.audits. We did not audit the financial statements of PT Telekomunikasi Selular (“Telkomsel”), a 65% owned65 percent-owned subsidiary, as of and for the year ended December 31, 2003, which financial statements reflect total assets and total revenues constituting 31 percent and total revenues constituting 40 percent, respectively, of the related consolidated totals. Those financial statements, which were prepared on the basis of accounting principles generally accepted in Indonesia, were audited by other auditors whose report has been furnished to us, and our opinion, insofar as it relates to the 2003 amounts included for Telkomsel, including information relating to the nature and effect of differences between accounting principles generally accepted in Indonesia and accounting principles generally accepted in the United States of America, is based solely on the report of the other auditors. The consolidated financial statements of the Company for the year ended December 31, 2002, and 2001 were audited by other auditors whose reportsreport thereon dated January 29, 2004, and February 28, 2002, except with respect to certain items that were subsequently restated as to which the date is January 29, 2004, respectively, expressed an unqualified opinionsopinion on those statements.

We conducted our auditaudits in accordance with auditing standards generally accepted in Indonesia and the standards of the Public Company Accounting Oversight Board (United States). and auditing standards generally accepted in Indonesia. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our auditaudits and the report of other auditors provide a reasonable basis for our opinion.

In our opinion, based on our auditaudits and the report of other auditors, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Perusahaan Perseroan (Persero) PT Telekomunikasi Indonesia Tbk. and subsidiaries as of December 31, 2003 and 2004, and the results of their operations and their cash flows for the yearyears then ended in conformity with accounting principles generally accepted in Indonesia.

Accounting principles generally accepted in Indonesia vary in certain significant respects from accounting principles generally accepted in the United States of America. Information relating to the nature and effect of such differences is presented in Note 5856 to the consolidated financial statements.

F-2

The accompanying consolidated financial statements as of and for the year ended December 31, 20032004, have been translated into United States Dollars solely for the convenience of the readers.reader. We have audited the translation and, in our opinion, the consolidated financial statements expressed in Indonesian Rupiah have been translated into dollars on the basis as set forth in Note 3 to the consolidated financial statements.

Kantor Akuntan Publik Siddharta Siddharta & Widjaja
Member Firm of KPMG International
License No.: KEP-232/KM.6/2002

/s/ Drs Istata Taswin Siddharta
Drs. Istata Taswin Siddharta
Public Accountant License No. 98.1.0192

Jakarta-Indonesia, JuneApril 29, 2004.

F-2

(HARYANTO SAHARI & REKAN LETTERHEAD)

INDEPENDENT AUDITOR’S REPORT

TO THE STOCKHOLDERS, BOARD OF COMMISSIONERS AND DIRECTORS OF

PERUSAHAAN PERSEROAN (PERSERO) PT TELEKOMUNIKASI INDONESIA TBK.

     We have audited the accompanying consolidated balance sheet of Perusahaan Perseroan (Persero) PT Telekomunikasi Indonesia Tbk. and its subsidiaries (the “Company”) as of December 31, 2002, and the related consolidated statements of income, changes in stockholders’ equity and cash flows2005, except for the year then ended. These consolidated financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these consolidated financial statements based on our audit. The consolidated financial statements of the Company as of December 31, 2001 were audited by other independent auditors whose report that was dated February 28, 2002 except with respect to certain items that were subsequently restated,Note 56, as to which the date is January 29, 2004, expressed an unqualified opinion on those statements.

     We conducted our audit in accordance with auditing standards established by the Indonesian Institute of Accountants and the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audit provides a reasonable basis for our opinion.

     In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the consolidated financial position of the Company as of December 31, 2002, and the consolidated results of its operations and its consolidated cash flows for the year then ended in conformity with accounting principles generally accepted in the Indonesia.

     Accounting principles generally accepted in Indonesia vary in certain significant respects from accounting principles generally accepted in the United States of America. Information relating to the nature and effect of such differences is presented in Note 58 to the consolidated financial statements.

Jakarta, January 29, 2004

(-s- DRS. IRHOAN TANUDIREDJA BAP)

DRS. IRHOAN TANUDIREDJA BAP

License of Public Accountant No. 99.1.0683July 8, 2005.

F-3

(HARYANTO SAHARI & REKAN LETTERHEAD)(HARYANTO SAHARI & REKAN LETTERHEAD)

REPORT OF INDEPENDENT AUDITORS’ REPORTREGISTERED PUBLIC ACCOUNTING FIRM

TO THE STOCKHOLDERS OF
PT TELEKOMUNIKASI SELULAR AND SUBSIDIARY

      We have audited the accompanying consolidated balance sheets of PT Telekomunikasi Selular (the “Company”) and its subsidiary (collectively the “Group”) as at December 31, 2003 and the related consolidated statements of income, changes in stockholders’ equity and cash flows for the year then ended. These consolidated financial statements are the responsibility of the Group’s management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits.

      We conducted our audits in accordance with auditing standards established by the Indonesian Institute of Accountants and the standards of the Public Company Accounting Oversight Board (United States). These standards require that we plan and perform the audit to obtain reasonable assurance that the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by the management, as well as evaluating the overall presentation of the financial statements. We believe that our audits provide a reasonable basis for our opinion.

      In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the consolidated financial position of the Group as at December 31, 2003 and the consolidated results of their operations, and their consolidated cash flows for the year then ended, in conformity with generally accepted accounting principles in Indonesia.

      Accounting principles generally accepted in Indonesia vary in certain significant respects from accounting principles generally accepted in the United States of America. Information relating to the nature and effect of such differences is presented in Notes 34 and 35 to the consolidated financial statements.

JAKARTA
April 8, 2004

(-s- DRS. IRHOAN TANUDIREDJA BAP)

Drs. Irhoan Tanudiredja BAP
License of Public Accountant No. 99.1.0683

F-4

(DELOITTE LETTERHEAD)(HARYANTO SAHARI & REKAN LETTERHEAD)

REPORT OF INDEPENDENT AUDITORS’ REPORTREGISTERED PUBLIC ACCOUNTING FIRM

No. 280202 TI LSW SAR4 — 20F

The Stockholders, Boards of Commissioners and Directors

Perusahaan Perseroan (Persero) P.T. Telekomunikasi Indonesia TbkTO THE STOCKHOLDERS, BOARD OF COMMISSIONERS AND DIRECTORS OF

PERUSAHAAN PERSEROAN (PERSERO) PT TELEKOMUNIKASI INDONESIA TBK.
      We have audited the accompanying consolidated statements of income, changes in stockholders’ equity and cash flows of Perusahaan Perseroan (Persero) PT Telekomunikasi Indonesia Tbk. and its subsidiaries (the “Company”) for the year ended December 31, 2001 of Perusahaan Perseroan (Persero) P.T. Telekomunikasi Indonesia Tbk and its subsidiaries.2002. These consolidated financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these consolidated financial statements based on our audit. The consolidated financial statements give retroactive effect toof the Company’s acquisitionCompany as of a controlling interest in PT Telekomunikasi Selular (Telkomsel), in a transaction between entities under common control that has been accounted for in a manner similar to a pooling of interests as described in Note 4 to the consolidated financial statements. We did not audit the financial statements of Telkomsel for the year ended December 31, 2001 which statements reflect total revenues constituting 27%, of consolidated total revenues for the year ended December 31, 2001. Those statements were audited by other independent auditors who have ceased operations, and whose report has been furnisheddated February 28, 2002, except for Note 60 of those consolidated financial statements as to us, and ourwhich the date is January 29, 2004, expressed an unqualified opinion insofar as it relates to the amounts included for Telkomsel, is based solely on the report of such other auditors who have ceased operations.

those statements.

      We conducted our auditsaudit in accordance with auditing standards established by the Indonesian Institute of Accountants and the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audit and the report of the other auditors provideprovides a reasonable basis for our opinion.

      In our opinion, based on our audit and the report of the other auditors who have ceased operations, the 2001 consolidated financial statements of income, changes in equity, and cash flowsreferred to above present fairly, in all material respects, the consolidated results of the operations changes in equity, and the consolidated cash flows of Perusahaan Perseroan (Persero) P.T. Telekomunikasi Indonesia Tbk and its subsidiariesthe Company for the year ended December 31, 20012002 in conformity with accounting principles generally accepted in Indonesia.

(DELOITTE LETTERHEAD FOOTER)

F-5

     Generally

      Accounting principles generally accepted accounting principles in Indonesia vary in certain significant respects from accounting principles generally accepted in the United States of America (U.S. GAAP). A descriptionAmerica. Information relating to the nature and effect of the significantsuch differences between those two generally accepted accounting principles and approximate effects of those differences on the net income for the year ended December 31, 2001 and equity as of December 31, 2001 are set forthis presented in Note 5856 to the consolidated financial statements.

HANS TUANAKOTTA MUSTOFA & HALIM

-s- HANS TUANAKOTTA MUSTOFA AND HALIM

Ludovicus Sensi W, SE, MM,Jakarta, January 29, 2004, except as to the stock split described in Note 1b which is as of July 30, 2004.
Drs. Irhoan Tanudiredja BAP
License of Public Accountant No. 99.1.070599.1.0683

February 28, 2002, except with respect to certain items that were subsequently restated, as to which the date is January 29, 2004.

F-6F-5

PERUSAHAAN PERSEROAN (PERSERO)
P.T. TELEKOMUNIKASI INDONESIA Tbk AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS
AS OF DECEMBER 31, 20022003 AND 20032004
(Figures in tables are presented in millions of Rupiah and thousands of United States Dollars)

ASSETS
                  
                  
Notes20022003  Notes 2003 2004
       
RpRpUS$ (Note 3)    Rp Rp US$ (Note 3)
CURRENT ASSETSCURRENT ASSETS CURRENT ASSETS             
Cash and cash equivalents 2c,2f,6,49 5,699,070 5,094,472 603,610 Cash and cash equivalents  2c,2f,5,47  5,094,472  4,856,123  522,726 
Temporary investments 2c,2g,7,49 573,000 4,006 475 Temporary investments  2c,2g,47  4,006  19,949  2,147 
Trade accounts receivable 2c,2h,8,49 Trade accounts receivable  2c,2h,6,47          
 Related parties — net of allowance for doubtful accounts of Rp95,676 million in 2002, and Rp110,932 million in 2003 886,763 410,923 48,687  Related parties — net of allowance for doubtful accounts of Rp110,932 million in 2003, and Rp64,928 million in 2004     410,923  419,104  45,113 
 Third parties — net of allowance for doubtful accounts of Rp407,313 million in 2002, and Rp332,960 million in 2003 1,919,904 2,422,005 286,967  Third parties — net of allowance for doubtful accounts of Rp332,960 million in 2003, and Rp457,138 million in 2004     2,422,005  2,899,999  312,164 
Other accounts receivable — net of allowance for doubtful accounts of Rp24,253 million in 2002, and Rp45,544 million in 2003 2c,2h,49 198,493 170,121 20,157 Other accounts receivable — net of allowance for doubtful accounts of Rp45,544 million in 2003, and Rp9,236 million in 2004  2c,2h,47  170,121  55,769  6,003 
Inventories — net of allowance for obsolescence of Rp53,795 million in 2002, and Rp40,489 million in 2003 2i,9 139,682 154,003 18,247 Inventories — net of allowance for obsolescence of Rp40,489 million in 2003, and Rp54,733 million in 2004  2i,7  154,003  203,085  21,861 
Prepaid expenses 2c,2j,10,49 353,656 717,917 85,061 Prepaid expenses  2c,2j,8,47  429,695  628,069  67,607 
Prepaid taxes 43a 84,674 212,282 25,152 Prepaid taxes  41a  212,282  77,228  8,313 
Other current assets 2c,11,49 691,788 45,083 5,342 Other current assets  2c,9,47  45,083  44,608  4,802 
 
 
 
           
 Total Current Assets 10,547,030 9,230,812 1,093,698  Total Current Assets     8,942,590  9,203,934  990,736 
 
 
 
           
NON-CURRENT ASSETSNON-CURRENT ASSETS NON-CURRENT ASSETS             
Long-term investments 2g,12 183,147 64,648 7,660 Long-term investments — net  2g,10  64,648  82,613  8,893 
Property, plant and equipment — net of accumulated depreciation of Rp18,886,345 million in 2002, and Rp23,581,560 million in 2003 2k,2l,13 28,448,606 34,775,140 4,120,277 Property, plant and equipment — net of accumulated depreciation of Rp23,581,559 million in 2003, and Rp29,297,163 million in 2004  2k,2l,11  34,775,140  39,572,099  4,259,645 
Property, plant and equipment under revenue- sharing arrangements — net of accumulated depreciation of Rp842,964 million in 2002, and Rp791,645 million in 2003 2m,15,52 377,622 305,041 36,142 Property, plant and equipment under revenue- sharing arrangements — net of accumulated depreciation of Rp791,645 million in 2003, and Rp694,570 million in 2004  2m,12,50  305,041  499,127  53,727 
Advances and other non-current assets 2c,49 306,363 175,954 20,847 Prepaid pension benefit costs  2q,44  288,222  91,262  9,824 
Intangible assets — net of accumulated amortization of Rp187,990 million in 2002, and Rp730,659 million in 2003 1c,2d,16 3,898,817 5,144,050 609,485 Advances and other non-current assets  2c,13,47  175,954  1,372,351  147,723 
Advance payments for investments in shares of stock 5e 247,583 65,458 7,756 Goodwill and other intangible assets — net of accumulated amortization of Rp973,704 million in 2003, and Rp1,846,034 million in 2004  1c,2d,14  5,144,050  5,411,425  582,500 
Escrow accounts 17 297,928 522,146 61,866 Advance payments for investments in shares of stock  4f  65,458  —  — 
 
 
 
 Escrow accounts  15  522,146  36,281  3,905 
 Total Non-current Assets 33,760,066 41,052,437 4,864,033           
 
 
 
  Total Non-current Assets     41,340,659  47,065,158  5,066,217 
         
TOTAL ASSETSTOTAL ASSETS 44,307,096 50,283,249 5,957,731 TOTAL ASSETS     50,283,249  56,269,092  6,056,953 
 
 
 
           

See accompanying notes to consolidated financial statements, which form an integral part of the consolidated financial statements.

F-7F-6

PERUSAHAAN PERSEROAN (PERSERO)
P.T. TELEKOMUNIKASI INDONESIA Tbk AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS — (Continued)
AS OF DECEMBER 31, 20022003 AND 20032004
(Figures in tables are presented in millions of Rupiah and thousands of United States Dollars)

LIABILITIES AND STOCKHOLDERS’ EQUITY
                
                
Notes20022003  Notes 2003 2004
       
RpRpUS$ (Note 3)    Rp Rp US$ (Note 3)
CURRENT LIABILITIESCURRENT LIABILITIES CURRENT LIABILITIES             
Trade accounts payable 2c,18,49 Trade accounts payable  2c,16,47          
 Related parties 790,227 657,478 77,900  Related parties     657,478  643,094  69,224 
 Third parties 2,272,624 3,109,854 368,466  Third parties     3,109,854  3,611,456  388,747 
Other accounts payable 215,775 188,112 22,288 Other accounts payable     187,938  5,073  546 
Taxes payable 2s,43b 1,109,632 1,513,038 179,269 Taxes payable  2s,41b  1,513,038  1,592,479  171,419 
Dividends payable 1,494 3,779 448 Dividends payable     3,779  62,689  6,748 
Accrued expenses 2c,19,49 1,949,914 1,215,872 144,061 Accrued expenses  2c,17,47  1,185,210  1,051,366  113,172 
Unearned income 20 445,561 763,211 90,428 Unearned income  18  763,211  1,030,000  110,872 
Advances from customers and suppliers 21 293,522 268,148 31,771 Advances from customers and suppliers  19  268,148  278,430  29,971 
Short-term bank loans 2c,22,49 39,205 37,642 4,460 Short-term bank loans  2c,20,47  37,642  1,101,633  118,583 
Current maturities of long-term liabilities 2c,23,49 2,590,227 3,443,516 407,999 Current maturities of long-term liabilities  2c,21,47  3,443,516  2,300,822  247,667 
 
 
 
           
 Total Current Liabilities 9,708,181 11,200,650 1,327,090  Total Current Liabilities     11,169,814  11,677,042  1,256,949 
 
 
 
           
NON-CURRENT LIABILITIESNON-CURRENT LIABILITIES NON-CURRENT LIABILITIES             
Deferred tax liabilities — net 2s,43e 3,083,166 3,546,770 420,234 Deferred tax liabilities — net  2s,41e  3,546,770  3,352,171  360,836 
Unearned income on revenue-sharing arrangements 2m,15,52 142,797 111,732 13,238 Unearned income on revenue-sharing arrangements  2m,12,50  111,732  360,332  38,787 
Unearned initial investor payments under joint operation schemes 2n,36,51 66,117 31,584 3,742 Unearned initial investor payments under joint operation schemes  2n,49  31,584  20,453  2,202 
Provision for long service awards 2r,47 489,231 473,614 56,115 Provision for long service awards  2c,2r,45,47  491,037  572,303  61,604 
Provision for post-retirement health care benefits 2r,48 1,602,494 2,063,350 244,474 Provision for post-retirement benefits  2c,2r,46,47  2,063,524  1,841,146  198,186 
Long-term liabilities — net of current maturities Accrued pension and other post-retirement benefits costs  2q,44b,44d  13,239  32,007  3,445 
 Two-step loans — related party 2c,24,49 7,734,033 6,858,910 812,667 Long-term liabilities — net of current maturities             
 Guaranteed notes and bonds 25 2,313,510 2,102,502 249,112  Two-step loans — related party  2c,22,47  6,858,910  5,363,283  577,318 
 Bank loans 2c,26,49 85,355 2,115,797 250,687  Notes and bonds  23  2,102,502  2,331,465  250,965 
 Liabilities for acquisitions of subsidiaries 27 1,618,979 746,974 88,504  Bank loans  2c,24,47  2,115,797  1,775,799  191,152 
 Suppliers’ credit loans 28 175,625 671 80  Liabilities of business acquisitions  25  746,974  3,743,317  402,940 
 Bridging loan 29 53,405 510 60  Suppliers’ credit loans  26  671  —  — 
 Other long-term debt 9,275 9,153 1,084  Bridging loan  27  510  —  — 
 Project cost payables 15,512 — —  Other long-term debt     9,153  —  — 
 
 
 
           
 Total Non-current Liabilities 17,389,499 18,061,567 2,139,997  Total Non-current Liabilities     18,092,403  19,392,276  2,087,435 
 
 
 
           
MINORITY INTERESTMINORITY INTEREST 30 2,595,799 3,708,155 439,355 MINORITY INTEREST  28  3,708,155  4,938,432  531,586 
 
 
 
           
STOCKHOLDERS’ EQUITYSTOCKHOLDERS’ EQUITY             
Capital stock1) — Rp250 par value per Series A Dwiwarna share and Series B share
             
 Authorized — one Series A Dwiwarna share and 79,999,999,999 Series B shares             
 Issued and fully paid — one Series A Dwiwarna share and 20,159,999,279 Series B shares  1b,29  5,040,000  5,040,000  542,519 
Additional paid-in capital  30  1,073,333  1,073,333  115,536 
Difference in value of restructuring transactions between entities under common control  31  (7,288,271)  (7,288,271)  (784,529)
Difference due to change of equity in associated companies  2g  385,595  385,595  41,506 
Unrealized holding gain on available-for-sale securities  2g  —  884  95 
Translation adjustment  2g  224,232  229,595  24,714 
Retained earnings             
 Appropriated     1,559,068  1,680,813  180,927 
 Unappropriated     16,318,920  19,139,393  2,060,215 
         
Total Stockholders’ Equity     17,312,877  20,261,342  2,180,983 
         
TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITYTOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY     50,283,249  56,269,092  6,056,953 
         
 
1) The prior year’s authorized, issued and fully paid capital stock and par value amounts have been restated to reflect a two-for-one stock split as resolved in the Annual General Meeting of Stockholders on July 30, 2004.
See accompanying notes to consolidated financial statements, which form an integral part of the consolidated financial statements.

F-7

PERUSAHAAN PERSEROAN (PERSERO)
P.T. TELEKOMUNIKASI INDONESIA Tbk AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
FOR THE YEARS ENDED DECEMBER 31, 2002, 2003 AND 2004
(Figures in tables are presented in millions of Rupiah and thousands of United States Dollars,
except per share and per ADS data)
                       
  Notes 2002 2003 2004
         
    Rp Rp Rp US$ (Note 3)
OPERATING REVENUES                    
 Telephone  2p,32                 
  Fixed lines      7,264,099   8,896,865   10,645,021   1,145,858 
  Cellular      6,226,801   8,458,830   10,421,298   1,121,776 
 Interconnection  2p,33,47   2,831,334   4,162,148   6,187,981   666,091 
 Joint operation schemes  2n,34,49   2,128,145   1,486,307   656,614   70,680 
 Data and Internet  35   1,551,626   3,108,562   4,808,742   517,626 
 Network  36   316,098   517,865   654,309   70,432 
 Revenue-sharing arrangements  2m,37,50   263,754   258,464   280,576   30,202 
 Other telecommunications services      220,961   226,882   293,225   31,564 
                
 Total Operating Revenues      20,802,818   27,115,923   33,947,766   3,654,229 
                
OPERATING EXPENSES                    
 Personnel  38   4,387,568   4,440,096   5,570,778   599,653 
 Depreciation  2k,2l,2m,11,12   3,473,370   4,779,520   6,438,557   693,063 
 Operations, maintenance and telecommunication services  39   2,290,219   3,338,693   4,529,587   487,577 
 General and administrative  40   1,146,294   2,078,777   2,599,847   279,854 
 Marketing      375,152   502,898   881,930   94,933 
                
 Total Operating Expenses      11,672,603   15,139,984   20,020,699   2,155,080 
                
OPERATING INCOME      9,130,215   11,975,939   13,927,067   1,499,149 
                
OTHER INCOME (CHARGES)                    
 Gain on sale of long-term investment in Telkomsel      3,196,380   —   —   — 
 Interest income  47   479,802   366,024   317,941   34,224 
 Interest expense  47   (1,582,750)  (1,383,446)  (1,270,136)  (136,721)
 Gain (loss) on foreign exchange — net  2e   556,613   126,121   (1,220,760)  (131,406)
 Equity in net income of associated companies  2g,10   4,598   2,819   3,420   368 
 Others — net      (35,956)  364,338   331,050   35,635 
                
 Other income (charges) — net      2,618,687   (524,144)  (1,838,485)  (197,900)
                
INCOME BEFORE TAX      11,748,902   11,451,795   12,088,582   1,301,249 
TAX EXPENSE  2s,41c                 
 Current tax      (2,747,762)  (3,791,280)  (4,267,111)  (459,323)
 Deferred tax      (151,209)  (69,810)  264,039   28,422 
                
       (2,898,971)  (3,861,090)  (4,003,072)  (430,901)
                
INCOME BEFORE MINORITY INTEREST IN NET INCOME OF SUBSIDIARIES      8,849,931   7,590,705   8,085,510   870,348 
MINORITY INTEREST IN NET INCOME OF SUBSIDIARIES, net  28   (810,222)  (1,503,478)  (1,956,301)  (210,581)
                
NET INCOME      8,039,709   6,087,227   6,129,209   659,767 
                
BASIC EARNINGS PER SHARE1)
  2t,42                 
 Net income per share      398.80   301.95   304.03   0.03 
                
 Net income per ADS (40 Series B shares per ADS)      15,951.80   12,077.83   12,161.13   1.20 
                
1) The prior years’ basic earnings per share have been restated to reflect a two-for-one stock split as resolved in the Annual General Meeting of Stockholders on July 30, 2004.
See accompanying notes to consolidated financial statements, which form an integral part of the consolidated financial statements.

F-8

PERUSAHAAN PERSEROAN (PERSERO)
P.T. TELEKOMUNIKASI INDONESIA Tbk AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS — (Continued)STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY
FOR THE YEARS ENDED DECEMBER 31, 2002, 2003 AND 20032004
(Figures in tables are presented in millions of Rupiah and thousands of United States Dollars)

LIABILITIES AND STOCKHOLDERS’ EQUITY

                    
Notes20022003
RpRpUS$ (Note 3)
STOCKHOLDERS’ EQUITY                
Capital stock — Rp 500 par value per Series A                
  Dwiwarna share and Series B share                
  Authorized — one Series A Dwiwarna share and 39,999,999,999 Series B shares                
  Issued and fully paid — one Series A Dwiwarna share and 10,079,999,639 Series B shares  31   5,040,000   5,040,000   597,156 
 Additional paid-in capital  32   1,073,333   1,073,333   127,172 
 Difference in value of restructuring transactions between entities under common control  33   (7,288,271)  (7,288,271)  (863,539)
 Difference due to change of equity in associated companies  2g   424,020   385,595   45,687 
 Translation adjustment  2e   235,665   224,232   26,568 
 Retained earnings                
  Appropriated      745,404   1,559,068   184,724 
  Unappropriated      14,383,466   16,318,920   1,933,521 
       
   
   
 
   Total Stockholders’ Equity      14,613,617   17,312,877   2,051,289 
       
   
   
 
TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY      44,307,096   50,283,249   5,957,731 
       
   
   
 
                                          
        Difference in            
        Value of            
        Restructuring Difference Due   Unrealized      
        Transactions to Change   Holding    
      Additional Between of Equity   Loss on Retained Earnings Total
    Capital Paid-In Entities Under in Associated Translation Available-for-   Stockholders’
Description Notes Stock Capital Common Control Companies Adjustment Sale Securities Appropriated Unappropriated Equity
                     
    Rp Rp Rp Rp Rp Rp Rp Rp Rp
Balance as of January 1, 2002
      5,040,000   1,073,333   (6,992,233)  489,178   256,674   (207)  320,392   8,893,824   9,080,961 
Foreign currency translation of CSM  2g   —   —   —   —   (21,009)  —   —   —   (21,009)
Sale of investment in mutual fund Reksa Dana Seruni      —   —   —   —   —   207   —   —   207 
Acquisition of Pramindo  4b   —   —   (296,038)  —   —   —   —   —   (296,038)
Realized difference due to change of equity in associated companies as the result of sale of 12.72% of Telkomsel  1c   —   —   —   (65,158)  —   —   —   —   (65,158)
Resolved during the Annual General Meeting of the Stockholders on June 21, 2002:                                        
 Declaration of cash dividends  43   —   —   —   —   —   —   —   (2,125,055)  (2,125,055)
 Appropriation for general reserve  43   —   —   —   —   —   —   425,012   (425,012)  — 
Net income for the year      —   —   —   —   —   —   —   8,039,709   8,039,709 
                               
Balance as of December 31, 2002
      5,040,000   1,073,333   (7,288,271)  424,020   235,665   —   745,404   14,383,466   14,613,617 
                               
See accompanying notes to consolidated financial statements, which form an integral part of the consolidated financial statements.

F-9

PERUSAHAAN PERSEROAN (PERSERO)
P.T. TELEKOMUNIKASI INDONESIA Tbk AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF INCOMECHANGES IN STOCKHOLDERS’ EQUITY (Continued)
FOR THE YEARS ENDED DECEMBER 31, 2001, 2002, 2003 AND 20032004
(Figures in tables are presented in millions of Rupiah and thousands of United States Dollars,
except per share and per ADS data)Dollars)
                     
Notes200120022003
RpRpRpUS$ (Note 3)
OPERATING REVENUES                  
 Telephone 2p,34                
  Fixed lines    6,415,156   7,264,099   8,896,865   1,054,131 
  Cellular    4,707,998   6,226,801   8,458,830   1,002,231 
 Interconnection 2p,35,49  1,423,686   2,831,334   4,162,148   493,145 
 Joint operation schemes 2n,36,49,51  2,219,586   2,128,145   1,486,307   176,103 
 Data and Internet 37  673,184   1,551,626   3,108,562   368,313 
 Network 38  414,929   316,098   517,865   61,358 
 Revenue-sharing arrangements 2m,39,52  264,253   263,754   258,464   30,624 
 Other telecommunications services    165,015   220,961   226,882   26,882 
     
   
   
   
 
 Total Operating Revenues    16,283,807   20,802,818   27,115,923   3,212,787 
     
   
   
   
 
OPERATING EXPENSES                  
 Personnel 40  2,281,245   4,387,568   4,440,096   526,078 
 Depreciation 2k,2l,2m,13,15  2,869,772   3,473,370   4,779,520   566,294 
 Operations, maintenance and telecommunication services 41  2,149,921   2,290,219   3,338,693   395,580 
 General and administrative 42  1,343,456   1,146,294   2,078,777   246,300 
 Marketing    220,006   375,152   502,898   59,585 
     
   
   
   
 
 Total Operating Expenses    8,864,400   11,672,603   15,139,984   1,793,837 
     
   
   
   
 
OPERATING INCOME    7,419,407   9,130,215   11,975,939   1,418,950 
     
   
   
   
 
OTHER INCOME (EXPENSE)                  
 Gain on sale of long-term investment in Telkomsel 1c  —   3,196,380   —   — 
 Interest income 49  571,586   479,802   366,024   43,367 
 Interest expense 49  (1,329,642)  (1,582,750)  (1,383,446)  (163,915)
 Gain (loss) on foreign exchange — net 2e  (378,720)  556,613   126,121   14,943 
 Equity in net income (loss) of associated companies 2g,12  (85,686)  4,598   2,819   334 
 Others — net    352,946   (35,956)  364,338   43,169 
     
   
   
   
 
 Other income (expense) — net    (869,516)  2,618,687   (524,144)  (62,102)
     
   
   
   
 
INCOME BEFORE TAX    6,549,891   11,748,902   11,451,795   1,356,848 
TAX EXPENSE 2s,43c                
 Current tax    (2,177,366)  (2,747,762)  (3,791,280)  (449,203)
 Deferred tax    170,471   (151,209)  (69,810)  (8,271)
     
   
   
   
 
     (2,006,895)  (2,898,971)  (3,861,090)  (457,474)
     
   
   
   
 
INCOME BEFORE MINORITY INTEREST IN NET INCOME OF SUBSIDIARIES    4,542,996   8,849,931   7,590,705   899,374 
MINORITY INTEREST IN NET INCOME OF SUBSIDIARIES, net 30  (474,605)  (810,222)  (1,503,478)  (178,137)
     
   
   
   
 
NET INCOME    4,068,391   8,039,709   6,087,227   721,237 
     
   
   
   
 
BASIC EARNINGS PER SHARE 2t,44                
 Net income per share    403.61   797.59   603.89   0.07 
     
   
   
   
 
 Net income per ADS                  
 (20 Series B shares per ADS)    8,072.20   15,951.80   12,077.83   1.43 
     
   
   
   
 
                                      
        Difference in          
        Value of          
        Restructuring Difference        
        Transactions Due to Change      
      Additional Between Entities of Equity in   Retained Earnings Total
    Capital Paid-In Under Common Associated Translation   Stockholders’
Description Notes Stock Capital Control Companies Adjustment Appropriated Unappropriated Equity
                   
    Rp Rp Rp Rp Rp Rp Rp Rp
Balance as of January 1, 2003
      5,040,000   1,073,333   (7,288,271)  424,020   235,665   745,404   14,383,466   14,613,617 
Realized difference due to change of equity in associated companies as the result of disposal of investment in Metrosel  10   —   —   —   (38,425)  —   —   —   (38,425)
Foreign currency translation of CSM  2g,10   —   —   —   —   (11,433)  —   —   (11,433)
Resolved during the Annual General Meeting of the Stockholders on May 9, 2003                                    
 Declaration of cash dividends  43   —   —   —   —   —   —   (3,338,109)  (3,338,109)
 Appropriation for general reserve  43   —   —   —   —   —   813,664   (813,664)  — 
Net income for the year      —   —   —   —   —   —   6,087,227   6,087,227 
                            
Balance as of December 31, 2003
      5,040,000   1,073,333   (7,288,271)  385,595   224,232   1,559,068   16,318,920   17,312,877 
                            
See accompanying notes to consolidated financial statements, which form an integral part of the consolidated financial statements.

F-10

PERUSAHAAN PERSEROAN (PERSERO)
P.T. TELEKOMUNIKASI INDONESIA Tbk AND SUBSIDIARIES
CONSOLIDATED STATEMENTSTATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY (Continued)
FOR THE YEARS ENDED DECEMBER 31, 2001, 2002, 2003 AND 20032004
(Figures in tables are presented in millions of Rupiah and thousands of United States Dollars)
                                  
Difference in
Value ofEquity in
RestructuringDifference DueUnrealizedSubsidiary
Transactionsto ChangeLoss onResulting from
AdditionalBetweenof EquityDecline inthe Recast of
CapitalPaid-InEntities Underin AssociatedTranslationValue ofFinancial
DescriptionNotesStockCapitalCommon ControlCompaniesAdjustmentSecuritiesStatements
RpRpRpRpRpRpRp
Balance as of January 1, 2001      5,040,000   1,073,333   —   609,139   253,020   (165)  1,221,533 
Restructuring transactions between entities under common control  4   —   —   (6,992,233)  —   —   —   (1,221,533)
Reversal of difference due to change of equity in Satelindo      —   —   —   (290,442)  —   —   — 
Difference due to change of equity in Telkomsel      —   —   —   170,481   —   —   — 
Unrealized loss on decline in value of securities      —   —   —   —   —   (42)  — 
Foreign currency translation of CSM  2g,12   —   —   —   —   3,654   —   — 
Resolved during the Annual General Meeting of the Stockholders on May 10, 2001:                                
 Declaration of cash dividend  45   —   —   —   —   —   —   — 
 Appropriation for general reserve  45   —   —   —   —   —   —   — 
Net income for the year      —   —   —   —   —   —   — 
       
   
   
   
   
   
   
 
Balance as of December 31, 2001      5,040,000   1,073,333   (6,992,233)  489,178   256,674   (207)  — 
       
   
   
   
   
   
   
 

[Additional columns below]

[Continued from above table, first column(s) repeated]
              
Retained earningsTotal
Stockholders’
DescriptionAppropriatedUnappropriatedEquity
RpRpRp
Balance as of January 1, 2001  193,442   6,082,762   14,473,064 
Restructuring transactions between entities under common control  —   (241,725)  (8,455,491)
Reversal of difference due to change of equity in Satelindo  —   —   (290,442)
Difference due to change of equity in Telkomsel  —   —   170,481 
Unrealized loss on decline in value of securities  —   —   (42)
Foreign currency translation of CSM  —   —   3,654 
Resolved during the Annual General Meeting of the Stockholders on May 10, 2001:            
 Declaration of cash dividend  —   (888,654)  (888,654)
 Appropriation for general reserve  126,950   (126,950)  — 
Net income for the year  —   4,068,391   4,068,391 
   
   
   
 
Balance as of December 31, 2001  320,392   8,893,824   9,080,961 
   
   
   
 

                                          
        Difference in            
        Value of Difference Unrealized        
        Restructuring Due to Holding        
        Transactions Change of Gain on      
      Additional Between Equity in Available-for-   Retained Earnings Total
    Capital Paid-In Entities Under Associated Sale Translation   Stockholders’
Description Notes Stock Capital Common Control Companies Securities Adjustment Appropriated Unappropriated Equity
                     
    Rp Rp Rp Rp Rp Rp Rp Rp Rp
Balance as of January 1, 2004
      5,040,000   1,073,333   (7,288,271)  385,595   —   224,232   1,559,068   16,318,920   17,312,877 
Unrealized holding gain on available- for-sale securities  2g   —   —   —   —   884   —   —   —   884 
Foreign currency translation of CSM  2g,10   —   —   —   —   —   5,363   —   —   5,363 
Resolved during the Annual General Meeting of the Stockholders on July 30, 2004                                        
 Declaration of cash dividends  43   —   —   —   —   —   —   —   (3,043,614)  (3,043,614)
 Appropriation for general reserve  43   —   —   —   —   —   —   121,745   (121,745)  — 
Declaration of interim cash dividends  43   —   —   —   —   —   —   —   (143,377)  (143,377)
Net income for the year      —   —   —   —   —   —   —   6,129,209   6,129,209 
                               
Balance as of December 31, 2004
      5,040,000   1,073,333   (7,288,271)  385,595   884   229,595   1,680,813   19,139,393   20,261,342 
                               
See accompanying notes to consolidated financial statements, which form an integral part of the consolidated financial statementsstatements.

F-11

PERUSAHAAN PERSEROAN (PERSERO)
P.T. TELEKOMUNIKASI INDONESIA Tbk AND SUBSIDIARIES
CONSOLIDATED STATEMENTSTATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY (continued)CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 2001, 2002, 2003 AND 20032004
(Figures in tables are presented in millions of Rupiah and thousands of United States Dollars)
                              
Difference in
Value of
RestructuringDifference DueUnrealized
Transactionsto ChangeLoss on
AdditionalBetween Entitiesof EquityDecline in
CapitalPaid-InUnder Commonin AssociatedTranslationValue of
DescriptionNotesStockCapitalControlCompaniesAdjustmentSecurities
RpRpRpRpRpRp
Balance as of January 1, 2002      5,040,000   1,073,333   (6,992,233)  489,178   256,674   (207)
Foreign currency translation of CSM  2g,12   —   —   —   —   (21,009)  — 
Sale of investment in mutual fund Reksa Dana Seruni      —   —   —   —   —   207 
Acquisition of Pramindo  5b   —   —   (296,038)  —   —   — 
Realized difference due to change of equity in associated companies as the result of sale of 12.72% of Telkomsel  1c   —   —   —   (65,158)  —   — 
Resolved during the Annual General Meeting of the Stockholders on June 21, 2002:                            
 Declaration of cash dividend  45   —   —   —   —   —   — 
 Appropriation for general reserve  45   —   —   —   —   —   — 
Net income for the year      —   —   —   —   —   — 
       
   
   
   
   
   
 
Balance as of December 31, 2002      5,040,000   1,073,333   (7,288,271)  424,020   235,665   — 
       
   
   
   
   
   
 
                     
  2002 2003 2004
       
  Rp Rp Rp US$ (Note 3)
CASH FLOWS FROM OPERATING ACTIVITIES                
 Cash receipts from operating revenues                
  Telephone                
   Fixed lines  7,230,394   8,201,928   10,084,558   1,085,528 
   Cellular  7,098,585   8,925,503   10,497,763   1,130,007 
  Joint operation schemes  1,577,976   1,195,563   547,487   58,933 
  Interconnection — net  1,697,073   4,203,802   5,766,444   620,715 
  Other services  1,132,077   3,932,084   6,663,500   717,277 
             
    Total cash receipts from operating revenues  18,736,105   26,458,880   33,559,752   3,612,460 
 Cash payments for operating expenses  (5,800,470)  (8,861,797)  (12,270,643)  (1,320,844)
             
 Cash generated from operations  12,935,635   17,597,083   21,289,109   2,291,616 
             
 Interest received  480,288   369,982   321,677   34,626 
 Income tax paid  (1,914,895)  (3,905,317)  (4,132,359)  (444,818)
 Interest paid  (900,660)  (1,178,332)  (1,348,919)  (145,201)
 Cash receipt (refund) from/to customers and advances  264,105   (30,884)  (78,028)  (8,399)
             
Net Cash Provided by Operating Activities  10,864,473   12,852,532   16,051,480   1,727,824 
             
CASH FLOWS FROM INVESTING ACTIVITIES                
 Proceeds from investments and maturity of time deposits  1,497,883   1,895,199   285,264   30,707 
 Proceeds from sale of property, plant and equipment  204,008   255,750   67,196   7,233 
 Purchase of marketable securities and placements in time deposits  (2,222,175)  (679,500)  (404,268)  (43,516)
 Sale of 12.72% of Telkomsel  3,948,945   —   —   — 
 Payment for cross-ownership transactions  (2,406,309)  —   —   — 
 Acquisition of businesses, net of cash acquired  (243,561)  141,985   (27,797)  (2,992)
 Acquisition of property, plant and equipment  (6,625,292)  (9,007,186)  (8,568,862)  (922,375)
 Payment of advances for the purchase of property, plant and equipment  —   —   (1,063,382)  (114,465)
 Decrease in advances and others  71,569   96,830   123,026   13,243 
 Payments of advances for investments in shares of stock  (230,223)  (14,338)  —   — 
 Acquisition of long-term investments  (37,607)  —   (9,290)  (1,000)
 Sale of long-term investments  —   5,398   —   — 
 Acquisition of intangible assets  (7,213)  —   —   — 
             
Net Cash Used in Investing Activities  (6,049,975)  (7,305,862)  (9,598,113)  (1,033,165)
             

[Additional columns below]F-12

[Continued from above table, first column(s) repeated]
              
Retained earningsTotal
Stockholders’
DescriptionAppropriatedUnappropriatedEquity
RpRpRp
Balance as of January 1, 2002  320,392   8,893,824   9,080,961 
Foreign currency translation of CSM  —   —   (21,009)
Sale of investment in mutual fund Reksa Dana Seruni  —   —   207 
Acquisition of Pramindo  —   —   (296,038)
Realized difference due to change of equity in associated companies as the result of sale of 12.72% of Telkomsel  —   —   (65,158)
Resolved during the Annual General Meeting of the Stockholders on June 21, 2002:            
 Declaration of cash dividend  —   (2,125,055)  (2,125,055)
 Appropriation for general reserve  425,012   (425,012)  — 
Net income for the year  —   8,039,709   8,039,709 
   
   
   
 
Balance as of December 31, 2002  745,404   14,383,466   14,613,617 
   
   
   
 

PERUSAHAAN PERSEROAN (PERSERO)
P.T. TELEKOMUNIKASI INDONESIA Tbk AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS — (Continued)
FOR THE YEARS ENDED DECEMBER 31, 2002, 2003 AND 2004
(Figures in tables are presented in millions of Rupiah and thousands of United States Dollars)
                  
  2002 2003 2004
       
  Rp Rp Rp US$ (Note 3)
CASH FLOWS FROM FINANCING ACTIVITIES                
 Payments for debt issuance cost  (53,915)  —   (2,394)  (258)
 Proceeds from bonds  2,365,314   —   —   — 
 Proceeds from Medium-term Notes  —   —   1,080,000   116,254 
 Repayments of long-term liabilities  (2,493,738)  (1,536,941)  (5,963,659)  (641,944)
 Repayments of promissory notes  (771,066)  (1,513,064)  (1,637,917)  (176,310)
 Cash dividends paid  (2,327,458)  (3,738,586)  (3,811,591)  (410,290)
 (Increase) decrease in escrow accounts  (126,848)  (224,219)  485,866   52,300 
 Redemption of Telkomsel’s notes  —   (160,509)  (504,101)  (54,263)
 Proceeds from borrowings  737,495   995,903   3,448,931   371,252 
             
Net Cash Used in Financing Activities  (2,670,216)  (6,177,416)  (6,904,865)  (743,259)
             
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS  2,144,282   (630,746)  (451,498)  (48,600)
EFFECT OF EXCHANGE RATE CHANGES ON CASH AND CASH EQUIVALENTS  (89,425)  26,148   213,149   22,944 
CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR  3,644,213   5,699,070   5,094,472   548,382 
             
CASH AND CASH EQUIVALENTS AT END OF YEAR  5,699,070   5,094,472   4,856,123   522,726 
             
SUPPLEMENTAL CASH FLOW
INFORMATION
                
Noncash investing and financing activities:                
 Increase in property under construction through the incurrence of long-term debt  480,756   536,248   —   — 
 Payment of insurance premium through the incurrence of long-term debt  —   81,186   11,658   1,255 
 Conversion of receivables to long-term investments  —   13,500   —   — 
 Acquisition of subsidiary through the issuance of Promissory Notes  3,329,004   927,273   —   — 
 Acquisition of minority interest through the issuance of Promissory Notes  —   —   126,692   13,637 
 Acquisition of business through the incurrence of long-term liability  —   —   3,257,566   350,653 
See accompanying notes to consolidated financial statements, which form an integral part of the consolidated financial statementsstatements.

F-12F-13

PERUSAHAAN PERSEROAN (PERSERO)
P.T. TELEKOMUNIKASI INDONESIA Tbk AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS’ EQUITY (continued)
FOR THE YEARS ENDED DECEMBER 31, 2001, 2002 AND 2003
(Figures in tables are presented in millions of Rupiah and thousands of United States Dollars)
                          
Difference in
Value of
RestructuringDifference Due
Transactionsto Change
AdditionalBetweenof Equity
CapitalPaid-InEntities Underin AssociatedTranslation
DescriptionNotesStockCapitalCommon ControlCompaniesAdjustments
RpRpRpRpRp
Balance as of January 1, 2003      5,040,000   1,073,333   (7,288,271)  424,020   235,665 
Realized difference due to change of equity in associated companies as the result of disposal of investment in Metrosel  12   —   —   —   (38,425)  — 
Foreign currency translation of CSM  2g,12   —   —   —   —   (11,433)
Resolved during the Annual General Meeting of the Stockholders on May 9, 2003:                        
 Declaration of cash dividend  45   —   —   —   —   — 
 Appropriation for general reserve  45   —   —   —   —   — 
Net income for the year      —   —   —   —   — 
       
   
   
   
   
 
Balance as of December 31, 2003      5,040,000   1,073,333   (7,288,271)  385,595   224,232 
       
   
   
   
   
 

[Additional columns below]

[Continued from above table, first column(s) repeated]
              
Retained earningsTotal
Stockholders’
DescriptionAppropriatedUnappropriatedEquity
RpRpRp
Balance as of January 1, 2003  745,404   14,383,466   14,613,617 
Realized difference due to change of equity in associated companies as the result of disposal of investment in Metrosel  —   —   (38,425)
Foreign currency translation of CSM  —   —   (11,433)
Resolved during the Annual General Meeting of the Stockholders on May 9, 2003:            
 Declaration of cash dividend  —   (3,338,109)  (3,338,109)
 Appropriation for general reserve  813,664   (813,664)  — 
Net income for the year  —   6,087,227   6,087,227 
   
   
   
 
Balance as of December 31, 2003  1,559,068   16,318,920   17,312,877 
   
   
   
 

See accompanying notes to consolidated financial statements, which form an integral part of the consolidated financial statements

F-13

PERUSAHAAN PERSEROAN (PERSERO)

P.T. TELEKOMUNIKASI INDONESIA Tbk AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS

FOR THE YEARS ENDED DECEMBER 31, 2001, 2002 AND 2003
(Figures in tables are presented in millions of Rupiah and thousands of United States Dollar)
                     
200120022003
RpRpRpUS$ (Notes 3)
CASH FLOWS FROM OPERATING ACTIVITIES                
 Cash receipts from operating revenues                
  Telephone and interconnection — net                
   Fixed lines  6,310,052   7,230,394   8,201,928   971,792 
   Cellular  5,237,087   7,098,585   8,925,503   1,057,524 
  Joint operation scheme  1,717,154   1,577,976   1,195,563   141,654 
  Interconnection — net  1,127,545   1,697,073   4,203,802   498,081 
  Other services  697,348   1,132,077   3,932,084   465,887 
   
   
   
   
 
    Total cash receipts from operating revenues  15,089,186   18,736,105   26,458,880   3,134,938 
 Cash payments for operating expenses  (5,321,836)  (5,800,470)  (8,861,797)  (1,049,976)
   
   
   
   
 
 Cash generated from operations  9,767,350   12,935,635   17,597,083   2,084,962 
   
   
   
   
 
 Interest received  590,966   480,288   369,982   43,836 
 Income tax payments  (2,098,272)  (1,914,895)  (3,905,317)  (462,715)
 Interest paid  (1,256,404)  (900,660)  (1,178,332)  (139,613)
 Cash receipt (refund) from/to customers and advances  8,949   264,105   (30,884)  (3,659)
   
   
   
   
 
Net Cash Provided by Operating Activities  7,012,589   10,864,473   12,852,532   1,522,811 
   
   
   
   
 
CASH FLOWS FROM INVESTING ACTIVITIES                
 Proceeds from investments and maturity of time deposits  7,892,554   1,497,883   1,895,199   224,550 
 Proceeds from sale of property, plant and equipment  10,944   204,008   255,750   30,302 
 Purchase of marketable securities and placements in time deposits  (4,370,479)  (2,222,175)  (679,500)  (80,509)
 Sale of 12.72% of Telkomsel  —   3,948,945   —   — 
 Payment for cross ownership transactions  (5,967,430)  (2,406,309)  —   — 
 Acquisition of businesses, net of cash acquired  (275,849)  (243,561)  141,985   16,823 
 Acquisition of property, plant and equipment  (3,591,449)  (6,625,292)  (9,007,186)  (1,067,202)
 Decrease in advances and others  187,313   71,569   96,830   11,473 
 Payments of advances for investments in shares of stock  —   (230,223)  (14,338)  (1,699)
 Acquisition of long-term investments  (1,400)  (37,607)  —   — 
 Sale of long-term investments  —   —   5,398   640 
 Acquisition of intangible assets  —   (7,213)  —   — 
   
   
   
   
 
Net Cash Used in Investing Activities  (6,115,796)  (6,049,975)  (7,305,862)  (865,622)
   
   
   
   
 

F-14

PERUSAHAAN PERSEROAN (PERSERO)
P.T. TELEKOMUNIKASI INDONESIA Tbk AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS — (Continued)

FOR THE YEARS ENDED DECEMBER 31, 2001, 2002 AND 2003
(Figures in tables are presented in millions of Rupiah and thousands of United States Dollar)
                   
200120022003
RpRpRpUS$ (Notes 3)
CASH FLOWS FROM FINANCING ACTIVITIES                
 Payment for debt issuance cost  —   (53,915)  —   — 
 Proceeds from bonds  —   2,365,314   —   — 
 Repayments of long-term liabilities  (985,403)  (2,493,738)  (1,536,941)  (182,102)
 Repayments of promissory notes  (247,640)  (771,066)  (1,513,064)  (179,273)
 Cash dividends paid  (1,023,355)  (2,327,458)  (3,738,586)  (442,960)
 Increase in escrow accounts  (171,077)  (126,848)  (224,219)  (26,566)
 Redemption of Telkomsel’s bonds  —   —   (160,509)  (19,019)
 Decrease in other non-current assets  264,664   —   —   — 
 Receipts from loan  500,000   737,495   995,903   117,998 
   
   
   
   
 
Net Cash Used in Financing Activities  (1,662,811)  (2,670,216)  (6,177,416)  (731,922)
   
   
   
   
 
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS  (766,018)  2,144,282   (630,746)  (74,733)
EFFECT OF EXCHANGE RATE CHANGES ON CASH AND CASH EQUIVALENTS  76,568   (89,425)  26,148   3,098 
CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR  4,333,663   3,644,213   5,699,070   675,245 
   
   
   
   
 
CASH AND CASH EQUIVALENTS AT END OF YEAR  3,644,213   5,699,070   5,094,472   603,610 
   
   
   
   
 
SUPPLEMENTAL CASH FLOW INFORMATION
                
Noncash investing and financing activities:                
 Increase in property under construction through the incurrence of long-term debts  60,341   480,756   536,248   63,536 
 Payment of insurance premium through incurrence of long-term debts  —   —   81,186   9,619 
 Increase in property and equipment through lease liabilities  2,483   —   —   — 
 Capitalization of borrowing costs during construction:                
  Losses (gains) on foreign exchange, net  1,746   (27,568)  —   — 
  Interest  8,089   20,108   22,925   2,716 
 Conversion of receivables to long-term investments  92,750   —   13,500   1,600 
 Acquisition of subsidiary through the issuance of Promissory Notes  1,171,157   3,329,004   927,273   109,866 

See accompanying notes to consolidated financial statements which form an integral part of the

consolidated financial statements.

F-15

PERUSAHAAN PERSEROAN (PERSERO)

P.T. TELEKOMUNIKASI INDONESIA Tbk AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 20022003 AND 2003,2004, AND FOR YEARS ENDED
DECEMBER 31, 2001, 2002, 2003 AND 20032004
(Figures in tables are presented in millions of Rupiah, unless otherwise stated)
1. GENERAL

     a. Establishment and General Information

      Perusahaan Perseroan (Persero) P.T. Telekomunikasi Indonesia Tbk (the “Company”) was originally part of “Post en Telegraafdienst”, which was established in 1884 under the framework of Decree No. 7 dated March 27, 1884 of the Governor General of the Dutch Indies and published in State Gazette No. 52 dated April 3, 1884.

      In 1991, based on Government Regulation No. 25 year 1991, the status of the Company was changed into a state-owned limited liability corporation (“Persero”). The Company was established based on notarial deed No. 128 dated September 24, 1991 of Imas Fatimah, S.H. The deed of establishment was approved by the Minister of Justice of the Republic of Indonesia in his decision letter No. C2-6870.HT.01.01.Th.1991 dated November 19, 1991, and was published in State Gazette of the Republic of Indonesia No. 210 dated January 17, 1992, Supplement No. 5. The articles of association have been amended several times, the most recent amendment was made through deed No. 426 dated January 10, 2002,July 30, 2004, of Notary A. Partomuan Pohan, S.H., LLM., concerning the change inamong others, to increase the Company’s objective, scopeauthorized, issued and fully paid share capital by means of activities, directors’ scope of authorities and the composition of the Company’s board of commissioners.a 2-for-1 stock split. The notarial deed was approved by the Minister of Justice and Human Rights of the Republic of Indonesia in his decision letter No. C-00682HT.01.04.Th.2002C-23270 HT.01.04.TH.2004 dated September 17, 2004, and was published in State Gazette of the Republic of Indonesia No. 5 dated January 15, 2002.

18, 2005.

      In accordance with article 3 of its articles of association, the scope of the Company’s activities is as follows:

 1. The Company’s objective is to provide telecommunications and information facilities and services, in accordance with prevailing regulations.
 
 2. To achieve the above objective, the Company is involved in the following activities:

       i. Planning, building, providing, developing, operating, marketing or selling, leasing and maintaining telecommunications and information networks in accordance with prevailing regulations.
 
       ii. Planning, developing, providing, marketing or selling and improving telecommunications and information services in accordance with prevailing regulations.
 
       iii. Performing activities and other undertakings in connection with the utilization and development of the Company’s resources and optimizing the utilization of the Company’s property, plant and equipment, information systems, education and training, and repairs and maintenance facilities.

      The Company’s principal business is the provision of domestic telecommunications services, including telephone, telex, telegram, satellite, leased lines, electronic mail, mobile communication and cellular services. In order to accelerate the construction of telecommunications facilities, to make the Company a world-class operator, and to increase the technology as well as the knowledge and skills of its employees, in 1996, the Company entered into agreements with investors to develop, manage and operate telecommunications facilities in five of the Company’s seven regional divisions under Joint Operation Schemes (known as “Kerja Sama Operasi” or “KSO”).

      The Company’s head office is located at Jalan Japati No. 1, Bandung, West Java.

F-16F-14

PERUSAHAAN PERSEROAN (PERSERO)
P.T. TELEKOMUNIKASI INDONESIA Tbk AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
DECEMBER 31, 20022003 AND 2003,2004, AND FOR YEARS ENDED
DECEMBER 31, 2001, 2002, 2003 AND 20032004
(Figures in tables are presented in millions of Rupiah, unless otherwise stated)

     Under

      Pursuant to Law No. 3/1989 on Telecommunications which took effect on April 1, 1989, Indonesian legal entities are allowed to provide basic telecommunications services in cooperation with the Company as the domestic telecommunications organizing body (or “badan penyelenggara”). Other Indonesian legal entities are also allowed to individually provide non-basic telecommunications services. In providing telecommunications services, these entities are required to obtain licenses from the Minister of Communications of the Republic of Indonesia (the Ministry of Communications assumed responsibility for the telecommunications sector from the previous Ministry of Tourism, Post and Telecommunications in March 1998). Government Regulation No. 8/1993, concerning the provision of telecommunications services, further regulates that cooperation to provide basic telecommunications services can be in the form of joint venture, joint operation or contract management and that the entities cooperating with the domestic telecommunications organizing body must use the organizing body’s telecommunications networks. If the telecommunications networks are not available, the Government Regulation requires that the cooperation be in the form of a joint venture that is capable of constructing the necessary networks.

      The Minister of Tourism, Post and Telecommunications of the Republic of Indonesia (“MTPT”), through his two decision letters both dated August 14, 1995, reaffirmed the status of the Company as the organizing body for the provision of domestic telecommunications services.

      Further, effective from January 1, 1996, the Company was granted the exclusive right to provide local wireline and fixed wireless services for a minimum period of 15 years and the exclusive right to provide domestic long-distance telecommunications services for a minimum period of 10 years. The exclusive rights also apply to telecommunications services provided for and on behalf of the Company through a KSO. This grant of rights does not affect the Company’s right to provide other domestic telecommunications services.

     On September 8, 1999, the Government issued Under Law No. 36/1999 on Telecommunications, to replace Law No. 3/1989. Under the new Law, which took effect from September 2000, telecommunications activities cover:

       i. Telecommunications networks
 
       ii. Telecommunications services
 
       iii. Special telecommunications

      National state-owned companies, regional state-owned companies, privately-owned companies and cooperatives are allowed to provide telecommunications networks and services. Special telecommunications can be provided by individuals, government agencies and legal entities other than telecommunications networks and service providers.

      Under Law No. 36/1999, activities that result in monopolistic practices and unfair competition are prohibited. In connection with this law, Government Regulation No. 52/2000 was issued, which provides that interconnection fees shall be charged to originating telecommunications network operators where telecommunications service is provided by two or more telecommunications network operators.

      Based on press release No. 05/HMS/JP/VIII/2000 dated August 1, 2000 from the Director General of Post and Telecommunications and the correction thereto No. 1718/UM/VIII/2000 dated August 2, 2000, the period of exclusive rights granted to the Company to provide local and domestic long-

F-17

PERUSAHAAN PERSEROAN (PERSERO)
P.T. TELEKOMUNIKASI INDONESIA Tbk AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

DECEMBER 31, 2002 AND 2003, AND FOR YEARS ENDED
DECEMBER 31, 2001, 2002 AND 2003
(Figures in tables are presented in millions of Rupiah, unless otherwise stated)

distancelong-distance fixed-line telecommunications services, which initially would expire in December 2010 and December 2005, respectively, was shortened to expire in August 2002 and August 2003, respectively. In return, the Government is required to pay compensation to the Company, the amount of which is to be estimated by an independent appraiser appointed by the Government.

      Based on a press release from the Coordinating Minister of Economics dated July 31, 2002, the Government decided to terminate the Company’s exclusive rights as a network provider for local and long-distance services with effect from August 1, 2002. On August 1, 2002, PT Indonesian Satellite

F-15

PERUSAHAAN PERSEROAN (PERSERO)
P.T. TELEKOMUNIKASI INDONESIA Tbk AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
DECEMBER 31, 2003 AND 2004, AND FOR YEARS ENDED
DECEMBER 31, 2002, 2003 AND 2004
(Figures in tables are presented in millions of Rupiah, unless otherwise stated)
Corporation Tbk (“Indosat”) was granted a license to provide local and long-distance telecommunications services.

      On March 30, 2004, the Minister of Communications issued Announcement No. PM. 2PM.2 year 2004 regarding the Implementation of Restructuring in the Telecommunications Sector which, among others, conveysaddresses the compensation for early termination of exclusive rights (See Note 57d).

following matters:

a.Compensation for early termination of exclusive rights
The Government shall pay to the Company an amount of Rp478,000 million net of tax and Indosat shall pay to the Government an amount of Rp178,000 million net of tax. As of the date of issuance of these consolidated financial statements, the Company has not received any payments.
b.License synchronization for the Company and Indosat
The Company was given the right to use access code of 007 for operating international telephone network and Indosat was given the right to use access code of 011 for operating DLD fixed telephone network.
      On May 13, 2004, pursuant to the Ministry of Communications Decree No. KP. 162/2004, the Company was granted a commercial license to provide International Direct Dialing (IDD) services.

Based on the resolution of the Extraordinary General Meeting of Stockholders, the minutes of which have been notarized by deed No. 37 dated June 21, 2002 of A. Partomuan Pohan, S.H., LLM., the composition of the Company’s Board of Commissioners and Board of Directors as of December 31, 2002 and 2003 was as follows:
     
President Commissioner : Bacelius Ruru
Commissioner : Agus Haryanto
Commissioner : Djamhari Sirat
Independent Commissioner : Arif Arryman
Independent Commissioner : Petrus Sartono
President Director : Kristiono
Director of Finance : Guntur Siregar
Director of Telecommunications Service Business : Garuda Sugardo
Director of Human Resources and Support Business : Agus Utoyo
Director of Telecommunications Network Business : Suryatin Setiawan

Subsequently,

      Based on the compositionresolution of the Company’s Board of Commissioners and Board of Directors was changed based on the Extraordinary General Meeting of Stockholders, the minutes of which have been notarized by deed No. 4 dated March 10, 2004 of A. Partomuan Pohan, S.H., LLM.,

F-16

PERUSAHAAN PERSEROAN (PERSERO)
P.T. TELEKOMUNIKASI INDONESIA Tbk AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
DECEMBER 31, 2003 AND 2004, AND FOR YEARS ENDED
DECEMBER 31, 2002, 2003 AND 2004
(Figures in tables are presented in millions of Rupiah, unless otherwise stated)
the composition of the Company’s Board of Commissioners and Board of Directors as of December 31, 2004 was as follows:
     
President Commissioner : Tanri Abeng
Commissioner : Anggito Abimanyu
Commissioner : Gatot Trihargo
Independent Commissioner : Arif Arryman
Independent Commissioner : Petrus Sartono
President Director : Kristiono
Director of Finance : Rinaldi Firmansyah
Director of Telecommunications Service Business : Suryatin Setiawan
Director of Human Resources and Support Business : Woeryanto Soeradji
Director of Telecommunications Network Business : Abdul Haris

F-18

PERUSAHAAN PERSEROAN (PERSERO)
P.T. TELEKOMUNIKASI INDONESIA Tbk AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

DECEMBER 31, 2002 AND 2003, AND FOR YEARS ENDED
DECEMBER 31, 2001, 2002 AND 2003
(Figures in tables are presented in millions of Rupiah, unless otherwise stated)

      As of December 31, 20022003 and 2003,2004, the Company had 34,67830,820 employees and 30,82029,375 employees, respectively, including those in the KSO Units, while the subsidiaries had 3,7224,384 employees and 4,3845,282 employees, respectively.

     b. Public Offering of Shares of the Company

b. Public offering of shares of the Company
      The Company’s total number of shares immediately prior to its initial public offering was 8,400,000,000, which consisted of 8,399,999,999 seriesSeries B shares and 1 seriesSeries A Dwiwarna share, all of which were owned by the Government of the Republic of Indonesia (the “Government”). On November 14, 1995, the Government sold the Company’s shares through an initial public offering on the Jakarta Stock Exchange and Surabaya Stock Exchange. The shares offered consisted of 933,333,000 new seriesSeries B shares and 233,334,000 seriesSeries B shares owned by the Government. A share offering was also conducted on the New York Stock Exchange and London Stock Exchange for 700,000,000 seriesSeries B shares owned by the Government of the Republic of Indonesia, which were converted into 35,000,000 American Depositary Shares (ADS). Each ADS representsrepresented 20 seriesSeries B shares.

shares at that time.

      In December 1996, the Government completed a block sale of 388,000,000 seriesSeries B shares, and later in 1997, distributed 2,670,300 seriesSeries B shares as an incentive to stockholders who did not sell their shares within one year from the date of the initial public offering. In May 1999, the Government sold 898,000,000 seriesSeries B shares.

      Under Law No. 1/1995 on Limited Liability Companies, the minimum total par value of the Company’s issued shares of capital stock must be at least 25% of the total par value of the Company’s authorized capital stock, or in the Company’s case Rp5,000,000 million. To comply with the Law, it was resolved at the Annual General Meeting of Stockholders on April 16, 1999 to increase the issued share capital by way of capitalization of certain additional paid-in capital. The bonus shares were distributed to the then existing stockholders in August 1999.

      In December 2001, the Government conducted another block sale of 1,200,000,000 shares or 11.9% of the total outstanding seriesSeries B shares. In July 2002, the Government sold 312,000,000 shares or 3.1% of the total outstanding seriesSeries B shares.
      On July 30, 2004, the Annual General Meeting of Stockholders, the minutes of which were notarized by deed No. 26 dated July 30, 2004 of A. Partomuan Pohan, S.H., LLM., resolved to decrease

F-17

PERUSAHAAN PERSEROAN (PERSERO)
P.T. TELEKOMUNIKASI INDONESIA Tbk AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
DECEMBER 31, 2003 AND 2004, AND FOR YEARS ENDED
DECEMBER 31, 2002, 2003 AND 2004
(Figures in tables are presented in millions of Rupiah, unless otherwise stated)
the par value of the Company’s shares from Rp500 to Rp250 by means of a 2-for-1 stock split. The Series A Dwiwarna share with par value of Rp500 was split to one Series A Dwiwarna share with par value of Rp250 and one Series B share with par value of Rp250. As a result of the stock split, the Company’s authorized capital stock increased from one Series A Dwiwarna share and 39,999,999,999 Series B shares to one Series A Dwiwarna share and 79,999,999,999 Series B shares, and the Company’s issued capital stock increased from one Series A Dwiwarna share and 10,079,999,639 Series B shares to one Series A Dwiwarna share and 20,159,999,279 Series B shares. After the stock split, each ADS represented 40 Series B shares.
      As of December 31, 2003,2004, all of the Company’s seriesSeries B shares were listed on the Jakarta Stock Exchange and Surabaya Stock Exchange and 38,317,04645,126,420 ADS shares were listed on the New York Stock Exchange and London Stock Exchange.

F-19

PERUSAHAAN PERSEROAN (PERSERO)
P.T. TELEKOMUNIKASI INDONESIA Tbk AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

DECEMBER 31, 2002 AND 2003, AND FOR YEARS ENDED
DECEMBER 31, 2001, 2002 AND 2003
(Figures in tables are presented in millions of Rupiah, unless otherwise stated)

     c. Subsidiaries

The Company consolidates the following subsidiaries as a result of majority ownership or its right to control operations.
              
                  
Percentage ofTotal Assets Before Percentage of   Total Assets before
OwnershipStart ofEliminations Ownership Start of Eliminations
Commercial
   Commercial  
SubsidiariesDomicileNature of Business20022003Operations20022003 Domicile Nature of Business 2003 2004 Operations 2003 2004
              
%% % %   
PT Pramindo Ikat Nusantara Medan Telecommunications construction & services 100.00 100.00 1995 1,911,183 1,954,907 Medan Telecommunications construction & services  100  100  1995 1,954,907 1,604,405
PT AriaWest International Bandung Telecommunications — 100.00 1995 — 1,628,605 Bandung Telecommunications  100  100  1995 1,628,605 1,416,225
PT Multimedia Nusantara Jakarta Pay TV 31.00 100.00 1998 9,290 7,908 Jakarta Pay TV  100  100  1998 7,908 22,116
PT Graha Sarana Duta Jakarta Real estate, construction and services 99.99 99.99 1982 44,998 69,752 Jakarta Real estate, construction and services  100  100  1982 69,752 69,227
PT Dayamitra Telekomunikasi Balikpapan Telecommunications  90  100  1995 797,810 641,249
PT Indonusa Telemedia Jakarta Multimedia 57.50 90.39 1997 49,787 54,319 Jakarta Multimedia  90  90  1997 54,319 72,080
PT Dayamitra Telekomunikasi Balikpapan Telecommunications 90.32 90.32 1995 854,007 797,810
PT Telekomunikasi Selular Jakarta Telecommunications 65.00 65.00 1995 11,255,500 15,386,289 Jakarta Telecommunications  65  65  1995 15,386,289 19,557,557
PT Napsindo Primatel International Jakarta Telecommunications 32.00 60.00 1999 45,668 47,389 Jakarta Telecommunications  60  60  1999 47,389 28,974
PT Infomedia Nusantara Jakarta Data and information service 51.00 51.00 1984 265,830 247,646 Jakarta Data and information service  51  51  1984 247,646 333,738
PT Pro Infokom Indonesia Jakarta System information network — 51.00 2003 — 5,032 Jakarta System information network  51  51  2003 5,032 1,261

F-18

PERUSAHAAN PERSEROAN (PERSERO)
P.T. TELEKOMUNIKASI INDONESIA Tbk AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
DECEMBER 31, 2003 AND 2004, AND FOR YEARS ENDED
DECEMBER 31, 2002, 2003 AND 2004
(Figures in tables are presented in millions of Rupiah, unless otherwise stated)
The Company has indirect investments through its subsidiaries in the following companies:
                   
Effective                     
Ownership     Ownership  
PercentageStart of     Percentage Start of
Nature of
Commercial   Nature of   Commercial
Indirect SubsidiariesStockholdersDomicileBusiness20022003Operations Stockholders Domicile Business 2003 2004 Operations
            
%%     % %  
Telekomunikasi Selular Finance Limited PT Telekomunikasi Selular Mauritius Fund raising 65.00 65.00 2002  PT Telekomunikasi Selular  Mauritius Fund raising  100  100  2002 
Aria West International Finance B.V.  PT AriaWest International Netherlands Finance — 100.00 1996 
Aria West International Finance B.V PT AriaWest International  Netherlands  Finance  100  100  1996 
PT Balebat Dedikasi Prima PT Infomedia Nusantara Bogor Printing — 26.18 2000  PT Infomedia Nusantara  Bogor  Printing  51  51  2000 
PT Pramindo Ikat Nusantara (“Pramindo”)

      Pramindo is the investor in KSO I (Note 51)49), the joint operating scheme that provides telecommunications services in Sumatra. On April 19, 2002, the Company entered into a Conditional Sale and

F-20

PERUSAHAAN PERSEROAN (PERSERO)
P.T. TELEKOMUNIKASI INDONESIA Tbk AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

DECEMBER 31, 2002 AND 2003, AND FOR YEARS ENDED
DECEMBER 31, 2001, 2002 AND 2003
(Figures in tables are presented in millions of Rupiah, unless otherwise stated)

Purchase Agreement (“CSPA”) (as amended on August 1, 2002) to acquire 100% of the issued and paid-up share capital of Pramindo (Note 5b)4b).

Effective with the closing of the first tranche, the Company obtained control over the operations of Pramindo and KSO Unit I. As a result, the Company has consolidated Pramindo as of the date of the acquisition reflecting a 100% ownership interest in Pramindo (Note 2b)4b).
PT AriaWest International (“AWI”)

      AWI is the investor in KSO III (Note 51)49), the joint operating scheme that provides telecommunicationtelecommunications services in West Java. On May 8, 2002, the Company entered into a Conditional Sale and Purchase Agreement (“CSPA”) to acquire 100% of the issued and paid-up capital of AWI. The acquisition was effective on July 31, 2003, the date when the Company entered into the First Amendment to the Conditional Sale and Purchase Agreement with the stockholders of AWI in which both parties agreed to the Company’s acquisition of AWI (Note 5c)4c).

The CSPA provides for certain conditions that have to be satisfied at or prior to the closing date to effect the acquisition, e.g. completion of the restructuring of AWI’s loan, amendment of KSO III agreement, final and unconditional dismissal with prejudice of any proceeding. Those conditions have been satisfied at or prior to July 31, 2003.
PT Multimedia Nusantara (“Metra”)

      Metra is engaged in providing pay television and multimedia telecommunications services.

On April 8, 2003, the Company increased its ownership interest in Metra from 31% to 100% through a share-swap agreement with PT Indocitra Grahabawana (“Indocitra”). Pursuant to the agreement, the Company sold its investment in PT Menara Jakarta in exchange for Indocitra’s 69% ownership interest in Metra (Note 12f)10k).
PT Graha Sarana Duta (“GSD”)

      GSD is currently engaged primarily in leasing of offices as well as providing building management and maintenance services.

F-19

PERUSAHAAN PERSEROAN (PERSERO)
P.T. TELEKOMUNIKASI INDONESIA Tbk AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
DECEMBER 31, 2003 AND 2004, AND FOR YEARS ENDED
DECEMBER 31, 2002, 2003 AND 2004
(Figures in tables are presented in millions of Rupiah, unless otherwise stated)
      On April 6, 2001, the Company acquired a 100% ownership interest in GSD from Koperasi Mitra Duta and Dana Pensiun Bank Duta, for a purchase consideration of Rp119,000 million. This acquisition resulted in goodwill of Rp106,348 million which is being amortized over a period of five years (Note 16)14).

On November 28, 2001, the Company sold one share of GSD to a related party for Rp9.5 million thereby reducing the Company’s ownership interest to 99.99%.

PT Indonusa Telemedia (“Indonusa”)

     Indonusa is engaged in providing multimedia telecommunications services.

     The Company increased its investment in Indonusa from 35% in 2000 to 57.5% in 2001, by acquiring 2,800,000 shares for Rp28,000 million. This acquisition resulted in goodwill of Rp654 million which was fully amortized in 2001.

F-21

PERUSAHAAN PERSEROAN (PERSERO)
P.T. TELEKOMUNIKASI INDONESIA Tbk AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

DECEMBER 31, 2002 AND 2003, AND FOR YEARS ENDED
DECEMBER 31, 2001, 2002 AND 2003
(Figures in tables are presented in millions of Rupiah, unless otherwise stated)

     On August 8, 2003, the Company increased its investment in Indonusa to 88.08% through a share-swap agreement with PT Centralindo Pancasakti Cellular (“CPSC”) (Note 12).

Pursuant to the extraordinary meeting of stockholders of Indonusa on October 29, 2003, Indonusa agreed to convert its payable to the Company amounting to Rp13,500 million to 1,350,000 shares of Indonusa. Following such conversion, the Company’s ownership in Indonusa increased from 88.08% to 90.39%.

PT Dayamitra Telekomunikasi (“Dayamitra”)

Dayamitra is the investor in KSO VI (Note 51)49), the joint operating scheme that provides telecommunications services in Kalimantan. The Company’s acquisition of a 90.32% ownership interest in Dayamitra was effective on May 17, 2001, the date when the Deed of Share Transfer was signed. The Company also entered into an Option Agreement to acquire the remaining 9.68% interest from the selling stockholdersstockholders. On December 14, 2004, the Company exercised the option to acquire the remaining 9.68% outstanding shares of Dayamitra by entering into a Sale and Purchase Agreement with TM Communications (HK) Ltd. (Note 5a)4a).
PT Indonusa Telemedia (“Indonusa”)
      Indonusa is engaged in providing multimedia telecommunications services.
      On August 8, 2003, the Company increased its investment in Indonusa from 57.5% to 88.08% through a share-swap agreement with PT Centralindo Pancasakti Cellular (“CPSC”) (Note 10).
      Pursuant to the extraordinary meeting of stockholders of Indonusa on October 29, 2003, Indonusa agreed to convert its payable to the Company amounting to Rp13,500 million to 1,350,000 shares of Indonusa. Following such conversion, the Company’s ownership in Indonusa increased from 88.08% to 90.39%.
PT Telekomunikasi Selular (“Telkomsel”)

      Telkomsel is engaged in providing telecommunications facilities and mobile cellular services using Global System for Mobile Communication (“GSM”) technology on a nationwide basis.

      The Company’s cross-ownership transaction with Indosat in 2001 increased the Company’s ownership interest in Telkomsel to 77.72%. The accounting treatment for the cross-ownership transaction is discussed further in Note 4.

      On April 3, 2002, the Company entered into a Conditional Sale and Purchase Agreement (“CSPA”) with Singapore Telecom Mobile Pte. Ltd. (“Singtel”). Pursuant to the agreement, the Company sold 23,223 ordinary registered shares of Telkomsel, representing 12.72% of the issued and paid-up capital of Telkomsel for a total consideration of US$429,000,000429.0 million (equivalent to Rp3,948,945 million). This transaction reduced the Company’s ownership in Telkomsel from 77.72% to 65%.

The sale of the shares was effective on July 30, 2002 and the Company recognized a gain of Rp3,196,380 million which was specifically identified in the Statement of Income as “Gain on sale of long-term investment in Telkomsel” and included an amount of Rp65,158 million reflecting the realisationrealization of a portion of gains attributable to past equity transactions in Telkomsel. For tax purposes, the gain was Rp30,294 million due to the higher tax bases of the shares sold.

F-20

PERUSAHAAN PERSEROAN (PERSERO)
P.T. TELEKOMUNIKASI INDONESIA Tbk AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
DECEMBER 31, 2003 AND 2004, AND FOR YEARS ENDED
DECEMBER 31, 2002, 2003 AND 2004
(Figures in tables are presented in millions of Rupiah, unless otherwise stated)
PT Napsindo Primatel Internasional (“Napsindo”)

      Napsindo is engaged in providing “Network Access Point” (NAP), “Voice Over Data” (VOD) and other related services.

     In connection with an increase in Napsindo’s paid-in capital, the Company increased its investment in Napsindo by Rp13,840 million on October 31, 2000. The increase in investment was made to maintain the Company’s ownership interest at 32% and was effective on March 29, 2001.

      Based on the notarial Deed No. 47 dated December 30, 2002 of Notary H. Yunardi, S.H., the Company purchased 28% of Napsindo’s shares from PT Info Asia Sukses Makmur Mandiri for

F-22

PERUSAHAAN PERSEROAN (PERSERO)
P.T. TELEKOMUNIKASI INDONESIA Tbk AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

DECEMBER 31, 2002 AND 2003, AND FOR YEARS ENDED
DECEMBER 31, 2001, 2002 AND 2003
(Figures in tables are presented in millions of Rupiah, unless otherwise stated)

US$4,900,0004.9 million (equivalent to Rp43,620 million), thereby increasing the Company’s ownership interest from 32% to 60% after the settlement of payment on January 28, 2003.

PT Infomedia Nusantara (“Infomedia”)

      Infomedia is engaged in providing telecommunications information services and other information services in the form of print and electronic media. In 2002, Infomedia established a new line of business to provide call center services.

PT Pro Infokom Indonesia (“PII”)

PT Pro Infokom Indonesia (“PII”)
      On January 29, 2003, the Company together with PT Indonesia Comnets Plus, a subsidiary of Perusahaan Perseroan (Persero) PT Perusahaan Listrik Negara (“PLN”), and PT Prima Infokom Indonesia established PT Pro Infokom Indonesia (“PII”). The establishment was notarized by deed of A. Partomuan Pohan, S.H., LLM., notary in Jakarta, under Article of Association No. 24, dated January 29, 2003. As of December 31, 2003, the Company had an ownership interest of 51% in PII.

      PII was established to develop a national information network system as the back-bone for the development of the Indonesian e-Government. PII iswas intended to maximize the utilization of both the Company’s and PLN’s existing infrastructures.

      On January 20, 2005, the Company sold its entire 51% equity interest in PII will act as a service provider that manages the government secure intranet and government information center management where all government institutions, including state-owned companies, are expected to take advantage of this network.PT Prima Infokom Indonesia for Rp471 million.
Telekomunikasi Selular Finance Limited (“TSFL”)

Telkomsel has 100% direct ownership interest in TSFL, a company established in Mauritius on April 22, 2002. TSFL’s objective is to raise funds for the development of Telkomsel’s business through the issuance of debenture stock, bonds, mortgages or any other securities.
Aria West International Finance B.V. (“AWI BV”)

AWI BV, a company established in the Netherlands, is a wholly owned subsidiary of AWI. AWI BV is engaged in rendering services in the field of trade and finance.
PT Balebat Dedikasi Prima (“Balebat”)

Infomedia has 51.33% direct ownership interest in Balebat, a company engaged in the printing business, domiciled in Bogor.

F-21

PERUSAHAAN PERSEROAN (PERSERO)
P.T. TELEKOMUNIKASI INDONESIA Tbk AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
DECEMBER 31, 2003 AND 2004, AND FOR YEARS ENDED
DECEMBER 31, 2002, 2003 AND 2004
(Figures in tables are presented in millions of Rupiah, unless otherwise stated)
d. Authorization of the Financial Statementsfinancial statements

The consolidated financial statements were authorized for issue by the Board of Directors on JuneApril 29, 2004.2005.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

      The consolidated financial statements of the Company and subsidiaries have been prepared in accordance with accounting principles generally accepted accounting principles in Indonesia (“Indonesian GAAP”). Indone-

F-23

PERUSAHAAN PERSEROAN (PERSERO)
P.T. TELEKOMUNIKASI INDONESIA Tbk AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

DECEMBER 31, 2002 AND 2003, AND FOR YEARS ENDED
DECEMBER 31, 2001, 2002 AND 2003
(Figures in tables are presented in millions of Rupiah, unless otherwise stated)

sianIndonesian GAAP varies in certain significant respects to accounting principles generally accepted in the United States of America (U.S. GAAP). Information relating to the nature and effect of such differences is presented in Note 58.

  a. Basis for Preparation of Financial Statements

56.

a. Basis for preparation of financial statements
      The consolidated financial statements, except for the statements of cash flows, are prepared on the accrual basis of accounting. The measurement basis used is historical cost, except for certain accounts recorded on the basis described in the related accounting policies.

      The consolidated statements of cash flows are prepared using the direct method and present the changes in cash and cash equivalents from operating, investing and financing activities.

      Figures in the consolidated financial statements are rounded to and presented in millions of Indonesian Rupiah (“Rp”), unless otherwise stated.

  b. Principles of Consolidation

b. Principles of consolidation
      The consolidated financial statements include the financial statements of the Company and its subsidiaries in which the Company directly or indirectly has ownership of more than 50%, or the Company has the ability to control the entity, even though the ownership is less than or equal to 50%. Subsidiaries are consolidated from the date on which effective control is obtained and are no longer consolidated from the date of disposal. The Company does not consolidate a subsidiary if control is expected to be temporary.

      All significant inter-company balances and transactions have been eliminated in consolidation.

      In the case of PT Pramindo Ikat Nusantara (“Pramindo”), the Company has evaluated the scope and terms of this investment and concluded that it has the ability to exercise control over Pramindo and the right to obtain all of the future economic benefits of ownership as though the Company owned 100% of the shares. The factors that the Company considered include, among others, the fact that the purchase price is fixed, its ability to vote 100% of the shares at general stockholders’ meetings, subject to certain protective rights retained by the selling stockholders, its ability to appoint all of the board members and management and its consequent ability to exclusively determine the financial and operating policies of Pramindo subject to certain protective rights, its issuance of irrevocable and unconditional promissory notes in settlement of the purchase consideration to the selling stockholders, the placement of the 70% of Pramindo shares not yet transferred to the Company in an escrow account by the selling stockholders and the protective provisions in the various agreements for the Company to take over all shares (including powers of attorney issued by the selling stockholders) or collapse the KSO arrangement once the full amount payable for the shares has been paid (Note 5b)4b).

  c. Transactions with Related PartiesF-22

PERUSAHAAN PERSEROAN (PERSERO)
P.T. TELEKOMUNIKASI INDONESIA Tbk AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
DECEMBER 31, 2003 AND 2004, AND FOR YEARS ENDED
DECEMBER 31, 2002, 2003 AND 2004
(Figures in tables are presented in millions of Rupiah, unless otherwise stated)
c. Transactions with related parties
      The Company and subsidiaries have transactions with related parties. The definition of related parties used is in accordance with Indonesian Statement of Financial Accounting Standards (“PSAK”) No. 7, “Related Party Disclosures”.

F-24

PERUSAHAAN PERSEROAN (PERSERO)
P.T. TELEKOMUNIKASI INDONESIA Tbk AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
d. Acquisitions of subsidiaries

DECEMBER 31, 2002 AND 2003, AND FOR YEARS ENDED
DECEMBER 31, 2001, 2002 AND 2003
(Figures in tables are presented in millions of Rupiah, unless otherwise stated)

  d. Acquisitions of Subsidiaries

      The acquisition of a subsidiary from a third party is accounted for using the purchase method of accounting. The excess of the acquisition cost over the Company’s interest in the fair value of identifiable assets acquired and liabilities assumed is recorded as goodwill and amortized using the straight-line method over a period of not more than five years.

      The acquisition transaction with entities under common control is accounted for in a manner similar to that in pooling of interests accounting (carryover basis). The difference between the consideration paid or received and the related historical carrying amount, after considering income tax effects, is recognized directly in equity and are reported as “Difference in value of restructuring transactions between entities under common control” in the stockholders’ equity section.

      The Company continually assesses whether events or changes in circumstances have occurred that would require revision of the remaining estimated useful life of goodwill, or whether there is any indication of impairment. If any indication of impairment exists, the recoverable amount of goodwill is estimated based on the expected future cash flows which are discounted to their present value using a pre-tax discount rate that reflects current market assessments of the time value of money and the risks specific to the asset.

  e. Foreign Currency Translation

e. Foreign currency translation
      The functional currency of the Company and its subsidiaries is the Indonesian Rupiah and the books of accounts of the Company and its subsidiaries are maintained in Indonesian Rupiah. Transactions in foreign currencies are translated into Indonesian Rupiah at the rates of exchange prevailing at transaction date. At the balance sheet date, monetary assets and monetary liabilities balances denominated in foreign currencies are translated into Indonesian Rupiah based on the buy and sell rates quoted by Reuters prevailing at the balance sheet date. The Reuters buy and sell rates, applied respectively to translate monetary assets and monetary liability balances, were Rp8,940 and Rp8,960 to US$1 as of December 31, 2002, and Rp8,430 and Rp8,450 to US$1 as of December 31, 2003.

2003, and Rp9,280 and Rp9,300 to US$1 as of December 31, 2004.

      The resulting foreign exchange gains or losses, realized and unrealized, are credited or charged to income of the current year, except for foreign exchange differences incurred on borrowings during the construction of qualifying assets which are capitalized to the extent that the borrowings can be attributed to the construction of those qualifying assets (Note 2k).

  f. Cash and Cash Equivalents

f. Cash and cash equivalents
      Cash and cash equivalents consist of cash on hand and in banks and all unrestricted time deposits with maturities of not more than three months from the date of placement. For the purpose of the statements of cash flows, bank overdrafts that are repayable on demand and form an integral part of cash management of the Company and subsidiaries are included as a component of cash and cash equivalents.

F-25F-23

PERUSAHAAN PERSEROAN (PERSERO)
P.T. TELEKOMUNIKASI INDONESIA Tbk AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
DECEMBER 31, 20022003 AND 2003,2004, AND FOR YEARS ENDED
DECEMBER 31, 2001, 2002, 2003 AND 20032004
(Figures in tables are presented in millions of Rupiah, unless otherwise stated)

g. Investments
  g. Investments

     i. Time Depositsdeposits

      Time deposits with maturities of more than three months are presented as temporary investments.

     ii. Investments in Securitiessecurities

      Investments in available-for-sale securities are stated at fair value. Unrealized holding gains or losses on available-for-sale securities are excluded from income of the current year and are reported as a separate component in the stockholders’ equity section until realized. Realized gains or losses from the sale of available-for-sale securities are recognized in the income of the current year, and are determined on a specific-identification basis. A decline in the fair value of any available-for-sale securities below cost that is deemed to be other-than-temporary is charged to income of the current year.

     iii. Investments in Associated Companiesassociated companies

      Investments in shares of stock in which the Company has 20% to 50% of the voting rights, and over which the Company exerts significant influence, but not control, over the financial and operating policies are accounted for using the equity method. Under this method, the Company recognizes the Company’s proportionate share in the income or loss of the associated company from the date that significant influence commences until the date that significant influence ceases. When the Company’s share of loss exceeds the carrying amount of the associated company, the carrying amount is reduced to nil and recognition of further losses is discontinued except to the extent that the Company has incurred obligations in respect of the associated company.

      On a continuous basis, but no less frequently than at the end of each year, the Company evaluates the carrying amount of its ownership interests in investee companies for possible impairment. Factors considered in assessing whether an indication of other than temporary impairment exists include the achievement of business plan objectives and milestones including cash flow projections and the results of planned financing activities, the financial condition and prospects of each investee company, the fair value of the ownership interest relative to the carrying amount of the investment, the period of time the fair value of the ownership interest has been below the carrying amount of the investment and other relevant factors. Impairment to be recognized is measured based on the amount by which the carrying amount of the investment exceeds the fair value of the investment. Fair value is determined based on quoted market prices (if any), projected discounted cash flows or other valuation techniques as appropriate.

      Changes in the value of investments due to changes in the equity of associated companies arising from capital transactions of such associated companies with other parties are recognized directly in equity and are reported as “Difference due to change of equity in associated companies” in the stockholders’ equity section. Differences previously credited directly to equity as a result of equity transactions in associated companies are released to the statement of income upon the sale of an interest in the associate in proportion with percentage of the interest sold.

      The functional currency of PT Pasifik Satelit Nusantara and PT Citra Sari Makmur is the U.S. Dollar. For the purpose of reporting these investments using the equity method, the assets and liabilities of these companies as of the balance sheet date are translated into Indonesian Rupiah using the rates of

F-26F-24

PERUSAHAAN PERSEROAN (PERSERO)
P.T. TELEKOMUNIKASI INDONESIA Tbk AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
DECEMBER 31, 20022003 AND 2003,2004, AND FOR YEARS ENDED
DECEMBER 31, 2001, 2002, 2003 AND 20032004
(Figures in tables are presented in millions of Rupiah, unless otherwise stated)

the rates of exchange prevailing at that date, while revenues and expenses are translated into Indonesian Rupiah at the average rates of exchange for the year. The resulting translation adjustments are reported as part of “Translation adjustment” in the stockholders’ equity section.

     iv. Other Investmentsinvestments

      Investments in shares of stock with ownership interests of less than 20% that do not have readily determinable fair values and are intended for long-term investments are carried at cost and are adjusted only for other-than-temporary decline in the value of individual investments. Any such write-down is charged directly to income of the current year.

  h. Trade and Other Accounts Receivable

h. Trade and other accounts receivable
      Trade and other accounts receivable are recorded net of an allowance for doubtful accounts, based upon a review of the collectibility of the outstanding amounts at the end of the year. Accounts are written off against the allowance during the period in which they are determined to be not collectible.

      Trade and other accounts receivable are recorded at the invoiced amount. The allowance for doubtful accounts is the Company’s best estimate of the amount of probable credit losses in the Company’s existing accounts receivable. The Company determines the allowance based on historical write-off experience. The Company reviews its allowance for doubtful accounts monthly. Past due balances over 90 days for retail customers are fully provided, and past due balance for non-retail customers over a specified amount are reviewed individually for collectibility. Account balances are charged off against the allowance after all means of collection have been exhausted and the potential for recovery is considered remote. The Company does not have any off-balance sheet credit exposure related to its customers.

  i. Inventories

i. Inventories
      Inventories, principally consist of components and modules, which are transferred to Plant, Property and Equipment upon use. Inventories also include SIMSubscriber Identification Module (“SIM”) card, Removable User Identity Module (“RUIM”) card and prepaid voucher blanks.

      Cost is determined using the weighted average method for components, SIM card, RUIM card and prepaid voucher blanks, and the specific-identification method for modules.

      Allowance for obsolescence is primarily based on the estimated forecast of future usage of these items.

  j. Prepaid Expenses

j. Prepaid expenses
      Prepaid expenses are amortized over their beneficial periods using the straight-line method.

  k. Property, Plant and Equipment — Direct Acquisitions

k. Property, plant and equipment — direct acquisitions
      Property, plant and equipment directly acquired are stated at cost, except for certain revalued assets, less accumulated depreciation.

F-27F-25

PERUSAHAAN PERSEROAN (PERSERO)
P.T. TELEKOMUNIKASI INDONESIA Tbk AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
DECEMBER 31, 20022003 AND 2003,2004, AND FOR YEARS ENDED
DECEMBER 31, 2001, 2002, 2003 AND 20032004
(Figures in tables are presented in millions of Rupiah, unless otherwise stated)

Property, plant and equipment, except land, are depreciated using the straight-line method, based on the estimated useful lives of the assets as follows:
     
Years
Buildings  20 
Switching equipment  5–15 
Telegraph, telex and data communication equipment  5–15 
Transmission installation and equipment  5–20 
Satellite, earth station and equipment  3–15 
Cable network  5–15 
Power supply  3–10 
Data processing equipment  3–10 
Other telecommunications peripherals  5 
Office equipment  3–5 
Vehicles  5–8 
Other equipment  5 

      Land is stated at cost and is not depreciated.

      When the carrying amount of an asset exceeds its estimated recoverable amount, the asset is written down to its estimated recoverable amount, which is determined based upon the greater of its net selling price or value in use.

      The cost of maintenance and repairs is expensed as incurred. Expenditures, which extend the useful life of the asset or result in increased future economic benefits such as increase in capacity or improvement in the quality of output or standard of performance, are capitalized and depreciated based on the applicable depreciation rates.

      When assets are retired or otherwise disposed of, their carrying values and the related accumulated depreciation are eliminated from the consolidated financial statements, and the resulting gains or losses on the disposal or sale of property, plant and equipment are recognized in the statement of income.

      Computer software used for data processing is included in the value of the associated hardware.

      Property under construction is stated at cost until construction is complete, at which time it is reclassified to the specific property, plant and equipment account it relates to. During the construction period, borrowing costs, which include interest expense and foreign exchange gains or lossesdifferences incurred to finance the construction of the asset, are capitalized in proportion to the average amount of accumulated expenditures during the period. Capitalization of borrowing cost ceases when the assets are ready for its intended use.

  l. Property, Plant and Equipment under Capital Leases

l. Property, plant and equipment under capital leases
      Property, plant and equipment acquired under capital leases are stated at the present value of minimum lease payments. At inception of the lease, a corresponding liability, which equals to the present value of minimum lease payments, is also recorded and subsequently reduced by the principal

F-26

PERUSAHAAN PERSEROAN (PERSERO)
P.T. TELEKOMUNIKASI INDONESIA Tbk AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
DECEMBER 31, 2003 AND 2004, AND FOR YEARS ENDED
DECEMBER 31, 2002, 2003 AND 2004
(Figures in tables are presented in millions of Rupiah, unless otherwise stated)
component of each minimum lease payment. The interest component of each minimum lease payment is recognized in the statement of income.

F-28

PERUSAHAAN PERSEROAN (PERSERO)
P.T. TELEKOMUNIKASI INDONESIA Tbk AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

DECEMBER 31, 2002 AND 2003, AND FOR YEARS ENDED
DECEMBER 31, 2001, 2002 AND 2003
(Figures in tables are presented in millions of Rupiah, unless otherwise stated)

      Leased assets are capitalized only if all of the following criteria are met: (a) the lessee has an option to purchase the leased asset at the end of the lease period at a price agreed upon at the inception of the lease agreement, and (b) the sum of periodic lease payments, plus the residual value, will cover the acquisition price of the leased asset and related interest, and (c) there is a minimum lease period of 2 years.

      Leased assets are depreciated using the same method and over the same estimated useful lives used for directly acquired property, plant and equipment.

  m. Revenue-Sharing Arrangements

m. Revenue-sharing arrangements
      The Company records assets under revenue-sharing agreements as “Property, plant and equipment under revenue-sharing arrangements” (with a corresponding initial credit to “Unearned income underon revenue-sharing arrangements” presented in the Liabilities section of the balance sheet) based on the costs incurred by the investors as agreed upon in the contracts entered into between the Company and the investors. Property, plant and equipment are depreciated over their estimated useful lives using the straight-line method.

      Unearned income related to the acquisition of the property, plant and equipment under revenue-sharing arrangements is amortized over the revenue-sharing period using the straight-line method.

      At the end of the revenue-sharing period, the respective property, plant and equipment under revenue-sharing arrangements are reclassified to the “Property, plant and equipment” account.

      Revenue earned under revenue-sharing arrangements is recognized on the basis of the Company’s share as provided in the agreement.

  n. Joint Operation Schemes

n. Joint operation schemes
      Revenues from joint operation schemes include amortization of the investor’s initial payments, Minimum Telkom Revenues (“MTR”) and the Company’s share of Distributable KSO Revenues (“DKSOR”).

      Unearned initial investor payments received as compensation from the KSO Investors are presented net of all direct costs incurred in connection with the KSO agreement and are amortized using the straight-line method over the KSO period of 15 years starting from January 1, 1996.

      MTR are recognized on a monthly basis based upon the contracted MTR amount for the current year, in accordance with the KSO agreement.

      The Company’s share of DKSOR is recognized on the basis of the Company’s percentage share of the KSO revenues, net of MTR and operational expenses of the KSO Units, as provided in the KSO agreements.

      Under PSAK No. 39, “Accounting for Joint Operation Schemes”, which supersedes paragraph 14 of PSAK No. 35, “Accounting for Telecommunication Services Revenue”, the assets built by the KSO Investors under the Joint Operation Schemes are recorded in the books of the KSO Investors which

F-27

PERUSAHAAN PERSEROAN (PERSERO)
P.T. TELEKOMUNIKASI INDONESIA Tbk AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
DECEMBER 31, 2003 AND 2004, AND FOR YEARS ENDED
DECEMBER 31, 2002, 2003 AND 2004
(Figures in tables are presented in millions of Rupiah, unless otherwise stated)
operate the assets and are transferred to the Company at the end of the KSO period or upon termination of the KSO agreement.

F-29

PERUSAHAAN PERSEROAN (PERSERO)
P.T. TELEKOMUNIKASI INDONESIA Tbk AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
o. Deferred charges for landrights

DECEMBER 31, 2002 AND 2003, AND FOR YEARS ENDED
DECEMBER 31, 2001, 2002 AND 2003
(Figures in tables are presented in millions of Rupiah, unless otherwise stated)

  o. Deferred Charges for Landrights

      Costs incurred to process and extend the landrights are deferred and amortized using the straight-line method over the term of the landrights.

p. Revenue and expense recognition
  p. Revenue and Expense Recognition

     i. Fixed Line Telephone Revenuesline telephone revenues

      Revenues from fixed line installations are recognized at the time the installations are placed in service. Revenues from usage charges are recognized as customers incur the charges.

     ii. Cellular and Fixed Wireless Telephone Revenuesfixed wireless telephone revenues

      Revenues from service connections (connection fees) are recognized as income at the time the connections occur. Revenues from airtime (for cellular) and monthly subscription charges are recognized as accessed and as earned. Revenues from prepaid card customers, which consist of the sale of starter packs, also known as Subscriber Identification Module (“SIM”)SIM cards in the case of cellular and Removable Unit Identity Card (“RUIM”)RUIM in the case of fixed wireless telephone, and pulse reload vouchers, are recognized as follows:

 1. Sale of starter packs is recognized as revenue upon delivery of the starter packs to distributors, dealers or directly to customers.
 
 2. Sale of pulse reload vouchers is recognized initially as unearned income and recognized proportionately as revenue based on successful calls made by the subscribers or whenever the unused stored value of the voucher has expired.

     iii. Interconnection Revenuesrevenues

      Revenues from network interconnection with other domestic and international telecommunications carriers are recognized as incurred and are presented net of interconnection expenses.

      Expenses are recognized on an accrual basis.

  q. Pension Benefits

  i. Defined Benefit Pension Plans

     The Company and certain subsidiaries established defined benefit pension plans covering substantially all of their permanent employees.

q. Pension benefits
i. Defined benefit pension plans
      The Company’s net obligation in respect of the defined benefit pension plans is calculated at the net present value of estimated future benefits that the employees have earned in return for their service in the current and prior periods, deducted by any plan assets. The calculation is performed by an independent actuary using the projected unit credit method.

      The benefits earned by the employees are recognized in the statement of income on a straight-line basis over the average remaining service period untilof active employees expected to receive benefits under the benefits become vested. Toplan, except to the extent that the benefits vest immediately, the expense isrelate to pensioners which are recognized immediately in the statement of income.

F-30F-28

PERUSAHAAN PERSEROAN (PERSERO)
P.T. TELEKOMUNIKASI INDONESIA Tbk AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
DECEMBER 31, 20022003 AND 2003,2004, AND FOR YEARS ENDED
DECEMBER 31, 2001, 2002, 2003 AND 20032004
(Figures in tables are presented in millions of Rupiah, unless otherwise stated)

     ii. Early Retirement Benefits

ii. Early retirement benefits
      Early retirement benefits are accrued at the time the Company makes a commitment to provide early retirement benefits as a result of an offer made in order to encourage voluntary redundancy. The Company is demonstrably committed to a termination when, and only when, the Company has a detailed formal plan for the early retirement and is without realistic possibility of withdrawal.

  r. Employee Benefits Other Than Pension

     i. Long Service Awards (“LSA”)

r. Employee benefits other than pension
i. Long service awards (“LSA”)
      The Company’s employees are entitled to receive certain cash awards based on length of service requirement. The benefits are either paid at the time the employee reaches certain anniversary dates during employment, upon retirement or at the time of termination.

      The Company’s obligation with respect to LSA is calculated by an independent actuary using the projected unit credit method.

     ii. Post-Retirement Health Care Plan

ii. Post-retirement health care plan
      The Company provides a post-retirement health care plan that covers its retired employees who meet age, participation and length of service requirements at retirement, and their eligible dependants.

dependents.

      The Company’s obligation with respect to post-retirement health care plan is calculated by an independent actuary using the projected unit credit method.

  s. Income Tax

s. Income tax
      The Company and subsidiaries apply the asset and liability method of accounting for income tax. Under this method, deferred tax assets and liabilities are recognized for temporary differences between the financial and tax bases of assets and liabilities at each reporting date. This method also requires the recognition of future tax benefits, such as the benefit of tax loss carryforwards, to the extent their realization is probable. Deferred tax assets and liabilities are measured using enacted or substantially enacted tax rates at each reporting date which are expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled.

      Income tax is charged or credited in the statement of income, except to the extent that it relates to items recognized directly in equity, such as difference in value of restructuring transactions between entities under common control (Note 2d) and effect of foreign currency translation adjustment for certain investments in associated companies (Note 2g. iii), in which case itincome tax is also recognizedcharged or credited directly into equity.

  t. Earnings per Share and Earnings per American Depositary Share (“ADS”)

t. Earnings per share and earnings per American Depositary Share (“ADS”)
      Basic earnings per share is computed by dividing net income by the weighted average number of shares outstanding during the year. In connection with the stock split discussed in Note 1b, the prior years’ share and per share amount have been restated to reflect the stock split. Net income per ADS is computed by multiplying basic earnings per share by 20,40, the number of shares represented by each ADS.

  u. Segment InformationF-29

PERUSAHAAN PERSEROAN (PERSERO)
P.T. TELEKOMUNIKASI INDONESIA Tbk AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
DECEMBER 31, 2003 AND 2004, AND FOR YEARS ENDED
DECEMBER 31, 2002, 2003 AND 2004
(Figures in tables are presented in millions of Rupiah, unless otherwise stated)
u. Segment information
      The Company and its subsidiaries’ segment information is presented based upon identified business segments. A business segment is a distinguishable unit that provides different products and

F-31

PERUSAHAAN PERSEROAN (PERSERO)
P.T. TELEKOMUNIKASI INDONESIA Tbk AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

DECEMBER 31, 2002 AND 2003, AND FOR YEARS ENDED
DECEMBER 31, 2001, 2002 AND 2003
(Figures in tables are presented in millions of Rupiah, unless otherwise stated)

services and is managed separately. Business segment information is consistent with operating information routinely reported to the Company’s chief operating decision maker.

      Segment information is prepared in conformity with the accounting policies adopted for preparing and presenting the consolidated financial statements.

  v. Derivative Instruments

v. Derivative instruments
      Derivative transactions are accounted for in accordance with PSAK No. 55, “Accounting for Derivative Instruments and Hedging Activities” which requires that all derivative instruments be recognized in the financial statements at fair value. To qualify for hedge accounting, PSAK No. 55 requires certain criteria to be met, including documentation required to have been in place at the inception of the hedge.

      Changes in fair value of derivative instruments that do not qualify for hedge accounting are recognized in the statement of income. If a derivative instrument areis designated and qualify for hedge accounting, changes in fair value of derivative instruments are recorded as adjustments to the assets or liabilities being hedged in the income of the current year or in the stockholders’ equity, depending on the type of hedge transaction represented and the effectiveness of the hedge.

  w. Use of Estimates

w. Use of estimates
      The preparation of the consolidated financial statements requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the consolidated financial statements and the reported amounts of revenues and expenses during the reporting period. Significant items subject to such estimates and assumptions include the carrying amount of property, plant and equipment and intangible assets, valuation allowance for receivables and obligations related to employee benefits. Actual results could differ from those estimates.

x. Reclassification of accounts
      Certain accounts in the 2003 balance sheet have been reclassified to conform to the current year’s presentation.
3. TRANSLATION OF RUPIAH INTO UNITED STATES DOLLARS

      The consolidated financial statements are stated in Indonesian Rupiah. The translations of Indonesian Rupiah amounts into United States Dollars are included solely for the convenience of the readers and have been made using the average of the market buy and sell rates of Rp8,440Rp9,290 to US$1 published by Reuters on December 31, 2003.2004. The convenience translations should not be construed as representations that the Indonesian Rupiah amounts have been, could have been, or could in the future be, converted into United States Dollars at this or any other rate of exchange.

F-30

PERUSAHAAN PERSEROAN (PERSERO)
P.T. TELEKOMUNIKASI INDONESIA Tbk AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
DECEMBER 31, 2003 AND 2004, AND FOR YEARS ENDED
DECEMBER 31, 2002, 2003 AND 2004
(Figures in tables are presented in millions of Rupiah, unless otherwise stated)
4. CROSS-OWNERSHIP TRANSACTIONS WITH INDOSATACQUISITION OF KSO INVESTORS AND KSO IV
a. Dayamitra
      On May 17, 2001, the Company acquired 90.32% of the shares of Dayamitra for an aggregate purchase price of US$134.2 million (including consultants’ fees of approximately US$3.3 million or Rp37,325 million). Pursuant to the terms of the agreement, the Company paid the initial payment amount of US$18.3 million (Rp206,675 million) on May 17, 2001, the closing date of the transaction, and US$8.9 million (Rp100,989 million) on August 10, 2001 as a post-closing working capital adjustment to the purchase price. The remaining amount of US$103.6 million (Rp1,171,157 million) was paid through an escrow arrangement discussed below, in eight quarterly installments of US$12.9 million, from August 17, 2001 to May 17, 2003. The estimated present value of US$103.6 million at the discount rate of 14% was estimated to be US$89.1 million (Rp1,006,310 million).
      The acquisition of Dayamitra has been accounted for using the purchase method of accounting. This acquisition resulted in the identification of an intangible asset amounting to Rp1,276,575 million representing the right to operate the business in the KSO area. The amount is being amortized over the remaining term of the KSO agreement of 9.6 years (Note 14). There was no goodwill arising from this acquisition.
      The Company acquired control of Dayamitra on May 17, 2001 and has consequently consolidated Dayamitra from that date.
      The allocation of the acquisition cost for the 90.32% ownership in Dayamitra was as follows:
Rp
Purchase consideration — net of discount on promissory notes1,351,299
Fair value of net assets acquired:
— Cash and cash equivalents93,652
— Distributable KSO revenue receivable62,398
— Other current assets9,450
— Property, plant and equipment1,401,479
— Intangible assets1,276,575
— Other non-current assets19,510
— Current liabilities(236,265)
— Deferred tax liabilities(581,816)
— Non-current liabilities(693,684)
1,351,299
      Net cash outflow on the acquisition of Dayamitra amounted to Rp241,300 million.

F-31

PERUSAHAAN PERSEROAN (PERSERO)
P.T. TELEKOMUNIKASI INDONESIA Tbk AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
DECEMBER 31, 2003 AND 2004, AND FOR YEARS ENDED
DECEMBER 31, 2002, 2003 AND 2004
(Figures in tables are presented in millions of Rupiah, unless otherwise stated)
      In connection with the Dayamitra transaction, the Company also entered into the following agreements:
      1. Option Agreement
      The Company entered into an Option Agreement with TM Communications (HK) Ltd (“TMC”), providing the Company with an option to acquire the remaining 9.68% equity interest in Dayamitra, referred to as the Option Share. Under the agreement, TMC, the selling stockholder, granted the Company an exclusive option to purchase full and legal title to the Option Share (the “Call Option”), and the Company granted the selling stockholder an exclusive option to sell to the Company full legal title to those shares (the “Put Option”).
      In consideration for the grant of the options, the Company paid to the selling stockholder the option purchase price of US$6.3 million plus US$1 million as payment for Dayamitra’s adjusted working capital, or a total of US$7.3 million. The amount was payable in eight quarterly installments of US$0.9 million beginning on August 17, 2001 and ending on May 17, 2003. Payments were made through an escrow account established under the Escrow Agreement discussed below. As of December 31, 2003, the option purchase price that had been paid by the Company amounted to US$7.3 million or equivalent to Rp65,458 million and is presented in “Advance payments for investments in shares of stock” in the consolidated balance sheet (Note 4f).
      The Company was entitled to exercise the option any time after Dayamitra satisfied all of its obligations under the JBIC (formerly J-Exim) loan beginning on May 17, 2003 and until five business days prior to March 26, 2006. The strike price payable by the Company to the selling stockholder for the Option Shares upon exercise of the option was US$16.2 million less certain amounts that are stipulated in the Option Agreement.
      Dayamitra repaid the JBIC loan and the JBIC loan agreement was terminated on March 25, 2003.
      On December 14, 2004, the Company exercised the option by entering into a Sale and Purchase Agreement to acquire TMC’s 9.68% outstanding shares in Dayamitra with the strike price of US$16.2 million which the payment will be due on March 26, 2006. Payment of the strike price will be made through an escrow account established under the Escrow Agreement discussed below. The Company is required to deposit US$12.6 million (representing the strike price of US$16.2 million less funds available in the escrow account on November 30, 2004 of US$2.4 million and withholding tax of US$1.2 million) in sixteen monthly installments of US$0.8 million beginning on December 26, 2004 through March 26, 2006.
      The purchase price for 9.68% outstanding shares of Dayamitra was US$22.1 million or equivalent to Rp203,028 million which represents the present value of the option strike price (US$16.2 million) using a discount rate of 7.5% at the acquisition date plus the option purchase price (US$6.3 million) and payment for Dayamitra’s adjusted working capital (US$1 million). This additional acquisition resulted in intangible assets of Rp231,477 million. The amount is being amortized over the remaining term of the KSO agreement of 6 years (Note 14). There was no goodwill arising from this additional acquisition. Had this acquisition taken place on January 1 of the previous year, consolidated income would not have been significantly different from the reported amounts.

F-32

PERUSAHAAN PERSEROAN (PERSERO)
P.T. TELEKOMUNIKASI INDONESIA Tbk AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
DECEMBER 31, 2003 AND 2004, AND FOR YEARS ENDED
DECEMBER 31, 2002, 2003 AND 2004
(Figures in tables are presented in millions of Rupiah, unless otherwise stated)
      As of December 31, 2004, the remaining option strike price to be paid to TMC, before unamortized discount, amounted to US$15.0 million (Rp139,752 million) and is presented as “Liabilities of business acquisitions” (Note 25).
      2. Escrow Agreement
      An Escrow Agreement dated May 17, 2001, was entered into by and among the Company, Dayamitra, PT Intidaya Sistelindomitra (“Intidaya”), Cable and Wireless plc (“C&W plc”), PT Mitracipta Sarananusa (“Mitracipta”), TMC, Tomen Corporation (“Tomen”), Citibank N.A. Singapore (the Singapore Escrow Agent) and Citibank N.A. Jakarta (the Jakarta Escrow Agent), to establish an Escrow Account and facilitate the payment (Note 15).
b. Pramindo
      On April 19, 2002, the Company and the stockholders of Pramindo, namely France Cables et Radio SA, PT Astratel Nusantara, Indosat, Marubeni Corporation, International Finance Corporation (“IFC”) and NMP Singapore Pte. Ltd. (“NMP Singapore”) (collectively the “Selling Stockholders”) entered into a Conditional Sale and Purchase Agreement (“CSPA”) pursuant to which the Company acquired all of Pramindo’s shares. The Selling Stockholders shares were transferred to an escrow account (hereafter referred as “escrow shares”).
      Legal title to the escrow shares was transferred to Telkom in 3 (three) specific tranches on September 15, 2002 — 30%, September 30, 2003 — 15% and on December 31, 2004 — 55% upon payment of the promissory notes issued to the Selling Stockholders as payment for the acquisition of the shares. The escrow shares can be accessed by the Selling Stockholders only upon default on payment of the promissory notes by the Company and no dividends can be paid out until the arrangements between the parties are completed or terminated in accordance with the terms of the relevant agreements.
      The Company and the Selling Stockholders also entered into a Stockholders Voting Agreement (“SVA”) on August 15, 2002, pursuant to which each stockholder of Pramindo delivered to the Company a Power of Attorney (“PoA”) whereby the Company obtained the right to vote the escrow shares. The Company thereby acquired the right to nominate all of the members of the Board of Directors and Board of Commissioners of Pramindo. The SVA is subject to certain reserve matters which serve as protective rights to the Selling Stockholders.
      The aggregate purchase price amounted to US$390.3 million (Rp3,464,040 million) plus Rp250,000 million, represented by an initial payment of approximately US$9.3 million (Rp82,218 million), consultants’ fees of US$5.9 million (Rp52,818 million), working capital reimbursement of Rp250,000 million, and the issue by Telkom of Promissory Notes (series I and series II) with an aggregate face value of US$375.1 million, of which the present value at the discount rate of 8.76% at the effective date of the acquisition was estimated to be US$332.8 million (Rp2,953,617 million). The series I promissory notes are non-interest bearing and the series II promissory notes carry a market interest rate. The Promissory Notes are to be paid in 10 unequal quarterly installments beginning September 15, 2002 and are irrevocable, unconditional and transferable.
      The total purchase consideration was allocated first to the net monetary assets and then the fixed assets acquired. An intangible asset of Rp2,752,267 million was identified representing right to operate

F-33

PERUSAHAAN PERSEROAN (PERSERO)
P.T. TELEKOMUNIKASI INDONESIA Tbk AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
DECEMBER 31, 2003 AND 2004, AND FOR YEARS ENDED
DECEMBER 31, 2002, 2003 AND 2004
(Figures in tables are presented in millions of Rupiah, unless otherwise stated)
the business in the KSO area. The amount is being amortized over the remaining term of the KSO agreement of 8.4 years (Note 14). There was no goodwill arising from this acquisition.
      In addition, the portion that relates to Indosat’s 13% equity interest in Pramindo has been accounted for as a restructuring of entities under common control. The difference between the purchase consideration and the historical amount of the net assets acquired amounting to Rp296,038 million, included as “Difference in value of restructuring transactions between entities under common control” in the stockholders’ equity section, is calculated as follows:
Rp
Purchase consideration — net of discount on promissory notes3,338,653
Historical amount of net assets1,061,437
Difference in value for 100% ownership2,277,216
Difference adjusted to stockholders’ equity for Indosat’s 13% ownership in Pramindo296,038
      The Company acquired control of Pramindo on August 15, 2002 and has consequently consolidated Pramindo from August 1, 2002 being the nearest convenient balance date.
      The allocation of the acquisition cost was as follows:
Rp
Purchase consideration — net of discount on promissory notes3,338,653
Fair value of net assets acquired:
— Cash and cash equivalents141,475
— Distributable KSO revenue receivable187,468
— Other current assets13,839
— Property, plant and equipment1,807,338
— Intangible assets2,752,267
— Other non-current assets160,139
— Current liabilities(284,120)
— Deferred tax liabilities(1,115,645)
— Non-current liabilities(620,146)
Fair value of net assets3,042,615
Difference adjusted to equity for 13% Indosat’s ownership in Pramindo296,038
Total purchase consideration3,338,653
      Net cash outflow on the acquisition of Pramindo amounted to Rp243,561 million.
      The outstanding promissory notes issued for the acquisition of Pramindo are presented as “Liabilities of business acquisitions” in the consolidated balance sheet as of December 31, 2003 (Note 25). As of December 31, 2003, the outstanding promissory notes, before unamortized discount, amounted to US$191.2 million (Rp1,615,473 million). On January 28, 2004, the Company obtained a loan to finance the payment of these promissory notes (Note 20b). On March 15, 2004, the Company

F-34

PERUSAHAAN PERSEROAN (PERSERO)
P.T. TELEKOMUNIKASI INDONESIA Tbk AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
DECEMBER 31, 2003 AND 2004, AND FOR YEARS ENDED
DECEMBER 31, 2002, 2003 AND 2004
(Figures in tables are presented in millions of Rupiah, unless otherwise stated)
repaid the remaining balance of these promissory notes and legal title to all of Pramindo’s shares has been completely transferred to the Company.
c. AWI
      Effective on July 31, 2003 (the “closing date”), the Company acquired 100% of the outstanding common stock of AWI, the investor in KSO III, for approximately Rp1,141,752 million plus the assumption of AWI’s debts of Rp2,577,926 million. The purchase consideration included non-interest bearing promissory notes with a face value of US$109.1 million (Rp927,272 million), of which the present value at the discount rate of 5.16% at the closing date was estimated to be US$92.7 million (Rp788,322 million). The promissory notes are to be paid in 10 equal semi-annual installments beginning July 31, 2004.
      The acquisition of AWI has been accounted for using the purchase method of accounting. There was no goodwill arising from this acquisition. The following table summarizes the final purchase price allocation of the acquired assets and assumed liabilities based on estimates of their respective fair values at the closing date:
Rp
Distributable KSO revenue receivable540,267
Property, plant and equipment1,556,269
Intangible assets1,982,564
Other assets34,372
Deferred tax liabilities(393,794)
Fair value of net assets acquired3,719,678
Borrowings assumed(2,577,926)
Amount of cash and promissory notes given up1,141,752
      Intangible assets identified from this acquisition represent right to operate the business in the KSO area and the amount is being amortized over the remaining term of the KSO agreement of 7.4 years (Note 14).
      The Company’s consolidated results of operations include the operating results of AWI since July 31, 2003, the date of acquisition.
      The outstanding promissory notes issued for the acquisition of AWI are presented as “Liabilities of business acquisitions” in the consolidated balance sheets as of December 31, 2003 and 2004 (Note 25). As of December 31, 2003 and 2004, the outstanding promissory notes, before unamortized discount, amounted to US$109.1 million (Rp921,818 million) and US$98.2 million (Rp913,091 million), respectively.
      The allocation of the acquisition cost described above was based on an independent appraisal of fair values. In addition, the Company also entered into a settlement agreement with AWI pursuant to which the Company and AWI irrevocably settled, discharged, and released claims and counterclaims in their ICC arbitration proceeding, and the Company agreed to pay a settlement amount of US$20 million. Based on this settlement and subsequent receipt of trade receivables from KSO III, the

F-35

PERUSAHAAN PERSEROAN (PERSERO)
P.T. TELEKOMUNIKASI INDONESIA Tbk AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
DECEMBER 31, 2003 AND 2004, AND FOR YEARS ENDED
DECEMBER 31, 2002, 2003 AND 2004
(Figures in tables are presented in millions of Rupiah, unless otherwise stated)
Company decided to reverse the provision for bad debts that had previously been recognized (Note 6d) and has accrued the costs related to the settlement at December 31, 2002.
  d. Amendment of the Joint Operation Scheme in Division Regional IV (“KSO IV”)
      On January 20, 2004, the Company and PT Mitra Global Telekomunikasi Indonesia (“MGTI”), the investor in KSO IV, entered into an agreement to amend and restate their joint operation agreement (“KSO agreement”). The principal provisions in the original KSO agreement that have been amended are:
• The rights to operate fixed-line telecommunications services are transferred to the Company, where KSO IV is operated under the management, supervision, control and responsibility of the Company.
• Responsibilities for funding construction of new telecommunication facilities and payments of operating expenses incurred in KSO IV are assigned to the Company.
• Risk of loss from damages or destruction of assets operated by KSO IV is transferred to the Company.
• At the end of the KSO period (December 31, 2010), all rights, title and interest of MGTI in existing property, plant and equipment (including new additional installations) and inventories shall be transferred to the Company at no cost.
• The Company’s rights to receive Minimum Telkom Revenues (“MTR”) and share in Distributable KSO Revenues (“DKSOR”) under the original KSO agreement were amended so that MGTI receives fixed monthly payments (“Fixed Investor Revenues”) beginning in February 2004 through December 2010 totaling US$517.1 million and the Company is entitled to the balance of KSO revenues net of operating expenses and payments to MGTI for Fixed Investor Revenues. In addition, payments for Fixed Investor Revenues must be made to MGTI before any payments can be made to the Company.
• In the event funds in KSO IV are insufficient to pay Fixed Investor Revenues to MGTI, the Company is required to pay the shortfall to MGTI.
      As a result of the amendment of the KSO agreement, the Company obtained the legal right to control financial and operating decisions of KSO IV. Accordingly, the Company has accounted for this transaction as a business combination using the purchase method of accounting.
      The purchase price for this transaction was approximately US$390.7 million or equivalent to Rp3,285,362 million which represents the present value of fixed monthly payments (totaling US$517.1 million) to be paid to MGTI beginning in February 2004 through December 2010 using a discount rate of 8.3% plus direct cost of the business combination. The allocation of the acquisition cost was as follows:
Rp
Property, plant and equipment2,377,134
Intangible assets908,228
Total purchase consideration3,285,362

F-36

PERUSAHAAN PERSEROAN (PERSERO)
P.T. TELEKOMUNIKASI INDONESIA Tbk AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
DECEMBER 31, 2003 AND 2004, AND FOR YEARS ENDED
DECEMBER 31, 2002, 2003 AND 2004
(Figures in tables are presented in millions of Rupiah, unless otherwise stated)
      The allocation of the acquisition cost described above was based on an independent appraisal of fair values. Intangible assets identified from this acquisition represent right to operate the business in the KSO area and the amount is being amortized over the remaining term of the KSO agreement of 6.9 years (Note 14). There was no goodwill arising from this acquisition.
      The Company’s consolidated results of operations include the operating results of KSO IV since February 1, 2004 being the nearest convenient balance date.
      As of December 31, 2004, the remaining monthly payments to be made to MGTI, before unamortized discount, amounted to US$462.9 million (Rp4,305,125 million) and is presented as “Liabilities of business acquisitions” (Note 25).
  e. Pro forma operating results related to acquisition of KSO investors and KSO IV
      The following unaudited pro forma financial information reflects the consolidated results of operations of the Company as if the acquisition of Pramindo and AWI had taken place on January 1, 2002 and KSO IV on January 1, 2003. The pro forma information includes adjustments for amortization of intangible assets, depreciation expense on property, plant and equipment based on the allocated purchase price, interest expense on incremental borrowings and income taxes. The pro forma financial information is not necessarily indicative of the results of operations as it would have been had the transactions been effected on the assumed dates or indicative of future operations.
             
  2002 2003 2004
       
Operating revenues  22,297,575   28,343,447   34,020,663 
Operating income  8,778,831   11,687,955   13,916,465 
Income before tax  11,726,254   11,399,321   12,071,780 
Net income  8,127,080   6,509,255   6,117,619 
Net income per share — in full Rupiah amount  403.13   322.88   303.45 
Net income per ADS — in full Rupiah amount  16,125.16   12,915.19   12,138.13 
  f. Advance payments for investments in shares of stock
         
  2003 2004
     
Dayamitra (Note 4a)  65,458   — 
       
5. CASH AND CASH EQUIVALENTS
            
  2003 2004
     
Cash on hand  6,790   8,631 
       
Cash in banks        
 Related parties        
  Rupiah        
   Bank Negara Indonesia  217,276   158,519 
   Bank Mandiri  109,887   192,056 
   Bank Rakyat Indonesia  9,988   10,712 
   Bank Pos Nusantara  1,135   1,278 
       
Total  338,286   362,565 
       

F-37

PERUSAHAAN PERSEROAN (PERSERO)
P.T. TELEKOMUNIKASI INDONESIA Tbk AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
DECEMBER 31, 2003 AND 2004, AND FOR YEARS ENDED
DECEMBER 31, 2002, 2003 AND 2004
(Figures in tables are presented in millions of Rupiah, unless otherwise stated)
            
  2003 2004
     
  Foreign currencies        
   Bank Mandiri  32,016   98,951 
   Bank Negara Indonesia  1,576   1,765 
   Bank Rakyat Indonesia  453   612 
       
Total  34,045   101,328 
       
Total — related parties  372,331   463,893 
       
 Third parties        
  Rupiah        
   Citibank NA  302   362 
   Bank Bukopin  9,463   10,190 
   Bank Central Asia  7,889   5,906 
   Bank Niaga  2,102   1,884 
   ABN AMRO Bank  251   81,184 
   Bank Danamon  172   114 
   Lippo Bank  274   2,265 
   Bank Internasional Indonesia  3   26 
   Bank Buana Indonesia  218   45 
   Bank Muamalat Indonesia  76   75 
   Bank Mega  4,239   689 
   Deutsche Bank  6,097   9,173 
       
Total  31,086   111,913 
       
  Foreign currencies        
   Citibank NA  3,231   4,416 
   Deutsche Bank  2,412   541 
   Standard Chartered Bank  1,808   322 
   ABN AMRO Bank  73   95 
   Bank Internasional Indonesia  22   31 
   Bank Central Asia  31   39 
   The Bank of Tokyo Mitsubishi  26   22 
       
Total  7,603   5,466 
       
Total — third parties  38,689   117,379 
       
Total cash in banks  411,020   581,272 
       

F-38

PERUSAHAAN PERSEROAN (PERSERO)
P.T. TELEKOMUNIKASI INDONESIA Tbk AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
DECEMBER 31, 2003 AND 2004, AND FOR YEARS ENDED
DECEMBER 31, 2002, 2003 AND 2004
(Figures in tables are presented in millions of Rupiah, unless otherwise stated)
            
  2003 2004
     
Time deposits        
 Related parties        
  Rupiah        
   Bank Mandiri  968,829   794,371 
   Bank Rakyat Indonesia  529,350   231,805 
   Bank Negara Indonesia  485,115   206,195 
   Bank Tabungan Negara  169,590   75,960 
       
Total  2,152,884   1,308,331 
       
  Foreign currencies        
   Bank Mandiri  526,384   — 
   Bank Rakyat Indonesia  —   32,480 
   Bank Negara Indonesia  5,789   139,450 
       
Total  532,173   171,930 
       
Total — related parties  2,685,057   1,480,261 
       
 Third parties        
  Rupiah        
   Standard Chartered Bank  287,122   698,750 
   Bank Mega  91,342   98,906 
   Bank Bukopin  96,099   98,710 
   Bank Yudha Bhakti  1,000   — 
   Bank Niaga  4,500   102,787 
   Deutsche Bank  359,342   — 
   Bank Danamon  145,725   61,115 
   ABN AMRO Bank  1,000   11,000 
   Bank NISP  47,369   53,650 
   Bank Bumiputra  —   18,303 
   Bank Syariah Mega Indonesia  —   16,000 
   Bank Muamalat Indonesia  —   7,000 
   Bank Jabar  67,204   89,648 
       
Total  1,100,703   1,255,869 
       

F-39

PERUSAHAAN PERSEROAN (PERSERO)
P.T. TELEKOMUNIKASI INDONESIA Tbk AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
DECEMBER 31, 2003 AND 2004, AND FOR YEARS ENDED
DECEMBER 31, 2002, 2003 AND 2004
(Figures in tables are presented in millions of Rupiah, unless otherwise stated)
           
  2003 2004
     
 Foreign currencies        
  Standard Chartered Bank  5,697   225,208 
  The Hongkong Shanghai Bank Corporation  —   253,043 
  Deutsche Bank  885,205   1,051,839 
       
Total  890,902   1,530,090 
       
Total — third parties  1,991,605   2,785,959 
       
Total time deposits  4,676,662   4,266,220 
       
Total cash and cash equivalents  5,094,472   4,856,123 
       
      Range of interest rates per annum for time deposits is as follows:
         
  2003 2004
     
Rupiah  5.5% – 14.25%   3.00% – 9.50% 
Foreign currencies  0.92% – 2.25%   0.55% – 1.95% 
      The related parties which the Company places its funds are Government-owned banks. The Company places a majority of its cash and cash equivalents in these banks because they have the most extensive branch network in Indonesia and are considered to be financially sound banks as they are owned by the Government.
      Refer to Note 47 for details of related party transactions.
6. TRADE ACCOUNTS RECEIVABLE
      Trade accounts receivable from related parties and third parties arise from services provided to both retail and non-retail customers.
a. By Debtor
Related parties:
         
  2003 2004
     
KSO Units  265,517   145,810 
Government agencies  181,551   289,644 
PT Mandara Selular Indonesia  37,326   — 
PT Citra Sari Makmur  20,450   20,127 
PT Patra Telekomunikasi Indonesia  8,513   8,824 
PT Aplikanusa Lintasarta  5,819   8,780 
Others  2,679   10,847 
       
Total  521,855   484,032 
Allowance for doubtful accounts  (110,932)  (64,928)
       
Net  410,923   419,104 
       

F-40

PERUSAHAAN PERSEROAN (PERSERO)
P.T. TELEKOMUNIKASI INDONESIA Tbk AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
DECEMBER 31, 2003 AND 2004, AND FOR YEARS ENDED
DECEMBER 31, 2002, 2003 AND 2004
(Figures in tables are presented in millions of Rupiah, unless otherwise stated)
      Trade accounts receivable from certain related parties are presented net of the Company’s liabilities to such parties due to legal right of offset in accordance with agreements with those parties.
     Third parties:
         
  2003 2004
     
Residential and business subscribers  2,682,288   3,213,598 
Overseas international carriers  42,836   143,539 
Others  29,841   — 
       
Total  2,754,965   3,357,137 
Allowance for doubtful accounts  (332,960)  (457,138)
       
Net  2,422,005   2,899,999 
       
b. By Age
Related parties:
         
  2003 2004
     
Up to 6 months  350,348   396,425 
7 to 12 months  42,250   14,947 
13 to 24 months  42,920   19,659 
More than 24 months  86,337   53,001 
       
Total  521,855   484,032 
Allowance for doubtful accounts  (110,932)  (64,928)
       
Net  410,923   419,104 
       
     Third parties:
         
  2003 2004
     
Up to 3 months  2,358,570   2,773,992 
More than 3 months  396,395   583,145 
       
Total  2,754,965   3,357,137 
Allowance for doubtful accounts  (332,960)  (457,138)
       
Net  2,422,005   2,899,999 
       

F-41

PERUSAHAAN PERSEROAN (PERSERO)
P.T. TELEKOMUNIKASI INDONESIA Tbk AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
DECEMBER 31, 2003 AND 2004, AND FOR YEARS ENDED
DECEMBER 31, 2002, 2003 AND 2004
(Figures in tables are presented in millions of Rupiah, unless otherwise stated)
     c. By Currency
     Related parties
         
  2003 2004
     
Rupiah  443,930   447,657 
United States Dollar  77,925   36,375 
       
Total  521,855   484,032 
Allowance for doubtful accounts  (110,932)  (64,928)
       
Net  410,923   419,104 
       
     Third parties
         
  2003 2004
     
Rupiah  2,720,331   3,198,875 
United States Dollar  34,634   158,262 
       
Total  2,754,965   3,357,137 
Allowance for doubtful accounts  (332,960)  (457,138)
       
Net  2,422,005   2,899,999 
       
     d. Movements in the allowance for doubtful accounts
             
  2002 2003 2004
       
Beginning balance  578,785   502,989   443,892 
Additions  523,024   296,099   342,895 
Reversal of allowance for trade accounts receivable from AWI (Note 4c)  (511,933)  —   — 
Bad debts write-off  (86,887)  (355,196)  (264,721)
          
Ending balance  502,989   443,892   522,066 
          
      Management believes that the allowance for doubtful receivables is adequate to cover probable losses on uncollectible accounts.
      Except for the amounts receivable from Government Agencies, management believes that there are no significant concentrations of credit risk on these receivables.
      Refer to Note 47 for details of related party transactions.

F-42

PERUSAHAAN PERSEROAN (PERSERO)
P.T. TELEKOMUNIKASI INDONESIA Tbk AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
DECEMBER 31, 2003 AND 2004, AND FOR YEARS ENDED
DECEMBER 31, 2002, 2003 AND 2004
(Figures in tables are presented in millions of Rupiah, unless otherwise stated)
7. INVENTORIES
          
  2003 2004
     
Components:        
 Telephone terminals and spare parts  27,407   29,910 
 Cable and transmission installation spare parts  1,540   3,155 
 Other spare parts  13,521   20,546 
       
 Total  42,468   53,611 
 Allowance for obsolescence  (14,757)  (20,188)
       
 Net  27,711   33,423 
       
Modules:        
 Cable and transmission installation spare parts  55,997   53,683 
 Telephone terminals and spare parts  37,917   34,434 
 Other spare parts  272   142 
       
 Total  94,186   88,259 
 Allowance for obsolescence  (25,584)  (34,063)
       
 Net  68,602   54,196 
       
Cards:        
 SIM cards, RUIM cards and prepaid voucher blanks  57,838   115,948 
 Allowance for obsolescence  (148)  (482)
       
 Net  57,690   115,466 
       
Total  154,003   203,085 
       
      Movements in the allowance for obsolescence are as follows:
         
  2003 2004
     
Beginning balance  53,795   40,489 
Additions  4,523   14,800 
Inventory write-off  (17,829)  (556)
       
Ending balance  40,489   54,733 
       
      Management believes that the allowance is adequate to cover probable losses from decline in inventory value due to obsolescence.
      At December 31, 2004, inventory held by a certain subsidiary was insured against fire, theft and other specified risks for US$0.8 million. Management believes that the insurance amount is adequate to cover such risks.

F-43

PERUSAHAAN PERSEROAN (PERSERO)
P.T. TELEKOMUNIKASI INDONESIA Tbk AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
DECEMBER 31, 2003 AND 2004, AND FOR YEARS ENDED
DECEMBER 31, 2002, 2003 AND 2004
(Figures in tables are presented in millions of Rupiah, unless otherwise stated)
8. PREPAID EXPENSES
         
  2003 2004
     
Rental  173,242   268,287 
Salary  124,061   218,329 
Insurance  98,167   98,485 
Telephone directory issuance cost  11,091   27,246 
Other  23,134   15,722 
       
Total  429,695   628,069 
       
9. OTHER CURRENT ASSETS
         
  2003 2004
     
Bank Mandiri  45,083   44,608 
       
      As of December 31, 2003, the balance consists of the Company’s time deposits of US$4.6 million (Rp38,778 million) pledged as collateral for credit facility obtained by Napsindo (Note 20a) and Rp2,412 million pledged as collateral for bank guarantees, and Telkomsel’s Rupiah time deposits of Rp3,893 million pledged as collateral for bank guarantees covering payments of customs duties.
      As of December 31, 2004, the balance consists of the Company’s time deposits of US$4.6 million (Rp42,688 million) pledged as collateral for credit facility obtained by Napsindo (Note 20a) and Rp1,920 million pledged as collateral for bank guarantees.

F-44

PERUSAHAAN PERSEROAN (PERSERO)
P.T. TELEKOMUNIKASI INDONESIA Tbk AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
DECEMBER 31, 2003 AND 2004, AND FOR YEARS ENDED
DECEMBER 31, 2002, 2003 AND 2004
(Figures in tables are presented in millions of Rupiah, unless otherwise stated)
10. LONG-TERM INVESTMENTS
                         
  2003
   
  Percentage  
  of Opening   Equity in Translation Ending
  Ownership Balance Deduction Net Income Adjustment Balance
             
Equity method:
                        
PT Citra Sari Makmur  25.00   62,270   —   1,585   (11,433)  52,422 
PT Patra Telekomunikasi Indonesia**  30.00   12,843   (2,745)  1,234   —   11,332 
PT Napsindo Primatel International*  60.00   4,693   (4,693)  —   —   — 
PT Multimedia Nusantara*  100.00   1,928   (1,928)  —   —   — 
PT Telekomindo Selular Raya  —   26,642   (26,642)  —   —   — 
PT Metro Selular Nusantara  —   16,307   (16,307)  —   —   — 
PT Pasifik Satelit Nusantara  43.69   —   —   —   —   — 
                   
       124,683   (52,315)  2,819   (11,433)  63,754 
                   
Cost method:
                        
PT Batam Bintan Telekomunikasi  5.00   587   —   —   —   587 
PT Pembangunan Telekomunikasi Indonesia  3.18   199   —   —   —   199 
Medianusa Pte. Ltd.   9.44   108   —   —   —   108 
PT Komunikasi Selular Indonesia  —   57,570   (57,570)  —   —   — 
PT Mandara Selular Indonesia  7.44   —   —   —   —   — 
                   
       58,464   (57,570)  —   —   894 
                   
       183,147   (109,885)  2,819   (11,433)  64,648 
                   
  * Consolidated in 2003
** Deduction represents cash dividends received by the Company

F-45

PERUSAHAAN PERSEROAN (PERSERO)
P.T. TELEKOMUNIKASI INDONESIA Tbk AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
DECEMBER 31, 2003 AND 2004, AND FOR YEARS ENDED
DECEMBER 31, 2002, 2003 AND 2004
(Figures in tables are presented in millions of Rupiah, unless otherwise stated)
                         
  2004
   
  Percentage  
  of Opening Addition/ Equity in Translation Ending
  Ownership Balance (Deduction) Net Income Adjustment Balance
             
Equity method:
                        
PT Citra Sari Makmur  25.00   52,422   —   2,331   5,363   60,116 
PT Patra Telekomunikasi Indonesia  30.00   11,332   —   1,089   —   12,421 
PT Pasifik Satelit Nusantara  43.69   —   —   —   —   — 
                   
       63,754   —   3,420   5,363   72,537 
                   
Cost method:
                        
PT Batam Bintan Telekomunikasi  5.00   587   —   —   —   587 
PT Pembangunan Telekomunikasi Indonesia  3.18   199   —   —   —   199 
Bridge Mobile Pte. Ltd.   14.29   —   9,290   —   —   9,290 
Medianusa Pte. Ltd.   —   108   (108)  —   —   — 
PT Mandara Selular Indonesia  3.63   —   —   —   —   — 
                   
       894   9,182   —   —   10,076 
                   
       64,648   9,182   3,420   5,363   82,613 
                   
      On August 8, 2003, the Company and PT Centralindo Pancasakti Cellular (“CPSC”) signed a share-swap agreement (“KMT-IP share-swap transaction”) in which the Company delivered its 14.20% outstanding shares in PT Komunikasi Selular Indonesia (“Komselindo”), its 20.17% outstanding shares in PT Metro Selular Nusantara (“Metrosel”), and its 100% outstanding shares in PT Telekomindo Selular Raya (“Telesera”) to CPSC. In return, CPSC delivered its 30.58% outstanding shares in PT Indonusa Telemedia (“Indonusa”), 21.12% outstanding shares in PT Pasifik Satelit Nusantara (“PSN”) under certain terms and paid cash of Rp5,398 million to the Company.
      From the KMT — IP share-swap transaction, the Company recognized a loss of Rp47,307 million being the difference between the fair value of assets received and the carrying amount of the Company’s investments given to CPSC, and reversal of difference due to change of equity in Metrosel previously recognized directly in equity.
     a. PT Citra Sari Makmur (“CSM”)
      CSM is engaged in providing Very Small Aperture Terminal (“VSAT”), network application services and consulting services on telecommunications technology and related facilities.
      As of December 31, 2003 and 2004, the carrying amount of investment in CSM was equal to the underlying equity in net assets of CSM.
     b. PT Patra Telekomunikasi Indonesia (“Patrakom”)
      Patrakom is engaged in providing satellite communication system services and related services and facilities to companies in the petroleum industry.

F-46

PERUSAHAAN PERSEROAN (PERSERO)
P.T. TELEKOMUNIKASI INDONESIA Tbk AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
DECEMBER 31, 2003 AND 2004, AND FOR YEARS ENDED
DECEMBER 31, 2002, 2003 AND 2004
(Figures in tables are presented in millions of Rupiah, unless otherwise stated)
      As of December 31, 2003 and 2004, the carrying amount of investment in Patrakom was equal to the underlying equity in net assets of Patrakom.
     c. PT Pasifik Satelit Nusantara (“PSN”)
      PSN is engaged in providing satellite transponder leasing and satellite-based communication services in the Asia Pacific Region.
      As of December 31, 2001, the Company’s share of losses in PSN has exceeded the carrying amount of the investment. Accordingly, the investment has been reduced to zero.
      On August 8, 2003, as a result of share-swap transaction with CPSC, the Company’s interest in PSN effectively increased to 43.69%. The Company decided to increase its ownership interest in PSN as part of the share-swap transactions that was premised on the Company’s assessment that PSN’s satellite services will allow it to capitalize on a government program which calls for the provision of telecommunication services to remote areas of Indonesia.
      In 2003, PSN entered into a negotiation with its current creditors to restructure its debts. As of the date of issuance of these consolidated financial statements, the debt restructuring was not yet effective.
     d. PT Batam Bintan Telekomunikasi (“BBT”)
      BBT is engaged in providing fixed line telecommunication services at Batamindo Industrial Park in Muka Kuning, Batam Island and at Bintan Beach International Resort and Bintan Industrial Estate in Bintan Island.
     e. PT Pembangunan Telekomunikasi Indonesia (“Bangtelindo”)
      Bangtelindo is primarily engaged in providing consultancy services on the installation and maintenance of telecommunications facilities.
f. Bridge Mobile Pte. Ltd
      On November 3, 2004, Telkomsel together with six other international mobile operators in Asia Pacific established Bridge Mobile Pte. Ltd. (Singapore), a company that is engaged in providing regional mobile services in the Asia Pacific region.
      Telkomsel contributed US$1.0 million (Rp9,290 million) which represents a 14.286% ownership interest.
g. Medianusa Pte. Ltd.
      Medianusa Pte. Ltd. is an associated company of Infomedia, which is engaged as a sales agent, in search of advertisers for telephone directories. On November 30, 2004, Infomedia sold its entire ownership in Medianusa Pte. Ltd. for SGD0.024 million (Rp135 million) and recognized a gain of Rp27 million.

F-47

PERUSAHAAN PERSEROAN (PERSERO)
P.T. TELEKOMUNIKASI INDONESIA Tbk AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
DECEMBER 31, 2003 AND 2004, AND FOR YEARS ENDED
DECEMBER 31, 2002, 2003 AND 2004
(Figures in tables are presented in millions of Rupiah, unless otherwise stated)
h. PT Mandara Selular Indonesia (“Mobisel”)
      Mobisel is engaged in providing mobile cellular services and related facilities. These services were previously provided by the Company under a revenue-sharing arrangement with PT Rajasa Hazanah Perkasa (“RHP”). The capital contribution made by the Company of Rp10,398 million represented a 25% equity ownership in Mobisel.
      As of December 31, 2002, the value of investment has been reduced to nil because the Company’s share of loss exceeded the carrying amount of investment in Mobisel.
      On July 28, 2003, Mobisel’s stockholders agreed to a restructuring program which included a debt to equity conversion of Mobisel’s interconnection payables to the Company, and an equity investment by a new stockholder. The debt conversion was completed in August 2003 which resulted in dilution of the Company’s interest to 7.44%.
      In January 2004, the Company’s ownership interest was further diluted to 6.4% following the debt to equity conversion of Mobisel’s debt to PT Property Java, Boston Investment Limited and Inquam (Indonesia) Limited Company.
      On December 20, 2004, Mobisel’s stockholders agreed to issue 306,000,000 new Series B shares to a new stockholder and an existing stockholder. The issuance of 306,000,000 new Series B shares resulted in dilution of the Company’s interest in Mobisel to 3.63%.
i. PT Telekomindo Seluler Raya (“Telesera”)
      In 2001, the Minister of Justice and Human Rights approved the corporate restructuring of PT Telekomindo Primabhakti (“Telekomindo”), an associated company engaged in the construction and development of telecommunications facilities. Pursuant to the restructuring, Telekomindo’s authorized and paid-up capital was reduced and the capital reduction became the paid-up capital of two new companies: PT Telekomindo Media Informatika (“TMI”) and PT Griya Insani Primabhakti (“GIP”).
      Based on a share-swap agreement dated December 5, 2001 among the Company, PT Rajawali Corporation (“RC”), Telekomindo and TMI, the parties agreed on the following:
• The Company sold its investments in Telekomindo, TMI and GIP to RC for Rp101,838 million.
• TMI sold its investments in PT Telekomindo Selular Raya (“Telesera”) and the fixed assets of PT Multisaka Mitra (“MSM”) to the Company for Rp87,907 million and Rp17,442 million, respectively.
      This transaction resulted in the Company owning 69.77% shares of Telesera as of December 31, 2001. In 2002, the Company acquired the remaining 30.23% interest in Telesera from Dana Pensiun Telkom for Rp38,093 million. In 2002, the Company also recognized a loss of Rp101,000 million to write down the carrying amount of this investment to net asset value.
      On August 8, 2003, the Company exchanged its investment in Telesera to CPSC.

F-48

PERUSAHAAN PERSEROAN (PERSERO)
P.T. TELEKOMUNIKASI INDONESIA Tbk AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
DECEMBER 31, 2003 AND 2004, AND FOR YEARS ENDED
DECEMBER 31, 2002, 2003 AND 2004
(Figures in tables are presented in millions of Rupiah, unless otherwise stated)
j. PT Metro Selular Nusantara (“Metrosel”)
      Metrosel is engaged in providing national mobile cellular services and related facilities in Central Java, Yogyakarta, East Java, Maluku and Irian Jaya.
      On May 30, 2002, Metrosel made an equity call. The Company made additional capital contributions amounting to Rp13,513 million to maintain its ownership in Metrosel at 20.17%.
      On August 8, 2003, the Company exchanged its investment in Metrosel to CPSC.
k. PT Menara Jakarta (“MJ”)
      MJ was engaged in the construction and the operation of towers and related facilities. The economic difficulties faced by Indonesia have resulted in the termination of MJ’s construction projects at the end of 1997. The value of this investment has been reduced to nil.
      On April 8, 2003, the Company exchanged all its shares in MJ to PT Indocitra Grahabawana (“Indocitra”) for Indocitra’s 69% ownership interest in Metra (Note 1c).
l. PT Komunikasi Selular Indonesia (“Komselindo”)
      Komselindo is a joint venture between the Company and PT Elektrindo Nusantara (“Elektrindo”), and is engaged in providing analog mobile cellular services. These services were previously provided by the Company under a revenue-sharing arrangement with Elektrindo.
      On August 30, 2002, Komselindo’s stockholders through an Extraordinary Stockholders’ Meeting approved the equity call for debt restructuring which was included in the Settlement Agreement and the Settlement, Termination and Release Agreement dated August 30, 2002. The Company released and waived its pre-emptive right to subscribe newly issued shares resulting in the dilution of the Company’s ownership in Komselindo to 14.20%.
      This debt restructuring transaction resulted in a net equity of Komselindo amounting to Rp405,421 million. As of December 31, 2002, the Company recorded its 14.20% interest in Komselindo at its net equity value of Rp57,570 million.
      On August 8, 2003, the Company sold its investment in Komselindo to CPSC.
11. PROPERTY, PLANT AND EQUIPMENT
                          
  January 1, AWI       December 31,
  2003 Acquisitions Additions Deductions Reclassifications 2003
             
At cost or revalued amounts:
                        
Direct acquisitions
                        
 Land  267,933   —   52,738   (20,762)  (945)  298,964 
 Buildings  1,658,390   2,436   43,301   (43,293)  158,261   1,819,095 
 Switching equipment  9,629,203   402,598   144,658   (10)  296,943   10,473,392 
 Telegraph, telex and data communication equipment  206,667   —   3,833   (86)  (11,100)  199,314 
 Transmission installation and equipment  10,340,314   7,565   278,020   (11,903)  6,204,183   16,818,179 
 Satellite, earth station and equipment  5,798,011   —   21,512   —   390,304   6,209,827 

F-49

PERUSAHAAN PERSEROAN (PERSERO)
P.T. TELEKOMUNIKASI INDONESIA Tbk AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
DECEMBER 31, 2003 AND 2004, AND FOR YEARS ENDED
DECEMBER 31, 2002, 2003 AND 2004
(Figures in tables are presented in millions of Rupiah, unless otherwise stated)
                           
  January 1, AWI       December 31,
  2003 Acquisitions Additions Deductions Reclassifications 2003
             
 Cable network  13,122,336   1,075,987   637,068   (59,275)  712,681   15,488,797 
 Power supply  1,032,534   9,549   18,473   (3,996)  92,898   1,149,458 
 Data processing equipment  2,739,837   2,269   131,942   (1,810)  380,429   3,252,667 
 Other telecommunications peripherals  681,363   —   33,769   (369)  20,425   735,188 
 Office equipment  639,682   —   25,585��  (1,802)  (2,974)  660,491 
 Vehicles  187,353   —   1,298   (1,760)  962   187,853 
 Other equipment  87,370   —   1,890   (6)  18,319   107,573 
 Property under construction:                        
  Buildings  42,913   —   36,173   —   (24,198)  54,888 
  Switching equipment  348,286   —   222,275   —   (412,505)  158,056 
  Transmission installation and equipment  139,499   —   5,843,119   —   (5,888,711)  93,907 
  Satellite, earth station and equipment  264,029   —   390,994   —   (47,851)  607,172 
  Cable network  115,420   55,865   1,567,652   —   (1,724,413)  14,524 
  Power supply  5,715   —   18,416   —   (24,025)  106 
  Data processing equipment  10,807   —   63,945   (634)  (63,592)  10,526 
  Other telecommunications peripherals  13,649   —   15,853   (1,392)  (11,627)  16,483 
Leased assets
                        
 Vehicles  3,640   —   73   (1,689)  (1,785)  239 
                   
 Total  47,334,951   1,556,269   9,552,587   (148,787)  61,679   58,356,699 
                   
Accumulated depreciation:
                        
Direct acquisitions
                        
 Buildings  736,997   —   115,602   (41,293)  1,013   812,319 
 Switching equipment  4,569,287   —   668,136   (4)  29,069   5,266,488 
 Telegraph, telex and data communication equipment  202,043   —   3,365   (59)  (11,100)  194,249 
 Transmission installation and equipment  3,183,736   —   1,784,031   (4,534)  (6,338)  4,956,895 
 Satellite, earth station and equipment  2,001,671   —   153,506   —   3,202   2,158,379 
 Cable network  5,286,209   —   1,300,460   (20,312)  46,924   6,613,281 
 Power supply  724,985   —   77,765   (3,437)  (1,388)  797,925 
 Data processing equipment  990,054   —   492,799   (2,394)  (10,643)  1,469,816 
 Other telecommunications peripherals  499,093   —   71,217   (240)  2,120   572,190 
 Office equipment  460,518   —   37,251   (1,088)  786   497,467 
 Vehicles  167,226   —   7,986   (1,705)  (373)  173,134 
 Other equipment  63,020   —   2,028   (6)  4,260   69,302 
Leased assets
                        
 Vehicles  1,506   —   307   (848)  (851)  114 
                   
 Total  18,886,345   —   4,714,453   (75,920)  56,681   23,581,559 
                   
Net Book Value  28,448,606                   34,775,140 
                   

F-50

PERUSAHAAN PERSEROAN (PERSERO)
P.T. TELEKOMUNIKASI INDONESIA Tbk AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
DECEMBER 31, 2003 AND 2004, AND FOR YEARS ENDED
DECEMBER 31, 2002, 2003 AND 2004
(Figures in tables are presented in millions of Rupiah, unless otherwise stated)
                           
  January 1, KSO IV       December 31,
  2004 Acquisitions Additions Deductions Reclassifications 2004
             
At cost or revalued amounts:
                        
Direct acquisitions
                        
 Land  298,964   —   34,212   (156)  (5,681)  327,339 
 Buildings  1,819,095   7,021   29,722   (14,448)  328,665   2,170,055 
 Switching equipment  10,473,392   616,769   209,463   (52,829)  (886,695)  10,360,100 
 Telegraph, telex and data communication equipment  199,314   —   4,071   (14)  10,484   213,855 
 Transmission installation and equipment  16,818,179   271,678   245,170   (573,950)  10,161,066   26,922,143 
 Satellite, earth station and equipment  6,209,827   —   30,998   (165,130)  (2,720,892)  3,354,803 
 Cable network  15,488,797   1,427,049   195,947   (44,651)  633,932   17,701,074 
 Power supply  1,149,458   18,644   22,784   (6,116)  9,940   1,194,710 
 Data processing equipment  3,252,667   32,012   469,470   (11,671)  44,263   3,786,741 
 Other telecommunications peripherals  735,188   —   62,550   (3,872)  30,768   824,634 
 Office equipment  660,491   102   32,513   (8,470)  (22,970)  661,666 
 Vehicles  187,853   3,859   4,972   (9,285)  4,004   191,403 
 Other equipment  107,573   —   1,855   (71)  3,269   112,626 
 Property under construction:                        
  Buildings  54,888   —   46,137   —   (47,613)  53,412 
  Switching equipment  158,056   —   57,033   —   (215,089)  — 
  Transmission installation and equipment  93,907   —   5,067,293   —   (4,986,069)  175,131 
  Satellite, earth station and equipment  607,172   —   234,354   —   (64,627)  776,899 
  Cable network  14,524   —   2,006,243   —   (1,995,259)  25,508 
  Power supply  106   —   24,953   —   (24,990)  69 
  Data processing equipment  10,526   —   30,065   —   (23,910)  16,681 
  Other telecommunications peripherals  16,483   —   10,594   —   (27,077)  — 
Leased assets
                        
 Vehicles  239   —   11   —   163   413 
                   
 Total  58,356,699   2,377,134   8,820,410   (890,663)  205,682   68,869,262 
                   

F-51

PERUSAHAAN PERSEROAN (PERSERO)
P.T. TELEKOMUNIKASI INDONESIA Tbk AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
DECEMBER 31, 2003 AND 2004, AND FOR YEARS ENDED
DECEMBER 31, 2002, 2003 AND 2004
(Figures in tables are presented in millions of Rupiah, unless otherwise stated)
                          
  January 1, KSO IV       December 31,
  2004 Acquisitions Additions Deductions Reclassifications 2004
             
Accumulated depreciation:
                        
Direct acquisitions
                        
 Buildings  812,319   —   136,083   (11,209)  15,445   952,638 
 Switching equipment  5,266,488   —   748,667   (36,795)  (377,087)  5,601,273 
 Telegraph, telex and data communication equipment  194,249   —   853   (791)  4,342   198,653 
 Transmission installation and equipment  4,956,895   —   2,747,743   (513,618)  1,017,239   8,208,259 
 Satellite, earth station and equipment  2,158,379   —   199,729   (165,075)  (660,751)  1,532,282 
 Cable network  6,613,281   —   1,560,387   (33,777)  95,770   8,235,661 
 Power supply  797,925   —   108,436   (5,642)  4,061   904,780 
 Data processing equipment  1,469,816   —   680,399   (11,221)  (26,173)  2,112,821 
 Other telecommunications peripherals  572,190   —   75,248   (3,664)  68,804   712,578 
 Office equipment  497,467   —   68,822   (7,291)  3,759   562,757 
 Vehicles  173,134   —   11,730   (8,224)  4,224   180,864 
 Other equipment  69,302   —   17,469   (71)  7,827   94,527 
Leased assets
                        
 Vehicles  114   —   33   —   (77)  70 
                   
 Total  23,581,559   —   6,355,599   (797,378)  157,383   29,297,163 
                   
Net Book Value  34,775,140                   39,572,099 
                   
         
  2003 2004
     
Proceeds from sale of property, plant and equipment  255,750   67,196 
Net book value  72,867   93,285 
       
Gain/(loss) on disposal  182,883   (26,089)
       
      In accordance with the amended and restated KSO agreement with MGTI (Note 4d), ownership rights to the acquired property, plant and equipment in KSO IV are legally retained by MGTI until the end of the KSO period (December 31, 2010). As of December 31, 2004, the net book value of these property, plant and equipment was Rp2,000,073 million.
      As of December 31, 2003 and 2004, the net book value of property, plant and equipment included in the Company’s property, plant and equipment that are utilized by the KSOs amounted to Rp795,838 million and Rp449,016 million, respectively. The legal ownership of these property, plant and equipment are still retained by the Company.
      Interest capitalized to property under construction amounted to Rp20,108 million, Rp22,925 million and Rp57,690 million in 2002, 2003 and 2004, respectively.
      Foreign exchange (gains) losses capitalized as part of property under construction amounted to (Rp27,568 million), nil and Rp74,283 million in 2002, 2003 and 2004, respectively.
      The Company and its subsidiaries own several pieces of land located throughout Indonesia with Building Use Rights (Hak Guna Bangunan or HGB) for a period of 20-30 years, which will expire

F-52

PERUSAHAAN PERSEROAN (PERSERO)
P.T. TELEKOMUNIKASI INDONESIA Tbk AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
DECEMBER 31, 2003 AND 2004, AND FOR YEARS ENDED
DECEMBER 31, 2002, 2003 AND 2004
(Figures in tables are presented in millions of Rupiah, unless otherwise stated)
between 2005-2034. Management believes that there will be no difficulty in obtaining the extension of the landrights when they expire.
      Some of the Company’s land is still under the name of the Ministry of Tourism, Post and Telecommunications and the Ministry of Communications of the Republic of Indonesia. The transfer to the Company of the legal title of ownership on those parcels of land is still in progress.
      As of December 31, 2004, the Company operated two satellites which primarily provide backbone transmission links for its Network and earth station satellite up-linking and down-linking services to domestic and international users. The Company can allocate the transponders in the satellite following to customer’s demand. As of December 31, 2004, there were no events or changes in circumstances which indicate that the carrying amount of the Company’s satellites may not be recoverable.
      The estimated date of completion of assets under construction is between January 2005 and June 2005. Management believes that there is no impediment to the completion of the construction in progress.
      As of December 31, 2004, property, plant and equipment of the Company and subsidiaries, except for land, were insured with various insurance companies against fire, theft and other specified risks for a coverage of Rp23,055,406 million plus US$2,288 million. In addition, the Telkom-1 satellite is insured for US$51.6 million. Management believes that the insurance coverage is adequate.
      On December 26, 2004, telecommunication facilities of the Company and its subsidiaries in Banda Aceh and certain areas nearby in Nanggroe Aceh Darusallam with net book value of Rp54,863 million were destroyed by earthquake and tsunami. As of December 31, 2004, the Company has recorded the loss in “Other Income (Expense)” in the consolidated statements of income. These telecommunication facilities were covered by insurance. As of the date of issuance of these financial statements, verification by insurance companies is still in progress. The Company and its subsidiaries will recognize insurance claims on the loss when the insurance companies have completed their verification and agreed on the claimed amounts.
      Certain property, plant and equipment of the Company and subsidiaries have been pledged as collateral for lending agreements (Note 24).

F-53

PERUSAHAAN PERSEROAN (PERSERO)
P.T. TELEKOMUNIKASI INDONESIA Tbk AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
DECEMBER 31, 2003 AND 2004, AND FOR YEARS ENDED
DECEMBER 31, 2002, 2003 AND 2004
(Figures in tables are presented in millions of Rupiah, unless otherwise stated)
12. PROPERTY, PLANT AND EQUIPMENT UNDER REVENUE-SHARING ARRANGEMENTS
                      
  January 1,       December 31,
  2003 Additions Deductions Reclassifications 2003
           
At cost:
                    
 Land  3,160   —   —   —   3,160 
 Buildings  23,727   —   —   (3,472)  20,255 
 Switching equipment  623,757   —   (9,154)  (76,713)  537,890 
 Transmission installation and equipment  107,558   —   (14,530)  —   93,028 
 Cable network  333,188   27,314   —   (42,121)  318,381 
 Other telecommunications peripherals  129,196   —   (2,711)  (2,513)  123,972 
                
 Total  1,220,586   27,314   (26,395)  (124,819)  1,096,686 
                
Accumulated depreciation:
                    
 Land  1,278   171   —   —   1,449 
 Buildings  10,411   1,155   —   (1,762)  9,804 
 Switching equipment  360,637   37,458   (9,154)  (47,416)  341,525 
 Transmission installation and equipment  95,198   9,052   (14,530)  —   89,720 
 Cable network  246,244   17,231   —   (38,300)  225,175 
 Other telecommunications peripherals  129,196   —   (2,711)  (2,513)  123,972 
                
 Total  842,964   65,067   (26,395)  (89,991)  791,645 
                
Net Book Value
  377,622               305,041 
                
                      
  January 1,       December 31,
  2004 Additions Deductions Reclassifications 2004
           
At cost:
                    
 Land  3,160   222   —   —   3,382 
 Buildings  20,255   225   —   (7,058)  13,422 
 Switching equipment  537,890   12,473   —   (132,226)  418,137 
 Transmission installation and equipment  93,028   200,251   —   (34,160)  259,119 
 Cable network  318,381   117,228   —   (39,469)  396,140 
 Other telecommunications peripherals  123,972   234   —   (20,709)  103,497 
                
 Total  1,096,686   330,633   —   (233,622)  1,193,697 
                

F-54

PERUSAHAAN PERSEROAN (PERSERO)
P.T. TELEKOMUNIKASI INDONESIA Tbk AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
DECEMBER 31, 2003 AND 2004, AND FOR YEARS ENDED
DECEMBER 31, 2002, 2003 AND 2004
(Figures in tables are presented in millions of Rupiah, unless otherwise stated)
                      
  January 1,       December 31,
  2004 Additions Deductions Reclassifications 2004
           
Accumulated depreciation:
                    
 Land  1,449   152   —   —   1,601 
 Buildings  9,804   802   —   (3,529)  7,077 
 Switching equipment  341,525   34,757   —   (90,160)  286,122 
 Transmission installation and equipment  89,720   13,406   —   (34,160)  68,966 
 Cable network  225,175   33,817   —   (31,475)  227,517 
 Other telecommunications peripherals  123,972   24   —   (20,709)  103,287 
                
 Total  791,645   82,958   —   (180,033)  694,570 
                
Net Book Value
  305,041               499,127 
                
      In accordance with revenue-sharing arrangements agreements, ownership rights to the property, plant and equipment under revenue-sharing arrangements are legally retained by the investors until the end of the revenue-sharing period.
      The unearned income on revenue-sharing arrangements is as follows:
         
  2003 2004
     
Gross amount  1,096,686   1,193,697 
       
Accumulated amortization:        
Beginning balance  (1,077,789)  (984,954)
Addition (Note 37)  (58,379)  (82,033)
Deduction  151,214   233,622 
       
Ending balance  (984,954)  (833,365)
       
Net  111,732   360,332 
       
13. ADVANCES AND OTHER NON-CURRENT ASSETS
      Advances and other non-current assets consist of:
         
  2003 2004
     
Advances for purchase of property, plant and equipment  28,698   1,070,065 
Security deposits  22,851   28,345 
Restricted cash  5,053   114,202 
Deferred landrights charges  74,299   93,843 
Others  45,053   65,896 
       
Total  175,954   1,372,351 
       

F-55

PERUSAHAAN PERSEROAN (PERSERO)
P.T. TELEKOMUNIKASI INDONESIA Tbk AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
DECEMBER 31, 2003 AND 2004, AND FOR YEARS ENDED
DECEMBER 31, 2002, 2003 AND 2004
(Figures in tables are presented in millions of Rupiah, unless otherwise stated)
      Restricted cash represents time deposits with original maturities of more than one year held by the Company and its subsidiaries and are pledged as collateral for bank guarantee.
      Deferred landrights charges represent costs to extend the contractual life of the landrights which are deferred and amortized over the new contractual life.
14. GOODWILL AND OTHER INTANGIBLE ASSETS
      The changes in the carrying amount of goodwill and other intangible assets for the years ended December 31, 2003 and 2004 are as follows:
              
    Other  
    Intangible  
  Goodwill Assets Total
       
Gross carrying amount:            
 Balance as of December 31, 2002  106,348   4,028,842   4,135,190 
 Addition — acquisition of AWI (Note 4c)  —   1,982,564   1,982,564 
          
 Balance as of December 31, 2003  106,348   6,011,406   6,117,754 
          
Accumulated amortization:            
 Balance as of December 31, 2002  (33,681)  (209,364)  (243,045)
 Amortization expense for 2003  (21,270)  (709,389)  (730,659)
          
 Balance as of December 31, 2003  (54,951)  (918,753)  (973,704)
          
Net book value  51,397   5,092,653   5,144,050 
          
Weighted-average amortization period  5 years   8.26 years     
              
    Other  
    Intangible  
  Goodwill Assets Total
       
Gross carrying amount:            
 Balance as of December 31, 2003  106,348   6,011,406   6,117,754 
 Addition — acquisition of Dayamitra (Note 4a)  —   231,477   231,477 
 Addition — acquisition of KSO IV (Note 4d)  —   908,228   908,228 
          
 Balance as of December 31, 2004  106,348   7,151,111   7,257,459 
          
Accumulated amortization:            
 Balance as of December 31, 2003  (54,951)  (918,753)  (973,704)
 Amortization expense for 2004  (21,270)  (851,060)  (872,330)
          
 Balance as of December 31, 2004  (76,221)  (1,769,813)  (1,846,034)
          
Net book value  30,127   5,381,298   5,411,425 
          
Weighted-average amortization period  5 years   7.97 years     
      Other intangible assets resulted from the acquisitions of Dayamitra, Pramindo, AWI and KSO IV, and represent the rights to operate the business in the KSO areas (Note 4). Goodwill resulted from the acquisition of GSD (Note 1c).

F-56

PERUSAHAAN PERSEROAN (PERSERO)
P.T. TELEKOMUNIKASI INDONESIA Tbk AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
DECEMBER 31, 2003 AND 2004, AND FOR YEARS ENDED
DECEMBER 31, 2002, 2003 AND 2004
(Figures in tables are presented in millions of Rupiah, unless otherwise stated)
      The estimated annual amortization expense relating to goodwill for the years ending December 31, 2005 and 2006 is Rp21,269 million and Rp8,858 million, respectively. The estimated annual amortization expense relating to other intangible assets for each of the next five years beginning from January 1, 2005 is Rp896,883 million per year.
15. ESCROW ACCOUNTS
      Escrow accounts consist of the following:
         
  2003 2004
     
Citibank N.A., Singapore  239,689   30,059 
JP Morgan Chase Bank  276,439   — 
Bank Mandiri  6,018   6,222 
       
   522,146   36,281 
       
  a. Citibank N.A., Singapore
      This escrow account with Citibank N.A., Singapore (“Dayamitra Escrow Agent”) was established to facilitate the payment of the Company’s obligations under the Conditional Sale and Purchase Agreement and Option Agreement entered into with the selling stockholders of Dayamitra (Note 4a).
      In 2004, the Company has repaid the entire obligations under the Conditional Sale and Purchase Agreement; therefore, as of December 31, 2004, this escrow account is used to facilitate the payment of the Company’s obligations under the Option Agreement with TMC.
      The escrow account earns interest at LIBOR minus 0.75% per annum, which is computed on a daily basis. The interest income earned is included as part of the escrow funds. The remaining funds available will be transferred to the Company after all of the obligations related to the Dayamitra transaction are satisfied.
b. JP Morgan Chase Bank
      This escrow account with JP Morgan Chase Bank (“Pramindo Escrow Agent”) was established to facilitate the settlement of the Company’s obligations under its Conditional Sale and Purchase Agreement for the acquisition of Pramindo (Note 4b).
      In accordance with the Escrow Agreement, the Company was required to make installment payments of US$12.8 million for eleven months and US$15.0 million for sixteen months. The first installment was due on October 1, 2002.
      The escrow account earned interest at LIBOR minus 0.4% per annum, which was computed on a daily basis. The interest income earned was included as part of the escrow funds.
      On March 15, 2004, the Company repaid the entire obligations related to the Pramindo transaction. On March 18, 2004, the escrow account was closed and the remaining balance of US$7.8 million was transferred to the Company’s account.

F-57

PERUSAHAAN PERSEROAN (PERSERO)
P.T. TELEKOMUNIKASI INDONESIA Tbk AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
DECEMBER 31, 2003 AND 2004, AND FOR YEARS ENDED
DECEMBER 31, 2002, 2003 AND 2004
(Figures in tables are presented in millions of Rupiah, unless otherwise stated)
c. Bank Mandiri
      The escrow account with Bank Mandiri was established by Dayamitra in relation with the credit facilities from Bank Mandiri (Note 24f).
16. TRADE ACCOUNTS PAYABLE
          
  2003 2004
     
Related parties        
 Payables to other telecommunications carriers  322,842   196,127 
 Concession fees  224,370   254,665 
 Purchases of equipment, materials and services  110,266   192,302 
       
Total  657,478   643,094 
       
Third parties        
 Purchases of equipment, materials and services  2,892,803   3,366,320 
 Payables related to revenue-sharing arrangements  94,508   220,158 
 Payables to other telecommunication providers  122,543   24,978 
       
Total  3,109,854   3,611,456 
       
Total  3,767,332   4,254,550 
       
      Trade accounts payable by currency are as follows:
         
  2003 2004
     
Rupiah  2,825,795   3,613,715 
U.S. Dollar  900,408   638,861 
Euro  29,463   — 
Japanese Yen  10,033   715 
Great Britain Pound Sterling  916   1,092 
Singapore Dollar  717   147 
Myanmar KYAT  —   20 
       
Total  3,767,332   4,254,550 
       
      Refer to Note 47 for details of related party transactions.

F-58

PERUSAHAAN PERSEROAN (PERSERO)
P.T. TELEKOMUNIKASI INDONESIA Tbk AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
DECEMBER 31, 2003 AND 2004, AND FOR YEARS ENDED
DECEMBER 31, 2002, 2003 AND 2004
(Figures in tables are presented in millions of Rupiah, unless otherwise stated)
17. ACCRUED EXPENSES
         
  2003 2004
     
Early retirement benefits  132,810   — 
Salaries and employee bonuses  442,785   321,237 
Interest and bank charges  261,050   163,203 
General, administrative and marketing  259,462   242,597 
Operations, maintenance and telecommunications services  89,103   324,329 
       
Total  1,185,210   1,051,366 
       
      Based on the Board of Directors’ Resolution No. KD.20/PS900/SDM-10/2001 dated June 11, 2001 and Resolution of Human Resources Director No. KR.18/PS900/SDM-30/2003 dated October 9, 2003 concerning Early Retirement, the Company offered an Early Retirement Program for interested and eligible employees. Employees’ rights under the early retirement program, method of calculation and payments for compensation and other benefits in 2003 and 2004 are provided in the Board of Directors’ Resolution No. KD.80/PS900/SDM-20/2002 regarding Employees’ Rights under Early Retirement Program Year 2003 and Resolution of Human Resources Director No. KR 1217/PS900/SDM.30/2004 regarding Early Retirement, respectively. Accrued early retirement benefits as of December 31, 2003 and early retirement benefits for 2004 were fully paid in 2004.
18. UNEARNED INCOME
         
  2003 2004
     
Prepaid pulse reload vouchers  740,077   1,017,530 
Other telecommunication services  16,361   7,669 
Other  6,773   4,801 
       
Total  763,211   1,030,000 
       
19. ADVANCES FROM CUSTOMERS AND SUPPLIERS
      Represent security deposits received from customers related to services and performance guarantee deposits from suppliers related to procurement contracts.
20. SHORT-TERM BANK LOANS
      Short-term bank loans consist of:
         
  2003 2004
     
Bank Mandiri  37,642   41,433 
ABN AMRO Bank  —   604,500 
Bank Central Asia  —   455,700 
       
Total  37,642   1,101,633 
       

F-59

PERUSAHAAN PERSEROAN (PERSERO)
P.T. TELEKOMUNIKASI INDONESIA Tbk AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
DECEMBER 31, 2003 AND 2004, AND FOR YEARS ENDED
DECEMBER 31, 2002, 2003 AND 2004
(Figures in tables are presented in millions of Rupiah, unless otherwise stated)
a. Bank Mandiri
      On August 28, 2001, Napsindo entered into a loan agreement with Bank Mandiri for a facility of US$1.8 million for a one–year term. The loan is secured with the Company’s time deposits (Note 9) with interest rate at 2% above the pledged time deposits interest rate (i.e. 3% as of December 31, 2003 and 2.65% as of December 31, 2004). On November 11, 2003, the facility was extended until August 28, 2004. The facility can be extended upon approval by the Company. Subsequently, on September 23, 2004, this loan facility was extended for another one-year term and will expire on August 28, 2005.
      On April 24, 2003, Napsindo also entered into a loan agreement with Bank Mandiri for a facility of US$2.7 million for a one–year term. On May 4, 2004, the facility was extended for another one year term and will expire on April 24, 2005. The loan is secured by the Company’s time deposits (Note 9) and bears interest at 2% above the pledged time deposits interest rate (i.e. 3% as of December 31, 2003 and 2.65% as of December 31, 2004).
      As of December 31, 2003 and 2004, principal outstanding under these facilities amounted to US$4.5 million (Rp37,642 million) and US$4.5 million (Rp41,433 million).
b. ABN AMRO Bank
      On January 28, 2004, the Company signed a short-term loan agreement with ABN AMRO Bank N.V., Jakarta Branch for a facility of US$129.7 million. The loan was used to settle the outstanding promissory notes at March 15, 2004 which were issued for the acquisition of Pramindo (Note 4b). The principal and interest are payable in 10 monthly installments from March 2004 to December 2004. The loan bears interest at LIBOR plus 2.75%. As of December 31, 2004, the loan was repaid and the loan agreement was terminated on January 6, 2005.
      On December 21, 2004, the Company entered into a loan agreement with ABN AMRO Bank N.V. for a short-term loan with a maximum facility of US$65.0 million. The loan principal of US$30.0 million and US$35.0 million is due on March 31, 2005 and June 30, 2005, respectively. The loan is unsecured and bears interest at 3-month U.S. Dollar LIBOR plus 2.5% (i.e. 5.02% as of December 31, 2004). Principal outstanding as of December 31, 2004 was Rp604,500 million (US$65.0 million).
c. Bank Central Asia
      On December 27, 2004, the Company entered into a loan agreement with Bank Central Asia for a short-term loan with a maximum facility of US$49.0 million. The loan is due on June 28, 2005. The facility is unsecured and bears interest at 1-month LIBOR plus 2.85% (i.e. 5.27% as of December 31, 2004). Principal outstanding as of December 31, 2004 amounted to Rp455,700 million (US$49.0 million).

F-60

PERUSAHAAN PERSEROAN (PERSERO)
P.T. TELEKOMUNIKASI INDONESIA Tbk AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
DECEMBER 31, 2003 AND 2004, AND FOR YEARS ENDED
DECEMBER 31, 2002, 2003 AND 2004
(Figures in tables are presented in millions of Rupiah, unless otherwise stated)
21. MATURITIES OF LONG-TERM LIABILITIES
a. Current maturities
             
  Notes 2003 2004
       
Two-step loans  22   832,135   655,422 
Medium-term Notes  23   —   468,976 
Bank loans  24   808,793   602,516 
Liabilities of business acquisitions  25   1,587,775   573,908 
Suppliers’ credit loans  26   164,958   — 
Bridging loan  27   49,855   — 
          
Total      3,443,516   2,300,822 
          
b. Long-term portion
                             
  Notes Total 2006 2007 2008 2009 Later
               
    (In billions of Rupiah)
Two-step loans  22   5,363.3   570.7   501.6   460.4   444.9   3,385.7 
Guaranteed Notes  23   736.2   —   736.2   —   —   — 
Bonds  23   986.6   —   986.6   —   —   — 
Medium-term Notes  23   608.7   144.7   464.0   —   —   — 
Bank loans  24   1,775.8   750.9   623.6   400.8   0.4   0.1 
Liabilities of business acquisitions  25   3,743.3   746.7   690.4   767.8   748.0   790.4 
                      
Total      13,213.9   2,213.0   4,002.4   1,629.0   1,193.3   4,176.2 
                      
22. TWO-STEP LOANS
      Two-step loans are loans, which were obtained by the Government from overseas banks and a consortium of contractors, which are then re-loaned to the Company. The loans entered into up to July 1994 were recorded and are payable in Rupiah based on the exchange rate at the date of drawdown. Loans entered into after July 1994 are payable in their original currencies and any resulting foreign exchange gain or loss is borne by the Company.
      On December 15, 2004, the Company repaid a portion of its Rupiah denominated two-step loans totaling Rp701,272 million before its maturity. Further, on December 24, 2004, the Company repaid a portion of its U.S. Dollar denominated two-step loans with principal amount of US$48.8 million and its entire Euro denominated two-step loans with principal amount of EUR14.5 million before their maturities. These early repayments of two-step loans have been approved by the Ministry of Finance of the Republic of Indonesia — Directorate General of Treasury.

F-61

PERUSAHAAN PERSEROAN (PERSERO)
P.T. TELEKOMUNIKASI INDONESIA Tbk AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
DECEMBER 31, 2003 AND 2004, AND FOR YEARS ENDED
DECEMBER 31, 2002, 2003 AND 2004
(Figures in tables are presented in millions of Rupiah, unless otherwise stated)
      The details of the two-step loans are as follows:
                 
  Interest Rate Outstanding
     
Creditors 2003 2004 2003 2004
         
Overseas banks  3.10% – 14.90%   3.10% – 13.25%   7,441,076   5,889,703 
Consortium of contractors  3.20% – 14.90%   3.20% – 13.25%   249,969   129,002 
             
Total          7,691,045   6,018,705 
Current maturities          (832,135)  (655,422)
             
Long-term portion          6,858,910   5,363,283 
             
      The details of two-step loans obtained from overseas banks as of December 31, 2003 and 2004 are as follows:
                 
  Interest Rate Outstanding
     
Currencies 2003 2004 2003 2004
         
U.S. Dollar  4.00% – 7.98%   4.00% – 7.98%   2,946,687   2,397,437 
Rupiah  9.69% – 14.90%   8.30% – 13.25%   3,050,043   2,098,948 
Japanese Yen  3.10%   3.10%   1,244,331   1,393,318 
Euro  7.33% – 8.45%   7.33% – 8.45%   200,015   — 
             
Total          7,441,076   5,889,703 
             
      The loans are intended for the development of telecommunications infrastructure and supporting equipment. The loans are repayable in semi-annual installments and they are due on various dates until 2024.
      Details of two-step loans obtained from a consortium of contractors as of December 31, 2003 and 2004 are as follows:
                 
  Interest Rate Outstanding
     
Currencies 2003 2004 2003 2004
         
Rupiah  12.66% – 14.90%   8.30% – 13.25%   116,574   9,924 
Japanese Yen  3.20%   3.20%   133,395   119,078 
             
Total          249,969   129,002 
             
      The consortium of contractors consists of Sumitomo Corporation, PT NEC Nusantara Communications and PT Humpuss Elektronika (SNH Consortium). The loans were obtained to finance the second digital telephone exchange project. The loans are repayable in semi-annual installments and they are due on various dates until June 15, 2008.
      Two-step loans which are payable in Rupiah bear either a fixed interest rate, a floating rate based upon the average interest rate on 3-month Certificates of Bank Indonesia during the six-months preceding the installment due date plus 1% or a floating interest rate offered by the lenders plus 5.25%. Two-step loans which are payable in foreign currencies bear either a fixed rate interest or the floating interest rate offered by the lenders, plus 0.5%.

F-62

PERUSAHAAN PERSEROAN (PERSERO)
P.T. TELEKOMUNIKASI INDONESIA Tbk AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
DECEMBER 31, 2003 AND 2004, AND FOR YEARS ENDED
DECEMBER 31, 2002, 2003 AND 2004
(Figures in tables are presented in millions of Rupiah, unless otherwise stated)
      As of December 31, 2004, the Company has used all facilities under the two-step loan program and the draw-down period for the two-step loans has expired.
      The Company should maintain financial ratios as follows:
      a. Projected net revenue to projected debt service ratio should exceed 1.5:1 and 1.2:1 for two-step loans originating from World Bank and Asian Development Bank (“ADB”), respectively.
      b. Internal financing (earnings before depreciation and interest expenses) should exceed 50% and 20% compared to capital expenditures for loans originating from World Bank and ADB, respectively.
      As of December 31, 2004, the Company complied with the above mentioned ratios.
23. NOTES AND BONDS
         
  2003 2004
     
Guaranteed Notes  1,121,224   736,174 
Bonds  981,278   986,564 
Medium-term Notes  —   1,077,703 
       
Total  2,102,502   2,800,441 
Current maturities  —   (468,976)
       
Long-term portion  2,102,502   2,331,465 
       
a. Guaranteed Notes
      In April 2002, TSFL, Telkomsel’s wholly-owned subsidiary, issued US$150.0 million Guaranteed Notes (the “Notes”) which are unconditionally and irrevocably guaranteed by Telkomsel. The Notes bear interest at 9.75%, payable semi-annually on April 30 and October 30 of each year and will mature on April 30, 2007. The trustee of the Notes is Deutsche Bank Trustees (Hongkong Limited) and the custodian is Deutsche Bank AG, Hongkong Branch.
      Telkomsel has unconditionally and irrevocably guaranteed the due and punctual payment of all sums from time to time payable by the Issuer in respect of the Notes. So long as any Notes remains outstanding, among others, neither the Issuer nor the Guarantor will create or permit to subsist any mortgage, charge, pledge, lien or other form of encumbrance or security interest including without limitation anything analogous to any of the foregoing under the laws of any jurisdiction (each a “Security Interest”) on the whole or any part of its present or future assets, undertakings, property or revenues as security for any Relevant Debt or any guarantee of or indemnity in respect of any Relevant Debt.
      TSFL may, on the interest payment date falling on or about the third anniversary of the issue date redeem the Notes, in whole or in part, at 102.50% of the principal amount of such Notes, together with interest accrued to the date fixed for redemption, provided that if only part of the Notes are redeemed, the principal amount of the outstanding Notes after such redemption will be at least US$100.0 million.
      The Notes are listed on the Singapore Exchange Securities Trading Limited. The Notes will constitute direct, unconditional, unsubordinated and unsecured obligations of TSFL and will at all times

F-63

PERUSAHAAN PERSEROAN (PERSERO)
P.T. TELEKOMUNIKASI INDONESIA Tbk AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
DECEMBER 31, 2003 AND 2004, AND FOR YEARS ENDED
DECEMBER 31, 2002, 2003 AND 2004
(Figures in tables are presented in millions of Rupiah, unless otherwise stated)
rankpari passu and without any preference among themselves. The payment obligations of TSFL under the Notes shall, save for such exceptions as may be provided by applicable laws, at all times rank at least equivalent with all other present and future unsecured and unsubordinated obligations of TSFL. The net proceeds from the sale of the Notes were used by TSFL to lend to Telkomsel in financing its capital expenditures.
      Based on the “On-Loan Agreement”, dated April 30, 2002 between Telkomsel and TSFL, TSFL lent the proceeds from the subscription of the Notes to Telkomsel at an interest rate of 9.765% per annum, payable under the same terms as above. Subsequently, on September 8, 2003, the agreement was amended such that if any Notes are cancelled, the principal amount of the outstanding loan will be reduced by the principal amount of the Notes cancelled. The loan will mature on April 30, 2007 or on such an earlier date as the loan may become repayable.
      The current rating for the Notes issued by Pefindo is AAA, by Standard and Poor’s is BB- and by Fitch is B+.
     b. Bonds
      On July 16, 2002, the Company issued bonds amounting to Rp1,000,000 million. The bonds were issued at par value and have a term of five years. The bonds bear interest at a fixed rate of 17% per annum, payable quarterly beginning October 16, 2002. The bonds are traded on the Surabaya Stock Exchange and will mature on July 15, 2007. The trustee of the bonds is PT Bank Negara Indonesia (Persero) Tbk and the custodian is PT Danareksa Sekuritas.
      The current rating for the bonds issued by Pefindo is AAA and by Standard and Poor’s is BB-.
      As of December 31, 2003 and 2004, the outstanding principal amount of the bonds and the unamortized bond issuance costs are as follows:
         
  2003 2004
     
Principal  1,000,000   1,000,000 
Bond issuance costs  (18,722)  (13,436)
       
Net  981,278   986,564 
       
      During the period when the bonds are outstanding, the Company should comply with all covenants or restrictions including maintaining consolidated financial ratios as follows:
1. Debt service coverage ratio should exceed 1.5:1
2. Debt to equity ratio should not exceed:
a. 3:1 for the period of January 1, 2002 to December 31, 2002
b. 2.5:1 for the period of January 1, 2003 to December 31, 2003
c. 2:1 for the period of January 1, 2004 to the redemption date of the bonds
3. Debt to EBITDA ratio should not exceed 3:1
      As of December 31, 2004, the Company complied with the covenants.

F-64

PERUSAHAAN PERSEROAN (PERSERO)
P.T. TELEKOMUNIKASI INDONESIA Tbk AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
DECEMBER 31, 2003 AND 2004, AND FOR YEARS ENDED
DECEMBER 31, 2002, 2003 AND 2004
(Figures in tables are presented in millions of Rupiah, unless otherwise stated)
     c. Medium-term Notes
      On December 13, 2004, the Company entered into an agreement with PT ABN AMRO Asia Securities Indonesia, PT Bahana Securities, PT BNI Securities and PT Mandiri Sekuritas (collectively referred as “Initial Purchasers”) to issue Medium-term Notes (the “Notes”) for a total principal amount of Rp1,125,000 million. Proceeds from issuance of the Notes were used to finance the payment of the remaining balance of the borrowings assumed in connection with the AWI acquisition amounting to US$123.0 million (Note 24a).
      The Notes consist of four Series with the following maturities and interest rates:
              
Series Principal Maturity Interest rate
       
 A  290,000   June 15, 2005   7.70%
 B  225,000   December 15, 2005   7.95%
 C  145,000   June 15, 2006   8.20%
 D  465,000   June 15, 2007   9.40%
          
Total  1,125,000         
          
      Interest on the Notes is payable semi-annually beginning June 15, 2005 through June 15, 2007. The Notes are unsecured and will at all times rankpari passu with other unsecured debts of the Company. The Company may at any time, before the maturity dates of the Notes, repurchase the Notes in whole or in part.
      As of December 31, 2004, the outstanding principal and unamortized debt issuance costs are as follows:
Rp
Principal1,080,000
Debt issuance costs(2,297)
1,077,703
Current maturities(468,976)
Long-term portion608,727
      The current rating for the Notes issued by Pefindo is AAA.
      During the period when the Notes are outstanding, the Company should comply with all covenants or restrictions including maintaining financial ratios as follows:
1. Debt service coverage ratio should exceed 1.5:1
2. Debt to equity ratio should not exceed 2:1
3. Debt to EBITDA ratio should not exceed 3:1
      As of December 31, 2004, the Company complied with the covenants.

F-65

PERUSAHAAN PERSEROAN (PERSERO)
P.T. TELEKOMUNIKASI INDONESIA Tbk AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
DECEMBER 31, 2003 AND 2004, AND FOR YEARS ENDED
DECEMBER 31, 2002, 2003 AND 2004
(Figures in tables are presented in millions of Rupiah, unless otherwise stated)
24. BANK LOANS
      The details of long-term bank loans as of December 31, 2003 and 2004 are as follows:
                         
      2003 2004
         
      Outstanding Outstanding
         
      Original   Original  
    Total Facility Currency Rupiah Currency Rupiah
Lenders Currency (in millions) (in millions) Equivalent (in millions) Equivalent
             
Group of lenders  US$   —   172.3   1,456,063   —   — 
Citibank N.A.   EUR   73.4   64.9   690,646   51.4   649,758 
   US$   113.3   51.3   434,059   85.9   798,197 
Bank Central Asia  Rp   173,000.0   —   139,826   —   143,489 
Deutsche Bank  Rp   108,817.7   —   95,418   —   41,009 
Bank Finconesia  Rp   —   —   15,884   —   — 
Bank Mandiri  Rp   82,425.3   —   42,115   —   59,729 
Syndicated banks  Rp   90,000.0   —   34,263   —   8,088 
   US$   4.0   1.9   15,751   0.4   4,092 
Bank Niaga  Rp   7,765.0   —   565   —   7,330 
The Export-Import Bank of Korea  US$   124.0   —   —   59.1   549,449 
Consortium of banks  Rp   150,000.0   —   —   —   117,174 
                   
Total              2,924,590       2,378,315 
Current maturities of bank loans              (808,793)      (602,516)
                   
Long-term portion              2,115,797       1,775,799 
                   
     a. Group of lenders
      AWI had a loan of US$270.9 million from a group of lenders (the “lenders”) before it was 100% acquired by the Company on July 31, 2003. Based on the Conditional Sale and Purchase Agreement related to the acquisition, the Company assumed the loan by repaying US$74.0 million and entering into a credit agreement with the lenders to finance the remaining outstanding balance of the loan amounting to US$197.0 million, with JP Morgan Chase Bank, Hong Kong office, as the facility agent. This loan bears an interest at LIBOR plus 3.5% per annum, net of 10% withholding tax (i.e. 4.65% as of December 31, 2003). The Company must pay an annual facility agent fee of US$0.1 million. The loan is repayable in 8 semi-annual installments beginning on December 31, 2003 with the first through the seventh installment of US$24.7 million and final installment of US$24.4 million. The Company has repaid the entire outstanding balance in December 2004 using the proceeds from issuance of Medium-term Notes (Note 23c) and the credit agreement was terminated on January 3, 2005.
     b. Citibank N.A.
     1. Hermes Export Facility
      On December 2, 2002, pursuant to the partnership agreement with Siemens Aktiengesellschaft (AG) (Note 52a.i), Telkomsel entered into the Hermes Export Facility Agreement (“Facility”)

F-66

PERUSAHAAN PERSEROAN (PERSERO)
P.T. TELEKOMUNIKASI INDONESIA Tbk AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
DECEMBER 31, 2003 AND 2004, AND FOR YEARS ENDED
DECEMBER 31, 2002, 2003 AND 2004
(Figures in tables are presented in millions of Rupiah, unless otherwise stated)
with Citibank International plc (as “Original Lender” and “Agent”) and Citibank N.A., Jakarta branch (as “Arranger”) covering a total facility of EUR76.2 million which is divided into several tranches.
      The agreement was subsequently amended on October 15, 2003, amending the Facility amount to EUR73.4 million and repayment dates.
      The interest rate per annum on the Facility is determined based on the aggregate of the applicable margin, EURIBOR and mandatory cost, if any (i.e., 2.98% as of December 31, 2003 and 2.963% as of December 31, 2004). Interest is payable semi-annually, starting on the utilization date of the Facility.
      In addition to the interest, in 2003, Telkomsel was also charged an insurance premium for the insurance guarantee given by Hermes in favor of Telkomsel for each loan utilization amounting to EUR 6.1 million, 15% of which was paid in cash. The remaining balance was settled through utilization of the Facility.
      As of December 31, 2003 and 2004, the outstanding balance was EUR64.9 million (Rp690,646 million) and EUR51.4 million (Rp649,758 million), respectively.
      The schedule of the principal payments on this long-term loan as of December 31, 2004 is as follows:
         
  Amount
   
  EUR Rupiah
Year (in millions) Equivalent
     
2005  14.7   185,645 
2006  14.7   185,645 
2007  11.0   139,234 
2008  11.0   139,234 
     2. High Performance Backbone (“HP Backbone”) Loans
      a. On April 10, 2002, the Company entered into a “Loan Agreement” with Citibank N.A. (“Arranger”) and Citibank International plc (“Agent”), which was supported by an export credit guarantee of Hermes Kreditversicherungs AG (“Lender” and “Guarantor”), providing a total facility of US$23.4 million.
      The facility was obtained to finance up to 85% of the cost of supplies and services sourced in Germany relating to the design, manufacture, construction, installation and testing of high performance backbone networks in Sumatra pursuant to the “Partnership Agreement” dated November 30, 2001, with PT Pirelli Cables Indonesia and PT Siemens Indonesia for the construction and provision of a high performance backbone in Sumatra.
      The lender required a fee of 8.4% of the total facility. This fee is paid twice during the agreement period, 15% of the fee is required to be paid in cash and 85% is included in the loan balance.
      As of December 31, 2003 and 2004, the outstanding loan was US$15.1 million (Rp127,664 million) and US$16.8 million (Rp155,918 million), respectively. The loan is payable in ten semi-annual installments beginning in July 2004.
      Amounts drawn from the facility bear interest at LIBOR plus 0.75% (i.e., 1.98% and 2.97% as of December 31, 2003 and 2004, respectively).

F-67

PERUSAHAAN PERSEROAN (PERSERO)
P.T. TELEKOMUNIKASI INDONESIA Tbk AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
DECEMBER 31, 2003 AND 2004, AND FOR YEARS ENDED
DECEMBER 31, 2002, 2003 AND 2004
(Figures in tables are presented in millions of Rupiah, unless otherwise stated)
      b. On April 10, 2002, the Company entered into a loan agreement with Citibank N.A. (as “Arranger”) and Citibank International plc (as “Agent”), which was supported by an export credit guarantee obtained from Istituto per I Servizi Assicurativi del Commercio Estero (“SACE Italy”) providing a total maximum facility to US$21.0 million. The facility was used to finance up to 85% of material and services procured in Italy in connection with the design, manufacture, development, installation and testing ofSub System VI, as part ofHP Backbone network.
      Amounts drawn from the facility bear fixed interest rate of 4.14%. The loans are payable in ten semi-annual installments beginning in December 2003. Total principal outstanding as of December 31, 2003 and 2004 was US$16.7 million (Rp141,073 million) and US$13.0 million (Rp120,809 million), respectively.
      During the period when the loans are outstanding, the Company should comply with all covenants or restrictions including maintaining financial ratios as follows:
      1. Debt service coverage ratio should exceed 1.5:1
      2. Debt to equity ratio should not exceed:
a. 3:1 for the period of April 10, 2002 to January 1, 2003
b. 2.75:1 for the period of January 2, 2003 to January 1, 2004
c. 2.5:1 for the period of January 2, 2004 to January 1, 2005
d. 2:1 for the period of January 2, 2005 to the fully repayment date of the loans
      3. Debt to EBITDA ratio should not exceed:
a. 3.5:1 for the period of April 10, 2002 to January 1, 2004
b. 3:1 for the period of January 2, 2004 to the fully repayment date of the loans
      The Company has breached a covenant in the loan agreement which stipulates that the Company will not make any loans or grant any credit to or for the benefit of any person. As of June 9, 2004, the Company obtained a written waiver from Citibank International plc with regard to entering into the AWI loan (Notes 4c and 24a). As of December 31, 2004, the Company complied with the covenants.
3. EKN-Backed Facility
      On December 2, 2002, pursuant to the partnership agreement with PT Ericsson Indonesia (Note 52a.i), Telkomsel entered into the EKN-Backed Facility agreement (“Facility”) with Citibank International plc (as “Original Lender” and “Agent”) and Citibank N.A., Jakarta branch (as “Arranger”) covering a total facility amount of US$70.5 million which is divided into several tranches.
      The agreement was subsequently amended on December 17, 2004, among others, to reduce the total Facility to US$68.9 million.
      The interest rate per annum on the Facility is determined based on the aggregate of the applicable margin, CIRR (Commercial Interest Reference Rate) and mandatory cost, if any (i.e., 4.27% and 4.02% as of December 31, 2003 and 2004, respectively). Interest is payable semi-annually, starting on the utilization date of the Facility.

F-68

PERUSAHAAN PERSEROAN (PERSERO)
P.T. TELEKOMUNIKASI INDONESIA Tbk AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
DECEMBER 31, 2003 AND 2004, AND FOR YEARS ENDED
DECEMBER 31, 2002, 2003 AND 2004
(Figures in tables are presented in millions of Rupiah, unless otherwise stated)
      In addition to the interest, in 2003 and 2004, Telkomsel was also charged an insurance premium for the insurance guarantee given by EKN in favor of Telkomsel for each loan utilization amounting to US$4.2 million and US$1.5 million, respectively, 15% of which was paid in cash. The remaining balance was settled through utilization of the Facility.
      The total amount drawn down from the Facility in 2003 and 2004 amounted to US$21.7 million (equivalent to Rp184,834 million) and US$47.3 million (equivalent to Rp428,719 million), respectively. As of December 31, 2003 and 2004, the outstanding balance was US$19.5 million (Rp165,322 million) and US$56.1 million (Rp521,470 million), respectively.
      The schedule of the principal payments on this long-term loan as of December 31, 2004 is as follows:
         
  Amount
   
  US$ Rupiah
Year (in millions) Equivalent
     
2005  15.5   143,841 
2006  15.5   143,841 
2007  12.6   116,894 
2008  12.5   116,894 
      The following table summarizes the principal outstanding on loans from Citibank N.A. as of December 31, 2003 and 2004:
                 
  2003 2004
     
  Foreign   Foreign  
  Currencies Rupiah Currencies Rupiah
  (in millions) Equivalent (in millions) Equivalent
         
Hermes Export Facility  EUR64.9   690,646   EUR51.4   649,758 
HP Backbone loans US$31.8   268,737  US$29.8   276,727 
EKN-Backed Facility US$19.5   165,322  US$56.1   521,470 
             
Total      1,124,705       1,447,955 
Current maturities      (242,116)      (402,983)
             
Long-term portion      882,589       1,044,972 
             
c. Bank Central Asia
      On April 10, 2002, the Company entered into a “Term Loan Agreement HP Backbone Sumatra Project” with Bank Central Asia, providing a total facility of Rp173,000 million. The facility was obtained to finance the Rupiah portion of the high performance backbone network in Sumatra pursuant to the “Partnership Agreement”.
      Amounts drawn from the facility bear interest at 4.35% plus the 3-month time deposit rate (i.e., 11.05% and 10.02% as of December 31, 2003 and 2004, respectively). The loans are payable in twelve unequal quarterly installments beginning January 2004. The loan will mature in October 2006.
      Total principal outstanding as of December 31, 2003 and 2004 were Rp139,826 million and Rp143,489 million, respectively.

F-69

PERUSAHAAN PERSEROAN (PERSERO)
P.T. TELEKOMUNIKASI INDONESIA Tbk AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
DECEMBER 31, 2003 AND 2004, AND FOR YEARS ENDED
DECEMBER 31, 2002, 2003 AND 2004
(Figures in tables are presented in millions of Rupiah, unless otherwise stated)
      The loan facility from Bank Central Asia is not collateralized.
      During the period when the loan is outstanding, the Company should comply with all covenants or restrictions including maintaining financial ratios as follows:
      1. EBITDA to interest ratio should not exceed 4:1
      2. EBITDA to interest and principal ratio should exceed 1.5:1
      3. Debt to EBITDA ratio should not exceed 3:1
      In 2003, the Company breached a covenant in the loan agreement which stipulated that the Company would not make any guarantee or collateralize its assets for an amount exceeding US$2 million or its equivalent. On June 23, 2004, the Company obtained a written waiver from Bank Central Asia with regard to the Company’s time deposits of US$4.6 million collateralized for Napsindo’s loan (Notes 9 and 20a). Subsequently, the covenant in the loan agreement was amended to increase the limit of the guarantee or collateralized assets to Rp500,000 million (equivalent US$53.9 million).
d. Deutsche Bank AG
      On June 28, 2002, the Company entered into a contract agreement with PT Siemens Indonesia and PT NEC Nusantara Communications for addition of Central Electronic Wahler Switching Digital (“EWSD”) and Nippon Electric Automatic Exchange (“NEAX”), respectively, in Regional Division V. Subsequently, 80% of the contract amounts were factored by the vendors to Deutsche Bank AG (“Facility Agent”). The loans bear fixed interest rate at 19% per annum and are repayable in two annual installments of Rp13,400 million beginning in December 2003 for loan ex-PT NEC Nusantara Communications and Rp41,009 million beginning in January 2004 for loan ex-PT Siemens Indonesia. As of December 31, 2003 and 2004, the outstanding balance was Rp 95,418 million and Rp41,009 million, respectively.
e. Bank Finconesia
      On June 28, 2002, the Company entered into a contract agreement with PT Olex Cables Indonesia for addition of installation of Central Lucent in Regional Division V. Subsequently, 80% of the contract amounts were factored by the vendor to Bank Finconesia. The loan bears fixed interest rate at 19% per annum and is repayable in two annual installments of Rp15,884 million beginning in December 2003. As of December 31, 2004, the facility has been repaid.
f. Bank Mandiri
      On November 20, 2003, Dayamitra entered into a loan agreement with Bank Mandiri for a maximum facility of Rp39,925 million. As of December 31, 2003, the facility has been fully drawn down. This facility is repayable on a quarterly basis until the fourth quarter of 2005 and bears interest at 14.5% per annum, payable on a monthly basis and subject to change. On December 30, 2003 and September 1, 2004, Bank Mandiri agreed to decrease the interest rate to 14% per annum commencing in January 2004 and 11.25% per annum commencing from September 1, 2004, respectively.
      On December 20, 2003, Dayamitra also obtained a credit facility from Bank Mandiri for a maximum facility of Rp40,000 million. The facility is repayable on a quarterly basis beginning from the end of the third quarter of 2004 until end of the fourth quarter of 2006 and bears interest at 14% per annum. On

F-70

PERUSAHAAN PERSEROAN (PERSERO)
P.T. TELEKOMUNIKASI INDONESIA Tbk AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
DECEMBER 31, 2003 AND 2004, AND FOR YEARS ENDED
DECEMBER 31, 2002, 2003 AND 2004
(Figures in tables are presented in millions of Rupiah, unless otherwise stated)
September 1, 2004, Bank Mandiri agreed to decrease the interest rate to 11.25% commencing from September 1, 2004. The loan is obtained to finance the construction of Fixed Wireless CDMA project pursuant to the procurement agreement entered between Dayamitra and Samsung Electronic Co. Ltd.
      The above loans are collateralized by Dayamitra’s telecommunications equipment/network with CDMA technology financed by these facilities, and Dayamitra’s share in the DKSOR of KSO Unit VI. As of December 31, 2003 and 2004, total principal outstanding under these facilities amounted to Rp39,925 million and Rp58,254 million, respectively.
      On March 13, 2003, Balebat entered into a loan agreement with Bank Mandiri for a facility of Rp2,500 million. This facility bears interest at 15% per annum payable on a monthly basis, is secured by Balebat’s operating equipment and will mature in July 2006. The principal is repayable on a monthly basis. As of December 31, 2003 and 2004, principal outstanding under this facility amounted to Rp2,190 million and Rp1,475 million, respectively.
g. Syndicated banks (Internet Protocol Backbone (“IP Backbone”) Loan)
      On February 25, 2002, the Company entered into a “Facility Funding Agreement” with Bank DBS Indonesia (syndicated agent and lender), Bank Bukopin (lender) and Bank Central Asia (“BCA”, lender), providing a total facility of US$4.0 million and Rp90,000 million to fund the IP Backbone project in 7 (seven) Regional Divisions or KSO regions divided into 6 (six) batches.
      Amounts drawn in U.S. Dollars bear interest at 2% plus the highest of 1, 2 or 3 month SIBOR divided by 0.87% for the first year and 2% plus the 3 month SIBOR divided by 0.87% thereafter (i.e., 3.38% and 4.875% as of December 31, 2003 and 2004, respectively). Amounts drawn in Rupiah bear interest at 19% fixed for the first year and 5% plus the average of BCA’s and Bukopin’s interest rates (the highest of 1, 3, 6 or 12-month time deposit rate) thereafter (i.e., 11.625% and 11.125% as of December 31, 2003 and 2004, respectively).
      The loans are payable in eleven quarterly installments beginning in September 2002. The loans will mature on March 15, 2005.
      Total outstanding IP Backbone loans for Rupiah and U.S. Dollars as of December 31, 2003 and 2004 are Rp34,263 million and US$1.9 million (Rp15,751 million) and Rp8,088 million and US$0.4 million (Rp4,092 million), respectively. The loans were fully repaid on March 15, 2005.
      The Company pledged the property under construction as collateral for the IP Backbone loan with a maximum amount of US$14.6 million and Rp401 million.
      Average interest rates for the loans during 2003 and 2004 were as follows:
         
  2003 2004
     
Rupiah  11.63% – 19.00%   10.83% – 11.63% 
U.S. Dollar  3.31% – 3.69%   3.31% – 4.88% 
      Under the Loan Agreement, the Company should maintain quarterly financial ratios as follows:
      1. Debt to equity ratio should not exceed 3:1
      2. EBITDA to interest expense should exceed 5:1
      As of December 31, 2004, the Company complied with the above mentioned ratios.

F-71

PERUSAHAAN PERSEROAN (PERSERO)
P.T. TELEKOMUNIKASI INDONESIA Tbk AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
DECEMBER 31, 2003 AND 2004, AND FOR YEARS ENDED
DECEMBER 31, 2002, 2003 AND 2004
(Figures in tables are presented in millions of Rupiah, unless otherwise stated)
h. Bank Niaga
      On July 18 and December 3, 2003, Balebat entered into loan agreements with Bank Niaga for facilities totaling Rp565 million. The facilities bear interest at 15% per annum and are secured by Balebat’s time deposits and vehicles. The principal and interest are payable on a monthly basis which will end in October 2005 and December 2005, respectively. As of December 31, 2003 and 2004, principal outstanding amounted to Rp565 million and Rp249 million, respectively.
      On December 28, 2004, Balebat entered into a loan agreement with Bank Niaga providing a total facility of Rp7,200 million comprising of Rp5,000 million to finance construction of plant (“Investment Facility”) which bears interest at 13.5% per annum and Rp2,200 million to finance purchase of machinery (“Specific Transaction Facility”) which bears interest at 12% per annum. The Investment Facility is repayable in 36 monthly installments commencing from March 31, 2005. The Specific Transaction Facility is repayable in 60 monthly installments commencing from June 29, 2005. These facilities are secured by Balebat’s property, plant and equipment with a value of Rp8,450 million. As of December 31, 2004, principal outstanding under these facilities amounted to Rp7,081 million.
i. The Export-Import Bank of Korea
      On August 27, 2003, the Company entered into a loan agreement with the Export-Import Bank of Korea for a total facility of US$124.0 million. The loan is used to finance the CDMA procurement from the Samsung Consortium (Note 52a(iv)) and available until April 2006. The loan bears interest, commitment and other fees totaling 5.68%. The loan is unsecured and payable in 10 semi-annual installments on June 30 and December 30 in each year beginning in 2006. As of December 31, 2004, principal outstanding amounted to US$59.1 million (equivalent Rp549,449 million).
j. Consortium of banks
      On June 21, 2002, the Company entered into a loan agreement with a consortium of banks for a facility of Rp400,000 million to finance the Regional Division V Junction Project. Bank Bukopin, acting as the facility agent, charged interest at the rate of 19.5% for the first year from the signing date and at the rate of the average 3-month deposit rate plus 4% for the remaining years. The drawdown period expires 19 months from the signing of the loan agreement and the principal is payable in 14 quarterly installments starting from April 2004. The loan facility is secured by the project equipment, with a value of not less than Rp500,000 million.
      Subsequently, based on an Addendum to the loan agreement dated April 4, 2003, the loan facility was reduced to Rp150,000 million, the drawdown period was amended to expire 18 months from the signing of the Addendum, the repayment schedule was amended to 14 quarterly installments starting from May 21, 2004 and ending on June 21, 2007 and the value of the project equipment secured was reduced to Rp187,500 million.
      As of December 31, 2004, interest rate charged on the loan was 10.19% and the principal outstanding amounted to Rp117,174 million.

F-72

PERUSAHAAN PERSEROAN (PERSERO)
P.T. TELEKOMUNIKASI INDONESIA Tbk AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
DECEMBER 31, 2003 AND 2004, AND FOR YEARS ENDED
DECEMBER 31, 2002, 2003 AND 2004
(Figures in tables are presented in millions of Rupiah, unless otherwise stated)
      During the period when the loan is outstanding, the Company should comply with all covenants or restrictions including maintaining financial ratios as follows:
      1. Debt to equity ratio should not exceed 3:1
      2. EBITDA to interest expense should exceed 5:1
      As of December 31, 2004, the Company complied with the above mentioned ratios.
25. LIABILITIES OF BUSINESS ACQUISITIONS
      This amount represents the Company’s obligation under the Promissory Notes issued to the Selling Stockholders of Pramindo in respect of the Company’s acquisition of 100% of Pramindo, to the Selling Stockholders of AWI in respect of the Company’s acquisition of 100% of AWI, to TM Communication (HK) Ltd. in respect of the Company’s exercise of the Option Agreement to purchase the remaining 9.68% of Dayamitra shares and to MGTI in respect of the Company’s acquisition of KSO IV.
          
  2003 2004
     
Pramindo transaction(Note 4b)
        
 France Cables et Radio S.A.   646,100   — 
 PT Astratel Nusantara  565,497   — 
 Indosat  210,042   — 
 Marubeni Corporation  129,220   — 
 International Finance Corporation, USA  48,457   — 
 NMP Singapore Pte. Ltd.   16,157   — 
 Less discount on promissory notes  (80,184)  — 
       
   1,535,289   — 
       
AWI transaction(Note 4c)
        
 PT Aria Infotek  483,955   479,373 
 The Asian Infrastructure Fund  115,227   114,136 
 MediaOne International I B.V.  322,636   319,582 
 Less discount on promissory notes  (122,358)  (90,173)
       
   799,460   822,918 
       
Dayamitra transaction(Note 4a)
        
 TM Communication (HK) Ltd.   —   139,752 
 Less discount on promissory notes  —   (11,883)
       
   —   127,869 
       

F-73

PERUSAHAAN PERSEROAN (PERSERO)
P.T. TELEKOMUNIKASI INDONESIA Tbk AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
DECEMBER 31, 2003 AND 2004, AND FOR YEARS ENDED
DECEMBER 31, 2002, 2003 AND 2004
(Figures in tables are presented in millions of Rupiah, unless otherwise stated)
          
  2003 2004
     
KSO IV transaction(Note 4d)
        
 MGTI  —   4,305,125 
 Less discount  —   (938,687)
       
   —   3,366,438 
       
Total  2,334,749   4,317,225 
Current maturity — net of discount (Note 21a)  (1,587,775)  (573,908)
       
Long-term portion — net of discount  746,974   3,743,317 
       
26. SUPPLIERS’ CREDIT LOANS
         
  2003 2004
     
Tomen Corporation  139,608   — 
Cable & Wireless plc  26,021   — 
       
Total  165,629   — 
Current maturities  (164,958)  — 
       
Long-term portion  671   — 
       
a. Tomen Corporation (“Tomen”)
      Dayamitra entered into a Design, Supply, Construction and Installation Contract dated November 18, 1998 with Tomen, the ultimate holding company of TMC, one of the former stockholders of Dayamitra. Under the terms of the contract, Tomen is responsible for the construction of the minimum new installations required under the KSO VI Agreement in which Dayamitra is the investor.
      In connection with the above agreement, Dayamitra entered into a Supplier’s Credit Agreement (“SCA”) with Tomen on November 18, 1998. The total commitment under the SCA was US$54.0 million of which US$50.4 million had been drawn down before the expiration date of the available credit on September 30, 1999.
      Interest accrues on the amounts drawn down at LIBOR plus 4.5% per annum, and is payable semiannually in arrears. Annual interest rates in 2003 and 2004 ranged from 5.53% to 5.92% and from 5.52% to 5.72%, respectively.
      The SCA loan is repayable in ten semi-annual installments commencing on December 15, 2000. The SCA contains a minimum fixed repayment schedule, however, additional principal repayments are required on repayment dates in the event that Dayamitra has excess cash, as defined in the SCA. The SCA loan is secured on a pro rata basis by the security rights provided under the C&W plc bridging facility loan (Note 27). On May 10, 2004, the loan was repaid and the loan agreement was terminated on November 9, 2004.

F-74

PERUSAHAAN PERSEROAN (PERSERO)
P.T. TELEKOMUNIKASI INDONESIA Tbk AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
DECEMBER 31, 2003 AND 2004, AND FOR YEARS ENDED
DECEMBER 31, 2002, 2003 AND 2004
(Figures in tables are presented in millions of Rupiah, unless otherwise stated)
b. Cable and Wireless plc (“C&W plc”)
      Dayamitra entered into a Supplier’s Credit Agreement (“SCA”) with C&W plc on May 19, 1999.
      The SCA loan is repayable in ten semi-annual installments commencing on December 15, 2000. The SCA loan contains a minimum fixed repayment schedule, however, additional principal repayments are required on repayment dates in the event that Dayamitra has excess cash, as defined in the SCA. Interest on this loan is at the rate of LIBOR plus 4.5%. Annual interest rates in 2003 and 2004 ranged from 5.53% to 5.92% and from 5.22% to 5.72%, respectively.
      The SCA loan is secured on a pro rata basis by the security rights provided under the C&W plc bridging facility loan. In addition, any distributions to stockholders in the form of dividends or repayments of share capital require the written consent of Tomen and C&W plc. On May 10, 2004, the loan was repaid and the loan agreement was terminated on November 9, 2004.
27. BRIDGING LOAN
         
  2003 2004
     
Total outstanding amount  50,365   — 
Current maturities  (49,855)  — 
       
Long-term portion  510   — 
       
      This loan is owed by Dayamitra to C&W plc under a bridging loan facility which was assigned from three local Indonesian banks. The loan is repayable in ten semi-annual installments commencing on December 15, 2000. Interest is payable on a monthly or a quarterly basis, at the option of Dayamitra, at the rate of LIBOR plus 4% per annum. Annual interest rates in 2003 and 2004 ranged from 5.06% to 5.42% and from 5.22% to 5.72%, respectively.
      C&W plc has agreed to the repayment of the bridging loan facility in proportion to the amounts made available to Dayamitra under this bridging loan facility and the C&W plc and Tomen Supplier’s Credit Loans. The security provided against the bridging loan facility consists of an assignment of KSO revenues, an assignment of bank accounts, a security interest in Dayamitra’s movable assets, an assignment of the Tomen construction contract, an assignment of proceeds from early termination of the KSO license by the Company, and an assignment of insurance proceeds.
      Distributions to stockholders in the form of dividends or repayment of share capital require the written consent of C&W plc. On May 10, 2004, the loan was repaid.

F-75

PERUSAHAAN PERSEROAN (PERSERO)
P.T. TELEKOMUNIKASI INDONESIA Tbk AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
DECEMBER 31, 2003 AND 2004, AND FOR YEARS ENDED
DECEMBER 31, 2002, 2003 AND 2004
(Figures in tables are presented in millions of Rupiah, unless otherwise stated)
28. MINORITY INTEREST
          
  2003 2004
     
Minority interest in net assets of subsidiaries:        
 Telkomsel  3,608,874   4,857,089 
 Infomedia  60,353   80,883 
 Dayamitra  32,999   — 
 Indonusa  1,959   — 
 Napsindo  2,068   — 
 PII  1,899   456 
 GSD  3   4 
       
Total  3,708,155   4,938,432 
       
              
  2002 2003 2004
       
Minority interest in net income (loss) of subsidiaries:            
 Telkomsel  782,870   1,482,897   1,915,543 
 Infomedia  19,031   22,399   37,088 
 Dayamitra  15,151   11,584   9,139 
 Indonusa  (6,831)  (2,351)  (1,959)
 Napsindo  —   (8,541)  (2,068)
 PII  —   (2,511)  (1,443)
 GSD  1   1   1 
          
Total  810,222   1,503,478   1,956,301 
          

F-76

PERUSAHAAN PERSEROAN (PERSERO)
P.T. TELEKOMUNIKASI INDONESIA Tbk AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
DECEMBER 31, 2003 AND 2004, AND FOR YEARS ENDED
DECEMBER 31, 2002, 2003 AND 2004
(Figures in tables are presented in millions of Rupiah, unless otherwise stated)
29. CAPITAL STOCK
               
  2003
   
    Percentage Total
  Number of of Paid-up
Description Shares* Ownership Capital
       
    % Rp
Series A Dwiwarna share            
 Government of the Republic of Indonesia  1   —   — 
Series B shares            
 Government of the Republic of Indonesia  10,320,470,711   51.19   2,580,118 
 JPMCB US Resident (Norbax Inc.)  1,792,091,302   8.89   448,023 
 The Bank of New York  1,314,526,816   6.52   328,632 
 Board of Commissioners:            
  Petrus Sartono  19,116   —   5 
 Board of Directors:            
  Kristiono  25,380   —   6 
  Garuda Sugardo  16,524   —   4 
  Guntur Siregar  19,980   —   5 
  Agus Utoyo  23,652   —   6 
  Suryatin Setiawan  21,708   —   5 
 Public (below 5% each)  6,732,784,090   33.40   1,683,196 
          
Total  20,159,999,280   100.00   5,040,000 
          
* Number of shares has been restated to reflect a two-for-one stock split as resolved in the Annual General Meeting of Stockholders on July 30, 2004 (Note 1b).

F-77

PERUSAHAAN PERSEROAN (PERSERO)
P.T. TELEKOMUNIKASI INDONESIA Tbk AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
DECEMBER 31, 2003 AND 2004, AND FOR YEARS ENDED
DECEMBER 31, 2002, 2003 AND 2004
(Figures in tables are presented in millions of Rupiah, unless otherwise stated)
               
  2004
   
    Percentage Total
  Number of of Paid-up
Description Shares Ownership Capital
       
    % Rp
Series A Dwiwarna share            
 Government of the Republic of Indonesia  1   —   — 
Series B shares            
 Government of the Republic of Indonesia  10,320,470,711   51.19   2,580,118 
 JPMCB US Resident (Norbax Inc.)  1,378,468,925   6.84   344,617 
 The Bank of New York  1,568,517,736   7.78   392,129 
 Board of Commissioners            
  Petrus Sartono  19,116   —   5 
 Board of Directors            
  Kristiono  25,380   —   6 
  Suryatin Setiawan  21,708   —   5 
  Woeryanto Soeradji  16,524   —   4 
 Public (below 5% each)  6,892,459,179   34.19   1,723,116 
          
Total  20,159,999,280   100.00   5,040,000 
          
30. ADDITIONAL PAID-IN CAPITAL
         
  2003 2004
     
Proceeds from sale of 933,333,000 shares in excess of par value through initial public offering in 1995  1,446,666   1,446,666 
Capitalization into 746,666,640 series B shares in 1999  (373,333)  (373,333)
       
Total  1,073,333   1,073,333 
       
31. DIFFERENCE IN VALUE OF RESTRUCTURING TRANSACTIONS BETWEEN ENTITIES UNDER COMMON CONTROL
      On April 3, 2001, the Company signed a Conditional Sale and Purchase Agreement with Indosat, for a series of transactions to consolidate their cross-ownership in certain companies. The transactions under the agreement are as follows:

 i.Acquisition by the Company of Indosat’s 35% equity interest in Telkomsel for US$945,000,000945.0 million (“Telkomsel Transaction”);
 
 ii.Acquisition by Indosat of the Company’s 22.5% equity interest in PT Satelit Palapa Indonesia (“Satelindo”) for US$186,000,000186.0 million (“Satelindo Transaction”);

F-32

PERUSAHAAN PERSEROAN (PERSERO)
P.T. TELEKOMUNIKASI INDONESIA Tbk AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

DECEMBER 31, 2002 AND 2003, AND FOR YEARS ENDED
DECEMBER 31, 2001, 2002 AND 2003
(Figures in tables are presented in millions of Rupiah, unless otherwise stated)

 iii.Acquisition by Indosat of the Company’s 37.66% equity interest in PT Aplikanusa Lintasarta (“Lintasarta”) for US$38,000,00038.0 million plus convertible bonds of Rp4,051 million issued by Lintasarta (“Lintasarta Transaction”); and

F-78

PERUSAHAAN PERSEROAN (PERSERO)
P.T. TELEKOMUNIKASI INDONESIA Tbk AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
DECEMBER 31, 2003 AND 2004, AND FOR YEARS ENDED
DECEMBER 31, 2002, 2003 AND 2004
(Figures in tables are presented in millions of Rupiah, unless otherwise stated)
 iv.The acquisition by Indosat of all of the Company’s rights and novation of all of the Company’s obligations, under the KSO IV Agreement dated October 20, 1995, between the Company and PT Mitra Global Telekomunikasi Indonesia (“MGTI”), together with all of the Company’s assets being used as KSO IV assets, for US$375,000,000375.0 million (“KSO IV Transaction”).

      Lintasarta’s convertible bonds were subsequently converted into shares, thereby reducing the Company’s 37.66% equity interest to 37.21% prior to the consummation of the Lintasarta Transaction.

      The Telkomsel and Lintasarta Transactions were consummated on May 16, 2001 based on Deed of Share Transfer No. 1/V/2001/triplo and No. 2/V/2001/duplo, respectively, of Notary Ny. Liliana Arif Gondoutomo, S.H.

      The Satelindo Transaction was consummated on July 23, 2001 after DeTeAsia Holding GmbH and PT Bimagraha Telekomindo (the other Satelindo stockholders) waived their pre-emptive rights on 7.26% and 13.06% of Satelindo’s shares, respectively.

      On February 1, 2002, the Company and Indosat announced the cancellation of the KSO IV Transaction. As a result, the Company settled this portion of the cross-ownership transaction in cash.

At the time of the transaction, the Government was the majority and controlling shareholder of both the Company and Indosat. Accordingly, the Telkomsel, Satelindo and Lintasarta Transactions have been accounted for as a restructuring of entities under common control. The Company’s acquisition of a controlling interest in Telkomsel was accounted for in a manner similar to that of pooling of interests accounting (carryover basis). Accordingly, for reporting purposes, the financial statements of the Company and those of Telkomsel have been combined, as if they had been combined from the beginning of the earliest period presented. The effects of the transactions between the Company and Telkomsel before the combination were eliminated in preparing the combined financial statements. The difference between the consideration paid or received and the historical amount of the net assets of the investee acquired or carrying amount of the investment sold, is included as a

F-79

PERUSAHAAN PERSEROAN (PERSERO)
P.T. TELEKOMUNIKASI INDONESIA Tbk AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
DECEMBER 31, 2003 AND 2004, AND FOR YEARS ENDED
DECEMBER 31, 2002, 2003 AND 2004
(Figures in tables are presented in millions of Rupiah, unless otherwise stated)
component of stockholders’ equity as “Difference in value of restructuring transactions between entities under common control”, as follows:
                             
Historical
ConsiderationAmount ofDeferredChange
Paid/Net Assets/Incomein
(Received)InvestmentTaxEquityTotalTaxNet
Telkomsel  10,782,450   1,466,658   337,324   —   8,978,468   —   8,978,468 
Satelindo  (2,122,260)  —   —   (290,442)  (2,412,702)  (627,678)  (1,785,024)
Lintasarta  (437,631)  116,834   —   —   (320,797)  (119,586)  (201,211)
   
   
   
   
   
   
   
 
Total  8,222,559   1,583,492   337,324   (290,442)  6,244,969   (747,264)  6,992,233 
   
   
   
   
   
   
   
 
                              
    Historical          
  Consideration Amount of Deferred        
  Paid/ Net Assets/ Income Change      
  (Received) Investment Tax in Equity Total Tax Net
               
Cross-ownership transactions with Indosat in 2001:                            
Acquisition of 35% equity interest in Telkomsel  10,782,450   1,466,658   337,324   —   8,978,468   —   8,978,468 
Sale of 22.5% equity interest in Satelindo  (2,122,260)  —   —   (290,442)  (2,412,702)  (627,678)  (1,785,024)
Sale of 37.66% equity interest in Lintasarta  (437,631)  116,834   —   —   (320,797)  (119,586)  (201,211)
                      
 Total  8,222,559   1,583,492   337,324   (290,442)  6,244,969   (747,264)  6,992,233 
Acquisition of 13% equity interest in Pramindo in 2002 from Indosat (Note 4b):  434,025   137,987   —   —   296,038   —   296,038 
                      
Total  8,656,584   1,721,479   337,324   (290,442)  6,541,007   (747,264)  7,288,271 
                      
32. TELEPHONE REVENUES
              
  2002 2003 2004
       
Fixed lines            
 Local and domestic long-distance usage  5,447,925   6,561,800   7,439,310 
 Monthly subscription charges  1,474,823   1,948,830   2,934,899 
 Installation charges  130,234   223,130   201,313 
 Phone cards  29,265   34,371   15,561 
 Others  181,852   128,734   53,938 
          
 Total  7,264,099   8,896,865   10,645,021 
          
Cellular            
 Air time charges  5,453,597   7,677,884   9,825,738 
 Monthly subscription charges  593,347   580,550   448,472 
 Connection fee charges  172,302   194,053   55,797 
 Features  7,555   6,343   91,291 
          
 Total  6,226,801   8,458,830   10,421,298 
          
Total Telephone Revenues  13,490,900   17,355,695   21,066,319 
          

F-33F-80

PERUSAHAAN PERSEROAN (PERSERO)
P.T. TELEKOMUNIKASI INDONESIA Tbk AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
DECEMBER 31, 20022003 AND 2003,2004, AND FOR YEARS ENDED
DECEMBER 31, 2001, 2002, 2003 AND 20032004
(Figures in tables are presented in millions of Rupiah, unless otherwise stated)

5. ACQUISITION OF KSO INVESTORS

     a. Dayamitra

     On May 17, 2001, the Company acquired 90.32% of the shares of Dayamitra for an aggregate purchase price of US$134,172,232 (including consultants’ fees of approximately US$3,303,191 or Rp37,325 million). Pursuant to the terms of the agreement, the Company paid the initial payment amount of US$18,289,800 (Rp206,675 million) on May 17, 2001, the closing date of the transaction, and US$8,937,041 (Rp100,989 million) on August 10, 2001 as a post-closing working capital adjustment to the purchase price. The remaining amount of US$103,642,200 (Rp1,171,157 million) was paid through an escrow arrangement discussed below, in eight quarterly installments of US$12,955,275, from August 17, 2001 to May 17, 2003. The estimated present value of US$103,642,200 at the discount rate of 14% was estimated to be US$89,053,984 (Rp1,006,310 million).

     This acquisition resulted in the identification of an intangible asset amounting to Rp1,276,575 million representing the right to operate the business in the KSO Area. The amount is being amortized over the remaining term of the KSO agreement (Note 16).

     The Company acquired control of Dayamitra on May 17, 2001 and has consequently consolidated Dayamitra from that date.

The allocation of the acquisition cost for the 90.32% ownership in Dayamitra was as follows:

Rp
Purchase consideration — net of discount on promissory notes1,351,299
Fair value of net assets acquired:
— Cash and cash equivalents93,652
— Distributable KSO revenue receivable62,398
— Other current assets9,450
— Property, plant and equipment1,401,479
— Intangible assets1,276,575
— Other non-current assets19,510
— Current liabilities(236,265)
— Deferred tax liabilities(581,816)
— Non-current liabilities(693,684)
1,351,299

     Net cash outflow on the acquisition of Dayamitra amounted to Rp241,300 million.

     In connection with the Dayamitra transaction, the Company also entered into the following agreements:

     1. Option Agreement

     The Company entered into an Option Agreement with TM Communications (HK) Ltd (“TMC”), providing the Company with an option to acquire the remaining 9.68% equity interest in Dayamitra, referred to as the Option Share. Under the agreement, TMC, the selling stockholder, granted the

F-34

PERUSAHAAN PERSEROAN (PERSERO)
P.T. TELEKOMUNIKASI INDONESIA Tbk AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

DECEMBER 31, 2002 AND 2003, AND FOR YEARS ENDED
DECEMBER 31, 2001, 2002 AND 2003
(Figures in tables are presented in millions of Rupiah, unless otherwise stated)

Company an exclusive option to purchase full and legal title to the Option Share (the “Call Option”), and the Company granted the selling stockholder an exclusive option to sell to the Company full legal title to those shares (the “Put Option”).

     In consideration for the grant of the options, the Company will pay to the selling stockholder the option purchase price of US$6,300,000, plus US$957,823 as payment for Dayamitra’s adjusted working capital, or a total of US$7,257,823. The amount is payable in eight quarterly installments of US$907,228, beginning on August 17, 2001 and ending on May 17, 2003. Payments will be made through an escrow account established under the Escrow Agreement discussed below.

     The Company may exercise the option any time after Dayamitra has satisfied all of its obligations under the JBIC (formerly J-Exim) loan (Note 26i) beginning on May 17, 2003 and until five business days prior to March 26, 2006. The strike price payable by the Company to the selling stockholder for the Option Shares upon exercise of the option is US$16,200,000, less certain amounts that are stipulated in the Option Agreement. As of December 31, 2003 the Company has not exercised the option.

     As of December 31, 2003, the option purchase price that has been paid by the Company amounted to US$7,257,823 or equivalent to Rp65,458 million (2002: US$5,443,367 or equivalent to Rp51,120 million), and is presented as part of “Advance payments for investments in shares of stock” (Note 5e).

     2. Escrow Agreement

     An Escrow Agreement dated May 17, 2001, was entered into by and among the Company, Dayamitra, PT Intidaya Sistelindomitra (“Intidaya”), Cable and Wireless plc (“C&W plc”), PT Mitracipta Sarananusa (“Mitracipta”), TMC, Tomen Corporation (“Tomen”), Citibank N.A. Singapore (the Singapore Escrow Agent) and Citibank N.A. Jakarta (the Jakarta Escrow Agent), to establish an Escrow Account and facilitate the payment (Note 17).

     b. Pramindo

     On April 19, 2002, the Company and the stockholders of Pramindo, namely France Cables et Radio SA, PT Astratel Nusantara, Indosat, Marubeni Corporation, International Finance Corporation (“IFC”) and NMP Singapore Pte. Ltd. (“NMP Singapore”) (collectively the “Selling Stockholders”) entered into a Conditional Sale and Purchase Agreement (“CSPA”) pursuant to which the Company acquired all of Pramindo’s shares. The Selling Stockholders shares were transferred to an escrow account (hereafter referred as “escrow shares”).

     Legal title to the escrow shares will be transferred to Telkom in 3 (three) specific tranches on 15 September 2002 — 30%, 30 September 2003  — 15% and on 31 December 2004 — 55% upon payment of the promissory notes issued to the selling stockholders as payment for the acquisition of the shares. The escrow shares can be accessed by the selling stockholders only upon default on payment of the promissory notes by the Company and no dividends can be paid out until the arrangements between the parties are completed or terminated in accordance with the terms of the relevant agreements.

     The Company and the Selling Stockholders also entered into a Stockholders Voting Agreement (“SVA”) on August 15, 2002, pursuant to which each stockholder of Pramindo delivered to the Company a Power of Attorney (“PoA”) whereby the Company obtained the right to vote the escrow shares. The Company, thereby acquired the right to nominate all of the members of the Board of

F-35

PERUSAHAAN PERSEROAN (PERSERO)
P.T. TELEKOMUNIKASI INDONESIA Tbk AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

DECEMBER 31, 2002 AND 2003, AND FOR YEARS ENDED
DECEMBER 31, 2001, 2002 AND 2003
(Figures in tables are presented in millions of Rupiah, unless otherwise stated)

Directors and Board of Commissioners of Pramindo. The SVA is subject to certain reserve matters which serve as protective rights to the Selling Stockholders.

     The aggregate purchase price amounted to US$390,308,972 (Rp3,464,040 million) plus Rp250,000 million, represented by an initial payment of approximately US$9,263,953 (Rp82,218 million), consultants’ fees of US$5,945,946 (Rp52,818 million), working capital reimbursement of Rp250,000 million, and the issue by Telkom of Promissory Notes (series I and series II) with an aggregate face value of US$375,099,073, of which the present value at the discount rate of 8.15% at the effective date of the acquisition was estimated to be US$332,802,122 (Rp2,953,617 million). The series I promissory notes are non-interest bearing and the series II promissory notes carry a market interest rate. The Promissory Notes are to be paid in 10 unequal quarterly installments beginning September 15, 2002 and are irrevocable, unconditional and transferable.

     The total purchase consideration was allocated first to the net monetary assets and then the fixed assets acquired. An intangible asset of Rp2,752,267 million was identified representing right to operate the business in the KSO Area. The amount is being amortized over the remaining term of the KSO agreement (Note 16). There was no goodwill arising from this acquisition.

In addition, the portion that relates to Indosat’s 13% equity interest in Pramindo has been accounted for as a restructuring of entities under common control. The difference between the purchase consideration and the historical amount of the net assets acquired amounting to Rp296,038 million, included as “Difference in value of restructuring transactions between entities under common control” in the stockholders’ equity section is calculated as follows:

Rp
Purchase consideration — net of discount on promissory notes3,338,653
Historical amount of net assets1,061,437
Difference in value for 100% ownership2,277,216
Difference adjusted to stockholders’ equity for Indosat’s 13% ownership in Pramindo296,038

     The Company acquired control of Pramindo on August 15, 2002 and has consequently consolidated Pramindo from August 1, 2002 being the nearest convenient balance date.

F-36

PERUSAHAAN PERSEROAN (PERSERO)
P.T. TELEKOMUNIKASI INDONESIA Tbk AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

DECEMBER 31, 2002 AND 2003, AND FOR YEARS ENDED
DECEMBER 31, 2001, 2002 AND 2003
(Figures in tables are presented in millions of Rupiah, unless otherwise stated)

The allocation of the acquisition cost was as follows:

Rp
Purchase consideration — net of discount on promissory notes3,338,653
Fair value of net assets acquired:
— Cash and cash equivalents141,475
— Distributable KSO revenue receivable187,468
— Other current assets13,839
— Property, plant and equipment1,807,338
— Intangible assets2,752,267
— Other non-current assets160,139
— Current liabilities(284,120)
— Deferred tax liabilities(1,115,645)
— Non-current liabilities(620,146)
Fair value of net assets3,042,615
Difference adjusted to equity for 13% Indosat’s ownership in Pramindo296,038
Total purchase consideration3,338,653

     Net cash outflow on the acquisition of Pramindo amounted to Rp243,561 million.

     The outstanding promissory notes issued for the acquisition of Pramindo are presented as “Liabilities for acquisitions of subsidiaries” in the consolidated balance sheets as of December 31, 2002 and 2003 (Note 27). As of December 31, 2002 and 2003, the outstanding promissory notes, before unamortized discount, amounted to US$342 million (Rp3,060,884 million) and US$191 million (Rp1,615,473 million).

     Subsequent to December 31, 2003, the Company obtained a loan to finance the payment of these promissory notes and legal title to all of Pramindo’s shares has been completely transferred to the Company (Note 57c).

     c. PT AriaWest International (“AWI”)

     Effective on July 31, 2003 (the “closing date”), the Company acquired 100% of the outstanding common stock of AWI, the investor in KSO III, for approximately Rp1,141,752 million plus the assumption of AWI’s debts of Rp2,577,926 million. The purchase consideration included non-interest bearing promissory notes with a face value of US$109,090,909 (Rp927,272 million), of which the present value at the discount rate of 5.16% at the closing date was estimated to be US$92,743,741 (Rp788,322 million). The promissory notes are to be paid in 10 equal semi-annual installments beginning July 31, 2004.

     The acquisition of AWI has been accounted for using the purchase method of accounting. There was no goodwill arising from this acquisition. The following table summarizes the final purchase price

F-37

PERUSAHAAN PERSEROAN (PERSERO)
P.T. TELEKOMUNIKASI INDONESIA Tbk AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

DECEMBER 31, 2002 AND 2003, AND FOR YEARS ENDED
DECEMBER 31, 2001, 2002 AND 2003
(Figures in tables are presented in millions of Rupiah, unless otherwise stated)

allocation of the acquired assets and assumed liabilities based on estimates of their respective fair values at the closing date:

Rp
Distributable KSO revenue receivable540,267
Property, plant and equipment1,556,269
Intangible assets1,982,564
Other assets34,372
Deferred tax liabilities(393,794)
Fair value of net assets acquired3,719,678
Borrowings assumed(2,577,926)
Amount of cash and promissory notes given up1,141,752

     The Company’s consolidated results of operations includes the operating results of AWI since July 31, 2003, the date of acquisition.

     The outstanding promissory notes issued for the acquisition of AWI are presented as “Liabilities for acquisitions of subsidiaries” in the consolidated balance sheet as of December 31, 2003 (Note 27). As of December 31, 2003 the outstanding promissory notes, before unamortized discount, amounted to US$109,090,909 (Rp921,818 million).

     The purchase price described above was based on third party appraisal. In addition, the Company also entered into a settlement agreement with AWI pursuant to which the Company and AWI irrevocably settled, discharged, and released claims and counterclaims in their ICC arbitration proceeding, and the Company agreed to pay a settlement amount of US$20,000,000. Based on this settlement and subsequent receipt of trade receivables from KSO III, the Company decided to reverse the provision for bad debts that had previously been recognized and has accrued the costs related to the settlement at December 31, 2002 (Notes 8d and 19).

  d. Pro Forma Operating Results Related to Acquisition of KSO Investors

     The following unaudited pro forma financial information reflects the consolidated results of operations of the Company as if the acquisition of Dayamitra and Pramindo had taken place on January 1, 2001 and AWI on January 1, 2002. The pro forma information includes adjustments for amortization of intangible assets, depreciation expense on property, plant and equipment based on the allocated purchase price, interest expense on incremental borrowings and income taxes. The pro forma

F-38

PERUSAHAAN PERSEROAN (PERSERO)
P.T. TELEKOMUNIKASI INDONESIA Tbk AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

DECEMBER 31, 2002 AND 2003, AND FOR YEARS ENDED
DECEMBER 31, 2001, 2002 AND 2003
(Figures in tables are presented in millions of Rupiah, unless otherwise stated)

financial information is not necessarily indicative of the results of operations as it would have been had the transactions been effected on the assumed dates or indicative of future operations.

             
200120022003
Operating revenues  17,622,331   22,297,575   27,513,766 
Operating income  7,215,988   8,778,831   11,819,863 
Income before tax  5,797,788   11,726,254   11,531,510 
Net income  3,409,285   8,127,080   6,571,287 
Net income per share (full amount)  338.22   806.26   651.91 
Net income per ADS (full amount)  6,764.45   16,125.16   13,038.27 

  e. Advance Payments for Investments in Shares of Stock

         
20022003
Dayamitra (Note 5a)  51,120   65,458 
AWI ��196,463   — 
   
   
 
   247,583   65,458 
   
   
 

     Advance payment for investment in shares of AWI represented advance amounting to US$20,000,000 (Rp196,463 million) paid to the former stockholders of AWI upon the signing of the Conditional Sale and Purchase Agreement on May 8, 2002.

6. CASH AND CASH EQUIVALENTS

            
20022003
Cash on hand  12,696   6,790 
   
   
 
Cash in banks        
 Related parties        
  Rupiah        
   Bank Negara Indonesia  152,774   217,276 
   Bank Mandiri  64,603   109,887 
   Bank Rakyat Indonesia  8,059   9,988 
   Bank Pos Nusantara  2,582   1,135 
   
   
 
Total  228,018   338,286 
   
   
 
  Foreign currencies        
   Bank Mandiri  29,019   32,016 
   Bank Negara Indonesia  4,560   1,576 
   Bank Rakyat Indonesia  479   453 
   
   
 
Total  34,058   34,045 
   
   
 
Total — related parties  262,076   372,331 
   
   
 

F-39

PERUSAHAAN PERSEROAN (PERSERO)
P.T. TELEKOMUNIKASI INDONESIA Tbk AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

DECEMBER 31, 2002 AND 2003, AND FOR YEARS ENDED
DECEMBER 31, 2001, 2002 AND 2003
(Figures in tables are presented in millions of Rupiah, unless otherwise stated)
            
20022003
 Third parties        
  Rupiah        
   Citibank  10,426   302 
   Bank Bukopin  6,428   9,463 
   Bank Central Asia  5,630   7,889 
   Bank Niaga  540   2,102 
   Bank Mizuho Indonesia  142   — 
   ABN Amro Bank  140   251 
   Bank Danamon  103   172 
   Lippo Bank  97   274 
   Chase Manhattan  39   — 
   Bank International Indonesia  136   3 
   Bank Buana Indonesia  2   218 
   Bank Muamalat Indonesia  —   76 
   Bank Mega  —   4,239 
   Deutsche Bank  —   6,097 
   
   
 
Total  23,683   31,086 
   
   
 
  Foreign currencies        
   Citibank  940   3,231 
   Deutsche Bank  456   2,412 
   Standard Chartered Bank  194   1,808 
   ABN Amro Bank  33   73 
   Bank Internasional Indonesia  —   22 
   Bank Central Asia  —   31 
   Bank of Tokyo Mitsubishi  —   26 
   
   
 
Total  1,623   7,603 
   
   
 
Total — third parties  25,306   38,689 
   
   
 
Total cash in banks  287,382   411,020 
   
   
 

F-40

PERUSAHAAN PERSEROAN (PERSERO)
P.T. TELEKOMUNIKASI INDONESIA Tbk AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

DECEMBER 31, 2002 AND 2003, AND FOR YEARS ENDED
DECEMBER 31, 2001, 2002 AND 2003
(Figures in tables are presented in millions of Rupiah, unless otherwise stated)
            
20022003
Time deposits        
 Related parties        
  Rupiah        
   Bank Mandiri  779,983   968,829 
   Bank Rakyat Indonesia  607,420   529,350 
   Bank Negara Indonesia  298,565   485,115 
   Bank Tabungan Negara  108,480   169,590 
   
   
 
Total  1,794,448   2,152,884 
   
   
 
  Foreign currencies        
   Bank Mandiri  3,022,661   526,384 
   Bank Negara Indonesia  2,447   5,789 
   
   
 
Total  3,025,108   532,173 
   
   
 
Total — related parties  4,819,556   2,685,057 
   
   
 
 Third parties        
  Rupiah        
   Standard Chartered Bank  142,000   287,122 
   Bank Mega  129,757   91,342 
   Bank Bukopin  58,214   96,099 
   Bank Yudha Bhakti  6,000   1,000 
   Bank Niaga  5,000   4,500 
   Bank Internasional Indonesia  2,000   — 
   Deutsche Bank  —   359,342 
   Bank Danamon  —   145,725 
   ABN Amro Bank  —   1,000 
   Bank NISP  —   47,369 
   Bank Jabar  —   67,204 
   
   
 
Total  342,971   1,100,703 
   
   
 
  Foreign currencies        
   Standard Chartered Bank  —   5,697 
   Deutsche Bank  236,465   885,205 
   
   
 
Total  236,465   890,902 
   
   
 
Total — third parties  579,436   1,991,605 
   
   
 
Total time deposits  5,398,992   4,676,662 
   
   
 
Total cash and cash equivalents  5,699,070   5,094,472 
   
   
 

Range of interest rates per annum for time deposits is as follows:

         
20022003
Rupiah  11.59% – 18.45%   5.5% – 14.25% 
Foreign currencies  1.15% – 5.03%   0.92% – 2.25% 

     Refer to Note 49 for details of related party transactions.

F-41

PERUSAHAAN PERSEROAN (PERSERO)
P.T. TELEKOMUNIKASI INDONESIA Tbk AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

DECEMBER 31, 2002 AND 2003, AND FOR YEARS ENDED
DECEMBER 31, 2001, 2002 AND 2003
(Figures in tables are presented in millions of Rupiah, unless otherwise stated)

7. TEMPORARY INVESTMENTS

            
20022003
Time deposits        
 Related parties        
  Rupiah        
   Bank Mandiri  100,000   — 
   Bank Rakyat Indonesia  423,000   — 
   
   
 
   523,000   — 
 Third parties        
   Bank Muamalat Indonesia  —   4,006 
   
   
 
Total time deposits  523,000   4,006 
   
   
 
Available-for-sale securities        
 Medium Term Notes — PSSI  50,000   — 
   
   
 
Total available-for-sale securities  50,000   — 
   
   
 
Total temporary investments  573,000   4,006 
   
   
 

Range of interest rates per annum for time deposits is as follows:

         
20022003
Rupiah  11.14% – 14.33%   6.00% – 6.76% 

     The terms of time deposits range from 3 months to 1 year.

     Medium Term Notes — PSSI represent medium term notes issued by Persatuan Sepakbola Seluruh Indonesia (PSSI) amounting to Rp50,000 million maturing on February 22, 2003. On the maturity date, the medium term notes were settled in cash.

     Investments placed with related parties have similar interest rates, terms and conditions as those placed with third parties. Refer to Note 49 for details of related party transactions.

F-42

PERUSAHAAN PERSEROAN (PERSERO)
P.T. TELEKOMUNIKASI INDONESIA Tbk AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

DECEMBER 31, 2002 AND 2003, AND FOR YEARS ENDED
DECEMBER 31, 2001, 2002 AND 2003
(Figures in tables are presented in millions of Rupiah, unless otherwise stated)

8. TRADE ACCOUNTS RECEIVABLE

a. By Debtor

Related parties:

         
20022003
KSO Units  633,327   265,517 
Government agencies  253,845   181,551 
PT Mandara Selular Indonesia (formerly PT Mobile Selular Indonesia)  33,560   37,326 
PT Citra Sari Makmur  16,262   20,450 
PT Bakrie Telecom (formerly PT Radio Telepon Indonesia)  18,233   — 
PT Komunikasi Selular Indonesia*  7,500   — 
PT Metro Selular Nusantara*  5,607   — 
PT Patra Telekomunikasi Indonesia  —   8,513 
PT Aplikanusa Lintasarta  3,578   5,819 
Other  10,527   2,679 
   
   
 
Total  982,439   521,855 
Allowance for doubtful accounts  (95,676)  (110,932)
   
   
 
Net  886,763   410,923 
   
   
 

* no longer related parties in 2003

    Trade accounts receivable from certain related parties are presented net of the Company’s liabilities to such parties due to legal right of offset in accordance with agreements with those parties.

Third parties:

         
20022003
Residential and business subscribers  2,140,894   2,682,288 
Overseas international carriers  167,853   42,836 
Others  18,470   29,841 
   
   
 
Total  2,327,217   2,754,965 
Allowance for doubtful accounts  (407,313)  (332,960)
   
   
 
Net  1,919,904   2,422,005 
   
   
 

F-43

PERUSAHAAN PERSEROAN (PERSERO)
P.T. TELEKOMUNIKASI INDONESIA Tbk AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

DECEMBER 31, 2002 AND 2003, AND FOR YEARS ENDED
DECEMBER 31, 2001, 2002 AND 2003
(Figures in tables are presented in millions of Rupiah, unless otherwise stated)

b. By Age

     Related parties:

         
20022003
Up to 6 months  763,820   350,348 
7 to 12 months  143,773   42,250 
13 to 24 months  30,227   42,920 
More than 24 months  44,619   86,337 
   
   
 
Total  982,439   521,855 
Allowance for doubtful accounts  (95,676)  (110,932)
   
   
 
Net  886,763   410,923 
   
   
 

Third parties:

         
20022003
Up to 3 months  1,919,904   2,358,570 
More than 3 months  407,313   396,395 
   
   
 
Total  2,327,217   2,754,965 
Allowance for doubtful accounts  (407,313)  (332,960)
   
   
 
Net  1,919,904   2,422,005 
   
   
 

     c. By Currency

Related parties

         
20022003
Rupiah  911,065   443,930 
United States Dollar  71,374   77,925 
   
   
 
Total  982,439   521,855 
Allowance for doubtful accounts  (95,676)  (110,932)
   
   
 
Net  886,763   410,923 
   
   
 

Third parties

         
20022003
Rupiah  2,251,199   2,720,331 
United States Dollar  76,018   34,634 
   
   
 
Total  2,327,217   2,754,965 
Allowance for doubtful accounts  (407,313)  (332,960)
   
   
 
Net  1,919,904   2,422,005 
   
   
 

F-44

PERUSAHAAN PERSEROAN (PERSERO)
P.T. TELEKOMUNIKASI INDONESIA Tbk AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

DECEMBER 31, 2002 AND 2003, AND FOR YEARS ENDED
DECEMBER 31, 2001, 2002 AND 2003
(Figures in tables are presented in millions of Rupiah, unless otherwise stated)

d. Movements in the Allowance for Doubtful Accounts

             
200120022003
Beginning balance  429,579   578,785   502,989 
Additions  266,433   523,024   296,099 
Reversal of allowance for trade accounts receivable from AWI (Note 5c)  —   (511,933)  — 
Bad debts write-off  (117,227)  (86,887)  (355,196)
   
   
   
 
Ending balance  578,785   502,989   443,892 
   
   
   
 

     Management believes that the allowance for doubtful receivables is adequate to cover probable losses on uncollectible accounts.

     Except for the amounts receivable from Government Agencies, management believes that there are no significant concentrations of credit risk on these receivables.

     Refer to Note 49 for details of related party transactions.

9. INVENTORIES

          
20022003
Components:        
 Telephone terminals and spare parts  29,311   27,407 
 Cable and transmission installation spare parts  15,226   1,540 
 Other spare parts  11,020   13,521 
   
   
 
 Total  55,557   42,468 
 Allowance for obsolescence  (30,160)  (14,757)
   
   
 
 Net  25,397   27,711 
   
   
 
Modules:        
 Cable and transmission installation spare parts  54,912   55,997 
 Telephone terminals and spare parts  42,563   37,917 
 Other spare parts  434   272 
   
   
 
 Total  97,909   94,186 
 Allowance for obsolescence  (23,464)  (25,584)
   
   
 
 Net  74,445   68,602 
   
   
 
SIM cards and prepaid voucher blanks  40,011   57,838 
 Allowance for obsolescence  (171)  (148)
   
   
 
 Net  39,840   57,690 
   
   
 
Total  139,682   154,003 
   
   
 

F-45

PERUSAHAAN PERSEROAN (PERSERO)
P.T. TELEKOMUNIKASI INDONESIA Tbk AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

DECEMBER 31, 2002 AND 2003, AND FOR YEARS ENDED
DECEMBER 31, 2001, 2002 AND 2003
(Figures in tables are presented in millions of Rupiah, unless otherwise stated)

Movements in the allowance for obsolescence are as follows:

         
20022003
Beginning balance  48,997   53,795 
Additions  20,012   4,523 
Inventory write-off  (15,214)  (17,829)
   
   
 
Ending balance  53,795   40,489 
   
   
 

     Management believes that the allowance is adequate to cover probable losses from decline in inventory value due to obsolescence.

At December 31, 2003, inventory held by a certain subsidiary was insured against fire, theft and other specified risks for US$750,000. Management believes that the insurance amount is adequate to cover such risks.

10. PREPAID EXPENSES
         
20022003
Pension cost (Note 46)  28,181   286,652 
Rental  131,906   173,242 
Salary  105,090   124,061 
Insurance  9,144   98,167 
Telephone directory issuance cost  68,382   11,091 
Other  10,953   24,704 
   
   
 
Total  353,656   717,917 
   
   
 
11. OTHER CURRENT ASSETS

This account consists of time deposits and restricted funds at the following banks:

         
20022003
Bank Mandiri  540,520   45,083 
Deutsche Bank and Citibank  151,268   — 
   
   
 
Total  691,788   45,083 
   
   
 

a. Bank Mandiri

     As of December 31, 2002, the balance consists of the Company’s time deposits of Rp500,000 million pledged as collateral for a credit facility from Bank Mandiri and Telkomsel’s Rupiah time deposits of Rp40,520 million representing security deposits for payments of customs duties. The Company’s credit facility from Bank Mandiri was obtained on February 11, 2002 with a maximum facility of Rp500,000 million which bears interest at 2% above the interest rate on the pledged time deposits. The credit facility was never used and was terminated on February 18, 2003. The time deposits have been released from the pledge.

F-46

PERUSAHAAN PERSEROAN (PERSERO)
P.T. TELEKOMUNIKASI INDONESIA Tbk AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

DECEMBER 31, 2002 AND 2003, AND FOR YEARS ENDED
DECEMBER 31, 2001, 2002 AND 2003
(Figures in tables are presented in millions of Rupiah, unless otherwise stated)

     As of December 31, 2003, the balance consists of the Company’s time deposits of US$4,600,000 (Rp38,778 million) pledged as collateral for credit facility obtained by Napsindo (Note 22a) and Rp2,412 million (included US$58,251) pledged as collateral for bank guarantees, and Telkomsel’s Rupiah time deposits of Rp3,893 million pledged as collateral for bank guarantees covering payments of customs duties.

b. Deutsche Bank and Citibank

     As of December 31, 2002, the balance consists of Telkomsel’s time deposits in Deutsche Bank and Citibank totaling US$9,971,936 (Rp89,149 million) for letter of credit facilities (Note 22b), and the Company’s time deposits in Citibank of US$6,950,000 (Rp62,119 million) that was pledged as collateral for a loan facility for the High Performance Backbone Project from Citibank for the two-year period ending April 10, 2004 (Note 26b).

12. LONG-TERM INVESTMENTS

                         
2002
PercentageEquity in
ofOpeningAddition/Net IncomeTranslationEnding
OwnershipBalance(Deduction)(Loss)AdjustmentBalance
Equity method:
                        
PT Citra Sari Makmur  25.00   74,833   —   8,446   (21,009)  62,270 
PT Telekomindo Selular Raya  100.00   87,907   (62,907)  1,642   —   26,642 
PT Metro Selular Nusantara  20.17   1,657   13,513   1,137   —   16,307 
PT Patra Telekomunikasi Indonesia  30.00   12,133   —   710   —   12,843 
PT Napsindo Primatel International  32.00   12,030   —   (7,337)  —   4,693 
PT Multimedia Nusantara  31.00   1,928   —   —   —   1,928 
PT Mandara Selular Indonesia  25.00   —   —   —   —   — 
PT Pasifik Satelit Nusantara  22.57   —   —   —   —   — 
PT Menara Jakarta  20.00   —   —   —   —   — 
       
   
   
   
   
 
       190,488   (49,394)  4,598   (21,009)  124,683 
       
   
   
   
   
 
Cost method:
                        
PT Batam Bintan Telekomunikasi  5.00   587   —   —   —   587 
PT Komunikasi Selular Indonesia  14.20   —   57,570   —   —   57,570 
PT Pembangunan Telekomunikasi Indonesia  3.18   199   —   —   —   199 
Medianusa Pte. Ltd.  9.44   108   —   —   —   108 
       
   
   
   
   
 
       894   57,570   —   —   58,464 
       
   
   
   
   
 
       191,382   8,176   4,598   (21,009)  183,147 
       
   
   
   
   
 

F-47

PERUSAHAAN PERSEROAN (PERSERO)
P.T. TELEKOMUNIKASI INDONESIA Tbk AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

DECEMBER 31, 2002 AND 2003, AND FOR YEARS ENDED
DECEMBER 31, 2001, 2002 AND 2003
(Figures in tables are presented in millions of Rupiah, unless otherwise stated)
                          
2003
Equity in
PercentageNet
ofOpeningAddition/IncomeTranslationEnding
OwnershipBalance(Deduction)(Loss)AdjustmentBalance
Equity method:
                        
 PT Citra Sari Makmur  25.00   62,270   —   1,585   (11,433)  52,422 
 PT Patra Telekomunikasi Indonesia**  30.00   12,843   (2,745)  1,234   —   11,332 
 PT Napsindo Primatel International*  60.00   4,693   (4,693)  —   —   — 
 PT Multimedia Nusantara*  100.00   1,928   (1,928)  —   —   — 
 PT Telekomindo Selular Raya  —   26,642   (26,642)  —   —   — 
 PT Metro Selular Nusantara  —   16,307   (16,307)  —   —   — 
 PT Pasifik Satelit Nusantara  43.69   —   —   —   —   — 
 PT Menara Jakarta  —   —   —   —   —   — 
       
   
   
   
   
 
       124,683   (52,315)  2,819   (11,433)  63,754 
       
   
   
   
   
 
Cost method:
                        
 PT Batam Bintan Telekomunikasi  5.00   587   —   —   —   587 
 PT Pembangunan Telekomunikasi Indonesia  3.18   199   —   —   —   199 
 Medianusa Pte. Ltd.  9.44   108   —   —   —   108 
 PT Komunikasi Selular Indonesia  —   57,570   (57,570)  —   —   — 
 PT Mandara Selular Indonesia  7.44   —   —   —   —   — 
       
   
   
   
   
 
       58,464   (57,570)  —   —   894 
       
   
   
   
   
 
       183,147   (109,885)  2,819   (11,433)  64,648 
       
   
   
   
   
 

* Consolidated in 2003

** Deduction represents cash dividends received by the Company

    On August 8, 2003, the Company and PT Centralindo Pancasakti Cellular (“CPSC”) signed a share-swap agreement (“KMT-IP share-swap transaction”) in which the Company delivered its 14.20% outstanding shares in PT Komunikasi Selular Indonesia (“Komselindo”), its 20.17% outstanding shares in PT Metro Selular Nusantara (“Metrosel”), and its 100% outstanding shares in PT Telekomindo Selular Raya (“Telesera”) to CPSC. In return, CPSC delivered its 30.58% outstanding shares in PT Indonusa Telemedia (“Indonusa”), 21.12% outstanding shares in PT Pasifik Satelit Nusantara (“PSN”) under certain terms and paid cash of Rp5,398 million to the Company.

     From the KMT-IP share-swap transaction, the Company recognized a loss of Rp47.3 billion being the difference between the fair value of assets received and the carrying amount of the Company’s investments given to CPSC, and reversal of difference due to change of equity in Metrosel previously recognized directly in equity.

     a. PT Citra Sari Makmur (“CSM”)

     CSM is engaged in providing Very Small Aperture Terminal (“VSAT”), network application services and consulting services on telecommunications technology and related facilities.

F-48

PERUSAHAAN PERSEROAN (PERSERO)
P.T. TELEKOMUNIKASI INDONESIA Tbk AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

DECEMBER 31, 2002 AND 2003, AND FOR YEARS ENDED
DECEMBER 31, 2001, 2002 AND 2003
(Figures in tables are presented in millions of Rupiah, unless otherwise stated)

     b. PT Patra Telekomunikasi Indonesia (“Patrakom”)

     Patrakom is engaged in providing satellite communication system services and related services and facilities to companies in the petroleum industry.

     c. PT Telekomindo Seluler Raya (“Telesera”)

     In 2001, the Minister of Justice and Human Rights approved the corporate restructuring of PT Telekomindo Primabhakti (“Telekomindo”), an associated company engaged in the construction and development of telecommunications facilities. Pursuant to the restructuring, Telekomindo’s authorized and paid-up capital was reduced and the capital reduction became the paid-up capital of two new companies: PT Telekomindo Media Informatika (“TMI”) and PT Griya Insani Primabhakti (“GIP”).

     Based on a share-swap agreement dated December 5, 2001 among the Company, PT Rajawali Corporation (“RC”), Telekomindo and TMI, the parties agreed on the following:

• The Company sold its investments in Telekomindo, TMI and GIP to RC for Rp101,838 million and recognized a gain of Rp101,838 million.
• TMI sold its investments in PT Telekomindo Selular Raya (“Telesera”) and the fixed assets of PT Multisaka Mitra (“MSM”) to the Company for Rp87,907 million and Rp17,442 million, respectively.

     This transaction resulted in the Company owning 69.77% shares of Telesera as of December 31, 2001. In 2002, the Company acquired the remaining 30.23% interest in Telesera from Dana Pensiun Telkom for Rp38,093 million. In 2002, the Company also recognized a loss of Rp101,000 million to write down the carrying amount of this investment to net asset value. As of December 31, 2002, the carrying amount of this investment was Rp26,642 million.

     On August 8, 2003, the Company exchanged its investment in Telesera to CPSC.

     d. PT Metro Selular Nusantara (“Metrosel”)

     Metrosel is engaged in providing national mobile cellular services and related facilities in Central Java, Yogyakarta, East Java, Maluku and Irian Jaya.

     On May 30, 2002, Metrosel made an equity call. The Company made additional capital contributions amounting to Rp13,513 million to maintain its ownership in Metrosel at 20.17%.

     On August 8, 2003, the Company exchanged its investment in Metrosel to CPSC.

     e. PT Pasifik Satelit Nusantara (“PSN”)

     PSN is engaged in providing satellite transponder leasing and satellite-based communication services in the Asia Pacific Region.

     In 2001, Management decided to recognize the decline in value of this investment due to the financial condition of PSN.

     On August 8, 2003, as a result of share-swap transaction with CPSC, the Company interest in PSN effectively increased to 43.69%.

F-49

PERUSAHAAN PERSEROAN (PERSERO)
P.T. TELEKOMUNIKASI INDONESIA Tbk AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

DECEMBER 31, 2002 AND 2003, AND FOR YEARS ENDED
DECEMBER 31, 2001, 2002 AND 2003
(Figures in tables are presented in millions of Rupiah, unless otherwise stated)

     In 2003, PSN entered into a negotiation with its current creditors to restructure its debts. Up to the date of this report, the debt restructuring has not yet been effective.

     f. PT Menara Jakarta (“MJ”)

     MJ was engaged in the construction and the operation of towers and related facilities. The economic difficulties faced by Indonesia have resulted in the termination of MJ’s construction projects at the end of 1997. The value of this investment has been reduced to nil.

     On April 8, 2003, the Company exchanged all its shares in MJ to PT Indocitra Grahabawana (“Indocitra”) for Indocitra’s 69% ownership interest in Metra (Note 1c).

     g. PT Batam Bintan Telekomunikasi (“BBT”)

     BBT is engaged in providing fixed line telecommunication services at Batamindo Industrial Park in Muka Kuning, Batam Island and at Bintan Beach International Resort and Bintan Industrial Estate in Bintan Island.

     h. PT Pembangunan Telekomunikasi Indonesia (“Bangtelindo”)

     Bangtelindo is primarily engaged in providing consultancy services on the installation and maintenance of telecommunications facilities.

     i. Medianusa Pte. Ltd.

     Medianusa Pte. Ltd. is an associated company of Infomedia, which is engaged as a sales agent, in search of advertisers for telephone directories.

     j. PT Komunikasi Selular Indonesia (“Komselindo”)

     Komselindo is a joint venture between the Company and PT Elektrindo Nusantara (“Elektrindo”), and is engaged in providing analog mobile cellular services. These services were previously provided by the Company under a revenue-sharing arrangement with Elektrindo.

     Based on the Deed of Komselindo’s Stockholders Extraordinary General Meeting No. 110 dated October 10, 2000, which was notarized by Ny. R. Arie Soetardjo, S.H., the Company agreed to the conversion of Rp92,750 million of receivables from Komselindo into equity in order to maintain a 35% ownership interest.

     In 2001, the Company recorded the conversion of the receivables into equity and recognized a loss upon the write-down of the new carrying amount of the investment amounting to Rp92,750 million.

     On August 30, 2002, Komselindo’s stockholders through an Extraordinary Stockholders Meeting approved the equity call for debt restructuring which was included in the Settlement Agreement and the Settlement, Termination and Release Agreement dated August 30, 2002. The Company released and waived its pre-emptive right to subscribe newly issued shares resulting in the dilution of the Company’s ownership in Komselindo to 14.20%.

F-50

PERUSAHAAN PERSEROAN (PERSERO)
P.T. TELEKOMUNIKASI INDONESIA Tbk AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

DECEMBER 31, 2002 AND 2003, AND FOR YEARS ENDED
DECEMBER 31, 2001, 2002 AND 2003
(Figures in tables are presented in millions of Rupiah, unless otherwise stated)

     This debt restructuring transaction resulted in a net equity of Komselindo amounting to Rp405,421 million. As of December 31, 2002, the Company recorded its 14.20% interest in Komselindo at its net equity value of Rp57,570 million.

     On August 8, 2003, the Company sold its investment in Komselindo to CPSC.

     k. PT Mandara Selular Indonesia (formerly PT Mobile Selular Indonesia, “Mobisel”)

     Mobisel is engaged in providing mobile cellular services and related facilities. These services were previously provided by the Company under a revenue-sharing arrangement with PT Rajasa Hazanah Perkasa (“RHP”). The capital contribution made by the Company of Rp10,398 million represented a 25% equity ownership in Mobisel.

     On July 28, 2003, Mobisel’s stockholders agreed to a restructuring program which included a debt to equity conversion of Mobisel’s interconnection payables to the Company, and an equity investment by a new stockholder. The debt conversion was completed in August 2003 which resulted in dilution of the Company’s interest to 7.44%.

     As of December 31, 2003, the value of investment has been reduced to nil.

     Subsequently, in January 2004, the Company’s ownership interest was further diluted to 6.4% following the debt to equity conversion of Mobisel’s debt to PT Property Java, Boston Investment Limited and Inquam (Indonesia) Limited Company.

     l. PT Radio Telepon Indonesia (“Ratelindo”)

     Ratelindo is engaged in providing facilities and telecommunication services using a domestic fixed wireless network.

     As of December 31, 2001, the Company had recognized a loss due to an other-than-temporary decline in value of this investment because of Ratelindo’s continuing operating losses and capital deficiency.

     The Company sold its equity interest in Ratelindo on March 28, 2002 for Rp14,000 million and recognized a gain for this amount because the carrying amount of the investment in Ratelindo was nil.

13. PROPERTY, PLANT AND EQUIPMENT

                          
January 1,PramindoDecember 31,
2002AcquisitionAdditionsDeductionsReclassifications2002
At cost or revalued amounts:                        
Direct ownership                        
 Land  195,153   8,881   60,553   (54)  3,400   267,933 
 Buildings  1,596,806   —   42,130   (18,888)  38,342   1,658,390 
 Switching equipment  8,842,943   456,062   53,341   (15,606)  292,463   9,629,203 
 Telegraph, telex and data communication equipment  206,592   —   4,141   (3,001)  (1,065)  206,667 
 Transmission installation and equipment  4,899,964   776,597   2,349,624   (8,942)  2,323,071   10,340,314 
 Satellite, earth station and equipment  5,772,334   —   5,892   —   19,785   5,798,011 

F-51

PERUSAHAAN PERSEROAN (PERSERO)
P.T. TELEKOMUNIKASI INDONESIA Tbk AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

DECEMBER 31, 2002 AND 2003, AND FOR YEARS ENDED
DECEMBER 31, 2001, 2002 AND 2003
(Figures in tables are presented in millions of Rupiah, unless otherwise stated)
                           
January 1,PramindoDecember 31,
2002AcquisitionAdditionsDeductionsReclassifications2002
 Cable network  11,689,767   333,111   267,993   (7,602)  839,067   13,122,336 
 Power supply  998,461   —   30,037   (538)  4,574   1,032,534 
 Data processing equipment  1,863,387   104,895   442,409   (79,550)  408,696   2,739,837 
 Other telecommunications peripherals  507,652   97,316   55,511   (6,704)  27,588   681,363 
 Office equipment  615,046   9,492   40,429   (26,589)  1,304   639,682 
 Vehicles  187,874   —   3,968   (1,717)  (2,772)  187,353 
 Other equipment  68,048   4,736   14,951   (365)  —   87,370 
 Property under construction:                        
  Buildings  17,556   —   67,666   —   (42,309)  42,913 
  Switching equipment  187,125   —   519,066   —   (357,905)  348,286 
  Transmission installation and equipment  291,861   16,248   2,157,089   —   (2,325,699)  139,499 
  Satellite, earth station and equipment  306,365   —   —   —   (42,336)  264,029 
  Cable network  189,883   —   806,897   —   (881,360)  115,420 
  Power supply  6,258   —   5,095   —   (5,638)  5,715 
  Data processing equipment  133,543   —   287,916   —   (410,652)  10,807 
  Other telecommunications peripherals  3,492   —   10,157   —   —   13,649 
Leased assets                        
 Vehicles  3,804   —   215   —   (379)  3,640 
   
   
   
   
   
   
 
 Total  38,583,914   1,807,338   7,225,080   (169,556)  (111,825)  47,334,951 
   
   
   
   
   
   
 
Accumulated depreciation:                        
Direct ownership                        
 Buildings  654,142   —   93,210   (10,471)  116   736,997 
 Switching equipment  3,985,490   —   650,215   (568)  (65,850)  4,569,287 
 Telegraph, telex and data communication equipment  201,748   —   4,186   (2,703)  (1,188)  202,043 
 Transmission installation and equipment  2,075,653   —   1,120,179   (1,653)  (10,443)  3,183,736 
 Satellite, earth station and equipment  1,875,016   —   126,658   —   (3)  2,001,671 
 Cable network  4,482,733   —   829,627   (1,102)  (25,049)  5,286,209 
 Power supply  667,615   —   42,673   (654)  15,351   724,985 
 Data processing equipment  679,382   —   388,453   (58,618)  (19,163)  990,054 
 Other telecommunications peripherals  437,610   —   65,036   (326)  (3,227)  499,093 
 Office equipment  425,057   —   49,706   (16,244)  1,999   460,518 
 Vehicles  158,945   —   14,385   (3,361)  (2,743)  167,226 
 Other equipment  48,815   —   13,820   (298)  683   63,020 
Leased assets                        
 Vehicles  669   —   837   —   —   1,506 
   
   
   
   
   
   
 
 Total  15,692,875   —   3,398,985   (95,998)  (109,517)  18,886,345 
   
   
   
   
   
   
 
Net Book Value  22,891,039                   28,448,606 
   
                   
 

F-52

PERUSAHAAN PERSEROAN (PERSERO)
P.T. TELEKOMUNIKASI INDONESIA Tbk AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

DECEMBER 31, 2002 AND 2003, AND FOR YEARS ENDED
DECEMBER 31, 2001, 2002 AND 2003
(Figures in tables are presented in millions of Rupiah, unless otherwise stated)
                           
January 1,AWIDecember 31,
2003AcquisitionsAdditionsDeductionsReclassifications2003
At cost or revalued amounts:                        
Direct ownership                        
 Land  267,933   —   52,738   (20,762)  (945)  298,964 
 Buildings  1,658,390   2,436   43,301   (43,293)  158,261   1,819,095 
 Switching equipment  9,629,203   402,598   144,658   (10)  296,943   10,473,392 
 Telegraph, telex and data communication equipment  206,667   —   3,833   (86)  (11,100)  199,314 
 Transmission installation and equipment  10,340,314   7,565   278,020   (11,903)  6,204,183   16,818,179 
 Satellite, earth station and equipment  5,798,011   —   21,512   —   390,304   6,209,827 
 Cable network  13,122,336   1,075,987   637,068   (59,275)  712,681   15,488,797 
 Power supply  1,032,534   9,549   18,473   (3,996)  92,898   1,149,458 
 Data processing equipment  2,739,837   2,269   131,942   (1,810)  380,429   3,252,667 
 Other telecommunications peripherals  681,363   —   33,769   (369)  20,425   735,188 
 Office equipment  639,682   —   25,585   (1,802)  (2,974)  660,491 
 Vehicles  187,353   —   1,298   (1,760)  962   187,853 
 Other equipment  87,370   —   1,890   (6)  18,319   107,573 
 Property under construction:                        
  Buildings  42,913   —   36,173   —   (24,198)  54,888 
  Switching equipment  348,286   —   222,275   —   (412,505)  158,056 
  Transmission installation and equipment  139,499   —   5,843,119   —   (5,888,711)  93,907 
  Satellite, earth station and equipment  264,029   —   390,994   —   (47,851)  607,172 
  Cable network  115,420   55,865   1,567,652   —   (1,724,413)  14,524 
  Power supply  5,715   —   18,416   —   (24,025)  106 
  Data processing equipment  10,807   —   63,945   (634)  (63,592)  10,526 
  Other telecommunications peripherals  13,649   —   15,853   (1,392)  (11,627)  16,483 
Leased assets                        
 Vehicles  3,640   —   73   (1,689)  (1,785)  239 
   
   
   
   
   
   
 
 Total  47,334,951   1,556,269   9,522,587   (148,787)  61,679   58,356,699 
   
   
   
   
   
   
 
Accumulated depreciation:                        
Direct ownership                        
 Buildings  736,997   —   115,602   (41,293)  1,013   812,319 
 Switching equipment  4,569,287   —   668,136   (4)  29,069   5,266,488 
 Telegraph, telex and data communication equipment  202,043   —   3,365   (59)  (11,100)  194,249 
 Transmission installation and equipment  3,183,736   —   1,784,031   (4,534)  (6,338)  4,956,895 
 Satellite, earth station and equipment  2,001,671   —   153,506   —   3,202   2,158,379 
 Cable network  5,286,209   —   1,300,460   (20,312)  46,924   6,613,281 
 Power supply  724,985   —   77,765   (3,437)  (1,388)  797,925 
 Data processing equipment  990,054   —   492,799   (2,394)  (10,643)  1,469,816 
 Other telecommunications peripherals  499,093   —   71,217   (240)  2,120   572,190 
 Office equipment  460,518  ��—   37,251   (1,088)  786   497,467 

F-53

PERUSAHAAN PERSEROAN (PERSERO)
P.T. TELEKOMUNIKASI INDONESIA Tbk AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

DECEMBER 31, 2002 AND 2003, AND FOR YEARS ENDED
DECEMBER 31, 2001, 2002 AND 2003
(Figures in tables are presented in millions of Rupiah, unless otherwise stated)
                          
January 1,AWIDecember 31,
2003AcquisitionsAdditionsDeductionsReclassifications2003
 Vehicles  167,226   —   7,986   (1,705)  (373)  173,134 
 Other equipment  63,020   —   2,028   (6)  4,260   69,302 
Leased assets                        
 Vehicles  1,506   —   307   (848)  (851)  114 
   
   
   
   
   
   
 
 Total  18,886,345   —   4,714,453   (75,920)  56,681   23,581,559 
   
   
   
   
   
   
 
Net Book Value  28,448,606                   34,775,140 
   
                   
 
         
20022003
Proceeds from sale of property, plant and equipment  204,008   255,750 
Net book value  73,558   72,867 
   
   
 
Gain on sale  130,450   182,883 
   
   
 

     Interest capitalized to property under construction amounted to Rp8,089 million, Rp20,108 million and Rp22,925 million in 2001, 2002 and 2003, respectively.

     Foreign exchange losses (gains) capitalized as part of property under construction amounted to Rp1,746 million, (Rp27,568) million and nil in 2001, 2002 and 2003, respectively.

     The Company and its subsidiaries own several pieces of land located throughout Indonesia with Building Use Rights (Hak Guna Bangunan or HGB) for a period of 20-30 years, which will expire between 2004-2032. Management believes that there will be no difficulty in obtaining the extension of the landrights when they expire.

     Some of the Company’s land of 330,690 sqm is still under the name of other parties including, among others, the Ministry of Tourism, Post and Telecommunications and the Ministry of Communications of the Republic of Indonesia. The transfer to the Company of the legal title of ownership on those parcels of land is still in progress.

     The estimated date of completion of assets under construction is between January 2004 up to January 2005. Management believes that there is no impediment to the completion of the construction in progress.

     As of December 31, 2003, property, plant and equipment of the Company and subsidiaries, except for land, were insured with various insurance companies against fire, theft and other specified risks for a coverage of Rp22,518,012 million and US$1,982,291,950. In addition, the Palapa B4 and Telkom-1 satellites are insured for US$59,456,265. Management believes that the insurance coverage is adequate.

     Certain property, plant and equipment of the Company and subsidiaries have been pledged as collateral for lending agreements (Notes 26, 28 and 29).

F-54

PERUSAHAAN PERSEROAN (PERSERO)
P.T. TELEKOMUNIKASI INDONESIA Tbk AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

DECEMBER 31, 2002 AND 2003, AND FOR YEARS ENDED
DECEMBER 31, 2001, 2002 AND 2003
(Figures in tables are presented in millions of Rupiah, unless otherwise stated)
14. PROPERTY, PLANT AND EQUIPMENT UNDER JOINT OPERATION SCHEME

Set forth below are the Company’s property, plant and equipment (included in Note 13 above) that are being managed, operated and maintained by the KSOs:

         
20022003
Land  3,783   200 
Buildings  203,660   237,045 
Switching equipment  1,346,764   871,799 
Telegraph, telex and data communication equipment  62,501   34,014 
Transmission installation and equipment  513,601   351,172 
Satellite, earth station and equipment  51,878   51,455 
Cable network  1,638,469   1,164,364 
Power supply  146,045   145,993 
Data processing equipment  87,745   67,213 
Other telecommunications peripherals  93,045   58,103 
Office equipment  42,133   48,765 
Vehicles  22,391   16,901 
Other equipment  463   463 
Property under construction  60,106   3,322 
   
   
 
Total cost  4,272,584   3,050,809 
Accumulated depreciation  (3,073,555)  (2,254,971)
   
   
 
Net book value  1,199,029   795,838 
   
   
 

The fixed assets under joint operation scheme decreased in 2003 due to the acquisition and consolidation of AWI, the investor in KSO III (Note 5c).

15. PROPERTY, PLANT AND EQUIPMENT UNDER REVENUE-SHARING ARRANGEMENTS
                      
January 1,December 31,
2002AdditionsDeductionsReclassifications2002
At cost:                    
 Land  3,160   —   —   —   3,160 
 Buildings  23,952   —   —   (225)  23,727 
 Switching equipment  624,794   —   —   (1,037)  623,757 
 Transmission installation and equipment  107,558   —   —   —   107,558 
 Cable network  334,345   —   —   (1,157)  333,188 
 Other telecommunications peripherals  199,842   —   (69,267)  (1,379)  129,196 
   
   
   
   
   
 
 Total  1,293,651   —   (69,267)  (3,798)  1,220,586 
   
   
   
   
   
 

F-55

PERUSAHAAN PERSEROAN (PERSERO)
P.T. TELEKOMUNIKASI INDONESIA Tbk AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

DECEMBER 31, 2002 AND 2003, AND FOR YEARS ENDED
DECEMBER 31, 2001, 2002 AND 2003
(Figures in tables are presented in millions of Rupiah, unless otherwise stated)
                      
January 1,December 31,
2002AdditionsDeductionsReclassifications2002
Accumulated depreciation:                    
 Land  1,146   132   —   —   1,278 
 Buildings  9,334   1,183   —   (106)  10,411 
 Switching equipment  322,455   38,776   —   (594)  360,637 
 Transmission installation and equipment  87,143   8,055   —   —   95,198 
 Cable network  221,034   26,203   —   (993)  246,244 
 Other telecommunications peripherals  199,806   36   (69,267)  (1,379)  129,196 
   
   
   
   
   
 
Total  840,918   74,385   (69,267)  (3,072)  842,964 
   
   
   
   
   
 
Net Book Value  452,733               377,622 
   
               
 
                      
January 1,December 31,
2003AdditionsDeductionsReclassifications2003
At cost:                    
 Land  3,160   —   —   —   3,160 
 Buildings  23,727   —   —   (3,472)  20,255 
 Switching equipment  623,757   —   (9,154)  (76,713)  537,890 
 Transmission installation and equipment  107,558   —   (14,530)  —   93,028 
 Cable network  333,188   27,314   —   (42,121)  318,381 
 Other telecommunications peripherals  129,196   —   (2,711)  (2,513)  123,972 
   
   
   
   
   
 
 Total  1,220,586   27,314   (26,395)  (124,819)  1,096,686 
   
   
   
   
   
 
Accumulated depreciation:                    
 Land  1,278   171   —   —   1,449 
 Buildings  10,411   1,155   —   (1,762)  9,804 
 Switching equipment  360,637   37,458   (9,154)  (47,416)  341,525 
 Transmission installation and equipment  95,198   9,052   (14,530)  —   89,720 
 Cable network  246,244   17,231   —   (38,300)  225,175 
 Other telecommunications peripherals  129,196   —   (2,711)  (2,513)  123,972 
   
   
   
   
   
 
Total  842,964   65,067   (26,395)  (89,991)  791,645 
   
   
   
   
   
 
Net Book Value  377,622               305,041 
   
               
 

     In accordance with revenue-sharing arrangements agreements, ownership rights to the property, plant and equipment under revenue-sharing arrangements are legally retained by the investors until the end of the revenue-sharing period.

F-56

PERUSAHAAN PERSEROAN (PERSERO)
P.T. TELEKOMUNIKASI INDONESIA Tbk AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

DECEMBER 31, 2002 AND 2003, AND FOR YEARS ENDED
DECEMBER 31, 2001, 2002 AND 2003
(Figures in tables are presented in millions of Rupiah, unless otherwise stated)

The unearned income on revenue-sharing arrangements is as follows:

         
20022003
Gross amount  1,220,586   1,096,686 
   
   
 
Accumulated amortization:        
Beginning balance  (1,098,583)  (1,077,789)
Addition (Note 39)  (52,271)  (58,379)
Deduction  73,065   151,214 
   
   
 
Ending balance  (1,077,789)  (984,954)
   
   
 
Net  142,797   111,732 
   
   
 
16. INTANGIBLE ASSETS
         
20022003
Intangible assets  3,892,145   5,144,050 
License — net  6,672   — 
   
   
 
Net  3,898,817   5,144,050 
   
   
 

Movement of intangible assets during 2002 and 2003 is as follows:

                     
2002
Intangible AssetsGoodwill
DayamitraPramindoAWIGSDTotal
Beginning balance  1,233,932   —   —   93,936   1,327,868 
Additions  —   2,752,267   —   —   2,752,267 
Amortization  (72,504)  (94,217)  —   (21,269)  (187,990)
   
   
   
   
   
 
Ending balance  1,161,428   2,658,050   —   72,667   3,892,145 
   
   
   
   
   
 
                     
2003
Intangible AssetsGoodwill
DayamitraPramindoAWIGSDTotal
Beginning balance  1,161,428   2,658,050   —   72,667   3,892,145 
Additions  —   —   1,982,564   —   1,982,564 
Amortization  (228,973)  (369,036)  (111,380)  (21,270)  (730,659)
   
   
   
   
   
 
Ending balance  932,455   2,289,014   1,871,184   51,397   5,144,050 
   
   
   
   
   
 

     The intangible assets resulted from the acquisitions of Dayamitra, Pramindo and AWI, and represent the right to operate the business in the KSO areas. Goodwill resulted from the acquisition of GSD (Note 1c).

     The license represented the Nationwide DCS 1800 Operations and License for Nationwide DCS 1800 Radio Frequency Spectrum Utilization held by Telkomsel which was fully amortized in 2003.

F-57

PERUSAHAAN PERSEROAN (PERSERO)
P.T. TELEKOMUNIKASI INDONESIA Tbk AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

DECEMBER 31, 2002 AND 2003, AND FOR YEARS ENDED
DECEMBER 31, 2001, 2002 AND 2003
(Figures in tables are presented in millions of Rupiah, unless otherwise stated)
17. ESCROW ACCOUNTS

Escrow accounts consist of the following:

         
20022003
Citibank N.A., Singapore  129,188   239,689 
JP Morgan Chase Bank  168,740   276,439 
Bank Mandiri  —   6,018 
   
   
 
   297,928   522,146 
   
   
 

     a. Citibank N.A., Singapore

     This escrow account with Citibank N.A., Singapore (“Dayamitra Escrow Agent”) was established to facilitate the payment of the Company’s obligations under the Conditional Sale and Purchase Agreement and Option Agreement entered into with the selling stockholders of Dayamitra (Note 5a).

     In accordance with the Escrow Agreement, the Company made the first installment payment of US$14,343,750 on May 17, 2001. Further monthly installments of US$6,250,000 for twenty four months are required by the agreement. The Company is also obliged to make additional installment payments necessary to settle the obligation on the due dates and to maintain a minimum balance of US$14,343,750.

     The escrow account earns interest at LIBOR minus 0.75% per annum, which is computed on a daily basis. The interest income earned is included as part of the escrow funds. The remaining funds available will be transferred to the Company after all of the obligations related to the Dayamitra transaction are satisfied.

     b. JP Morgan Chase Bank

     This escrow account with JP Morgan Chase Bank (“Pramindo Escrow Agent”) was established to facilitate the settlement of the Company’s obligations under its Conditional Sale and Purchase Agreement for the acquisition of Pramindo (Note 5b).

     In accordance with the Escrow Agreement, the Company will make installment payments of US$12,800,000 for eleven months and US$15,000,000 for sixteen months. The first installment was due on October 1, 2002.

     The escrow account earns interest at LIBOR minus 0.4% per annum, which is computed on a daily basis. The interest income earned will be included as part of the escrow funds. The remaining funds available will be transferred to the Company after all of the obligations related to the Pramindo transaction are satisfied.

     c. Bank Mandiri

     The escrow account with Bank Mandiri was established by Dayamitra in relation with the credit facilities from Bank Mandiri (Note 26f).

F-58

PERUSAHAAN PERSEROAN (PERSERO)
P.T. TELEKOMUNIKASI INDONESIA Tbk AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

DECEMBER 31, 2002 AND 2003, AND FOR YEARS ENDED
DECEMBER 31, 2001, 2002 AND 2003
(Figures in tables are presented in millions of Rupiah, unless otherwise stated)
18. TRADE ACCOUNTS PAYABLE
          
20022003
Related parties        
 Payables to other telecommunications carriers  365,786   322,842 
 Concession fees  359,665   224,370 
 Purchases of equipment, materials and services  64,776   110,266 
   
   
 
Total  790,227   657,478 
   
   
 
Third parties        
 Purchases of equipment, materials and services  2,015,145   2,892,803 
 Payables related to revenue-sharing arrangements  81,710   94,508 
 Payables to other telecommunication providers  175,769   122,543 
   
   
 
Total  2,272,624   3,109,854 
   
   
 
Total  3,062,851   3,767,332 
   
   
 

Trade accounts payable by currency are as follows:

         
20022003
Rupiah  1,961,804   2,825,795 
U.S. Dollars  831,258   900,408 
Euro  264,959   29,463 
Japanese Yen  229   10,033 
Great Britain Pound Sterling  4,598   916 
Singapore Dollars  3   717 
   
   
 
Total  3,062,851   3,767,332 
   
   
 

Refer to Note 49 for details of related party transactions.

19. ACCRUED EXPENSES
         
20022003
Early retirement benefits  670,981   132,810 
Salaries and employee bonuses  411,739   473,447 
Interest and bank charges  298,840   261,050 
General, administrative and marketing  199,625   259,462 
Operations, maintenance and telecommunications services  180,740   89,103 
AWI settlement (Note 5c)  179,000   — 
Other  8,989   — 
   
   
 
Total  1,949,914   1,215,872 
   
   
 

     Based on the Board of Directors’ Resolution No. KD.20/ PS900/ SDM-10/2001 dated June 11, 2001 and Resolution of Human Resources Director No. KR.18/ PS900/ SDM-30/2003 dated October 9, 2003 concerning Early Retirement, the Company offered an Early Retirement Program for interested and eligible employees. Employees’ rights under the early retirement program, method of calculation and payments for compensation and other benefits in 2002 and 2003 are provided in the Board of Directors’

F-59

PERUSAHAAN PERSEROAN (PERSERO)
P.T. TELEKOMUNIKASI INDONESIA Tbk AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

DECEMBER 31, 2002 AND 2003, AND FOR YEARS ENDED
DECEMBER 31, 2001, 2002 AND 2003
(Figures in tables are presented in millions of Rupiah, unless otherwise stated)

Resolution No. KD.35/ PS900/ SDM-10/01 dated November 30, 2001 regarding Employees’ Rights under Early Retirement Program Year 2002 and the Board of Directors’ Resolution No. KD 80/ PS900/ SDM-20/2002 regarding Employees’ Rights under Early Retirement Program year 2003, respectively. Accrued early retirement benefits as of December 31, 2002 were fully paid in 2003. Accrued early retirement benefits as of December 31, 2003 represents the continued early retirement program which was paid out in early 2004.

20. UNEARNED INCOME
         
20022003
Prepaid pulse reload vouchers  375,021   740,077 
Telephone directory  52,729   — 
Other telecommunication services  8,069   16,361 
Other  9,742   6,773 
   
   
 
Total  445,561   763,211 
   
   
 
21. ADVANCES FROM CUSTOMERS AND SUPPLIERS

Represent security deposits received from customers related to services and performance guarantee deposits from suppliers related to procurement contracts.

22. SHORT-TERM BANK LOANS

Short-term bank loans consist of:

         
20022003
Bank Mandiri  —   37,642 
Citibank N.A.  39,205   — 
   
   
 
Total  39,205   37,642 
   
   
 

     a. Bank Mandiri

     On August 28, 2001, Napsindo entered into a loan agreement with Bank Mandiri amounting to US$1,800,000 for a one–year term. The loan is secured with the Company’s time deposits (Note 11) with interest rate at 2% above the pledged time deposits interest rate (i.e., 3% as of December 31, 2003). On November 11, 2003, the facility was extended until August 28, 2004. On April 24, 2003, Napsindo obtained a new loan from Bank Mandiri amounting to US$2,660,000 for a one–year term. The loan is secured by the Company’s time deposits and bears interest at 2% above the pledged time deposits interest rate. The facility can be extended upon approval by the Company. Subsequently, on May 4, 2004, this loan facility was extended for another one-year term and will expire on April 24, 2005. As of December 31, 2003, principal outstanding under these facilities amounted to US$4,460,000 (Rp37,642 million).

F-60

PERUSAHAAN PERSEROAN (PERSERO)
P.T. TELEKOMUNIKASI INDONESIA Tbk AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

DECEMBER 31, 2002 AND 2003, AND FOR YEARS ENDED
DECEMBER 31, 2001, 2002 AND 2003
(Figures in tables are presented in millions of Rupiah, unless otherwise stated)

     b. Citibank N.A.

     On July 12, 2002, Telkomsel entered into an Opening LC and Trust Receipt Loan Facility Agreement with Citibank, N.A. providing for a total facility of US$40,000,000.

     The facility was obtained to finance Telkomsel’s capital expenditures in connection with procurement contracts with three strategic partners and a strategic supplier. Amounts drawn from the facility bear interest at the bank’s cost of funds plus 2.5%. The facility is available until July 31, 2004 and is not collateralized.

     As of December 31, 2002, the outstanding balance of the loan amounted to US$4,385,295 (equivalent to Rp39,205 million). The loan drawn down from the facility in 2003 amounted to US$32,441,455 (equivalent to Rp275,312 million). As of December 31, 2003, the loan had been repaid.

23. MATURITIES OF LONG-TERM LIABILITIES

     a. Current Maturities

             
Notes20022003
Two-step loans  24   836,109   832,135 
Bank loans  26   162,077   808,793 
Liabilities for acquisitions of subsidiaries  27   1,385,956   1,587,775 
Suppliers’ credit loans  28   163,072   164,958 
Bridging loan  29   42,112   49,855 
Other      901   — 
       
   
 
Total      2,590,227   3,443,516 
       
   
 

     b. Long-Term Portion

                             
NotesTotal2005200620072008Later
(In billions of Rupiah)
Two-step loans  24   6,858.9   843.3   748.8   660.5   578.3   4,028.0 
Guaranteed notes  25   1,121.2   —   —   1,121.2   —   — 
Bonds  25   981.3   —   —   981.3   —   — 
Bank loans  26   2,115.8   817.4   732.2   454.2   112.0   — 
Liabilities for acquisitions of subsidiaries  27   747.0   151.4   159.4   167.8   176.6   91.8 
Suppliers’ credit loans  28   0.7   0.7   —   —   —   — 
Bridging loan  29   0.5   0.5   —   —   —   — 
Other long-term debt      9.1   —   —   —   —   9.1 
       
   
   
   
   
   
 
Total      11,834.5   1,813.3   1,640.4   3,385.0   866.9   4,128.9 
       
   
   
   
   
   
 

24. TWO-STEP LOANS

     Two-step loans are loans, which were obtained by the Government from overseas banks and a consortium of contractors, which are then re-loaned to the Company. The loans entered into up to July 1994 were recorded and are payable in Rupiah based on the exchange rate at the date of draw-down.

F-61

PERUSAHAAN PERSEROAN (PERSERO)
P.T. TELEKOMUNIKASI INDONESIA Tbk AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

DECEMBER 31, 2002 AND 2003, AND FOR YEARS ENDED
DECEMBER 31, 2001, 2002 AND 2003
(Figures in tables are presented in millions of Rupiah, unless otherwise stated)

Loans entered into after July 1994 are payable in their original currencies and any resulting foreign exchange gain or loss is borne by the Company.

The details of the two-step loans are as follows:

                 
Interest RateOutstanding
Creditors2002200320022003
Overseas banks  2.95% – 18.41%   3.10% – 14.90%   8,271,096   7,441,076 
Consortium of contractors  3.20% – 18.41%   3.20% – 14.90%   299,046   249,969 
           
   
 
Total          8,570,142   7,691,045 
Current maturities          (836,109)  (832,135)
           
   
 
Long-term portion          7,734,033   6,858,910 
           
   
 

Details of two-step loans obtained from overseas banks as of December 31, 2002 and 2003 are as follows:

                 
Interest RateOutstanding
Currencies2002200320022003
U.S. Dollars  3.85% – 8.70%   4.00% – 7.98%   3,500,678   2,946,687 
Rupiah  12.00% – 18.41%   9.69% – 14.90%   3,366,297   3,050,043 
Japanese Yen  2.95%   3.10%   1,188,369   1,244,331 
Euro  7.18% – 8.30%   7.33% – 8.45%   215,752   200,015 
           
   
 
Total          8,271,096   7,441,076 
           
   
 

     The loans are intended for the development of telecommunications infrastructure and supporting equipment. The loans are repayable in semi-annual installments and they are due on various dates until 2025.

Details of two-step loans obtained from a consortium of contractors as of December 31, 2002 and 2003 are as follows:

                 
Interest RateOutstanding
Currencies2002200320022003
Rupiah  13.25% – 18.41%   12.66% – 14.90%   143,365   116,574 
Japanese Yen  3.20%   3.20%   155,681   133,395 
           
   
 
Long-term portion          299,046   249,969 
           
   
 

     The consortium of contractors consists of Sumitomo Corporation, PT NEC Nusantara Communications and PT Humpuss Elektronika (SNH Consortium). The loans were obtained to finance the second digital telephone exchange project. The loans are repayable in semi-annual installments and they are due on various dates until March 15, 2015.

     Two-step loans which are payable in Rupiah bear either a fixed interest rate or a floating rate based upon the average interest rate on 3-month Certificates of Bank Indonesia during the six-months preceding the installment due date, plus 1%. Two-step loans which are payable in foreign currencies bear either a fixed rate interest or the floating interest rate offered by the lenders, plus 0.5%.

F-62

PERUSAHAAN PERSEROAN (PERSERO)
P.T. TELEKOMUNIKASI INDONESIA Tbk AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

DECEMBER 31, 2002 AND 2003, AND FOR YEARS ENDED
DECEMBER 31, 2001, 2002 AND 2003
(Figures in tables are presented in millions of Rupiah, unless otherwise stated)

     As of December 31, 2003, the Company has used all facilities under the two-step loan program and the draw-down period for the two-step loans has expired.

     The Company should maintain financial ratios as follows:

     a. Projected net revenue to projected debt service ratio should exceed 1.5:1 and 1.2:1 for two-step loans originating from World Bank and Asian Development Bank (“ADB”), respectively.
     b. Internal financing (earnings before depreciation and interest expenses) should exceed 50% and 20% compared to capital expenditures for loans originally from World Bank and ADB, respectively.

As of December 31, 2003, the Company complied with the above mentioned ratios.

25. GUARANTEED NOTES AND BONDS
         
20022003
Guaranteed Notes  1,337,518   1,121,224 
Bonds  975,992   981,278 
   
   
 
   2,313,510   2,102,502 
   
   
 
     a. Guaranteed Notes

     In April 2002, TSFL, Telkomsel’s wholly-owned subsidiary, issued US$150,000,000 Guaranteed Notes (“Notes”) which are guaranteed by Telkomsel. The Notes bear interest at 9.75%, payable semi-annually on April 30 and October 30 of each year and will mature on April 30, 2007. The trustee of the Notes is Deutsche Bank Trustees (Hongkong Limited) and the custodian is Deutsche Bank AG, Hongkong Branch.

     On April 23, 2002, TSFL entered into subscription agreements with UBS AG (“UBS”) whereby UBS agreed to subscribe and pay for the Notes at an issue price equal to 99.709% of the principal amount of the Notes, less any fees. TSFL has further authorized UBS to have the Notes listed on the Singapore Exchange Securities Trading Limited (the “Singapore Exchange”).

     Based on the “On-Loan Agreement” dated April 30, 2002, between Telkomsel and TSFL, the proceeds from the subscription of the Notes were lent to Telkomsel at an interest rate of 9.765% per annum, payable on the same terms as above.

     On September 8, 2003, the agreement was amended such that if any Notes are cancelled, the principal amount of the outstanding loan will be reduced by the principal amount of the Notes cancelled.

     TSFL may, on the interest payment date falling on or about the third anniversary of the issue date redeem the Notes, in whole or in part, at 102.50% of the principal amount of such Notes, together with interest accrued up to the redemption date. If only parts of the Notes are redeemed, the principal amount of the Notes outstanding after such redemption must be at least US$100,000,000.

     In 2003, Telkomsel purchased US$17,273,000 (equivalent to Rp145,447 million) of the Notes from Deutsche Bank.

F-63

PERUSAHAAN PERSEROAN (PERSERO)
P.T. TELEKOMUNIKASI INDONESIA Tbk AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

DECEMBER 31, 2002 AND 2003, AND FOR YEARS ENDED
DECEMBER 31, 2001, 2002 AND 2003
(Figures in tables are presented in millions of Rupiah, unless otherwise stated)

     The current rating for the Notes issued by Standard and Poors is B+ and by Fitch is B+.

As of December 31, 2002 and 2003, the outstanding principal amount of the Notes and the unamortized discount are as follows:

                 
20022003
Foreign CurrencyRupiah EquivalentForeign CurrencyRupiah Equivalent
US$US$
Principal  150,000,000   1,341,000   132,727,000   1,123,534 
Discount  (389,468)  (3,482)  (272,857)  (2,310)
   
   
   
   
 
Net  149,610,532   1,337,518   132,454,143   1,121,224 
   
   
   
   
 
b. Bonds

     On July 16, 2002, the Company issued bonds amounting to Rp1,000,000 million. The bonds were issued at par value and have a term of five years. The bonds bear interest at a fixed rate of 17% per annum, payable quarterly beginning October 16, 2002. The bonds are traded on the Surabaya Stock Exchange and will mature on July 15, 2007. The trustee of the bonds is PT Bank Negara Indonesia (Persero) Tbk and the custodian is PT Danareksa Sekuritas.

     The current rating for the bonds issued by Pefindo is AAA and by Standard and Poors is B+.

As of December 31, 2002 and 2003, the outstanding principal amount of the bonds and the unamortized discount are as follows:

         
20022003
Principal  1,000,000   1,000,000 
Discount  (24,008)  (18,722)
   
   
 
Net  975,992   981,278 
   
   
 

     During the period when the bonds are outstanding, the Company should comply with all covenants or restrictions including maintaining consolidated financial ratios as follows:

1. Debt service coverage ratio should exceed 1.5:1
2. Debt to equity ratio should not exceed:

a. 3:1 for the period of January 1, 2002 to December 31, 2002
b. 2.5:1 for the period of January 1, 2003 to December 31, 2003

c. 2:1 for the period of January 1, 2004 to the redemption date of the bonds

3. Debt to EBITDA ratio should not exceed 3:1

     As of December 31, 2003, the Company complied with the covenants.

F-64

PERUSAHAAN PERSEROAN (PERSERO)
P.T. TELEKOMUNIKASI INDONESIA Tbk AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

DECEMBER 31, 2002 AND 2003, AND FOR YEARS ENDED
DECEMBER 31, 2001, 2002 AND 2003
(Figures in tables are presented in millions of Rupiah, unless otherwise stated)
26. BANK LOANS

The details of long-term bank loans as of December 31, 2002 and 2003 are as follows:

                         
20022003
OutstandingOutstanding
OriginalOriginal
Total FacilityCurrencyRupiahCurrencyRupiah
LendersCurrency(in million)(in million)Equivalent(in million)Equivalent
Group of lenders  US$   196.970   —   —   172.315   1,456,063 
Citibank N.A.   EUR   73.365   —   —   64.890   690,646 
   US$   114.883   7.690   68,911   51.340   434,059 
Bank Central Asia  Rp   173,000.000   —   25,903   —   139,826 
Deutsche Bank  Rp   108,817.710   —   —   —   95,418 
Bank Finconesia  Rp   31,767.818   —   —   —   15,884 
Bank Mandiri  Rp   82,425.262   —   —   —   42,115 
Syndicated banks  Rp   90,000.000   —   60,438   —   34,263 
   US$   4.000   3.288   29,460   1.864   15,751 
Bank Niaga  Rp   565.000   —   —   —   565 
Japan Bank for International Cooperation  US$   —   7.000   62,720   —   — 
               
       
 
Total              247,432       2,924,590 
Current maturities of bank loans              (162,077)      (808,793)
               
       
 
Long-term portion              85,355       2,115,797 
               
       
 
     a. Group of Lenders

AWI had a loan of US$270,935,729 from a group of lenders (the “lenders”) before it was 100% acquired by the Company on July 31, 2003. Based on the Conditional Sale and Purchase Agreement related to the acquisition, the Company assumed the loan by repaying US$73,965,454 and entering into a credit agreement with the lenders to finance the remaining outstanding balance of the loan amounting to US$196,970,275, with JP Morgan Chase Bank, Hong Kong office, as the facility agent. This loan bears an interest at LIBOR plus 3.5% per annum (i.e., 4.65% as of December 31, 2003), net of 10% withholding tax. The Company must pay an annual facility agent fee of US$75,000. The loan is repayable in 8 semi-annual installments beginning on December 31, 2003 with the first through the seventh installment of US$24,655,151 and final installment of US$24,384,218.

     b. Citibank N.A.

     1. Hermes Export Facility

     On December 2, 2002, pursuant to the partnership agreement with Siemens Aktiengesellschaft (AG), Telkomsel entered into the Hermes Export Facility Agreement (“Facility”) with Citibank International plc (as “Arranger” and “Agent”) covering a total facility of EUR 76,195,313 which is divided into several tranches.

F-65

PERUSAHAAN PERSEROAN (PERSERO)
P.T. TELEKOMUNIKASI INDONESIA Tbk AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

DECEMBER 31, 2002 AND 2003, AND FOR YEARS ENDED
DECEMBER 31, 2001, 2002 AND 2003
(Figures in tables are presented in millions of Rupiah, unless otherwise stated)

     The agreement was subsequently amended on October 15, 2003, amending the Facility amount to EUR73,365,093, availability period and the repayment dates.

     The interest rate per annum on the Facility is determined based on the aggregate of the applicable margin, EURIBOR and mandatory cost, if any (i.e., 2.98% as of December 31, 2003). Interest is payable semi-annually, starting on the utilization date of the Facility.

     In addition to the interest, in 2003, Telkomsel was also charged an insurance premium for the insurance guarantee given by Hermes in favor of Telkomsel for each loan utilization amounting to EUR 6,089,149, 15% of which was paid in cash. The remaining balance was settled through utilization of the Facility.

     The total amount drawn down from the Facility in 2003 amounted to EUR72,227,349 (equivalent to Rp712,389 million). As of December 31, 2003, the outstanding balance was EUR64,890,840.

The schedule of the principal payments on this long-term loan as of December 31, 2003 is as follows:

         
Amount
EURRupiah
YearFull AmountEquivalent
2004  14,420,187   153,477 
2005  14,420,187   153,477 
2006 – 2008  36,050,466   383,692 
     2. High Performance Backbone (“HP Backbone”) Loans

     a. On April 10, 2002, the Company entered into a “Term Loan Agreement HP Backbone Sumatra Project and Pledge of Right to Deposit” with Citibank, N.A. providing a total facility of US$6,950,000.

     The facility was obtained to finance the construction of the Sumatra High Performance Backbone, in connection with the “Partnership Agreement” dated November 30, 2001, with PT Pirelli Cables Indonesia and PT Siemens Indonesia for the construction and provision of a high performance backbone in Sumatra.

     Amounts drawn from the facility bear interest at 1% above the interest rate provided by the Bank on the relevant deposits being pledged to the bank (Note 11). The loans are payable in eight monthly installments beginning in April 2003. The Company has drawn down the entire facility of US$6,950,000.

     As of December 31, 2002, the outstanding balance of the loan amounted to US$6,950,000. The loans were repaid in full by the Company and the loan agreement was terminated in May 2003.

     b. On April 10, 2002, the Company entered into a “Loan Agreement” with Citibank N.A. (“arranger”) and Citibank International plc (“agent”), which was supported by an export credit guarantee of Hermes Kreditversicherungs AG (“lender” and “guarantor”), providing a total facility of US$23,400,000.

     The facility was obtained to finance up to 85% of the cost of supplies and services sourced in Germany relating to the design, manufacture, construction, installation and testing of high performance backbone networks in Sumatra pursuant to the “Partnership Agreement” referred to above.

F-66

PERUSAHAAN PERSEROAN (PERSERO)
P.T. TELEKOMUNIKASI INDONESIA Tbk AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

DECEMBER 31, 2002 AND 2003, AND FOR YEARS ENDED
DECEMBER 31, 2001, 2002 AND 2003
(Figures in tables are presented in millions of Rupiah, unless otherwise stated)

     The lender required a fee of 8.4% of the total facility. This fee is paid twice during the agreement period, 15% of the fee is required to be paid in cash and 85% is included in the loan balance.

     As of December 31, 2002 and 2003, the outstanding loan was US$740,914 (representing the first installment of the fee) and US$15,108,176, respectively. The loan is payable in ten semi-annual installments beginning in July 2004.

     Amounts drawn from the facility bear interest at LIBOR plus 0.75% (i.e., 1.98% as of December 31, 2003).

c. On April 10, 2002, the Company entered into a loan agreement with Citibank N.A. (as an arranger) and Citibank International Plc (as an agent), which was supported by an export credit guarantee obtained from Istituto per I Servizi Assicurativi del Commercio Estero(“SACE Italy”)providing a total maximum facility to US$21,000,000. The facility was used to finance up to 85% of material and services procured in Italy in connection with the design, manufacture, development, installation and testing ofSub System VI,as part ofHP Backbonenetwork.

     This facility was secured by the Company’s property under construction pursuant to the Partnership Agreement.

     Amounts drawn from the facility bear fixed interest rate of 4.14%. The loans are payable in ten semi-annual installments beginning December 2003. Total principal outstanding as of December 31, 2003 was US$16,701,777.

     The Company has breached a covenant in the loan agreement which stipulates that the Company will not make any loans or grant any credit to or for the benefit of any person. As of June 9, 2004, the Company has obtained a written waiver from Citibank International Plc with regard to entering into the AWI loan (Notes 5c and 26a).

3. EKN-Backed Facility

     On December 2, 2002, pursuant to the partnership agreement with PT Ericsson Indonesia (Note 54b), Telkomsel entered into the EKN-Backed Facility agreement (“Facility”) with Citibank International plc (as “Arranger” and “Agent”) covering a total facility amount of US$70,483,426 which is divided into several tranches.

     The agreement was subsequently amended on October 15, 2003, amending availability period and the first repayment date.

     The interest rate per annum on the Facility is determined based on the aggregate of the applicable margin, CIRR (Commercial Interest Reference Rate) and mandatory cost, if any (i.e., 4.27% as of December 31, 2003). The interest charge will be paid semi annually, starting on the utilization date of the Facility.

     In addition to the interest, in 2003, Telkomsel was also charged an insurance premium for the insurance guarantee given by EKN in favor of Telkomsel for each loan utilization amounting to US$4,244,793, 15% of which was paid in cash. The remaining balance was settled through utilization of the Facility.

     The total amount drawn down from the Facility in 2003 amounted to US$21,700,126 (Rp184,834 million). As of December 31, 2003, the outstanding balance was US$19,530,113.

F-67

PERUSAHAAN PERSEROAN (PERSERO)
P.T. TELEKOMUNIKASI INDONESIA Tbk AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

DECEMBER 31, 2002 AND 2003, AND FOR YEARS ENDED
DECEMBER 31, 2001, 2002 AND 2003
(Figures in tables are presented in millions of Rupiah, unless otherwise stated)

The schedule of the principal payments of this long-term loan as of December 31, 2003 is as follows:

         
Amount
US$Rupiah
Year(in Full Amount)Equivalent
2004  4,340,025   36,738 
2005  4,340,025   36,738 
2006 – 2008  10,850,063   91,846 

     c. Bank Central Asia

     On April 10, 2002, the Company entered into a “Term Loan Agreement HP Backbone Sumatra Project” with Bank Central Asia, providing a total facility of Rp173,000 million. The facility was obtained to finance the Rupiah portion of the high performance backbone network in Sumatra pursuant to the “Partnership Agreement”.

     Amounts drawn from the facility bear interest at 4.35% plus the 3-month time deposit rate (i.e., 11.6% as of December 31, 2003). The loans are payable in twelve quarterly installments beginning January 2004. The loan will mature in October 2006.

     Total principal outstanding as of December 31, 2002 and 2003 were Rp25,903 million and Rp139,826 million, respectively.

     The loan facility from Bank Central Asia is not collateralized.

     The Company has breached a covenant in the loan agreement which stipulates that the Company will not make any guarantee or collateralize its assets for an amount exceeding US$2 million or its equivalent. As of June 23, 2004, the Company has obtained a written waiver from Bank Central Asia with regard to the Company’s time deposits collateralized for Napsindo’s loan (Notes 11b and 22a).

     d. Deutsche Bank AG

     On June 28, 2002, the Company entered into a contract agreement with PT Siemens Indonesia and PT NEC Nusantara Communications for addition of Central Electronic Wahler Switching Digital (“EWSD”) and Nippon Electric Automatic Exchange (“NEAC”), respectively, in Division Regional V. Subsequently, 80% of the contract amounts were factored by the vendors to Deutsche Bank AG (“Facility Agent”). The loans bear fixed interest rate at 19% per annum and are repayable in two annual installments of Rp13,400 million beginning in December 2003 for loan ex-PT NEC Nusantara Communications and Rp41,800 million beginning in January 2004 for loan ex-PT Siemens Indonesia.

     e. Bank Finconesia

     On June 28, 2002, the Company entered into a contract agreement with PT Olex Cables Indonesia for addition of installation of Central Lucent in Division Regional V. Subsequently, 80% of the contract amounts were factored by the vendor to Bank Finconesia. The loan bears fixed interest rate at 19% per annum and is repayable in two annual installments of Rp15,884 million beginning in December 2003.

F-68

PERUSAHAAN PERSEROAN (PERSERO)
P.T. TELEKOMUNIKASI INDONESIA Tbk AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

DECEMBER 31, 2002 AND 2003, AND FOR YEARS ENDED
DECEMBER 31, 2001, 2002 AND 2003
(Figures in tables are presented in millions of Rupiah, unless otherwise stated)

     f. Bank Mandiri

     On November 20, 2003, Dayamitra entered into a loan agreement with Bank Mandiri for a maximum facility of Rp39,925 million. As of December 31, 2003, the facility has been fully drawn down. This facility is repayable on a quarterly basis until the fourth quarter of 2005 and bears interest at 14.5% per annum, payable on a monthly basis and subject to change. On December 30, 2003, Bank Mandiri agreed to decrease the interest rate to 14% per annum commencing in January 2004.

     On December 20, 2003, Dayamitra also obtained a credit facility from Bank Mandiri for a maximum facility of Rp40,000 million. The facility is repayable on a quarterly basis beginning end of the third quarter of 2004 until end of the fourth quarter of 2006 and bears interest at 14% per annum. The loan is obtained to finance the construction of Fixed Wireless CDMA project pursuant to the procurement agreement entered between Dayamitra and Samsung Electronic Co. Ltd.

     The above loans are collateralized by Dayamitra’s telecommunications equipment/network with CDMA technology financed by these facilities, and Dayamitra’s share in the DKSOR of KSO Unit VI. As of December 31, 2003, total principal outstanding under these facilities amounted to Rp39,925 million.

     On March 13, 2003, Balebat entered into a loan agreement with Bank Mandiri for a facility of Rp2,500 million. This facility bears interest at 15% per annum payable on a monthly basis, is secured by Balebat’s operating equipment and will mature in July 2006. The principal is repayable on a monthly basis. As of December 31, 2003, principal outstanding under this facility amounted to Rp2,190 million.

     g. Syndicated Banks (Internet Protocol Backbone (“IP Backbone”) Loan)

     On February 25, 2002, the Company entered into a “Facility Funding Agreement” with Bank DBS Indonesia (syndicated agent and lender), Bank Bukopin (lender) and Bank Central Asia (lender), providing a total facility of US$4,000,000 and Rp90,000 million to fund the IP Backbone project in 7 (seven) Regional Divisions or KSO regions divided into 6 (six) batches.

     Amounts drawn in U.S. Dollars bear interest at 2% plus the highest of 1, 2 or 3 month SIBOR divided by 0.87% for the first year and 2% plus the 3 month SIBOR divided by 0.87% thereafter (i.e., 3.38% as of December 31, 2003). Amounts drawn in Rupiah bear interest at 19% fixed for the first year and 5% plus the average of BCA’s and Bukopin’s interest rates (the highest of 1, 3, 6 or 12 month time deposit rate) thereafter (i.e., 12.75% as of December 31, 2003).

     The loans are payable in eleven quarterly installments beginning in September 2002. The loans will mature on March 15, 2005.

     Total outstanding IP Backbone loans for Rupiah and U.S. Dollars as of December 31, 2002 and 2003 are Rp60,438 million and US$3,288,000 (equivalent Rp29,460 million) and Rp34,263 million and US$1,864,000 (Rp15,751 million), respectively.

     The Company pledged the property under construction as collateral for the IP Backbone loan pursuant to Notarial Deed No. 17 dated February 25, 2002 of Notary Titi Sri Amiretno Diah Wasisti Bagiono, S.H. on “Fiduciary Collateral”. The pledge has a maximum amount of US$14,587,525 and Rp401 million.

F-69

PERUSAHAAN PERSEROAN (PERSERO)
P.T. TELEKOMUNIKASI INDONESIA Tbk AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

DECEMBER 31, 2002 AND 2003, AND FOR YEARS ENDED
DECEMBER 31, 2001, 2002 AND 2003
(Figures in tables are presented in millions of Rupiah, unless otherwise stated)

Average interest rates for the loans during 2002 and 2003 were as follows:

         
20022003
Rupiah  17.14% –  19%   14.87% – 19% 
U.S. Dollar  3.5% –  4.38%   3.31% –  3.68% 

     Under the Loan Agreements for HP Backbone and IP Backbone, the Company should maintain quarterly financial ratios as follows:

     1. Debt to equity ratio should not exceed 3:1

     2. EBITDA to interest expense should exceed 5:1

     As of December 31, 2003, the Company complied with the above mentioned ratios.

     h. Bank Niaga

     On July 18 and December 3, 2003, Balebat entered into loan agreements with Bank Niaga for facilities totalling Rp565 million. The facilities bear interest at 15% per annum and are secured by Balebat’s time deposit and vehicles. The principal and interest are payable on a monthly basis which will end in October 2005 and December 2005, respectively. As of December 31, 2003, principal outstanding amounted to Rp565 million.

     i. Japan Bank for International Cooperation (“JBIC”, Formerly Export-Import Bank of Japan)

         
20022003
Total outstanding amount  62,720   — 
Current maturities  (62,720)  — 
   
   
 
Long-term portion  —   — 
   
   
 

     This loan represented Dayamitra’s obligation under a loan facility agreement it entered into with Tomen on April 27, 1998. The facility had been fully drawn down for US$35 million, which was repayable in five semi-annual installments of US$7 million commencing on March 25, 2001. The Company unconditionally guaranteed this loan.

     Interest accrues on the outstanding principal at the rate of LIBOR plus 1% and was repayable semi-annually, commencing on September 25, 1998. Annual interest rates in 2002 and 2003 ranged from 2.75% to 3.58% and from 2.75% to 2.77%.

     On June 21, 1999, an agreement was entered into between Tomen and JBIC under which the loan and related security rights were assigned from Tomen to JBIC.

     Principal outstanding as of December 31, 2002 of US$7,000,000 was fully paid and the loan agreement was terminated on March 25, 2003.

F-70

PERUSAHAAN PERSEROAN (PERSERO)
P.T. TELEKOMUNIKASI INDONESIA Tbk AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

DECEMBER 31, 2002 AND 2003, AND FOR YEARS ENDED
DECEMBER 31, 2001, 2002 AND 2003
(Figures in tables are presented in millions of Rupiah, unless otherwise stated)

27. LIABILITIES FOR ACQUISITIONS OF SUBSIDIARIES

This amount represents the Company’s obligation under the Promissory Notes issued to the Selling Stockholders of Dayamitra in respect of the Company’s acquisition of 90.32% of Dayamitra, to the Selling Stockholders of Pramindo in respect of the Company’s acquisition of 100% of Pramindo, and to the Selling Stockholders of AWI in respect of the Company’s acquisition of 100% of AWI.

          
20022003
Dayamitra transaction(Note 5a)
        
 PT Intidaya Sistelindomitra  99,500   — 
 PT Mitracipta Sarananusa  68,398   — 
 Cable and Wireless plc  64,260   — 
 Less discount on promissory notes  (10,033)  — 
   
   
 
   222,125   — 
   
   
 
Pramindo transaction(Note 5b)
        
 France Cables et Radio S.A.   1,224,296   646,100 
 PT Astratel Nusantara  1,071,343   565,497 
 Indosat  397,928   210,042 
 Marubeni Corporation  244,878   129,220 
 International Finance Corporation, USA  91,829   48,457 
 NMP Singapore Pte. Ltd.  30,610   16,157 
 Less discount on promissory notes  (278,074)  (80,184)
   
   
 
   2,782,810   1,535,289 
   
   
 
AriaWest transaction(Note 5c)
        
 PT Aria Infotek  —   483,955 
 The Asian Infrastructure Fund  —   115,227 
 MediaOne International I B.V.   —   322,636 
 Less discount on promissory notes  —   (122,358)
   
   
 
   —   799,460 
   
   
 
Total  3,004,935   2,334,749 
Current maturity — net of discount  (1,385,956)  (1,587,775)
   
   
 
Long-term portion — net of discount  1,618,979   746,974 
   
   
 

F-71

PERUSAHAAN PERSEROAN (PERSERO)
P.T. TELEKOMUNIKASI INDONESIA Tbk AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

DECEMBER 31, 2002 AND 2003, AND FOR YEARS ENDED
DECEMBER 31, 2001, 2002 AND 2003
(Figures in tables are presented in millions of Rupiah, unless otherwise stated)
28. SUPPLIERS’ CREDIT LOANS
         
20022003
Tomen Corporation  290,498   139,608 
Cable & Wireless plc  48,199   26,021 
   
   
 
Total  338,697   165,629 
Current maturities  (163,072)  (164,958)
   
   
 
Long-term portion  175,625   671 
   
   
 
a. Tomen Corporation (“Tomen”)

     Dayamitra entered into a Design, Supply, Construction and Installation Contract dated November 18, 1998 with Tomen, the ultimate holding company of TMC, one of the former stockholders of Dayamitra. Under the terms of the contract, Tomen is responsible for the construction of the minimum new installations required under the KSO VI Agreement in which Dayamitra is the investor.

     In connection with the above agreement, Dayamitra entered into a Supplier’s Credit Agreement (“SCA”) with Tomen on November 18, 1998. The total commitment under the SCA was US$54,000,000 of which US$50,444,701 had been drawn down before the expiration date of the available credit on September 30, 1999.

     Interest accrues on the amounts drawn down at LIBOR plus 4.5% per annum, and is payable semiannually in arrears. Annual interest rates in 2002 and 2003 ranged from 5.92% to 6.48% and from 5.53% to 5.92%, respectively.

The SCA loan is repayable in ten semi-annual installments commencing on December 15, 2000. The SCA contains a minimum fixed repayment schedule, however, additional principal repayments are required on repayment dates in the event that Dayamitra has excess cash, as defined in the SCA. To date, Dayamitra has not been required to make additional principal repayments from excess cash. The SCA loan is secured on a pro rata basis by the security rights provided under the C&W plc bridging facility loan (Note 29).

b. Cable and Wireless plc (“C&W plc”)

     Dayamitra entered into a Supplier’s Credit Agreement (“SCA”) with C&W plc on May 19, 1999.

     The SCA loan is repayable in ten semi-annual installments commencing on December 15, 2000. The loan contains a minimum fixed repayment schedule, however, additional principal repayments are required on repayment dates in the event that Dayamitra has excess cash, as defined in the SCA. To date, Dayamitra has not been required to make additional principal repayments from excess cash. Interest on this loan is at the rate of LIBOR plus 4.5%. Annual interest rates in 2002 and 2003 ranged from 5.92% to 6.48% and from 5.53% to 5.92%, respectively.

     The SCA loan is secured on a pro rata basis by the security rights provided under the C&W plc bridging facility loan. In addition, any distributions to stockholders in the form of dividends or repayments of share capital require the written consent of Tomen and C&W plc.

F-72

PERUSAHAAN PERSEROAN (PERSERO)
P.T. TELEKOMUNIKASI INDONESIA Tbk AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

DECEMBER 31, 2002 AND 2003, AND FOR YEARS ENDED
DECEMBER 31, 2001, 2002 AND 2003
(Figures in tables are presented in millions of Rupiah, unless otherwise stated)
29. BRIDGING LOAN
         
20022003
Total outstanding amount  95,517   50,365 
Current maturities  (42,112)  (49,855)
   
   
 
Long-term portion  53,405   510 
   
   
 

     This loan is owed by Dayamitra to C&W plc under a bridging loan facility which was assigned from three local Indonesian banks. The loan is repayable in ten semi-annual installments commencing on December 15, 2000. Interest is payable on a monthly or a quarterly basis, at the option of Dayamitra, at the rate of LIBOR plus 4% per annum. Annual interest rates in 2002 and 2003 ranged from 5.42% to 5.98% and from 5.06% to 5.42%, respectively.

     C&W plc has agreed to the repayment of the bridging loan facility in proportion to the amounts made available to Dayamitra under this bridging loan facility and the C&W plc and Tomen Supplier’s Credit Loan. The security provided against the bridging loan facility consists of an assignment of KSO revenues, an assignment of bank accounts, a security interest in Dayamitra’s movable assets, an assignment of the Tomen construction contract, an assignment of proceeds from early termination of the KSO license by the Company, and an assignment of insurance proceeds.

Distributions to stockholders in the form of dividends or repayment of share capital require the written consent of C&W plc.

30. MINORITY INTEREST
          
20022003
Minority interest in net assets of subsidiaries:        
 Telkomsel  2,516,180   3,608,874 
 Infomedia  43,744   60,353 
 Dayamitra  22,173   32,999 
 Indonusa  13,700   1,959 
 Napsindo  —   2,068 
 PII  —   1,899 
 GSD  2   3 
   
   
 
Total  2,595,799   3,708,155 
   
   
 

F-73

PERUSAHAAN PERSEROAN (PERSERO)
P.T. TELEKOMUNIKASI INDONESIA Tbk AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

DECEMBER 31, 2002 AND 2003, AND FOR YEARS ENDED
DECEMBER 31, 2001, 2002 AND 2003
(Figures in tables are presented in millions of Rupiah, unless otherwise stated)
              
200120022003
Minority interest in net income (loss) of subsidiaries:            
 Telkomsel  455,331   782,870   1,482,897 
 Infomedia  15,067   19,031   22,399 
 Dayamitra  6,241   15,151   11,584 
 Indonusa  (2,034)  (6,831)  (2,351)
 Napsindo  —   —   (8,541)
 PII  —   —   (2,511)
 GSD  —   1   1 
   
   
   
 
Total  474,605   810,222   1,503,478 
   
   
   
 

31. CAPITAL STOCK

               
2002
PercentageTotal
Number ofofPaid-up
DescriptionSharesOwnershipCapital
%
Series A Dwiwarna share            
 Government of the Republic of Indonesia  1   —   — 
Series B shares            
 Government of the Republic of Indonesia  5,160,235,355   51.19   2,580,118 
 JPMCB US Resident (Norbax Inc.)  879,723,798   8.73   439,862 
 The Bank of New York  610,489,548   6.06   305,245 
 Board of Commissioners:            
  Petrus Sartono  8,262   —   4 
 Board of Directors:            
  Kristiono  12,690   —   6 
  Garuda Sugardo  8,262   —   4 
  Guntur Siregar  9,990   —   5 
  Agus Utoyo  11,826   —   6 
  Suryatin Setiawan  10,854   —   5 
 Public (below 5% each)  3,429,489,054   34.02   1,714,745 
   
   
   
 
Total  10,079,999,640   100.00   5,040,000 
   
   
   
 

F-74

PERUSAHAAN PERSEROAN (PERSERO)
P.T. TELEKOMUNIKASI INDONESIA Tbk AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

DECEMBER 31, 2002 AND 2003, AND FOR YEARS ENDED
DECEMBER 31, 2001, 2002 AND 2003
(Figures in tables are presented in millions of Rupiah, unless otherwise stated)
               
2003
PercentageTotal
Number ofofPaid-up
DescriptionSharesOwnershipCapital
%
Series A Dwiwarna share            
 Government of the Republic of Indonesia  1   —   — 
Series B shares            
 Government of the Republic of Indonesia  5,160,235,355   51.19   2,580,118 
 JPMCB US Resident (Norbax Inc.)  896,045,651   8.89   448,023 
 The Bank of New York  657,263,408   6.52   328,632 
 Board of Commissioners:            
  Petrus Sartono  9,558   —   5 
 Board of Directors:            
  Kristiono  12,690   —   6 
  Garuda Sugardo  8,262   —   4 
  Guntur Siregar  9,990   —   5 
  Agus Utoyo  11,826   —   6 
  Suryatin Setiawan  10,854   —   5 
 Public (below 5% each)  3,366,392,045   33.40   1,683,196 
   
   
   
 
Total  10,079,999,640   100.00   5,040,000 
   
   
   
 

32. ADDITIONAL PAID-IN CAPITAL

         
20022003
Proceeds from sale of 933,333,000 shares in excess of par value through initial public offering in 1995  1,446,666   1,446,666 
Capitalization into 746,666,640 series B shares in 1999  (373,333)  (373,333)
   
   
 
Total  1,073,333   1,073,333 
   
   
 
33.DIFFERENCE IN VALUE OF RESTRUCTURING TRANSACTIONS BETWEEN ENTITIES UNDER COMMON CONTROL

Represents the difference between the consideration paid or received and the historical amount of the net assets of the investee acquired or carrying amount of the investment sold, arising from transactions with entities under common control.

F-75

PERUSAHAAN PERSEROAN (PERSERO)
P.T. TELEKOMUNIKASI INDONESIA Tbk AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

DECEMBER 31, 2002 AND 2003, AND FOR YEARS ENDED
DECEMBER 31, 2001, 2002 AND 2003
(Figures in tables are presented in millions of Rupiah, unless otherwise stated)

34. TELEPHONE REVENUES

              
200120022003
Fixed lines            
 Local and domestic long-distance usage  5,225,705   5,447,925   6,561,800 
 Monthly subscription charges  997,651   1,474,823   1,948,830 
 Installation charges  98,017   130,234   223,130 
 Phone cards  25,455   29,265   34,371 
 Others  68,328   181,852   128,734 
   
   
   
 
Total  6,415,156   7,264,099   8,896,865 
   
   
   
 
Cellular            
 Air time charges  3,987,738   5,453,597   7,677,884 
 Monthly subscription charges  581,566   593,347   580,550 
 Connection fee charges  128,543   172,302   194,053 
 Features  10,151   7,555   6,343 
   
   
   
 
Total  4,707,998   6,226,801   8,458,830 
   
   
   
 
Total Telephone Revenues  11,123,154   13,490,900   17,355,695 
   
   
   
 

35. INTERCONNECTION REVENUES — NET

                        
200120022003 2002 2003 2004
      
Cellular 1,241,603 2,383,667 3,908,292   2,241,533  3,908,292  5,351,613 
International 116,770 344,500 184,097   389,255  184,097  641,210 
Other 65,313 103,167 69,759   200,546  69,759  195,158 
 
 
 
        
Total 1,423,686 2,831,334 4,162,148   2,831,334  4,162,148  6,187,981 
 
 
 
        

36.34. REVENUE UNDER JOINT OPERATION SCHEMES
                       
200120022003 2002 2003 2004
      
Minimum Telkom Revenues 1,474,200 1,319,715 899,862   1,319,715  899,862  295,955 
Share in Distributable KSO Revenues 732,960 801,010 583,012   801,010  583,012  349,528 
Amortization of unearned initial investor payments under Joint Operation Schemes 12,426 7,420 3,433   7,420  3,433  11,131 
 
 
 
        
Total 2,219,586 2,128,145 1,486,307   2,128,145  1,486,307  656,614 
 
 
 
        

      Distributable KSO Revenues represent the entire KSO revenues, less MTR and operational expenses of the KSO Units. These revenues are shared between the Company and the KSO Investors based upon agreed percentages (Note 51)49).
      The Minimum Telkom Revenue and Share in Distributable KSO Revenues decreased in 2003 and 2004 due to the acquisitions and consolidations of AWI, the investor in KSO III (Note 4c), and KSO IV (Note 4d).
35. DATA AND INTERNET REVENUES
             
  2002 2003 2004
       
SMS  997,249   2,205,058   3,562,726 
Multimedia  337,796   494,747   813,330 
VoIP  152,195   328,284   318,854 
ISDN  64,386   80,473   113,832 
          
Total  1,551,626   3,108,562   4,808,742 
          
36. NETWORK REVENUES
             
  2002 2003 2004
       
Satellite transponder lease  190,220   270,860   210,901 
Leased lines  125,878   247,005   443,408 
          
Total  316,098   517,865   654,309 
          

F-76F-81

PERUSAHAAN PERSEROAN (PERSERO)
P.T. TELEKOMUNIKASI INDONESIA Tbk AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
DECEMBER 31, 20022003 AND 2003,2004, AND FOR YEARS ENDED
DECEMBER 31, 2001, 2002, 2003 AND 20032004
(Figures in tables are presented in millions of Rupiah, unless otherwise stated)

37. DATA AND INTERNET REVENUES
             
200120022003
SMS  344,600   997,249   2,205,058 
Multimedia  218,300   337,796   494,747 
VoIP  25,589   152,195   328,284 
ISDN  84,695   64,386   80,473 
   
   
   
 
Total  673,184   1,551,626   3,108,562 
   
   
   
 

38. NETWORK REVENUES

             
200120022003
Satellite transponder lease  203,558   190,220   270,860 
Leased lines  211,371   125,878   247,005 
   
   
   
 
Total  414,929   316,098   517,865 
   
   
   
 

39. REVENUE-SHARING ARRANGEMENT REVENUES

                  
200120022003 2002 2003 2004
      
Revenue-Sharing Arrangement revenues 191,478 211,483 200,085   211,483  200,085  198,543 
Amortization of unearned income (Note 15) 72,775 52,271 58,379 
Amortization of unearned income (Note 12)  52,271  58,379  82,033 
 
 
 
        
Total 264,253 263,754 258,464   263,754  258,464  280,576 
 
 
 
        

40.38. OPERATING EXPENSES — PERSONNEL
                        
200120022003 2002 2003 2004
      
Salaries and related benefits 883,409 1,410,670 1,574,181   1,410,670  1,574,181  1,796,914 
Vacation pay, incentives and other benefits 364,707 655,518 816,055   655,518  816,055  1,156,069 
Early retirements 140,000 717,289 355,735   717,289  355,735  243,466 
Net periodic post-retirement benefit cost (Note 48) 374,510 616,512 641,435 
Net periodic pension cost (Note 46) 86,233 362,298 190,914 
Net periodic post-retirement benefit cost (Note 46)  616,512  641,435  492,240 
Net periodic pension cost (Note 44)  362,298  190,974  1,034,806 
Employee income tax 132,855 201,468 468,805   201,468  468,805  523,787 
Long service awards (Note 47) 94,540 289,922 207,126 
Long service awards (Note 45)  289,922  219,239  159,323 
Housing 93,315 89,495 116,858   89,495  116,858  103,459 
Medical 81,698 28,209 9,682   28,209  9,682  12,190 
Other employee benefits (Note 44)  —  4,439  11,510 
Others 29,978 16,187 59,305   16,187  42,693  37,014 
 
 
 
        
Total 2,281,245 4,387,568 4,440,096   4,387,568  4,440,096  5,570,778 
 
 
 
        
39. OPERATING EXPENSES — OPERATIONS, MAINTENANCE AND TELECOMMUNICATION SERVICES
             
  2002 2003 2004
       
Operations and maintenance  1,042,588   1,744,806   2,398,159 
Radio frequency usage charges  292,703   371,740   492,568 
Electricity, gas and water  219,913   300,432   385,662 
Cost of phone cards  197,683   181,272   366,661 
Concession fees  163,891   238,979   314,741 
Insurance  142,932   157,075   151,297 
Leased lines  103,643   127,021   132,829 
Vehicles and supporting facilities  79,961   115,697   181,737 
Travelling  16,523   29,815   42,213 
Others  30,382   71,856   63,720 
          
Total  2,290,219   3,338,693   4,529,587 
          

F-77F-82

PERUSAHAAN PERSEROAN (PERSERO)
P.T. TELEKOMUNIKASI INDONESIA Tbk AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
DECEMBER 31, 20022003 AND 2003,2004, AND FOR YEARS ENDED
DECEMBER 31, 2001, 2002, 2003 AND 20032004
(Figures in tables are presented in millions of Rupiah, unless otherwise stated)
40. OPERATING EXPENSES — GENERAL AND ADMINISTRATIVE
41. OPERATING EXPENSES — OPERATIONS, MAINTENANCE AND TELECOMMUNICATION SERVICES
             
200120022003
Operations and maintenance  891,435   1,042,588   1,744,806 
Radio frequency usage charges  101,305   292,703   371,740 
Electricity, gas and water  157,068   219,913   300,432 
Cost of phone cards  173,412   197,683   181,272 
Concession fees  63,561   163,891   238,979 
Insurance  67,783   142,932   157,075 
Leased lines  82,880   103,643   127,021 
Vehicles and supporting facilities  38,235   79,961   115,697 
Travelling  15,700   16,523   29,815 
Telephone kiosks’ commissions  520,947   —   — 
Others  37,595   30,382   71,856 
   
   
   
 
Total  2,149,921   2,290,219   3,338,693 
   
   
   
 
             
  2002 2003 2004
       
Professional fees  218,949   115,598   137,355 
Collection expenses  224,782   273,767   358,957 
Amortization of goodwill and other intangible assets (Note 14)  187,990   730,659   872,330 
Training, education and recruitment  122,045   126,927   228,524 
Travel  111,427   144,677   192,567 
Security and screening  77,103   110,278   143,892 
General and social contribution  69,419   113,785   111,838 
Printing and stationery  43,513   50,535   80,972 
Meetings  31,719   42,813   58,333 
Provision for doubtful accounts and inventory obsolescence  31,103   326,419   357,695 
Research and development  10,483   9,111   13,225 
Others  17,761   34,208   44,159 
          
Total  1,146,294   2,078,777   2,599,847 
          
41. INCOME TAX
           
  2003 2004
     
a. Prepaid taxes        
 The Company        
  Refundable corporate income tax — overpayment  38,370   38,370 
       
   38,370   38,370 
       
 Subsidiaries        
  Corporate income tax  2,443   34,515 
  Value added tax  171,469   4,343 
       
   173,912   38,858 
       
   212,282   77,228 
       

Effective January 1, 2002, telephone kiosks are charged 70% of basic tariff charged by operators to its customers on calls placed from kiosk phones. Consequently, the Company is no longer required to pay commissions.

42. OPERATING EXPENSES — GENERAL AND ADMINISTRATIVE
             
200120022003
Professional fees  325,268   218,949   115,598 
Collection expenses  181,925   224,782   273,767 
Amortization of intangible assets (Note 16)  55,709   187,990   730,659 
Training, education and recruitment  147,312   122,045   126,927 
Travel  92,828   111,427   144,677 
Security and screening  48,792   77,103   110,278 
General and social contribution  36,762   69,419   113,785 
Printing and stationery  37,589   43,513   50,535 
Meetings  26,498   31,719   42,813 
Provision for doubtful accounts and inventory obsolescence  342,900   31,103   326,419 
Research and development  39,523   10,483   9,111 
Others  8,350   17,761   34,208 
   
   
   
 
Total  1,343,456   1,146,294   2,078,777 
   
   
   
 

     The allowance for doubtful accounts in 2001 includes an allowance for the MTR and share in distributable KSO revenues receivable from KSO III amounting to Rp155,756 million. This provision was reversed in 2002 following the settlement of the AriaWest dispute (Note 8d).

F-78F-83

PERUSAHAAN PERSEROAN (PERSERO)
P.T. TELEKOMUNIKASI INDONESIA Tbk AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
DECEMBER 31, 20022003 AND 2003,2004, AND FOR YEARS ENDED
DECEMBER 31, 2001, 2002, 2003 AND 20032004
(Figures in tables are presented in millions of Rupiah, unless otherwise stated)

43. INCOME TAX

            
20022003
a. Prepaid taxes        
 The Company        
  Refundable corporate income tax overpayment  —   38,370 
   
   
 
   —   38,370 
   
   
 
 Subsidiaries        
  Corporate income tax  265   2,443 
  Value added tax  84,409   171,469 
   
   
 
   84,674   173,912 
   
   
 
   84,674   212,282 
   
   
 
b. Taxes payable        
 The Company        
  Income tax        
   Article 21  10,959   91,229 
   Article 22  2,189   2,577 
   Article 23  25,325   19,131 
   Article 25  3,450   87,219 
   Article 26  1,892   7,045 
   Article 29  631,124   363,566 
  Value added tax  34,487   120,206 
   
   
 
   709,426   690,973 
   
   
 
 Subsidiaries        
  Income tax        
   Article 4  —   4,012 
   Article 21  16,613   47,265 
   Article 22  187   765 
   Article 23  26,408   66,793 
   Article 25  77,881   66,289 
   Article 26  4,931   39,488 
   Article 29  220,377   498,826 
  Value added tax  53,809   98,627 
   
   
 
   400,206   822,065 
   
   
 
   1,109,632   1,513,038 
   
   
 
            
  2003 2004
     
b. Taxes payable        
 The Company        
  Income tax        
   Article 21  91,229   35,970 
   Article 22  2,577   3,057 
   Article 23  19,131   25,223 
   Article 25  87,219   94,857 
   Article 26  7,045   31,165 
   Article 29  363,566   508,909 
  Value added tax  120,206   101,683 
       
   690,973   800,864 
       
 Subsidiaries        
  Income tax        
   Article 4  4,012   4,437 
   Article 21  47,265   38,853 
   Article 22  765   930 
   Article 23  66,793   46,636 
   Article 25  66,289   151,318 
   Article 26  39,488   9,515 
   Article 29  498,826   427,641 
  Value added tax  98,627   112,285 
       
   822,065   791,615 
       
   1,513,038   1,592,479 
       
      c. The components of income tax expense (benefit) are as follows:
              
  2002 2003 2004
       
Current            
 The Company  1,671,104   1,886,283   1,922,238 
 Subsidiaries  1,076,658   1,904,997   2,344,873 
          
   2,747,762   3,791,280   4,267,111 
          
Deferred            
 The Company  (44,054)  (198,719)  (506,084)
 Subsidiaries  195,263   268,529   242,045 
          
   151,209   69,810   (264,039)
          
   2,898,971   3,861,090   4,003,072 
          

F-79F-84

PERUSAHAAN PERSEROAN (PERSERO)
P.T. TELEKOMUNIKASI INDONESIA Tbk AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
DECEMBER 31, 20022003 AND 2003,2004, AND FOR YEARS ENDED
DECEMBER 31, 2001, 2002, 2003 AND 20032004
(Figures in tables are presented in millions of Rupiah, unless otherwise stated)

c. The components of income tax expense (benefit) are as follows:

              
200120022003
Current            
 The Company  1,291,206   1,671,104   1,886,283 
 Subsidiaries  886,160   1,076,658   1,904,997 
   
   
   
 
   2,177,366   2,747,762   3,791,280 
   
   
   
 
Deferred            
 The Company  (168,815)  (153,019)  142,089 
 Subsidiaries  (1,656)  304,228   (72,279)
   
   
   
 
   (170,471)  151,209   69,810 
   
   
   
 
   2,006,895   2,898,971   3,861,090 
   
   
   
 

      d. Corporate income tax is computed for each individual company as a separate legal entity (consolidated financial statements are not applicable for computing corporate income tax).

The reconciliation of consolidated income before tax to income before tax attributable to the Company and the components of consolidated income tax expense isare as follows:
                        
200120022003 2002 2003 2004
      
Consolidated income before tax 6,549,891 11,748,902 11,451,795   11,748,902  11,451,795  12,088,582 
Add back consolidation eliminations 1,926,439 2,554,407 3,332,176   2,554,407  3,332,176  3,936,524 
 
 
 
        
Consolidated income before tax and eliminations 8,476,330 14,303,309 14,783,971   14,303,309  14,783,971  16,025,106 
Deduct income before tax of the subsidiaries (3,285,548) (4,745,515) (7,009,179)  (4,745,515)  (7,009,179)  (8,485,296)
 
 
 
        
Income before tax attributable to the Company 5,190,782 9,557,794 7,774,792   9,557,794  7,774,792  7,539,810 
Less: Income subject to final tax  —  (279,142)  (206,601)
       
 
 
 
   9,557,794  7,495,650  7,333,209 
Tax calculated at progressive rates 1,557,218 2,867,321 2,332,420   2,867,321  2,248,678  2,199,945 
Income not subject to tax (665,007) (1,785,208) (1,044,835)
Non-taxable income  (1,785,208)  (1,017,791)  (1,181,983)
Non-deductible expenses 230,180 469,464 669,643   578,429  328,835  345,674 
Deferred tax (assets) liabilities originating from previously unrecognized temporary difference, net — (40,252) 71,144 
Deferred tax assets that cannot be utilized — 6,760 — 
Deferred tax (assets) liabilities originating from previously unrecognized temporary differences, net  (40,252)  71,144  (14,940)
Deferred tax assets that cannot be utilized, net  6,760  —  24,045 
 
 
 
        
Income tax expense of the Company 1,122,391 1,518,085 2,028,372 
Corporate income tax expense  1,627,050  1,630,866  1,372,741 
Final income tax expense  —  56,698  43,413 
       
Total income tax expense of the Company  1,627,050  1,687,564  1,416,154 
Income tax expense of the subsidiaries 884,504 1,380,886 1,832,718   1,271,921  2,173,526  2,586,918 
 
 
 
        
Total consolidated income tax expense 2,006,895 2,898,971 3,861,090   2,898,971  3,861,090  4,003,072 
 
 
 
        

F-80

PERUSAHAAN PERSEROAN (PERSERO)
P.T. TELEKOMUNIKASI INDONESIA Tbk AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

DECEMBER 31, 2002 AND 2003, AND FOR YEARS ENDED
DECEMBER 31, 2001, 2002 AND 2003
(Figures in tables are presented in millions of Rupiah, unless otherwise stated)

The reconciliation between income before tax and the estimated taxable income for the years ended December 31, 2001, 2002, 2003 and 20032004 is as follows:

                          
200120022003  2002 2003 2004
       
Income before tax attributable to the CompanyIncome before tax attributable to the Company 5,190,782 9,557,794 7,774,792 Income before tax attributable to the Company  9,557,794  7,774,792  7,539,810 
Less: Income subject to final taxLess: Income subject to final tax  —  (279,142)  (206,601)
       
  9,557,794  7,495,650  7,333,209 
 
 
 
         
Temporary differences:Temporary differences: Temporary differences:          
Depreciation of property, plant and equipment 165,239 (170,134) 442,029 Depreciation of property, plant and equipment  (170,134)  442,029  415,805 
Gain on sale of property, plant and equipment (21,759) 14,774 (25,495)Gain on sale of property, plant and equipment  14,774  (25,495)  (12,874)
Allowance/(write back) for doubtful accounts 226,514 (156,223) 166,341 Allowance/(write back) for doubtful accounts  (156,223)  166,341  491,577 
Accounts receivable written-off (44,423) (82,474) (79,728)Accounts receivable written-off  (82,474)  (79,728)  (91,865)
Allowance for inventory obsolescence 74,059 10,099 5,543 Allowance for inventory obsolescence  10,099  5,543  11,385 
Inventory written-off (3,013) (15,223) (693)
Provision for early retirement benefits 140,000 670,981 293,626 
Payment of early retirement benefits — (140,000) (831,796)
Provision for bonus — — 262,082 
Net periodic pension cost (46,852) 58,226 (271,503)
Long service awards 65,675 213,397 (15,617)
Amortization of deferred stock issuance costs (5,981) (17,942) — 
Amortization of landrights 5,839 (1,524) (2,356)
Provision for impairment of property, plant and equipment — 6,401 (6,401)
Decline in value of investments (90,000) — — 
Gain on sale of long-term investments — — (171,334)
Temporary differences of KSO units 10,694 6,317 4,782 
Depreciation of property, plant and equipment under revenue sharing arrangements 53,884 11,576 63,424 
Amortization of unearned income under revenue-sharing arrangements (15,380) (7,998) (58,379)
Revenue from transfer of property, plant and equipment under revenue-sharing arrangements — 765 34,828 
Interest income/receivable — — (45,835)
Equity in net loss of associated companies — 41,178 — 
 
 
 
 
 514,496 442,196 (236,482)
 
 
 
 
Permanent differences: 
Net periodic post-retirement benefit cost 373,074 611,992 634,385 
Amortization of goodwill and intangible assets 55,709 187,990 773,197 
Amortization of discount on promissory notes and interest expense 79,899 173,794 224,931 
Tax penalties — 216,198 — 
Equity in net income of associates and subsidiaries (1,307,404) (2,238,300) (3,313,831)
Gain on sale of long-term investments — (3,166,086) (38,425)
Interest income (494,332) (359,049) (279,142)

F-81F-85

PERUSAHAAN PERSEROAN (PERSERO)
P.T. TELEKOMUNIKASI INDONESIA Tbk AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
DECEMBER 31, 20022003 AND 2003,2004, AND FOR YEARS ENDED
DECEMBER 31, 2001, 2002, 2003 AND 20032004
(Figures in tables are presented in millions of Rupiah, unless otherwise stated)
              
200120022003
 Amortization of unearned income under revenue-sharing arrangements  (57,395)  (44,273)  — 
 Adjustment of equity in net income of Telkomsel as a result of the recast of financial statements  (241,725)  —   — 
 Income from land/building rental  (116,831)  (65,175)  (40,380)
 Others  307,813   253,322   599,631 
   
   
   
 
Total  (1,401,192)  (4,429,587)  (1,439,634)
   
   
   
 
Total taxable income of the Company  4,304,086   5,570,403   6,098,676 
   
   
   
 
Current income tax expense of the Company  1,291,206   1,671,104   1,886,283 
Current income tax expense of the subsidiaries  886,160   1,076,658   1,904,997 
   
   
   
 
Total  2,177,366   2,747,762   3,791,280 
   
   
   
 
              
  2002 2003 2004
       
 Inventory written-off  (15,223)  (693)  — 
 Provision for early retirement benefits  530,981   (538,170)  (132,810)
 Provision for bonus  —   262,082   (139,064)
 Net periodic pension cost  58,226   (271,503)  197,591 
 Long service awards  213,397   (15,617)  75,554 
 Amortization of intangible assets  166,721   751,927   851,060 
 Amortization of deferred stock issuance costs  (17,942)  —   — 
 Amortization of landrights  (1,524)  (2,356)  (3,419)
 Provision for impairment of property, plant and equipment  6,401   (6,401)  — 
 Gain on sale of long-term investments  —   (171,334)  — 
 Temporary differences of KSO units  6,317   4,782   — 
 Depreciation of property, plant and equipment under revenue-sharing arrangements  11,576   63,424   82,415 
 Amortization of unearned income on revenue-sharing arrangements  (7,998)  (58,379)  (82,033)
 Revenue from transfer of property, plant and equipment under revenue-sharing arrangements  765   34,828   — 
 Interest income/receivable  —   (45,835)  45,835 
 Equity in net loss of associated companies  41,178   —   — 
 Payments of liability of business acquisition and the related interest  —   —   (233,337)
 Consultant fees for acquisition of business  —   —   (27,797)
 Unrealized foreign exchange loss on liability of business acquisitions  —   —   342,073 
 Foreign exchange losses capitalized to property under construction  —   —   (74,283)
          
 Total temporary differences  608,917   515,445   1,715,813 
          
Permanent differences:            
 Net periodic post-retirement benefit cost  611,992   634,385   484,462 
 Amortization of goodwill  21,269   21,270   21,270 
 Amortization of discount on promissory notes  173,794   224,931   109,786 
 Tax penalties  216,198   —   14,645 
 Equity in net income of associates and subsidiaries  (2,238,300)  (3,313,831)  (3,939,944)
 Gain on sale of long-term investments  (3,166,086)  (38,425)  — 
 Interest income  (359,049)  —   — 
 Amortization of unearned income on revenue-sharing arrangements  (44,273)  —   — 

F-86

PERUSAHAAN PERSEROAN (PERSERO)
P.T. TELEKOMUNIKASI INDONESIA Tbk AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
DECEMBER 31, 2003 AND 2004, AND FOR YEARS ENDED
DECEMBER 31, 2002, 2003 AND 2004
(Figures in tables are presented in millions of Rupiah, unless otherwise stated)
             
  2002 2003 2004
       
Income from land/building rental  (65,175)  (40,380)  — 
Others  253,322   599,631   523,568 
          
Total permanent differences  (4,596,308)  (1,912,419)  (2,786,213)
          
Taxable income subject to corporate income tax  5,570,403   6,098,676   6,262,809 
          
Corporate income tax expense  1,671,104   1,829,585   1,878,825 
Final income tax expense  —   56,698   43,413 
          
Total current income tax expense of the Company  1,671,104   1,886,283   1,922,238 
Current income tax expense of the subsidiaries  1,076,658   1,904,997   2,344,873 
          
Total current income tax expense  2,747,762   3,791,280   4,267,111 
          
      In 2002, the Company received an Underpayment Tax Assessment Letter (SKPKB) from the Tax Service Office for its corporate income tax for fiscal years 2000 and 2001 amounting to Rp34,489 million and Rp19,568 million, respectively. The additional tax due was settled in December 2002 and the difference between the recorded amount of tax liabilities/prepayments and the amount assessed by the Tax Service Office was charged to the 2002 statement of income.

      In 2003, Telkomsel received tax assessment letters (SKPKB) for all taxes covering the fiscal years 2000 and 2001. Telkomsel filed an objection on a portion of the SKPKB for fiscal year 2001 assessments which was partly approved by Director of General of Taxes. As a result, Telkomsel charged tax underpayments to expense in 2003 amounting to Rp32,283 million.

F-87

PERUSAHAAN PERSEROAN (PERSERO)
P.T. TELEKOMUNIKASI INDONESIA Tbk AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
DECEMBER 31, 2003 AND 2004, AND FOR YEARS ENDED
DECEMBER 31, 2002, 2003 AND 2004
(Figures in tables are presented in millions of Rupiah, unless otherwise stated)
      e. Deferred tax assets and liabilities.

liabilities

The details of the Company’s and subsidiaries’ deferred tax assets and liabilities are as follows:
                                  
(Charged)/      (Charged)/  
Credited toAcquisition      Credited to  
December 31,StatementsofDecember 31,  December 31, Acquisition Statements December 31,
2001of IncomePramindo2002  2002 of AWI of Income 2003
         
The CompanyThe Company 
The Company
             
Deferred tax assets:Deferred tax assets: Deferred tax assets:             
Allowance for doubtful accounts 170,419 (69,030) — 101,389 Allowance for doubtful accounts  101,389  —  17,456  118,845 
Allowance for inventory obsolescence 11,911 (1,404) — 10,507 Allowance for inventory obsolescence  10,507  —  1,020  11,527 
Provision for early retirement benefits 42,000 159,294 — 201,294 Provision for impairment of property, plant and equipment  1,920  —  (1,920)  — 
Decline in value of investments 5,656 (5,656) — — Landrights  161  —  (707)  (546)
Long-term investments  52,605  —  (52,605)  — 
Provision for early retirement benefits  201,294  —  (161,451)  39,843 
Provision for employee bonuses  —  —  84,385  84,385 
Provision for long service awards  146,769  —  (4,685)  142,084 
         
Total deferred tax assetsTotal deferred tax assets  514,645  —  (118,507)  396,138 
         
Deferred tax liabilities:Deferred tax liabilities:             
Interest receivables  —  —  (13,750)  (13,750)
Long-term investments  —  —  (14,138)  (14,138)
Difference between book and tax property, plant and equipment’s net book value  (1,729,436)  (29,989)  190,750  (1,568,675)
Revenue-sharing arrangements  (18,119)  —  (40,334)  (58,453)
Intangible assets  (1,208,652)  (594,771)  275,625  (1,527,798)
Net periodic pension cost  (7,988)  —  (80,927)  (88,915)
         
Total deferred tax liabilitiesTotal deferred tax liabilities  (2,964,195)  (624,760)  317,226  (3,271,729)
         
Deferred tax liabilities of the Company, netDeferred tax liabilities of the Company, net  (2,449,550)  (624,760)  198,719  (2,875,591)
         
Deferred tax liabilities of the subsidiaries, netDeferred tax liabilities of the subsidiaries, net  (633,616)  230,966  (268,529)  (671,179)
         
Total deferred tax liabilities, netTotal deferred tax liabilities, net  (3,083,166)        (3,546,770)
         

F-82F-88

PERUSAHAAN PERSEROAN (PERSERO)
P.T. TELEKOMUNIKASI INDONESIA Tbk AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
DECEMBER 31, 20022003 AND 2003,2004, AND FOR YEARS ENDED
DECEMBER 31, 2001, 2002, 2003 AND 20032004
(Figures in tables are presented in millions of Rupiah, unless otherwise stated)
                                  
(Charged)/      (Charged)/  
Credited toAcquisition      Credited to  
December 31,StatementsofDecember 31,  December 31, Business Statements December 31,
 2003 Acquisitions of Income 2004
        
The Company
The Company
             
Deferred tax assets:Deferred tax assets:             
2001of IncomePramindo2002Allowance for doubtful accounts  118,845  —  88,834  207,679 
Allowance for inventory obsolescence  11,527  —  3,967  15,494 
Deferred stock issuance costs 5,382 (5,382) — — Long-term investments  (14,138)  —  18,823  4,685 
Landrights 618 (457) — 161 Provision for early retirement benefits  39,843  —  (39,843)  — 
Long-term investments — 52,605 — 52,605 Provision for employee bonuses  84,385  —  (41,720)  42,665 
Provision for long service awards 82,751 64,018 — 146,769 Provision for long service awards  142,084  —  22,666  164,750 
Provision for impairment of property, plant and equipment — 1,920 — 1,920 Liabilities of business acquisitions  —  985,609  24,323  1,009,932 
 
 
 
 
           
Total deferred tax assetsTotal deferred tax assets 318,737 195,908 — 514,645 Total deferred tax assets  382,546  985,609  77,050  1,445,205 
 
 
 
 
           
Deferred tax liabilities:Deferred tax liabilities: Deferred tax liabilities:             
Difference between book and tax property, plant and equipment’s net book value (1,451,655) (61,352) — (1,513,007)Interest receivables  (13,750)  —  13,750  — 
Revenue-sharing arrangements (19,417) 1,298 — (18,119)Difference between book and tax property, plant and equipment’s net book value  (1,568,675)  (713,140)  83,161  (2,198,654)
Net periodic pension cost (25,153) 17,165 — (7,988)Landrights  (546)  —  (1,025)  (1,571)
 
 
 
 
 Revenue-sharing arrangements  (58,453)  —  16,816  (41,637)
Intangible assets  (1,527,798)  (341,909)  255,321  (1,614,386)
Net periodic pension cost  (88,915)  —  61,011  (27,904)
         
Total deferred tax liabilitiesTotal deferred tax liabilities (1,496,225) (42,889) — (1,539,114)Total deferred tax liabilities  (3,258,137)  (1,055,049)  429,034  (3,884,152)
 
 
 
 
           
Deferred tax liabilities of the Company, netDeferred tax liabilities of the Company, net (1,177,488) 153,019 — (1,024,469)Deferred tax liabilities of the Company, net  (2,875,591)  (69,440)  506,084  (2,438,947)
 
 
 
 
           
Deferred tax liabilities of the subsidiaries, netDeferred tax liabilities of the subsidiaries, net (638,824)(*) (304,228) (1,115,645) (2,058,697)Deferred tax liabilities of the subsidiaries, net  (671,179)  —  (242,045)  (913,224)
 
 
 
 
           
Total deferred tax liabilities, netTotal deferred tax liabilities, net (1,816,312) (3,083,166)Total deferred tax liabilities, net  (3,546,770)        (3,352,171)
 
 
           
      The net deferred tax liabilities of subsidiaries as of December 31, 2004 included deferred tax assets of Rp239,501 million arising from tax loss carryforwards amounting to Rp798,337 million. The subsidiaries’ tax loss carryforwards of Rp160,196 million and Rp638,141 million will expire in 2005 and 2006, respectively. Realization of the deferred tax assets is dependent upon profitable operations. Although realization is not assured, the Company and its subsidiaries believe that it is probable that these deferred tax assets will be realized through the reduction of future taxable income. The amount of deferred tax assets considered realizable, however, could be reduced if actual future taxable income is lower than estimated.

(*) Including deferred tax asset of PT Infomedia Nusantara, a subsidiary, of Rp1,924 million presented separately in the “Advances and other non-current assets” as at 31 December 2001.

                  
(Charged)/
Credited to
December 31,StatementsAcquisitionDecember 31,
2002of Incomeof AWI2003
The Company                
Deferred tax assets:                
 Allowance for doubtful accounts  101,389   17,456   —   118,845 
 Allowance for inventory obsolescence  10,507   1,020   —   11,527 
 Provision for early retirement benefits  201,294   (161,451)  —   39,843 
 Landrights  161   (707)  —   (546)
 Long-term investments  52,605   (52,605)  —   — 
 Provision for employee bonuses  —   84,385   —   84,385 
 Provision for long service awards  146,769   (4,685)  —   142,084 
 Provision for impairment of property, plant and equipment  1,920   (1,920)  —   — 
   
   
   
   
 
Total deferred tax assets  514,645   (118,507)  —   396,138 
   
   
   
   
 

F-83F-89

PERUSAHAAN PERSEROAN (PERSERO)
P.T. TELEKOMUNIKASI INDONESIA Tbk AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
DECEMBER 31, 20022003 AND 2003,2004, AND FOR YEARS ENDED
DECEMBER 31, 2001, 2002, 2003 AND 20032004
(Figures in tables are presented in millions of Rupiah, unless otherwise stated)
                  
(Charged)/
Credited to
December 31,StatementsAcquisitionDecember 31,
2002of Incomeof AWI2003
Deferred tax liabilities:                
 Difference between book and tax property, plant and equipment’s net book value  (1,513,007)  125,567   —   (1,387,440)
 Interest receivables  —   (13,750)  —   (13,750)
 Long-term investments  —   (14,138)  —   (14,138)
 Revenue sharing arrangements  (18,119)  (40,334)  —   (58,453)
 Net periodic pension cost  (7,988)  (80,927)  —   (88,915)
   
   
   
   
 
Total deferred tax liabilities  (1,539,114)  (23,582)  —   (1,562,696)
   
   
   
   
 
Deferred tax liabilities of the Company, net  (1,024,469)  (142,089)  —   (1,166,558)
   
   
   
   
 
Deferred tax liabilities of the subsidiaries, net  (2,058,697)  72,279   (393,794)  (2,380,212)
   
   
   
   
 
Total deferred tax liabilities, net  (3,083,166)          (3,546,770)
   
           
 

     As of December 31, 2003, AWI had tax loss carryforwards of approximately Rp952,854 million, which will expire from 2005 through 2006.

     f. Administration

f. Administration
      Under the taxation laws of Indonesia, the Company submits tax returns on the basis of self-assessment. The tax authorities may assess or amend taxes within ten years from the date the tax became payable.

      The Company and its subsidiaries are being audited by the tax authorities for various fiscal years. These tax audits are not finalized at the date of these financial statements; however, management believes that the outcome of these tax audits will not be significant.

44.42. BASIC EARNINGS PER SHARE

      Net income per share is computed by dividing net income by the weighted average number of shares outstanding during the year, totaling 10,079,999,640 shares20,159,999,280 in 2001, 2002, 2003 and 2003.

2004. See also Notes 1b and 2t.

      The Company does not have potentially dilutive ordinary shares.

45.43. CASH DIVIDENDS AND GENERAL RESERVE

     Pursuant to the Annual General Meeting of Shareholders as stated in notarial deed No. 17 dated May 10, 2001 of A. Partomuan Pohan, S.H., LL.M., the stockholders approved the distribution of cash dividends for 2000 amounting to Rp888,654 million or Rp88.16 per share, and appropriation of Rp126,950 million for general reserve.

      Pursuant to the Annual General Meeting of Shareholders as stated in notarial deed No. 36 dated June 21, 2002 of A. Partomuan Pohan, S.H., LL.M., the stockholders approved the distribution of cash dividends for 2001 amounting to Rp2,125,055 million or Rp210.82 per share (pre-split), and appropriation of Rp425,012 million for general reserve.

F-84

PERUSAHAAN PERSEROAN (PERSERO)
P.T. TELEKOMUNIKASI INDONESIA Tbk AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

DECEMBER 31, 2002 AND 2003, AND FOR YEARS ENDED
DECEMBER 31, 2001, 2002 AND 2003
(Figures in tables are presented in millions of Rupiah, unless otherwise stated)

      Pursuant to the Annual General Meeting of Shareholders as stated in notarial deed No. 17/V/2003 dated May 9, 2003 of A. Partomuan Pohan, S.H., LL.M., the stockholders approved the distribution of cash dividends for 2002 amounting to Rp3,338,109 million or Rp331.16 per share (pre-split), and appropriation of Rp813,664 million for general reserve.

      In connection with the restatement of the consolidated financial statements for the three years ended December 31, 2002, the stockholders ratified the previous declaration of dividends in the Extraordinary General Meeting of Stockholders as stated in notarial deed No. 4 dated March 10, 2004 of Notary A. Partomuan Pohan, S.H., LLM. as follows:
• Dividends for 2002 amounting to Rp3,338,109 million or Rp331.16 per share (pre-split), social contribution fund (“Dana Bina Lingkungan”) of Rp20,863 million and appropriated Rp813,664 million for general reserves.
• Dividends for 2001 amounting to Rp2,125,055 million or Rp210.82 per share (pre-split), and appropriated Rp425,012 million for general reserves.
• Dividends for 2000 amounting to Rp888,654 million or Rp88.16 per share (pre-split), and appropriated Rp126,950 million for general reserves.
      Pursuant to the Annual General Meeting of Shareholders as stated in notarial deed No. 25 dated July 30, 2004 of A. Partomuan Pohan, S.H., LL.M., the stockholders approved the distribution of cash dividends for 2003 amounting to Rp3,043,614 million or Rp301.95 per share (pre-split) and appropriation of Rp121,745 million for general reserve.

F-90

46.PERUSAHAAN PERSEROAN (PERSERO)
P.T. TELEKOMUNIKASI INDONESIA Tbk AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
DECEMBER 31, 2003 AND 2004, AND FOR YEARS ENDED
DECEMBER 31, 2002, 2003 AND 2004
(Figures in tables are presented in millions of Rupiah, unless otherwise stated)
      On December 7, 2004, the Company decided to distribute 2004 interim cash dividends of Rp143,377 million or Rp7.11 per share to the Company’s stockholders.
44. PENSION PLANPLANS

     a. The Company

a. The Company
      The Company providessponsors a defined benefit pension plan and a defined contribution plan.
      The defined benefit pension plan is provided for employees hired with permanent status prior to July 1, 2002. The pension benefits are paid based on the participating employees’ latest basic salary at retirement and years of service. The plan is managed by DanaTelkom Pension Fund (Dana Pensiun Telkom.Telkom). The participating employees contribute 18% (before March 2003: 8.4%) of their basic salaries to the plan. The Company’s contributions to the pension fund for the years ended December 31, 2001, 2002, 2003 and 20032004 amounted to Rp129,252 million, Rp297,352 million, Rp486,324 million and Rp460,576Rp839,980 million, respectively. In addition, the pension contribution of KSO Units during 2003 amounted to the Rp20,709 million.

      In 2002, the Company added doubleamended its defined pension benefit plan to increase the pension benefits for certain participating employees above 56 years of age, beneficiaries of deceased participating employees or employees with physical disabilities. The increase applies to participating employees who retired on or after July 1, 2002. The Company also increased pension benefits for employees who retired prior to August 1, 2000 by 50%, effective January 1, 2003.

      The defined contribution plan is provided for employees hired with permanent status on or after July 1, 2002. The plan is managed by a financial institution pension fund (Dana Pensiun Lembaga Keuangan). The Company’s annual contribution to the defined contribution plan is determined based on a certain percentage of the participants’ salaries and amounted to Rp124 million and Rp399 million in 2003 and 2004, respectively.
The following table presents the change in benefit obligation, the change in plan assets, funded status of the plan and the net amount recognized in the Company’s balance sheets as of December 31, 20022003 and 2003:2004 for its defined benefit pension plan:
         
20022003
Change in benefit obligation
        
Benefit obligation at beginning of year  2,289,134   4,248,110 
Service cost  90,869   119,089 
Interest cost  418,044   537,797 
Employee contributions  31,939   40,530 
Benefits paid  (186,805)  (222,421)
Plan amendment  1,676,601   — 
Actuarial (gain) loss  (71,672)  2,129,818 
   
   
 
Benefit obligation at end of year  4,248,110   6,852,923 
   
   
 
Change in plan assets
        
Fair value of plan assets at beginning of year  2,571,714   3,099,648 
Employer contributions  359,725   521,816 
Actual return on plan assets  343,121   421,706 
         
  2003 2004
     
Change in benefit obligation
        
Benefit obligation at beginning of year  4,248,110   6,852,923 
Service cost  119,089   137,264 
Interest cost  537,797   740,494 
Plan participants’ contributions  35,173   43,906 
Actuarial loss (gain)  2,284,868   (155,128)
Benefits paid  (372,114)  (304,277)
       
Benefit obligation at end of year  6,852,923   7,315,182 
       

F-85F-91

PERUSAHAAN PERSEROAN (PERSERO)
P.T. TELEKOMUNIKASI INDONESIA Tbk AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
DECEMBER 31, 20022003 AND 2003,2004, AND FOR YEARS ENDED
DECEMBER 31, 2001, 2002, 2003 AND 20032004
(Figures in tables are presented in millions of Rupiah, unless otherwise stated)
                
20022003 2003 2004
    
Change in plan assets
       
Fair value of plan assets at beginning of year  3,099,648  3,671,309 
Actual return on plan assets  422,278  633,605 
Employer contribution  486,324  839,980 
Plan participants’ contributions  35,173  43,906 
Benefits paid (186,805) (222,421)  (372,114)  (304,277)
Actuarial gain (loss) 11,893 (149,440)
 
 
      
Fair value of plan assets at end of year 3,099,648 3,671,309   3,671,309  4,884,523 
 
 
      
Funded status (1,148,462) (3,181,614)  (3,181,614)  (2,430,659)
Unamortized net amount resulting from changes in plan experience and actuarial assumptions (820,394) 1,663,963 
Unamortized prior service cost 1,812,198 1,655,412 
Unrecognized prior service cost  1,655,412  1,498,628 
Unrecognized net actuarial loss  1,663,963  901,674 
Unrecognized net obligation at the date of initial application of PSAK No. 24 177,525 148,891   148,891  120,257 
 
 
      
Prepaid pension cost
 20,867 286,652 
Prepaid pension benefit costs
  286,652  89,900 
 
 
      

      Plan assets consist mainly of Rupiah time deposits.

deposits at December 31, 2003 and Indonesian Government Bonds at December 31, 2004.

      The unrecognized net obligation at the date of initial application of PSAK No. 24 is amortized over the expected average remaining working lives of active employees, i.e., 17.2 years, starting from January 1, 1992.

The actuarial valuations for the defined benefit pension plan performed based on measurement date of December 31 for each of the years were prepared on February 4, 2002, February 28, 2003, and May 21, 2004 and March 15, 2005, respectively, by PT Watson Wyatt Purbajaga, an independent actuary in association with Watson Wyatt Worldwide. The principal actuarial assumptions used by the independent actuary as of December 31, 2001, 2002, 2003 and 20032004 are as follows:follows.
            
200120022003           
 2002 2003 2004
%%%      
Discount rate 13 13 11   13%  11%  11%
Expected long-term return on plan assets 13 13 11   13%  11%  10.5%
Salary growth rate 6 6 8 
Rate of compensation increase  6%  8%  8%

The components of net periodic pension cost recognized are as follows:

             
200120022003
Service cost  32,441   65,661   89,193 
Interest cost  277,077   418,044   537,797 
Expected return on plan assets  (266,324)  (343,121)  (421,706)
Net amortization and deferral  17,624   132,928   (176,465)
Increase in amortization of prior service cost  23,806   88,786   156,784 
   
   
   
 
Net periodic pension cost (Note 40)  84,624   362,298   185,603 
   
   
   
 

     In addition, the pension cost charged to the KSO Units amounted to Rp27,188 million, Rp25,207 million and Rp29,896 million in 2001, 2002 and 2003, respectively.

F-86F-92

PERUSAHAAN PERSEROAN (PERSERO)
P.T. TELEKOMUNIKASI INDONESIA Tbk AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
DECEMBER 31, 20022003 AND 2003,2004, AND FOR YEARS ENDED
DECEMBER 31, 2001, 2002, 2003 AND 20032004
(Figures in tables are presented in millions of Rupiah, unless otherwise stated)

      The components of net periodic pension cost recognized are as follows:
             
  2002 2003 2004
       
Service cost  90,869   119,089   137,264 
Interest cost  418,044   537,797   740,494 
Expected return on plan assets  (343,121)  (421,706)  (436,672)
Amortization of prior service cost  88,786   156,784   156,784 
Recognized actuarial loss (gain)  104,293   (205,099)  415,991 
Amortization of net obligation at the date of initial application of PSAK No. 24  28,634   28,634   28,634 
          
Net periodic pension cost  387,505   215,499   1,042,495 
Amounts charged to KSO Units under contractual agreement  (25,207)  (29,896)  (16,369)
          
Total net periodic pension cost less amounts charged to KSO Units (Note 38)  362,298   185,603   1,026,126 
          
     b. Telkomsel

      Telkomsel provides a defined benefit pension plan tofor its employees under which pension benefits to be paid are based on the employee’s latest basic salary and number of years of service. PT Asuransi Jiwasraya (“Jiwasraya”), a state-owned life insurance company, manages the plan. The employees contribute 5% of their final monthly basic salaries to the plan and Telkomsel contributes any remaining amount required to fund the plan.

      Telkomsel’s contributions to Jiwasraya amounted to Rp3,080 million, Rp5,163 million, and Rp3,081 million and nil for the years ended 2001, 2002, 2003 and 2003,2004, respectively.

The components of the net periodic pension cost are as follows:
             
200120022003
Service cost  2,247   2,651   3,068 
Net amortization and deferral  (943)  (533)  2,243 
   
   
   
 
Net periodic pension cost  1,304   2,118   5,311 
   
   
   
 
             
  2002 2003 2004
       
Service cost  2,651   3,068   4,155 
Interest cost  —   2,499   3,889 
Expected return on plan assets  (512)  (1,013)  (824)
Amortization of prior service cost (gain)  431   —   (63)
Recognized actuarial loss (gain)  (452)  579   1,158 
Amortization of net obligation at the date of initial application of PSAK No. 24  —   178   178 
          
Net periodic pension cost (Note 38)  2,118   5,311   8,493 
          

The net periodic pension cost for the pension plan is calculated based on the actuarial calculation prepared by PT Watson Wyatt Purbajaga, an independent actuary in association with Watson Wyatt

F-93

PERUSAHAAN PERSEROAN (PERSERO)
P.T. TELEKOMUNIKASI INDONESIA Tbk AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
DECEMBER 31, 2003 AND 2004, AND FOR YEARS ENDED
DECEMBER 31, 2002, 2003 AND 2004
(Figures in tables are presented in millions of Rupiah, unless otherwise stated)
Worldwide. The principal actuarial assumptions used by the independent actuary performed based on measurement date of December 31 for each of the years as of December 31, 2002 and 2003 are as follows:
                     
200120022003 2002 2003 2004
      
Discount rate 12% 12% 11%   12%  11%  11%
Expected long-term return on plan assets 12% 12% 7.5%   12%  7.5%  7.5%
Salary growth rate 10% 10% 9% 
Rate of compensation increase  10%  9%  9%

The reconciliation of the funded status of the plan with the net amount recognized in the balance sheets of Telkomsel as of December 31, 20022003 and 20032004 is as follows:
         
20022003
Projected benefit obligation  20,927   35,502 
Plan assets at fair value  27,919   8,504 
   
   
 
Excess (shortages) of plan assets over projected benefit obligation  6,992   (26,998)
Unrecognized past service cost  3,135   1,443 
Unrecognized experience adjustment  (2,813)  23,718 
   
   
 
Prepaid (unfunded) pension cost  7,314   (1,837)
   
   
 
         
  2003 2004
     
Projected benefit obligation  (35,502)  (43,547)
Fair value of plan assets  8,504   11,182 
       
Funded status  (26,998)  (32,365)
Unrecognized prior service gain  (1,097)  (1,034)
Unrecognized net actuarial loss  23,718   20,707 
Unrecognized net obligation at the date of initial application of PSAK No. 24  2,540   2,362 
       
Accrued pension benefit costs  (1,837)  (10,330)
       

      The unrecognized net obligation at the date of initial application of PSAK No. 24 is amortized over the expected average remaining service period of active employees, i.e., 18.87 years, as of June 1, 1999.
     c. Infomedia
      Infomedia provides a defined benefit pension plan for its employees. The reconciliation of the funded status of the plan with the net amount recognized in the balance sheets as of December 31, 2003 and 2004 is as follows:
         
  2003 2004
     
Projected benefit obligation  (3,774)  (4,051)
Fair value of plan assets  4,432   5,413 
       
Funded status  658   1,362 
Unrecognized prior service cost  1,259   — 
Unrecognized net actuarial gain  (347)  — 
       
Prepaid pension benefit cost  1,570   1,362 
       
      The net periodic pension cost of Infomedia amounted to Rp274 million, Rp60 million and Rp187 million for the years ended December 31, 2002, 2003 and 2004, respectively.
     d. Obligation Under Labor Law
      Under Law No. 13/2003 concerning labor regulation, the Company and its subsidiaries are required to provide a minimum pension benefit, if not already covered by the sponsored pension plans, to their employees upon retiring at the age of 55. The total related obligation recognized as of

F-87F-94

PERUSAHAAN PERSEROAN (PERSERO)
P.T. TELEKOMUNIKASI INDONESIA Tbk AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
DECEMBER 31, 20022003 AND 2003,2004, AND FOR YEARS ENDED
DECEMBER 31, 2001, 2002, 2003 AND 20032004
(Figures in tables are presented in millions of Rupiah, unless otherwise stated)

     c. Other Subsidiaries

Infomedia

Infomedia provides a defined benefit pension plans to their employees. The funding status of the plan as of December 31, 2003 is as follows:

2003
Projected benefit obligation(3,774)
Fair value of plan assets4,432
Funded status658
Unamortized past service cost1,259
Unamortized experience adjustments(497)
Unamortized changes in actuarial assumptions150
Prepaid pension cost recognized in the balance sheet1,570
Other

     In other subsidiaries that no pension plans are provided,and 2004 amounted to Rp11,402 million and Rp21,677 million, respectively. The total related employee benefit cost charged to expense amounted to Rp4,439 million and Rp11,510 million for the obligation for pension benefits is calculated based on Law No. 13 of 2003 concerning labor regulation. Total obligation recognized as ofyears ended December 31, 2003 was Rp576 million.

and 2004, respectively.

47.45. LONG SERVICE AWARDS

     a. The Company
      The Company provides certain cash awards tofor its employees who meet certain length of service requirement. The benefits which are either paid at the time the employee reaches certain anniversary dates during active employment, upon resignation, retirement or termination, are as follows:

     Awards paid during active employment:

     i. Karya Bhakti — long term award
     ii. Long leave allowance

     Awards payable upon resignation, retirement or termination:

     i. Purnabhakti award and Pengabdian award
     ii. Last housing allowance
     iii. Last transportation allowance

termination.

      The actuarial valuations for the long service awards performed based on measurement date of December 31 for the year 2001 and 2002 werewas prepared on January 15, 2004, while the actuarial valuations as of December 31, 2003 wasand 2004 were prepared on May 21, 2004 and March 15, 2005, respectively, by PT Watson Wyatt Purbajaga, an independent actuary in association with Watson Wyatt Worldwide, using the Projected Unit Credit

F-88

PERUSAHAAN PERSEROAN (PERSERO)
P.T. TELEKOMUNIKASI INDONESIA Tbk AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

DECEMBER 31, 2002 AND 2003, AND FOR YEARS ENDED
DECEMBER 31, 2001, 2002 AND 2003
(Figures in tables are presented in millions of Rupiah, unless otherwise stated)

Method. The principal actuarial assumptions used by the independent actuary as of December 31, 2001, 2002, 2003 and 20032004 are as follows:

                        
200120022003 2002 2003 2004
      
Discount rate 13% 13% 11%  13%  11%  11%
Salary growth rate 8% 8% 8%
Rate of compensation increase  8%  8%  8%

The movement of the long service awards during the years ended December 31, 2001, 2002, 2003 and 20032004 is as follows:
                  
200120022003 2002 2003 2004
      
Liability at beginning of year 210,159 275,834 489,231   275,834  489,231  473,614 
Net periodic benefit cost (Note 40) 94,540 289,922 207,126 
Net periodic benefit cost (Note 38)  289,922  207,126  153,610 
Benefits paid (28,865) (76,525) (222,743)  (76,525)  (222,743)  (78,057)
 
 
 
        
Liability at end of year 275,834 489,231 473,614   489,231  473,614  549,167 
 
 
 
        

     b. Telkomsel
      Telkomsel provides certain cash awards for its employees based on the employees’ length of service. The benefits are either paid at the time the employee reaches certain anniversary dates during employment, upon retirement or at the time of termination.
      The obligation with respect to these awards is determined based on actuarial valuation using the Projected Unit Credit Method, and amounted to Rp17,423 million and Rp23,136 million as of December 31, 2003 and 2004, respectively. The related benefit cost charged to expense amounted to Rp5,310 million, Rp12,113 million and Rp5,713 million for the years ended December 31, 2002, 2003 and 2004, respectively.
48.46. POST-RETIREMENT BENEFITS

      The Company provides a post-retirement health care plan for all of its employees hired before November 1, 1995 who have worked for the Company for 20 years or more when they retire, and to their eligible dependents. The requirement of working for over 20 or more years does not apply to

F-95

PERUSAHAAN PERSEROAN (PERSERO)
P.T. TELEKOMUNIKASI INDONESIA Tbk AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
DECEMBER 31, 2003 AND 2004, AND FOR YEARS ENDED
DECEMBER 31, 2002, 2003 AND 2004
(Figures in tables are presented in millions of Rupiah, unless otherwise stated)
employees who retired prior to June 3, 1995. However, the employees hired by the Company starting from November 1, 1995 will no longer be entitled to this plan. The plan is managed by Yayasan Kesehatan Pegawai Telkom (“YKPT”).

The components of net periodic post-retirement benefit cost are as follows:
                    
200120022003 2002 2003 2004
      
Service cost 46,689 69,345 80,599   83,956  88,394  76,163 
Interest cost 298,541 424,834 493,596   424,834  493,596  411,110 
Expected return on plan assets (49,011) (33,744) (56,004)  (33,744)  (56,004)  (61,084)
Amortization of prior service gain  (395)  (368)  (368)
Recognized actuarial loss  80,683  99,287  52,007 
Amortization of unrecognized transition obligation 26,213 26,213 24,325   26,213  24,325  24,325 
Amortization of prior service cost (395) (395) (368)
Amortization of gain/losses 52,473 80,683 99,287 
Net curtailment gain/loss — 49,576 — 
Net curtailment loss  49,576  —  — 
 
 
 
        
Net periodic post-retirement benefit cost (Note 40) 374,510 616,512 641,435 
Net periodic post-retirement benefit cost  631,123  649,230  502,153 
Amounts charged to KSO Units under contractual agreement  (14,611)  (7,795)  (9,913)
 
 
 
        
Total net periodic post-retirement benefit cost less amounts charged to KSO Units (Note 38)  616,512  641,435  492,240 
       

     In addition, the cost of post-retirement benefits charged to the KSO Units amounted to Rp16,212 million, Rp14,611 million and Rp7,795 million in 2001, 2002 and 2003, respectively.

      The actuarial valuations for the post-retirement benefit planhealth care benefits performed based on measurement date of December 31 for each of the years wereyear 2002 was prepared on January 15, 2004, while the valuation for the post-retirement benefitsactuarial valuations as of December 31, 2003 wasand 2004 were prepared on May 21, 2004 and March 15, 2005, respectively, by PT Watson Wyatt Purbajaga, an independent actuary in association with Watson Wyatt Worldwide.

F-89

PERUSAHAAN PERSEROAN (PERSERO)Worldwide, using the Projected Unit Credit Method.
P.T. TELEKOMUNIKASI INDONESIA Tbk AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

DECEMBER 31, 2002 AND 2003, AND FOR YEARS ENDED
DECEMBER 31, 2001, 2002 AND 2003
(Figures in tables are presented in millions of Rupiah, unless otherwise stated)

The principal actuarial assumptions used by the independent actuary as of December 31, 2001, 2002, 2003 and 20032004 are as follows:

                  
200120022003 2002 2003 2004
      
Discount rate 13% 13% 11%   13%  11%  11% 
Expected return on plan assets 13% 13% 11% 
Expected long-term return on plan assets  13%  11%  8% 
Health care cost trend rate assumed for next year 16% 14% 12%   14%  12%  12% 
The ultimate trend rate 10% 10% 8%   10%  8%  8% 
Year that the rate reaches the ultimate trend rate 2005 2005 2006   2005  2006  2007 

The following table presents the change in benefit obligation, the change in plan assets, funded status of the plan and the net amount recognized in the Company’s balance sheets as of December 31, 20022003 and 2003:2004:
         
20022003
Change in benefit obligation
        
Benefit obligation at beginning of year  3,286,991   3,812,781 
Service cost  69,345   80,599 
Interest cost  424,834   493,596 
Benefits paid  (70,491)  (93,420)
Actuarial (gain) loss  102,102   (544,785)
   
   
 
Benefit obligation at end of year  3,812,781   3,748,771 
   
   
 
Change in plan assets
        
Fair value of plan assets at beginning of year  330,461   343,896 
Employer contributions  59,543   180,580 
Actual return on plan assets  53,287   56,004 
Benefits paid  (79,851)  (98,612)
Actuarial gain (loss)  (19,544)  (14,972)
   
   
 
Fair value of plan assets at end of year  343,896   466,896 
   
   
 
Funded status  (3,468,885)  (3,281,875)
Unrecognized net transition obligation  291,899   267,574 
Unrecognized prior service gain  (2,301)  (1,934)
Unrecognized net losses  1,576,793   952,885 
   
   
 
Accrued post-retirement benefit cost  (1,602,494)  (2,063,350)
   
   
 
         
  2003 2004
     
Change in benefit obligation
        
Benefit obligation at beginning of year  3,843,604   3,787,389 
Service cost  88,394   76,163 
Interest cost  493,596   411,110 
Actuarial (gain) loss  (539,593)  529,618 
Benefits paid  (98,612)  (123,275)
       
Benefit obligation at end of year  3,787,389   4,681,005 
       

F-96

PERUSAHAAN PERSEROAN (PERSERO)
P.T. TELEKOMUNIKASI INDONESIA Tbk AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
DECEMBER 31, 2003 AND 2004, AND FOR YEARS ENDED
DECEMBER 31, 2002, 2003 AND 2004
(Figures in tables are presented in millions of Rupiah, unless otherwise stated)
         
  2003 2004
     
Change in plan assets
        
Fair value of plan assets at beginning of year  374,446   505,340 
Actual return on plan assets  41,033   32,173 
Employer contributions  188,473   724,530 
Benefits paid  (98,612)  (123,275)
       
Fair value of plan assets at end of year  505,340   1,138,768 
       
Funded status  (3,282,049)  (3,542,237)
Unrecognized prior service gain  (1,934)  (1,566)
Unrecognized net actuarial loss  952,885   1,459,408 
Unrecognized net transition obligation  267,574   243,249 
       
Accrued post-retirement benefit costs
  (2,063,524)  (1,841,146)
       
      The transition obligation at the date of initial application of Rp524,250 million is amortized over 20 years, beginning on January 1, 1995.

A 1% increase in the cost trend rate would result in service cost and interest cost, and accumulated post-retirement benefit obligation as of December 31, 2001, 2002, 2003 and 20032004 as follows:
                        
20012002*2003 2002* 2003 2004
      
Service cost and interest cost 623,715 664,741 594,958   664,741  594,958  723,941 
Accumulated post-retirement benefit obligation 3,981,842 4,473,675 4,545,961   4,473,675  4,545,961  5,597,965 

* before curtailment

F-90

PERUSAHAAN PERSEROAN (PERSERO)
P.T. TELEKOMUNIKASI INDONESIA Tbk AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

DECEMBER 31, 2002 AND 2003, AND FOR YEARS ENDED
DECEMBER 31, 2001, 2002 AND 2003
(Figures in tables are presented in millions of Rupiah, unless otherwise stated)

49.47. RELATED PARTY INFORMATION

      In the normal course of business, the Company and its subsidiaries entered into transactions with related parties. It is the Company’s policy that the pricing of these transactions be the same as those of arms-length transactions.

      The following are significant agreements/transactions with related parties:

     a. Government of the Republic of Indonesia

       i. The Company obtained “two-step loans” from the Government of the Republic of Indonesia, the Company’s majority stockholder.
Interest expense for two-step loans amounted to Rp960,424 million, Rp968,973 million, and Rp755,517 million and Rp489,220 million in 2001, 2002, 2003 and 20032004, respectively. Interest expense for two-step loan reflected 72.23%61.2%, 61.22%54.6% and 54.61%38.5% of total interest expensesexpense in 2001, 2002, 2003 and 2003,2004, respectively.
 
       ii. The Company and its subsidiarysubsidiaries pay concession fees for telecommunications services provided and radio frequency usage charges to the Ministry of Communications (formerly, Ministry of Tourism, Post and Telecommunications) of the Republic of Indonesia.
Concession fees amounted to Rp63,561 million, Rp163,891 million, and Rp238,979 million and Rp314,741 million in 2001, 2002, 2003 and 2003,2004, respectively. Concession fees reflected 0.7%1.4%, 1.4%1.6% and 1.6% of total operating expenses in 2001, 2002, 2003 and 2003,2004, respectively. Radio frequency usage charges amounted to Rp101,305Rp292,703 million, Rp292,703

F-97

PERUSAHAAN PERSEROAN (PERSERO)
P.T. TELEKOMUNIKASI INDONESIA Tbk AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
DECEMBER 31, 2003 AND 2004, AND FOR YEARS ENDED
DECEMBER 31, 2002, 2003 AND 2004
(Figures in tables are presented in millions of Rupiah, unless otherwise stated)
Rp371,740 million and Rp371,740Rp492,568 million in 2001, 2002, 2003 and 2003,2004, respectively. Radio frequency usage charges reflected 1.1%2.5%, 2.5% and 2.5% of total operating expenses in 2001, 2002, 2003 and 2003,2004, respectively.

     b. Commissioners and Directors Remuneration

       i. The Company and its subsidiaries provide honorarium and facilities to support the operational duties of the Board of Commissioners. The total of such benefits amounted to Rp7,189 million, Rp8,706 million, and Rp14,047 million and Rp22,700 million in 2001, 2002, 2003 and 2003,2004, respectively, which reflected 0.1%, 0.1% and 0.1% of total operating expenses in 2001, 2002, 2003 and 2003,2004, respectively.
 
       ii. The Company and its subsidiaries provide salaries and facilities to support the operational duties of the Board of Directors. The total of such benefits amounted to Rp30,329 million, Rp35,106 million, and Rp45,586 million, and Rp50,327 million in 2001, 2002, 2003 and 2003,2004, respectively, which reflected 0.3%, 0.3% and 0.3% of total operating expenses in 2001, 2002, 2003 and 2003,2004, respectively.

     c. Indosat including Satelindo

     The Company has an agreement with Indosat for the provision of international telecommunications services to the public.

      Following the merger of Indosat, PT Indosat Multimedia Mobile (“IM3”), Satelindo and PT Bimagraha Telekomindo on November 20, 2003, all rights and obligations arising from the agreements entered by the Company with IM3 and Satelindo were transferred to Indosat. The Company has an agreement with Indosat for the provision of international telecommunications services to the public.
      The principal matters covered by the agreement are as follows:

       i. The Company provides a local network for customers to make or receive international calls. Indosat provides the international network for the customers, except for certain border towns, as determined by the Director General of Post and Telecommunications of the Republic of Indonesia. The international telecommunications services include telephone, telex, telegram, package

F-91

PERUSAHAAN PERSEROAN (PERSERO)
P.T. TELEKOMUNIKASI INDONESIA Tbk AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

DECEMBER 31, 2002 AND 2003, AND FOR YEARS ENDED
DECEMBER 31, 2001, 2002 AND 2003
(Figures in tables are presented in millions of Rupiah, unless otherwise stated)

switched data network, television, teleprinter, Alternate Voice/ Data Telecommunications (“AVD”), hotline and teleconferencing.
 
       ii. The Company and Indosat are responsible for their respective telecommunications facilities.
 
       iii. Customer billing and collection, except for leased lines and public phones located at the international gateways, are handled by the Company.
 
       iv. The Company receives compensation for the services provided in the first item above, based on the interconnection tariff determined by the Minister of Communications of the Republic of Indonesia.
      The Company has also entered into an interconnection agreement between the Company’s fixed-line network and Indosat’s cellular network in connection with the implementation of Indosat Multimedia Mobile services and the settlement of the related interconnection rights and obligations.
      The Company also has an agreement with Indosat for the interconnection of Indosat’s GSM mobile cellular telecommunications network with the Company’s PSTN, enabling the

     The Company has also entered into an interconnection agreement between the Company’s fixed-line network and Indosat’s cellular networkF-98

PERUSAHAAN PERSEROAN (PERSERO)
P.T. TELEKOMUNIKASI INDONESIA Tbk AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
DECEMBER 31, 2003 AND 2004, AND FOR YEARS ENDED
DECEMBER 31, 2002, 2003 AND 2004
(Figures in connection with the implementationtables are presented in millions of Indosat Multimedia Mobile services and the settlement of the related interconnection rights and obligations.

     Pursuant to the Ministry of Communications Decree regarding the transfer of the license for Indosat’s mobile cellular network operation from Indosat to PT Indosat Multimedia Mobile (“IM3”), the Company agreed to transfer all interconnection rights and obligations to IM3 based on Interconnection Cooperation Agreement, as regulated in the Amendment of Agreement in the side letter No. 656 dated March 18, 2002.

     The Company’s compensation relating to leased lines/channel services, such as International Broadcasting System (“IBS”), AVD and bill printing is calculated at 15% of Indosat’s revenues from such services.

     Indosat also leases circuits from the Company to link Jakarta, Medan and Surabaya.

     The Company has been handling customer billings and collections for Indosat. Indosat is gradually taking over the activities and performing its own direct billing and collection. The Company receives compensation from Indosat computed at 1% of the collections made by the Company beginning January 1, 1995, plus the billing process expenses which are fixed at a certain amount per record.

     Telkomsel also entered into an agreement with Indosat for the provision of international telecommunications services to GSM mobile cellular customers. The principal matters covered by the agreement are as follows:

Rupiah, unless otherwise stated)

Company’s customers to make outgoing calls to or receive incoming calls from Indosat’s customers.
      The Company’s compensation relating to leased lines/channel services, such as International Broadcasting System (“IBS”), AVD and bill printing is calculated at 15% of Indosat’s revenues from such services. Through year-end 2003, Indosat leased circuits from the Company to link Jakarta, Medan and Surabaya. In 2004, Indosat did not use this service.
      The Company has been handling customer billings and collections for Indosat. Indosat is gradually taking over the activities and performing its own direct billing and collection. The Company receives compensation from Indosat computed at 1% of the collections made by the Company beginning January 1, 1995, plus the billing process expenses which are fixed at a certain amount per record.
      Telkomsel also entered into an agreement with Indosat for the provision of international telecommunications services to GSM mobile cellular customers. The principal matters covered by the agreement are as follows:
       i. Telkomsel’s GSM mobile cellular telecommunications network is connected to Indosat’s international gateway exchanges to make outgoing or receive incoming international calls through Indosat’s international gateway exchanges.
 
       ii. Telkomsel’s GSM mobile cellular telecommunications network is connected to Indosat’s mobile cellular telecommunications network, enabling Telkomsel’s cellular subscribers to make outgoing calls to or receive incoming calls from Indosat’s cellular subscribers.
 
       iii. Telkomsel receives as compensation for the interconnection, a specific percentage of Indosat’s revenues from the related services which are made through Indosat’s international gateway exchanges and mobile cellular telecommunications network.

F-92

PERUSAHAAN PERSEROAN (PERSERO)
P.T. TELEKOMUNIKASI INDONESIA Tbk AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

DECEMBER 31, 2002 AND 2003, AND FOR YEARS ENDED
DECEMBER 31, 2001, 2002 AND 2003
(Figures in tables are presented in millions of Rupiah, unless otherwise stated)

       iv. Billings for calls made by Telkomsel’s customers are handled by Telkomsel. Telkomsel is obliged to pay Indosat’s share of revenue regardless whether billings to customers have been collected.
 
       v. The provision and installation of the necessary interconnection equipment is Telkomsel’s responsibility. Interconnection equipment installed by one of the parties in another party’s locations shall remain the property of the party installing such equipment. Expenses incurred in connection with the provision of equipment, installation and maintenance are borne by Telkomsel.

     Telkomsel also has an agreement with Indosat on the usage of Indosat’s telecommunications facilities. The agreement, which was made in 1997 and is valid for eleven years, is subject to change based on an annual review and mutual agreement by both parties. The charges for the usage of the facilities amounted to Rp13,372 million, Rp12,703 million and Rp17,933 million in 2001, 2002 and 2003, respectively, reflecting 0.2%, 0.1% and 0.1% of total operating expenses in 2001, 2002 and 2003, respectively. Other agreements between Telkomsel and Indosat are as follows:

      Telkomsel also has an agreement with Indosat on the usage of Indosat’s telecommunications facilities. The agreement, which was made in 1997 and is valid for eleven years, is subject to change based on an annual review and mutual agreement by both parties. The charges for the usage of the facilities amounted to Rp12,703 million, Rp17,933 million and Rp19,101 million in 2002, 2003 and 2004, respectively, reflecting 0.1%, 0.1% and 0.1% of total operating expenses in 2002, 2003 and 2004, respectively. Other agreements between Telkomsel and Indosat are as follows:
       i. Agreement on Construction and Maintenance for Jakarta-Surabaya Cable System (“J — SJ-S Cable System”).

F-99

PERUSAHAAN PERSEROAN (PERSERO)
P.T. TELEKOMUNIKASI INDONESIA Tbk AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
DECEMBER 31, 2003 AND 2004, AND FOR YEARS ENDED
DECEMBER 31, 2002, 2003 AND 2004
(Figures in tables are presented in millions of Rupiah, unless otherwise stated)
       On October 10, 1996, Telkomsel, Lintasarta, Satelindo and Indosat (the “Parties”) entered into an agreement on the construction and maintenance of the J-S Cable System. The partiesParties have formed a management committee which consists of a chairman and one representative offrom each of the partiesParties to direct the construction and operation of the cable system. The construction of the cable system was completed in 1998. In accordance with the agreement, Telkomsel shared 19.325% of the total construction cost. Telkomsel shares in the operatingOperating and maintenance costs are shared based on an agreed formula.
 
       The cost of operationTelkomsel’s share in operating and maintenance sharedcosts amounted to Rp1,359 million, Rp956 million, Rp1,393 million and Rp1,393Rp2,098 million for the years 2001, 2002, 2003 and 2003,2004, respectively.
 
       ii. Indefeasible Right of Use Agreement
 
       On September 21, 2000, Telkomsel entered into agreement with Indosat on the use of SEA — ME — WE 3 and tail link in Jakarta and Medan. In accordance with the agreement, Telkomsel was granted an indefeasible right to use certain capacity of the Link starting from September 21, 2000 until September 20, 2015 in return for an upfront payment of US$2,727,273.2.7 million. In addition to the upfront payment, Telkomsel is also charged annual operationoperating and maintenance costs amounting to US$136,364.0.1 million.
 
       Pursuant to the expiration of the agreement between Telkomsel and Indosat with regard to the provision of international telecommunication services to GSM mobile cellular customers, in April 2004 Telkomsel and Indosat entered into an interim agreement. Under the terms of the interim agreement, Telkomsel receives 27% of the applicable tariff for outgoing international calls from Telkomsel subscribers and Rp800 per minute for incoming international calls to Telkomsel subscribers. The interim agreement is effective from March 1, 2004 until such date that Telkomsel and Indosat enter into a new agreement.
      The Company and its subsidiaries earned net interconnection revenues from Indosat (including IM3 and Satelindo) of Rp950,687 million and Rp235,655 million in 2002 and 2003, respectively, reflecting 4.6% and 0.9% of total operating revenues in 2002 and 2003, respectively. The Company and its subsidiaries were charged net interconnection charges from Indosat of Rp158,285 million in 2004, reflecting 0.5% of total operating revenues in 2004.
      The Company leased international circuits from Indosat. Payments made in relation to the lease expense amounted to Rp32,885 million and Rp30,239 million in 2002 and 2003, respectively, which reflected 0.3% and 0.2% of total operating expenses for 2002 and 2003, respectively.
      In 1994, the Company transferred to Satelindo the right to use a parcel of Company-owned land located in Jakarta which had been previously leased to Telekomindo. Based on the transfer agreement, Satelindo is given the right to use the land for 30 years and can apply for the right to build properties thereon. The ownership of the land is retained by the Company. Satelindo agreed to pay Rp43,023 million to the Company for the thirty-year right. Satelindo paid Rp17,210 million in 1994 and the remaining Rp25,813 million was not paid because the Utilization Right (“Hak Pengelolaan Lahan”) on the land could not be delivered as provided in the transfer agreement. In 2000, the Company and Satelindo agreed on an alternative solution resulting in which the payment is treated as a lease expense up to 2006. In 2001, Satelindo paid an additional amount of Rp59,860 million as lease expense up to 2024. As of April 8,December 31, 2003 and 2004, the prepaid portion is shown in connection with merger of Indosat, amendment to the agreements with Indosat, including extension of period, is still in process.consolidated balance sheets as “Advances from customers and suppliers.”

     The Company and its subsidiary earned net interconnection revenues from Indosat (including IM3 and Satelindo in 2003) of Rp54,024 million, Rp274,706 million and Rp235,655 million in 2001, 2002 and 2003, respectively, reflecting 0.3%, 1.3% and 0.9% of total operating revenues in 2001, 2002 and 2003, respectively.

     The Company and its subsidiary earned net interconnection revenue from IM3 in 2001 and 2002 amounted to Rp157 million and Rp50,880 million, respectively.

F-93F-100

PERUSAHAAN PERSEROAN (PERSERO)
P.T. TELEKOMUNIKASI INDONESIA Tbk AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
DECEMBER 31, 20022003 AND 2003,2004, AND FOR YEARS ENDED
DECEMBER 31, 2001, 2002, 2003 AND 20032004
(Figures in tables are presented in millions of Rupiah, unless otherwise stated)

     The Company leases international circuits from Indosat, subsequent to the merger of Satelindo to Indosat in 2003. Payments made in relation to the lease expense amounted to Rp30,239 million in 2003, which reflected 0.2% of total operating expenses for 2003.

     The Company has an agreement with Satelindo, an Indosat subsidiary, whereby both parties agreed, among other matters, on the following:

       i. InterconnectionThe Company provides leased lines to Indosat and its subsidiaries, namely Indosat Mega Media and Lintasarta. The leased lines can be used by those companies for telephone, telegraph, data, telex, facsimile or other telecommunication services. Revenue earned from these transactions amounted to Rp43,595 million and Rp109,814 million in 2003 and 2004, respectively, which reflected 0.2% and 0.3% of the Company’s fixed-line network (“PSTN”) with Satelindo’s international gateway exchange, enabling the Company’s customers to make outgoing or receive incoming international calls through Satelindo’s international gateway exchange.total operating revenues in 2003 and 2004, respectively.
 
       ii. BillingsLintasarta utilizes the Company’s Palapa B4 and Telkom-1 satellite transponders or frequency channels. Revenue earned from these transactions amounted to Rp15,778 million, Rp23,672 million and Rp14,486 million in 2002, 2003 and 2004, respectively, which reflected 0.1%, 0.1% and less than 0.1% of total operating revenues in 2002, 2003 and 2004, respectively.
      Telkomsel has an agreement with Lintasarta and PT Artajasa Pembayaran Elektronis (“Artajasa”) for the international telecommunicationsusage of data communication network system. The charges from Lintasarta and Artajasa for the services used by domestic customers through Satelindo’s international gateway exchange will be handled by the Company.amounted to Rp10,975 million and Rp21,407 million, in 2003 and 2004, respectively, reflecting 0.1% and 0.1% of total operating expenses in 2003 and 2004, respectively.

     The Company also has an agreement with Satelindo for the interconnection of Satelindo’s GSM mobile cellular telecommunications network with the Company’s PSTN, enabling the Company’s customers to make outgoing calls to or receive incoming calls from Satelindo’s customers.

     Interconnection revenues earned from Satelindo were Rp293,726 million and Rp625,101 million in 2001 and 2002, respectively, which reflected 1.8% and 3.0% of total operating revenues for 2001 and 2002, respectively.

     The Company leases international circuits from Satelindo. Payments made in relation to the lease expense amounted to Rp28,111 million and Rp32,885 million in 2001 and 2002, respectively, which reflected 0.3% and 0.3% of total operating expenses for 2001 and 2002, respectively.

     In 1994, the Company transferred to Satelindo the right to use a parcel of Company-owned land located in Jakarta which had been previously leased to Telekomindo, an associated company. Based on the transfer agreement, Satelindo is given the right to use the land for 30 years and can apply for the right to build properties thereon. The ownership of the land is retained by the Company. Satelindo agreed to pay Rp43,023 million to the Company for the thirty-year right. Satelindo paid Rp17,210 million in 1994 and the remaining Rp25,813 million was not paid because the Utilization Right (“Hak Pengelolaan Lahan”) on the land could not be delivered as provided in the transfer agreement. In 2000, the Company and Satelindo agreed on an alternative solution resulting in which the payment is treated as a lease expense up to 2006. In 2001, Satelindo paid the remaining amount of Rp59,860 million as lease expense up to 2024. As of December 31, 2003, the prepaid portion is shown in the consolidated balance sheets as “Advances from customers and suppliers.”

     The Company provides leased lines to Satelindo. The leased lines can be used by Satelindo for telephone, telegraph, data, telex, facsimile or other telecommunication services. Revenue earned from these transactions amounted to Rp21,475 million in 2003 which reflected 0.1% of total operating revenue in 2003.

     Following the merger of Indosat, IM3, Satelindo and PT Bimagraha Telekomindo on November 20, 2003, all right and obligations arising from the agreements entered by the Company with IM3 and Satelindo were transferred to Indosat.

d. Others
 d.       (i) The Company provides telecommunication services to Government agencies.

 e.       (ii) The Company has entered into agreements with Government agencies and associated companies, Lintasarta,namely CSM and Patrakomindo,Patrakom, for utilization of the Company’s Palapa B4 and Telkom-1

F-94

PERUSAHAAN PERSEROAN (PERSERO)
P.T. TELEKOMUNIKASI INDONESIA Tbk AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

DECEMBER 31, 2002 AND 2003, AND FOR YEARS ENDED
DECEMBER 31, 2001, 2002 AND 2003
(Figures in tables are presented in millions of Rupiah, unless otherwise stated)

satellite transponders or frequency channels. RevenuesRevenue earned from these transactions amounted to Rp89,469Rp28,331 million, Rp44,109Rp73,205 million and Rp96,877Rp51,046 million in 2001, 2002, 2003 and 2003,2004, respectively, which reflected 0.5%0.1%, 0.2%0.3% and 0.4%0.2% of total operating revenues in 2001, 2002, 2003 and 2003,2004, respectively.

 f.       (iii) The Company provides leased lines to associated companies, namely CSM and Indosat’s subsidiaries i.e., CSM, Lintasarta, Satelindo,PSN (2002: including Komselindo, Mobisel Metrosel and PSN (2003: Exclude Satelindo, Komselindo and Metrosel). The leased lines can be used by the associated companies for telephone, telegraph, data, telex, facsimile or other telecommunications services. Revenue earned from these transactions amounted to Rp19,764 million, Rp75,704 million, Rp44,738 million and Rp69,386Rp25,714 million in 2001, 2002, 2003 and 2003,2004, respectively, reflecting 0.1%0.4%, 0.4%0.2%, and 0.3%0.1% of total operating revenues in 2001, 2002, 2003 and 2003,2004, respectively.

 g. The Company provides a data communication network system for Lintasarta, an Indosat subsidiary, and operates a telemetry tracking and command station for PSN, an associated company. Revenues earned by the Company from these transactions amounted to Rp27,963 million, RpNil and RpNil in 2001, 2002 and 2003, respectively, reflecting 0.2%, 0% and 0% of total operating revenues in 2001, 2002 and 2003, respectively.

h.       (iv) The Company purchases property and equipment including construction and installation services from a number of related parties. These related parties include PT Industri Telekomunikasi Indonesia (“PT INTI”), Lembaga Elektronika Nasional, PT Adhi Karya, PT Pembangunan Perumahan, PT Nindya Karya, PT Boma Bisma Indra, PT Wijaya Karya, PT Waskita Karya, PT Gratika Telekomindo, Bangtelindo, Telesera and Koperasi Pegawai Telekomunikasi.Telkom. Total purchases made from these related parties amounted to Rp100,459 million, Rp154,808 million, and Rp126,965 million and Rp268,901 million in 2001, 2002, 2003 and 2003,2004, respectively, reflecting 2.4%2.1%, 2.1%1.1%, and 1.1%2.4% of total fixed assetsasset purchases in 2001, 2002, 2003 and 2003,2004, respectively.

 i.       (v) PT INTI is also a major contractor and supplier for providing equipment, including construction and installation services for Telkomsel. Total purchases from PT INTI in 2001, 2002, 2003 and 20032004 amounted to Rp663,587 million, Rp34,717 million, Rp52,346 million and Rp52,346Rp217,668 million, respectively, reflecting 15.7%0.5%, 0.5% and 0.5%1.9% of total fixed assets purchasedasset purchases in 2001, 2002, 2003 and 2003,2004, respectively.
 
 j.       (vi) Telkomsel has an agreement with PSN for lease of PSN’s transmission link. Based on the agreement, which was made in March 14, 2001, the minimum lease period is 2 years since the

F-101

PERUSAHAAN PERSEROAN (PERSERO)
P.T. TELEKOMUNIKASI INDONESIA Tbk AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
DECEMBER 31, 2003 AND 2004, AND FOR YEARS ENDED
DECEMBER 31, 2002, 2003 AND 2004
(Figures in tables are presented in millions of Rupiah, unless otherwise stated)
operation of the transmission link and is extendable subject to agreement by both parties. The lease charges amounted to Rp40,519 million and Rp49,710 million in 2003 and 2004, respectively, reflecting 0.3% and 0.2% of total operating expenses in 2003 and 2004, respectively.
      (vii) The Company and its subsidiaries carry insurance (on their property, plant and equipment against property losses, inventory and on employees’ social security) obtained from PT Asuransi Jasa Indonesia, PT Asuransi Tenaga Kerja and PT Persero Asuransi Jiwasraya, which are state-owned insurance companies. Insurance premiums charged amounted to Rp83,945 million, Rp131,445 million, and Rp159,517 million and Rp148,279 million in 2001, 2002, 2003 and 2003,2004, respectively, reflecting 0.9%1.1%, 1.1% and 1.1%0.7% of total operating expenses in 2001, 2002, 2003 and 2003,2004, respectively.

 k.       (viii) The Company and its subsidiaries maintain current accounts and time deposits in several state-owned banks. In addition, some of those banks are appointed as collecting agents for the Company. Total placements in form of current accounts and time deposits, and mutual funds in state-owned banks and mutual funds amounted to Rp6,161,244Rp3,130,375 million and Rp3,130,375Rp2,116,038 million as of December 31, 20022003 and 2003,2004, respectively, reflecting 13.9%6.2% and 6.2%3.8% of total assets as of December 31, 20022003 and 2003,2004, respectively. Interest income recognized during 2003 and 2004 was Rp273,986 million and Rp150,367 million reflecting 74.85%74.9% and 47.3% of total interest income.income in 2003 and 2004, respectively.

F-95

PERUSAHAAN PERSEROAN (PERSERO)
P.T. TELEKOMUNIKASI INDONESIA Tbk AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

DECEMBER 31, 2002 AND 2003, AND FOR YEARS ENDED
DECEMBER 31, 2001, 2002 AND 2003
(Figures in tables are presented in millions of Rupiah, unless otherwise stated)

 l.       (ix) The Company’s subsidiaries have loans from a state-owned bank. Interest expense on the loans for 2004 amounted to Rp9,115 million representing 0.7% of total interest expense in 2004.
      (x) The Company leases buildings, purchases materials and construction services, and utilizes maintenance and cleaning services from Dana Pensiun Telkom and PT Sandhy Putra Makmur, a subsidiary of Yayasan Sandikara Putra Telkom — a foundation managed by Dharma Wanita Telkom. Total charges from these transactions amounted to Rp18,680 million, Rp14,570 million, and Rp32,785 million and Rp24,921 million in 2001, 2002, 2003 and 2003,2004, respectively, reflecting 0.2%0.1%, 0.1%0.2% and 0.2%0.1% of total operating expenses in 2001, 2002, 2003 and 2003,2004, respectively.

 m.       (xi) The Company purchased encoded phone cards from Perusahaan Umum Percetakan Uang Republik Indonesia (“Peruri”), a state-owned company. The cost of the phone cards amounted to Rp1,781 million, Rp1,377 million, and Rp7,730 million and nil in 2001, 2002, 2003 and 2003,2004, respectively, which reflect 0.02%0.01%, 0.01%0.05% and 0.05%0% of total operating expenses for 2001, 2002, 2003 and 2003,2004, respectively.

 n. In 1991, the Company granted loans to Koperasi Telekomunikasi (“Koptel”) amounting to Rp1,000 million to support Koptel’s activities in providing housing loans to the Company’s employees. The balance of the loans amounted to Rp100 million and RpNil in 2002 and 2003, respectively.

o.       (xii) The Company and its subsidiarysubsidiaries earned (were charged for) interconnection revenues (charges) from PSN (2002: including Komselindo, Metrosel, Mobisel BBT and PSN (2003: excluding Komselindo and Metrosel)BBT), with a total of Rp345,284 million, Rp77,984 million, Rp19,035 million and Rp20,997 million(Rp5,495 million) in 2001, 2002, 2003 and 2003,2004, respectively, which reflect 2.1%0.4%, 0.4%0.1% and 0.1%(0.02%) of total operating revenues in 2001, 2002, 2003 and 2003,2004, respectively.

 p.       (xiii) In addition to revenues earned under the KSO Agreement (Note 51)49), the Company also earned income from building rental, repairs and maintenance services and training services provided to the KSO Units, amounting to Rp114,200 million, Rp73,679 million, and Rp23,147 million and Rp18,449 million in 2001, 2002, 2003 and 2003,2004, respectively, which reflect 0.7%0.4%, 0.4%0.1% and 0.1% of total operating revenues in 2001, 2002, 2003 and 2003,2004, respectively.

F-102

PERUSAHAAN PERSEROAN (PERSERO)
P.T. TELEKOMUNIKASI INDONESIA Tbk AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
DECEMBER 31, 2003 AND 2004, AND FOR YEARS ENDED
DECEMBER 31, 2002, 2003 AND 2004
(Figures in tables are presented in millions of Rupiah, unless otherwise stated)
 q.       (xiv) The Company has a revenue-sharing arrangement with Koperasi Pegawai Telkom (“Kopegtel”). Share of Kopegtel in revenues from this arrangement amounted to Rp20,560 million in 2004, representing 0.1% of total operating revenues.
      (xv) Infomedia provides electronic media and call center services to KSO Unit VII based on an agreement dated March 4, 2003. Revenue earned from these transactions in 2004 amounted to Rp5,541 million, reflecting 0.01% of total operating revenues.
      (xvi) The Company has also seconded a number of its employees to related parties to assist them in operating their business. In addition, the Company provided certain of its related parties with the right to use its buildings free of charge.
      Presented below are balances of accounts with related parties:
                   
    2003 2004
       
      % of   % of
    Amount Total Assets Amount Total Assets
           
a. Cash and cash equivalents (Note 5)  3,057,388   6.08   1,944,154   3.46 
               
b. Temporary investments  —   —   7,290   0.01 
               
c. Trade accounts receivable, net (Note 6)  410,923   0.82   419,104   0.74 
               
d. Other accounts receivable                
  KSO Units  26,969   0.05   1,300   0.00 
  State-owned banks (interest)  9,453   0.02   5,717   0.01 
  Government agencies  2,683   0.01   5,433   0.01 
  Other  81,603   0.16   16,765   0.03 
               
  Total  120,708   0.24   29,215   0.05 
               
e. Prepaid expenses (Note 8)  17,074   0.03   22,440   0.04 
               
f. Other current assets (Note 9)  45,083   0.09   44,608   0.08 
               
g. Advances and other non-current assets (Note 13)                
  Bank Mandiri  642   0.00   113,762   0.20 
  PT Asuransi Jasa Indonesia  —   —   23,104   0.04 
  Peruri  813   0.00   813   0.00 
               
  Total  1,455   0.00   137,679   0.24 
               

F-96F-103

PERUSAHAAN PERSEROAN (PERSERO)
P.T. TELEKOMUNIKASI INDONESIA Tbk AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
DECEMBER 31, 20022003 AND 2003,2004, AND FOR YEARS ENDED
DECEMBER 31, 2001, 2002, 2003 AND 20032004
(Figures in tables are presented in millions of Rupiah, unless otherwise stated)

Presented below are balances of accounts with related parties:

                   
20022003
% of% of
RpTotal AssetsRpTotal Assets
a. Cash and cash equivalents (Note 6)  5,081,632   11.47   3,057,388   6.08 
     
   
   
   
 
b. Temporary investments (Note 7)  523,000   1.18   —   — 
     
   
   
   
 
c. Trade accounts receivable, net (Note 8)  886,763   2.00   410,923   0.82 
     
   
   
   
 
d. Other accounts receivable                
  KSO Units  48,221   0.11   26,969   0.05 
  State-owned banks (interest)  12,523   0.03   9,453   0.02 
  Government agencies  4,122   0.01   2,683   0.01 
  Other  58,411   0.13   81,603   0.16 
     
   
   
   
 
  Total  123,277   0.28   120,708   0.24 
     
   
   
   
 
e. Prepaid expenses (Note 10)  20,867   0.05   17,074   0.03 
     
   
   
   
 
f. Other current assets (Note 11)  540,520   1.22   45,083   0.09 
     
   
   
   
 
g. Advances and other non-current assets                
  Bank Mandiri  16,128   0.04   27,904   0.06 
  Peruri  —   —   813   0.00 
     
   
   
   
 
     16,128   0.04   28,717   0.06 
     
   
   
   
 
                   
    2003 2004
       
      % of   % of
      Total   Total
    Amount Liabilities Amount Liabilities
           
h. Trade accounts payable (Note 16)                
  Government agencies  224,370   0.77   259,678   0.84 
  KSO Units  78,664   0.27   24,312   0.08 
  Indosat  224,611   0.77   150,631   0.49 
  Koperasi Pegawai Telkom  11,512   0.04   78,717   0.25 
  PSN  1,035   0.00   39   0.00 
  PT INTI  94,190   0.32   77,591   0.25 
  Others  23,096   0.08   52,126   0.17 
               
  Total  657,478   2.25   643,094   2.08 
               
i. Accrued expenses (Note 17)                
  Government agencies and state-owned banks  176,272   0.60   204,504   0.66 
  Employees  606,257   2.07   321,237   1.03 
  PT Asuransi Jasa Indonesia  13,713   0.05   2,040   0.01 
  Others  —   —   9,729   0.03 
               
  Total  796,242   2.72   537,510   1.73 
               
j. Short-term bank loans (Note 20)                
    Bank Mandiri  37,642   0.13   41,433   0.13 
               
k. Two-step loans (Note 22)  7,691,045   26.28   6,018,705   19.37 
               
l. Provision for long service awards (Note 45)  491,037   1.68   572,303   1.84 
               
m. Provision for post-retirement benefits (Note 46)  2,063,524   7.05   1,841,146   5.93 
               
n. Long-term bank loans (Note 24)                
    Bank Mandiri  42,115   0.14   59,729   0.19 
               
                   
20022003
% of% of
RpTotal LiabilitiesRpTotal Liabilities
h. Trade accounts payable (Note 18)                
  Government agencies  359,211   1.33   224,370   0.77 
  KSO Units  114,717   0.42   78,664   0.27 
  Indosat (Including Satelindo)  220,637   0.81   224,611   0.77 
  Koperasi Pegawai Telkom  14,279   0.05   11,512   0.04 
  PSN  5,183   0.02   1,035   0.00 
  PT INTI  1,420   0.01   94,190   0.32 
  Others  74,780   0.28   23,096   0.08 
     
   
   
   
 
  Total  790,227   2.92   657,478   2.25 
     
   
   
   
 

F-97

PERUSAHAAN PERSEROAN (PERSERO)48. SEGMENT INFORMATION
P.T. TELEKOMUNIKASI INDONESIA Tbk AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

DECEMBER 31, 2002 AND 2003, AND FOR YEARS ENDED
DECEMBER 31, 2001, 2002 AND 2003
(Figures in tables are presented in millions of Rupiah, unless otherwise stated)
                   
20022003
% of% of
TotalTotal
RpLiabilitiesRpLiabilities
i. Accrued expenses (Note 19)                
  Government Agencies and State-owned
  banks		  298,840   1.10   176,272   0.60 
  Employees  1,082,720   4.00   606,257   2.07 
  PT Asuransi Jasa Indonesia  7,665   0.03   13,713   0.05 
     
   
   
   
 
  Total  1,389,225   5.13   796,242   2.72 
     
   
   
   
 
j. Short-term bank loans (Note 22)                
   Bank Mandiri  —   —   37,642   0.13 
     
   
   
   
 
k. Two-step loans (Note 23 and 24)  8,570,142   31.63   7,691,045   26.28 
     
   
   
   
 
l. Provision for long service awards
 (Note 47)		  489,231   1.81   473,614   1.62 
     
   
   
   
 
m. Provision for post-retirement
  benefits (Note 48)		  1,602,494   5.91   2,063,350   7.05 
     
   
   
   
 
n. Long-term bank loans (Note 26)                
   Bank Mandiri  —   —   42,115   0.14 
     
   
   
   
 

50. SEGMENT INFORMATION

      The Company and its subsidiaries have two main business segments: fixed line and cellular. The fixed line segment provides local, domestic long-distance and domestic long distanceinternational (starting 2004) telephone services, and other telecommunications services (including among others, leased lines, telex, transponder, satellite and Very Small Aperture Terminal-VSAT) as well as ancillary services. The cellular segment provides basic telecommunication services, particularly mobile cellular telecommunication services. Operating segments that do not individually represent more than 10% of the Company’s revenues are presented as “Other” comprising the telephone directories and building management businesses.

      Segment revenues and expenses include transactions between business segments and are accounted for at prices that represent market prices.

F-98F-104

PERUSAHAAN PERSEROAN (PERSERO)
P.T. TELEKOMUNIKASI INDONESIA Tbk AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
DECEMBER 31, 20022003 AND 2003,2004, AND FOR YEARS ENDED
DECEMBER 31, 2001, 2002, 2003 AND 20032004
(Figures in tables are presented in millions of Rupiah, unless otherwise stated)
                      
                      
2001 2002
  
Total   Total  
FixedBeforeTotal Fixed   Before   Total
LineCellularOtherEliminationEliminationConsolidated Line Cellular Other Elimination Elimination Consolidated
            
Segment results
                    
Operating revenues                    
External operating revenues 10,549,644 5,590,108 144,055 16,283,807 — 16,283,807   13,245,303  7,315,028  242,487  20,802,818  —  20,802,818 
Intersegment operating revenues 1,174,993 (671,884) — 503,109 (503,109) —   155,105  245,970  8,624  409,699  (409,699)  — 
 
 
 
 
 
 
              
Total operating revenues 11,724,637 4,918,224 144,055 16,786,916 (503,109) 16,283,807   13,400,408  7,560,998  251,111  21,212,517  (409,699)  20,802,818 
 
 
 
 
 
 
              
Operating expenses (6,966,606) (1,932,919) (121,780) (9,021,305) 156,905 (8,864,400)  (8,525,232)  (3,446,755)  (205,835)  (12,177,822)  505,219  (11,672,603)
 
 
 
 
 
 
              
Operating income 4,758,031 2,985,305 22,275 7,765,611 (346,204) 7,419,407   4,875,176  4,114,243  45,276  9,034,695  95,520  9,130,215 
Interest expense (1,302,452) (27,190) — (1,329,642) — (1,329,642)  (1,405,409)  (177,341)  —  (1,582,750)  —  (1,582,750)
Interest income 506,464 57,220 7,902 571,586 — 571,586   367,725  102,176  9,901  479,802  —  479,802 
Loss on foreign exchange — net (322,511) (53,946) (2,263) (378,720) — (378,720)
Gain (loss) on foreign exchange-net  554,741  2,311  (439)  556,613  —  556,613 
Other income (charges) — net 644,492 (35,513) 12,514 621,493 (268,547) 352,946   82,327  (27,257)  4,494  59,564  (95,520)  (35,956)
Equity in net income (loss) of associated companies 1,334,083 — — 1,334,083 (1,419,769) (85,686)
Tax expense (1,114,574) (881,867) (10,454) (2,006,895) — (2,006,895)  (1,659,363)  (1,226,958)  (12,650)  (2,898,971)  —  (2,898,971)
Equity in net income of associated companies  2,066,277  —  —  2,066,277  (2,061,679)  4,598 
Gain on sale of long-term investment in Telkomsel  3,196,380  —  —  3,196,380  —  3,196,380 
 
 
 
 
 
 
              
Income before minority interest 4,503,533 2,044,009 29,974 6,577,516 (2,034,520) 4,542,996   8,077,854  2,787,174  46,582  10,911,610  (2,061,679)  8,849,931 
Unallocated minority interest — — — — — (474,605)  —  —  —  —  —  (810,222)
 
 
 
 
 
 
              
Net income 4,503,533 2,044,009 29,974 6,577,516 (2,034,520) 4,068,391   8,077,854  2,787,174  46,582  10,911,610  (2,061,679)  8,039,709 
 
 
 
 
 
 
              
Other information
                    
Segment assets 29,678,357 7,363,322 253,153 37,294,832 (4,449,250) 32,845,582   34,177,425  11,255,500  310,828  45,743,753  (1,561,340)  44,182,413 
Investments in associates 190,488 — — 190,488 — 190,488   124,683  —  —  124,683  —  124,683 
 
 
 
 
 
 
              
Total consolidated assets 29,868,845 7,363,322 253,153 37,485,320 (4,449,250) 33,036,070   34,302,108  11,255,500  310,828  45,868,436  (1,561,340)  44,307,096 
 
 
 
 
 
 
              
Total consolidated liabilities (20,583,335) (2,143,805) (146,137) (22,873,277) 153,502 (22,719,775)  (24,348,322)  (4,066,412)  (198,756)  (28,613,490)  1,515,810  (27,097,680)
 
 
 
 
 
 
              
Minority interest — — — — — 1,235,334   —  —  —  —  —  (2,595,799)
 
 
 
 
 
 
              
Capital expenditures (2,903,486) (2,780,366) (14,416) (5,698,268) — (5,698,268)  (6,266,859)  (2,730,028)  (35,531)  (9,032,418)  —  (9,032,418)
 
 
 
 
 
 
              
Depreciation (2,346,535) (513,065) (10,172) (2,869,772) — (2,869,772)
Depreciation and amortization  (2,576,073)  (984,039)  (7,256)  (3,567,368)  4,675  (3,562,693)
 
 
 
 
 
 
              
Amortization of intangible assets (55,709) — — (55,709) — (55,709)
Amortization of goodwill and other intangible assets  (187,990)  —  —  (187,990)  —  (187,990)
 
 
 
 
 
 
              
Other non-cash expenses (305,698) (35,307) (1,895) (342,900) — (342,900)  106,329  (139,214)  (3,047)  (35,932)  —  (35,932)
 
 
 
 
 
 
              
Net cash provided by operating activities 4,215,969 2,759,528 37,092 7,012,589 — 7,012,589   6,237,405  4,557,442  69,626  10,864,473  —  10,864,473 
 
 
 
 
 
 
              
Net cash used in investing activities (3,064,442) (2,629,620) (18,539) (5,712,601) (403,195) (6,115,796)  (1,492,286)  (4,531,036)  (26,653)  (6,049,975)  —  (6,049,975)
 
 
 
 
 
 
              
Net cash (used in) provided by financing activities (2,291,844) 218,808 7,030 (2,066,006) 403,195 (1,662,811)
Net cash used in financing activities  (2,482,408)  (146,819)  (40,989)  (2,670,216)  —  (2,670,216)
 
 
 
 
 
 
              

F-99F-105

PERUSAHAAN PERSEROAN (PERSERO)
P.T. TELEKOMUNIKASI INDONESIA Tbk AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
DECEMBER 31, 20022003 AND 2003,2004, AND FOR YEARS ENDED
DECEMBER 31, 2001, 2002, 2003 AND 20032004
(Figures in tables are presented in millions of Rupiah, unless otherwise stated)
                   
                      
2002 2003
  
Total   Total  
FixedBeforeTotal Fixed   Before   Total
LineCellularOtherEliminationEliminationConsolidated Line Cellular Other Elimination Elimination Consolidated
            
Segment results
                    
Operating revenues                    
External operating revenues 13,245,303 7,315,028 242,487 20,802,818 — 20,802,818   16,068,496  10,797,555  249,872  27,115,923  —  27,115,923 
Intersegment operating revenues 155,105 245,970 8,624 409,699 (409,699) —   122,653  337,100  30,824  490,577  (490,577)  — 
 
 
 
 
 
 
              
Total operating revenues 13,400,408 7,560,998 251,111 21,212,517 (409,699) 20,802,818   16,191,149  11,134,655  280,696  27,606,500  (490,577)  27,115,923 
 
 
 
 
 
 
              
Operating expenses (8,525,232) (3,446,755) (205,835) (12,177,822) 505,219 (11,672,603)  (10,596,851)  (4,802,283)  (275,499)  (15,674,633)  534,649  (15,139,984)
 
 
 
 
 
 
              
Operating income 4,875,176 4,114,243 45,276 9,034,695 95,520 9,130,215   5,594,298  6,332,372  5,197  11,931,867  44,072  11,975,939 
Interest expense (1,405,409) (177,341) — (1,582,750) — (1,582,750)  (1,249,795)  (179,486)  —  (1,429,281)  45,835  (1,383,446)
Interest income 367,725 102,176 9,901 479,802 — 479,802   342,980  60,407  8,472  411,859  (45,835)  366,024 
Gain (loss) on foreign exchange — net 554,741 2,311 (439) 556,613 — 556,613   198,803  (73,017)  335  126,121  —  126,121 
Other income (charges) — net 82,327 (27,257) 4,494 59,564 (95,520) (35,956)  358,191  (10,605)  81,988  429,574  (65,236)  364,338 
Tax expense (1,659,363) (1,226,958) (12,650) (2,898,971) — (2,898,971)  (1,942,070)  (1,892,821)  (26,199)  (3,861,090)  —  (3,861,090)
Equity in net income of associated companies 2,066,277 — — 2,066,277 (2,061,679) 4,598   3,313,831  —  —  3,313,831  (3,311,012)  2,819 
Gain on sale of long-term investment in Telkomsel 3,196,380 — — 3,196,380 — 3,196,380 
 
 
 
 
 
 
              
Income before minority interest 8,077,854 2,787,174 46,582 10,911,610 (2,061,679) 8,849,931   6,616,238  4,236,850  69,793  10,922,881  (3,332,176)  7,590,705 
Unallocated minority interest — — — — — (810,222)  —  —  —  —  —  (1,503,478)
 
 
 
 
 
 
              
Net income 8,077,854 2,787,174 46,582 10,911,610 (2,061,679) 8,039,709   6,616,238  4,236,850  69,793  10,922,881  (3,332,176)  6,087,227 
 
 
 
 
 
 
              
Other information
                    
Segment assets 34,177,425 11,255,500 310,828 45,743,753 (1,561,340) 44,182,413   46,884,985  15,386,289  317,398  62,588,672  (12,370,071)  50,218,601 
Investments in associates 124,683 — — 124,683 — 124,683   64,648  —  —  64,648  —  64,648 
 
 
 
 
 
 
              
Total consolidated assets 34,302,108 11,255,500 310,828 45,868,436 (1,561,340) 44,307,096   46,949,633  15,386,289  317,398  62,653,320  (12,370,071)  50,283,249 
 
 
 
 
 
 
              
Total consolidated liabilities (24,348,322) (4,066,412) (198,756) (28,613,490) 1,515,810 (27,097,680)  (28,020,867)  (5,075,222)  (166,119)  (33,262,208)  3,999,991  (29,262,217)
 
 
 
 
 
 
              
Minority interest — — — — — (2,595,799)  —  —  —  —  —  (3,708,155)
 
 
 
 
 
 
              
Capital expenditures (6,266,859) (2,730,028) (35,531) (9,032,418) — (9,032,418)  (5,698,401)  (5,348,783)  (61,672)  (11,108,856)  —  (11,108,856)
 
 
 
 
 
 
              
Depreciation and amortization (2,576,073) (984,039) (7,256) (3,567,368) 4,675 (3,562,693)  (3,126,223)  (1,680,554)  (9,824)  (4,816,601)  11,916  (4,804,685)
 
 
 
 
 
 
              
Amortization of intangible assets (187,990) — — (187,990) — (187,990)
Amortization of goodwill and other intangible assets  (730,659)  —  —  (730,659)  —  (730,659)
 
 
 
 
 
 
              
Other non-cash expenses 106,329 (139,214) (3,047) (35,932) — (35,932)  (210,646)  (113,904)  (4,308)  (328,858)  —  (328,858)
 
 
 
 
 
 
              
Net cash provided by operating activities 6,237,405 4,557,442 69,626 10,864,473 — 10,864,473   6,028,485  6,753,253  70,794  12,852,532  —  12,852,532 
 
 
 
 
 
 
              
Net cash used in investing activities (1,492,286) (4,531,036) (26,653) (6,049,975) — (6,049,975)  (1,955,079)  (5,310,509)  (40,274)  (7,305,862)  —  (7,305,862)
 
 
 
 
 
 
              
Net cash used in financing activities (2,482,408) (146,819) (40,989) (2,670,216) — (2,670,216)  (5,425,189)  (727,880)  (24,347)  (6,177,416)  —  (6,177,416)
 
 
 
 
 
 
              

F-100F-106

PERUSAHAAN PERSEROAN (PERSERO)
P.T. TELEKOMUNIKASI INDONESIA Tbk AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
DECEMBER 31, 20022003 AND 2003,2004, AND FOR YEARS ENDED
DECEMBER 31, 2001, 2002, 2003 AND 20032004
(Figures in tables are presented in millions of Rupiah, unless otherwise stated)
                    
                   
2003 2004
  
Total   Total  
FixedBeforeTotal Fixed   Before   Total
LineCellularOtherEliminationEliminationConsolidated Line Cellular Other Elimination Elimination Consolidated
            
Segment results
                    
Operating revenues                    
External operating revenues 16,068,496 10,797,555 249,872 27,115,923 — 27,115,923   19,436,271  14,201,786  309,709  33,947,766  —  33,947,766 
Intersegment operating revenues 122,653 337,100 30,824 490,577 (490,577) —   (46,781)  534,790  51,063  539,072  (539,072)  — 
 
 
 
 
 
 
              
Total operating revenues 16,191,149 11,134,655 280,696 27,606,500 (490,577) 27,115,923   19,389,490  14,736,576  360,772  34,486,838  (539,072)  33,947,766 
 
 
 
 
 
 
              
Operating expenses (10,596,851) (4,802,283) (275,499) (15,674,633) 534,649 (15,139,984)  (13,658,138)  (6,757,243)  (320,698)  (20,736,079)  715,380  (20,020,699)
 
 
 
 
 
 
              
Operating income 5,594,298 6,332,372 5,197 11,931,867 44,072 11,975,939   5,731,352  7,979,333  40,074  13,750,759  176,308  13,927,067 
Interest expense (1,249,795) (179,486) — (1,429,281) 45,835 (1,383,446)  (1,224,079)  (142,632)  (38)  (1,366,749)  96,613  (1,270,136)
Interest income 342,980 60,407 8,472 411,859 (45,835) 366,024   289,322  121,744  3,488  414,554  (96,613)  317,941 
Gain (loss) on foreign exchange — net 198,803 (73,017) 335 126,121 — 126,121   (1,158,577)  (62,029)  (154)  (1,220,760)  —  (1,220,760)
Other income (charges) — net 358,191 (10,605) 81,988 429,574 (65,236) 364,338   449,556  (39,122)  96,924  507,358  (176,308)  331,050 
Tax expense (1,942,070) (1,892,821) (26,199) (3,861,090) — (3,861,090)  (1,583,477)  (2,384,314)  (35,281)  (4,003,072)  —  (4,003,072)
Equity in net income of associated companies 3,313,831 — — 3,313,831 (3,311,012) 2,819   3,939,944  —  —  3,939,944  (3,936,524)  3,420 
 
 
 
 
 
 
              
Income before minority interest 6,616,238 4,236,850 69,793 10,922,881 (3,332,176) 7,590,705   6,444,041  5,472,980  105,013  12,022,034  (3,936,524)  8,085,510 
Unallocated minority interest — — — — — (1,503,478)  —  —  —  —  —  (1,956,301)
 
 
 
 
 
 
              
Net income 6,616,238 4,236,850 69,793 10,922,881 (3,332,176) 6,087,227   6,444,041  5,472,980  105,013  12,022,034  (3,936,524)  6,129,209 
 
 
 
 
 
 
              
Other information
                    
Segment assets 46,884,985 15,386,289 317,398 62,588,672 (12,370,071) 50,218,601   38,902,911  19,548,267  402,965  58,854,143  (2,667,664)  56,186,479 
Investments in associates 64,648 — — 64,648 — 64,648   10,705,711  9,290  —  10,715,001  (10,632,388)  82,613 
 
 
 
 
 
 
              
Total consolidated assets 46,949,633 15,386,289 317,398 62,653,320 (12,370,071) 50,283,249   49,608,622  19,557,557  402,965  69,569,144  (13,300,052)  56,269,092 
 
 
 
 
 
 
              
Total consolidated liabilities (28,020,867) (5,075,222) (166,119) (33,262,208) 3,999,991 (29,262,217)  (27,853,851)  (5,680,160)  (202,971)  (33,736,982)  2,667,664  (31,069,318)
 
 
 
 
 
 
              
Minority interest — — — — — (3,708,155)  —  —  —  —  —  (4,938,432)
 
 
 
 
 
 
              
Capital expenditures (5,698,401) (5,348,783) (61,672) (11,108,856) — (11,108,856)  (6,148,109)  (4,982,744)  (66,691)  (11,197,544)  —  (11,197,544)
 
 
 
 
 
 
              
Depreciation and amortization (3,126,223) (1,680,554) (9,824) (4,816,601) 11,916 (4,804,685)  (3,798,179)  (2,651,028)  (18,740)  (6,467,947)  14,590  (6,453,357)
 
 
 
 
 
 
              
Amortization of intangible assets (730,659) — — (730,659) — (730,659)
Amortization of goodwill and other intangible assets  (872,330)  —  —  (872,330)  —  (872,330)
 
 
 
 
 
 
              
Other non-cash expenses (210,646) (113,904) (4,308) (328,858) — (328,858)  (244,356)  (100,737)  (5,338)  (350,431)  —  (350,431)
 
 
 
 
 
 
              
Net cash provided by operating activities 6,028,485 6,753,253 70,794 12,852,532 — 12,852,532   7,184,330  8,786,290  80,860  16,051,480  —  16,051,480 
 
 
 
 
 
 
              
Net cash used in investing activities (1,955,079) (5,310,509) (40,274) (7,305,862) — (7,305,862)  (4,065,668)  (5,469,715)  (62,730)  (9,598,113)  —  (9,598,113)
 
 
 
 
 
 
              
Net cash used in financing activities (5,425,189) (727,880) (24,347) (6,177,416) — (6,177,416)  (4,693,034)  (2,181,181)  (30,650)  (6,904,865)  —  (6,904,865)
 
 
 
 
 
 
              

F-101F-107

PERUSAHAAN PERSEROAN (PERSERO)
P.T. TELEKOMUNIKASI INDONESIA Tbk AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
DECEMBER 31, 20022003 AND 2003,2004, AND FOR YEARS ENDED
DECEMBER 31, 2001, 2002, 2003 AND 20032004
(Figures in tables are presented in millions of Rupiah, unless otherwise stated)

51.49. JOINT OPERATION SCHEMES (“KSO”)

      In 1995, the Company and five investors (PT Pramindo Ikat Nusantara, PT AriaWest International, PT Mitra Global Telekomunikasi Indonesia, PT Dayamitra Telekomunikasi and PT Bukaka Singtel International) entered into agreements for Joint Operation Schemes (“KSO”) and KSO construction agreements for the provision of telecommunication facilities and services for the Sixth Five-Year Development Plan (“Repelita VI”) of the Republic of Indonesia. The five investors undertook the development and operation of the basic fixed telecommunications facilities and services in five of the Company’s seven regional divisions.

      Under the Joint Operation Scheme, the KSO Unit is required to make payments to the Company consisting of the following:

 • Minimum Telkom Revenue (“MTR”)
Represents the amount guaranteed by the KSO investor to be paid to the Company in accordance with the KSO agreement.
 
 • Distributable KSO Revenues (“DKSOR”)
DKSOR are the entire KSO revenues, less the MTR and the operational expenses of the KSO Units, as provided in the KSO agreements. These revenues are shared between the Company and the KSO Investors based on agreed upon percentages.

       The DKSOR from fixed wireless revenues (“Telkom Flexi Revenues”) are shared between the Company and KSO Investor based on a ratio of 95% and 5%, respectively.
 
       The DKSOR from non-Telkom Flexi Revenues are shared between the Company and KSO Investor based on a ratio of 30% and 70%, respectively, except for KSO VII. For KSO VII, the DKSOR from non-Telkom Flexi Revenues are shared between the Company and KSO Investor at a ratio of 35% and 65%, respectively. Effective on 31 July 2003, the ratio for distribution of DKSOR from non-Telkom Flexi Revenue in KSO III was changed to 5% and 95% for the Company and KSO Investor, respectively, from the date thereof until 31 December 2005, and to 30% and 70%, respectively, thereafter.

      At the end of the KSO period, all rights, title and interests of the KSO Investor in existing installations and all work in progress, inventories, equipment, materials, plans and data relating to any approved additional new installation projects then uncompleted or in respect of which the tests have not been successfully completed, shall be sold and transferred to the Company without requiring any further action by any party, upon payment by the Company to the KSO Investor of one hundred Rupiah, plus:

of:

       i. the net present value, if any, of the KSO Investor’s projected share in DKSOR from the additional new installations forming part of the KSO system on the termination date over the balance of the applicable payback periods, and
 
       ii. an amount to be agreed upon between the Company and the KSO Investor as a fair compensation in respect of any uncompleted or untested additional new installations transferred.

      The depreciation of the Rupiah against the U.S. Dollars, which started in the second half of 1997, has impacted the financial condition of the KSO Investors. In response to economic conditions, on

F-102

PERUSAHAAN PERSEROAN (PERSERO)
P.T. TELEKOMUNIKASI INDONESIA Tbk AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

DECEMBER 31, 2002 AND 2003, AND FOR YEARS ENDED
DECEMBER 31, 2001, 2002 AND 2003
(Figures in tables are presented in millions of Rupiah, unless otherwise stated)

June 5, 1998, all KSO Investors and the Company signed a Memorandum of Understanding (“MoU”) to amend certain provisions of the KSO agreements. Among the amendments are as follows:

       i. The percentage of sharing of the distributable KSO revenues for 1998 and 1999 was 10% and 90% for the Company and the KSO Investors, respectively.

F-108

PERUSAHAAN PERSEROAN (PERSERO)
P.T. TELEKOMUNIKASI INDONESIA Tbk AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
DECEMBER 31, 2003 AND 2004, AND FOR YEARS ENDED
DECEMBER 31, 2002, 2003 AND 2004
(Figures in tables are presented in millions of Rupiah, unless otherwise stated)
       ii. The minimum number of access line units to be installed by the KSO Investors up to March 31, 1999 was 1,268,000 lines.
 
       iii. The incremental rate of the MTR would not exceed 1% in 1998 and 1.5% in 1999 for the KSO agreements with the Investors that have MTR incremental factors.
 
       iv. “Operating Capital Expenditures” in each of the KSO Units will be shared between the Company and the respective KSO Investors in proportion to the previous year’s share in the annual net income of the KSO Units, starting from 1999.
 
       v. The cancellation of the requirement to maintain a bank guarantee in respect of MTR.

      In 1998 and 1999, the Company adopted the provisions of the MoU. Beginning November 1999, the Company and the KSO Investors had begun to renegotiate the terms of the KSO agreements in conjunction with the changing environment and the expiration of certain terms in the MoU. Among others, it was agreed to return to most of the provisions of the original KSO agreements beginning January 1, 2000.

     KSO I

      In 2002, the Company and the stockholders of Pramindo (KSO Investor) reached an agreement in which the Company acquired 100% of Pramindo and gained control over the operation of KSO Unit I (Note 5b)4b).

     KSO III

      Effective on July 31, 2003, the Company and the stockholders of AWI (KSO Investor) reached an agreement in which the Company acquired 100% of AWI and gained control over the operation of KSO Unit III (Note 5c)4c).

     KSO IV

     The sale of

      Effective on January 20, 2004, the Company and PT Mitra Global Telekomunikasi Indonesia (“MGTI”, KSO IV to Indosat, which was placed under the cross-ownership transactions (Note 4), was cancelled. The Company has, however, entered into an amendmentInvestor) have amended their joint operation agreement with respect to the KSO agreementarea. Upon the amendment, the Company gained full control over the operation of KSO Unit IV (Note 57b)4d).

     KSO VI

      In 2001, the Company and the stockholders of Dayamitra (KSO Investor) reached an agreement in which the Company acquired 90.32% of Dayamitra and gained control over the operation of KSO Unit VI. In addition,On December 14, 2004, the Company entered into a put and call option arrangement foracquired the remaining 9.68% of the issued and paid up capitaloutstanding shares of Dayamitra (Note 5a)4a).

F-103

PERUSAHAAN PERSEROAN (PERSERO)
P.T. TELEKOMUNIKASI INDONESIA Tbk AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

DECEMBER 31, 2002 AND 2003, AND FOR YEARS ENDED
DECEMBER 31, 2001, 2002 AND 2003
(Figures in tables are presented in millions of Rupiah, unless otherwise stated)

     KSO VII

      The Company and PT Bukaka Singtel International intend to continue the KSO schemes in accordance with original agreements with some additional projects.

      The gross MTR and DKSOR of the unconsolidated KSOs for the years ended December 31, 2001, 2002, 2003 and 20032004 were Rp3,771,000 million, Rp3,586,000 million, and Rp2,769,530 million and Rp1,250,945 million, respectively.

F-109

52.PERUSAHAAN PERSEROAN (PERSERO)
P.T. TELEKOMUNIKASI INDONESIA Tbk AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
DECEMBER 31, 2003 AND 2004, AND FOR YEARS ENDED
DECEMBER 31, 2002, 2003 AND 2004
(Figures in tables are presented in millions of Rupiah, unless otherwise stated)
50. REVENUE-SHARING ARRANGEMENTS

      The Company has entered into separate agreements with several investors under Revenue-Sharing Arrangements (“RSA”) to develop fixed lines, analog mobile cellular lines, public card-phone booths (including their maintenance) and related supporting telecommunications facilities.

      As of December 31, 2003,2004, the Company has 2776 RSA with 2159 partners. The RSA were located mostly in Palembang, Pekanbaru, Jakarta, Central Java and Surabaya with concession period ranging from 244 to 172176 months.

      Under the RSA, the investors finance the costs incurred in developing telecommunications facilities. Upon completion of the construction, the Company manages and operates the facilities and bears the cost of repairs and maintenance during the revenue-sharing period. The investors legally retain the rights to the property, plant and equipment constructed by them during the revenue-sharing periods. At the end of each revenue-sharing period, the investors transfer the ownership of the facilities to the Company.

     The

      Generally, the revenues earned from the customers in the form of line installation charges are allocated in full to the investors. The revenues from outgoing telephone pulses and monthly subscription charges are shared between the investors and the Company based on certain agreed ratio. Certain additional arrangements are made for revenues earned from analog mobile cellular, whereby revenues from international outgoing pulses are allocated in full to the Company. Revenues earned from pay phone cards during the revenue-sharing period are shared 60:40 (in favor of the investors) based on the recorded usage of pulses.

      The net book value of property, plant and equipment under RSA which have been transferred to property, plant and equipment amounted to Rp726Rp34,828 million and Rp34,828Rp53,589 million in 20022003 and 2003,2004, respectively (Note 15)12).

      The investors’ share of revenues amounted to Rp546,701 million, Rp636,985 million, and Rp442,633 million and Rp891,165 million in 2001, 2002, 2003 and 2003,2004, respectively.

53.51. TELECOMMUNICATIONS SERVICES TARIFFS

      Under Law No. 36 year 1999 and Government Regulation No. 52 year 2000, tariffs for the use of telecommunications network and telecommunication services are determined by providers based on the tariffs category, structure and with respect to fixed line telecommunication services price cap formula set by the Government.

     Fixed Line Telephone Tariffs

      Fixed line telephone tariffs are imposed for network access and usage. Access charges consist of a one-time installation charge and a monthly subscription charge. Usage charges are measured in pulses

F-104

PERUSAHAAN PERSEROAN (PERSERO)
P.T. TELEKOMUNIKASI INDONESIA Tbk AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

DECEMBER 31, 2002 AND 2003, AND FOR YEARS ENDED
DECEMBER 31, 2001, 2002 AND 2003
(Figures in tables are presented in millions of Rupiah, unless otherwise stated)

and classified as either local or domestic long-distance. The tariffs depend on call distance, call duration, the time of day, the day of the week and holidays.

      Tariffs for fixed line telephone are regulated under Minister of Communications Decree No. KM.12 year 2002 dated January 29, 2002 concerning the addendum of the decree of Minister of Tourism, Post and Telecommunication (“MTPT”) No. 79 year 1995, concerning the Method for Basic Tariff Adjustment on Domestic Fixed Line Telecommunication Services. Furthermore, the Minister of Communications issued Letter No. PK 304/1/3 PHB-2002 dated January 29, 2002 concerning increase in tariffs for fixed line telecommunications services. According to the letter, tariffs for fixed line domestic calls would increase by 45.49% over three years. The average increase in 2002 was 15%. This increase was effective on February 1, 2002.

     To follow up the previous Letter, the MinistryF-110

PERUSAHAAN PERSEROAN (PERSERO)
P.T. TELEKOMUNIKASI INDONESIA Tbk AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
DECEMBER 31, 2003 AND 2004, AND FOR YEARS ENDED
DECEMBER 31, 2002, 2003 AND 2004
(Figures in tables are presented in millions of Communications issued Letter No. PR.304/2/4/ PHB-2002 dated December 17, 2002 regarding tariff adjustments for domestic fixed line telecommunications services effective on January 1, 2003.Rupiah, unless otherwise stated)
      Considering the fact that the Independent Regulatory Body, a precondition for the tariff adjustment, had not been established, Thethe Minister of Communications postponed the implementation of tariffs adjustments for 2003 by issuing Ministerial Letter No. PR.304/1/1/ PHB-2003, dated January 16, 2003.

      Based on the Announcement No. PM.2 year 2004 of the Minister of Communications dated March 30, 2004, the Company adjusted the tariffs effective April 1, 2004 as follows:
• Local charges increased by an average of 28%
• DLD charges decreased by an average of 10%
• Monthly subscription charges increased by an average of 12% to 25%, depending on customer segment.
     Mobile Cellular Telephone Tariffs

     Tariff

      Tariffs for cellular providers are set on the basis of the MTPT Decree No. KM. 27/KM.27/PR.301/MPPT-98 dated February 23, 1998. Under the regulation, the cellular tariffs consist of activation fees, monthly charges and usage charges.

      The maximum tariff for the activation fee is Rp200,000��Rp200,000 per new subscriber number. The maximum tariff for the monthly charges is Rp65,000. Usage charges consist of the following:

      a. Air time

The maximum basic airtime tariff charged to the originating cellular subscriber is Rp325/minute. Charges to the originating cellular subscriber are calculated as follows:
   
1. Cellular to cellular: cellular 2 times airtime rate
2. Cellular to PSTN: PSTN 1 times airtime rate
3. PSTN to cellular: cellular 1 times airtime rate
4. Card phone to cellular: cellular 1 times airtime rate plus 41% surcharges

b. Usage Tariffs

      b. Usage Tariffs
       1. Usage tariffs charged to a cellular subscriber who makes a call to a fixed line (“PSTN”) subscriber are the same as the usage tariffs applied to PSTN subscribers. For the use of local PSTN network, the tariffs are computed at 50% of the prevailing local PSTN tariffs.
 
       2. The long-distance usage tariffs between two different service areas charged to a cellular subscriber are the same as the prevailing tariffs for domestic long-distance call (“SLJJ”) applied to PSTN subscribers.

      Based on the Decree No. KM. 79 year 1998 of the Ministry of Communications, the maximum tariff for prepaid customers may not exceed 140% of the peak time tariffs for post-paid subscribers.

F-105

PERUSAHAAN PERSEROAN (PERSERO)
P.T. TELEKOMUNIKASI INDONESIA Tbk AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

DECEMBER 31, 2002 AND 2003, AND FOR YEARS ENDED
DECEMBER 31, 2001, 2002 AND 2003
(Figures in tables are presented in millions of Rupiah, unless otherwise stated)

     Interconnection Tariffs

      Interconnection tariffs regulate the sharing of interconnection calls between the Company and other cellularlicensed operators.

F-111

PERUSAHAAN PERSEROAN (PERSERO)
P.T. TELEKOMUNIKASI INDONESIA Tbk AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
DECEMBER 31, 2003 AND 2004, AND FOR YEARS ENDED
DECEMBER 31, 2002, 2003 AND 2004
(Figures in tables are presented in millions of Rupiah, unless otherwise stated)
      The current interconnection tariff is governed under MTPT Decree No. KM.46/PR.301/MPPT-98 (“KM. 46 year 1998”) dated February 27, 1998 which came into effect on April 1, 1998 and was further revised by the Minister of Communications Decree No. KM.37KM. 37 year 1999 dated June 11, 1999 (“KM. 37 year 1999”).

 i. International interconnection with PSTN and cellular telecommunications network

       Based on KM. 37 year 1999, effective December 1, 1998, the international interconnection tariffs are calculated by applying the following charges to successful incoming and outgoing calls to the Company’s network:
     
TarifTariff
(in full Rupiah)
Access charge  Rp850 per call 
Usage charge  Rp550 per paid minute 
Universal Service Obligation (USO)  Rp750 per call 

 ii. Mobile and fixed cellular interconnection with the PSTN

       Based on KM. 46 year 1998, cellular interconnection tariffs with PSTN are as follows:

                1. Local Calls

       For local calls from a mobile cellular network to PSTN, the cellular operator pays the Company 50% of the prevailing tariffs for local calls. For local calls from PSTN to a cellular network, the Company charges its subscribers the applicable local call tariff plus an airtime charge, and pays the cellular operator the airtime charge.

                2. Domestic Long-distance Calls

       KM. 46 year 1998 provides tariffs which vary among long-distance carriers depending upon the routes and the long-distance network used. Pursuant to this decree, for long-distance calls which originate from the PSTN, the Company is entitled to retain a portion of the prevailing long-distance tariffs, which portion ranges from 40% of the tariffs, in cases where the entire long-distance traffic is carried by cellular operator’s network, and delivered to another, and up to 85% of the tariffs, in cases where the entire long-distance traffic is carried by the PSTN.

      For long-distance calls which originate from a cellular operator, the Company is entitled to retain a portion of the prevailing long-distance tariffs, which portion ranges from 25% of the tariff, in cases where the entire long-distance traffic is carried by cellular operator’s network and the call is delivered to a cellular subscriber, and up to 85% of the tariff, in cases where the entire long-distance traffic is carried by the PSTN and the call is delivered to a PSTN subscriber.

     Interconnection tariffs with mobile satellite networks (“STBSAT”) are established based on Joint Operation Agreements between the Company and STBSAT providers pursuant to Minister of Communications Decree No. KM. 30 year 2000 concerning Global Mobile Personal Telecommunication Service

F-106

PERUSAHAAN PERSEROAN (PERSERO)
P.T. TELEKOMUNIKASI INDONESIA Tbk AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

DECEMBER 31, 2002 AND 2003, AND FOR YEARS ENDED
DECEMBER 31, 2001, 2002 AND 2003
(Figures in tables are presented in millions of Rupiah, unless otherwise stated)

Tariffs by Garuda Satellite dated March 29, 2000. Flat interconnection tariffs per minute apply for those companies.

     Interconnection tariffs with mobile cellular networks, including USO, are determined based on the duration of the call. Access and usage charges for international telecommunications traffic interconnection with telecommunications networks of more than one domestic carrier are to be shared proportionately with each carrier involved, which proportion is determined by the MTPT.

     Interconnection tariffs between a fixed wireless network and PSTN, and amongst PSTN, are regulated under MTPT letter No. KU.506/1/1/ MPPT-97 dated January 2, 1997 and letter No. KU.506/4/6/ MPPT-97 dated July 21, 1997. Currently, Ratelindo is the only operator of a fixed wireless network and apart from the Company, PT Batam Bintan Telekomunikasi (“BBT”) is the only operator of PSTN. For fixed wireless interconnection with the PSTN and BBT with the PSTN, the “sender-keeps-all” basis for local calls is applied and for domestic long-distance calls that originate from Ratelindo’s network and transit to the PSTN, the Company receives 35% of Ratelindo’s revenue for such calls. For domestic long-distance calls that originate from the PSTN, the Company retains 65% as its revenue for such calls. For long distance calls from and to BBT, the Company retains 75% of the revenue while BBT receives the remaining 25%.

iii. Mobile cellular interconnection with other mobile cellular providers

     Based on KM. 46 year 1998, the mobile cellular interconnection tariffs with other mobile cellular providers are as follows:

               1. Local Calls

     For local calls from one cellular telecommunications network to another, the originating cellular operator pays the airtime to the destination cellular operator. If the call is carried by the PSTN, the cellular operator pays the PSTN operator 50% of the prevailing tariffs for local calls.

               2. Domestic Long-distance Calls

     For long-distance calls which are originated from a cellular telecommunications network, the cellular operator is entitled to retain a portion of the prevailing long-distance tariffs, which portion ranges from 15%25% of the tariff, in cases where the entire long-distance traffic is not carried by cellular operator’s network and the call is delivered to a cellular operator,subscriber, and up to 60%85% of the tariff, in cases where the entire long-distance portiontraffic is carried by the cellular operatorPSTN and the call is delivered to another cellular operator, or upa PSTN subscriber.

      Interconnection tariffs with mobile satellite networks (“STBSAT”) are established based on Joint Operation Agreements between the Company and STBSAT providers pursuant to 75% if the call is delivered to the same cellular operator.Minister of Communications Decree No. KM. 30 year 2000 concerning Global Mobile Personal Telecommunication Service Tariffs by Garuda Satellite dated March 29, 2000. Flat interconnection tariffs per minute apply for those companies.

     In connection with the issuance of Law No. 36 year 1999 and Government Regulation No. 52 year 2000, the Minister of Communications, on May 31, 2001, issued Decree No. KM. 20 year 2001, concerning Operations of Telecommunications Network and KM. 21 year 2001, concerning Operations of Telecommunications Services, which became effective from the date of the decree. Subsequently, the Minister of Communications issued Decree No. KM. 84 year 2002 concerning Telecommunication Traffic Clearing Process.

F-107F-112

PERUSAHAAN PERSEROAN (PERSERO)
P.T. TELEKOMUNIKASI INDONESIA Tbk AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
DECEMBER 31, 20022003 AND 2003,2004, AND FOR YEARS ENDED
DECEMBER 31, 2001, 2002, 2003 AND 20032004
(Figures in tables are presented in millions of Rupiah, unless otherwise stated)
iii. Fixed-line and fixed-wireless network interconnection
      Currently the operators of fixed wireline and fixed wireless network are PT Batam Bintan Telekomunikasi (“BBT”), Indosat and Bakrie Telecom (“Bakrie”).
                1. Local calls
      Local interconnection calls with the network of Bakrie and BBT are operated on a “sender-keeps-all” basis.
      For local calls originating from the network of Bakrie and BBT and terminating at a cellular network and vice versa which transit through the Company’s network, the Company receives 50% of the local interconnection call tariff for local interconnection with Bakrie and a fixed amount for each minute for local interconnection call with BBT.
      For local interconnection calls with Indosat’s network, the operator of the network on which the calls terminate receives Rp57/minute.
                2. Long-distance calls
      For interconnection with the network of Bakrie and BBT, the Company is entitled to retain 35% of the prevailing DLD tariff, in cases where DLD calls originate on Bakrie’s network and terminate at the Company’s network, 65% of the prevailing DLD tariff, in cases where DLD calls originate on the Company’s network and terminate at Bakrie’s network, and 75% of the prevailing DLD tariff, in cases where DLD calls originate from or terminate at BBT’s network.
      For DLD calls originating from the network of Bakrie and BBT and terminating at a cellular network and vice versa which transit through the Company’s network, the Company receives 60% to 63.75% of the prevailing DLD tariff.
      In addition, BBT is to receive or retain certain fixed amount for each minute of incoming and outgoing international calls which transit through the Company’s network and international gateway, and certain fixed amount for each successful call and each minute of incoming and outgoing international calls that transit through the Company’s network and use Indosat’s international gateway.
      With respect to the interconnection long-distance calls from or to Indosat, pending the implementation of the duopoly system for long-distance calls, Indosat receives Rp240/minute for local originating calls from or local terminating calls at Indosat’s network.
      Based on the Minister of Communications Decree No. 32 year 2004 dated March 11, 2004 and the announcement No. PM. 2 year 2004 of the Minister of Communications dated March 30, 2004, cost-based interconnection fees shall be applicable beginning January 1, 2005. However as of the date of issuance of these consolidated financial statements, such cost-based interconnection fees have not been implemented because the preparation for the adjustment of interconnection arrangements has not been completed.

Public Phone Kiosk (“Wartel”) TariffF-113

PERUSAHAAN PERSEROAN (PERSERO)
P.T. TELEKOMUNIKASI INDONESIA Tbk AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
DECEMBER 31, 2003 AND 2004, AND FOR YEARS ENDED
DECEMBER 31, 2002, 2003 AND 2004
(Figures in tables are presented in millions of Rupiah, unless otherwise stated)
Public Phone Kiosk (“Wartel”) Tariff
      The Company is entitled to retain 70% of the telephone tariff based on Director of Operational and Marketing Decree No. KD 01/HK220/OPSAR-33/2002 dated January 16, 2002, which came into effect on February 16, 2002. This governs the transition of the business arrangement between Telkom and Wartel providers, from a commission-based revenue sharing into agreed usage charges (pulses).

      On August 7, 2002, the Minister of Communications issued Decree No. KM. 46 year 2002 regarding the operation of phone kiosks. The decree provides that the Company is entitled to retain a maximum of 70% of the phone kiosk basic tariffs for domestic calls and up to 92% of phone kiosk basic tariffs for international calls.

54.52. COMMITMENTS

     a. Capital Expenditures

a. Capital Expenditures
As of December 31, 2003,2004, the amount of capital expenditures committed under contractual arrangements, principally relating to procurement and installation of switching equipment, transmission equipment and cable network, are as follows:
                
Amounts in Amounts in  
Foreign CurrenciesEquivalent Foreign Currencies Equivalent
Currencies(in thousands)in Rupiah (in millions) in Rupiah
    
Rupiah — 9,370,973      2,293,478 
U.S. Dollars 310,056 2,622,237 
U.S. Dollar  155  1,443,474 
Euro 72,913 776,024   86  1,085,577 
Japanese Yen 116,276 9,206   202  18,307 
Singapore Dollar 3,881 19,316 
 
      
Total 12,797,756      4,840,836 
 
      

      The above balance includes the following significant agreements:

     (i) Procurement Agreements

(i) Procurement Agreements
      In September 2001, Telkomsel entered into procurement agreements with its three suppliers called “Strategic Partners”, namely Motorola, Inc., PT Ericsson Radio A.B.,Indonesia, Siemens AG, Nokia Corporation (formerly Nokia Oyj) and Siemens Aktiengesellschaft (AG) and one Strategic Supplier (Nokia Oyj.); which was subsequently also called “Strategic Partner”PT Nokia Network, for the procurement of equipment and related services. In accordance with the agreements, with these suppliers, the procurement will be made based on the Notification to Proceed (“NTP”), the agreed procurement planning between Telkomsel and its suppliers for the coming 18 months divided into 6-quarterly periods, which are confirmed with the issuance of Execution Orders (“EO”) on a quarterly basis. The total amount in the EO could be higher or lower but not less than 75% of the amount in the NTP.

      Telkomsel procurement (import) under the agreements with Motorola, Inc. and Nokia Corporation were made partially through the Letter of Credit Facilities from Citibank N.A. and Deutsche Bank (which expired in 2003). Telkomsel’s procurement under the agreements with PT Ericsson Indonesia and Siemens AG were made partially through the credit facilities from Citibank International plc. (Note 24b). The agreements are valid and effective as of the execution date by the respective parties for a period of three years and extendable upon mutual agreement of both parties to a maximum of two additional years.

F-108F-114

PERUSAHAAN PERSEROAN (PERSERO)
P.T. TELEKOMUNIKASI INDONESIA Tbk AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
DECEMBER 31, 20022003 AND 2003,2004, AND FOR YEARS ENDED
DECEMBER 31, 2001, 2002, 2003 AND 20032004
(Figures in tables are presented in millions of Rupiah, unless otherwise stated)

     Telkomsel’s procurement (import) under

      In August 2004, pursuant to the expiration of the above agreements, to maintain a sustainable growth, Telkomsel entered into agreements with Motorola Inc. and Nokia Oyj were made through the Letter of Credit Facilities from Citibank N.A.PT Motorola Indonesia, Ericsson AB and Deutsche Bank (which expired in 2003). Telkomsel’s procurement under the agreements with PT Ericsson Indonesia, Nokia Corporation and PT Nokia Network, and Siemens AG, will be made throughfor the credit facilities from Citibank International plc (Note 26b).

     Telkomsel has not collateralized anymaintenance and procurement of its borrowings, loans Guaranteed Notes or other credit facilities.

     The termsequipment and related services which consist of the variousfollowing:

• Joint Planning and Process Agreement
• Equipment Supply Agreement (“ESA”)
• Technical Service Agreement (“TSA”)
• Site Acquisition and Civil, Mechanical and Engineering Agreement (“SITAC” and “CME”)
      The agreements contain list of charges (“Price List”) to be used in determining the fees payable by Telkomsel for all equipment and related services to be procured during the roll-out period depending on confirmed Purchase Order (“PO”).
      The agreements are valid and effective as of the execution date (“Effective Date”) by the respective parties for a period of three years, provided that the suppliers are able to meet requirements set out in PO. In the event that the suppliers fail to meet those requirements, with Telkomsel’s lendersa prior written notice, Telkomsel may terminate the agreements at its sole discretion.
      In accordance with the agreements, the parties also agreed that the charges specified in the Price List will also apply to equipment and financiers include a number of pledgesservices (ESA and negative pledgesTSA) and services (SITAC and CME) acquired from the suppliers between May 26, 2004 and the Effective Date (“Pre-Effective Date Pricing”), except for those acquired from Siemens under TSA which are applicable for certain equipment and the related maintenance services acquired or rendered between July 1, 2004 and Effective Date. Prices as well as financial and other covenants which must be complied with including, inter alia, certain restrictions on dividend and other profit distributions. The terms of the relevant agreements also contain default and cross default clauses. Management is not aware of any breaches of the terms of these agreements and does not foresee any such breaches occurring in the future.

discount are subject to a quarterly review.

(ii) Procurement of TELKOM-2 Satellite
      The Company has TELKOM-2 Satellite

     In accordance procurement agreement with Agreement No.K.TEL.191/ HK.810/ UTA-00/2002 dated October 24, 2002, which is amended on December 15, 2003, the Company and Orbital Sciences Corporation (“Contractor”(the “Contractor”) agreed on the procurement of the TELKOM-2 satellite. Thewith a total price of US$73,140,32273.1 million. As of December 31, 2004, the Company has paid US$70.5 million and the remaining balance is expected to be fullypaid when the satellite has been launched and passed acceptance test.

(iii) Launching of TELKOM-2 Satellite
      The Company has TELKOM-2 Satellite launching agreement with Arianespace S.A. with a total price of US$62.9 million. The entire contract price was paid in January 2005.September 2004. The agreement also includes a refund provision of US$4,338,292 for any transponder that has its communication capabilities reduced below 3dB and which cannot be corrected by switching to a redundant transponder.

     (iii) Launchinglaunch of TELKOM-2 Satellite,

     On November 8, 2002, the Company and ARIANESPACE S.A. agreed on the launching of TELKOM-2 Satellite which was previously scheduled between November 1, 2004 and January 31, 2005. Payments totaling US$62,880,000 will2005, is currently expected to be made between January 2004 and September 2004.

     (iv) PSTN Excellence Regional Junction DIVRE II Project

     On February 8, 2002, the Company entered into an agreement with Consortium Olex-Lucent-Brimbun (“Consortium”) for the procurement of in SDH Transmission System, Optical Fiber, Network Management System (“NMS”) and other services with a value of approximately US$28,807,460 and Rp102,829 million. The agreement was amended several times with the latest amendment on December 4, 2003 whereby the total cost of services and equipment became approximately US$28,880,957 and Rp123,240 million (inclusive of value-added tax), respectively. The amount was settled in February 2004.

     (v) CDMA Procurement Agreement with Samsung Consortium

June 2005.

(iv) CDMA Procurement Agreement with Samsung Consortium
      On October 9, 2002, the Company signed an Initial Purchase Order Contract for CDMA 2000-IX with Samsung Consortium for Base Station Subsystem (“BSS”) procurement in Regional Division II,Divisions V, VI and VII and on December 23, 2002, the Company signed a Master Procurement Partnership Agreement (“MPPA”). Based on the latest amendment, the total contract price is US$144.1 million and Rp286,537 million. The MPPA provides for planning, manufacturing, delivery, and construction of

F-115

PERUSAHAAN PERSEROAN (PERSERO)
P.T. TELEKOMUNIKASI INDONESIA Tbk AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
DECEMBER 31, 2003 AND 2004, AND FOR YEARS ENDED
DECEMBER 31, 2002, 2003 AND 2004
(Figures in tables are presented in millions of Rupiah, unless otherwise stated)
1.6 million lines as well as service level agreement. The MPPA between the Company and Samsung consists of construction of 1,656,300 lines of Network and Switching Subsystem (“NSS”) for nationwide and

F-109

PERUSAHAAN PERSEROAN (PERSERO)
P.T. TELEKOMUNIKASI INDONESIA Tbk AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

DECEMBER 31, 2002 AND 2003, AND FOR YEARS ENDED
DECEMBER 31, 2001, 2002 AND 2003
(Figures in tables are presented in millions of Rupiah, unless otherwise stated)

802,000 lines of BSS for Regional DivisionDivisions III, IV, V, VI, and VII for US$116 per line for BSS and US$34 per line for NSS. This project will be partly financed by The Export-Import Bank of Korea as contemplated in the Loan Agreement dated August 27, 2003. The2003 (Note 24i). As of December 31, 2004, the Company has paid and/or accrued a total facility amounts toof US$123,965,000 and will be available from the execution of the agreement until April 2006 (Note 54i).

136.3 million plus Rp162,238 million.

     (vi)     (v) CDMA Procurement Agreement with Ericsson CDMA Consortium

      The Company and Ericsson CDMA Consortium have also entered into a Master Procurement Partnership Agreement (“MPPA”) on December 23, 2002.2002, which based on the latest amendment the total contract price is US$72.6 million and Rp170,453 million. The MPPA consists of construction of 631,800 lines of BSS for US$116 per line. This MPPA is part of the planning, manufacturing, delivery and construction of total 1.6 million CDMA lines as well as service level agreement.

Under the MPPA, the work related to network deployment shall be carried out and completed within 42 months (six months after end of fiscal year 2005).
     (vii) Partnership Agreement for the Construction and Provision of High Performance Backbone in Sumatera

On November 30, 2001, As of December 31, 2004, the Company signedhas paid and/or accrued a partnership agreement with a consortium consistingtotal of PT Pirelli Cables Indonesia and PT Siemens Indonesia for the construction and provision of a high performance backbone network in Sumatera. The agreement became effective as of June 10, 2002. The scope of work includes the provision of an optical fiber cable, together with transmission equipment and network management systems. The Company is obliged to pay approximately US$46,322,629 and Rp172,69070.7 million as consideration. On June 12, 2003, the parties agreed to amend this agreement to reflect additional work being carried out by the consortium in consideration for a lump-sum additional US$2,830,086 and Rp1,699plus Rp140,952 million. The amount was fully settled in April 2004.

     (viii) Partnership Agreement for the Development of a PSTN Regional Junction for Regional Division V (East Java)

     On December 5, 2001, the Company entered into a partnership agreement with a consortium consisting of Sumitomo Corporation, NEC Corporation and PT Nasio Karya Pratama for the development of a high quality PSTN Regional Junction for Regional Division V (East Java). The scope of work includes the development of a SDH transmission system, as well as the provision of ancillary fiber optic and other related equipment. The Company is obliged to pay approximately JP¥3,670,938,358 and Rp125,464 million which is inclusive of value-added tax. The parties agreed to add another partner to the consortium, PT Communication Cable Systems Indonesia, on September 27, 2002. In accordance with the amendment of the partnership agreement on December 11, 2003, the parties agreed to amend the contract value to JP¥1,258,833,916 and Rp188,788 million (exclusive of value-added tax). The amounts will be paid in the third quarter of 2004.

     (ix)     (vi) Supply Contract for Thailand-Indonesia-Singapore (TIS) Cable Network

      On November 27, 2002, the Company entered into a supply contract with NEC Corporation, the Communications Authority of Thailand (the “CAT”) and Singapore Telecommunications Limited (“SingTel”) whereby NEC Corporation has agreed to construct a submarine fiber optic network linking Thailand, Indonesia and Singapore. Under the terms of this agreement, the Company, SingTel and the

F-110

PERUSAHAAN PERSEROAN (PERSERO)
P.T. TELEKOMUNIKASI INDONESIA Tbk AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

DECEMBER 31, 2002 AND 2003, AND FOR YEARS ENDED
DECEMBER 31, 2001, 2002 AND 2003
(Figures in tables are presented in millions of Rupiah, unless otherwise stated)

CAT will contribute equally to a payment of US$32,680,00032.7 million (inclusive of value-added tax). The amount will be fully settled in the last quarter of 2004.

     b. Agreements on Derivative Transactions

     Telkomsel is exposed to market risks, primarily changes in foreign exchange, and uses derivative instruments in connection with its risk management activities. Telkomsel entered into derivative transactions for the purpose of hedging and not for trading purposes. However, the existing documentation does not fulfill the criteria contained in PSAK 55 to qualify as hedges. Therefore, changes in the fair values of the derivative financial instruments are recognized in the consolidated statements of income.

     Telkomsel purchases equipment from several countries and, as a result, is exposed to movements in foreign currency exchange rates. In 2003, Telkomsel entered into forward foreign exchange contracts with Deutsche Bank (DB) and Standard Chartered Bank (SCB) to protect against foreign exchange risks relating to its foreign currency denominated purchases. The primary purpose of Telkomsel’s foreign currency hedging activities is to protect against the volatility associated with foreign currency purchases of equipment and other assets in the normal course of business.

The following table presents the aggregate notional amounts of Telkomsel’s foreign exchange forward contracts entered into in 2003:

         
US$EUR
(full amount)(full amount)
DB  80,000,000   6,000,000 
SCB  12,000,000   18,000,000 
   
   
 
Total  92,000,000   24,000,000 
   
   
 

As of December 31, 2003, all2004 the Company has paid approximately 90% of the forward contracts with SCB had been settled. The outstanding contract with DB amounted to EUR 1 million. A receivable to reflectprice and the gain on the difference between the contract rate and month-end rate amounting to Rp941,000,000 is reportedremaining 10% was paid in the balance sheet, as part of “accrued income”.

     In 2002, the Company entered into two derivative facility agreements with Bank Mandiri and HSBC with the intention of hedging the Company’s liabilities in foreign currency and for the Company’s liability under the cross-ownership transaction amounting to US$120,000,000 and US$1,000,000, respectively. The facility agreement with Bank Mandiri was extended until April 4, 2004, whilst the facility agreement with HSBC was extended until August 31, 2004. The Company has not used these derivative facilities.

January 2005.

     c.      (vii) MPPA with PT INTI

      The Company and PT INTI signed an MPPA on August 26, 2003 whereby PT INTI is appointed to construct a CDMA fixed wireless access network and integrate such network with the Company’s existing network and all ancillary services relating thereto in West Java and Banten. Under the terms of this Agreement, and its latest amendment PT INTI must deliver the CDMA 2000 IX system within thirty-four months after August 26, 2003 for a total of approximately US$22,856,79132.3 million and Rp61,408Rp105,868 million (inclusive of valued-

F-111

PERUSAHAAN PERSEROAN (PERSERO)
P.T. TELEKOMUNIKASI INDONESIA Tbk AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

DECEMBER 31, 2002 AND 2003, AND FOR YEARS ENDED
DECEMBER 31, 2001, 2002 AND 2003
(Figures in tables are presented in millions of Rupiah, unless otherwise stated)

addedvalue-added tax).PT INTI will service and maintain the CDMA 2000 IX system pursuant to a Service Level Agreement dated the same date in return for an annual consideration of US$2,305,000.2.3 million. As of December 31, 2004, the Company has paid and/or accrued a total of US$30.6 million plus Rp103,461 million.

     (viii) MPPA with Motorola
d. MPPA with Motorola

      On March 24, 2003, the Company signed an MPPA with Motorola, Inc. Under the MPPA, Motorola is obliged to undertake and be jointly responsible for the demand forecast and solely responsible for the survey, design, development, manufacture, delivery, supply, installation, and integration and commissioning of the network, including all project management, training and other related services in relation to the establishment of the “T-21 Program”.

F-116

PERUSAHAAN PERSEROAN (PERSERO)
P.T. TELEKOMUNIKASI INDONESIA Tbk AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
DECEMBER 31, 2003 AND 2004, AND FOR YEARS ENDED
DECEMBER 31, 2002, 2003 AND 2004
(Figures in tables are presented in millions of Rupiah, unless otherwise stated)
The MPPA, as amended, consists of 222,500 lines of BSS (radio system) for Regional Division I Sumatera for a total of approximately US$20,686,85543.2 million and Rp61,268Rp167,111 million. The agreed price does not include the service level agreement, training for technical staff and documentation. The network will use Samsung’s NSS as already contracted on December 23, 2002 (Note 54a(v)52a(iv)). The agreement is valid until mid of 2006. As of December 31, 2004, the Company has paid and/or accrued a total of US$42.8 million plus Rp167,046 million.
     (ix) Partnership Agreement with Siemens Consortium
     
e. Partnership Agreement with Siemens Consortium

The Company entered into a Partnership Agreement with a consortium led by Siemens AG on September 24, 2003 for the development, procurement and construction of a fiber optic backbone transmission network in Kalimantan and Sulawesi, a related work management system and the provision of maintenance services in connection with this network. Other members of the consortium include PT Siemens Indonesia, PT Lembaga Elektronik Indonesia and Corning Cable System GmbH & Co.KG. The consideration payable by the Company for the fiber optic networks is approximately US$3,776,2694.2 million plus Rp74,021Rp79,144 million for the network located within Kalimantan and approximately US$3,815,2953.4 million plus Rp70,733Rp78,566 million for the network located within Sulawesi. As of December 31, 2004, approximately 95% of the project has been completed and the Company has paid approximately 40% of the total contract. The project is expected to complete in 2005.

     (x) Metro Junction and Optical Network Access Agreement for Regional Division III with PT INTI
     
f. Metro Junction and Optical Network Access Agreement for Regional Division III with PT INTI

On November 12, 2003, the Company entered into an agreement with PT INTI for the construction and procurement of an optical network, as well as a network management system and other related services and equipment, with respect to Regional Division III (West Java). Under this agreement and its amendment, the Company is obliged to pay PT INTI a total consideration of approximately US$6,479,9926.6 million and Rp112,427Rp111,655 million.

g. Agreement for the Procurement As of Softswitch System Class 4 with a Consortium Led by Santera-Olex

     On December 18, 2003,31, 2004, the Company has paid and/or accrued a total of US$2.9 million plus Rp59,018 million.

     b. Agreements on Derivative Transactions
      Telkomsel is exposed to market risks, primarily changes in foreign exchange, and uses derivative instruments in connection with its risk management activities. Telkomsel entered into an agreement with a consortium led by Santera-Olexderivative transactions for the constructionpurpose of hedging and procurement of a softswitch system (class 4) andnot for trading purposes. However, the improvement of switching capacityexisting documentation does not fulfill the criteria contained in PSAK 55 to qualify as hedges. Therefore, changes in the existing switching systemfair value of the derivative financial instruments are recognized in Jakarta, Bandungthe consolidated statements of income.
      Telkomsel purchases equipment from several countries and, Surabaya. Pursuantas a result, is exposed to the terms of this agreement, the Company will paymovements in third quarter offoreign currency exchange rates. In 2003 and 2004, approximately US$4,050,510 and Rp2,457 million.

     h. Loan Agreement with Bukopin for Regional Division V Junction Project

     On June 21, 2002, the CompanyTelkomsel entered into a loan agreementforward foreign exchange contracts with a consortiumDeutsche Bank, Standard Chartered Bank and Citibank Jakarta to protect against foreign exchange risk relating to its foreign currency denominated purchases. The primary purpose of banks amountingTelkomsel’s foreign currency hedging activities is to Rp400,000 million for financingprotect against the Regional Division V Junction Project. Bukopin actingvolatility associated with foreign currency purchases of equipment and other assets in the normal course of business.

F-112F-117

PERUSAHAAN PERSEROAN (PERSERO)
P.T. TELEKOMUNIKASI INDONESIA Tbk AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
DECEMBER 31, 20022003 AND 2003,2004, AND FOR YEARS ENDED
DECEMBER 31, 2001, 2002, 2003 AND 20032004
(Figures in tables are presented in millions of Rupiah, unless otherwise stated)

as facility agent, charged

      The following table presents the interest for the first year on the signing date, of 19.5% and then the average 3 month deposit rate plus 4% for the remaining year. The disbursement period is 19 months from the signingaggregate notional amounts of the loan agreement with the repayment period 14 times quarterly starting from April 2004. The loan facility is secured by the project equipment, with a value of not less than Rp500,000 million.

     Subsequently, based on an Addendum to the loan agreement dated April 4,Company’s foreign exchange forwards entered into in 2003 the loan facility was reduced to Rp150,000 million. The disbursement period changed to 18 months from the signing of the Addendum. The repayment schedule in 14 quarterly installments starting from May 21, 2004 and ending on June 21, 2007.

2004:

          
  2003 2004
     
  (in millions) (in millions)
Deutsche Bank        
 U.S. Dollar  80   15 
 Euro  6   — 
Standard Chartered Bank        
 U.S. Dollar  12   — 
 Euro  18   15 
Citibank — U.S. Dollar  —   25 
      As of December 31, 2003, all of the Company has not used this facility.

     i. Loan Agreementforward contracts with The Export-ImportStandard Chartered Bank, which were made in 2003, had been closed and the outstanding contract with Deutsche Bank amounted to EUR1 million.

      As of KoreaDecember 31, 2004, all of the forward contracts with Standard Chartered Bank and Citibank had been closed and the outstanding contract with Deutsche Bank amounted to US$5 million.
      A receivable to reflect the gain on the difference between the contract rate and month-end-rate as of December 31, 2003 and 2004 amounting to Rp941 million and Rp1,020 million, respectively, was included in “Other Receivables” in the consolidated balance sheets.
     c. Borrowing and other credit facilities

(i) Loan Agreement with The Hongkong Shanghai Bank Corporation (“HSBC”)
      On August 27, 2003,December 20, 2004, the Company entered into a revolving loan agreement with the Export-Import BankHSBC for a maximum facility of Korea in the amount of US$123,965,000.Rp500,000 million. The loan will be used to finance the CDMA procurement with Samsung Consortium (Note 54a(v)) up to US$123,965,000 andfacility will be available for withdrawal until April 2006.

     The loanJanuary 20, 2005 and interestany amount drawn down under this facility is payable in 10 semi-annual installments on June 30within 6 months from the withdrawal date. The facility bears interest at one-month Certificate of Bank Indonesia (“SBI”) plus 1% of the amount drawn down which is payable at the maturity date of the loan. On January 20, 2005, the Company drew down Rp100,000 million from the facility.

      On March 28, 2005, the maximum facility was amended to Rp100,000 million with interest rate at one-month SBI plus 1% and US$49.0 million with interest rate at LIBOR plus 1.8%.
      (ii) On December 30 in each year.

     j. In December 2003, Napsindo entered into an agreement with Indosat with regards to an installation of fiber optic international link cable from Jakarta to Hongkong. Napsindo shall pay fixed revenue of US$100,000 and 30% of income to Indosat. Napsindo also3, 2004, Telkomsel entered into a sales VSAT contractLoan Agreement with PT Pundi Karya Abadi amountingDeutsche Bank AG, Jakarta (as “Arranger” and “Agent”) and Bank Central Asia (“BCA”, as “Lender”) covering a total facility of Rp170,000 million (“Facility”). The Facility bears interest at three-month SBI plus 1%, to US$120,000 (inclusivebe paid quarterly in arrears. The facility is available during the period commencing on the date of value-added tax).the agreement and ending on the earlier of sixty (60) days after the date of agreement and the date of which the Facility is fully drawn, cancelled or terminated. The repayment of amount drawn is on the first anniversary of the utilization date of the Facility. The lender (transferor), may at any time, subject to giving five business days prior notice to the Agent, transfer its rights, benefits, and obligations under this agreement to any bank or financial institution. Such transfer is conducted by way of delivery of

55. CONTINGENCIESF-118

PERUSAHAAN PERSEROAN (PERSERO)
P.T. TELEKOMUNIKASI INDONESIA Tbk AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
DECEMBER 31, 2003 AND 2004, AND FOR YEARS ENDED
DECEMBER 31, 2002, 2003 AND 2004
(Figures in tables are presented in millions of Rupiah, unless otherwise stated)
Transfer Agreement from the transferor to the Agent and acknowledgement of the Telkomsel on the transfer.
      (iii) As of December 31, 2003 and 2004, Telkomsel had Banking Facility from Standard Chartered Bank, Jakarta including import L/ C facility (US$25 million), Bank Guarantee (US$25 million) and Foreign Exchange Facility, due on July 31, 2004 and 2005, respectively. The loan bears interest at SIBOR plus 2.5% (US Dollar loan) and three-month SBI plus 2% (Rupiah loan). As of 31 December 2003 and 2004, there was no outstanding loan related to the facility.
      (iv) As of December 31, 2003 and 2004, Telkomsel had L/ C and Trust Receipt Loan Facility of US$40 million from Citibank N.A., Jakarta, due on July 31, 2004 and 2005, respectively. The loan bears interest at 2% above the Bank’s cost of funds (2003: 2.5% above the Bank’s cost of funds). The total loan drawn down from the facility was US$31 million in 2003 and nil in 2004. As of December 31, 2003 and 2004, there was no outstanding loan from the facility.
53. CONTINGENCIES
      a. The SEC requires that the Company’s Annual Report on Form 20-F be filed within six months after the reported balance sheet date. In this respect, the Company published its previous 2002 consolidated financial statements in March 31, 2003 and submitted the Annual Report on Form 20-F to the SEC on April 17, 2003.

      In May 2003, however, the SEC informed the Company that it considered that the submitted 2002 consolidated financial statements were un-audited as the audit firm that was originally appointed to perform the 2002 audit was not qualified for SEC purposes. Due to the time consumed in selecting an SEC qualified auditor, KAP Drs. Haryanto Sahari & Rekan (formerly called KAP Drs. Hadi Sutanto & Rekan), the member firm of PricewaterhouseCoopers in Indonesia, began their work in July 2003. As a result, the Company was not able to meet its June 30, 2003 deadline to file a fully compliant Annual Report on Form 20-F with the SEC.

      Because of the foregoing and the fact that Annual Report was filed after the June 30, 2003 deadline, the Company may face an SEC enforcement action under U.S. securities law and other legal liability and adverse consequences such as delisting of its ADSs from the New York Stock Exchange. In addition, the staff of the SEC has described a press release that the Company issued and furnished to the SEC on Form 6-K in May 2003 as “grossly understating the nature and severity of the staff’s concerns” regarding matters related to the Company’s filing of a non-compliant Annual Report. Such press release could also form the basis of an SEC enforcement action and other legal liability. The

F-113

PERUSAHAAN PERSEROAN (PERSERO)
P.T. TELEKOMUNIKASI INDONESIA Tbk AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

DECEMBER 31, 2002 AND 2003, AND FOR YEARS ENDED
DECEMBER 31, 2001, 2002 AND 2003
(Figures in tables are presented in millions of Rupiah, unless otherwise stated)

Company cannot at this time predict the likelihood or severity of an SEC enforcement action or any other legal liability or adverse consequences.

      b. In the ordinary course of business, the Company has been named as a defendant in various legal actions. Based on Management’s estimate of the outcome of these matters, the Company accrued Rp35,809Rp99 million at December 31, 2003.

2004.

      c. In connection with the re-audit of the Company’s 2002 consolidated financial statements, the former auditor KAP Eddy Pianto filed lawsuits in the South Jakarta District Court against KAP Drs. Haryanto Sahari & Rekan (formerly called KAP Drs. Hadi Sutanto & Rekan) (the Company’s auditor for the re-audit of the 2002 consolidated financial statements), the Company, KAP Hans Tuanakotta Mustofa & Halim (formerly KAP Hans Tuanakotta & Mustofa) (the Company’s 2001

F-119

PERUSAHAAN PERSEROAN (PERSERO)
P.T. TELEKOMUNIKASI INDONESIA Tbk AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
DECEMBER 31, 2003 AND 2004, AND FOR YEARS ENDED
DECEMBER 31, 2002, 2003 AND 2004
(Figures in tables are presented in millions of Rupiah, unless otherwise stated)
auditor) and the Capital Market Supervisory Agency “BAPEPAM” (collectively, “Defendants”), alleging that the Defendants, through the reaudit of the Company’s 2002 consolidated financial statements, had conspired to engage in an illegal action against KAP Eddy Pianto, tarnishing the reputation of KAP Eddy Pianto in the public accounting profession. KAP Eddy Pianto seekssought to recover approximately Rp7,840 billionRp7,840,000 million in damages from the CompanyDefendants. The court decided in the Defendant’s favor and KAP Eddy Pianto appealed. On March 9, 2005, KAP Eddy Pianto withdrew its co-defendants. The mediation processappeal and on March 14, 2005, the District Court granted its request to resolvewithdraw its appeal.
      d. On August 13, 2004, the dispute amicably did not succeed and the Company is scheduled to formally submit its response to the claim soon. The resolution of this issue at present time cannot be determined.

     d. The Company is being inquired by Commissions for Business Competition Watch (Komisi Pengawas Persaingan Usaha) related to alleged unfair business practiceUsaha, “KPPU”) issued its verdict in providing international telecommunications services,Commission Court, which if proven, breachesdetermined that the Company had breached several articles 15, 19 and 25 of Law of the Republic of Indonesia No. 5/1999 on Anti Monopolistic Practices and Unfair Business Competition (“Competition Law”). A breach of this regulation may result in a penalty at a minimum of Rp5,000 million and at a maximum of Rp100,000 million. The Company has not accrued any amount as of December 31, 2003 because the Company is unable to estimate the likelihood of the outcome.

     e. The Company has breached a covenant in the loan agreement with Citibank N.A. and Citibank International Plc which stipulatesIn addition, KPPU also indicated that the Company will not make any loans or grant any creditshould allow Warung Telkom (“kiosks”) to or forchannel international calls to other international call operators, and abolish the benefit of any person. As of June 9, 2004,clause in agreements between the Company has obtained a written waiver from Citibank International Plc with regardand Warung Telkom providers which limit Warung Telkom to entering into the AWI loan (Notes 5c, 26a and 26c).sell telecommunication services of other operators. The Company has also breached a covenant in the loan agreement with Bank Central Asia which stipulates that the Company will not make any guarantee or collateralize its assets forfiled an amount exceeding US$2 million or its equivalent. As of June 23, 2004, the Company has obtained a written waiver from Bank Central Asia with regardappeal to the Company’s time deposits collateralized for Napsindo loan (Notes 11b, 22a and 26c).Bandung District Court which on December 7, 2004, issued its verdicts in favor of the Company. Subsequently, KPPU has filed an appeal to the Indonesian Supreme Court.

F-114F-120

PERUSAHAAN PERSEROAN (PERSERO)
P.T. TELEKOMUNIKASI INDONESIA Tbk AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
DECEMBER 31, 20022003 AND 2003,2004, AND FOR YEARS ENDED
DECEMBER 31, 2001, 2002, 2003 AND 20032004
(Figures in tables are presented in millions of Rupiah, unless otherwise stated)

56.54. ASSETS AND LIABILITIES DENOMINATED IN FOREIGN CURRENCIES

The balances of monetary assets and liabilities denominated in foreign currencies are as follows:
                  
                 
20022003  2003 2004
     
ForeignForeign  Foreign   Foreign  
CurrenciesRupiahCurrenciesRupiah  Currencies Rupiah Currencies Rupiah
(in thousands)Equivalent(in thousands)Equivalent  (in millions) Equivalent (in millions) Equivalent
         
AssetsAssets Assets             
Cash and cash equivalentsCash and cash equivalents Cash and cash equivalents             
U.S. Dollars 349,800 3,127,211 123,536 1,043,400 U.S. Dollar  123.54  1,043,400  74.80  694,116 
Euro 18,148 170,040 39,583 421,288 Euro  39.58  421,288  88.10  1,114,704 
Japanese Yen 36 3 454 35 Japanese Yen  0.45  35  0.98  89 
Trade accounts receivableTrade accounts receivable Trade accounts receivable             
Related parties Related parties U.S. Dollar  9.22  77,925  3.92  36,375 
 U.S. Dollars 7,984 71,374 9,224 77,925 Third parties U.S. Dollar  4.11  34,634  16.19  150,223 
Third parties 
 U.S. Dollars 8,503 76,018 4,108 34,634 
Other accounts receivableOther accounts receivable Other accounts receivable             
U.S. Dollars 202 1,808 12,605 106,258 U.S. Dollar  12.61  106,258  1.12  10,355 
Japanese Yen — — 5,441 429 Japanese Yen  5.44  429  —  — 
French Franc — — 4,805 5,447 French Franc  4.81  5,447  —  — 
Netherland Guilder — — 814 2,745 Netherland Guilder  0.81  2,745  —  — 
Euro — — 21 224 Euro  0.02  224  —  — 
Other current assetsOther current assets Other current assets             
U.S. Dollars 16,922 151,282 4,658 39,269 U.S. Dollar  4.66  39,269  4.61  42,792 
Euro  —  —  0.01  157 
Advances and other non-current assetsAdvances and other non-current assets Advances and other non-current assets             
U.S. Dollars 2,429 21,711 12,290 103,651 U.S. Dollar  1.91  16,283  6.90  64,056 
Escrow accountsEscrow accounts Escrow accounts             
U.S. Dollars 33,325 297,928 61,302 516,128 U.S. Dollar  61.30  516,128  3.24  30,059 
 
 
           
Total AssetsTotal Assets 3,917,375 2,351,433 Total Assets     2,264,065     2,142,926 
 
 
           
Liabilities 
Trade accounts payable 
Related parties 
 U.S. Dollars 54,433 487,715 13,867 117,281 
 Euro 2,027 19,007 2,720 28,947 
Third parties 
 U.S. Dollars 38,342 343,543 92,677 783,127 
 Euro 26,228 245,952 48 516 
 Great Britain Pound Sterling 319 4,598 61 916 
 Japanese Yen 3,039 229 126,925 10,033 
 Singapore Dollars 1 3 144 717 

F-115F-121

PERUSAHAAN PERSEROAN (PERSERO)
P.T. TELEKOMUNIKASI INDONESIA Tbk AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
DECEMBER 31, 20022003 AND 2003,2004, AND FOR YEARS ENDED
DECEMBER 31, 2001, 2002, 2003 AND 20032004
(Figures in tables are presented in millions of Rupiah, unless otherwise stated)
                  
 2003 2004
    
 Foreign   Foreign  
 Currencies Rupiah Currencies Rupiah
 (in millions) Equivalent (in millions) Equivalent
        
LiabilitiesLiabilities             
Trade accounts payableTrade accounts payable             
                  Related parties             
 U.S. Dollar  13.87  117,281  19.13  177,892 
20022003 Euro  2.72  28,947  —  — 
 Myanmar  —  —  0.01  20 
ForeignForeign Singapore Dollar  —  —  —  1 
CurrenciesRupiahCurrenciesRupiahThird parties             
(in thousands)Equivalent(in thousands)Equivalent U.S. Dollar  92.68  783,127  49.57  460,969 
 Euro  0.05  516  —  — 
Other accounts payable 
 Great Britain Pound Sterling  0.06  916  0.06  1,092 
 Japanese Yen  126.93  10,033  7.88  715 
U.S. Dollars 9 77 — —  Singapore Dollar  0.14  717  0.03  146 
Accrued expensesAccrued expenses Accrued expenses             
U.S. Dollars 17,981 161,116 28,946 244,925  U.S. Dollar  28.95  244,925  24.08  223,931 
Japanese Yen 252,604 19,069 14,135 1,117  Japanese Yen  14.14  1,117  20.41  1,852 
Singapore Dollars — — 189 940  Singapore Dollar  0.19  940  0.37  2,135 
Great Britain Pound Sterling — — 46 689  Australian Dollar  —  —  0.07  507 
French Franc — — 710 808  Great Britain Pound Sterling  0.05  689  —  — 
Netherland Guilder — — 482 1,631  Netherland Guilder  0.48  1,631  0.48  1,795 
Euro 9,633 90,336 40,698 433,155  Euro  40.77  433,963  26.54  336,572 
Short-term bank loansShort-term bank loans Short-term bank loans             
Third parties Third parties             
 U.S. Dollars 4,385 39,205 4,460 37,642  U.S. Dollar  4.46  37,642  118.46  1,101,633 
Advances from customers and suppliersAdvances from customers and suppliers Advances from customers and suppliers          
U.S. Dollars 1,555 13,935 3,041 25,701 U.S. Dollar  3.04  25,701  0.42  3,947 
Great Britain Pound Sterling — — 1 7 Great Britain Pound Sterling  —  7  —  — 
Japanese Yen — — 23,940 1,892 Japanese Yen  23.94  1,892  —  — 
Current maturities of long-term liabilitiesCurrent maturities of long-term liabilities Current maturities of long-term liabilities          
U.S. Dollars 249,823 2,238,421 332,921 2,813,246 U.S. Dollar  332.92  2,813,246  116.29  1,081,478 
Euro 3,781 35,455 18,671 198,810 Euro  18.67  198,810  14.64  185,643 
Japanese Yen 374,909 28,306 699,163 55,266 Japanese Yen  699.16  55,266  1,142.91  103,688 
Long-term liabilitiesLong-term liabilities Long-term liabilities             
U.S. Dollars 724,193 6,488,764 699,605 5,913,824 U.S. Dollar  699.61  5,913,824  830.22  7,721,068 
Euro 19,226 180,297 64,976 691,850 Euro  64.98  691,850  36.60  464,108 
Japanese Yen 17,626,220 1,330,614 16,730,301 1,322,460 Japanese Yen  16,730.30  1,322,460  15,527.59  1,408,708 
 
 
           
Total liabilitiesTotal liabilities 11,726,642 12,685,500 Total liabilities     12,685,500     13,277,900 
 
 
           
Net liabilitiesNet liabilities (7,809,267) (10,334,067)Net liabilities     (10,421,435)     (11,134,974)
 
 
           

57.55. SUBSEQUENT EVENTSEVENT

     a. Extraordinary General Meeting of Shareholders

     In connection with the restatement of the consolidated financial statements for the three years ended December 31, 2002, the stockholders ratified the previous declaration of dividends in the Extraordinary General Meeting of Stockholders as stated in notarial deed No. 4 dated March 10, 2004 of Notary A. Partomuan Pohan, S.H., LLM., as follows:

• Dividends for 2002 amounting to Rp3,338,109 million or Rp331.16 per share, social contribution fund (“Dana Bina Lingkungan”) of Rp20,863 million and appropriated Rp813,664 million for general reserves.
• Dividends for 2001 amounting to Rp2,125,055 million or Rp210.81 per share, and appropriated Rp425,011 million for general reserves.Early retirement program
      Based on the Resolution of Human Resources Director No.KR.06/ PS900/ SDM-30/2005 dated February 11, 2005 concerning Early Retirement, the Company offered an Early Retirement Program for

F-116F-122

PERUSAHAAN PERSEROAN (PERSERO)
P.T. TELEKOMUNIKASI INDONESIA Tbk AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
DECEMBER 31, 20022003 AND 2003,2004, AND FOR YEARS ENDED
DECEMBER 31, 2001, 2002, 2003 AND 20032004
(Figures in tables are presented in millions of Rupiah, unless otherwise stated)

• Dividends for 2000 amounting to Rp888,654 million or Rp88.16 per share, and appropriated Rp126.951 million for general reserves.

     b. Amendment

interested and eligible employees. As of KSO IV Agreement with PT Mitra Global Telekomunikasi Indonesia (“MGTI”)

     On January 20, 2004, the Company and MGTI entered into an agreement to amend and restate the KSO Agreement with respect to Regional Division IV. Under the amended KSO Agreement, for the remaining KSO period, the Company will be entitled at its sole discretion and expense to construct new telecommunication facilities in Divre IV. The Company also obtains the right to manage KSO Unit IV and assume the risk and rewards of the KSO Unit IV operation. MGTI will receive a fixed monthly payment regardless of the performance of KSO Unit IV.

     c. Loan Agreement with ABN-AMRO and Settlement of Payment for Pramindo Transaction

     On January 28, 2004, the Company signed a short-term loan agreement with ABN-AMRO Bank NV Jakarta Branch (“ABN-AMRO”) in the amount of approximately US$130,000,000. The loan will be used to re-purchase the outstanding promissory notes on March 15, 2004 which were issued for the acquisition of the Pramindo (Note 5b). The loan and interest is payable to ABN-AMRO in 10 monthly installments from March 2004 to December 2004. The loan bears floating interest rate of LIBOR + 2.75%.

     On March 15, 2004, the Company and Selling shareholders of Pramindo entered into the termination agreement related to acquisition of Pramindo and settled the payment of the remaining liabilities.

     d. Implementation of the Restructuring in Telecommunication Sector

     On March 30, 2004 the Minister of Communication issued Announcement No. PM.2 of 2004 regarding the Implementation of Restructuring in the Telecommunication Sector which, among others, conveys the following matters:

     1. Compensation for early termination of exclusive rights

     The Government shall pay to TELKOM (including its KSO Partners) an amount of Rp478 billion after tax and Indosat shall pay to the Government an amount of Rp178 billion after tax. The payment of compensation shall be made gradually from the “on top” (above allocated ceiling) fund of the State Budget for the Ministry of Communications after approval by Parliament.

     2. Supporting Regulations

Amendments to regulations restricting competition

     1. Domestic Long Distance (DLD) and International Direct Dialing (IDD) access codes are distinctive features of the network as well as distinctive features of basic telephone services. All DLD and IDD operators use a 3 (three)-digits access code (prefix) for all parts of Indonesian territory;
     2. Every customer can freely select (have free selection of) DLD and IDD operators as he/she desires in an automatic manner (normally opened) for each call he/she wishes to make.

F-117

PERUSAHAAN PERSEROAN (PERSERO)
P.T. TELEKOMUNIKASI INDONESIA Tbk AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

DECEMBER 31, 2002 AND 2003, AND FOR YEARS ENDED
DECEMBER 31, 2001, 2002 AND 2003
(Figures in tables are presented in millions of Rupiah, unless otherwise stated)

     3. DLD and IDD fixed telecommunication network operators may provide DLD and IDD basic telephony services;
     4. Furthermore, DLD and IDD operators shall be entitled to determine retail rates for customers and provide services for their customers.

Regulations on Interconnection

     Cost-based interconnection fees shall be applicable as from January 1, 2005. Preparation shall be made within the period commencing on January 1, 2004 and ending on December 31, 2004 for the adjustment of interconnection arrangements with the assistance of consultants, which shall include: the amount of interconnection fees, cost accounting standards, reference interconnection offer (RIO) and interconnection dispute resolutions.

Supervision on competition

     Prohibition of the abuse of position as dominant operator (dumping, cross subsidy, blocking, hampering interconnection, tied sales), as well as prohibition for dominant operator from conducting anti-competition transfer pricing.

     3. Establishment of Indonesian Telecommunication Regulatory Body (BRTI) and Telecommunication Traffic Clearing System (SKTT).

     4. Rebalancing Tariff

     a. With the elimination of cross subsidy of Long-distance Tariff by Local Tariff through the implementation of tariff rebalancing, operators are given freedom to set the local tariff and monthly subscription in accordance to market mechanism, with a minimum decrease of Domestic Long Distance Tariff of 10%.

     b. Accordingly,2005, the Company has adjusted the amount of tariff with the following rebalancing structure:

     1. Local charges increased by an average of 28%
     2. Domestic Long Distance charges decreased by an average of 20% for the 07.00 – 20.00 time band, while other time band are not increased, therefore the decrease of all DLD charges is 10%
     3. Monthly subscription charges increased by an average of 12% – 25%, depending upon its customer segment.

     c. In addition, the Government requires operator to build a minimum of 1.4 million installed lines in 2004 up to 10.7 million installed lines in 2008.

     5. Universal Service Obligation

     Funds for USO development are taken from contributions given by telecommunication operators in the amount of 0.75% of their gross revenue with due observance of bad debtsaccepted and interconnection charges;

     6. Fixed Wireless

     a. FWA is included in the provision for local fixed network services;

F-118

PERUSAHAAN PERSEROAN (PERSERO)
P.T. TELEKOMUNIKASI INDONESIA Tbk AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

DECEMBER 31, 2002 AND 2003, AND FOR YEARS ENDED
DECEMBER 31, 2001, 2002 AND 2003
(Figures in tables are presented in millions of Rupiah, unless otherwise stated)

     b. FWA technology has limited mobility and is operated based on local fixed network operation permit without any automated facilities.

     7. License synchronizationapproved 1,016 employees eligible for the Company and Indosat

early retirement program. The Companyentire early retirement benefits cost of Rp734,981 million was given the right to use access code of 007 for operating international telephone network and Indosat was given the right to access code of 011 for operating long-distance fixed telephone network.

     e. Guaranteed Notes

     As part of Telkomsel’s plan to minimize foreign exchange exposures and to reduce interest charge, subsequent to December 31, 2003, Telkomsel bought back TSFL’s Guaranteed Notes from Deutsche Bank with a total face value of US$51,960,000.

     f. Telkomsel’s interim agreement with Indosat

Pursuant to the expiration of the agreement between Telkomsel and Indosat with regards of the provision of international telecommunication services to GSM mobile cellular customers,paid in April 2004 Telkomsel and Indosat have entered into an interim agreement. Under the terms of the interim agreement, Telkomsel will receive 27% of the applicable tariff for outgoing international calls from Telkomsel subscribers and Rp800 per minute for incoming international calls to Telkomsel subscribers. The interim agreement will be effective from March 1, 2004 until such date that Telkomsel and Indosat enter into a new agreement.2005.

58. 56. SUMMARY OF SIGNIFICANT DIFFERENCES BETWEEN ACCOUNTING PRINCIPLES GENERALLY ACCEPTED IN INDONESIA AND ACCOUNTING PRINCIPLES GENERALLY ACCEPTED IN THE UNITED STATES OF AMERICA

      The consolidated financial statements have been prepared in accordance with accounting principles generally accepted in Indonesia (“Indonesian GAAP”), which differ in certain significant respects with accounting principles generally accepted in the United States of America (“U.S. GAAP”). A description of the differences and their effects on net income and stockholders’ equity are set forth below.

(1) Description of Differences Between Indonesian GAAP and U.S. GAAP

     a. Termination Benefits

(1) Description of differences between Indonesian GAAP and U.S. GAAP
a. Termination Benefits
      Under Indonesian GAAP, termination benefits are recognized as liabilities when certain criteria are met (e.g. the enterprise is demonstratively committed to provide termination benefits as a result of an offer made in order to encourage early retirement).

      Under U.S. GAAP, termination benefits are recognized as liabilities when the employees accept the offer and the amount can be reasonably estimated.

     b. Foreign Exchange Differences Capitalized to Property under Construction

b. Foreign Exchange Differences Capitalized to Property Under Construction
      Under Indonesian GAAP, foreign exchange differences resulting from borrowings used to finance property under construction are capitalized. Capitalization of foreign exchange differences ceaseceases when

F-119

PERUSAHAAN PERSEROAN (PERSERO)
P.T. TELEKOMUNIKASI INDONESIA Tbk AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

DECEMBER 31, 2002 AND 2003, AND FOR YEARS ENDED
DECEMBER 31, 2001, 2002 AND 2003
(Figures in tables are presented in millions of Rupiah, unless otherwise stated)

the construction of the qualifying asset is substantially completed and the constructed property is ready for its intended use.

      Under U.S. GAAP, foreign exchange differences are charged to current operations.

     c. Interest Capitalized on Property under Construction

c. Interest Capitalized on Property under Construction
      Under Indonesian GAAP, qualifying assets, to which interest cost can be capitalized, should be those that take a substantial period of time to get ready for its intended use or sale, i.e. minimum 12 months. To the extent that funds are borrowed specifically for the purpose of obtaining a qualifying asset, the amount of interest cost eligible for capitalization on that asset should be determined based on the actual interest cost incurred on that borrowing during the period of construction less any investment income on the temporary investment of those borrowings.

      Under U.S. GAAP, there is no minimum limit (i.e. 12-month requirement) on the length of the construction period in which the interest cost could be capitalized. The interest income arising from any unused borrowings is recognized directly to current operations.

F-123

PERUSAHAAN PERSEROAN (PERSERO)
P.T. TELEKOMUNIKASI INDONESIA Tbk AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
DECEMBER 31, 2003 AND 2004, AND FOR YEARS ENDED
DECEMBER 31, 2002, 2003 AND 2004
(Figures in tables are presented in millions of Rupiah, unless otherwise stated)
     d. Revenue-sharingRevenue-Sharing Arrangements

      Under Indonesian GAAP, property, plant and equipment built by an investor under revenue-sharing arrangements are recognized as property, plant and equipment under revenue-sharing arrangements in the books of the party to whom ownership in such properties will be transferred at the end of the revenue-sharing period, with a corresponding initial credit to unearned income. The property, plant and equipment are depreciated over their useful lives, while the unearned income is amortized over the revenue-sharing period. The Company records its share of the revenues earned net of amounts due to the investors.

      Under U.S. GAAP, the revenue-sharing arrangements are recorded in a manner similar to capital leases where the fixed assets and obligation under revenue-sharing arrangements are recorded and, correspondingly, an obligation underreflected on the balance sheet. All the revenues generated from the revenue-sharing arrangements is recorded. Aare recorded as a component of operating revenues, while a portion of the investor’sinvestors’ share inof revenue from the revenue-sharing arrangements is recorded as interest expense based on the implicit rate of return and the balance is treated as a reduction of the obligation. Revenues are recorded on a gross basis.

obligation under revenue-sharing arrangements.

     e. Revaluation of Property, Plant and Equipment

      While Indonesian GAAP does not generally allow companies to recognize increases in the value of property, plant and equipment that occur subsequent to acquisition, an exception is provided for revaluations made in accordance with Government regulations. The Company revalued its property, plant and equipment that were used in operations as of January 1, 1979 and January 1, 1987.

      Under U.S. GAAP, asset revaluations are not permitted. The effects of the previous revaluations have been fully depreciated in 2002, such that there ishas been no difference in equity as ofsince December 31, 2002.

     f. Pension

      In 1994 and 1998, the Company provided increases in pension benefits for pensioners. Under Indonesian GAAP, the prior service costs attributable to the increases in pension benefits for pensioners were directly charged to expense in those years. Under U.S. GAAP, because the majority of plan

F-120

PERUSAHAAN PERSEROAN (PERSERO)
P.T. TELEKOMUNIKASI INDONESIA Tbk AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

DECEMBER 31, 2002 AND 2003, AND FOR YEARS ENDED
DECEMBER 31, 2001, 2002 AND 2003
(Figures in tables are presented in millions of Rupiah, unless otherwise stated)

participants are still active, such prior service costs are deferred and amortized systematically over the estimated remaining service period for active employees.

      Under Indonesian GAAP, the Company amortizes the cumulative unrecognized actuarial gain or loss over four years. Under U.S. GAAP, any cumulative unrecognized actuarial gain or loss exceeding 10% of the greater of the projected benefit obligation or the fair value of plan assets is recognized in the statement of income on a straight-line basis over the expected average remaining service period.

      Under U.S. GAAP, the Company would be required to recognize an additional minimum liability when the accumulated benefit obligation exceeds the fair value of the plan assets, and an equal amount would be recognized as an intangible asset, provided that the asset recognized does not exceed the amount of unrecognized prior service cost.

F-124

PERUSAHAAN PERSEROAN (PERSERO)
P.T. TELEKOMUNIKASI INDONESIA Tbk AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
DECEMBER 31, 2003 AND 2004, AND FOR YEARS ENDED
DECEMBER 31, 2002, 2003 AND 2004
(Figures in tables are presented in millions of Rupiah, unless otherwise stated)
     g. Equity in Net Income or Loss of Associated Companies

      The Company records its equity in net income or loss of associated companies based on the associates’ financial statements that have been prepared under Indonesian GAAP.

      For U.S. GAAP reporting purposes, the Company recognizedrecognizes the effect of the differences ofbetween U.S. GAAP and Indonesian GAAP at the investee level in the investment accounts and its share of the net income or loss of those associates.

     h. Land Rights

      In Indonesia, the title of land rests with the State under the Basic Agrarian Law No. 5 of 1960. Land use is accomplished through land rights whereby the holder of the right enjoys the full use of the land for a stated period of time, subject to extensions. The land rights generally are freely tradeable and may be pledged as security under borrowing agreements. Under Indonesian GAAP, land ownership is not depreciated unless it can be foreseen that the possibility for the holder to obtain an extension or renewal of the rights is remote.

      Under U.S. GAAP, the cost of acquired land rights is amortized over the economic useful life which represents the contractual period the holder is expected to retainof the land rights.

     i. Equipment to be Installed

      Under Indonesian GAAP, temporarily idle equipment or equipment that is awaiting installation is not depreciated.

      Under U.S. GAAP, temporarily idle equipment should continue to be depreciated. In 2002, prior year equipment to be installed was fully installed and their carrying values have been reclassified to property, plant and equipment.

     j. Revenue Recognition

      Under Indonesian GAAP, revenues from cellular and fixed wireless services connection fees are recognized as income when the connection takes place (for postpaid service) or at the time of delivery of starter packs to distributors, dealers or customers (for prepaid service). Installation fees for wire line services are recognized at the time of installation. The revenue from calling cards (“Kartu Telepon”) is also recognized when the Company sells the card.

F-121

PERUSAHAAN PERSEROAN (PERSERO)
P.T. TELEKOMUNIKASI INDONESIA Tbk AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

DECEMBER 31, 2002 AND 2003, AND FOR YEARS ENDED
DECEMBER 31, 2001, 2002 AND 2003
(Figures in tables are presented in millions of Rupiah, unless otherwise stated)

      Under U.S. GAAP, revenue from front-end fees and incremental costs up to, but not exceeding such fees, are deferred and recognized over the expected term of the customer relationship. Direct incremental costs were not significant. Revenues from calling cards are recognized upon usage or expiration.

     k. Goodwill

      Under Indonesian GAAP, goodwill is amortized over a period, not exceeding 20 years, that it is expected to benefit the Company.

      Under U.S. GAAP, effective January 1, 2002, goodwill is no longer amortized but rather subjected to a test for impairment.

F-125

PERUSAHAAN PERSEROAN (PERSERO)
P.T. TELEKOMUNIKASI INDONESIA Tbk AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
DECEMBER 31, 2003 AND 2004, AND FOR YEARS ENDED
DECEMBER 31, 2002, 2003 AND 2004
(Figures in tables are presented in millions of Rupiah, unless otherwise stated)
     l. Capital Leases

      Under Indonesian GAAP, a leased asset is capitalized only if all of the following criteria are met: (a) the lessee has an option to purchase the leased asset at the end of the lease period at a price agreed upon at the inception of the lease agreement, and (b) the sum of periodic lease payments, plus the residual value, will cover the acquisition price of the leased asset and related interest, and (c) there is a minimum lease period of 2 years.

      Under U.S. GAAP, a leased asset is capitalized if one of the following criteria is met: (a) there is an automatic transfer of ownership at the end of the lease term; or (b) the lease contains a bargain purchase option; or (c) the lease term is for 75% or more of the economic life of the asset; or (d) the lease payments are at least 90% of the fair value of the asset. Certain leased assets that are accounted for as operating leases under Indonesian GAAP are accounted for as capital leases under U.S. GAAP.

     m. Acquisition of Dayamitra

     The

      On May 17, 2001 the Company acquired a 90.32% interest in Dayamitra and contemporaneously acquired a call option to buy the other 9.68% at a fixed price at a stated future date, and provided to the minority interest holder a put option to sell the other 9.68% to the Company under those same terms; meaning that the fixed price of the call is equal to the fixed price of the put option. Under U.S. GAAP, the Company should account for the option contracts on a combined basis with the minority interest and account for it as a financing of the purchase of the remaining 9.68% minority interest. As such, under U.S. GAAP, the Company has consolidated 100% of Dayamitra and attributed the stated yield earned under the combined derivative and minority interest position to interest expense.

expense since May 17, 2001.

      On December 14, 2004 the Company exercised the option to acquire the 9.86% interest in Dayamitra.
      Under Indonesian GAAP, prior to December 14, 2004, the Company accountsaccounted for the remaining 9.68% of Dayamitra as minority interest. In addition, the option price that has been paid by the Company iswas presented as “Advance payments for investments in shares of stock”.

stock.” The Company started consolidating the remaining 9.68% of Dayamitra on December 14, 2004 following the exercise of the option.

      The difference in the timing of the 9.68% ownership interest recognition gives rise to differences in the timing and amounts of purchase consideration and liability recognized under Indonesian GAAP and U.S. GAAP.
     n. Reversal of Difference Due to Change of Equity in Associated Companies

      Under Indonesian GAAP, differences previously credited directly to equity as a result of equity transactions in associated companies are released to the statement of income upon the sale of an interest in the associate in proportion with the percentage of the interest sold.

F-122

PERUSAHAAN PERSEROAN (PERSERO)
P.T. TELEKOMUNIKASI INDONESIA Tbk AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

DECEMBER 31, 2002 AND 2003, AND FOR YEARS ENDED
DECEMBER 31, 2001, 2002 AND 2003
(Figures in tables are presented in millions of Rupiah, unless otherwise stated)

      Under U.S. GAAP, it is the Company’s policy to include differences resulting from equity transactions in associated companies in equity. Such amounts can not be released to the statement of income and consequently remain in equity indefinitely.

F-126

PERUSAHAAN PERSEROAN (PERSERO)
P.T. TELEKOMUNIKASI INDONESIA Tbk AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
DECEMBER 31, 2003 AND 2004, AND FOR YEARS ENDED
DECEMBER 31, 2002, 2003 AND 2004
(Figures in tables are presented in millions of Rupiah, unless otherwise stated)
     o. Asset Retirement Obligations

      Under Indonesian GAAP, legal obligations associated with the retirement of long-lived assets that result from the acquisition, construction, development and/or the normal operation of a long-lived assets are charged to current operations as incurred.

      Under U.S. GAAP, the obligations are capitalized to the related long-lived assets and depreciated over the useful life of the assets.

The Company and its subsidiaries identified their Asset Retirement Obligations by reviewing contractual agreements to identify whether the Company and its subsidiaries are required to settle any obligations as a result of the prevailing laws, statute, ordinance, written or by legal construction of a contract under the doctrine of promissory estoppel.

     p. Deferred Income Taxes

      Under Indonesian GAAP, the Company does not recognize deferred taxes on temporary differences between the financial statement carrying amounts and tax bases of equity method investments when it is not probable that these differences will be reversedreverse in the foreseeable future.

      Under U.S. GAAP, deferred taxes are recognized in full on temporary differences between the financial statement carrying amounts and tax bases of equity method investments.

     q. Impairment of Assets

      Under Indonesian GAAP, an impairment loss is recognized whenever the carrying amount of an asset or its cash-generating unit exceeds its recoverable amount. The recoverable amount of fixed assetsasset is the greater of its net selling price or value in use. In assessing value in use, the estimated future cash flows are discounted to their present value using a pre-tax discount rate that reflects current market assessments of the time value of money and the risks specific to the asset. An impairment loss can be reversed if there has been a change in the estimates used to determine the recoverable amount. An impairment loss is only reversed to the extent that the asset’s carrying amount does not exceed the carrying amount that would have been determined, net of depreciation, if no impairment loss had been recognized.

      Under U.S. GAAP, an impairment loss is recognized whenever the sum of the expected future cash flows (undiscounted and without interest charges) is less than the carrying amount of the asset. An impaired asset is written down to its estimated fair value based on quoted market prices in active markets or discounting estimated future cash flows. Reversals of previously recognized impairment losses isare prohibited.

      There were no impairment charges recognized by the Company and therefore there were no differences between Indonesian GAAP and U.S. GAAP.

     r. Gain (loss) on SaleDisposal of Property, Plant and Equipment

      Under Indonesian GAAP, the Company classifies gain (loss) on saledisposal of property, plant and equipment as a component of other income (expenses)(expense) which areis excluded from determination of operating income.

F-123

PERUSAHAAN PERSEROAN (PERSERO)
P.T. TELEKOMUNIKASI INDONESIA Tbk AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

DECEMBER 31, 2002 AND 2003, AND FOR YEARS ENDED
DECEMBER 31, 2001, 2002 AND 2003
(Figures in tables are presented in millions of Rupiah, unless otherwise stated)

      Under U.S. GAAP, gain (loss) on saledisposal of property, plant and equipment is classified as a component of operating expenses and hence included in the determination of operating income. For

F-127

PERUSAHAAN PERSEROAN (PERSERO)
P.T. TELEKOMUNIKASI INDONESIA Tbk AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
DECEMBER 31, 2003 AND 2004, AND FOR YEARS ENDED
DECEMBER 31, 2002, 2003 AND 2004
(Figures in tables are presented in millions of Rupiah, unless otherwise stated)
the years ended December 31, 2001, 2002, 2003 and 2003,2004, operating income would have been higher (lower) by Rp10,944 million, Rp130,450 million, Rp182,883 million and Rp182,883(Rp26,089) million respectively, and other income (expenses) would have been lower (higher) by the same amounts due to the inclusion of the gain (loss) on saledisposal of property, plant and equipment in the determination of operating income.

(2) A summary of the significant adjustments to consolidated net income for the years ended December 31, 2001, 2002, 2003 and 20032004 and to consolidated stockholders’ equity as of December 31, 20022003 and 20032004 which would be required if U.S. GAAP had been applied, instead of Indonesian GAAP, in the consolidated financial statements are set forth below:
                                  
Note200120022003  Note 2002 2003 2004
         
Net income according to the consolidated statements of income prepared under Indonesian GAAPNet income according to the consolidated statements of income prepared under Indonesian GAAP 4,068,391 8,039,709 6,087,227 Net income according to the consolidated statements of income prepared under Indonesian GAAP     8,039,709  6,087,227  6,129,209 
 
 
 
           
U.S. GAAP adjustments — increase (decrease) due to:U.S. GAAP adjustments — increase (decrease) due to: U.S. GAAP adjustments — increase (decrease) due to:             
Termination benefits (a) 140,000 530,981 (670,981)Termination benefits  (a)  530,981  (670,981)  — 
Capitalization of foreign exchange differences, net of related depreciation of (76,732), (79,797) and (76,756), respectively (b) 74,987 107,365 76,756 Capitalization of foreign exchange differences, net of related depreciation of (79,797), (76,756) and (75,870), respectively  (b)  107,365  76,756  1,587 
Interest capitalized on property under construction net of related depreciation of (nil), (3,061) and (8,787), respectively (c) 19,690 43,045 39,077 Interest capitalized on property under construction, net of related depreciation of (3,061), (8,787) and (13,392), respectively  (c)  43,045  39,077  26,802 
Revenue-sharing arrangements (d) 43,999 67,959 23,159 Revenue-sharing arrangements  (d)  67,959  23,159  155,369 
Revaluation of property, plant and equipment (e) 4,095 3,929 — Revaluation of property, plant and equipment  (e)  3,929  —  — 
Pension (f) (19,640) 111,415 (109,334)Pension  (f)  111,415  (109,334)  313,870 
Equity in net income/ (loss) of associated companies (g) (3,786) (182) (170)Equity in net income/ (loss) of associated companies  (g)  (182)  (170)  (177)
Amortization of landrights (h) (6,409) (11,781) (10,212)Amortization of land rights  (h)  (11,781)  (10,212)  (13,907)
Depreciation of equipment to be installed (i) — 9,706 — Depreciation of equipment to be installed  (i)  9,706  —  — 
Revenue recognition (j) 81,429 (89,274) (53,226)Revenue recognition  (j)  (89,274)  (53,226)  54,159 
Goodwill (k) — 21,269 21,270 Goodwill  (k)  21,269  21,270  21,270 
Capital leases (l) — 14,241 6,882 Capital leases  (l)  14,241  6,882  (3,435)
Adjustment for Dayamitra accounted at 100% (m) (4,191) (9,270) (24,476)Adjustment for consolidation of Dayamitra  (m)  (9,270)  (24,476)  (72,361)
Reversal of difference due to change of equity in associated companies (n) — (65,158) (38,425)Reversal of difference due to change of equity in associated companies  (n)  (65,158)  (38,425)  — 
Asset retirement obligations (o) — — (848)Asset retirement obligations  (o)  —  (848)  (848)

F-124F-128

PERUSAHAAN PERSEROAN (PERSERO)
P.T. TELEKOMUNIKASI INDONESIA Tbk AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
DECEMBER 31, 20022003 AND 2003,2004, AND FOR YEARS ENDED
DECEMBER 31, 2001, 2002, 2003 AND 20032004
(Figures in tables are presented in millions of Rupiah, unless otherwise stated)
                   
Note200120022003
 Deferred income tax:                
  Deferred income tax on equity method investments  (p)  —   —   119,456 
  Deferred income tax effect on U.S. GAAP adjustments      (100,942)  (220,724)  323,089 
       
   
   
 
       229,232   513,521   (297,983)
 Minority interest      577   34,029   1,396 
       
   
   
 
 Net adjustments      229,809   547,550   (296,587)
       
   
   
 
Net income in accordance with U.S. GAAP      4,298,200   8,587,259   5,790,640 
       
   
   
 
Net income per share — in full Rupiah amount      426.41   851.91   574.47 
       
   
   
 
Net income per ADS (20 Series B shares per ADS) — in full Rupiah amount      8,528.17   17,038.21   11,489.40 
       
   
   
 
                   
  Note 2002 2003 2004
         
 Deferred income tax:                
  Deferred income tax on equity method investments  (p)  —   119,456   (11,234)
  Deferred income tax effect on U.S. GAAP adjustments      (220,724)  323,089   (113,712)
             
       513,521   (297,983)  357,383 
 Minority interest      34,029   1,396   (18,019)
             
 Net adjustments      547,550   (296,587)  339,364 
             
Net income in accordance with U.S. GAAP      8,587,259   5,790,640   6,468,573 
             
Net income per share — in full Rupiah amount*      425.96   287.23   320.86 
             
Net income per ADS — in full Rupiah amount (40 Series B shares per ADS)      17,038.21   11,489.40   12,834.47 
             
* The prior years’ net income per share has been restated to reflect a two-for-one stock split as resolved in the Annual General Meeting of Stockholders on July 30, 2004 (Note 1b).
               
  Note 2003 2004
       
Equity according to the consolidated balance sheets prepared under Indonesian GAAP      17,312,877   20,261,342 
          
U.S. GAAP adjustments — increase (decrease) due to:            
 Capitalization of foreign exchange differences — net of related depreciation  (b)   (550,473)  (548,886)
 Interest capitalized on property under construction — net of related depreciation  (c)   101,812   128,614 
 Revenue-sharing arrangements  (d)   (447,696)  (292,327)
 Revaluation of property, plant and equipment:  (e)         
  Increment      (664,974)  (664,974)
  Accumulated depreciation      664,974   664,974 
 Pension  (f)   122,156   436,026 
 Equity in net income/(loss) of associated companies  (g)   (18,252)  (18,429)
 Amortization of landrights  (h)   (65,211)  (79,118)
 Revenue recognition  (j)   (768,548)  (714,389)
 Goodwill  (k)   42,539   63,809 
 Capital leases  (l)   21,123   17,688 
 Adjustment for consolidation of Dayamitra  (m)   (38,718)  (61,728)
 Asset retirement obligations  (o)   (848)  (1,696)

F-125F-129

PERUSAHAAN PERSEROAN (PERSERO)
P.T. TELEKOMUNIKASI INDONESIA Tbk AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
DECEMBER 31, 20022003 AND 2003,2004, AND FOR YEARS ENDED
DECEMBER 31, 2001, 2002, 2003 AND 20032004
(Figures in tables are presented in millions of Rupiah, unless otherwise stated)
               
Note20022003
Equity according to the consolidated balance sheets prepared under Indonesian GAAP      14,613,617   17,312,877 
       
   
 
U.S. GAAP adjustments — increase (decrease) due to:            
 Early retirement benefits  (a)   670,981   — 
 Capitalization of foreign exchange differences — net of related depreciation  (b)   (627,229)  (550,473)
 Interest capitalized on property under construction — net of related depreciation  (c)   62,735   101,812 
 Revenue-sharing arrangements  (d)   (470,855)  (447,696)
 Revaluation of property, plant and equipment:  (e)         
  Increment      (664,974)  (664,974)
  Accumulated depreciation      664,974   664,974 
 Pension  (f)   231,490   122,156 
 Equity in net loss of associated companies  (g)   (18,082)  (18,252)
 Amortization of landrights  (h)   (54,999)  (65,211)
 Revenue recognition  (j)   (715,322)  (768,548)
 Goodwill  (k)   21,269   42,539 
 Capital leases  (l)   14,241   21,123 
 Adjustment for Dayamitra accounted at 100%  (m)   (14,242)  (38,718)
 Asset retirement obligations  (o)   —   (848)
 Deferred income tax:            
  Deferred income tax on equity method investments  (p)   —   52,186 
  Deferred income tax effect on U.S. GAAP adjustments      132,736   455,825 
       
   
 
       (767,277)  (1,094,105)
 Minority interest      64,524   65,920 
       
   
 
 Net adjustments      (702,753)  (1,028,185)
       
   
 
 Equity in accordance with U.S. GAAP      13,910,864   16,284,692 
       
   
 
              
  Note 2003 2004
       
Deferred income tax:            
 Deferred income tax on equity method investments  (p)   52,186   39,343 
 Deferred income tax effect on U.S. GAAP adjustments      455,825   334,900 
          
       (1,094,105)  (696,193)
Minority interest      65,920   5,763 
          
Net adjustments      (1,028,185)  (690,430)
          
Equity in accordance with U.S. GAAP      16,284,692   19,570,912 
          

F-126

PERUSAHAAN PERSEROAN (PERSERO)
P.T. TELEKOMUNIKASI INDONESIA Tbk AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

DECEMBER 31, 2002 AND 2003, AND FOR YEARS ENDED
DECEMBER 31, 2001, 2002 AND 2003
(Figures in tables are presented in millions of Rupiah, unless otherwise stated)

The changes in stockholders’ equity in accordance with U.S. GAAP for the years ended December 31, 2001, 2002, 2003 and 20032004 are as follows:

                          
200120022003  2002 2003 2004
       
Equity at beginning of yearEquity at beginning of year 12,927,793 7,765,500 13,910,864 Equity at beginning of year  7,765,500  13,910,864  16,284,692 
Changes during the year:Changes during the year: Changes during the year:          
Net income under U.S. GAAP 4,298,200 8,587,259 5,790,640 Net income under U.S. GAAP  8,587,259  5,790,640  6,468,573 
Dividends (888,654) (2,125,055) (3,338,109)Dividends  (2,125,055)  (3,338,109)  (3,186,991)
Difference due to change in equity of investees (119,961) — — Other comprehensive income, net of tax  (20,802)  (78,703)  4,638 
Other comprehensive income, net of nil tax 3,612 (20,802) (78,703)Common control transaction  (296,038)  —  — 
Common control transaction (8,455,490) (296,038) —         
 
 
 
 
Equity at end of yearEquity at end of year 7,765,500 13,910,864 16,284,692 Equity at end of year  13,910,864  16,284,692  19,570,912 
 
 
 
         

With regard to the consolidated balance sheets, the following significant captions determined under U.S. GAAP would have been:
                
20022003 2003 2004
    
Consolidated balance sheets        
Current assets 10,628,933 9,411,469   9,411,469  9,610,433 
Non-current assets 33,994,014 41,935,581   41,935,581  47,091,387 
 
 
      
Total assets 44,622,947 51,347,050   51,347,050  56,701,820 
 
 
      
Current liabilities 9,037,200 11,207,431   11,207,431  11,650,470 
Non-current liabilities 19,143,607 20,212,692   20,212,692  20,547,769 
 
 
      
Total liabilities 28,180,807 31,420,123   31,420,123  32,198,239 
Minority interest in net assets of subsidiaries 2,531,276 3,642,235   3,642,235  4,932,669 
Equity 13,910,864 16,284,692   16,284,692  19,570,912 
 
 
      
Total liabilities and equity 44,622,947 51,347,050   51,347,050  56,701,820 
 
 
      

F-127F-130

PERUSAHAAN PERSEROAN (PERSERO)
P.T. TELEKOMUNIKASI INDONESIA Tbk AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
DECEMBER 31, 20022003 AND 2003,2004, AND FOR YEARS ENDED
DECEMBER 31, 2001, 2002, 2003 AND 20032004
(Figures in tables are presented in millions of Rupiah, unless otherwise stated)
(3) Additional Financial Statement Disclosures Requiredfinancial statement disclosures required by U.S. GAAP and U.S. SEC

     a. Income Tax

The reconciliation between the expected income tax provision in accordance with U.S. GAAP and the actual provision for income tax recorded in accordance with U.S. GAAP is as follows:
                          
200120022003  2002 2003 2004
       
Consolidated income before tax in accordance with U.S. GAAPConsolidated income before tax in accordance with U.S. GAAP 6,880,064 12,483,147 10,711,267 Consolidated income before tax in accordance with U.S. GAAP  12,483,147  10,711,267  12,570,911 
 
 
 
         
Income tax in accordance with U.S. GAAP at 30% statutory tax rateIncome tax in accordance with U.S. GAAP at 30% statutory tax rate 2,064,002 3,744,927 3,213,380 Income tax in accordance with U.S. GAAP at 30% statutory tax rate  3,744,927  3,213,380  3,771,273 
 
 
 
         
Effect of non-deductible expenses (non-taxable income) at the enacted maximum tax rate (30%)Effect of non-deductible expenses (non-taxable income) at the enacted maximum tax rate (30%) Effect of non-deductible expenses (non-taxable income) at the enacted maximum tax rate (30%)          
Net periodic post-retirement benefits cost 111,922 183,597 188,375 Net periodic post-retirement benefit cost  183,597  188,375  139,834 
Amortization of discount on promissory notes and interest expense 28,515 58,298 132,876 Amortization of discount on promissory notes and other borrowing costs  58,298  132,876  136,994 
Amortization of intangible assets 16,713 55,616 — Amortization of intangible assets  55,616  —  — 
Tax penalty — 72,471 16,521 Tax penalty  72,471  16,521  1,941 
Employee benefits 18,707 24,714 6,342 Employee benefits  24,714  6,342  24,719 
Permanent differences of the KSO Units 12,209 (8,767) 16,739 Permanent differences of the KSO Units  (8,767)  16,739  17,213 
Amortization of landrights 1,922 3,534 3,064 Income which was already subject to final tax  (140,982)  (61,876)  (30,743)
Income which was already subject to final tax (169,447) (140,982) (61,876)Gain on sale of Telkomsel’s shares  (949,826)  —  — 
Decline in value of investments 23,288 — — Equity in net (income) loss of associated companies  22,465  (990)  3,273 
Gain on sale of Telkomsel’s shares — (949,826) — Others  57,182  (92,822)  63,514 
Equity in net (income) loss of associated companies 26,842 22,465 (990)        
Others (26,837) 53,648 (95,886)Total  (625,232)  205,165  356,745 
 
 
 
         
Total 43,834 (625,232) 205,165 
 
 
 
 
Provision for income tax in accordance with U.S. GAAPProvision for income tax in accordance with U.S. GAAP 2,107,836 3,119,695 3,418,545 Provision for income tax in accordance with U.S. GAAP  3,119,695  3,418,545  4,128,018 
 
 
 
         

      For the three yearthree-year period ended December 31, 2003,2004, all of the Company’s operating revenues occurred in Indonesia, and accordingly, the Company has not been subject to income taxestax in other countries.

F-128F-131

PERUSAHAAN PERSEROAN (PERSERO)
P.T. TELEKOMUNIKASI INDONESIA Tbk AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
DECEMBER 31, 20022003 AND 2003,2004, AND FOR YEARS ENDED
DECEMBER 31, 2001, 2002, 2003 AND 20032004
(Figures in tables are presented in millions of Rupiah, unless otherwise stated)
                
20022003 2003 2004
    
Deferred tax assets
        
Accounts receivable 151,955 145,918 
Trade accounts receivable  145,918  228,889 
Inventories 14,614 11,528   11,528  15,494 
Tax loss carryforwards 16,254 285,856   285,856  239,501 
Provision for long service awards 146,769 142,084   142,084  164,750 
Deferral of revenue 214,597 230,564   230,564  220,538 
Long-term investments 52,605 38,048   38,048  44,029 
Liabilities of business acquisitions  —  1,009,932 
Provision for employee benefits  131,757  53,692 
Others — 72,730   72,730  40,532 
Provision for employee benefits — 131,757 
 
 
      
Total 596,794 1,058,485   1,058,485  2,017,357 
 
 
      
Deferred tax liabilities
        
Property, plant and equipment (2,406,220) (2,471,577)  (2,471,577)  (3,215,173)
Intangible assets (1,115,897) (1,527,796)  (1,527,796)  (1,592,645)
Pension costs (79,303) (125,010)
Pension benefit costs  (125,010)  (153,177)
Prepaid expenses and other receivables (21,618) (49,519)  (49,519)  (34,290)
Others (842) — 
 
 
      
Total (3,623,880) (4,173,902)  (4,173,902)  (4,995,285)
 
 
      
Total deferred tax liabilities — net (3,027,086) (3,115,417)  (3,115,417)  (2,977,928)
 
 
      

     Benefits enjoyed by pensioners fall under the category of benefits in kind which are non-deductible expenses under Indonesian tax laws.

b. Fair Value of Financial Instruments

b. Fair Value of Financial Instruments
The following methods and assumptions are used to estimate the fair value of each class of financial instruments:
Cash and Cash Equivalentscash equivalents and Temporary Investmentstemporary investments

      The carrying amount approximates fair value because of the short-term nature of the instruments.

     Short-term bank loans

      The carrying amount approximates fair value because of the short-term nature of the instruments.

     Long-term Liabilitiesliabilities

      (i) The fair value of two-step loans are estimated on the basis of the discounted value of future cash flows expected to be paid, considering rates of interest at which the Company could borrow as of the respective balance sheet dates.

      For purposes of estimating the fair value of two-step loans, the Company has used the average Rupiah borrowing rates of 14.92%9.63%, and 9.63%8.04%, the average U.S. Dollar borrowing rate of 1.65%1.21% and 1.21%2.23%, and the respective average borrowing rates for 20022003 and 20032004 for the debt in other currencies. Under the current environment, an estimate of the interest rates as of a point in time, given the significance of the Company’s debt and the general unavailability of funds, is difficult. For one

F-129F-132

PERUSAHAAN PERSEROAN (PERSERO)
P.T. TELEKOMUNIKASI INDONESIA Tbk AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
DECEMBER 31, 20022003 AND 2003,2004, AND FOR YEARS ENDED
DECEMBER 31, 2001, 2002, 2003 AND 20032004
(Figures in tables are presented in millions of Rupiah, unless otherwise stated)

Company’s debt and the general unavailability of funds, is difficult. For one percentage point increase in the above-mentioned borrowing rates, the fair value of the Company’s long-term two-step loans at December 31, 20032004 would decrease by Rp462,988Rp217,340 million.

      (ii) The fair value of suppliers’ credit loans, bridging loan and long-term bank loan is estimated on the basis of the discounted value of future cash flows expected to be paid, considering rates of interest at which the Company could borrow as of the balance sheet date.

      (iii) The fair value of the liability for the acquisitionliabilities of subsidiaries isbusiness acquisitions are estimated on the basis of the discounted future cash flows expected to be paid.

      (iv) The fair value of the bonds and guaranteed notes are based on market prices at balance sheet date.

The estimated fair values of the Company and its subsidiaries’ financial instruments are as follows:
         
Carrying AmountFair Value
2002
 
Cash and cash equivalents 5,699,070 5,699,070 
Temporary investments 573,000 573,000 
Short-term bank loans 39,205 39,205 
Long-term liabilities: 
Two-step loans 8,570,142 9,866,256 
Suppliers’ credit loans 338,697 361,388 
Bridging loan 95,517 101,213 
Bonds 975,992 1,050,000 
Guaranteed notes 1,337,518 1,441,575          
Liabilities for acquisitions of subsidiaries 3,004,935 3,235,312   Carrying Amount Fair Value
Bank loans 247,432 268,309      
2003
2003
 
2003
       
Cash and cash equivalentsCash and cash equivalents 5,094,472 5,094,472 Cash and cash equivalents  5,094,472  5,094,472 
Temporary investmentsTemporary investments 4,006 4,006 Temporary investments  4,006  4,006 
Short-term bank loansShort-term bank loans 37,642 37,642 Short-term bank loans  37,642  37,642 
Long-term liabilities:Long-term liabilities: Long-term liabilities:       
Two-step loans 7,691,045 9,230,697 Two-step loans  7,691,045  9,230,697 
Guaranteed notes 1,121,224 1,452,826 Guaranteed notes  1,121,224  1,452,826 
Bonds 981,278 1,265,606 Bonds  981,278  1,265,606 
Bank loans 2,924,590 3,140,373 Bank loans  2,924,590  3,140,373 
Liabilities for acquisitions of subsidiaries 2,334,749 2,498,138 Liabilities of business acquisitions  2,334,749  2,498,138 
Suppliers’ credit loans 165,629 194,006 Suppliers’ credit loans  165,629  194,006 
Bridging loan 50,365 52,393 Bridging loan  50,365  52,393 
Other 9,153 9,153 Other  9,153  9,153 
2004
2004
       
Cash and cash equivalentsCash and cash equivalents  4,856,123  4,856,123 
Temporary investmentsTemporary investments  19,949  19,949 
Short-term bank loansShort-term bank loans  1,101,633  1,101,633 
Long-term liabilities:Long-term liabilities:       
Two-step loans  6,018,705  6,983,321 
Guaranteed notes  736,174  863,184 
Bonds  986,564  1,245,208 
Bank loans  2,378,315  2,462,916 
Liabilities of business acquisitions  4,317,225  5,033,748 
Medium-term notes  1,077,703  1,100,032 

F-133

PERUSAHAAN PERSEROAN (PERSERO)
P.T. TELEKOMUNIKASI INDONESIA Tbk AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
DECEMBER 31, 2003 AND 2004, AND FOR YEARS ENDED
DECEMBER 31, 2002, 2003 AND 2004
(Figures in tables are presented in millions of Rupiah, unless otherwise stated)
      The methods and assumptions followed to determine the fair value estimates are inherently judgmental and involve various limitations, including the following:

       i. Fair values presented do not take into consideration the effect of future currency fluctuations.

F-130

PERUSAHAAN PERSEROAN (PERSERO)
P.T. TELEKOMUNIKASI INDONESIA Tbk AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

DECEMBER 31, 2002 AND 2003, AND FOR YEARS ENDED
DECEMBER 31, 2001, 2002 AND 2003
(Figures in tables are presented in millions of Rupiah, unless otherwise stated)

       ii. Estimated fair values are not necessarily indicative of the amounts that the Company and its subsidiary would record upon disposal/termination of the financial instruments.

     c. Research and Development

      Research and development expenditures, as determined under U.S. GAAP, amounted to approximately Rp39,523 million, Rp8,995 million, and Rp9,111 million and Rp13,225 million in 2001, 2002, 2003 and 2003,2004, respectively.

     d. Comprehensive Income
                        
200120022003 2002 2003 2004
      
Net income under U.S. GAAP 4,298,200 8,587,259 5,790,640   8,587,259  5,790,640  6,468,573 
Unrealized gain (loss) in value of securities (42) 207 — 
Unrealized holding gain on available-for-sale securities  207  —  884 
Foreign exchange translation of associates 3,654 (21,009) (78,703)  (21,009)  (78,703)  3,754 
 
 
 
        
 4,301,812 8,566,457 5,711,937   8,566,457  5,711,937  6,473,211 
 
 
 
        

Adjustments to net income to arrive at comprehensive income include foreign currency translation adjustments and unrealized holding gains (losses) inof available-for-sale securities. The foreign exchange translation of associates is reported net of income tax of nil, Rp67,270 million and Rp1,609 million for the value of securities.years ended December 31, 2002, 2003 and 2004, respectively. The components of accumulated other comprehensive income (loss) are as follows:
                  
200120022003 2002 2003 2004
      
Unrealized losses in value of securities (207) — — 
Unrealized holding gain on available-for-sale securities  —  —  884 
Foreign exchange translation of associates 256,674 235,665 156,962   235,665  156,962  160,716 
 
 
 
        
 256,467 235,665 156,962   235,665  156,962  161,600 
 
 
 
        

F-134

PERUSAHAAN PERSEROAN (PERSERO)
P.T. TELEKOMUNIKASI INDONESIA Tbk AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
DECEMBER 31, 2003 AND 2004, AND FOR YEARS ENDED
DECEMBER 31, 2002, 2003 AND 2004
(Figures in tables are presented in millions of Rupiah, unless otherwise stated)
e. Employee Benefit Plans
The Company

The disclosures under SFAS No. 87 and SFAS No. 106 are as follows:
                                  
 Pension Health Care
PensionHealth Care    
 2002 2003 2004 2002 2003 2004
200120022003200120022003            
Components of Net Periodic Pension Cost
 
Components of Net Periodic Benefit Cost
                   
Service cost 59,629 90,869 119,089 46,689 69,345 80,599   90,869  119,089  137,264  83,956  88,394  76,163 
Interest cost 277,077 418,044 537,797 298,541 424,834 493,596   418,044  537,797  740,494  424,834  493,596  411,110 
Expected return on plan assets (266,325) (343,121) (421,706) (49,011) (33,744) (56,004)  (343,121)  (421,706)  (436,672)  (33,744)  (56,004)  (61,084)
Net amortization and deferral 61,354 110,557 186,879 78,291 106,501 123,244 
Amortization of prior service cost (gain)  115,495  201,265  201,265  (395)  (367)  (367)
Recognized actuarial loss (gain)  (33,572)  (43,020)  57,641  80,683  99,286  52,006 
Amortization of transition obligation  28,634  28,634  28,634  26,213  24,325  24,325 
Curtailment — — — — 49,576 —   —  —  —  49,576  —  — 
 
 
 
 
 
 
              
Net periodic pension cost 131,735 276,349 422,059 374,510 616,512 641,435 
Net periodic benefit cost  276,349  422,059  728,626  631,123  649,230  502,153 
Amounts charged to KSO Units under contractual agreement  (25,207)  (29,896)  (16,369)  (14,611)  (7,795)  (9,913)
 
 
 
 
 
 
              
Total net periodic benefit cost less amounts charged to KSO Units  251,142  392,163  712,257  616,512  641,435  492,240 
             

F-131F-135

PERUSAHAAN PERSEROAN (PERSERO)
P.T. TELEKOMUNIKASI INDONESIA Tbk AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
DECEMBER 31, 20022003 AND 2003,2004, AND FOR YEARS ENDED
DECEMBER 31, 2001, 2002, 2003 AND 20032004
(Figures in tables are presented in millions of Rupiah, unless otherwise stated)

A summary of

      The following table presents the change in benefit obligation, the change in plan assets, projected benefit obligation and funded status of the plans wereplan and the net amount recognized in the Company’s balance sheets as follows:of December 31, 2003 and 2004:
                
                
PensionHealth Care Pension Health Care
    
2002200320022003 2003 2004 2003 2004
        
Change in benefit obligation
              
Beginning of year 2,289,134 4,248,110 3,286,991 3,812,781 
Benefit obligation at beginning of year  4,248,110  6,852,923  3,843,604  3,787,389 
Service cost 90,869 119,089 69,345 80,599   119,089  137,264  88,394  76,163 
Interest cost 418,044 537,797 424,834 493,596   537,797  740,494  493,596  411,110 
Employee contributions 31,939 40,530 — — 
Plan participants’ contributions  35,173  43,906  —  — 
Actuarial loss (gain)  2,284,868  (155,128)  (539,593)  529,618 
Benefits paid (186,805) (222,421) (70,491) (93,420)  (372,114)  (304,277)  (98,612)  (123,275)
Plan amendment 1,676,601 — — — 
Actuarial (gain) loss (71,672) 2,129,818 102,102 (544,785)
 
 
 
 
          
Benefit obligation at end of year 4,248,110 6,852,923 3,812,781 3,748,771   6,852,923  7,315,182  3,787,389  4,681,005 
 
 
 
 
          
Change in plan assets
              
Fair value of plan assets at beginning of year 2,571,714 3,099,648 330,461 343,896   3,099,648  3,671,309  374,446  505,340 
Employer contributions 359,725 521,816 59,543 180,580 
Actual return on plan assets 343,121 421,706 53,287 56,004   422,278  633,605  41,033  32,173 
Employer contribution  486,324  839,980  188,473  724,530 
Plan participants’ contributions  35,173  43,906  —  — 
Benefits paid (186,805) (222,421) (79,852) (98,612)  (372,114)  (304,277)  (98,612)  (123,275)
Actuarial gain (loss) 11,893 (149,440) (19,543) (14,972)
 
 
 
 
          
Fair value of plan assets at end of year 3,099,648 3,671,309 343,896 466,896   3,671,309  4,884,523  505,340  1,138,768 
 
 
 
 
          
Funded status (1,148,462) (3,181,614) (3,468,885) (3,281,875)  (3,181,614)  (2,430,659)  (3,282,049)  (3,542,237)
Unrecognized prior service cost (gain) 2,264,095 2,062,830 (2,301) (1,934)  2,062,830  1,861,565  (1,934)  (1,566)
Unrecognized actuarial net (gain) loss (943,576) 1,378,701 1,576,793 952,885 
Unrecognized net actuarial loss  1,378,701  974,763  952,885  1,459,408 
Unrecognized net transition obligation 177,525 148,891 291,899 267,574   148,891  120,257  267,574  243,249 
 
 
 
 
          
Net amount recognized 349,582 408,808 (1,602,494) (2,063,350)  408,808  525,926  (2,063,524)  (1,841,146)
 
 
 
 
          
         
Pension
20022003
Accumulated benefit obligation (ABO)  3,436,184   4,258,022 
Fair value of plan asset  (3,099,648)  (3,671,309)
   
   
 
   336,536   586,713 
   
   
 
Excess of ABO over fair value of plan assets  336,536   586,713 
Prepaid pension expense  349,582   408,808 
   
   
 
Additional minimum liability under U.S. GAAP  686,118   995,521 
   
   
 
Unrecognized prior service cost — intangible asset  686,118   995,521 
   
   
 
         
  Pension
   
  2003 2004
     
Accumulated benefit obligation  4,258,022   4,656,605 
Fair value of plan asset  (3,671,309)  (4,884,523)
       
Unfunded accumulated benefits (required minimum liability)  586,713   — 
Overfunded accumulated benefits  —   (227,918)
Prepaid pension cost  408,808   525,926 
       
Additional liability under U.S. GAAP  995,521   — 
       
Intangible asset  995,521   — 
       

F-136

PERUSAHAAN PERSEROAN (PERSERO)
P.T. TELEKOMUNIKASI INDONESIA Tbk AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
DECEMBER 31, 2003 AND 2004, AND FOR YEARS ENDED
DECEMBER 31, 2002, 2003 AND 2004
(Figures in tables are presented in millions of Rupiah, unless otherwise stated)
      The measurement date used to determine pension and health care benefit measures for the pension plan and the health care plan is December 31 for each of eachthe years.

F-132

PERUSAHAAN PERSEROAN (PERSERO)
P.T. TELEKOMUNIKASI INDONESIA Tbk AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

DECEMBER 31, 2002 AND 2003, AND FOR YEARS ENDED
DECEMBER 31, 2001, 2002 AND 2003
(Figures in tables are presented in millions of Rupiah, unless otherwise stated)

The assumptions used by the independent actuary to determine the benefit obligation and net periodic pensionbenefit cost of the planplans as of December 31, 2001, 2002, 2003 and 20032004 were as follows:

                        
                        
PensionHealth Care Pension Health Care
    
200120022003200120022003 2002 2003 2004 2002 2003 2004
            
Discount rate 13% 13% 11% 13% 13% 11%  13%  11%  11%  13%  11%  11%
Expected long-term return on plan assets 13% 13% 11% 13% 13% 11%  13%  11%  10.5%  13%  11%  8%
Rate of compensation increase 6% 6% 8% — — —   6%  8%  8%  —  —  — 

Assumed health care cost trend rates at December 31, 2001, 2002, 2003 and 20032004 are as follow:
                  
200120022003 2002 2003 2004
      
Health care cost trend assumed for next year 16% 14% 12%  14%  12%  12% 
Rate to which the cost trend is assumed to decline (the ultimate trend rate) 10% 10% 8%  10%  8%  8% 
Year that the rate reaches the ultimate trend rate 2005 2005 2006   2005  2006  2007 

      The actuarial valuationvaluations for the defined benefit pension plan and post-retirement health care plan as of December 31, 2001, 2002 and 2003 were prepared on February 4, 2002, February 28, 2003 and January 15, 2004, respectively, by an independent actuary, while the actuarial valuations for those plans as of December 31, 2003 and 2004 were prepared on May 21, 2004 and March 15, 2005, respectively, by PT Watson Wyatt Purbajaga, an independent actuary in association with Watson Wyatt Worldwide.

actuary.

      Discount rate is based on the yields available on Government BondsBond, i.e., 10% – 12% for Bonds maturing between 2008 and 2013. The levelrate of salary growthcompensation increase assumed areis based on long-term inflation of the order of 6% – 7%.

The expected long-term return on plan assets is based on the average rate of earnings expected on the funds invested or to be invested.

Assumed health care cost trends have a significant effect on the amounts reported for the health care plans.plan. A one-perone-percentage-point change in assumed health care cost trend rates would have the following impact:effects:
1-Percentage
Point Increase
Effect on total of service and interest cost107,685
Effect on postretirement benefit obligation758,572
         
  1-Percentage- 1-Percentage-
  Point Increase Point Decrease
     
Effect on total of service and interest cost components  128,311   (99,603)
Effect on post-retirement benefit obligation  916,961   (720,657)

The Company’s pension plan weighted average asset allocation at December 31, 2002 and 2003, by asset category, is as follows:

             
Allocation
of Plan
Assets as of
ExpectedDecember 31
Allocation
200420022003
Debt securities  68%  7%  24%
Deposit securities  21%  82%  67%
Equity securities  7%  7%  5%
Real estate  1%  2%  2%
Other  3%  2%  2%
   
   
   
 
Total  100%  100%  100%
   
   
   
 

F-133F-137

PERUSAHAAN PERSEROAN (PERSERO)
P.T. TELEKOMUNIKASI INDONESIA Tbk AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
DECEMBER 31, 20022003 AND 2003,2004, AND FOR YEARS ENDED
DECEMBER 31, 2001, 2002, 2003 AND 20032004
(Figures in tables are presented in millions of Rupiah, unless otherwise stated)

      The Company’s pension plan weighted average asset allocations at December 31, 2003 and 2004, by asset category, are as follows:
         
  Plan Assets
  as of
  December 31
   
  2003 2004
     
Asset Category        
Debt securities  24%  71%
Deposit securities  67%  17%
Equity securities  5%  7%
Real estate  2%  1%
Other  2%  4%
       
Total  100%  100%
       
      Dana Pensiun Telkom is moving to a more long termlong-term focused investment strategy and during 20042005 intends to further reduce holding deposit securities in favor of longer term debt securities and equity securities.

      Equity securities include the Company’s common stock in the amounts of Rp16,372 million (0.5 percent of total plan assets) and Rp96,063 million (2.0 percent of total plan assets) at December 31, 2003 and 2004, respectively.
      Debt securities include the Company’s bonds in the amounts of Rp 181,022 million (4.9 percent of total plan assets) and Rp159,253 million (3.3 percent of total plan assets) at December 31, 2003 and 2004, respectively.
The Company’s post-retirement health care plan weighted average asset allocations at December 31, 20022003 and 2003,2004, by asset category, are as follows:
          
 Plan Assets
Allocation as of
of Plan December 31
Assets as of  
December 31 2003 2004
    
20022003
Asset Category       
Debt securities — —   —  15%
Deposit securities 98% 98%  98%  84%
Equity securities — — 
Real estate — — 
Other 2% 2%  2%  1%
 
 
      
Total 100% 100%  100%  100%
 
 
      

      Debt securities include the Company’s medium-term notes in the amounts of nil and Rp145,000 million (12.7 percent of total plan assets) at December 31, 2003 and 2004, respectively.
     Contributions

      The Company expects to contribute Rp816,023Rp697,529 million to theits defined benefit pension plan and Rp200,000Rp516,538 million to theits post-retirement health care plan during 2004.2005.

Expected Future Benefit Payments

The expected benefit payments are as follows:

         
PensionHealth Care
2004  242,312   100,054 
2005  282,056   114,866 
2006  316,589   131,507 
2007  367,143   148,374 
2008  437,514   165,132 
2009 – 2013  3,503,488   1,170,330 
Telkomsel
             
Pension
200120022003
Service cost  2,247   4,021   4,679 
Interest cost  1,315   2,395   3,337 
Expected return on assets  (2,417)  (2,741)  (1,013)
Net amortization and deferral  (125)  437   1,045 
   
   
   
 
Net periodic benefit cost  1,020   4,112   8,048 
   
   
   
 

F-134F-138

PERUSAHAAN PERSEROAN (PERSERO)
P.T. TELEKOMUNIKASI INDONESIA Tbk AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
DECEMBER 31, 20022003 AND 2003,2004, AND FOR YEARS ENDED
DECEMBER 31, 2001, 2002, 2003 AND 20032004
(Figures in tables are presented in millions of Rupiah, unless otherwise stated)
Expected Future Benefit Payments
      The expected benefit payments are as follows:
         
  Pension Health Care
     
2005  337,588   125,751 
2006  403,314   143,629 
2007  360,334   164,356 
2008  423,202   185,685 
2009  514,794   207,564 
2010 – 2014  3,694,356   1,457,765 
Telkomsel
             
  Pension Plan
   
  2002 2003 2004
       
Service cost  4,021   4,679   6,300 
Interest cost  2,395   3,337   5,199 
Expected return on plan assets  (2,741)  (1,013)  (824)
Amortization of prior service cost  —   —   125 
Recognized actuarial loss (gain)  (21)  587   1,157 
Amortization of transition obligation  458   458   458 
          
Net periodic benefit cost  4,112   8,048   12,415 
          

A summaryF-139

PERUSAHAAN PERSEROAN (PERSERO)
P.T. TELEKOMUNIKASI INDONESIA Tbk AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
DECEMBER 31, 2003 AND 2004, AND FOR YEARS ENDED
DECEMBER 31, 2002, 2003 AND 2004
(Figures in tables are presented in millions of Rupiah, unless otherwise stated)
      The following table presents the change in benefit obligation, the change in plan assets, projected benefit obligation and funded status of the plans wereplan and the net amount recognized in Telkomsel’s balance sheets as follows:of December 31, 2003 and 2004:
         
20022003
Vested benefits  5,049   9,185 
   
   
 
Accumulated benefit obligation  11,073   21,921 
   
   
 
Projected benefit obligation  28,060   47,645 
Plan assets at fair value  27,918   8,504 
   
   
 
Excess of plan assets over projected benefit obligation  (142)  (39,141)
Unrecognized net transition obligations  7,564   7,106 
Unrecognized prior service cost  —   2,173 
Unrecognized net (gain) loss  (667)  23,831 
   
   
 
Prepaid (unfunded) pension cost before adjustment for minimum liability  6,755   (6,031)
   
   
 
Additional minimum liability  (1,359)  (7,386)
   
   
 
Prepaid (unfunded) pension cost after adjustment for minimum liability  5,396   (13,417)
   
   
 
         
  2003 2004
     
Change in benefit obligation
        
Benefit obligation at beginning of year  28,060   47,646 
Service cost  4,679   6,300 
Interest cost  3,337   5,199 
Plan participants’ contributions  2,001   — 
Actuarial loss  9,777   — 
Benefits paid  (208)  — 
       
Benefit obligation at end of year  47,646   59,145 
       
Change in plan assets
        
Fair value of plan assets at beginning of year  6,063   8,504 
Actual return on plan assets  (2,617)  2,678 
Employer contribution  3,265   — 
Plan participants’ contributions  2,001   — 
Benefits paid  (208)  — 
       
Fair value of plan assets at end of year  8,504   11,182 
       
Funded status  (39,142)  (47,963)
Unrecognized prior service cost  2,173   2,048 
Unrecognized net actuarial loss  23,831   20,820 
Unrecognized transition obligation  7,106   6,648 
       
Net amount recognized  (6,032)  (18,447)
       

         
  2003 2004
     
Accumulated benefit obligation  21,921   26,045 
Fair value of plan assets  (8,504)  (11,182)
       
Unfunded accumulated benefits (required minimum liability)  13,417   14,863 
Accrued pension cost  (6,032)  (18,447)
       
Additional liability under U.S. GAAP  7,385   — 
       
Intangible asset  7,385   — 
       
      The actuarial calculation for the pension plan is prepared by PT Watson Wyatt Purbajaga, an independent actuary in association with Watson Wyatt Worldwide.actuary. The measurement date used to determine pension benefit measures for the pension plan is December 31 of each of the years.

F-140

PERUSAHAAN PERSEROAN (PERSERO)
P.T. TELEKOMUNIKASI INDONESIA Tbk AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
DECEMBER 31, 2003 AND 2004, AND FOR YEARS ENDED
DECEMBER 31, 2002, 2003 AND 2004
(Figures in tables are presented in millions of Rupiah, unless otherwise stated)
The assumptions used by the independent actuary to determine benefit obligation and net periodic pension cost of the plan as of December 31, 2001, 2002, 2003 and 2003 were2004 are as follows:
             
200120022003
Discount rate  12%  12%  11%
Salary growth rate  10%  10%  9%
Expected long term return on assets  12%  12%  7.5%
             
  2002 2003 2004
       
Discount rate  12%  11%  11%
Expected long-term return on plan assets  12%  7.5%  7.5%
Rate of compensation increase  10%  9%  9%
f. Recent Accounting Pronouncements

      SFAS No. 151 “Inventory Cost — an amendment of ARB No. 43, Chapter 4.” In November 2004, FASB Interpretation (FIN)issued SFAS No. 46, “Consolidation151 which requires certain abnormal expenditures to be recognized as expenses in current period. It also requires that the amount of Variable Interest Entities”includes requirementsfixed production overhead allocated to inventory be based on the normal capacity of the production facilities. SFAS No. 151 shall be effective for financial reporting by companies involved with variable interest entities. A variable interest entity is a corporation, partnership, trust or any other legal structure usedstatements for business purposes that either (a) does not have equity investors with voting rights, or (b) has equity investors that do not provide sufficient financial resources for the entity to support its activities. FIN 46 changes that by requiring a variable interest entity to be consolidated by a company if that company is subject to a majority of the risk of loss from the variable interest entity’s activities or entitled to receive a majority of the entity’s residual returns, or both. FIN 46 also requires disclosures about variable interest entities that a companyfiscal years beginning after June 15, 2005. It is not required to consolidate but in which it hasexpected that the adoption of SFAS No. 151 will have a significant variable interest.material effect on the Company’s consolidated financial statements.
      SFAS No. 153 “Exchanges of Nonmonetary Asset — an amendment of APB Opinion No. 29.” In December 2003,2004, FASB issued SFAS No. 153, which shall be effective for nonmonetary asset exchanges occurring in fiscal periods beginning after June 15, 2005. SFAS No. 153 requires that exchanges of productive assets be accounted for at fair value unless fair value can not be reasonably determined or the FASB approvedtransaction lacks commercial substance. It is not expected that the adoption of this standard will have a partial deferral of FIN 46. Undermaterial effect on the new guidance, application of FIN 46R is required inCompany’s consolidated financial statements of public entities that have interests in structures that are commonly referred to as special-purpose entities for periods ending after December 15, 2003. Application by public entities,statements.

F-135F-141

PERUSAHAAN PERSEROAN (PERSERO)
P.T. TELEKOMUNIKASI INDONESIA Tbk AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
DECEMBER 31, 20022003 AND 2003,2004, AND FOR YEARS ENDED
DECEMBER 31, 2001, 2002, 2003 AND 20032004
(Figures in tables are presented in millions of Rupiah, unless otherwise stated)

other than small business issuers, for all other types of variable interest entities is required in financial statements for periods ending after March 15, 2004. The adoption of this standard did not have a material impact on the Company’s financial statements.

SFAS No. 150 “Accounting for Certain Financial Instruments with Characteristics of both Liabilities and Equity”. In May 2003, the FASB issued SFAS No. 150 which establishes standards for the classification and measurement of certain financial instruments with characteristics of both liabilities and equity. It also include required disclosures for financial instruments within its scope. For the Company, SFAS No. 150 was effective for instruments entered into or modified after May 31, 2003 and otherwise will be effective at the beginning of the first financial year beginning after June 15, 2003. FASB Staff Position No. FAS 150-3 deferred certain provisions of SFAS No. 150 for certain mandatorily redeemable non-controlling interests. The Company currently does not have any financial instruments that are within the scope of SFAS No. 150.

EITF Issue 00-21 “Accounting for Revenue Arrangements with Multiple Deliverables”. The Issue addresses a vendor’s accounting for transactions involving the delivery of more than one product or service, and when it is necessary to separate the transaction into individual component deliverables, each with its own separate earnings process. If the conditions requiring separate revenue recognition exist, revenue is allocated among the different deliverables based on their relative fair values (the relative fair value of each of the component deliverables to the aggregated relative fair value of the bundled deliverables), with revenue for each component deliverable recognized when the revenue is realized and earned. The final consensus will be applicable to agreements entered into in fiscal periods beginning after June 15, 2003 with early adoption permitted. The adoption of this standard did not have a material impact on the Company’s financial statements.

F-136

PERUSAHAAN PERSEROAN (PERSERO)
P.T. TELEKOMUNIKASI INDONESIA Tbk AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

DECEMBER 31, 2002 AND 2003, AND FOR YEARS ENDED
DECEMBER 31, 2001, 2002 AND 2003
(Figures in tables are presented in millions of Rupiah, unless otherwise stated)
59. 57. RECONCILIATION OF NET INCOME TO NET CASH PROVIDED BY OPERATING ACTIVITIES
                          
200120022003  2002 2003 2004
       
Net incomeNet income 4,068,391 8,039,709 6,087,227 Net income  8,039,709  6,087,227  6,129,209 
Adjustments to reconcile net income to net cash provided by operating activities:Adjustments to reconcile net income to net cash provided by operating activities: Adjustments to reconcile net income to net cash provided by operating activities:          
Depreciation of property, plant and equipment  3,473,370  4,779,520  6,438,557 
Depreciation of property, plant and equipment 2,869,772 3,473,370 4,779,520 Interest income  (479,802)  (366,024)  (317,941)
Interest income (571,586) (479,802) (366,024)Interest expense  1,582,750  1,383,446  1,270,136 
Interest expense 1,329,642 1,582,750 1,383,446 Foreign exchange (gain) loss  (723,831)  (363,505)  1,192,842 
Foreign exchange (gain) loss (811,933) (723,831) (363,505)Equity in net income of associated companies  (4,598)  (2,819)  (3,420)
Equity in net (income) loss of associated companies 85,686 (4,598) (2,819)(Gain) loss on sale of property, plant and equipment  (130,450)  (182,883)  26,089 
Gain on sale of property, plant and equipment (10,944) (130,450) (182,883)Loss on redemption of Telkomsel’s bonds  —  —  44,628 
(Gain) loss on sale of trading and investment securities — (3,196,380) 46,595 (Gain) loss on sale of trading and investment securities  (3,196,380)  46,595  — 
Amortization of intangible assets 55,709 187,990 730,659 Amortization of goodwill and other intangible assets  187,990  730,659  872,330 
Amortization of unearned income (85,201) (59,691) (61,812)Amortization of unearned income  (59,691)  (61,812)  (93,164)
Amortization of deferred charges 36,014 11,903 26,555 Amortization of deferred charges  11,903  26,555  25,751 
Net periodic postretirement benefit cost 374,510 616,512 641,435 Net periodic post-retirement benefit cost  616,512  641,435  492,240 
Net periodic long service award benefit cost 94,539 289,922 207,126 Net periodic long service award benefit cost  289,922  219,239  159,323 
Provision for doubtful accounts and inventory obsolescence 342,900 31,103 326,419 Provision for doubtful accounts and inventory obsolescence  31,103  326,419  357,096 
Income tax expense 2,006,895 2,898,971 3,861,090 Income tax expense  2,898,971  3,861,090  4,003,072 
Minority interest in net income of subsidiaries 474,605 810,222 1,503,478 Minority interest in net income of subsidiaries  810,222  1,503,478  1,956,301 
Changes in assets and liabilities:Changes in assets and liabilities: Changes in assets and liabilities:          
Trade accounts receivable (980,196) (373,125) (827,772)Trade accounts receivable  (373,125)  (827,772)  (670,103)
Other accounts receivable (78,930) 882 6,512 Other accounts receivable  882  14,579  105,670 
Inventories (51,278) 31,398 76,486 Inventories  31,398  76,486  (58,329)
Prepaid expenses (153,415) (17,936) (344,731)Prepaid expenses  (17,936)  (84,690)  (179,573)
Prepaid taxes — (84,409) (127,607)Prepaid taxes  (84,409)  (127,607)  173,189 
Trade accounts payable 134,237 1,303,288 593,826 Prepaid pension benefit costs  —  (260,041)  196,960 
Other accounts payable 23,035 166,383 (27,663)Trade accounts payable  1,303,288  593,826  (47,618)
Taxes payable 319,412 (1,601,223) 477,961 Other accounts payable  166,383  (27,837)  (96,022)
Accrued expenses 225,170 347,910 (760,763)Taxes payable  (1,601,223)  477,961  (105,991)
Unearned income 60,223 134,850 317,650 Accrued expenses  347,910  (779,917)  (65,078)
Advance from customers and suppliers 89,600 80,090 (30,884)Unearned income  134,850  317,650  266,774 
Contribution to Yayasan Kesehatan Pegawai Telkom (41,693) (59,543) (180,580)Advances from customers and suppliers  80,090  (30,884)  (78,028)
Payment of long service award benefit (28,865) (76,525) (222,743)Accrued pension and other post-retirement benefit costs  —  7,041  18,768 
Interest paid (1,256,404) (900,660) (1,178,332)
Interest received 590,966 480,288 369,982 
Income tax paid (2,098,272) (1,914,895) (3,905,317)
Contributions to Yayasan Kesehatan Pegawai TelkomContributions to Yayasan Kesehatan Pegawai Telkom  (59,543)  (188,473)  (724,530)
Payments of long service award benefitPayments of long service award benefit  (76,525)  (222,743)  (78,057)
Interest paidInterest paid  (900,660)  (1,178,332)  (1,348,919)
Interest receivedInterest received  480,288  369,982  321,677 
Income tax paidIncome tax paid  (1,914,895)  (3,905,317)  (4,132,359)
 
 
 
         
Net cash provided by operating activitiesNet cash provided by operating activities 7,012,589 10,864,473 12,852,532 Net cash provided by operating activities  10,864,473  12,852,532  16,051,480 
 
 
 
         

F-137F-142