UNITED STATES 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
o
REGISTRATION STATEMENT PURSUANT TO SECTION 12(b) OR (g) OF THE SECURITIES EXCHANGE ACT OF 1934
OR
þ
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 20042006
o
Commission file number 1-14406TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
OR
o
SHELL COMPANY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
Date of event requiring this shell company report
Commission 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
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.
   
Title of Name of each exchange on
Title of Each class on which registered
   
American Depositary Shares representing Series B Shares,
par value 250 Rupiah per share
 New York Stock Exchange
Series B Shares, par value 250 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,Dwiwarna Share, par value 250 Rupiah per share 1
Series B Shares, par value 250 Rupiah per share 20,159,999,279
     Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.    Yes þ        No o
     If this report is an annual or transition report, indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934.    Yes o        No þ
     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 þ        No o
Yes X     No     Indicate by check mark whether the registrant is a large accelerate filer, an accelerated filer, or an non-accelerated filer. See definition of “accelerated filer and large accelerated filer” in Rule 12b-2 of the Exchange Act. (Check one):
Large accelerated filer þ        Accelerated filer o        Non-accelerated filer o
     Indicate by check mark which financial statement item the Registrant has elected to follow.
Item 17o        Item 18 X þ
     If this is an annual report, indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    Yes o        No þ
 
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  21 
 FORWARD LOOKING STATEMENTS  7 
 CONVENTIONS  7 
PART I 
PART I
 Item 1.  IDENTITY OF DIRECTORS, SENIOR MANAGEMENT AND ADVISERS*  8 
  OFFER STATISTICS AND EXPECTED TIMETABLE*  8 
  KEY INFORMATION  8 
  INFORMATION ON THE COMPANY  25 
  OPERATING AND FINANCIAL REVIEW AND PROSPECTS  7779 
  DIRECTORS, SENIOR MANAGEMENT AND EMPLOYEES  135141 
  MAJOR STOCKHOLDERS AND RELATED PARTY TRANSACTIONS  143152 
  FINANCIAL INFORMATION  152161 
  THE OFFER AND LISTING  154162 
  ADDITIONAL INFORMATION  158166 
  QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK  173180 
  DESCRIPTION OF SECURITIES OTHER THAN EQUITY SECURITIES*  176184 
PART II 
PART II
 Item 13.  DEFAULTS, DIVIDEND ARREARAGES AND DELINQUENCIES*  176184 
  MATERIAL MODIFICATIONS TO THE RIGHTS OF SECURITY HOLDERS AND USE OF PROCEEDS*  177184 
  CONTROLCONTROLS AND PROCEDURES  177184 
  RESERVED  191187 
  AUDIT COMMITTEE FINANCIAL EXPERT  191187 
  CODE OF ETHICS  192187 
  PRINCIPAL ACCOUNTANT FEES AND SERVICES  192188 
  EXEMPTIONS FROM THE LISTING STANDARDS FOR AUDIT COMMITTEES  193189 
  PURCHASES OF EQUITY SECURITIES BY THE ISSUER AND AFFILIATED PURCHASERS*PURCHASERS  193190 
PART III 
PART III
 Item 17.  CONSOLIDATED FINANCIAL STATEMENTS*  194190 
  CONSOLIDATED FINANCIAL STATEMENTS  194190 
  EXHIBITS  194190 
 Ex-1 The ArticlesEX-4.48 Second Amendment to Contract on Procurement of Incorporation ofTELKOM-2 Satellite between TELKOM and Orbital Sciences Corporation, dated 31 March 2004.
 EX-4.43 MEDIUM TERM NOTES ISSUANCE AGREEMENTEX-4.49 Third Amendment to Contract on Procurement of TELKOM-2 Satellite between TELKOM and Orbital Sciences Corporation, dated 29 October 2004.
 EX-4.44 INDEMNITY AGREEMENT DATED APRIL 25,EX-4.50 Fourth Amendment to Contract on Procurement of TELKOM-2 Satellite between TELKOM and Orbital Sciences Corporation, dated 21 February 2005.
EX-4.51 Fifth Amendment to Contract on Procurement of TELKOM-2 Satellite between TELKOM and Orbital Sciences Corporation, dated 30 August 2005.
EX-4.52 First Amendment To Supply Contract For The Procurement and Installation of Ring Jasuka Backbone between TELKOM and NEC-Siemens Consortium, dated 6 February 2006.
EX-4.53 Second Amendment of the Supply Contract for the Procurement and Installation of Ring JASUKA Backbone between TELKOM and NEC-Siemens Consortium, dated 16 March 2006.
EX-4.54 Third Amendment of the Supply Contract for the Procurement and Installation of Ring JASUKA Backbone between TELKOM and NEC-Siemens Consortium, dated 7 February 2007.
EX-4.55 Amended and Restated KSO7 Agreement, between TELKOM and PT Bukaka Singtel International, dated 19 October 2006.
EX-4.56 First Amendment of Supply Contract for Tanjung Pandan - Pontianak Capacity Expansion between TELKOM and NEC Corporation, dated 12 January 2006.
EX-4.57 Supply Agreement for Surabaya - Ujung Pandang - Banjarmasin (SUB) Capacity Expansion between TELKOM and NEC Corporation, dated 16 August 2006.
EX-4.58 First Amendment to Supply Contract for Surabaya - Ujung Pandang - Banjarmasin (SUB) Capacity Expansion between TELKOM and NEC Corporation, dated 29 December 2006.
EX-4.59 Second Amendment to Supply Contract for Surabaya - Ujung Pandang - Banjarmasin (SUB) Capacity Expansion between TELKOM and NEC Corporation, dated 26 January 2007.
EX-4.60 Third Amendment to Supply Contract for Surabaya - Ujung Pandang - Benjarmasin (SUB) Capacity Expansion between TELKOM and NEC Corporation, dated 21 February 2007.
EX-4.61 Fourth Amendment to Supply Contract for Surabaya - Ujung Pandang - Banjarmasin (SUB) Capacity Expansion between TELKOM and NEC Corporation, dated 12 March 2007.
EX-4.62 Procurement and Installation Agreement for Ring JDCS Project (JEMBER DENPASAR Cable System) between TELKOM and ZTE Consortium, dated 29 December 2006.
EX-4.63 First Amendment for Procurement and Establishment of Regional Metro Junction and Optical Access Network for Regional Division-III between TELKOM and PT Industri Telekomunikasi Indonesia (INTI)
EX-4.64 Second Amendment of Procurement and Establishment of Regional Metro Junction and Optical Access Network for Regional Division-III between TELKOM and PT Industri Telekomunikasi Indonesia (INTI)
EX-4.65 Third Amendment of Procurement and Establishment of Regional Metro Junction and Optical Access Network for Regional Division-III between TELKOM and PT Industri Telekomunikasi Indonesia (INTI)
EX-4.66 Partnership Agreement for FWA CDMA Expansion Project NSS, BSS and PDN System in DIVRE I and DIVRE IV between TELKOM and Huawei Consortium, dated 6 January 2006.
Ex-4.67 Agreement for Procurement and Installation on the CDMA 2000-IX Equipment in Division Regional V East Java between TELKOM and Samsung Consortium dated 8 June 2006.
EX-4.68 First Amendment to Agreement for Procurement and Installation on CDMA 2000-IX Equipment in Divre V East Java between TELKOM and Samsung Consortuim, dated 1 August 2006.
EX-4.69 Second Amendment to Agreement for Procurement and Installation on CDMA 2000-IX Equipment in Divre V East Java between TELKOM and Samsung Consortium, dated 18 December 2006.
EX-4.70 Procurement and Installation Agreement of MSOAN Package III Divre-I Sumatera between TELKOM and PT Industri Telekomunikasi Indonesia (INTI), dated 29 June 2006.
EX-4.71 First Amendment to the Procurement and Installation Agreement of MSOAN Package III Divre-I Sumatera between TELKOM and PT Industri Telekomunikasi Indonesia (INTI), dated 29 December 2006.
EX-4.72 Procurement and Installation Agreement of OSP for Regional Metro Junction (RMJ) Banda Aceh - Sigli Divre I Sumatera between TELKOM and PT Telekomindo Primakarya, dated 3 July 2006.
EX-4.73 Procurement and Installation Agreement of Digital Micro Wave Radio ("GMD Radio") for Regional Metro Junction (RMJ) Package II Java and Kalimantan, between TELKOM and PT Fujitsu Indonesia
EX-4.74 Procurement and Installation Agreement of MSOAN Divre II year 2005 Phase II Location Divre II between TELKOM and ZTE - Temasindo Consortium 6 October 2005.
EX-4.75 First Amendment to Procurement and Installation Agreement of MSOAN Divre II year 2005 Phase II Location Divre II between TELKOM and ZTE - Temasindo Consortium dated 30 December 2005.
EX-4.76 Second Amendment to Procurement and Installation Agreement of MSOAN Divre II year 2005 Phase II Location Divre II between TELKOM and ZTE - Temasindo Consortium dated 15 September 2006.
EX-4.77 Procurement and Installation Agreement on IP Core Backbone Expansion Package-1 between TELKOM and PT Siemens Indonesia, dated 26 September 2006.
EX-4.78 Procurement and Installation Agreement on Expansion of Interface VS.2, E1 Circuit, E1 PRA, CCS#7P, Clip and Enhancement of PSTN Central EWSD between TELKOM and PT Siemens Indonesia
EX-4.79 Procurement and Installation Agreement for FWA CDMA Expansion Project NSS, BSS and PDN System in Divre V between TELKOM and Samsung Consortium dated 13 October 2006.
EX-4.80 Agreement for Procurement and Installation for FWA CDMA Expansion Project NSS, BSS and PDN Systems in Divre VI between TELKOM and ZTE Consortium, dated 28 November 2006.
EX-4.81 Procurement and Installation Agreement on Expansion of Interface VS.2, E1 Circuit, E1 PRA, CCS#7P, Clip and Enhancement of PSTN Central 5ESS between TELKOM and PT Lintas Teknologi Indonesia
EX-4.82 Procurement and Installation Agreement on Expansion of Interface VS.2, E1 Circuit, E1 PRA, CCS#7P, Clip and Enhancement of PSTN Central NEAX between TELKOM and PT NEC Indonesia
EX-4.83 Agreement for Procurement and Installation for Optical Access Network (OAN) Project Package-III between TELKOM and Huawei Consortium, dated 30 November 2006.
EX-4.84 Agreement for Procurement and Installation for FWA CDMA Expansion Project NSS, BSS and PDN Systems in Divre III between TELKOM and Huawei Consortium, dated 8 December 2006.
EX-4.85 Agreement for Procurement and Installation for FWA CDMA Expansion Project NSS, BSS and PDN Systems in Divre II between TELKOM and Huawei Consortium, dated 8 December 2006.
EX-4.86 Agreement for Procurement and Installtion for Optical Access Network (OAN) Project Package-IV between TELKOM and Alcatel-INTI Consortium dated 18 December 2006.
EX-4.87 First Amendment to Procurement and Installation Agreement of MSOAN Divre I Sumatera Package I between TELKOM and PT Dharmala Kumala Utama, dated 28 December 2006.
EX-4.88 Procurement and Installation Agreement of MSOAN Aceh Area Divre I Sumatera between TELKOM and PT NEC Indonesia, dated 16 August 2006.
EX-4.89 First Amendment to Procurement and Installation Agreement of MSOAN Aceh Area Divre I Sumatera between TELKOM and PT NEC Indonesia, dated 29 December 2006.
EX-4.90 Agreement for Procurement and Installation for Secondary Cable Network Package I between TELKOM and Olex Cables Indonesia (OLEXINDO), dated 29 December 2006.
EX-4.91 Agreement for Procurement and Installation for Optical Access Network (OAN) Project Package-I (Divre I and Divre III) between TELKOM and Opnet - Olexindo Consortium, dated 29 December 2006.
EX-4.92 Agreement for Procurement and Installation for Optical Access Network (OAN) Project Package-II (DIVRE-II) between TELKOM and Opnet - Olexindo Consortium, dated 29 December 2006.
EX-4.93 Contract on the CDMA2000-1X Initial Purchase Order Between TELKOM and SAMSUNG Electronics Co., Ltd., dated 9 October 2002.
 EX-12.1 CERTIFICATION PURSUANT TO SECTIONCertification Pursuant to Section 302, The Sarbanes-Oxley Act of 2002
 EX-12.2 CERTIFICATION PURSUANT TO SECTIONCertification Pursuant to Section 302, The Sarbanes-Oxley Act of 2002
 EX-13.1 CERTIFICATION PURSUANT TO SECTIONCertification Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
 EX-13.2 CERTIFICATION PURSUANT TO SECTIONCertification Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
 
Omitted because the item is not applicable.

1i


DEFINITIONS
“3G”is the generic term for third generation mobile phone technologies. 3G offers very high speed connections to cellular phones, enabling video conference and other applications requiring broadband connectivity to the internet. Users connecting to the internet from a laptop using either a cell phone and data cable or a PCcard also benefit from 3G.
“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 40 of TELKOM’s Series B shares.Shares. The ratio of shares to ADS is 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. It is computed by dividing total revenues (including gross interconnection revenues) for a given period by the respective average number of subscribers for such period, except that for the mobile cellular service, revenues do not include connection fees, interconnection revenues, international roaming revenues from non-subscribers and dealer discounts.
 
“ASR”(Answer to Seizure Ratio). See “Call Completion Rate”.“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-BusinessBusiness-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 communicationscommunication 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”.“ASR.”

1


“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.

2


DCS 1800”DCS1800”(Digital Communication System) is a mobile cellular system using GSM technology operating in the 1800Mhz1800 MHz frequency band.
 
“DGPT”is the Director General of Post and Telecommunications.
“Directors’ Decree on Internal Control”is the decree of the Board of Directors, dated October 29, 2004, titled “Internal Control over Financial Reporting in Compliance with the Sections 302 and 404 of the Sarbanes Oxley Act of 2002” on certain policies and procedures for effective internal controls and good corporate governance and early detection of errors, frauds and other misuses.”
 
“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.
 
DSL”(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.
DTR”(Distributable TELKOM Revenues) is the monthly revenue share payable by each KSO Unitunit to TELKOM under the KSO Agreements, being a specified percentage of total KSO revenues in a KSO Unitunit after deduction of specified KSO operating expenses and MTR.
 
dual band”dualband”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 line telecommunication services including domestic long-distance and international long-distance.long- distance.
“e-business”refers to electronic business solutions including electronic payment services, Internet data centers and content and application solutions.
 
“earth station”is the antenna and associated equipment used to receive or transmit telecommunication signals via satellite.
 
“Erlang”refers to a unit of measurement of telephone traffic equal to one hour of conversation.

2


“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 line”refers to fixed wireline and fixed wireless.
 
“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.
 
“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-endend-to-end digital connectivity and allows simultaneous transmission of voice, data and video and provides high-speed Internet connectivity.
“ITRB”refers to the Indonesian Telecommunications Regulatory Body.
 
“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

3


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. See “KSO Period.”
 
“KSO Period”refers to the period covered by thea 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.
 
“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 Communication, from which telecommunications regulatory responsibility was transferred to the MoCI in February 2005.Communication. See “MoCI.”
 
“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 Arrangement”(Pola Bagi Hasil) is a type of Build, Operate and Transfer arrangement scheme between TELKOM and domestic private

4


companies. Under this scheme the private company invests in the telecommunication facilities to be operated by TELKOM.
“PPLT”refers to Penyediaan dan Pengembangan Layanan Telekomunikasi or Provision and Development of Telecommunications Services program established by TELKOM to provide telecommunication infrastructure to certain regions where telecommunication services are not available.
 
“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.
 
RSA”refers to the Revenue-Sharing Agreement.
RUIM” or “RUIM card”(Removable User Identity 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.
 
“SMS”(Short Messaging Service,Service) is 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

5


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 ase-mail, Web sites, financial information, on-line banking, information and entertainment (infotainment), games and micro payments.
“WLL”(Wireless Local Loop) is a means of providing local loop (the physical connection from the subscriber’s premises to the carrier’s point of presence or POP) facility without wires, which allows carriers to provide local loop with approximately 1 Gbps or more in aggregate bandwidth per coverage area. WLL is particularly effective in rocky or soggy terrain.

6


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. and its subsidiaries (“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.9,290Rp.9,000 = US$1.00,1, being the middle market spot rate of exchange for Rupiah against US Dollar quoted by Reuters on December 31, 2004.2006. 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, 20042006 was Rp.9,290Rp.9,020 to US$1.00.1. See Item 3. “Key Information — A. Selected financial data — Exchange Rate Information” for further information regarding rates of exchange between Rupiah and US Dollars.
      Unless expressly stated to the contrary, this Annual Report includes information as of and for the year ended December 31, 2006, and has not been updated or amended for events or circumstances occurring after such date.

7


PART I
ITEM 1.     IDENTITY OF DIRECTORS, SENIOR MANAGEMENT AND ADVISERS
ITEM 1.IDENTITY OF DIRECTORS, SENIOR MANAGEMENT AND ADVISERS
      Not applicable.
ITEM 2.     OFFER STATISTICS AND EXPECTED TIMETABLE
ITEM 2.OFFER STATISTICS AND EXPECTED TIMETABLE
      Not applicable.
ITEM 3.     KEY INFORMATION
ITEM 3.KEY INFORMATION
A.     Selected financial data
      The Company’sTELKOM’s consolidated financial statements for the years 20002002 and 2001 were audited by KAP Hans Tuanakotta Mustofa & Halim (formerly KAP Hans Tuanakotta & Mustofa), the member firm of Deloitte Touche Tohmatsu in Indonesia (“Deloitte”). The Company’s consolidated financial statements for the year 20022006 have been audited by KAP Drs. Haryanto Sahari & Rekan (formerly KAP Drs. Hadi Sutanto & Rekan), the member firm of PricewaterhouseCoopers in Indonesia (“PwC”). The Company’sTELKOM’s consolidated financial statements for the years 2003, 2004 and 20042005 have been audited by KAP Siddharta Siddharta & Widjaja, the member firm of KPMG International in Indonesia (“KPMG”). KPMG is a Swiss cooperative of which all firms are members. See Item 5. “Operating and Financial Review and Prospects — A. Operating Results — Changes in Methods of Accounting under Indonesian GAAP.” 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 — A. Operating Results — Summary of Significant Differences between Indonesian GAAP and U.S. GAAP” and Note 56 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 amountamounts 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.
      For the year 2004, ten2006, 9 companies and their subsidiaries were consolidated into the Company’sTELKOM’s consolidated financial statements, namely: PT AriaWest International (“AriaWest”, 100%) owned by TELKOM), PT Multimedia Nusantara (“Metra”, 100%), PT Graha Sarana Duta (“GSD”, 100%99.9%), PT Pramindo Ikat Nusantara (“Pramindo”, 100%), PT Indonusa Telemedia (“Indonusa”, 90%96%), PT Dayamitra Telekomunikasi (“Dayamitra”, 100%), PT Telekomunikasi Selular (“Telkomsel”, 65%), PT Napsindo Primatel Internasional (“Napsindo”, 60%), and PT Infomedia Nusantara (“Infomedia”, 51%). See Item 4. “Information on the Company — C. Business and PT Pro Infokom Indonesia (“PII”, 51%).Organizational Structure — Information on Subsidiaries and Associated Companies” and Note 1c to TELKOM’s consolidated financial statements.

8


      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,
  
 2002 2003 2004 2005 2006 2006
                               
 Year Ended December 31,    (US$
    (Rp. in billion, except for data relating to shares, million,
 2000 2001 2002 2003 2004 2004  dividends and ADS) except for
                data relating
   (US$ million)    to shares,
 (Rp. in billion, except for data relating to shares,      dividends
 dividends and ADS)      and ADS)(1)
Consolidated Income Statement Data
Consolidated Income Statement Data
                   
Consolidated Income Statement Data
                   
Indonesian GAAPIndonesian GAAP                   Indonesian GAAP                   
OPERATING REVENUESOPERATING REVENUES                   
Operating revenues                   Telephone                   
 Telephone                    Fixed lines                   
 Fixed lines                    Local and domestic long-distance usage  5,448  6,562  7,439  7,223  7,131  792 
 Local and domestic long-distance usage  4,097  5,226  5,448  6,562  7,439  801  Monthly subscription charges  1,475  1,949  2,935  3,290  3,492  388 
 Monthly subscription charges  887  998  1,475  1,949  2,935  316  Installation charges  130  223  201  197  170  19 
 Installation charges  75  98  130  223  201  22  Others  211  163  70  71  186  21 
 Others  119  93  211  163  70  7               
              Total fixed lines revenues  7,264  8,897  10,645  10,781  10,979  1,220 
 Total fixed lines revenues  5,178  6,415  7,264  8,897  10,645  1,146               
 Cellular                    Cellular                   
 Air time charges  2,484  3,988  5,454  7,678  9,826  1,058  Air time charges  5,454  7,678  9,826  13,666  19,257  2,140 
 Monthly subscription charges  356  581  593  581  448  48  Monthly subscription charges  593  581  448  384  298  33 
 Features  7  10  8  6  91  10  Features  8  6  91  457  959  106 
 Connection fee charges  43  129  172  194  56  6  Connection fee charges  172  194  56  64  109  12 
                           
 Total cellular revenues  2,890  4,708  6,227  8,459  10,421  1,122  Total cellular revenues  6,227  8,459  10,421  14,571  20,623  2,291 
 Total telephone revenues  8,068  11,123  13,491  17,356  21,066  2,268               
 Joint Operation Schemes                    Total telephone revenues  13,491  17,356  21,066  25,352  31,602  3,511 
 Minimum TELKOM Revenues (MTR)  1,557  1,474  1,320  900  296  32               
 Share in Distributable KSO Revenues (DKSOR)  695  733  801  583  350  38 Joint Operation Schemes                   
 Amortization of unearned initial investor payments  15  13  7  3  11  1  Minimum TELKOM Revenues (MTR)  1,320  900  296  269  207  23 
              Share in Distributable KSO Revenues (DKSOR)  801  583  350  319  275  30 
 Total revenue under Joint Operation Schemes  2,267  2,220  2,128  1,486  657  71  Amortization of unearned initial investor payments  7  3  11  1  7  1 
 Interconnection  981  1,424  2,831  4,162  6,188  666               
 Network  340  415  316  518  654  70  Total revenue under Joint Operation Schemes  2,128  1,486  657  589  489  54 
 Data and Internet  108  673  1,552  3,109  4,809  518 Interconnection — net  2,831  4,162  6,188  7,742  8,682  965 
 Revenue-Sharing Arrangements  288  264  264  258  281  30 Network  316  518  654  587  719  80 
 Other telecommunications services  138  165  221  227  293  31 Data and Internet  1,552  3,109  4,809  6,934  9,065  1,007 
             Revenue-Sharing Arrangements  264  258  281  302  415  46 
 Total Operating Revenues  12,190  16,284  20,803  27,116  33,948  3,654 Other telecommunications services  221  227  293  301  322  36 
                           
Operating expenses                    Total Operating Revenues  20,803  27,116  33,948  41,807  51,294  5,699 
 Personnel  1,770  2,281  4,388  4,440  5,571  600               
 Depreciation  2,419  2,870  3,474  4,779  6,438  693 
 Operations, maintenance and telecommunication services  1,386  2,150  2,290  3,339  4,530  487 
 General and administrative  872  1,343  1,146  2,079  2,600  280 
 Marketing  147  220  375  503  882  95 
             
 Total Operating Expenses  6,594  8,864  11,673  15,140  20,021  2,155 
             

9


                                          
 Year Ended December 31,  Year ended December 31,
     
 2000 2001 2002 2003 2004 2004  2002 2003 2004 2005 2006 2006
                         
   (US$ million)    (US$
 (Rp. in billion, except for data relating to shares,    (Rp. in billion, except for data relating to shares, million,
 dividends and ADS)    dividends and ADS) except for
Operating Income  5,596  7,420  9,130  11,976  13,927  1,499 
Other income (expense)                   
   data relating
   to shares,
   dividends
   and ADS)(1)
OPERATING EXPENSESOPERATING EXPENSES                   
Gain on sale of long-term investment in Telkomsel      3,196       Personnel  4,388  4,440  4,910  6,563  8,514  946 
Interest expense  (817)  (1,330)  (1,583)  (1,383)  (1,270)  (137)Depreciation  3,474  4,779  6,438  7,571  9,178  1,020 
Interest income  692  572  480  366  318  34 Operations, maintenance and telecommunication services  2,290  3,339  4,530  5,916  7,496  833 
Gain (loss) on foreign exchange — net  (944)  (379)  557  126  (1,221)  (131)General and administrative  1,146  2,079  2,600  2,764  3,271  363 
Equity in net income (loss) of associated companies  (232)  (86)  5  3  3  0 Marketing  375  503  882  1,126  1,242  138 
Other — net  313  353  (36)  364  331  36 Write-down of assets        617     
             Loss on procurement commitments        79     
Other Income (Expense) — net  (988)  (870)  2,619  (524)  (1,839)  (198)
             
Total Operating ExpensesTotal Operating Expenses  11,673  15,140  19,360  24,636  29,701  3,300 
             
Operating IncomeOperating Income  9,130  11,976  14,588  17,171  21,593  2,399 
             
Other income (expenses)Other income (expenses)                   
Gain on sale of long-term investment in Telkomsel  3,196           
Interest expense  (1,583)  (1,383)  (1,270)  (1,177)  (1,286)  (143)
Interest income  480  366��  318  345  655  73 
Gain (loss) on foreign exchange — net  557  126  (1,221)  (517)  836  93 
Equity in net income (loss) of associated companies  5  3  3  11  (7)  (1)
Others — net  (36)  364  331  409  202  23 
             
Other Income (Expenses) — netOther Income (Expenses) — net  2,619  (524)  (1,839)  (929)  400  45 
                           
Income Before TaxIncome Before Tax  4,608  6,550  11,749  11,452  12,088  1,301 Income Before Tax  11,749  11,452  12,749  16,242  21,993  2,444 
Tax expenseTax expense  (1,520)  (2,007)  (2,899)  (3,861)  (4,003)  (431)Tax expense  (2,899)  (3,861)  (4,178)  (5,184)  (7,040)  (782)
                           
Income before minority interest in net income of subsidiariesIncome before minority interest in net income of subsidiaries  3,088  4,543  8,850  7,591  8,085  870 Income before minority interest in net income of subsidiaries  8,850  7,591  8,571  11,058  14,953  1,662 
Minority interest in net income of subsidiaries, netMinority interest in net income of subsidiaries, net  (313)  (475)  (810)  (1,504)  (1,956)  (210)Minority interest in net income of subsidiaries, net  (810)  (1,504)  (1,956)  (3,064)  (3,948)  (439)
                           
Net IncomeNet Income  2,775  4,068  8,040  6,087  6,129  660 Net Income  8,040  6,087  6,615  7,994  11,005  1,223 
                           
Weighted average shares outstanding (millions)(1)
  20,160  20,160  20,160  20,160  20,160    
Weighted average shares
outstanding (millions)
Weighted average shares
outstanding (millions)
  20,160  20,160  20,160  20,160  20,115   
Net income per share(1)
  137.65  201.81  398.80  301.95  304.03    Net income per share  398.80  301.95  328.10  396.51  547.15  0.06 
Net income per ADS(1)
  5,505.96  8,072.20  15,951.80  12,077.83  12,161.13    Net income per ADS  15,951.80  12,077.83  13,124.14  15,860.25  21,886.00  2.43 
Dividends declared per share(2)
  53.88  44.08  105.41  165.58  158.09    
Dividends declared per share(2)
  105.41  165.58  158.09  144.90  267.27  0.03 
U.S. GAAP(3)
U.S. GAAP(3)
                   
U.S. GAAP(3)
                   
Net income  2,216  4,298  8,587  5,791  6,468    Net income  8,587  5,791  6,468  7,840  12,111  1,346 
Net income per share(1)
  109.94  213.20  425.96  287.23  320.86    Net income per share  425.96  287.23  320.86  388.89  602.12  0.07 
Net income per ADS(1)
  4,397.47  8,528.17  17,038.21  11,489.40  12,834.47    Net income per ADS  17,038.21  11,489.40  12,834.47  15,555.74  24,085  2.68 

10


                                             
 As of December 31,  As of December 31,
     
 2000 2001 2002 2003 2004 2004  2002 2003 2004 2005 2006 2006
                         
   (US$ million)  (Rp. in (Rp. in (Rp. in (Rp. in (Rp. in (US$
 (Rp. in billion)    billion) billion) billion) billion) billion) million)(1)
Consolidated Balance Sheet Data
Consolidated Balance Sheet Data
                   
Consolidated Balance Sheet Data
                   
Indonesian GAAPIndonesian GAAP                   Indonesian GAAP                   
Total assets  32,019  33,036  44,307  50,283  56,269  6,057 Total assets  44,307  50,283  56,179  62,171  75,136  8,348 
Current liabilities(4)
  4,138  9,543  9,708  11,170  11,677  1,257 
Current liabilities(4)
  9,708  11,170  11,677  13,513  20,536  2,282 
Other liabilities  3,048  3,447  5,383  6,258  6,178  665 Other liabilities  5,383  6,258  8,222  7,728  8,095  899 
Long-term debts  9,546  9,730  12,006  11,834  13,214  1,422 Long-term debts  12,006  11,834  13,214  11,332  10,249  1,139 
Total liabilities  16,732  22,720  27,097  29,262  31,069  3,344 Total liabilities  27,097  29,262  33,113  32,573  38,880  4,320 
Minority interest  814  1,235  2,596  3,708  4,938  532 Minority interest  2,596  3,708  4,938  6,305  8,187  909 
Capital stock(5)
  5,040  5,040  5,040  5,040  5,040  543 
Capital stock(5)
  5,040  5,040  5,040  5,040  5,040  560 
Total stockholders’ equity  14,473  9,081  14,614  17,313  20,261  2,181 Total stockholders’ equity  14,614  17,313  18,128  23,292  28,069  3,119 
U.S. GAAP(3)
U.S. GAAP(3)
                   
U.S. GAAP(3)
                   
Total assets  30,900  32,449  44,623  51,347  56,702  6,104 Total assets  44,623  51,347  56,702  63,481  76,134  8,459 
Total stockholders’ equity  12,928  7,766  13,911  16,285  19,571  2,107 Total stockholders’ equity  13,911  16,285  19,571  24,568  26,308  2,923 
 
(1) The prior years’ weighted average shares, net income per sharetranslations of Rupiah amounts into US Dollars are included solely for the convenience of the readers and net income per ADS have been restatedmade using the average of the market buy and sell rates of Rp.9,000 to reflect a two-for-one stock splitUS$1 published by Reuters on December 31, 2006. The convenience translations should not be construed as resolvedrepresentations that the Rupiah amounts have been, could have been, or can in the Annual General Meetingfuture be, converted into US Dollars at this or any other rate of Shareholders (“AGMS”) on July 30, 2004.exchange.

10


(2) Dividends declared per share in 2000, 2001, 2002 and 2003 representsrepresent 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. Dividends declared per share in 2005 represent cash dividends for 2004 of Rp.152.01 per share deducted by interim cash dividends declared in 2004 of Rp.7.11 per share. Dividends declared per share in 2006 represent cash dividends for 2005 of Rp.218.86 per share and interim cash dividends declared in 2006 of Rp.48.41 per share.
 
(3) U.S. GAAP amounts reflect adjustments resulting from differences in the accounting treatment of voluntary termination benefits, foreign exchange differences capitalized to propertyassets under construction, interest capitalized on propertyassets under construction, revenue-sharing arrangements, revaluation of property, plant and equipment, pension,employee benefits, equity in net income or loss of associated companies, amortization of land rights, equipment to be installed, revenue recognition, amortization of goodwill, capital leases, acquisition of Dayamitra, reversal of difference due to change of equity in associated companies, asset retirement obligations, and deferred income taxes.taxes, and amendment and restatement of the Joint Operation Scheme in Regional Division VII. 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 56(1)56 to the Company’s consolidated financial statements.
 
(4) Includes current maturities of long-term debt.debts.
 
(5) As of December 31, 2005 and 2006, Issued and Paid-Up Capital Stock consists of one Series A Dwiwarna shareShare having a par value of Rp.250 each and 20,159,999,279 Series B sharesShares having a par value of Rp.250 each from an authorized capital stock comprising one Series A Dwiwarna shareShare and 79,999,999,999 Series B shares, after the stock split.Shares.

11


Exchange Rate Information
      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      
Year end Average(1) High(2) Low(2)
         
  (Rp. per US$1.00)
2000  9,595   8,534   9,595   7,425 
 First Quarter  7,590   7,507   7,590   7,425 
 Second Quarter  8,735   8,433   8,620   7,945 
 Third quarter  8,780   8,691   9,003   8,290 
 Fourth quarter  9,595   9,507   9,595   9,395 
2001  10,400   10,266   11,675   8,865 
 First Quarter  10,400   9,895   10,400   9,450 
 Second Quarter  11,440   11,391   11,440   11,058 
 Third quarter  9,675   9,355   9,675   10,350 
 Fourth quarter  10,400   10,422   10,435   10,400 
2002  8,940   9,316   10,473   8,460 
 First Quarter  9,655   10,192   10,473   9,542 
 Second Quarter  8,730   9,109   9,775   8,460 
 Third quarter  9,015   8,949   9,218   8,695 
 Fourth quarter  8,940   9,058   9,326   8,815 
2003  8,465   8,573   9,120   8,165 
 First Quarter  8,919   8,907   9,120   8,836 
 Second Quarter  8,285   8,488   8,906   8,165 
 Third Quarter  8,389   8,427   8,665   8,166 
 Fourth Quarter  8,465   8,471   8,583   8,365 
2004  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 

11


                 
YearYear At period end Average(1) High(2) Low(2)
                          
 At period        (Rp. Per US$1)
Year end Average(1) High(2) Low(2)
20022002  8,940  9,316  10,473  8,460 
First Quarter  9,655  10,192  10,473  9,542 
Second Quarter  8,730  9,109  9,775  8,460 
Third Quarter  9,015  8,949  9,218  8,695 
Fourth Quarter  8,940  9,058  9,326  8,815 
20032003  8,465  8,573  9,120  8,165 
First Quarter  8,919  8,907  9,120  8,836 
Second Quarter  8,285  8,488  8,906  8,165 
Third Quarter  8,389  8,427  8,665  8,166 
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 
 (Rp. per US$1.00)Fourth Quarter  9,290  9,126  9,355  8,960 
20052005             2005  9,830  9,711  10,800  9,133 
January  9,165  9,204  9,305  9,133 First Quarter  9,480  9,276  9,520  9,133 
February  9,260  9,245  9,300  9,166 Second Quarter  9,713  9,548  9,755  9,435 
March  9,480  9,371  9,520  9,250 Third Quarter  10,310  10,006  10,800  9,735 
April  9,570  9,539  9,755  9,475 Fourth Quarter  9,830  9,992  10,300  9,735 
20062006  9,020  9,167��  9,795  8,720 
May  9,495  9,480  9,545  9,435 First Quarter  9,075  9,304  9,795  9,030 
June  9,713  9,616  9,713  9,528 Second Quarter  9,300  9,107  9,520  8,720 
July (through July 13, 2005)  9,750  9,785  9,860  9,740 Third Quarter  9,235  9,121  9,245  9,030 
Fourth Quarter  9,020  9,134  9,228  9,020 
December  9,020  9,087  9,165  9,020 
20072007             
January  9,090  9,067  9,135  8,950 
February  9,160  9,068  9,160  9,045 
March  9,118  9,164  9,225  9,100 
April  9,083  9,098  9,120  9,080 
May  8,828  8,844  9,083  8,672 
 
(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
Source:Bank Indonesia

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     The exchange rates used for translation of monetary assets and liabilities denominated in foreign currencies are the buy and sell rates published by Reuters in 2002, 20032004, 2005 and 2004.2006. 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, Rp.8,430 and Rp.8,450 to US$1 as of December 31, 2003 and Rp.9,280 and Rp.9,300 to US$1 as of December 31, 2004.2004, Rp.9,825 and Rp.9,835 to US$1 as of December 31, 2005 and Rp.8,995 and Rp.9,005 to US$1 as of December 31, 2006. 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, 2004.2006.
      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.9,290Rp.9,000 to US$1 published by Reuters on December 31, 2004.2006. 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.
      On June 27, 2007, the Reuters buy and sell rates were Rp.9,120 and Rp.9,123 to US$1.
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, PwC, did not begin their audit work until their appointment in July 2003. TELKOM filed a non- compliant 2002 Annual Report on Form 20-F on April 17, 2003 and then filed a 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;

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• 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 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 the 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 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, 2003 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 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 with the SEC by the June 30, 2003 deadline and the May 2003 press release relating thereto, TELKOM was 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.

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TELKOM hadhas identified a number of material weaknesses in its internal control over financial reporting as of December 31, 2004, 2005 and 2006, and concluded that, as of December 31, 20032006, its internal control over financial reporting and 2004, its disclosures controls and controlsprocedures were ineffective,not effective, which could cause investors to lose confidence in its reported financial results and have an adverse effect onadversely impact the trading pricereliability of its securities.internal control over financial reporting.
      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 errorsa number of material weaknesses 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, 2002,2004, 2005 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.2006. 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) inresult, TELKOM’s internal control over financial reporting. TELKOM’s principal executive officer and principal financial officermanagement concluded that because of the “material weaknesses” identified, TELKOM’s disclosure controls and procedures as of December 31, 2003 and 2004each such period were not effective to ensure that information required to be disclosed by TELKOM in the reports that TELKOM files orand submits under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the Commission’s rulesas and formswhen required, 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. In addition, TELKOM’s management concluded that because of the material weaknesses identified, TELKOM’s internal control over financial reporting as of December 31, 2006 was not effective based on the criteria set forth in the Internal Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (“COSO”). See Item 15. “Control and Procedures”.Procedures.”
      Since November 2003,the identification of the material weaknesses, 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. SeeFor a discussion of the material weaknesses and the remediation efforts, 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.Procedures.” Any control system, regardless of how well designed, operated and evaluated, can provide only reasonable, not absolute, assurance that its objectives will be met. In the future, TELKOM may identify further material weaknesses or significant deficiencies in its internal control over financial reporting or disclosure controls and procedures that TELKOM has not discovered to date. In addition, TELKOM cannot be certain that it will be able to maintain adequate controls over its financial processes and reporting in the future. 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 over financial reporting or disclosure controls and procedures could also cause investors to lose confidence in TELKOM’s

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reported financial information, which could have an adverse effect on the trading price of TELKOM’s securities.

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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 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. In October 2005 following substantial increases in the market price of crude oil, the Government raised fuel prices by approximately 80%, which also led to numerous demonstrations and strikes.
      Actions by separatist movements and clashes between religious and ethnic groups have also resulted in social and civil unrest in parts of Indonesia. InFor example, in the provincesprovince of Aceh and Papua (formerly Irian Jaya), there have been numerous clashes between supporters of separatist movements and the Indonesian military. In the provinceprovinces of Maluku and Central Sulawesi (Poso), clashes between religious groups have resulted in thousands of casualties and displaced persons in recent years. The Government has attempted to resolve problems in these troubled regions with 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 usTELKOM 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 embassyEmbassy 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. In October 2005, multiple bombs exploded in two locations in Bali, killing 22 people and injuring at least 50. 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,

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and could continue to have, a material adverse effect on investment and confidence in, and the performance of, the Indonesian economy and our business.

15


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 institutions. The foregoing consequences, if they occur, could have a material adverse effect on TELKOM’s business. As of December 31, 2004,2006, the average exchange rate of Rupiah to US Dollar, based on the Reuters middle buy and sell rates, was Rp.9,290Rp.9,000 per US Dollar.
      Fluctuations in the exchange rate between the Rupiah and the US Dollar could adversely affect, among other things, the Rupiah cost of TELKOM’s network equipment purchases, the dollar value of any amounts a holder or beneficial owner of ADSs will receive in the event we issueTELKOM issues 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.the World Bank and the Asian Development Bank.
      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. The last debt rescheduling took place in April 2002 when the Paris Club rescheduled approximately US$5.4 billion of principal and interest

15


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. 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. 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 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 July 13, 2005,May 22, 2007, the Government’s long-term foreign currency debt and its short-term foreign currency debt werewas rated “B2” and “NP”, respectively,B1 by Moody’s, rated BB-by Fitch Ratings (“Fitch”), and rated “B+” and “B”, respectively,BB- 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, Fitch 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,and the earthquake caused an estimatedapproximately Rp.54.9 billion (US$5.95.6 million) of damagedamages to TELKOM’s assets and equipment in the Aceh province, including 22 out of 44damages to TELKOM’s 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 activityOn May 27, 2006, a tectonic earthquake estimated to be of magnitude 6.3 on the Richter scale, and at least two related aftershocks each measuring over 4.0 on the Richter scale, struck central Java and Yogyakarta. On July 17, 2006, another major earthquake estimated at 6.8 on the Richter scale occurred in Tasikmalaya in West Java. In addition, since May 2006, a hot mud flow occurring in Sidoarjo, East Java, has also coincided withdevastated several villages in the region. As a volcanoresult of these natural disasters, TELKOM suffered asset and income losses from our network in Sumatra spewing ashthose affected regions.
      In February 2007, Jakarta and its surrounding areas were affected by a major flood caused by heavy rainfall. As a result of the flood, TELKOM’s facilities located in April 2005, as well as increased volcanic activityseveral areas of Jakarta and buildits surrounding areas were damaged and TELKOM’s services to its customers in several areas were interrupted for up of gases in a volcano in Sumatra and another one near Bandung, where TELKOM’s headquarters is based.to 72 hours.
      While TELKOM maintains several insurance policies relating to TELKOM’s assets which covered the losses resulting from tsunami damage,natural disasters, 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.
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 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 carried through itsTELKOM operates fixed line networks (PSTN), fixed wireless networks, data networks and GSM cellular networks. The integrated networks consist of a copper access network, a optical access network, BTS, switches, optimal transmissions, satellites 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.
an application server. 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,

17


could damage TELKOM’s ability to attract and retain subscribers and adversely affect its results of operations, financial condition and prospects.
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.
      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. As of December 31, 2004,2006, this service was offered in 192 cities, 130 of which are financed entirely by TELKOM and the remaining 62 are financed through revenue sharing-arrangements (“RSAs”).236 cities. 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 the same area code). Customers generally have all features offered by cellular services except roaming to other area 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 postpaid rates but with no monthly fees. In each case, both 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, 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 reliedrelies heavily on its internal funds, 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 does not have sufficient internal funds or 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.network, which could adversely affect its revenues and growth.

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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 coveredprovides more protection for the employee, such as requiring a

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ruling from the Industrial Relations Court for termination of an employee in certain situations, and covers 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“SEKAR.” In May 2006, TELKOM employees formed another union named “Serikat Pekerja” or “SP” as an alternative to SEKAR. Both unions are recognized by TELKOM, though membership with SEKAReither union is not compulsory. TELKOM believes that its relations with each of SEKAR and SP 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.
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 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, due to changes in customer preferences or inefficiencies in existing infrastructure, TELKOM may need to substantially upgrade to a next generation network to implement convergent and cost-effective technologies and upgrade 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. If TELKOM is unable to keep pace with rapid technological changes, its business, financial condition and results of operations could be materially and adversely affected.
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 competition structure. The Telecommunications Law only outlines the framework and substantive principles for the liberalization of the telecommunications industry. TELKOM considers that there is uncertainty in the Indonesian regulatory environment with regard to, among other things:
 • Interconnection:TELKOM, including its subsidiaries such as Telkomsel, is obligated to allow other operators to interconnect their networks with those of TELKOM subject to entering into interconnection agreements with those other operators. 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 Decreesministerial 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 agreed by the operators rather than the revenue sharing scheme as currently implemented. On March 11, 2004, the Ministry of Communication (“MoC”), the former telecommunications regulator, issued a decree stating that cost-based interconnection will commence beginning January 1, 2005. In connection with the implementation of cost-based interconnection, the MoC appointed an independent consultant to assist in determining the basis for the new cost-based tariffs. As of the date of this Annual Report,February 8, 2006, the MoCI has not issued implementing regulations. TELKOM expects that the current interconnection fees may be adjusted asRegulation No. 8/ Per/ M.KOMINFO/02/2006, which mandates a result of the new cost-based interconnection tariff scheme butfor all telecommunications network and services operators. Under the new scheme, the operator of the network on which calls terminate would determine the interconnection charge to be received by it based on a formula stipulated in Regulation No. 8/ Per/ M.KOMINFO/02/2006, which would be intended to have the effect of requiring that operators charge for calls based on the costs of carrying such calls. Such calculated interconnection charges must be presented in a Reference Interconnection Offer (“RIO”) and reported to the ITRB. TELKOM can give no assurance regarding the impact, ifsubmitted its RIO in April 2006. In August 2006, ITRB completed its review of RIOs submitted by large network operators, including TELKOM. ITRB issued its final RIO (DJPT No. 279/ DIRJEN/2006) with respect to TELKOM on August 4, 2006. The new interconnection tariff scheme became effective on January 1, 2007. For further

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 any,information on the interconnection scheme, see Item 4. “Information on the Company — B. Business Overview — Regulations — Interconnection.” TELKOM can give no assurance regarding the impact of such adjustment on the interconnection revenues and costs on TELKOM and there can be no assurance that such impact would not have a material adverse effect on TELKOM’s business, financial condition, results of operations and prospects.
 
 • Licenses:TELKOM’s separate licenses to provide fixed line services, DLD services and 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, network access 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. “Business4. “Information on the Company — B. Business Overview — RegulationRegulations — Modern License”.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 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, as recommended by the ITRB, announced that it would allow operators to rebalanceadjust their tariffs, with the resulting weighted average of tariffs increasing by 9%. TheOn February 8, 2006, the Government did not effectissued Decree No. 09/Per/ M.KOMINFO/02/2006 on the remainingProcedure on Determination of Current Tariff and Adjusted Tariff of Fixed Network Basic Telephony, which established new formulas for calculating subsequent tariff increases. For further information on the tariff scheme, see Item 4. “Information on the Company — B. Business Overview — Regulations — Interconnection.” There can be no assurance that the Government will implement further tariff increases or that tariffs will keep pace with costs over time. Any failure of the Government to implement regular tariff increases could have a material adverse effect on TELKOM’s business, financial condition and results of operations.
• Migration of Frequencies for 3G Service Providers: On August 31, 2005, the MoCI issued a press release which announced that in order to conform with the international standards of the industry and as recommended by the International Telecommunications Union — Radiocommunication Sector(“ITU-R”), the 1900 MHz frequency spectrum would only be used for the International Mobile Telecommunications-2000(“IMT-2000” or “3G”) network. The MoCI also announced that the CDMA-based technology network which TELKOM uses for its fixed wireless services can only operate in the 800 MHz frequency spectrum. At present, TELKOM utilizes the 1900 MHz frequency spectrum for its fixed wireless network in the Jakarta and West Java areas while for other areas, TELKOM utilizes the 800 MHz frequency spectrum. As a result of the Government’s decision, TELKOM’s Base Station System (“BSS”) equipment in Jakarta and West Java which are part of transmission installation and equipment for the fixed wireless network can no longer be used commencing at the end of 2007. TELKOM expects that the BSS equipment will be completely replaced with the BSS equipment operating in 800 MHz by the end of June 2007. On January 2005,13, 2006, the MoCI issued MoCI Regulation No. 01/ PER/ M.KOMINFO/1/2006 which reaffirmed the Government’s decision that TELKOM’s fixed wireless network can only operate in the 800 MHz frequency spectrum and that the 1900 MHz is allocated for the 3G network. See Item 5. “Operating and Financial Review and Prospects — A. Operating Results — Overview — Write-down of Assets,

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Depreciation Expense, Loss on Procurement Commitments, and Operations Maintenance and Telecommunication Services Expenses.” TELKOM has incurred significant costs in replacing the BSS equipment and there iscan be no assurance that TELKOM will not recognize further loss as a result of such Government decisions. In addition, in response to when or whether the remaining tariff increases will be implementedfrequency migration regulation, TELKOM initiated a registration plan for its fixed wireless customers in June 2007. Currently, TELKOM is registering its customers to identify the number of affected customers in need of handset replacements upon the effective date of the frequency migration. TELKOM is also considering the form and amount of compensation to such customers in connection with the frequency migration which formula has not been finalized yet as of the date of this Annual Report.
• Termination of Wireless Local Loop (“WLL”) License: In the first quarter of 2005, the Government, in its efforts to rearrange the frequency spectra utilized by the Government.telecommunications industry, issued a series of regulations which resulted in TELKOM not being able to utilize certain frequency spectra it currently uses to support its fixed wireline cable network commencing at the end of 2006. As a result of these regulations, certain of TELKOM’s cable network facilities within the fixed wireline segment, which comprise primarily WLL and approach link equipment (a transmission equipment to link BTSs to a local exchange) operating in the affected frequency spectra, can no longer be used commencing at the end of 2006. See Item 5. “Operating and Financial Review and Prospects — A. Operating Results — Overview — Write-down of Assets, Depreciation Expense, Loss on Procurement Commitments, and Operations Maintenance and Telecommunication Services Expenses.” There can be no assurance that TELKOM will not recognize further loss as a result of such Government decisions. In addition, TELKOM initiated a replacement program to replace the affected WLL services with TELKOMFlexi home services. Currently, TELKOM has identified that the number of WLL subscribers affected by the regulations consists of 173,418 subscribers and plans to complete the replacement at end of 2007.
 
 • Indonesian Telecommunications Regulatory Body (“ITRB”):The Telecommunications Law allows the Government to delegate its authority to regulate, supervise 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 MoC 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. There can be no assurance that the ITRB will not take actions that may be detrimental to TELKOM’s business, financial condition, results of operations or prospects.
 
 • Competition in the Fixed Line Domestic Telecommunications Market:Historically, TELKOM had the exclusive right to provide fixed line domestic telecommunications services in Indonesia. Pursuant to regulations introduced to implement the Telecommunications Law, the Government terminated TELKOM’s monopoly in providing fixed line domestic telecommunications services. The MoC issued Indosat a license to provide 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 December 31, 2004,2005, Indosat only offered this service in Jakarta, Bogor, Depok, Tangerang, Bekasi, Banten, Surabaya, Yogyakarta, Malang, Sidoarjo, Gresik, Batu, Madura (Bangkalan, Sampang, Sumenep), Pasuruan, and their surrounding areas.Medan. Based on amendment to the interconnection agreement between TELKOM and Indosat dated March 31,September 23, 2005, TELKOM hasand Indosat have agreed to open interconnection (i) of TELKOM’s local fixed line network with Indosat’s long-distance fixed line network; (ii) of Indosat’s local fixed line service in certain areas such as Batam, Bandung, Medan, Balikpapannetwork with TELKOM’s long-distance fixed line network; (iii) between TELKOM’s and Malang.Indosat’s long-distance fixed line networks; (iv) of TELKOM’s domestic fixed line network with Indosat’s international fixed line network; and (v) Indosat’s local fixed line network with TELKOM’s international fixed line network, with the interconnection tariff being calculated on a call-by-call basis. On December 1, 2005, TELKOM and Indosat entered into an interconnection agreement for the interconnection of TELKOM’s fixed

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network with Indosat’s mobile cellular network and allowing Indosat’s mobile customers to access TELKOM’s IDD services. 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. TELKOM’s interconnection arrangements will be affected by the new cost-based interconnection scheme which was publicly announced in February 2006. An amendment to the interconnection agreement with Indosat reflecting the new cost-based interconnection scheme took effect on January 1, 2007.
 
 • DLD and IDD Services:On March 11, 2004, the MoC issued Decree No. 28/2004, Decree No. 29/2004 and Decree No. 30/2004 that 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 utilize separate three 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 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 yearfive-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, the interconnection agreement between Indosat and TELKOM in these five cities would still be subject to the parties reaching agreementdoes not contain any provisions on technical and business arrangements regarding the use of “011” and entering into an interconnection agreement.“017” DLD access codes. In the five-year interim period and thereafter, the “0” prefix may continue to be used by all operators, including TELKOM, as default codescode 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/No. 6/2005. According to Decree No.6/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 accomodateaccommodate customers who prefer to choose their long-distancelong- distance carrier. TELKOM is inFor further information, see Item 4. “Information on the process of negotiating with Indosat to allow TELKOM’s customers to access Indosat’sCompany — B. Business Overview — Regulations — DLD services and for Indosat’s fixed and mobile customers to access TELKOM’s IDD services.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

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TELKOM’s exclusive rights, which will consist of (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.478Rp.478.0 billion (after taxes)(net of tax). While the amount of the compensation payable to TELKOM and its KSO partners has been determined, payment iswas contingent on appropriations to the State Budget for the MoCI, which requires approval by Parliament. AsOn December 15, 2005, TELKOM signed an agreement on Implementation of Compensation for Termination of Exclusive Rights with the Directorate General of Post and Telecommunications of the dateMoCI. Pursuant to this agreement, the Government agreed to pay Rp.478.0 billion to TELKOM over a five-year period. Under the plan, the Government paid Rp.90.0 billion in each of this Annual Report,2005 and 2006 and shall then pay the remaining Rp.298.0 billion thereafter in installments or in lump-sum, depending upon the Government’s budgetary considerations. In addition, TELKOM is required by the Government to use funds received thereunder for development of Indonesian telecommunications infrastructure. TELKOM can provide no assurance with regardthat the Government will honor its promise to when Parliament will approvepay the necessary appropriations or as tobalance within the effects the net cash payment will have on TELKOM’s financial condition, results of operations and prospects.five year period.
 
 • USO Risk:Identity Registration:All telecommunications network For prepaid subscribers, there is a new obligation regulated under MoCI Decree No. 23/2005, issued on October 28, 2005. Pursuant to this Decree, TELKOM and other operators and service providers are bound by a Universal Service Obligation,required to obtain identity information for all prepaid customers on or USO, which requires provisionprior to April 28, 2006. As of certain telecommunications facilities and infrastructure in rural and remote areas. As a local network provider,December 31, 2006, TELKOM is obligated to build and operate telecommunications networks in the USO areas. Historically, TELKOM has been obligated to contribute 5%registered over 98% of its capitalprepaid customers and removed the remaining inactive or low-activity unregistered customers from its customer database. TELKOM’s continuing obligations to update the registry may slow down revenue growth and have an adverse impact on TELKOM’s profit as TELKOM will have to incur additional expenditures on support systems and dealers’ compensation. It may also present difficulties for TELKOM in retaining existing customers and expose TELKOM customers’ identities to its USO requirements. 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 MoC issued Announcement 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 regulationsillegal use or announcementgovernment investigations. This identity registration requirement, however, will affect other competitors 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.well.

      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. 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 mayhas therefore deployed significant resources to eliminate such constraints. Although Telkomsel is not currently experiencing such difficulties, there is no guarantee that Telkomsel would not 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.subscriber base.
      The Indonesian cellular telecommunications market is highly competitive. Currently, Telkomsel competes primarily with Indosat and PT Excelcomindo Pratama (“Excelcomindo”) in attracting and retaining subscribers for its mobile cellular telecommunications services. In particular, Telkomsel faces increasing and substantial competition from Excelcomindo, which outperformed Indosat in 2006 in terms of subscriber and network infrastructure growth. There are also several other new competitors, including newcompetitors. For example, PT Hutchison CP Telecommunications (“HCPT”) launched its cellular services during the end of March 2007. TELKOM also expects PT Lippo Telecom (Natrindo Telepon Selular) to launch its cellular services in 2007. New CDMA cellular operators.operators will also likely emerge and compete with Telkomsel. Accordingly, TELKOM expects competition in the cellular market to intensify. Increased competition could adversely affect Telkomsel’s market share and results of operations. 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. While TELKOM believes Telkomsel has been successful in maintaining its market share to date, there can be no assurance that Telkomsel will be successful in competing in the cellular market in the future.

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TELKOM’s satellites have a limited life spans and substantial risk existsrisks exist forTELKOM-1 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 ourTELKOM’s financial condition, results of operations and ability to provide certain services.
      TELKOM’sTELKOM-1 Palapa B-4 and to be launched TELKOM-2 satellites have limited operational lifespans.lifespan. A number of factors affect the operational livespanslifespan 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 lives and repairing these satellites while in orbit is not feasible. TELKOM maintainsFor further information on the insurance coverage forTELKOM-1 satellite. As of December 31, 2004, such coverage was US$51.6 million, in the event of a total loss andTELKOM-2 satellites, see Item 4. “Information of the satellite. In connection with its planned launch of the TELKOM-2 satellite,Company — B. Business Overview — Insurance.” While TELKOM has procuredprovided 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-orbitfor its satellites, there can be no assurance that such 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 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 separation. However, thewill offer adequate coverage. The loss of its satellites and the failure to launch the new satellite may have a material adverse effect on TELKOM’s financial condition, results of operations and ability to provide certain services, particularly in the eastern parts of Indonesia which currently reliesrely 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 differsvaries in certain materialsignificant 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 56(1)56 to TELKOM’s consolidated financial statements.
Certain TELKOM employees, including former TELKOM directors, are subject to on-going litigation, police investigations, and criminal charges.
      There are pending litigation, criminal charges and on-going investigations by the West Java Police Department, the Office of the Attorney General, the Makassar District Court and the Denpasar District Court as to the conduct of former TELKOM directors, a former President Director of Napsindo and several TELKOM employees. For details regarding such litigation, criminal charges and investigations, see Item 6. “Directors, Senior Management and Employees — D. Employees — On-going Litigation and Investigations.” There can be no assurance that the police will not find evidence of wrong-doing, that charges or additional charges will not be filed in relation to the foregoing or that such persons or other TELKOM employees will not be found guilty of any offense. Although TELKOM believes that the investigations are without merit, to the extent any TELKOM employees are in custody, or are found guilty of any offense, TELKOM is and would be deprived of their services. TELKOM does not believe that any subsequent investigation or court decision will have significant financial impact to the Company, though there can be no assurance that this is the case.
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,

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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 ourTELKOM’s expectations and projections for future operating performance and business prospects. The words “believe”, “expect”, “anticipate”, “estimate”, “project” and similar words identify forward-looking 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 sharesCommon Stock 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 ourTELKOM’s behalf are expressly qualified in their entirety by reference to these risks.
ITEM 4.     INFORMATION ON THE COMPANY
ITEM 4.INFORMATION ON THE COMPANY
A.  History and development of the Company
A.History and Development of the Company
      TELKOM, a majority state-owned company, is the principal provider of fixed 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 telecommunicationstelecommunications-related 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 a25-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,Sumatra, 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 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;Sumatra; Division II Jakarta and the surrounding areas; Division III West Java;

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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 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 havewere also been publicly offered without listing on the Tokyo Stock Exchange. TELKOM is currently one of the largest companiescompany by market capitalization in Indonesia, with a market capitalization of approximately Rp.97,272Rp.203,616 billion as of December 31, 20042006 and of approximately Rp.93,740Rp.190,511 billion as of MayJanuary 31, 2005.2007. The Government currently has an aggregate interest of approximately 51.19%51.2% 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.
      Based on the resolution of the Extraordinary General Meeting of Stockholders on December 21, 2005, the Stockholders authorized a plan to repurchase up to a maximum of 5% of TELKOM’s 20,159,999,279 total issued and outstanding Series B Shares for a total repurchase amount not exceeding Rp.5,250.0 billion. Pursuant to the share repurchase plan, as of June 27, 2007, TELKOM has cumulatively repurchased an aggregate of 211,290,500 Series B Shares on either the Jakarta Stock Exchange or the New York Stock Exchange, representing approximately 1.05% of the total issued and outstanding Series B Shares of 20,159,999,279 for a total repurchase amount of Rp.1,829.1 billion (US$203.1 million). These transactions are in compliance with the limitations set forth in the resolution. For further information on the share repurchase, see Item 7. “Major Stockholders and Related Party Transactions — A. Major Stockholders.”
Following the Indonesian economic crisis that began in mid-1997, certain KSO partners experienced difficulties in fulfilling their obligations to TELKOM, leadingwhich led 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, and amended the terms of the KSO agreement with its KSO partnerpartners in regionregions IV and VII to obtain legal right to control financial and operating decisions of Regional Division IV.
• 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.

Divisions IV and VII. For a more complete description of the foregoing transactionsacquisition of control of its KSO partners in regions I, III and VI, acquisition of control of regions IV and VII, 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).Scheme.
      In 1999, the Government passed Telecommunications Law No. 36 which became effective in September 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 GovernmentsGovernment 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 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 was likewise terminated in

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August 2003. On May 13, 2004, TELKOM received its commercial license to provide IDD fixed line services and began offering such services on June 7, 2004. The MoC issued Indosat a license to provide 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 expectedcurrently able to expand service coverage to additional cities in Indonesia. Indosat also commenced offering limited domestic long-distanceprovide nationwide DLD services for calls withinthrough its CDMA-based fixed wireless network in late 2004.and its interconnection arrangements with TELKOM.
      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”.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”.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”.Resources.” The Company is domiciled in the Republic of Indonesia. It is incorporated in and under the legislation of the Republic of Indonesia. The address of the Company’s registered office is No. 1, Jalan Japati, Bandung, 40133, Indonesia and the telephone number of the Company’s registered office is (62) (22) 452-1510.
B.  Business Overview
B.Business Overview
General
      TELKOM is the main provider of fixed 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 lines (which consists of fixed wireline and fixed wireless);
 
 • Cellular;
 
 • Joint Operation Schemes (KSO);
 
 • Interconnection;
 
 • Network;
 
 • Data and Internet;
 
 • Revenue-Sharing Arrangements; and
 
 • Other Telecommunications Servicesservices (including revenues from telephone directory services and building management services).
      For segment reporting purposes, TELKOM has threefour segments: (i) fixed lines,wireline, (ii) fixed wireless, (iii) cellular and (iii)(iv) other. See Note 4847 to the consolidated financial statements. The fixed linewireline 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 fixed wireless segment provides local and domestic long-distance CDMA-based telephone services, as well as other telecommunication services using limited-mobility wireless handsets within a local area code. 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’sTELKOM’s revenues are presented as “Other” comprising the telephone directories and building management businesses.

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      For 2004,2006, no single customer, other than interconnection customers, accounted for more than 1%0.3% of TELKOM’s total operating revenues and TELKOM’s top 100 customers, other than interconnection customers, together accounted for no more than 5%24% 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 Line Services
Fixed Line Services
      Fixed line services are comprised mainly of local and domestic long-distance services. TELKOM is the principal provider of fixed line services in Indonesia. In 2004,2006, TELKOM provided fixed line services in Divisions I, II, III, IV, V, VI and VI.VII. In 2004,2006, revenues from fixed line services in these divisions contributed Rp.10,645.0Rp.10,979.0 billion (US$1,145.91,219.9 million), or 31.4%21.4% of total operating revenues. Beginning January 20, 2004, when TELKOM acquired Regional Division IV, TELKOM began providing fixed line services in Division IV. Fixed line servicesDivisions IV and VII in DivisionJanuary 2004 and October 2006, respectively, when TELKOM acquired control of their operations on January 20, 2004 and October 19, 2006, respectively. For a more complete description of the acquisition of control of Divisions IV and VII, continue to be provided through KSO, a joint operation arrangement, and revenue to TELKOM from KSO VII is reported undersee Item 4. Information on the Company — B. Business Overview — Joint Operation Schemes. See “— Joint Operation Scheme” below.Scheme.” And item 10. “Additional Information — C. Material Contracts”.
Fixed Wireline Services
      Fixed linewireline subscribers pay one-time installation charges, ongoing monthly subscription charges and usage charges for local, and domestic long-distance and international 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.assistance.
      TELKOM has historically beenbegan offering IDD services, under the principal provider of fixed line services and Indosat has historically been the principal provider ofbrand name “Telkom International Call 007”, or “TIC-007,” on June 7, 2004. TELKOM reports its IDD revenues under international direct dial services in Indonesia. However, the Governmentinterconnection revenues as of August 1, 2002 has terminated TELKOM’s exclusive rights to provide local fixed line services and Indosat’s exclusive rights to provide international direct dial 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 line services and Indosat’s

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commercial license to provide DLD fixed line services. As a result,this service requires interconnection between TELKOM and Indosat now engagenetwork operators in competition with each other countries. See “— Interconnection Services” below. Through its VoIP service, which is known as “TelkomGlobal 01017” (formerly, “TelkomGlobal 017” prior to December 31, 2006), TELKOM already provides international call services based on VoIP technology. TELKOM records its revenues from the VoIP service under “Data and Internet Services” as this service uses IP and data-based infrastructure. See “— Data and Internet Services” below.
      In May 2006, TELKOM began offering corporate customers an integrated direct call center service under the brand name “TELKOM Call 500.” TELKOM Call 500 is a basic communication service solution for corporate customers providing an integrated contact center to support their marketing programs and customer service. TELKOM Call 500 is targeted at companies in the markets for these services.various segments including banking and finance, manufacturing, trade and industry, government, and mining and construction.
     CDMA Fixed Wireless
Fixed Wireless Services
      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, 2004,2006, was available in 192236 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 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, 2004,2006, TELKOM had 1,1391,531 BTSs and 2,470,9297.7 million line units deployed, of which 1,0571,460 BTSs and 2,213,5797.2 million line units

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were financed by TELKOM and 8271 BTSs and 257,3500.5 million line units were established under the RSA scheme. As of December 31, 2004,2006, TELKOM had 1,429,3684,175,853 TELKOMFlexi subscribers (including 63,005 subscriberslines in areas financed by RSA schemes).
      TELKOMFlexi revenues are reported under fixed line services. These revenues are being reported as fixed line revenues because this business is being conducted pursuant to TELKOM’s fixed line license. See “— Regulation” below.service.
      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 line subscribers. Prepaid subscribers are required to purchase starterpacks containing RUIM cards and vouchers or refills, and pay only usage charges, which are typically higher than those paid by postpaid subscribers. Prepaid subscribers may purchase astarterpacks ranging from Rp.20,000 to Rp.35,000, starterpack, which include a Rp.50,000 voucher, or Rp.80,000 starterpack, which includes a Rp.100,000 voucher.vouchers ranging from Rp.15,000 to Rp.35,000. As of June 2006, TELKOMFlexi only offers Rp.30,000 starterpacks. However, existing Rp.20,000 and Rp.35,000 starterpacks were still available in the market as of December 31, 2006. Prepaid subscribers using Electronic Serial Number (ESN) based handsets are also required to purchase starterpacks containing RUIM cards. 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 to 210 days for a Rp.500,000 voucher or refill. TELKOM generally provides a30-day grace period after the expiry of the 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, ring tones, voicemail and information services, such as billing, directory assistance and other content services. The revenues from these services are reported in the Data and Internet category. See “— Data and Internet Services” below. 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 (area codes), but without local area code or international roaming. AsIn August 2006, TELKOM launched a new FlexiCombo service to allow TELKOMFlexi subscribers to use TELKOMFlexi throughout Indonesia with a primary number and up to two temporary numbers on the same RUIM card. Charges for this new service will be billed to the primary number. Through the call forwarding feature of December 31, 2004, the “Flexicombo”this service was available in 130 cities.for a flat fee, subscribers can receive calls to their primary numbers even though they are using a temporary number for a flat fee without time or zone limitation.
IDD Services
      TELKOM received its commercial license from the Government to provide IDD services on May 13, 2004. TELKOM began offering IDD services, under the brand name “Telkom International Call 007”, or “TIC 007,” on June 7, 2004. TELKOM reports its IDD revenues under international interconnection revenues as this service requires 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 based on VoIP technology. TELKOM records its revenues from the VoIP service under “Data and Internet Services” as this service uses IP and data-based infrastructure. See “— Data and Internet Services” below.

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Cellular Services
      TELKOM provides its mobile cellular services through its 65%-owned subsidiary Telkomsel. Cellular revenues grew by 23.2%41.5% from Rp.8,458.8Rp.14,571.0 billion, (US$1,002.2 million), or 31.2% of TELKOM’s total operating revenues, for the year ended December 31, 20032005 to Rp.10,421.3Rp.20,622.6 billion (US$1,121.82,291.4 million), or 30.7%40.2% of TELKOM’s total operating revenues,revenue for the year ended December 31, 2004.2006. Over the same period, the total number of Telkomsel’s mobile cellular subscribers (pre-paid(prepaid and post-paid)postpaid) increased by 69.8%46.5% from approximately 9.624.3 million at the end of 20032005 to approximately 16.335.6 million as of December 31, 2004.2006. Of the total subscribers as of December 31, 2004,2006, approximately 15.033.9 million were pre-paidprepaid and approximately 1.31.7 million were post-paid.postpaid. Based on data developed by Telkomsel from various sources, Telkomsel had an estimated 54%56% share of the GSM cellular market (full mobility) in Indonesia as of December 31, 2004,2006, compared to an estimated 51%52% market share as of December 31, 2003.2005.
      Telkomsel provided GSM cellular services in Indonesia through its own network and internationally through the 463 networks of 356operated by 268 international roaming partners in 145155 countries as of the end of 2004.2006. As of December 31, 2004,2006, Telkomsel had the largest network of any of the cellular operators in Indonesia, providing coverage to over 90% of Indonesia’s population, including all counties in Indonesia and more than 650 cities.all sub-counties in Java, Bali and Sumatra.
      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.”“KartuHALO”. In May 2004, Telkomsel launched a new prepaid brand “Kartu As,” which iswas 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

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and domestic long-distance calls, with no difference between tariffs for calls during peak and off-peak hours. On February 1, 2005, Telkomsel introduced new flat tariff for SimPATI — Rp.150 per 30 seconds for any call within Telkomsel’s network throughout Indonesia during off-peak time. Further, on March 15, 2005, in order to accelerate SimPATI growth and to decrease the SimPATI churn rate, Telkomsel launched a new starter pack edition called “SimPATI 10HOKI” which offers ten new benefits, including 10 free SMSs, a free 10 minute call and 10 free contents download. Telkomsel also offers tailor-made postpaid services for corporate customers and a postpaid family service under the brand name “HALOkeluarga.”
“HALOkeluarga”. In August 2005, Telkomsel launched new “HALObebas” packages for its postpaid customers which allow customers who subscribe to any kartuHALO package to enjoy free roaming facilities as part of their basic service. 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,All postpaid subscribers canenjoy free national roaming and also choose among the following options: (a) free national roaming;special tariff for calls to five favorite numbers within Telkomsel’s network; (b) 150 free SMSSMSs per month; or (c) waiver of the monthly subscription charge.charge subject to minimum monthly usage.
      In early 2006, Telkomsel launched a new off-peak/ on-net discount tariff for SimPATI customers. Previously off-peak time started from 23:00 to 06:59. For a call from 22:00 to 22:59, a special tariff of Rp.300 per 30 seconds is assessed.
      In January 2006, Telkomsel launched a new SimPATI starter pack edition called “SimPATI Jitu”. The package costs Rp.15,000 and includes a regular credit of Rp.10,000 plus Rp.10,000 credit upon first recharge and 20 free SMSs. In April 2006, Telkomsel introduced Indonesia’s first flat-tariff per-second prepaid plan as part of its Kartu As product. A call to any Telkomsel, PSTN and other cellular subscriber is charged Rp.20 per second, Rp.30 per second and Rp.40 per second, respectively. Under this plan, SMSs among Kartu As users cost Rp.99 per SMS, while SMSs to KartuHALO, SimPATI and TELKOMFlexi users cost Rp.149 per SMS, and to other cellular users, Rp.299 per SMS. In June 2006, a new KartuHALO package was launched called “HALObebas Bicara”. This package includes nationwide flat-rate tariffs and offers one of the country’s longest off-peak periods.
      Prepaid customers purchase a starter package, the price of which starts at Rp.25,000Rp.10,000 for Kartu As customers and Rp.25,000 for SimPATI customers, depending on the value of the pre-paidprepaid voucher included in the package. For Kartu As customers, the Rp.25,000Rp.10,000 starter package contains a SIM card and a voucher worth Rp.25,000.Rp.10,000. The Rp.15,000 “SLANK” starter package contains a SIM card and a voucher worth Rp.15,000. For SimPATI customers, the Rp.25,000Rp.10,000 “SimPATI Ekstra” starter package, which was launched in February 2007, contains a SimPATI SIM card and a voucher worth Rp.15,000.Rp.5,000 plus a credit of Rp.5,000 for intra-Telkomsel calls and a Rp.10,000 credit bonus after the first refill.
      SimPATI subscribers can buy pre-paidprepaid vouchers ranging in value from Rp.20,000Rp.10,000 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.ranging from Rp.5,000 to Rp.100,000. 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.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.date.

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      Provided that they meet certain credit-related eligibility requirements, SimPATI customers may sign up for Telkomsel’s post-paidpostpaid KartuHALO services at any time without having to change their telephone numbers.

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While Kartu As and SimPATI customers do not pay an activation fee or monthly subscription charges, they pay higher usage charges than postpaid subscribers.
      On May 26, 2005, Telkomsel launched its trial run of 3G services in Jakarta. Telkomsel became the first Indonesian telecommunication company to implement a trial run of such services. In February 2006, Telkomsel, Indosat, Excelcomindo, HCPT and PT Lippo Telekom (Natrindo Telepon Selular) were awarded separate licenses to operate the 3G network. The licenses will expire in ten years. In August 2006, Telkomsel initiated a comprehensive customer education pre-registration campaign to introduce its 3G services. In September 2006, Telkomsel launched its 3G services in Jakarta for both postpaid and prepaid customers. As of December 31, 2006, Telkomsel’s 3G services were available in Jakarta, Bandung, Surabaya, Medan, Semarang, Yogyakarta, Batam, Bali, Makasar and surrounding cities. The 3G services provide Telkomsel’s subscribers (over 500,000 3G network subscribers as of December 31, 2006) with various features including video calls, mobile television, mobile download and high-speed data access. Telkomsel continues to expand and optimize its 3G network and is conducting various marketing and educational campaigns for its 3G services.
      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 toe-mail services, missed call alert features (“MCA”), “Notify Me” notifications services (which informs the calling parties when the called party becomes active) 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 As of or for the Year Ended December 31,
 Year Ended December 31,  
   2004 2005 2006(1)
 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 
Cellular subscribers
          
KartuHALO (Postpaid)  1,327,549  1,470,755  1,661,925 
SimPATI (Prepaid)  11,557,758  16,004,631  21,377,995 
Kartu As (Prepaid)  3,405,201  6,793,967  12,557,251 
Deactivations(2)
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 
KartuHALO (Postpaid)  317,020  372,921  376,748 
SimPATI (Prepaid)  8,470,819  15,836,633  27,256,632 
Kartu As (Prepaid)  824,489  12,105,848  17,724,133 
Average monthly churn rate(3)
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%
KartuHALO (Postpaid)  2.3%  2.1%  2.0%
SimPATI (Prepaid)  6.8%  8.2%  11.9%
Kartu As (Prepaid)  5.0%  14.9%  16.8%
ARPU(4)
ARPU(4)
                    
KartuHALO (Postpaid) (Rp.’000)  298  314  304 
SimPATI (Prepaid) (Rp.’000)  103  95  84 
Kartu As (Prepaid)      48 
KartuHALO (Postpaid) (Rp. ’000)  304  291  274 
SimPATI (Prepaid) (Rp. ’000)  84  84  83 
Kartu As (Prepaid) (Rp. ’000)  48  45  54 

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      The following table shows the respective active periods for Telkomsel’s SimPATI and Kartu As refill vouchers, respectively:
(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, the voucher values are Rp.20,000 and Rp.50,000. The following table shows the respective active periods for Telkomsel’s SimPATI prepaid packages:
   
  Period during which
subscriberssubscribers will have
SimPATI Value of Voucher will have access to services
  
Rp.10,00037 days 
Rp.20,000 45 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
Period during which subscribers
Kartu As Value of Voucherwill have access to services
Rp.5,00030 days
Rp.10,00030 days
Rp.25,00030 days
Rp.50,00030 days
Rp.100,00030 days
(1) For 2006, prepaid subscribers could purchase SIM cards with values ranging from Rp.10,000 to Rp.50,000 and refill vouchers with values ranging from Rp.5,000 to Rp.100,000.
(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

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connection fees, interconnection revenues, international roaming revenues from visitorsnon-subscribers and dealer discounts) for each month by the respective average number of postpaid or prepaid cellular subscribers for 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, 2004,2006, EDGE was available in Jakarta, Surabaya, Batam, Semarang and Surabaya.Bali. Telkomsel has ceased further development of EDGE.
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 sharingrevenue-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

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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 DivisionDivisions IV and VII to acquire control of the KSO IV and KSO VII operations.

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      TELKOM consolidated the revenues from Regional Division I (Sumatra), Regional Division VI (Kalimantan) and Regional Division III (West Java and Banten) following their acquisitions in 2001, 2002 and 2003, respectively. TELKOM’s portion of KSO revenues for the last three years (2002(2004 — 2004)2006) 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 
                   
                          
  2004 2005 2006
       
KSO Division MTR DTR MTR DTR MTR DTR
             
  (Rp. in billion) (Rp. in billion) (Rp. in billion)
Division IV (Central Java)(1)
  35.2   15.7             
Division VII (Eastern Indonesia)(2)
  260.8   333.8   268.6   318.6   207.5   274.6 
                   
 Total  296.0   349.5   268.6   318.6   207.5   274.6 
                   
 
(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 represent the MTR 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 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 consolidated Regional Division III (West Java and Banten) from July 31, 2003 following the acquisition of a 100% equity interest in AriaWest on July 31, 2003. TELKOM consolidated Rp.377.9 billion of operating revenues from Regional Division III (West Java and Banten) from July 31, 2003 through December 31, 2003 and Rp.1,016.8 billion in 2004.
(3) On January 20, 2004, TELKOM and MGTIPT Mitra Global Telekomunikasi Indonesia (“MGTI”) entered into an agreement to amend and restate the KSO Agreement with respect to Regional Division IV (Central Java). See Item 10. “Additional Information — C. Material Contracts — PT Mitra Global Telekomunikasi Indonesia.Indonesia (MGTI)” As a result of the amended and restated KSO agreement, TELKOM acquired Regional Division IV. TELKOM consolidated Rp.1,398.0 billion, Rp.1,653.2 billion and Rp.1,662.4 billion of operating revenues from Regional Division IV (Central Java) from February 1, 2004 through December 31, 2004.2004 and in 2005 and 2006, respectively. For 2004, MTR and DTR for Regional Division IV representrepresented MTR and DTR generated by Regional Division IV in January 2004.
(4)(2) On October 19, 2006, TELKOM and PT Bukaka Singtel International (BSI) entered into an agreement to amend and restate the KSO Agreement with respect to Regional Division VII (Eastern Indonesia). See Item 10. “Additional Information — C. Material Contracts — PT Bukaka Singtel International (BSI).” As a result of the amended and restated KSO agreement, TELKOM acquired Regional Division VII. TELKOM consolidated Regional Division VI (Kalimantan) following the acquisition of a 90.32% equity interest in Dayamitra on May 17, 2001. TELKOM consolidated Rp. 323.4 billion, Rp.763.8 billion and Rp.802.4Rp.796.5 billion of operating revenues from Regional Division VI (Kalimantan)VII (Eastern Indonesia) from October 1, 2006 through December 31, 2006. For 2006, MTR and DTR for Regional Division VII represent MTR and DTR generated by Regional Division VII in 2002, 2003 and 2004, respectively.January 1, 2006 through September 30, 2006.
     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 AgreementAgreements with respect to Regional DivisionDivisions IV and VII to acquire control of the operations of KSO IV operations.and KSO VII.
      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

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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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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.
      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).
      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)

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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 of 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(Rp.203.0 billion), which represents the present value of the

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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 SingTelSingtel (BSI) International (“Bukaka SingTel”Singtel (BSI)”), 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 SingTelSingtel (BSI) 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. 28.4Rp.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.Singtel (BSI). The new facilities are expected to bewere completed byin March 2006, with TELKOM and Bukaka SingTelSingtel (BSI) sharing the revenues generated by these new facilities. See Item 1010. “Additional Information — C. Material Contracts.”
      On October 19, 2006, TELKOM announced that it had entered into an agreement with PT Bukaka Singtel International (BSI), TELKOM’s KSO partner for Regional Division VII Eastern Indonesia, to amend and restate the KSO VII Agreement. Under the amended and restated KSO VII Agreement, the rights to operate telecommunication services in KSO VII region were transferred to TELKOM with KSO VII being operated under the sole management, supervision, control and responsibility of TELKOM. For the remaining KSO period, TELKOM is entitled at its sole discretion and expense to construct new telecommunications facilities in Regional Division VII. PT Bukaka Singtel International (BSI) will receive fixed monthly payments, while TELKOM is entitled to the balance of the KSO revenues after the monthly amounts due to PT Bukaka Singtel International (BSI) and operating expenses. At the end of the KSO period on December 31, 2010, all rights, title and interest of PT Bukaka Singtel International (BSI) in existing property, plant and equipment (including new additional installations) and inventories of KSO VII shall be transferred to TELKOM without requiring any further action by any party, upon payment by TELKOM to PT Bukaka Singtel International (BSI) of Rp.1,000. As a result of the amended and restated KSO VII Agreement, TELKOM obtained the legal right to control financial and operating decisions of Regional Division VII, and TELKOM must pay to PT Bukaka Singtel International (BSI) a fixed monthly payment of Rp.55.64 billion from October 2006 to June 2007, and Rp.44.25 billion from July 2007 to December 2010. TELKOM has accounted for this transaction as a business combination using the purchase method of accounting in 2006.
      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,On October 19, 2006, TELKOM amended 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 agreement and as of December 31, 2004, which has been derivedthat date, obtained operational control over KSO VII. TELKOM consolidated the operating results of KSO VII from October 1, 2006, being the KSO Agreements, amendments to the KSO Agreements and other related sources.nearest convenient balance date.
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
      TELKOM receives revenues from other telecommunications operators providing fixed line, cellular, international long-distance and other services that interconnect with TELKOM’s network. In 2004,2006, revenues from interconnection services contributed Rp.6,188.0Rp.8,681.5 billion (US$666.1964.6 million), or 18.2%16.9% 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 termshort-term (one-year) interconnection agreements are entered into with telecommunications network operators. Beginning in 2004, following the

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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 2005,2006, as a result of new regulations regarding DLD and IDD services, andTELKOM entered into an agreement with Indosat governing DLD interconnection fees. TELKOM also entered into a series of agreements governing IDD interconnection fees with all network operators, including Indosat. In December 2006, as a result of the expected implementation of the cost-based interconnection scheme, to be announced by the Government,which was promulgated on February 8, 2006, TELKOM expects to amendamended all of its interconnection agreements with other domestic network operators to adjust, among other provisions, routing procedures, network configuration and interconnection fees in accordance withcover the cost-based interconnection scheme. These amendments became effective on January 1, 2007. For further information on the interconnection scheme, see “— Regulations  — Interconnection” below; and 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.”

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      TELKOM’s interconnection traffic volumes are set forth in the following table for the periods indicated:
                                      
 Year Ended December 31,  Year Ended December 31,
     
 2000 2001 2002 2003 2004  2002 2003 2004 2005 2006
                     
 (millions of minutes)  (millions of minutes)
Mobile Cellular Interconnection(1)
Mobile Cellular Interconnection(1)
                
Mobile Cellular Interconnection(1)
                
Incoming paid minutes  2,040.4  2,355.4  2,830.9  3,463.7  4,235.1 Incoming paid minutes  2,830.9  3,463.7  4,235.1  4,863.6  5,162.2 
Outgoing paid minutes  1,721.1  2,689.3  3,854.5  4,872.1  6,448.0 Outgoing paid minutes  3,854.5  4,872.1  6,448.0  7,514.9  7,704.2 
           
 Subtotal  3,761.5  5,044.7  6,685.4  8,335.8  10,683.1 
Fixed Line Interconnection(2)
Fixed Line Interconnection(2)
                
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 
           Incoming paid minutes  128.4  130.1  136.7  612.3  864.9 
 Subtotal  145.2  150.3  168.0  161.0  187.8 Outgoing paid minutes  39.6  30.9  51.1  493.5  965.2 
Satellite Phone Interconnection
Satellite Phone Interconnection
                
Satellite Phone Interconnection
                
Incoming paid minutes    2.4  12.6  16.1  14.7 Incoming paid minutes  12.6  16.1  14.7  10.7  9.3 
Outgoing paid minutes    0.5  5.6  7.5  8.2 Outgoing paid minutes  5.6  7.5  8.2  6.5  4.5 
           
 Total paid minutes    2.9  18.2  23.6  22.9 
International Interconnection(3)
International Interconnection(3)
                
International Interconnection(3)
                
Incoming paid minutes  345.8  286.8  303.3  444.1  247.1 Incoming paid minutes  303.3  444.1  427.6  596.4  861.9 
Outgoing paid minutes  250.6  241.9  200.3  149.7  99.6 Outgoing paid minutes  200.3  149.7  158.1  185.5  177.6 
           
 Total paid minutes  596.4  528.7  503.6  593.8  346.7 
Total
Total
                
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 
           
Total Incoming paid minutesTotal Incoming paid minutes  3,275.2  4,054.0  4,814.1  6,083.0  6,898.3 
Outgoing paid minutesOutgoing paid minutes  4,100.0  5,060.2  6,665.4  8,200.4  8,851.5 
 
(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), BBT,PT Batam Bintan Telekomunikasi, and forstarting 2004, 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.starting 2004, incoming and outgoing calls usingTIC-007 as well.
     TELKOM’s paid minutes from Telkomsel for 2000 – 20042002 — 2006 are set forth in the following table.
                               
 Year Ended December 31, Year Ended December 31,
    
 2000 2001 2002 2003 2004 2002 2003 2004 2005 2006
                    
 (millions of minutes) (millions of minutes)
Incoming paid minutes  1,025.0  1,289.9  1,672.6  2,011.8  2,354.1   1,672.6  2,011.8  2,354.1  2,709.1  2,914 
Outgoing paid minutes  771.0  1,266.0  2,001.6  2,610.3  3,422.1   2,001.6  2,610.3  3,422.1  4,251.5  4,546 
      On June 7, 2004, TELKOM began offering IDD fixed line services under the brand name “TIC 007.“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 doesdid 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”),

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Telekom Malaysia Berhad (“Telekom Malaysia”), MCI WorldComInc. (“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 2004,2006, revenues from network services contributed Rp.654.3Rp.718.7 billion (US$70.479.9 million), or 1.9%1.4% 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 2004,2006, revenues from data and Internet services contributed Rp.4,808.7Rp.9,065.2 billion (US$517.61,007.2 million), or 14.2%17.7% of total operating revenues.
      In October 2004, TELKOM introduced a premium prepaid dial-up Internet access service. In 2004,2006, an average of 456,648approximately 680,000 telephone subscribers accessed its TELKOMNet Instan, and premium prepaid dial-up Internet service per month, representing an increase of 24.7%36% over the prior year. Subscribers utilized a total of 2.53.7 billion minutes of TELKOMNet Instan, and premium prepaid dial-up service in 2004,representing an increase of which 131,673 minutes constituted premium prepaid dial-up Internet access.32% over the prior year. As of December 31, 2004,2006, TELKOM also had 10,710approximately 93,200 broadband Internet access subscribers, whichrepresenting an increase of 204% over the prior year. As of December 31, 2006, TELKOMNet Instan was available in Jakarta and Surabaya.major cities in Indonesia.
      In September 2002, TELKOM began offering a premium VoIP international calling service under the name “TELKOMGlobal-017” (which changed to “TELKOMGlobal-01017” as of December 31, 2006), and a standard VoIP international calling service under the name “TELKOMSave” and TELKOM is currently providing both services in several cities in Indonesia.Indonesia, including Jakarta, Surabaya, Bandung, Medan and Denpasar. As of December 31, 2004,2006, TELKOM’s VoIP services allowed subscribers access to 634633 destination points in 235236 countries through agreements which TELKOM has entered into with fiveeight global carriers (including two global carriers for outgoing only, three global carriers for incoming only and three global carriers for incoming and outgoing) and wholesalers that allow TELKOM to access their international networks. VoIP is a low-cost phone service for international calls 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. On May 17, 2005, MoCI Regulation No. 7/2005 was ratified, which changes the VoIP access codes to (i) “010XY” for single stage method; and (ii) “170XY” for double stage method, respectively, effective January 1, 2006. The single stage method refers to direct dialing services without subscription validation. The double stage method refers to direct dialing services whereby subscription validation is required before dialing the destination number. In 2006, the access codes for TELKOM’s VoIP service were “017” (which changed to “01017” as of December 31, 2006) for single stage and “17017” (prepaid) and “17071” (postpaid) for double stage.
      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 average2006, there was a total of 9,235,832 minutes call used either275.9 million outgoing (using TELKOMSave or TELKOMGlobal each month,017) and incoming (from TELKOM’s global partners) VoIP minutes called, representing an increasea decrease in VoIP minutes called of 55.4%24.7 million, or 8.2%, over the prior year. Incoming VoIP minutes called increased by 7.7% from 215.6 million minutes in 2005 to 232.3 million minutes in 2006. However, outgoing VoIP minutes called decreased by 48.6% from 85.0 million minutes in 2005 to 43.7 million minutes in 2006. VoIP revenues (consisting of incoming and outgoing) decreased by Rp.14.7 billion, or 5.0%, in 2006, principally due to a 22.7% decrease in traffic of outgoing international VoIP calls, primarily resulting

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from increased price competition from TELKOM’s competitors and focused marketing efforts to promote TELKOM’s IDD service (TIC-007), an alternative to VoIP.
      Certain information about TELKOM VoIP services is set forth in the following table:
     
Item TELKOMGlobal 017017/01017 TELKOMSave
     
Tariff UpDiscount up to 40% of normal IDD rate UpDiscount up to 60% of normal IDD rate
Dial One stage Two stage
Quality/ Technology Premium VoIP Standard 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 2004,2006, revenues from revenue-sharing arrangements amounted to Rp.280.6Rp.415.5 billion (US$30.246.2 million), or 0.8% of TELKOM’s total operating revenues.

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      As of December 31, 2004,2006, the Company has 76had 90 revenue-sharing arrangements with 5967 partners. The revenue-sharing arrangements were located mostly in Palembang, Pekanbaru, Jakarta, CentralEast Java, Kalimantan, Makasar, Parepare, Manado, Denpasar, Mataram and SurabayaKupang with concession periodperiods ranging from 424 to 176 months.
      Under somethe 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.ratios.
      Under revenue-sharing arrangements entered into before October 2002, TELKOM guaranteed a specific internal rate of return forto the investors. However, since October 2002, TELKOM’sTELKOM no longer guarantees an internal rate of return infor new revenue sharing arrangements it enters into. In February 2004, TELKOM began implementing itsPenyediaan Pengembangan Layanan Telekomunikasi (“PPLT”) PPLT program in the Regional Divisions 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 heads are required to consider certain business factors and act within specified parameters. Priority is also being given to the development of CDMA facilities.
      As of December 31, 2006, TELKOM has entered into 25 PPLTs for fixed wireless services and 42 PPLTs for fixed wireline services.
Other Telecommunications Services
      TELKOM also provides a variety of other services, such as:
 • telephone directory services, which TELKOM provides through its majority-owned subsidiary, Infomedia;
 
 • cable and pay television and related services (42,351 subscribers as of December 31, 2006), which it provides through its majority-owned subsidiary, Indonusa; and
 
 • telex and telegram services.

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      In 2004,2006, revenues from other telecommunications services amounted to Rp.293.2Rp.322.1 billion (US$31.635.8 million), or 0.9%0.6% of TELKOM’s total operating revenues.
Network Infrastructure
Fixed line Network and Backbone
     Fixed LineWireline Network.TELKOM’s fixed 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 wireline 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 TELKOMhas remained at the end of the KSO period, has increased from approximately 8.488.7 million as of December 31, 2003 to approximately 9.99 million as of2005 and December 31, 2004, of which approximately 6.57 million were for residential customers, approximately 2.98 million were for business customers, approximately 13,188 were for social customers (which include churches, hospitals, schools and

39


government offices), and approximately 423,533 were for public telephones, including kiosk phones, or public phones.2006.
      The following table sets forth statistics relating to TELKOM’s fixed linewireline network since 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,
                       
 2000(1) 2001(2) 2002(3) 2003(4) 2004(5)  As of or for the Year Ended December 31,
             
Operating Statistics
Operating Statistics
                Operating Statistics 2002(1) 2003(2) 2004(3) 2005(3) 2006(4)
          
Exchange capacityExchange capacity                
Exchange capacity
                
Non-KSO Divisions  4,515,615  5,135,108  6,643,688  8,476,816  10,739,531 Non-KSO Divisions  6,643,688  7,810,766  8,786,887  9,138,167  10,439,658 
KSO Divisions(10)
  3,946,407  3,669,336  2,459,950  1,670,005  1,134,165 
KSO Divisions(9)
  2,459,950  1,608,455  954,465  1,045,366   
                       
 Total  8,462,022  8,804,444  9,103,638  10,146,821  11,873,696 Total  9,103,638  9,419,221  9,741,352  10,183,533  10,439,658 
Installed linesInstalled lines                
Installed lines
                
Non-KSO Divisions  4,086,298  4,725,268  6,165,770  7,894,532  10,556,211 Non-KSO Divisions  6,157,149  7,235,035  8,264,999  8,497,255  9,634,910 
KSO Divisions(10)
  3,581,779  3,316,406  2,234,892  1,664,220  1,111,716 
KSO Divisions(9)
  2,234,892  1,548,070  931,999  998,901   
                       
 Total  7,668,077  8,041,674  8,400,662  9,558,752  11,667,927 Total  8,392,041  8,783,105  9,196,998  9,496,156  9,634,910 
Lines in service(6)
                
Non-KSO Divisions  3,610,363  4,270,243  5,710,427  7,030,049  9,032,650 
KSO Divisions(10)
  3,052,242  2,948,695  2,039,608  1,449,066  956,068 
           
 Total  6,662,605  7,218,938  7,750,035  8,479,115  9,988,718 
Lines in service per 100 inhabitants                
Non-KSO Divisions  5.7  5.6  4.6  4.4  4.3 
Lines in service(5)
Lines in service(5)
                
KSO Divisions(10)
  2.0  2.0  2.0  1.9  2.9 Non-KSO Divisions  5,701,900  6,792,300  7,714,977  7,787,693  8,709,211 
           
KSO Divisions(9)
  2,039,608  1,422,028  844,373  898,438   
 Combined  3.1  3.3  3.5  3.5  4.1             
           Total  7,741,508  8,214,328  8,559,350  8,686,131  8,709,211 
Subscriber linesSubscriber lines                
Subscriber lines
                
Non-KSO Divisions  3,394,075  4,005,106  5,394,940  6,679,173  8,636,544 Non-KSO Divisions  5,386,430  6,441,973  7,323,304  7,413,769  8,328,179 
KSO Divisions(10)
  2,923,223  2,831,168  1,952,226  1,392,152  928,641 
KSO Divisions(9)
  1,952,226  1,365,114  816,208  869,631   
                       
 Total  6,317,298  6,836,274  7,347,166  8,071,325  9,565,185 Total  7,338,656  7,807,087  8,139,512  8,283,400  8,328,179 
Public telephonesPublic telephones                
Public telephones
                
Non-KSO Divisions  216,288  265,137  315,487  350,876  395,368 Non-KSO Divisions  315,470  350,327  391,673  373,924  381,032 
KSO Divisions(10)
  129,019  117,527  87,382  56,914  28,165 
KSO Divisions(9)
  87,382  56,914  28,165  28,807   
                       
 Total  345,307  382,664  402,869  407,790  423,533 Total  402,852  407,241  419,838  402,731  381,032 
Leased lines in serviceLeased lines in service                
Leased lines in service
                
Non-KSO Divisions(7)
  3,300  4,973  8,193  8,213  8,887 
Non-KSO Divisions(6)
  8,193  8,213  8,887  11,333  7,476 
KSO Divisions(10)
  2,702  2,631  1,879  1,162  382 
KSO Divisions(9)
  1,879  1,162  382  575   
                       
 Total  6,002  7,604  10,072  9,375  9,269 Total  10,072  9,375  9,269  11,908  7,476 
Fixed wireline subscriber pulse production(8)(millions)
                
Non-KSO Divisions  28,231  34,342  44,340  50,848  58,314 
KSO Divisions(10)
  24,628  24,047  16,788  11,413  6,838 
           
 Total  52,859  58,389  61,128  62,261  65,152 
Fixed wireless subscriber pulse production/ minutes(8)(11)(millions)
                
Non-KSO Divisions      14  214  1,020 
KSO Divisions(10)
        4  128 
           
 Total      14  218  1,148 

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  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 
                      
  As of or for the Year Ended December 31,
   
Operating Statistics 2002(1) 2003(2) 2004(3) 2005(3) 2006(4)
           
Fixed wireline subscriber pulse production(7)(millions)
                    
 Non-KSO Divisions  44,326   50,848   58,314   57,926   64,012 
 KSO Divisions  16,788   11,413   6,838   9,743    
                
 Total  61,114   62,261   65,152   67,669   64,012 
Call completion rate(%)
                    
Local
                    
 Non-KSO Divisions  75.8   76.8   78.6   80.4   77.1 
 
KSO Divisions(9)
  75.5   78.4   77.9   80.8    
                
 Combined  75.6   77.3   78.5   80.4   77.1 
Domestic long-distance
                    
 Non-KSO Divisions  65.5   67.5   70.9   74.0   72.1 
 
KSO Divisions(9)
  68.1   74.7   74.9   75.8    
                
 Combined  66.6   69.5   71.5   74.3   72.1 
Fault rate(8)
                    
 Non-KSO Divisions  4.6   4.4   3.4   3.8   3.6 
 
KSO Divisions(9)
  8.9   3.5   1.9   2.0    
                
 Combined  5.2   4.1   3.2   3.6   3.6 
 
(1)For 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)(2) For 2003, Non-KSO Divisions refer to Divisions I, II, III, V and VI, while KSO Divisions refer to Divisions IV and VII.
(5)(3) For 2004 and 2005, Non-KSO Divisions refer to Divisions I, II, III, IV, V and VI, while KSO Divisions refer to Division VII.
(4) (6)For 2006, Non-KSO Divisions refer to Divisions I, II, III, IV, V, VI and VII.
(5) Lines in service compriseare comprised of subscriber lines (including fixed wireless) and public telephone lines and include the following number of lines in service operated by TELKOM pursuant to revenue-sharing arrangements. Such lines in service under revenue-sharing arrangements amounted to 443,316, 511,108, 396,926, 201,485 and 166,142 as of December 31, 2000: 409,818, 2001: 430,477, 2002: 443,316, 2003: 519,3162002, 2003, 2004, 2005 and 2004: 459,931.2006, respectively.
(7)(6) Excludes leased lines for TELKOM’s network and multimedia businesses.
(8)(7) Consists of pulses generated from local and domestic long-distance calls, excluding calls made from pay phones and mobile cellular phones.
(9)(8) 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.
(10)(9) Divisions classified as KSO Divisions differ year by year due to acquisitions in certain years. See footnotes (1) to (5)(4) above.
     The following table sets forth certain information relating to TELKOM’s fixed line network in each of its operating divisions as of December 31, 2006:
                                 
      Division III          
      (West Java       Division VII  
  Division I Division II and Division IV Division V Division VI (East  
  (Sumatra) (Jakarta) Banten) (Central Java) (East Java) (Kalimantan) Indonesia) Total
                 
Local exchange capacity  2,816,477   5,137,211   1,868,454   1,346,527   3,687,753   826,718   1,412,409   17,095,549 
Total lines in service  1,875,708   3,829,992   1,087,786   1,268,933   2,824,922   656,969   1,340,754   12,885,064 
Capacity utilization(%)(1)
  66.60   74.55   58.22   94.24   76.60   79.47   94.93   75.37 
Installed lines(2)
  2,593,002   5,236,124   1,876,421   1,578,092   3,511,639   973,106   1,564,565   17,332,949 
Utilization rate(%)(1)
  72.34   73.15   57.97   80.41   80.44   67.51   85.70   74.34 
Employees(3)
  3,059   5,552   1,585   1,709   2,154   765   3,129   17,953 
Population (millions)(4)
  55.97   31.18   27.34   47.61   39.47   14.76   34.23   250.56 
TELKOM line penetration(%)(5)
  3.35   12.28   3.98   2.67   7.16   4.45   3.92   5.14 
(11)
(1) Capacity utilization (lines in service/exchange capacity) and utilization rate (lines in service/installed lines) consist of fixed wireline and fixed wireless. The rate can exceed 100% since the exchange capacity in fixed wireless (MSC and BTS) is calculated by assuming traffic allocation per subscriber of 60 mE (mili Erlang).
(2) Total includes 113,048 fixed wireless line units established under RSA scheme.

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(3) Does not include employees from the corporate office or support divisions, such as TELKOM’s long distance, fixed wireless, multimedia and construction divisions.
(4) Source: Indonesian Central Bureau of Statistics (estimated figures).
(5) TELKOM’s penetration based on the estimated population figures.

Fixed Wireless Network. TELKOM’s fixed wireless network comprises a hierarchy of exchanges originating from MSC (Mobile Switching Center) and connecting with each other through trunk exchanges. Each MSC is connected to BSS (Base Station Sub System) that comprises BSC (Base Station Controller) and BTS (Base Transceiver Station), which connect equipment at a customer’s premises (handheld device and fixed wireless terminal) to TELKOM’s fixed wireless network.
      TELKOM’s total number of fixed wireless lines in service increased from approximately 4.1 million as of December 31, 2005 to approximately 4.2 million as of December 31, 2006.
      The following table sets forth statistics relating to TELKOM’s fixed wireless network since 2002:
                      
  As of or for the Year Ended December 31,
   
  2002(1) 2003(2) 2004(3) 2005(3) 2006(4)
           
Exchange capacity (MSC)(8)
                    
 Non-KSO Divisions     666,050   1,952,644   2,687,348   6,655,891 
 
KSO Divisions(7)
     61,550   179,700   329,708    
                
 Total     727,600   2,132,344   3,017,056   6,655,891 
Installed lines (BTS)(8)
                    
 Non-KSO Divisions  8,621   659,497   2,291,212   3,332,893   7,698,039 
 
KSO Divisions(7)
     116,150   179,717   340,568    
                
 Total  8,621   775,647   2,470,929   3,673,461   7,698,039 
Lines in service(5)
                    
 Non-KSO Divisions  8,527   237,749   1,317,673   3,750,821   4,175,853 
 
KSO Divisions(7)
     27,038   111,695   311,046    
                
 Total  8,527   264,787   1,429,368   4,061,867   4,175,853 
Subscriber lines
                    
 Non-KSO Divisions  8,510   237,200   1,313,978   3,739,095   4,163,284 
 
KSO Divisions(7)
     27,038   111,695   311,046    
                
 Total  8,510   264,238   1,425,673   4,050,141   4,163,284 
Public telephones
                    
 Non-KSO Divisions  17   549   3,695   11,726   12,569 
 
KSO Divisions(7)
               
                
 Total  17   549   3,695   11,726   12,569 
Fixed wireless subscriber pulse production/minutes production(6)(9)(millions)
                    
 Non-KSO Divisions  14   214   989   3,254   5,512 
 
KSO Divisions(7)
     4   125   299    
                
 Total  14   218   1,114   3,553   5,512 
(1) For 2002, Non-KSO Divisions refer to Divisions I, II, V and VI, while KSO Divisions refer to Divisions III, IV and VII.
(2) For 2003, Non-KSO Divisions refer to Divisions I, II, III, V and VI, while KSO Divisions refer to Divisions IV and VII.
(3) For 2004 and 2005, Non-KSO Divisions refer to Divisions I, II, III, IV, V and VI, while KSO Divisions refer to Division VII.
(4) For 2006, Non-KSO Divisions refer to Divisions I, II, III, IV, V, VI and VII.

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(5) Lines in service are comprised of subscriber lines and public telephone lines and include the lines in service operated by TELKOM pursuant to the revenue-sharing arrangements. Such lines in service under revenue-sharing arrangements amounted to 63,005, 130,947 and 113,048 as of December 31, 2004, 2005 and 2006, respectively.
(6) Fixed wireless useusage was measured in subscriber pulse before 2004, and in minutes beginning 2004 due to the installation of new equipment, and are therefore not comparable betweenequipment. Therefore, fixed wireless usage beginning 2004 and previousprior to 2004 are not comparable.
(7) Divisions classified as KSO Divisions varies year to year due to KSO acquisitions in certain years. See footnotes (1) to (4) above.
(8) Prior to 2006, the capacities of BTS and MSC were calculated by assuming traffic allocation per subscriber to be 60 mE (mili Erlang). However, the average traffic used per subscriber in 2005 was only 18 to 30 mE. Therefore, the capacities of BTS and MSC in 2006 were calculated by assuming traffic allocation per subscriber of 30 mE.
(9) Consists of minutes usage generated from local and domestic long-distance calls, excluding calls made from pay phones and mobile cellular phones.

     The following table sets forth certain information relating to the Company’s (including KSOs) fixed line network in each of its operating divisions as of December 31, 2004:
                                 
        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 2004 includes 257,350 CDMA fixed wireless line units established under RSA scheme.
(2) Includes employees seconded to KSO in Division 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) TELKOM’s penetration based on the estimated population figures. Does not include Indosat’s fixed lines.
CDMA Fixed Wireless.TELKOM began offering a limited mobility CDMA-based fixed wireless phone service under the brand name “TELKOMFlexi” in December 2002. For more information on TELKOMFlexi, see “— General — Fixed Wireless Services” above. 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, 2004,2006, 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 1,429,3684,175,853 TELKOMFlexi subscribers (consisting of 1,366,363 subscriberslines in non-RSA areas and 63,005 subscribers in RSA areas).service.
     Backbone.TELKOM’s backbone telecommunications network consists of transmission, trunk switches and switching facilitiescore routers 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, 2004.2006.
                 
 Capacity Percentage Capacity Percentage
 (number of of total (number of transmission of total
Transmission medium circuits) capacity
 medium circuits) capacity
        
Optical fiber cableOptical fiber cable  369,270  66.5   21,272  76.01%
MicrowaveMicrowave  109,980  19.8   4,472  15.98%
Submarine cableSubmarine cable  46,860  8.4   1,763  6.30%
SatelliteSatellite  29,590  5.3   480  1.71%
          
Total  27,987  100.00%
Total  555,700  100.0      
     
      For more information on TELKOM’s satellites, see “Other Network Infrastructure” below.
Mobile Cellular Network
Mobile 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 thanover 90% of Indonesia’s population, including all counties in Indonesia and more than 650 cities as of December 31, 2004.all sub-counties in Java, Bali and Sumatra. 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. Both networks operate as a single integrated dual band network. Telkomsel has rolled out GPRS services nationwide since October 2002. In February 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, 2004,2006, EDGE was available in Jakarta, Surabaya, Batam, Semarang and Surabaya.Bali. In September 2006, Telkomsel launched its 3G services in Jakarta for both postpaid and prepaid customers with 5 MHz bandwidth at 2 GHz frequency.
      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

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and towers. As of December 31, 2004,2006, Telkomsel’s digital network had 6,20516,057 BTSs, 8482 cellular switching centers, 195386 base station controllers and 49,332138,442 transmitting and receiving exchanges, with an overall network capacity capable of supporting 17.938.8 million subscribers.
      For each of the years ended December 31, 2002, 20032004, 2005 and 20042006, Telkomsel made capital expenditures for the development and expansion of its cellular network of approximately Rp.4,531.0Rp.4,982.7 billion, Rp.5,348.8Rp.10,085.7 billion and Rp.4,982.7Rp. 16,496.0 billion (US$536.41,832.9 million), 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.
      UnderPursuant to the terms of the Telkomsel Co-operation Agreement, TELKOM procuredundertook 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.
Data Networksand Internet Network
      TELKOM began operating data network services in 1997 and has since continued to develop and expand its network progressively. As of December 31, 2004,2006, TELKOM’sIP-based network covered most of the metropolitan areas of Indonesia,142 locations with routers in 175217 router nodes nationwide. TELKOM will continue to improve the speed and quality of itsIP-based network. TheIP-based network serves as the backbonetransport network is used for high quality VPNs, VoIP, and fordial-up and broadband Internet service providers.services. TELKOM has remote access servers in 8796 locations in Indonesiawith 132 nodes nationwide used for its “TELKOMNet Instan”dial-up Internet services. For corporate customers requiring high performanceservices and secured virtual private networks,corporatedial-up Internet services.
      Since 2004, TELKOM provideshas provided fixed-line based broadband access services under the brand name “Speedy” by using DSL technology. As of December 31, 2006, there were over 93,200 subscribers in the areas where such services were available, such as Jakarta, Surabaya and Makasar. TELKOM expects the subscriber base of Speedy to grow significantly over the next 12 months. As of December 31, 2006, Speedy is available in all of Divisions I to VII. Subscribers of Speedy typically are residentialdial-up users with a premium service known as VPN Frame Relay.monthly usage of more than Rp.250,000, small office/home office (“SOHO”) companies, travel agents, Internet cafes and schools.
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”“TIC-007” on June 7, 2004. According to an internal study, TELKOM’s market share in terms of call volume (incoming and outgoing) in this market was 50.8% in 2006, an increase of 5.1% from 45.7% in 2005. TELKOM’s market share in 2006 in terms of incoming IDD call volume was 50.3%, an increase of 6.1% from 44.2% in 2005. In terms of outgoing IDD call volume, TELKOM’s market share was 53.9% in 2006, an increase of 1.5% from 52.4% in 2005. To route outgoing IDD and incoming international calls, TELKOM has three international gateways, in Batam, Jakarta and Surabaya. At present, TELKOM has no intention to develop any new gateways. According to a study conducted by TELKOM in September 2005, three gateways are sufficient to accommodate TELKOM’s international call volume. Nonetheless, TELKOM plans to improve the capacities of each gateway and the bandwidth of its international links.

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      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.satellites, which TELKOM completed developing the ground segment to link its network to the Intelsat satellitesatellites 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. In 2006, TELKOM completed a comprehensive upgrade of its microwave, international cable and satellite links.

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      In order to facilitate interconnection of international calls, TELKOM has entered into international telecommunications service agreements with telecommunications operators in several countries,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. As of December 31, 2006, TELKOM has entered into international telecommunications service agreements with 21 international operators in 16 countries, compared to 18 international operators in 13 countries as of December 31, 2005. 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
Other Network Infrastructure
      As of December 31, 2004,2006, the Company also operated theTELKOM-1 and the Palapa B-4TELKOM-2 satellites and 173275 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 extendedC-band transponders and 24 standardC-band transponders while Palapa B-4 and the to-be-launched TELKOM-2 each have has 24 standardC-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;
 
 • Satellite transponder capacity leasing;
 
 • Satellite-based lease line; and
 
 • Teleport (earth station satellite uplinking and downlinking services to and from other satellites).
Network Development.Development
Fixed lineLine Network Development
     1. Fixed Wireline Network Development
      In 2004, TELKOM substantially completed the expansion of its Java fiber optic backbone. TELKOM entered into an agreement on June 10, 2005 with a consortium consisting of NEC Corporation and PT Siemens Indonesia to further develop its Java-Sumatra-Kalimantan network, which was completed in May 2006.
      TELKOM also had several network developments projects (both new and ongoing) as of December 31, 2006, which included the development of:
• capacity expansion of the Surabaya — Ujung Pandang — Banjarmasin (SUB) submarine backbone infrastructure;

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• the Jember — Denpasar submarine backbone;
• the fiber optic regional junction in Bandung — Cirebon (West Java);
• IP DSLAM project offering broadband access to all users in Indonesia;
• capacity expansion of local exchange switches;
• wireline access network in Divisions I to VI; and
• expansion of theIP-based network.
      To further develop its communications services, TELKOM also plans to:
• continue to implement the deployment of additional line units;
• continue to implement the next generation network by deployment and expansion of softswitch system, IP transport, broadband access and transmission network;
• continue to improve the quality of its network through enhancements in its copper access network, ring system transmission network and redundancy system for all equipment, including battery and rectifier; and
• continue network integration and quality improvement through the national operational support system.
     2. Fixed Wireless Network Development
      TELKOM continues to develop and expand its network infrastructure. TELKOM signed agreements with a consortium led by Samsung Electronics Co. Ltd. in OctoberDecember 2002, andwith a consortium led by Ericsson in December 2002, with Motorola, Inc. in March 2003, and with PT INTI in August 2003, for the development of a total of 1,656,300 base station subsystem lines and network and switching subsystem lines based on CDMA fixed wireless technology. These projects were originally scheduled to be completed by the middle of 2006,mid-2006 but were accelerated and completed in 2005 to meetsatisfy increasing market demand. See Item 10. “Additional Information  — C. Material Contracts.” In 2004,2006, TELKOM also substantially completed the expansiondevelopment of its Java fiber optic backbone.fixed wireless services in 44 locations, consisting of 40 locations in Jakarta, two locations in Sumatra and two locations in Sulawesi.
      In 2006, TELKOM entered into agreements with PT Samsung Telecommunication Indonesia for the procurement of CDMA 2000-1X Equipment & Services in Division V; a procurement and installation agreement with a Samsung Consortium for expansion of the NSS, BSS and PDN FWA CDMA System Project in Regional Division V (East Java); agreements with a Huawei Consortium for the fixed wireless access (“FWA”) CDMA expansion in Divisions I to IV; and an agreement on June 10, 2005 with a consortium consisting of NEC and Siemens AG to further develop its Java-Sumatra-Kalimantan network byZTE Consortium for the end of 2006.FWA CDMA expansion in Division VI. For details on these agreements, see Item 10. “Additional Information — C. Material Contracts.”
     Mobile Cellular Network Development
      TELKOM also had several network developments projects that were ongoing as of December 31,Since 2004, which included 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. This was completed in January 2005;
• fiber optic backbone infrastructure in Kalimantan (Borneo) from 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:
• continue to implement soft switch technologies to move towards a next generation network;
• continue to enhance its network through the progressive replacement of its old copper access network with optical access network; and
• continue network integration and quality improvement.
Mobile Cellular Network Development
      In 2004, Telkomsel has 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 2004,2006, Telkomsel added, among other equipment, 1,3856,162 BTSs (including 942 nodes for 3G services) and 10,70858,530 transmitting and receiving exchanges.exchanges, thereby expanding its cellular network to cover all the sub-counties in Sumatra. Telkomsel plans to continue to install additional BTSs to further expand its coverage to the sub-county level in Kalimantan, Sulawesi and East Indonesia, to expand its 3G network since it had launched in September 2006, to further expand its fiber optic transmission backbone for major cities in Java, to install additional microcells and to 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 to expand its intelligent network used in connection with its prepaid products.

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Data Network Development
      In 2004,2005, 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, as well as improving its billing system, security and access tocoverage. In 2005, TELKOM expanded its data network.network coverage in 15 cities. In 2006, TELKOM further expanded its IP/MPLS-based core infrastructure with additional multiservice router platforms. The new deployments consist of expansion of existing IP core and additional nodes in 10 cities, and connecting softswitch systems and legacy routers. TELKOM also expanded the coveragedeveloped additionalhost-to-host systems by installation of its high performance IP backbonecollecting agents in eight banks for a total of 36 banks, enabling customers to pay their bills (e.g., utilities, airline tickets and related IP infrastructure to increase its IP traffic capacity. TELKOM appointed 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 December 2004 and formalized by a contract dated April 1, 2005. The project was awarded after holding an e-auction, and is expected to be completed in the third quarter of 2005.phone bills) using channel payment banks.
      In 2004,2006, TELKOM also improved the quality and coverage of its broadband Internet access network by continuing to expand its ADSLDSL broadband access network which currently covers Division II (Jakarta) and Division V (East Java).nationwide. TELKOM is planningcontinues to deploy a nationwide ADSLimprove on its quality enhancement program for the broadband Internet access network called the “JAWARA Broadband” program to modernize the broadband access networks of TELKOM and expects to enter into a contractimprove the quality of such access networks. In 2006, the program resulted in an increase in the near future for the developmentnumber of this network, which it expects will be completed around the third quarter of 2005.broadband access networks supported by DSL technology by 41.7%.
TELKOM-2 Satellite
      TELKOM signed a US$73.1 million contract with Orbital Sciences Corporation to build theTELKOM-2 satellite based on Orbital’sSTAR-2 platform, to replace TELKOM’s PalapaB-4 satellite, which is expected to bewas taken out of service after the TELKOM-2 satellite is launched and the operational lifespan of which expired in late 2004.August 2005. TheTELKOM-2 satellite has a capacity of 24 standardC-band transponders, with transponder specifications similar to those of theTELKOM-1 satellite.TELKOM-2 has a 15 yearsyear 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.
      TELKOM expects to launch TELKOM-2 around September 2005.      On November 8, 2002, TELKOM signed a US$62.9 million agreement with Arianespace S.A., which covers the cost of launchingTELKOM-2. TELKOM launchedTELKOM-2 on November 17, 2005. TELKOM launched theTELKOM-2 satellite into service on December 20, 2005 following the completion of its final acceptance test. Traffic migration fromTELKOM-1 toTELKOM-2 satellites was completed in early 2006.

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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
      TELKOM’s objective is to become a leading full telecommunication services and network company in Indonesia providing a wide range of communications services. The Company’s vision is to become a leading “InfoCom” player in the region, with a mission to provide one-stop services with excellent quality and competitive priceprices 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 low penetration rates for both fixed lines and mobile cellular lines 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 line and wireless business in recent years and will continue to offer favorable growth opportunities in the future. TELKOM expects that fixed line and wireless services will continue to contribute the substantial majority of its operating revenues in the near 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 lineWireline and Fixed Wireless Business
      Indonesia has one of the lowest fixed line penetration rates in Southeast Asia. As of December 31, 2004,2006, 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 linewireline and fixed wireless business by:
 • increasing its fixed 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 bundled services, broadband access, a customer care service center for business customers 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 PlasaTELKOMPlasa TELKOM as a point of sale for TELKOM’s services; and
 
 • developing and expanding its IDD fixed line business, which TELKOM began offering to customers on June 7, 2004.2004; and
• enhancing fixed wireline access network to provide broadband capability.
Strengthening its Backbone Network
      In order to provide a better quality of service to its customers, TELKOM intends to continue to increase the capacity, coverage and quality of its backbone 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)ring configuration in the Java-Sumatra-Kalimantan submarine backbone, JASUKA and by its planned launch of the new TELKOM-2 satellite to replace the Palapa B-4 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 andSurabaya-Ujung Pandang-Banjarmasin submarine links and upgrading its systems to provide integrated billing for new services.backbone.
Maintaining Telkomsel’s Leading Position in the Industry
      The Company regards the cellular business as having the greatest opportunity for revenue growth. The Company provides its cellular services 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, 20042006 of approximately 54%56% of the GSM mobilefull-mobility cellular market, maintaining its position as the largest nationwide licensed GSM mobile cellular operator in Indonesia and representing a slightan increase from its estimated market share of 51%52% as of December 31, 2003.2005. 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 Telkomsel’s products and services, and expanding Telkomsel’s network capacity to enable Telkomsel to meet the projected needs of its customer base through 2005.2007. In order to focus on Telkomsel and GSM technology, TELKOM has sold its interests in cellular operators PT Telekomindo Selular Raya (“Telesera”), PT Metro Selular Nusantara (“Metrosel”) and PT Komunikasi Selular Indonesia (“Komselindo”) which utilize analogon August 8, 2003 and other first generation non-GSM technologies.PT Mandara Selular Indonesia (“MSI”) on January 13, 2006.
      TELKOM believes that the 35% equity interest of Singapore Telecom Mobile Pte Ltd (“SingTel Mobile”) 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.

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      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;
 
 • continuous capacity and coverage expansion at predefinedpre-defined quality levels to handle subscriber growth;
 
 • maintaining or improving market share 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 GPRS, EDGE and GPRS3G 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, 2004, was available in 192 cities throughout Indonesia, including Jakarta, Malang, Batam, Makasar, Banjarmasin, Medan and Palangkaraya.For more information on TELKOMFlexi, see “— Fixed Wireless Services” above. 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 to TELKOM with a competitive advantage in the face of liberalization and increased competition in the fixed 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/ CoaxialDSL 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;
 
 • 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 ase-payment services for banks and other financial institutions and wireless data content for GPRS and MMS users;
 
 • expanding the international coverage of TELKOM’s data and Internet services by entering into agreements with additional global carriers and 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

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not be sufficient to fund its aggressive plans to grow its business. As a result, since the end of 2002 TELKOM has sought to implement a “pay as you grow” scheme starting from the end of 2002 for its additional network capacity in order to:
 • share investment risks with its suppliers;
 
 • reduce its asset base and outsource non-core businesses; and
 
 • mitigate financing, commercial, operational, technical and capacity risks.
      “PayThe “pay as you grow” scheme involves arrangements in which TELKOM and its equipment suppliers agree that a percentage of the contract cost will be paid up frontup-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 thisthe “pay as you grow” scheme have assessed the risk of entering into such a 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 onlyOnly a relatively small number of equipment vendors will beare invited to participate in the “pay as you grow” programs and supplyhave supplied a substantial portion of TELKOM’s infrastructure and other equipment needs.
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

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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. 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 a joint promotion campaign);
 
 joint promotion and marketing activities on case by casea case-by-case basis whenever this generatesis expected to generate additional benefits to the group;
 
 consolidated procurement programutilizing available distribution channels to improve services and processesselling activities to obtain competitive prices for common purchasescustomers (such as joint customer services officers (“CSO”)); 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 customer services through:
 Walk-in customer servicesservice points.Customer TELKOM’s walk-in customer service points (“Plasa TELKOM”) provide convenient and comprehensive access to TELKOM’s customer services and handleincluding product and service information requests and complaints, activation of services, customer billing, payments, account suspensions, service features and marketing promotions. As of December 31, 2004,2006, TELKOM had more than 795850 customer service points in total, including 51 large centers in Jakarta and 49 in Surabaya, and includingtotal. Since June 2006, TELKOM expanded its services at customer service points operated by its KSO Units.to include electronic payment services via Electronic Data Capture (“EDC”) usingon-site terminals in 50 Plasa TELKOM points.
 
 Call centers and Internet.TELKOM operates call centers in many cities in Indonesia, including in the KSO regions. Customerswhereby customers are provided a contact number 08001 TELKOM (toll free for corporate customers)“147” to speak directly to customer service operators who are trained to handle customer requests and complaints and to provide up-to-dateup-to-date information on

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matters such as customer bills, promotions and service features. Billing information may also be obtained through the Internet forCorporate customers in 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.particular locations are provided an additional toll-free number “08001TELKOM” (“0800183556”). Customers are also provided access to directory services for which a charge is levied. TELKOM intends to promotepromotes the use of call centers, SMS and the Internet over walk-in customer service points for its retail customers.
 
 Enterprise service and account management teams.To focus on the top 20% of its corporate customers that contribute between Rp.50 million to Rp.500 million to TELKOM’s monthly revenues, particularly corporations with national operations, TELKOM has set up an enterprise service division in Jakarta in August 2004, 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, including integrated communications solutions. Since August 2004, 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 service division works on integrating various product and service offerings to provide total telecommunications solutions, including voice telecommunications services, multimedia services and 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, 2004,2006, TELKOM had 137 national-level account managers658 national and over 497 regional-level account managers that cover Divisions I to VI and KSO VII. It plans to further increase the number of such teams.
 
 Service level guarantee program.TELKOM has had a service level guarantee program for its fixed line customers in Divisions II and V since May 2001June 2002 and has been implementing a service level guarantee program on a national basisfor TELKOMFlexi and Speedy since June 2002.August 2006. 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 customer services through:
 GraPARI Customer Services Centers:customer services centers.As of December 31, 2004,2006, Telkomsel had 6268 GraPARI customer services 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:Gerai HALO service outlets.“Caroline” Gerai HALO service outlets are service outlets operated by third parties. As of December 31, 2006, Telkomsel had 207 Gerai HALO service outlets.
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-dateup-to-date information on matters such as customer bills, payments, promotions and service features.
 
 Anita:Anita.“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.

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Sales, Marketing and Distribution
TELKOM
      TELKOM distributes and sells its principal products and services, including fixed wireless services but excluding mobile cellular services, through sixthe following 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, telextelexes and telegrams, access the Internet and purchase phone-cards and TELKOMFlexi starter packs and vouchers. TELKOM generally provides discounts to such kiosks of 30% compared with subscriber telephone rates. Kiosks operate on a non-exclusive basis and may also 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 TELKOMFLexiTELKOMFlexi subscriptions, starter packs and vouchers. Independent dealers and retail outlets pay a discount to face value for all products they receive at a discount, operate on a non-exclusive basis and may also sell products and services of other operators. As of December 31, 2006, Telkomsel had 740 direct retail outlets.
 
 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 continuing 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 primarythe following distribution channels:
 (i)its 6268 GraPARI centers (as of December 31, 2004),2006);
 
 (ii)its 207 Gerari HALO service outlets (as of December 31, 2006);
(iii)a network of authorized dealers (operating over 12,000248,185 retail outlets throughout Indonesia)Indonesia as of December 31, 2006) selling primarily prepaid SIM cards and vouchers,vouchers;
(iv)joint outlets with Plasa TELKOM and PT Pos Indonesia; and
 
 (iii)(v)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.
      Independent dealers and other outlets pay for all products they receive, such as starter packs and prepaid vouchers, at a discount. 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, and HALOkeluarga, product and services to professionals who tend to generate higher usage and,

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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 prepaid 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-salepoint-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 preferences. 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 payments that are overdue payments,for three months or more, 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 threetwo months from the due

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date, although TELKOM does not cut off service to its Government subscribers. After an account is 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:policy for “Lines in Service” (“Sambungan Pokok Telepon”) and TELKOMFlexi (excluding Government subscribers), effective since April 1, 2006:
       
Stage Overdue Payment Charge Penalty
       
I 1-10 days 5% of the total outstanding receivables, subject to thea minimum charge of Rp.5,000Not isolated
II11-40 days10% of overdue bill subject to minimum charge of Rp.10,000 Out-going isolation (i.e., restricted to receiving incoming calls only)
IIIII 41-7011-40 days 15%10% of the overdue bill subject to a minimum charge of Rp.15,000Rp.10,000 Total isolation (i.e., no outgoing or incoming calls)
III41-60 days15% of the overdue bill subject to a minimum charge of Rp.15,000Service disconnected
IV More than 7060 days Customer must fulfill15% of the overdue payment, 100%bill subject to a minimum charge of installation feeRp.15,000 TerminatedService disconnected and the associated number subject to termination
      The following is a summary of TELKOM’s overdue payment policy for Speedy (excluding Government subscribers), effective since April 1, 2006:
StageOverdue PaymentChargePenalty
I1-10 days5% of the total outstanding receivablesTotal isolation
II11-40 days10% of the overdue billTotal isolation
III41-60 days15% of the overdue billService disconnected
IVMore than 60 days15% of the overdue billService disconnected and the associated number subject to termination

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      The following is a summary of TELKOM’s overdue payment policy for WARTEL and Warung TELKOM, kiosk telephone operators which use TELKOM’s networks, effective since April 1, 2006:
StageOverdue PaymentChargePenalty
I1-20 days5% of the total outstanding receivablesTotal isolation
II21-50 days10% of the overdue billService disconnected
IIIMore than 50 days15% of the overdue billService disconnected and the associated number subject to termination
      TELKOM currently provides billing services for Indosat in connection with their IDD services, for which it charges a flat fee for each bill.
Management of Customer Receivables
     TELKOM
      TELKOM does not collect deposits from its subscribers. TELKOM has historically been the onlyprimary provider of fixed line telecommunication services in Indonesia and, has more than 9as of December 31, 2006, TELKOM had approximately 12.9 million subscriber lines comprising 8.7 million subscriber lines on its fixed linewireline network and 4.2 million subscriber lines on its fixed wireless network. A delinquent subscriber, except for Government, police and military customers, is subject to late fees, increasing levels of call barring and, eventually, disconnection of the service after approximately 3 months of delinquency. Since the monthly bill for thean 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,re-subscribe, there is nolittle 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 such potential customers. Accordingly, TELKOM believes that the collectibility of 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 non-retail customers over a specified amount, TELKOM review the outstanding debt individually for collectibility, except for Government subscribers. For 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. TELKOM does not charge any late fees or interest on its overdue accounts for Government subscribers.
Telkomsel
      Telkomsel bills its KartuHALO post-paidpostpaid subscribers on a monthly basis, in arrears based on: (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, postpaidPostpaid subscribers can choose among threefour options: (a) free national roaming;special tariff for calls to five favorite numbers within Telkomsel’s network; (b) 150 free SMSSMSs per month; or (c) waiver of the monthly subscription charge.charge; or (d) nationwide flat-rate tariffs.
      Telkomsel offers its KartuHALO post-paidpostpaid 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-counterover-the-counter facilities (mostly at post offices and banks with whom Telkomsel has an arrangement).
      Telkomsel issues bills to retailits non-corporate customers on one of five billing cycles. It issues bills to each customer on the fifth day ofcustomer’s respective billing cycle each month and payment of the bill is due by the 20th day after the end of that same month (corporatethe usage period. Corporate customers can also choose the dayany of the monthfive billing cycle that they would

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like their bill due and Telkomsel issues the bill approximately 15 days prior to such date).that date. If payment is not received by the due date of the bill, subscribers arethe subscriber is 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 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, 2004, TELKOM’s2006, property, plant and equipment, including optical fibers but excluding multi-pair cables,of the Company and its subsidiaries, except for land, were insured with PT Asuransi Jasa Indonesia (“Jasindo”), PT Asuransi Ramayana, PT Asuransi Wahana Tata and PT Asuransi Export Indonesia (“ASEI”) against the risk of fire, theft and other specified risksrisks. Total cost of assets being insured amounted to Rp.27,794,300 million and US$3.84 billion, which was covered by Sum Insured Basis with maximum loss claim of Rp.2,064,903 million and covered by First Loss Basis of US$250 million and Rp.824,000 million including business recovery of Rp.324,000 million with Automatic Reinstatement of Loss Clausul. In addition, theTELKOM-1 andTELKOM-2 satellite were insured separately for an aggregate coverage value of Rp.19.3 trillion (US$2.1 billion). TELKOM maintained additionalUS$45.2 million and US$57.9 million respectively. Management believes that the 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$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 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 separation. As of December 31, 2004, TELKOM also maintained general insurance coverage for motor vehicles of Rp.107.7 billion (US$11.6 million). TELKOM does not maintain business interruption insurance.is adequate.
      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 in the amount of US$2.4 billion.Tbk. 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 maintainAs of December 31, 2006, property, plant and equipment were insured under policies covering property damage and business interruption, insurance.limited to an aggregate coverage amount of US$3.83 billion for property damage, Rp. 8.41 billion for vehicle damage and Rp.324.00 billion for business interruption. Management believes that this coverage is adequate to cover potential losses. See Item 3. “Key Information — D. Risk Factors — Risks relating to Indonesia — 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.
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 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. TheAt that time, the deregulation of the telecommunications sector iswas closely linked to the national economic recovery program supported by the IMF.

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      Fixed line and cellular penetration are low in Indonesia by international standards. As of December 31, 2004,2006, Indonesia had an estimated fixed line penetration (excluding Indosat’s(including fixed wireless subscribers) of 4.11%6.2% and an estimated cellular penetration of 14%27.0%, based on projected population figures from the Indonesian Central Bureau of Statistics.according to an internal study.
      TELKOM believes that there are a number of significant 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 MoCI. The MoCI is responsible for the overall supervision and regulation of the industry. Within the MoCI, various directorates and bureaus carry out specific regulatory duties. The MoCI has authority to issue implementing decrees, which are typically broad in scope, thereby giving the MoCI considerable latitude. Pursuant to such decrees, the MoCI 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 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 MoCI, the Government regulates the radio frequency spectrum allocation for all operators, including TELKOM, which are required to obtain a license from the MoCI 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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      TheAt that time, the overall program of telecommunications sector deregulation iswas closely linked to the national economic recovery program supported by the IMF. The national plan iswas 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 iswas to stabilize the economy and regain trust through a comprehensive plan based on:
 • Deregulation;
 
 • Promoting competition;
 
 • Liberalization;
 
 • Restructuring;

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 • Improving market access; and
 
 • Introducing market-oriented regulations.
      The Government’s telecommunications reform policy iswas formulated in its “Blueprint of the Indonesian Government’s Policy on Telecommunications”, as contained in the MoC’s Decree 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;
 
 • 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 No.PM. 2/2004 regarding the Implementation of the Telecommunications 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 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”)ITRB is comprised of officials from the DGPT and the Committee of Telecommunication Regulations and is headed by the Director General of Post 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 the ITRB. As part of its regulatory function, the 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

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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 onwith 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.
      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
      Pursuant to the Telecommunications Law the existing licenses for telecommunication services is in the process of beingwere replaced with the so-called “Modern Licenses”., which TELKOM received in May 2004. 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. TELKOM’s separate licenses to provide fixed line

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services, DLD services and 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, network access provider and VoIP.
Exclusivity
      Under the previous regulatory regime that precedes the Telecommunications Law, TELKOM was granted a monopoly to provide domestic local fixed 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 SatelintoSatelindo 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 and 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 willwould be subject to agreement between the relevant incumbents and the Government, whereby incumbents willwould 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

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of TELKOM) and IDD (in the case of Indosat). 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 the differences of opinion regarding the amountamounts of compensation to be provided to TELKOM and Indosat for the early terminationterminations 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 ofcompensation. The Parliament approved the Rp.478 billion compensation.compensation amount, the payment of which will be made over a5-year period. See “ItemItem 3. Key“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 receivereceived a commercial license to provide IDD services, which was issued on May 13, 2004. Indosat would receivereceived a commercial license to provide local telephone service commercial license,services, 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.
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 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,On February 8, 2006, the MoCI issued Regulation No. 8/ Per/ M.KOMINFO/02/2006, which mandates a cost-based interconnection costs paidtariff scheme for all telecommunications network and services operators. Under the new scheme, the operator of the network on which calls terminate would determine the interconnection with TELKOM’s fixed linecharge to be received by it based on a cost-based formula. Pursuant to Decree No. 8/ Per/ M.KOMINFO/02/2006, each telecommunication network vary, depending onoperator is required to prepare and submit to the ITRB a RIO, which must prescribe the type of interconnected operator (e.g. IDD, cellular, fixed wireline, fixed wireless or satellite), and are determined in accordance with MoC Decree No. No. 46/1998 (IDD and IDD, DLD and DLD, cellular and DLD, cellular and cellular, cellular and IDD), as amendedinterconnection services offered by MoC Decree 37/1999 (DLD and IDD) and MoC Decree No. KU506/1997 (fixed wireline and 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 providersoperators and the tariffs charged for each of the offered services. Such calculated interconnection charges must be presented in a RIO and reported to the event no agreement is reachedITRB. TELKOM submitted its RIO in April 2006. In August 2006, ITRB completed its review of the RIOs submitted by large network operators, including TELKOM. Due to significant modifications by the providers,ITRB on TELKOM’s RIO, TELKOM proposed certain amendments to it. Following correspondence between TELKOM and the ITRB, the ITRB decided that the final TELKOM RIO is as had been determined by DJPT No. 279/ DIRJEN/2006 issued on August 4, 2006. 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 beginningtariff scheme took effect on January 1, 2005. As2007. Pursuant to a transition clause in MoCI Regulation No. 8/ Per/ M.KOMINFO/02/2006, the existing interconnection agreements remain valid as long as the parties to the agreements mutually agree and to the extent that the existing agreements do not conflict with Regulation No. 8/ Per/ M.KOMINFO/02/2006. On December 28, 2006, TELKOM and all existing network operators signed amendments to their respective interconnection agreements for the implementation of the date of this Annual Report, the MoCI,cost-based tariffs obligated under Regulation No. 8/ Per/ M.KOMINFO/02/2006. These amendments took effect on January 1, 2007. See Item 3. “Key Information” — D. Risk Factors — Risks relating to which telecommunicationsTELKOM and its subsidiaries — TELKOM operates in a legal

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and regulatory responsibility was transferred in February 2005,environment that 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)undergoing significant reforms and the procedure for resolving interconnection disputes.such reforms may adversely affect TELKOM’s business”.
DLD and IDD Services
      Historically, DLD and IDD services could only be offered by TELKOM and Indosat, respectively (See — “Exclusivity”).respectively. See “— Exclusivity” above. 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 implemented the new policypolicies regarding IDD and DLD services. Under these Decrees:
 • DLD and IDD network operators may offer DLD and IDD serviceservices as part of their basic telephony service;services;
 
 • Each DLD and IDD operator must use a distinct 3-digit access code for its DLD and IDD service;services;
 
 • 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.
      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 implemented within the given deadline, implemented, and does not expect to implement 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 customerscustomer to access the DLD service selected by the respective operator. On March 31, 2005, TELKOM and Indosat entered into an amended interconnection agreement, extending the coverage of their local fixed line network from Jakarta, Surabaya and Malang to cover Medan, Batam, Bandung, Bogor, Balikpapan, Yogyakarta and their surrounding areas. This amendment also allows automatic renewal of local coverage without entering into further amendments, except when there is a change in the business scheme, such as a change in the tariff scheme or a change in the settlement method from call-by-call basis to wholesale basis. On September 23, 2005, TELKOM and Indosat entered into an interconnection agreement related to interconnection between (i) TELKOM’s local fixed line network and Indosat’s long-distance fixed line network; (ii) Indosat’s local fixed line network and TELKOM’s long-distance fixed line network; (iii) TELKOM’s and Indosat’s long-distance fixed line networks; (iv) TELKOM’s domestic fixed line network and Indosat’s international fixed line network; and (v) Indosat’s local fixed line network and TELKOM’s international fixed line network, with the interconnection tariff being calculated on a call-by-call basis. Six cities, which include Medan, Batam, Jakarta, Surabaya, Balikpapan and Denpasar, are covered under this interconnection agreement.
      TELKOM has been granted the authority to use “007” as its IDD access code. On December 1, 2005, TELKOM and Indosat entered into another interconnection agreement enabling each party’s customers to make domestic calls between Indosat’s mobile network and TELKOM’s fixed line network and allowing

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Indosat’s mobile customers to access TELKOM’s IDD service by dialing “007”. This agreement overrides all existing interconnection agreements on mobile and fixed line network between TELKOM and Indosat.
      On May 17, 2005, the MoCI issued decreeDecree 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”)ITRB was established as the implementing agency of the Telecommunications Law. Under MoC Decree No. KM 31/2003, as amended by MoC Decree No. 25/2005, the ITRB is authorized to regulate, monitor and control the operations of the telecommunications sector. The ITRB is composed of officials from the DGPT 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. As of the date of this Annual Report, the SKTT 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, 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 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 anddial-up Internet services; (b) the facilities should provide basic public telephony services, with domestic 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 DGPT. Tariffs for services provided under the USO program are based on the applicable PSTN tariffs. On March 30, 2004, the MoC issued Announcement No. PM. 2/2004, which sets forth the basic policies underlying the USO program and required telecommunications operators in Indonesia to contribute 0.75% of gross revenues (with due consideration for bad debt and interconnection charges) for USO development. On September 30, 2005, the MoCI issued Regulation No. 15/2005 which provides that the USO contribution in the amount of 0.75% of the gross revenues is to be made payable per quarter, per semester or annually, at the latest on March 31 of the

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following year, to the State Treasury through a certain determined account. 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 MoCI is inTELKOM paid the processtotal USO amount payable of drafting detailed regulations to further implementRp.307.7 billion for the USO program.fiscal year 2005 and Rp.383.8 billion for the fiscal year 2006.
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”), MoCI Regulation No. 6/2005 (“Second Amendments to the Decree of the Minister of Communication No. KM 4/2001 of Fundamental Technical Plan National 2000”), MoCI Regulation No. 7/2005 (“Second Amendments to the Decree of the Minister of Communication No. KM 23/2002 on Internet Telephony Service for Public”), MoCI Regulation No. 13/2005 (“Operation of Telecommunications using Satellite”), MoCI Regulation No. 15/2005 (“Implementing Guidance on Tariff for Non-Tax State Income from USO Contribution”), MoCI Regulation No. 23/2005 (“Prepaid Card Registration”), MoCI Regulation No. 24/2005 (“Provision of Value Added Features”), MoCI Regulation No. 01/2006 (“Operation of Radio Frequency Band 2.1 GHz for Cellular Network), MoCI Regulation No. 8/ Per/ M.KOMINFO/02/2006 (“Interconnection”) and MoCI Decree No. 181/2006 (“Frequency Migration”). The MoCI 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.

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Competition
Fixed lineWireline and Fixed Wireless
      Historically, TELKOM had the exclusive right to provide fixed line domestic telecommunications services in Indonesia. Pursuant to regulations introduced to implement the Telecommunications Law, the Government terminated TELKOM’s monopoly in providing fixed line domestic telecommunications services. The MoC issued Indosat a license to provide 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 December 31, 2004,2005, Indosat only offers this service in Jakarta, Surabaya, Malangis able to provide nationwide DLD services through its CDMA-based fixed wireless network, its own fixed line network and their surrounding areas.its interconnection arrangements with TELKOM. Based on amendment to the interconnection agreement between TELKOM and Indosat dated March 31,September 23, 2005, TELKOM has agreed to open interconnection with Indosat’s local fixed line service in certain areas such as Jakarta, Surabaya, Batam, Bandung, Medan, Balikpapan and Malang. Therefore,Denpasar. To date, Indosat is expectedhas expanded the coverage of its local fixed network to expand its service coverage to other citiesmajor areas in Indonesia.Sumatra, Java, Bali, Kalimantan and Sulawesi. Indosat also commenced offering limited domestic long-distance services for calls within its network in late 2004.
      TELKOMTELKOM’s fixed line services also faces direct and indirect competition from other fixed wireline and fixed wireless service providers, such as PT Bakrie Telecom (formerly Ratelindo) and PT Batam Bintan Telecom, mobile cellular services, fixed cellular services, SMS, VoIP services ande-mail. TELKOM expects that the increasing uses of these services may adversely affect future demand for its fixed line services.
Cellular
      As of the date of this Annual Report, the cellular market in Indonesia is dominated by Telkomsel, Indosat and Excelcomindo. As of December 31, 2004,2006, these nationwide GSMcellular operators (full mobility) collectively had over 90% of the Indonesian cellular market. The number of full-mobility cellular subscribers in Indonesia totaled approximately 18.847.1 million at the end of 20032005 and approximately 30.463.7 million at the end of 2004,2006, representing an annual growth rate of approximately 62%34% during that period. Despite this rapid growth, the cellular penetration rate in Indonesia, at approximately 14%27% at the end of 2004,2006, has remained relatively low compared to many other countries. During the last tworecent 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. See Item 3. “Key Information — D. Risk Factors — Risk 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”.
      As of December 31, 2004,2006, Telkomsel remained the largest national licensed provider of GSMcellular services in Indonesia, with approximately 16.335.6 million cellular subscribers and a market share of approximately 54%56% of the GSM mobilefull-mobility cellular market, which represented a slightan increase compared to its approximately 51%52% market

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share as of December 31, 2003.2005. Indosat, as a result of its merger with

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Satelindo, was the second largest provider with approximately 9.816.7 million cellular subscribers and a market share of approximately 32%26% as of December 31, 2004.2006. Excelcomindo had approximately 3.99.5 million subscribers and a market share of approximately 13%15% as of December 31, 2004.2006. Since 2003, Mobile 8 has also operated a nationwide CDMA mobile cellular service. Mobile 8 had approximately 0.11.8 million subscribers and a market share of approximately 0.3%3% as of December 31, 2004.2006. In addition to the nationwide GSM operators, a number of smaller regional GSM, analog and CDMA cellular providers operate in Indonesia.
      The following table sets forth summary information as of December 31, 20042006 on each of the three leading nationwide licensed GSM mobile cellular operators:
Nationwide Licensed GSM Mobile Cellular Operators in Indonesia
              
 Operator Operator
    
 Telkomsel Indosat Excelcomindo 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 30 MHz 25 MHz
2G Licensed frequency bandwidth
(GSM 900 & 1800)
 30 MHz 30 MHz 25 MHz
3G Licensed frequency bandwidth (2 GHz) 5 MHz 5 MHz 5 MHz
Licensed coverage  Nationwide Nationwide Nationwide Nationwide Nationwide Nationwide
Network coverage  Nationwide Information not available Information not available Nationwide Information not available Information not available
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
Market share (as of December 31, 2006)(1)
 56% 26% 15%
Subscribers (as of December 31, 2006)(1)
 35.6 million 16.7 million 9.5 million
 
(1) Estimated, 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 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)(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 was completed in 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 also completed developing the ground segment to connect to the Intelsat Satellite in December 2004. As a new player in IDD, TELKOM cooperates with somevarious 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 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 SwagunaSatria Widya PratamaPrima provide VoIP

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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-PCPC-to-PC voice communications 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.operators and other IDD service providers.
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
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.wireline and fixed wireless.TELKOM provided local and domestic long-distance fixed 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 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 line services in their respective regions. The Government has amended certain of TELKOM’s fixed line licenses to comply with the new Telecommunication Law, and TELKOM received its Modern 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 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 “ItemItem 3. Key“Key Information — D. Risk Factors — Risks 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 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.
Third-Generation Mobile Telecommunications System (3G). In February 2006, the Indonesian Government conducted the tender for three radio frequency spectrum licenses of 2.1 GHz, each having a bandwidth of 5 MHz, to be used in conjunction with the new licenses to operate nation-wide 3G cellular

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telecommunication network in Indonesia. The winning bidders would become the operators of 3G cellular telecommunication networks along with two existing license holders (HCPT and PT Lippo Telekom (Natrindo Telepon Selular)) that had received the 3G licences through a competitive bid in 2003. On February 14, 2006, under MoCI Regulation No. 19/2006, the 3G licenses were awarded to Telkomsel, Indosat and Excelcomindo. As winning bidders, Telkomsel, Indosat and Excelcomindo are subject to an upfront fee of up to 200% of the bidding price, payable within 30 business days of the award. Telkomsel, Indosat and Excelcomindo are also subject to a radio frequency spectrum usage fee based on certain formula in accordance with Decision Letter No. 07/ PER/ M.KOMINFO/2/2006 of the Minister of Communication and Information Technology. See Note 51c (ii) to the consolidated financial statements.
     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.
     VoIP and ISP.TELKOM holds a Modern License to provide VoIP and ISP services, pursuant to a DGPT Decree No. SK01/dirjen/ DIRJEN/2004, which also permits TELKOM to provide data communications services.
Tariffs and Interconnection ChargesNetwork access provider. TELKOM holds a license to provide Internet interconnection services beginning on July 31, 2006, pursuant to DGPT Decree No. 275/ DIRJEN/2006.
Tariffs and Interconnection Charges
      The Government divides tariffs into two categories:
 • Tariffs for the provision of telecommunications services; and
 
 • Tariffs for the provision of telecommunications networks.
Tariffs for the Provision of Telecommunications Services
      Generally, the MoCI regulates prices and the amount TELKOM can charge is based on a tariff formula for telecommunications services in Indonesia. Telecommunications operators may set the amount of tariff. In this regard, TELKOM’s operating business units have authority to make adjustments to prices based on specific guidelines fixed by the directors of TELKOM.
Fixed lineWireline Tariffs
      Fixed linewireline tariffs consist of monthly subscription and usage charges. The Government establishes fixed linewireline tariffs by reference to a price cap formula that calculates the maximum average percentage increase in fixed linewireline 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”“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.Rupiah-US 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 linewireline tariffs would be increased by an average of 45.49% over three years. Effective February 1, 2002, the MoC increased fixed linewireline tariffs by a weighted average of 15%. Although fixed linewireline 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. See Item 3. “Key Information — D. Risk

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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.”business”.
      On March 30, 2004, the Government 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 linewireline and fixed wireless tariffs, with local charges increasing by 28.2%, DLD tariffs decreasing by an average of 10.6% and monthly subscription charges increasing by varying amounts from 12.1% to 25.1%.

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      The current tariffs chargeable by TELKOM, which became effective on April 1, 2004, are as follows:
Tariff Rate StructureSchedule (effective April 1, 2004):
Installation and Monthly Charges:
             
Access charges Business Residential Social
     
  (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 
Usage charges:Charges:
       
  Price per Pulse Pulse Duration
     
  (Rp.)  
Local
      
Up to 20 km  250  3 minminutes (off peak) and 2 minminutes (peak)
Over 20 km  250  2 minminutes (off peak) and 1.5 minminutes (peak)
Domestic Long-Distance
         
    Rounding Time
Block
  Price Per MinuteBlock Duration
(Rp.)
Domestic Long-distance
     
 (Rp.)  
0-20 km  83 – 122   1 minute 
20-30 km  122 – 163   1 minute 
30-200 km  325 – 1,290   6 secseconds 
200-500 km  460 – 1,815   6 secseconds 
Over 500 km  570 – 2,270   6 secseconds 
      The Government did not carry out its plan to further increase fixed linewireline 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 MoCI whenOn February 8, 2006, the Government intends to carry outissued Decree No. 09/ Per/ M.KOMINFO/02/2006 on the plan.Procedure on Determination of Current Tariff and Adjusted Tariff of Fixed Network Basic Telephony, which established new formulas for calculating subsequent tariff increases.
CDMA Fixed Wireless Tariffs
      Tariffs charged to CDMA fixed wireless subscribers are reported as fixed line revenues. TELKOM offers both postpaid and prepaid fixed wireless services.

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     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:Charges:
       
  Price Per Pulse Pulse Duration
     
  (Rp.)  
Local
  250  2 minminutes (off peak) and 1.5 minminutes (peak)

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Rounding Time
Price Per MinuteBlock Duration
(Rp.)
Domestic Long-distance
0-200 km325 – 1,2906 sec
200-500 km460 – 1,8156 sec
Over 500 km570 – 2,2706 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. 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 including VAT of 10%, summarized as follows:
Usage charges:Domestic Long-Distance
         
    Rounding Time
Block
  Price Per MinuteBlock Duration
    
  (Rp.)
0-200 km325 – 1,2906 seconds
200-500 km460 – 1,8156 seconds
Over 500 km570 – 2,2706 seconds
      For SMS, postpaid subscribers are charged Rp.250 per message. Postpaid subscribers who use TELKOM Internet access via wirelessdial-up are charged Rp.165 per minute. Postpaid subscribers who use Public Data Network based dedicated lines for Internet access are charged Rp.5 per KBps.
Prepaid. Usage charges for prepaid subscribers, effective February 10, 2004, including VAT of 10%, are summarized as follows:
Usage Charges:
Rounding Time
Block
Price Per MinuteDuration
(Rp.)  
Flexi to Flexi/ Fixed Wireline:
        
Local
  260   30 secseconds 
Domestic Long-distanceLong-Distance
        
0-200 km  700 – 1,100   30 secseconds 
Over 200 km  1,600 – 2,500   30 secseconds 
Flexi to mobile cellular:
        
Local
  650 – 810   30 secseconds 
Domestic Long-distanceLong-Distance
        
0-200 km  1,100 – 1,540   30 secseconds 
Over 200 km  2,250 – 3,150   30 secseconds 
      For SMS, prepaid subscribers are charged Rp.350 per message. Prepaid subscribers who use TELKOM Internet access via wirelessdial-up are charged Rp.350 per minute.

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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
Block
Region Price Per MinuteBlock Duration
    
  (Rp.)  
Africa  5,090 – 6,440   6 secseconds 
Americas and Caribbean  5,090 – 7,470   6 secseconds 
Asia and Oceania  4,410 – 9,630   6 secseconds 
Europe  5,090 – 9,630   6 secseconds 
Middle East  5,090 – 8,460   6 secseconds 
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 the specified maximum limits established by the Government. The Government has announced that it intends to move towards aOn February 8, 2006, the MoCI issued Decree No. 8/ Per/ M.KOMINFO/02/2006, which mandates the new cost-based interconnection tariff structurescheme for

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cellular all telecommunications network and services as ofoperators. This scheme became effective on January 1, 2005. However, it has not announced2007. See Item 3. “Key Information — D. Risk Factors — Risks relating to TELKOM and its subsidiaries — TELKOM operates in a proposed framework forlegal and regulatory environment that is undergoing significant reforms and such a formula. ITRB has submitted a regulation draft to MoCI,reforms may adversely affect TELKOM’s business” 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.“— Regulations — Interconnection” above.
     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(1)
 Rp.1,000/call plus incoming charge/charge per minute
 Local Cellular Conversation PSTN local tariff
 DLD Cellular Conversation PSTN DLD tariff
(1) Beginning in mid-2005, Telkomsel provides free roaming services to its subscribers.
     Prior to the amendments in 1998 to implement the current cellular tariff structure, the Government amended the cellular tariff structure in 1997 and 1994.

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      Telkomsel charges new postpaid subscribers a maximum one-time connection fee of Rp.150,000Rp.200,000 for service activation, although discounts may be granted. After initial connection, Telkomsel charges a monthly subscription fee ranging from Rp.0Rp.nil (provided minimum monthly usage reaches Rp.25,000) to Rp.65,000 per month (depending on the chosen tariff plan). Usage charges as of December 31, 2006 are as follows:
Rounding Time
Block
Price Per MinuteDuration
(Rp.)
Mobile cellular to mobile cellular:
Local
650 – 93820 seconds
Domestic Long-Distance
DLD1 (neighboring point-of-charging areas)650 – 2,62815 seconds
DLD2 (other areas)650 – 3,08315 seconds
Mobile cellular to fixed line:
Local
450 – 53120 seconds
Domestic Long-Distance
30-200 km650 – 1,69615 seconds
200-500 km785 – 2,22115 seconds
Over 500 km895 – 2,67615 seconds
International Long-Distance:
Group I3,675 – 5,88015 seconds
Group II4,237 – 6,78015 seconds
Group III4,687 – 7,50015 seconds
Group IV5,362 – 8,58015 seconds
Group V6,225 – 9,96015 seconds
Group VI7,050 – 11,28015 seconds
Group VII8,025 – 12,84015 seconds

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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 charges for postpaid services. As of December 31, 2006, Telkomsel charged its prepaid customers (SimPATI/ Kartu As) usage charges as follows:
         
    Rounding Time
  Price Per Minute Block Duration
     
  (Rp.)  
SimPATIKartu AsSimPATIKartu As
Mobile cellular to mobile cellular:Calls within Telkomsel:
        
Local
650 – 9381 min
Domestic Long-distance
30-200 km1,110 – 2,6281 min
Over 200 km1,220 – 3,0831 min
Mobile cellular to fixed line:
Local
450 – 5311 min
Domestic Long-distance
30-200 km650 – 1,6961 min
200-500 km785 – 2,2211 min
Over 500 km895 – 2,6761 min
International Long-distance:
Group I7,500 – 8,0001 min
Group II11,000 – 12,0001 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 charges for postpaid services. Telkomsel charges its prepaid customers (both SimPATI and KARTU As) usage charges as follows:
Rounding Time
Price Per MinuteBlock Duration
(Rp.)
Calls to mobile cellular:
        
Local
  300 – 1,6001,500   1 min1,20030 secondsper second 
Domestic Long-distanceLong-Distance
        
Zone 1  300 – 4,000   1 min1,20030 secondsper second 
Zone 2  300 – 4,500   1 min1,20030 secondsper second 
Calls to fixed line:other cellular:
        
Local
  4001,300 – 9501,600   1 min2,40030 secondsper second 
Domestic Long-distanceLong-Distance
        
Zone 13,500 – 4,0002,40030 secondsper second
Zone 24,000 – 4,5002,40030 secondsper second
Calls to fixed line/fixed wireless:
Local
750 – 9501,80030 secondsper second
Domestic Long-Distance
30-200 km  1,2002,000 – 2,300   1 min1,80030 secondsper second 
200-500 km  1,2003,200 – 3,720   1 min1,80030 secondsper second 
Over 500 km  1,2003,600 – 4,150   1 min1,80030 secondsper second 
International Long-distance:Long-Distance:
        
Group II-III  7,500 – 8,000   1 min8,00015 seconds60 seconds 
Group IIIV-VII  11,000 – 12,000   1 min12,00015 seconds60 seconds 
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,services; however, it has not announced a proposed framework for such a formula.

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      The following table sets forth the maximum leased line tariffs, effective January 1, 1998 and still valid as of the date hereofhereof:
      
  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)  380,000190,000 – 172,268,000(4)
 Inter-local (over 25 km)  1,009,850478,800 – 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.
VoIP Tariffs
      Charges for VoIP services may be freely determined by VoIP operators, based on cost. TELKOM has launched its VoIP services, which as of the date of this Annual Report consistsconsist of TELKOM Global-017Global-01017 and its cheaperlower-cost alternative, TELKOMSave. TELKOM believes that the tariff for TELKOM Global-017Global-01017 service and the TELKOMSave service are approximately 40% and 60%, respectively, of the tarifftariffs charged by Indosat and TELKOM for IDD operators in Indonesia.calls.
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 the 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-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$1.151.05 million to US$1.51.20 million per transponder, although in some instances TELKOM may offer discounted tariffs for long-term commitments or loyal customers.
Broadband Access
      The following table sets forforth the tariffs for TELKOM’s broadband access services:services as of December 31, 2006:
                 
        Fees for Usage in
      Monthly Excess of
SpeedyLink ADSL(1) Activation Fee Monthly Fee Usage Allowance(1) Monthly Allowance
         
  (Rp.) (Rp.)   (Rp.)
Limited 384 kbps  200,000   200,000   500 MB – 1.0 GB(2)  500/MB 
Limited 512 kbps  200,000   350,000   2.0 GB   500/MB 
Unlimited 384 kbps  2,500,000   1,520,000   Unlimited    
                 
      Monthly Usage Excess Usage
Speedy Services Activation Fee Monthly Fee Allowance Charge
         
  (Rp.) (Rp.)   (Rp.)
Speedy for Personal  150,000   300,000   750MB   700/MB 
Speedy for Professional  150,000   700,000   2.0GB   700/MB 
Speedy for Office  150,000   2,000,000   Unlimited    
Speedy for Warnet  150,000   3,000,000   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    

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      Since April 1, 2007, the tariff for TELKOM’s broadband access services has changed as follows:
(1) Provides 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) Depending on the Internet service provider plan.
                 
      Monthly Usage Excess Usage
Speedy Services Activation Fee Monthly Fee Allowance Charge
         
  (Rp.) (Rp.)   (Rp.)
Speedy for Personal  75,000   200,000   1.0GB   500/MB 
Speedy for Professional  75,000   400,000   3.0GB   500/MB 
Speedy for Office  75,000   750,000   Unlimited    
Speedy for Warnet  75,000   1,750,000   Unlimited    
Speedy Time Based  75,000   200,000   50 hours   25/minutes 
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 the Provision of Telecommunications Networks
Tariffs for Interconnection and Access
      As of the date of this Annual Report,December 31, 2006, the Government establishes the percentage of tariffs and amount of interconnection charges to be received by each operator in respect of calls that transit multiple networks. The Telecommunications LawInterconnection costs paid for interconnection with TELKOM’s fixed line network vary, depending on the type of interconnected operator (e.g., IDD, cellular, fixed wireline, fixed wireless or satellite networks), and Governmentare determined in accordance with MoC Decree No. 46/1998 (between IDD networks, between domestic fixed networks, domestic fixed and IDD networks, between cellular networks, cellular and domestic fixed networks, cellular and IDD networks), as amended by MoC Decree No. 37/1999 (domestic fixed and IDD networks) and MoC Decree No. KU506/1997 (between local fixed and domestic networks). For interconnection with satellite operators, interconnection costs are based on MoC Decree No. 30/2000. Interconnection costs for local fixed and domestic networks are based on Decree No. KU506/1997. Interconnection costs paid by interconnecting 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 above mentioned Decrees.
      According to MoCI Regulation No. 528/ Per/ M.KOMINFO/02/2006, each operator shall prescribe its tariff on its RIO, and each dominant operator’s RIO shall be approved by the ITRB. On April 12, 2006, DJPT issued Decree No. 141/2006 regarding Determination of 2000 providesDominant Operators, in which TELKOM, Indosat and Telkomsel were declared as dominant operators for RIO purposes. The tariffs for interconnection with TELKOM’s network are presented in TELKOM’s RIO, as determined by DJPT No. 279/ DIRJEN/2006 on August 4, 2006, and vary depending on the type of interconnected operator (local fixed network, cellular network, international, satellite mobile network and international network). On December 28, 2006, TELKOM and all other network operators signed amendments to their respective existing interconnection agreements for the implementation of a new policy to replace the current revenue sharing policy. Undercost-based tariffs obligated under the new policy, which has not yet been implemented,MoCI Regulation No. 8/ Per/ M.KOMINFO/02/2006. These amendments became effective on January 1, 2007. For more information about the operator ofscheme, see “— Regulations — Interconnection” above.
      On February 8, 2006, 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 MoCMoCI issued Decree No. 32/2004,8/ Per/ M.KOMINFO/02/2006, which stated thatmandates the new cost-based interconnection fees shall be applicable beginningtariff scheme for all telecommunications network and services operators. This scheme became effective on January 1, 2005. As of the date of this Annual Report, the MoCI2007. 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 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)undergoing significant reforms and interconnection dispute resolutions,such reforms may adversely affect TELKOM’s business” and has not issued such regulations.“— Regulations — Interconnection” above.

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Interconnection with Fixed line Network
      The Government’s National Fundamental Technical Plan set forth in Decree 4 of 2000,2001, as amended by Decree 28 of 2004 and MoCI Regulation No. 6/2005, sets out the technical requirements, routing plans and numbering plans for interconnection of the networks of various telecommunications operators among themselves and with TELKOM’s fixed line network. Under the National Fundamental Technical Plan, all operators are permitted to interconnect with TELKOM’s fixed 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 line network. As of the date of this Annual Report, the fees for interconnection within TELKOM’s fixed line network are set forthmainly referred to in Decree No. 506/1997, Decree No. 46/1998, Decree No. 37/1999, and Decree No. 30/2000.2000 and Law No. 36/1999. Certain interconnection fees are determined based on negotiations between interconnecting parties. On December 28, 2006, TELKOM and all other network operators signed amendments to their respective existing interconnection agreements for the implementation of the cost-based tariffs obligated under Regulation No. 8/ Per/ M.KOMINFO/02/2006. The amendments took effect on January 1, 2007.
     Local Fixed line Interconnection with Indosat.In September 2002, 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. Based on the interconnection agreement between TELKOM and INDOSAT signed an agreement for local fixed line interconnection. Pursuant to the agreement,Indosat for interconnection of local and domestic long distance calls, dated September 23, 2005, 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.
     Other 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 callsThe fixed wireless interconnection between TELKOM’s fixed line networkTELKOM and PT Bakrie Telecom’sTelecom is currently based on the most recent interconnection agreement signed in 2005. Pursuant to the agreement, for interconnection of local calls, the operator of the network are operated on a “sender-keeps-all” basis.which the calls terminate receives an agreed amount per minute. For DLDlocal calls that originateoriginating on PT Bakrie Telecom’s network and terminateterminating on a cellular network and vice versa which transit through TELKOM’s fixed line network, TELKOM receives 35%an agreed percentage of the prevailing DLD tariff from suchfor local calls. For DLDdomestic long-distance calls that originate on TELKOM’s fixed line network and terminate on PT Bakrie Telecom’s network, PT Bakrie Telecom receives an agreed amount per minute. For domestic long-distance calls that originate on PT Bakrie Telecom’s fixed line network and terminate on TELKOM’s network and for transit long-distance calls through TELKOM’s fixed line network, TELKOM retains 65%receives an agreed percentage of the revenueprevailing long-distance tariff. In addition, PT Bakrie Telecom receives a certain fixed amount for each minute of incoming and outgoing international calls to and from such calls. Since April 1, 2005,PT Bakrie Telecom that transit through TELKOM’s fixed line network and use TELKOM’s IDD service. It also receives 25% of the prevailing interconnection scheme for interconnection has been changed to:tariff of incoming and outgoing international calls that transit through TELKOM’s fixed line network but use Indosat’s IDD service.
• 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 local calls originating from BBTon BBT’s network and terminating on a cellular network and vice versa which transit through TELKOM’s fixed line network, TELKOM receives a fixed amount for each minute for local calls and 60% to 63.75%an agreed percentage of the prevailing DLD tariff for DLDlocal calls. For interconnection of DLD calls, that originate from BBT terminating at a fixed wirelessthe operator of the network on which the calls terminate or transit through TELKOM’s fixed line network, TELKOM receives 75%an agreed percentage of the prevailing DLDlong-distance tariff. In addition, BBT is to receivereceives a 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 amount50% of the prevailing interconnection tariff 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, including transit calls, between a cellular network and TELKOM’s fixed line network, TELKOM receives a share of the local interconnection call tariff equal to the local fixed line usage tariff (50%50% of the prevailing fixed-line usage tariff for local pulse per minute).

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pulse. For local calls from TELKOM’s fixed line network to a cellular network, TELKOM charges its subscribers the applicable local call tariff plus an airtime charge, and pays the cellular operator the airtime charge. For local calls between cellular telecommunications networks, the originating cellular operator pays the terminating cellular operator air time charges.
      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 DLD calls which originate on TELKOM’s fixed 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 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 through TELKOM’s fixed line network and terminates withon 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 line network and terminates on TELKOM’s fixed line network.
International Interconnection
      Interconnection on TELKOM’s domestic fixed line network for international calls consists of access charges and usage charges and charges for Universal Service Obligations.charges. The following table sets forth the current international interconnection tariff effective as of December 1, 1998,in 2006 for IDD calls which are routed through Indosat’s international gateways and which originate, transit or terminate on TELKOM’s domestic fixed line network and Telkomsel’s cellular network, pursuant to Ministerial Decree No. 37 of 1999:
     
Description Tariff
   
Access Charge  Rp.850/successful call 
Usage Charge  Rp.550/paid minute 
USORp.750/call
      A new interconnection tariff scheme became effective on January 1, 2007. For further information on the interconnection scheme, see “— Regulations — Interconnection” above.
      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.Indonesia. 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 be adjusted when cost-based interconnection fees are implemented, as discussed above.
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 line network.
VoIP Interconnection
      Previously, MoC Decree No. 23 of 23/2002 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 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 determinedwere to be fixed by the MoC. As of the date of this Annual Report, the MoCI, 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 transitterminate on TELKOM’s fixed line network.network at agreed fixed amounts per minute.

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Trademarks, Copyrights and Patents
      TELKOM has a number of registered intellectual property rights consisting of trademarks, copyrights and copyrights.patents. 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 andproducts; (ii) copyrights of books and artworks.artworks; and (iii) a patent for SMS grouping services. In addition, TELKOM is also in the process of registering a numberapplying for copyrights of patents for technologies relating to, among others, cellular phones and network, PSTN, switching systems and related administration systems.certain books. These intellectual property rights are important to TELKOM’s business.
C.  Business and Organizational Structure
C.Business and Organizational Structure
Information on Subsidiaries and Associated Companies
Subsidiaries
      As of December 31, 2004,2006, TELKOM had interests in 10nine consolidated direct subsidiaries and sixfive unconsolidated direct associated companies. The business activities of the consolidated subsidiaries (as further described below) are described as part of TELKOM’s business in this Form 20-F,Annual Report, 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 and Note 1011 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, 2004.2006. 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 fixed phone, mobile phone and multimedia businesses. In January 2006, TELKOM’s subsidiary, PT Multimedia Nusantara (“Metra”) together with PT Mekar Prana Indah (owned by Dana Pensiun Bank Indonesia or Bank Indonesia’s Pension Fund) and Yayasan Kesejahteraan Karyawan Bank Indonesia) established a company called PT Finnet Indonesia. The new company will provide nationwide financial network services transmitting banking data ande-payments throughout Indonesia.
                   
 Legal    Legal   
 Ownership (%)    Ownership (%)   
 As of    As of   
 December 31,    December 31,   
Company 2004 Notes Business Operations 2006 Notes Business Operations
            
Consolidated subsidiaries:
       
CONSOLIDATED
       
A. Direct subsidiaries
       
Fixed Phone:
       
PT AriaWest International (“AriaWest”)  100  (1) Fixed-phone (KSO-III West Java & Banten)  100  (1) Telecommunications
PT Dayamitra Telekomunikasi (“Dayamitra”)  100  (2) Telecommunications
PT Pramindo Ikat Nusantara (“Pramindo”)  100  (3) Telecommunications construction & services
Cellular:
       
PT Telekomunikasi Selular (“Telkomsel”)  65  (4) Telecommunications (GSM cellular phone services)
Application, Content, Datacom:
       
PT Multimedia Nusantara (“Metra”)  100  (2) Multimedia, pay TV  100  (5) Multimedia
PT Infomedia Nusantara (“Infomedia”)  51  (6) Data and information service
PT Indonusa Telemedia (“Indonusa”)  96  (7) Pay TV
PT Napsindo Primatel Internasional (“Napsindo”)  60  (8) Telecommunications
Property & Construction:
       
PT Graha Sarana Duta (“GSD”)  100    Real estate, construction and services  99.9  (9) Real estate, construction and services
PT Indonusa Telemedia (“Indonusa”)  90  (3) Interactive multimedia, special pay TV
PT Dayamitra Telekomunikasi (“Dayamitra”)  100  (4) Fixed-phone (KSO-VI Kalimantan)
PT Telekomunikasi Selular (“Telkomsel”)  65    GSM cellular phone services
PT Napsindo Primatel Internasional (“Napsindo”)  60  (5) Network Access Point, Voice Over Data
PT Infomedia Nusantara (“Infomedia”)  51    Telephone directory and other information services (electronic based business, call center and data segment)
PT Pro Infokom Indonesia (“PII”)  51  (6) Telecommunication & information services, especially e-Government, e-Indonesia programs and B2B
PT Pramindo Ikat Nusantara (“Pramindo”)  100  (7) Fixed-phone (KSO-I Sumatera)
Where TELKOM owns between 20% to 50%:
       
PT Patra Telekomunikasi Indonesia (“Patrakom”)  30.00    VSAT services
PT Citra Sari Makmur (“CSM”)  25.00    VSAT and other telecommunications services
PT Pasifik Satelit Nusantara (“PSN”)  43.69  (8) Satellite transponder & communications
Where TELKOM owns less than 20%:
PT Mandara Selular Indonesia (previously PT Mobile Selular Indonesia) (“Mobisel”)  3.63  (9) NMT-450 cellular and CDMA services
B. Indirect subsidiaries
       
Telekomunikasi Selular Finance Limited (“TSFL”)  100  (10) Finance
Telkomsel Finance B.V.(“TFBV”)  100  (11) Finance
Aria West International Finance B.V. (“AWI BV”)  100  (12) Finance
PT Balebat Dedikasi Prima (“Balebat”)  65  (13) Printing
PT Finnet Indonesia (“Finnet”)  60  (14) Banking data and communication

7375


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
           
  Legal    
  Ownership (%)    
  As of    
  December 31,    
Company 2006 Notes Business Operations
       
UNCONSOLIDATED
          
A. Direct associated companies
          
Where TELKOM owns between 20% to 50%:
          
PT Patra Telekomunikasi Indonesia (“Patrakom”)  40   (15)  VSAT services
PT Citra Sari Makmur (“CSM”)  25   (16)  VSAT and other telecommunication services
PT Pasifik Satelit Nusantara (“PSN”)  22.38   (17)  Satellite transponder and communications
Where TELKOM owns less than 20%:
          
PT Batam Bintan Telekomunikasi (“BBT”)  5   (18)  Fixed-phone (in Batam and Bintan islands)
PT Pembangunan Telekomunikasi Indonesia (“Bangtelindo”)  3.18   (19)  Telco network and equipment maintenance
B. Indirect associated companies
          
Bridge Mobile Pte. Ltd. (“BMP”)  12.5   (20)  Mobile services (in the Asia Pacific)
 
(1) OnTELKOM fully controlled AriaWest from July 31, 2003, TELKOM and the shareholders of AriaWest consummated the sale and purchase of AriaWest, pursuant to which TELKOM acquiredafter acquiring 100% of AriaWest from PT AriaPT.Aria Infotek (52.50%), MediaOne International I B.V. (35%) and The Asian Infrastructure Fund (12.50%). OnePursuant to the Sale and Purchase Agreement dated September 12, 2005, one share in AriaWest was transferred to Mr. Woeryanto SoeradjiJohn Welly in order to comply with the legal requirement that Indonesian limited liability companies should havebe owned by more than one shareholder. On March 6, 2007, the name of PT Aria West International was changed to PT Telekomunikasi Indonesia International (See note 54b to the consolidated financial statements).
(2) TELKOM controlled 100% of the shares of Dayamitra from December 14, 2004, following the acquisition of 9.68% shares of Dayamitra from TM Communications (HK) Ltd., which increased TELKOM’s ownership in Dayamitra from 90.32% to 100%. One TELKOM’s share in Dayamitra was transferred to Mr. Robby Rubama Sadeli in order to comply with the legal requirement that Indonesian limited liability companies be owned by more than one shareholder.
 
(2) (3) TELKOM and the shareholders of Pramindo signed a Conditional Sale and Purchase Agreement for the sale of the Pramindo shares on April 19, 2002, pursuant to which TELKOM received 30% of the shares of Pramindo in August 2002 and additional 15% in September 2003 while the remaining 55% was to be transferred to TELKOM on December 15, 2004. Although TELKOM only had 30% of the shares of Pramindo, TELKOM acquired control of Pramindo on August 15, 2002 and accordingly, TELKOM consolidated 100% of Pramindo from August 15, 2002. TELKOM signed a short-term loan agreement with ABN AMRO Bank N.V. Jakarta in the amount of approximately US$130 million on January 29, 2004 to finance the accelerated purchase of the remaining 55%. On April 8, 2003, 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. Following this transaction, TELKOM owned 100% of Pramindo. One of TELKOM’s shares in Pramindo was transferred to Mr. Adek Julianwar in order to comply with the legal requirement that Indonesian limited liability companies be owned by more than one shareholder.
(4) Telkomsel was established in 1995 by TELKOM (5 1%) and PT Indosat Tbk (49%). Following various transactions and changes in ownership, Telkomsel is currently owned by TELKOM (65%) and Singapore Telecom Mobile Pte. Ltd. (35%).
(5) TELKOM increased its ownership in Metra on April 8, 2003 to 100% by acquiring 69% of the shares of Metra from PT Indocitra Grahabawana under a share-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. OnePursuant to a sale and purchase agreement dated September 12, 2005, one share in Metra was transferred by TELKOM to Mr. Woeryanto SoeradjiJohn Welly in order to comply with the legal requirement that Indonesian limited liability companies be owned by more than one shareholder. On July 21, 2005, the Annual General Meeting of Stockholders of Metra resolved to issue additional share capital totaling Rp. 26,000 million to the Company. The Company paid the entire amount on October 21, 2005.
 
(3)(6) Infomedia was established in 1984 and is currently owned by TELKOM (51%) and PT Elnusa (49%), a subsidiary of PERTAMINA, an Indonesian state-owned oil company. Infomedia provides telephone directory and other information services.
(7) On August 8, 2003, TELKOM and PT Centralindo Pancasakti Cellular (“CPSC”) signed a share-swap agreement pursuant to which TELKOM received an additional 30.58%31% of the shares of Indonusa from CPSC. Following this transaction, TELKOM’s ownership in Indonusa increased from 57.50%57% to 88.08%88%. Pursuant to an extraordinary general meeting of the shareholders of Indonusa on October 29, 2003, all of the stockholders 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%88% to 90.39%90%. As of December 31, 2004,2005, CPSC did not hold any shares in Indonusa. CPSC is not a major customer of TELKOM. In November 2005, TELKOM increased its ownership in Indonusa from 90% to 96% by acquiring 5.29% of the shares in Indonusa, owned by PT Megacell Media.
 
(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)(8) TELKOM increased its ownership in Napsindo from 32% to 60% by acquiring 28% of the shares of Napsindo from PT Info Asia Sukses Makmur Mandiri (“InfoAsia”) on January 28, 2003. Napsindo is currently owned by TELKOM (60%) and PT Info Asia Sukses Mandiri (40%). The agreement betweenAs of January 13, 2006, Napsindo had ceased operations. On April 18, 2007, Napsindo’s NAP license was revoked

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by the DGPT under Decree No. 109/2007 concerning the Revocation of ISP and NAP Operational Licenses. As disclosed in TELKOM’s consolidated financial statements as of and for the year ended December 31, 2006, Napsindo has ceased its operation since January 13, 2006 and accordingly, no material adverse effect on TELKOM and InfoAsia was signed on December 30, 2002. The purchase price was paid on 28 January 2003, on which date TELKOM acquired controlis expected from the revocation of Napsindo.Napsindo’s NAP license.
 
(6) In January 2003, (9) TELKOM PT Indonesia Comnets Plus, a subsidiary of Perusahaan Perseroan (Persero) PT Perusahaan Listrik Negara and PT Prima Infokom Indonesia established PII to provide B2B, e-Government and e-Indonesia services. On January 20, 2005, TELKOM sold all of its shares in PII to PT Prima Infokom Indonesia.
(7) On April 19, 2002, TELKOM and the shareholders of 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 consolidatedacquired 100% of PramindoGSD on April 6, 2001, from that date even though its ownership in Pramindo was only 30% asKoperasi Mitra Duta and Dana Pensiun Bank Duta. TELKOM transferred one 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 purchase of the remaining 55%. Following this transaction, TELKOM owned 100% of Pramindo. One share in Pramindo has been transferredsuch shares to Mr. Adek JulianwarMartono in order to comply with the legal requirement that Indonesian limited liability companies should be owned by more than one shareholder.

(10) 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.
 
(8)(11) TFBV, a wholly owned subsidiary of Telkomsel, was established in Amsterdam, the Netherlands, on February 7, 2005, for the purpose of borrowing, lending and raising funds, including issuance of bonds, promissory notes or debt instruments.
(12) 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 service.
(13) Balebat is a company engaged in the printing business, domiciled in Bogor, Indonesia. On July 1, 2006 Infomedia purchased 14% of Balebat’s shares from other shareholders, thereby increasing Infomedia’s ownership interest from 51% to 65%.
(14) Finnet was established in January 2006 by Metra (60%), a wholly-owned subsidiary of TELKOM and PT Mekar Prana Indah, owned by Dana Pensiun Bank Indonesia/ Bank Indonesia Pension Fund and Yayasan Kesejahteraan Bank Indonesia. Finnet provides nationwide financial network services transmitting banking data ande-payments.
(15) On August 26, 2005, TELKOM purchased a 10% stake in PT Patra Telekomunikasi Indonesia (“Patrakom”) from Indosat. As a result, TELKOM’s ownership in Patrakom increased from 30% to 40%, and the remaining shares are owned by PT Elnusa (40%) and PT Tanjung Mustika (20%).
(16) CSM was established in 1986 by Mr. Subagio Wirjoatmodjo and Bell Atlantic Indonesia Inc. Currently, CSM is owned by PT Tigatra Media (38.29%), Media Trio (L) Inc. Malaysia (36.71%), and TELKOM (25%).
(17) As part of the agreement signed on August 8, 2003 between TELKOM and CPSC, TELKOM was entitled to receive CPSC’s 21.12% interest in PSN within a period of one year from the date the agreement was signed. During this period, all of CPSC’s rights in relation torespect of the shares were granted to TELKOM. TELKOM received the shares of CPSC in PSN on August 9, 2004, increasing its legal ownership interest in PSN to 43.69%. PSN and its creditors have agreed toconsummated a debt-to-equitydebt-to-equity conversion, pursuant to which PSN is required to issue approximately 20 millionissued 18,180,660 new shares to the creditors. The conversion will inhas the effect diluteof diluting 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,In 2005, TELKOM’s ownership interest in PSN will be diluted to approximately 35%.

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(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 was diluted to 6.40%35.5% as a result of thedebt-to-equity conversion. In January 2006, TELKOM’s ownership interest in PSN was further diluted to 22.38% as a result of issuance of new shares to a new shareholder.
(18) BBT was established in 1996 by PT Batamindo Investment Co (95%) and TELKOM (5%). BBT provides fixed line services at Batamindo Industrial Park in Muka Kuning, Batam Island and at Bintan Beach International Resort and Bintan Industrial Estate in Bintan Island. There are special economic and tourist development zones on those islands.
(19) Bangtelindo was established in 1993 by TELKOM (15%), PT Indosat (15%), PT Inti (15%) and other shareholders (55%). Bangtelindo is currently owned by Dana Pensiun TELKOM (82%), TELKOM (3.18%) and other shareholders (14.82%).
(20) BMP was established in 2004 by Telkomsel (14.286%) and six other international mobile operators in the Asia-Pacific region. On December 20, 2004, pursuantApril 14, 2005, Telkomsel’s ownership interest was diluted to shareholders’ resolutions, Mobisel issued 306 million12.5% following the issuance of new Series B shares resulting in TELKOM’s interest being diluted from 6.40%by BMP to 3.63%.a new shareholder, namely, Hong Kong CSL Limited.
Unconsolidated Associated Companies
PT Patra Telekomunikasi Indonesia (“Patrakom”)
      Patrakom was established in September 1995 and as of the date of this Annual Report is owned by TELKOM (30%), Indosat (10%(40%), 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 increase of ownership in Patrakom.
PT Citra Sari Makmur (“CSM”)
      CSM was established in February 1986 and as of the date of this Annual Report is owned by TELKOM (25%), PT Tigatra Media (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.

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PT Pasifik Satelit Nusantara (“PSN”)
      PSN was established in July 1991 and as of the date of this Annual Report, PSN is legally owned by Magic Alliance Labuan Limited (42.67%), TELKOM (43.69%(22.38%), Bank of New York (9.97%), Pulsa Labuan Limited (3.95%), Skaisnetindo Teknotama (10.92%(3.77%), Primaupaya Lintasswara (7.71%PT Trinur Cakrawala (3.75%), Hughes Space and Communications International (7.23%(3.71%), Telesat Canada (7.23%(3.71%) and others (23.20%(6.10%) (including holders of American Depositary Shares of PSN who own 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 CPSC, TELKOM was entitled to receive CPSC’s 21.12% interest in PSN within a period of one year from the date the agreement was signed. During this period, all of CPSC’s rights in relation torespect of the shares were granted to TELKOM. TELKOM received the shares of CPSC in PSN on August 9, 2004, increasing its legal ownership interest in PSN to 43.69%. In 2005, TELKOM’s ownership interest in PSN was diluted to 35.5% as a result of thedebt-to-equity conversion by PSN. In 2006, TELKOM’s ownership interest in PSN was further diluted to 22.38% as a result of issuance of new shares to a new shareholder.
      As of the date of this Annual Report, TELKOM is evaluating the costs and 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)Batam Bintan Telekomunikasi (“BBT”)
      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 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, 2004, Mobisel had approximately 10,000 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 was 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.
PT Batam Bintan Telekomunikasi
      BabintelBBT was established in June 1996 and as of the date of this Annual Report is 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, 2004, Babintel had approximately 2,590 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
Bridge Mobile Pte. Ltd.
      On November 3, 2004, Telkomsel together with six other international mobile operators in the Asia Pacific established Bridge Mobile Pte. Ltd. (Singapore), a company that is engaged in providing regional mobile services in the Asia Pacific region.Pacific.
      Telkomsel contributed US$1.0 million (Rp.9,290 million) which representspreviously held a 14.286% ownership interest. In 2005, Telkomsel’s ownership interest in Bridge Mobile Pte. Ltd. was diluted to 12.5% as a result of the issuance of shares by Bridge Mobile Pte. Ltd. to a new shareholder, namely, Hong Kong CSL Limited.
PT Mandara Selular Indonesia (“MSI”), previously referred to as PT Mobile Selular Indonesia (“Mobisel”)
      On January 13, 2006, TELKOM sold its entire ownership interest in MSI to a third party, namely, Twinwood Venture Limited. The resulting gain was not significant to TELKOM’s consolidated statement of income.

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D.Property, PlantPlants 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(Hak Guna Bangunan)Bangunan) and rights to use (Hak Pakai)(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, 2004,2006, TELKOM, excluding its subsidiaries, ownedhad land use rights to approximately 2,0002,578 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, 2002, 20032004, 2005 and 20042006 included elsewhere in 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 56 to the consolidated financial statements for our reconciliation to U.S. GAAP.
A.Operating Results
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. As of December 31, 2004,2006, TELKOM had approximately 9.912.9 million fixed lines in service comprising 8.7 million lines on its fixed wireline network and 4.2 million lines on its fixed wireless network and Telkomsel had approximately 16.335.6 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 factors that have materially affected TELKOM, as well as the environment in which it operates, during 2002 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:
• 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 2004 were significantly affected by:
 • the general economic situation in Indonesia, particularly the devaluationdepreciation 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 the 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 the 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.

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      TELKOM believes that its operating results in 2005 were significantly affected by:
• the increase in fixed lines, particularly in fixed wireless lines;
• 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;
• increased demand for data and Internet services, particularly in SMS, broadband Internet, and data communication network services using frame relay, SMS and IP VPN;
•��increased 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;
• increased depreciation expense, primarily due to Telkomsel’s expansion of its network capacity, increase in TELKOM’s fixed wireless assets and change in TELKOM’s estimate of remaining useful lives for certain cable network facilities (WLL and Approach Link equipment) and certain Jakarta and West Java transmission and installation equipment (BSS equipment); and
• write-down of assets and loss on procurement commitments due to the Government’s decision to allocate the 1900 MHz frequency spectrum for exclusive use in 3G services commencing at the end of 2007 which resulted in TELKOM no longer being able to use its BSS equipment operating in the 1900 MHz in the Jakarta and West Java areas commencing at the end of 2007.
      TELKOM believes that the factors that have materially affected TELKOM’s operating results, as well as the environment in which it operates, during 2006 were:
• the increase in fixed lines, particularly in fixed wireless lines;
• 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;
• increased demand for data and Internet services, particularly in SMS;
• increased operations and maintenance expenses associated with TELKOM’s aggressive deployment of network infrastructure, mainly due to Telkomsel’s expansion of its network capacity;
• increased depreciation expenses, primarily due to Telkomsel’s expansion of its network capacity and the increase in TELKOM’s fixed wireless assets; and
• the amendment of the KSO agreement with PT Bukaka Singtel International (BSI) on October 19, 2006 which resulted in TELKOM obtaining the legal right to control financial and operating decisions of KSO VII, and the subsequent consolidation of KSO VII.
      TELKOM’s operating results, discussed below under “Results“— Results of Operations”, for the three-year period from 20022004 through 20042006 reflected significant growth in operating revenues, particularly in the fixed line,wireless, cellular, interconnection, and data and Internet businesses.Internet. The growth in operating revenues in the fixed linewireless business reflected both increased fixed linesgrowth in service in the non-KSO and KSO regions and the acquisition and subsequent consolidation of KSO IV in January 2004, AriaWest (KSO III) in July 2003 and Pramindo (KSO I) in August 2002.subscribers’ wireless pulse production. The growth of revenues in the cellular business primarily reflected growth in the number of Telkomsel’s cellular subscribers. The growth of revenues in data and Internet services primarily reflected the increase in SMS traffic from Telkomsel subscribers and increased usage of TELKOM’s multimedia services. Interconnection revenues have also increased as a result of greaterhigher interconnection charges received from mobile cellular operators and from the launch of its international long-distance services (TIC-007)under the “TIC-007” brand in June 2004, which is classified under interconnection revenue.2004. KSO revenues have declined in the three-year period from 20022004 through 20042006 due to the acquisitions of KSO I, IIIIV and IV discussed above.VII.
      TELKOM’s operating results for the three-year period from 20022004 to 20042006 also reflected significant growth in operating expenses. From 20022004 to 2003, the growth in operating expenses was primarily driven by an increase in depreciation expense, operations, maintenance and telecommunications services expenses and general and administrative expenses. The increase in depreciation expense and operations, maintenance and telecommunications services expenses 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 2004,2005, the growth of operating expenses was primarily driven by write-down of assets, and an increase in depreciation expense, personnel expenses and operations, maintenance and telecommunication services expenses. From 2005 to 2006, the growth of operating expenses was primarily

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driven by an increase in depreciation expense, personnel expenses and operations, maintenance and telecommunicationstelecommunication services expenses.
      In August 2005, the Government decided to set aside the 1900 MHz frequency spectrum for the exclusive use in 3G services and 800 MHz frequency spectrum for the exclusive use in the CDMA-based technology network commencing at the end of 2007. As a result, TELKOM’s BSS equipment in the Jakarta and West Java areas, which operates in 1900 MHz and forms an integral part of the fixed wireless transmission system of TELKOM, can no longer be used commencing at the end of 2007. Following the Government’s decision, TELKOM reviewed the recoverable amount of cash-generating unit to which the affected fixed wireless asset belongs and recognized a write-down of Rp.616.8 billion relating to this equipment. In addition, TELKOM changed its estimate of the remaining useful lives for the Jakarta and West Java BSS equipment and depreciates the remaining net book value of these assets through the June 30, 2007, the date when all of TELKOM’s 1900 MHz BSS equipment are expected to be completely replaced with the 800 MHz BSS equipment. This change in estimate increased depreciation expense by Rp.159.0 billion in 2005 and Rp.173.8 billion in 2006. In addition, TELKOM recognized a loss relating to non-cancellable contracts for procurement of the 1900 MHz transmission installation and equipment in the Jakarta and West Java areas amounting to Rp.79.4 billion in 2005. Due to the Government’s decision issued in the first quarter of 2005 to rearrange the frequency spectra utilized by the telecommunication industry which resulted in TELKOM not being able to utilize certain frequency spectra TELKOM currently uses to support fixed wireline cable network commencing at the end of 2006, certain of TELKOM’s cable network facilities, which comprise primarily of WLL and approach link equipment operating in the affected frequency spectra, can no longer be used commencing at the end of 2006. Accordingly, TELKOM shortened its estimate of the remaining useful lives for WLL and approach link equipment in the first quarter of 2005 and began depreciating the then remaining net book value of those assets through December 31, 2006. This change in estimate increased depreciation expense by Rp.471.2 billion in 2005 and Rp.240.4 billion in 2006. The increase in depreciation expense in 2005 and operations, maintenance and telecommunications services expenses in 20042006 was principallyalso due to expenses arising from Telkomsel’san expansion of itsTelkomsel’s cellular network capacity and an increase in TELKOM’s fixed assets due to its deployment of fixed wireless. Personnelwireless network.
      The increase in operations, maintenance and telecommunication services expenses grew in 20042006 was primarily due to a significantnetwork expansion by TELKOM, an increase of concession and USO fees as well as an increase of radio frequency usage charges, including 3G’s annual BHP fee (“Beban Hak Penyelenggaraan” or annual rights of usage fee).
      Personnel expenses increased in 2006 primarily due to an increase in net periodic

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pension cost and increases in salaries and related benefits and vacation pay, incentives and other benefits.early retirement program expense.
      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 2004,2005, TELKOM recognized loss on foreign exchange of Rp.1,220.8Rp.516.8 billion primarily due to foreign exchange losses on its US Dollar borrowings. In 2006, TELKOM recognized gain on foreign exchange of Rp.836.3 billion primarily due to foreign exchange gain on its US Dollar borrowings. The gain on foreign exchange was due to the devaluationrelatively modest appreciation of the Rupiah during 2004, primarily related2006, compared to foreign exchange loss on its US Dollar borrowings.the modest depreciation of the Rupiah during 2005.
Economic Situation in Indonesia
      TELKOM was significantly affected by a severe economic crisis that Indonesia and other Asian countries experienced beginning in the second half of 1997. As a result of the Asian financial crisis, the Rupiah depreciated significantly and experienced periods of significant volatility. 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 a low of approximately Rp.15,000 per US Dollar. In the three-year period from 20022004 through 2004,2006, 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;
• in 2005, a depreciation from Rp.9,290 per US Dollar at December 31, 2004 to Rp.9,830 per US Dollar at December 31, 2005; and
• in 2006, an appreciation from Rp.9,830 per US Dollar at December 31, 2005 to Rp.9,020 per US Dollar at December 31, 2006.
      As of July 13, 2005,June 27, 2007, Bank Indonesia’s middle exchange rate was Rp.9,750 perRp.9,114 to US$1.00.1.

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      Indonesia also experienced higher rates of inflation and interest rates from the second half of 1997 through 2002.      For the years ended December 31, 2002, 20032004, 2005 and 2004,2006, the annual inflation rate was 10.03%6.4%, 5.1%17.1% and 6.4%6.6%, respectively. The interest rate on a one-month Bank Indonesia Certificate (SBI) as of December 31, 2002, 20032004, 2005 and 20042006 was 12.9%7.4%, 8.3%12.8% and 7.4%9.8%, 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.”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 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. AlthoughBased on Announcement No. PM.2 year 2004 of the regulations provide for an annual tariff review and adjustment, economic conditions in Indonesia led toMinister of Communications dated March 30, 2004, TELKOM adjusted the tariffs being frozen in 2000 and 2001.effective April 1, 2004 as follows:
• Local charges increased by an average of 28%;
• Direct long distance charges decreased by an average of 10%; and
• Monthly subscription charges increased by an average of 12% to 25%, depending on customer’s segment.
      See Item 3D. “Risk3. “Key Information — D. Risk Factors — Risk Relatingrelating to TELKOM and its subsidiaries — TELKOM operates in a legal and regulatory environment that is undergoing significant reforms and such reformreforms may adversely affect TELKOM’s business.”
      On January 29, 2002, the MoC announced that fixed line tariffs would be increased by an average of 45.49% over three years. Effective February 1, 2002, the MoC increased fixed line tariffs by an average of 15%business”. Although fixed 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, 2003For details of the implementation of such increases. On March 30, 2004, the Government, as 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 adjusted its fixed line tariffsincrease and fixed wireless tariffs, with local charges increasing by 28.2%, DLD tariffs decreasing by an average of 10.6% and monthly subscription charges increasing by varying amounts from 12.1% to 25.1%, depending on the type of subscription. 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 MoCI whenGovernment, see Item 4. “Information on the Government intends to carry outCompany — B. Business Overview  — Competition — Tariffs for the plan.Provision of Telecommunication Services — Fixed Wireline Tariffs”.
Growth of Indonesian Cellular Market and Increase in Telkomsel’s revenuesRevenues
      The Indonesian cellular market has increased significantly in recent years. Telkomsel a subsidiary of TELKOM engaged in the cellular telephone business, experienced a 32.3%37.9% growth in net operating revenues from 20032005 to 2004,2006, due to a 69.8%46.7% growth in its total number of cellular subscribers, as 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%43.1% growth in net operating revenues from 20022004 to 2003,2005, due to a 60%49.0% growth in its total number of cellular subscribers.subscribers, as a result of the increased usage of mobile cellular phones in Indonesia and a corresponding increase in revenues from air time charges. Telkomsel’s revenues from cellular phone services (air time charges — net) accounted for approximately 30.7%40.4% of TELKOM’s consolidated total operating revenues for the year ended December 31, 2004,2006, compared to 31.2%34.9% for the year ended December 31, 20032005 and 29.9%30.7% for the year ended December 31, 2002.2004.
      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 the growing number of fixed wireless lines in service increasing significantly in 2004.service.
Increase in TELKOM’s interconnection revenuesInterconnection Revenues
      TELKOM’s interconnection revenues accounted for approximately 18.2%16.9% of TELKOM’s consolidated operating revenues for the year ended December 31, 2004,2006, compared to 15.3%18.5% for the year ended December 31, 20032005 and 13.6%18.2% for the year ended December 31, 2002.2004. From 20032005 to 2004,2006, the 48.7%12.1% increase in interconnection revenues was primarily due to a 36.9%11.3% increase in net interconnection charges paid to TELKOM by mobile cellular operators to Rp.5,351.6Rp.7,442.3 billion and a 248.3%17.1% increase in interconnection revenue from international calls to Rp.641.2Rp.1,001.3 billion. This international interconnection revenue includedTELKOM recognizes these international long-distance revenue from TELKOM’s IDD service (TIC-007) sincerevenues

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as interconnection revenues. From 2004 to 2005, the launch in June 2004. From 2002 to 2003, the25.1% increase in interconnection revenues was primarily due to a 74.4%24.9% increase in net interconnection charges paid to TELKOM by mobile cellular operators to Rp.3,908.3Rp.6,685.1 billion partially offset byand a 52.7% decrease33.3% increase in interconnection revenuerevenues from international calls to Rp.184.1Rp.854.8 billion. On February 8, 2006, the MoCI issued Regulation No. 8/ Per/ M.KOMINFO/02/2006, which mandates a new cost-based interconnection tariff scheme for all telecommunications network and service operators and became effective on January 1, 2007. On December 28, 2006, TELKOM and all network operators signed amendments to their interconnection agreements for their fixed line networks (local, domestic long distance and international) and mobile network for the implementation of the cost-based tariff obligations. Under the new scheme, the operator of the network on which calls terminate will determine the interconnection charge to be received by it based on a formula to be mandated by the Government, which will require the operators to charge for calls based on the costs of carrying such calls. For further information on the interconnection scheme, see Item 4. “Information on the Company — B. Business Overview — Regulations — Interconnection”; and 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”.
Increase in TELKOM’s dataData and Internet revenuesRevenues
      Data and Internet revenues accounted for approximately 14.2%17.7% of TELKOM’s consolidated operating revenues for the year ended December 31, 2004,2006, compared to 11.5%16.6% for the year ended December 31, 20032005 and 7.5%14.2% for the year ended December 31, 2002.2004. TELKOM’s revenues from its data and Internet services increased by 54.7%30.7% from 20032005 to 20042006 and by 100.3%44.2% from 20022004 to 2003.2005. The increase in data and Internet revenues in 20042006 was primarily due to a 61.6%26.8% increase in revenues generated from SMS services, and a 64.4%an 83.9% increase in revenues from multimediadata communication and a 27.6% increase in revenues from Internet connectivity services. The increase in 20032005 was primarily due to a 121.1%49.0% increase in revenues generated from SMS services, and a 115.7%69.2% increase in revenues from TELKOM’s internationaldata communication and a 28.2% increase in revenues from Internet connectivity services. From 2005 to 2006, revenues from VoIP services.

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Sale of 12.72% equity interest in Telkomselservices decreased by 5.0% to Rp.278.0 billion (US$30.9 million) due to SingTel
      On July 30, 2002, TELKOM completed the sale of a 12.72% shareholdingdecrease in Telkomsel to SingTel 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.total outgoing VoIP traffic.
Acquisition and Consolidation of KSO IV III and IVII
      TELKOM’s operating revenues and expenses for the three-year period from 20022004 through 20042006 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)KSO VII in July 2003 and Pramindo (KSO I) in August 2002.October 2006. Prior to consolidation of KSO IV III and I,VII, 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 “ItemItem 4. Information“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 20022004 through 20042006 due to the acquisitions of KSO I, IIIIV and IVVII 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 the 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. TELKOM is entitled to the balance of KSO revenues net of operating expenses and payments to MGTI for Fixed Investor Revenues. The allocation of the acquisition cost consisted of Rp.2,377.1 billion for property, plant and equipment and Rp.908.2 millionbillion 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.

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��     On October 19, 2006, TELKOM entered into an agreement with Bukaka Singtel (PT Bukaka Singtel International (BSI)) to amend and restate the KSO VII Agreement, with the purchase price at approximately Rp.1,770.9 billion. As a result, TELKOM obtained the legal right to control financial and operating decisions of KSO VII, in return TELKOM will pay PT Bukaka Singtel International (BSI) a fixed monthly payment of Rp.55.64 billion using a discount rate of 15% between October 2006 to June 2007, and Rp.44.25 billion from July 2007 until the end of the KSO period on December 2010. As a condition precedent to the coming into effect of the amended KSO agreement, TELKOM has entered into a separate assignment agreement with PT Bukaka Singtel International (BSI) and its business partners whereby PT Bukaka Singtel International (BSI) has assigned its interests in the revenue sharing agreements with its business partners to TELKOM. TELKOM is entitled to the balance of KSO revenues net of operating expenses and payments to PT Bukaka Singtel International (BSI) for Fixed Investor Revenues. The allocation of the acquisition cost consisted of Rp.1,288.9 billion for property, plant and equipment, Rp.452.2 billion for property, plant and equipment under revenue sharing arrangements, Rp.451.7 billion for intangible assets, Rp.266.3 billion for receivables, Rp.143.6 billion for cash and cash equivalents, Rp.70.0 billion for other current assets, Rp.7.0 billion for deferred tax assets, Rp.(456.6) billion for current liabilities, and Rp.(452.2) billion for unearned income on revenue sharing arrangements. Unearned income on revenue sharing arrangements represent the periodic payments to be made to the investors based on the costs incurred by the investor as agreed upon in the revenue sharing agreements with the investors. The fair value of the property, plant and equipment and property, plant and equipment under revenue sharing arrangements described above was determined by an independent appraisal whereas the fair value of other assets and liabilities was determined by management. The intangible assets represent the right to operate the business in the KSO VII area and the amount is being amortized over the remaining term of the KSO agreement of 4.3 years.
      As of December 31, 2004,2006, the remaining monthly payments to be made to MGTI and PT Bukaka Singtel International (BSI), before unamortized discount, amounted to US$462.9319.2 million (Rp.4,305.1(Rp.2,874.1 billion) and Rp.2,226.4 billion, respectively, is presented in TELKOM’s balance sheet as “Liabilities of Business Acquisitions.”“Deferred consideration for business combinations”.
Early Retirement Program
      In 2001, TELKOM implemented a voluntary early retirement program for certain eligible employees. TELKOM continued its voluntary early retirement program during 2002, 2003 and 2004 and made lump-sum payments to participating employees based on years of service, age and salary. A total of 7,269 employees retired under the program during the three-year period from 2002-2004, with 2,288 retiring 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.
Write-down of Assets, Depreciation Expense, Loss on Procurement Commitments, and Operations Maintenance and Maintenance ExpenseTelecommunication Services Expenses
      TELKOM’s depreciation expense and operations, maintenance and maintenance expense hastelecommunication services expenses have increased significantly during thethree-year period from 20022004 through 2004.2006. These increases haveare 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 began an aggressive deployment of fixed wireless in KSO IIIIV and KSO IVVII following TELKOM’s acquisitions of KSO III in July 2003 and KSO IV in January 2004.
Restatement2004 and KSO VII in October 2006. Telkomsel’s subscriber base has increased from 16,290,508 subscribers as of Information Previously ReportedDecember 31, 2004 to 24,269,353 subscribers as of December 31, 2005 and 35,597,171 subscribers as of December 31, 2006. TELKOM’s fixed wireless service grew substantially from 1,429,368 lines in service as of December 31, 2004 to 4,061,867 lines in service as of December 31, 2005 and 4,175,853 lines in service as of December 31, 2006.
      SubsequentAs a result of the Government’s decision issued in the first quarter of 2005 to rearrange the filingfrequency spectra used by the telecommunication service providers, TELKOM can no longer be able to utilize certain frequency spectra it currently uses to support fixed wireline cable network commencing at the end of 2006. Consequently, certain of TELKOM’s cable network facilities within the fixed wireline segment which comprise primarily of WLL and Approach Link Equipment operating in the affected frequency spectra, can no longer be used commencing at the end of 2006. Accordingly, TELKOM shortened its estimate of the remaining useful lives for WLL and Approach Link Equipment in the first quarter of 2005 and began depreciating the then remaining net book value of those assets through December 31, 2006. The effect of this change in estimate increased depreciation expense by Rp.471.2 billion (Rp.329.8 billion after tax) in 2005 and Rp.240.4 billion (Rp.168.3 billion after tax) in 2006.
      In August 2005, the MoCI decided to set aside 1900 MHz for the exclusive use in the 3G services and 800 MHz frequency spectrum for the exclusive use in CDMA-based technology network commencing at the

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end of 2007. As a result, TELKOM’s BSS equipment in the Jakarta and West Java areas, which operates in 1900 MHz and are part of the fixed wireless transmission installation and equipment, can no longer be used commencing at the end of 2007. On January 13, 2006, the MoCI issued MoCI Regulation No. 01/ PER/ M.KOMINFO/1/2006 which reaffirmed the Government’s decision that TELKOM’s fixed wireless network could only operate in the 800 MHz frequency spectrum and that the 1900 MHz will be allocated for 3G network. Following the MoCI’s decision, TELKOM’s reviewed the recoverable amount of cash-generating units to which the affected fixed wireless asset belongs. The recoverable amount was estimated using value in use which represented the present value of estimated future cash flows from cash-generating units using a pretax discount rate of 16.89%, representing TELKOM’s weighted average cost of capital as of December 31, 2005. TELKOM recognized a write-down of Rp.616.8 billion relating to this equipment in 2005. In addition, TELKOM changed its estimate of the remaining useful lives for the Jakarta and West Java BSS equipment and depreciated the remaining net book value of those assets through June 30, 2007, the date when all of TELKOM’s 1900 MHz BSS equipment are expected to be completely replaced with the 800 MHz BSS equipment. The effect of this change in estimate increased depreciation expense by Rp.159.0 billion (Rp.111.3 billion after tax) and Rp.173.8 billion (Rp.121.7 billion after tax) in 2005 and 2006, respectively. In addition, TELKOM recognized a loss relating to non-cancellable contracts for procurement of the 1900 MHz transmission installation and equipment in the Jakarta and West Java areas amounting to Rp.79.4 billion in 2005.
Intangible Assets
      Intangible assets comprised intangible assets from subsidiaries and business acquisitions (see Note 2d to the consolidated financial statementsstatements) and license. An intangible asset shall be recognized if it is probable that the expected future economic benefits that are attributable to the asset will flow to the Company and the cost of the asset can be reliably measured. An intangible asset is stated at cost less accumulated amortization and impairment, if any. An intangible asset is amortized over its useful life. The Company shall estimate the recoverable value of its intangible assets. When the carrying amount of an asset exceeds its estimated recoverable amount, the asset is written down to its estimated recoverable amount.
      In 2006, Telkomsel was granted the right to operate the 3G license. Telkomsel is required to pay an up-front fee and annual rights of usage (“BHP”) fee for the next ten years. The up-front fee is recorded as an intangible asset and amortized using the straight line method over the term of the right to operate the 3G license (10 years). Amortization commenced from the date when the assets attributable to the provision of the related services were available for use.
      Based on management interpretation of the license conditions and the written confirmation from the Directorate General of Post and Telecommunication, it is believed that the license could be returned at any time without any financial obligation to pay the remaining outstanding BHP fees. Based on this fact, Telkomsel concluded that it has purchased the right to make annual operating payments to operate the 3G license. Accordingly, Telkomsel recognizes the BHP fees as expenses when incurred.
      Management of Telkomsel assess its plan to continue to use the 3G license on an annual basis.
Changes in Methods of Accounting under Indonesian GAAP
      In July 2004, the Indonesian Financial Accounting Standards Board issued PSAK No. 38 (Revised 2004), “Accounting for Restructuring Transactions between Entities under Common Control,” (“PSAK 38R”). PSAK 38R changes TELKOM’s method of accounting for previously recorded restructuring transactions between entities under common control when certain conditions are met. The provisions of PSAK 38R were effective for TELKOM beginning January 1, 2005, the initial application date. Pursuant to a ruling issued by the Indonesian Capital Market and Financial Institution Supervisory Agency (“BAPEPAM”) regarding the initial application of PSAK 38R by public entities, TELKOM is required to reclassify the previously recorded difference in value of restructuring transactions between entities under common control as a direct adjustment to retained earnings as of the initial application date when the common control relationship between the transacting parties no longer exists as of January 1, 2005. The difference in value of

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restructuring transactions between entities under common control as of January 1, 2005 amounting to Rp.7,288.3 billion arose from transactions between TELKOM and Indosat, which at the time of the transactions was also controlled by the Government and therefore was an entity under common control with TELKOM. This common control relationship ceased to exist in December 2002 Annual Report on Form 20-Fwhen the Government sold its 41.94% ownership interest in Indosat to STT Communications Ltd. (“STTC”) and Amendment No. 1waived its special voting rights with respect to 2002 Annual Report on Form 20-F/the Series A that was filedDwiwarna Share. In accordance with the SECBAPEPAM ruling, TELKOM has reclassified the difference in value of restructuring transactions between entities under common control resulting from the cross-ownership transactions and acquisition of Pramindo as a charge to retained earnings as of January 1, 2005. This reclassification has no effect on June 11, 2003, TELKOM made certain adjustmentsnet consolidated stockholders’ equity. See Note 4 to the Indonesian GAAP and the related reconciliation with U.S. GAAP amounts previously disclosed for 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 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.” Please see “Item 15. Controls and Procedures — Restatement of Information Previously Reported.”
Reclassifications
      TELKOM also described in Amendment No. 2 to 2002 Annual Report on Form 20-F/ A the reclassification of certain accounts to conform with Indonesian GAAP and U.S. GAAP presentation requirements, but these reclassifications did not affect TELKOM’s consolidated net income for the year ended 2002. Please see “Item 15. Controls and Procedures — Reclassifications.”financial statements.
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 obtainedsubsidiaries, even though the legal titleownership is less than or equal 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.50%.
      TELKOM consolidated the revenues and expensesresults of operations of KSO IV from February 1, 2004 being the nearest convenient balance date, after it obtained the legal right to control financial and operating decisions of KSO IV on January 20, 2004.
      TELKOM consolidated the results of operations of KSO VII from October 1, 2006 being the nearest convenient balance date, after it obtained the legal right to control financial and operating decisions of KSO VII on October 19, 2006.
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 prevailing at the transaction date. At the balance sheet date, the exchange rates used for translation of monetary assets and monetary liabilitiesliability balances denominated in foreign currencies are translated into Indonesian Rupiah based on the buyingbuy and sellingsell rates quoted by

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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,liability balances, were Rp.8,940as follows:
• Rp.9,280 and Rp.9,300 to US$1, Rp.12,652 and Rp.12,682 to Euro1 and Rp.90.45 and Rp.90.72 to Japanese Yen1, as of December 31, 2004;
• Rp.9,825 and Rp.9,835 to US$1, Rp.11,638 and Rp.11,652 to Euro1 and Rp.83.78 and Rp.83.89 to Japanese Yen1, as of December 31, 2005; and
• Rp.8,995 and Rp.9,005 to US$1, Rp.11,839 and Rp.11,853 to Euro1 and Rp.75.58 and Rp.75.68 to Japanese Yen1, as of December 31, 2006.
      Telkomsel used the middle rates of Bank Indonesia, which were Rp.9,830 to US$1 and Rp.8,960Rp.11,660 to US$1.00Euro1 as of December 31, 2002, Rp.8,4302005 and Rp.8,450Rp.9,020 to US$1.001 and Rp.11,858 to as Euro1 as of December 31, 2003 and Rp.9,280 and Rp.9,300 to US$1.00 as of December 31, 2004. These rates differ from2006. Management concluded that the difference between the exchange rates used for convenience translations in this Annual Report, including inby TELKOM and Telkomsel are not material to the tables appearing in the discussion and analysis below.consolidated financial statements. See Note 2(e)2e 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. See Note 2k to the consolidated financial statements.
      The consolidated financial statements are stated in Indonesian Rupiah. The translations of Indonesian Rupiah amounts for 20042006 into United StatesUS Dollars are included solely for the convenience of the readers and have been

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made using the average of the market buy and sell rates of Rp.9,290Rp.9,000 to US$1.001 published by Reuters on December 31, 2004.2006. 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 StatesUS Dollars at this or any other rate of exchange. See Note 3 to the consolidated financial statements.
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 20022004 through 2004,2006, with each item also expressed as a percentage of total operating revenues:
                                              
 Year Ended December 31,  Year Ended December 31,
     
 2002 2003 2004 2004  2004 2005 2006 2006
                 
 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  7,264.1  34.9  8,896.9  32.8  10,645.0  31.4  1,145.9 Fixed lines  10,645.0  31.4  10,781.3  25.8  10,979.0  21.4  1,219.8 
Cellular  6,226.8  29.9  8,458.8  31.2  10,421.3  30.7  1,121.8 Cellular  10,421.3  30.7  14,570.9  34.9  20,622.6  40.2  2,291.4 
Joint Operation Schemes  2,128.1  10.2  1,486.3  5.5  656.6  1.9  70.7 
Interconnection  2,831.3  13.6  4,162.1  15.3  6,188.0  18.2  666.1 
Revenue under Joint Operation Schemes (KSO)Revenue under Joint Operation Schemes (KSO)  656.6  1.9  588.7  1.4  489.4  1.0  54.4 
Interconnection-netInterconnection-net  6,188.0  18.2  7,742.1  18.5  8,681.5  16.9  964.6 
Data and InternetData and Internet  1,551.6  7.5  3,108.6  11.5  4,808.8  14.2  517.6 Data and Internet  4,808.8  14.2  6,934.3  16.6  9,065.2  17.7  1,007.2 
NetworkNetwork  316.1  1.5  517.9  1.9  654.3  1.9  70.4 Network  654.3  1.9  586.6  1.4  718.7  1.4  79.9 
Revenue-sharing arrangements  263.8  1.3  258.5  1.0  280.6  0.8  30.2 
Other telecommunications services  221.0  1.1  226.9  0.8  293.2  0.9  31.5 
Revenue-sharing ArrangementsRevenue-sharing Arrangements  280.6  0.8  302.3  0.7  415.5  0.8  46.1 
Other telecommunications ServicesOther telecommunications Services  293.2  0.9  301.0  0.7  322.1  0.6  35.8 
                               
Total Operating RevenuesTotal Operating Revenues  33,947.8  100.0  41,807.2  100.0  51,294.0  100.0  5,699.3 
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 rightrights to provide domestic local serviceservices was finally terminated in August 2002 and TELKOM’s exclusive rightrights to provide domestic long-distance service was likewise terminated in August 2003. TELKOM, however, received its commercial license to provide IDD fixed line services on May 13, 2004. As a result of the termination of TELKOM’s exclusive rightrights to provide local and domestic long-distance service,services, Indosat, a competitor of TELKOM, received its commercial license to provide domestic long-distance services on May 13, 2004 and began offering fixed wireless services in August 2004. TELKOM believes Indosat will enter thebegan offering its domestic long-distance marketservice in the future.late 2004. 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 markets. With regard to IDD fixed line services,

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TELKOM began offering these services to its customers on June 7, 2004 under the “TIC 007”“TIC-007” brand. TELKOM currently recognizes these international long-distance revenues from TELKOM’s IDD service (TIC-007) as interconnection revenues. Although TELKOM expects its IDD fixed 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 results 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

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time band, while installation charges, phone cards and other services charges are set by individual operators. See Item 5. “Operating Results — A.“— Overview — Limited Increases in Tariffs.”Tariffs” above.
      Most fixed line revenues are recognized as services asare 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.service and ready for use.
      Fixed line telephone revenues for the three years 20022004 through 20042006 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  2004 2005 2006 2006
                 
 Rp. (billion) % Rp. (billion) % Rp. (billion) % US$ (million)  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  5,447.9  26.2  6,561.8  24.2  7,439.3  21.9  800.8 Local and domestic long-distance usage  7,439.3  21.9  7,223.1  17.3  7,130.9  13.9  792.3 
Monthly subscription chargesMonthly subscription charges  1,474.8  7.1  1,948.8  7.2  2,934.9  8.6  315.9 Monthly subscription charges  2,934.9  8.6  3,289.8  7.9  3,491.5  6.8  387.9 
Installation chargesInstallation charges  130.2  0.6  223.1  0.8  201.3  0.6  21.7 Installation charges  201.3  0.6  197.3  0.5  170.2  0.3  18.9 
Phone cardsPhone cards  29.3  0.1  34.4  0.1  15.6  0.1  1.7 Phone cards  15.6  0.1  10.9  0.0  4.0  0.0  0.4 
OthersOthers  181.9  0.9  128.8  0.5  53.9  0.2  5.8 Others  53.9  0.2  60.2  0.1  182.4  0.4  20.3 
                               
Total  7,264.1  34.9  8,896.9  32.8  10,645.0  31.4  1,145.9 Total  10,645.0  31.4  10,781.3  25.8  10,979.0  21.4  1,219.8 
                               
Cellular Telephone Revenues
      The main component of cellular telephone revenues is air time charges. Cellular telephone revenues also include monthly subscription charges, connection fee 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. 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.(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 refillreload vouchers are recognized initially as unearned income and thereafter recognized proportionately as revenue based on duration of 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.
      Cellular telephone revenues for the three years 20022004 through 20042006 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 2004 2005 2006 2006
                
 Rp. (billion) % Rp. (billion) % Rp. (billion) % US$ (million) Rp. (billion) % Rp. (billion) % Rp. (billion) % US$ (million)
Cellular Telephone Revenues
Cellular Telephone Revenues
                                            
Air time chargesAir time charges  5,453.6  26.2  7,677.9  28.3  9,825.7  28.9  1,057.7   9,825.7  28.9  13,666.3  32.7  19,257.3  37.5  2,139.7 
Monthly subscription chargesMonthly subscription charges  593.3  2.9  580.5  2.2  448.5  1.3  48.3   448.5  1.3  383.5  0.9  297.4  0.6  33.1 
Connection fee chargesConnection fee charges  172.3  0.8  194.1  0.7  55.8  0.2  6.0   55.8  0.2  64.1  0.2  109.2  0.2  12.1 
FeaturesFeatures  7.6  0.0  6.3  0.0  91.3  0.3  9.8   91.3  0.3  457.0  1.1  958.7  1.9  106.5 
                              
Total  10,421.3  30.7  14,570.9  34.9  20,622.6  40.2  2,291.4 
Total  6,226.8  29.9  8,458.8  31.2  10,421.3  30.7  1,121.8                
               

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Joint Operation Scheme (“KSO”) Revenues
      KSO revenues consist of:
KSO revenues consist of:
 • Initial paymentpayments made by the KSO partners, which iswere amortized over the life of the KSO Agreement;
 
 • Minimum TELKOM Revenues (“MTR”), being a specified minimum payment, which iswere payable monthly; and
 
 • Distributable TELKOMKSO Revenues (“DTR”DKSOR”), being a specified percentage of KSO revenues after deduction of operating expenses and MTR obligation, which iswere payable monthly.
      KSO Revenuesrevenues have been decreasing due to the acquisition of KSO partners’ interests in the KSO units, resulting in the revenues of the KSO units being consolidated and included under Fixed Line revenues. The decrease in KSO revenues for 2006 resulted from the acquisition and consolidation of KSO VII in October 2006.
      KSO revenues for the three years 20022004 through 20042006 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  2004 2005 2006 2006
                 
 Rp. (billion) % Rp. (billion) % Rp. (billion) % US$ (million)  Rp. (billion) % Rp. (billion) % Rp. (billion) % US$ (million)
KSO Revenues
KSO Revenues
                      
KSO Revenues
                      
Minimum TELKOM RevenuesMinimum TELKOM Revenues  1,319.7  6.3  899.9  3.3  296.0  0.9  31.9 Minimum TELKOM Revenues  296.0  0.9  268.6  0.6  207.5  0.4  23.1 
Share in distributable KSO Revenues  801.0  3.9  583.0  2.2  349.5  1.0  37.6 
Share in Distributable KSO RevenuesShare in Distributable KSO Revenues  349.5  1.0  318.6  0.8  274.6  0.6  30.5 
Amortization of unearned initial investor payments under Joint Operation SchemesAmortization of unearned initial investor payments under Joint Operation Schemes  7.4  0.0  3.4  0.0  11.1  0.0  1.2 Amortization of unearned initial investor payments under Joint Operation Schemes  11.1  0.0  1.5  0.0  7.3  0.0  0.8 
                               
Total  2,128.1  10.2  1,486.3  5.5  656.6  1.9  70.7 Total  656.6  1.9  588.7  1.4  489.4  1.0  54.4 
                               
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, and a retail fee charged to TELKOM’s subscribers for an outgoing call. This international interconnection revenue includedcalls and international long-distance revenuerevenues from TELKOM’s IDD service (TIC-007) since the launch of TELKOM’s IDD service (TIC-007) 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 network interconnection with other domestic and international telecommunications carriers are recognized as incurred based on agreement and are presented net of interconnection expenses paid to other operators. Interconnection revenues are typically accrued initially and settled among operators monthly and can fluctuate significantly as a result of adjustments among operators to accrued amounts at the time of settlement. On 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,February 8, 2006, the MoCI toissued Regulation No. 8/ Per/ M.KOMINFO/02/2006, which telecommunications regulatory responsibility was transferred in February 2005, has not issued implementing regulations. TELKOM expects that the current interconnection fees may be adjusted asmandates a result of the new cost-based interconnection tariff scheme butfor all telecommunications network and services operators that effectively applied on 1 January 2007. For further information on the interconnection scheme, see Item 4. “Information on the Company — B. Business Overview — Regulations — Interconnection”; and Item 3. “Key Information” — D. Risk Factors — Risks relating to TELKOM can give no assurance regarding the impact, if any, ofand its subsidiaries — TELKOM operates in a legal and regulatory environment that is undergoing significant reforms and such adjustment onreforms may adversely affect TELKOM’s business, financial condition, results of operations and prospects.business”.

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      Interconnection revenues for the three years 20022004 through 20042006 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  2004 2005 2006 2006
                 
 Rp. (billion) % Rp. (billion) % Rp. (billion) % US$ (million)  Rp. (billion) % Rp. (billion) % Rp. (billion) % US$ (million)
Interconnection Revenues
Interconnection Revenues
                      
Interconnection Revenues
                      
CellularCellular  2,241.5  10.8  3,908.3  14.4  5,351.6  15.7  576.1 Cellular  5,351.6  15.7  6,685.1  16.0  7,442.3  14.5  826.9 
InternationalInternational  389.3  1.9  184.1  0.7  641.2  1.9  69.0 International  641.2  1.9  854.8  2.0  1,001.4  1.9  111.3 
OtherOther  200.5  0.9  69.7  0.2  195.2  0.6  21.0 Other  195.2  0.6  202.2  0.5  237.8  0.5  26.4 
                               
Total  2,831.3  13.6  4,162.1  15.3  6,188.0  18.2  666.1 Total  6,188.0  18.2  7,742.1  18.5  8,681.5  16.9  964.6 
                               
Data and Internet Revenues
      The components of data and Internet revenues are revenues from SMS, multimedia,internet, data communication, VoIP and ISDNe-business services. Data and Internet revenuerevenues for the three years 20022004 through 20042006 are set out below, with each item also expressed as a percentage of operating revenues:
                              
  Year Ended December 31,
   
  2002 2003 2004 2004
         
  Rp. (billion) % Rp. (billion) % Rp. (billion) % US$ (million)
Data and Internet Revenue
                            
SMS  997.2   4.9   2,205.1   8.2   3,562.7   10.5   383.5 
Multimedia  337.8   1.6   494.7   1.8   813.3   2.4   87.5 
VoIP  152.2   0.7   328.3   1.2   318.9   0.9   34.3 
ISDN  64.4   0.3   80.5   0.3   113.9   0.4   12.3 
                      
 Total  1,551.6   7.5   3,108.6   11.5   4,808.8   14.2   517.6 
                      
                              
  Year Ended December 31,
   
  2004 2005 2006 2006
         
  Rp. (billion) % Rp. (billion) % Rp. (billion) % US$ (million)
Data and Internet Revenues
                            
SMS  3,562.7   10.5   5,309.2   12.7   6,730.5   13.1   747.8 
Internet  554.9   1.6   711.4   1.7   907.5   1.8   100.8 
Data communication  360.7   1.1   610.4   1.5   1,122.3   2.2   124.7 
VoIP  318.9   1.0   292.7   0.7   278.0   0.5   30.9 
e-business  11.6   0.0   10.6   0.0   26.9   0.1   3.0 
                             
 Total  4,808.8   14.2   6,934.3   16.6   9,065.2   17.7   1,007.2 
                             
Network Revenues
      The components of network revenues are revenues from satellite transponder leases and leased lines. Network revenuerevenues for the three years 20022004 through 20042006 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  2004 2005 2006 2006
                 
 Rp. (billion) % Rp. (billion) % Rp. (billion) % US$ (million)  Rp. (billion) % Rp. (billion) % Rp. (billion) % US$ (million)
Network Revenue
                      
Network Revenues
Network Revenues
                      
Satellite transponder leaseSatellite transponder lease  190.2  0.9  270.9  1.0  210.9  0.6  22.7 Satellite transponder lease  210.9  0.6  239.5  0.6  294.1  0.6  32.7 
Leased linesLeased lines  125.9  0.6  247.0  0.9  443.4  1.3  47.7 Leased lines  443.4  1.3  347.1  0.8  424.6  0.8  47.2 
                               
Total  316.1  1.5  517.9  1.9  654.3  1.9  70.4 Total  654.3  1.9  586.6  1.4  718.7  1.4  79.9 
                               

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Revenues under Revenue-Sharing Arrangements
      The components of revenues under revenue-sharing arrangements are net share in revenue earned under revenue-sharing arrangements and amortization of unearned income under revenue-sharing arrangements.

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      Revenues under revenue-sharing arrangements for the three years 20022004 through 20042006 are set out below, with each item also expressed as a percentage of operating revenues:
                              
  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 
                      
                              
  Year Ended December 31,
   
  2004 2005 2006 2006
         
  Rp. (billion) % Rp. (billion) % Rp. (billion) % US$ (million)
Revenues Under Revenue- Sharing Arrangements
                            
Net share in revenue earned
under Revenue-Sharing Arrangements
  198.6   0.6   165.6   0.4   263.5   0.5   29.3 
Amortization of unearned income under Revenue-Sharing Arrangements  82.0   0.2   136.7   0.3   152.0   0.3   16.9 
                             
 Total  280.6   0.8   302.3   0.7   415.5   0.8   46.2 
                             
Other Telecommunications Services Revenues
      Other telecommunications services revenues primarily represent telex and telegram revenues, revenues from the telephone directory assistance business and revenues from cable television services. In 2006, TELKOM’s revenues from cable televisionother telecommunications services and telephone directoryincreased by Rp.21.1 billion, or 7.0%, from Rp.301.0 billion in 2005 to Rp.322.1 billion in 2006. The increase in other telecommunications services have been increasing. However,revenues was primarily due to the rapid growth of technology development, telex and telegraman increase in directory assistance revenues areby Rp.23.1 billion, or 8.2%, from Rp.281.1 billion in decline.2005 to Rp.304.2 billion in 2006.
TELKOM’s Operating Expenses
      The following table sets out TELKOM’s operating expenses for the three years 20022004 through 2004,2006, with each item also expressed as a percentage of operating revenues:
                                              
 Year Ended December 31,  Year Ended December 31,
     
 2002 2003 2004 2004  2004 2005 2006 2006
                 
 Rp. (billion) % Rp. (billion) % Rp. (billion) % US$ (million)  Rp. (billion) % Rp. (billion) % Rp. (billion) % US$ (million)
Operating Expenses
Operating Expenses
                      
Operating Expenses
                      
DepreciationDepreciation  3,473.4  16.7  4,779.5  17.6  6,438.5  19.0  693.1 Depreciation  6,438.6  19.0  7,570.7  18.1  9,178.3  17.9  1,019.8 
Operations, maintenance and telecommunications servicesOperations, maintenance and telecommunications services  2,290.2  11.0  3,338.7  12.3  4,529.6  13.3  487.6 Operations, maintenance and telecommunications services  4,529.6  13.3  5,916.3  14.1  7,495.7  14.6  832.9 
PersonnelPersonnel  4,387.6  21.1  4,440.1  16.4  5,570.8  16.4  599.7 Personnel  4,910.0  14.5  6,563.0  15.7  8,513.8  16.6  946.0 
General and administrative  1,146.3  5.5  2,078.8  7.7  2,599.8  7.7  279.8 
General and AdministrativeGeneral and Administrative  2,599.8  7.7  2,764.0  6.6  3,271.5  6.4  363.5 
MarketingMarketing  375.1  1.8  502.9  1.8  881.9  2.6  94.9 Marketing  881.9  2.6  1,126.2  2.7  1,241.5  2.4  137.9 
Write-down of assetsWrite-down of assets      616.8  1.5       
Loss on procurement CommitmentsLoss on procurement Commitments      79.4  0.2       
                               
Total Operating Expenses  11,672.6  56.1  15,140.0  55.8  20,020.6  59.0  2,155.1 Total Operating Expenses  19,359.9  57.1  24,636.4  58.9  29,700.8  57.9  3,300.1 
                               
Depreciation Expense, Write-down of Assets and Loss on Procurement Commitments
      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 when such assets wereare placed into service. Equipment temporarily unused is reclassified into equipment not used in operation and depreciated over its estimated useful life using the straight line method. See NotesNote 2k 2l, 2m, 11 and 12 to the consolidated financial statements.
      In accordance with Indonesian GAAP, TELKOM capitalizes interest costsexpenses 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 2002, 2003 and 2004,such assets. TELKOM capitalized interest costsexpenses for qualifying assets under construction of Rp.20.1 billion, Rp.22.9 billion and Rp.57.7 billion, (US$6.2 million), respectively.Rp.nil and

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Rp.nil in 2004, 2005 and 2006, respectively. TELKOM also capitalized foreign exchange losses (gains) for those assets under construction of (Rp.27.6 billion), nil and Rp.74.3 billion, (US$8.0 million)Rp.nil and Rp.nil in 2002, 20032004, 2005 and 2004,2006, respectively.
      As a result of the MoCI’s decisions issued in 2005 on the rearrangement of frequency spectra utilized by the telecommunication industry, certain of TELKOM’s fixed wireline cable network facilities, which comprise primarily WLL and approach link, and TELKOM’s BSS equipment in the Jakarta and West Java areas, which are part of transmission installation and equipment for fixed wireless assets, cannot be used through the end of their initial estimated useful lives. In 2005, TELKOM recognized a write-down of assets of Rp.616.8 billion related to transmission installation and equipment of fixed wireless assets and loss on procurement commitments of Rp.79.4 billion related to non-cancelable contracts for procurement of the 1900 MHz transmission installation and equipment in the Jakarta and West Java areas. TELKOM also shortened its estimate of the remaining useful lives for fixed wireline WLL and approach link equipment and the Jakarta and West Java fixed wireless BSS equipment. See “— Write-down of Assets, Depreciation Expense, Loss on Procurement Commitments, and Operations, Maintenance and Telecommunication Services Expenses” above.
Operations, Maintenance and Telecommunications Services Expenses
      Operations, maintenance and telecommunications services expenses for the three years 20022004 through 20042006 are set out below, with each item also expressed as a percentage of operating revenues:
                              
  Year Ended December 31,
   
  2002 2003 2004 2004
         
  Rp. (billion) % Rp. (billion) % Rp. (billion) % US$ (million)
Operations, Maintenance and Telecommunications Services Expenses
                            
Operations and maintenance  1,042.6   5.0   1,744.8   6.4   2,398.2   7.1   258.1 
Radio frequency usage charges  292.7   1.4   371.7   1.4   492.6   1.5   53.0 
Electricity, gas and water  219.9   1.1   300.4   1.1   385.7   1.1   41.5 
Cost of phone cards  197.7   1.0   181.3   0.7   366.7   1.1   39.5 
Concession fees  163.9   0.8   239.0   0.9   314.7   0.9   33.9 
Insurance  142.9   0.7   157.1   0.6   151.3   0.4   16.3 
Leased lines  103.6   0.5   127.0   0.5   132.8   0.4   14.3 
Vehicles and supporting facilities  80.0   0.3   115.7   0.4   181.7   0.5   19.6 
Traveling  16.5   0.1   29.8   0.1   42.2   0.1   4.5 
Others  30.4   0.1   71.9   0.2   63.7   0.2   6.9 
                      
 Total  2,290.2   11.0   3,338.7   12.3   4,529.6   13.3   487.6 
                      
                              
  Year Ended December 31,
   
  2004 2005 2006 2006
         
  Rp. (billion) % Rp. (billion) % Rp. (billion) % US$ (million)
Operations, Maintenance and Telecommunications Services Expenses
                            
Operations and Maintenance  2,398.2   7.1   3,075.1   7.3   4,209.1   8.2   467.7 
Radio Frequency Usage Charges  492.6   1.5   548.2   1.3   722.6   1.4   80.3 
Concession fees and Universal Service Obligation (USO) charges  314.7   0.9   709.2   1.7   881.8   1.7   98.0 
Cost of phone, SIM and RUIM Cards  366.7   1.1   582.3   1.4   579.3   1.1   64.4 
Electricity, gas and Water  385.7   1.1   372.5   0.9   417.3   0.8   46.4 
Vehicles and supporting Facilities  181.7   0.5   217.2   0.5   246.2   0.5   27.4 
Insurance  151.3   0.4   136.4   0.3   145.1   0.3   16.1 
Leased lines  132.8   0.4   124.2   0.3   236.4   0.5   26.3 
Traveling  42.2   0.1   33.5   0.1   39.1   0.1   4.3 
Call Center  59.6   0.2   105.0   0.3   14.7   0.0   1.6 
Others  4.1   0.0   12.7   0.0   4.1   0.0   0.5 
                             
 Total  4,529.6   13.3   5,916.3   14.1   7,495.7   14.6   833.0 
                             
Personnel Expenses
      The main components of personnel expenses in 20042006 were salaries and related benefits, which were Rp.1,796.9Rp.2,400.6 billion (US$193.4266.7 million), vacation pay, incentives and other benefits, which were Rp.1,156.1Rp.2,209.1 billion (US$124.4245.5 million), and net periodic pension cost,early retirement expenses, which was Rp.1,034.8were Rp.1,461.2 billion (US$111.4162.4 million).

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      Personnel expenses for the three years 20022004 through 20042006 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  2004 2005 2006 2006
                 
 Rp. (billion) % Rp. (billion) % Rp. (billion) % US$ (million)  Rp. (billion) % Rp. (billion) % Rp. (billion) % US$ (million)
Personnel Expenses
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 Salaries and related benefits  1,796.9  5.3  2,165.9  5.2  2,400.6  4.7  266.7 
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 Vacation pay, incentives and other benefits  1,156.1  3.4  1,615.6  3.8  2,209.1  4.3  245.5 
Early retirementsEarly retirements  717.3  3.4  355.7  1.3  243.5  0.7  26.2 Early retirements  243.5  0.7  486.4  1.2  1,461.2  2.8  162.4 
Long service awards  289.9  1.4  219.2  0.8  159.3  0.5  17.2 
Net periodic post-retirement health care benefit costNet periodic post-retirement health care benefit cost  416.3  1.2  488.6  1.2  604.7  1.2  67.2 
Net periodic pension costNet periodic pension cost  362.3  1.7  191.0  0.7  1,034.8  3.1  111.4 Net periodic pension cost  572.4  1.7  532.3  1.3  438.4  0.9  48.7 
Employee income taxEmployee income tax  201.5  1.0  468.8  1.7  523.8  1.5  56.4 Employee income tax  523.8  1.5  856.4  2.0  889.1  1.7  98.8 
Net periodic post-retirement benefit cost  616.5  3.0  641.4  2.4  492.2  1.5  53.0 
Long service awardsLong service awards  36.9  0.1  201.9  0.5  215.8  0.4  24.0 
HousingHousing  89.5  0.4  116.9  0.4  103.5  0.3  11.2 Housing  103.4  0.3  113.7  0.3  168.4  0.3  18.7 
MedicalMedical  28.2  0.1  9.7  0.1  12.2  0.0  1.3 Medical  12.2  0.1  18.0  0.0  25.1  0.0  2.8 
Other employee benefitsOther employee benefits      4.4  0.0  11.5  0.0  1.2 Other employee benefits  11.5  0.1  6.0  0.0  14.3  0.0  1.6 
OthersOthers  16.2  0.1  42.7  0.2  37.0  0.1  4.0 Others  37.0  0.1  78.2  0.2  87.1  0.3  9.6 
                               
Total  4,387.6  21.1  4,440.1  16.4  5,570.8  16.4  599.7 Total  4,910.0  14.5  6,563.0  15.7  8,513.8  16.6  946.0 
                               
General and Administrative Expenses
      The main components of general and administrative expenses in 20042006 were amortization of goodwill and other intangible assets, which totaled Rp.872.3Rp.944.4 billion (US$93.9104.9 million), arising from the acquisitions of GSD, Dayamitra, Pramindo, AriaWest and KSO IV collection expenses, which totaled Rp.359.0 billion (US$38.6 million),in previous years, the acquisition of KSO VII by TELKOM and 3G license by Telkomsel in 2006, provision for doubtful accounts and inventory obsolescence, which totaled Rp.357.7Rp.458.2 billion (US$38.550.9 million), and collection expenses, which totaled Rp.542.5 billion (US$60.3 million).

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      General and administrative expenses for the three years 20022004 through 20042006 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  2004 2005 2006 2006
                 
 Rp. (billion) % Rp. (billion) % Rp. (billion) % US$ (million)  Rp. (billion) % Rp. (billion) % Rp. (billion) % US$ (million)
General and Administrative Expenses
General and Administrative Expenses
                      
General and Administrative Expenses
                      
Provision for doubtful accounts and inventory obsolescence  31.1  0.1  326.4  1.2  357.7  1.1  38.5 
Professional feesProfessional fees  219.0  1.0  115.6  0.4  137.3  0.4  14.8 Professional fees  137.3  0.4  131.0  0.3  221.0  0.4  24.6 
Collection expensesCollection expenses  224.8  1.1  273.8  1.0  359.0  1.1  38.6 Collection expenses  359.0  1.1  379.1  0.9  542.5  1.1  60.3 
Amortization of goodwill and other intangible assetsAmortization of goodwill and other intangible assets  872.3  2.6  918.2  2.2  944.4  1.8  104.9 
Training, education and recruitmentTraining, education and recruitment  122.1  0.6  126.9  0.5  228.5  0.7  24.6 Training, education and recruitment  228.5  0.7  177.9  0.4  224.3  0.4  24.9 
TravelTravel  111.4  0.5  144.7  0.6  192.6  0.6  20.7 Travel  192.6  0.6  171.7  0.4  229.7  0.4  25.5 
Amortization 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  77.1  0.4  110.3  0.4  143.9  0.4  15.5 Security and screening  143.9  0.4  164.4  0.4  197.4  0.4  21.9 
General and social contributionGeneral and social contribution  111.8  0.3  204.3  0.5  301.8  0.6  33.5 
Printing and stationeryPrinting and stationery  43.5  0.2  50.5  0.2  81.0  0.2  8.7 Printing and stationery  81.0  0.2  50.2  0.1  51.9  0.1  5.7 
MeetingsMeetings  31.7  0.2  42.8  0.2  58.3  0.2  6.3 Meetings  58.3  0.2  40.3  0.1  64.0  0.1  7.1 
Provision for doubtful accounts and inventory obsolescenceProvision for doubtful accounts and inventory obsolescence  357.7  1.1  489.0  1.2  458.2  0.8  50.9 
Research and developmentResearch and development  10.5  0.1  9.1  0.0  13.2  0.0  1.4 Research and development  13.2  0.0  8.4  0.0  8.7  0.0  1.0 
General and social contribution  69.4  0.3  113.8  0.4  111.8  0.3  12.0 
OthersOthers  17.7  0.1  34.2  0.1  44.2  0.1  4.8 Others  44.2  0.1  29.5  0.1  27.6  0.1  3.2 
                               
Total  1,146.3  5.5  2,078.8  7.7  2,599.8  7.7  279.8 Total  2,599.8  7.7  2,764.0  6.6  3,271.5  6.4  363.5 
                               

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Marketing Expenses
      Marketing expenses consist of advertising, customer education and other marketing expenses.
                                                        
 Year Ended December 31, Year Ended December 31,
    
 2002 2003 2004 2004 2004 2005 2006 2006
                
 Rp. (billion) % Rp. (billion) % Rp. (billion) % US$ (million) Rp. (billion) % Rp. (billion) % Rp. (billion) % US$ (million)
Marketing Expenses
                                            
Advertising  310.3  1.5  381.7  1.4  699.6  2.1  75.3   699.6  2.1  795.6  1.9  944.3  1.8  104.9 
Customer education  52.3  0.2  102.2  0.3  152.4  0.4  16.4   152.4  0.4  305.3  0.7  267.7  0.5  29.7 
Others  12.5  0.1  19.0  0.1  29.9  0.1  3.2   29.9  0.1  25.3  0.1  29.5  0.1  3.3 
                              
Total  375.1  1.8  502.9  1.8  881.9  2.6  94.9   881.9  2.6  1,126.2  2.7  1,241.5  2.4  137.9 
                              
Results of Operations
Year ended December 31, 20042006 compared to year ended December 31, 20032005
Operating Revenues.Revenues
      Total operating revenues increased by Rp.6,831.8Rp.9,486.8 billion, or 25.2%22.7%, from Rp.27,116.0Rp.41,807.2 billion in 20032005 to Rp.33,947.8Rp.51,294.0 billion in 2004. Operating2006. The increase in operating revenues increased in 2004 for fixed lines,2006 was primarily due to the increase in revenues from cellular, interconnection network,and data and Internet, revenue-sharing arrangements and other telecommunications services. KSO revenues decreased from 2003 to 2004.Internet.
Fixed LinesLine Telephone Revenues.Revenues
      Fixed linesline revenues increased by Rp.1,748.1Rp.197.7 billion, or 19.6%1.8%, from Rp.8,896.9Rp.10,781.3 billion in 20032005 to Rp.10,645.0Rp.10,979.0 billion in 2004.2006. The increase in fixed linesline revenues was primarily due to increasesan increase in fixed wireless revenues, partially offset by a slight decrease in fixed wireline revenues. Fixed wireless revenues

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increased by Rp.548.5 billion, or 107.6%, from Rp.509.9 billion in 2005 to Rp.1,058.4 billion in 2006. Fixed wireline revenues decreased by Rp.350.7 billion, or 3.4%, from Rp.10,271.3 billion in 2005 to Rp.9,920.6 billion in 2006.
      The increase in fixed wireless revenues was primarily attributable to a 52.8% growth in the wireless pulse production from 3.6 billion minutes in 2005 to 5.5 billion minutes in 2006. Such increase was partially offset by a slight decrease in fixed wireline revenues which was primarily due to a 7.3% decrease 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.6,561.8Rp.6,920.2 billion in 20032005 to Rp.7,439.3Rp.6,413.8 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 2004.2006.
      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.Revenues
      Cellular telephone revenues increased by Rp.1,962.5Rp.6,051.7 billion, or 23.2%41.5%, from Rp.8,458.8Rp.14,570.9 billion in 20032005 to Rp.10,421.3Rp.20,622.6 billion in 2004.2006. 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.2,147.8Rp.5,591.0 billion, or 28.0%40.9%, from Rp.7,677.9Rp.13,666.3 billion in 20032005 to Rp.9,825.7Rp.19,257.3 billion in 2004.2006. Connection fee charges increased by Rp.45.1 billion, or 70.4%, from Rp.64.1 billion in 2005 to Rp.109.2 billion in 2006 due to the growth in net-additional KartuHALO cellular subscribers. Features charges increased by Rp.501.7 billion, or 109.8%, from Rp.457.0 billion in 2005 to Rp.958.7 billion in 2006 due to an increase in sales from new features services, including ring back tone, message boards and mobile fax services. Monthly subscription charges decreased by Rp.132.0Rp.86.1 billion, or 22.7%22.4%, from Rp.580.5Rp.383.5 billion in 20032005 to Rp.448.5Rp.297.4 billion in 20042006, primarily due to price competition among cellular operators and the increase in prepaidspecial exemption from subscription charges for Telkomsel subscribers as discussed below.

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Connection fee charges decreasedto match similar programs offered 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.
its competitors. The increase in cellular telephone revenues was primarily attributable to 69.9%a 47% growth in Telkomsel’s total cellular subscribers from 9,588,80724.3 million subscribers as of December 31, 2003in 2005 to 16,290,50835.6 million subscribers as of December 31, 2004.in 2006. This increase was caused by a 87.3%41% growth in net-additional subscribers from 3,578,0358.0 million subscribers as of December 31, 2003in 2005 to 6,701,70111.3 million 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.in 2006. Postpaid subscribers grew by 31.8%13.0% to 1,327,5491.7 million subscribers and prepaid subscribers grew by 74.4%48.8% to 14,962,95933.9 million subscribers, in each case as of December 31, 2004.2006.
      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, 200393.9% in 2005 to 91.9% as of December 31, 2004.95.3% in 2006. 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.123,000Rp.87,000 in 20032005 to approximately Rp.84,000 in 2006. The SMS/non-voice ARPU for postpaid remained stable at Rp.47,000 in 2005 and 2006.
Interconnection Revenues
      Net interconnection revenues increased by Rp.939.4 billion, or 12.1%, from Rp.7,742.1 billion in 2005 to Rp.8,681.5 billion in 2006. Net interconnection revenues comprised 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 revenues included incoming international long-distance revenues from TELKOM’s IDD service (TIC-007), net of interconnection charges for outgoing international long-distance calls.
      Cellular interconnection revenues increased by Rp.757.2 billion, or 11.3%, from Rp.6,685.1 billion in 2005 to Rp.7,442.3 billion in 2006, primarily due to the growth of cellular subscribers in Indonesia. International interconnection revenues increased by Rp.146.6 billion, or 17.1%, from Rp.854.8 billion in 2005 to Rp.1,001.4 billion in 2006, primarily due to an increase in incoming and outgoing IDD traffic from domestic operators. Other interconnection revenues increased by Rp.35.6 billion, or 17.6%, from Rp.202.2 billion in 2005 to Rp.237.8 billion in 2006, primarily due to the growth of fixed wireless subscribers of Indosat and PT Bakrie Telecom.
      TELKOM’s interconnection revenues accounted for approximately 16.9% of TELKOM’s consolidated operating revenues for the year ended December 31, 2006, compared to 18.5% for the year ended December 31, 2005.

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KSO Revenues (Joint Operation Scheme Revenues)
      KSO revenues decreased by Rp.99.3 billion, or 16.9%, from Rp.588.7 billion in 2005 to Rp.489.4 billion in 2006. The decrease in KSO revenues was a result of the consolidation of KSO VII in October 2006. MTR decreased by Rp.61.1 billion, or 22.8%, from Rp.268.6 billion in 2005 to Rp.207.5 billion in 2006. DKSOR decreased by Rp.44.0 billion, or 13.8%, from Rp.318.6 billion in 2005 to Rp.274.6 billion in 2006. Amortization of unearned initial payments increased by Rp.5.8 billion, or 386.7%, from Rp.1.5 billion in 2005 to Rp.7.3 billion in 2006.
Data and Internet Revenues
      Data and Internet revenues increased by Rp.2,130.9 billion, or 30.7%, from Rp.6,934.3 billion in 2005 to Rp.9,065.2 billion in 2006. The increase in data and Internet revenues was primarily due to significant increases in SMS revenues, internet connectivity revenues, data communication revenues and e-business service. SMS revenues increased by Rp.1,421.3 billion, or 26.8%, from Rp.5,309.2 billion in 2005 to Rp.6,730.5 billion in 2006 mainly due to a significant growth in SMS traffic from Telkomsel subscribers. Internet connectivity revenues increased by Rp.196.1 billion, or 27.6%, from Rp.711.4 billion in 2005 to Rp.907.5 billion in 2006 due to increased marketing efforts to boost sales of data and Internet services, an increase in usage of the dial-up Internet for TELKOMNet Instant and an increase in Speedy subscribers in 2006. Data communication revenues increased by Rp.511.9 billion, or 83.9%, from Rp.610.4 billion in 2005 to Rp.1,122.3 billion in 2006, due to an increase in new subscribers of data network services, particularly, frame relay and IP VPN, primarily used for the internal data networks of commercial banks. E-business service revenues increased by Rp.16.3 billion, or 153.8%, from Rp.10.6 billion in 2005 to Rp.26.9 billion in 2006, primarily due to the increase in e-payment transactions. VoIP revenues decreased by Rp.14.7 billion, or 5.0%, from Rp.292.7 billion in 2005 to Rp.278.0 billion in 2006, due to the decrease in traffic of outgoing international VoIP calls, which was slightly offset by an increase in total incoming (international termination) VoIP traffic.
Network Revenues
      Network revenues increased by Rp.132.1 billion, or 22.5%, from Rp.586.6 billion in 2005 to Rp.718.7 billion in 2006. Satellite transponder revenues increased by Rp.54.6 billion, or 22.8%, from Rp.239.5 billion in 2005 to Rp.294.1 billion in 2006, primarily due to an increase in satellite transponder usage. Leased lines revenues increased by Rp.77.5 billion, or 22.3%, from Rp.347.1 billion in 2005 to Rp.424.6 billion in 2006 as a result of an increase in the number of telecommunications operators that use TELKOM’s network.
Revenues under Revenue-Sharing Arrangements
      Revenues under revenue-sharing arrangements increased by Rp.113.2 billion, or 37.5%, from Rp.302.3 billion in 2005 to Rp.415.5 billion in 2006. The increase in revenue under revenue-sharing arrangements was due to additional RSA following the consolidation of KSO VII. Amortization of unearned income under revenue-sharing arrangements increased by Rp.15.3 billion, or 11.2%, from Rp.136.7 billion in 2005 to Rp.152.0 billion in 2006. Net share in revenue earned under revenue-sharing arrangements increased by Rp.97.9 billion, or 59.1%, from Rp.165.6 billion in 2005 to Rp.263.5 billion in 2006. The total number of revenue-sharing arrangements was 90 contracts with 63 partners and 90 contracts with 67 partners as of December 31, 2005 and December 31, 2006, respectively.
Other Telecommunications Services Revenues
      Other telecommunications services revenues increased by Rp.21.1 billion, or 7.0%, from Rp.301.0 billion in 2005 to Rp.322.1 billion in 2006. The increase in other telecommunications services revenues was primarily due to an increase in directory assistance revenues, although this was partially offset by a decrease in operator service assistance revenues.

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Operating Expenses
      Total operating expenses increased by Rp.5,064.4 billion, or 20.6%, from Rp.24,636.4 billion in 2005 to Rp.29,700.8 billion in 2006. The increase in total operating expenses was attributable to substantial increases in personnel expenses, depreciation expenses, and operations, maintenance and telecommunications services expenses.
Personnel Expenses
      Personnel expenses increased by Rp.1,950.8 billion, or 29.7%, from Rp.6,563.0 billion in 2005 to Rp.8,513.8 billion in 2006. The main contributors were the increase in early retirement expenses due to the implementation of TELKOM’s early retirement program in December 2006, the increase in vacation pay, incentives and other benefits expenses, salaries and related benefits expense due to TELKOM’s improved financial performance in 2006, management premium, and the consolidation of personnel expenses related to KSO VII employees following the acquisition of KSO VII in October 2006. These led to an increase in recurring employee expenses, as follows:
• early retirement expenses increased by Rp.974.8 billion, or 200.4%, from Rp.486.4 billion in 2005 to Rp.1,461.2 billion in 2006. The number of employees taking early retirement increased from 1,017 in 2005 to 1,871 in 2006;
• vacation pay, incentives and other benefits expenses increased by Rp.593.5 billion, or 36.7%, from Rp.1,615.6 billion in 2005 to Rp.2,209.1 billion in 2006;
• salaries and related benefits increased by Rp.234.7 billion, or 10.8%, from Rp.2,165.9 billion in 2005 to Rp.2,400.6 billion in 2006, primarily due to increased base salaries; and
• post retirement benefit costs increased by Rp.116.1 billion, or 23.8%, from Rp.488.6 billion in 2005 to Rp.604.7 billion in 2006.
      In addition, long service awards increased by Rp.13.9 billion, or 6.9%, from Rp.201.9 billion in 2005 to Rp.215.8 billion in 2006. Pension costs decreased by Rp.93.9 billion, or 17.6%, from Rp.532.3 billion in 2005 to Rp.438.4 billion in 2006.
      Other components of personnel expenses did not contribute significantly to operating expenses in 2006.
Depreciation Expenses
      Depreciation expenses increased by Rp.1,607.6 billion, or 21.2%, from Rp.7,570.7 billion in 2005 to Rp.9,178.3 billion in 2006. The increase in depreciation expense was primarily due to Telkomsel’s BTS deployment of 6,162 units in 2006, an increase in the capacity of its transmitting and receiving stations and switching and intelligence network equipment, and an increase in TELKOM’s capital expenditures for network infrastructure (transmission network, backbone and access network).
Operations, Maintenance and Telecommunications Services Expenses
      Operations, maintenance and telecommunications services expenses increased by Rp.1,579.4 billion, or 26.7%, from Rp.5,916.3 billion in 2005 to Rp.7,495.7 billion in 2006. The increase in operations, maintenance and telecommunications services expenses was mainly attributable to:
• an increase in operations and maintenance expenses by Rp.1,134.0 billion to Rp.4,209.1 billion, an increase of 36.9%, due to the growth in Telkomsel’s overall capacity to support the increase in its subscribers from 24.3 million subscribers as of 2005 to 35.6 million subscribers as of 2006. The number of Telkomsel’s BTSs grew by 62.3% from 9,895 units in 2005 to 16,057 units in 2006. Telkomsel also increased the capacity of its transmitting and receiving stations and switching and Intelligent Network equipment;
• total concession fees and Universal Service Obligation (USO) charges increased by Rp.172.6 billion to Rp.881.8 billion in 2006, an increase of 24.3%, primarily due to an increase of 24.7% or Rp.75.9 billion

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in USO contribution by TELKOM and Telkomsel to the Government, from Rp.307.7 billion in 2005 to Rp.383.8 billion in 2006;
• radio frequency usage expenses increased by Rp.174.4 billion to Rp.722.6 billion, an increase of 31.8%, due to an increase in TELKOM’s and Telkomsel’s BTSs and additional annual BHP fee for 3G license. The number of TELKOM’s BTS grew by 5.7% from 1,448 units in 2005 to 1,531 units in 2006. The number of Telkomsel’s BTSs grew by 62.3% from 9,895 units in 2005 to 16,057 units in 2006; and
• leased lines expenses increased by Rp.112.2 billion to Rp.236.4 billion, an increase of 90.3%, due to an increase of TELKOM’s expansion of its data network capacity.

      Other components of operations, maintenance and telecommunications services expenses did not contribute significantly to operating expenses in 2006.
General and Administrative Expenses
      General and administrative expenses increased by Rp.507.5 billion, or 18.4%, from Rp.2,764.0 billion in 2005 to Rp.3,271.5 billion in 2006. In particular, in 2006:
• collection expenses increased by Rp.163.4 billion to Rp.542.5 billion, an increase of 43.1%, generally in line with the growth in TELKOM’s fixed line subscriber base and Telkomsel’s mobile cellular subscriber base, which resulted in higher collection charges paid to third party collection agents;
• security and screening expenses increased by Rp.33.0 billion, or 20.1%, to Rp.197.4 billion in 2006, primarily due to an increase in the salary of security guards by Rp.27.8 billion;
• training, education and recruitment expenses, which increased by Rp.46.4 billion to Rp.224.3 billion, or 26.1%, following an increase in the number of TELKOM’s employee training programs;
• general and social contributions expenses increased by Rp.97.5 billion, or 47.7%, to Rp.301.8 billion, primarily due to an increase in social contribution fund and community development expenses by Rp.48.9 billion to Rp.159.7 billion in 2006;
• travel expenses increased by Rp.58.0 billion, or 33.8%, to Rp.229.7 billion in 2006, primarily due to an increase in local travel cost by Rp.48.5 billion;
• professional fees increased by Rp.90.0 billion, or 68.7%, to Rp.221.0 billion in 2006, primarily due to an increase in management consultancy expenses by Rp.87.7 billion; and
• amortization of intangible assets increased by Rp.26.2 billion, or 2.9%, to Rp.944.4 billion in 2006, due to the higher amortization amounts of the rights to operate the KSO operations as a result of the KSO VII acquisition and the up-front fees for the 3G license.
      This increase was partially offset by:
• a decrease in the provision for doubtful accounts and inventory obsolescence of Rp.30.8 billion, or 6.3%, to Rp.458.2 billion in 2006, resulting from the implementation of bad debt reduction programs in 2006.
      Other components of general and administrative expenses did not contribute significantly to operating expenses in 2006.
Marketing Expenses
      Marketing expenses increased by Rp.115.3 billion, or 10.2%, from Rp.1,126.2 billion in 2005 to Rp.1,241.5 billion in 2006. The increase in marketing expenses was primarily due to an increase in Telkomsel’s marketing expenses, which increased by Rp.206.7 billion, or 41.9%, primarily due to increases in advertising and promotion expenses.

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      This increase was partially offset by a decrease in TELKOM (parent company) marketing expenses, which decreased by Rp.128.3 billion, or 24.5%, primarily due to decreases in advertising and promotion expenses.
Operating Income and Operating Margin
      As a result of the foregoing, operating income increased by Rp.4,422.5 billion, or 25.8%, from Rp.17,170.8 billion in 2005 to Rp.21,593.2 billion in 2006. TELKOM’s operating margin slightly increased from 41.1% in 2005 to 42.1% in 2006.
Other Income (Expenses)
      Other income increased by Rp.1,329.7 billion, or 143.1%, from expenses of Rp.929.3 billion in 2005 to income of Rp.400.4 billion in 2006. The increase in other income was primarily due to an increase of 261.8% in foreign exchange gain, due to appreciation of the Rupiah in 2006 compared to 2005. In particular, in 2006:
• gain on foreign exchange (net) increased by Rp.1,353.1 billion, or 261.8% from a net loss of Rp.516.8 billion in 2005 to a net gain of Rp.836.3 billion in 2006, primarily due to the relatively modest appreciation of the Rupiah, which resulted in translation gains on TELKOM’s US Dollar borrowings;
• interest expenses increased by Rp.109.1 billion, or 9.3%, from Rp.1,177.3 billion in 2005 to Rp.1,286.4 billion in 2006, reflecting primarily increases in short-term bank loans and medium term loan of Telkomsel;
• interest income increased by Rp.310.3 billion, or 90.0%, from Rp.344.7 billion in 2005 to Rp.655.0 billion in 2006, primarily due to a slight increase in the average balance of time deposits. See Note 6 to the consolidated financial statements; and
• other income (net) decreased by Rp.207.2 billion, or 50.6% from Rp.409.2 billion in 2005 to Rp.202.0 billion in 2006, primarily resulting from an increase in expenses from losses on sales of fixed assets and decrease in vendor’s penalty income but offset by an increase in the penalty income on overdue services, income from the service charge of building management.
      Other components did not contribute significantly to other income (expenses) in 2006.
Income Before Tax and Pre-Tax Margin
      As a result of the foregoing, income before tax increased by Rp.5,752.2 billion, or 35.4%, from Rp.16,241.4 billion in 2005 to Rp.21,993.6 billion in 2006. Pre-tax margin increased from 38.8% in 2005 to 42.9% in 2006.
Income Tax Expenses
      Income tax expenses increased by Rp.1,856.0 billion, or 35.8%, from Rp.5,183.9 billion in 2005 to Rp.7,039.9 billion in 2006, in line with the increase in income before tax by Rp.5,752.2 billion, or 35.4%, from Rp.16,241.4 billion in 2005 to Rp.21,993.6 billion in 2006.
Minority Interest in Net Income of Subsidiaries
      Minority interest in the net income of subsidiaries increased by Rp.884.1 billion, or 28.9%, from Rp.3,064.0 billion in 2005 to Rp.3,948.1 billion in 2006. The increase was primarily due to the improved financial performance by Telkomsel.
Net Income
      As a result of the foregoing, net income increased by Rp.3,012.0 billion, or 37.7%, from Rp.7,993.6 billion in 2005 to Rp.11,005.6 billion in 2006. TELKOM’s net income margin increased from 19.1% in 2005 to 21.5% in 2006.

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Equity
      Total shareholders’ equity increased by Rp.4,776.3 billion, or 20.5%, from Rp.23,292.4 billion in 2005 to Rp.28,068.7 billion in 2006. The increase in total shareholders’ equity was primarily the result of net income of Rp.11,005.6 billion in 2006 offset by cash dividend of Rp.5,371.1 billion. As of December 31 2006, TELKOM has repurchased 118,376,500 Series B shares of TELKOM’s issued and outstanding Series B shares representing 0.59% of TELKOM’s issued and outstanding Series B shares, for a total repurchased amount of Rp.952.2 billion (including the broker and custodian fees). This contributed to a decrease of equity by Rp.952.2 billion.
Retained Earnings
      Appropriated and unappropriated retained earnings increased by Rp.5,634.5 billion from Rp.16,471.0 billion as of December 31, 2005 to Rp.22,105.4 billion as of December 31, 2006. The increase in appropriated and unappropriated retained earnings was due to net income of Rp.11,005.6 billion in 2006, partially offset by the declaration of cash dividends of Rp.4,400.1 billion.
Year ended December 31, 2005 compared to year ended December 31, 2004
Operating Revenues
      Total operating revenues increased by Rp.7,859.4 billion, or 23.2%, from Rp.33,947.8 billion in 2004 to Rp.41,807.2 billion in 2005. Increase in operating revenues in 2005 was primarily due to increases in revenues from cellular, interconnection and data and Internet.
Fixed Line Telephone Revenues
      Fixed line revenues increased by Rp.136.3 billion, or 1.3%, from Rp.10,645.0 billion in 2004 to Rp.10,781.3 billion in 2005. The increase in fixed line revenues was primarily due to an increase in fixed wireless revenues, partially offset by a decrease in fixed wireline revenues. Fixed wireless revenues increased by Rp.411.3 billion, or 417.1%, from Rp.98.6 billion in 2004 to Rp.509.9 billion in 2005. Fixed wireline revenues decreased by Rp.275.0 billion, or 2.6%, from Rp.10,546.4 billion in 2004 to Rp.10,271.4 billion in 2005.
      The increase in fixed wireless revenues was primarily attributable to a 184.2% growth in the number of subscribers and lines in service for fixed wireless, from 1,429,368 lines in service as of December 31, 2004 to 4,061,867 lines in service as of December 31, 2005, particularly, the 184.7% growth in the number of lines in service in the non-KSO regions, resulting in an increase of lines in service from 1,317,673 as of December 31, 2004 to 3,750,821 as of December 31, 2005 primarily due to an aggressive marketing campaign in those regions from April to June 2005. Such increase was partially offset by a decrease in fixed wireline revenues which was primarily due to a 7.6% decrease in local and domestic long-distance revenues from Rp.7,493.1 billion in 2004 to Rp.6,920.2 billion.
Cellular Telephone Revenues
      Cellular telephone revenues increased by Rp.4,149.6 billion, or 39.8%, from Rp.10,421.3 billion in 2004 to Rp.14,570.9 billion in 2005. The increase in cellular telephone revenues was primarily due to an increase in air time charges, connection fee charges for new subscribers and features, partially offset by a decrease in monthly subscription charges. Air time charges increased by Rp.3,840.6 billion, or 39.1%, from Rp.9,825.7 billion in 2004 to Rp.13,666.3 billion in 2005. Connection fee charges increased by Rp.8.3 billion, or 14.9%, from Rp.55.8 billion in 2004 to Rp.64.1 billion in 2005 due to the growth in KartuHALO and SimPATI net-additional cellular subscribers. Features increased by Rp.365.7 billion, or 400.6%, from Rp.91.3 billion in 2004 to Rp.457.0 billion in 2005 due to an increase in sales from the new feature services introduced in 2005, including ring back tone, message boards and mobile fax services. Monthly subscription charges decreased by Rp.65.0 billion, or 14.5%, from Rp.448.5 billion in 2004 to Rp.383.5 billion in 2005, primarily due to the special exemption from subscription charges for certain customers offered by Telkomsel to match similar

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programs offered by its competitors. The increase in cellular telephone revenues was primarily attributable to 49% growth in Telkomsel’s total cellular subscribers from 16,290,508 subscribers as of December 31, 2004 to 24,269,353 subscribers as of December 31, 2005. This increase was caused by a 19% growth in net-additional subscribers from 6,701,701 subscribers in 2004 to 7,978,845 subscribers in 2005. Postpaid subscribers grew by 11% to 1,470,755 subscribers and prepaid subscribers grew by 52% to 22,798,598 subscribers, in each case as of December 31, 2005.
      As a result of the higher rate of growth in the number of prepaid subscribers than postpaid subscribers, the proportion of prepaid subscribers to total subscribers increased from 91.9% as of December 31, 2004 to 93.9% as of December 31, 2005. 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.102,000 in 2004.2004 to approximately Rp.87,000 in 2005. Despite the decrease in overall ARPU for voice, the SMS/non-voice ARPU for postpaid increased (approximately 37% growth average per month)(by approximately 15%) due to the increase in premium SMS, mobile banking transactions,services and average number of SMS per subscribers per month.other value-added services.
Interconnection Revenues.Revenues
      Net interconnection revenues increased by Rp.2,025.9Rp.1,554.1 billion, or 48.7%25.1%, from Rp.4,162.1 billion in 2003 to Rp.6,188.0 billion in 2004.2004 to Rp.7,742.1 billion in 2005. 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 revenuerevenues included incoming international long-distance revenuerevenues from TELKOM’s IDD service (TIC-007) since the launch in June 2004., net of interconnection charges for outgoing international long-distance calls.
      Cellular interconnection revenues increased by Rp.1,443.3Rp.1,333.5 billion, or 36.9%24.9%, from Rp.3,908.3 billion in 2003 to Rp.5,351.6 billion in 2004 to Rp.6,685.1 billion in 2005, primarily due to the growth of Telkomsel’s cellular subscribers.subscribers in Indonesia. International interconnection revenues increased by Rp.457.1Rp.213.6 billion, or 248.3%33.3%, from Rp.184.1 billion in 2003 to Rp.641.2 billion in 2004 to Rp.854.8 billion in 2005, 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.from domestic operators. Other interconnection revenues increased by Rp.125.5Rp.7.0 billion, or 180.1%3.6%, from Rp.69.7 billion in 2003 to Rp.195.2 billion in 2004 to Rp.202.2 billion in 2005, primarily due to interconnection with Indosat’s localthe growth of fixed wireless services which was launched in 2004.subscribers of Indosat and PT Bakrie Telecom.
      TELKOM’s interconnection revenues accounted for approximately 18.2%18.5% of TELKOM’s consolidated operating revenues for the year ended December 31, 2004,2005, compared to 15.3%18.2% for the year ended December 31, 2003.2004.
KSO Revenues (Joint Operation Scheme Revenues).
      KSO revenues decreased by Rp.829.7Rp.67.9 billion, or 55.8%10.3%, from Rp.1,486.3 billion in 2003 to Rp.656.6 billion in 2004.2004 to Rp.588.7 billion in 2005. The decrease in KSO revenues was primarily due to a significant decrease in MTR and DTR in 2004.2005, resulting from the business acquisition of KSO IV. MTR decreased by Rp.603.9Rp.27.4 billion, or 67.1%9.2%, from Rp.899.9 billion in 2003 to Rp.296.0 billion in 2004.2004 to Rp.268.6 billion in 2005. DTR decreased by Rp.233.5Rp.30.9 billion, or 40.1%8.8%, from Rp.583.0 billion in 2003 to Rp.349.5 billion in 2004.2004 to Rp.318.6 billion in 2005. Amortization of unearned initial payments increased slightlydecreased by Rp.7.7Rp.9.6 billion, or 226.5%86.5%, from Rp.3.4 billion in 2003 to Rp.11.1 billion in 2004 to Rp.1.5 billion in 2005 due to the recognition in 2004 of the remaining portion of unearned initial payments for KSO IV following the acquisition of KSO IV.

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      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.Revenues
      Data and Internet revenues increased by Rp.1,700.2Rp.2,125.5 billion, or 54.7%44.2%, from Rp.3,108.6 billion in 2003 to Rp.4,808.8 billion in 2004.2004 to Rp.6,934.3 billion in 2005. The increase in data and Internet revenues was primarily due to significant increases in SMS revenues, and multimediainternet connectivity revenues and a smaller increase in ISDNdata communications revenues, partially offset by a slight decrease in VoIP revenues. SMS revenues increased by Rp.1,357.6Rp.1,746.5 billion, or 61.6%49.0%, from Rp.2,205.1 billion in 2003 to Rp.3,562.7 billion in 2004 to Rp.5,309.2 billion in 2005 mainly attributeddue to thea significant growth in SMS traffic from Telkomsel subscribers. MultimediaInternet connectivity revenues increased by Rp.318.6Rp.156.5 billion, or 64.4%28.2%, from Rp.494.7 billion in 2003 to Rp.813.3Rp.554.9 billion in 2004 to Rp.711.4 billion in 2005 due to increased marketing efforts to boost sales of data

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and Internet services, an increase in usage of the dial-up Internet for TELKOMNet Instant and premium prepaid dial-up internet access and an increase in Indonesia and the general growthSpeedy subscribers in the data communications market in Indonesia including use of frame relay, VPN and international leased line services. ISDN2005. Data communication revenues increased by Rp.33.4Rp.249.7 billion, or 41.5%69.2%, from Rp.80.5 billion in 2003 to Rp.113.9Rp.360.7 billion in 2004 to Rp.610.4 billion in 2005, due to an increase in monthlynew subscribers of data network services, particularly, frame relay and usage chargesIP VPN, primarily used for onethe internal data networks of its ISDN services, following the tariff rebalancing.commercial banks. VoIP revenues decreased by Rp.9.4Rp.26.2 billion, or 2.9%8.2%, from Rp.328.3 billion in 2003 to Rp.318.9 billion in 2004 to Rp.292.7 billion in 2005, due to the decrease in traffic of outgoing international VoIP calls, primarily resulting from TELKOM’s focused marketing efforts to promote TELKOM’s IDD service (TIC-007), an alternative to VoIP.
Network Revenues.Revenues
      Network revenues increaseddecreased by Rp.136.4Rp.67.7 billion, or 26.3%10.3%, from Rp.517.9 billion in 2003 to Rp.654.3 billion in 2004. A decrease2004 to Rp.586.6 billion in satellite revenues was offset by an increase in leased line revenues.2005. Satellite transponder revenues decreasedincreased by Rp.60.0Rp.28.6 billion, or 22.1%13.6%, from Rp.270.9 billion in 2003 to Rp.210.9 billion in 2004 to Rp.239.5 billion in 2005, primarily due to a price decrease madean increase in 2004 to reflect market conditions.satellite transponder usage by VSAT providers. Leased lines revenues increaseddecreased by Rp.196.4Rp.96.3 billion, or 79.5%21.7%, from Rp.247.0 billion in 2003 to Rp.443.4 billion in 2004 to Rp.347.1 billion in 2005 as a result of an increase in the number of telecommunications operators particularly cellular operators due to significant increases in cellular subscribers.that use their own networks.
Revenues under Revenue-Sharing Arrangements (“PBHs”).
      Revenues under revenue-sharing arrangements increased by Rp.22.1Rp.21.7 billion, or 8.6%7.7%, from Rp.258.5 billion in 2003 to Rp.280.6 billion in 2004.2004 to Rp.302.3 billion in 2005. The increase in revenue under revenue-sharing arrangements was due to an increase in amortization of unearned income under the revenue-sharing arrangements, partially offset by a slight decreasewhich is in net shareline with the increase in revenue earned underthe number of revenue-sharing arrangements. Amortization of unearned income under revenue-sharing arrangements increased by Rp.23.6Rp.54.7 billion, or 40.4%66.7%, 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.Rp.136.7 billion in 2005. Net share in revenue earned under revenue-sharing arrangements decreased by Rp.1.5Rp.33.0 billion, or 0.8%16.6%, from Rp.200.1 billion in 2003 to Rp.198.6 billion in 2004 due to the expirationRp.165.6 billion in 2005. The total number of somerevenue-sharing arrangements increased from 79 contracts as of the revenue-sharing arrangement contracts.December 31, 2004 to 90 contracts as of December 31, 2005. Although the total number of revenue-sharing arrangements increased, from 27 contracts asmost of December 31, 2003 to 79 contracts as of December 31, 2004, many of these new revenue-sharing arrangementsthem 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 2004.2005.

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Other Telecommunications Services Revenues.Revenues
      Other telecommunications services revenues increased by Rp.66.3Rp.7.8 billion, or 29.2%2.7%, from Rp.226.9 billion in 2003 to Rp.293.2 billion in 2004.2004 to Rp.301.0 billion in 2005. The increase in revenue from other telecommunications services revenues was primarily due to an increase in revenue from telephonepay-TV revenues and directory services resulting from anassistance revenues, which increase was partially offset by a decrease in advertisingtelex and an increase in revenue from cable television services resulting from increased marketing.telegram revenues due to technological advancement.
Operating Expenses.Expenses
      Total operating expenses increased by Rp.4,880.7Rp.5,276.5 billion, or 32.2%27.3%, from Rp.15,140.0Rp.19,359.9 billion in 20032004 to Rp.20,020.7Rp.24,636.4 billion in 2004.2005. 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.write-down of assets.
Personnel Expenses.Expenses
      Personnel expenses increased by Rp.1,130.7Rp.1,653.0 billion, or 25.5%33.7%, from Rp.4,440.1Rp.4,910.0 billion in 20032004 to Rp.5,570.8Rp.6,563.0 billion in 2004.2005. The main contributorcontributors were the increase in salaries and related benefits, and vacation pay, incentives and other benefits, primarily due to the increase was KSO IV personnel cost following Telkom’s acquisitionimplementation of KSO IV. TELKOM incorporated 2,802 employees from KSO IVperformance-based remuneration system in 2004. The increaseJuly 2004 which resulted 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 basicbase salary, basic allowanceallowances, incentives and position allowance of its employees.bonuses. These reasons led to an increase in recurring employee expenses, as follows:
 • salaries and related benefits increased by Rp.222.7Rp.369.0 billion, or 14.2%20.5%, from Rp.1,574.2 billion in 2003 to Rp.1,796.9 billion in 2004; and2004 to Rp.2,165.9 billion in 2005;

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 • vacation pay, incentives and other benefits increased by Rp.340.0Rp.459.5 billion, or 41.7%39.7%, from Rp.816.1 billion in 2003 to Rp.1,156.1 billion in 2004.2004 to Rp.1,615.6 billion in 2005; and
• employee income tax increased by Rp.332.6 billion, or 63.5%, from Rp.523.8 billion in 2004 to Rp.856.4 billion in 2005 which is in line with the increase in salaries and related benefits and vacation pay, incentives and other benefits.
      In addition, net periodic pension costlong service awards increased by Rp.843.8Rp.165.0 billion, or 441.8%447.2%, from Rp.191.0 in 2003 to Rp.1,034.8Rp.36.9 billion in 2004 to Rp.201.9 billion in 2005, primarily due to the recognition of actuarial lossgain of Rp.417.0Rp.106.5 billion in 2004, compared to the recognition of actuarial gainloss of Rp.205.0Rp.82.9 billion in 2003.2005.
      These increases offset declines in early retirements costs and net periodic post-retirement benefit cost. Early retirements costs decreasedretirement expenses increased by Rp.112.2Rp.242.9 billion, or 31.5%99.8%, from Rp.355.7 billion in 2003 to Rp.243.5 billion in 2004 due to a declineRp.486.4 billion in the2005. The number of employees retiring under TELKOM’staking early retirement program. Net periodic post-retirement benefit cost declined by Rp.149.2 billion, or 23.3%,increased from Rp.641.4 billion in 2003 to Rp.492.2 billion804 in 2004 due to decreases1,017 in service cost and recognized actuarial loss.2005.
      Other components of personnel expenses did not contribute significantly to operating expenses in 2004.2005.
Depreciation Expense.Expense
      Depreciation expense increased by Rp.1,659.0Rp.1,132.1 billion, or 34.7%17.6%, from Rp.4,779.5Rp.6,438.6 billion in 20032004 to Rp.6,438.5Rp.7,570.7 billion in 2004.2005. The increase in depreciation expensesexpense was primarily due to significant increasesTelkomsel’s expansion of its network capacity due to the growth in depreciation expense for both TELKOMits subscriber base and Telkomsel. TELKOM’san increase in depreciation expenses reflected continuedTELKOM’s capital expenditures in TELKOM’s transmissionfor network infrastructure (transmission network, backbone and backbone, as well as its access network,network), particularly for fixed wireless. Telkomsel’sIn addition, the increase in depreciation expense reflected continued capital expenditureswas also because TELKOM shortened the estimate of remaining useful lives for Telkomsel’sWLL and approach link equipment and the Jakarta and West Java BSS equipment, which contributed to increase in depreciation expense by Rp.471.2 billion and Rp.159.0 billion, respectively, in 2005. See “— Write-down of Assets, Depreciation Expense, Loss on Procurement Commitments, and Operations, Maintenance and Telecommunication Services Expenses” above.
Write-down of Assets
      In 2005, TELKOM recognized a write-down of assets of Rp.616.8 billion related to transmission installation and equipment of fixed wireless assets. This write-down was made as a result of TELKOM’s review of the recoverable amount of the cash-generating unit of its fixed wireless assets following the Government’s decision to set aside the 1900 MHz frequency spectrum for exclusive use in 3G services and the 800 MHz frequency spectrum for CDMA-based technology network infrastructure.commencing at the end of 2007. As a result of this decision, TELKOM’s BSS equipment in Jakarta and West Java, which currently operates in the 1900 MHz frequency spectrum, will no longer be operational commencing at the end of 2007 and, furthermore, this equipment must be replaced with BSS equipment operating in 800 MHZ. See “— Write-down of Assets, Depreciation Expense, Loss on Procurement Commitments, and Operations, Maintenance and Telecommunication Services Expenses” above.

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Loss on Procurement Commitments
      In 2005, TELKOM recognized a loss relating to non-cancelable contracts for procurement of the 1900 MHz transmission installation and equipment in the Jakarta and West Java areas amounting to Rp.79.4 billion. See “— Write-down of Assets, Depreciation Expense, Loss on Procurement Commitments, and Operations, Maintenance and Telecommunication Services Expenses” above.
Operations, Maintenance and Telecommunications Services Expenses.Expenses
      Operations, maintenance and telecommunications services expenses increased by Rp.1,190.9Rp.1,386.7 billion, or 35.7%30.6%, from Rp.3,338.7 billion in 2003 to Rp.4,529.6 billion in 2004.2004 to Rp.5,916.3 billion in 2005. The increase in operations, maintenance and telecommunications services expenses was mainly attributable to:
 • an increase in operations and maintenance expenses by Rp.653.4Rp.676.9 billion to Rp.2,398.2Rp.3,075.1 billion, an increase of 37.5%28.2%, due to an increase in Telkomsel’s operations and maintenance expenses arising from

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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, 2004.2004 to 26.2 million subscribers as of December 31, 2005. The number of Telkomsel’s BTSs grew by 28.7%59.5% from 4,820 units in 2003 to 6,205 units in 2004.2004 to 9,895 units in 2005. Telkomsel also increased the numbercapacity of its transmitting and receiving stations and switching and Intelligent Network equipment;
 
 • an increase in the cost of phonephones and SIM and RUIM cards increased by Rp.185.4Rp.215.6 billion to Rp.366.7Rp.582.3 billion in 2004,2005, an increase of 102.3%58.8%, due to increases in expenses for TELKOM and Telkomsel prepaid cards. TELKOM’s prepaid card expenses included cost of fixed wireless cards (staterpack/(starterpack/voucher/replacement) ofincreased by Rp.72.5 billion, or 220.4%, from Rp.32.9 billion that contributed Rp.26.5in 2004 to Rp.105.4 billion to the increase in 2005. Telkomsel’s cost of phone cards after TELKOM began its TELKOMFlexi prepaid program in September 2003. Telkomsel’s prepaid card expenses ofincreased by Rp.142.2 billion, or 44.9%, from Rp.316.5 billion contributed Rp.143.6in 2004 to Rp.458.7 billion to the increase in cost of phone cards2005, 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.75.7Rp.450.1 billion to Rp.1,257.4 billion in 2005, an increase of 55.8%, primarily due to 125.3% increase or Rp.394.5 billion in concession fees paid to the Government from Rp.314.7 billion in 2004 an increase of 31.7%, which isto Rp.709.2 billion in 2005, in line with the increasegrowth in operating revenues.revenues and incurrence of USO contributions by TELKOM and Telkomsel to the Government beginning in 2005. Total USO contribution incurred by TELKOM and Telkomsel for the fiscal year 2005 amounted to Rp.307.7 billion.

      This increase was partially offset by electricity, gas and water charges, which slightly decreased by Rp.13.2 billion, or 3.4%, from Rp.385.7 billion in 2004 to Rp.372.5 billion in 2005, reflecting primarily conservation and more efficient use of utilities, which decrease was partially offset by an increase in electricity and gas rates in 2005 compared to 2004.
      Other components of operations, maintenance and telecommunications services expenses did not contribute significantly to operating expenses in 2004.2005.
General and Administrative Expenses.Expenses
      General and administrative expenses increased by Rp.521.0Rp.164.2 billion, or 25.1%6.3%, from Rp.2,078.8 billion in 2003 to Rp.2,599.8 billion in 2004.2004 to Rp.2,764.0 billion in 2005. In particular, in 2004:2005:
 • amortization of goodwill and other intangible assets increased by Rp.141.6Rp.45.9 billion to Rp.872.3Rp.918.2 billion, or 19.4%5.3%, mainly due to an increase in amortization of additional intangible assets arisingresulting from the acquisitions of AriaWest in July 2003, KSO IV on January 20, 2004 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 expensesDayamitra on December 14, 2004. The intangible assets resulting from such acquisitions were amortized for the acquisitionfull year in 2005, compared to 2004 when it was only amortized from the date of KSO IV and the necessary training because of new technologies;acquisition;
 
 • collection expenses increased by Rp.85.2Rp.20.1 billion to Rp.359.0Rp.379.1 billion, an increase of 31.1%5.6%, generally in line with the growth in TELKOM’s fixed line subscriber base and Telkomsel’s mobile cellular subscriber base, but also reflectingwhich resulted in higher fees charged bycollection charges paid to 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;agents;
 
 • security and screening expenses increased by Rp.33.6Rp.20.5 billion, or 30.5%14.3%, to Rp.143.9Rp.164.4 billion in 2004,2005, primarily due to an increase in the salary of security guards by Rp.29.3Rp.21.5 billion;
 
 • provision for doubtful accounts and inventory obsolescence increased by Rp.31.3Rp.131.3 billion, or 9.6%36.7%, to Rp.357.7Rp.489.0 billion in 2004,2005, primarily due to an increase in TELKOM and Telkomsel customer defaults as subscriber numbers increased; and
 
 • printinggeneral and stationerysocial contributions expenses increased by Rp.30.5Rp.92.5 billion, or 60.4%82.7%, to Rp.81.0Rp.204.3 billion, in 2004,which increase was primarily due to an increase in social contribution funding and community development expenses by Rp.60.6 billion to Rp.91.9 billion in 2005, pursuant to TELKOM’s AGMS resolution on June 24, 2005.
      This increase was partially offset by:
• training, education and recruitment expenses, which decreased by Rp.50.6 billion to Rp.177.9 billion, or 22.2%, following a decrease in TELKOM’s employee training programs primarily due to a more rigorous selection process for its overseas training;

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• travel expenses, which decreased by Rp.20.9 billion, or 10.9%, to Rp.171.7 billion in 2005, primarily due to a decrease in local travel cost by Rp.12.7 billion; and
• printing and stationery expenses, which decreased by Rp.30.8 billion, or 38.0%, to Rp.50.2 billion in 2005, primarily due to a decrease in printing and photocopy expenses by Rp.20.0Rp.14.8 billion, as well as an increasea decrease in stationery expenses by Rp.10.0 billion.Rp.15.6 billion, resulting from the implementation of cost-saving plans.
      Other components of general and administrative expenses did not contribute significantly to operating expenses in 2004.2005.
Marketing Expenses.Expenses
      Marketing expenses increased by Rp.379.0Rp.244.3 billion, or 75.4%27.7%, from Rp.502.9 billion in 2003 to Rp.881.9 billion in 2004.2004 to Rp.1,126.2 billion in 2005. 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.174.1which increased by Rp.148.1 billion, or 95.8%)41.6%, primarily for sales support and advertising and promotion programs due to significant competitionincreases in the cellular market.customer education expenses, advertising, promotions and exhibitions.
Operating Income and Operating Margin
Operating Income and Operating Margin
      As a result of the foregoing, operating income increased by Rp.1,951.2Rp.2,582.9 billion, or 16.3%17.7%, from Rp.11,975.9Rp.14,587.9 billion in 20032004 to Rp.13,927.1Rp.17,170.8 billion in 2004.2005. TELKOM’s operating margin slightly decreased from 44.2% in 2003 to 41.0%43.0% in 2004 due to the higher growth of operating expenses (32.2%) compared to the growth of operating revenues (25.2%).41.1% in 2005.
Other Income (Expenses)
Other Income (Charges)
      Other charges increasedexpenses decreased by Rp.1,314.4Rp.909.2 billion, or 250.8%49.5%, from Rp.524.1 billion in 2003 to Rp.1,838.5 billion in 2004.2004 to Rp.929.3 billion in 2005. The increasedecrease in other chargesexpenses was primarily due to a significant loss ondecrease of 57.7% in 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,losses, primarily due to thea decrease in floating interest rates for both Rupiah and U.S. Dollar-denominated depositsTELKOM’s borrowings denominated in foreign currencies 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 torelatively modest depreciation of the Rupiah from Rp.8,440in 2005 compared 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.particular, in 2005:
• Loss on foreign exchange-net decreased by Rp.704.0 billion from a net loss of Rp.1,220.8 billion in 2004 to a net loss of Rp.516.8 billion in 2005, primarily due to lower foreign exchange losses on US Dollar borrowings in 2005 compared to 2004, resulting from a decrease in TELKOM’s US Dollar borrowings and the relatively modest depreciation of the Rupiah;
• Interest expense decreased by Rp.92.8 billion, or 7.3%, from Rp.1,270.1 billion in 2004 to Rp.1,177.3 billion in 2005, reflecting primarily decreases in short-term bank loans and long-term debts of TELKOM;
• Interest income increased by Rp.26.8 billion, or 8.4%, from Rp.317.9 billion in 2004 to Rp.344.7 billion in 2005, primarily due to a slight increase in the average balance of time deposits. See Note 6 to the consolidated financial statements; and
• Others (net) increased by Rp.78.1 billion, from Rp.331.1 billion in 2004 to Rp.409.2 billion in 2005, primarily resulting from an increase in income from penalties on overdue payments.
      Other components of Others (Net) did not contribute significantly to Other other income (expenses) in 2005.
Income (Charges) in 2004.Before Tax and Pre-Tax Margin
Income Before Tax and Pre-Tax Margin
      As a result of the foregoing, income before tax increased by Rp.636.8Rp.3,492.0 billion, or 5.6%27.4%, from Rp.11,451.8Rp.12,749.4 billion in 20032004 to Rp.12,088.6Rp.16,241.4 billion in 2004.2005. Pre-tax margin decreasedincreased from 42.2%37.6% in 20032004 to 35.6%38.8% in 2004.2005.
Income Tax Expense
Income Tax Expense
      Income tax expense increased by Rp.142.0Rp.1,005.4 billion, or 3.7%24.1%, from Rp.3,861.1Rp.4,178.5 billion in 20032004 to Rp.4,003.1Rp.5,183.9 billion in 2004. The effective tax rate slightly decreased from 33.7% of2005, in line with the increase in income before taxtax.

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Minority Interest in 2003 to 33.1%Net Income of income before tax in 2004.Subsidiaries
Minority Interest in Net Income of Subsidiaries
      Minority interest in the net income of subsidiaries increased by Rp.452.8Rp.1,107.7 billion, or 30.1%56.6%, from Rp.1,503.5 billion in 2003 to Rp.1,956.3 billion in 2004.2004 to Rp.3,064.0 billion in 2005. The increase was primarily due to the significant increase in the net income of Telkomsel for 2004.improved financial performance by Telkomsel.
Net Income
Net Income
      As a result of the foregoing, net income increased by Rp.42.0Rp.1,379.0 billion, or 0.7%20.8%, from Rp.6,087.2Rp.6,614.6 billion in 20032004 to Rp.6,129.2Rp.7,993.6 billion in 2004.2005. TELKOM’s net income margin decreased from 22.4%19.5% in 20032004 to 18.1%19.1% 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 2004.2005.
Equity
Equity
      Total shareholders’ equity increased by Rp.2,948.4Rp.5,164.4 billion, or 17.0%28.5%, from Rp.17,312.9Rp.18,128.0 billion in 20032004 to Rp.20,261.3Rp.23,292.4 billion in 2004.2005. The increase in total shareholders’ equity was primarily due to the increase in retained earnings fromresult of net income of Rp.7,993.6 billion for the year 2004 of Rp.6,129.2 billion,2005, 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).Rp.2,921.2 billion.
Retained Earnings.Earnings
      Appropriated and unappropriated retained earnings decreased by Rp.2,215.9 billion from Rp.18,686.9 billion in 2004 to Rp.16,471.0 billion in 2005. The decrease in appropriated and unappropriated retained earnings was due to the change in method of accounting for restructuring transactions between entities under common control, which resulted in TELKOM reclassifying the difference in value of restructuring transactions between entities under common control amounting to Rp.7,288.3 billion as a charge to unappropriated retained earnings as of January 1, 2005, and cash dividends of Rp.2,921.2 billion, which decrease was offset by net income for the year 2005 of Rp.7,993.6 billion. The reclassification of the difference in value of restructuring transactions between entities under common control amounting to Rp.7,288.3 billion as a charge to unappropriated retained earnings as of January 1, 2005 has no effect on net consolidated stockholders’ equity. See “— Changes in Methods of Accounting under Indonesian GAAP” above and Note 4 to TELKOM’s consolidated financial statements.
TELKOM’s Results of Operations by Segment
      TELKOM has three main business segments: fixed wireline, fixed wireless and cellular. Operating segments that do not individually represent more than 10% of TELKOM’s revenues are presented as “Other” and comprise the telephone directories and building management business. See Note 47 to TELKOM’s consolidated financial statements.
                 
  Year Ended December 31,
   
  2004 2005 2006 2006
         
  Rp.(billion) Rp.(billion) Rp.(billion) US$(million)
Fixed Wireline Segment results
                
External operating revenues  18,860.8   19,637.4   20,137.8   2,237.5 
Inter-segment operating revenues  4.3   305.4   514.6   57.2 
                 
Total revenues  18,865.1   19,942.8   20,652.4   2,294.7 
                 
Segment expense  (12,207.7)  (14,378.8)  (16,257.5)  (1,806.4)
                 
Segment result  6,657.4   5,564.0   4,394.9   488.3 
                 
Depreciation and amortization  (3,568.2)  (4,006.2)  (4,290.9)  (476.8)
Amortization of goodwill and other intangible assets  (851.1)  (896.9)  (932.7)  (103.6)
Other non-cash expenses  (244.4)  (292.4)  (325.1)  (36.1)

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  Year Ended December 31,
   
  2004 2005 2006 2006
         
  Rp.(billion) Rp.(billion) Rp.(billion) US$(million)
Fixed Wireless
                
Segment results
                
External operating revenues  575.4   1,449.7   2,806.2   311.8 
Inter-segment operating revenues  (51.1)  (167.9)  (253.4)  (28.2)
                 
Total revenues  524.3   1,281.8   2,552.8   283.6 
                 
Segment expense  (789.6)  (2,174.7)  (1,815.8)  (201.8)
                 
Segment result  (265.3)  (892.9)  737.0   81.8 
                 
Depreciation and amortization  (230.0)  (537.3)  (452.8)  (50.3)
Write-down of assets and loss on procurement commitments     (696.1)      
Other non-cash expenses     (21.6)      
Cellular
                
Segment results
                
External operating revenues  14,201.8   20,384.9   28,205.1   3,133.9 
Inter-segment operating revenues  534.8   691.2   863.2   95.9 
                 
Total revenues  14,736.6   21,076.1   29,068.3   3,229.8 
                 
Segment expense  (6,757.2)  (8,775.0)  (12,839.5)  (1,426.6)
                 
Segment result  7,979.4   12,301.1   16,228.8   1,803.2 
                 
Depreciation and amortization  (2,651.0)  (3,046.6)  (4,427.8)  (492.0)
Amortization of goodwill and other intangible assets        (11.7)  (1.3)
Other non-cash expenses  (100.7)  (171.2)  (127.5)  (14.2)
Other
                
Segment results
                
External operating revenues  309.7   335.2   144.9   16.1 
Inter-segment operating revenues  51.1   70.5   333.9   37.1 
                 
Total revenues  360.8   405.7   478.8   53.2 
                 
Segment expense  (320.7)  (328.2)  (384.3)  (42.7)
                 
Segment result  40.1   77.5   94.5   10.5 
                 
Depreciation and amortization  (18.7)  (23.3)  (34.5)  (3.8)
Amortization of goodwill and other intangible assets  (21.3)  (21.3)      
Other non-cash expenses  (5.3)  (4.8)  (5.7)  (0.6)
Results of Segments
Year ended December 31, 2006 compared to year ended December 31, 2005
Fixed Wireline Segment
      TELKOM’s fixed wireline segment revenues increased by Rp.2,942.2Rp.709.7 billion, or 3.6%, from Rp.19,942.8 billion in 2005 to Rp.20,652.4 billion in 2006. This increase was in line with a 0.3% growth in the number of subscribers for fixed wireline, from 8,686,131 lines in service as of December 31, 2005 to 8,709,211

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lines in service as of December 31, 2006. The increase in the fixed wireline segment revenues was primarily due to an increase in data and Internet revenues by Rp.364.8 billion, primarily due to an increase in Internet connection revenues from TELKOMNet Instant and the broadband access. This increase also contributed to an increase in network revenues by Rp.132.1 billion. The increases were partially offset by a decrease in fixed wireline’s voice revenues by Rp.382.0 billion, primarily due to a decrease in call volumes.
      TELKOM’s fixed wireline segment’s expenses increased by Rp.1,878.7 billion, or 13.1% from Rp.14,378.8 billion in 2005 to Rp.16,257.5 billion in 2006. The increase in fixed wireline segment expense was primarily due to an increase in personnel expenses by Rp.1,365.8 billion, or 24.2%, from Rp.5,648.6 billion in 2005 to Rp.7,014.5 billion in 2006. The increase in personnel expenses was caused by the increase in early retirement expenses and salaries and related benefits, vacation pay, incentives and other benefits. The increase in fixed wireline segment expense was also a result of an increase of Rp.144.5 billion in general and administrative expenses.
Fixed Wireless Segment
      TELKOM’s fixed wireless segment’s revenues increased by Rp.1,271.0 billion, or 99.2%, from Rp.1,281.8 billion in 2005 to Rp.2,552.8 billion in 2006. The increase in the fixed wireless segment revenues was due to the increase in fixed wireless’s voice revenues by Rp.590.9 billion in line with a 2.8% growth in the number of subscribers for fixed wireless, from 4,061,867 lines in service as of December 31, 2005 to 4,175,853 lines in service as of December 31, 2006. This increase was also contributed to by an increase of Rp.521.7 billion in fixed wireless’s Interconnection revenues.
      TELKOM’s fixed wireless segment’s expenses decreased by Rp.358.9 billion, or 16.5%, from Rp.17,878.0Rp.2,174.7 billion in 20032005 to Rp.20,820.2Rp.1,815.8 billion in 2004.2006. The decrease in the fixed wireless segment expense was primarily due to a decrease in operations, maintenance and telecommunication services expenses of Rp.642.8 billion from 2005 to 2006.
Cellular Segment
      TELKOM’s cellular segment’s revenues increased by Rp.7,992.3 billion, or 37.9%, from Rp.21,076.1 billion in 2005 to Rp.29,068.3 billion in 2006. The increase in the cellular segment revenues was primarily due to the increase in cellular voice revenues by Rp.6,051.7 billion, cellular SMS revenues by Rp.1,267.0 billion, and cellular data communication revenues by Rp.340.6 billion in line with the 46.7% growth in Telkomsel’s total cellular subscribers from 24,269,353 subscribers as of December 31, 2005 to 35,597,171 subscribers as of 2006.
      TELKOM’s cellular segment’s expenses increased by Rp.4,064.5 billion, or 46.3%, from Rp.8,775.0 billion in 2005 to Rp.12,839.5 billion in 2006. The increase in the cellular segment expense was primarily due to increases in operations, maintenance and telecommunication services expenses and depreciation expenses by Rp.1,676.2 billion and Rp.1,381.1 billion, respectively, in line with the growth in Telkomsel’s overall subscriber base from 24.3 million subscribers as of December 31, 2005 to 35.6 million subscribers as of December 31, 2006 as well as the number of Telkomsel’s BTSs from 9,895 units as of December 31, 2005 to 16,057 units as of December 31, 2006.
Other Segments
      TELKOM’s other segment’s revenues increased by Rp.73.1 billion, or 18.0%, from Rp.405.7 billion in 2005 to Rp.478.8 billion in 2006, due to the increase in Infomedia’s call center services revenue by Rp.49.1 billion.
      TELKOM’s other segment’s expenses increased by Rp.56.1 billion, or 17.1%, from Rp.328.2 billion in 2005 to Rp.384.3 billion in 2006, primarily due to an increase in the consulting costs of Infomedia.

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Year ended December 31, 20032005 compared to year ended December 31, 20022004
Operating Revenues.Fixed Wireline Segment
      Total operatingTELKOM’s fixed wireline segment revenues grewincreased by Rp.6,313.2Rp.1,077.7 billion, or 30.3%5.7%, from Rp.20,802.8Rp.18,865.1 billion in 20022004 to Rp.27,116.0Rp.19,942.8 billion in 2003. Operating2005. The increase in fixed wireline segment revenues was primarily due to an increase in fixed wireline’s interconnection revenues by Rp.1,377.0 billion, primarily due to increases in international call volumes and outgoing calls to cellular users, and data and internet revenues by Rp.329.3 billion, primarily due to an increase in Internet connection revenues from TELKOMNet Instant and the broadband access services, partially offset by a decrease in fixed wireline’s voice revenues by Rp.862.5 billion, primarily due to a decrease in the call volumes.
      TELKOM’s fixed wireline segment expenses increased by Rp.2,171.1 billion, or 17.8% from Rp.12,207.7 billion in 2004 to Rp.14,378.8 billion in 2005. The increase in fixed wireline segment expenses was primarily due to an increase in personnel expenses by Rp.1,436.5 billion, or 34.1%, from Rp.4,212.1 billion in 2004 to Rp.5,648.6 billion in 2005. The increase in personnel expenses was caused by the increase in salaries and related benefits, vacation pay, incentives and other benefits primarily due to the implementation of a performance based remuneration system in July 2004 which resulted in increased base salary, allowances, incentives and bonuses. The increase in fixed wireline segment expense was also contributed to by an increase of Rp.425.4 billion in depreciation expense, due primarily to a change in the estimate of the remaining useful lives for WLL and approach link equipment. See “— Write-down of Assets, Depreciation Expense, Loss on Procurement Commitments, and Operations, Maintenance and Telecommunication Services Expenses” above.
Fixed Wireless Segment
      TELKOM’s fixed wireless segment revenues increased by Rp.757.5 billion, or 144.5%, from Rp.524.3 billion in 2004 to Rp.1,281.8 billion in 2005. The increase in fixed wireless segment revenues was due to the increase in fixed wireless’s voice revenues by Rp.975.5 billion in line with a 184.2% growth in the number of subscribers for fixed wireless, from 1,429,368 lines in service as of December 31, 2004 to 4,061,867 lines in service as of December 31, 2005. This increase was partially offset by the decrease in fixed wireless interconnection revenues, resulting from a decrease in incoming and outgoing calls to and from cellular interconnection, data and Internet and network.users.
      TELKOM’s fixed wireless segment expenses increased by Rp.1,385.1 billion, or 175.4%, from Rp.789.6 billion in 2004 to Rp.2,174.7 billion in 2005. The declineincrease in KSO revenuefixed wireless segment expenses was primarily due to a write-down of assets of Rp.616.8 billion, loss on procurement commitments of Rp.79.4 billion and an increase in depreciation expense by Rp.307.3 billion, due primarily to an increase in TELKOM’s fixed wireless assets and a change in the estimate of the remaining useful lives for the Jakarta and West Java BSS equipment. See “— Write-down of Assets, Depreciation Expense, Loss on Procurement Commitments, and Operations, Maintenance and Telecommunication Services Expenses” above.
Cellular Segment
      TELKOM’s cellular segment revenues increased by Rp.6,339.5 billion, or 43.0%, from Rp.14,736.6 billion in 2004 to Rp.21,076.1 billion in 2005. The increase in cellular revenues was primarily due to the elimination of MTR and DTR revenue recognizedincrease in cellular telephone revenues by TELKOM for KSO III UnitRp.4,149.6 billion as a result of TELKOM’s acquisition and subsequent consolidation of AriaWestwell as in July 2003.
Fixed Lines Telephone Revenues.
      Fixed linescellular SMS revenues grew by Rp.1,632.8 billion, or an increase of 22.5%, from Rp.7,264.1Rp.1,656.8 billion in 2002 to Rp.8,896.9 billion in 2003. Local and domestic long-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 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 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 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 to the increase in operating revenues.
      Revenues from phone cards for 2003 increased by Rp.5.1 billion to Rp.34.4 billion, 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, 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 in 2003. Air time charges for 2003 increased by Rp.2,224.3 billion to Rp.7,677.9 billion, an increase of 40.8% compared to 2002. Monthly subscription charges decreased by Rp.12.8 billion to Rp.580.5 billion, a decline of 2.2%. Connection fee charges increased by Rp.21.8 billion to Rp.194.1 billion, an increase of 12.6%.
      The increase was primarily attributable to 60%line with 49% growth in Telkomsel’s total cellular subscribers from 6,010,77216,290,508 subscribers as of December 31, 20022004 to 9,588,80724,269,353 subscribers as of December 31, 2003. This2005.
      TELKOM’s cellular segment expenses increased by Rp.2,017.8 billion, or 29.9%, from Rp.6,757.2 billion in 2004 to Rp.8,775.0 billion in 2005. The increase in cellular segment expenses was causedprimarily due to increases in operations, maintenance and telecommunications services expenses and depreciation expenses by a 38.7%Rp.1,116.5 billion and Rp.395.6 billion, respectively, in line with the growth in net-additional subscribersTelkomsel’s overall capacity from 2,578,74017.9 million subscribers as of December 31, 20022004 to 3,578,03526.2 million 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 case2005 as well as the number of Telkomsel’s BTSs from 6,205 units as of December 31, 2003.
      As a result of the higher rate of growth in the number of prepaid subscribers, the proportion of prepaid subscribers2004 to total subscribers increased from 84.6%9,895 units 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 monthly2005.

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ARPU, blended monthly ARPU decreased from approximately Rp.145,000 in 2002 to approximately Rp.123,000 in 2003. Increased SMS traffic also contributed to the decline in ARPU.
Interconnection Revenues.Other Segment
      Net interconnectionTELKOM’s other segment revenues grewincreased by Rp.1,330.8Rp.44.9 billion, or an increase of 47.0%12.4%, from Rp.2,831.3Rp.360.8 billion in 20022004 to Rp.4,162.1Rp.405.7 billion 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 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 in 2003, an increase of 2.7%.
      Interconnection revenues involving international direct dialing IDD calls decreased by 52.7%, from Rp.389.3 billion in 2002 to Rp.184.1 billion 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 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 in 2003. DTR decreased by Rp.218.0 billion, or 27.2%, from Rp.801.0 billion in 2002 to Rp.583.0 billion in 2003. Amortization of unearned initial payments decreased by Rp.4.0 billion to Rp.3.4 billion 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, 20032005, due to the exclusion of AriaWest following its acquisitionincrease in Infomedia’s call center service revenue by TELKOM.
Data and Internet Revenues.Rp.43.1 billion.
      Data and Internet revenues grewTELKOM’s other segment expenses increased by Rp.1,557.0Rp.7.5 billion, or 100.3%2.3%, from Rp.1,551.6Rp.320.7 billion in 20022004 to Rp.3,108.6Rp.328.2 billion 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, an increase of 121.1%. Multimedia revenues for 2003 increased by Rp.156.9 billion to Rp.494.7 billion, an increase of 46.5% compared to 2002. VoIP revenues for 2003 increased by Rp.176.1 billion to Rp.328.3 billion, an increase of 115.7% compared to 2002. ISDN revenues for 2003 increased by Rp.16.1 billion to Rp.80.5 billion, 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 in 2003. Satellite transponder revenues for 2003 increased by Rp.80.7 billion to Rp.270.9 billion, an increase of 42.4% compared to 2002,2005, primarily due to an increase in the numberprinting costs of transponder leases. Leased lines revenues for 2003 increased by Rp.121.1 billion to Rp.247.0 billion, an increase of 96.2% compared to 2002, as a result of an increase in the number of customers who took advantage of the absence of any increase in TELKOM’s leased line tariffs.Infomedia.

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Revenues under Revenue-Sharing Arrangements (“PBHs”).
      Revenues under Revenue-Sharing Arrangements decreased by Rp.5.3 billion, or 2.0%, from Rp.263.8 billion in 2002 to Rp.258.5 billion in 2003, mainly due to the termination of certain revenue-sharing arrangements. Net share for revenue earned under revenue-sharing arrangements for 2003 decreased by Rp.11.4 billion to Rp.200.1 billion. Amortization of unearned income under revenue-sharing arrangements for 2003 increased by Rp.6.1 billion to Rp.58.4 billion, an increase of 11.7% compared to 2002.
Other Telecommunications Services Revenues.
      Other telecommunications services revenues increased by Rp.5.9 billion, or 2.7%, from Rp.221.0 billion in 2002 to Rp.226.9 billion 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 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 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, an increase of 11.6%;
• vacation pay, incentives and other benefits increased by Rp.160.6 billion to Rp.816.1 billion, an increase of 24.5%; and
• employee income tax increased by Rp.267.3 billion to Rp.468.8 billion, 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 retirements costs, net periodic pension cost and medical expenses. Early retirements costs decreased by Rp.361.6 billion to Rp.355.7 billion, 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 cost declined by Rp.171.3 billion to Rp.191.0 billion, 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 in 2003, primarily as a result of TELKOM’s and Telkomsel’s 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 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 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, 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 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 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 in 2003, an increase of 45.8% due to an increase in the revenues of TELKOM and Telkomsel; and
• electricity, gas and water charges increased by 36.6%, from Rp.219.9 billion in 2002 to Rp.300.4 billion 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 Expenses.
      General and administrative expenses increased by Rp.932.5 billion, or 81.3%, from Rp.1,146.3 billion in 2002 to Rp.2,078.8 billion in 2003. In particular, in 2003:
• amortization of goodwill and other intangible assets increased by Rp.542.7 billion to Rp.730.7 billion, or 288.7%, mainly due to amortization of additional intangible assets arising from the acquisition of 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 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 expenses increased by Rp.49.0 billion to Rp.273.8 billion, 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, 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, an increase of 43.1%, primarily due to the consolidation of the KSO III Unit; and
• professional fees decreased by Rp.103.4 billion, or 47.2%, to Rp.115.6 billion 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 Expenses.
      Marketing expenses grew by Rp.127.8 billion, or 34.1%, from Rp.375.1 billion in 2002 to Rp.502.9 billion 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 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 (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 charge of Rp.524.1 billion 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. Gain on foreign exchange-net also declined from Rp.556.6 billion in 2002 to Rp.126.1 billion 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 in 2003, as well as an increase in Others-net to Rp.364.3 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 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 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 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 income of Rp.4.6 billion in 2002 to a net income of Rp.2.8 billion in 2003, primarily due 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 in 2003. In 2003, Others (net) included the following significant income and expense items:
• Rp.248.6 billion 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.
      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 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 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 in 2003. The increase was primarily due to the significant increase in the net income of Telkomsel for 2003.
     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 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.398.8 in 2002 to Rp.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
      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 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. In May 2003, TELKOM declared cash dividends of Rp.3,338.1 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 in 2003.

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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 stockholders’ 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, 2002, 20032004, 2005 and 20042006 in accordance with Indonesian GAAP and U.S. GAAP:
                                
 Year Ended December 31, Year Ended December 31,
    
 2002 2003 2004 2004 2004 2005 2006 2006
                
 Rp. (billion) Rp. (billion) Rp. (billion) US$ (million) Rp. (billion) Rp. (billion) Rp. (billion) US$ (million)
Net income in accordance with
             
Net income in accordance with:
             
Indonesian GAAP  8,039.7  6,087.2  6,129.2  659.8   6,614.6  7,993.6  11,005.6  1,222.8 
U.S. GAAP  8,587.3  5,790.6  6,468.6  696.3   6,468.6  7,840.1  12,111.5  1,345.7 
                                
 Year Ended December 31, Year Ended December 31,
    
 2002 2003 2004 2004 2004 2005 2006 2006
                
 Rp. (billion) Rp. (billion) Rp. (billion) US$ (million) Rp. (billion) Rp. (billion) Rp. (billion) US$ (million)
Equity in accordance with
             
Stockholders’ equity in accordance with:
             
Indonesian GAAP  14,613.6  17,312.9  20,261.3  2,181.0   18,128.0  23,292.4  28,068.7  3,118.7 
U.S. GAAP  13,910.9  16,284.7  19,570.9  2,106.7   19,570.9  24,568.5  26,308.6  2,923.2 
Summary of Significant Differences Between Indonesian GAAP and U.S. GAAP
      The Company’s consolidated financial statementsstatement of the Company and its subsidiaries have been prepared in accordance with accounting principles generally accepted in Indonesia (“Indonesian GAAP,GAAP”), which differsdiffer in certain significant respects from accounting principles generally accepted in the United States of America (“U.S. GAAP.GAAP”). The significant differences are summarized below and are describedconsolidated statements of cash flows together with the reconciliation in Note 56(1) to57 comply with SFAS 95 “Statement of Cash Flows”. A description of the Company’s consolidated financial statements.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
Termination Benefits
Voluntary Termination Benefits
      Under Indonesian GAAP, voluntary termination benefits are recognized as liabilities when certain criteria are met (e.g. the enterpriseCompany is demonstratively committed to provide termination benefits as a result of an offer made in order to encourage early retirement).voluntary redundancy.
      Under U.S. GAAP, voluntary termination benefits liabilities are recognized as liabilitiesonly when the employees accepthave accepted the offer and the related 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.531.0 billion higher in 2002, Rp.671.0 billion lower in 2003 and no change in 2004.Foreign Exchange Differences Capitalized to Assets under Construction
Foreign Exchange Differences Capitalized to Property under Construction
      Under Indonesian GAAP, the foreign exchange differencesgains and losses resulting from borrowings used to finance property underthe construction of the qualifying assets are capitalized.capitalized as part of the cost of the qualifying assets. Capitalization of foreign exchange differences ceasegains and losses ceases when the construction of the qualifying assetsasset is substantially completed and the constructed property is ready for its intended use.

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      Under U.S. GAAP, foreign exchange differencesgains and losses are credited and charged to current operations.the consolidated statement of income.
      Consequently,Interest Capitalized on a U.S. GAAP basis, the Company’s consolidated income before tax would have been Rp.107.4 billion higher in 2002, Rp.76.8 billion higher in 2003 and Rp.1.6 billion higher in 2004.Assets under Construction
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 periodminimum of time12 months to get ready for itstheir intended use or sale i.e. minimum of 12 months.sale. To the extent that funds are borrowed specifically forto finance the purposeconstruction of obtaining a qualifying

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asset, the amount of the interest cost eligible for capitalization on that asset mustshould 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., a minimum 12-month construction period requirement) on the length of the construction period in which the interest cost could be capitalized. The amount of interest cost to be capitalized for qualifying assets is intended to be that portion of the interest cost incurred during the construction periods that theoretically could have been avoided if expenditures for the assets had not been made. The interest cost need not arise from borrowings specifically made to acquire the qualifying assets. The amount capitalized in a period is determined by applying an interest rate to the average amount of accumulated expenditures for the assets during the period. 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.43.0 billion higher in 2002, Rp.39.1 billion higher in 2003 and Rp.26.8 billion higher in 2004.Revenue-Sharing Arrangements
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 booksaccounting records 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 reflected on the balance sheet. All the revenues generated from the revenue-sharing arrangements are recorded as a component of operating revenues, while a portion of the investors’ share of revenuethe revenues from the revenue-sharing arrangements is recorded as interest expense andwith the balance is treated as a reduction of the obligation under revenue-sharing arrangements.
      In connection withEmployee Benefits
      As of January 1, 2005, the different treatmentCompany and its subsidiaries adopted PSAK 24R in accounting for the costs of revenue-sharing arrangementspension benefit, post-retirement health care benefit and long service awards for Indonesian GAAP purposes. PSAK 24R requires the adoption of its provisions retrospectively as of January 1, 2004.
      The differences between the accounting by the Company and its subsidiaries for the pension benefit and post-retirement health care benefit under Indonesian GAAP and U.S. GAAP for the years ended December 31, 2004, 2005 and Indonesian GAAP, the Company’s consolidated income before tax under U.S. GAAP would have been Rp.68.0 billion higher in 2002, Rp.23.2 billion higher in 2003 and Rp.155.4 billion higher in 2004.2006 are as follows:
i.RevaluationUnder Indonesian GAAP, the prior service cost is recognized immediately if vested or amortized on a straight line basis over the average period until the benefits become vested. Under U.S. GAAP, prior service cost (vested and non-vested benefits) is generally deferred and amortized systematically over the estimated remaining service period for active employees and the recognized amount is recorded in the consolidated statement of Property, Plantincome.
ii.Under Indonesian GAAP, the transition obligations were recognized on January 1, 2004, the date PSAK 24R was adopted. Under U.S. GAAP, the transition obligations arising from the adoption of SFAS 87 “Employers’ Accounting for Pensions” and EquipmentSFAS 106 “Employers’ Accounting for Postretirement Benefits Other Than Pensions” on January 1, 1992 and January 1, 1995, respectively are deferred and
      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 has been no difference in equity since 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.3.9 billion higher in 2002, with no change in both 2003 and 2004.

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Pensionamortized systematically over the estimated remaining service period for active employees and 20 years, respectively. In addition, different adoption dates resulted in significant difference in cumulative unrecognized actuarial gains and losses.

      In 1994Under Indonesian GAAP, recognition of a minimum liability for the pension plans is not required. Under U.S. GAAP, for the years ended December 31, 2004 and 1998,2005, the Company and its subsidiaries were required to recognize an additional minimum liability when the accumulated benefits obligation exceeded the fair value of the plan assets with the equal amount recognized as an intangible assets, provided increasesthat the asset recognized did not exceed the amount of unrecognized prior service cost. If the additional liability required to be recognized exceeded unrecognized prior service cost, the excess was reported in pensionother comprehensive income, net of tax.
      In addition, there is a difference between the accounting by the Company for certain benefits under long service awards under Indonesian GAAP and U.S. GAAP for pensioners.the years ended December 31, 2004, 2005 and 2006. Under Indonesian GAAP, the prior service costs attributable tocost is recognized immediately if vested or amortized on a straight line basis over the increases in pensionaverage period until the benefits become vested. The amortized amount is recorded as a component of net periodic benefit cost for pensioners were directly charged to expense in those years.the year. Under U.S. GAAP, because the majority of plan participants are still active, suchobligation for the accumulating post-retirement benefits is measured in accordance with the guidance in SFAS 87, as permitted by SFAS 112 “Employers’ Accounting for Post-employment Benefits”. The prior service costs arecost is deferred and amortized systematically over the estimated remaining service period for active employees.employees and the recognized amount is recorded in the consolidated statement of income.
      Under Indonesian GAAP,In September 2006, the Company amortizesFASB issued SFAS 158 “Employers’ Accounting for Defined Benefit Pension and Other Postretirement Plans — an amendment of FASB Statement No. 87, 88, 106 and 132R”. The requirements of SFAS 158 to recognize 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%funded status and to provide the required disclosures are effective as of the greaterend of the projected benefit obligation oryear ended after December 15, 2006. The Company and its subsidiaries have adopted the fair valueabove recognition and disclosure requirements 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 valueSFAS 158 as of the plan assets, and an equal amount would be recognized as an intangible asset, provided thatend of the asset recognizedyear ended December 31, 2006.
SFAS 158 does not exceedchange the amountdetermination of unrecognized prior service cost.
net periodic benefit costs under SFAS 87, SFAS 106 and SFAS 112. The Company’s consolidated income before tax under U.S. GAAP would have been Rp.111.4 billion higher in 2002, Rp.109.3 billion lower in 2003 and Rp.313.9 billion higher in 2004.impacts of the adoption of SFAS 158 as of the end of the year ended December 31, 2006 are as follow:
i.EquityThe Company and its subsidiaries no longer report the additional minimum liability and any corresponding intangible asset for the unfunded pension obligation as the funded status for unfunded or underfunded benefit plans is now fully recognized as a net pension liability on the balance sheet. This is similar to the Indonesian GAAP requirements.
ii.On adoption of SFAS 158, the unrecognised actuarial losses, prior service costs, and transition obligations were recognised, net of tax, in Net Income or Lossthe accumulated other comprehensive income balance. These will continue to be amortised and reported as a component of Associated Companiesnet periodic benefit cost in the consolidated statement of income in accordance with the requirements of SFAS 87, SFAS 106 and SFAS 112.
Equity in Net Income or Loss of Associated Companies
      The Company records its equity in net income or loss of its associated companies based on the associates’those associated companies’ financial statements that have been prepared under Indonesian GAAP.
      For U.S. GAAP reporting purposes, the Company recognizes the effect of the differences between U.S. GAAP and Indonesian GAAP at the investee level in the investment accounts and its share of the net income or loss and other comprehensive income or loss of those associates.associated companies.
      As a result, on a U.S. GAAP basis, the Company’s consolidated income before tax would have been Rp.0.2 billion lower in 2002, Rp.0.2 billion lower in 2003 and Rp.0.2 billion lower in 2004.Land Rights
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 tradabletradeable and may be pledged as security under

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collateral for 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 land rights is amortized over the economic useful life which represents the contractual period of the land rights.
      The Company’s consolidated income before tax would have been Rp.11.8 billion lower in 2002, Rp.10.2 billion lower in 2003 and Rp.13.9 billion lower in 2004 under U.S. GAAP reporting.Revenue Recognition
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 2003 and 2004.
Revenue Recognition
      Under Indonesian GAAP, revenuefees from connection of mobile cellular and fixed wireless services connection fees are recognized as incomerevenue when the connection takes place (for postpaid service) or at the time of deliveryservices). Sales of starter packs are recognized as revenue upon delivery to distributors, dealers, or customers (for prepaid service)services). Installation fees for wire line services are recognized at the time of installation. The revenueRevenues from calling cards (“Kartu Telepon”) isare recognized when the Company sells the card.cards.

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      Under U.S. GAAP, revenue from front-end fees and incremental costcosts up to, but not exceeding such fees, are deferred and recognized as income over the expected term of the customer relationship.relationships. 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.89.3 billion lower in 2002, Rp.53.2 billion lower in 2003 and Rp.54.2 billion higher in 2004.Amortization of Goodwill
Goodwill
      Under Indonesian GAAP, goodwill is amortized over a period not exceeding 20 years, that it is expected to benefit the Company.years.
      Under U.S. GAAP, effective January 1, 2002, goodwill is no longernot amortized but rather subjected to aan annual 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 2004.Capital Leases
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 the related interest, and (c) there is a minimum lease period of 2 years.
      Under U.S. GAAP, a leased asset is capitalized ifwhen any one of the following criteria is met: (a) there is an automatic transfer of ownership at the end of the lease term; orterm, (b) the lease contains a bargain purchase option; oroption, (c) the lease term is for 75% or more of the economic life of the asset; orasset, and (d) the net present value of the minimum lease payments areamounts to at least 90% of the fair value of the asset.
      Consequently the Company’s consolidated income before tax under U.S. GAAP would have been Rp.14.2 billion higher in 2002, Rp.6.9 billion higher in 2003 and Rp.3.4 billion lower in 2004.Acquisition of Dayamitra
Acquisition of Dayamitra
      On May 17, 2001 the Company acquired a 90.32% interest in Dayamitra and contemporaneously acquired a call option to buy the otherremaining 9.68% interest at a fixed price at a stated future date, and provided to the minority interest holder a put option to sell the otherits 9.68% interest to the Company under those same terms; meaning that theterms. The fixed price of the call is equal toequaled the fixed price of the put option.
Under U.S. GAAP, the Company should accountaccounted for the option contracts on a combined basis together with the minority interest and account for it as a financing ofarrangement for 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 since May 17, 2001.
      On December 14, 2004, the Company exercised the call option to acquire the 9.68% interest in Dayamitra.
      Under Indonesian GAAP, prior to December 14, 2004, the Company accounted for the remaining 9.68% ofinterest in Dayamitra as minority interest. In addition, the option price that has been paid by the Company was presented as “Advance payments for investments in shares of stock.” The Company started consolidating the remaining 9.68% ofinterest in Dayamitra only on December 14, 2004 following the exercise of the option.
      The difference in the timing of the recognition of the 9.68% ownership interest recognition gives rise to differences in the timing and amounts of the 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.9.3 billion lower in 2002, Rp.24.5 billion lower in 2003 and Rp.72.4 billion lower in 2004.Asset Retirement Obligations
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, the Company’s consolidated income before tax under U.S. GAAP would have been Rp.65.2 billion lower in 2002, Rp.38.4 billion lower in 2003 and no change in 2004.
Asset Retirement Obligations
      Under Indonesian GAAP, legal obligationscosts associated with the retirement of long-lived assets that the Company and its subsidiaries must cover by law as a result from the acquisition, construction, development and/or the normal operation of long-lived assets are charged to current operationsthe consolidated statement of income as incurred.
      Under U.S. GAAP, the obligations areestimated fair value of such obligation is accrued at the time of the acquisition with an equal amount 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 Obligationsasset retirement obligations by reviewing their contractual agreements to identifydetermine whether the Company and its subsidiaries are required to settle any obligations as a result of the prevailing laws, statute and ordinance, written or by legal construction of a contract under the doctrine of promissory estoppel. A present value technique is used to estimate the fair value of the obligations. The cash flows used in the estimates of fair value have incorporated the assumptions relating to the timing and the amount of the possible cash flows. Accretion expense resulting from the passage of time is recognized in the consolidated statement of income. In subsequent periods, changes resulting from the revisions to the timing and the amount of the original estimate of undiscounted cash flows are recognized as an increase or decrease in (a) the carrying amount of the liability, and (b) the related asset retirement cost capitalized as part of the carrying amount of the related long-lived asset.
      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 and Rp.0.9 billion lower in 2004.Deferred Income Taxes
Deferred Income Taxes
      Under Indonesian GAAP, the Company does not recognize deferred taxes on temporary differences between the financial statement carrying amounts and the tax bases of its equity method investments when it is not probable that these differences will reverse in the foreseeable future.
      Under U.S. GAAP, deferred taxes are recognized in full on temporary differences between the financial statement carrying amounts and the tax bases of equity method investments.
      Consequently, the Company’s consolidated net income would have been no change in 2002, Rp.119.5 billion higher in 2003 and Rp.11.2 billion lower in 2004.Impairment of Assets
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 a 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 the current market assessmentsassessment 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 its quoted market pricesprice in an active

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markets market or discountingits discounted estimated future cash flows. Reversals of previously recognized impairment losses are prohibited.
      ThereThrough the year ended December 31, 2004, there were no impairment charges recognized by the Company or its subsidiaries. In 2005, the Company recognized impairment charges on BSS equipment which are part of transmission installation and therefore,equipment of fixed wireless assets. The sum of the expected future cash flows (undiscounted and without interest charges) relating to these impaired assets was less than their carrying amount. Therefore, for U.S. GAAP reporting purposes, these assets were written down to their estimated fair value based on their discounted estimated future cash flows. The estimated fair value of the impaired assets determined under U.S. GAAP was the same as that determined under Indonesian GAAP and accordingly, there arewere no differences between Indonesian GAAP and U.S. GAAP.

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Gain (loss) on Disposal of Property, Plant and Equipment
Gain (loss) on Sale of Property, Plant and Equipment
      Under Indonesian GAAP, the Company classifies gain (loss)and its subsidiaries classify the gains (losses) on disposaldisposals of property, plant and equipment as a component of other income (expenses)(expense) which is excluded from the determination of operating income.
      Under U.S. GAAP, gain (loss)the gains (losses) on disposaldisposals of property, plant and equipment isare classified as a component of operating expenses and hence included in the determination of operating income.
      Consequently, For the Company’syears ended December 31, 2004, 2005 and 2006, the operating income under U.S. GAAP would have been Rp.130.5 billion higher in 2002, Rp.182.9 billion higher in 2003(lower) by (Rp.26,089) million, Rp.46,193 million, and Rp.26.1 billion lower in 2004,(Rp.47,983) million, respectively, and other income (expenses) would have been lower (higher) by the same amounts in each of 2002, 2003 and 2004, respectively, due to the inclusion of the gain (loss)gains (losses) on disposaldisposals of property, plant and equipment in the determination of operating income.
Reclassification of Difference in Value of Restructuring Transactions Between Entities Under Common Control
      Under Indonesian GAAP, the Company is required to reclassify the difference in value of restructuring transactions between entities under common control as of January 1, 2005 as a direct adjustment to retained earnings when the common control relationship between the transacting parties no longer existed as of January 1, 2005.
      Under U.S. GAAP, the difference in value of restructuring transactions between entities under common control remains in equity indefinitely as part of the additional paid-in capital.
Available-For-Sale-Securities
      Under Indonesian GAAP, available-for-sale securities are carried at fair value and changes in fair value are recognized in “Unrealized holding gain (loss) on available-for-sale securities” under equity.
      Under U.S. GAAP, available-for-sale securities are carried at fair value and any unrealized gains or losses are reported as a component of other comprehensive income.
Cumulative Translation Adjustments
      Under Indonesian GAAP, investments in foreign companies using the equity method are reported by translating the assets and the liabilities of these companies as of the balance sheet date using the rate of exchange prevailing at that date. Revenues and expenses are translated using the exchange rates at the date of transaction or the average exchange rate for the year for practical reasons. The amounts includedresulting translation adjustments are reported as part of “Translation Adjustments” in the reconciliation below showstockholders’ equity section.
      Under U.S. GAAP, the income tax effectsresulting translation adjustments are reported in other comprehensive income.
Amendment and Restatement of the differences betweenJoint Operation Scheme in Regional Division VII
      As discussed in Note 5e to the consolidated financial statements, the Company has accounted for the amendment and restatement of the KSO VII agreement as a business combination using the purchase method of accounting.
      Under Indonesian GAAP, the fair value of the unearned income relating to the revenue-sharing arrangements was deemed to be equal to the fair value of the property, plant and equipment under those revenue-sharing arrangements based on the accounting treatment of revenue sharing agreements under Indonesian GAAP. Under U.S. GAAP, as described above.
      A summarythe fair value of the obligation under the revenue-sharing arrangements has been determined to be Rp.473,754 million based on the present value of the estimated future payments to PT Bukaka Singtel International (BSI)’s business partners under the revenue-sharing arrangements.
      Under Indonesian GAAP, the excess of the acquisition cost over the Company’s interest in the fair value of identifiable asset acquired and liabilities assumed is recorded as goodwill. After assigning the purchase

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consideration to all other identifiable assets and liabilities, the remaining residual amount was allocated to the intangible asset representing the right to operate the business in the KSO VII area, to be amortized over the remaining KSO VII term of 4.3 years. As a result, there was no goodwill recognized under Indonesian GAAP. For U.S. GAAP reporting purposes, the right to operate the KSO VII operation represented a reacquired right and was recognized by the Company as a separate intangible asset under EITF 04-1 “Accounting for Preexisting Relationships between the Parties to a Business Combination”. The intangible asset was directly valued to determine its fair value in accordance with the requirements in EITF Topic No. D-108 “Use of the Residual Method to Value Acquired Assets Other Than Goodwill”. The excess of the purchase consideration over the net of the amounts assigned to assets acquired and liabilities assumed of Rp.61,386 million was recognized as goodwill.
      (2) The significant adjustments to the consolidated net income for the years ended December 31, 2002, 20032004, 2005 and 20042006 and to the consolidated stockholders’ equity as of December 31, 20032005 and 20042006 which would be required if U.S. GAAP had been applied, instead of Indonesian GAAP, in the consolidated financial statements are set forth below:
             
  2002 2003 2004
       
  Rp. million Rp. million Rp. million
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:            
Termination benefits  530,981   (670,981)   
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)
              
  2004 2005 2006
       
  Rp. million Rp. million Rp. million
Net income according to the consolidated statements of income prepared under Indonesian GAAP  6,614,568   7,993,566   11,005,577 
U.S. GAAP adjustments — increase (decrease) due to:            
 Voluntary termination benefits        1,461,149 
 Capitalization of foreign exchange losses, net of related depreciation of Rp.75,870 million, Rp.77,010 million and Rp.79,178 million, respectively  1,587   77,010   79,178 
 Interest capitalized on assets under construction, net of related depreciation of Rp.13,392 million, Rp.17,275 million and Rp.23,270 million, respectively  26,802   23,825   73,934 
 Revenue-sharing arrangements  155,369   69,173   58,545 
 Pension  (148,517)  (104,877)  (95,788)
 Post-retirement health care  (75,964)  (104,466)  (101,205)
 Long service awards  (122,462)  (90,933)  201,345 
 Equity in net income (loss) of associated companies  (177)  (192)  (223)
 Amortization of land rights  (13,907)  (4,881)  (16,947)
 Revenue recognition  54,159   5,046   (4,547)
 Amortization of goodwill  21,270   21,270   8,858 
 Capital leases  (3,435)  (47,524)  (27,580)
 Adjustment for consolidation of Dayamitra  (72,361)  5,084   11,127 
 Asset retirement obligations  (848)  (848)  (11,255)
 Amendment and restatement of the Joint Operation Scheme in Regional Division VII        4,479 

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  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 
          
               
  2004 2005 2006
       
  Rp. million Rp. million Rp. million
 Deferred income tax:            
  Deferred income tax on equity method investments  (11,234)  (3,206)  2,053 
  Deferred income tax effect on U.S. GAAP adjustments  61,742   18,288   (520,693)
             
   (127,976)  (137,231)  1,122,430 
 Minority interest  (18,019)  (16,244)  (16,559)
             
 Net adjustments  (145,995)  (153,475)  1,105,871 
             
Net income in accordance with U.S. GAAP  6,468,573   7,840,091   12,111,448 
             
Net income per share — in full Rupiah amount  320.86   388.89   602.12 
             
Net income per ADS — in full Rupiah amount (40 Series B shares per ADS)  12,834.47   15,555.74   24,085.00 
             
(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, 2003 and 2004 are shown below:
          
  2003 2004
     
  Rp. million Rp. million
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  (550,473)  (548,886)
Interest capitalized on property under construction — net of related depreciation  101,812   128,614 
Revenue-sharing arrangements  (447,696)  (292,327)
Revaluation of property, plant and equipment:        
 Increment  (664,974)  (664,974)
 Accumulated depreciation  664,974   664,974 
Pension  122,156   436,026 
Equity in net income (loss) of associated companies  (18,252)  (18,429)
Amortization of land rights  (65,211)  (79,118)
Revenue recognition  (768,548)  (714,389)
Goodwill  42,539   63,809 
Capital leases  21,123   17,688 
Adjustment for consolidation of Dayamitra  (38,718)  (61,728)
Asset retirement obligations  (848)  (1,696)
           
  2005 2006
     
  Rp. million Rp. million
Stockholders’ equity according to the consolidated balance sheets prepared under Indonesian GAAP  23,292,401   28,068,689 
         
U.S. GAAP adjustments — increase (decrease) due to:        
 Voluntary termination benefits     1,461,149 
 Capitalization of foreign exchange differences — net of related depreciation  (471,876)  (392,698)
 Interest capitalized on property under construction  — net of related depreciation  152,439   226,373 
 Revenue-sharing arrangements  (223,154)  (164,609)
 Pension  1,851,509   (115,601)
 Post-retirement health care  1,038,095   (1,786,355)
 Long service awards  (213,395)  (234,052)
 Equity in net income (loss) of associated companies  (18,621)  (18,844)
 Amortization of land rights  (83,999)  (100,946)
 Revenue recognition  (709,343)  (713,890)
 Amortization of Goodwill  85,079   93,937 
 Capital leases  (29,836)  (57,416)
 Adjustment for consolidation of Dayamitra  (56,644)  (45,517)
 Asset retirement obligations  (2,544)  (13,799)
 Amendment and restatement of the Joint Operation Scheme in Regional Division VII     4,479 
 Deferred income tax:        
  Deferred income tax on equity method investments  35,040   38,768 
  Deferred income tax effect on U.S. GAAP adjustments  (66,182)  39,180 
         
   1,286,568   (1,779,841)
 Minority interest  (10,481)  19,724 
         
 Net adjustments  1,276,087   (1,760,117)
         
 Stockholders’ equity in accordance with U.S. GAAP  24,568,488   26,308,572 
         

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  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
      TELKOM expects to have substantial liquidity and capital resources requirements in 2005the short and 2006long term 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 2005 and 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,(Java, Sumatra and Kalimantan), Submarine Cable JDM (Jember-Denpasar- Mataram), the expansion of TELKOM’s CDMAfixed wireless access networks, fiber optic transmission network from Kalimantan and Sulawesi,the expansion of Submarine Cable SUB (Surabaya-UjungPandang-Banjarmasin), an additional ground satellite segment in east Indonesia,Jakarta, fiber optic transmission network Medan-Pekanbaru,Medan-Padang, softswitch development, the installation and upgrading of fixed lines and increased capacity in its mobile cellular service conducted through Telkomsel (see “— Capital Expenditures”) below);
 
 • debt service requirements relating to existing indebtedness, including two-step loans, indebtedness of subsidiaries, its short-term loanloans with ABN AMRO Bank N.V. Jakarta and Bank Central Asia and Bank Niaga, and its Rp.1.1 trillion medium-term notes due between June 2005of Rp.465 billion, IDR bonds of Rp.1 trillion, its loan facility from Bank Central Asia in relation to the construction of the Sumatra backbone network, its loan from a consortium of banks for the Regional Division V junction project, its loans from Citibank N.A. through its Hermes Export facility, the High Performance Backbone facility and June 2007;the EKN-Backed facility and a loan from the Export and Import Bank of Korea in connection with the CDMA project;
 
 • installment payments of the purchase price for shares of AriaWest;AriaWest which are expected to be fully paid by January 31, 2009;
 
 • payments of contributioncontributions to TELKOM’s defined benefit pension plan and post-retirement health care plan and long-service awards in 2005;plan;
 
 • fixed monthly payments to MGTI pursuant to the amended and restated agreement for KSO IV, commencing February 2004 and terminating in 2010; and
 
 • payment of call option price throughfixed monthly payment beginning in December 2004 and ending March 2006 relatingpayments to PT Bukaka Singtel International (BSI) pursuant to the acquisition of 9.68% shares of Dayamitra.amended and restated agreement for KSO VII, commencing October 2006 and terminating in 2010.
      Liquidity and capital resources will also be required for TELKOM to change its current DLD access code as a result of the end of TELKOM’s exclusive right to provide DLD services, with possible expenditures for the creation of a new routing database and the costs for customer education and marketing. TELKOM will be required to fully implement this change in its DLD access code by April 1, 2010. See Item 4. Information“Information on the Company — B. Business Overview  — Regulations — DLD and IDD Services.”
      PrimaryIn addition, liquidity and capital resources will be required for the share repurchase plan. See Item 7. “Major Stockholders and Related Party Transactions — A. Major stockholders — General.”
      The primary sources of financing available to TELKOM consist of: (i) cash flow from its operating activities; (ii) financing from the bonds issuance; (iii) financing from banks or export credit agencies (including financing procured by its vendors); and (iv) deferred vendor payment terms.arrangements.

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      TELKOM believes that these sources of financing will be sufficient to fund its planned capital expenditures, its anticipated working capital needs and its likely contractual obligations and commitments in 2005the short and 2006.long term. 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.US Dollar, TELKOM’s net cash flow from its operating activities may decrease and the amount of the required capital expenditures in Rupiah terms may increase, any of which may negatively impact its liquidity.

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      TELKOM manages the liquidity for all of its businesses, including KSOsKSO units 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 2005 and 2006 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 bank loans. Telkomsel’s management believes that Telkomsel will continue to generate sufficient cash flow from its operating activities to fund planned capital expenditures in 2005the short and 2006.long term and should it require additional financing, it will use external financing sources such as bank facilities or debt market instruments such as bonds or MTNs (medium-term notes).
Defaults and Waivers of Defaults under ourTELKOM Debt Facilities
      As a result of our failure to file a fully compliant 2002 Annual Report on Form 20-F with the SEC by the June 30, 2003 filing deadlineIn 2005 and our May 2003 press release relating thereto, we were2006, TELKOM was in breach of certain covenants in our Citibank andthe debt facilities from Bank Central Asia (BCA)(for High Performance Backbone) and the indenture in connection with TELKOM’s IDR bonds of Rp.1 trillion, whilst for debt facilities that require us, among other things,from Citibank (for High Performance Backbone), TELKOM was in breach only in 2005. Based on the covenants, TELKOM is not permitted to comply with all laws and regulations applicablemake any loans to us and deliver financial statements toor for the lenders. We havebenefit of any person which in the aggregate exceed a certain amount. TELKOM has obtained written waivers from both Citibank International plc, acting as agent for the lenders under the relevant facility agreements, Bank Central Asia and BCA with respect to such breaches.
      As discussed in Item 3.D. “— Risk Factors”PT Bank Rakyat Indonesia Tbk., our failure to file a fully compliant 2002 Annual Report on Form 20-F 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 suchacting as a related de-listing of TELKOM’s ADSs from the New York Stock Exchange. Anytrustee 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.IDR bonds.

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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”):statements:
                                  
 Year Ended December 31,  Year Ended December 31,
     
 2002 2003 2004 2004  2004 2005 2006 2006
                 
 Rp. (billion) Rp. (billion) Rp. (billion) US$ (million)  Rp. (billion) Rp. (billion) Rp. (billion) US$ (million)
Net cash flows:Net cash flows:             Net cash flows:             
from operating activities  10,864.5  12,852.5  16,051.5  1,727.8 from operating activities  16,051.5  21,102.7  26,695.2  2,966.1 
from investing activities  (6,050.0)  (7,305.9)  (9,598.1)  (1,033.2)used in investing activities  (9,598.1)  (12,212.7)  (16,461.1)  (1,829.0)
from financing activities  (2,670.2)  (6,177.4)  (6,904.9)  (743.2)used in financing activities  (6,904.9)  (8,339.4)  (7,382.8)  (820.3)
         
Change in cash and cash equivalentsChange in cash and cash equivalents  2,144.3  (630.8)  (451.5)  (48.6)Change in cash and cash equivalents  (451.5)  550.6  2,851.3  316.8 
Effect of foreign exchange changes on cash and cash equivalentsEffect of foreign exchange changes on cash and cash equivalents  (89.4)  26.2  213.1  22.9 Effect of foreign exchange changes on cash and cash equivalents  213.1  (32.0)  89.8  10.0 
Cash and cash equivalents, beginning of year  3,644.2  5,699.1  5,094.5  548.4 
Cash and cash equivalents, beginning of YearCash and cash equivalents, beginning of Year  5,094.5  4,856.1  5,374.7  597.2 
Cash and cash equivalents, end of yearCash and cash equivalents, end of year  5,699.1  5,094.5  4,856.1  522.7 Cash and cash equivalents, end of year  4,856.1  5,374.7  8,315.8  924.0 
Net Cash Flows from Operating Activities
      TELKOM’s primary sourcesources of liquidity in recent years was cash flows from its operating activities and from financing activities. Net cash flows from its operating activities totaled Rp.10,864.5 billion in 2002, Rp.12,852.5 billion in 2003 and Rp.16,051.5 billion, Rp.21,102.7 billion, and Rp.26,695.2 billion (US$1,727.82,966.1 million) in 2004.2004, 2005, and 2006, respectively. In 2003,2005 and 2006, the growth in operating cash flows principally resulted from the 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, the higher interconnection revenues from mobile cellular operators and greaterIDD operators, as well as from the IDD service business (TIC-007), and the higher data and Internetinternet revenues due to increased SMS, usage, as well as the acquisition of AriaWest in 2003. In 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 (datadata communication 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.broadband internet access network usage.

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Year ended December 31, 20042006 compared to year ended December 31, 2003.2005.
      In 20042006 compared to 2003,2005, net cash flows from operating activities increased by Rp.3,199.0Rp.5,592.5 billion, or 24.9%26.5%, primarily due to:
 • an increase of Rp.2,731.4Rp.6,017.0 billion, or 69.5%40.6%, in cash receipts from other services,cellular business, primarily due to an increasea growth in cash receipts from data and Internet services, particularly from greater SMS usage among Telkomsel subscribers;the mobile cellular business of Telkomsel;
 
 • an increase of Rp.1,882.7Rp.1,252.6 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%16.9%, in cash receipts from interconnection services, primarily due to an increase in cellular interconnection fees, collectedresulting from an increased mobile cellular operators;subscriber base in Indonesia; and
 
 • an increase of Rp.1,572.3Rp.1,962.0 billion, or 17.6%28.2%, 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 greaterprimarily due to increases in SMS usage amongby Telkomsel subscribers and the number of Speedy subscribers.
      This increase was partially offset by:
 • an increase of Rp.3,061.3Rp.1,510.6 billion, or 52.8%10.1%, in cash payments for operating expenses, which hadis in line with the effectincrease in operating expenses (excluding depreciation and amortization); and
• an increase of increasingRp.2,236.8 billion, or 45.3%, in cash outflows from operating activities.payments for income tax, which is in line with the increase in net income.
Net Cash FlowsYear ended December 31, 2005 compared to year ended December 31, 2004.
      In 2005 compared to 2004, net cash flows from operating activities increased by Rp.5,051.2 billion, or 31.5%, primarily due to:
• an increase of Rp.4,327.7 billion, or 41.2%, in cash receipts from Investing Activitiescellular business, primarily due to a growth in the mobile cellular business of Telkomsel;
• an increase of Rp.1,636.9 billion, or 28.4%, in cash receipts from interconnection services, primarily due to an increase in cellular interconnection fees, resulting from an increased mobile cellular subscriber base in Indonesia; and
• an increase of Rp.1,978.8 billion, or 39.8%, in cash receipts from data and Internet primarily due to increases in SMS usage by Telkomsel subscribers and the number of Speedy subscribers.
      This increase was partially offset by:
• an increase of Rp.2,684.1 billion, or 21.9%, in cash payments for operating expenses, which is in line with the increase in operating expenses (excluding depreciation and amortization, write-down of assets and loss on procurement commitments).
Net Cash Flows from Investing Activities
      Net cash flows used in investing activities totaled Rp.6,050.0Rp.9,598.1 billion, Rp.7,305.9Rp.12,212.7 billion, and Rp.9,598.1Rp.16,461.1 billion (US$1,033.2 million)1,829.0) in 2002, 20032004, 2005 and 2004,2006, respectively. In 2002, net cash used in investing activities was used for capital expenditures2004, 2005 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 2004,2006, the net cash used in investing activities were primarily used for capital expenditures.
      Apart from cash on hand and cash in banks, TELKOM invests the 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 Rupiah-based mutual funds.funds and other marketable securities. At December 31, 2004, Rp.120.9 billion2006, no amount of time deposits had a maturity greater than three months, and Rp.14.9Rp.84.5 billion (US$1.69.4 million) of mutual funds and other marketable securities were 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, 20032006 compared to year ended December 31, 2002.2005.
      In the year ended December 31, 20032006 compared to the year ended December 31, 2002,2005, net cash flows used in investment activities increased by Rp.1,255.9Rp.4,248.4 billion, or 20.8%34.8%, primarily due to:
 • an increase of Rp.2,381.9Rp.3,793.7 billion, or 36.0%31.3%, in cash used for capital expenditures;the acquisition of property, plant and equipment, primarily due to the installation of additional transmission stations, earth stations and equipment, cable network and the investment in data processing equipment; and
 
 • an increase of Rp.397.3Rp.436.0 billion, or 26.5%, in the cash proceeds from investments andpayment of 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.3G license up-front fee by Telkomsel.
Year ended December 31, 2005 compared to year ended December 31, 2004.
      In 2005 compared to 2004, net cash flows used in investment activities increased by Rp.2,614.6 billion, or 27.2%, primarily due to:
• an increase of Rp.3,538.1 billion, or 41.3%, in the acquisition of property, plant and equipment, primarily due to an additional installation of transmission stations, earth stations and equipment, cable network and an investment in data processing equipment.
      This increase was partially offset by a decrease of Rp.851.2 billion, or 80%, in cash payments for advances for the purchase of property, plant and equipment.
Net Cash Flows from Financing Activities
      Net cash flows used in financing activities totaled Rp.2,670.2Rp.6,904.9 billion, Rp.6,177.4Rp.8,339.4 billion, and Rp.6,904.9Rp.7,382.8 billion (US$743.2820.3 million) in 2002, 20032004, 2005 and 2004,2006, respectively. In all three years, net cash flows from financing activities were drivencomprised primarily byof proceeds from borrowing, repayments of outstanding indebtedness and by payments of cash dividends. In 2004,2006, cash flow used in financing activities increaseddecreased by Rp.727.5Rp.956.5 billion, or 11.8%11.5%, primarily resulting from an increase of Rp.1,962.3 billion in the proceeds from long-term borrowings, and Rp.1,226.7 billion in the repayments of short-term borrowings, offset by a 288.0%80.3% increase in the repaymentpayments of long-term indebtedness to Rp.5,963.7 billion. Thiscash dividends of Rp.2,390.5 billion and an increase was partially offset by a Rp.2,453.0of Rp.952.2 billion increase in proceeds from borrowings and a Rp.1,080.0 billion increase in proceeds from medium-term notes.for the purchase of treasury stock.
Repayments of Current Indebtedness.Indebtedness
      At December 31, 2002, 20032004, 2005 and 2004,2006, approximately 68.5%72.7%, 89.2%72.7%, and 72.7%47.1%, 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 U.S.US 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 20032006, compared to 2002 andthe depreciation of the Rupiah in 2004 compared to 2003.and 2005.
      In 2002, 20032004, 2005 and 2004,2006, TELKOM made net repayments of current indebtedness for borrowed money of Rp.3,342.0Rp.7,601.6 billion, Rp.3,050.0Rp.4,096.8 billion, and Rp.7,601.6Rp.2,542.1 billion (US$818.3282.5 million), respectively. Cash outflows in 20042006 reflected payments for:
 • two-step loansshort-term borrowings of Rp.2,180.2Rp.507.1 billion;
 
 • liabilitiesmedium-term notes of business acquisitions of AriaWest, Pramindo, Dayamitra and KSO IV of Rp.1,893.4Rp.145.0 billion;
 
 • Rp.3,293.9 billion for paymentlong-term borrowings 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;Rp.1,674.5 billion; and
 
 • Rp.9.1promissory notes of Rp.201.3 billion for paymentand capital lease obligation of other long-term debts.Rp.14.1 billion.

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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’s annual shareholder meeting, as follows:
                 
  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 
             
Date of Annual General Meeting Dividend Total Cash Dividend
of Shareholders Year Dividends Per Share
       
    (Rp. billion) (Rp.)
July 30, 2004  2003   3,043.6   301.95 
June 24, 2005  2004   3,064.6(1)  152.01 
June 30, 2006  2005   4,400.1   218.86 
December 5, 2006  2006   971.0(2)  48.41 
 
(1) Dividend per share for 2001, 2002 and 2003 were prior to the two-for-one stock split as resolvedIncluding interim cash dividends distributed in the AGMS on July 30, 2004.December 2004 of Rp.143.4 billion.
(2) Interim cash dividends distributed in December 2006 of Rp.971.0 billion
     In 2002, 20032004, 2005 and 2004,2006, the amountamounts of cash dividends paid waswere 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,In 2004, TELKOM’s board of directors approved an interim2005 and 2006, cash dividends for the year 2004paid to minority shareholders of subsidiaries amounted to Rp.682.4 billion, Rp.1,694.3 billion and Rp.2,067.7 billion, respectively, which primarily represented cash dividends paid to minority shareholders of Telkomsel.
      On June 22, 2007, Telkomsel held an Annual General Meeting of Shareholders that approved a change in the amountcomposition of Rp.7.112 per share for an aggregate totalTelkomsel’s Board of Commissioners and the Board of Directors and cash dividends of Rp.143.4 billion. The interim cashRp.9,505.0 billion representing 85% of Telkomsel’s 2006 net income. Of the declared dividends, were35% will be paid to the Government on December 29, 2004 and to other shareholders on January 6, 2005.Singtel.
Escrow Accounts.Accounts
      In 2004,2006, TELKOM recorded a net decrease in escrow accounts of Rp.485.9Rp.94.1 billion, (US$52.3 million), which representedor US$10.4 million, primarily resulting from a decrease in funds deposited into the repayments of indebtedness related to the acquisition of Dayamitra funded from the contractually-required escrow accounts established in connection with TELKOM’s acquisition of the remaining shares of Dayamitra. See Item 4. “Information on May 17, 2001 and payments to Samsung Electronic Co. Ltd. for financing the CDMA project starting in July 2004.Company — B. Business Overview — General — Joint Operation Scheme.”
Working Capital
      Net working capital, calculated as the difference between current assets and current liabilities, was negative Rp.2,227.2Rp.(3,208.6) billion at December 31, 20032005, and negative Rp.2,473.1Rp.(6,614.9) billion (US$266.2(735.0) million) at December 31, 2004.2006. The decrease in net working capital was principally due to a significant increaseincreases in current liabilities such as short-term bank loans, trade accounts payable, to third partiestaxes payable, accrued expenses, unearned income, short term bank loans, and unearned income.current maturities of long-term liabilities. These increases were partially offset by increases in cash and cash equivalents, trade receivables, prepaid expenses, claims for tax refunds and a decrease in other current assets.
Current Assets
      Current assets were Rp.8,942.6Rp.10,304.6 billion at December 31, 20032005, and Rp.9,203.9Rp.13,920.8 billion (US$990.71,546.8 million) at December 31, 2004,2006, reflecting an increase of Rp.261.3Rp.3,616.2 billion, or 2.9%35.1%. The increase in current assets was primarily due to:
 • an increase in trade accounts receivable from third parties of Rp.478.0Rp.2,941.1 billion, or 19.7%54.7%, in cash and cash equivalents from Rp.2,422.0Rp.5,374.7 billion at December 31, 2003in 2005 to Rp.2,900.0Rp.8,315.8 billion (US$312.2 million) at December 31, 2004;in 2006;
 
 • an increase of Rp.295.4 billion, or 38.0%, in prepaid expenses from Rp.777.9 billion in 2005 to Rp.1,073.3 billion in 2006;

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• an increase of Rp.198.4Rp.139.4 billion, or 46.2%3.9%, in trade receivables from Rp.429.7Rp.3,577.9 billion at December 31, 2003in 2005 to Rp.628.1Rp.3,717.3 billion (US$67.6 million) at December 31, 2004;in 2006;
• an increase of Rp.359.6 billion in claims for tax refunds from Rp.nil in 2005 to Rp.359.6 billion in 2006; and
 
 • an increase in inventories of Rp.49.1Rp.62.4 billion, or 31.9%282.4%, in temporary investment from Rp.154.0Rp.22.1 billion at December 31, 2003in 2005 to Rp.203.1Rp.84.5 billion (US$21.9 million) at December 31, 2004;in 2006.

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      These increases were partially offset by:
 • a decrease in cash and cash equivalents of Rp.238.4Rp.5.5 billion, or 4.7%3.6%, in other receivables from Rp.5,094.5Rp.153.2 billion at December 31, 2003in 2005 to Rp.4,856.1Rp.147.7 billion (US$522.7 million) at December 31, 2004;in 2006;
 
 • a decrease of Rp.152.7 billion, or 95.7%, in other current assets from Rp.159.5 billion in 2005 to Rp.6.8 billion in 2006;
• a decrease of Rp.16.5 billion, or 87.3%, in prepaid taxes of Rp.135.1from Rp.18.9 billion or 63.6%, from Rp.212.3in 2005 to Rp.2.4 billion at December 31, 2003 to Rp.77.2 billion (US$8.3 million) at December 31, 2004;in 2006; and
 
 • a decrease in other accounts receivable of Rp.114.3Rp.7.0 billion, or 67.2%3.2%, in inventories from Rp.170.1Rp.220.3 billion at December 31, 2003in 2005 to Rp.55.8Rp.213.3 billion (US$6.0 million) at December 31, 2004;in 2006.
      At December 31, 2002, 20032004, 2005 and 2004,2006, approximately 34.0%22.3%, 19.4%17.8% and 22.3%19.4%, respectively, of TELKOM’s current assets were denominated in foreign currencies, principally the U.S.Euro and the US Dollar in 2002 and 20032004 and the EuroUS Dollar in 2004,2005 and 2006, such that the movements of the Rupiah exchange rate against U.S.US Dollar and Euro across these years would affectaffected TELKOM’s current assets.
Trade Accounts Receivable.Receivables
      Trade accounts receivablereceivables from related parties (net of allowance for doubtful accounts) increaseddecreased by Rp.8.2Rp.9.7 billion, or 2.0%1.8%, from Rp.410.9Rp.530.4 billion as ofat December 31, 20032005 to Rp.419.1Rp.520.7 billion (US$45.157.9 million) at December 31, 2004.2006, The decrease was primarily due to an elimination transaction in trade receivables from KSO VII as result of the business combination with KSO VII, and the increase of allowance for doubtful accounts for trade receivables by Rp.0.8 billion, or 0.9%, from Rp.84.3 billion at December 31, 2005 to Rp.85.1 billion (US$9.5 million) at 2006.
      Trade accounts receivablereceivables from third parties (net of allowance for doubtful accounts) increased by Rp.478.0Rp.149.1 billion, or 19.7%4.9%, from Rp.2,422.0Rp.3,047.5 billion at December 31, 20032005 to Rp.2,900.0Rp.3,196.6 billion (US$312.2355.2 million) at December 31, 2004,2006, primarily due to an increase in the number of mobile cellular, fixed wireless subscriberstrade receivables from residential and the consolidation of KSO IV. In the case of trade accounts receivable from related parties, the increase was primarily due to increase in number of related party customers following the acquisition of KSO IV.
      The allowance for doubtful accounts for trade accounts receivable from related parties decreased Rp.46.0 billion, or 41.5%, from Rp.110.9 billion at December 31, 2003 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.business subscribers.
      At December 31, 20042006, compared to December 31, 2003,2005, the allowance for doubtful accounts for trade receivables from third parties increased Rp.124.1by Rp.98.3 billion, or 37.3%16.3%, from Rp.333.0Rp.601.4 billion to Rp.457.1Rp.699.7 billion (US$49.277.7 million), primarily due to an increase in numberthe amount of delinquent accounts oftrade receivables from third parties.
Other Current Assets.Assets
      At December 31, 2004, Rp.44.62006, Rp.6.8 billion (US$4.80.8 million) of TELKOM’s time deposits with maturity of less than one year were restricted for security interests in favor of other parties and for bank guarantees, of which Rp.42.7 billion (US$4.6 million) was used to secure Napsindo’s borrowings, a subsidiary, and recorded as other current assets.guarantees.
Current Liabilities
      Current liabilities were Rp.11,169.8Rp.13,513.2 billion at December 31, 20032005 and Rp.11,677.0Rp.20,535.7 billion (US$1,256.9 billion)2,281.7 million) at December 31, 2004,2006, reflecting an increase of Rp.507.2Rp.7,022.5 billion, or 4.5%.52.0% which is mainly due to increase in Rupiah denominated current liabilities. The increase in current liabilities primarily

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arose from increases in the following: (a) trade accounts payable; (b) taxes payable; (c) accrued expenses; (d) unearned income; and (e) short-term bank loans; (b) trade accounts payable to third parties; and (c) unearned income.
      At December 31, 2002, 2003 and 2004, approximately 17.2%, 42.5% and 31.6%, respectively,(f) current maturities 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. Dollar across these years significantly affected TELKOM’s currentlong-term liabilities.

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Current Maturities of Long-term Liabilities.Liabilities
      Current maturities of long-term liabilities decreasedincreased by Rp.1,142.7Rp.2,448.5 billion, or 33.2%109.9%, from Rp.3,443.5Rp.2,226.9 billion at December 31, 20032005, to Rp.2,300.8Rp.4,675.4 billion (US$247.7519.5 million) at December 31, 2004.2006. This decreaseincrease was primarily due to the decreaseincreases in liabilitiescurrent maturities of bank loans, notes and bonds, and deferred consideration for business acquisitions.combinations.
Accrued Expenses.Expenses
      Accrued expenses decreasedincreased by Rp.133.8Rp.1,954.5 billion, or 11.3%128.5%, from Rp.1,185.2Rp.1,521.2 billion at December 31, 20032005, to Rp.1,051.4Rp.3,475.7 billion (US$113.2386.2 million) at December 31, 2004.2006. The decreaseincrease was primarily due to the decreasean increase of Rp.48.0 billion, or 10.8%, in early retirement benefitsaccruals for general, administrative and marketing expenses from Rp.132.8Rp.444.1 billion at December 31, 20032005 to nilRp.492.1 billion at December 31, 2004 as2006, an increase of Rp.258.4 billion, or 57.1%, in accrued salaries and benefits from Rp.452.4 billion at December 31, 2005 to Rp.710.8 billion at December 31, 2006, and an increase of Rp.144.6 billion, or 35.2% in accruals for operations, maintenance and telecommunication services expenses from Rp.411.1 billion at December 31, 2005 to Rp.555.7 billion at December 31, 2006, and an increase of Rp.1,528.4 billion or 100% in accrued expenses for the early retirement benefits were fully paid in 2004.program from Rp.nil at December 31, 2005 to Rp.1,528.4 billion at December 31, 2006.
Indebtedness
      Consolidated total indebtedness (consisting of long-term liabilities, current maturities of long-term liabilities, and short-term bank loans)loans and deferred consideration for business combinations) at December 31, 2002, 20032004, 2005 and 2004, was2006 were as follows:
           
 At December 31,                
   At December 31,
 2002 2003 2004 2004  
         2004 2005 2006 2006
   (US$ in million)        
 (Rp. in billion)   (Rp. in billion) (Rp. in billion) (Rp. in billion) (US$ in million)
Indonesian Rupiah(1)
Indonesian Rupiah(1)
  4,294.1  4,485.1  4,550.0  489.8   4,550.0  4,009.0  8,260,0  917.3 
U.S. Dollar(2),(3)
  8,766.4  8,562.2  9,904.2  1,066.1 
US Dollar(2),(3)
  9,904.2  7,993.9  6,002.8  666.6 
Japanese Yen(4)
Japanese Yen(4)
  1,358.9  1,377.7  1,512.4  162.8   1,512.4  1,302.6  1,088.6  121.0 
EURO(5)
  215.7  890.7  649.7  69.9 
Euro(5)
  649.7  427.7  261.0  29.0 
                  
Total  16,616.3  13,733.2  15,612.4  1,733.9 
Total  14,635.1  15,315.7  16,616.3  1,788.6          
         
 
(1) Amounts at December 31,For 2004, include debt issuance costs for medium term notes of Rp.2.3 billion. In addition for 2002, 20032005 and 2004,2006, the amounts also includeincluded bond issuance costs for TELKOM bonds of Rp.24.0Rp.13.4 billion, Rp.18.7Rp.8.15 billion and Rp.13.4Rp.2.9 billion. In addition, the amount at December 31, 2006 included the present value of the future fixed monthly payments to be made for the deferred consideration for business combinations relating to the acquisition of KSO VII (the interest to be accreted over time amounting to Rp.536.8 billion (US$59.6 million)).
(2) AmountsThe amounts at December 31, 2002, 20032004, 2005 and 20042006 translated into Rupiah at Rp.8,960, Rp.8,450Rp.9,300, Rp.9,835, and Rp.9,300Rp.9,005 = US$1, respectively, being the Reuters sell rates for U.S.US Dollars at each of those dates.
(3) Amounts at December 31, 2002 includes imputed interest on liabilities of business 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 liabilities of business 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. AmountsThe amounts at December 31, 2004 includes imputedincluded the present values of the future payments to be made for the deferred consideration for business combinations relating to: a. the acquisition of AriaWest (the interest on liabilitiesto be accreted over time amounting to US$9.7 million (Rp.90.2 billion)); b. the purchase 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),shares (the interest to be accreted over time amounting to US$1.3 million (Rp.11.9 billion)); and c. the acquisition of KSO IV (the interest to be accreted over time amounting to US$101.0 million (Rp.938.7 billion), respectively, being imputed interest for installment payments of the liability.).
The amounts at December 31, 2005 included the present values of the future payments to be made for the deferred consideration for business combinations relating to: a. the acquisition of AriaWest (the interest to be accreted over time amounting to US$5.8 million (Rp.57.3 billion);) b. the purchase of the remaining 9.68% interest in Dayamitra shares (the interest to be accreted over time amounting to US$0.3 million (Rp.2.5 billion)); and c. the acquisition of KSO IV (the interest to be accreted over time amounting to US$72.9 million (Rp.717.1 billion)).
The amounts at December 31, 2006 included the present values of the future payments to be made for the deferred consideration for business combinations relating to the acquisitions of AriaWest and KSO IV (the interests to be accreted over time amounting to US$2.9 million (Rp.26.1 billion) and US$48.6 million (Rp.437.7 billion), respectively).

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(4) AmountsThe amounts at December 31, 2002, 20032004, 2005 and 20042006, translated into Rupiah at Rp.75.5, Rp.79.05Rp.90.6, Rp.83.9, and Rp.90.6Rp.75.7 = Yen 1, respectively, being the prevailing exchange rates for buying Yen at each of those dates.
(5) AmountsThe amounts at December 31, 2002, 20032004, 2005 and 20042006, translated into Rupiah at Rp.9,377.5, Rp.10,663.9Rp.12,666.9, Rp.11,651.5 and Rp.12,666.9Rp.11,853.3 = EUROEuro 1, respectively, being the prevailing exchange rate for buying EurosEuro at each of those dates.

     Of the total indebtedness at December 31, 2004, Rp.3,402.42006, Rp.5,363.4 billion, Rp.2,213.0Rp.3,011.4 billion and Rp.11,000.9Rp.7,237.6 billion waswere scheduled for repayments in 2005, 2006, 2007-2024,2007, 2008, and 2009-2024, respectively. Of these amounts, Telkomsel was scheduled to repay Rp.329.5 billion in 2005, Rp.329.5 billion in 2006, Rp.992.3Rp.1,666.7 billion in 2007, and Rp.256.1Rp.1,000.0 billion in 2008. Further, Rp.43.92008 and Rp.500.0 billion in 2009. Infomedia was scheduled to repay Rp.12.1 billion, Rp.10.3 billion and Rp.14.3Rp.8.2 billion was to be repaid by Dayamitra in 20052007, 2008 and 2006,2009-2011, respectively.
      TELKOM expects scheduled repayments of indebtedness to be financed primarily from the net cash flows from its operating activities of and re-financingrefinancing by TELKOM (Parent Company), Telkomsel, Dayamitra, and Dayamitra, respectively.Infomedia.
      At December 31, 2004,2006, approximately 51.0%52.2% of TELKOM’s Rupiah-denominated indebtedness and approximately 24.6%20.8% of its U.S.US Dollar-denominated indebtedness bore interest at floating rates. TELKOM’s Rupiah-denominated floating rate indebtedness bore interest rates between 8.3%11.2% and 11.1%13.7%, 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%1.5%. The weighted average interest rate on Rupiah-denominated floating rate indebtedness at December 31, 20042006 was 8.5%12.3%. TELKOM’s U.S.US Dollar-denominated floating rate indebtedness was subject to interest rates between 3.0%4.00% and 6.0%6.48%, with rates generally based on floating interest raterates offered by the lenders or LIBOR plus a margin of between 0.5% and 0.8%0.75%. The weighted average interest rate on U.S. Dollar denominatedUS Dollar-denominated floating rate indebtedness at December 31, 20042006 was 5.3%6.5%. TELKOM’s Rupiah-denominated fixed rate indebtedness at that date bore a weighted average interest rate of 12.5%16.6%, while its U.S. Dollar denominatedUS Dollar-denominated fixed rate indebtedness bore a weighted average interest rate of 6.4%6.56%. All of TELKOM’s Japanese Yen denominatedYen-denominated indebtedness was fixed rate and bore a weighted average interest rate at December 31, 20042006 of 3.1%.
      At December 31, 2004,2006, TELKOM had the following outstanding significant indebtedness:
 • Rp.6,018.7Rp.4,476.6 billion (US$647.9497.1 million) (including current maturities) in two-step loans through the Government;
 
 • Rp.736.2Rp.997.1 billion (US$79.2 million) (after discount) in guaranteed notes which is owed by Telkomsel;
• Rp.986.6 billion (US$106.2110.7 million) (after bond issuance costs) in IDR bonds issued by TELKOM;
 
 • Rp.822.9Rp.465.1 billion (US$88.651.6 million) (including current maturities) in acquisitionthe indebtedness relating to TELKOM’s acquisition of 100% equity interest in AriaWest (after discount);
 
 • Rp.127.9Rp.2,436.4 billion (US$13.8 million) from exercising the call option agreement with TM Communication (HK) Ltd. to purchase 9.68% of Dayamitra shares (after discount);
• Rp.3,366.4 billion (US$362.4270.6 million) representing the present value of the fixed monthly payments to be paid to MGTI in respect of the acquisition of KSO IV;
• Rp.1,689.6 billion (US$187.6 million) representing the present value of the fixed monthly payments to be paid to PT Bukaka Singtel International (BSI) in respect of the acquisition of KSO VII;
• Rp.464.8 billion (US$51.6 million) in medium-term notes (net of debt issuance costs) issued by TELKOM;
• Rp.952.8 billion (US$105.8 million) in project financing from the Export and Import Bank of Korea in connection with the CDMA Project;
• Rp.488.0 billion (Euro 22.0 million and US$25.2 million) (including current maturities) of Telkomsel’s loan from Citibank International plc through its Hermes Export facility (Rp.261.0 billion) and EKN-Backed facility (Rp.227.0 billion); and
 
 • Rp.1,077.7Rp.3,166.7 billion (US$116.0351.9 million) Telkomsel’s short-term and medium-term notes (net of debt issuance costsloans received from Mandiri, BCA, Citibank NA and TELKOM’s MTN owned by Telkomsel) issued by TELKOM.BNI.
      In addition, TELKOM, on its own and through its subsidiaries, entered into several new bank facilities in 2003 and 2004 and owes amounts under these bank facilities. These amounts were approximately Rp.3,480.0 billion (US$374.6 million) in aggregate as of December 31, 2004. These included:
• Rp.1,171.2 billion (US$126.1 million) (including current maturities) of Telkomsel’s loan from Citibank N.A. through its Hermes Export facility (Rp.649.8 billion) and EKN-Backed facility (Rp.521.4 billion);
• Rp.590.6 billion (US$63.6 million) (including current maturities) from loan facilities relating to TELKOM’s Sumatera backbone network and Regional Division V junction project;
• Rp.108.5 billion (US$11.7 million) (including current maturities and short-term loans) from other loan facilities for other subsidiaries, namely Infomedia, Napsindo and 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.

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Two-Step Loans
      Since 1982, TELKOM has entered into a series of two-step loans, in which were obtained by the Government borrows money from supranational lendersoverseas banks and foreign export credit agencies, such as the World Bank and the U.S. Export-Import Bank, for on-lendingcompanies, which are then re-loaned to TELKOM to fund investment in property, plantthe development of telecommunications infrastructure and supporting 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.

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      At December 31, 2004,2006, TELKOM’s outstanding principal indebtedness under the two-step loans totaled Rp.6,018.7Rp.4,476.6 billion (US$647.9497.4 million), of which US$257.8199.5 million (Rp.2,397.4(Rp.1,795.8 billion) was denominated in U.S.US Dollars and Japanese Yen 16.7 billion (Rp.1,512.4¥14,384.7 million (Rp.1,088.6 billion) was denominated in Japanese Yen. As of December 31, 2004,2006, 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 month3-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 loans which are payable in Rupiah and the interest rate offered by offshore lenders plus 0.5% for two-step loans which are payable onin foreign currencies. Repayments of principal are due on the loans at various dates through 2024. For the years 20052007 through 2009,2011, aggregate scheduled repayments of principal range from Rp.444.9Rp.368.6 billion to Rp.655.4Rp.469.7 billion per year and average Rp.526.6Rp.417.1 billion per year.
      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, 2004,2006, the Company was in compliance with the above covenants.
Guaranteed NotesDirect Borrowings
      InBeginning in 2002, TELKOM began funding a significant portion of its capital expenditures through vendor-procured and other direct borrowings from banks and other lenders, including the capital markets.
      On April 10, 2002, Telekomunikasi Selular Finance LimitedTELKOM borrowed US$51.4 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 Sumatra. Citibank loans, which were supported by an export credit guarantee of Hermes Kreditversicherungs AG and Servizi Assicurativi del Commercio Estero (“TSFL”)SACE” Italy), Telkomsel’s wholly-owned subsidiary, issuedbear interest rate at a rate equal to 6-month LIBOR plus 0.75% and fixed interest rate of 4.14%, respectively. Bank Central Asia loan bears interest at 4.35% plus the 3-month time deposit rate. As of December 31, 2006, the outstanding amounts under these facilities were US$15014.0 million and Rp.28.7 billion.
      On June 21, 2002, as amended on April 4, 2003, TELKOM entered into a loan agreement with several Indonesian banks in Guaranteed Notes (the “Notes”)which Bank Bukopin acted as facility agent for Rp.150 billion to fund the development of the regional junction Regional Division V project. The lenders charged interest at the rate of 19.5% for the first year and at the average three-month deposit rate plus 4% for the remaining years. A substantial portion of these loans was supported by export credit agency guarantees procured by the equipment vendors for the project. As of December 31, 2006, the outstanding amounts under these facilities was Rp.32.6 billion with the interest rate charged on the loan at 12.7%.
      On August 27, 2003 TELKOM entered into a Loan Agreement with The Export-Import Bank of Korea for approximately US$124.0 million, with a portion of the loan amount to be used by TELKOM to finance the CDMA procurement from the Samsung Consortium. The loan bears interest, commitment, and other fees totaling 5.68%. The Notes bear interest at 9.75%,loan is unsecured and payable semi-annuallyin 10 semi-annual installments on AprilJune 30 and October December

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30 of each year beginning in December 2006. As of December 31, 2006, the outstanding amounts under this facility was US$105.8 million.
      On December 3, 2004, Telkomsel entered into a short-term loan agreement with Bank Central Asia for a total facility of Rp.170 billion. The loan bears interest at the 3-month Bank Indonesia Certificate plus 1% (13.09% as of December 31, 2005), payable in arrears. The principal outstanding as of December 31, 2005 was Rp.170.0 billion. The loan was fully repaid on February 1, 2006.
      On August 15, 2006, Telkomsel signed a loan agreement with Bank Central Asia for a Rp.350.0 billion short-term facility. The loan amount under the short-term facility would be repaid in three quarterly installments commencing after three months from the availability period (i.e., the earlier of November 15, 2006 and the date when the facility had been fully drawn down). The loan bears a floating interest rate of three-month Certificate of Bank Indonesia plus 1.5% (i.e., 11.00% as of December 31, 2006) and is unsecured. The principal outstanding as of December 31, 2006 amounted to Rp.233.3 billion.
      On August 15, 2006, Telkomsel signed a loan agreement with Bank Mandiri for a Rp.350,000 million short-term facility. The short-term facility is to be repaid in three quarterly installment commencing after three months from the availability period (i.e the earlier of November 15, 2006 or the date when the facility had been fully drawn down). The loan bears a floating interest rate of three-month Certificate of Bank Indonesia plus 1.5% (i.e., 11.00% as of December 31, 2006) and is unsecured. The principal outstanding as of December 31, 2006 amounted to Rp.233,333 million.
      On August 15, 2006, Telkomsel signed a loan agreement with BNI for a Rp.300.0 billion short-term facility. The short-term facility is to be repaid in three quarterly installments commencing after three months from the availability period (i.e., the earlier of November 15, 2006 and the date when the facility had been fully drawn down). The loan bears a floating interest rate of three-month Certificate of Bank Indonesia plus 1.5%. (i.e., 11.00% as of December 31, 2006) and is unsecured. The principal outstanding as of December 31, 2006 amounted to Rp.200.0 billion. For further details regarding TELKOM’s Short-Term Bank Loans, see Note 20 to the consolidated financial statements.
      On June 15, 2007, Telkomsel entered into loan agreements with Bank Central Asia Tbk, Bank Negara Indonesia Tbk and Bank Mandiri Tbk with total facilities of Rp.2,400 billion which consists of short-term loans and medium term loans. Subsequently, on the same date, Telkomsel entered into a loan agreement with Bank Rakyat Indonesia Tbk for a medium term loan facility of Rp.400 billion. The short term loans are repayable in 3 (three) equal quarterly installments beginning 3 (three) months after the end of availability period (the earlier of 3 (three) months after the date of agreements and the date on which the facilities have been fully drawn). The medium-term loans are repayable in 5 (five) equal semi-annual installments; the first installment shall be due 6 (six) months after the end of the availability period (the earlier of 12 (twelve) months after the date of the agreements and the date on which the facilities have been fully drawn). The loans bear interest at rate equal to the average rate for three-month Jakarta Inter Bank Offered Rate plus 1.25% which becomes due quarterly in arrears.
      On April 25, 2005, Balebat entered into a loan agreement with Bank Niaga for a 12% per annum fixed rate revolving credit facility of Rp.800 million and an investment credit facility of Rp.1,600 million (Note 24g). These credit facilities are secured by Balebat’s property located in West Java up to a maximum of Rp.3,350 million. The applicable fixed interest rate and maturity date of the revolving credit facility was amended on July 26, 2005 to 12.5% per annum and May 30, 2006, respectively and subsequently on June 13, 2006 to 16.5% per annum and May 30, 2007, respectively. Based on the amendment on June 13, 2006, the revolving credit facility amounted to Rp.800 million was combined with the short-term fixed credit facility of Rp.4,000 million as described in Note 24g. Additionally, Balebat obtained credit facility of Rp.500 million at a fixed interest rate of 16.75% per annum maturing on May 30, 2007. As of December 31, 2005 and 2006, the principal outstanding balance amounted to Rp.800 million and Rp.1,323 million, respectively.
      On October 18, 2005, GSD entered into a loan agreement with Bank Niaga for a short-term facility of Rp.3,000 million for a one-year term. The loan facility was secured by certain of GSD’s property, carried interest at 14.5% per annum and would expire on October 18, 2006. On June 7, 2006, the loan agreement was

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amended to increase the maximum facility amount and interest rate to Rp.8,000 million and 16.25% per annum, respectively. On November 3, 2006, the loan agreement was amended (2nd amendment agreement) to change the interest rate to 15.5% for the period October 18, 2006 to October 18, 2007. As of December 31, 2005 and 2006, the principal outstanding amounted to Rp.3,000 million and Rp.8,000 million, respectively.
      In October 2005, GSD also entered into a loan agreement with the Bank Niaga to obtain a Rp.12,000 million short-term facility, which would expire on October 18, 2006. The borrowing under this facility carried interest at 14.5% per annum. On June 7, 2006, the credit agreement was amended to reduce the maximum facility to Rp.7,000 million and to change the interest rate to 16.25% per annum. On November 3, 2006, the loan agreement was amended (2nd amendment agreement) to change the interest rate to 15.5% for the period October 18, 2006 to October 18, 2007. The principal outstanding as of December 31, 2005 and 2006 was Rp.nil and Rp.4,000 million, respectively.
      The credit facilities of Rp.8,000 million and Rp.7,000 million are secured by GSD’s property located in Jakarta.
      On February 15, 2006, GSD entered into a loan agreement with Bank Bumiputera Indonesia amounted to Rp.8,000 million with interest at 17% per annum, unsecured and repayable by monthly installments. The loan is payable within 12 months from the signing date and will mature on April 30,February 15, 2007.
      On April 23, 2002, TSFL entered into subscription agreements with UBS AG (“UBS”) whereby UBS agreed to subscribe As of December 31, 2006, the loan was fully drawn-down 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 UBSoutstanding amounted 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$100Rp.8,000 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 of the Notes from Deutsche Bank. In 2004, Telkomsel purchased US$53.4 million 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. 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, 2002.2002 and secured with all assets owned by TELKOM. The bonds are traded on the Surabaya Stock Exchange and will mature on July 15,16, 2007. Net proceeds after bond issuance costs of Rp.19.2 billion from the bond issued amounted to Rp.980.8 billion.
      As of December 31, 2004, all of the bond proceeds have been used, primarily for the CDMA project with the remainder for the access network.
      The Company must maintain the following consolidated financial ratios:
 • Debt service coverage ratio mustto exceed 1.5:1;
 
 • Debt to equity ratio must notto 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 mustto not exceed 3:1.
      AsTELKOM also covenanted in the bonds indenture that during the periods the bonds are outstanding, TELKOM would not make any loans to or for the benefit of December 31, 2004,any person which in the Company wasaggregate exceed Rp.500 billion. In 2005 and 2006, TELKOM breached this covenant with regard to providing loans to certain subsidiary which in compliance with these covenants.aggregate exceed Rp.500,000 million. However, TELKOM had obtained a written waiver from PT Bank Rakyat Indonesia Tbk, the trustee of the bonds. See “— Defaults and Waivers of Defaults under TELKOM Debt Facilities” above.
Medium-Term Notes
      On December 15,13, 2004, TELKOM issued unsecured medium-term notes (“MTN”) in the principal amount of Rp.1.125 trillionRp.1,125 billion 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 amounthave matured and have been repaid as of Rp.225 billion, matures on December 15, 2005 and bears interest at the rate of 7.95% per annum,31, 2005. Series C is in the principal amount of Rp.145 billion maturesmatured on June 15, 2006 and bearsbore interest at the rate of 8.2% per annum, and Series D is in the principal amount of Rp.465 billion, maturesmatured on June 15, 2007 and bearsbore interest at the rate of 9.4% per annum. InterestInterests on the outstanding MTN is payable on June 15, 2005, December 15, 2005, June 15, 2006,

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December 15, 2006 and June 15, 2007.2007, have been paid on their due dates as of the date of this Annual Report. The MTN were offered at their principal amounts. TELKOM is expected to redeem the Series D MTN at the maturity date.
      Under the termterms 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, orfor the purpose of tendering or acquiring assets through export credit etc;credit; (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 isare 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 thanto exceed 1.5 to 1; (ii) debt to equity ratio of not more thanto exceed 2 to 1; and (iii) debt to EBITDA ratio of not more thanto exceed 3 to 1. As of the date of this Annual Report, 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) Ltd. (“TM Communications”) for the right to purchase the remaining 9.68% equity interest in Dayamitra held by TM Communications. As of December 31, 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 to complete its 100% acquisition of Dayamitra. Payment for the shares in the amount of US$16.2 million will be paidwas made on March 26, 2006 through an escrow account in Citibank Singapore. TELKOM will makehas been making monthly

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payments of US$787,390 to the escrow account starting from December 26, 2004, untilwhich was ended on 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 US$191.2 million (before unamortized discount) to the former shareholders of Pramindo, representing the unpaid portion of the purchase price for France Cable et Radio, Astratel, Indosat, Marubeni, IFC USA and NMP Singapore.
      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 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 was repaid in 10 monthly payments starting March 31, 2004 through December 31, 2004, with interest payable at one month LIBOR plus 2.75%. 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 beis being repaid in ten semi-annual installments from July 31, 2004 through January 31, 2009. As of December 31, 2004,2006, the amount payable to AriaWest’s former shareholders, before unamortized discount, totaled US$98.254.5 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%. As of December 31, 2004, TELKOM has repaid the entire 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. UnderFor details, see Item 4. “Information on 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

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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.Company — B. Business Overview — General — Joint Operation Scheme.”
      At December 31, 2004,2006, the remaining monthly payments to be made by TELKOM to MGTI, before unamortized discount, amounted to US$462.9319.2 million (Rp.4,305.1(Rp.2,874.1 billion).
KSO VII
      On October 19, 2006, TELKOM and PT Bukaka Singtel International (BSI) entered into an agreement to amend and restate the KSO Agreement with respect to Regional Division VII. For details, see Item 4. “Information on the Company — B. Business Overview — General — Joint Operation Scheme.”
      TELKOM must pay to PT Bukaka Singtel International (BSI) a fixed monthly payment of Rp.55.64 billion from October 2006 to June 2007, and Rp.44.25 billion from July 2007 to December 2010.

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Sumatera backbone networkSumatra High Performance Backbone Network
      On April 10, 2002, TELKOM entered into four term loan facilities to finance the construction of the SumateraSumatra high performance backbone network. These four facilities arewere entered into with (i) Bank Central Asia, for Rp.173 billion; (ii) Citibank N.A., for US$6,950,000;6.95 million; (iii) Citibank International plc as agent for certain lenders tounder a syndicated loan, for US$23,400,00023.40 million (supported by an export credit guarantee of Hermes Kreditversicherungs AG); and (iv) Citibank International plc as agent for certain lenders tounder a syndicated loan, for US$21,000,00021.00 million (supported by an export credit guarantee of Istituto per I Servizi Assicurativi del Commercio Estero). As of December 31, 2004,2006, all of these facilities have been fully or partially utilized, with the US$6,950,0006.95 million loan to Citibank N.A.N.A being fully repaid in May 2003.
      Under the
Bank Central Asia
      The loan facility withfrom Bank Central Asia TELKOM is required atprovides a total facility of Rp.173 billion to finance the end of each calendar quarter during the lifeRupiah portion of the facilityhigh performance backbone network in Sumatra pursuant 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;the “Partnership Agreement” dated November 30, 2001 with PT Pirelli Cables Indonesia 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.PT Siemens Indonesia.
      UnderThe amounts drawn from the otherfacility bear interest at 4.35% plus the three-month time deposit rate (i.e., 13.27% and 13.18% as of December 31, 2005 and 2006, respectively). The loans would be repaid in twelve unequal quarterly installments beginning in July 2004. The loan was originally scheduled to mature in October 2006 but was amended in 2004 to mature in April 2007 instead.
      Total principal outstanding facilities, duringas of December 31, 2005 and 2006 was Rp.86,093 million and Rp.28,698 million, respectively. The loan facility from Bank Central Asia is not collateralized.
      During the period when the subjectloan is outstanding, the Company is required to comply with all covenants or restrictions including maintaining financial ratios as follows:
      • EBITDA to interest ratio to exceed 4:1
      • EBITDA to interest and principal ratio to exceed 1.5:1
      • Debt to EBITDA ratio not to exceed 3:1
      In 2005 and 2006, the Company breached a covenant in the loan agreement which stipulates that the Company will not make any loans to or for the benefit of any person which in aggregate exceed Rp.500,000 million. The Company has obtained a written waiver from Bank Central Asia with regard to providing loans to certain subsidiaries which in aggregate exceed Rp.500,000 million.
Citibank N.A. and Citibank International
      The loan facility with Citibank N.A. as arranger and Citibank International plc as agent which was supported by an export credit guarantor of Hermes Kreditversicherungs AG as lender, provides a total facility of US$23.4 million 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. The credit facility is unsecured. The lender required a fee of 8.4% of the total facility. This fee was paid in two installments during the agreement period, 15% of the fee was required to be paid in cash and 85% was included in the loan balance.
      As of December 31, 2005 and 2006, the outstanding loan was US$12.6 million (equivalent to Rp.123,665 million) and US$8.4 million (equivalent to Rp.75,486 million), respectively. The loan is payable in ten semi-annual installments beginning in April 2004. The amounts drawn from the facility bear interest at a rate equal to the six-month LIBOR plus 0.75% (i.e., 5.04% and 6.11% as of December 31, 2005 and 2006, respectively).
      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 Servizi Assicurativi del Commercio Estero (“SACE Italy”)providing a total maximum facility of US$21.0 million.

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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 of Sub System VI,as part of HP Backbone network.
      The amounts drawn from the facility bear a 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, 2005 and 2006 was US$9.3 million (equivalent to Rp.91,257 million) and US$5.6 million (equivalent to Rp.50,133 million), respectively. The credit facility is unsecured.
      During the period when the loans are outstanding, TELKOMthe Company is required to maintaincomply with all covenants or restrictions including maintaining financial ratios as follows:
• Debt service coverage ratio to exceed 1.5:1
• Debt to equity ratio not to exceed:
a. 3:1 for the period April 10, 2002 to January 1, 2003
b. 2.75:1 for the period January 2, 2003 to January 1, 2004
c. 2.5:1 for the period January 2, 2004 to January 1, 2005
d. 2:1 for the period January 2, 2005 to the full repayment date of the loans
• Debt to EBITDA ratio not to exceed:
a. 3.5:1 for the period April 10, 2002 to January 1, 2004
b. 3:1 for the period January 2, 2004 to the full repayment date of the loans
      In 2005, the following financial ratio:
      (i) debt service coverage ratio ofCompany breached a covenant in the loan agreements which stipulates that the Company will not less than 1.5make any loans or grant any credit to 1; (ii) debt to equity ratio of not more than: (a) 3 to 1or for the periodbenefit of April 10, 2002any person which in aggregate exceed 3% of shareholders’ equity. On May 12, 2006, the Company obtained a written waiver from Citibank International plc with regard to January 1, 2003, (b) 2.75providing loans to 1 forcertain subsidiaries which in aggregate exceed 3% of stockholders’ equity. In 2006, the period of January 2, 2003 to January 1, 2004, (c) 2.5 to 1 forCompany has complied with 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.above covenant.
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.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 provideprovided for repayments to be made in 14 quarterly installments starting on May 21, 2004. As of December 31, 2004,2005, TELKOM had drawn down a total of Rp. 148.9Rp.148.9 billion of this loan. As of December 31, 2004,2006, the outstanding amount of the loan was Rp.117.2Rp.32.6 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 thanto exceed 3 to 1; and (ii) EBITDA to interest expense ratio of not less thanto exceed 5 to 1. As of the date of this Annual Report, TELKOM iswas 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 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 and 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. Subsequently, on July 31, 2004, the maturity date was extended to July 31, 2005, with changes to the cost of funds from 2.5% to 2.0% above the bank’s cost of funds. Total loans drawn from the facility amounted to US$31.0 million in 2003 and nil in 2004. As of December 31, 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 guarantee (US$25 million) and other foreign exchange facilities. Outstanding amounts (once the 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, 2004, loans under this facility have been fully repaid.
Hermes Export Facility
      On December 2, 2002, pursuant to the Partnership Agreementpartnership agreement with Siemens Aktiengesellschaft (AG), Telkomsel entered into a Hermes Export Facility Agreement with Citibank International plc (as Arranger“Original Lender” and Agent) providing“Agent”) covering a total facility of EUREuro 76.2 million divided into several tranches. The agreement was subsequently amended with the latest amendment on October 15, 2003, to changeamending the facility amount to EUREuro 73.4 million the availability period and the first repayment date.payment dates. The interest rate per annum on thisthe facility is determined based on the aggregateEURIBOR plus 0.75% per annum (i.e., 2.96% as of applicable margin (0.75%) EURIBORDecember 31, 2004, 3.33% as of December 2005 and mandatory cost, if any.4.48% as of

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December 2006). Interest is paidpayable semi-annually, starting on the utilization date amounts are drawn. Totalof the Facility (May 29, 2003). As of December 31, 2006, total loans drawn from the facility amounted to EUR 72.2Euro 73.4 million (Rp.712.4 billion) in 2003 and EUR 1.1 million (Rp.12.2 billion) in 2004. As of December 31, 2004, the outstanding balance was EUR 51.4Euro 22.0 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 amounting to EUR 6,089,149, 15% of which was paid in cash. 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 Original Lender“Original Lender” and Agent)“Agent”) and Citibank N.A., Jakarta branch (“Arranger”), 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 amount to US$68.9 million. The interest rate on the facility is based on the aggregateCIRR (Commercial Interest Reference Rate) of the applicable margin, commercial interest reference rate and mandatory cost, if any3.52% plus 0.5% per annum (i.e., 4.27% and 4.02% as of December 31, 20032005 and 2004, respectively).2006) and unsecured. Interest is paid semi-annually, starting on the utilization date (July 31, 2003). In addition to the interest, in 2004, Telkomsel was also charged an insurance premium for the insurance guarantee given by EKN in favor of Telkomsel for the loan utilization amounting to US$1.5 million, 15% of which was paid in cash. The remaining balance was settled through utilization of the Facility. No amounts are drawn.were drawn down from the facility in 2005 and 2006. As of December 31, 2004, Telkomsel had drawn down US$69.0 million from this facility2005 and 2006, the outstanding balance was US$56.1 million.40.6 million (equivalent to Rp.399,579 million) and US$25.2 million (equivalent to Rp.226,993 million), respectively.
Short-term and Medium-term Loans
      Pursuant to the purchase of the Notes from BCA, on December 3, 2004, Telkomsel entered into a Loan Agreement with Deutsche Bank AG, Jakarta (as “Arranger” and “Agent”) and BCA (as “Lender”) covering a total facility of Rp.170,000,000,000 (“Facility”). The facility bore interest at three-month Bank Indonesia certificate plus 1%, paid quarterly in arrears. The repayment of the amounts drawn was made on February 1, 2006.
      In March 2006, Telkomsel entered into medium-term loan agreements with Bank Central Asia, Citibank N.A. and Bank Mandiri for loan facilities of Rp.400 billion, Rp.500 billion and Rp.600 billion, respectively. Under the agreements, the availability period of the facilities commences on the date of the agreements and ends on the earlier of (a) the date falling twelve months after the date of the agreements and (b) the date on which the facilities are fully drawn, cancelled or terminated. The repayment of loans shall be made by five equal semi-annual installment, of which the first repayment shall be due six months after the end of the availability period. Borrowings under the facilities bear interest at a rate equal to the three-month certificate of Bank Indonesia plus 1.75% per annum, which becomes due quarterly in arrears.
      Subsequently, on August 15, 2006, Telkomsel entered into loan agreements with Bank Mandiri, Bank Central Asia and Bank Negara Indonesia for loan facilities of Rp.700 billion, Rp.700 billion and Rp.600 billion, respectively. The facilities consist of a Short-term Loan (Facility A) and Medium-term Loan (Facility B) of equal proportions.
      Based on the agreements, the availability period of Facility A commences on the date of the agreements and ends on the earlier of (a) the date falling three months after the date of the agreements, (b) the date on which the facility is fully drawn, cancelled or terminated. The repayment of loans shall be made by three equal quarterly installments with the first installment due three months after the end of the availability period.
      The availability period of Facility B commences on the date of the agreements and ends on the earlier of (a) the date falling twelve months after the date of the agreements, (b) the date on which the Facility is fully drawn, cancelled or terminated. The repayment of loans shall be made in five equal semi-annual installments; the first installment shall be due six months after the end of the availability period.
      The loans under Facility A and B bear interest at a rate equal to the three-month certificate of Bank Indonesia plus 1.5% which becomes due quarterly in arrears.
      As of December 31, 2006, the loan facilities were fully drawn.

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      The outstanding balance of the borrowings under the facilities as of December 31, 2006 was scheduled to be repaid as follows:
          
  Amount (Rp.)
   
Years Ended Short-Term Medium-Term
     
2007  666,666,666,666   1,000,000,000,000 
2008     1,000,000,000,000 
2009     500,000,000,000 
         
 
Total
  666,666,666,666   2,500,000,000,000 
Dayamitra’s Indebtedness
      As of December 31, 2004,2006, Dayamitra had fully repaid its indebtedness loan facilities from Bank Mandiri pursuant to the following significant indebtedness outstanding:terms of loan agreements entered into on December 20, 2003. The loans were payable on a quarterly basis with interest at 14% per annum.
• Rp.58.3 billion (US$6.3 million), representing loan facilities from Bank Mandiri pursuant to the terms of loan agreements entered into on November 20, 2003 and December 20, 2003. The loans are payable on a quarterly basis until the fourth quarter of 2006 and bear interest at 11.25% per annum.
Capital Expenditures
      At December 31, 2004,2006, TELKOM (unconsolidated)(Parent Company) incurred capital expenditures of Rp.3,715.6Rp.2,203.6 billion (US$400.0244.8 million), which was slightlyRp.4,609.8 billion less than the Rp.5,019.8 billionamount originally budgeted for in its capital expenditure plan.
      TELKOM groups its capital expenditures into the following categories for planning purposes:purposes of:
 • Infrastructure, which consists of the transmission and switching network access networkand backbone (including fixed wireless networks), data backbone and fixed line network backbone infrastructure;infrastructure), access network (including fixed wireless networks) and BTS of Fixed Wireless;
 
 • Phone, which is essentially fixed wireline and fixed wireless;
• Mobile, which consists of GSM mobile wireless telephone servicesSoft Switch # 4 and is presently conducted through Telkomsel;5, Local Central (V52 and QE Central), Trunk Expand, Signaling CCS#7 for Fixed Wireline and NSS or MSC for Fixed Wireless.
 
 • Multimedia, which consists of Internet access, VoIPdata communication services, content and datacommunity development and e-business services; and
 
 • Service-Net,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.4,982.7Rp.16,496 billion (US$536.41,832.9 million) for network infrastructure and other investments and TELKOM’s other subsidiaries incurred capital expenditures of Rp.122.1Rp.196.5 billion (US$13.221.8 million).

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      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,
   
  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, Years Ended December 31,
    
 2002(1) 2003(1) 2004(1) 2005(2) 2006(3) 2004(1) 2005(1) 2006(1) 2007(2) 2008(3)
                    
 Rp. (billion)
TELKOM (Parent Company):
                
Infrastructure:                
Transmission Network and Backbone  560.4  277.7  714.8  1,285.5  330.1 
Access Network  1,831.2  1,577.0  668.6  4,244.4  1,089.9 
           
Subtotal Infrastructure  2,391.6  1,854.7  1,383.4  5,529.9  1,420.0 
Commercial Services:                
Phone  901.5  524.5  220.8  1,137.7  292.1 
Multimedia  92.7  334.2  155.9  767.7  197.1 
Services-Net  34.2  94.9  8.9  41.7  10.7 
           
Subtotal Commercial Services  1,028.4  953.6  385.6  1,947.1  499.9 
Supporting Services  295.6  559.5  434.6  1,014.3  260.5 
           
Subtotal for TELKOM (Parent Company)  3,715.6  3,367.8  2,203.6  8,491.3  2,180.4 
 Rp. (billion)           
TELKOM’s Subsidiaries:
                                
Telkomsel
  4,531.0  5,348.8  4,982.7  7,153.0  5,323.9   4,982.7  10,085.7  16,496.0  18,517.0  18,146.7 
Dayamitra
  40.6  109.5  50.4  108.9  95.8   50.4         
Infomedia Nusantara
  25.9  44.6  63.0  63.5  11.6   63.0  37.9  89.1  127.6  97.7 
Pramindo Ikat Nusantara
  109.4  37.4  1.7  38.5  23.1   1.7  29.4  12.0  38.1  45.4 
Indonusa Telemedia
  2.6  0.8  1.4    4.1   1.4  8.9    82.4  21.8 
Graha Sarana Duta
  0.8  17.0  3.7  21.3  28.7   3.7  2.4  2.1  27.3  8.2 
PT Pro Infokom Indonesia
    0.6  0.6    10.8   0.6         
PT Metra (Holding)
    6.1  0.9  12.6   
PT Metra
  0.9  19.3  45.4  15.2  60.0 
AriaWest
    0.2  0.1  0.1     0.1  1.1  47.9  4.0   
Napsindo
    53.8  0.3  1.3     0.3  0.5       
                      
Subtotal for subsidiaries  4,710.3  5,618.8  5,104.8  7,399.2  5,498.0   5,104.8  10,185.2  16,692.5  18,811.6  18,379.8 
                      
Total for TELKOM (consolidated)  6,788.6  9,552.6  8,820.4  12,971.6  13,064.0   8,820.4  13,553.0  18,896.1  27,302.9  20,560.2 
                      
 
(1) Amounts for 2002, 20032004, 2005 and 20042006 are actual capital expenditures.
(2) Amounts for 20052007 are planned capital expenditures included in TELKOM’s budget and are subject to upward or downward adjustment.
(3) Amounts for 20062008 are projected capital expenditures for 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 Rupiah/ US Dollar and Rupiah/ Euro exchange rates and other applicable foreign exchange rates, 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 financing, including “pay as you grow”.grow.” See Item 3.D. “Risk3. “Key Information — D. Risk Factors — Capital Expenditures — Financing”TELKOM’s ability to develop adequate financing arrangements is critical to support its capital expenditures” and Item 4.B. “Business4. “Information on the Company — B. Business Overview — Business Strategy — Reducing Cost of Capital.”

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Planned Investments in 20052007
      In 2005,2007, 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 20052007 total Rp.2,999.8 billion, allocated as follows:Rp.5,529.9 billion. This will be used for capital investments in transmission infrastructure, which are expected to include investments in a fiber optic transmission network, expansion of the backbone transmission network on Jawa, Sumatra and Kalimantan (JASUKA), a submarine cable system between Kalimantan and Sulawesi and a submarine cable system between Denpasar and Mataram. Substantial investment will also be made in replacing and expanding access infrastructure, which includes fiber optic cable fixed line, copper wire fixed line and CDMA wireless access networks.
• Rp.752.1 billion for capital investments in transmission infrastructure, which are expected to include investments in a fiber optic transmission network, a backbone transmission network on the island of Kalimantan and Sulawesi and an additional ground satellite segment in Jakarta and a submarine cable system between Batam-Jakarta; and
• Rp.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.4. “Information on the Company — B. Business Overview — Network Infrastructure.

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Planned Investments in Commercial Services
      In 2005, TELKOM also plans to spend Rp.1,650.6Rp.1,947.2 billion in 2007 for capital investments in commercial services, allocated as follows:including:
 • Rp.683.7 billion for capital investments in fixed 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.802.4 billion for capital investments inenhancing TELKOM’s multimedia network (including core network of IR Transport and IP transport, HFC and CATV services)Metro Junction), which includeincludes increases in the numberbandwidth capacity of VoIP access points, Internet multiplexinginternational internet gateway, internet multiflexing (IMUX) systemssystem for Internetinternet and data access, Internetinternet value added service in commercial services such as B2B e-commerce access, broadband access (xDsl)(Speedy), NGN platform services and improving TELKOM’s HFCbroadband contents and CATV systems;applications; and
 
 • Rp.164.5 billion for capital investmentsinvesting in service-net, including the establishment of fixed wireless services, e-commerce, internet connectivity and value added services.
Planned Investments in Supporting Services
      TELKOM plans to spend Rp.922.0Rp.1,014.3 billion in 20052007 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:including:
 • investments in BTS stations to expand network coverage and TRX and microcellsinformation systems to improve quality;and increase the capability of the IT support system, billing systems, operating support system (“OSS”), customer care and billing system (“CCBS”);
 
 • switching equipment;
• IN equipment used for prepaid products;buildings (for operations and equipment) and power supply; and
 
 • fiber optic transmission for large cities in Java.other supporting facilities such as network measurement tools, research and development, training equipment, and office facilities.
Other Financing Techniques
      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 maturity 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 trillionRp.1,125 billion in four series with interest rates

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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-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-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-sharing period. The investors legally retain rights to the equipment during the revenue-sharing period but transfer ownership to TELKOM at the end of such period. See Item 4.B. “Business4. “Information on the Company — B. Business Overview — General — Revenue Sharing Arrangements (PBHs).”
      TELKOM did not fund any capital investments (other than capital investments in fixed line telephone services and broadband Internet services) through revenue- sharingrevenue-sharing arrangements in 2002, 20032004, 2005 or 20042006 and does not intend to fund any such capital investments (other than capital investments in fixed line telephone services) 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 inSince 2004, TELKOM intendshas been trying to replace existing revenue-sharing arrangements with new partnership schemes on more favorable terms.
Direct Borrowings
      Beginning in 2002, TELKOM began funding a significant portion of its capital expenditures through vendor-procured and other direct borrowings 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, 2004, the outstanding amount under these facilities was US$0.4 million and Rp.8.1 billion.
      On April 10, 2002, TELKOM borrowed US$51.4 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, 2004, the outstanding amount under these facilities were US$29.8 million and Rp.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, 2004, the outstanding amount under this facility was US$59.1 million
      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 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 entered into a US$65.0 million short-term loan facility agreement with ABN AMRO to be used for working capital purposes. The principal amount of US$30 million matured 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 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“pay as You Growyou 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 thisthe “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 paythe “pay as you grow programs andgrow” program to supply a substantial portion of TELKOM’s infrastructure and other equipment needs.
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 and carrying value of property, plant and equipment and intangible assets, valuation allowance for receivables, 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 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 ourits significant accounting policies, the following may involve a

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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 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%.

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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.
      All significant inter-company balances and transactions have been eliminated in consolidation.
      In the case of Pramindo, the Company has evaluated the scope and terms of this investment and has 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 shareholders 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 percent 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 other 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.
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 as accessed and as earned. Revenues from prepaid card customers, which consist of the

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sale of starter packs, which consist of a 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 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.
      Revenue 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.
Allowances for Doubtful Accounts
      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 amount of the allowance is recognized in the consolidated statements of income under operating, general and administrative expenses. 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

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the potential for recovery is considered remote. The Company does not have any off-balance sheet credit exposure related to its customers.
Carrying Amount of Property, Plant and Equipment and 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 and, in the case of rights to operate intangible assets, the remaining term of the KSO agreement. When the carrying 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 useTELKOM uses in projecting ourTELKOM’s future cash flows involve ourTELKOM’s expectations of the future prices at which ourTELKOM’s services will be charged, the number of access lines that weTELKOM 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 ourTELKOM’s services are charged are subject to government regulation. The number of access lines that weTELKOM will have in service will depend upon ourTELKOM’s 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      In 2006, Telkomsel was granted 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 (atright to operate the dates of the relevant transactions) were both controlled by the Government. These transactions have been recorded at historical cost in a manner similar3G license. Telkomsel is required to that in pooling of interests accounting.
      The difference between the consideration paid or receivedpay an up-front fee and the related historical carrying amount, after considering income tax effects, has been charged to equity as “Difference in valueannual rights of restructuring transactions between entities under common control”.
usage (“BHP”) fees for the next ten years. 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 acquiredup-front fee is recorded as goodwillan intangible asset and amortized using the straight-linestraight line method over a period generally not expectedthe term of the right to operate the 3G license (10 years). Amortization commences from the date when the assets attributable to the provision of the related services are available for use. Based on Telkomsel’s management interpretation of the license conditions and the written confirmation from the Directorate General of Post and Telecommunication, it is believed that the license could be more than five years.returned at any time without any financial obligation to pay the remaining outstanding BHP fees. Based on this fact, Telkomsel concluded that it has purchased the right to make annual operating payments to operate the 3G license. Accordingly, Telkomsel recognized the BHP fees as expenses when incurred. Management of Telkomsel assesses its plan to continue using the 3G license on an annual basis.
Pension and Post-retirement Benefits
      We haveTELKOM has a commitment, mainly through TELKOM’sits pension fund, to pay pension and other post-retirement benefits to ourits employees and former employees who reachhave reached 56 years of age. The cost of these benefits and the present value of ourits pension and other post-retirement liabilities depend on a number of factors which we determine

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are determined 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 plansplan’s 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 the long-term historical actual return information and the estimated future long-term investment return information by reference to external sources, taking into account the current and expected asset allocations, 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 wereTELKOM has not been able to identify suitable investments in Indonesia with a corresponding maturity to the expected duration of the benefit obligations so we haveand has therefore used the yield-to-maturity of Indonesian Government Bonds at year end. At December 31, 2004,2006, TELKOM’s discount rate was 11%10.5%. Due to the fact that there are very limited types of high-quality debt instruments in Indonesia coupled with the lack of ability to estimate interest rates, TELKOM believes that the yield-to-maturity of the Indonesian Government Bonds represents the most appropriate discount rate to measure the present value of the benefit obligations at year end. Changes in such rates due to changes in the reference Indonesian Government Bonds brought about by changing economic conditions in Indonesia and throughout the world would affect the recognition of TELKOM’s pension and post-retirement benefit obligations and as a consequence, could materially affect TELKOM’s financial position and results of operations.
      The expected rate of medical cost has been determined by comparing the historical relationship of ourits actual medical cost increases with the rate of general inflation in the Indonesian economy.economy and health care utilization patterns. Past experience has shown that ourits actual medical costs have on average increased by a factor of 1.5 times2% above the general rate of inflation. We have maintained ourThe projected medical cost attrend was 9% and 12% fromas of December 31, 2003 to December 31, 2004 to reflect a steady growth in our medical cost trend experience which is in line with a constant general inflationary trends in Indonesia.2005 and 2006, respectively.
      AssumedThe 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- 1-Percentage- 1-Percentage-
 Point Increase Point Decrease Point Increase Point Decrease
        
Effect on total of service and interest cost components  128,311  (99,603)  174,413  (137,032)
Effect on post-retirement benefit obligation  916,961  (720,657)  1,342,138  (1,058,800)
      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
      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 crystallizebe realized 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

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than as a holding company, is not subject to tax whereas a capital gain on the sale of shares is subject to tax at the normal corporate tax rate. As long as we continueTELKOM continues to hold ourits investments in ourits affiliated companies with a minimum share ownership of 25% and have 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 not subject to tax, we doTELKOM does 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 weit no longer expectexpects to realize ourits interest in the undistributed earnings of

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the particular affiliated company in a manner which enables usTELKOM to take advantage of the zero percent tax rate applicable to dividend distributions. Such a change in the future would require usTELKOM to recognize a deferred tax liability with a commensurate charge to ourTELKOM’s income statement.
      Deferred tax is calculated at the enacted 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
      As of the date of this Annual Report, we areTELKOM is involved in certain legal proceedings and havehas accrued amounts that represent ouran 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. While we believeTELKOM believes that ourthe current accruals are adequate, a future event or change in the facts and circumstances may require usthe Company to make additional accruals that would be charged to ourTELKOM’s income statement in the future. See Note 5352 to the consolidated financial statements and Item 8. “Financial Information — A. Consolidated statements and other financial information — Material Litigation.”
      In addition, we may face SEC enforcement actionC.     Research and other legal liability in connection with our failure to timely file a compliant 2002 Annual Report on Form 20-F 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, 2004Development and may face an SEC enforcement action, or other legal liability or adverse consequences.”Intellectual Property
C.Research and Development and Intellectual Property
      TELKOM makes investments to improve its product and service offerings. Such expenditure amounted to approximately Rp.11.2Rp.27.8 billion in 2002, Rp.2.12004, Rp.8.4 billion in 20032005 and Rp.27.8Rp.8.7 billion (US$3.01.0 million) in 2004.2006. In 2004,2006, these expenditures related to video conferencing, SMS development, CMS system, CDMA lab, measuring system and CDMA lab.other content development.
      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;
 
 • upgradingdevelopment of the network with soft switching technology;broadband access network;
 
 • 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;
 
 • implementation of cost-based interconnection tariff;
• changes in foreign exchange rates and interest rates;
 
 • implementationincrease in the usage of TELKOM’s early retirement program;high speed broadband Internet in Indonesia;
 
 • development of triple play, application and content multimedia services;
• the acquisition of Pramindo;KSO VII;
• competition in the market for TELKOM’s international services;
• expansion of TELKOM’s international services;

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 • acquisition of AriaWest;fixed wireless development and deployment;
 
 • acquisitiondevelopment of KSO IV;
• competition in the market for DLD services;
• commencement of TELKOM’s IDD services;
• fixed wireless development and deployment;flexi business unit;
 
 • implementation of competence-based human resource management; and
 
 • acquisitionimplementation of the remaining 9.68% shares in Dayamitra.integrated customer centric application.
      See Item 5.A. “Operating Results.”“— A. Operating Results” above.
E.     Off-Balance Sheet Arrangements
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.leases. These operating leases relate principally to motor vehicles, computers, circuits, towers, land and computers.buildings. TELKOM does not believebelieves some of these operating leases are material to its business.
      TELKOM has entered into a partnership agreementcertain agreements, including with Motorola, Inc., Ericsson Radio A.B., Siemens Aktiengesellschaft (AG) and Nokia Oyj whereby TELKOM is obligated to purchase certain cellular equipment and services. In addition, TELKOM has entered into agreements pursuant to which TELKOM is committed to pay for servicesSamsung Corporation relating to the launchremaining purchase commitment under the MPPA; PT INTI for the construction and procurement of an optical network management system; NEC-Siemens Consortium for the procurement and installation of Ring JASUKA Backbone; ZTE Consortium for procurement and installation of Speedy Access I; Huawei Consortium for the procurement and installation of Speedy Access II and III; PT Samsung Indonesia for procurement of CDMA 2000-1X in Division V; Siemens for the expansion of the TELKOM-2 SatelliteIP Core Network and the construction of aadditional capacity for PSTN networklocal and trunk switch; Huawei Consortium for each of Regional DivisionCDMA expansion in Divisions II and V.III; and ZTE Consortium for CDMA expansion in Division VI and deployment of submarine cable system. For more details, relating to these agreements, please see Item 10. “Additional Information — C. Material Contracts”.Contracts.”
      Based on Decision Letter No. 19/ KEP/ M.KOMINFO/2/2006 of the Minister of Communication and Information Technology in February 2006, Telkomsel obtained a 3G mobile cellular operating license for 2.1 GHz frequency bandwidth for a 10-year period, which is extendable subject to evaluation. The upfront fee for the 3G license, which amounted to Rp.436,000 million, was recognized as an intangible asset and is amortized over the term of the 3G license.
      Except as disclosed above, TELKOM does not have other off-balance sheet arrangements that are material.
F.     Tabular Disclosure of Contractual Obligations
F.Tabular Disclosure of Contractual Obligations
      The following summarizes TELKOM’s contractual obligations at December 31, 20042006 and the effect such obligations are expected to have on liquidity and cash flow in future periods:
                      
  Payments Due by Period
   
    Less than  
Contractual Obligations Total 1 year 1-3 years 4-5 years After 5 years
           
  (Rp. billion)
Short Term Loans(1)(5)
  1,101.6   1,101.6          
Long Term Debts(2)(5)
  15,514.7   2,300.8   6,215.4   2,822.3   4,176.2 
Capital Lease Obligations(3)
               
Operating Leases(3)
  247.5      247.5       
Unconditional Purchase Obligations(4)
  4,373.2   3,500.3   872.9       
                
 Total  21,237.0   6,902.7   7,335.8   2,822.3   4,176.2 
                
                      
  Payments Due by Period
   
    Less than   More than
Contractual Obligations Total 1 year 1-3 years 3-5 years 5 years
           
  (Rp. billion)
Short-Term Loans(1)(6)
  688.0   688.0          
Long-Term Debts(2)(6)
  10,095.6   3,600.8   3,020.1   1,083.8   2,390.9 
Capital Lease Obligations(3)
  436.5   73.4   146.9   146.9   69.3 
Interest on Short-term Loans, Long-term Debts and Capital Lease Obligations  3,906.5   1,271.8   1,375.2   547.6   711.9 
Operating Leases(4)
  1,769.1   483.6   807.9   313.6   164.0 
Unconditional Purchase Obligations(5)
  12,585.6   12,585.6          
Deferred consideration for business combination  5,591.7   1,472.4   2,753.1   1,366.2    
                     
 Total  35,073.0   20,175.6   8,103.2   3,458.1   3,336.1 
                     
 
(1) RelatesRelated to liabilities under a short term loans obtained from Bank Central Asia, Bank Mandiri, ABN AMRO Bank and Bank Central Asia.BNI. See Note 20 to the Company’s consolidated financial statements included elsewhere in this Annual Report.statements.

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(2) See “— Liquidity and Capital Resources — Indebtedness” above and Notes 21, 22, 23, 24, 25, 26 and 2724 to the Company’s consolidated financial statements included elsewhere in this Annual Report.statements.
(3) RelatesRelated to the leases of the repeaters used for TELKOM’s telecommunication networks for TELKOMFlexi.
(4) Related primarily to leases of motortowers, computers, vehicles, land, buildings, office equipment and computers.circuits.
(4)(5) RelatesRelated to commitments of TELKOM to suppliers and vendors for the purchase of telecommunications-related equipment and infrastructure.
(5)(6) ExcludesExcluded contractually committed rate of interest.

     In addition to the above contractual obligations, as of December 31, 2004, Telkom2006, TELKOM had long-term liabilities for pension, post-retirement health care benefits and long service awards. TelkomTELKOM expects to contribute Rp.516.5Rp.900.0 billion to its post-retirement health care benefits plan in 2005. In addition, Telkom also expects to

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contribute Rp.697.5and Rp.736.4 billion to its defined benefit pension plan in 2005.2007. See Notes 43, 44, 45 46 and 56.3.e56 to the consolidated financial statements.
ITEM 6.     DIRECTORS, SENIOR MANAGEMENT AND EMPLOYEES
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.
      The current Board of Commissioners of TELKOM consists of five members,one President Commissioner and four Commissioners, 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 thirdfifth 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.

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      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, 20042006 were:
         
  Age as of    
Name January 1, 20052007 Title Since
       
Tanri Abeng  6364  President Commissioner March 10, 2004
P. Sartono  6062  Independent Commissioner June 21, 2002
Arif Arryman  4950  Independent Commissioner June 21, 2002
Anggito Abimanyu  4243  Commissioner March 10, 2004
Gatot Trihargo  4446  Commissioner March 10, 2004
Tanri Abeng
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 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
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 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 19911992 to 1995, until his retirement in 2000. During1995. Prior his tenure at TELKOM, he also held various positions at Directorate General of Post and Communications from 19721973 to 1985 and served as President Director of PT Telekomindo Primabhakti.Primabhakti from 1995 to 1998. 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
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.Tbk. from 2001 to 2005. Previously, he served as an advisor to the Coordinating Minister for Economy and a member of the assistance teamAssistancy 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 in Bangkok, Thailand, Diploma d’Etuded’etude Approfondie in economics from UniversityUniversite Paris-IX Dauphine in France and a doctoral degree in Economicseconomics from UniversityUniversite of Paris-IX Dauphine in France.
Anggito Abimanyu
Anggito Abimanyu
      Mr. Abimanyu has been a Commissioner of TELKOM since March 10, 2004. As of the date of this Annual Report, he is the Acting Head of the Agency for Fiscal AnalysisResearch in Economics, Finance and International Cooperation 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

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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
Gatot Trihargo
      Mr. Trihargo has been a Commissioner of TELKOM since March 10, 2004. As 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
      As of the date of this Annual Report, the Board of Commissioners has three standing committees: the Audit Committee, the Planning and Risk Assessment Committee (formerly, the Review and Planning CommitteeCommittee) and the Nomination and RenumerationRemuneration Committee. An Independent Commissioner chairs each committee. In addition, external members to the Audit Committee, in order to be considered independent:independent under applicable Indonesian rules: (a) must not be a member of any Indonesian registered public accountant that 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) doesmust not own, directly or indirectly, any shares in TELKOM; and (d) doesmust not have any business relationship that relates to TELKOM’s businesses.
      As of the date of this Annual Report, the Audit Committee of the Board of Commissioners is composed of seven 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;Sahat Pardede; (vi) Mr. Sahat PardedeGatot Trihargo; and (vii) Mr. Gatot Trihargo.Jarot Kristiono. All of the members of the Audit Committee (except for Mr. Arif Arryman, Mr. Sartono and Mr. Trihargo) are independent external members and Mr. Pardede is an accounting and financial expert. New listing rules adopted pursuant to Rule 10A-3 under the Exchange Act require a foreign private issuer with securities listed on the NYSE to have an audit committee comprised of independent directors. The rules became effective on July 31, 2005. Under Rule 10A-3 (c) (3), however, foreign private issuers are exempt from the independence requirements if (i) the home country government or stock exchange requires the company to have an audit committee; (ii) the audit committee is separate from the board of directors and has members from both inside and outside the board of directors; (iii) the audit committee members are not elected by the management and no executive officer of the company is a member of the audit committee; (iv) the home country government or stock exchange has requirements for an audit committee independent from the management of the company; and (v) the audit committee is responsible for the appointment, retention and oversight of the work of external auditors. TELKOM avails itself of this exemption as set forth in its Section 303A Annual Written Affirmation that it submits to the NYSE. An Audit Committee Charter (the “Charter”) that has been adopted by the Board of Commissioners 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.

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      The Planning and Risk Assessment Committee (formerly, the Review and Planning CommitteeCommittee) was established on August 1, 2003. The original objective of this committee iswas 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. On May 19, 2006, the Board of Commissioners redefined and expanded the objectives of this committee to include strategic risk assessment and changed the committee’s name accordingly. As of the date of this Annual Report, the ReviewPlanning and PlanningRisk Assessment Committee consists of nine members: (i) Mr. Anggito Abimanyu (the Chairman); (ii) Mr. Arif ArrymanGatot Trihargo (the Vice Chairman); (iii) Mr. Yuki Indrayadi (Secretary); (iv) Mr. P. Sartono; (v) Mr. Kindy Syahrir;Arif Arryman (an Independent Commissioner); (vi) Mr. Ario Guntoro; (vii) Mr. Adam Wirahadi; (viii) Mrs. Widuri M. Kusumawati; and (ix) Mr. Arman Soeriasoemantri. All of the members of the ReviewPlanning and PlanningRisk Assessment Committee (except for Mr. Abimanyu, Mr. Trihargo, 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 is composed of: (i) Mr. Tanri Abeng, the President Commissioner and the Chairman; (ii) Mr. P. Sartono, an Independent Commissioner and the Secretary; and (iii) Mr. Gatot Trihargo, a Commissioner. The committee was tasked with: (a) formulating selection criteria and nomination procedures for strategic positions in the Company based on good corporate governance principles; (b) assisting the Board of Commissioners and consulting with the Board of Directors in candidate selection for strategic positions in the Company; and (c) formulating a remuneration system for the Board of 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
      TheIn 2006, the Board of Directors iswas comprised of one President Director and six Directors. Following the Extraordinary General Meeting of Stockholders on February 28, 2007, the number of Directors increased from six to seven. 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 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 twothree Directors, one of whom shall be the President Director.Director and another, the Deputy President Director (upon appointment).
      The President Director, or in case of his absence, the Deputy President Director or 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

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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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      TELKOM has a disclosure committee comprised of 14 senior members from various departments and chaired by the chief financial officer. The disclosure committee’s role is to support TELKOM’s management in designing and evaluating TELKOM’s disclosure controls and procedures and 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 the preparation of TELKOM’s annual reports on Form 20-F, and participated in the review and preparation of TELKOM’s annual reports on Form 20-F. The establishment of the disclosure committee formalized the previous disclosure process where designated senior employees from various departments were responsible for assisting with the necessary disclosures.
      The members of the Board of Directors as of June 25, 2005December 31, 2006 were:
         
  Age as of    
Name January 1, 20052007 Title Since
     
Arwin Rasyid  4749  President Director June 24, 2005
Garuda Sugardo  5556  Vice President Director and Chief Operating Officer
and Vice President Director
 June 24, 2005
Rinaldi Firmansyah  4445  Director of Finance March 10, 2004
Arief Yahya  4345  Director of Enterprise & Wholesale June 24, 2005
Abdul Haris  4951  Director of Network & Solution March 10, 2004
John Welly  5052  Director of Human Resource DevelopmentResources June 24, 2005
Guntur Siregar  5355  Director of Consumer June 24, 2005
Arwin Rasyid
      Mr. Rasyid was appointed the President Director of TELKOM on June 24, 2005. He previously served as DeputyVice President Director of PT Bank Negara Indonesia from 2003 to 2005, President Director of Bank Danamon Indonesia from 2000 to 2003, Deputy HeadVice Chairman of Badan Penyehatan Perbankan Nasional (the Indonesian Banks Restructuring Agency) in 2000, DeputyVice President Director of Bank Niaga from 19881998 to 1999, Assistant Vice President of Bank of America from 1986 to 1987 as well in severalvarious positions in Bank Niaga since 1987. Mr. Rasyid graduated with a degree in economyeconomics from the University of Indonesia. He also holds a Mastermaster of Artsarts degree in International Economicsinternational economics and a Master of Business Administrationmasters degree in International Businessbusiness administration (international business) from the University of Hawaii, USA.
Garuda Sugardo
      Mr. Sugardo was appointed the Chief Operating Officer and Vice President Director of TELKOM on June 24, 2005. He joined TELKOM in 1977 and has held several positions in various departments. He previously served as Senior Consultant Marketing in the Management Consulting Center of TELKOM, Director of Telecommunication Service Business of TELKOM from 2002 to 2004, Director of Operation and Technical of Indosat as well as a number of positions in TELKOM from 1977-2000.1977 to 2000. Mr. Sugardo graduated with a degree in Electrical Engineeringelectrical engineering from the University of Indonesia.
Rinaldi Firmansyah
      Mr. Firmansyah has been Director of Finance of TELKOM since March 10, 2004. As of the date of this Annual Report, he servesHe previously served as the Vice President Commissioner, President Director and Director of Investment Banking of PT Bahana

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Securities from 2003 to 2004, 2001 to 2003 and is also a1997 to 2001, respectively, and Commissioner and Head of the Audit Committee of PT Semen Padang. He previously served as the Vice President for Finance of PT Tirtamas Comexindo.Padang in 2003. 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
      Mr. Yahya was appointed the Director of Enterprise & Wholesale of TELKOM on June 24, 2005. He joined TELKOM in 1986 and has held several positions in various departments. Previously, he served as TELKOM’s Head of Regional Division V (East Java) and Head of Regional Division VI (Kalimantan). Mr. Yahya graduated with a degree in electrical engineering from the Bandung Institute of Technology and a Mastersmasters degree in Telecommunication Engineeringtelecommunications engineering from the University of Surrey.
Abdul Haris
      Mr. Haris was appointed the Director of Network & Solution of TELKOM on June 24, 2005. He joined TELKOM in 1980 and has held several positions in various departments. He previously served as

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Director of Telecommunications and Network Business of TELKOM from 2004 to 2005, and as Deputy Head of TELKOM’s Regional Division II (Jakarta). Mr. Haris has a degree in electrical 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 from 2001 to 2005, 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 Engineeringelectrical engineering from the Bandung Institute of Technology and a Mastersmasters degree in telecommunicationtelecommunications and information from Essex University, UK. See “— D. Employees — On-going Litigation and Investigations” below and Item 3. “Key Information — D. Risk Factors — Risks relating to TELKOM and its subsidiaries — Certain TELKOM employees, including former TELKOM directors, are subject to on-going litigation, police investigations, and criminal charges.”
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, Director of Commerce of Indosat from 2000 to 2002, Commissioner of PT Aplikanusa Lintasarta from 1996 to 2000, Head of Regional Division II (Jakarta) from 2000 to 2002 and Director of Commerce of Indosat from 1996 to 2000.2000, and Head of Regional Division I (Sumatra) from 1995 to 1996. Mr. Siregar graduated with a degree in Electrical Engineering from the Bandung Institute of Technology. See “— D. Employees — On-going Litigation and Investigations” below and Item 3. “Key Information — D. Risk Factors — Risks relating to TELKOM and its subsidiaries — Certain TELKOM employees, including former TELKOM directors, are subject to on-going litigation, police investigations, and criminal charges.”

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      At the Extraordinary General Meeting of Stockholders on February 28, 2007, the Board of Directors was changed and since that date, the Board of Directors is as follows:
Age as of
NameFebruary 28, 2007TitleSince
Rinaldi Firmansyah46President DirectorFebruary 28, 2007
Sudiro Asno49Director of FinanceFebruary 28, 2007
Faisal Syam51Director of Human Capital & General AffairsFebruary 28, 2007
I Nyoman G Wiryanata47Director of Network & SolutionFebruary 28, 2007
Ermady Dahlan53Director of ConsumerFebruary 28, 2007
Arief Yahya45Director of Enterprise & WholesaleJune 24, 2005
Prasetio46Director of Compliance & Risk ManagementFebruary 28, 2007
Indra Utoyo44Director of Information Technology & SupplyFebruary 28, 2007
Rinaldi Firmansyah
      Mr. Firmansyah was appointed the President Director of TELKOM in an Extraordinary General Meeting of Shareholders on February 28, 2007. He was Director of Finance of TELKOM since March 10, 2004. He previously served as Vice President Commissioner, President Director and Director of Investment Banking of PT Bahana Securities from 2003 to 2004, 2001 to 2003 and 1997 to 2001, respectively, and Commissioner and Head of the Audit Committee of PT Semen Padang in 2003. Mr. Firmansyah graduated with a degree in electrical engineering from the Bandung Institute of Technology and a masters degree in business administration from the Indonesian Institute of Management Development, Jakarta. Mr. Firmansyah is also a Chartered Financial Analyst (CFA).
Sudiro Asno
      Mr. Asno was appointed the Director of Finance of TELKOM on February 28, 2007. He joined TELKOM in 1985 and has held several positions in TELKOM’s finance department. He previously served as Senior General Manager Finance Center of TELKOM. Mr. Asno has a degree in accounting from the University of Padjajaran Bandung.
Faisal Syam
      Mr. Syam was appointed the Director of Human Capital & General Affairs of TELKOM on February 28, 2007. He joined TELKOM in 1983 and has held several positions in various departments, including Senior General Manager of the Human Resource Center of TELKOM. Mr. Syam has a degree in mathematics from North Sumatra University and a masters degree in management from the Bandung School of Management.
I Nyoman G Wiryanata
      Mr. Wiryanata was appointed the Director of Network & Solution of TELKOM on February 28, 2007. He joined TELKOM in 1983 and has held several positions in various departments, including Executive General Manager, Regional Division I (Sumatra). Mr. Wiryanata has a degree in electrical engineering from Surabaya Institute of Technology and a masters degree in business administration from Prasetya Mulya Management Institute.
Ermady Dahlan
      Mr. Dahlan was appointed the Director of Consumer of TELKOM on February 28, 2007. He joined TELKOM in 1973 and has held several positions in various departments. He previously served as Executive

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General Manager, Regional Division II (Jakarta). Mr. Dahlan has a degree in telecommunications from the National Telecommunication Academy Bandung.
Arief Yahya
      Mr. Yahya was appointed the Director of Enterprise & Wholesale of TELKOM on June 24, 2005. He joined TELKOM in 1986 and has held several positions in various departments. Previously, he served as TELKOM’s Head of Regional Division V (East Java) and Head of Regional Division VI (Kalimantan). Mr. Yahya graduated with a degree in electrical engineering from the Bandung Institute of Technology and a masters degree in telecommunications engineering from University of Surrey.
Prasetio
      Mr. Prasetio was appointed the Director of Compliance and Risk Management of TELKOM on February 28, 2007. He joined TELKOM in 2006 as Executive Vice President of Risk Management, Legal and Compliance. He previously served as Director of PT Merpati Nusantara Airline from 2004 to 2005, Executive Vice President & Managing Director of PT Bank Danamon Indonesia from 2001 to 2004 and Senior Vice President of the Indonesian Banking Restructuring Agency from 1999 to 2001. Mr. Prasetio has a degree in accounting from the University of Airlangga Surabaya.
Indra Utoyo
      Mr. Utoyo was appointed the Director of Information Technology & Supply of TELKOM on February 28, 2007. He joined TELKOM in 1986 and has held several positions in various departments, including Senior General Manager, Information System Center. Mr. Utoyo has a degree in telecommunications from the Bandung Institute of Technology and a masters degree in science (communication and signal processing) from Imperial College of Science, Technology and Medicine, University of London.
      None of the Directors has a service contract with the CompanyTELKOM nor are any such contracts proposed. The Directors’ business address is Jalan Japati, 1, Bandung 40133, Indonesia. None of the Directors or Commissioners are 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)(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, 2004,2006, the aggregate compensation paid by TELKOM and its consolidated subsidiaries to all of their Commissioners and Directors was Rp.73.0Rp.94.7 billion (US$7.9 million), while the amount paid by TELKOM (unconsolidated) to all its Commissioners and Directors was approximately Rp.29.9 billion (US$3.210.5 million), in each case including bonuses and the cost of benefits provided to Directors, such as housing facilities.
      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.22.7 billion, Rp.19.7 billion and Rp.23.2 billion in 2004, 2005 and 2006, respectively, which reflected 0.1% of total operating expenses in each respective year.

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      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 Rp.50.3 billion, Rp.52.1 billion and Rp.71.5 billion (US$7.9 million) in 2004, 2005 and 2006, respectively, which reflected 0.3%, 0.2% and 0.2% of total operating expenses in 2004, 2005 and 2006, respectively.
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;investments in excess of the amount stipulated by the Board of Commissioners; (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; (vi) selling or otherwise disposing of fixed 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; (viii) binding the Company as surety in excess of the amount stipulated by the Board of Commissioners; and (ix) assuming or granting medium 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 (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.
      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. For further information on the composition and terms of the Board of Directors, see “— A. Directors and Senior Management — Board of Directors” above.
None of the Directors or Commissioners has any substantial interest, direct or indirect, in any company carrying on a similar trade as TELKOM.

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D.     Employees
      As of December 31, 2004 the Company2006, TELKOM and its subsidiaries had 29,37534,021 employees in total, of which 25,82327,658 were employed inby TELKOM, regions and 3,5526,363 were employed in KSO VII.by TELKOM’s subsidiaries.
      As of December 31, 2003 the Company2005, TELKOM and its subsidiaries had 30,82034,004 employees in total, of which 24,20628,179 were employed inby TELKOM, and 6,6145,825 were employed in KSO regions respectively.by TELKOM’s subsidiaries. As of December 31, 2002, the Company2004, TELKOM and its subsidiaries had 34,67834,657 employees in total, of which 24,543 and 10,135 personnel29,375 were employed inby TELKOM, and KSO regions respectively.5,282 were employed by TELKOM’s subsidiaries.

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      The table below sets forth a breakdown of TELKOM’s employees by position as at December 31, 2004:2006:
         
 TELKOM regions KSO region VII
 as at as at        
 December 31, December 31, TELKOM as at TELKOM’s subsidiaries as at
 2004 2004 December 31, 2006 December 31, 2006
        
Senior managementSenior management  154     169  167 
Middle managementMiddle management  2,136  87   2,331  529 
SupervisorsSupervisors  7,982  796   9,832  602 
OthersOthers  15,551  2,669   15,326  5,065 
          
Total  27,658  6,363 
Total  25,823  3,552      
     
      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.135Rp.114 billion to Rp.304.42Rp.304 billion. In 2004,2006, 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 upon their respective performances and uniform bonuses for employees at each staff level for each Division are then determined.
      Except in connection with its initial public offering in 1995, TELKOM does not maintain an employee share scheme for any of its employees or senior management.
      TELKOM’s mandatory retirement age for all employees is 56. TELKOM sponsors a defined benefit pension plan and a defined contribution pension plan. The defined benefit pension plan is for permanent employees hired prior to 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.297.4Rp.845.7 billion, Rp.486.3Rp.698.5 billion and Rp.840.0Rp.693.5 billion (US$90.477.1 million), for the years ended December 31, 2002, 20032004, 2005 and 2004,2006, respectively. See Note 4443 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 on a certain percentage

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on a certain percentage of the participants’ salaries and amounted to Rp124Rp.399 million, Rp.971 million and Rp399Rp.1,858 million in 20032004, 2005 and 2004,2006, 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; (ii) for employees hired before November 1, 1995 who retire with years of service of less than 20 years; 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 who retired prior to June 3, 1995, and who have had 20 years of service when they retired after June 3, 1995 were Rp.75.4Rp.724.5 billion, Rp.188.5Rp.435.9 billion and Rp.724.5Rp.714.8 billion (US$78.079.4 million), for the years ended December 31, 2002, 20032004, 2005 and 2004,2006, respectively.
      In May 2000, TELKOM employees formed a union named “Serikat Karyawan TELKOM” or “SEKAR”.“SEKAR.” In May 2006, several TELKOM employees formed another union named “Serikat Pekerja” or “SP” as an alternative to SEKAR. The formation of each of SEKAR and SP is in accordance with the Presidential Decree No. 83 of 1998 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 SEKARthe unions is not compulsory. TELKOM believes that its relations with each of SEKAR and SP 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’     On-going Litigation and Directors’ RemunerationInvestigations
      A former Director of Human Resources and an employee of TELKOM were indicted under the anti-corruption law in the Bandung District Court relating to allegations of misuse of authority in procuring consultancy services resulting in losses of Rp.789 million. On May 2, 2007, the Bandung District Court found the defendants guilty and sentenced each defendant to a one-year prison term. The Company and its subsidiaries provide honoraria and facilitiesdefendants have filed an appeal with the West Java High Court objecting to support the operational dutiesDistrict Court ruling. As of the Boarddate of Commissioners. The totalthis Annual Report, no decision has been rendered on appeal.
      In December 2005, the West Java Police Department initiated investigations related to an alleged violation of such benefits amountedanti-corruption law, in particular the provision of interconnection services to Rp.8.7 billion, Rp.14.0 billionNapsindo, TELKOM’s subsidiary, and Rp.22.7 billionGlobalcom, a Malaysian company, at an incorrect tariff for TELKOM’s network for the provision of illegal VoIP services, and misuse of authority in 2002, 2003 and 2004 respectively, which reflected 0.1%, 0.1% and 0.1% of total operating expenses in 2002, 2003 and 2004, respectively.
      The Company and its subsidiaries provide salaries and facilities to support the operational dutiesprocuring telecommunications equipment. It is also understood that one of the Boardinvestigations relates to TELKOM’s guarantee of Directors. Totala bank loan obtained by Napsindo. During the investigation, former Directors and employees of TELKOM were held in custody by the West Java Police Department pending the completion of the investigation. On May 10, 2006, such benefits amountedindividuals were released from police custody after the expiration of the maximum period of 120 days allowed for police custody of suspects for investigation purposes. These investigations are on-going. As of the date of this Annual Report, the police have not found sufficient evidence to Rp.35.1 billion, Rp.45.6 billionproperly transfer the case to the Office of the Attorney General for indictment.
      On January 2, 2006, the Office of the Attorney General launched an investigation into allegations of misuse of telecommunications facilities in connection with the provision of VoIP services, whereby one of TELKOM’s former employee and Rp.50.3 billionfour of TELKOM’s employees in KSO VII were named suspects. As a result of the investigations, one of TELKOM’s former employee and two of TELKOM’s employees were indicted in the year ended December 31, 2002, 2003Makasar District Court, and 2004, respectively, which reflected 0.3%, 0.3% and 0.3% of total operating expensestwo other employees were indicted in the year ended December 31, 2002, 2003Denpasar District Court for their alleged corruption in KSO VII. As of the date of this Annual Report, the District Courts have not rendered their verdicts.

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      TELKOM does not believe that any subsequent investigation or court decision will have significant financial impact to TELKOM. See Item 3. “Key Information — D. Risk Factors — Certain TELKOM employees, including former TELKOM directors, are subject to on-going police investigations, litigation and 2004, respectively.criminal charges.”
F.E.     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
A.     Major stockholders
General
      At 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, 20042006 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 Class Identity of Person or Group Amount Owned Percent 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  10,320,470,711  51.19%  Government  10,320,470,711  51.19% 
Series B JPMCB US Resident (Norbax Inc.)  1,378,468,925  6.84%  JPMCB US Resident (Norbax Inc.)  1,756,681,581  8.71% 
Series B The Bank of New York (BoNY)  1,568,517,736  7.78%  The Bank of New York (BoNY)  1,487,512,256  7.38% 
Series B Board of Directors and Commissioners  82,728  <0.01%  Board of Directors and  56,624  <0.01% 
 Commissioners       
      As of December 31, 2004,2006, a total of 45,126,42037,187,806 American Depositary Shares (“ADSs”) and 20,159,999,279 Series B sharesShares (including the Series B sharesShares represented by these ADSs) and 1one Series A shareDwiwarna Share were outstanding.
      The Government holds a majority of the outstanding Series B sharesShares of TELKOM. In addition, the Government is the holder of the Series A Dwiwarna share,Share, which has special voting rights. See Item 7. “Major Stockholders and Related Party Transactions —“— Relationship with the Government — Government as Shareholder.”Shareholder” below.
      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 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 Offeringinitial public offering was 8,400,000,000, which consisted of 8,399,999,999 Series B sharesShares and 1 Series A Dwiwarna share,Share, all of which were owned by the Government. On November 14, 1995, the Government sold some of its TELKOM shares through an

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initial public offering on the Jakarta Stock Exchange and Surabaya Stock Exchange. The shares offered consisted of 933,333,000 new Series B sharesShares and 233,334,000 Series B sharesShares 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 sharesShares owned by the State of the Republic of Indonesia, which were converted into 35 million ADSs. Each ADS represented 20 Series B sharesShares at that time.
      In December 1996, the Government of the Republic of Indonesia completed a block sale of 388 million Series B shares.Shares. In 1997, the Government distributed 2,670,300 Series B sharesShares 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.Shares.
      Under Law No.1/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 inpaid-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)Shares).
      On July 16, 2002, the Government sold 312 million Series B sharesShares (3.1% of the Series B shares)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 meetingAnnual General Meeting of shareholdersShareholders in July 2004, the shareholders approved the split of nominal value of the Series A Dwiwarna shareShare 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 outstandingissued 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 shareShare was preserved as a Series A Dwiwarna shareShare 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.
      At TELKOM’s Extraordinary General Meeting of Shareholders on December 21, 2005, the shareholders approved a share repurchase plan, pursuant to which TELKOM may repurchase up to a maximum of 5% of issued and outstanding Series B Shares for a total repurchase amount not exceeding Rp.5.25 trillion, in accordance with the rules and regulations of Badan Pengawas Pasar Modal dan Lembaga Keuangan (“BAPEPAM”) and the stock exchanges on which TELKOM shares and ADSs are trading, as well as other applicable regulatory bodies. Such repurchases are intended to be made from time to time over the eighteen month period following the announcement. Repurchases may be made at the discretion of the Company’s management through purchases of shares on the Jakarta and Surabaya Stock Exchanges, purchase of shares in ADS form on the New York Stock Exchange, off-exchange transactions and agreements, or any other legal means the Company deems appropriate. Through its share repurchase plan, TELKOM intends to: (i) achieve greater flexibility in managing its capital; (ii) lower its overall cost of financing and increase its Earnings Per Share, Earnings Per ADS and return on equity; and (iii) achieve greater flexibility to undertake share repurchases during the approved period.
      TELKOM has appointed Morgan Stanley Services Limited as the agent and PT. Danareksa Securities as the local broker for the share repurchase.
      Pursuant to the share repurchase plan, as of June 27, 2007, TELKOM has cumulatively repurchased an aggregate of 211,290,500 Series B Shares on either the Jakarta Stock Exchange or the New York Stock Exchange, representing approximately 1.05% of the total issued and outstanding Series B Shares of 20,159,999,279 for a total repurchase amount of Rp.1,829.1 billion (US$203.1 million).

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Relationship with the Government
Government as Shareholder
      As of December 31, 2004,2006, 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 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 adopthas adopted a similar policy.
      Under regulations ofBadan Pengawas Pasar Modal (“BAPEPAM”), BAPEPAM, Indonesia’s capital markets and financial institution 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 of 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

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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.
Government as Regulator
      The Government regulates the telecommunications sector through the MoCI. In particular, the MoCI 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 MoCI 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 MoCI (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 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.
      The Company and its subsidiaries pay concession fees for telecommunication services provided and radio frequency usage charges to the MoCI. Concession fees amounted to Rp.314.7 billion, Rp.558.5 billion and Rp.497.9 billion (US$55.3 million) in 2004, 2005 and 2006, respectively. Concession fees accounted for 1.6%, 2.3% and 1.7% of total operating expenses in 2004, 2005 and 2006, respectively. Radio frequency usage charges amounted to Rp.492.6 billion, Rp.548.2 billion and Rp.722.6 billion (US$80.3 million) in 2004, 2005 and 2006, respectively. Radio frequency usage charges accounted for 2.5%, 2.2% and 2.4% of total operating expenses in 2004, 2005 and 2006, respectively. Beginning in 2005, the Company and its subsidiaries pay Universal Service Obligation (“USO”) charges to the MoCI, which amounted to Rp.307.7 billion and Rp.383.8 billion (US$42.6 million) in 2005 and 2006, respectively, reflecting 1.2% and 1.3% of total operating expenses in 2005 and 2006, respectively.
Government as Lender
      As of December 31, 2004,2006, the Government had sub-loaned borrowings from foreign lenders to TELKOM as “two-step loans” amounting to Rp.6,018.7Rp.4,476.6 billion (US$647.9497.4 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 endAs of December 2004,31, 2006, foreign currency loans represented 65%64.4% of the outstanding total of such loans. The remaining 35.0%35.6% of such outstanding loans is denominated in Rupiah. In 2004,2006, the annual interest rates charged on loans repayable in Rupiah range from 8.3%11.2% to 13.3%13.7%, on those repayable in U.S.US Dollar range from 4.0% to 8.0%6.5%, on those repayable in EURO range from 7.3% to 8.5% and on thosethe loan repayable in Japanese Yen range fromis 3.1% to 3.2%. See Item 5. “Operating and Financial Review and Prospects — B. Liquidity and Capital Resources — Indebtedness.”
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 in respect to its connection charges and monthly charges as “residential”, which rates are lower than the business service rates. This special treatment does not apply to the tariff for local, long distance and IDD calls.

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Other
Proportion of securities of TELKOM held in Indonesia and outside Indonesia
      As of December 31, 2004, 15,9472006, 14,196 persons, including the Government, were registered as holders of 20,159,999,279 Series B sharesShares of TELKOM’s Common Stock in Indonesia. There were a total of 45,126,42037,187,806 ADSs held by 154134 registered holders as of December 31, 2004.2006. 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.of TELKOM.
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, such as state-owned entities. See Note 4746 to the Company’s consolidated financial statements. The most significant of these transactions include:
Government of the Republic of Indonesia
      The CompanyTELKOM obtained “two-step loans”two-step loans from the Government of the Republic of Indonesia, the Company’sTELKOM’s majority stockholder. See Note 22 to the consolidated financial statements. Interest expense onfor two-step loans amounted to Rp.969.0Rp.489.2 billion, Rp.755.5Rp.324.7 billion and Rp.489.2Rp.366.7 billion (US$52.7 million) in 2002, 20032004, 2005 and 2004,2006, respectively. Interest expense onfor the two-step loans reflected 61.2%loan represented 38.5%, 54.6%27.6% and 38.5%28.5% of total interest expense in 2002, 20032004, 2005 and 2004,2006, respectively.
      The Company and its subsidiaries payTELKOM pays concession fees for telecommunicationthe telecommunications services provided and radio frequency usage charges to the MoC.MoCI (formerly, the Ministry of Tourism, Post and Telecommunications) of the Republic of Indonesia. Concession fees amounted to Rp.163.9Rp.314.7 billion, Rp. 239.0Rp.558.5 billion and Rp.314.7Rp.497.9 billion (US$33.9 million) in 2002, 20032004, 2005 and 2004, respectively. Concession fees accounted for 1.4%2006, respectively, representing 1.6%, 1.6%2.3% and 1.6%1.7% of total operating expenses in 2002, 2003 and 2004, respectively.for each year. Radio frequency usage charges amounted to Rp 292.7Rp.492.6 billion, Rp.371.7Rp.548.2 billion and Rp.492.6Rp.722.6 billion (US$53.0 million) in 2002, 20032004, 2005 and 2004, respectively. Radio frequency usage charges accounted for2006, respectively, representing 2.5%, 2.5%2.2% and 2.5%2.4% of total operating expenses in 2002, 20032004, 2005, 2006, respectively. See Note 38 to the consolidated financial statements. Telkomsel paid the upfront fee for the 3G license amounted to Rp.436,000 million and 2004,recognized it as an intangible asset. See Note 15 to the consolidated financial statements.
      Starting in 2005, TELKOM began paying Universal Service Obligation (“USO”) charges to the MoCI of the Republic of Indonesia pursuant to MoCI Regulation No. 15/ PER/ M.KOMINFO/9/2005 dated September 30, 2005. USO charges amounted to Rp.307,705 million and Rp.383,829 million in 2005 and 2006, respectively, representing 1.2% and 1.3% of total operating expenses in 2005 and 2006, respectively. See Note 38 to the consolidated financial statements.

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Indosat
      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 ourTELKOM’s major shareholder, the Government of Indonesia. As such,Since December 20, 2002, Indosat is considered ashas been controlled by Singapore Technologies Telemedia Pte. Ltd. TELKOM still considers Indosat a related party.party because the Government can exert significant influence over the financial and operating policies of Indosat by virtue of its right to appoint one director and one commissioner of Indosat.
      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

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Satelindo and IM3 arising from their agreements with TELKOM and Telkomsel, as the case may be, were transferred to 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 CommunicationsMoC of the Republic of Indonesia;
 
 • The Company has also entered into an interconnection agreement between the Company’s PSTN 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.obligations; and
 
 • The Company’s compensation relating to leased lines/channel services, such as International Broadcasting System, AVD and bill printing is calculated at 15% of Indosat’s revenues from such services. Indosat also leased circuits from the Company to link Jakarta, Medan and 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.through year-end 2003.
      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 andbut 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 a lease expense up to 2006. In 2001, Satelindo paid an additional amount of Rp.59.9 billion as a 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;
 
 • BillingsBilling for international calls made by Telkomsel’s customers of GSM mobile cellular telecommunication areis handled by Telkomsel. Telkomsel is obliged to pay Indosat’s share of revenue regardless of whether billingsbilling to customers havehas 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.amended agreement is valid until March 2008, but extendable as agreed by both parties. 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 bebecame effective fromon March 1, 2004 and continues until such date that Telkomsel and Indosat enter into a new agreement.

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      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.12.7Rp.19.1 billion, Rp. 17.9Rp.19.1 billion and Rp.19.1Rp.17.7 billion (US$2.12.0 million) in 2002, 20032004, 2005 and 2004,2006, respectively, or 0.1%, 0.1% and 0.1% of total operating expenses in 2002, 2003each of 2004, 2005 and 2004, respectively.2006.
      Other agreements between Telkomsel and Indosat are as follows:
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 chairman and a representative of the respective parties,each party to direct the construction and operation of the cable system. The construction of the cable system was completed in 1998. Based on the agreement, Telkomsel shareshared 19.325% of the total construction cost was 19.325%. Telkomsel shares the total cost of operationcost. Operation and maintenance costs are shared based on an agreed formula.
      Telkomsel’s share of the cost ofin operation and maintenance costs amounted to Rp.0.9Rp.2.1 billion, Rp.1.4Rp.1.2 billion and Rp.2.1Rp.0.4 billion (US$0.2 million)44.4 thousand) in 2002, 20032004, 2005 and 2004,2006, respectively.
Indefeasible Right of Use Agreement
      On September 21, 2000, Telkomsel entered into an agreement with Indosat for the use of the SEA — ME — WE 3 and tail link in Jakarta and Medan. Based on the agreement, Telkomsel was granted an indefeasible right to use a certain capacity of the network commencing from September 21, 2000 to 2015 by prepaying compensation amounting to US$2,727,273.2.7 million. In addition to the prepayment, Telkomsel is also charged annual operation and maintenance costs amounting to US$136,364.0.1 million.
Interconnection Revenues
      The Company and its subsidiaries earned net interconnection revenues from Indosat (including Satelindo and IM3 before their merger with Indosat) of Rp.950.7 billion, Rp.235.7 billion in 2002 and 2003, respectively, or 4.6% and 0.9% of total operating revenues in 2002 and 2003, respectively. The

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Company and its subsidiaries were charged net interconnection charges from Indosat of Rp.158.3 billion, Rp.52.8 billion and Rp.168.3 billion (US$17.018.7 million) in 2004, or2005 and 2006, respectively, representing 0.5%, 0.1% and 0.3%, of total operating revenues in 2004.2004, 2005 and 2006, respectively.
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.43.6Rp.109.8 billion, Rp.126.4 billion and Rp109.8Rp.164.9 billion (US$11.818.3 million) in 20032004, 2005 and 2004,2006, respectively, or 0.2% andrepresenting 0.3% of total operating revenues in 2003each of 2004, 2005 and 2004, respectively.2006.
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.15.8Rp.14.5 billion, Rp.23.7Rp.8.1 billion and Rp.14.5Rp.7.0 billion (US$1.60.8 million) in 2002, 20032004, 2005 and 2004,2006, respectively, or 0.1%, 0.1% andrepresenting less than 0.1% of total operating revenues in 2002, 2003each of 2004, 2005 and 2004, respectively.2006.
Data communication network
      Telkomsel has an agreement with Lintasarta and PT Artajasa Pembayaran Elektronis (“Artajasa”) which 39.8% of the shares are owned by Indosat) for the usage of the data communication network system. The charges from Lintasarta and Artajasa for the services amounted to Rp.11.0Rp.21.4 billion, Rp.23.1 billion and Rp.21.4Rp.44.2 billion (US$2.34.9 million) in 20032004, 2005 and 2004,2006, respectively, or 0.1% andrepresenting 0.1% of total operating expensesrevenues in 2003each of 2004, 2005 and 2004, respectively.2006.

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Agreement with Government agencies and associated companies
      The Company provides telecommunication services to Government agencies.
      The Company has entered into agreements with Government agencies and associated companies, namely, CSM, Patrakom and Patrakom,KSO VII (for 2004 and 2005, and for the period between January to September 2006), 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.28.3Rp.51.0 billion, Rp.73.2Rp.66.8 billion and Rp.51.0Rp.87.3 billion (US$5.59.7 million) in 2002, 20032004, 2005 and 2004,2006 respectively, or 0.1%, 0.3% andrepresenting 0.2% of total operating revenues in 2002, 2003each of 2004, 2005 and 2004, respectively.2006.
      The Company provides leased lines to associated companies, namely CSM, Patrakom and PSN (including to Komselindo, Mobisel and Metrosel in 2002).PSN. 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.75.7Rp.25.7 billion, Rp.44.7Rp.30.7 billion and Rp.25.7Rp.44.4 billion (US$2.84.9 million) in 2002, 20032004, 2005 and 2004,2006, respectively, which was 0.4%, 0.2% andrepresenting 0.1% of total operating revenues in 2002, 2003each of 2004, 2005 and 2004, respectively.2006.
      The Company purchases property and equipment including construction and installation services from a number of related parties. These related parties include among others 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, an associated company and Koperasi Pegawai Telekomunikasi,TELKOM, a related party cooperative. PurchasesTotal purchases made from these related parties amounted to Rp.154.8Rp.268.9 billion, Rp.127.0Rp.337.7 billion and Rp.268.9Rp.153.5 billion (US$28.917.1 million) in 2002, 20032004, 2005 and 2004,2006, respectively, or 2.1%representing 2.4%, 1.1%2.5% and 2.4%0.9% of total fixed assets purchases in 2002, 20032004, 2005 and 20042006, respectively.
      PT INTI is also a major contractor and supplier providing equipment, including construction and installation services, for Telkomsel. Total purchases from PT INTI in 2002, 20032004, 2005 and 20042006 amounted to Rp.34.7Rp.217.7 billion, Rp.52.3Rp.67.6 billion and Rp.217.7Rp.90.5 billion (US$23.410.1 million), respectively, or 0.5%representing 1.9%, 0.5% and 1.9%0.5% of total fixed assets purchases in 2002, 20032004, 2005 and 2004,2006, respectively.

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      Telkomsel has an agreement with PSN for the lease of PSN’s transmission link. Based on the agreement, which was made on March 14, 2001, the 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.40.5Rp.49.7 billion, Rp.95.2 billion and Rp.49.7Rp.131.4 billion (US$5.414.6 million) in 20032004, 2005 and 2004,2006, respectively, orrepresenting 0.3%, 0.4% and 0.2%0.4% of TELKOM’s total operating expenses in 20032004, 2005 and 2004,2006, respectively.
      The CompanyTELKOM 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.131.4Rp.148.3 billion, Rp.159.5Rp.58.3 billion and Rp.148.3Rp.105.5 billion (US$16.011.7 million) in 2002, 20032004, 2005 and 2004,2006, respectively, or 1.1%representing 0.8%, 1.1%0.2% and 0.7%0.4% of total operating expenses in 2002, 20032004, 2005 and 2004,2006, respectively.
      The CompanyTELKOM 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 the form of current accounts and time deposits, and mutual funds in state-owned banks amounted to Rp.6,161.2 billion, Rp.3,130.4Rp.3,315.4 billion and Rp.2,116.0Rp.5,737.7 billion (US$227.8637.5 million) as of December 31, 2002, 20032005 and 2004,2006, respectively, or 13.9%, 6.2%representing 5.3% and 3.8%7.6% of total assets as of December 31, 2002, 20032005 and 2004,2006, respectively. Interest income recognized during 20032004, 2005 and 20042006 was Rp. 274.0Rp.150.4 billion, Rp.124.0 billion and Rp.150.4Rp.405.2 billion (US$16.245.0 million), or 74.9%representing 47.3%, 36.0% and 47.3%62.0% of total interest income in 2004, 2005 and 2006, respectively.
      The Company’sTELKOM’s subsidiaries have loans from a state-owned bank.banks. Interest expense on the loans for 2004, 2005 and 2006 amounted to Rp.9.1 billion, Rp.5.1 billion and Rp.86.3 billion (US$1.09.6 million), orrespectively, representing 0.7%, 0.4% and 6.7% of the total interest expense in 2004.2004, 2005 and 2006, respectively.
      The CompanyTELKOM (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).Telkom. Total charges from these transactions amounted to Rp14.6Rp.24.9 billion, Rp.32.8

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Rp.39.1 billion and Rp.24.9Rp.79.6 billion (US$2.78.8 million) in 2002, 20032004, 2005 and 2004,2006, respectively, orrepresenting 0.1%, 0.2% and 0.1%0.3% of total operating expenses in 2002, 20032004, 2005 and 2004,2006, respectively.
      The Company purchased encoded phone cards from Perusahaan Umum Percetakan Uang Republik Indonesia, a state-owned company. The cost of the phone cards amounted to Rp.1.4 billion, Rp.7.7 billion and nil in 2002, 2003 and 2004, respectively, or 0.01%, 0.05% and 0% of total operating expenses for 2002, 2003 and 2004, respectively.
      The CompanyTELKOM and its subsidiaries earned (were charged) interconnection revenues (charges) from Komselindo, Metrosel, Mobisel, Babintel and PSN in 2002 of Rp.78.0Rp.(5.5) billion, Rp.1.1 billion and from PSNRp.9.7 billion (US$1.1 million) in 2003 of Rp.19.0 billion, which was 0.4%2004, 2005 and 0.1%2006, respectively, representing (0.02)%, respectively,less than 0.01% and less than 0.02% of total operating revenues in 20022004, 2005 and 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 less than 0.1% of total operating revenues in 2004.2006, respectively.
      In addition to revenues earned under the KSO Agreement,Agreements, the Company also earned income from building rental, repairs and maintenance services and training services provided to the KSO Units, amounting to Rp.73.7Rp.18.4 billion, Rp.23.1Rp.26.8 billion and Rp.18.4Rp.14.5 billion (US$2.01.6 million) in 2002, 20032004, 2005 and 2004,2006, respectively, or 0.4%representing 0.1%, 0.1% and less than 0.1% of total operating revenues in 2002, 20032004, 2005 and 2004,2006, respectively.
      The CompanyTELKOM has a revenue-sharing arrangement with Koperasi Pegawai TelkomTELKOM (“Kopegtel”). Kopegtel’s share ofin the revenues from this arrangementthese arrangements amounted to Rp.20.6 billion, Rp.31.9 billion and Rp.28.9 billion (US$2.23.2 million) in 2004, or2005 and 2006, respectively, representing 0.1% of total operating revenues.revenues for each year.
      Telkomsel has operating lease agreements with Patrakom and CSM for the usage of their transmission link for a period of three years, subject to extensions. The lease charges amounted to Rp.25.0 billion, Rp.123.9 billion and Rp.192.1 billion (US$21.3 million) in 2004, 2005 and 2006, respectively, representing 0.1%, 0.5% and 0.6% of total operating expenses in 2004, 2005 and 2006, respectively.
      Kisel is a cooperative that was established by Telkomsel’s employees to provide car rental services, printing and distribution of customer bills, collection and other services, principally servicing Telkomsel. For Kisel’s services, Telkomsel paid Rp.109.5 billion, Rp.78.7 billion and Rp.322.9 billion (US$35.9 million) in 2004, 2005 and 2006, respectively. Telkomsel also has dealership agreements with Kisel for the distribution of SIM cards and pulse reload vouchers. Total SIM cards and pulse reload vouchers sold to Kisel amounted to Rp.816.6 billion, Rp.1,158.6 billion and Rp.1,568.7 billion (US$174.3 million) in 2004, 2005 and 2006, respectively.
      Infomedia providesprovided electronic media and call center services to KSO Unit VII (for 2004 and 2005, and for the period between January to September 2006) based on an agreement dated March 4, 2003. Revenue earned from these transactions in 2004, 2005 and 2006 amounted to Rp.5.5 billion, Rp.9.2 billion and Rp.6.9 billion (US$0.60.8 million), or less than 0.1%respectively, representing 0.02%, 0.02% and 0.01% of total operating revenues.

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      The Company provides a defined benefit pension planrevenues in 2004, 2005 and a post-retirement health care plan for its pensioners through Dana Pensiun Telkom and Yayasan Kesehatan Pegawai Telkom. See Notes 44 and 46 to the consolidated financial statements in Item 18.2006, respectively.
      The CompanyTELKOM 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.
      Telkomsel has procurement agreements with PT Graha Informatika Nusantara, a subsidiary of Dana Pensiun Telkom for installation and maintenance of equipment. Total procurement for installations of equipment amounted to Rp.nil, Rp.127.7 billion and Rp.103.0 billion (US$11.4 million) in 2004, 2005 and 2006, respectively; and the maintenance of equipment amounted to Rp.nil, Rp.36.5 billion and Rp.45.4 billion (US$5.0 million) in 2004, 2005 and 2006, respectively.
C.Interest of experts and counsel

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C.     Interest of experts and counsel
      Not applicable.
ITEM 8.     FINANCIAL INFORMATION
ITEM 8.FINANCIAL INFORMATION
A.     Consolidated statements and other financial information
A.Consolidated statements and other financial information
      See Item 18. “Consolidated Financial Statements,” which is incorporated herein by reference.
Material Litigation
Aria WestCommissions for Business Competition Watch (Komisi Pengawas Persaingan Usaha) (“KPPU”)
      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 (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 PwC (TELKOM’s auditor for the reaudit of TELKOM’s 2002 financial statements), TELKOM, Deloitte (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 sought 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 TelkomTELKOM (“kiosks”) to channel international calls to other international call operators, and abolish the clause in agreements between the Company and Warung TelkomTELKOM providers which limit Warung TelkomTELKOM 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,On January 4, 2005, KPPU has filed an appeal to the Indonesian Supreme Court.
     Recent Press Reports
      There have recently been reports in On January 15, 2007, the Indonesian media that a special government agency may be investigating possible financial wrongdoing, including graft, at TELKOM. Such reports have not indicatedSupreme Court rendered its decision in favor of KPPU, whereby TELKOM must comply with the persons that may be the subjectverdict of investigation or the natureKPPU within eight days as of the wrongdoing.date of a formal notice from the Chief of Bandung District Court requesting TELKOM to comply with the decision of the Supreme Court. The Company does not believe that the Supreme Court decision will have a material adverse effect on the Company’s consolidated financial position, results of operations or liquidity.
The Audit Board of the Republic of Indonesia (Badan Pemeriksa Keuangan Republik Indonesia) (“BPK-RI”)
      The Audit Board of the Republic of Indonesia have initiated investigations related to procurement of goods and services for the years of 2004, 2005, and first semester of 2006. Currently they have initiated investigation related to the execution of a co-operative joint operation schemes (KSO) in Division regional IV. As of the date of this Annual Report, TELKOM has not received any formal notice of any investigation but, if notified, intends to fully cooperate with any investigation.these investigations are on going.
B.     Significant changes
B.Significant changes
      See Note 54 to the important disclosures madeCompany’s consolidated financial statements 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 license18 for information relating to provide IDD fixed line services. On June 7, 2004, TELKOM began offering IDD fixed line services to customers under the brand name “TIC 007.”
material subsequent events occurring after December 31, 2006. See also 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 55 to the Company’s consolidated financial statements in Item 18 for information relating to material subsequent events occurring after December 31, 2004.

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ITEM 9.     THE OFFER AND LISTING
ITEM 9.THE OFFER AND LISTING
A.     Offer and listing details
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
  Share*
   
Calendar Year High Low
     
  (in Rupiah)
2000
  4,350   2,025 
First Quarter  4,350   3,325 
Second Quarter  3,775   2,675 
Third Quarter  3,325   2,600 
Fourth Quarter  2,890   2,025 
2001
  3,400   1,825 
First Quarter  3,150   1,775 
Second Quarter  3,200   2,175 
Third Quarter  3,525   2,650 
Fourth Quarter  3,250   2,425 
2002
        
First Quarter  4,300   2,825 
Second Quarter  4,725   3,700 
Third Quarter  3,900   3,125 
Fourth Quarter  4,000   2,350 
2003
        
First Quarter  3,725   3,225 
Second Quarter  4,950   3,650 
Third Quarter  6,000   4,125 
Fourth Quarter  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  5,200   4,600 
2005
        
January  5,125   4,800 
February  4,825   4,425 
March  4,625   4,300 
April  4,725   4,275 
May  4,600   4,175 
June   5,350   4,700 
July (through July 13, 2005)  5,250   4,950 
          
  Price per Share*
   
Calendar Year High Low
     
  (In Rupiah)
2002
  4,725   2,350 
 First Quarter  4,300   2,825 
 Second Quarter  4,725   3,700 
 Third Quarter  3,900   3,125 
 Fourth Quarter  4,000   2,350 
2003
  6,750   3,225 
 First Quarter  3,725   3,225 
 Second Quarter  4,950   3,650 
 Third Quarter  6,000   4,125 
 Fourth Quarter  6,750   5,650 
2004
  5,200   3,300 
 First Quarter  4,025   3,300 
 Second Quarter  4,350   3,300 
 Third Quarter  4,225   3,650 
 Fourth Quarter  5,200   4,175 
2005
  6,150   4,175 
 First Quarter  5,125   4,300 
 Second Quarter  5,350   4,175 
 Third Quarter  5,800   4,775 
 Fourth Quarter  6,150   4,925 
2006
  10,550   5,950 
 First Quarter  7,000   5,950 
 Second Quarter  8,400   6,750 
 Third Quarter  8,450   7,100 
 Fourth Quarter  10,550   8,200 
 October  8,450   8,200 
 November  10,000   8,500 
 December  10,550   9,700 
2007
        
 January  10,350   9,450 
 February  9,700   8,900 
 March  9,850   9,000 
 April  10,800   9,900 
      * 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 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.

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     On December 30, 2004,28, 2006 (the last trading day in 20042006 on the JSX), the closing price for a share of Common Stock was Rp.4,825.Rp.10,100.

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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 ADS Price per ADS
  (NYSE) (LSE)
     
Calendar Year High Low High Low
         
  (in US Dollars) (in US Dollars)
2000
  12.00   4.13   12.15   4.27 
First Quarter  12.00   9.1   12.1   9.2 
Second Quarter  9.7   6.4   9.6   6.4 
Third Quarter  8.0   5.9   7.9   6.1 
Fourth Quarter  6.3   4.1   6.4   4.3 
2001
  7.06   3.65   7.05   3.80 
First Quarter  6.7   4.0   6.5   3.9 
Second Quarter  5.6   3.7   5.6   3.8 
Third Quarter  7.1   5.5   7.1   5.5 
Fourth Quarter  5.8   4.7   6.1   4.8 
2002
  9.77   5.56   9.82   5.27 
First Quarter  8.6   5.5   8.6   5.5 
Second Quarter  9.8   8.4   9.8   8.4 
Third Quarter  8.7   7.0   8.7   7.1 
Fourth Quarter  8.9   5.6   8.9   5.3 
2003
  8.44   7.30   8.53   7.27 
First Quarter  8.44   7.30   8.53   7.27 
Second Quarter  12.09   8.19   11.78   8.33 
Third Quarter  13.73   9.85   13.90   9.60 
Fourth Quarter  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  23.33   19.35   22.96   19.64 
2005
                
January  21.96   20.60   21.95   20.47 
February  20.95   19.21   20.88   19.05 
March  19.40   18.11   20.05   18.66 
April  19.82   17.75   20.24   18.02 
May  19.75   16.85   20.18   18.01 
June 30, 2005  21.96   19.46   22.36   19.86 
July (through July 13, 2005)  21.30   20.29   21.42   20.55 
                  
  Price per ADS Price per ADS
  (NYSE) (LSE)
     
Calendar Year High Low High Low
         
  (In US Dollars) (In US Dollars)
2002
  9.77   5.56   9.83   5.28 
 First Quarter  8.60   5.56   8.58   5.48 
 Second Quarter  9.77   8.40   9.83   8.45 
 Third Quarter  8.70   7.00   8.70   7.13 
 Fourth Quarter  8.93   5.62   8.88   5.28 
2003
  16.42   7.30   16.05   7.27 
 First Quarter  8.44   7.30   8.53   7.27 
 Second Quarter  12.09   8.19   11.78   8.33 
 Third Quarter  13.73   9.85   13.90   9.60 
 Fourth Quarter  16.42   13.13   16.05   13.40 
2004
  23.33   14.13   23.21   14.08 
 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 
2005
  25.50   16.85   29.76   16.88 
 First Quarter  21.96   18.11   21.86   18.17 
 Second Quarter  21.96   16.85   21.99   16.88 
 Third Quarter  23.66   18.10   29.76   17.97 
 Fourth Quarter  25.50   19.81   25.47   19.71 
2006
  46.68   24.65   46.70   23.78 
 First Quarter  31.51   24.65   31.38   23.78 
 Second Quarter  38.28   27.95   38.35   27.90 
 Third Quarter  36.56   30.32   36.15   30.08 
 Fourth Quarter  46.68   35.64   46.69   36.00 
 October  37.13   35.64   37.07   36.00 
 November  43.96   37.00   43.66   36.10 
 December  46.68   42.93   46.70   42.64 
2007
                
 January  46.98   41.94   46.82   41.95 
 February  43.31   37.74   42.90   39.46 
 March  43.55   37.90   43.05   39.30 
 April  47.02   44.03   47.15   42.91 
      On December 30, 2004,29, 2006 (the last trading day in 2006 on the NYSE), the closing price for an ADS was US$21.0245.60 on the NYSE andNYSE. On December 28, 2006 (the last trading day in 2006 on the LSE), the closing price for an ADS was US$20.7345.49 on the LSE.

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B.     Plan of distribution
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 principalnon-U.S. trading market for the Company’s Common Stock. In addition, American Depositary Shares (“ADSs”), each representing 40 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
      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.679.95Rp.1,249.1 trillion at year end 20042006 as compared to Rp. 605.39Rp.1,083 trillion for the SSX. Total trading value on the JSX during 20042006 was Rp.247.01Rp.445.7 trillion, compared with Rp.8.12Rp.5.22 trillion on the SSX.
Overview of the JSX
Overview of the JSX
      As of December 31, 2004,2006, the JSX comprised of 125124 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, a morning session from 9.30 a.m. to 12.00 noon, followed by an afternoon session from 1.30 p.m. to 4.00 p.m. There are two trading sessions on Friday, from 9.30 a.m. to 11.30 a.m. and from 2.00 p.m. to 4.00 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, negotiated market and cash 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. Regular market and cash market trading is generally carried out in unit lots of 500 shares. The price 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.2,000, in multiples of Rp.10 and each price movement should be no more than Rp.100;
for shares with previous price between the range of Rp.2,000 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 between the range 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 price priority and time priority. Price priority refers 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 (i.e., time priority).
      The negotiated market trading is carried out by (i) direct negotiation between members of JSX or (ii) between clients through one member of JSX or (iii) between client and a member of JSX or (iv) between a member of JSX with Kustodi Penjaminan Efek Indonesia (Indonesian Clearing Guarantee Corporation) (“KPEI”). The negotiated market trading does not use round lots.
      Transactions on the JSX regular market are required to be settled no later than the third 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 per

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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, cash market trading takes place, pursuant to which trading of securities by means of direct negotiation on cash and carry terms will be conducted. All cash market transactions must be reported to the JSX. An exchange member is obliged to pay a transaction cost as regulated by the JSX, delay in payment of the transaction cost will be subject to a fine of 1.0% of the outstanding amount for each day of delay. For any violation on JSX rules, JSX may impose to exchange 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 JSX 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 securities settlement must be conducted through the facilities of the JSX. Engaging in short selling is prohibited under the applicable regulations. Furthermore, the JSX may cancel a transaction if proof exists of fraud, market manipulation or the use of insider information. The JSX may also suspend trading if there are indications of fraudulent transactions or artificial inflation of share prices, misleading information, use of insider information, counterfeit securities or securities blocked from trading, or any other material event. The JSX may suspend trading of certain securities or suspend certain members of the stock exchange. For transactions involving shares listed on both the JSX and the SSX, either exchange may be used to effect the trade.
      Members of the JSX charge a brokerage fee for their services, based on agreement with their client, up to a maximum of 1.0% of the transaction value. When conducting share transactions on the JSX, exchange members are required to pay a transaction cost in the amount of 0.03% of the transaction value (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 the 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 10.0% value added tax on the amount of brokerage fee and transaction cost. Also, Indonesian sellers are required to pay a withholding tax of 0.1% (0.6% for founder shares) of the total transaction value. Additionally, stamp duty of Rp.3,000 is payable on any transaction with a value between Rp.250,000 and Rp.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 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 registry of 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
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 40 shares of Common Stock. As of December 31, 2004, 45,126,4202006, 37,187,806 ADSs were outstanding in either the United StatesNew York Stock Exchange or London Stock Exchange and there were 154134 registered holders of ADSs.
D.     Selling Stockholders
      Not applicable.
E.     Dilution
      Not applicable.

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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 Articlesarticles of Associationassociation
      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 numberC2-7468.HT.01.04.TH.97 year 1997.1997, as amended by the Decree of the Minister of Justice No. C-12265.HT.01.04 TH 2006. 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 statesstate 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 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.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.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.profits. See dividend rights;
 
 rights to share in any surplus in the event of liquidation.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.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.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.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.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 shareShare and two thirds of the holders of the Series B sharesShares present at a general meeting. Such meeting must also be attended by the holder of the Series A Dwiwarna share.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 2two newspapers in Indonesian and one newspaper in English having general circulation within Indonesia, one of which must be in Indonesian and the other in English.Indonesia. The notice period for 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 more 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 shareShare and a majority constituting 75% of the holders of the Series B sharesShares at a general meeting of stockholders that must be attended by the holder of the Series A Dwiwarna share.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 IndonesiaIndonesian 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 Law No. 19 of 2003 on State-Owned Enterprises; the Decree of the Minister of State-Owned Enterprises No. KEP-117/M.MBU/2002 on the Implementation of Good Corporate Governance Practice; 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 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-dayday-to-day business activities of the company and is authorized to act for and on behalf of the company, while the BoC acts ashas the representatives of the company’s shareholdersauthority and is authorized and responsible for the supervision ofresponsibility to supervise 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

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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 whichwhom 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 toand 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 has an audit committee composed of seven members: two independent commissioners, four members who are not affiliated with TELKOM and a non-independent commissioner with no right to vote as he is affiliated with the Government. New listing rules adopted pursuant to Rule 10A-3 under the Exchange Act requires a foreign private issuer with securities listed on the NYSE to have an audit committee comprised of independent directors. The rules became effective on July 31, 2005. Under Rule 10A-3 (c) (3), however, foreign private issuers are exempt from the independence requirements if (i) the home country government or stock exchange requires the company to have an audit committee; (ii) the audit committee is separate from the board of directors and has members from both inside and outside the board of directors; (iii) the audit committee members are not elected by the management and no executive officer of the company is a member of the audit committee; (iv) the home country government or stock exchange has requirements for an audit committee independent from the management of the company; and (v) the audit committee is responsible for the appointment, retention and oversight of the work of external auditors. TELKOM avails itself of this exemption as set forth in its Section 303A Annual Written Affirmations submitted to the NYSE. The NYSE listing standards 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. For more information, see Item 6. “Directors, Senior Management and Employees — A. Directors and Senior Managers — Board of Commissioners’ Committees.”
      TELKOM’s BoC also re-established TELKOM’s nomination and renumerationremuneration 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 adelivered its 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.”

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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
AcquisitionMaster of AriaWestProcurement Partnership Agreement (MPPA) with Samsung Consortium
      On October 9, 2002, TELKOM signed an Initial Purchase Order Contract for CDMA 2000 IX with a consortium lead by Samsung Corporation (“Samsung Consortium”) for BSS procurement in Regional Divisions V, VI and VII and on December 23, 2002, TELKOM signed a MPPA for the construction of Network and Switching Subsystem (“NSS”) nationwide and BSS for Regional Divisions IV, V, VI and VII. In 2006, TELKOM completed its remaining purchase commitment in connection with this MPPA, which amounted to US$5.6 million and Rp.1,826 million.
Procurement Agreements
      In August 2004, Telkomsel entered into the following agreements with Motorola Inc and PT Motorola Indonesia, Ericsson AB and PT Ericsson Indonesia, Nokia Corporation and PT Nokia Network, and Siemens AG, for the maintenance and procurement of equipment and related services, involving:
Joint Planning and Process Agreement;
Equipment Supply Agreement (“ESA”);
Technical Services Agreement (“TSA”); and
Site Acquisition and Civil, Mechanical and Engineering Agreement (“SITAC” and “CME”).
      The agreements contain lists of charges to be used in determining the fees payable by Telkomsel for all equipment and related services to be procured during the roll-out period, upon the issuance of the Purchase Order (“PO”). The agreements are valid and effective as of the execution date by the respective parties for a

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period of three years, provided that the suppliers are able to meet requirements set out in each PO. In the event that the suppliers fail to meet those requirements, Telkomsel may terminate the agreements at its sole discretion with prior written notice.
      In accordance with the agreements, the parties also agreed that the charges specified in the price list would apply to equipment and services (ESA and TSA) and services (SITAC and CME) acquired from the suppliers between May 26, 2004 and the effective date, except for those acquired from Siemens under TSA relating to equipment and the maintenance of Telkomsel’s Switching Sub System (“SSS”) and Base Station Subsystem (“BSS”) that were acquired between July 1, 2004 and the effective date. Prices are subject to quarterly review.
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$6.6 million and Rp.111.7 billion. Pursuant to an amendment dated November 27, 2006, TELKOM’s payment obligation including value added taxes was amended to US$3.2 million and Rp.130.3 billion.
Co-Operation Agreement on Fixed Wireless CDMA Facilities Construction in KSO Division VII Area
      On January 14, 2003, TELKOM and Bukaka Singtel (BSI) entered into a Co-Operation Agreement on Fixed Wireless CDMA Facilities Construction in KSO Division VII Area (the “Co-Operation Agreement”) that implemented the terms of the June 11, 2002 Memorandum of Understanding between TELKOM and Bukaka Singtel (BSI). 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 (BSI). The new facilities are expected to be completed by 2007, 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 (BSI) 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.
NEC-Siemens Consortium for Ring Jakarta-Sumatra-Kalimantan (JASUKA) Backbone
      On June 10, 2005, TELKOM entered into a partnership agreement with NEC-Siemens Consortium, a consortium consisting of NEC Corporation and PT Siemens Indonesia for the procurement and installation of Ring JASUKA Backbone amounting to US$46.9 million and Rp.169.6 billion. The scope of work under this agreement covers the procurement and installation of Ring JASUKA Backbone, which is the optical cable transmission system consisting of (i) Ring-I (Link Jakarta-Tanjung-Pandan-Pontianak-Batam-Dumai-Pekanbaru-Palembang-Jakarta) and (ii) Ring-II (Link Medan-Padang-Pekanbaru-Medan). Pursuant to an amendment dated March 26, 2006, the amount of the contract was amended to US$45.0 million and Rp.156.9 billion. Pursuant to an amendment dated February 7, 2007, the amount of the contract was further amended to US$45.0 million and Rp.156.9 billion.
Tanjung-Pandan-Pontianak Capacity Expansion with NEC Corporation
      On July 8, 2005, TELKOM entered into a supply contract with NEC Corporation for the Tanjung-Pandan-Pontianak capacity expansion amounting to US$4,636,493.96, excluding 10% VAT. The scope of work under this agreement includes expansion of the capacity of the existing undersea optical cable transmissions system. Pursuant to an amendment dated January 12, 2006, the amount of the contract was amended to US$4.1 million, excluding 10% VAT. The work was completed on January 24, 2006.

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The Capacity Expansion of Submarine Cable System (Surabaya — Ujung Pandang — Banjarmasin) with NEC
      On August 16, 2006, TELKOM entered into an agreement with NEC Corporation for a supply contract for the capacity expansion of Submarine Cable System (Surabaya-Ujung Pandang-Banjarmasin) The contract covered the procurement and installation of the system on a turn-key basis and is to be completed within 210 days from the effective date of the contract for US$6.16 million and Rp.7.39 billion, excluding 10% VAT.
The CDMA 2000-1X Equipment in Regional Division V (East Java) with Samsung Consortium
      On June 8, 2006, TELKOM entered into an agreement with PT Samsung Telecommunication Indonesia for the procurement of CDMA2000-1X Equipment & Services in Division V. This agreement was for an amount of US$7.18 million and Rp.16.8 billion. The project was to be completed on a turn-key basis within three months after the effective date of the contract. On August 1, 2006, TELKOM entered into a first amendment with PT Samsung Telecommunication Indonesia and two other companies, INTI and Samsung Electronics, to complete the contract together. On December 18, 2006, TELKOM entered into a second amendment for additional services under the same scope of work for an amount of US$7.67 million and Rp.10.9 billion, excluding 10% VAT.
IP Core Expansion with Siemens and Juniper Networks, Inc.
      On September 26, 2006, TELKOM entered into an agreement with Siemens for the expansion of its IP core network for an amount of Rp.22.05 billion. TELKOM further expanded its IP/MPLS-based core infrastructure with additional Juniper networks M-series multiservice routing platforms, including the M320. The upgrade, performed by Siemens, builds on TELKOM’s existing M-series routers, deployed last year as part of an initial Next Generation Network (“NGN”) rollout. The new deployment spans 16 cities, connecting softswitch systems and legacy routers.
Additional Capacity for PSTN Local and Trunk Switch
      On September 27, 2006, TELKOM entered into an agreement with Siemens for capacity expansion of its local and trunk switch for an amount of Rp.209 billion, excluding VAT 10%. TELKOM further expanded capacity for its local and trunk switch with PT Lintas Teknologi Indonesia and NEC on November 29, 2006 and November 30, 2006, respectively, for Rp.63.45 billion and Rp.22.0 billion, excluding 10% VAT.
Optical Access Network Deployment in Divisions I and III
      On December 29, 2006, TELKOM entered into an agreement with OPNET Technologies — OLEX Cables Consortium for Rp.61.17 billion and US$2.76 million, excluding 10% VAT, for the optical access network (“OAN”) deployment of a115k-line unit. The OAN will be connected to the switched networks in Divisions I and III.
Optical Access Network Deployment in Division II
      On December 29, 2006, TELKOM entered into an agreement with OPNET Technologies — OLEX Cables Consortium for Rp.55.78 billion and US$3.67 million, excluding 10% VAT, for the OAN deployment of a165k-line unit. The OAN will be connected to the switched network in Division II.
Optical Access Network Deployment in Division IV
      On November 30, 2006, TELKOM entered into an agreement with Huawei — Andi Arta Consortium for Rp.58.89 billion and US$2.94 million, excluding 10% VAT, for the OAN deployment of a130k-line unit. The OAN will be connected to the switched network in Division IV.

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Optical Access Network Deployment in Division VI
      On December 18, 2006, TELKOM entered into an agreement with ALCATEL — INTI Consortium for Rp.63.66 billion and US$3.44 million, excluding 10% VAT, for the OAN deployment of a 133k line unit. The OAN will be connected to the switched network in Division VI.
Agreement for FWA CDMA Expansion Project in Regional Divisions I and IV with Huawei Consortium
      On January 6, 2006, TELKOM entered into an agreement with Huawei Consortium for the fixed wireless access (“FWA”) CDMA expansion in Divisions I and IV. The scope of work in this contract consists of two stages. The first stage consists of preparation and testing activities, while the second stage consists of the installation and service-level agreement (“SLA”) maintenance of 1,942,888 lines in Divisions I and IV. The scope of work is to be executed within three years of the date of issuance of the Buy or Return Acceptance Test Certificate (“BAT Certificate”) by TELKOM certifying the completion of stage one. The total contract price, including 10% VAT, was US$27.7 million and Rp.150.2 billion.
Agreement for FWA CDMA Expansion Project in Regional Division II with Huawei Consortium
      On December 8, 2006, TELKOM entered into an agreement with Huawei Consortium for the FWA CDMA expansion in Division II. The scope of work in this contract consists of two stages. The first stage consists of preparation and testing activities, while the second stage consists of the installation and SLA maintenance of 3,584,489 lines in Division II. The scope of work is to be executed within three years of the date of issuance of the BAT Certificate. The total contract price, including 10% VAT, was US$25.31 million and Rp.142.55 billion.
Agreement for FWA CDMA Expansion Project in Regional Division III with Huawei Consortium
      On December 8, 2006, TELKOM entered into an agreement with Huawei Consortium for the FWA CDMA expansion in Division III. The scope of work in this contract consists of two stages. The first stage consists of preparation and testing activities, while the second stage consists of the installation and SLA maintenance of 1,478,910 lines in Division III. The scope of work is to be executed within three years of the date of issuance of the BAT Certificate. The total contract price, including 10% VAT, was US$9.87 million and Rp.59.48 billion.
Agreement for the Expansion of the NSS, BSS and PDN FWA CDMA System Project in Regional Division V with Samsung Consortium
      On October 13, 2006, the Company entered into a procurement and installation agreement with Samsung Consortium for the expansion of the NSS, BSS and PDN FWA CDMA System Project in Regional Division V (East Java) for the amounts of US$59.9 million plus Rp.94.8 billion. Samsung Consortium will provide service and maintenance support for structures that it constructs, pursuant to a Service Level Agreement for a period of three years (2006-2008) in return for a consideration of Rp.30.0 billion. As of December 31, 2003,2006, total purchase commitment amounted to US$59.9 million and Rp.124.8 billion.
Agreement for FWA CDMA Expansion Project in Regional Division VI with ZTE Consortium
      On November 28, 2006, TELKOM entered into an agreement with ZTE Consortium for the FWA CDMA expansion in Division VI. The scope of work in this contract consists of two stages. The first stage consists of preparation and testing activities, while the second stage consists of the installation and SLA maintenance of 2,103,617 lines in Division VI. The scope of work is to be executed within three years of the date of issuance of the BAT Certificate. The total contract price, including 10% VAT, was US$22.53 million and Rp.66.09 billion.

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Jember-Denpasar Submarine Backbone
      On December 29, 2006, TELKOM entered into an agreement with ZTE Consortium for a supply contract for the deployment of the Jember-Denpasar Submarine Cable System. The contract covered the procurement and installation of the system on a turn key basis, which is to be carried out and completed within 6.5 months from the effective date of the contract for an amount, including 10% VAT, of US$10.19 million and Rp.16.14 billion.
Acquisition of Dayamitra
      On May 17, 2001, TELKOM acquired 100%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 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 occurring 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. The balance of US$103.6 million was to be paid through an escrow account in eight quarterly installments of US$12.9 million each, beginning on August 17, 2001. 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 Dayamitra’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 was made on March 26, 2006.
PT Mitra Global Telekomunikasi Indonesia (MGTI)
      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 IV 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 IV 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 million) to be paid by TELKOM to MGTI from 2004 through 2010 plus direct cost of the business combination.
Restatement and Amendment of KSO VII Agreement
      On October 19, 2006, TELKOM announced that the Company and PT Bukaka Singtel International (BSI), TELKOM’s KSO partner for Regional Division III, AriaWest, forVII Eastern Indonesia, entered into an aggregate considerationagreement to amend and restate the KSO VII Agreement. Under the amended and restated KSO VII Agreement, the rights to operate telecommunication services in KSO VII region were transferred to TELKOM with KSO VII being operated under the sole management, supervision, control and responsibility of US$38.67 million in cash (US$20 million of which was paid when the purchase agreement was signed on May 8, 2002 andTELKOM. For the remaining US$18.67 million was paid on July 31, 2003)KSO period, TELKOM is entitled at its sole discretion 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 obligationsexpense to its lenders, TELKOM also repaid approximately US$99 million of AriaWest’s debt (on behalf of AriaWest) and entered into aconstruct new loan agreement for approximately US$197 million with AriaWest’s 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.
Acquisition of Pramindo
      Pursuant to a Conditional Sale and Purchase Agreement dated April 19, 2002, TELKOM agreed to acquire 100% of its KSO partnertelecommunications facilities in Regional Division I, Pramindo and obtained management control over Pramindo. UponVII. PT Bukaka Singtel International (BSI) receives fixed monthly payments, while TELKOM is entitled to 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. UnderKSO revenues after the agreement, TELKOM also agreedmonthly amounts due to repay loans toPT Bukaka Singtel International (BSI) and operating expenses. At 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 purchaseend of the remaining 55%KSO period on December 31, 2010, all rights, title and interest of Pramindo that it did not yet own and as of the date of this Annual Report TELKOM owns 100% of Pramindo.PT Bukaka Singtel International (BSI) in existing property,

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plant and equipment (including new additional installations) and inventories of KSO VII shall be transferred to TELKOM without requiring any further action by any party, upon payment by TELKOM to PT Bukaka Singtel International (BSI) of Rp.1,000. As a result of the amended and restated KSO VII Agreement, TELKOM obtained the legal right to control the financial and operating decisions of Regional Division VII, and TELKOM must pay to PT Bukaka Singtel International (BSI) a fixed monthly payment of Rp.55.64 billion from October 2006 to June 2007, and Rp.44.25 billion from July 2007 to December 2010. Payment is derived from the revenue of KSO VII. TELKOM believes that the transaction will not have a material impact on TELKOM’s financial position or operating results.
Medium-Term Notes Issuance Agreement
      See Item 5. “Operating and Financial Review and Prospects — B. Liquidity and Capital Resources — Medium-Term Notes.”
      See Exhibit 4.43 for an English summary of the terms and conditions of the MTN.
TELKOM appoints PwC as its External Auditor for 2006
      On August 11, 2006, TELKOM announced that it has selected KAP Drs. Haryanto Sahari & Rekan, the Indonesian affiliate of PricewaterhouseCoopers (“PwC”) as its independent auditor to perform an integrated audit for 2006, consisting of the audits of TELKOM’s consolidated financial statements and its internal control over financial reporting for 2006.
Interconnection Agreement with IndosatAcquisition of Dayamitra
      On September 3, 2002,May 17, 2001, TELKOM signed an Interconnection Agreement with Indosat. This agreement provides foracquired 90.32% of the interconnection of TELKOM’s fixed line network with the local fixed line network to be established by Indosat. The Interconnection Agreement only regulates local fixed wireline in Jakartaissued and Surabaya area.
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, 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$73.1 million, which is expected to be fully paid by TELKOM by July 2005. TELKOM expects to replace its existing Palapa B-4 satellite withshares of Dayamitra, the TELKOM-2 satellite around September 2005. The TELKOM-2 satellite hasKSO VI investor, for US$134.2 million (including consultant’s fee of US$3.3 million) and also purchased a capacity of 24 standard C-band transponders with transponder specifications similar to those of the TELKOM-1 satellite. The TELKOM-2 satellite has 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, videocall option and data communications. The satellite is planned to be launched into geo-synchronous orbit 22,300 miles above the earth and to operate in geostationary orbit position located at 118 degrees east longitude.
Contract with Arianespace
      On November 8, 2002, TELKOM signedgranted 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. Payment was made in 4 installments between January 2004 until September 2004. On October 15, 2004, the parties amended the contract to allow TELKOM to exercise a reflightput option which allows TELKOM a reflight in the event of a launch failure or a certain amount of compensation in the event of 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 for nationwide and 802,000 base station subsystem (BSS) lines for Regional Division III, IV, V, VI and VII for US$116 per base station subsystem line and US$34 per 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 for the construction of 631,800 base station subsystem lines 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).

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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 1x system within thirty-four months of August 26, 2003, and will be paid a total of US$32.3 million and Rp.105.9 billion. PT INTI will service and maintain the CDMA 2000 1x 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 was 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 scheduleremaining 9.68% partner shares of 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 occurring 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. The balance of US$103.6 million was to be paid through an escrow account in eight quarterly installments of US$12.9 million each, beginning on August 17, 2001. TELKOM paid the last quarterly installment on May 17, 2003. On December 14, 2004, TELKOM exercised its call option to purchase, and location, and agreed to an increased Rupiah portionacquired, the remaining 9.68% of the shares of Dayamitra, for an aggregate consideration from Rp.144.7 billionof 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 Dayamitra’s adjusted working capital of US$1.0 million. TELKOM is required to Rp.157.7 billion.pay the option strike price less funds available in the escrow account on November 30, 2004 in 16 equal installments, the last of which was made on March 26, 2006.
PSTN Regional Junction in Jakarta AreaPT Mitra Global Telekomunikasi Indonesia (MGTI)
      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 betweenJanuary 20, 2004, TELKOM and Motorola consists of 225,500 lines of BSS (radio system) for Regional Division I Sumatera for a total of approximately US$43.2 million and Rp.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, TELKOMMGTI entered into an agreement with PT INTI forto amend and restate the construction and procurement of an optical network, as well as a network management system and other related services and equipment,KSO Agreement with respect to Regional Division III (West Java).IV. Under this agreement,the amended and restated KSO IV 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 paymake 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 IV 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 million) to be paid by TELKOM to MGTI from 2004 through 2010 plus direct cost of the business combination.
Restatement and Amendment of KSO VII Agreement
      On October 19, 2006, TELKOM announced that the Company and PT INTI a total considerationBukaka Singtel International (BSI), TELKOM’s KSO partner for Regional Division VII Eastern Indonesia, entered into an agreement to amend and restate the KSO VII Agreement. Under the amended and restated KSO VII Agreement, the rights to operate telecommunication services in KSO VII region were transferred to TELKOM with KSO VII being operated under the sole management, supervision, control and responsibility of US$6.6 millionTELKOM. For the remaining KSO period, TELKOM is entitled at its sole discretion and Rp.111.7 billion.expense to construct new telecommunications facilities in Regional Division VII. PT Bukaka Singtel International (BSI) receives fixed monthly payments, while TELKOM is entitled to the balance of the KSO revenues after the monthly amounts due to PT Bukaka Singtel International (BSI) and operating expenses. At the end of the KSO period on December 31, 2010, all rights, title and interest of PT Bukaka Singtel International (BSI) in existing property,

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plant and equipment (including new additional installations) and inventories of KSO VII shall be transferred to TELKOM without requiring any further action by any party, upon payment by TELKOM to PT Bukaka Singtel International (BSI) of Rp.1,000. As a result of the amended and restated KSO VII Agreement, TELKOM obtained the legal right to control the financial and operating decisions of Regional Division VII, and TELKOM must pay to PT Bukaka Singtel International (BSI) a fixed monthly payment of Rp.55.64 billion from October 2006 to June 2007, and Rp.44.25 billion from July 2007 to December 2010. Payment is derived from the revenue of KSO VII. TELKOM believes that the transaction will not have a material impact on TELKOM’s financial position or operating results.
Medium-Term Notes Issuance Agreement
      See Item 5. “Operating and Financial Review and Prospects — B. Liquidity and Capital Resources — Medium-Term Notes.”
      See Exhibit 4.43 for an English summary of the Procurementterms and conditions of Softswitch System Class 4 with a consortium led by Santera-Olexthe MTN.
TELKOM appoints PwC as its External Auditor for 2006
      On December 18, 2003,August 11, 2006, TELKOM entered intoannounced that it has selected KAP Drs. Haryanto Sahari & Rekan, the Indonesian affiliate of PricewaterhouseCoopers (“PwC”) as its independent auditor to perform an agreement with a consortium led by Santera-Olexintegrated audit 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 portion2006, consisting 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”) that implemented the termsaudits 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 TELKOMTELKOM’s consolidated financial statements 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.control over financial reporting for 2006.
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$49.2 million and Rp.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.1.7 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).

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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 150 km optical submarine cable between Indonesia and Malaysia, which was scheduled to be completed by the end of 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.
Acquisition of Dayamitra
      On May 17, 2001, TELKOM acquired 90.32% of the issued and fully paid shares of Dayamitra, the KSO VI Investor,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 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 transactionoccurring 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 thecapital. The balance of US$103.6 million was to be paid through an escrow account in eight quarterly installments of US$12.9 million each, beginning on August 17, 2001 and2001. 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’sDayamitra’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 bewas made on March 26, 2006.
PT Mitra Global Telekomunikasi Indonesia (MGTI)
      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,IV 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,IV 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 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)Restatement and Amendment of KSO VII Agreement
      On October 19, 2006, TELKOM hasannounced that the Company and PT Bukaka Singtel International (BSI), TELKOM’s KSO partner for Regional Division VII Eastern Indonesia, entered into three indemnity agreements with Deloitte.an agreement to amend and restate the KSO VII Agreement. Under the first agreement, dated February 9, 2004,amended and restated KSO VII Agreement, the rights to operate telecommunication services in KSO VII region were transferred to TELKOM agreedwith KSO VII being operated under the sole management, supervision, control and responsibility of TELKOM. For the remaining KSO period, TELKOM is entitled at its sole discretion and expense to indemnify Deloitte against reasonable legal costs incurredconstruct new telecommunications facilities in successfully defending any legal proceedings brought against Deloitte onRegional Division VII. PT Bukaka Singtel International (BSI) receives fixed monthly payments, while TELKOM is entitled to the basisbalance of the inclusionKSO revenues after the monthly amounts due to PT Bukaka Singtel International (BSI) and operating expenses. At the end of the audited 2000KSO period on December 31, 2010, all rights, title and 2001 financial statementsinterest of PT Bukaka Singtel International (BSI) in Amendment No. 2 to 2002 Annual Report on Form 20-F/A that was filed on February 9, 2004, provided however that the indemnity will be void andexisting property,

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inoperative if a court, after adjudication, determines that Deloitte is liable for professional malpractice. If this situation wereplant and equipment (including new additional installations) and inventories of KSO VII shall be transferred to arise, Deloitte has agreed to immediately reimburse TELKOM for all amounts paidwithout requiring any further action by any party, upon payment 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 basisPT Bukaka Singtel International (BSI) of Rp.1,000. As a result of the inclusionamended and restated KSO VII Agreement, TELKOM obtained the legal right to control the financial and operating decisions of Regional Division VII, and TELKOM must pay to PT Bukaka Singtel International (BSI) a fixed monthly payment of Rp.55.64 billion from October 2006 to June 2007, and Rp.44.25 billion from July 2007 to December 2010. Payment is derived from the audited 2001 financial statements in its 2003 Annual Report on Form 20-F, provided howeverrevenue of KSO VII. TELKOM believes that the indemnitytransaction will be void and inoperative ifnot have 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, but with respect to inclusion of the audited 2001material impact on TELKOM’s financial statements in its Amendment No. 1 to 2002 Annual Report 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 were 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.position or operating results.
Medium-Term Notes Issuance Agreement
      On December 15, 2004, TELKOM issued unsecuredSee Item 5. “Operating and Financial Review and Prospects — B. Liquidity and Capital Resources — 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.Notes.”
      See Exhibit 4.454.43 for an English summary of the terms and conditions of the MTN.
TELKOM appoints PwC as its External Auditor for 2006
      On August 11, 2006, TELKOM announced that it has selected KAP Drs. Haryanto Sahari & Rekan, the Indonesian affiliate of PricewaterhouseCoopers (“PwC”) as its independent auditor to perform an integrated audit for 2006, consisting of the audits of TELKOM’s consolidated financial statements and its internal control over financial reporting for 2006.
Interconnection Agreement with Indosat
      On September 23, 2005, TELKOM entered into an interconnection agreement with Indosat. This agreement provides for the interconnection (i) of TELKOM’s local fixed line network with Indosat’s long-distance fixed line network; (ii) of Indosat’s local fixed line network with TELKOM’s long-distance fixed line network; (iii) between TELKOM’s and Indosat’s long-distance fixed line networks; (iv) of TELKOM’s domestic fixed line network with Indosat’s international fixed line network; and (v) of Indosat’s local fixed line network with TELKOM’s international fixed line network. In each case, the interconnection tariff is calculated on a call-by-call basis. This agreement replaced the previous interconnection agreements with Indosat regulating interlocal interconnection, namely, (i) Interconnection Agreement and the Settlement of Interconnection Financial Rights and Obligations No. PKS162/HK81OPSAR-00/2002 — 26/DNI/HK720/02 dated September 3, 2002 as amended by Addendum No. PKS56/HK.810/JAR-30/2005 — 065/100-ICO/REL/2005 dated March 31, 2005; (ii) Agreement on the Performance of Telecommunications Services No. 63/HK.800/UTA-00/97 — 092/DRU.HK.720/97 dated August 21, 1997; and (iii) Interconnection Agreement No. 64/HK.81OPSAR-00/97 — 1000/NDN/HK.720/97 dated August 21, 1997. On July 13, 2006, TELKOM and Indosat amended this interconnection agreement to accommodate changes in technical and operational issues regarding signaling and call scenarios.
      On December 1, 2005, TELKOM and Indosat entered into another interconnection agreement enabling each party’s customers to make domestic calls between Indosat’s mobile network and TELKOM’s fixed line network and allowing Indosat’s mobile customers to access TELKOM’s IDD service by dialing “007.” This agreement replaces those existing interconnection agreements relating to TELKOM’s fixed line network and Indosat’s mobile network. This agreement is valid for three years from its execution date, and thereafter, may be amended upon agreement by both parties.
Interconnection Agreement with HCPT
      On January 25, 2006, TELKOM entered into an interconnection agreement with HCPT, a3G-licensed cellular operator. This agreement provides for the interconnection of TELKOM’s fixed line networks, including local, long distance, and international networks with HCPT’s mobile network. It enables each party’s customers to make a call between each others’ networks and also allows customers access to certain services provided by the other party.

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Interconnection Agreement with STI
      On May 8, 2006, TELKOM signed a side letter in connection with an interconnection agreement with PT Sampoerna Telekomunikasi Indonesia (“STI”) following the change of the name from PT Mandara Selular Indonesia to PT Sampoerna Telekomunikasi Indonesia. STI assumed the obligations of Mandara under their respective interconnection agreements with TELKOM.
Amendments to Interconnection Agreements under Cost-Based Scheme
      On December 28, 2006, TELKOM and all network operators including Indosat, HCPT and STI signed amendments to their interconnection agreements for its fixed line network (local, long distance, and international) and mobile network for the implementation of the cost-based tariff obligations under the MoCI Regulation No. 8/2006. These amendments took effect on January 1, 2007. These amendments are limited to changes to tariff rates and do not fully cover the requirements under the RIO. TELKOM expects that all existing interconnection agreements and amendments will be replaced by new interconnection agreements which address all requirements under the RIO by the end of 2007.
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.US Dollar. These downward adjustments occurred in November 1978, when the exchange rate was realigned from Rp.415 to Rp.623 to the U.S.US Dollar; in March 1983, when the rate went from Rp.703 to Rp.970 to the U.S.US Dollar; and in September 1986, when the rate fell from Rp.1,134 to Rp.1,644 to the U.S.US 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.US Dollar by about 4% annually. Since the free-floating regime was implemented in August 1997, the Rupiah fluctuation has been significant. During 2004,2006, the average rate of Rupiah to the U.S.US Dollar was Rp.8,935,Rp.9,167, with the highest and lowest rates being Rp.9,430Rp.9,795 and Rp.8,323Rp.8,720, respectively.

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E.  Taxation
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, which, 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 theU.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 received by a non-resident taxpayer 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

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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 theU.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, 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 StatesCertain U.S. Federal Income TaxationTax Considerations
      The following is a general descriptionsummary of the principalcertain United States federal income tax consequencesconsiderations relating to a U.S. Holder, as defined below, of the purchase,acquisition, ownership, and disposition of the ADSs or shares of Common Stock. This description isStock by U.S. Holder’s (as defined below) that hold their ADSs or Common Stock as “capital assets” (generally, property held for general information purposes only and is based oninvestment) under 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. This summary is based upon existing United States federal income tax law, which areis subject to differing interpretations or change, possibly retroactively. Thewith retroactive effect. This summary does not discuss all aspects of United States federal income taxation which may be important to particular investors in light of their individual investment circumstances, including investors subject to special tax treatmentrules (for example, financial institutions, insurance companies, broker-dealers, partnerships and their partners, and tax-exempt organizations (including private foundations)), holders who are not U.S. Holders, investors that will hold ADSs or Common Stock as part of a holder of ADSsstraddle, hedge, conversion, constructive sale, 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 minimumother integrated transaction for United States federal income tax broker-dealers, personspurposes, or investors that have a “functional currency”functional currency other than the U.S.US Dollar, and persons owning, directly or indirectly, 10% or moreall of the voting shares of the Company)whom may be subject to specialtax rules that differ significantly from those summarized below. In addition, this summary does not discussed below. The following summarydiscuss any state, local, or non-United States tax considerations. Each holder is limitedurged to U.S. Holders, as defined below, who will holdconsult their tax advisors regarding the United States federal, state, local, and non-United States income and other tax considerations of their investment in the ADSs or sharesCommon Stock.
      For purposes of this summary, a “U.S. Holder” is a beneficial owner of ADSs or 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 anythat is, for United States federal estate, gift or alternative minimumincome 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 Stockpurposes, (i) an individual 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 for United States federal income tax purposes, created in, or organized under the lawslaw of, the United States or any State or political subdivision thereof, (iii) an estate the income of which is subject toincludible in gross income for United States federal income tax without regard topurposes regardless of its source, or (iv) a trust if a court within the United States is able to exercise primary supervision over(A) the administration of which is subject to the trustprimary supervision of a United States court and which has one or more United States persons who have the authority to control all substantial decisions of the trust.trust or (B) that has otherwise elected to be treated as a United States person under the Code.
      If a partnership (including any entity treated asis a partnership for United States federal income tax purposes) holdsbeneficial owner of ADSs or shares of Common Stock, the tax treatment of a partner in suchthe partnership will generally 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

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      For United States federal income tax consequences applicable to them.
purposes, U.S. Holders of ADSs evidencing Common Stock will be treated as the beneficial owners of the underlying Common Stock represented by thosethe 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.

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Taxation of DistributionsThreshold PFIC Classification Matters
      Subject toA non-United States corporation, such as 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,Company, will be treated as a dividend subject to“passive foreign investment company” (a “PFIC”), for United States federal income tax as ordinarypurposes, if 75% or more of its gross income on the dateconsists of receipt by the Depositarycertain types of “passive” income or the holder50% or more of such ADSs or shares of Common Stock, respectively, to the extent ofits assets are passive. Based on the Company’s current income and accumulatedassets, the Company presently does not believe that it should be classified as a PFIC. Because PFIC status is a fact-intensive determination made on an annual basis, no assurance can be given that the Company is not or will not become classified as a PFIC. The discussion below under “Dividends” and “Sale or Other Disposition of ADSs or Common Stock” is written on the basis that the Company will not be classified as a PFIC for United States federal income tax purposes.
Dividends
      Any cash distributions paid by the Company out of earnings and profits, as determined for U.S.under United States federal income tax purposes.principles, will be subject to tax as dividend income and will be includible in the gross income of a U.S. Holder upon receipt. A non-corporate recipient of dividend income will generally be subject to tax on such dividend income from a “qualified foreign corporation” at a maximum U.S.United States federal tax rate of 15% rather than the marginal tax rates generally applicable to ordinary income provided that certain holding period requirements are met. Dividends received from “qualified foreign corporations” generally qualify for the reduced rate. A non-U.S.non-United States corporation (other than a PFIC) generally 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 of the United States 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 (or ADSs backed by such stock) which is readily tradable on an established securities market in the United States. The Treasury Department has determined that the incomeThere is currently a tax treaty in effect between Indonesia and the United States as in effect asand Indonesia which the Secretary of the date of this Annual Report meets the requirements described in clause (i) aboveTreasury has determined is satisfactory for these purposes and the Company believes that it wouldshould be eligible for the benefits of suchthe treaty. In addition,Additionally, because the ADSs are listed on the New York Stock Exchange, an established securities market in the United States, they would under Treasury Department guidelines beare considered to be readily tradeabletradable on that exchange. Distributions, if any,
      Cash distributions in excess of current and accumulatedour earnings and profits will constitutebe treated as a tax-free return of capital and will be applied against and reduce such holder’sto the extent of the U.S. Holder’s adjusted tax basis in suchits ADSs or sharesCommon Stock, and thereafter as gain from the sale or exchange of Common Stock. Toa capital asset. The amount of any cash distribution paid in Rupiah should equal the extent thatUS Dollar value of such Rupiah on the remaining portiondate of receipt of the distribution, is in excessregardless of such basis,whether the Rupiah are actually converted into US Dollars at that amounttime. Gain or loss, if any, recognized on a subsequent sale, conversion, or other disposition of Rupiah generally will constitute capital gain as discussed below. U.S. corporate holdersbe United States source ordinary income or loss. Dividends received on the ADSs or Common Stock 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.corporations.
      If a distribution is paid with respect to ADSs or shares of Common Stock in Rupiah, the amount of the distributionDividends generally 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 from foreign sources for United States foreign tax credit limitation purposes. If the Depositary converts the RupiahA U.S. Holder may be eligible, subject to a number of complex limitations, to claim a foreign tax credit in respect of any foreign withholding taxes imposed on dividends received on ADSs or Common Stock. A U.S. Dollars on the date it receives such Rupiah, U.S. Holders willHolder who does 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 claimfor foreign tax creditswithheld, may instead claim a deduction, for IndonesianUnited States federal income tax withheld.purposes, in respect of such withholdings, but only for a year in which such holder elects to do so for all creditable foreign income taxes.
TaxationSale or Other Disposition of Capital GainsADSs or Common Stock
      Subject to the PFIC rules discussed below,A U.S. Holder will generally recognize capital gain or loss upon 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 onupon the sale or other disposition and the holder’s adjusted tax basis in such ADSs or shares of Common Stock. This will result in a long-term or short-termAny capital gain or loss depending on whetherwill be long-term if the ADSs or shares of Common Stock have been

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held for more than one year. As of the date of this Annual Report, long-term capital year and will generally be United States source

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gain of a non-corporate holder is subject to a maximumor loss for United States foreign tax rate of 15% in respect of property with a holding period of more than one year.credit purposes. The deductibility of a capital loss ismay be subject to limitations.
Passive Foreign Investment Company StatusConsiderations
      AdverseIf the Company were to be classified as a PFIC in any taxable year, a U.S. Holder would be subject to special rules generally intended to reduce or eliminate any benefits from the deferral of United States federal income tax rules apply to holders of equity intereststhat a U.S. Holder could derive from investing in a corporationnon-United States company that does not distribute all of its earnings on a current basis. In such event, a U.S. Holder may be subject to tax at ordinary income tax rates on (i) any gain recognized on the sale of ADSs or Common Stock and (ii) any “excess distribution” paid on ADSs or Common Stock (generally, a distribution in excess of 125% of the average annual distributions paid by us in the three preceding taxable years). In addition, a U.S. Holder may be subject to an interest charge on such gain or excess distribution. Finally, the 15% maximum rate on Company dividends would not apply if the Company becomes classified as a PFIC underPFIC. Each U.S. Holder is urged to consult its tax advisor regarding the Code. A foreign corporation will constitute a PFIC for United States federal incomepotential 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 riseconsequences to such income) or 50% or more of the average value of its assets determined 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 a PFIC. If the Company is not operated in the manner 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.
      Ifholder if the Company is or becomes a PFIC, any gain upon sale or other disposition or 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.
      If the Company is classified as a PFIC, a U.S. Holder would notas well as certain elections that may be eligible for a reduced tax rate on dividends paid on, and on gain realized with respectavailable to dispositions of, ADSs or shares of Common Stock. See “Taxation of Distributions” above.mitigate such consequences.
F.  Dividends and paying agents
F.Dividends and paying agents
      Not applicable.
G.  Statement by experts
G.Statement by experts
      Not applicable.
H.  Documents on display
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 Fifth100 F Street, N.W.N.E., Washington, D.C. 20459. You may obtain information on the operation of the Public Reference Room by calling the SEC at1-800-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.www.sec.gov.
I.   Subsidiary Information
I.Subsidiary Information
      Not applicable.

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ITEM 11. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK
A.  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 hedgedhedges its obligations for the current year. As of December 31, 2004,2006, foreign currency time deposits provided approximately 46%45% 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-term fixed rate assets, the rates for which are reset periodically. The Company’s exposure to such market risks fluctuated significantly during 2002, 20032004, 2005 and 20042006 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 20052007 or thereafter.

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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 bearsbear 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 raterates offered by the lenders plus 5.25% and for the non-Rupiah portion based on floating interest rate offered by the lenders plus 0.5%. See Note 22 to the Company’s consolidated financial statements. To the extent interest rates in Indonesia fluctuate significantly, the Company’s interest obligations under its long-term debt could increase.
      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.US 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 for3-month placements in effect as of December 31, 20042006 by the banks where such deposits were located; (ii) variable interest rates on Rupiah denominated long-term liabilities are calculated as of December 31, 20042006 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 or based on the average 3-month deposit rate offered by the lenders; (iii) variablefixed interest rates on U.S.US Dollar deposits are based on average interest rates offered for3-month placements by the various lending institutions to the Republic of Indonesiawhere such deposits are located as of December 31, 2004;2006; and (iv) the value of marketable securities is based on the value of such securities at December 31, 2004.2006. 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

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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              
  December 31, 2004    
    Expected Maturity Date  
  Foreign Rp.      
  Currency Equivalent Rate 2005 2006 2007 2008 2009 2010-2024 Fair Value
                     
                    (Rp. in
    (Rp. in     million)
  (in millions) million) (%) (Rp. in million)  
ASSETS
                                        
Fixed Rate
                                        
Cash and Cash equivalents                                        
 Time deposit                                        
 Rupiah                                        
  Principal     2,564,200       2,564,200                  2,564,200 
  Interest          6.5                             
 U.S. Dollar                                        
  Principal  66.79   620,452       620,452                  620,452 
  Interest          1.9                             
 Euro                                        
  Principal  85.49   1,081,568       1,081,568                  1,081,568 
  Interest          1.9                             
Temporary Investments                                        
 Time deposits                                        
 Rupiah                                        
  Principal     5,065       5,065                  5,065 
  Interest          6.4                             
 Available-for-Sale Securities Rupiah     14,884       14,884                  14,884 
LIABILITIES
                                        
Short Term Bank Loan
                                        
Variable Rate
                                        
 U.S. Dollar                                        
  Principal  118.46   1,101,633       1,101,633                  1,101,633 
  Interest          5.0   24,161                    
Long-term debt(1)
                                        
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
                                        
 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     
                                          
  Outstanding Balance as at  
  December 31, 2006 Expected Maturity Date
     
  Foreign Rp.     2012- Fair
  Currency Equiv. Rate 2007 2008 2009 2010 2011 2024 Value
                     
  (in million) (Rp. in (%)   (Rp. in
    million)   (Rp. in million) million)
ASSETS
                                        
Fixed Rate
                                        
Cash and cash equivalents
                                        
Time deposit                                        
Rupiah                                        
 Principal      5,601,885       5,601,885                  5,601,885 
 Interest          9.96                             
US Dollar                                        
 Principal  152.33   1,370,251       1,370,251                  1,370,251 
 Interest          3.75                             
Euro                                        
 Principal  68.97   816,498       816,498                  816,498 
 Interest          2.90                             
Temporary Investments — Available-for-Sale Securities
                                        
Rupiah      47,036       47,036                  47,036 
US Dollar  3.98   37,456       37,456                       37,456 

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  Outstanding Balance as at  
  December 31, 2006 Expected Maturity Date
     
  Foreign Rp.     2012- Fair
  Currency Equiv. Rate 2007 2008 2009 2010 2011 2024 Value
                     
  (in million) (Rp. in (%)   (Rp. in
    million)   (Rp. in million) million)
 
LIABILITIES
                                        
Short-term bank loans
                                        
Variable Rate
                                        
Rupiah                                        
 Principal      666,667       666,667                  668,814 
 Interest      29,634   11.93   29,634                    
Fixed Rate
                                        
Rupiah                                        
 Principal      21,323       21,323                  21,465 
 Interest      482   15.58   482                    
Long-term debts(1)
                                        
Variable Rate
                                        
Rupiah                                        
 Principal      4,153,501       1,249,265   1,189,326   690,831   167,431   140,028   716,620   4,140,064 
 Interest      1,504,790   12.31   446,991   303,419   161,409   110,983   93,934   388,054     
US Dollar                                        
 Principal  138.87   1,250,551       168,306   168,306   130,563   130,563   130,563   522,250   1,160,573 
 Interest      367,386   6.45   77,914   67,414   57,091   48,630   40,170   76,167     
Fixed Rate
                                        
Rupiah                                        
 Principal      3,419,545       1,880,329   395,166   456,356   527,573   97,099   63,022   3,321,134 
 Interest      879,984   16.59   393,218   221,288   159,846   78,444   20,869   6,319     
US Dollar                                        
 Principal  527.69   4,752,224       1,118,000   1,099,123   975,839   955,420   207,214   396,628   4,528,704 
 Interest      808,732   6.56   278,787   205,585   137,971   70,517   32,666   83,206     
Japanese Yen                                        
 Principal  14,384.68   1,088,631       86,496   72,305   58,114   58,114   58,114   755,488   1,014,345 
 Interest      301,476   3.10   33,108   30,484   28,371   26,569   24,768   158,176     
Euro                                        
 Principal  22.01   260,994       173,996   86,998               253,406 
 Interest      13,969   4.02   11,643   2,326                 
 
(1) Long-term debt consistsdebts consist of loans which are subject to interest; namely two-step loans, notes and bonds, liabilities of business acquisitions and long-term bank loans, in each case including their current maturities. Long-term debt, for the purpose of this table, includes liabilities of 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.US Dollar, Japanese Yen, French Franc, Euro, Singapore Dollar and Netherland Guilder.Great Britain Pound Sterling. For a description of the Company’s foreign currency assets and liabilities, see Note 5453 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.
      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.US Dollar, Netherland Guilder, French Franc,

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Euro, Singapore Dollar, Great Britain Pound Sterling 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 for the exchange rates for U.S.US Dollar as well as other currencies, which are based on the selling and buying rates quoted by Reuters on December 31, 2004,29, 2006, applied respectively to monetary assets and liabilities. The buying and selling rates as of December 31, 200429, 2006 were Rp.9,280Rp.8,995 and Rp.9,300Rp.9,005 to US$1, respectively. Telkomsel applied the Bank Indonesia middle buy and sell rate for its monetary asset and liabilities which was Rp.9,290Rp.9,020 to US$1.001 as of December 31, 2004.2006. 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, 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 

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 Outstanding Balance as at               Outstanding Balance as  
 December 31, 2004     at December 31, 2006 Expected Maturity Date
   Expected Maturity Date      
 Foreign       Foreign Rp.   Fair
 Currency Rp. Equivalent 2005 2006 2007 2008 2009 2010-2024 Fair Value Currency Equiv. 2007 2008 2009 2010 2011 2012-2024 Value
                                    
 (in millions) (Rp. in million)     (in (Rp. in   (Rp. in
     (Rp. in million) (Rp. in million) million) (Rp. in million) million)
       million)
ASSETSASSETS
Cash and cash equivalents
                            
US Dollar  159.59  1,443,160  1,443,160            1,443,160 
Japanese Yen  1.95  148  148            148 
Euro  71.30  845,448  845,448            845,448 
Temporary Investment
                            
US Dollar  3.98  37,446  37,456                 37,456 
Trade accounts receivable
                            
US Dollar  41.03  368,747  368,747            368,747 
Other accounts receivable
                            
US Dollar  0.56  5,077  5,077            5,077 
Euro  0.03  402  402            402 
Great Britain Pound Sterling    37  37            37 
Other current assets
                            
US Dollar  0.1  937  937            937 
Advances and other non-current assets
                            
US Dollar  3.59  32,314  32,314            32,314 
LIABILITIES
LIABILITIES
                            LIABILITIES
Trade accounts payableTrade 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 
Related parties
                            
US Dollar  0.28  2,501  2,501            2,501 
Singapore Dollar    20  20            20 
Third parties
                            
US Dollar  28.58  257,495  257,495            257,495 
Euro  1.55  18,377  18,377            18,377 
Great Britain Pound Sterling  0.04  630  630            630 
MYR    12  12            12 
Singapore Dollar  0.41  2,411  2,411            2,411 
Other Account Payable
                            
US Dollar  0.06  573  573            573 
Great Britain Pound Sterling    2  2            2 
Accrued expensesAccrued 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 
US Dollar  199.18  1,793,609  1,793,609            1,793,609 
Japanese Yen  74.13  5,610  5,610            5,610 
Singapore Dollar  0.35  2,039  2,039            2,039 
Euro  104.61  1,239,946  1,239,946            1,239,946 
Long-term debts(1)
                            
US Dollar  666.56  6,002,773  1,286,306  1,267,429  1,106,401  1,085,982  337,776  918,878  5,689,277 
Japanese Yen  14,384.68  1,088,632  86,496  72,305  58,114  58,114  58,114  755,488  1,014,345 
Euro  22.01  260,994  173,996  86,998           253,406 
 
(1) Long-term debtdebts for the purpose of this table consistsconsist of loans denominated in foreign currencies namely, two-step loans, liabilities of business acquisitions, long-term bank loans, notes and 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

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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
ITEM 12.DESCRIPTION OF SECURITIES OTHER THAN EQUITY SECURITIES
      Not applicable.
PART II
ITEM 13.     DEFAULTS, DIVIDEND ARREARAGES AND DELINQUENCIES
ITEM 13.DEFAULTS, DIVIDEND ARREARAGES AND DELINQUENCIES
      Not applicable.There are no defaults, dividend arrearages or delinquencies to which this Item applies. But see Item 5. “Operating and Financial Review and Prospects — B. Liquidity and Capital Resources — Indebtedness” for information on covenant defaults for which waivers have been obtained.

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ITEM 14.MATERIAL MODIFICATIONS TO THE RIGHTS OF SECURITY HOLDERS AND USE OF PROCEEDS
      Not applicable.
ITEM 15.CONTROLS AND PROCEDURES
ITEM 15.     CONTROLDISCLOSURE CONTROLS AND PROCEDURES
      InUnder the coursesupervision and with the participation of the auditCompany’s management, including the Company’s Chief Executive Officer and Chief Financial Officer, management conducted an evaluation of TELKOM’s consolidated financial statementsthe effectiveness of the Company’s disclosure controls and procedures (as such term is defined in Rules 13a-15(e) and15d-15(e) under the Securities Exchange Act of 1934, as amended (the “Exchange Act”)), as of and for the year ended December 31, 2002 by PwC, TELKOM identified certain errors in2006. Based on this evaluation and made certain adjustments to its consolidated financial statementsas a result of the material weaknesses discussed below, the Company’s Chief Executive Officer and Chief Financial Officer have concluded that, as of and for the year ended December 31, 20022006, the Company’s disclosure controls and procedures were not effective. The Company’s disclosure controls and procedures are designed to ensure 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. The identified errors and adjustments made to TELKOM’s consolidated financial statements as of and for the years ended December 31, 2000, 2001 and 2002 are outlined below.
Restatement of Information Previously Reported
      Subsequent to the filing 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 wereinformation required to be made pursuantdisclosed in reports filed or submitted under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms, and that such information is accumulated and communicated to Indonesian GAAPthe Company’s management, including the Chief Executive Officer and U.S. GAAP. These adjustments were set forthChief Financial Officer, as appropriate, to allow timely discussions regarding required disclosure.
MANAGEMENT’S REPORT ON INTERNAL CONTROL OVER FINANCIAL REPORTING
      Management of the Company is responsible for establishing and maintaining adequate internal control over financial reporting, as such term is defined in Amendment No. 2Exchange Act Rules 13a-15(f) and15d-15(f). The Company’s internal control over financial reporting is a process designed to 2002 Annual Report on Form 20-F/ Aprovide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with applicable generally accepted accounting principles.
      Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that was filedcontrols may become inadequate because of changes in conditions, or that the degree of compliance with the SEC on February 9, 2004 underpolicies or procedures may deteriorate.
      The Company’s management has evaluated the heading “Item 5. Restatement of Information Previously Reported.”
      Set forth below are the effectseffectiveness of the restatements onCompany’s internal control over financial reporting based upon criteria established inInternal Control — Integrated Frameworkissued by the previously reported consolidated net income and stockholders’ equity for the years ended December 31, 2000, 2001 and 2002, respectively. The correctionsCommittee of Sponsoring Organizations of the Indonesian GAAP consolidatedTreadway Commission (“COSO”).
      A material weakness is a control deficiency, or combination of control deficiencies, that results in more than a remote likelihood that a material misstatement of the annual or interim 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.will not be

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prevented or detected. In connection with management’s evaluation of the Company’s internal control over financial reporting, the following material weaknesses have been identified as of December 31, 2006.
(a)1.Changes in Indonesian GAAP Information Previously ReportedThe Company did not have an effective control environment based on the COSO criteria. The following material weaknesses related to the Company’s control environment were identified:
      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 were reflected in the restated audited consolidated financial statements included 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 entitledThe Company did not adequately design and maintain effective controls over the assignment of authority and responsibility with respect to receiveits internal control over financial reporting and the necessary lines of communication throughout the organization. Specifically, certain cash awards, such as long service, housing, transport and other allowances, based on lengthkey members 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. TELKOMmanagement had not previously made provision for these liabilities and was only accounting for the awards at the time payments were madeinappropriate access to the employees. TELKOM determined that these awards should have been accountedCompany’s financial application systems and related data with the ability to effect accounting entries within such systems without adequate mechanisms for underidentifying and evaluating the accrual method.results of any such actions.
 
 (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 “Adjustmentsadequately design and maintain effective information technology policies, including those related to Stockholders’ Equity” below).security and access to its financial application programs and data. Specifically, the Company had inadequate controls to identify and monitor conflicting user roles (i.e., segregation of duties) and lacked independent monitoring of access by employees to its financial application systems and data.
 
 (iv) AcquisitionThe Company did not maintain a sufficient complement of personnel with an appropriate level of accounting. In respect knowledge, experience and training in the application of the acquisition of Pramindo in August 2002, the Company previously consolidated a 30% interest in Pramindo in accordanceapplicable generally accepted accounting principles commensurate 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 theCompany’s 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 (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.reporting requirements.
 
 (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, theThe Company did not account for the acquisition of Pramindo recognizingadequately perform a risk assessment to identify risks so as to ensure 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 ofit adequately designed and implemented effective controls that would prevent and detect material misstatements to its financial statements.

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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 U.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 restatements 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 reflected 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 restatementsThese control environment material weaknesses contributed to the financial position and resultsexistence of operations under Indonesian GAAP as described above, had the same impact on consolidated stockholders’ equity and netadditional material weaknesses below.

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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
2.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. TELKOMThe Company did not initially recordmaintain effective controls, including monitoring, over its financial close and reporting process. Specifically, 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 revenuesCompany did not maintain effective controls over the expected termcompleteness and accuracy of its financial consolidation and disclosure process including matters relating to: the customer relationship. For 2000, the adjustment presented included an amount which represents the initial impactdisclosure 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 infixed assets and 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 differencebusiness combinations. In addition, controls related to the deferred tax liability onaccuracy of financial statement preparation and disclosures relating to consolidated statements of cash flows, segment information and the undistributed earningsacquisition of subsidiaries and associates.a joint operation were not operating effectively.
 
3.TELKOM also made adjustments in relationThe Company did not adequately design and maintain effective controls over its accounting for property, plant and equipment. Specifically, the Company’s controls were not adequately designed or operating effectively to other restated amounts.
      (v)  Acquisition of Dayamitra
ensure the completeness, accuracy and valuation of its fixed assets, including related additions and dispositions/retirements.
 
4.The adjustment reflectedCompany did not design and maintain effective controls over its accounting for revenue and related accounts receivable. Specifically, the U.S. GAAP requirement, as described in Note 57(1)Company’s controls were not designed and operating effectively to ensure the completeness and accuracy of leased line revenue and provisions for uncollectible balances. In addition, the controls to ensure the completeness and accuracy of fixed line and fixed wireless revenue and collections were not operating effectively.
All of the above material weaknesses resulted in audit adjustments 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 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 and delivered to TELKOM on January 12, 2004 and discussed by PwC with the Board of Directors on January 14, 2004 and with the Board of Commissioners and TELKOM’s Audit Committee on January 16, 2004 in connection with its audit of the consolidated financial statements as of and for the year ended December 31, 2002,2006. Additionally, each of the material weaknesses described above could result in misstatements of the aforementioned financial statement accounts and identified and communicated by KPMGdisclosures that would result in a material misstatement to TELKOM and its Audit Committee on June 29, 2004 and July 14, 2005 in connection with its audit of the Company’s annual consolidated financial statements that would not be prevented or detected.
      Because of the material weaknesses described above, management has concluded that the Company did not maintain effective internal control over its financial reporting as of and for the years ended December 31, 20032006 based on theInternal Control — Integrated Frameworkissued by the COSO.

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      As permitted by Securities and 2004, respectively. Both PwC and KPMG identifiedExchange Commission guidance, management has excluded 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 prioroperations related to the commencementRegional Division VII (“KSO VII”) (acquired on October 19, 2006) from its assessment 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 control over financial reporting with respectas of December 31, 2006. The KSO VII operations represented approximately 2.1 percent of the Company’s 2006 consolidated total operating revenues and 3.9 percent of consolidated total assets as at December 31, 2006. The controls for these acquired operations are required to be evaluated and tested by the end of 2007.
      Management’s assessment of the effectiveness of the Company’s internal control over financial reporting as of December 31, 2006 has been audited by Kantor Akuntan Publik Haryanto Sahari & Rekan, an independent registered public accounting firm, as stated in their report which appears on page F-2 herein.
CHANGES IN INTERNAL CONTROL OVER FINANCIAL REPORTING
Remediation of Material Weaknesses and Plan for Future Remediation
      Since 2006, the Company has undertaken substantial efforts to address its previously reported material weaknesses. To fully remediate the material weaknesses necessitates designing new business process controls, and testing them to ensure that they address the previously reported control deficiencies. The Company continues to review and make necessary changes to the design of its internal control environment, through critical assessments of the roles and responsibilities of each functional group within the organization, enhancing and documenting policies and procedures and providing relevant training where appropriate.
      The Company previously reported in its fiscal 2005 Annual Report on Form 20-F, material weaknesses pertaining to: (1)1) inadequate personnel resources with sufficient knowledge and experience in the application of Indonesian GAAP and US GAAPapplicable generally accepted accounting principles because TELKOM did not have sufficient personnel in its accounting departmentcommensurate 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)the Company’s financial reporting requirements; 2) deficiencies in the organizational structure ofin the accounting department, including the oversight function for accounting and financial reporting because there was inadequate management, supervision and review forof the accounting functions; (3)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)4) insufficient written policies and procedures for the accounting and financial reporting function, insufficient knowledge of and compliance with, existing policies and procedures amongprocedures.
      In 2006, the Company implemented the following changes; 1) recruited and integrated personnel into the finance function; 2) a structured training program for all relevant personnelaccounting personnel; 3) significant enhancements were made to the financial reporting process, including the U.S. GAAP reconciliation analysis and insufficient emphasis bydocumentation; 4) in February 2006, the internal auditCompany adopted a new organizational structure in the accounting and finance department, including a dedicated unit responsible for the oversight function on the foregoing; in particular,of accounting and financial reporting; and 5) enhanced accounting and reporting personnel did not have objective written policies and proceduresrelated supplements were also issued in February 2006. As of June 27, 2007, the Company believes that it has now designed effective controls 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 other reportable conditions identified herein.
      In responseaddress these material weaknesses; however, these controls require further time to the matters identified by TELKOM’s external auditors, under the supervision of the Audit Committee, in January 2004 TELKOM’s senior management directed that TELKOM dedicate resources and take steps to strengthen control processes and procedures in order to prevent a recurrence of the circumstances that resultedbe embedded in the needorganization 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, underhave a permanent and sustainable effect. The Company has therefore not fully remediated 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 theabove material weaknesses in TELKOM’s internal control over financial reporting identified by PwC and KPMG. The steps set forthhas included them 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 under item 1 point 3 and item 3 of “Management’s Report on Internal Control over Financial Reporting.”
      The Company expects its remediation efforts for all material weaknesses to continue 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, TELKOMfiscal year 2007, as further described below.
      The Company has taken, a number of steps directly in response toor will take, 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 itfollowing actions:
 On December 31, 2003, TELKOM,Form a Remediation Committee, under the supervisioncoordination of the Human Resources Department, retainedCompliance and Risk Management Director; comprised of key members of management from a human resources consulting firm, which assisted TELKOM in assessing job competency requirementsvariety of functions across the organization, this committee will monitor, oversee implementation and regularly report to the adequacyBoard of Directors and Audit Committee on 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.progress of our remediation activities;
 
 TELKOM, initiallyPerform a full evaluation of the assignment of authority and responsibility with respect to 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 functionCompany’s internal control over financial reporting and the need for additional personnel and expertise in performing such function. Sincenecessary lines of communication throughout 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.organization;
      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
 On January 7, 2004, TELKOM establishedCommence a team comprisedcomprehensive review of 75access privileges granted to all personnel from various departments of TELKOMto ensure access is commensurate with their respective roles 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.responsibilities;
 
 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, underReview the supervisiondesign 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 controlinformation technology policies and procedures.

The second phase, which began on November 9, 2004, included the (i) dissemination of the Directors’ Decree on internal controls, through sessionsprocedures, including those relating to discuss the new internal controls; (ii) evaluation of information technology-related general controls; (iii) evaluationsecurity 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 respectaccess to the implementation of the new internal controls,Company’s application programs 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 business units through intensive and continuing training and proactive consultations with advisors on technical matters as they relate to 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.data;
 
 TELKOM held seminarsContinue to maintain and enhance the quality of staff 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 issuesfinance, through a structured training and attendeddevelopment program and by senior management and certain accounting and finance-related personnel.engaging with a qualified external consultant;
 
 TELKOM subscribed to a U.S. GAAP information web-site through E&Y beginning May 2004.Develop an enterprise risk management system under the coordination of the Compliance & Risk Management Director;
 
 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 membersPerform a comprehensive review 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,existing monitoring and supervision procedures relating to internal control over financial reporting
On December 7, 2004, TELKOM modified the mandate of 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 thefinancial close and 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.process;
 
 In April 2004, TELKOM hired two consultantsReview the design of and implement enhanced controls over the accounting 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 TELKOMproperty, plant and (3) reviewing the financial reporting of TELKOM.equipment; and
 
 On December 14-16, 2004, allDesign and implement controls to ensure the completeness and accuracy 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 rolesleased line revenue, provision for uncollectible balances and functions of TELKOM’s Internal Audit Unit to ensure compliance with the Sarbanes-Oxley Act of 2002.fixed line and fixed wireless revenues and collections.

Additional StepsManagement’s Conclusions on the Remediation Plan
      The remediation measures described above that have been, or are to Strengthen Disclosure Controlsbe, implemented and/or tested are expected to strengthen the Company’s internal control over financial reporting and Procedures
On December 28, 2004, TELKOM informally established a new disclosure committeeremediate the material weaknesses the Company has identified. The Company is committed to continuing to improve its internal control processes 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 disclosureintends to continue to diligently review its financial reporting controls and procedures in order to ensure compliance with the requirements of the Sarbanes-Oxley Act and participatingthe related rules promulgated by the Commission.
      Management has concluded that the consolidated financial statements included 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 the preparation of TELKOM’s annual reportthis Annual Report on Form 20-F fairly present, in all material respects, TELKOM’s financial position, results of operations and participatedcash flows for the periods presented in the review and preparation of TELKOM’s annual report on Form 20-F. The establishment of the disclosure committee formalized the previous disclosure process where designated senior employees from various departments were responsible for assistingconformity with the necessary disclosures.GAAP.
Changes in Internal Control over Financial Reporting
      Other than as describedstated above, there have been no significantother changes in TELKOM’s internal control over financial reporting that occurred during the lastmost recently completed fiscal period covered by this report,quarter 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 (as defined in Rules 13a-15(e) and 15d-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 over 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 since November 2003 and which it is continuing to take.
      TELKOM’s principal executive officer and principal financial officer concluded, based on their evaluation, as of December 31, 2004, that, while Telkom has made improvements, because of the “material weaknesses” identified above that continue to exist, 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, 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 16.     RESERVED
ITEM 16A.     AUDIT COMMITTEE FINANCIAL EXPERT
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

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February 17, 2004, and also serves as a member of the risk and compliance committee of PT Bank BNI.2004. Prior to his appointment as a member of TELKOM’s Audit Committee, Mr. Pardede practiced, and is currently practicing, 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.
ITEM 16B.     CODE OF ETHICS
ITEM 16B.CODE OF ETHICS
      We haveThe Company has adopted a code of ethics in accordance with the provisions of Section 406 of the Sarbanes-Oxley Act of 2002. OurThe Company’s code of ethics applies to ourits President Director, Finance Director (being its officers in equivalent positions to a Chief Executive Officer and a Chief Financial OfficerOfficer) and

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persons performing similar functions as well as to ourits Commissioners, Directors and other officers and employees. OurThe Company’s code of ethics may be viewed on ourthe company web site at www.telkom-indonesia.com/english/hubunganinvestor/index.asp.investor-relation/corporate-governance. If we amendthe Company amends the provisions of ourits code of ethics that applyapplies to our Chief Executive Officer, Chief Financial Officerits President Director, Finance Director and persons performing similar functions, or if we grantthe Company grants any waiver of such provisions, wethe Company will disclose such amendment or waiver on ourthe company web site at the same address.
ITEM 16C.     PRINCIPAL ACCOUNTANT FEES AND SERVICES
ITEM 16C.PRINCIPAL ACCOUNTANT FEES AND SERVICES
      The following table summarizes the aggregate fees billed to usthe Company by KPMG during the fiscal year ended December 31, 2003 and 2004:PwC in 2005 and 2006, respectively:
        
         Year Ended
 Year Ended December 31,
 December 31,  
   2005 2006
 2003 2004 (KPMG) (PwC)
        
 (in Rp. million) (in Rp. million)
Audit Fees  10,715.0  19,274.6   42,390.3  55,558.0 
Audit-Related Fees          
Tax Fees          
Other Fees     
All Other Fees     
A.  Audit Fees
A.Audit Fees
      Audit fees in the above table are the aggregate fees billed by KPMG in 20032005 and 2004,by PwC in 2006, in each case in connection with the auditaudits of ourTELKOM’s annual consolidated financial statements.
B.  Audit-Related Fees
B.Audit-Related Fees
      None.
C.  Tax Fees
C.Tax Fees
      Neither KPMG did not performnor PwC performed any tax compliance, tax advisory or tax planning services for TELKOM during the fiscal years ended December 31, 2003in 2005 and 2004.2006.
D.  All Other Fees
D.All Other Fees
      Neither KPMG did notnor PwC perform any other services than audit for TELKOM during the fiscal years ended December 31, 2003in 2005 and 2004.2006.
E.  Audit Committee Pre-Approval Policies and Procedures
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

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services may be performed by TELKOM’s independent registered public accounting firm provided that: (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-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

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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, 20022004, 2005 and 2003.2006.
ITEM 16D.     EXEMPTIONS FROM THE LISTING STANDARDS FOR AUDIT COMMITTEES
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’sTELKOM’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. For further information on the Rule 10A-3(c)(3) exemption, see Item 6. “Directors, Senior Management and Employees — A. Directors and Senior Management — Board of Commissioners’ Committees” and Item 10. “Additional Information — B. Memorandum and articles of association — Committees.”
      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.

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ITEM 16E.PURCHASES OF EQUITY SECURITIES BY THE ISSUER AND AFFILIATED PURCHASERS
      Not applicable.The following table sets forth certain information concerning purchases by TELKOM of its Series B Shares in 2006.

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  Total Number of   Total Number of Shares Maximum Number of Shares
  Shares Average Price Paid Purchased as Part of that May Yet Be Purchased
Period (2006) Purchased per Share in Rp. Publicly Announced Plans(1) Under the Plans(2)
         
January           1,007,999,964 
February           1,007,999,964 
March           1,007,999,964 
April           1,007,999,964 
May  8,373,500   7,332.40   8,373,500   999,626,464 
June  47,070,000   7,064.26   55,443,500   952,556,464 
July  21,925,000   7,235.40   77,368,500   930,631,464 
August  5,668,000   7,935.67   83,036,500   924,963,464 
September  1,750,000   7,803.90   84,786,500   923,213,464 
October        84,786,500   923,213,464 
November  4,820,000   9,902.79   89,606,500   918,393,464 
December  28,770,000   10,194.30   118,376,500   889,623,464 
TOTAL  118,376,500   8,043.87   118,376,500   889,623,464 
(1) Represents Series B Shares repurchased pursuant to TELKOM’s share repurchase plan approved at TELKOM’s Extraordinary General Meeting of Shareholders on December 21, 2005. Under the share repurchase program, TELKOM may repurchase up to a maximum of 5% of issued and outstanding Series B Shares for a total repurchase amount not exceeding Rp.5.25 trillion, in accordance with the rules and regulations of the BAPEPAM and the stock exchanges on which TELKOM’s Common Stock and ADSs are trading, as well as other applicable regulatory bodies. Such repurchases are intended to be made from time to time over the eighteen month period following the announcement. Repurchases may be made at the discretion of the Company’s management through purchases of shares on the Jakarta and Surabaya Stock Exchanges, purchases of shares in ADS form on the New York Stock Exchange, off-exchange transactions and agreements, or any other legal means the Company deems appropriate. For further information on the share repurchase, see Item 7. “Major Stockholders and Related Party Transactions — A. Major Stockholders.”
(2) Represents a maximum of 1,007,999,964 Series B Shares (equivalent to 5% of issued and outstanding Series B Shares) initially available for repurchase under TELKOM’s share repurchase plan.
PART III
ITEM 17.     CONSOLIDATED FINANCIAL STATEMENTS
ITEM 17.CONSOLIDATED FINANCIAL STATEMENTS
      Not applicable.
ITEM 18.     CONSOLIDATED FINANCIAL STATEMENTS
ITEM 18.CONSOLIDATED FINANCIAL STATEMENTS
      See pages F-1 through F-142.F-158.
ITEM 19.     EXHIBITS
ITEM 19.EXHIBITS
Exhibit 1 — The Articles of Incorporation of TELKOM, amended as of July 30, 2004, together with an English translation thereof.thereof (incorporated herein by reference to Exhibit 1 to the Annual Report on Form 20-F for the year ended December 31, 2004 filed July 14, 2005 and incorporated herein by reference).
Exhibit 2 — Not applicable.
Exhibit 3 — Not applicable.
Exhibit 4 — Material Contracts Exhibits:

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4.1* Settlement Agreement between TELKOM and the shareholders of AriaWest, dated July 31, 2003.
4.2* Credit Agreement between TELKOM and the AriaWest lenders, dated July 31, 2003.
4.3* First Amendment to the Conditional Sale and Purchase Agreement between TELKOM and the shareholders of AriaWest, dated July 31, 2003.
4.4* Conditional Sale and Purchase Agreement between TELKOM and the shareholders of AriaWest, dated May 8, 2002.
4.5* Conditional Sale and Purchase Agreement between TELKOM and the shareholders of Pramindo, dated April 19, 2002.
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.
4.7** Kontrak Pengadaan Satelit TELKOM-2 (ContractContract on Procurement of TELKOM-2 Satellite)Satellite between TELKOM and Orbital Sciences Corporation, dated October 24, 2002.
4.8+ First Amendment to Contract on Procurement of TELKOM-2 Satellite between TELKOM and Orbital Sciences Corporation, dated December 15, 2003.
4.9** Kontrak Jasa Peluncur Satelit TELKOM-2 (AgreementAgreement on Launch Services of TELKOM-2 Satellite)Satellite between TELKOM and Arianespace S.A., dated November 8, 2002.
4.10* Master Procurement Partnership Agreement between TELKOM and a consortium led by Samsung Electronics, dated December 23, 2003.
4.11* Amendment No. 1 to the Master Procurement Partnership Agreement between TELKOM and a consortium led by Samsung Electronics, dated December 31, 2003.
4.12* Service Level Agreement between TELKOM and a consortium led by Samsung Electronics, dated December 23, 2002.
4.13* Loan Agreement between TELKOM and The Export-Import Bank of Korea, dated August 27, 2003.
4.14* Master Procurement Partnership Agreement between TELKOM and a consortium led by Ericsson, dated December 23, 2002.
4.15* Service Level Agreement between TELKOM and a consortium led by Ericsson, dated December 23, 2002.

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4.16* Master Procurement Partnership Agreement between TELKOM and PT Industri Telekomunikasi Indonesia (Persero), dated August 26, 2003, including an English translation thereof.
4.17* Service Level Agreement between TELKOM and PT Industri Telekomunikasi Indonesia Tbk., dated August 26, 2003.
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.
4.19** Development Contract PSTN Excellence Regional Junction Divre-IIDivision-II between TELKOM and the Olex-Lucent-Brimbun consortium, dated February 8, 2002.
4.20+ Co-Operation Agreement on Fixed Wireless CDMA Facilities Construction in KSO DivreDivision VII Area between TELKOM and PT Bukaka SingTelSingtel (BSI) International, dated January 14, 2003.
4.21* Amendment No. 1 to the Development Contract PSTN Excellence Regional Junction Divre-IIDivision-II between TELKOM and the Olex-Lucent-Brimbun consortium, dated August 22, 2002.
4.22* Amendment No. 2 to the Development Contract PSTN Excellence Regional Junction Divre-IIDivision-II between TELKOM and the Olex-Lucent-Brimbun consortium, dated October 25, 2002.
4.23* Amendment No. 3 to the Development Contract PSTN Excellence Regional Junction Divre-IIDivision-II between TELKOM and the Olex-Lucent-Brimbun consortium, dated December 20, 2002.

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 4.24* 
4.24* Amendment No. 4 to the Development Contract PSTN Excellence Regional Junction Divre-IIDivision-II between TELKOM and the Olex-Lucent-Brimbun consortium, dated March 20, 2003.
4.25* Amendment No. 5 to the Development Contract PSTN Excellence Regional Junction Divre-IIDivision-II between TELKOM and the Olex-Lucent-Brimbun consortium, dated June 26, 2003.
4.26+ Amendment No. 6 to the Development Contract PSTN Excellence Regional Junction Divre-IIDivision-II between TELKOM and the Olex-Lucent-Brimbun consortium, dated October 9, 2003.
4.27+ Amendment No. 7 to the Development Contract PSTN Excellence Regional Junction Divre-IIDivision-II between TELKOM and the Olex-Lucent-Brimbun consortium, dated December 4, 2003.
4.28* Master Procurement Partnership Agreement between TELKOM and Motorola, Inc., dated March 24, 2003.
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.
4.30* 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.
4.31* Side Letter to the Partnership Agreement for the Construction and Provision of the High Performance Backbone in Sumatera,Sumatra, dated June 12, 2003.
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.
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.
4.34+ 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.

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4.35* Supply Contract among TELKOM, NEC Corporation, the Communication Authority of Thailand and Singapore Telecommunications Limited, dated November 27, 2002.
4.36* Amended and Restated KSO Agreement between TELKOM and PT Mitra Global Telekomunikasi Indonesia, dated January 20, 2004.
4.37* Service Level Agreement between TELKOM and Motorola, Inc., dated March 24, 2003.
4.38* Indemnity Agreement between TELKOM and KAP Hans Tuanakotta Mustofa & Halim (formerly KAP Hans Tuanakotta & Mustofa), dated February 9, 2004.
4.39+ Supply Contract for the Procurement and Installation of Dumai-Melaka Cable System among TELKOM, Telekom Malaysia Berhad and NEC Corporation, dated May 14, 2004.
4.40+ Loan Agreement and Acknowledgement of Indebtedness between TELKOM and ABN AMRO Bank N.V. Jakarta Branch, dated January 28, 2004.
4.41+ 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.
4.42+ Indemnity Agreement between TELKOM and KAP Hans Tuanakotta Mustofa & Halim (formerly KAP Hans Tuanakotta & Mustofa), dated June 29, 2004.
4.434.43++ Medium Term Notes Issuance Agreement dated December 13, 2004 (English summary).
4.444.44++ Indemnity Agreement between TELKOM and KAP Hans Tuanakotta Mustofa & Halim (formerly KAP Hans Tuanakotta & Mustofa), dated April 25, 2005.
4.45+++Supply Contract For The Procurement and Installation of Ring JASUKA Backbone between TELKOM and NEC-SIEMENS CONSORTIUM, dated June 10, 2005.
4.46+++Supply Contract For Capacity Expansion of Submarine Cable System Tanjung Pandan-Pontianak between TELKOM and NEC Corporation, dated 8 July 2005.

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4.47++++Interconnection Agreements between TELKOM and Indosat, dated September 23, 2005 and December 1, 2005 (English Summary).
4.48#Second Amendment to Contract on Procurement of TELKOM-2 Satellite between TELKOM and Orbital Sciences Corporation, dated 31 March 2004.
4.49#Third Amendment to Contract on Procurement of TELKOM-2 Satellite between TELKOM and Orbital Sciences Corporation, dated 29 October 2004.
4.50#Fourth Amendment to Contract on Procurement of TELKOM-2 Satellite between TELKOM and Orbital Sciences Corporation, dated 21 February 2005.
4.51#Fifth Amendment to Contract on Procurement of TELKOM-2 Satellite between TELKOM and Orbital Sciences Corporation, dated 30 August 2005.
4.52#First Amendment To Supply Contract For The Procurement and Installation of Ring Jasuka Backbone between TELKOM and NEC-Siemens Consortium, dated 6 February 2006.
4.53#Second Amendment of the Supply Contract for the Procurement and Installation of Ring JASUKA Backbone between TELKOM and NEC-Siemens Consortium, dated 16 March 2006.
4.54#Third Amendment of the Supply Contract for the Procurement and Installation of Ring JASUKA Backbone between TELKOM and NEC-Siemens Consortium, dated 7 February 2007.
4.55#Amended and Restated KSO7 Agreement, between TELKOM and PT Bukaka Singtel International, dated 19 October 2006.
4.56#First Amendment of Supply Contract for Tanjung Pandan — Pontianak Capacity Expansion between TELKOM and NEC Corporation, dated 12 January 2006.
4.57#Supply Agreement for Surabaya — Ujung Pandang — Banjarmasin (SUB) Capacity Expansion between TELKOM and NEC Corporation, dated 16 August 2006.
4.58#First Amendment to Supply Contract for Surabaya — Ujung Pandang — Banjarmasin (SUB) Capacity Expansion between TELKOM and NEC Corporation, dated 29 December 2006.
4.59#Second Amendment to Supply Contract for Surabaya — Ujung Pandang — Banjarmasin (SUB) Capacity Expansion between TELKOM and NEC Corporation, dated 26 January 2007.
4.60#Third Amendment to Supply Contract for Surabaya — Ujung Pandang — Banjarmasin (SUB) Capacity Expansion between TELKOM and NEC Corporation, dated 21 February 2007.
4.61#Fourth Amendment to Supply Contract for Surabaya — Ujung Pandang — Banjarmasin (SUB) Capacity Expansion between TELKOM and NEC Corporation, dated 12 March 2007.
4.62#Procurement and Installation Agreement For Ring JDCS Project (JEMBER DENPASAR Cable System) between TELKOM and ZTE Consortium, dated 29 December 2006.
4.63#First Amendment of Procurement and Establishment of Regional Metro Junction and Optical Access Network for Regional Division-III between TELKOM and PT Industri Telekomunikasi Indonesia (INTI), dated 31 May 2004.
4.64#Second Amendment of Procurement and Establishment of Regional Metro Junction and Optical Access Network for Regional Division-III between TELKOM and PT Industri Telekomunikasi Indonesia (INTI), dated 4 September 2006.
4.65#Third Amendment of Procurement and Establishment of Regional Metro Junction and Optical Access Network for Regional Division-III between TELKOM and PT Industri Telekomunikasi Indonesia (INTI), dated 27 November 2006.
4.66#Partnership Agreement for FWA CDMA Expansion Project NSS, BSS and PDN System in DIVRE I and DIVRE IV between TELKOM and Huawei Consortium, dated 6 January 2006.
4.67#Agreement for Procurement and Installation on the CDMA 2000-IX Equipment in Division Regional V East Java between TELKOM and Samsung Consortium dated 8 June 2006.
4.68#First Amendment to Agreement for Procurement and Installation on CDMA 2000-IX Equipment in Divre V East Java between TELKOM and Samsung Consortium, dated 1 August 2006.
4.69#Second Amendment to Agreement for Procurement and Installation on CDMA 2000-IX Equipment in Divre V East Java between TELKOM and Samsung Consortium, dated 18 December 2006.

193


4.70#Procurement and Installation Agreement of MSOAN Package III Divre-I Sumatera between TELKOM and PT Industri Telekomunikasi Indonesia (INTI), dated 29 June 2006.
4.71#First Amendment to the Procurement and Installation Agreement of MSOAN Package III Divre-I Sumatera between TELKOM and PT Industri Telekomunikasi Indonesia (INTI), dated 29 December 2006.
4.72#Procurement and Installation Agreement of OSP for Regional Metro Junction (RMJ) Banda Aceh — Sigli Divre I Sumatera between TELKOM and PT Telekomindo Primakarya, dated 3 July 2006.
4.73#Procurement and Installation Agreement of Digital Micro Wave Radio (“GMD Radio”) for Regional Metro Junction (RMJ) Package II Java and Kalimantan, between TELKOM and PT Fujitsu Indonesia dated 3 July 2006.
4.74#Procurement and Installation Agreement of MSOAN Divre II year 2005 Phase II Location Divre II between TELKOM and ZTE — Temasindo Consortium 6 October 2005.
4.75#First Amendment to Procurement and Installation Agreement of MSOAN Divre II year 2005 Phase II Location Divre II between TELKOM and ZTE — Temasindo Consortium dated 30 December 2005.
4.76#Second Amendment to Procurement and Installation Agreement of MSOAN Divre II year 2005 Phase II Location Divre II between TELKOM and ZTE — Temasindo Consortium dated 15 September 2006.
4.77#Procurement and Installation Agreement on IP Core Backbone Expansion Package-1 between TELKOM and PT Siemens Indonesia, dated 26 September 2006.
4.78#Procurement and Installation Agreement on Expansion of Interface VS.2, E1 Circuit, E1 PRA, CCS#7P, Clip and Enhancement of PSTN Central EWSD between TELKOM and PT Siemens Indonesia, dated 27 September 2006.
4.79#Procurement and Installation Agreement for FWA CDMA Expansion Project NSS, BSS and PDN System in Divre V between TELKOM and Samsung Consortium dated 13 October 2006.
4.80#Agreement for Procurement and Installation for FWA CDMA Expansion Project NSS, BSS and PDN Systems in Divre VI between TELKOM and ZTE Consortium, dated 28 November 2006.
4.81#Procurement and Installation Agreement on Expansion of Interface VS.2, E1 Circuit, E1 PRA, CCS#7P, Clip and Enhancement of PSTN Central 5ESS between TELKOM and PT Lintas Teknologi Indonesia, dated 29 November 2006.
4.82#Procurement and Installation Agreement on Expansion of Interface VS.2, E1 Circuit, E1 PRA, CCS#7P, Clip and Enhancement of PSTN Central NEAX between TELKOM and PT NEC Indonesia, dated 30 November 2006.
4.83#Agreement for Procurement and Installation for Optical Access Network (OAN) Project Package-III between TELKOM and Huawei Consortium, dated 30 November 2006.
4.84#Agreement for Procurement and Installation for FWA CDMA Expansion Project NSS, BSS and PDN Systems in Divre III between TELKOM and Huawei Consortium, dated 8 December 2006.
4.85#Agreement for Procurement and Installation for FWA CDMA Expansion Project NSS, BSS and PDN Systems in Divre II between TELKOM and Huawei Consortium, dated 8 December 2006.
4.86#Agreement for Procurement and Installation for Optical Access Network (OAN) Project Package-IV between TELKOM and Alcatel-INTI Consortium dated 18 December 2006.
4.87#First Amendment to Procurement and Installation Agreement of MSOAN Divre I Sumatera Package I between TELKOM and PT Dharmala Kumala Utama, dated 28 December 2006.
4.88#Procurement and Installation Agreement of MSOAN Aceh Area Divre I Sumatera between TELKOM and PT NEC Indonesia, dated 16 August 2006.
4.89#First Amendment to Procurement and Installation Agreement of MSOAN Aceh Area Divre I Sumatera between TELKOM and PT NEC Indonesia, dated 29 December 2006.

194


4.90#Agreement for Procurement and Installation for Secondary Cable Network Package I between TELKOM and Olex Cables Indonesia (OLEXINDO), dated 29 December 2006.
4.91#Agreement for Procurement and Installation for Optical Access Network (OAN) Project Package-I (Divre I and Divre III) between TELKOM and Opnet — Olexindo Consortium, dated 29 December 2006.
4.92#Agreement for Procurement and Installation for Optical Access Network (OAN) Project Package-II (DIVRE-II) between TELKOM and Opnet — Olexindo Consortium, dated 29 December 2006.
4.93#Contract on the CDMA2000-1X Initial Purchase Order Between TELKOM and SAMSUNG Electronics Co., Ltd., dated 9 October 2002.
* Filed with Amendment No. 2 to the Annual Report ofon 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.
++Filed with original Annual Report on Form 20-F for the year ended December 31, 2004 filed July 15, 2005 and incorporated herein by reference.
+++Filed with original Annual Report on Form 20-F for the year ended December 31, 2005 filed June 23, 2006 and incorporated herein by reference.
++++Filed with Amendment No. 1 to the Annual Report on Form 20-F/A for the year ended December 31, 2005 filed June 29, 2006 and incorporated herein by reference.
#Filed herewith.
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 20,159,999,280 shares in 2002, 2003, 2004 and 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.2005. TELKOM does not have potentially dilutive ordinary shares.
Exhibit 7 — Not applicable.

196


Exhibit 8 — List of subsidiaries as of December 31, 2004:2005 (incorporated herein by reference to the annual report on the Form 20-F, which was filed with the Securities and Exchange Commission on June 23, 2006).
Name Under Which
Jurisdiction ofSubsidiary Conducts
Name of SubsidiaryIncorporationits Business
PT AriaWest InternationalIndonesiaAriaWest
PT Multimedia NusantaraIndonesiaMetra
PT Graha Sarana DutaIndonesiaGSD
PT Indonusa TelemediaIndonesiaIndonusa
PT Dayamitra TelekomunikasiIndonesiaMitratel
PT Telekomunikasi SelularIndonesiaTelkomsel
PT Napsindo Primatel InternasionalIndonesiaNapsindo
PT Infomedia NusantaraIndonesiaInfomedia
PT Pro Infokom IndonesiaIndonesiaPII
PT Pramindo Ikat NusantaraIndonesiaPramindo
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.aspindex.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.

197195


SIGNATURES
      Pursuant to the requirements of Section 12 of the Securities Exchange Act of 1934, as amended, theThe 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 14thtwenty-eighth day of July, 2005.
PERUSAHAAN PERSEROAN (PERSERO)
P.T. TELEKOMUNIKASI INDONESIA Tbk.June, 2007.
PERUSAHAAN PERSEROAN (PERSERO)
P.T. TELEKOMUNIKASI INDONESIA Tbk.
By:/s/ Arwin RasyidRinaldi Firmansyah
ARWIN RASYID
President Director
Rinaldi Firmansyah
President Director
Date: July 14, 2005June 28, 2007

196


PERUSAHAAN PERSEROAN (PERSERO)
P.T. TELEKOMUNIKASI INDONESIA Tbk AND SUBSIDIARIES
TABLE OF CONTENTS
     
  Page
   
  F-2 
Consolidated Financial Statements    
F-6
  F-8 
2. Consolidated Statements of Income
F-10
3. Consolidated Statements of Changes in Stockholders’ Equity  F-9F-11 
F-12
  F-14 
5. Notes to Consolidated Financial StatementsF-16

F-1


(HARYANTO SAHARI & REKAN LETTERHEAD)
INDEPENDENT REGISTERED PUBLIC ACCOUNTANTS’ REPORT
TO THE STOCKHOLDERS OF
PERUSAHAAN PERSEROAN (PERSERO) PT TELEKOMUNIKASI INDONESIA Tbk
      We have completed an integrated audit of Perusahaan Perseroan (Persero) PT Telekomunikasi Indonesia Tbk and its subsidiaries (the “Company”)’s 2006 consolidated financial statements and of its internal control over financial reporting as of 31 December 2006, in accordance with the standards of the Public Company Accounting Oversight Board (United States). The Company’s consolidated balance sheet as of 31 December 2005 and the related consolidated statements of income, changes in stockholders’ equity and cash flows for the years ended 31 December 2005 and 2004 were audited by other independent auditors whose report dated 8 June 2006, except for Note 56, as to which the date was 16 June 2006, expressed an unqualified opinion on those statements. Our opinions, based on our audit, are presented below.
Consolidated financial statements
      In our opinion, the accompanying consolidated balance sheet and the related consolidated statements of income, changes in stockholders’ equity and cash flows present fairly, in all material respects, the financial position of the Company at 31 December 2006, and the results of their operations and their cash flows for the year ended 31 December 2006 in conformity with accounting principles generally accepted in Indonesia. These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements based on our audit.
      We conducted our audit of these statements in accordance with 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 of financial statements includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audit provides a reasonable basis for our opinion.
      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 56 to the consolidated financial statements.
Internal control over financial reporting
      Also, we have audited management’s assessment, included in the accompanying Management’s Report On Internal Control Over Financial Reporting presented in Item 15, that the Company did not maintain effective internal control over financial reporting as of 31 December 2006, because of the effect of the following material weaknesses: The Company did not have an effective control environment; The Company did not maintain effective controls, including monitoring, over its financial close and reporting process; The Company did not adequately design and maintain effective controls over its accounting for property, plant and equipment; and, The Company did not design and maintain effective controls over its accounting for revenue

F-2


(HARYANTO SAHARI & REKAN LETTERHEAD)
and related accounts receivable, based on criteria established inInternal Control -Integrated Frameworkissued by the Committee of Sponsoring Organizations of the Treadway Commission (“COSO”). The Company’s management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting. Our responsibility is to express opinion on management’s assessment and on the effectiveness of the Company’s internal control over financial reporting based on our audit.
      We conducted our audit of internal control over financial reporting in accordance with 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 effective internal control over financial reporting was maintained in all material respects. An audit of internal control over financial reporting includes obtaining an understanding of internal control over financial reporting, evaluating management’s assessment, testing and evaluating the design and operating effectiveness of internal control, and performing such other procedures as we consider necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinions.
      A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (i) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the Company; (ii) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the Company are being made only in accordance with authorizations of management and directors of the Company; and (iii) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the Company’s assets that could have a material effect on the financial statements.
      Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
      A material weakness is a control deficiency, or combination of control deficiencies, that results in more than a remote likelihood that a material misstatement of the annual or interim financial statements, will not be prevented or detected. In connection with management’s evaluation of the Company’s internal control over financial reporting, the following material weaknesses have been identified as of December 31, 2006:
      1. The Company did not have an effective control environment based on the COSO criteria. The following material weaknesses related to the Company’s control environment were identified:
• The Company did not adequately design and maintain effective controls over the assignment of authority and responsibility with respect to its internal control over financial reporting and the necessary lines of communication throughout the organization. Specifically, certain key members of management had inappropriate access to the Company’s financial application systems and related data with the ability to effect accounting entries within such systems without adequate mechanisms for identifying and evaluating the results of any such actions.
• The Company did not adequately design and maintain effective information technology policies, including those related to security and access to its financial application programs and data. Specifically, the Company had inadequate controls to identify and monitor conflicting user roles (i.e.,

F-3


(HARYANTO SAHARI & REKAN LETTERHEAD)
segregation of duties) and lacked independent monitoring of access by employees to its financial application systems and data.
• The Company did not maintain a sufficient complement of personnel with an appropriate level of accounting knowledge, experience and training in the application of applicable generally accepted accounting principles commensurate with the Company’s financial reporting requirements.
• The Company did not adequately perform a risk assessment to identify risks so as to ensure that it adequately designed and implemented effective controls that would prevent and detect material misstatements to its financial statements.
      These control environment material weaknesses contributed to the existence of the additional material weaknesses below.
      2. The Company did not maintain effective controls, including monitoring, over its financial close and reporting process. Specifically, the Company did not maintain effective controls over the completeness and accuracy of its financial consolidation and disclosure process including matters relating to: the disclosure of fixed assets and accounting for business combinations. In addition, controls related to the accuracy of financial statement preparation and disclosures relating to consolidated statements of cash flows, segment information and the acquisition of a joint operation were not operating effectively
      3. The Company did not adequately design and maintain effective controls over its accounting for property, plant and equipment. Specifically, the Company’s controls were not adequately designed or operating effectively to ensure the completeness, accuracy and valuation of its fixed assets, including related additions and dispositions/retirements.
      4. The Company did not design and maintain effective controls over its accounting for revenue and related accounts receivable. Specifically, the Company’s controls were not designed and operating effectively to ensure the completeness and accuracy of leased line revenue and provisions for uncollectible balances. In addition, the controls to ensure the completeness and accuracy of fixed line and fixed wireless revenue and collections were not operating effectively.
      These material weaknesses were considered in determining the nature, timing, and extent of audit tests applied in our audit of the 2006 consolidated financial statements, and our opinion regarding the effectiveness of the Company’s internal control over financial reporting does not affect our opinion on those consolidated financial statements.
      As permitted by Securities and Exchange Commission guidance, management has excluded the operation related to the Regional Division VII (“KSO VII”) (acquired on October 19, 2006) from its assessment of internal control over financial reporting as of December 31, 2006. The KSO VII operations represented approximately 2.1 percent of the Company’s 2006 consolidated total operating revenues and 3.9 percent of consolidated total assets as at December 31, 2006. The controls for these acquired operations are required to be evaluated and tested by the end of 2007.
      In our opinion, management’s assessment that Perusahaan Perseroan (Persero) PT Telekomunikasi Indonesia Tbk did not maintain effective internal control over financial reporting as of 31 December 2006, is fairly stated, in all material respects, based on criteria established inInternal Control — Integrated Frameworkissued by the COSO. Also, in our opinion, because of the effects of the material weaknesses described above on the achievement of the objectives of the control criteria, Perusahaan Perseroan (Persero) PT Telekomunikasi Indonesia Tbk has not maintained effective internal control over financial reporting as of

F-4


(HARYANTO SAHARI & REKAN LETTERHEAD)
31 December 2006, based on criteria established inInternal Control — Integrated Frameworkissued by the COSO.
JAKARTA,
27 June 2007
/s/ Drs. Irhoan Tanudiredja, BAP
Drs. Irhoan Tanudiredja, BAP
Public Accountant Licence No. 99.1.0683

F-5


(HARYANTO SAHARI & REKAN LETTERHEAD)
Report of Independent Registered Public Accounting Firm
No. L.04L.05 — 3737 — 05/06/ US
The Shareholders, Board of Commissioners and Board of Directors
Perusahaan Perseroan (Persero) PT Telekomunikasi Indonesia Tbk.:
We have audited the consolidated balance sheetssheet of Perusahaan Perseroan (Persero) PT Telekomunikasi Indonesia Tbk. and subsidiaries (the “Company”) as of December 31, 2003 and 2004,2005, and the related consolidated statements of income, changes in stockholders’ equity, and cash flows for each of the years then ended.in the two-year period ended December 31, 2005. 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 audits. We did not audit the financial statements of PT Telekomunikasi Selular (“Telkomsel”), a 65 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 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, were audited by other auditors whose report thereon dated January 29, 2004, expressed an unqualified opinion on those statements.
We conducted our audits in accordance with 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 audits and the report of other auditors provide a reasonable basis for our opinion.
In our opinion, based on our audits 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 2004,2005, and the results of their operations and their cash flows for each of the years 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 56 to the consolidated financial statements.

F-2


The accompanying consolidated financial statements as of and for the yeartwo-year period ended December 31, 2004, have been translated into United States Dollars solely for the convenience of the 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, April 29, 2005, except for Note 56, as to which the date is July 8, 2005.

F-3


(HARYANTO SAHARI & REKAN LETTERHEAD)
REPORT OF INDEPENDENT REGISTERED 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
Drs. Irhoan Tanudiredja BAP
License of Public Accountant No. 99.1.0683

F-4


(HARYANTO SAHARI & REKAN LETTERHEAD)
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
TO 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, 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 of the Company as of December 31, 2001 were audited by other independent auditors whose report dated February 28, 2002, except for Note 60 of those consolidated financial statements 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 results of the operations and the consolidated cash flows of the Company for the year ended December 31, 2002 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 56 to the consolidated financial statements.
Jakarta, January 29, 2004,Kantor Akuntan Publik Siddharta Siddharta & Widjaja
Member Firm of KPMG International
License No.: KEP-232/ KM.6/2002
/s/ Lucas Kurniawan, BAP
Lucas Kurniawan, BAP
Public Accountant License No. 04.1.0934
Jakarta-Indonesia, June 8, 2006, except for Note 56, as to which the stock split described in Note 1b whichdate is as of July 30, 2004.
Drs. Irhoan Tanudiredja BAP
License of Public Accountant No. 99.1.0683June 16, 2006.

F-5F-6


PERUSAHAAN PERSEROAN (PERSERO)
P.T. TELEKOMUNIKASI INDONESIA Tbk
AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETSFINANCIAL STATEMENTS
AS OF DECEMBER 31, 20032005 AND 20042006,
(Figures in tables are presented in millions of Rupiah and thousands of United States Dollars)AND FOR YEARS ENDED
ASSETSDECEMBER 31, 2004, 2005 AND 2006
                    
  Notes 2003 2004
       
    Rp Rp US$ (Note 3)
CURRENT ASSETS                
 Cash and cash equivalents  2c,2f,5,47   5,094,472   4,856,123   522,726 
 Temporary investments  2c,2g,47   4,006   19,949   2,147 
 Trade accounts receivable  2c,2h,6,47             
  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 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 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 Rp40,489 million in 2003, and Rp54,733 million in 2004  2i,7   154,003   203,085   21,861 
 Prepaid expenses  2c,2j,8,47   429,695   628,069   67,607 
 Prepaid taxes  41a   212,282   77,228   8,313 
 Other current assets  2c,9,47   45,083   44,608   4,802 
             
   Total Current Assets      8,942,590   9,203,934   990,736 
             
NON-CURRENT ASSETS                
 Long-term investments — net  2g,10   64,648   82,613   8,893 
 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 Rp791,645 million in 2003, and Rp694,570 million in 2004  2m,12,50   305,041   499,127   53,727 
 Prepaid pension benefit costs  2q,44   288,222   91,262   9,824 
 Advances and other non-current assets  2c,13,47   175,954   1,372,351   147,723 
 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 
 Advance payments for investments in shares of stock  4f   65,458       
 Escrow accounts  15   522,146   36,281   3,905 
             
   Total Non-current Assets      41,340,659   47,065,158   5,066,217 
             
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-6F-7


PERUSAHAAN PERSEROAN (PERSERO)
P.T. TELEKOMUNIKASI INDONESIA Tbk AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
AS OF DECEMBER 31, 20032005 AND 20042006
(Figures in tables are presented in millions of Rupiah and thousands of United States Dollars)
LIABILITIES AND STOCKHOLDERS’ EQUITY
                    
  Notes 2003 2004
       
    Rp Rp US$ (Note 3)
CURRENT LIABILITIES                
 Trade accounts payable  2c,16,47             
  Related parties      657,478   643,094   69,224 
  Third parties      3,109,854   3,611,456   388,747 
 Other accounts payable      187,938   5,073   546 
 Taxes payable  2s,41b   1,513,038   1,592,479   171,419 
 Dividends payable      3,779   62,689   6,748 
 Accrued expenses  2c,17,47   1,185,210   1,051,366   113,172 
 Unearned income  18   763,211   1,030,000   110,872 
 Advances from customers and suppliers  19   268,148   278,430   29,971 
 Short-term bank loans  2c,20,47   37,642   1,101,633   118,583 
 Current maturities of long-term liabilities  2c,21,47   3,443,516   2,300,822   247,667 
             
   Total Current Liabilities      11,169,814   11,677,042   1,256,949 
             
 
NON-CURRENT LIABILITIES                
 Deferred tax liabilities — net  2s,41e   3,546,770   3,352,171   360,836 
 Unearned income on revenue-sharing arrangements  2m,12,50   111,732   360,332   38,787 
 Unearned initial investor payments under joint operation schemes  2n,49   31,584   20,453   2,202 
 Provision for long service awards  2c,2r,45,47   491,037   572,303   61,604 
 Provision for post-retirement benefits  2c,2r,46,47   2,063,524   1,841,146   198,186 
 Accrued pension and other post-retirement benefits costs  2q,44b,44d   13,239   32,007   3,445 
 Long-term liabilities — net of current maturities                
  Two-step loans — related party  2c,22,47   6,858,910   5,363,283   577,318 
  Notes and bonds  23   2,102,502   2,331,465   250,965 
  Bank loans  2c,24,47   2,115,797   1,775,799   191,152 
  Liabilities of business acquisitions  25   746,974   3,743,317   402,940 
  Suppliers’ credit loans  26   671       
  Bridging loan  27   510       
  Other long-term debt      9,153       
             
   Total Non-current Liabilities      18,092,403   19,392,276   2,087,435 
             
MINORITY INTEREST  28   3,708,155   4,938,432   531,586 
             
STOCKHOLDERS’ 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’ EQUITY      50,283,249   56,269,092   6,056,953 
             
                  
  Notes 2005 2006
       
    Rp. Rp. US$ (Note 3)
ASSETS
CURRENT ASSETS                
Cash and cash equivalents  2c,2f,6,46   5,374,684   8,315,836   923,982 
Temporary investments  2c,2g,46   22,064   84,492   9,388 
Trade receivables  2c,2h,7,46             
 Related parties — net of allowance for doubtful accounts of Rp.84,275 million in 2005 and Rp.85,053 million in 2006      530,370   520,689   57,854 
 Third parties — net of allowance for doubtful accounts of Rp.601,393 million in 2005 and Rp.699,736 million in 2006      3,047,539   3,196,588   355,176 
Other receivables — net of allowance for doubtful accounts of Rp.4,402 million in 2005 and Rp.1,685 million in 2006  2c,2h,46   153,247   147,735   16,415 
Inventories — net of allowance for obsolescence of Rp.48,347 million in 2005 and Rp.48,098 million in 2006  2i,8   220,327   213,329   23,703 
Prepaid expenses  2c,2j,9,46   777,869   1,073,329   119,259 
Claim for tax refund  40a      359,582   39,954 
Prepaid taxes  40b   18,913   2,390   266 
Other current assets  2c,10,46   159,537   6,822   758 
                
Total Current Assets      10,304,550   13,920,792   1,546,755 
                
NON-CURRENT ASSETS                
Long-term investments — net  2g,11   101,400   89,197   9,911 
Property, plant and equipment — net of accumulated depreciation of Rp.37,092,663 million in 2005 and Rp.45,043,380 million in 2006  2k,2l,12   45,643,243   54,267,060   6,029,673 
Property, plant and equipment under revenue-sharing arrangements — net of accumulated depreciation of Rp.458,234 million in 2005 and Rp.493,381 million in 2006  2m,13,49   549,405   965,632   107,292 
Prepaid pension benefit cost  2r,43c   640   103   11 
Advances and other non-current assets  2c,2k,14,46   946,037   1,454,283   161,587 
Goodwill and other intangible assets — net of accumulated amortization of Rp.2,764,187 million in 2005 and Rp.3,708,590 million in 2006  2x,5,15   4,493,272   4,436,605   492,956 
Escrow accounts  2c,16,46   132,497   2,073   230 
                
Total Non-current Assets      51,866,494   61,214,953   6,801,660 
                
TOTAL ASSETS      62,171,044   75,135,745   8,348,415 
                
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-7F-8


PERUSAHAAN PERSEROAN (PERSERO)
P.T. TELEKOMUNIKASI INDONESIA Tbk AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS — (Continued)
AS OF DECEMBER 31, 2005 AND 2006
(Figures in tables are presented in millions of Rupiah and thousands of United States Dollars)
                  
  Notes 2005 2006
       
    Rp. Rp. US$ (Note 3)
LIABILITIES AND STOCKHOLDERS’ EQUITY
CURRENT LIABILITIES                
Trade payables  2c,17,46             
 Related parties      1,014,389   1,116,496   124,055 
 Third parties      4,281,285   5,801,457   644,606 
Other payables      6,677   9,219   1,024 
Taxes payable  2s,40c   2,469,765   2,569,002   285,446 
Dividends payable      3,276   1,380   153 
Accrued expenses  2c,18,46   1,521,247   3,475,698   386,189 
Unearned income  19   1,592,718   2,037,772   226,419 
Advances from customers and suppliers      223,086   161,262   17,918 
Short-term bank loans  2c,20,46   173,800   687,990   76,443 
Current maturities of long-term liabilities  2c,21,46   2,226,925   4,675,409   519,490 
                
Total Current Liabilities      13,513,168   20,535,685   2,281,743 
                
NON-CURRENT LIABILITIES                
Deferred tax liabilities — net  2s,40g   2,391,810   2,665,397   296,155 
Unearned income on revenue-sharing arrangements  2m,13,49   425,484   817,174   90,797 
Unearned initial investor payments under joint operation scheme  2n,48   7,311       
Accrued long service awards  2c,2r,44,46   524,524   596,325   66,258 
Accrued post-retirement health care benefits  2c,2r,45,46   3,048,021   2,945,728   327,303 
Accrued pension and other post-retirement benefits costs  2r,43   1,330,664   1,070,622   118,958 
Long-term liabilities — net of current maturities                
 Obligations under capital leases  2l,12   235,537   217,108   24,123 
 Two-step loans — related party  2c,22,46   4,760,199   4,006,935   445,215 
 Notes and bonds  23   1,456,669       
 Bank loans  2c,24,46   1,752,104   2,487,913   276,435 
 Deferred consideration for business combinations  25   3,127,959   3,537,082   393,009 
                
Total Non-current Liabilities      19,060,282   18,344,284   2,038,253 
                
MINORITY INTEREST  26   6,305,193   8,187,087   909,676 
                
STOCKHOLDERS’ EQUITY                
Capital stock — Rp.250 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,27   5,040,000   5,040,000   560,000 
Additional paid-in capital  28   1,073,333   1,073,333   119,259 
Treasury stock (118,376,500 shares)  2p,29      (952,211)  (105,801)
Difference in value of restructuring transactions between entities under common control  30   90,000   180,000   20,000 
Difference due to change of equity in associated companies  2g   385,595   385,595   42,844 
Unrealized holding gain (loss) from available-for-sale securities  2g   (748)  8,865   985 
Translation adjustment  2g   233,253   227,669   25,297 
Retained earnings Appropriated      1,803,397   1,803,397   200,377 
 Unappropriated      14,667,571   20,302,041   2,255,782 
                
Total Stockholders’ Equity      23,292,401   28,068,689   3,118,743 
                
TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY      62,171,044   75,135,745   8,348,415 
                
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 INCOME
FOR THE YEARS ENDED DECEMBER 31, 2002, 20032004, 2005 AND 20042006
(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  Notes 2004 2005 2006
                 
   Rp Rp Rp US$ (Note 3)    Rp. Rp. Rp. US$ (Note 3)
OPERATING REVENUESOPERATING REVENUES                OPERATING REVENUES                
Telephone  2p,32             Telephone  2q,31             
 Fixed lines     7,264,099  8,896,865  10,645,021  1,145,858  Fixed lines     10,645,021  10,781,252  10,979,033  1,219,893 
 Cellular     6,226,801  8,458,830  10,421,298  1,121,776  Cellular     10,421,298  14,570,958  20,622,647  2,291,405 
Interconnection  2p,33,47  2,831,334  4,162,148  6,187,981  666,091 Interconnection — net  2q,32,46  6,187,981  7,742,084  8,681,461  964,607 
Joint operation schemes  2n,34,49  2,128,145  1,486,307  656,614  70,680 Joint operation schemes  2n,33,48  656,614  588,647  489,414  54,379 
Data and Internet  35  1,551,626  3,108,562  4,808,742  517,626 Data and Internet  2q,34  4,808,742  6,934,324  9,065,187  1,007,243 
Network  36  316,098  517,865  654,309  70,432 Network  2q,35,46  654,309  586,636  718,738  79,860 
Revenue-sharing arrangements  2m,37,50  263,754  258,464  280,576  30,202 Revenue-sharing arrangements  2m,36,49  280,576  302,282  415,477  46,163 
Other telecommunications services     220,961  226,882  293,225  31,564 Other telecommunications services     293,225  301,001  322,051  35,783 
                      
Total Operating Revenues     20,802,818  27,115,923  33,947,766  3,654,229 Total Operating Revenues     33,947,766  41,807,184  51,294,008  5,699,333 
                      
OPERATING EXPENSESOPERATING EXPENSES                OPERATING EXPENSES                
Personnel  38  4,387,568  4,440,096  5,570,778  599,653 Personnel  37  4,909,965  6,563,047  8,513,765  945,974 
Depreciation  2k,2l,2m,11,12  3,473,370  4,779,520  6,438,557  693,063 Depreciation  2k,2l,2m,12,13,14  6,438,557  7,570,739  9,178,343  1,019,816 
Operations, maintenance and telecommunication services  39  2,290,219  3,338,693  4,529,587  487,577 Write-down of assets  2k,12    616,768     
General and administrative  40  1,146,294  2,078,777  2,599,847  279,854 Loss on procurement commitments  12    79,359     
Marketing     375,152  502,898  881,930  94,933 Operations, maintenance and telecommunication services  38,46  4,529,587  5,916,341  7,495,728  832,859 
           General and administrative  39  2,599,847  2,763,951  3,271,427  363,492 
Total Operating Expenses     11,672,603  15,139,984  20,020,699  2,155,080 Marketing     881,930  1,126,229  1,241,504  137,946 
                      
Total Operating Expenses     19,359,886  24,636,434  29,700,767  3,300,087 
          
OPERATING INCOMEOPERATING INCOME     9,130,215  11,975,939  13,927,067  1,499,149 OPERATING INCOME     14,587,880  17,170,750  21,593,241  2,399,246 
                      
OTHER INCOME (CHARGES)                
Gain on sale of long-term investment in Telkomsel     3,196,380       
OTHER INCOME (EXPENSES)OTHER INCOME (EXPENSES)                
Interest income  47  479,802  366,024  317,941  34,224 Interest income  46  317,941  344,686  654,984  72,776 
Interest expense  47  (1,582,750)  (1,383,446)  (1,270,136)  (136,721)Interest expense  46  (1,270,136)  (1,177,268)  (1,286,354)  (142,928)
Gain (loss) on foreign exchange — net  2e  556,613  126,121  (1,220,760)  (131,406)Gain (loss) on foreign exchange — net  2e  (1,220,760)  (516,807)  836,328  92,925 
Equity in net income of associated companies  2g,10  4,598  2,819  3,420  368 Equity in net income (loss) of associated companies  2g,11  3,420  10,879  (6,619)  (735)
Others — net     (35,956)  364,338  331,050  35,635 Others — net     331,050  409,184  202,025  22,447 
                      
Other income (charges) — net     2,618,687  (524,144)  (1,838,485)  (197,900)Other income (expenses) — net     (1,838,485)  (929,326)  400,364  44,485 
                      
INCOME BEFORE TAXINCOME BEFORE TAX     11,748,902  11,451,795  12,088,582  1,301,249 INCOME BEFORE TAX     12,749,395  16,241,424  21,993,605  2,443,731 
TAX EXPENSE  2s,41c             
TAX (EXPENSE) BENEFITTAX (EXPENSE) BENEFIT  2s,40d             
Current tax     (2,747,762)  (3,791,280)  (4,267,111)  (459,323)Current tax     (4,267,111)  (5,719,644)  (7,097,202)  (788,578)
Deferred tax     (151,209)  (69,810)  264,039  28,422 Deferred tax     88,585  535,757  57,275  6,364 
                      
     (2,898,971)  (3,861,090)  (4,003,072)  (430,901)      (4,178,526)  (5,183,887)  (7,039,927)  (782,214)
                      
INCOME BEFORE MINORITY INTEREST IN NET INCOME OF SUBSIDIARIESINCOME BEFORE MINORITY INTEREST IN NET INCOME OF SUBSIDIARIES     8,849,931  7,590,705  8,085,510  870,348 INCOME BEFORE MINORITY INTEREST IN NET INCOME OF SUBSIDIARIES     8,570,869  11,057,537  14,953,678  1,661,517 
MINORITY INTEREST IN NET INCOME OF SUBSIDIARIES, net  28  (810,222)  (1,503,478)  (1,956,301)  (210,581)
MINORITY INTEREST IN NET INCOME OF SUBSIDIARIES — netMINORITY INTEREST IN NET INCOME OF SUBSIDIARIES — net  26  (1,956,301)  (3,063,971)  (3,948,101)  (438,678)
                      
NET INCOMENET INCOME     8,039,709  6,087,227  6,129,209  659,767 NET INCOME     6,614,568  7,993,566  11,005,577  1,222,839 
                      
BASIC EARNINGS PER SHARE1)
  2t,42             
BASIC EARNINGS PER SHAREBASIC EARNINGS PER SHARE  2t,41             
Net income per share     398.80  301.95  304.03  0.03 Net income per share     328.10  396.51  547.15  0.06 
                      
Net income per ADS (40 Series B shares per ADS)     15,951.80  12,077.83  12,161.13  1.20 Net income per ADS (40 Series B shares per ADS)     13,124.14  15,860.25  21,886.00  2.43 
                      
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-8F-10


PERUSAHAAN PERSEROAN (PERSERO)
P.T. TELEKOMUNIKASIP.T.TELEKOMUNIKASI INDONESIA Tbk AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY
FOR THE YEARS ENDED DECEMBER 31, 2002, 20032004, 2005 AND 20042006
(Figures in tables are presented in millions of Rupiah and thousands of United States Dollars)Rupiah)
                                          
        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 CHANGES IN STOCKHOLDERS’ EQUITY (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)
                                      
        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 STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY (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)
                                                           
       Difference in                    Difference in            
       Value of Difference Unrealized                value of            
       Restructuring Due to Holding                restructuring Difference          
       Transactions Change of Gain on              transactions due to change Unrealized      
     Additional Between Equity in Available-for-   Retained Earnings Total      Additional between entities of equity holding gain on   Retained earnings Total
   Capital Paid-In Entities Under Associated Sale Translation   Stockholders’    Capital paid-in under common in associated available-for-sale Translation   stockholders’
DescriptionDescription Notes Stock Capital Common Control Companies Securities Adjustment Appropriated Unappropriated EquityDescription Notes stock capital control companies securities adjustment Appropriated Unappropriated equity
                                         
   Rp Rp Rp Rp Rp Rp Rp Rp Rp    Rp. Rp. Rp. Rp. Rp. Rp. Rp. Rp. Rp.
Balance as of January 1, 2004
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 
Balance as of
January 1, 2004
     5,040,000  1,073,333  (7,288,271)  385,595    224,232  1,559,068  13,700,255  14,694,212 
Unrealized holding gain on available- for-sale securitiesUnrealized holding gain on available- for-sale securities  2g          884        884 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)
Foreign currency translation of associated companyForeign currency translation of associated company  2g            5,363      5,363 
Resolved during the Annual General Meeting of the Stockholders on July 30, 2004 Declaration of cash dividendsResolved during the Annual General Meeting of the Stockholders on July 30, 2004 Declaration of cash dividends  2w,42                (3,043,614)  (3,043,614)
Appropriation for general reserve  43              121,745  (121,745)   Appropriation for general reserve  42              121,745  (121,745)   
Declaration of interim cash dividendsDeclaration of interim cash dividends  43                (143,377)  (143,377)Declaration of interim cash dividends  2w,42                (143,377)  (143,377)
Net income for the yearNet income for the year                   6,129,209  6,129,209 Net income for the year                   6,614,568  6,614,568 
                                          
Balance as of December 31, 2004
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 
Balance as of
December 31, 2004
     5,040,000  1,073,333  (7,288,271)  385,595  884  229,595  1,680,813  17,006,087  18,128,036 
                                          
See accompanying notes to consolidated financial statements, which form an integral part of the consolidated financial statements.

F-11


PERUSAHAAN PERSEROAN (PERSERO)
P.T.TELEKOMUNIKASI INDONESIA Tbk AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY — (Continued)
FOR THE YEARS ENDED DECEMBER 31, 2004, 2005 AND 2006
(Figures in tables are presented in millions of Rupiah)
                                          
        Difference in            
        value of            
        restructuring Difference          
        transactions due to change Unrealized      
      Additional between entities of equity holding gain (loss) on   Retained earnings Total
    Capital paid-in under common in associated available-for-sale Translation   stockholders’
Description Notes stock capital control companies securities adjustment Appropriated Unappropriated equity
                     
    Rp. Rp. Rp. Rp. Rp. Rp. Rp. Rp. Rp.
Balance as of January 1, 2005
      5,040,000   1,073,333   (7,288,271)  385,595   884   229,595   1,680,813   17,006,087   18,128,036 
Change in accounting policy for restructuring transactions between entities under common control  4,30         7,288,271               (7,288,271)   
Unrealized holding loss on available- for-sale securities  2g               (1,632)           (1,632)
Foreign currency translation of associated company  2g,11                  3,658         3,658 
Compensation for early termination of exclusive rights  30         90,000                  90,000 
Resolved during the Annual General Meeting of the Stockholders on June 24, 2005 Declaration of cash dividends  2w,42                        (2,921,227)  (2,921,227)
 Appropriation for general reserve  42                     122,584   (122,584)   
Net income for the year                           7,993,566   7,993,566 
                                        
Balance as of December 31, 2005
      5,040,000   1,073,333   90,000   385,595   (748)  233,253   1,803,397   14,667,571   23,292,401 
                                        
See accompanying notes to consolidated financial statements, which form an integral part of the consolidated financial statements

F-12


PERUSAHAAN PERSEROAN (PERSERO)
P.T.TELEKOMUNIKASI INDONESIA Tbk AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY — (Continued)
FOR THE YEARS ENDED DECEMBER 31, 2004, 2005 AND 2006
(Figures in tables are presented in millions of Rupiah)
                                             
          Difference in            
          value of            
          restructuring Difference          
          transactions due to change Unrealized      
      Additional   between entities of equity holding gain (loss) on   Retained earnings Total
    Capital paid-in   under common in associated available-for-sale Translation   stockholders’
Description Notes stock capital Treasury stock control companies securities adjustment Appropriated Unappropriated equity
                       
    Rp. Rp. Rp. Rp. Rp. Rp. Rp. Rp. Rp. Rp.
Balance as of January 1, 2006
      5,040,000   1,073,333      90,000   385,595   (748)  233,253   1,803,397   14,667,571   23,292,401 
Unrealized holding gain on available- for-sale securities  2g                  9,613            9,613 
Foreign currency translation of associated company  2g,11                     (5,584)        (5,584)
Compensation for early termination of exclusive rights  30            90,000                  90,000 
Resolved during the Annual General Meeting of the Stockholders on June 30, 2006 Declaration of cash dividends  2w,42                           (4,400,090)  (4,400,090)
Payment of interim cash dividends  2w,42                           (971,017)  (971,017)
Treasury stock acquired — at cost  29         (952,211)                    (952,211)
Net income for the year                              11,005,577   11,005,577 
                                            
Balance as of December 31, 2006
      5,040,000   1,073,333   (952,211)  180,000   385,595   8,865   227,669   1,803,397   20,302,041   28,068,689 
                                            
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, 2002, 20032004, 2005 AND 20042006
(Figures in tables are presented in millions of Rupiah and thousands of United States Dollars)
                                  
 2002 2003 2004  2004 2005 2006
             
 Rp Rp Rp US$ (Note 3)  Rp. Rp. Rp. US$ (Note 3)
CASH FLOWS FROM OPERATING ACTIVITIESCASH FLOWS FROM OPERATING ACTIVITIES             CASH FLOWS FROM OPERATING ACTIVITIES             
Cash receipts from operating revenues             Cash receipts from operating revenues             
 Telephone              Telephone             
 Fixed lines  7,230,394  8,201,928  10,084,558  1,085,528  Fixed lines  10,084,558  10,668,915  10,673,901  1,185,989 
 Cellular  7,098,585  8,925,503  10,497,763  1,130,007  Cellular  10,497,763  14,825,437  20,842,406  2,315,823 
 Joint operation schemes  1,577,976  1,195,563  547,487  58,933  Interconnection — net  5,766,444  7,403,322  8,655,917  961,768 
 Interconnection — net  1,697,073  4,203,802  5,766,444  620,715  Joint operation schemes  547,487  614,652  596,423  66,269 
 Other services  1,132,077  3,932,084  6,663,500  717,277  Data and Internet  4,973,559  6,952,323  8,914,019  990,447 
          Other services  1,689,941  1,445,668  1,285,275  142,808 
 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) Total cash receipts from operating revenues  33,559,752  41,910,317  50,967,941  5,663,104 
         Cash payments for operating expenses  (12,270,643)  (14,954,742)  (16,465,320)  (1,829,480)
Cash generated from operations  12,935,635  17,597,083  21,289,109  2,291,616 Cash receipt (refund) from (to) customers  (78,028)  (55,343)  (57,580)  (6,398)
                   
Cash generated from operationsCash generated from operations  21,211,081  26,900,232  34,445,041  3,827,226 
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 received  321,677  341,848  642,959  71,440 
Interest paid  (900,660)  (1,178,332)  (1,348,919)  (145,201)Income tax paid  (4,132,359)  (4,938,916)  (7,175,681)  (797,298)
Cash receipt (refund) from/to customers and advances  264,105  (30,884)  (78,028)  (8,399)Interest paid  (1,348,919)  (1,200,484)  (1,217,131)  (135,237)
                   
Net Cash Provided by Operating ActivitiesNet Cash Provided by Operating Activities  10,864,473  12,852,532  16,051,480  1,727,824 Net Cash Provided by Operating Activities  16,051,480  21,102,680  26,695,188  2,966,131 
                   
CASH FLOWS FROM INVESTING ACTIVITIESCASH FLOWS FROM INVESTING ACTIVITIES             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 temporary investments and maturity of time deposits  285,264  227,633  46,081  5,120 
Proceeds from sale of property, plant and equipment  204,008  255,750  67,196  7,233 Purchase of temporary investments and placements in time deposits  (404,268)  (226,054)  (98,896)  (10,988)
Purchase of marketable securities and placements in time deposits  (2,222,175)  (679,500)  (404,268)  (43,516)Proceeds from sale of property, plant and equipment  67,196  84,621  17,269  1,919 
Sale of 12.72% of Telkomsel  3,948,945       Proceeds from insurance claim    27,580     
Payment for cross-ownership transactions  (2,406,309)       Acquisition of property, plant and equipment  (8,568,862)  (12,106,930)  (15,900,628)  (1,766,736)
Acquisition of businesses, net of cash acquired  (243,561)  141,985  (27,797)  (2,992)Increase in advances for the purchase of            
Acquisition of property, plant and equipment  (6,625,292)  (9,007,186)  (8,568,862)  (922,375) property, plant and equipment  (1,063,382)  (212,187)  (293,920)  (32,658)
Payment of advances for the purchase of property, plant and equipment      (1,063,382)  (114,465)Decrease in advances and others  123,026  874  38,395  4,266 
Decrease in advances and others  71,569  96,830  123,026  13,243 Business combinations, net of cash (paid) acquired  (27,797)  (4,000)  143,648  15,961 
Payments of advances for investments in shares of stock  (230,223)  (14,338)     Acquisition of intangible assets      (436,000)  (48,444)
Acquisition of long-term investments  (37,607)    (9,290)  (1,000)Proceeds from sale of long-term investments      22,561  2,507 
Sale of long-term investments    5,398     Cash dividends received      382  42 
Acquisition of intangible assets  (7,213)       Acquisition of long-term investments  (9,290)  (4,250)     
                   
Net Cash Used in Investing ActivitiesNet Cash Used in Investing Activities  (6,049,975)  (7,305,862)  (9,598,113)  (1,033,165)Net Cash Used in Investing Activities  (9,598,113)  (12,212,713)  (16,461,108)  (1,829,011)
                   
See accompanying notes to consolidated financial statements, which form an integral part of
the consolidated financial statements.

F-12F-14


PERUSAHAAN PERSEROAN (PERSERO)
P.T. TELEKOMUNIKASI INDONESIA Tbk AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS — (Continued)
FOR THE YEARS ENDED DECEMBER 31, 2002, 20032004, 2005 AND 20042006
(Figures in tables are presented in millions of Rupiah and thousands of United States Dollars)
                                
 2002 2003 2004  2004 2005 2006
             
 Rp Rp Rp US$ (Note 3)  Rp. Rp. Rp. US$ (Note 3)
CASH FLOWS FROM FINANCING ACTIVITIESCASH FLOWS FROM FINANCING ACTIVITIES             CASH FLOWS FROM FINANCING ACTIVITIES             
Payments for debt issuance cost  (53,915)    (2,394)  (258)Cash dividends paid  (3,129,225)  (2,980,640)  (5,371,102)  (596,789)
Proceeds from bonds  2,365,314       Cash dividends paid to minority shareholders of subsidiaries  (682,366)  (1,694,261)  (2,067,696)  (229,744)
Proceeds from Medium-term Notes      1,080,000  116,254 Increase in escrow accounts  (1,341,546)  (96,216)  (2,073)  (230)
Repayments of long-term liabilities  (2,493,738)  (1,536,941)  (5,963,659)  (641,944)Proceeds from short-term borrowings  1,062,183  739,153  1,020,000  113,333 
Repayments of promissory notes  (771,066)  (1,513,064)  (1,637,917)  (176,310)Repayments of short-term borrowings    (1,733,862)  (507,133)  (56,348)
Cash dividends paid  (2,327,458)  (3,738,586)  (3,811,591)  (410,290)Payments for debt issuance cost  (2,394)       
(Increase) decrease in escrow accounts  (126,848)  (224,219)  485,866  52,300 Proceeds from Medium-term Notes  1,080,000       
Redemption of Telkomsel’s notes    (160,509)  (504,101)  (54,263)Repayments of Medium-term Notes    (470,000)  (145,000)  (16,111)
Proceeds from borrowings  737,495  995,903  3,448,931  371,252 Redemption of Telkomsel’s notes  (504,101)  (780,565)     
         Proceeds from long-term borrowings  2,386,748  569,995  2,532,313  281,368 
Repayments of long-term borrowings  (5,734,156)  (1,723,126)  (1,674,516)  (186,057)
Payment for purchase of treasury stock      (952,211)  (105,801)
Repayments of promissory notes  (40,008)  (164,186)  (201,307)  (22,368)
Repayments of obligations under capital leases    (5,643)  (14,095)  (1,566)
         
Net Cash Used in Financing ActivitiesNet Cash Used in Financing Activities  (2,670,216)  (6,177,416)  (6,904,865)  (743,259)Net Cash Used in Financing Activities  (6,904,865)  (8,339,351)  (7,382,820)  (820,313)
                   
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS  2,144,282  (630,746)  (451,498)  (48,600)
NET (DECREASE) INCREASE IN CASH AND CASH EQUIVALENTSNET (DECREASE) INCREASE IN CASH AND CASH EQUIVALENTS  (451,498)  550,616  2,851,260  316,807 
EFFECT OF EXCHANGE RATE CHANGES ON CASH AND CASH EQUIVALENTSEFFECT OF EXCHANGE RATE CHANGES ON CASH AND CASH EQUIVALENTS  (89,425)  26,148  213,149  22,944 EFFECT OF EXCHANGE RATE CHANGES ON CASH AND CASH EQUIVALENTS  213,149  (32,055)  89,892  9,988 
CASH AND CASH EQUIVALENTS AT BEGINNING OF YEARCASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR  3,644,213  5,699,070  5,094,472  548,382 CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR  5,094,472  4,856,123  5,374,684  597,187 
                   
CASH AND CASH EQUIVALENTS AT END OF YEARCASH AND CASH EQUIVALENTS AT END OF YEAR  5,699,070  5,094,472  4,856,123  522,726 CASH AND CASH EQUIVALENTS AT END OF YEAR  4,856,123  5,374,684  8,315,836  923,982 
                   
SUPPLEMENTAL CASH FLOW
INFORMATION
SUPPLEMENTAL CASH FLOW
INFORMATION
             SUPPLEMENTAL CASH FLOW INFORMATION             
Noncash investing and financing activities:Noncash investing and financing activities:             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  11,658       
Payment of insurance premium through the incurrence of long-term debt    81,186  11,658  1,255 Acquisition of minority interest through the issuance of Promissory Notes  126,692       
Conversion of receivables to long-term investments    13,500     Acquisition of business through the incurrence of long-term liability  3,257,566    1,770,925  196,769 
Acquisition of subsidiary through the issuance of Promissory Notes  3,329,004  927,273     Acquisition of property, plant and equipment through capital leases    257,380  8,440  938 
Acquisition of minority interest through the issuance of Promissory Notes      126,692  13,637 Exchange of property, plant and equipment      440,358  48,929 
Acquisition of business through the incurrence of long-term liability      3,257,566  350,653 Acquisition of property, plant and equipment through incurrence of payable  3,029,489  3,786,014  4,540,200  504,467 
Acquisition of property, plant and equipment through Revenue-Sharing Arrangements  330,633  201,833  543,651  60,406 
See accompanying notes to consolidated financial statements, which form an integral part of the consolidated financial statements.

F-13F-15


PERUSAHAAN PERSEROAN (PERSERO)
P.T. TELEKOMUNIKASI INDONESIA Tbk AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 20032005 AND 2004,2006, AND FOR YEARS ENDED
DECEMBER 31, 2002, 20032004, 2005 AND 20042006
(Figures in tables are presented in millions of Rupiah, unless otherwise stated)
1.GENERAL
     a. Establishment and General Information
     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. 2105 dated January 17, 1992, Supplement No. 5.210. The articlesArticles of associationAssociation have been amended several times, the most recent amendment was made throughbased on notarial deed No. 264 dated July 30, 2004,April 6, 2006 of Notary A. Partomuan Pohan, S.H., LLM., among others, to increase the Company’s authorized, issued and fully paid share capital by means of 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-23270 HT.01.04.TH.2004 dated September 17, 2004, and was published in State Gazette of the Republic of Indonesia No. 551 dated January 18, 2005.June 27, 2006, Supplement No. 666, among others, to amend the directors’ and commissioners’ authorities and responsibilities.
      In accordance with articleArticle 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 principalhead office is located at Jalan Japati No. 1, Bandung, West Java.
      The Company’s business isin 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 1996,1995, 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”) (Note 5).
      The Company’s head office is located at Jalan Japati No. 1, Bandung, West Java.

F-14


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)
      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”). Government RegulationRegula-

F-16


PERUSAHAAN PERSEROAN (PERSERO)
P.T. TELEKOMUNIKASI INDONESIA Tbk AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
DECEMBER 31, 2005 AND 2006, AND FOR YEARS ENDED
DECEMBER 31, 2004, 2005 AND 2006
(Figures in tables are presented in millions of Rupiah, unless otherwise stated)
tion 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 applyapplied to telecommunications services provided for and on behalf of the Company through a KSO. This grant of rights doesdid not affect the Company’s right to provide other domestic telecommunications services.
      Under Law No. 36/1999 on Telecommunications, 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-distance fixed-line telecommunications services, which initially would expire in December 2010 and December 2005, respectively, waswere shortened to expire in August 2002 and August 2003, respectively. In return, the Government iswas required to pay compensation to the Company the amount of which is to be estimated by an independent appraiser appointed by the Government.(Note 30).
      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.2 year 2004 regarding the Implementation of Restructuring in the Telecommunications Sector which, among others, addresses the 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, 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
      Based on the resolution of 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-16F-17


PERUSAHAAN PERSEROAN (PERSERO)
P.T. TELEKOMUNIKASI INDONESIA Tbk AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
DECEMBER 31, 20032005 AND 2004,2006, AND FOR YEARS ENDED
DECEMBER 31, 2002, 20032004, 2005 AND 20042006
(Figures in tables are presented in millions of Rupiah, unless otherwise stated)
      Based on the resolution of the Annual General Meeting of Stockholders, the minutes of which have been summarized by deed No. 36 dated June 24, 2005 of A. Partomuan Pohan, S.H., LLM., the composition of the Company’s Board of Commissioners and Board of Directors as of December 31, 20042005 and 2006 was as follows:
   
President Commissioner :Tanri Abeng
Commissioner :Anggito Abimanyu
Commissioner :Gatot Trihargo
Independent Commissioner :Arif Arryman
Independent Commissioner :Petrus Sartono
President Director : Arwin Rasyid
Vice President Director/ Chief Operating Officer Kristiono: Garuda Sugardo
Director of Finance :Rinaldi Firmansyah
Director of Telecommunications Service BusinessNetwork and Solution : Abdul Haris
Director of Enterprise and Wholesale Suryatin Setiawan: Arief Yahya
Director of Human Resources and Support Business :Woeryanto Soeradji John Welly
Director of Telecommunications Network BusinessConsumer : Guntur Siregar
      Subsequently, based on Extraordinary General Meeting of Stockholders, the minutes of which have been summarized by deed No. 45/ II/2007 dated February 28, 2007 of A. Partomuan Pohan, S.H., LLM., the composition of the Company’s Board of Commissioners and Board of Directors was as follows:
 Abdul Haris
President Commissioner: Tanri Abeng
Commissioner: Anggito Abimanyu
Commissioner: Gatot Trihargo
Independent Commissioner: Arif Arryman
Independent Commissioner: Petrus Sartono
President Director: Rinaldi Firmansyah
Director of Finance: Sudiro Asno
Director of Network and Solution: I Nyoman Gede Wiryanata
Director of Enterprise and Wholesale: Arief Yahya
Director of Human Capital and General Affairs: Faisal Syam
Director of Consumer: Ermady Dahlan
Chief Information Technology Officer: Indra Utoyo
Director of Compliance and Risk Management: Prasetio
      As of December 31, 20032005 and 2004,2006, the Company had 30,82028,179 employees and 29,37527,658 employees, respectively, while the subsidiaries had 4,3845,825 employees and 5,2826,363 employees, respectively.
     b. 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 Series B shares and 1 Series 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

F-18


PERUSAHAAN PERSEROAN (PERSERO)
P.T. TELEKOMUNIKASI INDONESIA Tbk AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
DECEMBER 31, 2005 AND 2006, AND FOR YEARS ENDED
DECEMBER 31, 2004, 2005 AND 2006
(Figures in tables are presented in millions of Rupiah, unless otherwise stated)
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. A share offering was also conducted on the New York Stock Exchange (“NYSE”) and London Stock Exchange (“LSE”) for 700,000,000 Series B shares owned by the Government, of the Republic of Indonesia, which were converted into 35,000,000 American Depositary Shares (ADS). Each ADS represented 20 Series B shares at that time.
      In December 1996, the Government completed a block sale of 388,000,000 Series B shares, and later in 1997, 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 sold 898,000,000 Series 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 Rp5,000,000Rp.5,000,000 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 waydistribution of 746,666,640 bonus shares through the 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 Series B shares. In July 2002, the Government sold 312,000,000 shares or 3.1% of the total outstanding Series 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 Rp500Rp.500 to Rp250Rp.250 by means of a2-for-1 stock split. The Series A Dwiwarna share with par value of Rp500Rp.500 was split to one Series A Dwiwarna share with par value of Rp250Rp.250 and one Series B share with par value of Rp250.Rp.250. As a result of the stock split, the number of 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 number of 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.
      Based on the resolution of the Extraordinary General Meeting of Stockholders on December 21, 2005, the Stockholders authorized the plan to repurchase up to a maximum of 5% of the Company’s issued Series B shares for a total repurchase amount not exceeding Rp.5,250,000 million. As of June 27, 2007, the Company has repurchased 211,290,500 shares of the Company’s issued and outstanding Series B shares, representing approximately 1.05% of the Company’s issued and outstanding Series B shares, for a total repurchase amount of Rp.1,829,113 million, including the broker and custodian fees (Note 29).
As of December 31, 2004,2006, all of the Company’s Series B shares were listed on the Jakarta Stock Exchange and Surabaya Stock Exchange and 45,126,42037,187,806 ADS shares were listed on the New York Stock ExchangeNYSE and London Stock Exchange.LSE.
     c. Subsidiaries
      The Company consolidates the following subsidiaries as a result of majority ownership or its right to control operations.
                     
      Percentage of   Total Assets before
      Ownership Start of Eliminations
        Commercial  
Subsidiaries Domicile Nature of Business 2003 2004 Operations 2003 2004
               
      % %      
PT Pramindo Ikat Nusantara Medan Telecommunications construction & services  100   100   1995  1,954,907 1,604,405
PT AriaWest International Bandung Telecommunications  100   100   1995  1,628,605 1,416,225
PT Multimedia Nusantara Jakarta Pay TV  100   100   1998  7,908 22,116
PT Graha Sarana Duta 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  90   90   1997  54,319 72,080
PT Telekomunikasi Selular Jakarta Telecommunications  65   65   1995  15,386,289 19,557,557
PT Napsindo Primatel International Jakarta Telecommunications  60   60   1999  47,389 28,974
PT Infomedia Nusantara Jakarta Data and information service  51   51   1984  247,646 333,738
PT Pro Infokom Indonesia Jakarta System information network  51   51   2003  5,032 1,261

F-18F-19


PERUSAHAAN PERSEROAN (PERSERO)
P.T. TELEKOMUNIKASI INDONESIA Tbk AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
DECEMBER 31, 20032005 AND 2004,2006, AND FOR YEARS ENDED
DECEMBER 31, 2002, 20032004, 2005 AND 20042006
(Figures in tables are presented in millions of Rupiah, unless otherwise stated)
     c. Subsidiaries
      The Company has indirect investments through itsconsolidated the following direct subsidiaries in Indonesia which it controls as a result of its majority ownership:
                         
      Percentage of   Total Assets Before
      Ownership Start of Eliminations
        Commercial  
Subsidiaries Domicile Nature of Business 2005 2006 Operations 2005 2006
               
      % %      
PT Pramindo Ikat
Nusantara
 Medan Telecommunications construction & services  100   100   1995   1,356,634   1,372,524 
PT AriaWest International Jakarta Telecommunications  100   100   1995   1,127,772   806,542 
PT Multimedia Nusantara Jakarta Multimedia  100   100   1998   53,738   94,187 
PT Graha Sarana Duta Jakarta Real estate, construction and services  99.99   99.99   1982   101,910   134,840 
PT Dayamitra Telekomunikasi Jakarta Telecommunications  100   100   1995   622,662   503,299 
PT Indonusa Telemedia Jakarta Pay TV  96   96   1997   66,445   66,862 
PT Telekomunikasi Selular Jakarta Telecommunications  65   65   1995   25,754,321   37,300,784 
PT Napsindo Primatel Internasional Jakarta Telecommunications  60   60   1999   7,884   6,297 
PT Infomedia Nusantara Jakarta Data and information service  51   51   1984   376,160   437,028 
      The Company has also consolidated the following companies:indirect subsidiaries:
                  
 Ownership  
                      Percentage  
     Ownership   by  
     Percentage Start of Subsidiaries Start of
   Nature of   Commercial   Commercial
Indirect Subsidiaries Stockholders Domicile Business 2003 2004 Operations Stockholders Domicile Nature of Business 2005 2006 Operations
                        
     % %   % %  
Telekomunikasi Selular Finance Limited PT Telekomunikasi Selular  Mauritius Fund raising  100  100  2002  PT Telekomunikasi Selular Mauritius Finance  100  100  2002 
Aria West International Finance B.V PT AriaWest International  Netherlands  Finance  100  100  1996 
Telkomsel Finance B.V.  PT Telekomunikasi Selular Netherlands Finance  100  100  2005 
Aria West International Finance B.V.  PT AriaWest International Netherlands Finance  100  100  1996 
PT Balebat Dedikasi Prima PT Infomedia Nusantara  Bogor  Printing  51  51  2000  PT Infomedia Nusantara Indonesia Printing  51  65  2000 
PT Finnet Indonesia PT Multimedia Nusantara Indonesia Banking data and communication    60  2006 
PT Pramindo Ikat Nusantara (“Pramindo”)
      Pramindo is the investor in KSO I, (Note 49), the joint operating scheme that provides telecommunications services in Sumatra. On April 19, 2002, the Company entered into a Conditional Sale and Purchase Agreement (“CSPA”) (as amended on August 1, 2002) to acquire 100% of the issued andpaid-up share capital of Pramindo. The Company acquired control of Pramindo (Note 4b).
      Effective withon August 15, 2002, the closing ofdate when the first tranche,Company entered into a Stockholders Voting Agreement pursuant to which the Company obtained control over the operationsright to vote all

F-20


PERUSAHAAN PERSEROAN (PERSERO)
P.T. TELEKOMUNIKASI INDONESIA Tbk AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
DECEMBER 31, 2005 AND 2006, AND FOR YEARS ENDED
DECEMBER 31, 2004, 2005 AND 2006
(Figures in tables are presented in millions of Rupiah, unless otherwise stated)
Pramindo’s shares and the right to nominate all the members of the Board of Directors and Board of Commissioners 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 4b)5b).
PT AriaWest International (“AWI”)
      AWI is the investor in KSO III, (Note 49), the joint operating scheme that provides telecommunicationstelecommunication 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 andpaid-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 4c)5c).
      The CSPA provides for certain conditions that haveOn March 6, 2007, the name of PT Aria West International has been changed 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 Telekomunikasi Indonesia International (Note 54b).
PT Multimedia Nusantara (“Metra”)
      Metra is engaged in providing pay television and multimedia telecommunications services.
      On April 8, 2003,July 21, 2005, the Company increased its ownership interest inAnnual General Meeting of Stockholders of Metra from 31%resolved to 100% through a share-swap agreement with PT Indocitra Grahabawana (“Indocitra”). Pursuantissue additional share capital totaling Rp.26,000 million to the agreement,Company. The Company paid the Company sold its investment in PT Menara Jakarta in exchange for Indocitra’s 69% ownership interest in Metra (Note 10k).entire amount on October 21, 2005.
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)services, civil consultant and developer.
      On April 6, 2001, the Company acquired a 100%its 99.99% ownership interest in GSD from Koperasi Mitra Duta and Dana Pensiun Bank Duta, for a purchase consideration of Rp119,000Rp.119,000 million. This acquisition resulted in goodwill of Rp106,348Rp.106,348 million which is beingwas amortized over a period of five years (Note 14)15).
PT Dayamitra Telekomunikasi (“Dayamitra”)
      Dayamitra is the investor in KSO VI, (Note 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 stockholders. 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 4a)5a).
PT Indonusa Telemedia (“Indonusa”)
      Indonusa is engaged in providing multimedia telecommunicationspay television and content 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)11c).
      Pursuant to the extraordinary meeting of stockholders of Indonusa on October 29, 2003, Indonusa agreed to convert its payable to the Company amounting to Rp13,500Rp.13,500 million tointo 1,350,000 shares of Indonusa. Following such conversion, the Company’s ownership in Indonusa increased from 88.08% to 90.39%.

F-21


PERUSAHAAN PERSEROAN (PERSERO)
P.T. TELEKOMUNIKASI INDONESIA Tbk AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
DECEMBER 31, 2005 AND 2006, AND FOR YEARS ENDED
DECEMBER 31, 2004, 2005 AND 2006
(Figures in tables are presented in millions of Rupiah, unless otherwise stated)
      The Company purchased 5.29% of Indonusa’s shares from PT Megacell Media for Rp.4,000 million, thereby increasing the Company’s ownership interest from 90.39% to 95.68% after the settlement of payment on November 22, 2005.
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% (Note 30).
      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 andpaid-up capital of Telkomsel for a total consideration of US$429.0429 million (equivalent to Rp3,948,945Rp.3,948,945 million). This transaction reduced the Company’s ownership in Telkomsel from 77.72% to 65%.
      The saleBased on Decision Letter No. 19/ KEP/ M.KOMINFO/2/2006 of the shares was effective on July 30, 2002Minister of Communication and Information Technology dated February 14, 2006, the Company recognized a gain of Rp3,196,380 million which was specifically identifiedGovernment granted Telkomsel an IMT-2000 license in the Statement of Income as “Gain2.1 GHz frequency bandwidth for a ten year period (3G license), extendable subject to evaluation (Note 15 and 51c). In September 2006, Telkomsel started its commercial 3G service.
      Based on sale of long-term investment in Telkomsel” and included an amount of Rp65,158 million reflecting the realization 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 basesDecision Letter No. 101/ KEP/ M.KOMINFO/10/2006 dated October 11, 2006 of the shares sold.

F-20


PERUSAHAAN PERSEROAN (PERSERO)Minister of Communication and Information Technology, Telkomsel operating licenses were updated granting Telkomsel the rights to provide:
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. Mobile telecommunication services with radio frequency bandwith in the 900 MHz and 1800 MHz bands;
      b. Mobile telecommunication services IMT-2000 with radio frequency bandwith in the 2.1 GHz bands (3G); and
      c. Basic telecommunication services.
PT Napsindo Primatel Internasional (“Napsindo”)
      Napsindo is engaged in providing “Network Access Point” (NAP), “Voice Over Data” (VOD) and other related services.
      Based on the notarial Deeddeed 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 US$4.9 million (equivalent to Rp43,620Rp.43,620 million), thereby increasing the Company’s ownership interest from 32% to 60% after the settlement of payment on January 28, 2003. Starting January 13, 2006 Napsindo’s operation has ceased.
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.

F-22


PERUSAHAAN PERSEROAN (PERSERO)
P.T. TELEKOMUNIKASI INDONESIA Tbk AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
DECEMBER 31, 2005 AND 2006, AND FOR YEARS ENDED
DECEMBER 31, 2004, 2005 AND 2006
(Figures in tables are presented in millions of Rupiah, unless otherwise stated)
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.
Telkomsel Finance B.V. (“TFBV”)
      TFBV, a wholly owned subsidiary of Telkomsel, was established in Amsterdam, the Netherlands, on February 7, 2005, for the purpose of borrowing, lending and raising funds, including issuance of bonds, promissory notes or debt instruments.
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 service.
PT Balebat Dedikasi Prima (“Balebat”)
      Balebat is a company engaged in the printing business, domiciled in Bogor, Indonesia. On July 1, 2006 Infomedia purchased 14% of Balebat’s shares from other shareholders, thereby increasing Infomedia’s ownership interest from 51% to 65%.
PT Finnet Indonesia (“Finnet”)
      Finnet is a company established in January 2006 that engaged in banking data and communication. Metra has 60% direct ownership interest in Finnet.
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.
      PII was established to develop a national information network system as theback-bone for the development of the Indonesiane-Government. PII was 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 to PT Prima Infokom Indonesia for Rp471Rp.471 million. The revenues and expenses of PII as well as the related loss on the sale of the subsidiary were not significant to the consolidated statement of income.
     d. Telekomunikasi Selular Finance Limited (“TSFL”)Authorization of the financial statements
      Telkomsel has 100% direct ownership interest in TSFL, a company established in MauritiusThe consolidated financial statements were authorized for issue by the Board of Directors 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.June 27, 2007.

F-21F-23


PERUSAHAAN PERSEROAN (PERSERO)
P.T. TELEKOMUNIKASI INDONESIA Tbk AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
DECEMBER 31, 20032005 AND 2004,2006, AND FOR YEARS ENDED
DECEMBER 31, 2002, 20032004, 2005 AND 20042006
(Figures in tables are presented in millions of Rupiah, unless otherwise stated)
d. Authorization of the financial statements
      The consolidated financial statements were authorized for issue by the Board of Directors on April 29, 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 in Indonesia (“Indonesian GAAP”). Indonesian GAAP varies in certain significant respects tofrom accounting principles generally accepted in the United States of America (U.S. GAAP)(“U.S. GAAP”). Information relating to the nature and effect of such differences is presented in Note 56.
     a. 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”Rp.”), unless otherwise stated.
     b. 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 every effective control is obtained and are no longer consolidated from the date of disposal.
      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 4b).

F-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. 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”.
     d. d. Acquisitions of subsidiaries
      The acquisition of a subsidiary from a third party is accounted for by using the purchase method of accounting. Intangible assets acquired in a purchase business combination are amortized over their respective contractual lives. 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 Company continually assesses whether events or changes in circumstances have occurred that would require revision of the remaining useful life of intangible assets and goodwill, or whether there is any indication of impairment. If any indication of impairment exists, the recoverable amount of intangible assets and 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.

F-24


PERUSAHAAN PERSEROAN (PERSERO)
P.T. TELEKOMUNIKASI INDONESIA Tbk AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
DECEMBER 31, 2005 AND 2006, AND FOR YEARS ENDED
DECEMBER 31, 2004, 2005 AND 2006
(Figures in tables are presented in millions of Rupiah, unless otherwise stated)
      In July 2004, the Indonesian Financial Accounting Standard Board issued PSAK No. 38 (Revised 2004), “Accounting for Restructuring Transactions between Entities under Common Control”, (PSAK 38R). Under PSAK 38R, the acquisition transaction with entities under common control is accounted for using book value, 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 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 changesbalance of “Difference 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 andrestructuring transactions between entities under common control” is reclassified to retained earnings when the risks specific to the asset.common control relationship has ceased (see Note 4).
     e. 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 liabilitiesliability 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 Rp8,430Rp.9,825 and Rp8,450Rp.9,835 to US$1, Rp.11,638 and Rp.11,652 to Euro1 and Rp.83.78 and Rp.83.89 to Japanese Yen1 as of December 31, 2003,2005 and Rp9,280Rp.8,995 and Rp9,300Rp.9,005 to US$1, Rp.11,839 and Rp.11,853 to Euro1 and Rp.75.58 and Rp.75.68 to Japanese Yen1 as of December 31, 2004.2006. Telkomsel used Bank Indonesia middle rate, which were Rp.9,830 to US$1 and Rp.11,660 to Euro1 as of December 31, 2005 and Rp.9,020 to US$1 and Rp.11,858 to as Euro1 of December 31, 2006. Management concludes that the difference of those exchange rates is not material to the consolidated financial statements.
      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. 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.

F-23


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. Investments
     i. g. InvestmentsTime deposits
     i. Time deposits
      Time deposits with maturities of more than three months are presented as temporary investments.
     ii. Investments in securities
     ii. Investments in securities
      Investments inavailable-for-sale securities are stated at fair value. Unrealized holding gains or losses on fromavailable-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 ofavailable-for-sale securities are recognized in the income of the current year, and are determined on a

F-25


PERUSAHAAN PERSEROAN (PERSERO)
P.T. TELEKOMUNIKASI INDONESIA Tbk AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
DECEMBER 31, 2005 AND 2006, AND FOR YEARS ENDED
DECEMBER 31, 2004, 2005 AND 2006
(Figures in tables are presented in millions of Rupiah, unless otherwise stated)
specific-identification basis. A decline in the fair value of anyavailable-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 companies
      Investments in shares of stock in which the Company has 20% to 50% of the voting rights, and overthrough 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 incurredguaranteed obligations in respect of the associated company or committed to provide further financial support to 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 temporaryother-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

F-24


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 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 investments
      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.

F-26


PERUSAHAAN PERSEROAN (PERSERO)
h. Trade and other accounts receivable
P.T. TELEKOMUNIKASI INDONESIA Tbk AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
DECEMBER 31, 2005 AND 2006, AND FOR YEARS ENDED
DECEMBER 31, 2004, 2005 AND 2006
(Figures in tables are presented in millions of Rupiah, unless otherwise stated)
     h. Trade and other receivables
      Trade and other accounts receivablereceivables 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.amounts. Accounts are written off against the allowance during the period in which they are determined to be not collectible.
      Trade and other accounts receivablereceivables 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 amount of the allowance is recognized in the consolidated statement of income within operating expenses — general and administrative. 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 expensed or transferred to Plant, Propertyproperty, plant and Equipmentequipment upon use. Inventories also include Subscriber Identification Module (“SIM”) card,cards, Removable User Identity Module (“RUIM”) cardcards and prepaidpulse reload voucher blanks.blanks, which are expensed upon sale. Inventories are stated at the lower of costs or net realizable value.
      Cost is determined using the weighted average cost method for components, SIM card,cards, RUIM cardcards 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.depreciation and impairment losses.

F-25F-27


PERUSAHAAN PERSEROAN (PERSERO)
P.T. TELEKOMUNIKASI INDONESIA Tbk AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
DECEMBER 31, 20032005 AND 2004,2006, AND FOR YEARS ENDED
DECEMBER 31, 2002, 20032004, 2005 AND 20042006
(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  5–155-15 
Telegraph, telex and data communication equipment  5–155-15 
Transmission installation and equipment  5–205-20 
Satellite, earth station and equipment  3–153-15 
Cable network  5–155-15 
Power supply  3–103-10 
Data processing equipment  3–103-10 
Other telecommunications peripherals  5 
Office equipment  3–52-5 
Vehicles  5–85-8 
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 onin conjunction with the applicable depreciation rates.of the related property, plant and equipment over their remaining useful lives or their newly estimated useful lives.
      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 statementstatements 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 to which it relates to.relates. During the construction period, borrowing costs, which include interest expense and foreign exchange differences incurred to finance the construction of the asset, are capitalized in proportion to the average amount of accumulated expenditures during the period. CapitalizationCapitalisation of borrowing cost ceases when the assets are ready for its intended use.
      Equipment temporarily unused are reclassified into equipment not used in operation and depreciated over their estimated useful life using straight line method.
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 ofpayments along with the lease, a corresponding liability, which equals to the present value of minimum lease payments, is also recorded and subsequently reducedresidual values (option price) paid by the principallessee at the end of lease period. At

F-26F-28


PERUSAHAAN PERSEROAN (PERSERO)
P.T. TELEKOMUNIKASI INDONESIA Tbk AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
DECEMBER 31, 20032005 AND 2004,2006, AND FOR YEARS ENDED
DECEMBER 31, 2002, 20032004, 2005 AND 20042006
(Figures in tables are presented in millions of Rupiah, unless otherwise stated)
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 component of each minimum lease payment. The interest component of each minimum lease payment is recognized in the statementstatements of income.
      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 at least 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. m. Revenue-sharing arrangements
      Revenues from revenue-sharing arrangements are recognized based on Company’s share as agreed upon in the contracts.
      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 Liabilitiesliabilities 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.method (Note 2k).
      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. n. Joint operation schemes
      Revenues 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”).
      Unearned initial investor payments received as compensation from the KSO Investors arewere 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 arewere 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 iswas 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 arejoint operation schemes were recorded in the books of the KSO Investors which operate the assets and would be transferred to the Company at the end of the KSO period or upon termination of the KSO agreement.

F-27F-29


PERUSAHAAN PERSEROAN (PERSERO)
P.T. TELEKOMUNIKASI INDONESIA Tbk AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
DECEMBER 31, 20032005 AND 2004,2006, AND FOR YEARS ENDED
DECEMBER 31, 2002, 20032004, 2005 AND 20042006
(Figures in tables are presented in millions of Rupiah, unless otherwise stated)
operate the assets and are transferred to      As of December 31, 2006 the Company at the endhas obtained full control over all of the KSO periodoperations by acquisition of its KSO investors or upon termination of the KSO agreement.businesses.
     o. 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. p. Treasury stock
      The reacquired Company’s stocks is accounted for using the reacquisition cost and presented as “Treasury Stock” to be deducted against the equity. The cost of reacquired Company’s stocks sold is accounted for using the weighted average method. The difference resulting from the cost and the proceeds from the sale of treasury stock is credited to “Paid-in Capital”.
     q. Revenue and expense recognition
     i. Fixed line telephone revenues
     i. Fixed line telephone revenues
      Revenues from fixed line installations are recognized at the time the installations are placed in service.service and ready for use. Revenues from usage charges are recognized as customers incur the charges.
     ii. Cellular and fixed wireless telephone revenues
     ii. Cellular and fixed wireless telephone revenues
      Revenues from service connections (connection fees) are recognizedpostpaid services, which consist of connection fee as income at the time the connections occur. Revenues from airtime (for cellular)well as usage and monthly subscription charges, are recognized as accessed and as earned.follows:
• Connection fees for service connection are recognized as revenues at the time the connection occurs.
• Airtime and charges for value added services are recognized based on usage by subscribers.
• Monthly subscription charges are recognized as revenues when incurred by subscribers.
      Revenues from prepaid card customers, which consist of the sale of starter packs also(also known as SIM cards in the case of cellular andor RUIM in the case of fixed wireless telephone andstart-up load vouchers) and pulse reload vouchers, are recognized as follows:
 1. Sale of starter packsSIM and RUIM card is recognized as revenue upon delivery of the starter packs to distributors, dealers or directly to customers.
 
 2. Sale of pulse reload vouchers (either bundled in starter packs or sold as separate items) is recognized initially as unearned income and recognized proportionately as usage revenue based on duration of successful calls made and the value added services used by the subscribers or wheneverthe expiration of the unused stored value of the voucher has expired.voucher.
     iii. Interconnection revenues
     iii. Interconnection revenues
      Revenues from network interconnection with other domestic and international telecommunications carriers are recognized as incurred based on agreement and are presented net of interconnection expenses.
      Expenses are recognized on an accrual basis.
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 of active employees expected to receive benefits under the plan, except to the extent that the benefits relate to pensioners which are recognized immediately in the statement of income.

F-28F-30


PERUSAHAAN PERSEROAN (PERSERO)
P.T. TELEKOMUNIKASI INDONESIA Tbk AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
DECEMBER 31, 20032005 AND 2004,2006, AND FOR YEARS ENDED
DECEMBER 31, 2002, 20032004, 2005 AND 20042006
(Figures in tables are presented in millions of Rupiah, unless otherwise stated)
     iv. ii. Early retirement benefitsData and internet revenues
      Early retirement benefitsRevenues from installations (set-up) of internet, data communication ande-Business are accrued atrecognized upon the time the Company makes a commitment to provide early retirement benefits as a resultcompletion of an offer made in order to encourage voluntary redundancy. The Company is demonstrably committed to a termination when,installations. Revenues from data communication and only when, the Company has a detailed formal plan for the early retirement and is without realistic possibility of withdrawal.internet are recognized based on usage.
     v. Revenues from network
      Revenues from network consist of revenues from leased lines and satellite transponder leases. Revenues are recognized based on subscription fee as specified in the agreements.
      Expenses are recognized on an accrual basis and unutilized promotional credits and allowances are netted against unearned income.
r. Employee benefits other than pension
     i. i. Pension and post-retirement health care benefit plans
      The net obligations in respect of the defined pension benefit and post-retirement health care benefit plans are calculated at the 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, unrecognized actuarial gains or losses, and unrecognized past service cost. The calculation is performed by an independent actuary using the projected unit credit method. The present value of the defined benefit obligation is determined by discounting the estimated future cash outflows using interest rates of government bonds that have terms to maturity approximating the terms of the related liability.
      Actuarial gains or losses arising from experience adjustments and changes in actuarial assumptions, when exceeding the greater of 10% of present value of the defined benefit obligation and 10% of fair value of plan assets, are charged or credited to the income statement over the average remaining service lives of the relevant employees. Prior service cost is recognized immediately if vested or amortized over the vesting period.
      For defined contribution plans, the regular contributions constitute net periodic costs for the year in which they are due and as such are included in staff costs.
     ii. Long service awards (“LSA”)
      The Company’s employeesEmployees 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 or proportionately upon retirement or at the time of termination.
      Actuarial gains or losses arising from experience adjustment and changes in actuarial assumptions are charged immediately to current income statement.
The Company’s obligation with respect to LSA is calculated by an independent actuary using the projected unit credit method.
     iii. ii. Post-retirement health care planEarly retirement benefits
      The Company providesEarly retirement benefits are accrued at the time a post-retirement health carecommitment to provide early retirement benefits is made as a result of an offer made in order to encourage voluntary redundancy. A commitment to a termination arises when, and only when a detailed formal plan that covers its retired employees who meet age, participation and lengthfor the early retirement cannot be withdrawn.

F-31


PERUSAHAAN PERSEROAN (PERSERO)
P.T. TELEKOMUNIKASI INDONESIA Tbk AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
DECEMBER 31, 2005 AND 2006, AND FOR YEARS ENDED
DECEMBER 31, 2004, 2005 AND 2006
(Figures in tables are presented in millions of service requirements at retirement, and their eligible dependents.Rupiah, unless otherwise stated)
      The Company’sGains or losses on curtailment are recognized when there is a commitment to make a material reduction in the number of employees covered by a plan or when there is an amendment of a defined benefit plan terms such that a material element of future services by current employees will no longer qualify for benefits, or will qualify only for reduced benefits.
      Gains or losses on settlement are recognized when there is a transaction that eliminates all further legal or constructive obligation with respect to post-retirement health care plan is calculated by an independent actuary usingfor part or all of the projected unit credit method.benefits provided under a defined benefit plan.
     s. s. Income tax
      The Company and its subsidiaries apply the asset and liability method of accounting for income tax. Under this method,recognized 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 requiresThe Company and its subsidiaries recognized deferred tax assets resulting from the recognition of future tax benefits, such as the benefit of tax loss carryforwards, to the extent their future realization is probable. Deferred tax assets and liabilities are measured using 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 into 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)2g.iii), in which case income tax is also charged or credited directly to equity.
      Amendments to taxation obligations are recorded when an assessment is received or if appealed against, when the results of the appeal are determined.
     t. t. EarningsBasic earnings per share and earnings per American Depositary Share (“ADS”)
      Basic earnings per share isare 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 40, the number of shares represented by each ADS.

F-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. 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 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. 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 is designated and qualifyqualifies for hedge accounting, changes in fair value of derivative instruments are recorded as adjustments to the assets or liabilities being hedged in

F-32


PERUSAHAAN PERSEROAN (PERSERO)
P.T. TELEKOMUNIKASI INDONESIA Tbk AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
DECEMBER 31, 2005 AND 2006, AND FOR YEARS ENDED
DECEMBER 31, 2004, 2005 AND 2006
(Figures in tables are presented in millions of Rupiah, unless otherwise stated)
the income offor the current year or in the stockholders’ equity, depending on the type of hedge transaction represented and the effectiveness of the hedge.
     w. w. Dividends
      Dividend distribution to the Company’s shareholders is recognized as liability in the Company’s consolidated financial statements in the period in which the dividends are approved by the Company’s shareholders. For interim dividends, the Company recognized as liability based on Board of Directors’ decision with the approval from Board of Commissioners.
     x. Intangible Assets
      Intangible assets comprised of intangible assets from subsidiaries and business acquisition (see note 2d) and license. Intangible asset shall be recognized if it is probable that the expected future economic benefits that are attributable to the asset will flow to the Company and the cost of the asset can be reliably measured. Intangible asset is stated at cost less accumulated amortization and impairment, if any. Intangible asset is amortized over its useful life. The Company shall estimate the recoverable value of its intangible assets. When the carrying amount of an asset exceeds its estimated recoverable amount, the asset is written down to its estimated recoverable amount.
      In 2006, Telkomsel was granted the right to operate the 3G license. Telkomsel is required to pay an up-front fee and annual rights of usage (“BHP”) fee for the next ten years. The up-front fee is recorded as intangible asset and amortized using the straight line method over the term of the right to operate the 3G license (10 years). Amortization commences from the date when the assets attributable to the provision of the related services are available for use.
      Based on management interpretation of the license conditions and the written confirmation from the Directorate General of Post and Telecommunication, it is believed that the license could be returned at any time without any financial obligation to pay the remaining outstanding BHP fees. Based on this fact, Telkomsel concluded that it has purchased the right to make annual operating payments to operate the 3G license. Accordingly, Telkomsel recognizes the BHP fees as expense when incurred.
      Management of Telkomsel assess its plan to continue to use the license on an annual basis.
     y. 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.
3.x. Reclassification of accountsTRANSLATION OF RUPIAH INTO UNITED STATES DOLLARS
      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 Rp9,290Rp.9,000 to US$1 published by Reuters on December 31, 2004.2006. The convenience translations should not be construed as representations that the

F-33


PERUSAHAAN PERSEROAN (PERSERO)
P.T. TELEKOMUNIKASI INDONESIA Tbk AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
DECEMBER 31, 2005 AND 2006, AND FOR YEARS ENDED
DECEMBER 31, 2004, 2005 AND 2006
(Figures in tables are presented in millions of Rupiah, unless otherwise stated)
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.
4.CHANGES IN ACCOUNTING POLICY
      In July 2004, the Indonesian Financial Accounting Standards Board issued PSAK No. 38 (Revised 2004), “Accounting for Restructuring Transactions between Entities under Common Control,” (“PSAK 38R”). PSAK 38R changed the Company’s accounting policy for the previously recorded restructuring transactions between entities under common control when certain conditions were met. The provisions of PSAK 38R were effective for the Company beginning January 1, 2005, the initial application date.
      Pursuant to a ruling issued by the Indonesian Capital Market and Financial Institution Supervisory Agency (“BAPEPAM”) regarding the initial application of PSAK 38R by public entities, the Company was required to reclassify the previously recorded difference in value of restructuring transactions between entities under common control as a direct adjustment to retained earnings as of the initial application date when the common control relationship between the transacting parties no longer exists as of January 1, 2005.
      As discussed in Note 30, the difference in value of restructuring transactions between entities under common control as of January 1, 2005 amounting to Rp.7,288,271 million arose from transactions between the Company and Indosat, which at the time of the transactions was also controlled by the Government and therefore was an entity under common control with the Company. This common control relationship ceased to exist in December 2002 when the Government sold its 41.94% ownership interest in Indosat to STT Communications Ltd. (“STTC”) and waived its special voting rights with respect to the Series A Dwiwarna share. In accordance with the BAPEPAM ruling, the Company has reclassified the difference in value of restructuring transactions between entities under common control resulting from the cross-ownership transactions and acquisition of Pramindo as a charge to retained earnings as of January 1, 2005. This reclassification has no net effect on the consolidated stockholders’ equity.
5.ACQUISITIONS OF KSO INVESTORS, KSO IV AND KSO VII
     a. Dayamitra
      The Company acquired control of Dayamitra (previously the Company’s KSO VI partner) on May 17, 2001 by acquiring 90.32% of the shares and has consequently consolidated Dayamitra from that date.

F-30F-34


PERUSAHAAN PERSEROAN (PERSERO)
P.T. TELEKOMUNIKASI INDONESIA Tbk AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
DECEMBER 31, 20032005 AND 2004,2006, AND FOR YEARS ENDED
DECEMBER 31, 2002, 20032004, 2005 AND 20042006
(Figures in tables are presented in millions of Rupiah, unless otherwise stated)
4. ACQUISITION 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:
      
  RpRp.
   
Purchase consideration — net of discount on promissory notes  1,351,299 
    
Fair value of net assets acquired:    
 — Cash and cash equivalents  93,652 
 — Distributable KSO revenue receivable  62,398 
 — Other current assets  9,450 
 — Property, plant and equipment  1,401,479 
 — Intangible assets  1,276,575 
 — Other non-current assets  19,510 
 — Current liabilities  (236,265)
 — Deferred tax liabilities  (581,816)
 — Non-current liabilities  (693,684)
    
Fair value of net assets  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, theThe Company also entered into the following agreements:
      1. Option Agreement
     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 payablepaid 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 waswould be 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 whichwith the payment will be due on March 26, 2006. Payment of the strike price willwould be made through an escrow account established under the Escrow Agreement discussed below. The Company iswas required to deposit US$12.6 million (representing the strike price of US$16.2 million less funds available in the escrow account

F-35


PERUSAHAAN PERSEROAN (PERSERO)
P.T. TELEKOMUNIKASI INDONESIA Tbk AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
DECEMBER 31, 2005 AND 2006, AND FOR YEARS ENDED
DECEMBER 31, 2004, 2005 AND 2006
(Figures in tables are presented in millions of Rupiah, unless otherwise stated)
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 Rp203,028Rp.203,028 million which representsrepresented 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 the payment for Dayamitra’s adjusted working capital (US$1 million). This additional acquisition resulted in intangible assets represents the rights to operate the business in KSO VI of Rp231,477Rp.231,477 million. The amount is being amortized over the then remaining term of the KSO agreement of 6 years (Note 14)15). There was no goodwill arising from this additional acquisition. Had this acquisition taken place on January 1, of2004, the previousconsolidated net income for the year consolidated incomeended December 31, 2004 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, 2004,2005, the remaining option strike price to be paid to TMC, before unamortized discount, amounted to US$15.015 million (Rp139,752(equivalent Rp.147,791 million) and is presented as “Liabilities of business acquisitions” (Note 25). On March 27, 2006, the option strike price had been fully repaid.
      2. Escrow Agreement
     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 andto facilitate the paymentpayment. In 2006, the Company repaid the entire obligation and the remaining funds available in the escrow account was transferred to the Company’s account (Note 15)16).
     b. b. Pramindo
      On April 19, 2002, the Company and the stockholders of Pramindo (previously the Company’s KSO I partner), 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(equivalent to Rp3,464,040 million) plus Rp250,000 million, represented by an initial payment of approximately US$9.3 million (Rp82,218(equivalent to Rp82,218 million), consultants’ fees of US$5.9 million (Rp52,818(equivalent to Rp52,818 million), working capital reimbursement of Rp250,000 million, and the issue by Telkomthe Company 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(equivalent to Rp2,953,617 million). The series I promissory notes arePromissory Notes were non-interest bearing and the series II promissory notes carryPromissory Notes carried a market interest rate. The Promissory Notes are towould be paidrepaid in 10 unequal quarterly installments beginning September 15, 2002 and arewere 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 the right to operate the

F-33F-36


PERUSAHAAN PERSEROAN (PERSERO)
P.T. TELEKOMUNIKASI INDONESIA Tbk AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
DECEMBER 31, 20032005 AND 2004,2006, AND FOR YEARS ENDED
DECEMBER 31, 2002, 20032004, 2005 AND 20042006
(Figures in tables are presented in millions of Rupiah, unless otherwise stated)
the business in the KSO area.I Area. The amount is being amortized over the then remaining term of the KSO agreement of 8.4 years (Note 14)15). There was no goodwill arising from this acquisition.
      In addition, the portion that relatesrelated to Indosat’s 13% equity interest in Pramindo has been accounted for as a restructuring of entities under common control. TheOn the acquisition date, the difference between the purchase consideration and the historical amount of the net assets acquired amounting to Rp296,038 million was included as “Difference in value of restructuring transactions between entities under common control” in the stockholders’ equity section is(see Note 30) and was calculated as follows:
     
  Rp
   
Purchase consideration — net of discount on promissory notes  3,338,653 
Historical amount of net assets  1,061,437 
    
Difference in value for 100% ownership  2,277,216 
    
Difference adjusted to stockholders’ equity for Indosat’s 13% ownership in Pramindo  296,038 
    
      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:
     
  RpRp.
   
Purchase consideration — net of discount on promissory notes  3,338,653 
    
Fair value of net assets acquired:    
— Cash and cash equivalents  141,475 
— Distributable KSO revenue receivable  187,468 
— Other current assets  13,839 
— Property, plant and equipment  1,807,338 
— Intangible assets  2,752,267 
— Other non-current assets  160,139 
— Current liabilities  (284,120)
— Deferred tax liabilities  (1,115,645)
— Non-current liabilities  (620,146)
    
Fair value of net assets  3,042,615 
Difference adjusted to equity for 13% Indosat’s ownership in Pramindo  296,038 
    
Total purchase consideration  3,338,653 
    
      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 thesethe outstanding promissory notes (Note 20b).issued for the acquisition of Pramindo. On March 15, 2004, the Company repaid the remaining balance of these promissory notes and legal title to all of Pramindo’s shares has been completely transferred to the Company.

F-34F-37


PERUSAHAAN PERSEROAN (PERSERO)
P.T. TELEKOMUNIKASI INDONESIA Tbk AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
DECEMBER 31, 20032005 AND 2004,2006, AND FOR YEARS ENDED
DECEMBER 31, 2002, 20032004, 2005 AND 20042006
(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. c. AWI
      Effective on July 31, 2003 (the “closing date”), the Company acquired 100% of the outstanding common stock of AWI (previously the investor inCompany’s KSO III partner), for approximately Rp1,141,752Rp.1,141,752 million plus the assumption of AWI’s debts of Rp2,577,926Rp.2,577,926 million. The purchase consideration included non-interest bearing promissory notes with a face value of US$109.1 million (Rp927,272(equivalent to Rp.927,272 million), of which the present value of which at the discount rate of 5.16% at the closing date was estimated to be US$92.7 million (Rp788,322(equivalent to Rp.788,322 million). The promissory notes are towould 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:
     
  RpRp.
   
Distributable KSO revenue receivable  540,267 
Property, plant and equipment  1,556,269 
Intangible assets  1,982,564 
Other assets  34,372 
Deferred tax liabilities  (393,794)
    
Fair value of net assets acquired  3,719,678 
Borrowings assumed  (2,577,926)
    
Amount of cash and promissory notes given upTotal purchase consideration  1,141,752 
    
      Intangible assets identified from this acquisition represent the right to operate the business in the KSO III area and the amount is being amortized over the then remaining term of the KSO agreement of 7.4 years (Note 14)15).
      The Company’s consolidated results of operations includehad included 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“Deferred consideration for business acquisitions”combinations” in the consolidated balance sheets as of December 31, 2003 and 2004 (Note 25). As of December 31, 20032005 and 2004,2006, the outstanding promissory notes, before unamortized discount, amounted to US$109.176.4 million (Rp921,818(equivalent to Rp.751,036 million) and US$98.254.5 million (Rp913,091(equivalent to Rp.491,182 million), respectively.
      The allocation of the acquisition cost described above was based on an independent appraisal report 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-35F-38


PERUSAHAAN PERSEROAN (PERSERO)
P.T. TELEKOMUNIKASI INDONESIA Tbk AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
DECEMBER 31, 20032005 AND 2004,2006, AND FOR YEARS ENDED
DECEMBER 31, 2002, 20032004, 2005 AND 20042006
(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”)
     d. Amendment and Restatement of the Joint Operation Scheme in Regional Division 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:are as follows:
 • The rights to operate fixed-line telecommunications services arehad been 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 arehad been 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 the existing property, plant and equipment (including new additional installations) and inventories shallwill be transferred to the Company at no cost.
 
 • The Company’s rights to receive Minimum TelkomTELKOM 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 the 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(equivalent to Rp3,285,362 millionRp.3,285,362 million) which representsrepresented 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 the direct cost of the business combination. The allocation of the acquisition cost was as follows:
     
  RpRp.
   
Property, plant and equipment  2,377,134 
Intangible assets  908,228 
    
Total purchase consideration  3,285,362 
    

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)15). There was no goodwill arising from this acquisition.

F-39


PERUSAHAAN PERSEROAN (PERSERO)
P.T. TELEKOMUNIKASI INDONESIA Tbk AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
DECEMBER 31, 2005 AND 2006, AND FOR YEARS ENDED
DECEMBER 31, 2004, 2005 AND 2006
(Figures in tables are presented in millions of Rupiah, unless otherwise stated)
      The Company’s consolidated results of operations includehas included the operating results of KSO IV since February 1, 2004 being the nearest convenient balance date.
      As of December 31, 2004,2005 and 2006, the remaining monthly payments to be made to MGTI, before unamortized discount, amounted to US$462.9393.3 million (Rp4,305,125(Rp.3,868,433 million) and US$319.2 million (Rp.2,874,128 million) and is presented as “Liabilities of“Deferred consideration for business acquisitions”combinations” (Note 25).
  e. Pro forma
     e. Amendment and Restatement of the Joint Operation Scheme in Regional Division VII (“KSO VII”)
      On October 19, 2006, the Company and PT Bukaka Singtel International (“BSI”), the investor in KSO VII, 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 and restated are as follow:
• The rights to operate fixed-line telecommunications services had been transferred to the Company, where KSO VII is operated under the management, supervision, control and responsibility of the Company.
• The responsibilities for funding construction of new telecommunication facilities and payments of operating expenses incurred in KSO VII had been assigned to the Company.
• The risk of loss from damages or destruction of assets operated by KSO VII will be transferred to the Company.
• At the end of the KSO period (December 31, 2010), all rights, title and interest of BSI in existing property, plant and equipment (including new additional installations) and inventories will 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 BSI receives fixed monthly payments (“Fixed Investor Revenues”) amounting to Rp.55.64 billion beginning in October 2006 through June 2007 and amounting to Rp.44.25 billion in July 2007 through December 2010. The Company is entitled to the balance of KSO revenues net of operating expenses and payments to BSI for Fixed Investor Revenues. In addition, payments for Fixed Investor Revenues must be made to BSI before any payments could be made to the Company.
• In the event funds in KSO VII are insufficient to pay Fixed Investor Revenues to BSI, the Company is required to pay the shortfall to BSI.
      As a result of the amendment and restatement of the KSO agreement, the Company obtained the legal right to control financial and operating decisions of KSO VII. Accordingly, the Company has accounted for this transaction as a business combination using the purchase method of accounting. As a condition precedent to the coming into effect of the amended KSO agreement, the Company has entered into assignment agreement with BSI and its business partners whereby BSI assigned its revenue sharing agreements with its business partners to the Company. The Company has accounted for these transactions in accordance with the accounting treatment for revenue sharing arrangements.
      The purchase price for this transaction was approximately Rp.1,770,925 million which represents the present value of fixed monthly payments (totaling Rp.2,359,230 million) to be paid to BSI beginning in

F-40


PERUSAHAAN PERSEROAN (PERSERO)
P.T. TELEKOMUNIKASI INDONESIA Tbk AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
DECEMBER 31, 2005 AND 2006, AND FOR YEARS ENDED
DECEMBER 31, 2004, 2005 AND 2006
(Figures in tables are presented in millions of Rupiah, unless otherwise stated)
October 2006 through December 2010 using a discount rate of 15% plus the direct cost of the business combination. The allocation of the acquisition cost was as follows:
Rp.
Purchase consideration — at present value1,770,925
Fair value of net assets acquired:
— Cash and cash equivalents143,648
— Receivables266,337
— Other current assets69,960
— Property, plant and equipment1,288,888
— Deferred tax assets6,993
— Property, plant and equipment under revenue sharing arrangements452,205
— Intangible assets451,736
— Current liabilities(456,637)
— Unearned income on revenue sharing arrangements(452,205)
Fair value of net assets1,770,925
      The fair value of the property, plant and equipment and property, plant and equipment under revenue sharing arrangements described above was determined by an independent appraisal whereas the fair value of other assets and liabilities was determined by management. The intangible assets represent right to operate the business in the KSO VII area and the amount is being amortized over the remaining term of the KSO agreement of 4.3 years (Note 15). There was no goodwill arising from this acquisition.
      The Company’s consolidated results of operations has included the operating results related to acquisition of KSO investorsVII since October 1, 2006 being the nearest convenient balance date.
      As of December 31, 2006, the remaining monthly payments to be made to BSI, before unamortized discount, amounted to Rp.2,226,431 million and KSO IVis presented as “Deferred consideration for business combinations” (Note 25).
     f. Pro forma operating results related to acquisition of KSO VII
      The following unaudited pro forma financial information reflects the consolidated results of operations of the Company as if the acquisition of Pramindo and AWIKSO VII had taken place on January 1, 2002 and KSO IV on January 1, 2003.2005. 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

F-41


PERUSAHAAN PERSEROAN (PERSERO)
P.T. TELEKOMUNIKASI INDONESIA Tbk AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
DECEMBER 31, 2005 AND 2006, AND FOR YEARS ENDED
DECEMBER 31, 2004, 2005 AND 2006
(Figures in tables are presented in millions of Rupiah, unless otherwise stated)
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.
        
 Unaudited
              
 2002 2003 2004 2005 2006
          
Operating revenues  22,297,575  28,343,447  34,020,663   43,331,841  52,410,229 
Operating income  8,778,831  11,687,955  13,916,465   17,568,948  21,896,658 
Income before tax  11,726,254  11,399,321  12,071,780   16,461,991  22,205,996 
Net income  8,127,080  6,509,255  6,117,619   8,147,616  11,245,085 
Net income per share — in full Rupiah amount  403.13  322.88  303.45   404.15  559.05 
Net income per ADS — in full Rupiah amount  16,125.16  12,915.19  12,138.13   16,165.91  22,362.13 
  f. Advance payments for investments in shares of stock
6.CASH AND CASH EQUIVALENTS
         
  2003 2004
     
Dayamitra (Note 4a)  65,458    
       
5. CASH AND CASH EQUIVALENTS
                    
 2003 2004  2005 2006
         
Cash on handCash on hand  6,790  8,631 Cash on hand  6,070  8,281 
           
Cash in banksCash in banks       Cash in banks       
Related parties       Related parties       
 Rupiah        Rupiah       
 Bank Negara Indonesia  217,276  158,519  Bank Negara Indonesia  54,590  207,365 
 Bank Mandiri  109,887  192,056  Bank Mandiri  89,128  136,481 
 Bank Rakyat Indonesia  9,988  10,712  Bank Rakyat Indonesia  5,095  15,395 
 Bank Pos Nusantara  1,135  1,278  Bank Pos Nusantara  879  1,447 
           
Total  338,286  362,565 
      Total  149,692  360,688 
     
 Foreign currencies       
 Bank Mandiri  55,797  32,039 
 Bank Negara Indonesia  2,701  5,818 
 Bank Rakyat Indonesia  657  607 
     
 Total  59,155  38,464 
     
Total — related parties  208,847  399,152 
     

F-37F-42


PERUSAHAAN PERSEROAN (PERSERO)
P.T. TELEKOMUNIKASI INDONESIA Tbk AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
DECEMBER 31, 20032005 AND 2004,2006, AND FOR YEARS ENDED
DECEMBER 31, 2002, 20032004, 2005 AND 20042006
(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 
       
            
  2005 2006
     
 Third parties        
  Rupiah        
   Deutsche Bank  15,954   18,274 
   Bank Central Asia  8,398   15,326 
   Bank Bukopin  15,800   8,058 
   ABN AMRO Bank  34,453   4,851 
   BPD Papua     2,717 
   Bank Niaga  498   2,104 
   Citibank NA  1,595   1,426 
   Bank Mega  1,321   941 
   Bank Permata     927 
   Lippo Bank  1,361   700 
   Bank Danamon  324   338 
   Bank Muamalat Indonesia  601   252 
   Bank Bumiputera Indonesia  242   158 
   Bank Buana Indonesia  1,189   123 
   Bank Internasional Indonesia  53   31 
         
  Total  81,789   56,226 
         
  Foreign currencies        
   ABN AMRO Bank  54,575   51,781 
   Citibank NA  5,737   8,568 
   Deutsche Bank  5,309   2,921 
   Standard Chartered Bank  99   91 
   Bank Central Asia  142   89 
   Bank Internasional Indonesia  30   48 
   The Bank of Tokyo Mitsubishi  46   33 
         
  Total  65,938   63,531 
         
 Total — third parties  147,727   119,757 
         
Total cash in banks  356,574   518,909 
         

F-38F-43


PERUSAHAAN PERSEROAN (PERSERO)
P.T. TELEKOMUNIKASI INDONESIA Tbk AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
DECEMBER 31, 20032005 AND 2004,2006, AND FOR YEARS ENDED
DECEMBER 31, 2002, 20032004, 2005 AND 20042006
(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 
       
            
  2005 2006
     
Time deposits        
 Related parties        
  Rupiah        
   Bank Negara Indonesia  660,915   2,131,515 
   Bank Mandiri  1,510,009   1,361,098 
   Bank Rakyat Indonesia  246,415   635,000 
   Bank Tabungan Negara  132,455   294,890 
   Bank Syariah Mandiri  7,000    
         
  Total  2,556,794   4,422,503 
         
  Foreign currencies        
   Bank Mandiri  293,115   732,631 
   Bank Negara Indonesia  98   98 
         
  Total  293,213   732,729 
         
 Total — related parties  2,850,007   5,155,232 
         
 Third parties        
  Rupiah        
   Bank Niaga  109,565   199,135 
   Bank Jabar  85,590   196,795 
   Standard Chartered Bank  177,800   142,500 
   Bank Danamon  63,915   130,560 
   Bank Muamalat Indonesia  9,000   115,420 
   Bank Mega  99,575   95,690 
   Bank Bukopin  89,255   90,780 
   Bank BTPN  43,255   55,100 
   Bank NISP  50,680   47,065 
   ABN AMRO Bank     35,000 
   Bank Internasional Indonesia     27,190 
   Deutsche Bank     17,300 
   Bank Syariah Mega Indonesia  17,000   15,700 
   Bank Yudha Bhakti  6,000   8,045 
   Bank Nusantara Parahyangan  4,000   3,000 
   Bank Permata     102 
   Citibank NA  310,100    
   Bank Bumiputera Indonesia  19,643    
         
  Total  1,085,378   1,179,382 
         

F-39F-44


PERUSAHAAN PERSEROAN (PERSERO)
P.T. TELEKOMUNIKASI INDONESIA Tbk AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
DECEMBER 31, 20032005 AND 2004,2006, AND FOR YEARS ENDED
DECEMBER 31, 2002, 20032004, 2005 AND 20042006
(Figures in tables are presented in millions of Rupiah, unless otherwise stated)
                    
 2003 2004  2005 2006
         
Foreign currencies        Foreign currencies       
 Standard Chartered Bank  5,697  225,208  Deutsche Bank  873,772  816,497 
 The Hongkong Shanghai Bank Corporation    253,043  Citibank NA  202,883  632,122 
 Deutsche Bank  885,205  1,051,839  Bank Bukopin    3,608 
      Bank Mega    1,805 
Total  890,902  1,530,090 
           
Total — third parties  1,991,605  2,785,959 
 Total  1,076,655  1,454,032 
     
Total — third parties  2,162,033  2,633,414 
           
Total time depositsTotal time deposits  4,676,662  4,266,220 Total time deposits  5,012,040  7,788,646 
           
Total cash and cash equivalentsTotal cash and cash equivalents  5,094,472  4,856,123 Total cash and cash equivalents  5,374,684  8,315,836 
           
      Range of interest rates per annum for time deposits is as follows:
                
 2003 2004 2005 2006
        
Rupiah  5.5% – 14.25%  3.00% – 9.50%  2.00% — 14.50% 4.00% — 16.00% 
Foreign currencies  0.92% – 2.25%  0.55% – 1.95%  0.60% — 3.70% 1.65% — 5.10% 
      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 4746 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, 20032005 AND 2004,2006, AND FOR YEARS ENDED
DECEMBER 31, 2002, 20032004, 2005 AND 20042006
(Figures in tables are presented in millions of Rupiah, unless otherwise stated)
7.TRADE RECEIVABLES
      Trade receivables from related parties and third parties arise from services provided to both retail and non-retail customers.
     a. By Debtor
Related parties:
                         
  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 
                   
         
  2005 2006
     
Government agencies  432,982   518,943 
PT Citra Sari Makmur  31,242   20,627 
PT Patra Telekomunikasi Indonesia  2,921   13,751 
PT Graha Informatika Nusantara  1,880   6,949 
PT Pasifik Satelit Nusantara  2,401   4,286 
Kopegtel  8,959   4,256 
PT Aplikanusa Lintasarta  437   3,217 
KSO VII  111,599    
Others  22,224   33,713 
         
Total  614,645   605,742 
Allowance for doubtful accounts  (84,275)  (85,053)
         
Net  530,370   520,689 
         
      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”) underTrade receivables from 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 amountrelated parties are presented net of the Company’s investments givenliabilities to CPSC, and reversal of differencesuch parties due to changelegal right of equityoffset in Metrosel previously recognized directly in equity.accordance with agreements with those parties.
     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.
Third parties:
         
  2005 2006
     
Residential and business subscribers  3,452,176   3,551,270 
Overseas international carriers  196,756   345,054 
         
Total  3,648,932   3,896,324 
Allowance for doubtful accounts  (601,393)  (699,736)
         
Net  3,047,539   3,196,588 
         

F-46


PERUSAHAAN PERSEROAN (PERSERO)
P.T. TELEKOMUNIKASI INDONESIA Tbk AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
DECEMBER 31, 20032005 AND 2004,2006, AND FOR YEARS ENDED
DECEMBER 31, 2002, 20032004, 2005 AND 2006
(Figures in tables are presented in millions of Rupiah, unless otherwise stated)
     b. By Age
Related parties:
         
  2005 2006
     
Up to 6 months  505,519   490,643 
7 to 12 months  27,390   30,007 
13 to 24 months  25,574   14,468 
More than 24 months  56,162   70,624 
         
Total  614,645   605,742 
Allowance for doubtful accounts  (84,275)  (85,053)
         
Net  530,370   520,689 
         
Third parties:
         
  2005 2006
     
Up to 3 months  2,938,326   2,932,542 
More than 3 months  710,606   963,782 
         
Total  3,648,932   3,896,324 
Allowance for doubtful accounts  (601,393)  (699,736)
         
Net  3,047,539   3,196,588 
         
     c. By Currency
Related parties
         
  2005 2006
     
Rupiah  598,533   597,415 
United States Dollar  16,112   8,327 
         
Total  614,645   605,742 
Allowance for doubtful accounts  (84,275)  (85,053)
         
Net  530,370   520,689 
         
Third parties
         
  2005 2006
     
Rupiah  3,444,914   3,535,904 
United States Dollar  204,018   360,420 
         
Total  3,648,932   3,896,324 
Allowance for doubtful accounts  (601,393)  (699,736)
         
Net  3,047,539   3,196,588 
         

F-47


PERUSAHAAN PERSEROAN (PERSERO)
P.T. TELEKOMUNIKASI INDONESIA Tbk AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
DECEMBER 31, 2005 AND 2006, AND FOR YEARS ENDED
DECEMBER 31, 2004, 2005 AND 2006
(Figures in tables are presented in millions of Rupiah, unless otherwise stated)
     d. Movements in the allowance for doubtful accounts
             
  2004 2005 2006
       
Beginning balance  443,892   522,066   685,668 
Additions  342,895   478,005   453,045 
Bad debts write-off  (264,721)  (314,403)  (353,924)
             
Ending balance  522,066   685,668   784,789 
             
      Management believes that the allowance for doubtful accounts is adequate to cover probable losses on uncollectible accounts.
      Except for the amounts receivable from the Government agencies, management believes that there were no significant concentrations of credit risk on these receivables.
      Refer to Note 46 for details of related party transactions.
8.INVENTORIES
         
  2005 2006
     
Components  50,520   57,074 
Allowance for obsolescence  (8,605)  (4,360)
         
Net  41,915   52,714 
         
Modules  103,520   109,978 
Allowance for obsolescence  (39,553)  (43,549)
         
Net  63,967   66,429 
         
SIM cards, RUIM cards and prepaid voucher blanks  114,634   94,375 
Allowance for obsolescence  (189)  (189)
         
Net  114,445   94,186 
         
Total  220,327   213,329 
         
      Movements in the allowance for obsolescence are as follows:
             
  2004 2005 2006
       
Beginning balance  40,489   54,733   48,347 
Additions  14,800   10,968   5,207 
Inventory write-off  (556)  (17,354)  (5,456)
             
Ending balance  54,733   48,347   48,098 
             
      Components and modules represent telephone terminals, cables, transmission installation spare parts and other spare parts.
      Management believes that the allowance is adequate to cover probable losses from decline in inventory value due to obsolescence.

F-48


PERUSAHAAN PERSEROAN (PERSERO)
P.T. TELEKOMUNIKASI INDONESIA Tbk AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
DECEMBER 31, 2005 AND 2006, AND FOR YEARS ENDED
DECEMBER 31, 2004, 2005 AND 2006
(Figures in tables are presented in millions of Rupiah, unless otherwise stated)
      At December 31, 2006, inventory held by a certain subsidiary was insured against fire, theft and other specified risks to PT Asuransi AIOI Indonesia for US$0.6 million. Management believes that the insurance amount is adequate to cover such risks.
9.PREPAID EXPENSES
         
  2005 2006
     
Frequency license  275,359   425,482 
Salary  289,632   356,227 
Rental  112,078   200,092 
Insurance  66,449   40,710 
Telephone directory issuance cost  26,527   29,692 
Others  7,824   21,126 
         
Total  777,869   1,073,329 
         
      Refer to Note 46 for details of related party transactions.
10.OTHER CURRENT ASSETS
         
  2005 2006
     
Restricted time deposits — Bank Mandiri (Note 46)  159,537   6,822 
         
      As of December 31, 2005, the balance consists of the Company’s time deposits of US$13.6 million (equivalent to Rp.133,926 million) and Rp.25,611 million pledged as collateral for bank guarantees.
      As of December 31, 2006, the balance consists of the Company’s time deposits of US$0.1 million (equivalent to Rp.937 million) and Rp.4,208 million and Infomedia’s time deposit of Rp.1,677 million pledged as collateral for bank guarantees.

F-49


PERUSAHAAN PERSEROAN (PERSERO)
P.T. TELEKOMUNIKASI INDONESIA Tbk AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
DECEMBER 31, 2005 AND 2006, AND FOR YEARS ENDED
DECEMBER 31, 2004, 2005 AND 2006
(Figures in tables are presented in millions of Rupiah, unless otherwise stated)
11.LONG-TERM INVESTMENTS
                         
  2005
   
  Percentage  
  of Beginning   Share of Translation Ending
  Ownership Balance Addition Net Income Adjustment Balance
             
Equity method:
                        
PT Citra Sari Makmur  25.00   60,116      2,480   3,658   66,254 
PT Patra Telekomunikasi Indonesia  40.00   12,421   4,250   8,399      25,070 
PT Pasifik Satelit Nusantara  35.50                
                        
       72,537   4,250   10,879   3,658   91,324 
                        
Cost method:
                        
Bridge Mobile Pte. Ltd.   12.50   9,290            9,290 
PT Batam Bintan Telekomunikasi  5.00   587            587 
PT Pembangunan Telekomunikasi Indonesia  3.18   199            199 
PT Mandara Selular Indonesia  1.33                
                        
       10,076            10,076 
                        
       82,613   4,250   10,879   3,658   101,400 
                        
                         
  2006
   
  Percentage   Share of  
  of Beginning   Net Income Translation Ending
  Ownership Balance Addition (Loss) Adjustment Balance
             
Equity method:
                        
PT Citra Sari Makmur  25.00   66,254      (7,556)  (5,584)  53,114 
PT Patra Telekomunikasi Indonesia  40.00   25,070      937      26,007 
PT Pasifik Satelit Nusantara  22.38                
                        
       91,324      (6,619)  (5,584)  79,121 
                        
Cost method:
                        
Bridge Mobile Pte. Ltd.   12.50   9,290            9,290 
PT Batam Bintan Telekomunikasi  5.00   587            587 
PT Pembangunan Telekomunikasi Indonesia  3.18   199            199 
PT Mandara Selular Indonesia  0.00                
                        
       10,076            10,076 
                        
       101,400      (6,619)  (5,584)  89,197 
                        
     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-50


PERUSAHAAN PERSEROAN (PERSERO)
P.T. TELEKOMUNIKASI INDONESIA Tbk AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
DECEMBER 31, 2005 AND 2006, AND FOR YEARS ENDED
DECEMBER 31, 2004, 2005 AND 2006
(Figures in tables are presented in millions of Rupiah, unless otherwise stated)
      As of December 31, 20032005 and 2004,2006, the carrying amount of investment in CSM was equal to the Company’s share in net assets of CSM.
     b. PT Patra Telekomunikasi Indonesia (“Patrakom”)
      Patrakom is engaged in providing satellite communication system services, related services and facilities to companies in the petroleum industry.
      On August 26, 2005, the Company purchased 10% of Patrakom’s outstanding shares from Indosat for Rp.4,250 million, thereby increasing the Company’s ownership interest from 30% to 40%.
      As of December 31, 2005 and 2006, the carrying amount of investment in Patrakom was equalapproximate to the underlying equityCompany’s share in net assets of Patrakom.
     c. PT Pasifik Satelit Nusantara (“PSN”)
     c. PT Pasifik Satelit Nusantara (“PSN”)
      PSN is engaged in providing satellite transponder leasing and satellite-based communication services in the Asia Pacific Region.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 value has been reduced to zero.nil.
      On August 8, 2003, as a result of share-swap transaction with CPSC,PT Centralindo Pancasakti Cellular, the Company’s interest in PSN effectively increased to 43.69%. The Company decidedCompany’s decision 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 willwould allow it to capitalize on a government program which callscalled for the provision of telecommunication services to remote areas of Indonesia.
      In 2003, PSN entered into2005, the Company’s ownership interest was diluted to 35.5% as a negotiation with its current creditorsresult of debt to restructure its debts. Asequity conversions consummated by PSN.
      On January 20, 2006, PSN’s stockholders agreed to issue new shares to a new stockholder. The issuance of new shares resulted in dilution 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 engagedCompany’s interest 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.PSN to 22.38%
     d. 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(equivalent to Rp.9,290 million) which represents a 14.286% ownership interest.
      On April 14, 2005, Telkomsel’s ownership interest was diluted to 12.50% following issuance of new shares by Bridge Mobile Pte. Ltd to a new stockholder.
     e. g. Medianusa Pte. Ltd.PT Batam Bintan Telekomunikasi (“BBT”)
      Medianusa Pte. Ltd. is an associated company of Infomedia, whichBBT is engaged as a sales agent, in search of advertisers for telephone directories. On November 30, 2004, Infomedia sold its entire ownershipproviding fixed line telecommunication services at Batamindo Industrial Park in Medianusa Pte. Ltd. for SGD0.024 million (Rp135 million)Muka Kuning, Batam Island and recognized a gain of Rp27 million.at Bintan Beach International Resort and Bintan Industrial Estate in Bintan Island.

F-47F-51


PERUSAHAAN PERSEROAN (PERSERO)
P.T. TELEKOMUNIKASI INDONESIA Tbk AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
DECEMBER 31, 20032005 AND 2004,2006, AND FOR YEARS ENDED
DECEMBER 31, 2002, 20032004, 2005 AND 20042006
(Figures in tables are presented in millions of Rupiah, unless otherwise stated)
     f. h. PT Pembangunan Telekomunikasi Indonesia (“Bangtelindo”)
      Bangtelindo is primarily engaged in providing consultancy services on the installation and maintenance of telecommunications facilities.
     g. 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 Rp10,398Rp.10,398 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.
      OnIn July 28, 2003 Mobisel’s stockholders agreed toand January 2004, Mobisel carried out a restructuring program which included aseries of 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 resultedconversions resulting in dilution of the Company’s ownership interest to 7.44%6.4%.
      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,      On May 27, 2005, the MinisterCompany’s ownership interest was further diluted to 1.33% following the issuance 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 two1,179,418,253 new companies: PT Telekomindo Media Informatika (“TMI”) and PT Griya Insani Primabhakti (“GIP”).Series B shares by Mobisel.
      Based on a share-swap agreement dated December 5, 2001 amongOn January 13, 2006, the Company PT Rajawali Corporation (“RC”), Telekomindo and TMI, the parties agreedsold its entire ownership interest in Mobisel to Twinwood Ventures Limited (third party) for Rp.22,561 million. The gain 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 millionsale amounted 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.Rp.22,561 million.

F-48F-52


PERUSAHAAN PERSEROAN (PERSERO)
P.T. TELEKOMUNIKASI INDONESIA Tbk AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
DECEMBER 31, 20032005 AND 2004,2006, AND FOR YEARS ENDED
DECEMBER 31, 2002, 20032004, 2005 AND 20042006
(Figures in tables are presented in millions of Rupiah, unless otherwise stated)
12.j. PT Metro Selular Nusantara (“Metrosel”)PROPERTY, PLANT AND EQUIPMENT
      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,  January 1,   Write-down of     December 31,
 2003 Acquisitions Additions Deductions Reclassifications 2003  2005 Additions Assets Deductions Reclassifications 2005
                         
At cost or revalued amounts:
                   
At cost
At cost
                   
Direct acquisitions
Direct acquisitions
                   
Direct acquisitions
                   
Land  267,933    52,738  (20,762)  (945)  298,964 Land  327,339  30,444    (22,104)  (1,232)  334,447 
Buildings  1,658,390  2,436  43,301  (43,293)  158,261  1,819,095 Buildings  2,170,055  65,622    (4,553)  336,435  2,567,559 
Switching equipment  9,629,203  402,598  144,658  (10)  296,943  10,473,392 Switching equipment  10,360,100  324,748    (13,547)  158,580  10,829,881 
Telegraph, telex and data communication equipment  206,667    3,833  (86)  (11,100)  199,314 Telegraph, telex and data communication equipment  213,855  2,410    (120)  (353)  215,792 
Transmission installation and equipment  10,340,314  7,565  278,020  (11,903)  6,204,183  16,818,179 Transmission installation and equipment  26,922,143  846,944    (28,747)  3,813,794  31,554,134 
Satellite, earth station and equipment  5,798,011    21,512    390,304  6,209,827 Satellite, earth station and equipment  3,354,803  697,304    (427,836)  1,319,733  4,944,004 
Cable network  17,701,074  868,823    (20,853)  148,456  18,697,500 
Power supply  1,194,710  73,492    (7,198)  51,391  1,312,395 
Data processing equipment  3,786,741  261,442    (6,132)  3,800,322  7,842,373 
Other telecommunications peripherals  824,634  69,469    (5,675)  15,723  904,151 
Office equipment  661,666  69,501    (1,772)  (79,457)  649,938 
Vehicles  191,403  975    (5,090)  (905)  186,383 
Other equipment  112,626  2,923      (5)  115,544 
Property under construction:                   
 Buildings  53,412  235,354      (266,991)  21,775 
 Switching equipment    13,172        13,172 
 Transmission installation and equipment  175,131  7,518,740      (6,979,472)  714,399 
 Satellite, earth station and equipment  776,899        (776,766)  133 
 Cable network  25,508  213      (21,950)  3,771 
 Power supply  69  8,711      (8,719)  61 
 Data processing equipment  16,681  2,167,465      (616,886)  1,567,260 
 Other telecommunications peripherals    37,825      (34,301)  3,524 

F-49F-53


PERUSAHAAN PERSEROAN (PERSERO)
P.T. TELEKOMUNIKASI INDONESIA Tbk AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
DECEMBER 31, 20032005 AND 2004,2006, AND FOR YEARS ENDED
DECEMBER 31, 2002, 20032004, 2005 AND 20042006
(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   January 1,   Write-down of     December 31,
 Data processing equipment  10,807    63,945  (634)  (63,592)  10,526   2005 Additions Assets Deductions Reclassifications 2005
 Other telecommunications peripherals  13,649    15,853  (1,392)  (11,627)  16,483              
Leased assets
Leased assets
                   
Leased assets
                   
Vehicles  3,640    73  (1,689)  (1,785)  239 Vehicles  413        (83)  330 
             Transmission installation and equipment    257,380        257,380 
Total  47,334,951  1,556,269  9,552,587  (148,787)  61,679  58,356,699               
             Total  68,869,262  13,552,957    (543,627)  857,314  82,735,906 
Accumulated depreciation:
                   
             
Accumulated depreciation and impairment:
Accumulated depreciation and impairment:
                   
Direct acquisitions
Direct acquisitions
                   
Direct acquisitions
                   
Buildings  736,997    115,602  (41,293)  1,013  812,319 Buildings  952,638  143,894    (1,789)  15,095  1,109,838 
Switching equipment  4,569,287    668,136  (4)  29,069  5,266,488 Switching equipment  5,601,273  766,155    (13,547)  118,711  6,472,592 
Telegraph, telex and data communication equipment  202,043    3,365  (59)  (11,100)  194,249 Telegraph, telex and data communication equipment  198,653  3,004    (120)  (10)  201,527 
Transmission installation and equipment  3,183,736    1,784,031  (4,534)  (6,338)  4,956,895 Transmission installation and equipment  8,208,259  3,281,208  552,828  (15,239)  (35,774)  11,991,282 
Satellite, earth station and equipment  2,001,671    153,506    3,202  2,158,379 Satellite, earth station and equipment  1,532,282  220,658    (427,836)  (19,043)  1,306,061 
Cable network  5,286,209    1,300,460  (20,312)  46,924  6,613,281 Cable network  8,235,661  2,019,324    (21,012)  97,771  10,331,744 
Power supply  724,985    77,765  (3,437)  (1,388)  797,925 Power supply  904,780  84,438    (7,198)  50,170  1,032,190 
Data processing equipment  990,054    492,799  (2,394)  (10,643)  1,469,816 Data processing equipment  2,112,821  796,921    (6,132)  34,521  2,938,131 
Other telecommunications peripherals  499,093    71,217  (240)  2,120  572,190 Other telecommunications peripherals  712,578  76,882    (5,675)  10,198  793,983 
Office equipment  460,518    37,251  (1,088)  786  497,467 Office equipment  562,757  43,274    (1,562)  (61,331)  543,138 
Vehicles  167,226    7,986  (1,705)  (373)  173,134 Vehicles  180,864  4,758    (5,089)  (932)  179,601 
Other equipment  63,020    2,028  (6)  4,260  69,302 Other equipment  94,527  7,042      (5)  101,564 
Leased assets
Leased assets
                   
Leased assets
                   
Vehicles  1,506    307  (848)  (851)  114 Vehicles  70  65      (65)  70 
             Transmission installation and equipment    27,002  63,940      90,942 
Total  18,886,345    4,714,453  (75,920)  56,681  23,581,559               
             Total  29,297,163  7,474,625  616,768  (505,199)  209,306  37,092,663 
             
Net Book ValueNet Book Value  28,448,606              34,775,140 Net Book Value  39,572,099              45,643,243 
                       

F-50F-54


PERUSAHAAN PERSEROAN (PERSERO)
P.T. TELEKOMUNIKASI INDONESIA Tbk AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
DECEMBER 31, 20032005 AND 2004,2006, AND FOR YEARS ENDED
DECEMBER 31, 2002, 20032004, 2005 AND 20042006
(Figures in tables are presented in millions of Rupiah, unless otherwise stated)
                                         
 January 1, KSO IV       December 31,  January 1, Acquisition       December 31,
 2004 Acquisitions Additions Deductions Reclassifications 2004  2006 KSO VII Additions Deductions Reclassifications 2006
                         
At cost or revalued amounts:
                   
At cost
At cost
                   
Direct acquisitions
Direct acquisitions
                   
Direct acquisitions
                   
Land  298,964    34,212  (156)  (5,681)  327,339 Land  334,447    64,891      399,338 
Buildings  1,819,095  7,021  29,722  (14,448)  328,665  2,170,055 Buildings  2,567,559  1,944  108,868    80,302  2,758,673 
Switching equipment  10,473,392  616,769  209,463  (52,829)  (886,695)  10,360,100 Switching equipment  10,829,881  241,040  129,011  (1,950)  10,137,530  21,335,512 
Telegraph, telex and data communication equipment  199,314    4,071  (14)  10,484  213,855 Telegraph, telex and data communication equipment  215,792      (2,172)  (23,919)  189,701 
Transmission installation and equipment  16,818,179  271,678  245,170  (573,950)  10,161,066  26,922,143 Transmission installation and equipment  31,554,134  107,014  760,937  (785,515)  2,984,732  34,621,302 
Satellite, earth station and equipment  6,209,827    30,998  (165,130)  (2,720,892)  3,354,803 Satellite, earth station and equipment  4,944,004  9,757  290,668  (3)  324,383  5,568,809 
Cable network  15,488,797  1,427,049  195,947  (44,651)  633,932  17,701,074 Cable network  18,697,500  909,876  538,985  (6,316)  (624,728)  19,515,317 
Power supply  1,149,458  18,644  22,784  (6,116)  9,940  1,194,710 Power supply  1,312,395  9,719  65,904  (1,823)  1,883,491  3,269,686 
Data processing equipment  3,252,667  32,012  469,470  (11,671)  44,263  3,786,741 Data processing equipment  7,842,373  6,438  308,528  (18,964)  (2,805,528)  5,332,847 
Other telecommunications peripherals  735,188    62,550  (3,872)  30,768  824,634 Other telecommunications peripherals  904,151  2,381  14,183  (2)  (294,082)  626,631 
Office equipment  660,491  102  32,513  (8,470)  (22,970)  661,666 Office equipment  649,938  70  98,709  (2,235)  13,477  759,959 
Vehicles  187,853  3,859  4,972  (9,285)  4,004  191,403 Vehicles  186,383  580  7,173  (4,718)  (17,640)  171,778 
Other equipment  107,573    1,855  (71)  3,269  112,626 Other equipment  115,544  69  2,914    (5,434)  113,093 
Property under construction:                   Property under construction:                   
 Buildings  54,888    46,137    (47,613)  53,412  Buildings  21,775    72,620    (59,290)  35,105 
 Switching equipment  158,056    57,033    (215,089)    Switching equipment  13,172    3,806,405    (2,484,621)  1,334,956 
 Transmission installation and equipment  93,907    5,067,293    (4,986,069)  175,131  Transmission installation and equipment  714,399    9,952,261    (7,679,566)  2,987,094 
 Satellite, earth station and equipment  607,172    234,354    (64,627)  776,899  Satellite, earth station and equipment  133        (133)   
 Cable network  14,524    2,006,243    (1,995,259)  25,508  Cable network  3,771    4,366  (5,375)  4,397  7,159 
 Power supply  106    24,953    (24,990)  69  Power supply  61    743,403    (725,820)  17,644 
 Data processing equipment  10,526    30,065    (23,910)  16,681  Data processing equipment  1,567,260    121,201    (1,688,445)  16 
 Other telecommunications peripherals  16,483    10,594    (27,077)    Other telecommunications peripherals  3,524        (3,524)   
Leased assets
Leased assets
                   
Leased assets
                   
Vehicles  239    11    163  413 Vehicles  330        (330)   
             Transmission installation and equipment  257,380        8,440  265,820 
Total  58,356,699  2,377,134  8,820,410  (890,663)  205,682  68,869,262               
             Total  82,735,906  1,288,888  17,091,027  (829,073)  (976,308)  99,310,440��
             

F-51F-55


PERUSAHAAN PERSEROAN (PERSERO)
P.T. TELEKOMUNIKASI INDONESIA Tbk AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
DECEMBER 31, 20032005 AND 2004,2006, AND FOR YEARS ENDED
DECEMBER 31, 2002, 20032004, 2005 AND 20042006
(Figures in tables are presented in millions of Rupiah, unless otherwise stated)
                                     
 January 1, KSO IV       December 31,  January 1, Acquisition       December 31,
 2004 Acquisitions Additions Deductions Reclassifications 2004  2006 KSO VII Additions Deductions Reclassifications 2006
                         
Accumulated depreciation:
                   
Accumulated depreciation and impairment
Accumulated depreciation and impairment
                   
Direct acquisitions
Direct acquisitions
                   
Direct acquisitions
                   
Buildings  812,319    136,083  (11,209)  15,445  952,638 Buildings  1,109,838    172,492    7,690  1,290,020 
Switching equipment  5,266,488    748,667  (36,795)  (377,087)  5,601,273 Switching equipment  6,472,592    2,412,237  (1,950)  2,312,126  11,195,005 
Telegraph, telex and data communication equipment  194,249    853  (791)  4,342  198,653 Telegraph, telex and data communication equipment  201,527    463  (2,172)  (14,082)  185,736 
Transmission installation and equipment  4,956,895    2,747,743  (513,618)  1,017,239  8,208,259 Transmission installation and equipment  11,991,282    2,889,113  (345,654)  (2,370,798)  12,163,943 
Satellite, earth station and equipment  2,158,379    199,729  (165,075)  (660,751)  1,532,282 Satellite, earth station and equipment  1,306,061    411,947  (3)  229,870  1,947,875 
Cable network  6,613,281    1,560,387  (33,777)  95,770  8,235,661 Cable network  10,331,744    1,760,530  (3,691)  (592,705)  11,495,878 
Power supply  797,925    108,436  (5,642)  4,061  904,780 Power supply  1,032,190    224,572  (1,523)  245,196  1,500,435 
Data processing equipment  1,469,816    680,399  (11,221)  (26,173)  2,112,821 Data processing equipment  2,938,131    1,031,187  (18,964)  (262,154)  3,688,200 
Other telecommunications peripherals  572,190    75,248  (3,664)  68,804  712,578 Other telecommunications peripherals  793,983    17,121  (2)  (223,557)  587,545 
Office equipment  497,467    68,822  (7,291)  3,759  562,757 Office equipment  543,138    41,676  (2,235)  10,459  593,038 
Vehicles  173,134    11,730  (8,224)  4,224  180,864 Vehicles  179,601    3,663  (4,718)  (17,528)  161,018 
Other equipment  69,302    17,469  (71)  7,827  94,527 Other equipment  101,564    5,205    (5,558)  101,211 
Leased assets
Leased assets
                   
Leased assets
                   
Vehicles  114    33    (77)  70 Vehicles  70        (70)   
             Transmission installation and equipment  90,942    42,534      133,476 
Total  23,581,559    6,355,599  (797,378)  157,383  29,297,163               
             Total  37,092,663    9,012,740  (380,912)  (681,111)  45,043,380 
             
Net Book ValueNet Book Value  34,775,140              39,572,099 Net Book Value  45,643,243              54,267,060 
                       
              
 2003 2004 2005 2006
        
Proceeds from sale of property, plant and equipment  255,750  67,196   84,621  17,269 
Net book value  72,867  93,285   38,428  7,806 
          
Gain/(loss) on disposal  182,883  (26,089)
Gain on disposal  46,193  9,463 
          
      In accordance with the amended and restated KSO VII agreement with BSI (Note 5e) dated October 19, 2006, the ownership rights to the acquired property, plant and equipment in KSO VII are legally retained by BSI until the end of the KSO period (December 31, 2010). As of December 31, 2006, the net book value of these property, plant and equipment items was Rp.1,156,829 million.
      In accordance with the amended and restated KSO IV agreement with MGTI (Note 4d)5d), the 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, 2004,2005 and 2006, 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 Rp795,838Rp.1,469,700 million and Rp449,016Rp.1,127,365 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-52F-56


PERUSAHAAN PERSEROAN (PERSERO)
P.T. TELEKOMUNIKASI INDONESIA Tbk AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
DECEMBER 31, 20032005 AND 2004,2006, AND FOR YEARS ENDED
DECEMBER 31, 2002, 20032004, 2005 AND 20042006
(Figures in tables are presented in millions of Rupiah, unless otherwise stated)
      In the first quarter of 2005, the Government of Indonesia issued a series of regulations in its efforts to rearrange the frequency spectra utilized by the telecommunications industry. This action has resulted in the Company not being able to utilize certain frequency spectra it had used to support its fixed wireline cable network by the end of 2006. As a result of these regulations, certain of the Company’s cable network facilities within the fixed wireline segment, which comprised primarily of Wireless Local Loop (“WLL”) and Approach Link equipment operating in the affected frequency spectra, could no longer be used by the end of 2006. The Company had accordingly shortened its estimate of the remaining useful lives for WLL and Approach Link equipment in the first quarter in 2005 and depreciated the remaining net book value of these assets through December 31, 2006. The effect of this change in estimate increased depreciation expense by Rp.471,187 million (Rp.329,831 million after tax) and Rp.240,398 million (Rp.168,279 million after tax) in 2005 and 2006, respectively.
      Further, on August 31, 2005, the Minister of Communication and Information Technology (“MoCI”) issued a press release which announced that in order to conform with the international standards and as recommended by the International Telecommunications Union — Radiocommunication Sector (“ITU-R”), the 1900 MHz frequency spectrum would only be used for the International Mobile Telecommunications-2000 (“IMT-2000” or “3G”) network. In its press release, the MoCI also announced that the CDMA-based technology network which the Company used for its fixed wireless services could only operate in the 800 MHz frequency spectrum. The Company utilizes the 1900 MHz frequency spectrum for its fixed wireless network in Jakarta and West Java areas while for other areas, the Company utilizes the 800 MHz frequency spectrum. As a result of this Government’s decision, the Company’s Base Station System (“BSS”) equipment in Jakarta and West Java areas which are part of transmission installation and equipment for fixed wireless network could no longer be used by the end of 2007. Management expects the BSS equipment will be completely replaced with BSS equipment operating in 800 MHz by the end of June 2007. On January 13, 2006, the MoCI issued MoCI Regulation No. 01/ PER/ M.KOMINFO/1/2006 which reaffirmed the Government’s decision that the Company’s fixed wireless network could only operate in the 800 MHz frequency spectrum and that the 1900 MHz will be allocated for 3G network.
      Following the preceding Government’s decisions, the Company reviewed the recoverable amount of cash-generating unit to which the affected fixed wireless asset belongs. The recoverable amount was estimated using value in use which represented the present value of estimated future cash flows from cash-generating unit using a pretax discount rate of 16.89%, representing the Company’s weighted average cost of capital as of December 31, 2005. In determining cash-generating unit to which an asset belongs, assets were grouped at the lowest level that included the asset and generated cash inflows that were largely independent of the cash inflows from other assets or group of assets. Based on this review, in 2005, the Company recognized a write-down of Rp.616,768 million related to transmission installation and equipment of fixed wireless assets and recorded the amount as a component of operating expenses in the consolidated statements of income. In addition, the Company recognized a loss relating to non-cancelable contracts for procurement of the 1900 MHz transmission installation and equipment in Jakarta and West Java areas amounting to Rp.79,359 million. The loss was included as a component of operating expenses in the consolidated statement of income with a corresponding liability included in “Accrued Expenses” in the consolidated balance sheet. In addition, the Company changed its estimate of the remaining useful lives for the Jakarta and West Java BSS equipment and depreciates the remaining net book value of these assets through June 30, 2007. The effect of this change in estimate increased depreciation expense by Rp.159,042 million (Rp.111,329 million after tax) and Rp.173,826 million (Rp.121,678 million after tax) in 2005 and 2006, respectively.

F-57


PERUSAHAAN PERSEROAN (PERSERO)
P.T. TELEKOMUNIKASI INDONESIA Tbk AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
DECEMBER 31, 2005 AND 2006, AND FOR YEARS ENDED
DECEMBER 31, 2004, 2005 AND 2006
(Figures in tables are presented in millions of Rupiah, unless otherwise stated)
      On August 18, 2005, the Company disposed of its Palapa B-4 satellite which had been fully depreciated as of July 1, 1999. On November 17, 2005, the Company’s TELKOM-2 satellite was launched, and on December 20, 2005, the TELKOM-2 satellite passed the final acceptance test and was put into service.
      As of December 31, 2006, the Company operated two satellites, TELKOM-1 and TELKOM-2 primarily providing backbone transmission links for its network and earth station satellite up-linking and down-linking services to domestic and international users. As of December 31, 2006, there were no events or changes in circumstances that would indicate that the carrying amount of the Company’s satellites may not be recoverable.
      Interest capitalized to property under construction amounted to Rp.57,690 million, Rp. nil and Rp. nil for 2004, 2005 and 2006, respectively.
      Foreign exchange loss capitalized as part of property under construction amounted to Rp.74,283 million, Rp. nil and Rp. nil in 2004, 2005, 2006, respectively.
      In 2006, certain accounts related to telecommunication equipments of subsidiaries were reclassified to a more detail group of assets to conform with the Company’s presentation. The reclassification have no impact to the economic useful life of the assets.
      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 2005-2034.2007 and 2036. Management believes that there will be no difficulty in obtaining the extension of the landrights when they expire.
      SomeThe Company was granted the right to use certain parcels of land by the Ministry of Communications and Information Technology of the Company’s land isRepublic of Indonesia (formerly Ministry of Tourism, Post and Telecommunications) where they are still under the name of the Ministry of Tourism, Post and Telecommunications and the Ministry of CommunicationsTransportation 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, 2004,2006, property, plant and equipment, of the Company operated two satellitesand its subsidiaries, except for land, were insured with PT Asuransi Jasa Indonesia (“Jasindo”), PT Asuransi Ramayana, PT Asuransi Wahana Tata and PT Asuransi Export Indonesia (“ASEI”) against fire, theft and other specified risks. Total cost of assets being insured amounted to Rp.27,794,300 million and US$3.84 billion, which primarily provide backbone transmission linkswas covered by Sum Insured Basis with maximum loss claim of Rp.2,064,903 million and covered by First Loss Basis of US$250 million and Rp.824,000 million including business recovery of Rp.324,000 million with Automatic Reinstatement of Loss Clausul. In addition, the TELKOM-1 and TELKOM-2 satellite were insured separately for its NetworkUS$45.2 million and earth station satellite up-linking and down-linking services to domestic and international users. The Company can allocateUS$57.9 million respectively. Management believes that the transponders in the satellite following to customer’s demand.insurance coverage is adequate.
      As of December 31, 2004, there were no events or changes in circumstances which indicate that2006 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.was around 25% of contract value. 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 DarusallamDarussalam with a net book value of Rp54,863Rp.54,863 million were destroyed by earthquake and tsunami. As ofFor the year ended December 31, 2004, the Company has recorded the loss in “Other Income (Expense)income (expenses)” in the consolidated statements of income. These telecommunication facilities were covered by insurance. As ofIn 2005, 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 equipmentreceived a portion of the Company and subsidiaries have been pledged as collateral for lending agreements (Note 24).its

F-53F-58


PERUSAHAAN PERSEROAN (PERSERO)
P.T. TELEKOMUNIKASI INDONESIA Tbk AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
DECEMBER 31, 20032005 AND 2004,2006, AND FOR YEARS ENDED
DECEMBER 31, 2002, 20032004, 2005 AND 20042006
(Figures in tables are presented in millions of Rupiah, unless otherwise stated)
insurance claims amounting to Rp.27,580 million and recorded this amount within “Other income (expenses)” in the consolidated statements of income.
12. PROPERTY, PLANT AND EQUIPMENT UNDER REVENUE-SHARING ARRANGEMENTS
      On May 27, 2006, Yogyakarta within Division Regional IV Central Java experienced an earthquake where an insurance claim amounting to Rp.14,934 million has been made. Operationally, the facilities have been re-operated gradually since June 2006.
      On July 17, 2006, the Pangandaran, area of Division Regional III West Java and Banten experienced a tsunami with the estimated total loss of Rp.368 million. The Company did not file a claim since the estimated total loss still below the deductible level.
      In 2006, Telkomsel exchanged its certain infrastructures equipment with a net book value of Rp.440,355 million for new equipment with a value of Rp.440,357 million. The resulting gain of Rp.2 million was charged to current operation.
      Certain property, plant and equipment of the Company and subsidiaries have been pledged as collateral for lending agreements (Notes 20 and 24).
      The Company has lease commitments for certain transmission installation and equipment, and vehicles with the option to purchase the leased assets at the end of the lease terms. Future minimum lease payments for the assets under capital leases as of December 31, 2005 and 2006 are as follows:
                      
  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 
                
         
Year 2005 2006
     
2006  73,443    
2007  73,443   73,443 
2008  73,443   73,443 
2009  73,443   73,443 
2010  73,443   73,443 
2011  73,443   73,443 
Later  69,332   69,332 
         
Total minimum lease payments  509,990   436,547 
Interest  (258,252)  (198,904)
         
Net present value of minimum lease payments  251,738   237,643 
Current maturities (Note 21a)  (16,201)  (20,535)
         
Long-term portion (Note 21b)  235,537   217,108 
         

F-54F-59


PERUSAHAAN PERSEROAN (PERSERO)
P.T. TELEKOMUNIKASI INDONESIA Tbk AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
DECEMBER 31, 20032005 AND 2004,2006, AND FOR YEARS ENDED
DECEMBER 31, 2002, 20032004, 2005 AND 20042006
(Figures in tables are presented in millions of Rupiah, unless otherwise stated)
13.PROPERTY, PLANT AND EQUIPMENT UNDER REVENUE-SHARING ARRANGEMENTS
                 
 January 1,     December 31,
 2005 Additions Reclassifications 2005
        
At cost:
At cost:
             
Land  3,382  46    3,428 
Buildings  13,422  338  (5,739)  8,021 
Switching equipment  418,137  25,419  (168,521)  275,035 
Transmission installation and equipment  259,119  36,214  (11,895)  283,438 
Cable network  396,140  13,629  (141,356)  268,413 
                Other telecommunications peripherals  103,497  126,187  (60,380)  169,304 
 January 1,       December 31,          
 2004 Additions Deductions Reclassifications 2004Total  1,193,697  201,833  (387,891)  1,007,639 
                    
Accumulated depreciation:
Accumulated depreciation:
                
Accumulated depreciation:
             
Land  1,449  152      1,601 Land  1,601  170    1,771 
Buildings  9,804  802    (3,529)  7,077 Buildings  7,077  480  (3,191)  4,366 
Switching equipment  341,525  34,757    (90,160)  286,122 Switching equipment  286,122  25,421  (125,854)  185,689 
Transmission installation and equipment  89,720  13,406    (34,160)  68,966 Transmission installation and equipment  68,966  26,223  (11,895)  83,294 
Cable network  225,175  33,817    (31,475)  227,517 Cable network  227,517  21,257  (134,648)  114,126 
Other telecommunications peripherals  123,972  24    (20,709)  103,287 Other telecommunications peripherals  103,287  22,563  (56,862)  68,988 
                     
Total  791,645  82,958    (180,033)  694,570 Total  694,570  96,114  (332,450)  458,234 
                     
Net Book Value
Net Book Value
  305,041           499,127 
Net Book Value
  499,127        549,405 
                   
      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 
       
                      
  January 1, Acquisition of     December 31,
  2006 KSO VII Additions Reclassifications 2006
           
At cost:
                    
 Land  3,428         1,218   4,646 
 Buildings  8,021         (2,911)  5,110 
 Switching equipment  275,035   108,810   27,294   (45,846)  365,293 
 Transmission installation and equipment  283,438   19,219   7,837   (14,129)  296,365 
 Cable network  268,413   321,756   56,119   (27,443)  618,845 
 Other telecommunications peripherals  169,304   2,420   196   (3,166)  168,754 
                     
 Total  1,007,639   452,205   91,446   (92,277)  1,459,013 
                     

F-55F-60


PERUSAHAAN PERSEROAN (PERSERO)
P.T. TELEKOMUNIKASI INDONESIA Tbk AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
DECEMBER 31, 20032005 AND 2004,2006, AND FOR YEARS ENDED
DECEMBER 31, 2002, 20032004, 2005 AND 20042006
(Figures in tables are presented in millions of Rupiah, unless otherwise stated)
                      
  January 1, Acquisition of     December 31,
  2006 KSO VII Additions Reclassifications 2006
           
Accumulated depreciation:
                    
 Land  1,771      212   720   2,703 
 Buildings  4,366      360   (1,800)  2,926 
 Switching equipment  185,689      25,774   (39,122)  172,341 
 Transmission installation and equipment  83,294      33,870   (13,911)  103,253 
 Cable network  114,126      30,949   (20,335)  124,740 
 Other telecommunications peripherals  68,988      21,597   (3,167)  87,418 
                     
 Total  458,234      112,762   (77,615)  493,381 
                     
Net Book Value
  549,405               965,632 
                  
      Restricted cash represents time depositsIn accordance with original maturities of more than one year heldrevenue-sharing arrangements agreements, the ownership rights to the property, plant and equipment under revenue-sharing arrangements are legally retained by the Company and its subsidiaries and are pledged as collateral for bank guarantee.
      Deferred landrights charges represent costs to extendinvestors until the contractual lifeend of the landrights which are deferred and amortized over the new contractual life.
14. GOODWILL AND OTHER INTANGIBLE ASSETSrevenue-sharing period.
      The changes in the carrying amountbalances of goodwill and other intangible assets for the years endedunearned income on revenue-sharing arrangements as of December 31, 20032004, 2005 and 20042006 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     
             
  2004 2005 2006
       
Gross amount  1,193,697   1,007,639   1,459,013 
             
Accumulated amortization:            
Beginning balance  (984,954)  (833,365)  (582,155)
Addition (Note 36)  (82,033)  (136,681)  (151,961)
Deduction  233,622   387,891   92,277 
             
Ending balance  (833,365)  (582,155)  (641,839)
             
Net  360,332   425,484   817,174 
             
              
    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-56F-61


PERUSAHAAN PERSEROAN (PERSERO)
P.T. TELEKOMUNIKASI INDONESIA Tbk AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
DECEMBER 31, 20032005 AND 2004,2006, AND FOR YEARS ENDED
DECEMBER 31, 2002, 20032004, 2005 AND 20042006
(Figures in tables are presented in millions of Rupiah, unless otherwise stated)
      The estimated annual amortization expense relating to goodwill for the years ending
14.ADVANCES AND OTHER NON-CURRENT ASSETS
      Advances and other non-current assets as of December 31, 2005 and 2006 is Rp21,269consist of:
         
  2005 2006
     
Prepaid rent, long-term portion  428,564   621,834 
Advances for purchase of property, plant and equipment  253,123   354,730 
Equipment not used in operation-net  4,236   203,002 
Restricted cash  90,749   91,862 
Deferred landrights charges  87,863   82,529 
Security deposits  30,570   32,072 
Others  50,932   68,254 
         
Total  946,037   1,454,283 
         
      As of December 31, 2006, equipment not used in operation represented Base Transceiver Station (“BTS”) and other equipments of the Company and Telkomsel temporarily taken out from operations but planned to be reinstalled.
      During 2006, the Company and Telkomsel wrote off certain equipment with a total net book value of Rp.58,252 million and Rp8,858 million, respectively.charged depreciation expense to current operations amounting to Rp.52,841 million.
      As of December 31, 2005 and 2006, restricted cash represented cash received from the Government relating to compensation for early termination of exclusive rights to be used for construction of certain infrastructures (Note 30) and time deposits with original maturities of more than one year pledged as collateral for bank guarantees.
      Deferred landrights charges represented costs to extend the contractual life of the landrights which have been deferred and amortized over the contractual life.
      Refer to Note 46 for details of related party transactions.

F-62


PERUSAHAAN PERSEROAN (PERSERO)
P.T. TELEKOMUNIKASI INDONESIA Tbk AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
DECEMBER 31, 2005 AND 2006, AND FOR YEARS ENDED
DECEMBER 31, 2004, 2005 AND 2006
(Figures in tables are presented in millions of Rupiah, unless otherwise stated)
15.GOODWILL AND OTHER INTANGIBLE ASSETS
      The changes in the carrying amount of goodwill and other intangible assets for the years ended December 31, 2005 and 2006 are as follows:
                  
    Other    
    intangible    
  Goodwill assets License Total
         
Gross carrying amount:                
 Balance as of December 31, 2005  106,348   7,151,111      7,257,459 
Accumulated amortization:                
 Balance as of December 31, 2004  (76,221)  (1,769,813)     (1,846,034)
 Amortization expense for 2005  (21,270)  (896,883)     (918,153)
                 
 Balance as of December 31, 2005  (97,491)  (2,666,696)     (2,764,187)
                 
Net book value  8,857   4,484,415      4,493,272 
                 
Weighted-average amortization period  5 years   7.97  years         
Gross carrying amount:                
 Balance as of December 31, 2005  106,348   7,151,111      7,257,459 
 Addition-3G License Telkomsel        436,000   436,000 
 Addition-KSO VII acquisition (Note 5e)     451,736      451,736 
                 
 Balance as of December 31, 2006  106,348   7,602,847   436,000   8,145,195 
Accumulated amortization:                
 Balance as of December 31, 2005  (97,491)  (2,666,696)     (2,764,187)
 Amortization expense for 2006  (8,857)  (923,867)  (11,679)  (944,403)
                 
 Balance as of December 31, 2006  (106,348)  (3,590,563)  (11,679)  (3,708,590)
                 
Net book value     4,012,284   424,321   4,436,605 
                 
Weighted-average amortization period  5 years   7.58  years   9.5  years     
      Other intangible assets resulted from the acquisitions of Dayamitra, Pramindo, AWI, KSO IV and KSO VII, and represented the rights to operate the business in the KSO areas (Note 5). Goodwill resulted from the acquisition of GSD (Note 1c).
      The estimated annual amortization expense relating to other intangible assets for each of the next fivefour years beginning from January 1, 2005 is Rp896,8832007 would be Rp.1,003,071 million per year.
      In February 2006, Telkomsel obtained a 3G mobile cellular operating license for 2.1 GHz frequency bandwidth for a10-year period, which is extendable subject to evaluation. The upfront fee for the 3G license amounted to Rp.436,000 million was recognized as an intangible asset and is amortized over the term of the 3G license.
      As of December 31, 2006, management believed that there was no indication of impairment.

F-63


15. ESCROW ACCOUNTSPERUSAHAAN PERSEROAN (PERSERO)
P.T. TELEKOMUNIKASI INDONESIA Tbk AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
DECEMBER 31, 2005 AND 2006, AND FOR YEARS ENDED
DECEMBER 31, 2004, 2005 AND 2006
(Figures in tables are presented in millions of Rupiah, unless otherwise stated)
16.ESCROW ACCOUNTS
      Escrow accounts as of December 31, 2005 and 2006 consist of the following:
              
 2003 2004 2005 2006
        
Citibank N.A., Singapore  239,689  30,059   126,128   
JP Morgan Chase Bank  276,439   
Bank Mandiri  6,018  6,222   6,369   
Bank Danamon    1,849 
Bank Negara Indonesia    116 
Bank Internasional Indonesia    108 
          
  522,146  36,281   132,497  2,073 
          
  a. Citibank N.A., Singapore
     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 withbetween the Company and the selling stockholders of Dayamitra (Note 4a)5a).
      In 2004, the Company has repaid the entire obligations under the Conditional Sale and Purchase Agreement; therefore, as of December 31, 2004,Agreement, and since then this escrow account ishad been 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.TM Communications (Hk) Ltd.
      The escrow account earned interest at LIBOR minus 0.4%0.75% per annum, which was computed on a daily basis. The interest income earned was included as part of the escrow funds. The remaining funds available would be transferred to the Company after all of the obligations related to the Dayamitra transaction had been satisfied. As of March 27, 2006, the Company has fully repaid the option strike price.
     b. Bank Mandiri
      The escrow account with Bank Mandiri was established by Dayamitra in relation with the credit facilities from Bank Mandiri (Note 24b).
      On March 15, 2004,September 23, 2006, the Company repaid the entire obligations related toobligation and the Pramindo transaction. On March 18, 2004,remaining funds available in the escrow account was closed and the remaining balance of US$7.8 million was transferred to the Company’s account.Company on December 6, 2006.
     c. Bank Danamon, Bank Internasional Indonesia, and Bank Negara Indonesia
      The escrow accounts with Bank Danamon, Bank Internasional Indonesia, and Bank Negara Indonesia were established in relation with the revenue sharing arrangement in telecommunications equipment in Divre VII East Indonesia.

F-57F-64


PERUSAHAAN PERSEROAN (PERSERO)
P.T. TELEKOMUNIKASI INDONESIA Tbk AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
DECEMBER 31, 20032005 AND 2004,2006, AND FOR YEARS ENDED
DECEMBER 31, 2002, 20032004, 2005 AND 20042006
(Figures in tables are presented in millions of Rupiah, unless otherwise stated)
17.c. Bank MandiriTRADE PAYABLES
          
  2005 2006
     
Related parties        
 Concession fees  648,950   818,121 
 Payables to other telecommunications providers  99,980   102,702 
 Purchases of equipment, materials and services  265,459   195,673 
         
 Total  1,014,389   1,116,496 
         
Third parties        
 Purchases of equipment, materials and services  4,011,444   5,499,254 
 Payables to other telecommunication providers  163,646   111,963 
 Payables related to revenue-sharing arrangements  106,195   190,240 
         
 Total  4,281,285   5,801,457 
         
Total  5,295,674   6,917,953 
         
      The escrow account with Bank Mandiri was establishedTrade payables by Dayamitra in relation with the credit facilities from Bank Mandiri (Note 24f).currency are as follows:
         
  2005 2006
     
Rupiah  3,112,303   6,636,507 
U.S. Dollar  1,381,473   259,996 
Euro  796,343   18,377 
Singapore Dollar  33   2,431 
Great British Pound Sterling  14   630 
Myanmar Kyat     12 
Japanese Yen  5,508    
         
Total  5,295,674   6,917,953 
         
      Refer to Note 46 for details of related party transactions.
16. 18.TRADE ACCOUNTS PAYABLEACCRUED EXPENSES
                 
 2003 2004 2005 2006
        
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 
Early retirement program    1,528,429 
Salaries and benefits  452,413  710,814 
Operations, maintenance and telecommunications services  411,075  555,653 
General, administrative and marketing  444,101  492,054 
Interest and bank charges  134,299  188,748 
Loss on procurement commitments (Note 12)  79,359   
          
TotalTotal  657,478  643,094   1,521,247  3,475,698 
          
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 47Based on the Board of Directors’ resolutions dated December 20, 2006 on early retirement, the Company planned an early retirement program for details of related party transactions.interested and eligible employees. The early retirement program has

F-58F-65


PERUSAHAAN PERSEROAN (PERSERO)
P.T. TELEKOMUNIKASI INDONESIA Tbk AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
DECEMBER 31, 20032005 AND 2004,2006, AND FOR YEARS ENDED
DECEMBER 31, 2002, 20032004, 2005 AND 20042006
(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 
       
      Basedbeen communicated to all employees, and the Company’s calculation was based on the Boardnumber 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.employees by grade who were expected to enroll. Accrued early retirement benefitsbenefit as of December 31, 20032006 amounting to Rp.1,528,429 million, consisted of Rp.1,461,150 million (Note 37) charged to the 2006 consolidated statement of income and early retirement benefitsRp.67,279 million in a reclassification from the balance for 2004 were fully paid in 2004.accrued long service awards.
18. 19.UNEARNED INCOME
                
 2003 2004 2005 2006
        
Prepaid pulse reload vouchers  740,077  1,017,530   1,582,762  1,976,868 
Other telecommunication services  16,361  7,669   3,917  3,492 
Other  6,773  4,801 
Others  6,039  57,412 
          
Total  763,211  1,030,000   1,592,718  2,037,772 
          
19. 20.ADVANCES FROM CUSTOMERS AND SUPPLIERSSHORT-TERM BANK LOANS
      Represent security deposits received from customers related to services and performance guarantee deposits from suppliers related to procurement contracts.
         
  2005 2006
     
Bank Central Asia  170,000   233,334 
Bank Mandiri     233,333 
Bank Negara Indonesia     200,000 
Bank Niaga  3,800   13,323 
Bank Bumiputera Indonesia     8,000 
         
Total  173,800   687,990 
         
20.      a. SHORT-TERM BANK LOANSBank Central Asia
      Short-termOn December 3, 2004, Telkomsel entered into a loan agreement with Deutsche Bank AG, Jakarta (as “Arranger” and “Agent”) and Bank Central Asia (as “Lender”) with a total facility of Rp.170,000 million. Under the agreement, the Lender may transfer its rights, benefits and obligations to any bank loans consist of:or financial institution by delivering the Transfer Agreement to the Agent and notifying Telkomsel. The facility carried interest at a rate equal to the3-month Certificates of Bank Indonesia plus 1% (i.e., 13.09% as of December 31, 2005) payable quarterly in arrears and unsecured. The loan was due on February 1, 2006. As of December 31, 2005, the principal outstanding amounted to Rp.170,000 million. On February 1, 2006, Telkomsel repaid the entire loan balance and the loan agreement was terminated.
         
  2003 2004
     
Bank Mandiri  37,642   41,433 
ABN AMRO Bank     604,500 
Bank Central Asia     455,700 
       
Total  37,642   1,101,633 
       
      On August 15, 2006, Telkomsel signed a loan agreement with Bank Central Asia for a Rp.350,000 million short-term facility. The loan amount under the short-term facility would be repaid in three quarterly installments commencing after three months from the availability period (i.e., the earlier of November 15, 2006 and the date when the facility had been fully drawn down). The loan bears a floating interest rate of three-month Certificate of Bank Indonesia plus 1.5% (i.e., 11.00% as of December 31, 2006) and is unsecured. The principal outstanding as of December 31, 2006 amounted to Rp.233,334 million.

F-59F-66


PERUSAHAAN PERSEROAN (PERSERO)
P.T. TELEKOMUNIKASI INDONESIA Tbk AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
DECEMBER 31, 20032005 AND 2004,2006, AND FOR YEARS ENDED
DECEMBER 31, 2002, 20032004, 2005 AND 20042006
(Figures in tables are presented in millions of Rupiah, unless otherwise stated)
     b. a. Bank Mandiri
      On August 28, 2001, Napsindo entered into15, 2006, Telkomsel signed a loan agreement with Bank Mandiri for a Rp.350,000 million short-term facility. The short-term facility would be repaid in three quarterly installment commencing after three months from the availability period (i.e the earlier of US$1.8 million for a one–year term.November 15, 2006 or the date when the facility had been fully drawn down). The loan is secured with the Company’s time deposits (Note 9) withbears a floating interest rate at 2% above the pledged time deposits interest rateof three-month Certificate of Bank Indonesia plus 1.5% (i.e. 3%, 11.00% as of December 31, 20032006) and 2.65%is unsecured. The principal outstanding as of December 31, 2004).2006 amounted to Rp.233,333 million.
     c. Bank Negara Indonesia (“BNI”)
      On August 15, 2006, Telkomsel signed a loan agreement with BNI for a Rp.300,000 million short-term facility. The short-term facility would be repaid in three quarterly installments commencing after three months from the availability period (i.e the earlier of November 11, 2003,15, 2006 and the date when the facility had been fully drawn down). The loan bears a floating interest rate of three-month Certificate of Bank Indonesia plus 1.5%. (i.e., 11.00% as of December 31, 2006) and is unsecured. The principal outstanding as of December 31, 2006 amounted to Rp.200,000 million.
     d. Bank Niaga
      On April 25, 2005, Balebat entered into a loan agreement for a 12% per annum fixed rate revolving credit facility of Rp.800 million and an investment credit facility of Rp.1,600 million (Note 24g). These credit facilities are secured by Balebat’s property located in West Java up to a maximum of Rp.3,350 million. The applicable fixed interest rate and maturity date of the revolving credit facility was extended until August 28, 2004.amended on July 26, 2005 to 12.5% per annum and May 30, 2006, respectively and subsequently on June 13, 2006 to 16.5% per annum and May 30, 2007, respectively. Based on the amendment on June 13, 2006, the revolving credit facility amounted to Rp.800 million was combined with the short-term fixed credit facility of Rp.4,000 million as described in Note 24g. Additionally, Balebat obtained credit facility of Rp.500 million at a fixed interest rate of 16.75% per annum maturing on May 30, 2007. As of December 31, 2005 and 2006, the principal outstanding balance amounted to Rp.800 million and Rp.1,323 million, respectively.
      On October 18, 2005, GSD entered into a loan agreement with Bank Niaga for a short-term facility of Rp.3,000 million for a one-year term. The facility can be extended upon approval by the Company. Subsequently, on September 23, 2004, this loan facility was extended for another one-year termsecured by certain GSD’s property, carried interest at 14.5% per annum and willwould expire on August 28, 2005.October 18, 2006. On June 7, 2006, the loan agreement was amended to increase the maximum facility amount and interest rate to Rp.8,000 million and 16.25% per annum, respectively. On November 3, 2006, the loan agreement was amended (2nd amendment agreement) to change the interest rate to 15.5% for the period October 18, 2006 to October 18, 2007. As of December 31, 2005 and 2006, the principal outstanding amounted to Rp.3,000 million and Rp.8,000 million, respectively.
      On April 24, 2003, NapsindoIn October 2005, GSD also entered into a loan agreement with the Bank Mandiri forNiaga to obtain a Rp.12,000 million short-term 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 willwhich would expire on April 24, 2005.October 18, 2006. The loan is secured by the Company’s time deposits (Note 9) and bearsborrowing under this facility carried interest at 2% above14.5% per annum. On June 7, 2006, the pledged time depositscredit agreement was amended to reduce the maximum facility to Rp.7,000 million and to change the 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
16.25% per annum. 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 andNovember 3, 2006, the loan agreement was terminated on January 6, 2005.
      On December 21, 2004,amended (2nd amendment agreement) to change the Company entered into a loan agreement with ABN AMRO Bank N.V.interest rate to 15.5% for a short-term loan with a maximum facility of US$65.0 million.the period October 18, 2006 to October 18, 2007. 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, 20042005 and 2006 was Rp604,500Rp. nil and Rp.4,000 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).respectively.

F-60F-67


PERUSAHAAN PERSEROAN (PERSERO)
P.T. TELEKOMUNIKASI INDONESIA Tbk AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
DECEMBER 31, 20032005 AND 2004,2006, AND FOR YEARS ENDED
DECEMBER 31, 2002, 20032004, 2005 AND 20042006
(Figures in tables are presented in millions of Rupiah, unless otherwise stated)
21. MATURITIES OF LONG-TERM LIABILITIES      The credit facilities of Rp.8,000 million and Rp.7,000 million are secured by GSD’s property located in Jakarta.
     e. Bank Bumiputera Indonesia
      On February 15, 2006, GSD entered into a loan agreement with Bank Bumiputera Indonesia amounted to Rp.8,000 million with interest at 17% per annum, unsecured and repayable by monthly installments. The loan is payable within 12 months from the signing date and will mature on February 15, 2007. As of December 31, 2006 the loan was fully drawn-down and the principal outstanding amounted to Rp.8,000 million.
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 
          
             
  Notes 2005 2006
       
Bank loans  24   634,542   1,669,146 
Notes and Bonds  23   144,510   1,461,955 
Deferred consideration for business combinations  25   862,394   1,054,095 
Two-step loans  22   569,278   469,678 
Obligations under capital leases  12   16,201   20,535 
            
Total      2,226,925   4,675,409 
            
     b. 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 
                      
                             
    (In billions of Rupiah)
     
  Notes Total 2008 2009 2010 2011 Later
               
Two-step loans  22   4,006.9   432.1   419.3   396.0   368.6   2,390.9 
Bank loans  24   2,487.9   1,450.9   717.8   213.1   106.1    
Deferred consideration for business combinations  25   3,537.1   1,102.4   1,141.4   1,188.1   105.2    
Obligations under capital leases  12   217.1   26.0   33.0   41.9   116.2    
                            
Total      10,249.0   3,011.4   2,311.5   1,839.1   696.1   2,390.9 
                            
22. TWO-STEP LOANS
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. The loans are unsecured. 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 Rp701,272Rp.701,272 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 ofamounting to US$48.8 million and its entire Euro denominated two-step loans with principal amount of EUR14.5amounting to Euro14.5 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-61F-68


PERUSAHAAN PERSEROAN (PERSERO)
P.T. TELEKOMUNIKASI INDONESIA Tbk AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
DECEMBER 31, 20032005 AND 2004,2006, AND FOR YEARS ENDED
DECEMBER 31, 2002, 20032004, 2005 AND 20042006
(Figures in tables are presented in millions of Rupiah, unless otherwise stated)
have been approved by the Ministry of Finance of the Republic of Indonesia — Directorate General of Treasury.
      The details of the two-step loans are as follows:
                                
 Interest Rate Outstanding Interest Rate Outstanding
        
Creditors 2003 2004 2003 2004 2005 2006 2005 2006
                
Overseas banks 3.10% – 14.90% 3.10% – 13.25%  7,441,076  5,889,703  3.10% — 10.71% 3.10% — 13.67%  5,250,829  4,434,041 
Consortium of contractors 3.20% – 14.90% 3.20% – 13.25%  249,969  129,002   3.20%  3.20%  78,648  42,572 
                
Total        7,691,045  6,018,705         5,329,477  4,476,613 
Current maturities        (832,135)  (655,422)
Current maturities (Note 21a)        (569,278)  (469,678)
                
Long-term portion        6,858,910  5,363,283 
Long-term portion (Note 21b)        4,760,199  4,006,935 
                
      The details of two-step loans obtained from overseas banks as of December 31, 20032005 and 20042006 are as follows:
                                
 Interest Rate Outstanding Interest Rate Outstanding
        
Currencies 2003 2004 2003 2004 2005 2006 2005 2006
                
U.S. Dollar 4.00% – 7.98% 4.00% – 7.98%  2,946,687  2,397,437  4.00% — 6.81% 4.00% — 6.48%  2,232,752  1,795,782 
Rupiah 9.69% – 14.90% 8.30% – 13.25%  3,050,043  2,098,948  8.30% — 10.71% 11.23% — 13.67%  1,794,149  1,592,198 
Japanese Yen  3.10%  3.10%  1,244,331  1,393,318   3.10%  3.10%  1,223,928  1,046,061 
Euro 7.33% – 8.45% 7.33% – 8.45%  200,015   
                
Total        7,441,076  5,889,703         5,250,829  4,434,041 
                
      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 untilthrough 2024.
      Details of two-step loans obtained from a consortium of contractors as of December 31, 20032005 and 20042006 are as follows:
                           
 Interest Rate Outstanding Interest Rate Outstanding
        
Currencies 2003 2004 2003 2004 2005 2006 2005 2006
                
Rupiah 12.66% – 14.90% 8.30% – 13.25%  116,574  9,924 
Japanese Yen  3.20%  3.20%  133,395  119,078   3.20%  3.20%  78,648  42,572 
                
Total        249,969  129,002         78,648  42,572 
                
      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 untilthrough June 15, 2008.
      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-monththree-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-62F-69


PERUSAHAAN PERSEROAN (PERSERO)
P.T. TELEKOMUNIKASI INDONESIA Tbk AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
DECEMBER 31, 20032005 AND 2004,2006, AND FOR YEARS ENDED
DECEMBER 31, 2002, 20032004, 2005 AND 20042006
(Figures in tables are presented in millions of Rupiah, unless otherwise stated)
      As of December 31, 2004,2006, the Company has used all facilities under the two-step loanloans program and the draw-down period for the two-step loans has expired.
      The Company shouldis required to maintain financial ratios as follows:
       a. Projected net revenue to projected debt service ratio should exceed 1.5:1 and 1.2:1 for the 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 annual average capital expenditures for loans originating from World Bank and ADB, respectively.
      As of December 31, 2004,2006, the Company complied with the above mentioned ratios.
23. NOTES AND BONDS
23.NOTES AND BONDS
                
 2003 2004 2005 2006
        
Guaranteed Notes  1,121,224  736,174 
Bonds  981,278  986,564   991,850  997,137 
Medium-term Notes    1,077,703   609,329  464,818 
      ��    
Total  2,102,502  2,800,441   1,601,179  1,461,955 
Current maturities    (468,976)
Current maturities (Note 21a)  (144,510)  (1,461,955)
          
Long-term portion  2,102,502  2,331,465   1,456,669   
          
     a. a. Guaranteed NotesBonds
      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 Rp1,000,000Rp.1,000,000 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, 2002.2002 and secured with all assets owned by the Company. The bonds are traded on the Surabaya Stock Exchange and will mature on July 15,16, 2007. The trustee of the bonds is PT Bank Rakyat Indonesia Tbk (effective from January 17, 2006 replacing PT Bank Negara Indonesia (Persero) TbkTbk) 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-.Kustodian Sentral Efek Indonesia.
      As of December 31, 20032006, the ratings for the bonds were AAA and 2004,BB+ by Pefindo and Standard and Poor’s, respectively.
      As of December 31, 2005 and 2006, the outstanding principal amount of the bonds and the unamortized bond issuance costs are as follows:
                
 2003 2004 2005 2006
        
Principal  1,000,000  1,000,000   1,000,000  1,000,000 
Bond issuance costs  (18,722)  (13,436)  (8,150)  (2,863)
          
Net  981,278  986,564   991,850  997,137 
          
      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-64F-70


PERUSAHAAN PERSEROAN (PERSERO)
P.T. TELEKOMUNIKASI INDONESIA Tbk AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
DECEMBER 31, 20032005 AND 2004,2006, AND FOR YEARS ENDED
DECEMBER 31, 2002, 20032004, 2005 AND 20042006
(Figures in tables are presented in millions of Rupiah, unless otherwise stated)
     During the period when the bonds are outstanding, the Company is required to 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 January 1, 2002 to December 31, 2002
      b. 2.5:1 for the period January 1, 2003 to December 31, 2003
      c. 2:1 for the period January 1, 2004 to the redemption date of the bonds
      3. Debt to EBITDA ratio should not exceed 3:1
      The Company also covenanted in the bonds indenture that during the periods the bonds are outstanding, the Company would not make any loans to or for the benefits of any person which in the aggregate exceed Rp.500,000 million. In 2005 and 2006, the Company breached this covenant with regard to providing loans to certain subsidiary which in aggregate exceed Rp.500,000 million. However, the Company has obtained a written waiver from PT Bank Rakyat Indonesia Tbk, the trustee of the bonds.
     c.b. 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 Notesmedium-term notes (the “Notes”) for a total principal amount of Rp1,125,000Rp.1,125,000 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).million.
      The Notes consist of four Series with the following maturities and interest rates:
                          
SeriesSeries Principal Maturity Interest rateSeries Principal Maturity Interest Rate
             
A  290,000 June 15, 2005  7.70%A  290,000 June 15, 2005  7.70%
B  225,000 December 15, 2005  7.95%B  225,000 December 15, 2005  7.95%
C  145,000 June 15, 2006  8.20%C  145,000 June 15, 2006  8.20%
D  465,000 June 15, 2007  9.40%D  465,000 June 15, 2007  9.40%
             
TotalTotal  1,125,000       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 passuwith 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 ofOn June 15, 2005, December 31, 2004, the outstanding principal15, 2005 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,June 15, 2006, 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,repaid the Company complied with the covenants.Series A, Series B and Series C Notes.

F-65F-71


PERUSAHAAN PERSEROAN (PERSERO)
P.T. TELEKOMUNIKASI INDONESIA Tbk AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
DECEMBER 31, 20032005 AND 2004,2006, AND FOR YEARS ENDED
DECEMBER 31, 2002, 20032004, 2005 AND 20042006
(Figures in tables are presented in millions of Rupiah, unless otherwise stated)
24. BANK LOANS
      The details of long-term bank loans as      As of December 31, 20032005 and 20042006, the outstanding principal and unamortized debt issuance costs 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 
                   
         
  2005 2006
     
Principal  610,000   465,000 
Debt issuance costs  (671)  (182)
         
   609,329   464,818 
Current maturities  (144,510)  (464,818)
         
Long-term portion  464,819    
         
     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      As of December 31, 2003). The2006, the Pefindo’s rating for the Notes was AAA.
      During the period when the Notes are outstanding, 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, 2003comply 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.all covenants or restrictions including maintaining financial ratios as follows:
     b. Citibank N.A.      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
     1. Hermes Export Facility
      On December 2, 2002, pursuant to      The Company complied with the partnership agreement with Siemens Aktiengesellschaft (AG) (Note 52a.i), Telkomsel entered intocovenants for the Hermes Export Facility Agreement (“Facility”)whole financial years.

F-66F-72


PERUSAHAAN PERSEROAN (PERSERO)
P.T. TELEKOMUNIKASI INDONESIA Tbk AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
DECEMBER 31, 20032005 AND 2004,2006, AND FOR YEARS ENDED
DECEMBER 31, 2002, 20032004, 2005 AND 20042006
(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, 2005 and 2006 are as follows:
                         
      2005 2006
         
    2006 Outstanding Outstanding
         
      Original   Original  
    Total Facility Currency Rupiah Currency Rupiah
Lenders Currency (in millions) (in millions) Equivalent (in millions) Equivalent
             
The Export-Import Bank of Korea US$    124.0   117.6   1,156,296   105.8   952,842 
Bank Mandiri  Rp.   950,000.0      14,918      950,000 
Bank Central Asia  Rp.   923,000.0      86,093      778,698 
Citibank N.A US$    113.3   62.5   614,501   39.2   352,612 
   Euro   73.4   36.7   427,718   22.0   260,994 
   Rp.   500,000.0            500,000 
Bank BNI  Rp.   300,000.0            300,000 
Consortium of banks  Rp.   150,000.0      74,890      32,606 
Lippo Bank  Rp.   18,500.0            18,401 
Bank Niaga  Rp.   11,300.0      7,229      6,705 
Bank Bukopin  Rp.   5,300.0      5,001      4,201 
                     
Total              2,386,646       4,157,059 
Current maturities of bank loans (Note 21a)              (634,542)      (1,669,146)
                     
Long-term portion (Note 21b)              1,752,104       2,487,913 
                     
     a. 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 loan facility of US$124.0 million. The loan was used to finance the CDMA procurement from the Samsung Consortium and the facility was 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 of each year beginning in December 2006. As of December 31, 2005 and 2006, the principal outstanding amounted to US$117.6 million (equivalent to Rp.1,156,296 million) and US$105.8 million (equivalent to Rp.952,842 million), respectively.
     b. Bank Mandiri
      On December 20, 2003, Dayamitra obtained a Rp.40,000 million credit facility from Bank Mandiri. The loan amount under the facility would be repaid on a quarterly basis beginning from the end of the third quarter of 2004 until the end of the fourth quarter of 2006 and carried interest at 14% per annum which would be subject to change to reflect any changes in the market rate (14% as of December 31, 2005). The loan was obtained to finance the construction of the Fixed Wireless CDMA project pursuant to the procurement

F-73


PERUSAHAAN PERSEROAN (PERSERO)
P.T. TELEKOMUNIKASI INDONESIA Tbk AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
DECEMBER 31, 2005 AND 2006, AND FOR YEARS ENDED
DECEMBER 31, 2004, 2005 AND 2006
(Figures in tables are presented in millions of Rupiah, unless otherwise stated)
agreement entered into between Dayamitra and Samsung Electronic Co. Ltd. As of December 31, 2005, the principal outstanding under this facility was Rp.14,328 million and the loan was fully repaid in July 2006.
      The above loan was collateralized by Dayamitra’s telecommunications equipment/network with the CDMA technology financed by these facilities, and Dayamitra’s share in the DKSOR of KSO VI. In addition, Dayamitra was required to maintain a minimum balance of Rp.6,000 million in an escrow account established to facilitate loan repayments (Note 16b).
      On March 13, 2003, Balebat entered into a loan agreement with Bank Mandiri for a facility of Rp.2,500 million. This facility was secured by Balebat’s operating equipment and matured in July 2006. As of December 31, 2005, the interest rate charged on the loan was 17% per annum, and was payable on a monthly basis. The principal was repayable by monthly installments. As of December 31, 2005, the principal outstanding under this facility amounted to Rp.590 million and the loan was fully repaid in July 2006.
      On March 20, 2006, Telkomsel signed a loan agreement with Bank Mandiri for a facility of Rp.600,000 million. The loan is payable to Bank Mandiri in five (5) equal semi-annual installments beginning six (6) months after the end of availability period (the earlier of March 20, 2007 and the date on which the facility has been fully drawn). The loan bears floating interest rate of three-month Certificate of Bank Indonesia plus 1.75% (i.e., 11.25% as of December 31, 2006) and unsecured. The principal outstanding as of December 31, 2006 amounted to Rp.600,000 million.
      On August 15, 2006, Telkomsel signed a medium-term facility loan agreement with Bank Mandiri of Rp.350,000 million. This facility is in 5 quarterly installments commencing six months after the end of the availability period (the earlier of August 15, 2007 or the date when the facility has been fully drawn down). The loan bears floating interest rate of three-month Certificate of Bank Indonesia plus 1.5% (i.e., 11.00% as of December 31, 2006) and unsecured. The principal outstanding as of December 31, 2006 amounted to Rp.350,000 million.
     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 Rp.173,000 million. The facility was obtained to finance the Rupiah portion of the high performance backbone network in Sumatra pursuant to the “Partnership Agreement” dated November 30, 2001 with PT Pirelli Cables Indonesia and PT Siemens Indonesia.
      The amounts drawn from the facility bear interest at 4.35% plus the three-month time deposit rate (i.e 13.27% and 13.18% as of December 31, 2005 and 2006, respectively). The loans would be repaid in twelve unequal quarterly installments beginning in July 2004. The loan was originally scheduled to mature in October 2006 but was amended in 2004 to mature in April 2007 instead.
      Total principal outstanding as of December 31, 2005 and 2006 was Rp.86,093 million and Rp.28,698 million, respectively.
      The loan facility from Bank Central Asia is not collateralized.
      During the period when the loan is outstanding, the Company is required to comply with all covenants or restrictions including maintaining financial ratios as follows:
      1. EBITDA to interest ratio should exceed 4:1

F-74


PERUSAHAAN PERSEROAN (PERSERO)
P.T. TELEKOMUNIKASI INDONESIA Tbk AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
DECEMBER 31, 2005 AND 2006, AND FOR YEARS ENDED
DECEMBER 31, 2004, 2005 AND 2006
(Figures in tables are presented in millions of Rupiah, unless otherwise stated)
      2. EBITDA to interest and principal ratio should exceed 1.5:1
      3. Debt to EBITDA ratio should not exceed 3:1
      In 2006 and 2005, the Company breached a covenant in the loan agreement which stipulates that the Company will not make any loans to or for the benefit of any person which in aggregate exceed Rp.500,000 million. The Company obtained a written waiver from Bank Central Asia with regard to providing loans to certain subsidiaries which in aggregate exceed Rp.500,000 million.
      On March 16, 2006, Telkomsel signed a loan agreement with Bank Central Asia for a facility of Rp.400,000 million. The loan is payable to Bank Central Asia in five (5) equal semi-annual installments beginning six (6) months after the end of availability period (the earlier of March 16, 2007 and the date on which the facility has been fully drawn). The loan bears a floating an interest rate of three-month Certificate of Bank Indonesia plus 1.75% (i.e., 11.25% as of December 31, 2006) and unsecured. The principal outstanding as of December 31, 2006 amounted to Rp.400,000 million.
      On August 15, 2006, Telkomsel signed a medium-term facility loan agreement with Bank Central Asia for Rp.350,000 million. This facility is payable for 5 quarterly installments commencing six months after the end of the availability period (the earlier of August 15, 2007 and the date when the facility has been fully drawn down). The loan bears a floating interest rate of three-month Certificate of Bank Indonesia plus 1.5% (i.e., 11.00% as of December 31, 2006) and unsecured. The principal outstanding as of December 31, 2006 amounted to Rp.350,000 million.
     d. Citibank N.A.
     1. Hermes Export Facility
      On December 2, 2002, pursuant to the partnership agreement with Siemens Aktiengesellschaft (AG) (Note 51a.i), Telkomsel entered into the Hermes Export Facility Agreement (“Facility”) with Citibank International plc (as “Original Lender” and “Agent”) and Citibank N.A., Jakarta branch (as “Arranger”(“Arranger”) covering a total facility of EUR76.2Euro76.2 million which is divided into several tranches.
      The agreement was subsequently amended on October 15, 2003, amending the Facility amount to EUR73.4Euro73.4 million and repaymentthe payment dates.
      The interest rate per annum on the Facility is determined based on the aggregate of the applicable margin, EURIBOR and mandatory cost, if anyplus 0.75% per annum (i.e., 2.98%3.33% as of December 31, 20032005 and 2.963%4.48% as of December 31, 2004).2006) and unsecured. 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.
Facility (May 29, 2003). As of December 31, 20032005 and 2004,2006, the outstanding balance was EUR64.9Euro36.7 million (Rp690,646(equivalent to Rp.427,718 million) and EUR51.4Euro22.0 million (Rp649,758(equivalent to Rp.260,994 million), respectively.
      The schedule of the principal payments on this long-term loan as of December 31, 20042006 is as follows:
                
 Amount Amount
    
 EUR Rupiah Euro Rupiah
Year (in millions) Equivalent (in millions) equivalent
        
2005  14.7  185,645 
2006  14.7  185,645 
2007  11.0  139,234   14.7  173,996 
2008  11.0  139,234   7.3  86,998 
     
  22.0  260,994 
     

F-75


PERUSAHAAN PERSEROAN (PERSERO)
P.T. TELEKOMUNIKASI INDONESIA Tbk AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
DECEMBER 31, 2005 AND 2006, AND FOR YEARS ENDED
DECEMBER 31, 2004, 2005 AND 2006
(Figures in tables are presented in millions of Rupiah, unless otherwise stated)
     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 credit facility is unsecured.
      The lender required a fee of 8.4% of the total facility. This fee iswas paid twice during the agreement period, 15% of the fee iswas required to be paid in cash and 85% iswas included in the loan balance.
      As of December 31, 20032005 and 2004,2006, the outstanding loan was US$15.112.6 million (Rp127,664(equivalent to Rp.123,665 million) and US$16.88.4 million (Rp155,918(equivalent to Rp.75,486 million), respectively. The loan is payable in ten semi-annual installments beginning in JulyApril 2004.
      AmountsThe amounts drawn from the facility bear interest at a rate equal to the six-month LIBOR plus 0.75% (i.e., 1.98%5.04% and 2.97%6.11% as of December 31, 20032005 and 2004,2006, 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”(“Arranger”) and Citibank International plc (as “Agent”(“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.
      AmountsThe amounts drawn from the facility bear a 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, 20032005 and 20042006 was US$16.79.3 million (Rp141,073(equivalent to Rp.91,257 million) and US$13.05.6 million (Rp120,809(equivalent to Rp.50,133 million), respectively. The credit facility is unsecured.
      During the period when the loans are outstanding, the Company shouldis required to 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:
      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 fullyfull repayment date of the loans
      3. Debt to EBITDA ratio should not exceed:
      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 fullyfull 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-68F-76


PERUSAHAAN PERSEROAN (PERSERO)
P.T. TELEKOMUNIKASI INDONESIA Tbk AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
DECEMBER 31, 20032005 AND 2004,2006, AND FOR YEARS ENDED
DECEMBER 31, 2002, 20032004, 2005 AND 20042006
(Figures in tables are presented in millions of Rupiah, unless otherwise stated)
      In 2005, the Company has breached a covenant in the loan agreements which stipulate that the Company will not make any loans or grant any credit to or for the benefit of any person which in aggregate exceed 3% of shareholders’ equity. On May 12, 2006, the Company obtained a written waiver from Citibank International plc with regard to providing loans to certain subsidiaries which in aggregate exceed 3% of stockholders’ equity. In 2006, the Company has complied with the above covenant.
     3. EKN-Backed Facility
      On December 2, 2002, pursuant to the partnership agreement with PT Ericsson Indonesia (Note 51a.i), Telkomsel entered into theEKN-Backed Facility agreement (“Facility”) with Citibank International plc (“Original Lender” and “Agent”) and Citibank N.A., Jakarta branch (“Arranger”) covering a total facility amount of US$70.5 million, divided into several tranches.
      The agreement was subsequently amended on December 17, 2004, to reduce the total Facility to US$68.9 million.
      The interest rate per annum on the Facility is determined based on CIRR (Commercial Interest Reference Rate) of 3.52% plus 0.5% per annum (i.e., 4.02% as of December 31, 2005 and 2006) and unsecured. Interest is payable semi-annually, starting on the utilization date of the Facility (July 31, 2003).
      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 eachthe 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 totalNo amount were drawn down from the Facility in 20032005 and 2004 amounted to US$21.7 million (equivalent to Rp184,834 million) and US$47.3 million (equivalent to Rp428,719 million), respectively.2006. As of December 31, 20032005 and 2004,2006, the outstanding balance was US$19.540.6 million (Rp165,322(equivalent to Rp.399,579 million) and US$56.125.2 million (Rp521,470(equivalent to Rp.226,993 million), respectively.
      The schedule of the principal payments on this long-term loan as of December 31, 20042006 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 
             
         
  Amount
   
  US$ (in Rupiah
Year millions) Equivalent
     
2007  15.5   139,660 
2008  9.7   87,333 
         
��  25.2   226,993 
         
     4. c. Bank Central AsiaMedium Term Loan
      On April 10, 2002, the Company entered intoMarch 21, 2006, Telkomsel signed a “Term Loan Agreement HP Backbone Sumatra Project”medium term loan agreement with Bank Central Asia, providingCitibank, N.A., Jakarta Branch for a total facility of Rp173,000Rp.500,000 million. The facility was obtainedloan is repayable to financeCitibank in five (5) equal semi-annual installments beginning six (6) months after the Rupiah portionend of availability period (the earlier of March 21, 2007 and the high performance backbone network in Sumatra pursuant to the “Partnership Agreement”.
      Amounts drawn fromdate on which the facility bearhas been fully drawn). The loan bears a floating interest at 4.35%rate of three-month Certificate of Bank Indonesia plus the 3-month time deposit rate1.75% (i.e., 11.05% and 10.02%11.25% as of December 31, 20032006) and 2004, respectively).unsecured. 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.2006 amounted to Rp.500,000 million.

F-69F-77


PERUSAHAAN PERSEROAN (PERSERO)
P.T. TELEKOMUNIKASI INDONESIA Tbk AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
DECEMBER 31, 20032005 AND 2004,2006, AND FOR YEARS ENDED
DECEMBER 31, 2002, 20032004, 2005 AND 20042006
(Figures in tables are presented in millions of Rupiah, unless otherwise stated)
      The following table summarizes the principal outstanding on the various long-term loans from Citibank N.A. as of December 31, 2005 and 2006:
                   
    2005 2006
       
    Foreign   Foreign  
    Currencies Rupiah Currencies Rupiah
    (in millions) Equivalent (in millions) Equivalent
           
Hermes Export Facility Euro  36.7   427,718   22.0   260,994 
HP Backbone loans US$  21.9   214,922   14.0   125,619 
EKN-Backed Facility US$  40.6   399,579   25.2   226,993 
Medium Term Loan Rp.           500,000 
                 
Total        1,042,219       1,113,606 
Current maturities        (401,013)      (584,821)
                 
Long-term portion        641,206       528,785 
                 
     e. Bank Negara Indonesia (“BNI”)
      On August 15, 2006, Telkomsel signed a medium-term facility loan agreement with BNI for Rp.300,000 million. This facility from Bank Central Asia is not collateralized.
      Duringpayable for 5 quarterly installment commencing six months after the end of the availability period (the earlier date of August 15, 2007 and the date when the facility has been fully drawn down). The loan isbears a floating interest rate of three-month Certificate of Bank Indonesia plus 1.5% (i.e., 11.00% as of December 31, 2006) and unsecured. The principal outstanding the Company should comply with all covenants or restrictions including maintaining financial ratios as follows:
      1. EBITDAof December 31, 2006 amounted 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).Rp.300,000 million.
     f. d. Deutsche Bank AGConsortium of banks
      On June 28,21, 2002, the Company entered into a contractloan agreement with PT Siemens Indonesia and PT NEC Nusantara Communicationsa consortium of banks for additiona facility of Central Electronic Wahler Switching Digital (“EWSD”) and Nippon Electric Automatic Exchange (“NEAX”), respectively, inRp.400,000 million to finance the Regional Division V. Subsequently, 80%V Junction Project. Bank Bukopin, acting as the facility agent, charged interest at the rate of 19% for the first year from the signing date and at the rate of the contract amounts were factoredhighest average three-month deposit rate of each creditors plus 4% for the remaining years. The draw-down 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 project equipment, with a value of not less than Rp.500,000 million.
      Subsequently, based on an addendum to the vendorsloan agreement dated April 4, 2003, the loan facility was reduced to Deutsche Bank AG (“Facility Agent”). The loans bear fixed interest rate at 19% per annumRp.150,000 million, the draw-down 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 are repayable in two annual installmentsending on June 21, 2007, and the value 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.the project equipment secured was reduced to Rp.187,500 million.
      As of December 31, 20032005 and 2004,2006, interest rate charged on the loan was 12.94% and 12.69%, respectively, and principal outstanding balance was Rp 95,418Rp.74,890 million and Rp41,009Rp.32,606 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-70F-78


PERUSAHAAN PERSEROAN (PERSERO)
P.T. TELEKOMUNIKASI INDONESIA Tbk AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
DECEMBER 31, 20032005 AND 2004,2006, AND FOR YEARS ENDED
DECEMBER 31, 2002, 20032004, 2005 AND 20042006
(Figures in tables are presented in millions of Rupiah, unless otherwise stated)
September 1, 2004, Bank Mandiri agreed to decrease      During the interest rate to 11.25% commencing from September 1, 2004. Theperiod when the loan is obtainedoutstanding, the Company is required 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/networkcomply 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.all covenants or restrictions including maintaining financial ratios as follows:
g. Syndicated banks (Internet Protocol Backbone (“IP Backbone”) Loan)      1. Debt to equity ratio should not exceed 3:1
      2. EBITDA to interest expense should exceed 5:1
      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, 2004,2006, 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)
     g. 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 Rp7,200Rp.7,200 million comprising of Rp5,000Rp.5,000 million to finance the construction of plant (“Investment Facility”) which bearswith interest at 13.5% per annum and Rp2,200Rp.2,200 million to finance purchasecertain purchases of machinery (“Specific Transaction Facility”) which bearswith the interest at 12% per annum. The interest rate was subsequently increased to 17% per annum on December 1, 2005. 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 Rp8,450Rp.8,450 million. As of December 31, 2004,2005 and 2006, principal outstanding under these facilities amounted to Rp7,081 million.Rp.5,696 million and Rp.3,631 million, respectively.
      On December 22, 2005 the loan agreement was amended to include a short term credit facility of Rp.4,000 million with maturity date and interest rate of December 22, 2006 and 12.5% per annum, respectively. On June 13, 2006, the facility was combined with the revolving credit facility of Rp.800 million (Note 20d).
      On June 13, 2006, Balebat also received additional facility of Rp.2,500 million which consist of transaction facility of Rp.2,000 million to finance the purchase of printing machine and Rp.500 million to finance the purchase of operational vehicle with interest rate 16.5% per annum. These facilities will be due on October 30, 2011 and November 28, 2009, respectively. Both facilities secured by Balebat’s property located in West Java. As of December 31, 2006, the outstanding loans of the facilities were Rp.1,628 million and Rp.312 million, respectively.
      As discussed in Note 20d, on April 25, 2005, Balebat entered into a loan agreement with Bank Niaga for a total facility of Rp.2,400 million which includes an investment credit facility of Rp.1,600 million with maturity date of October 25, 2009. The investment credit facility loan is payable in 48 unequal monthly installments beginning in November 2005 through October 2009. The investment credit facility bears interest at a rate equal to market rate plus 2% (17% as of December 31, 2005 and 2006). As of December 31, 2005 and 2006, the principal outstanding amounted to Rp.1,533 million and Rp.1,134 million, respectively.
     h. i. The Export-Import Bank of KoreaBukopin
      On August 27, 2003, the CompanyMay 11, 2005, Infomedia entered into loan agreements with Bank Bukopin for various facilities totaling Rp.5,300 million. The loans were obtained to finance the acquisition of a loan agreement with the Export-Import Bank of Korea for a total facility of US$124.0 million.property. 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 on60 monthly installments. A portion of the facilities of Rp.4,200 million will mature in June 302010 and the remainder of Rp.1,100 million will mature in December 30 in each year beginning in 2006.2010. 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 date2005 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, 2004,2006, interest rate charged on the loan was 10.19%15.75%. The facilities are secured by certain Infomedia’s property. As of December 31, 2005 and 2006, the principal outstanding amounted to Rp117,174 million.Rp.5,001 million and Rp.4,201 million, respectively.

F-72F-79


PERUSAHAAN PERSEROAN (PERSERO)
P.T. TELEKOMUNIKASI INDONESIA Tbk AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
DECEMBER 31, 20032005 AND 2004,2006, AND FOR YEARS ENDED
DECEMBER 31, 2002, 20032004, 2005 AND 20042006
(Figures in tables are presented in millions of Rupiah, unless otherwise stated)
      During
     i. Bank Lippo
      On May 29, 2006, Infomedia entered into a loan agreement with Bank Lippo for a facility of Rp.18,500 million to finance its Call Center project with Telkomsel. The facility bears interest at 15.5% per annum and is secured by Infomedia’s receivables on the period whenCall Center contract with Telkomsel amounted to Rp.23,125 million until the due date of the loan is outstanding,within 36 months from 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
withdrawal date. As of December 31, 2004,2006, the Company complied with the above mentioned ratios.principal outstanding amounted to Rp.18,401 million.
25. LIABILITIES OF BUSINESS ACQUISITIONS
25.DEFERRED CONSIDERATION FOR BUSINESS COMBINATIONS
      This amount representsThese represent 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.IV, and BSI in respect of the Company’s acquisition of KSO VII.
          
  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 
       
          
  2005 2006
     
AWI transaction(Note 5c)
        
 PT Aria Infotek  394,294   257,870 
 The Asian Infrastructure Fund  93,879   61,398 
 MediaOne International I B.V  262,863   171,914 
 Less discount on promissory notes  (57,298)  (26,064)
         
   693,738   465,118 
         
Dayamitra transaction(Note 5a)
        
 TM Communication (HK) Ltd.   147,791    
 Less discount on promissory notes  (2,519)   
         
   145,272    
         
KSO IV transaction(Note 5d)
        
 MGTI  3,868,433   2,874,128 
 Less discount  (717,090)  (437,710)
         
   3,151,343   2,436,418 
         
KSO VII transaction(Note 5e)
        
 BSI     2,226,431 
 Less discount     (536,790)
         
      1,689,641 
         
Total  3,990,353   4,591,177 
Current maturity — net of discount (Note 21a)  (862,394)  (1,054,095)
         
Long-term portion — net of discount (Note 21b)  3,127,959   3,537,082 
         

F-73F-80


PERUSAHAAN PERSEROAN (PERSERO)
P.T. TELEKOMUNIKASI INDONESIA Tbk AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
DECEMBER 31, 20032005 AND 2004,2006, AND FOR YEARS ENDED
DECEMBER 31, 2002, 20032004, 2005 AND 20042006
(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    
       
26.a. Tomen Corporation (“Tomen”)MINORITY INTEREST
      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.
          
  2005 2006
     
Minority interest in net assets of subsidiaries:        
 Telkomsel  6,208,354   8,074,595 
 Infomedia  96,835   110,912 
 Metra     1,573 
 GSD  4   7 
         
Total  6,305,193   8,187,087 
         
              
  2004 2005 2006
       
Minority interest in net income (loss) of subsidiaries:            
 Telkomsel  1,915,543   3,026,029   3,913,743 
 Infomedia  37,088   37,940   36,784 
 Dayamitra  9,139       
 Indonusa  (1,959)      
 Napsindo  (2,068)      
 PII  (1,443)      
 GSD  1   2   2 
 Metra        (2,428)
             
Total  1,956,301   3,063,971   3,948,101 
             

F-74F-81


PERUSAHAAN PERSEROAN (PERSERO)
P.T. TELEKOMUNIKASI INDONESIA Tbk AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
DECEMBER 31, 20032005 AND 2004,2006, AND FOR YEARS ENDED
DECEMBER 31, 2002, 20032004, 2005 AND 20042006
(Figures in tables are presented in millions of Rupiah, unless otherwise stated)
27.b. Cable and Wireless plc (“C&W plc”)CAPITAL STOCK
      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    
       
               
  2005
   
    Percentage Total Paid-up
Description Number of Shares of 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.)  1,992,333,765   9.88   498,083 
 The Bank of New York  1,291,002,696   6.41   322,751 
 Board of Commissioners (Note 1a):            
  Petrus Sartono  19,116      5 
 Board of Directors (Note 1a):            
  Garuda Sugardo  16,524      4 
  Guntur Siregar  19,980      5 
  John Welly  21,712      5 
  Abdul Haris  1,000       
 Public (individually less than 5%)  6,556,113,775   32.52   1,639,029 
             
Total  20,159,999,280   100.00   5,040,000 
             
      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-75F-82


PERUSAHAAN PERSEROAN (PERSERO)
P.T. TELEKOMUNIKASI INDONESIA Tbk AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
DECEMBER 31, 20032005 AND 2004,2006, AND FOR YEARS ENDED
DECEMBER 31, 2002, 20032004, 2005 AND 20042006
(Figures in tables are presented in millions of Rupiah, unless otherwise stated)
               
  2006
   
    Percentage Total Paid-up
Description Number of Shares of 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.)  1,756,681,581   8.71   439,170 
 The Bank of New York  1,487,512,256   7.38   371,878 
 Board of Commissioners (Note 1a):            
  Petrus Sartono  19,116      5 
 Board of Directors (Note 1a):            
  Garuda Sugardo  16,524      4 
  Guntur Siregar  19,980      5 
  John Welly  4       
  Abdul Haris  1,000       
 Public (individually less than 5%)  6,476,901,607   32.13   1,619,226 
             
 Total  20,041,622,780   99.41   5,010,406 
 Treasury Stock (Note 29)  118,376,500   0.59   29,594 
             
Total  20,159,999,280   100.00   5,040,000 
             
28. MINORITY INTEREST      The Company only issued one Series A Dwiwarna Share which is held by the Government and cannot be transferred to any party, and has a veto in the General Meeting of the Stockholders with respect to election and removal of Commissioners and Directors and to amend the Company’s article of association.
      Series B shares give the same and equal rights to all the Series B shareholders.
28.ADDITIONAL PAID-IN CAPITAL
                 
 2003 2004 2005 2006
        
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 
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)
          
TotalTotal  3,708,155  4,938,432   1,073,333  1,073,333 
          
              
  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 
          
29.TREASURY STOCK
      Based on the resolution of the Extraordinary General Meeting of Stockholders on December 21, 2005, the Stockholders authorized the plan to repurchase the Company’s issued and outstanding Series B shares. The proposals to a stock repurchase programs, under the following terms and conditions: (i) maximum stock repurchase would be 5% of the Company’s issued Series B shares with total cost not to exceed

F-76F-83


PERUSAHAAN PERSEROAN (PERSERO)
P.T. TELEKOMUNIKASI INDONESIA Tbk AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
DECEMBER 31, 20032005 AND 2004,2006, AND FOR YEARS ENDED
DECEMBER 31, 2002, 20032004, 2005 AND 20042006
(Figures in tables are presented in millions of Rupiah, unless otherwise stated)
29. CAPITAL STOCKRp.5,250,000 million; (ii) the period determined for the acquisition would not be longer than 18 months (December 21, 2005 to June 20, 2007), in accordance with BAPEPAM Regulation No.XI.B.2.
      As of December 31, 2006 the Company has repurchased 118,376,500 Series B shares of the Company’s issued and outstanding Series B shares representing 0.59% of the Company’s issued and outstanding Series B shares, for a total repurchased amount of Rp.952,211 million (included broker commission and custodian fee).
      The movement of shares held in treasury arising from the programs for repurchase of shares was the following:
               
  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 
          
         
  2006
   
  Number of share Rp.
     
Balance as of January 1, 2006      
Number of shares acquired  118,376,500   952,211 
         
Balance as of December 31, 2006  118,376,500   952,211 
         
      Historical unit cost of repurchase of treasury shares:
Rp.
Weighted average8,044
Minimum6,633
Maximum10,620
     
The acquisition unit cost has included the total cost for the shares repurchase programs i.e., broker commission and custodian fee. Up to balance sheet date none of the shares acquired were sold.
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
Cross-ownership transactions and acquisition of Pramindo
      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 The acquisition by the Company of Indosat’s 35% equity interest in Telkomsel for US$945.0 million (“Telkomsel Transaction”);
 
 ii.Acquisition The acquisition by Indosat of the Company’s 22.5% equity interest in PT Satelit Palapa Indonesia (“Satelindo”) for US$186.0 million (“Satelindo Transaction”);
 
 iii.Acquisition The acquisition by Indosat of the Company’s 37.66% equity interest in PT Aplikanusa Lintasarta (“Lintasarta”) for US$38.0 million plusand convertible bonds of Rp4,051Rp.4,051 million issued by Lintasarta for US$38.0 million (“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$375.0 million (“KSO IV Transaction”).

F-84


PERUSAHAAN PERSEROAN (PERSERO)
P.T. TELEKOMUNIKASI INDONESIA Tbk AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
DECEMBER 31, 2005 AND 2006, AND FOR YEARS ENDED
DECEMBER 31, 2004, 2005 AND 2006
(Figures in tables are presented in millions of Rupiah, unless otherwise stated)
      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,transactions, 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. TheOn the consummation dates of the transactions, 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 iswas included as “Difference in value of restructuring transactions between entities under common control” in the stockholders’ equity section.
      In connection with the acquisition of Pramindo on August 15, 2002, the portion representing Indosat’s 13% equity interest in Pramindo has been accounted for as a restructuring of entities under common control. On the acquisition date, the difference between the purchase consideration and the historical amount of the net assets acquired amounting to Rp.296,038 million was included as “Difference in value of restructuring transactions between entities under common control” in the stockholders’ equity section.

F-79F-85


PERUSAHAAN PERSEROAN (PERSERO)
P.T. TELEKOMUNIKASI INDONESIA Tbk AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
DECEMBER 31, 20032005 AND 2004,2006, AND FOR YEARS ENDED
DECEMBER 31, 2002, 20032004, 2005 AND 20042006
(Figures in tables are presented in millions of Rupiah, unless otherwise stated)
component      The difference in the value of stockholders’ equity as “Difference in value ofthe restructuring transactions between the entities under common control”,control arising from the cross-ownership transactions and acquisition of Pramindo can be summarized as follows:
                                            
   Historical              Historical          
 Consideration Amount of Deferred          Consideration Amount of          
 Paid/ Net Assets/ Income Change        Paid/ Net Assets/ Deferred Change in      
 (Received) Investment Tax in Equity Total Tax Net  (Received) Investment Income Tax Equity Total Tax Net
                             
Cross-ownership transactions with Indosat in 2001:Cross-ownership transactions with Indosat in 2001:                      Cross-ownership transactions with Indosat in 2001:                      
Acquisition of 35% equity interest in TelkomselAcquisition of 35% equity interest in Telkomsel  10,782,450  1,466,658  337,324    8,978,468    8,978,468 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 SatelindoSale of 22.5% equity interest in Satelindo  (2,122,260)      (290,442)  (2,412,702)  (627,678)  (1,785,024)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 LintasartaSale of 37.66% equity interest in Lintasarta  (437,631)  116,834      (320,797)  (119,586)  (201,211)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 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 
Acquisition of 13% equity interest in Pramindo in 2002 from Indosat (Note 5b)Acquisition of 13% equity interest in Pramindo in 2002 from Indosat (Note 5b)  434,025  137,987      296,038    296,038 
                               
TotalTotal  8,656,584  1,721,479  337,324  (290,442)  6,541,007  (747,264)  7,288,271 Total  8,656,584  1,721,479  337,324  (290,442)  6,541,007  (747,264)  7,288,271 
                               
32. TELEPHONE REVENUES      On December 20, 2002, the Government sold its 41.94% ownership interest in Indosat to STTC and waived its special voting rights with respect to the Series A Dwiwarna share. As a result, as of December 20, 2002, the Government ceased to be the majority and controlling shareholder of Indosat and consequently, the Company no longer considered Indosat as a common control entity from that date. As discussed in Note 4, in connection with the adoption of PSAK 38R and pursuant to a ruling issued by BAPEPAM regarding the initial application of PSAK 38R by public companies, the Company has reclassified the difference in the value of the restructuring transactions between the entities under common control account resulting from the cross-ownership transactions and acquisition of Pramindo as a charge to retained earnings as of January 1, 2005.
              
  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 
          
Compensation for early termination of exclusive rights
      As discussed in Note 1a, on July 31, 2002, the Government decided to terminate the Company’s exclusive rights to provide local and domestic long-distance fixed-line telecommunications services taking effect since August 1, 2002.
      On March 30, 2004, the Minister of Communications issued Announcement No. PM.2 year 2004 regarding the Implementation of Restructuring in the Telecommunications Sector which, among others, stipulates that the Government shall pay compensation for early termination of exclusive rights to the Company amounting to Rp.478,000 million, net of tax.
      On December 15, 2005, the Company signed an agreement on Implementation of Compensation for Termination of Exclusive Rights with the State Minister of Communication and Information — Directorate General of Post and Telecommunications, which was amended on October 18, 2006. Pursuant to this agreement, the Government agreed to pay Rp.478,000 million to the Company over a five-year period where Rp.90,000 million shall be paid from the 2005 State budget, Rp.90,000 million from the 2006 State budget

F-80F-86


PERUSAHAAN PERSEROAN (PERSERO)
P.T. TELEKOMUNIKASI INDONESIA Tbk AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
DECEMBER 31, 20032005 AND 2004,2006, AND FOR YEARS ENDED
DECEMBER 31, 2002, 20032004, 2005 AND 20042006
(Figures in tables are presented in millions of Rupiah, unless otherwise stated)
and the remaining Rp.298,000 million shall be paid gradually or in one lump-sum payment based on the State’s financial ability. In addition, the Company is required by the Government to use the funds received from this compensation for the development of telecommunications infrastructure.
      As of December 31, 2006, the Company has received Rp.180,000 million in relation to the compensation for the early termination of exclusivity right, being Rp.90,000 million paid on December 30, 2005 and Rp.90,000 million on December 28, 2006. The Company recorded these amounts in “Difference in value of restructuring transactions between entities under common control” in the stockholders’ equity section. These amounts are recorded as a component of stockholders’ equity because the Government is the majority and controlling shareholder of the Company. The Company will record the remaining amount of Rp.298,000 million when it is received.
      As of December 31, 2006, the development of the related infrastructure amounted to Rp.90,702 million.
33.31.     TELEPHONE REVENUES
              
  2004 2005 2006
       
Fixed lines            
 Local and domestic long-distance usage  7,439,310   7,223,137   7,130,861 
 Monthly subscription charges  2,934,899   3,289,750   3,491,497 
 Installation charges  201,313   197,266   170,205 
 Phone cards  15,561   10,943   4,036 
 Others  53,938   60,156   182,434 
             
 Total  10,645,021   10,781,252   10,979,033 
             
Cellular            
 Air time charges  9,825,738   13,666,286   19,257,290 
 Monthly subscription charges  448,472   383,537   297,450 
 Connection fee charges  55,797   64,110   109,251 
 Features  91,291   457,025   958,656 
             
 Total  10,421,298   14,570,958   20,622,647 
             
Total Telephone Revenues  21,066,319   25,352,210   31,601,680 
             
32.     INTERCONNECTION REVENUES — NET
             
  2002 2003 2004
       
Cellular  2,241,533   3,908,292   5,351,613 
International  389,255   184,097   641,210 
Other  200,546   69,759   195,158 
          
Total  2,831,334   4,162,148   6,187,981 
          
34. REVENUE UNDER JOINT OPERATION SCHEMES
             
  2002 2003 2004
       
Minimum Telkom Revenues  1,319,715   899,862   295,955 
Share in Distributable KSO Revenues  801,010   583,012   349,528 
Amortization of unearned initial investor payments under Joint Operation Schemes  7,420   3,433   11,131 
          
Total  2,128,145   1,486,307   656,614 
          
             
  2004 2005 2006
       
Cellular  5,351,613   6,685,138   7,442,340 
International  641,210   854,766   1,001,304 
Others  195,158   202,180   237,817 
             
Total  6,187,981   7,742,084   8,681,461 
             
      Distributable KSO Revenues represent the entire KSO revenues, less MTR and operational expensesRefer to Note 46 for details of the KSO Units. These revenues are shared between the Company and the KSO Investors based upon agreed percentages (Note 49).related party transactions.
      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-81F-87


PERUSAHAAN PERSEROAN (PERSERO)
P.T. TELEKOMUNIKASI INDONESIA Tbk AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
DECEMBER 31, 20032005 AND 2004,2006, AND FOR YEARS ENDED
DECEMBER 31, 2002, 20032004, 2005 AND 20042006
(Figures in tables are presented in millions of Rupiah, unless otherwise stated)
37. REVENUE-SHARING ARRANGEMENT33.     REVENUE UNDER JOINT OPERATION SCHEMES
             
  2004 2005 2006
       
Minimum TELKOM Revenues  295,955   268,629   207,516 
Share in Distributable KSO Revenues  349,528   318,556   274,587 
Amortization of unearned initial investor payments under Joint Operation Schemes  11,131   1,462   7,311 
             
Total  656,614   588,647   489,414 
             
      KSO revenues were shares of the Company’s revenues under joint operation agreement with the KSO investors. On October 19, 2006, the Company has amended the KSO VII agreement and as of that date the Company has obtained the operational control over KSO VII (Note 5e and 48). As of December 31, 2006 the Company has obtained full control over all of the KSO operations by acquisition of its KSO investors or the businesses.
34.     DATA AND INTERNET REVENUES
             
  2002 2003 2004
       
Revenue-Sharing Arrangement revenues  211,483   200,085   198,543 
Amortization of unearned income (Note 12)  52,271   58,379   82,033 
          
Total  263,754   258,464   280,576 
          
             
  2004 2005 2006
       
SMS  3,562,726   5,309,244   6,730,463 
Internet  554,948   711,375   907,467 
Data communication  360,642   610,367   1,122,285 
VoIP  318,854   292,750   278,057 
e-Business  11,572   10,588   26,915 
             
Total  4,808,742   6,934,324   9,065,187 
             
38. OPERATING EXPENSES — PERSONNEL35.     NETWORK REVENUES
             
  2002 2003 2004
       
Salaries and related benefits  1,410,670   1,574,181   1,796,914 
Vacation pay, incentives and other benefits  655,518   816,055   1,156,069 
Early retirements  717,289   355,735   243,466 
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  201,468   468,805   523,787 
Long service awards (Note 45)  289,922   219,239   159,323 
Housing  89,495   116,858   103,459 
Medical  28,209   9,682   12,190 
Other employee benefits (Note 44)     4,439   11,510 
Others  16,187   42,693   37,014 
          
Total  4,387,568   4,440,096   5,570,778 
          
             
  2004 2005 2006
       
Leased lines  443,408   347,105   424,633 
Satellite transponder lease  210,901   239,531   294,105 
             
Total  654,309   586,636   718,738 
             
      Refer to Note 46 for details of related party transactions.
39. OPERATING EXPENSES — OPERATIONS, MAINTENANCE AND TELECOMMUNICATION SERVICES
36.     REVENUE-SHARING ARRANGEMENTS REVENUES
             
  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 
          
             
  2004 2005 2006
       
Revenue-Sharing Arrangements revenues  198,543   165,601   263,516 
Amortization of unearned income (Note 13)  82,033   136,681   151,961 
             
Total  280,576   302,282   415,477 
             

F-82F-88


PERUSAHAAN PERSEROAN (PERSERO)
P.T. TELEKOMUNIKASI INDONESIA Tbk AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
DECEMBER 31, 20032005 AND 2004,2006, AND FOR YEARS ENDED
DECEMBER 31, 2002, 20032004, 2005 AND 20042006
(Figures in tables are presented in millions of Rupiah, unless otherwise stated)
40.37.     OPERATING EXPENSES — GENERAL AND ADMINISTRATIVEPERSONNEL
             
  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 
          
             
  2004 2005 2006
       
Salaries and related benefits  1,796,914   2,165,895   2,400,631 
Vacation pay, incentives and other benefits  1,156,069   1,615,640   2,209,056 
Early retirements program (Note 18)  243,466   486,374   1,461,150 
Employee income tax  523,787   856,451   889,083 
Net periodic post-retirement health care benefit cost (Note 45)  416,276   488,586   604,748 
Net periodic pension cost (Note 43)  572,419   532,331   438,383 
Long service awards (Note 44)  36,861   201,878   215,840 
Housing  103,459   113,673   168,416 
Medical  12,190   18,019   25,117 
Other employee benefits (Note 43)  11,510   5,954   14,341 
Others  37,014   78,246   87,000 
             
Total  4,909,965   6,563,047   8,513,765 
             
41. INCOME TAX
38.OPERATING EXPENSES — OPERATIONS, MAINTENANCE AND TELECOMMUNICATION SERVICES
           
  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 
       
             
  2004 2005 2006
       
Operations and maintenance  2,398,159   3,075,092   4,209,145 
Concession fees and Universal Service Obligation (USO) charges  314,741   709,190   881,757 
Radio frequency usage charges  492,568   548,186   722,600 
Cost of phone, SIM and RUIM cards  366,661   582,351   579,334 
Electricity, gas and water  385,662   372,526   417,349 
Vehicles and supporting facilities  181,737   217,217   246,184 
Leased lines  132,829   124,253   236,394 
Insurance  151,297   136,378   145,075 
Call center  59,634   104,989   14,679 
Travelling  42,213   33,455   39,106 
Others  4,086   12,704   4,105 
             
Total  4,529,587   5,916,341   7,495,728 
             
      Refer to Note 46 for details of related party transactions.

F-83F-89


PERUSAHAAN PERSEROAN (PERSERO)
P.T. TELEKOMUNIKASI INDONESIA Tbk AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
DECEMBER 31, 20032005 AND 2004,2006, AND FOR YEARS ENDED
DECEMBER 31, 2002, 20032004, 2005 AND 20042006
(Figures in tables are presented in millions of Rupiah, unless otherwise stated)
39.     OPERATING EXPENSES — GENERAL AND ADMINISTRATIVE
            
  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 
       
             
  2004 2005 2006
       
Amortization of goodwill and other intangible assets (Note 15)  872,330   918,153   944,403 
Collection expenses  358,957   379,056   542,466 
Provision for doubtful accounts and inventory obsolescence  357,695   488,973   458,252 
General and social contribution  111,838   204,326   301,826 
Travelling  192,567   171,657   229,670 
Training, education and recruitment  228,524   177,853   224,321 
Professional fees  137,355   131,047   221,043 
Security and screening  143,892   164,416   197,416 
Meetings  58,333   40,311   63,953 
Stationery and printing  80,972   50,190   51,864 
Research and development  13,225   8,396   8,653 
Others  44,159   29,573   27,560 
             
Total  2,599,847   2,763,951   3,271,427 
             
      c. The components40.     TAXATION
      a. In 2006, Telkomsel recognized a claim for tax refund amounting to Rp.337,855 million as a result of incomethe revision to the 2004 and 2005 tax expense (benefit) arereturns and Rp.21,727 million as follows:a result of its objection to the 2002 tax assessment (Note 40f).
              
  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 
          
           
  2005 2006
     
b. Prepaid taxes        
 Subsidiaries        
  Corporate income tax  13,352    
  Value added tax  5,561   896 
  Income tax Article 23 — Services Delivery     1,494 
         
   18,913   2,390 
         

F-84F-90


PERUSAHAAN PERSEROAN (PERSERO)
P.T. TELEKOMUNIKASI INDONESIA Tbk AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
DECEMBER 31, 20032005 AND 2004,2006, AND FOR YEARS ENDED
DECEMBER 31, 2002, 20032004, 2005 AND 2006
(Figures in tables are presented in millions of Rupiah, unless otherwise stated)
            
  2005 2006
     
c. Taxes payable        
 The Company        
  Income taxes        
   Article 21 — Individual income tax  64,793   80,626 
   Article 22 — Witholding tax on goods delivery and import  5,055   3,137 
   Article 23 — Witholding tax on services delivery  46,132   36,258 
   Article 25 — Installment of corporate income tax  117,281   128,291 
   Article 26 — Witholding tax on non-resident income tax  1,143   73,872 
   Article 29 — Underpayment of corporate income tax  376,140   602,159 
  Value added tax  256,523   275,657 
         
   867,067   1,200,000 
         
 Subsidiaries        
  Income taxes        
   Article 4 — Final tax  3,318   7,829 
   Article 21 — Individual income tax  25,059   55,340 
   Article 22 — Witholding tax on goods delivery and import     639 
   Article 23 — Witholding tax on services delivery  55,928   75,577 
   Article 25 — Installment of corporate income tax  203,254   272,803 
   Article 26 — Witholding tax on non-resident income tax  72,252   34,115 
   Article 29 — Underpayment of corporate income tax  1,207,247   808,838 
  Value added tax  35,640   113,861 
         
   1,602,698   1,369,002 
         
   2,469,765   2,569,002 
         
      dThe components of income tax expense (benefit) are as follows:
              
  2004 2005 2006
       
Current            
 The Company  1,922,238   2,034,248   2,536,459 
 Subsidiaries  2,344,873   3,685,396   4,560,743 
             
   4,267,111   5,719,644   7,097,202 
             
Deferred            
 The Company  (330,630)  (694,843)  (713,200)
 Subsidiaries  242,045   159,086   655,925 
             
   (88,585)  (535,757)  (57,275)
             
   4,178,526   5,183,887   7,039,927 
             

F-91


PERUSAHAAN PERSEROAN (PERSERO)
P.T. TELEKOMUNIKASI INDONESIA Tbk AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
DECEMBER 31, 2005 AND 2006, AND FOR YEARS ENDED
DECEMBER 31, 2004, 2005 AND 2006
(Figures in tables are presented in millions of Rupiah, unless otherwise stated)
      d.e. 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 ofbetween the consolidated income before tax toand taxable income before tax attributable to the Company and the components of consolidated income tax expense are as follows:
             
  2002 2003 2004
       
Consolidated income before tax  11,748,902   11,451,795   12,088,582 
Add back consolidation eliminations  2,554,407   3,332,176   3,936,524 
          
Consolidated income before tax and eliminations  14,303,309   14,783,971   16,025,106 
Deduct income before tax of the subsidiaries  (4,745,515)  (7,009,179)  (8,485,296)
          
Income before tax attributable to the Company  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  2,867,321   2,248,678   2,199,945 
Non-taxable income  (1,785,208)  (1,017,791)  (1,181,983)
Non-deductible expenses  578,429   328,835   345,674 
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 
          
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  1,271,921   2,173,526   2,586,918 
          
Total consolidated income tax expense  2,898,971   3,861,090   4,003,072 
          
      The reconciliation between income before tax and the estimated taxable income for the years ended December 31, 2002, 2003 and 2004 is as follows:
              
  2002 2003 2004
       
Income before tax attributable to the Company  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 
          
Temporary differences:            
 Depreciation of property, plant and equipment  (170,134)  442,029   415,805 
 Gain on sale of property, plant and equipment  14,774   (25,495)  (12,874)
 Allowance/(write back) for doubtful accounts  (156,223)  166,341   491,577 
 Accounts receivable written-off  (82,474)  (79,728)  (91,865)
 Allowance for inventory obsolescence  10,099   5,543   11,385 
             
  2004 2005 2006
       
Consolidated income before tax  12,749,395   16,241,424   21,993,605 
Add back consolidation eliminations  3,936,524   5,737,400   7,529,604 
             
Consolidated income before tax and eliminations  16,685,919   21,978,824   29,523,209 
Less: income before tax of the subsidiaries  (8,485,296)  (12,645,854)  (16,694,373)
             
Income before tax attributable to the Company  8,200,623   9,332,970   12,828,836 
Less: income subject to final tax  (206,601)  (285,075)  (690,760)
             
   7,994,022   9,047,895   12,138,076 
             
Tax calculated at progressive rates  2,398,189   2,714,351   3,641,405 
Non-taxable income  (1,181,983)  (1,724,483)  (2,256,896)
Non-deductible expenses  322,884   315,041   321,880 
Deferred tax assets originating from previously unrecognized temporary differences, net  (14,940)  (6,900)   
Deferred tax assets that cannot be utilized, net  24,045      (3,071)
             
Corporate income tax expense  1,548,195   1,298,009   1,703,318 
Final income tax expense  43,413   41,396   119,940 
             
Total income tax expense of the Company  1,591,608   1,339,405   1,823,258 
Income tax expense of the Subsidiaries  2,586,918   3,844,482   5,216,669 
             
Total consolidated income tax expense  4,178,526   5,183,887   7,039,927 
             

F-85F-92


PERUSAHAAN PERSEROAN (PERSERO)
P.T. TELEKOMUNIKASI INDONESIA Tbk AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
DECEMBER 31, 20032005 AND 2004,2006, AND FOR YEARS ENDED
DECEMBER 31, 2002, 20032004, 2005 AND 20042006
(Figures in tables are presented in millions of Rupiah, unless otherwise stated)
      The reconciliation between income before tax attributable to the Company and estimated taxable income for the years ended December 31, 2004, 2005 and 2006 is as follows:
              
  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)      
              
  2004 2005 2006
       
Income before tax attributable to the Company  8,200,623   9,332,970   12,828,836 
Less: income subject to final tax  (206,601)  (285,075)  (690,760)
             
   7,994,022   9,047,895   12,138,076 
             
Temporary differences:            
 Depreciation of property, plant and equipment  415,805   880,578   746,190 
 Gain on sale of property, plant and equipment  (12,874)  (2,143)  (41,269)
 Allowance for doubtful accounts  491,577   308,193   265,385 
 Trade receivables written-off  (91,865)  (336,715)  (118,668)
 Allowance for inventory obsolescence  11,385   11,228   5,501 
 Inventory written-off     (12,183)  (1,928)
 Accrued early retirement benefits  (132,810)     1,528,429 
 Accrued employee benefits  (139,064)  67,792   27,105 
 Net periodic pension cost  (264,796)  (164,008)  (275,486)
 Long service awards  (46,908)  69,264   94,094 
 Amortization of intangible assets  851,060   896,883   923,867 
 Amortization of landrights  (3,419)  (3,441)  (3,988)
 Provision for impairment of property, plant and equipment     616,768    
 Depreciation of property, plant and equipment under revenue-sharing arrangements  82,415   96,114   112,762 
 Interest income/receivable  45,835       
 Amortization of unearned income on revenue-sharing arrangements  (82,033)  (135,662)  (153,465)
 Payments of deferred consideration for business combinations  (233,337)  (405,302)  (484,276)
 Consultant fees for acquisition of business  (27,797)      
 Foreign exchange loss/(gain) on deferred consideration for business combinations  342,073   190,206   (273,555)
 Foreign exchange losses capitalized to property under construction  (74,283)      
 Capital leases     21,359   20,000 
 Loss on purchase commitments     79,359    
 Other provisions     114,854   (3,600)
             
 Total temporary differences  1,130,964   2,293,144   2,367,098 
             

F-86F-93


PERUSAHAAN PERSEROAN (PERSERO)
P.T. TELEKOMUNIKASI INDONESIA Tbk AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
DECEMBER 31, 20032005 AND 2004,2006, AND FOR YEARS ENDED
DECEMBER 31, 2002, 20032004, 2005 AND 20042006
(Figures in tables are presented in millions of Rupiah, unless otherwise stated)
                         
 2002 2003 2004  2004 2005 2006
             
Income from land/building rental  (65,175)  (40,380)   
Others  253,322  599,631  523,568 
Permanent differences:Permanent differences:          
Net periodic post-retirement health care benefit cost  408,498  483,045  596,108 
Amortization of goodwill  21,270  21,270  8,858 
Amortization of discount on promissory notes  109,786  74,632  46,183 
Tax penalties  14,645  59,850  (2,925)
Equity in net income of associates and subsidiaries  (3,939,944)  (5,748,277)  (7,522,986)
Gain on sales of investment      (10,397)
Others  523,568  411,339  435,104 
               
Total permanent differences  (4,596,308)  (1,912,419)  (2,786,213)Total permanent differences  (2,862,177)  (4,698,141)  (6,450,055)
               
Taxable income subject to corporate income tax  5,570,403  6,098,676  6,262,809 
Taxable incomeTaxable income  6,262,809  6,642,898  8,055,119 
               
Corporate income tax expense  1,671,104  1,829,585  1,878,825 Corporate income tax expense  1,878,825  1,992,852  2,416,519 
Final income tax expense    56,698  43,413 Final income tax expense  43,413  41,396  119,940 
               
Total current income tax expense of the Company  1,671,104  1,886,283  1,922,238 Total current income tax expense of the Company  1,922,238  2,034,248  2,536,459 
Current income tax expense of the subsidiaries  1,076,658  1,904,997  2,344,873 
Current income tax expense of the SubsidiariesCurrent income tax expense of the Subsidiaries  2,344,873  3,685,396  4,560,743 
               
Total current income tax expense  2,747,762  3,791,280  4,267,111 Total current income tax expense  4,267,111  5,719,644  7,097,202 
               
      Calculation of corporate income tax liability above was in accordance with annual tax return submitted by the Company to the Tax Office.
      f. Tax assessment
      In 2002,2006, the Company received an Underpayment Tax Assessment Lettera tax assessment letter (SKPKB) from the Tax Service Office forconfirming an underpayment of its corporate income tax for fiscal years 2000 and 2001year 2004 amounting to Rp34,489 millionRp.4,363 million. The underpayment was paid in August 2006.
      During 2006, Telkomsel was assessed for underpayments of withholding taxes and Rp19,568 million, respectively.value added tax (self assessed) including penalty covering the fiscal year 2002 totaling Rp.129 billion and overpayment of corporate income tax of Rp.5 billion. The additional tax duenet underpayment was settled through the use of the payment of income tax in December 20022003 of Rp.24 billion and a cash payment of Rp.100 billion. Of the difference betweenRp.100 billion cash payment made, Telkomsel has filed an objection for Rp.99 billion. Of the recordednet underpayment of Rp.105 billion, Rp.83 billion was charged to expense in 2006 with the remaining amount of Rp.22 billion recorded as part of its claims for tax liabilities/prepaymentsrefund (Note 40a).
      In 2006, Telkomsel filed revisions of its tax returns for the fiscal years 2004 and 2005 due to a recalculation of the amount assesseddepreciation of property, plant and equipment for tax purposes. As a result of the recalculation, Telkomsel recognized claims for overpayments with a corresponding addition to the deferred tax liability of property, plant and equipment amounting to Rp.338 billion (Note 40a). Accordingly, Telkomsel is being audited by the Tax Service Office was charged to the 2002 statement of income.
      In 2003, Telkomsel received tax assessment letters for all taxes covering the fiscal years 2000 and 2001. Telkomsel filed an objection on a portion of the 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.Office.

F-87F-94


PERUSAHAAN PERSEROAN (PERSERO)
P.T. TELEKOMUNIKASI INDONESIA Tbk AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
DECEMBER 31, 20032005 AND 2004,2006, AND FOR YEARS ENDED
DECEMBER 31, 2002, 20032004, 2005 AND 20042006
(Figures in tables are presented in millions of Rupiah, unless otherwise stated)
      e.g. Deferred tax assets and liabilities
      The details of the Company’s and subsidiaries’ deferred tax assets and liabilities are as follows:
                              
     (Charged)/      (Charged)/  
     Credited to      credited to  
 December 31, Acquisition Statements December 31,  December 31, statements of December 31,
 2002 of AWI of Income 2003  2004 income 2005
               
The Company
The Company
             The Company          
Deferred tax assets:Deferred tax assets:             Deferred tax assets:          
Allowance for doubtful accounts  101,389    17,456  118,845 Allowance for doubtful accounts  207,679  (2,283)  205,396 
Allowance for inventory obsolescence  10,507    1,020  11,527 Allowance for inventory obsolescence  15,494  (1,842)  13,652 
Provision for impairment of property, plant and equipment  1,920    (1,920)   Long-term investments  4,685  1,981  6,666 
Landrights  161    (707)  (546)Accrued employee benefits  42,665  20,338  63,003 
Long-term investments  52,605    (52,605)   Accrued long service awards  128,011  20,780  148,791 
Provision for early retirement benefits  201,294    (161,451)  39,843 Net periodic pension cost  433,439  (49,202)  384,237 
Provision for employee bonuses      84,385  84,385 Capital leases    6,408  6,408 
Provision for long service awards  146,769    (4,685)  142,084 Deferred consideration for business combinations  1,009,932  (64,529)  945,403 
         Accrued expenses    58,265  58,265 
       
Total deferred tax assetsTotal deferred tax assets  514,645    (118,507)  396,138 Total deferred tax assets  1,841,905  (10,084)  1,831,821 
                 
Deferred tax liabilities: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)Difference between book and tax property, plant and equipment’s net book value  (2,198,654)  432,437  (1,766,217)
Revenue-sharing arrangements  (18,119)    (40,334)  (58,453)Landrights  (1,571)  (1,033)  (2,604)
Intangible assets  (1,208,652)  (594,771)  275,625  (1,527,798)Revenue-sharing arrangements  (41,637)  4,461  (37,176)
Net periodic pension cost  (7,988)    (80,927)  (88,915)Intangible assets  (1,614,386)  269,062  (1,345,324)
                 
Total deferred tax liabilitiesTotal deferred tax liabilities  (2,964,195)  (624,760)  317,226  (3,271,729)Total deferred tax liabilities  (3,856,248)  704,927  (3,151,321)
                 
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 Company, net  (2,014,343)  694,843  (1,319,500)
                 
Deferred tax liabilities of the subsidiaries, netDeferred tax liabilities of the subsidiaries, net  (633,616)  230,966  (268,529)  (671,179)Deferred tax liabilities of the subsidiaries, net  (913,224)  (159,086)  (1,072,310)
                 
Total deferred tax liabilities, netTotal deferred tax liabilities, net  (3,083,166)        (3,546,770)Total deferred tax liabilities, net  (2,927,567)  535,757  (2,391,810)
                 

F-88F-95


PERUSAHAAN PERSEROAN (PERSERO)
P.T. TELEKOMUNIKASI INDONESIA Tbk AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
DECEMBER 31, 20032005 AND 2004,2006, AND FOR YEARS ENDED
DECEMBER 31, 2002, 20032004, 2005 AND 20042006
(Figures in tables are presented in millions of Rupiah, unless otherwise stated)
                                      
     (Charged)/      (Charged)/      
     Credited to      Credited to      
 December 31, Business Statements December 31,  December 31, Statements of Business Prior Year December 31,
 2003 Acquisitions of Income 2004  2005 Income Acquisition Overpayment 2006
                   
The Company
The Company
             The Company                
Deferred tax assets:Deferred tax assets:             Deferred tax assets:                
Allowance for doubtful accounts  118,845    88,834  207,679 Allowance for doubtful accounts  205,396  57,925      263,321 
Allowance for inventory obsolescence  11,527    3,967  15,494 Allowance for inventory obsolescence  13,652  447      14,099 
Long-term investments  (14,138)    18,823  4,685 Long-term investments  6,666  (6,666)       
Provision for early retirement benefits  39,843    (39,843)   Accrued for employee benefits  63,003  466,659      529,662 
Provision for employee bonuses  84,385    (41,720)  42,665 Accrued long service awards  148,791  28,228      177,019 
Provision for long service awards  142,084    22,666  164,750 Net periodic pension cost  384,237  (81,977)      302,260 
Liabilities of business acquisitions    985,609  24,323  1,009,932 Capital Leases  6,408  6,000      12,408 
         Deferred consideration for business combinations  945,403  (227,349)  531,278    1,249,332 
Accrued expenses  58,265  (1,080)      57,185 
           
Total deferred tax assetsTotal deferred tax assets  382,546  985,609  77,050  1,445,205 Total deferred tax assets  1,831,821  242,187  531,278    2,605,286 
                     
Deferred tax liabilities:Deferred tax liabilities:             Deferred tax liabilities:                
Interest receivables  (13,750)    13,750   
Difference between book and tax property, plant and equipment’s net book value  (1,568,675)  (713,140)  83,161  (2,198,654)
Landrights  (546)    (1,025)  (1,571)Difference between book and tax property, plant and equipment’s net book value  (1,766,217)  205,534  (386,666)    (1,947,349)
Revenue-sharing arrangements  (58,453)    16,816  (41,637)Landrights  (2,604)  (1,196)      (3,800)
Intangible assets  (1,527,798)  (341,909)  255,321  (1,614,386)Revenue-sharing arrangements  (37,176)  (10,485)      (47,661)
Net periodic pension cost  (88,915)    61,011  (27,904)Intangible assets  (1,345,324)  277,160  (137,619)    (1,205,783)
                     
Total deferred tax liabilitiesTotal deferred tax liabilities  (3,258,137)  (1,055,049)  429,034  (3,884,152)Total deferred tax liabilities  (3,151,321)  471,013  (524,285)    (3,204,593)
                     
Deferred tax liabilities of the Company, netDeferred tax liabilities of the Company, net  (2,875,591)  (69,440)  506,084  (2,438,947)Deferred tax liabilities of the Company, net  (1,319,500)  713,200  6,993    (599,307)
                     
Deferred tax liabilities of the subsidiaries, netDeferred tax liabilities of the subsidiaries, net  (671,179)    (242,045)  (913,224)Deferred tax liabilities of the subsidiaries, net  (1,072,310)  (655,925)    (337,855)  (2,066,090)
                     
Total deferred tax liabilities, netTotal deferred tax liabilities, net  (3,546,770)        (3,352,171)Total deferred tax liabilities, net  (2,391,810)  57,275  6,993  (337,855)  (2,665,397)
                     
      The net deferred tax liabilities of subsidiaries as of December 31, 20042005 included deferred tax assets of Rp239,501Rp.123,309 million arising from tax loss carryforwards amounting to Rp798,337 million. The subsidiaries’losses carry forwards from PT Aria West Indonesia. As of December 31, 2006, tax loss carryforwards of Rp160,196 million and Rp638,141 million will expire in 2005 and 2006, respectively.losses carry forwards balance had been utilised for fiscal year 2006.
      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 is considered realizable, however, could be reduced if actual future taxable income is lower than estimated.

F-89F-96


PERUSAHAAN PERSEROAN (PERSERO)
P.T. TELEKOMUNIKASI INDONESIA Tbk AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
DECEMBER 31, 20032005 AND 2004,2006, AND FOR YEARS ENDED
DECEMBER 31, 2002, 20032004, 2005 AND 20042006
(Figures in tables are presented in millions of Rupiah, unless otherwise stated)
      h. Administration
f. Administration
      Under the taxation laws of Indonesia, the Company submitsand each subsidiary submit 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 beinghas been audited by the tax authorities for variousTax Office up to the fiscal years. These tax audits are not finalized at the dateyear of these financial statements; however, management believes that the outcome of these tax audits will not be significant.2004.
42.41.     BASIC EARNINGS PER SHARE
      Net incomeBasic earnings per share is computed by dividing net income by the weighted average number of shares outstanding during the year, totaling 20,159,999,280, 20,159,999,280 and 20,114,511,886 in 2002, 20032004, 2005 and 2004.2006, respectively. See also Notes 1b and 2t.
      The Company does not have potentially dilutive ordinary shares.
43.42.     CASH DIVIDENDS AND 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.
      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.LLM., the stockholders approved the distribution of cash dividends for the year 2003 amounting to Rp3,043,614Rp.3,043,614 million or Rp301.95Rp.301.95 per share (pre-split)(pre-stock split) and the appropriation of Rp121,745Rp.121,745 million for general reserve.

F-90


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 the 2004 interim cash dividends of Rp143,377Rp.143,377 million or Rp7.11Rp.7.11 per share to the Company’s stockholders.
      Pursuant to the Annual General Meeting of Stockholders as stated in notarial deed No. 36 dated June 24, 2005 of A. Partomuan Pohan, S.H., LLM., the stockholders approved the distribution of cash dividends for the year 2004 amounting to Rp.3,064,604 million or Rp.152.01 per share (of which Rp.143,377 million or Rp.7.11 per share was distributed as interim cash dividends in December 2004) and the appropriation of Rp.122,584 million for general reserve.
      Pursuant to the Annual General Meeting of Stockholders as stated in notarial deed No. 68 dated June 30, 2006 of A. Partomuan Pohan, S.H., LLM., the stockholders approved the distribution of cash dividends for the year 2005 amounting to Rp.4,400,090 million or minimum of Rp.218.86 per share.
      On December 5, 2006, the Company decided to distribute the 2006 interim cash dividends of Rp.971,017 million or Rp.48.41 per share to the Company’s stockholders.
44.43.     PENSION PLANS
     a. a. The Company
      The Company sponsors a defined benefit pension plan and a defined contribution pension 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 the number of years of their service. The plan is managed by TelkomTELKOM Pension Fund (Dana(“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, 2002, 20032004, 2005 and 20042006 amounted to Rp297,352Rp.845,743 million, Rp486,324Rp.698,526 million and Rp839,980Rp.693,497 million, respectively.
      In 2002, the Company amended 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, 2003 and 2004 for its defined benefit pension plan:
         
  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-91F-97


PERUSAHAAN PERSEROAN (PERSERO)
P.T. TELEKOMUNIKASI INDONESIA Tbk AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
DECEMBER 31, 20032005 AND 2004,2006, AND FOR YEARS ENDED
DECEMBER 31, 2002, 20032004, 2005 AND 20042006
(Figures in tables are presented in millions of Rupiah, unless otherwise stated)
      The defined contribution pension plan is provided for employees hired with permanent status on or after July 1, 2002. The plan is managed by financial institutions pension fund (“DPLK”). The Company’s contribution is determined based on a certain percentage of the participants’ salaries and amounted to Rp.399 million, Rp.971 million and Rp.1,858 million for the years December 31, 2004, 2005 and 2006, respectively.
      The following table presents the change in projected benefit obligation, the change in plan assets, funded status of the plan and the net amount recognized in the Company’s balance sheets for the years ended December 31, 2004, 2005 and 2006 for its defined benefit pension plan:
                    
 2003 2004 2004 2005 2006
          
Change in projected benefit obligation
          
Projected benefit obligation at beginning of year  6,852,923  7,315,182  7,140,100 
Service cost  137,264  138,117  187,960 
Interest cost  740,494  789,830  768,586 
Plan participants’ contributions  42,838  41,371  43,918 
Actuarial gain (loss)  (216,025)  (874,573)  286,733 
Expected benefits paid  (242,312)  (269,827)  (305,916)
       
Projected benefit obligation at end of the year  7,315,182  7,140,100  8,121,381 
       
Change in plan assets
                 
Fair value of plan assets at beginning of year  3,099,648  3,671,309   3,671,309  4,884,523  5,429,954 
Actual return on plan assets  422,278  633,605 
Expected return on plan assets  436,672  533,333  677,602 
Employer contribution  486,324  839,980   845,743  698,526  693,497 
Plan participants’ contributions  35,173  43,906   42,838  41,371  43,918 
Benefits paid  (372,114)  (304,277)
Actuarial gain (loss)  130,273  (457,972)  671,693 
Expected benefits paid  (242,312)  (269,827)  (305,916)
            
Fair value of plan assets at end of year  3,671,309  4,884,523 
Fair value of plan assets at end of the year  4,884,523  5,429,954  7,210,748 
            
Funded status  (3,181,614)  (2,430,659)  (2,430,659)  (1,710,146)  (910,633)
Unrecognized prior service cost  1,655,412  1,498,628   1,329,046  1,190,024  1,051,002 
Unrecognized net actuarial loss  1,663,963  901,674 
Unrecognized net obligation at the date of initial application of PSAK No. 24  148,891  120,257 
Unrecognized net actuarial gain  (346,298)  (762,899)  (1,143,369)
            
Prepaid pension benefit costs
  286,652  89,900 
Accrued pension benefit cost  (1,447,911)  (1,283,021)  (1,003,000)
            
      PlanThe actual return on plan assets consistwas Rp.627,842 million, Rp.155,754 million and Rp.1,300,632 million for the years ended 2004, 2005 and 2006, respectively.

F-98


PERUSAHAAN PERSEROAN (PERSERO)
P.T. TELEKOMUNIKASI INDONESIA Tbk AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
DECEMBER 31, 2005 AND 2006, AND FOR YEARS ENDED
DECEMBER 31, 2004, 2005 AND 2006
(Figures in tables are presented in millions of Rupiah, unless otherwise stated)
      The movement of the accrued pension benefit cost during the years ended December 31, 2004, 2005 and 2006 is as follows:
             
  2004 2005 2006
       
Accrued pension benefit cost at beginning of the year  1,713,546   1,447,911   1,283,021 
Net periodic benefit cost less amounts charged to KSO Units  563,739   514,976   397,317 
Amounts charged to KSO Units under contractual agreement  16,369   18,660   16,159 
Employer contributions  (845,743)  (698,526)  (693,497)
             
Accrued pension benefit cost at end of the year  1,447,911   1,283,021   1,003,000 
             
      As of December 31, 2005 and 2006, plan assets consisted mainly of Rupiah time deposits atIndonesian Government bonds and corporate bonds. As of December 31, 20032006 plan assets included bonds and Indonesian Government Bonds at DecemberSeries B shares issued by the Company with fair values of Rp.217,531 million and Rp.238,495 million, respectively (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, 1992.2005: Rp.223,736 million and Rp.124,189 million, respectively).
      The actuarial valuationsvaluation for the defined benefit pension plan was performed based on measurement date of December 31, for each of2004, 2005 and 2006, with the years werereports prepared on February 28, 2003, May 21, 2004 and March 15, 2005, February 27, 2006, and April 24, 2007, 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, 2002, 20032004, 2005 and 20042006 are as follows.
                    
 2002 2003 2004 2004 2005 2006
            
Discount rate  13%  11%  11%  11%  11%  10.5% 
Expected long-term return on plan assets  13%  11%  10.5%  10.5%  10.5%  12% 
Rate of compensation increase  6%  8%  8%  8%  8.8%  8% 
      The components of net periodic pension cost are as follows:
             
  2004 2005 2006
       
Service Cost  137,264   138,117   187,960 
Interest Cost  740,494   789,830   768,586 
Expected return on plan assets  (436,672)  (533,333)  (677,602)
Amortization of prior service cost  139,022   139,022   139,022 
Recognized actuarial loss (gain)        (4,490)
             
Net periodic pension cost  580,108   533,636   413,476 
Amount charged to KSO Units under contractual agreement  (16,369)  (18,660)  (16,159)
             
Total net periodic pension cost less amounts charged to KSO Units (Note 37)  563,739   514,976   397,317 
             
     b. Telkomsel
      Telkomsel provides a defined benefit pension plan for its employees. Under this plan, employees are entitled to pension benefits based on their latest basic salary or take-home pay and the number of years of their

F-92F-99


PERUSAHAAN PERSEROAN (PERSERO)
P.T. TELEKOMUNIKASI INDONESIA Tbk AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
DECEMBER 31, 20032005 AND 2004,2006, AND FOR YEARS ENDED
DECEMBER 31, 2002, 20032004, 2005 AND 20042006
(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 for 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. TheUntil 2004, the employees contributecontributed 5% of their final monthly basic salaries to the plan and Telkomsel contributescontributed any remaining amount required to fund the plan. Starting 2005, the entire contributions are fully made by Telkomsel.
      Telkomsel’s contributions to Jiwasraya amounted to Rp5,163 million, Rp3,081Rp. Nil, Rp.14,928 million and nilRp.29,731 million for the years ended 2002, 20032004, 2005 and 2006, respectively.
      The following table reconciles the unfunded status of the plan with the amounts included in the consolidated balance sheets as of December 31, 2004, respectively.2005 and 2006:
             
  2004 2005 2006
       
Projected benefit obligation  (43,547)  (147,103)  (230,172)
Fair value of plan assets  11,182   20,971   29,904 
             
Unfunded status  (32,365)  (126,132)  (200,268)
Unrecognized items in the balance sheet:            
Unrecognized prior service cost  1,328   1,213   1,098 
Unrecognized net actuarial loss  20,707   103,391   166,676 
             
Accrued pension benefit cost  (10,330)  (21,528)  (32,494)
             
      The components of the net periodic pension cost are as follows:
             
  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 
          
             
  2004 2005 2006
       
Service cost  4,155   10,072   21,321 
Interest cost  3,889   6,650   16,169 
Expected return on plan assets  (824)  (832)  (2,124)
Amortization of past service cost  115   115   115 
Recognized actuarial loss  1,158   1,320   5,216 
             
Net periodic pension cost (Note 37)  8,493   17,325   40,697 
             
      The net periodic pension cost for the pension plan iswas calculated based on measurement date of December 31, 2004, 2005 and 2006, with the actuarial calculationreports prepared on January 17, 2005, January 13, 2006, and February 16, 2007 respectively, by PT Watson Wyatt Purbajaga, an independent actuary in association with Watson Wyatt Worldwide. The principal actuarial assumptions used by the independent actuary based on measurement date of December 31, 2004, 2005 and 2006 for each of the years are as follows:
             
  2004 2005 2006
       
Discount rate  11%  11%  10.5%
Expected long-term return on plan assets  7.5%  7.5%  7.5%
Rate of compensation increase  9%  8%  8%

F-93F-100


PERUSAHAAN PERSEROAN (PERSERO)
P.T. TELEKOMUNIKASI INDONESIA Tbk AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
DECEMBER 31, 20032005 AND 2004,2006, AND FOR YEARS ENDED
DECEMBER 31, 2002, 20032004, 2005 AND 20042006
(Figures in tables are presented in millions of Rupiah, unless otherwise stated)
Worldwide. The principal actuarial assumptions used by the independent actuary based on measurement date of December 31 for each of the years are as follows:
             
  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%
      The reconciliation of the funded status of the plan with the net amount recognized in the balance sheets of Telkomsel as of December 31, 2003 and 2004 is as follows:
         
  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
     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, 20032004, 2005 and 2004 is2006 are as follows:
               
 2003 2004 2004 2005 2006
          
Projected benefit obligation  (3,774)  (4,051)  (4,051)  (5,225)  (6,188)
Fair value of plan assets  4,432  5,413   5,413  5,865  6,291 
            
Funded status  658  1,362   1,362  640  103 
Unrecognized prior service cost  1,259   
Unrecognized net actuarial gain  (347)   
            
Prepaid pension benefit cost  1,570  1,362   1,362  640  103 
            
      The net periodic pension cost of Infomedia amounted to Rp274Rp.187 million, Rp60Rp.30 million and Rp187Rp.369 million for the years ended December 31, 2002, 20032004, 2005 and 2004, respectively.2006, respectively (Note 37).
     d. Obligation Under Labor Law
     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-94


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)
December 31, 20032005 and 20042006 amounted to Rp11,402Rp.26,115 million and Rp21,677Rp.35,128 million, respectively. The total related employee benefit cost charged to expense amounted to Rp4,439Rp.11,510 million, Rp.5,954 million and Rp11,510Rp.14,341 million for the years ended December 31, 20032004, 2005 and 2004, respectively.2006, respectively (Note 37).
45.44.     LONG SERVICE AWARDS
     a. The Company
     a. The Company
      The Company provides certain cash awards for its employees who meet certain length of service requirement. The benefits are either paid at the time the employee reaches certain anniversary dates during employment, or proportionately upon retirement or termination.
      The actuarial valuationsvaluation for the long service awards performedwas prepared based on the measurement date of December 31 for2004, 2005, and 2006 with the year 2002 wasreports prepared on January 15, 2004, while the actuarial valuations as of December 31, 2003 and 2004 were prepared on May 21, 2004 and March 15, 2005, February 27, 2006 and April 24, 2007 respectively, by PT Watson Wyatt Purbajaga, an independent actuary in association with Watson Wyatt Worldwide, using the Projected Unit Credit Method.Worldwide. The principal actuarial assumptions used by the independent actuary as of December 31, 2002, 20032004, 2005 and 20042006 are as follows:
                       
 2002 2003 2004 2004 2005 2006
            
Discount rate  13%  11%  11%  11%  11%  10.5%
Rate of compensation increase  8%  8%  8%  8%  8%  8%

F-101


PERUSAHAAN PERSEROAN (PERSERO)
P.T. TELEKOMUNIKASI INDONESIA Tbk AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
DECEMBER 31, 2005 AND 2006, AND FOR YEARS ENDED
DECEMBER 31, 2004, 2005 AND 2006
(Figures in tables are presented in millions of Rupiah, unless otherwise stated)
      The movement of the accrued long service awards during the years ended December 31, 2002, 20032004, 2005 and 20042006 is as follows:
             
  2002 2003 2004
       
Liability at beginning of year  275,834   489,231   473,614 
Net periodic benefit cost (Note 38)  289,922   207,126   153,610 
Benefits paid  (76,525)  (222,743)  (78,057)
          
Liability at end of year  489,231   473,614   549,167 
          
             
  2004 2005 2006
       
Accrued long service awards at beginning of year  473,614   426,705   495,969 
Net periodic benefit cost less amounts charged to KSO Units (Note 37)  31,148   192,450   150,741 
Amounts to charged to KSO Units under contractual agreement        10,321 
Benefits paid  (78,057)  (123,186)  (66,968)
             
Accrued long service awards at end of year  426,705   495,969   590,063 
Benefits to be paid for early retirement program (Note 18)        (67,279)
             
Accrued long service awards — non current  426,705   495,969   522,784 
             
     b. Telkomsel
     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, or proportionately upon retirement or at the time of termination.
      The obligation with respect to these awards iswas determined based on the actuarial valuation using the Projected Unit Credit Method, and amounted to Rp17,423Rp.28,555 million and Rp23,136Rp.73,541 million as of December 31, 20032005 and 2004,2006, respectively. The related benefit cost charged to expense amounted to Rp5,310Rp.5,713 million, Rp12,113Rp.9,428 million and Rp5,713Rp.65,099 million for the years ended December 31, 2002, 20032004, 2005 and 2004, respectively.2006, respectively (Note 37).
46.45.     POST-RETIREMENT HEALTH CARE 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 TelkomTELKOM (“YKPT”).
      The components of net periodic post-retirement benefit cost are as follows:
             
  2002 2003 2004
       
Service cost  83,956   88,394   76,163 
Interest cost  424,834   493,596   411,110 
Expected return on plan assets  (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   24,325   24,325 
Net curtailment loss  49,576       
          
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 
          
      The actuarial valuations for the post-retirement health care benefits performed based on measurement date of December 31 for the year 2002 was prepared on January 15, 2004, while the actuarial valuations 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, using the Projected Unit Credit Method.
      The principal actuarial assumptions used by the independent actuary as of December 31, 2002, 2003 and 2004 are as follows:
             
  2002 2003 2004
       
Discount rate  13%   11%   11% 
Expected long-term return on plan assets  13%   11%   8% 
Health care cost trend rate assumed for next year  14%   12%   12% 
The ultimate trend rate  10%   8%   8% 
Year that the rate reaches the ultimate trend rate  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, 2003 and 2004:
         
  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-96F-102


PERUSAHAAN PERSEROAN (PERSERO)
P.T. TELEKOMUNIKASI INDONESIA Tbk AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
DECEMBER 31, 20032005 AND 2004,2006, AND FOR YEARS ENDED
DECEMBER 31, 2002, 20032004, 2005 AND 20042006
(Figures in tables are presented in millions of Rupiah, unless otherwise stated)
      The following table presents the change in projected 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, 2004, 2005 and 2006:
         
  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)
       
             
  2004 2005 2006
       
Change in projected benefit obligation
            
Projected benefit obligation at beginning of the year  3,787,389   4,681,005   5,574,489 
Service cost  76,163   87,636   107,513 
Interest cost  411,110   507,994   605,573 
Actuarial loss  506,397   423,606   836,334 
Expected benefits paid  (100,054)  (125,752)  (138,566)
             
Projected benefit obligation at end of the year  4,681,005   5,574,489   6,985,343 
             
Change in plan assets
            
Fair value of plan assets at beginning of the year  505,340   1,138,768   1,493,897 
Expected return on plan assets  61,084   103,498   145,264 
Employer contributions  724,530   435,899   714,854 
Actuarial gain (loss)  (52,132)  (58,516)  37,812 
Expected benefits paid  (100,054)  (125,752)  (138,566)
             
Fair value of plan assets at end of the year  1,138,768   1,493,897   2,253,261 
             
Funded status  (3,542,237)  (4,080,592)  (4,732,082)
Unrecognized net actuarial loss  558,530   1,032,571   1,786,354 
             
Accrued post-retirement health care benefit cost  (2,983,707)  (3,048,021)  (2,945,728)
             
      The transition obligation atactual return on plan assets was Rp.32,173 million, Rp.45,209 million and Rp.144,659 million for the years ended December 31, 2004, 2005 and 2006.
      The components of net periodic post-retirement health care benefit cost are as follows:
             
  2004 2005 2006
       
Service cost  76,163   87,636   107,513 
Interest cost  411,110   507,994   605,573 
Expected return on plan assets  (61,084)  (103,498)  (145,264)
Recognized actuarial loss     8,081   44,738 
             
Net periodic post-retirement benefit cost  426,189   500,213   612,560 
Amounts charged to KSO Units under contractual agreement  (9,913)  (11,627)  (7,812)
             
Total net periodic post-retirement health care benefits cost less amounts charged to KSO Units (Note 37)  416,276   488,586   604,748 
             
      As of December 31, 2005, plan assets included bonds and Medium-term Notes issued by the Company with a total fair value of Rp.232,394 million. As of December 31, 2006, plan assets included stocks and Medium-term Notes issued by the Company with a total fair value of Rp.191,248 million.

F-103


PERUSAHAAN PERSEROAN (PERSERO)
P.T. TELEKOMUNIKASI INDONESIA Tbk AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
DECEMBER 31, 2005 AND 2006, AND FOR YEARS ENDED
DECEMBER 31, 2004, 2005 AND 2006
(Figures in tables are presented in millions of Rupiah, unless otherwise stated)
      The movement of the accrued post-retirement health care benefit cost during the years ended December 31, 2004, 2005 and 2006 is as follows:
             
  2004 2005 2006
       
Accrued post-retirement health care benefit cost at beginning of year  3,282,048   2,983,707   3,048,021 
Net periodic post-retirement health care benefit cost less amounts charged to KSO Units (Note 37)  416,276   488,586   604,748 
Amounts charged to KSO Units under contractual agreement  9,913   11,627   7,812 
Employer contributions  (724,530)  (435,899)  (714,853)
             
Accrued post-retirement health care benefits cost at end of the year  2,983,707   3,048,021   2,945,728 
             
      The actuarial valuation for the post-retirement health care benefits was performed based on the measurement date as of initial applicationDecember 31, 2004, 2005 and 2006 with the reports prepared on March 15, 2005, February 27, 2006 and April 24, 2007 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 Rp524,250 million is amortized over 20 years, beginning on January 1, 1995.December 31, 2004, 2005 and 2006 are as follows:
             
  2004 2005 2006
       
Discount rate  11%  11%  10.5%
Expected long-term return on plan assets  8%  8%  8.5%
Health care cost trend rate assumed for next year  12%  9%  12%
Ultimate health care cost trend rate  8%  9%  8%
Year that the rate reaches the ultimate trend rate  2007   2006   2011 
      A 1% increase in the health care cost trend rate would result in service cost and interest cost,costs, and accumulated post-retirement health care benefit obligation as of December 31, 2002, 20032004, 2005 and 20042006 as follows:
                        
 2002* 2003 2004 2004 2005 2006
            
Service cost and interest cost  664,741  594,958  723,941   723,941  872,159  1,011,620 
Accumulated post-retirement benefit obligation  4,473,675  4,545,961  5,597,965 
Accumulated post-retirement health care benefit obligation  5,597,965  6,718,434  8,327,481 
before curtailment
47.46.     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. 
     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 (Note 22).
      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 Rp968,973 million, Rp755,517 million and Rp489,220 million in 2002, 2003 and 2004, respectively. Interest expense for two-step loan reflected 61.2%, 54.6% and 38.5% of total interest expense in 2002, 2003 and 2004, respectively.
      ii. The Company and its subsidiaries 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 Rp163,891 million, Rp238,979 million and Rp314,741 million in 2002, 2003 and 2004, respectively. Concession fees reflected 1.4%, 1.6% and 1.6% of total operating expenses in 2002, 2003 and 2004, respectively. Radio frequency usage charges amounted to Rp292,703 million,

F-97F-104


PERUSAHAAN PERSEROAN (PERSERO)
P.T. TELEKOMUNIKASI INDONESIA Tbk AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
DECEMBER 31, 20032005 AND 2004,2006, AND FOR YEARS ENDED
DECEMBER 31, 2002, 20032004, 2005 AND 20042006
(Figures in tables are presented in millions of Rupiah, unless otherwise stated)
Rp371,740      Interest expense for two-step loans amounted to Rp.489,220 million, Rp.324,652 million and Rp492,568 million in 2002, 2003 and 2004, respectively. Radio frequency usage charges reflected 2.5%, 2.5% and 2.5% of total operating expenses in 2002, 2003 and 2004, respectively.
     b. Commissioners and Directors RemunerationRp.366,679 million in 2004, 2005 and 2006, respectively. Interest expense for two-step loan represented 38.5%, 27.6% and 28.5% of total interest expense in 2004, 2005 and 2006, respectively.
      ii. The Company and its subsidiaries 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 Rp.314,741 million, Rp.558,485 million and Rp.497,928 million in 2004, 2005 and 2006, respectively (Note 38), representing 1.6%, 2.3% and 1.7% of total operating expenses for each year. Radio frequency usage charges amounted to Rp.492,568 million, Rp.548,186 million and Rp.722,600 million in 2004, 2005 and 2006, respectively (Note 38), representing 2.5%, 2.2% and 2.4% of total operating expenses in 2004, 2005, 2006, respectively.
      Telkomsel paid the upfront fee for the 3G license amounted to Rp.436,000 million and recognized as an intangible asset (Note 15).
      iii. Starting 2005, the Company and its subsidiaries pay Universal Service Obligation (“USO”) charges to the MoCI of the Republic of Indonesia pursuant to the MoCI Regulation No. 15/PER/ M.KOMINFO/9/2005 of September 30, 2005.
      USO charges amounted to Rp.307,705 million and Rp.383,829 million in 2005 and 2006, respectively (Note 38), representing 1.2% and 1.3% of total operating expenses in 2005 and 2006, respectively.
     b.       i. The CompanyCommissioners and its subsidiaries provide honorarium and facilities to support the operational duties of the Board of Commissioners. The total of such benefits amounted to Rp8,706 million, Rp14,047 million and Rp22,700 million in 2002, 2003 and 2004, respectively, which reflected 0.1%, 0.1% and 0.1% of total operating expenses in 2002, 2003 and 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 Rp35,106 million, Rp45,586 million, and Rp50,327 million in 2002, 2003 and 2004, respectively, which reflected 0.3%, 0.3% and 0.3% of total operating expenses in 2002, 2003 and 2004, respectively.Directors Remuneration
     c. Indosat      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 Rp.22,700 million, Rp.19,707 million and Rp.23,173 million in 2004, 2005 and 2006, respectively, which reflect 0.1% of total operating expenses for each year.
      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 Rp.50,327 million, Rp.52,147 million and Rp.71,526 million in 2004, 2005 and 2006, respectively, which reflected 0.3%, 0.2% and 0.2% of total operating expenses in 2004, 2005 and 2006, respectively.
     c.       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.
      Through December 19, 2002, the Government was the majority and controlling shareholder of Indosat and therefore, Indosat was under the same common control as the Company. Following the sale of the Government’s 41.94% ownership interest in Indosat on December 20, 2002 (Note 30), the Government’s ownership interest in Indosat was reduced to approximately 15%. The Company still considers Indosat as a related party because the Government can exert significant influence over the financial and operating policies of Indosat by virtue of its right to appoint one director and one commissioner of Indosat.
      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.

F-105


PERUSAHAAN PERSEROAN (PERSERO)
P.T. TELEKOMUNIKASI INDONESIA Tbk AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
DECEMBER 31, 2005 AND 2006, AND FOR YEARS ENDED
DECEMBER 31, 2004, 2005 AND 2006
(Figures in tables are presented in millions of Rupiah, unless otherwise stated)
      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 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
      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

F-98


PERUSAHAAN PERSEROAN (PERSERO)
P.T. TELEKOMUNIKASI INDONESIA Tbk AND SUBSIDIARIES      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 each party’s customer to make domestic calls between Indosat’s GSM mobile network and TELKOM’s fixed line network and allowing Indosat’s mobile customer to access TELKOM’s IDD service by dialing “007”.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)      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.
DECEMBER 31, 2003 AND 2004, AND FOR YEARS ENDED      On December 28, 2006, the Company and Indosat signed amendments to the interconnection agreements for the fixed line networks (local, long distance and international) and mobile network for the implementation of the cost-based tariff obligations under the MoCI Regulations No. 8/2006 (Note 50). These amendments took effect on January 1, 2007.
DECEMBER 31, 2002, 2003 AND 2004
(Figures in tables      Telkomsel also entered into an agreement with Indosat for the provision of international telecommunications services to its GSM mobile cellular customers. The principal matters covered by the agreement are presented in millions of Rupiah, unless otherwise stated)as follows:
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.

F-106


PERUSAHAAN PERSEROAN (PERSERO)
P.T. TELEKOMUNIKASI INDONESIA Tbk AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
DECEMBER 31, 2005 AND 2006, AND FOR YEARS ENDED
DECEMBER 31, 2004, 2005 AND 2006
(Figures in tables are presented in millions of Rupiah, unless otherwise stated)
       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.
 
       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.
      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 Rp.800 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 have entered into a new agreement.
      The Company and its subsidiaries were charged net interconnection charges from Indosat of Rp.158,285 million, Rp.52,798 million and Rp.168,295 million in 2004, 2005 and 2006, respectively, representing 0.5%, 0.1% and 0.3% of the total operating revenues in 2004, 2005 and 2006, respectively.
      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 Rp.19,101 million, Rp.19,066 million, Rp.17,669 million in 2004, 2005, and 2006, respectively, representing 0.1% of the total operating expenses in each year.
      Other agreements between Telkomsel and Indosat are as follows:
     i.       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-S Cable System”).
      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 Parties have formed a management committee which consists of a chairman and one representative from each of the Parties 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. Operating and maintenance costs are shared based on an agreed formula.
      Telkomsel’s share in operating and maintenance costs amounted to Rp.2,098 million, Rp.1,187 million and Rp.380 million for the years 2004, 2005 and 2006, respectively.
     ii. Indefeasible Right of Use Agreement
      On September 21, 2000, Telkomsel entered into agreement with Indosat on the use ofSEA — ME — WE 3and 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,

F-99F-107


PERUSAHAAN PERSEROAN (PERSERO)
P.T. TELEKOMUNIKASI INDONESIA Tbk AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
DECEMBER 31, 20032005 AND 2004,2006, AND FOR YEARS ENDED
DECEMBER 31, 2002, 20032004, 2005 AND 20042006
(Figures in tables are presented in millions of Rupiah, unless otherwise stated)
2015 in return for an upfront payment of US$2.7 million. In addition to the upfront payment, Telkomsel is also charged annual operating and maintenance costs amounting to US$0.1 million.
      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 Rp.43,023 million to the Company for the 30 years right. Satelindo paid Rp.17,210 million in 1994 and the remaining Rp.25,813 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 the payment being treated as a lease expense up to 2006. In 2001, Satelindo paid an additional amount of Rp.59,860 million as lease expense up to 2024. As of December 31, 2005 and 2006, the prepaid portion is shown in the consolidated balance sheets as “Advances from customers and suppliers”.
      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.109,814 million, Rp.126,425 million and Rp.164,900 million in 2004, 2005 and 2006, respectively, representing 0.3% of total operating revenues for each year.
      Lintasarta utilizes the Company’s satellite transponders or frequency channels. Revenue earned from these transactions amounted to Rp.14,486 million, Rp.8,125 million and Rp.6,987 million in 2004, 2005 and 2006, respectively, representing less than 0.1% of total operating revenues for each year.
      Telkomsel has an agreement with Lintasarta and PT Artajasa Pembayaran Elektronis (“Artajasa” which 39.8% shares owned by Indosat) for the usage of data communication network system. The charges from Lintasarta and Artajasa for the services amounted to Rp.21,407 million, Rp.23,109 million and Rp.44,208 million in 2004, 2005 and 2006, respectively, representing 0.1% of total operating expenses for each year.
     d. Others
      Transactions with all stated owned enterprises are considered as related parties transactions:
       On October 10, 1996, Telkomsel, Lintasarta, Satelindo and Indosat (the “Parties”) entered into an agreement on(i) The Company provides telecommunication services to substantially all Government agencies in Indonesia which the construction and maintenance oftransaction is treated as well as the J-S Cable System. The Parties have formed a management committee which consists of a chairman and one representative from each of the Parties to direct the construction and operation of the cable system. The construction of the cable system was completed in 1998. In accordancetransaction with the agreement, Telkomsel shared 19.325% of the total construction cost. Operating and maintenance costs are shared based on an agreed formula.third parties customers.
 
       Telkomsel’s share in operating(ii) The Company has entered into agreements with Government agencies and maintenance costsassociated companies, namely CSM, Patrakom and KSO VII (for the years 2004 and 2005, and for the period January — September 2006), for utilization of the Company’s satellite transponders or frequency channels. Revenue earned from these transactions amounted to Rp956Rp.51,046 million, Rp1,393Rp.66,804 million and Rp2,098Rp.87,275 million in 2004, 2005 and 2006, respectively, representing 0.2% of total operating revenues for the years 2002, 2003 and 2004, respectively.each year.
 
       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$2.7 million. In addition to the upfront payment, Telkomsel is also charged annual operating and maintenance costs amounting to US$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.
(iii) The Company provides leased lines to associated companies, namely CSM, Patrakom and its subsidiariesPSN. The leased lines can be used by the associated companies for telephone, telegraph, data, telex, facsimile or other telecommunications services. Revenue earned net interconnection revenues from Indosat (including IM3 and Satelindo) of Rp950,687these transactions amounted to Rp.25,714 million, Rp.30,678 million and Rp235,655Rp.44,368 million in 20022004, 2005 and 2003,2006, respectively, reflecting 4.6% and 0.9%representing 0.1% of the 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 December 31, 2003 and 2004, the prepaid portion is shown in the consolidated balance sheets as “Advances from customers and suppliers.”each year.

F-100F-108


PERUSAHAAN PERSEROAN (PERSERO)
P.T. TELEKOMUNIKASI INDONESIA Tbk AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
DECEMBER 31, 20032005 AND 2004,2006, AND FOR YEARS ENDED
DECEMBER 31, 2002, 20032004, 2005 AND 20042006
(Figures in tables are presented in millions of Rupiah, unless otherwise stated)
      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 Rp43,595 million and Rp109,814 million in 2003 and 2004, respectively, which reflected 0.2% and 0.3% of total operating revenues in 2003 and 2004, respectively.
      Lintasarta 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 usage of data communication network system. The charges from Lintasarta and Artajasa for the services 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.
d. Others
      (i) The Company provides telecommunication services to Government agencies.
      (ii) The Company has entered into agreements with Government agencies and associated companies, namely CSM and Patrakom, for utilization of the Company’s Palapa B4 and Telkom-1 satellite transponders or frequency channels. Revenue earned from these transactions amounted to Rp28,331 million, Rp73,205 million and Rp51,046 million in 2002, 2003 and 2004, respectively, which reflected 0.1%, 0.3% and 0.2% of total operating revenues in 2002, 2003 and 2004, respectively.
      (iii) The Company provides leased lines to associated companies, namely CSM and PSN (2002: including Komselindo, Mobisel 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 Rp75,704 million, Rp44,738 million and Rp25,714 million in 2002, 2003 and 2004, respectively, reflecting 0.4%, 0.2%, and 0.1% of total operating revenues in 2002, 2003 and 2004, respectively.
       (iv) The Company purchases property and equipment including construction and installation services from a number of related parties. These related parties include, among others, 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 and Koperasi Pegawai Telkom.TELKOM. Total purchases made from these related parties amounted to Rp154,808Rp.268,901 million, Rp126,965Rp.337,648 million and Rp268,901Rp.153,541 million in 2002, 20032004, 2005 and 2004,2006, respectively, reflecting 2.1%representing 2.4%, 1.1%,2.5% and 2.4%0.9% of the total fixed asset purchasespurchased in 2002, 20032004, 2005 and 2004,2006, respectively.
 
       (v) PT INTI is also a major contractor and supplier for providingof equipment, including construction and installation services for Telkomsel. Total purchases from PT INTI in 2002, 20032004, 2005 and 20042006 amounted to Rp34,717Rp.217,668 million, Rp52,346Rp.67,555 million and Rp217,668Rp.90,519 million, respectively, reflecting 0.5%representing 1.9%, 0.5% and 1.9%0.5% of the total fixed asset purchasesassets purchased in 2002, 20032004, 2005, and 2004,2006, respectively.
 
       (vi) Telkomsel has an agreement with PSN for the lease of PSN’s transmission link. Based on the agreement, which was made inon 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 Rp40,519Rp.49,710 million, Rp.95,206 million and Rp49,710Rp.131,414 million in 20032004, 2005 and 2004,2006, respectively, reflectingrepresenting 0.3%, 0.4% and 0.2%0.4% of the total operating expenses in 2003 and 2004, respectively.for each year.
 
       (vii) The Company and its subsidiaries carry insurance (onon their property, plant and equipment against property losses, inventory and on employees’ social security)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 Rp131,445Rp.148,279 million, Rp159,517Rp.58,338 million and Rp148,279Rp.105,463 million in 2002, 20032004, 2005 and 2004,2006, respectively, reflecting 1.1%representing 0.8%, 1.1%0.2% and 0.7%0.4% of total operating expenses in 2002, 20032004, 2005 and 2004,2006, respectively.
 
       (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 amounted to Rp3,130,375Rp.3,315,428 million and Rp2,116,038Rp.5,737,676 million as of December 31, 20032005 and 2004,2006, respectively, reflecting 6.2%representing 5.3% and 3.8%7.6% of the total assets as of December 31, 20032005 and 2004,2006, respectively. Interest income recognized during 20032004, 2005 and 2004 was Rp273,9862006 were Rp.150,367 million, Rp.123,951 million and Rp150,367Rp.405,176 million reflecting 74.9%representing 47.3%, 36% and 47.3%62% of total interest income in 20032004, 2005 and 2004,2006, respectively.
 
       (ix) The Company’s subsidiaries have loans from a state-owned bank.banks. Interest expense on the loans for 2004, 2005 and 2006 amounted to Rp9,115Rp.9,115 million, Rp.5,055 million and Rp.86,270 million, respectively, representing 0.7%, 0.4% and 6.7% of the total interest expense in 2004.2004, 2005 and 2006, respectively.
 
       (x) The Company leases buildings, purchases materials and construction services, and utilizes maintenance and cleaning services from Dana Pensiun TelkomTELKOM and PT Sandhy Putra Makmur, a subsidiary of Yayasan Sandikara Putra TelkomTELKOM — a foundation managed by Dharma Wanita Telkom.TELKOM. Total charges from these transactions amounted to Rp14,570Rp.24,921 million, Rp32,785Rp.39,146 million and Rp24,921Rp.79,599 million in 2002, 20032004, 2005 and 2004,2006, respectively, reflectingrepresenting 0.1%, 0.2% and 0.1%0.3% of the total operating expenses in 2002, 20032004, 2005 and 2004,2006, respectively.
 
       (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 Rp1,377 million, Rp7,730 million and nil in 2002, 2003 and 2004, respectively, which reflect 0.01%, 0.05% and 0% of total operating expenses for 2002, 2003 and 2004, respectively.
      (xii) The Company and its subsidiaries earned (were charged for) interconnection revenues (charges) from PSN, (2002: including Komselindo, Metrosel, Mobisel and BBT), with a total of Rp77,984 million, Rp19,035(Rp.5,495 million), Rp.1,072 million and (Rp5,495 million) in 2002, 2003 and 2004, respectively, which reflect 0.4%, 0.1% and (0.02%) of total operating revenues in 2002, 2003 and 2004, respectively.
      (xiii) In addition to revenues earned under the KSO Agreement (Note 49), the Company also earned income from building rental, repairs and maintenance services and training services provided to the KSO Units, amounting to Rp73,679 million, Rp23,147 million and Rp18,449Rp.9,715 million in 2002, 2003 and 2004, respectively, which reflect 0.4%, 0.1% and 0.1% of total operating revenues in 2002, 2003 and 2004, respectively.

F-102F-109


PERUSAHAAN PERSEROAN (PERSERO)
P.T. TELEKOMUNIKASI INDONESIA Tbk AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
DECEMBER 31, 20032005 AND 2004,2006, AND FOR YEARS ENDED
DECEMBER 31, 2002, 20032004, 2005 AND 20042006
(Figures in tables are presented in millions of Rupiah, unless otherwise stated)
       (xiv)2005 and 2006, respectively, representing (0.02%), less than 0.01% and less than 0.02% of the total operating revenues in 2004, 2005 and 2006, respectively.
      (xii) In addition to revenues earned under the KSO Agreement (Note 48), the Company also earned income from building rental, repairs and maintenance services and training services provided to the KSO Units, amounting to Rp.18,449 million, Rp.26,769 million and Rp.14,549 million in 2004, 2005 and 2006, respectively, representing 0.1%, 0.1% and less than 0.1% of the total operating revenues in 2004, 2005 and 2006, respectively.
      (xiii) The Company has a revenue-sharing arrangementarrangements with Koperasi Pegawai TelkomTELKOM (“Kopegtel”). Share of KopegtelKopegtel’s share in the revenues from this arrangementthese arrangements amounted to Rp20,560Rp.20,560 million, Rp.31,909 million and Rp.28,913 million in 2004, 2005 and 2006, respectively, representing 0.1% of the total operating revenues.revenues for each year.
      (xiv) Telkomsel has operating lease agreements with Patrakom and CSM for the usage of their transmission link for a period of 3 years, subject to extensions. The lease charges amounted to Rp.25,032 million, Rp.123,857 million and Rp.192,146 million in 2004, 2005 and 2006, respectively, representing 0.1%, 0.5% and 0.6% of the total operating expenses in 2004, 2005 and 2006, respectively.
 
       (xv) Kisel is a cooperative that was established by Telkomsel’s employees to engage in car rental services, printing and distribution of customer bills, collection and other services principally for the benefit of Telkomsel. For these services, Kisel charged Telkomsel Rp.109,548 million, Rp.78,714 million and Rp.322,851 million in 2004, 2005 and 2006, respectively. Telkomsel also has dealership agreements with Kisel for distribution of SIM cards and pulse reload vouchers. Total SIM cards and pulse reload vouchers which were sold to Kisel amounted to Rp.816,591 million, Rp.1,158,559 million and Rp.1,568,701 million in 2004, 2005 and 2006, respectively.
      (xvi) Infomedia provides electronic media and call center services to KSO Unit VII (for the years 2004 and 2005, and for the period January — September 2006) based on an agreement dated March 4, 2003. Revenue earned from these transactions in 2004, 2005 and 2006 amounted to Rp5,541Rp.5,541 million, reflectingRp.9,221 million and Rp.6,874 million, representing 0.02% 0.02% and 0.01% of total operating revenues.revenues in 2004, 2005 and 2006, respectively.
 
       (xvi)(xvii) 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.
      (xviii) Telkomsel has procurement agreements with PT Graha Informatika Nusantara, a subsidiary of Dana Pensiun TELKOM for installation and maintenance of equipment. Total procurement for installations of equipment amounted to Rp. nil, Rp.127,661 million and Rp.102,982 million in 2004, 2005 and 2006, respectively; and for maintenance of equipment amounted to Rp. nil, Rp.36,486 million and Rp.45,422 million in 2004, 2005 and 2006, respectively.
      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-103F-110


PERUSAHAAN PERSEROAN (PERSERO)
P.T. TELEKOMUNIKASI INDONESIA Tbk AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
DECEMBER 31, 20032005 AND 2004,2006, AND FOR YEARS ENDED
DECEMBER 31, 2002, 20032004, 2005 AND 2006
(Figures in tables are presented in millions of Rupiah, unless otherwise stated)
      Presented below are balances of accounts with related parties:
                  
  2005 2006
     
    % of Total   % of Total
  Amount Assets Amount Assets
         
a. Cash and cash equivalents (Note 6)
  3,058,854   4.92   5,554,384   7.39 
                 
b. Temporary investments
  22,064   0.04   84,492   0.11 
                 
c.  Trade receivables, net (Note 7)
  530,370   0.85   520,689   0.69 
                 
d. Other receivables
                
 KSO Units  93,959   0.15       
 State-owned banks (interest)  8,555   0.01   19,242   0.03 
 Government agencies  421   0.00   716   0.00 
 Other  16,304   0.03   3,133   0.00 
                 
 Total  119,239   0.19   23,091   0.03 
                 
e.  Prepaid expenses (Note 9)
  299,799   0.48   451,845   0.60 
                 
f.  Other current assets (Note 10)
  159,537   0.26   6,822   0.01 
                 
g. Advances and other non-current assets (Note 14)
                
 Bank Mandiri  90,668   0.15   91,862   0.12 
 Peruri  813   0.00   813   0.00 
                 
 Total  91,481   0.15   92,675   0.12 
                 
h. Escrow accounts (Note 16)
  6,369   0.01   116   0.00 
                 
i.  Trade payables (Note 17)
                
 Government agencies  660,166   2.03   828,771   2.13 
 KSO Units  15,281   0.05       
 Indosat  46,372   0.14   71,417   0.18 
 Koperasi Pegawai TELKOM  78,673   0.24   103,758   0.27 
 PSN        62   0.00 
 PT INTI  125,792   0.39   37,820   0.10 
 Others  88,105   0.27   74,668   0.19 
                 
 Total  1,014,389   3.12   1,116,496   2.87 
                 

F-111


PERUSAHAAN PERSEROAN (PERSERO)
P.T. TELEKOMUNIKASI INDONESIA Tbk AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
DECEMBER 31, 2005 AND 2006, AND FOR YEARS ENDED
DECEMBER 31, 2004, 2005 AND 2006
(Figures in tables are presented in millions of Rupiah, unless otherwise stated)
                   
    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 
               
                  
  2005 2006
     
    % of Total   % of Total
  Amount Assets Amount Assets
         
j.  Accrued expenses (Note 18)
                
 Government agencies and state-owned banks  395,791   1.22   93,101   0.24 
 Employees  452,413   1.39   2,239,243   5.76 
 PT Asuransi Jasa Indonesia  2,038   0.01       
 Others  38,442   0.11       
                 
 Total  888,684   2.73   2,332,344   6.00 
                 
k. Short-term bank loans (Note 20)
                
 Bank Mandiri        233,333   0.60 
 Bank BNI  
 
   
 
  200,000
433,333
  0.51
1.11
 
 Total  
5,329,477
   
16.36
   
4,476,613
   
11.51
 
l.  Two-step loans (Note 22)
                
                 
m. Accrued long service awards (Note 44)
  524,524   1.61   596,325   1.53 
                 
n. Accrued post-retirement health care benefits (Note 45)
  3,048,021   9.36   2,945,728   7.58 
                 
o. Long-term bank loans (Note 24)
  14,918   0.05   950,000   2.44 
 Bank Mandiri        300,000   0.77 
 Bank BNI  
 
14,918
   
 
0.05
   
 
1,250,000
   
 
3.21
 
 Total                
                 
48.47.     SEGMENT INFORMATION
      The Company and its subsidiaries have twothree main business segments:segments operated in Indonesia: fixed linewireline, fixed wireless and cellular. The fixed linewireline 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 fixed wireless segment provides CDMA-based telecommunication services which offer customers the ability to use a wireless handset with limited mobility (within a local code area). 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 management believes represent market prices.

F-104F-112


PERUSAHAAN PERSEROAN (PERSERO)
P.T. TELEKOMUNIKASI INDONESIA Tbk AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
DECEMBER 31, 20032005 AND 2004,2006, AND FOR YEARS ENDED
DECEMBER 31, 2002, 20032004, 2005 AND 20042006
(Figures in tables are presented in millions of Rupiah, unless otherwise stated)
                      
 2002                       
   2004
   Total    
 Fixed   Before   Total Fixed Fixed   Total Before   Total
 Line Cellular Other Elimination Elimination Consolidated Wireline Wireless 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   18,860,835  575,436  14,201,786  309,709  33,947,766    33,947,766 
Intersegment operating revenues  155,105  245,970  8,624  409,699  (409,699)   
Inter-segment operating revenues  4,302  (51,083)  534,790  51,063  539,072  (539,072)   
                            
Total operating revenues  13,400,408  7,560,998  251,111  21,212,517  (409,699)  20,802,818 
Total segment revenues  18,865,137  524,353  14,736,576  360,772  34,486,838  (539,072)  33,947,766 
                            
Operating expenses  (8,525,232)  (3,446,755)  (205,835)  (12,177,822)  505,219  (11,672,603)
Segment expenses  (12,207,726)  (789,599)  (6,757,243)  (320,698)  (20,075,266)  715,380  (19,359,886)
                            
Operating income  4,875,176  4,114,243  45,276  9,034,695  95,520  9,130,215 
Segment result  6,657,411  (265,246)  7,979,333  40,074  14,411,572  176,308  14,587,880 
              
Interest expense  (1,405,409)  (177,341)    (1,582,750)    (1,582,750)                    (1,270,136)
Interest income  367,725  102,176  9,901  479,802    479,802                     317,941 
Gain (loss) on foreign exchange-net  554,741  2,311  (439)  556,613    556,613 
Other income (charges) — net  82,327  (27,257)  4,494  59,564  (95,520)  (35,956)
Gain (loss) on foreign exchange — net                    (1,220,760)
Other income (expenses) — net                    331,050 
Tax expense  (1,659,363)  (1,226,958)  (12,650)  (2,898,971)    (2,898,971)                    (4,178,526)
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 
Equity in net income (loss) of associated companies                    3,420 
                      
Income before minority interest  8,077,854  2,787,174  46,582  10,911,610  (2,061,679)  8,849,931                     8,570,869 
Unallocated minority interest            (810,222)                    (1,956,301)
                      
Net income  8,077,854  2,787,174  46,582  10,911,610  (2,061,679)  8,039,709                     6,614,568 
                      
Other information
                                         
Segment assets  34,177,425  11,255,500  310,828  45,743,753  (1,561,340)  44,182,413   34,493,795  3,048,671  18,988,939  414,165  56,945,570  (2,396,426)  54,549,144 
Investments in associates  124,683      124,683    124,683   73,323    9,290    82,613    82,613 
Unallocated corporate assets                    1,547,435 
                      
Total consolidated assets  34,302,108  11,255,500  310,828  45,868,436  (1,561,340)  44,307,096                     56,179,192 
                      
Segment liabilities  (2,821,945)  (86,780)  (1,712,623)  (87,346)  (4,708,694)  987,442  (3,721,252)
Unallocated corporate liabilities                    (29,391,472)
         
Total consolidated liabilities  (24,348,322)  (4,066,412)  (198,756)  (28,613,490)  1,515,810  (27,097,680)                    (33,112,724)
             
Minority interest            (2,595,799)
                      
Capital expenditures  (6,266,859)  (2,730,028)  (35,531)  (9,032,418)    (9,032,418)  (4,340,591)  (1,807,518)  (4,982,744)  (66,691)  (11,197,544)    (11,197,544)
                            
Depreciation and amortization  (2,576,073)  (984,039)  (7,256)  (3,567,368)  4,675  (3,562,693)  (3,568,196)  (229,983)  (2,651,028)  (18,740)  (6,467,947)  14,590  (6,453,357)
                            
Amortization of goodwill and other intangible assets  (187,990)      (187,990)    (187,990)  (851,060)      (21,270)  (872,330)    (872,330)
                            
Other non-cash expenses  106,329  (139,214)  (3,047)  (35,932)    (35,932)  (244,356)    (100,737)  (5,338)  (350,431)    (350,431)
                            
Net cash provided by operating activities  6,237,405  4,557,442  69,626  10,864,473    10,864,473 
             
Net cash used in investing activities  (1,492,286)  (4,531,036)  (26,653)  (6,049,975)    (6,049,975)
             
Net cash used in financing activities  (2,482,408)  (146,819)  (40,989)  (2,670,216)    (2,670,216)
             

F-105F-113


PERUSAHAAN PERSEROAN (PERSERO)
P.T. TELEKOMUNIKASI INDONESIA Tbk AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
DECEMBER 31, 20032005 AND 2004,2006, AND FOR YEARS ENDED
DECEMBER 31, 2002, 20032004, 2005 AND 20042006
(Figures in tables are presented in millions of Rupiah, unless otherwise stated)
                      
 2003                      
   2005
   Total    
 Fixed   Before   Total Fixed Fixed   Total Before   Total
 Line Cellular Other Elimination Elimination Consolidated Wireline Wireless 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   19,637,386  1,449,725  20,384,856  335,217  41,807,184    41,807,184 
Intersegment operating revenues  122,653  337,100  30,824  490,577  (490,577)   
Inter-segment operating revenues  305,382  (167,935)  691,188  70,475  899,110  (899,110)   
                            
Total operating revenues  16,191,149  11,134,655  280,696  27,606,500  (490,577)  27,115,923 
Total segment revenues  19,942,768  1,281,790  21,076,044  405,692  42,706,294  (899,110)  41,807,184 
                            
Operating expenses  (10,596,851)  (4,802,283)  (275,499)  (15,674,633)  534,649  (15,139,984)
Segment expenses  (14,378,819)  (2,174,656)  (8,774,996)  (328,184)  (25,656,655)  1,020,221  (24,636,434)
                            
Operating income  5,594,298  6,332,372  5,197  11,931,867  44,072  11,975,939 
Segment result  5,563,949  (892,866)  12,301,048  77,508  17,049,639  121,111  17,170,750 
              
Interest expense  (1,249,795)  (179,486)    (1,429,281)  45,835  (1,383,446)                    (1,177,268)
Interest income  342,980  60,407  8,472  411,859  (45,835)  366,024                     344,686 
Gain (loss) on foreign exchange — net  198,803  (73,017)  335  126,121    126,121                     (516,807)
Other income (charges) — net  358,191  (10,605)  81,988  429,574  (65,236)  364,338 
Other income (expenses) — net                    409,184 
Tax expense  (1,942,070)  (1,892,821)  (26,199)  (3,861,090)    (3,861,090)                    (5,183,887)
Equity in net income of associated companies  3,313,831      3,313,831  (3,311,012)  2,819 
Equity in net income (loss) of associated companies                    10,879 
                      
Income before minority interest  6,616,238  4,236,850  69,793  10,922,881  (3,332,176)  7,590,705                     11,057,537 
Unallocated minority interest            (1,503,478)                    (3,063,971)
                      
Net income  6,616,238  4,236,850  69,793  10,922,881  (3,332,176)  6,087,227                     7,993,566 
                      
Other information
                                         
Segment assets  46,884,985  15,386,289  317,398  62,588,672  (12,370,071)  50,218,601   33,980,509  3,617,374  25,444,587  455,644  63,498,114  (2,260,681)  61,237,433 
Investments in associates  64,648      64,648    64,648   92,110    9,290    101,400    101,400 
Unallocated corporate assets              832,211 
                      
Total consolidated assets  46,949,633  15,386,289  317,398  62,653,320  (12,370,071)  50,283,249                     62,171,044 
                      
Segment liabilities  (2,890,445)  (459,284)  (2,547,874)  (111,620)  (6,009,223)  886,435  (5,122,788)
Unallocated corporate liabilities              (27,450,662)
         
Total consolidated liabilities  (28,020,867)  (5,075,222)  (166,119)  (33,262,208)  3,999,991  (29,262,217)                    (32,573,450)
             
Minority interest            (3,708,155)
                      
Capital expenditures  (5,698,401)  (5,348,783)  (61,672)  (11,108,856)    (11,108,856)  (2,037,866)  (1,388,876)  (10,085,755)  (40,460)  (13,552,957)    (13,552,957)
                            
Depreciation and amortization  (3,126,223)  (1,680,554)  (9,824)  (4,816,601)  11,916  (4,804,685)  (4,006,246)  (537,284)  (3,046,632)  (23,322)  (7,613,484)  11,919  (7,601,565)
                            
Write-down of assets and loss on procurement commitments    (696,127)      (696,127)    (696,127)
               
Amortization of goodwill and other intangible assets  (730,659)      (730,659)    (730,659)  (896,883)      (21,270)  (918,153)    (918,153)
                            
Other non-cash expenses  (210,646)  (113,904)  (4,308)  (328,858)    (328,858)  (292,357)  (21,582)  (171,192)  (4,783)  (489,914)    (489,914)
                            
Net cash provided by operating activities  6,028,485  6,753,253  70,794  12,852,532    12,852,532 
             
Net cash used in investing activities  (1,955,079)  (5,310,509)  (40,274)  (7,305,862)    (7,305,862)
             
Net cash used in financing activities  (5,425,189)  (727,880)  (24,347)  (6,177,416)    (6,177,416)
             

F-106F-114


PERUSAHAAN PERSEROAN (PERSERO)
P.T. TELEKOMUNIKASI INDONESIA Tbk AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
DECEMBER 31, 20032005 AND 2004,2006, AND FOR YEARS ENDED
DECEMBER 31, 2002, 20032004, 2005 AND 20042006
(Figures in tables are presented in millions of Rupiah, unless otherwise stated)
                   
 2004                      
   2006
   Total    
 Fixed   Before   Total Fixed Fixed   Total Before   Total
 Line Cellular Other Elimination Elimination Consolidated Wireline Wireless Cellular Other Elimination Elimination Consolidated
                          
Segment results
                                         
Operating revenues                   
External operating revenues  19,436,271  14,201,786  309,709  33,947,766    33,947,766   20,137,847  2,806,204  28,205,052  144,905  51,294,008    51,294,008 
Intersegment operating revenues  (46,781)  534,790  51,063  539,072  (539,072)   
Inter-segment operating revenues  514,589  (253,397)  863,268  333,849  1,458,309  (1,458,309)   
                            
Total operating revenues  19,389,490  14,736,576  360,772  34,486,838  (539,072)  33,947,766 
Total segment revenues  20,652,436  2,552,807  29,068,320  478,754  52,752,317  (1,458,309)  51,294,008 
                            
Operating expenses  (13,658,138)  (6,757,243)  (320,698)  (20,736,079)  715,380  (20,020,699)
Segment expenses  (16,257,545)  (1,815,803)  (12,839,526)  (384,263)  (31,297,137)  1,596,370  (29,700,767)
                            
Operating income  5,731,352  7,979,333  40,074  13,750,759  176,308  13,927,067 
Segment result  4,394,891  737,004  16,228,794  94,491  21,455,180  138,061  21,593,241 
              
Interest expense  (1,224,079)  (142,632)  (38)  (1,366,749)  96,613  (1,270,136)                    (1,286,354)
Interest income  289,322  121,744  3,488  414,554  (96,613)  317,941                     654,984 
Gain (loss) on foreign exchange — net  (1,158,577)  (62,029)  (154)  (1,220,760)    (1,220,760)                    836,328 
Other income (charges) — net  449,556  (39,122)  96,924  507,358  (176,308)  331,050 
Other income (expenses) — net                    202,025 
Tax expense  (1,583,477)  (2,384,314)  (35,281)  (4,003,072)    (4,003,072)                    (7,039,927)
Equity in net income of associated companies  3,939,944      3,939,944  (3,936,524)  3,420 
Equity in net income (loss) of associated companies                    (6,619)
                      
Income before minority interest  6,444,041  5,472,980  105,013  12,022,034  (3,936,524)  8,085,510                     14,953,678 
Unallocated minority interest            (1,956,301)                    (3,948,101)
                      
Net income  6,444,041  5,472,980  105,013  12,022,034  (3,936,524)  6,129,209                     11,005,577 
                      
Other information
                                         
Segment assets  38,902,911  19,548,267  402,965  58,854,143  (2,667,664)  56,186,479   33,406,552  5,856,074  37,280,255  575,823  77,118,704  (2,072,156)  75,046,548 
Investments in associates  10,705,711  9,290    10,715,001  (10,632,388)  82,613   79,907    9,290    89,197    89,197 
                      
Total consolidated assets  49,608,622  19,557,557  402,965  69,569,144  (13,300,052)  56,269,092                     75,135,745 
                      
Total consolidated liabilities  (27,853,851)  (5,680,160)  (202,971)  (33,736,982)  2,667,664  (31,069,318)  (26,270,257)  (1,714,144)  (12,688,285)  (284,995)  (40,957,681)  2,077,712  (38,879,969)
                      
Minority interest            (4,938,432)
             
Capital expenditures  (6,148,109)  (4,982,744)  (66,691)  (11,197,544)    (11,197,544)  (1,822,867)  (338,795)  (14,838,596)  (90,769)  (17,091,027)    (17,091,027)
                            
Depreciation and amortization  (3,798,179)  (2,651,028)  (18,740)  (6,467,947)  14,590  (6,453,357)  (4,290,872)  (452,766)  (4,427,771)  (34,536)  (9,205,945)  9,916  (9,196,029)
                            
Amortization of goodwill and other intangible assets  (872,330)      (872,330)    (872,330)  (932,724)    (11,679)    (944,403)    (944,403)
                            
Other non-cash expenses  (244,356)  (100,737)  (5,338)  (350,431)    (350,431)  (325,055)    (127,521)  (5,676)  (458,252)    (458,252)
                            
Net cash provided by operating activities  7,184,330  8,786,290  80,860  16,051,480    16,051,480 
             
Net cash used in investing activities  (4,065,668)  (5,469,715)  (62,730)  (9,598,113)    (9,598,113)
             
Net cash used in financing activities  (4,693,034)  (2,181,181)  (30,650)  (6,904,865)    (6,904,865)
             

F-107


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)
49.48.     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.
      UnderFollowing the Joint Operation Scheme, theIndonesian economics crisis that began in mid-1997, certain 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.
      At the end of the KSO period, all rights, title and interests of the KSO Investorinvestors experienced difficulties 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:
      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 June 5, 1998, all KSO Investors and the Company signed a Memorandum of Understanding (“MoU”) to amend certain provisions offulfilling their commitment under the KSO agreements. Among the amendments are as follows:As remedial measures instituted by
      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.

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PERUSAHAAN PERSEROAN (PERSERO)
P.T. TELEKOMUNIKASI INDONESIA Tbk AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
DECEMBER 31, 20032005 AND 2004,2006, AND FOR YEARS ENDED
DECEMBER 31, 2002, 20032004, 2005 AND 20042006
(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,both the Company and those KSO investors did not fully remedy this situation, the Company acquired those KSO Investors had begun to renegotiateinvestors (Dayamitra in 2001, Pramindo in 2002 and AWI in 2003 — Note 5a, 5b, 5c) and currently controls the termsrelated KSOs through its ownership of such KSO investors. The Company acquired full operational control of the KSO agreementsIV operation in conjunction withJanuary 2004 (Note 5d) and KSO VII operations in October 2006 (Note 5e). Accordingly, the changing environmentrevenue sharing percentage in those KSOs is no longer relevant as the financial statements of the acquired KSO investors and the expirationrelated KSOs are consolidated into the Company’s financial statements since the date 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 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 4c).
KSO IV
      Effective on January 20, 2004, the Company and PT Mitra Global Telekomunikasi Indonesia (“MGTI”, KSO Investor) have amended their joint operation agreement with respect to the KSO area. Upon the amendment, the Company gained full control over the operation of KSO Unit IV (Note 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. On December 14, 2004, the Company acquired the remaining 9.68% outstanding shares of Dayamitra (Note 4a).
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, 2002, 2003 and 2004 were Rp3,586,000 million, Rp2,769,530 million and Rp1,250,945 million, respectively.

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PERUSAHAAN PERSEROAN (PERSERO)acquisition.
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)
50.49.     REVENUE-SHARING ARRANGEMENTS
      The Company has entered into separate agreements with several investors under Revenue-Sharing Arrangements (“RSA”) to develop fixed lines, public card-phone booths (including their maintenance), data and internet network and related supporting telecommunications facilities.
      As of December 31, 2004,2006, the Company has 7690 RSA with 5967 partners. The RSA wereare located mostlymainly in Palembang, Pekanbaru, Jakarta, CentralEast Java, Kalimantan, Makassar, Pare-pare, Manado, Denpasar, Mataram and SurabayaKupang with concession periodperiods ranging from 424 to 176 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-sharingRSA periods. At the end of each revenue-sharingthe RSA period, the investors transfer the ownership of the facilities to the Company.Company at a nominal price.
      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.
      The net book value of property, plant and equipment under RSA which have been transferred to property, plant and equipment amounted to Rp34,828Rp.55,441 million and Rp53,589Rp.14,662 million in 2003on December 31, 2005 and 2004,2006, respectively (Note 12)13).
      The investors’ share of revenues amounted to Rp636,985Rp.891,165 million, Rp442,633Rp.513,528 million and Rp891,165Rp.413,263 million in 2002, 20032004, 2005 and 2004,2006, respectively.
51.50.     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
      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 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.

F-116


PERUSAHAAN PERSEROAN (PERSERO)
P.T. TELEKOMUNIKASI INDONESIA Tbk AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
DECEMBER 31, 2005 AND 2006, AND FOR YEARS ENDED
DECEMBER 31, 2004, 2005 AND 2006
(Figures in tables are presented in millions of Rupiah, unless otherwise stated)
      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.

F-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 The implementation of the planned increase in tables are presented in millions of Rupiah, unless otherwise stated)
      Considering the fact that the Independent Regulatory Body, a precondition for the tariff adjustment, had not been established,in 2003, however, was postponed by the Minister of Communications postponed the implementation of tariffs adjustments for 2003 by issuing Ministerial Letterthrough 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%
 
 • DLDDirect long distance charges decreased by an average of 10%
 
 • Monthly subscription charges increased by an average of 12% to 25%, depending on customercustomer’s segment.
Mobile Cellular      For the subsequent tariff establishment, the Government has issued initial tariff formula and adjustment tariff which are stipulated in Minister Decree No. 09/Per/ M.KOMINFO/02/2006 concerning Procedure for Initial Tariff Establishment and Tariff Change for Basic Telephone TariffsService Through Fixed Line dated February 8, 2006, replacing Minister of Communications Decree No. KM. 12 year 2002 on January 29, 2002 regarding the addendum of the decree of Minister of Tourism, Post and Telecommunication (“MTPT”) No. 79 year 1995 concerning Method for Basic Tariff Adjustment on Domestic Fixed Line Telecommunication Services.
Mobile Cellular Telephone Tariffs
      Tariffs for cellular providers are set on the basis of the MTPT Decree No. 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 Rp200,000Rp.200,000 per new subscriber number. The maximum tariff for the monthly charges is Rp65,000.Rp.65,000. Usage charges consist of the following:
      a. Air time
     a. Airtime
      The maximum basic airtime tariff charged to the originating cellular subscriber is Rp325/Rp.325/minute. Charges to the originating cellular subscriber are calculated as follows:
   
1. Cellular to cellular 2 times airtime rate
2. Cellular to PSTN 1 timestime airtime rate
3. PSTN to cellular 1 timestime airtime rate
4. Card phone to cellular 1 timestime airtime rate plus 41% surchargessurcharge

F-117


      b. Usage TariffsPERUSAHAAN PERSEROAN (PERSERO)
P.T. TELEKOMUNIKASI INDONESIA Tbk AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
DECEMBER 31, 2005 AND 2006, AND FOR YEARS ENDED
DECEMBER 31, 2004, 2005 AND 2006
(Figures in tables are presented in millions of Rupiah, unless otherwise stated)
     b. Usage tariffs
       1. Usage local 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 per minute 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-paidpostpaid subscribers.
Interconnection Tariffs      Based on the Announcement No. PM.2 year 2004 of the Minister of Communications dated March 30, 2004, Telkomsel adjusted its tariffs by eliminating the tariff subsidy from long-distance calls. This resulted in a 9% tariff increase.
      For the subsequent tariff setting, the Government has issued calculation formula for tariff change on basic telephone service through mobile cellular network which is stipulated in Minister Decree No. 12/ Per/ M.KOMINFO/02/2006 concerning Procedure for Tariff Change Establishment for Basic Telephone Service Through Mobile Cellular Network dated February 28, 2006, replacing Minister of Communications Decree No. KM.12 year 2002 on January 29, 2002 regarding the addendum of the decree of Minister of Tourism, Post and Telecommunication No. KM.27/ PR.301/ MPPT-98 date February 23, 1998 concerning Mobile Cellular Telephone Line Tariff.
      Due to the commencing of Minister Decree No. 12/Per/ M.KOMINFO/02/2006 concerning the interconnection charges thereby implemented after Minister Decree No. 08/Per/ M.KOMINFO/02/2006 concerning Interconnection.
Interconnection Tariffs
      The Government establishes the percentage of tariffs regulateto 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 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 betweenbased on the costs of carrying such calls. On March 11, 2004, the MoCI issued Decree No. 32/2004, which stated that cost-based interconnection fees shall be applicable beginning January 1, 2005. The effective date of this decree was subsequently postponed until January 1, 2007 based on the Ministry Regulation No. 08/ Per/ M.KOMINF/02/2006 dated February 8, 2006. On December 28, 2006 the Company and other licensed operators.all network operators signed amendments to their interconnection agreements for its fixed line networks (local, domestic long distance and international) and mobile network for the implementation of the cost-based tariff obligations under the MoCI Regulations No. 08/ Per/ M.KOMINFO/02/2006. These amendments took effect on January 1, 2007.
     i. Interconnection with Fixed line Network
      The Government’s National Fundamental Technical Plan set forth in Decree No. KM.4/2001, as amended by Decree No. KM.28/2004, sets out the technical requirements, routing plans and numbering plans

F-111F-118


PERUSAHAAN PERSEROAN (PERSERO)
P.T. TELEKOMUNIKASI INDONESIA Tbk AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
DECEMBER 31, 20032005 AND 2004,2006, AND FOR YEARS ENDED
DECEMBER 31, 2002, 20032004, 2005 AND 20042006
(Figures in tables are presented in millions of Rupiah, unless otherwise stated)
      The currentfor interconnection of the networks of various telecommunications operators among themselves and with the Company’s fixed line network. Under the National Fundamental Technical Plan, all operators are permitted to interconnect with the Company’s fixed 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 the Company’s fixed line network. Currently, the fees for interconnection are set forth in Decree No. KU.506/1997, Decree No. KM.46/1998, Decree No. KM.37/1999 and Decree No. KM.30/2000.
Fixed line Interconnection with Indosat. Currently, the fixed line interconnection between the Company and Indosat is generally based on their agreement signed in 2005. Pursuant to the agreement between the Company and Indosat, for interconnection of local and domestic long-distance calls, the operator of the network on which the calls terminate receives an agreed amount per minute.
Other Fixed Wireline Interconnection. Since September 1, 1998, the Company 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 the Company’s fixed line network. Under the interconnection agreement, for local interconnection calls, revenues are shared on a “sender keeps all” basis. For local calls originating on BBT’s network terminating on a cellular network and vice versa which transit through the Company’s fixed line network, the Company receives an agreed percentage of the prevailing tariff for local calls. For interconnection of domestic long-distance calls, the operator of the network on which the calls terminate or transit receives an agreed percentage of the prevailing long-distance tariff. In addition, BBT is to receive a certain fixed amount for each minute of incoming and outgoing international calls, from and to BBT that transit through the Company’s fixed line network and use the Company’s IDD service and 50% of the prevailing interconnection tariff for incoming and outgoing international calls that transit through the Company’s fixed line network and use Indosat’s IDD service.
Other Fixed Wireless Interconnection. Fixed wireless networks may interconnect with the Company’s fixed line network at the Company’s gateway. At present, other than the Company and Indosat, PT Bakrie Telecom (“BT”) also operates a fixed wireless network in Indonesia. The fixed wireless interconnection between the Company and BT is governed under MTPT Decree No. KM.46/PR.301/MPPT-98 (“KM. 46 year 1998”) dated February 27, 1998currently based on the most recent interconnection agreement signed in 2005. Pursuant to the agreement, for interconnection of local calls, the operator of the network on which came into effectthe calls terminate receives an agreed amount per minute. For local calls originating on April 1, 1998BT’s network terminating on a cellular network and was further revised byvice versa which transit through the MinisterCompany’s fixed line network, the Company receives an agreed percentage of Communications Decree No. KM. 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:
Tariff
(in full Rupiah)
Access chargeRp850 per call
Usage chargeRp550 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 Callsthe prevailing tariff for local calls. For domestic long-distance calls that originate on the Company’s fixed line network and terminate on BT’s network, BT receives an agreed amount per minute. In the reverse situation and for transit long-distance calls through the Company’s fixed line network, the Company receives an agreed percentage of the prevailing long-distance tariff. In addition, BT is to receive a certain fixed amount for each minute of incoming and outgoing international calls to and from BT that transit through the Company’s fixed line network and use the Company’s IDD service and 25% of prevailing interconnection tariff of incoming and outgoing international calls that transit through the Company’s fixed line network and use Indosat’s IDD service.
     ii.       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.Cellular Interconnection
      2. Domestic Long-distance CallsIn respect of local interconnection calls, including transit calls, between a cellular network and the Company’s fixed line network, the Company receives 50% of the prevailing fixed-line usage tariff for local pulse. For local calls from the Company’s fixed line network to a cellular network, the Company charges its
      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 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 Tariffs by Garuda Satellite dated March 29, 2000. Flat interconnection tariffs per minute apply for those companies.

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PERUSAHAAN PERSEROAN (PERSERO)
P.T. TELEKOMUNIKASI INDONESIA Tbk AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
DECEMBER 31, 20032005 AND 2004,2006, AND FOR YEARS ENDED
DECEMBER 31, 2002, 20032004, 2005 AND 20042006
(Figures in tables are presented in millions of Rupiah, unless otherwise stated)
subscribers the applicable local call tariff plus an airtime charge, and pays the cellular operator the airtime charge. For local calls between cellular telecommunications networks, the originating cellular operator pays the terminating cellular operator the airtime charges.
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. LocalThe 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 long-distance calls which originate on the Company’s fixed line network, the Company is entitled to retain a portion of the prevailing long-distance tariff, which ranges from 40% of the tariff in cases where the entire long-distance portion is carried by a cellular operator up to 85% of the tariff in cases where the entire long-distance portion is carried by the Company’s fixed line network. For long-distance calls that originate from a cellular subscriber, the Company is entitled to retain a portion of the prevailing long-distance tariff, which ranges from 25% of the tariff in cases where the call originates from a cellular subscriber, transits the Company’s fixed line network and terminates on another cellular subscriber with the entire long-distance portion carried by a cellular operator, up to 85% of the tariff in cases where the entire long-distance portion is carried by the Company’s fixed line network and terminates on the Company’s fixed line network.
     iii. International Interconnection
      Interconnection on the Company’s domestic fixed line network for international calls consists of access charges and usage charges. 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 the Company’s domestic fixed line network and Telkomsel’s cellular network, pursuant to Ministerial Decree No. KM.37 of 1999:
  Local interconnection calls with the network of Bakrie and BBT are operated on a “sender-keeps-all” basis.
DescriptionTariff
  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.
 
Access charge For local interconnection calls with Indosat’s network, the operator of the network on which the calls terminate receives Rp57/minute.Rp.850/ successful call
Usage chargeRp.550/ successful paid minute
      2. Long-distanceIn addition, since June 2004, the Company has provided IDD services. Currently, the Company’s IDD service can be accessed by subscribers of all telecommunication operators in Indonesia. Interconnection and access charges for originating calls using the Company’s IDD service or terminating incoming international calls routed through the Company’s international voice telecommunications gateway are negotiated with each respective domestic operator.
     iv.       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.Satellite Phone Interconnection
      Since the fourth quarter of 2001, the Company 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 calls between the Company and PSN, the Company receives Rp.800 per minute for network charges and an additional Rp.300 per minute origination fee if the call originates from the Company’s fixed line network.
     v.       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.VoIP Interconnection
      Based on thePreviously, Minister of Communications Decree No. 32 year 2004 datedKM.23/2002 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 March 11, 2004, and the announcement No. PM. 2 year 2004 of the Minister of Communications dated March 30, issued Decree No. 31/2004, cost-basedwhich stated that interconnection fees shallcharges for VoIP are to be applicable beginning January 1, 2005. However asfixed by the Minister 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.Communications. Currently,

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PERUSAHAAN PERSEROAN (PERSERO)
P.T. TELEKOMUNIKASI INDONESIA Tbk AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
DECEMBER 31, 20032005 AND 2004,2006, AND FOR YEARS ENDED
DECEMBER 31, 2002, 20032004, 2005 AND 20042006
(Figures in tables are presented in millions of Rupiah, unless otherwise stated)
the Minister of Communications has not yet determined what the new VoIP interconnection charges will be. Until such time as the new charges are fixed, the Company will continue to receive connection fees for calls that originate or terminate on the Company’s fixed line network at agreed fixed amount per minute.
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. It also provides that the airtime from the cellular operators shall generate at a minimum 10% of the kiosk phones’ revenue.
      The Government issued Ministry Regulation No. PM.05/ Per/ M.KOMINFO/ I/2006 dated January 30, 2006 about Public Phone Kiosk Operation which replace the Minister of Communications Decree No. KM.46 year 2002. There are no tariff differences between both decrees. This regulation is effective upon its issuance date.
Tariff for Other Services
      The tariffs for satellite rental, and other telephony and multimedia services are determined by the service provider by taking into account the expenditures and market price. The Government only determines the tariff formula for basic telephony services. There is no stipulation for the tariff of other services.
Universal Service Obligation (“USO”)
      On September 30, 2005, the MoCI issued Regulation No. 15/ PER/ M.KOMINFO/9/2005, 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.
52.51.     COMMITMENTS
     a. a. Capital Expenditures
      As of December 31, 2004,2006, 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          
 Foreign Currencies Equivalent Amounts in  
Currencies (in millions) in Rupiah Foreign Currencies Equivalent
        
 (in millions) in Rupiah
Rupiah     2,293,478     6,484,482 
U.S. Dollar  155  1,443,474   504  4,554,896 
Euro  86  1,085,577   130  1,546,220 
Japanese Yen  202  18,307 
         
Total     4,840,836      12,585,598 
         
      The above balance includes the following significant agreements:
(i) Procurement Agreements
      In September 2001, Telkomsel entered into procurement agreements with Motorola, Inc., PT Ericsson Indonesia, Siemens AG, Nokia Corporation (formerly Nokia Oyj) and PT Nokia Network, for the procurement of equipment and related services. In accordance with the agreements, 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.

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PERUSAHAAN PERSEROAN (PERSERO)
P.T. TELEKOMUNIKASI INDONESIA Tbk AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
DECEMBER 31, 20032005 AND 2004,2006, AND FOR YEARS ENDED
DECEMBER 31, 2002, 20032004, 2005 AND 20042006
(Figures in tables are presented in millions of Rupiah, unless otherwise stated)
      The above balance includes the following significant agreements:
     (i) Procurement Agreements
In August 2004, pursuant to the expiration of the above agreements, to maintain a sustainable growth, Telkomsel entered into the following agreements with Motorola Inc.Inc and PT Motorola Indonesia, Ericsson AB and PT Ericsson Indonesia, Nokia Corporation and PT Nokia Network, and Siemens AG, for the maintenance and procurement of equipment and related services, which consist of the following:involving:
 • 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 listlists 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 confirmedupon the issuance of 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 each PO. In the event that the suppliers fail to meet those requirements, with a prior written notice, Telkomsel may terminate the agreements at its sole discretion.discretion with a prior written notice.
      In accordance with the agreements, the parties also agreed that the charges specified in the Price List will alsoprice list would apply to equipment and services (ESA and TSA) and services (SITAC and CME) acquired from the suppliers between May 26, 2004 and the Effective Date (“Pre-Effective Date Pricing”),effective date, except for those acquired from Siemens under TSA which are applicable for certainrelating to equipment and the related maintenance servicesof Telkomsel’s Switching Sub System (“SSS”) and Base Station Subsystem (“BSS”) that were acquired or rendered between July 1, 2004 and Effective Date.the effective date. Prices as well as discount are subject to a quarterly review.
      Subsequently, for the purpose of providing telecommunications services with 3G technology, in September and October 2006, Telkomsel entered into agreements with Nokia Corporation and PT Nokia Network, Ericsson AB and PT Ericsson Indonesia, and Siemens Network GmbH and Co.KG, for network construction (Roll-out Agreement) and PT Nokia Network, Ericsson Indonesia; and Siemens Network GmbH and Co.KG for network operations and maintenance (Managed Operations Agreement and Technical Support Agreement). The agreements are valid and effective as of the execution date by the respective parties (the effective date) until the later of December 31, 2008 and the date on which the last PO terminates under the agreement or expires in respect of any PO issued prior to December 31, 2008 providing that the supplier are able to meet requirements set out in each PO.
     (ii) (ii) Procurement of TELKOM-2 SatelliteMetro Junction and Optical Network Access Agreement for Regional Division III with PT INTI
      The Company has TELKOM-2 Satellite procurement agreement with Orbital Sciences Corporation (the “Contractor”) with a total price of US$73.1 million. As of December 31, 2004, the Company has paid US$70.5 million and the remaining balance is expected to be paid 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 September 2004. The launch of TELKOM-2 Satellite, which was previously scheduled between November 1, 2004 and January 31, 2005, is currently expected to be in 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 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 802,000 lines of BSS for Regional Divisions 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 (Note 24i). As of December 31, 2004, the Company has paid and/or accrued a total of US$136.3 million plus Rp162,238 million.
     (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, 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). As of December 31, 2004, the Company has paid and/or accrued a total of US$70.7 million plus Rp140,952 million.
     (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 CAT will contribute equally to a payment of US$32.7 million (inclusive of value-added tax). As of December 31, 2004 the Company has paid approximately 90% of the contract price and the remaining 10% was paid in January 2005.
     (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$32.3 million and Rp105,868 million (inclusive of value-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$2.3 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
      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”.

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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$43.2 million and Rp167,111 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 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
      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$4.2 million plus Rp79,144 million for the network located within Kalimantan and approximately US$3.4 million plus Rp78,566 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
      On November 12, 2003 which then amended on November 27, 2006, 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 tofor Regional Division III (West Java). Under this agreement and its amendment, the Company is obliged amounting to pay PT INTI a total consideration of approximately US$6.63.2 million and Rp111,655Rp.130,293 million. As of December 31, 2004, the Company has paid and/or accrued a2006, total of US$2.9 million plus Rp59,018purchase commitment amounting Rp.58,575 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 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 value 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 and 2004, Telkomsel entered into forward foreign exchange contracts with Deutsche Bank, Standard Chartered Bank and Citibank Jakarta to protect against foreign exchange risk 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.

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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 aggregate notional amounts of the Company’s foreign exchange forwards entered into in 2003 and 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 forward contracts with Standard Chartered Bank, which were made in 2003, had been closed and the outstanding contract with Deutsche Bank amounted to EUR1 million.
      As of December 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 December 20, 2004, the Company entered into a revolving loan agreement with HSBC for a maximum facility of Rp500,000 million. The facility will be available for withdrawal until January 20, 2005 and any amount drawn down under this facility is payable within 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 3, 2004, Telkomsel entered into a Loan Agreement with Deutsche 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 be paid quarterly in arrears. The facility is available during the period commencing on the date of 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

F-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 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 Rp99 million at December 31, 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 sought to recover approximately Rp7,840,000 million in damages from the Defendants. The court decided in the Defendant’s 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.
      d. On August 13, 2004, the Commissions for Business Competition Watch (Komisi Pengawas Persaingan Usaha, “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.

F-120


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)
54. ASSETS AND LIABILITIES DENOMINATED IN FOREIGN CURRENCIES
      The balances of monetary assets and liabilities denominated in foreign currencies are as follows:
                  
  2003 2004
     
  Foreign   Foreign  
  Currencies Rupiah Currencies Rupiah
  (in millions) Equivalent (in millions) Equivalent
         
Assets                
Cash and cash equivalents                
 U.S. Dollar  123.54   1,043,400   74.80   694,116 
 Euro  39.58   421,288   88.10   1,114,704 
 Japanese Yen  0.45   35   0.98   89 
Trade accounts receivable                
 Related parties U.S. Dollar  9.22   77,925   3.92   36,375 
 Third parties U.S. Dollar  4.11   34,634   16.19   150,223 
Other accounts receivable                
 U.S. Dollar  12.61   106,258   1.12   10,355 
 Japanese Yen  5.44   429       
 French Franc  4.81   5,447       
 Netherland Guilder  0.81   2,745       
 Euro  0.02   224       
Other current assets                
 U.S. Dollar  4.66   39,269   4.61   42,792 
 Euro        0.01   157 
Advances and other non-current assets                
 U.S. Dollar  1.91   16,283   6.90   64,056 
Escrow accounts                
 U.S. Dollar  61.30   516,128   3.24   30,059 
             
Total Assets      2,264,065       2,142,926 
             

F-121


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   Foreign  
  Currencies Rupiah Currencies Rupiah
  (in millions) Equivalent (in millions) Equivalent
         
Liabilities                
Trade accounts payable                
 Related parties                
  U.S. Dollar  13.87   117,281   19.13   177,892 
  Euro  2.72   28,947       
  Myanmar        0.01   20 
  Singapore Dollar           1 
 Third parties                
  U.S. Dollar  92.68   783,127   49.57   460,969 
  Euro  0.05   516       
  Great Britain Pound Sterling  0.06   916   0.06   1,092 
  Japanese Yen  126.93   10,033   7.88   715 
  Singapore Dollar  0.14   717   0.03   146 
Accrued expenses                
  U.S. Dollar  28.95   244,925   24.08   223,931 
  Japanese Yen  14.14   1,117   20.41   1,852 
  Singapore Dollar  0.19   940   0.37   2,135 
  Australian Dollar        0.07   507 
  Great Britain Pound Sterling  0.05   689       
  Netherland Guilder  0.48   1,631   0.48   1,795 
  Euro  40.77   433,963   26.54   336,572 
Short-term bank loans                
 Third parties                
  U.S. Dollar  4.46   37,642   118.46   1,101,633 
Advances from customers and suppliers            
 U.S. Dollar  3.04   25,701   0.42   3,947 
 Great Britain Pound Sterling     7       
 Japanese Yen  23.94   1,892       
Current maturities of long-term liabilities            
 U.S. Dollar  332.92   2,813,246   116.29   1,081,478 
 Euro  18.67   198,810   14.64   185,643 
 Japanese Yen  699.16   55,266   1,142.91   103,688 
Long-term liabilities                
 U.S. Dollar  699.61   5,913,824   830.22   7,721,068 
 Euro  64.98   691,850   36.60   464,108 
 Japanese Yen  16,730.30   1,322,460   15,527.59   1,408,708 
             
Total liabilities      12,685,500       13,277,900 
             
Net liabilities      (10,421,435)      (11,134,974)
             
55. SUBSEQUENT EVENT
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-122


PERUSAHAAN PERSEROAN (PERSERO)
P.T. TELEKOMUNIKASI INDONESIA Tbk AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
DECEMBER 31, 20032005 AND 2004,2006, AND FOR YEARS ENDED
DECEMBER 31, 2002, 20032004, 2005 AND 20042006
(Figures in tables are presented in millions of Rupiah, unless otherwise stated)
interested and eligible employees. As of March 15,
     (iii) Ring JASUKA Backbone with NEC-Siemens Consortium
      On June 10, 2005, the Company entered into an agreement with NEC-Siemens Consortium for the procurement and installation of an optical cable transmission of RING I (link Jakarta — Tanjung Pandan — Pontianak — Batam — Dumai — Pekanbaru — Palembang — Jakarta) and RING II (link Medan — Padang — Pekanbaru — Medan). The agreement has acceptedbeen amended several times and the total contract based on the latest amendment dated 7 February 2007 amounting to US$45 million and Rp.156,855 million. This agreement is based on a turnkey arrangement. As of December 31, 2006, total purchase commitment amounting Rp.2,444 million.
     (iv) Expansion NSS, BSS and PDN FWA CDMA System Project in Regional Division I and IV with Huawei Consortium
      On January 6, 2006, the Company entered into a Partnership Agreement with Huawei Consortium for FWA CDMA expansion Project NSS, BSS and PDN system in Regional Division I and IV amounting to US$27.7 million and Rp.150,234 million for period 3 years (2006-2008) with option of 2 years extension(2009-2010) amounting to US$12.3 million and Rp.39,972 million. Huawei consortium will provide service and maintenance support that it constructs, pursuant to a Service Level Agreement, for period of 3 years (2006-2008) in return for a consideration of Rp.10,450 million. As of December 31, 2006, total purchase commitment amounting US$40 million and Rp.190,206 million.
     (v) CDMA 2000 IX in Regional Division V with PT Samsung Telecommunication Indonesia
      On June 8, 2006, which was amended on August 1, 2006 and later on December 18, 2006, the Company entered into an agreement with PT Samsung Telecommunication Indonesia for Procurement and Installation of CDMA 2000 IX in Regional Division V (East Java) amounting to US$8.4 million plus Rp.12,008 million. As of December 31, 2006, total purchase commitment amounting US$0.8 million and Rp.12,008 million.
     (vi) Expansion of Submarine Cable System Capacity Surabaya-Ujung Pandang-Banjarmasin with NEC Corporation
      On August 16, 2006, the Company entered into an agreement with NEC Corporation for Expansion of Submarine Cable System Capacity Surabaya — Ujung Pandang — Banjarmasin amounting to US$6.7 million plus Rp.8,132 million. The payment will be made based on 100% of contract value for each sub-system after Acceptance Report-1 issued by the Company. As of December 31, 2006, total purchase commitment amounting US$6.7 million and Rp.8,132 million.
     (vii) PSTN Interface Expansion and Enhancement in 114 locations with PT Siemens Indonesia
      On September 27, 2006, the Company entered into a procurement and installation agreement with PT Siemens Indonesia for the PSTN Interface Expansion and Enhancement in 114 locations amounting to Rp.229,900 million. The payment will be made based on the completion in each location which is 100% of lump-sum price for the location. As of December 31, 2006, total purchase commitment amounting Rp.187,144 million.

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PERUSAHAAN PERSEROAN (PERSERO)
P.T. TELEKOMUNIKASI INDONESIA Tbk AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
DECEMBER 31, 2005 AND 2006, AND FOR YEARS ENDED
DECEMBER 31, 2004, 2005 AND 2006
(Figures in tables are presented in millions of Rupiah, unless otherwise stated)
     (viii) Expansion NSS, BSS and PDN FWA CDMA System Project in Regional Division V with Samsung Consortium
      On October 13, 2006, the Company entered into a procurement and installation agreement with Samsung Consortium for Expansion NSS, BSS and PDN FWA CDMA System Project in Regional Division V (East Java) amounting to US$59.9 million plus Rp.94,759 million. Samsung Consortium will provide service and maintenance support that it constructs, pursuant to a Service Level Agreement for period 3 years (2006-2008) in return for a consideration of Rp.29,998 million. As of December 31, 2006, total purchase commitment amounting US$59.9 million and Rp.124,757 million.
     (ix) Expansion NSS, BSS and PDN System Project in Regional Division VI with ZTE Consortium
      On November 28, 2006, the Company entered into a procurement and installation agreement with ZTE Consortium for Expansion NSS, BSS and PDN System Project in Regional Division VI (Kalimantan) amounting to US$22.5 million plus Rp.57,168 million. ZTE Consortium will provide service and maintenance support that it constructs, pursuant to a Service Level Agreement, for period 3 years (2006-2008) in return for a consideration of Rp.8,925 million. As of December 31, 2006, total purchase commitment amounting US$22.5 million and Rp.66,093 million.
     (x) Interface Expansion V.52, E1, Circuit, E1 PRA, CCS#7, CLIP and Enhancement PSTN Central 5ESS Project with PT Lintas Teknologi Indonesia
      On November 29, 2006, the Company entered into a procurement and installation agreement with PT Lintas Teknologi Indonesia for Interface Expansion V.52, E1, Circuit, E1 PRA, CCS#7, CLIP and Enhancement PSTN Central 5ESS Project amounting to Rp.69,795 million. As of December 31, 2006, total purchase commitment amounting Rp.38,305 million.
     (xi) Optical Access Network (“OAN”) Project Batch III in Regional Division IV with Huawei Consortium
      On November 30, 2006, the Company entered into a procurement and installation agreement with Huawei Consortium for Optical Access Network (OAN) Project Batch III in Regional Division IV (Central Java and Daerah Istimewa Yogyakarta) amounting to US$3.2 million plus Rp.64,776 million. As of December 31, 2006, total purchase commitment amounting US$3.2 million and Rp.64,776 million.
     (xii) Expansion NSS, BSS and PDN System Project in Regional Division II with Huawei Consortium
      On December 8, 2006, the Company entered into a procurement and installation agreement with Huawei Consortium for Expansion NSS, BSS and PDN System Project in Regional Division II (Jakarta) amounting to US$25.3 million plus Rp.131,045 million. Huawei Consortium will provide service and maintenance support that it constructs, pursuant to a Service Level Agreement for period 3 years(2006-2008) in return for a consideration of Rp.11,509 million. As of December 31, 2006, total purchase commitment amounting US$25.3 million and Rp.142,554 million.
     (xiii) Expansion NSS, BSS and PDN System Project in Regional Division III with Huawei Consortium
      On December 8, 2006, the Company entered into a procurement and installation agreement with Huawei Consortium for Expansion NSS, BSS and PDN System Project in Regional Division III (West Java and

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PERUSAHAAN PERSEROAN (PERSERO)
P.T. TELEKOMUNIKASI INDONESIA Tbk AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
DECEMBER 31, 2005 AND 2006, AND FOR YEARS ENDED
DECEMBER 31, 2004, 2005 AND 2006
(Figures in tables are presented in millions of Rupiah, unless otherwise stated)
Banten) amounting to US$9.8 million plus Rp.55,261 million. Huawei Consortium will provide service and maintenance support that it constructs, pursuant to a Service Level Agreement, for period 3 years(2006-2008) in return for a consideration of Rp.4,217 million. As of December 31, 2006, total purchase commitment amounting US$9.8 million and Rp.59,478 million.
     (xiv) Optical Access Network (“OAN”) Project Batch IV in Regional Division VI with Alcatel — Inti Consortium
      On December 18, 2006, the Company entered into a procurement and installation agreement with Alcatel-Inti Consortium for Optical Access Network (OAN) Batch IV in Regional Division VI (Kalimantan) amounting to US$3.7 million plus Rp.70,022 million. As of December 31, 2006, total purchase commitment amounting US$3.7 million and Rp.70,022 million.
     (xv) Optical Access Network (“OAN”) Project Batch I in Regional Divison I and III with Opnet-Olexindo Consortium
      On December 29, 2006, the Company entered into a procurement and installation agreement with Opnet — Olexindo Consortium for OAN Project Batch I in Regional Division I and III amounting to US$3.0 million and Rp.67,288 million. As of December 31, 2006, total purchase commitment amounting to US$3.0 million and Rp.67,288 million.
     (xvi) Optical Access Network (“OAN”) Project Batch II in Regional Division II with Opnet-Olexindo Consortium
      On December 29, 2006, the Company entered into a procurement and installation agreement with Opnet-Olexindo Consortium for OAN Project Batch II in Regional Division II (Jakarta) amounting to US$4.0 million plus Rp.61,355 million. As of December 31, 2006, total purchase commitment amounting to US$4.0 million and Rp.61,355 million.
     (xvii) Ring JDCS (Jember-Denpasar Cable System) with ZTE Consortium.
      On December 29, 2006, the Company entered into a procurement and installation agreement with ZTE Consortium for ring JDCS (Jember-Denpasar Cable System) amounting to US$10.2 million and Rp.16,136 million. As of December 31, 2006, total purchase commitment amounting US$10.2 million and Rp.16.136 million.
     b. Borrowings and other credit facilities
      (i) Telkomsel has a combined US$20 million facility with Standard Chartered Bank, Jakarta for import L/C, bank guarantee, standby L/C and foreign exchange. The borrowing facility expires in December 2006 and has been rolled over up to December 2007. Under the facility, at December 31, 2006, Telkomsel has issued bank guarantees totaling Rp.120 billion (equivalent to US$13.3 million). The bank guarantees consists of guarantees for the import facility and 3G performance bond (Note 51c(ii)) amounting to Rp.100 billion and Rp.20 billion, respectively. Borrowings under the facility bear interest at SIBOR plus 2% per annum (US$), and at a rate equal to the three-month Bank Indonesia certificate plus 2% per annum (Rupiah); for other currencies the interest rate is based on the bank cost of funds plus 2%. As of December 31, 2005 and 2006, there were no outstanding loans under this facility.

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PERUSAHAAN PERSEROAN (PERSERO)
P.T. TELEKOMUNIKASI INDONESIA Tbk AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
DECEMBER 31, 2005 AND 2006, AND FOR YEARS ENDED
DECEMBER 31, 2004, 2005 AND 2006
(Figures in tables are presented in millions of Rupiah, unless otherwise stated)
      (ii) Telkomsel has not collateralized any of its assets for its bank borrowings or other credit facilities. The terms of the various agreements with Telkomsel’s lenders and financiers require compliance with a number of pledges and negative pledges as well as financial and other covenants, which include inter alia, certain restrictions on the amount of dividends and other profit distributions which could adversely affect Telkomsel’s capacity to comply with its obligation under the facility. The terms of the relevant agreements also contain default and cross default clauses. Management of Telkomsel is not aware of any breaches of the terms of these agreements and does not foresee any such breaches occurring in the future.
     c. Others
     (i) Employee Benefits
      On March 24, 2006, Telkomsel and its Labour Union (Serikat Pekerja Telkomsel) signed a collective labour agreement which is valid until March 23, 2008. Based on the agreement, Telkomsel shall provide Long Service Leave and Post Retirement Insurance to its employees. Those benefits are subject to further agreement between Telkomsel and Labour Union which has not been made until the date of this report. Accordingly, it is not possible to determine the amount of the benefits as of December 31, 2006.
     (ii) 3G License
      With reference to Decision Letter No. 07/ PER/ M.KOMINFO/2/2006 of the Minister of Communication and Information Technology, as one of the successful bidders, Telkomsel amongst other requirements, is required to:
      1. Pay an annual right of usage (BHP) fee which is determined based on a certain formula over the license term of 10 years. The BHP for the first year was paid in March 2006. The commitments as of December 31, 2006 arising from the BHP up to the expiry period of the license using the formula set forth in the decision letter are as follow:
Radio Frequency Usage
YearBI Rates (%)Index (multiplier)Tariff
120% x HL
2R1I1 = (1 + R1)40% x I1 x HL
3R2I2 = I1(1 + R2)60% x I2 x HL
4R3I3 = I2(1 + R3)100% x I3 x HL
5R4I4 = I3(1 + R4)130% x I4 x HL
6R5I5 = I4(1 + R5)130% x I5 x HL
7R6I6 = I5(1 + R6)130% x I6 x HL
8R7I7 = I6(1 + R7)130% x I7 x HL
9R8I8 = I7(1 + R8)130% x I8 x HL
10R9I9 = I8(1 + R9)130% x I9 x HL
Notes:
Ri
= average Bank Indonesia rate from previous year
HL (auction price)
= Rp. 160 billion
Index
= adjustment to the bidding price for respective year

F-126


PERUSAHAAN PERSEROAN (PERSERO)
P.T. TELEKOMUNIKASI INDONESIA Tbk AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
DECEMBER 31, 2005 AND 2006, AND FOR YEARS ENDED
DECEMBER 31, 2004, 2005 AND 2006
(Figures in tables are presented in millions of Rupiah, unless otherwise stated)
      The BHP is payable upon receipt ofSurat Pemberitahuan Pembayaran(notification letter) from the Directorate General of Post and Telecommunication.
      2. Provide roaming access for the existing 3G operators
      3. Contribute to USO development
      4. Construct a 3G network which cover at least the following provinces:
     
  Minimum number
Year of provinces
   
1  2 
2  5 
3  8 
4  10 
5  12 
6  14 
      5. Issue a performance bond each year amounting to Rp.20 billion or 5% of the annual fee to be paid for the subsequent year, whichever is higher. Such performance bond shall be redeemed by the Government if Telkomsel is not able to meet the requirements set out in the above mentioned decision letter or upon cancellation/termination of the license, or if Telkomsel decides to return the license voluntarily.
52.     CONTINGENCIES
      a. In the ordinary course of business, the Company has been named as a defendant in various legal actions in relation with land disputes, other disputes involving premium call billing and telecommunication billing. Based on management’s estimate of the probable outcomes of these matters, the Company accrued Rp.33,116 million as of December 31, 2005 and 2006.
      b. On August 13, 2004, the Commissions for Business Competition Watch (Komisi Pengawas Persaingan Usaha, “KPPU”) issued a verdict with its dictum stating that the Company had breached article 15 verse (3) and article 19 verse a and b of Law No. 5/1999 on Anti Monopolistic Practices and Unfair Business Competition (“Competition Law”). As consequences, KPPU has dropped the agreement clauses between the Company and Warung TELKOM (“kiosk”) provider which stated that Warung TELKOM provider can only sell the Company’s telecommunication service and/or product. KPPU subsequently ordered the Company to open the channel of international calls to other international call operators in Warung TELKOM. Pursuant to the KPPU verdict, the Company has filed an objection to District Court of Bandung which then issued a verdict on December 7, 2004 that granted the Company’s objection and dropped the KPPU’s verdict on August 13, 2004. On January 4, 2005, KPPU filed an appeal to the Indonesian Supreme Court. On January 15, 2007, the Indonesian Supreme Court issued a verdict which granted the KPPU’s appeal and dropped the verdict of District Court of Bandung. The Company believes that there is no significant losing revenue impact.
      c. In December 2005, the West Java Police Department initiated investigations related to an alleged violation of anti-corruption law, in particular the provision of interconnection services to Napsindo, the Company’s subsidiary, and Globalcom, a Malaysian company, at an incorrect tariff for the Company’s

F-127


PERUSAHAAN PERSEROAN (PERSERO)
P.T. TELEKOMUNIKASI INDONESIA Tbk AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
DECEMBER 31, 2005 AND 2006, AND FOR YEARS ENDED
DECEMBER 31, 2004, 2005 AND 2006
(Figures in tables are presented in millions of Rupiah, unless otherwise stated)
network for the provision of illegal VoIP services, and misuse of authority in procuring telecommunication equipment. It is also understood that one of the investigations relates to the Company’s guarantee of a bank loan obtained by Napsindo. During the investigation, former directors and employees of the Company were held in custody by the West Java Police Department for further investigation. On May 10, 2006, such individuals were released from police custody after the expiration of the maximum period of 120 days allowed for police custody of suspects for investigation purposes. These investigations are on-going. As of the date of the consolidated financial statements, the police have not found sufficient evidence to properly transfer the case to the High Attorney Office for indictment.
      A former Director of Human Resources and an employee of the Company were indicted under the anti-corruption law in Bandung District Court relating to allegations of misuse of authority in producing consultancy services resulting in losses of Rp.789 million. On May 2, 2007, the Bandung District Court found the defendants guilty and sentenced each defendant to a one-year prison term and given Rp.50 million for penalty. The defendant have filed and appeal with the West Java High Court objecting to the District Court ruling. As of the date of the consolidated financial statements, no decision has been reached on appeal.
      On January 2, 2006, the Office of the Attorney General launched an investigation into allegations of misuse of telecommunications facilities in connection with the provision of VoIP services, whereby one of Company’s former employees and four of the Company’s employees in KSO VII were named suspects. As a result of the investigations, one of Company’s former employees and two of the Company’s employees were indicted in the Makassar District Court, and two other employees were indicted in the Denpasar District Court for their alleged corruption in KSO VII. As of the date of the consolidated financial statements, the District Courts have not issued their verdicts.
      The Company does not believe that any subsequent investigation or court decision will have significant financial impact to the Company.

F-128


PERUSAHAAN PERSEROAN (PERSERO)
P.T. TELEKOMUNIKASI INDONESIA Tbk AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
DECEMBER 31, 2005 AND 2006, AND FOR YEARS ENDED
DECEMBER 31, 2004, 2005 AND 2006
(Figures in tables are presented in millions of Rupiah, unless otherwise stated)
53.     ASSETS AND LIABILITIES DENOMINATED IN FOREIGN CURRENCIES
      The balances of monetary assets and liabilities denominated in foreign currencies are as follows:
                  
  2005 2006
     
  Foreign Rupiah Foreign Rupiah
  Currencies Equivalent Currencies Equivalent
         
  (in millions)   (in millions)  
Assets
                
Cash and cash equivalents                
 U.S. Dollar  81.96   805,489   159.59   1,443,160 
 Euro  59.14   689,472   71.30   845,448 
 Japanese Yen        1.95   148 
Trade receivables                
Related parties                
 U.S. Dollar  1.64   16,112   0.93   8,327 
Third parties                
 U.S. Dollar  19.46   191,199   40.10   360,420 
Other receivables                
 U.S. Dollar  0.30   2,910   0.56   5,077 
 Euro  0.01   88   0.03   402 
 Great Britain Poundsterling           37 
Other current assets                
 U.S. Dollar  13.63   133,926   0.10   937 
Advances and other non-current assets                
 U.S. Dollar  2.25   22,162   3.59   32,314 
Escrow accounts                
 U.S. Dollar  12.89   126,128       
               
Total assets      1,987,486       2,696,270 
               

F-129


PERUSAHAAN PERSEROAN (PERSERO)
P.T. TELEKOMUNIKASI INDONESIA Tbk AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
DECEMBER 31, 2005 AND 2006, AND FOR YEARS ENDED
DECEMBER 31, 2004, 2005 AND 2006
(Figures in tables are presented in millions of Rupiah, unless otherwise stated)
                   
  2005 2006
     
  Foreign Rupiah Foreign Rupiah
  Currencies Equivalent Currencies Equivalent
         
  (in millions)   (in millions)  
Liabilities
                
Trade payables                
 Related parties                
  U.S. Dollar  15.09   148,423   0.28   2,501 
  Singapore Dollar           20 
 Third parties                
  U.S. Dollar  125.40   1,233,050   28.58   257,495 
  Euro  68.30   796,343   1.55   18,377 
  Japanese Yen  66.03   5,508       
  Singapore Dollar  0.01   33   0.41   2,411 
  Great Britain Pound Sterling     14   0.04   630 
  Myanmar Kyat           12 
Other payables                
  U.S. Dollar        0.06   573 
  Great Britain Pound Sterling           2 
Accrued expenses                
  U.S. Dollar  21.01   206,639   199.18   1,793,609 
  Euro  8.79   102,509   104.61   1,239,946 
  Japanese Yen  52.85   4,433   74.13   5,610 
  Singapore Dollar  0.42   2,497   0.35   2,039 
Advances from customers and suppliers U.S. Dollar  0.15   1,474       
Current maturities of long-term liabilities                
  U.S. Dollar  150.43   1,479,401   142.84   1,286,306 
  Euro  14.67   171,087   14.68   173,996 
  Japanese Yen  1,142.91   95,876   1,142.91   86,496 
Long-term liabilities                
  U.S. Dollar  662.39   6,514,501   523.76   4,716,467 
  Euro  22.01   256,631   7.34   86,998 
  Japanese Yen  14,384.68   1,206,700   13,241.77   1,002,137 
               
Total liabilities      12,225,119       10,675,625 
               
Net liabilities      (10,237,633)      (7,979,355)
               
      The Company and subsidiaries’ activities expose it to a variety of financial risks, including the effects of changes in debt and equity market prices, foreign currency exchange rates and interest rates.

F-130


PERUSAHAAN PERSEROAN (PERSERO)
P.T. TELEKOMUNIKASI INDONESIA Tbk AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
DECEMBER 31, 2005 AND 2006, AND FOR YEARS ENDED
DECEMBER 31, 2004, 2005 AND 2006
(Figures in tables are presented in millions of Rupiah, unless otherwise stated)
      The Company and subsidiaries’ overall risk management program focused on the unpredictability of financial markets and seeks to minimize potential adverse effects on the financial performance of the Company and subsidiaries. Management provides written policy for foreign currency risk management mainly through time deposits placement and hedging to cover foreign currency risk exposure for the time range of 3 up to 12 months.
54.     SUBSEQUENT EVENT
      a. On February 2, 2007, Jakarta and the area of Regional Division II (Jakarta) were massively flooded. At the date of issuance of these consolidated financial statements, the Company and subsidiaries are still calculating loss resulting from that catastrophe. The damaged telecommunication infrastructures have been covered by insurance.
      b. On March 6, 2007, based on notarial deed No. 3 of Titien Suwartini, S.H. and approved 1,016 employees eligibleby Ministry of Justice and Human Rights in its decision letter No. W8-00573.HT.01.04-TH.2007 in relation to the amendment of the Company’s Articles of Association, the name of PT Aria West International, a subsidiary, has been changed to PT Telekomunikasi Indonesia International. At the same time, its business operation has been expanded to include international businesses. All changes have been approved by Capital Investment Coordinating Board in its decision letter No. 20/ III/ PMDN/2007 dated March 1, 2007.
      c. On April 27, 2007, the Company became a member of Asia-America Gateway (AAG) consortium by signing Construction and Maintenance Agreement (C&MA) and Supply Contract with AAG. AAG is an undersea cable consortium comprising 19 companies. The Company paid US$30 million to be the part of AAG consortium. Through AAG, the Company will acquire 30 Gbps international bandwith at the end of 2008 in the AAG configuration that will be laid from Malaysia to the United States.
      d. On June 15, 2007, Telkomsel entered into loan agreements with Bank Central Asia Tbk, Bank Negara Indonesia Tbk and Bank Mandiri Tbk with total facilities of Rp2,400 billion which consists of short-term loans and medium term loans. Subsequently, on the same date, Telkomsel entered into a loan agreement with Bank Rakyat Indonesia Tbk for a medium term loan facility of Rp400 billion. The short term loans are repayable in 3 (three) equal quarterly installments beginning 3 (three) months after the early retirement program.end of availability period (the earlier of 3 (three) months after the date of agreements and the date on which the facilities have been fully drawn). The entire early retirement benefits costmedium-term loans are repayable in 5 (five) equal semi-annual installments; the first installment shall be due 6 (six) months after the end of Rp734,981 million wasthe availability period (the earlier of 12 (twelve) months after the date of the agreements and the date on which the facilities have been fully drawn). The loans bear interest at rate equal to the average rate for three-month Jakarta Inter Bank Offered Rate plus 1.25% which becomes due quarterly in arrears.
      e. On June 12, 2007, the Company has initiated a compensation plan to its fixed wireless’ customers related to the Government’s decision of frequency migration. Currently, the Company is registering its customers in Regional Division II and III to identify the number of customers whom should be compensated upon the date of the frequency migration. Subsequently, the Company is considering the compensation form to its customers.
      f. On June 22, 2007, Telkomsel held an Annual General Meeting of Shareholders that approved a change in the composition of Telkomsel’s Board of Commissioners and the Board of Directors and cash dividends of Rp9,505 billion that represents 85% of 2006 Telkomsel’s net income. The 35% of declared dividend should be paid to Singtel.

F-131


PERUSAHAAN PERSEROAN (PERSERO)
P.T. TELEKOMUNIKASI INDONESIA Tbk AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
DECEMBER 31, 2005 AND 2006, AND FOR YEARS ENDED
DECEMBER 31, 2004, 2005 AND 2006
(Figures in April 2005.tables are presented in millions of Rupiah, unless otherwise stated)
55.     RECENT ACCOUNTING PRONOUNCEMENTS IN INDONESIA
      PSAK 50 (Revised 2006), “Financial Instruments: Presentations and Disclosures”. In December 2006, the Financial Accounting Standard Board in Indonesia issued PSAK 50 (Revised 2006), “Financial Instruments: Presentations and Disclosures” which amends PSAK 50, “Accounting for Investments in Certain Securities”. PSAK 50 (Revised 2006) gives guidance on how to disclose and present financial instruments in the financial statements and whether a financial instrument is a financial liability or an equity instrument. This Standard applies to the classification of financial instruments, from the perspective of the issuer, into financial assets, financial liabilities and equity instruments; the classification of related interest, dividends, losses and gains; and the circumstances in which financial assets and financial liabilities should be offset. PSAK 50 (Revised 2006) complements the principles for recognizing and measuring financial assets and financial liabilities in PSAK 55 (Revised 2006). PSAK 50 (Revised 2006) shall be effective after January 1, 2009. It is not expected that the adoption of PSAK 50 (Revised 2006) will have material effect on the Company’s consolidated financial statements.
      PSAK 55 (Revised 2006), “Financial Instruments: Recognition and Measurement”. In December 2006, the Financial Accounting Standard Board in Indonesia issued PSAK 55 (Revised 2006), “Financial Instruments: Recognition and Measurement” which amends PSAK 55 (Revised 1999), “Accounting for Derivatives Instruments and Hedging Activities”. PSAK 55 (Revised 2006) provides guidance on how to recognize, measure and derecognize financial asset and liability including derivative instruments. It also provides guidance on the recognition and measurement of sales and purchase contracts of non-financial items. PSAK 55 (Revised 2006) shall be effective after January 1, 2009. It is not expected that the adoption of PSAK 55 (Revised 2006) will have material effect on the Company’s consolidated financial statements.
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 of the Company and its subsidiaries have been prepared in accordance with accounting principles generally accepted in Indonesia (“Indonesian GAAP”), which differ in certain significant respects withfrom accounting principles generally accepted in the United States of America (“U.S. GAAP”). The consolidated statements of cash flows together with the reconciliation in Note 57 comply with SFAS 95 “Statement of Cash Flows”. A description of the differences and their effects on net income and stockholders’ equity are set forth below.below:
(1) Description of differences between Indonesian GAAP and U.S. GAAP
a. Voluntary 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.
      Under Indonesian GAAP, voluntary termination benefits are recognized as liabilities when the Company is demonstratively committed to provide termination benefits as a result of an offer made in order to encourage voluntary redundancy.
      Under U.S. GAAP, voluntary termination benefits liabilities are recognized only when the employees have accepted the offer and the related amount can be reasonably estimated.
b. Foreign Exchange Differences Capitalized to Property UnderAssets under Construction
      Under Indonesian GAAP, foreign exchange differences resulting from borrowings used to finance property under construction are capitalized. Capitalization of foreign exchange differences ceases when 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
      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-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 reflected on the balance sheet. All the revenues generated from the revenue-sharing arrangements are recorded as a component of operating revenues, while a portion of the investors’ share of revenue from the revenue-sharing arrangements is recorded as interest expense and the balance is treated as a reduction of the 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 has been no difference in equity since 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 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 recognizes the effect of the differences between 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 land rights is amortized over the economic useful life which represents the contractual period of 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 recognized when the Company sells the card.
      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. 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.
     m. Acquisition of Dayamitra
      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 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 accounted for the remaining 9.68% of Dayamitra as minority interest. In addition, the option price that has been paid by the Company was 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.
     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.
      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 reverse 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 asset 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 are 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 Disposal of Property, Plant and Equipment
      Under Indonesian GAAP, the Company classifies gain (loss) on disposal of property, plant and equipment as a component of other income (expense) which is excluded from determination of operating income.
      Under U.S. GAAP, gain (loss) on disposal 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, 2002, 2003 and 2004, operating income would have been higher (lower) by Rp130,450 million, Rp182,883 million and (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 disposal 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, 2002, 2003 and 2004 and to consolidated stockholders’ equity as of December 31, 2003 and 2004 which would be required if U.S. GAAP had been applied, instead of Indonesian GAAP, in the consolidated financial statements are set forth below:
                  
  Note 2002 2003 2004
         
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:                
 Termination benefits  (a)  530,981   (670,981)   
 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 (3,061), (8,787) and (13,392), respectively  (c)  43,045   39,077   26,802 
 Revenue-sharing arrangements  (d)  67,959   23,159   155,369 
 Revaluation of property, plant and equipment  (e)  3,929       
 Pension  (f)  111,415   (109,334)  313,870 
 Equity in net income/ (loss) of associated companies  (g)  (182)  (170)  (177)
 Amortization of land rights  (h)  (11,781)  (10,212)  (13,907)
 Depreciation of equipment to be installed  (i)  9,706       
 Revenue recognition  (j)  (89,274)  (53,226)  54,159 
 Goodwill  (k)  21,269   21,270   21,270 
 Capital leases  (l)  14,241   6,882   (3,435)
 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)   
 Asset retirement obligations  (o)     (848)  (848)

F-128


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)
                   
  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      Under Indonesian GAAP, foreign exchange gains and losses resulting from borrowings used to reflect a two-for-one stock splitfinance the construction of the qualifying assets are capitalized as resolved inpart of the Annual General Meetingcost of Stockholders on July 30, 2004 (Note 1b).the qualifying
               
  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-129


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)
              
  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 
          
      The changes in stockholders’ equity in accordance with U.S. GAAP for the years ended December 31, 2002, 2003 and 2004 are as follows:
              
  2002 2003 2004
       
Equity at beginning of year  7,765,500   13,910,864   16,284,692 
Changes during the year:            
 Net income under U.S. GAAP  8,587,259   5,790,640   6,468,573 
 Dividends  (2,125,055)  (3,338,109)  (3,186,991)
 Other comprehensive income, net of tax  (20,802)  (78,703)  4,638 
 Common control transaction  (296,038)      
          
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:
         
  2003 2004
     
Consolidated balance sheets        
Current assets  9,411,469   9,610,433 
Non-current assets  41,935,581   47,091,387 
       
Total assets  51,347,050   56,701,820 
       
Current liabilities  11,207,431   11,650,470 
Non-current liabilities  20,212,692   20,547,769 
       
Total liabilities  31,420,123   32,198,239 
Minority interest in net assets of subsidiaries  3,642,235   4,932,669 
Equity  16,284,692   19,570,912 
       
Total liabilities and equity  51,347,050   56,701,820 
       

F-130


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)
(3) Additional financial 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:
              
  2002 2003 2004
       
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 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%)            
 Net periodic post-retirement benefit cost  183,597   188,375   139,834 
 Amortization of discount on promissory notes and other borrowing costs  58,298   132,876   136,994 
 Amortization of intangible assets  55,616       
 Tax penalty  72,471   16,521   1,941 
 Employee benefits  24,714   6,342   24,719 
 Permanent differences of the KSO Units  (8,767)  16,739   17,213 
 Income which was already subject to final tax  (140,982)  (61,876)  (30,743)
 Gain on sale of Telkomsel’s shares  (949,826)      
 Equity in net (income) loss of associated companies  22,465   (990)  3,273 
 Others  57,182   (92,822)  63,514 
          
 Total  (625,232)  205,165   356,745 
          
Provision for income tax in accordance with U.S. GAAP  3,119,695   3,418,545   4,128,018 
          
      For the three-year period ended December 31, 2004, all of the Company’s operating revenues occurred in Indonesia, and accordingly, the Company has not been subject to income tax in other countries.

F-131


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
     
Deferred tax assets
        
Trade accounts receivable  145,918   228,889 
Inventories  11,528   15,494 
Tax loss carryforwards  285,856   239,501 
Provision for long service awards  142,084   164,750 
Deferral of revenue  230,564   220,538 
Long-term investments  38,048   44,029 
Liabilities of business acquisitions     1,009,932 
Provision for employee benefits  131,757   53,692 
Others  72,730   40,532 
       
Total  1,058,485   2,017,357 
       
Deferred tax liabilities
        
Property, plant and equipment  (2,471,577)  (3,215,173)
Intangible assets  (1,527,796)  (1,592,645)
Pension benefit costs  (125,010)  (153,177)
Prepaid expenses and other receivables  (49,519)  (34,290)
       
Total  (4,173,902)  (4,995,285)
       
Total deferred tax liabilities — net  (3,115,417)  (2,977,928)
       
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 equivalents and temporary 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 liabilities
      (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 9.63%, and 8.04%, the average U.S. Dollar borrowing rate of 1.21% and 2.23%, and the respective average borrowing rates for 2003 and 2004 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

F-132


PERUSAHAAN PERSEROAN (PERSERO)
P.T. TELEKOMUNIKASI INDONESIA Tbk AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
DECEMBER 31, 20032005 AND 2004,2006, AND FOR YEARS ENDED
DECEMBER 31, 2002, 20032004, 2005 AND 20042006
(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, 2004 would decrease by Rp217,340 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 liabilities of business 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 Amount Fair Value
     
2003
        
Cash and cash equivalents  5,094,472   5,094,472 
Temporary investments  4,006   4,006 
Short-term bank loans  37,642   37,642 
Long-term liabilities:        
 Two-step loans  7,691,045   9,230,697 
 Guaranteed notes  1,121,224   1,452,826 
 Bonds  981,278   1,265,606 
 Bank loans  2,924,590   3,140,373 
 Liabilities of business acquisitions  2,334,749   2,498,138 
 Suppliers’ credit loans  165,629   194,006 
 Bridging loan  50,365   52,393 
 Other  9,153   9,153 
2004
        
Cash and cash equivalents  4,856,123   4,856,123 
Temporary investments  19,949   19,949 
Short-term bank loans  1,101,633   1,101,633 
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 
assets. Capitalization of foreign exchange gains and losses ceases when 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 gains and losses are credited and charged to the consolidated statement of income.
c. Interest Capitalized on Assets under Construction
      Under Indonesian GAAP, qualifying assets, to which interest cost can be capitalized, should be those that take a minimum of 12 months to get ready for their intended use or sale. To the extent that funds are borrowed specifically to finance the construction of a qualifying asset, the amount of the 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., a minimum12-month construction period requirement) on the length of the construction period in which the interest cost could be capitalized. The amount of interest cost to be capitalized for qualifying assets is intended to be that portion of the interest cost incurred during the construction periods that theoretically could have been avoided if expenditures for the assets had not been made. The interest cost need not arise from borrowings specifically made to acquire the qualifying assets. The amount capitalized in a period is determined by applying an interest rate to the average amount of accumulated expenditures for the assets during the period. Interest income arising from any unused borrowings is recognized directly to current operations.
d. 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 accounting records 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 reflected on the balance sheet. All the revenues generated from the revenue-sharing arrangements are recorded as a component of operating revenues, while a portion of the investors’ share of the revenues from the revenue-sharing arrangements is recorded as interest expense with the balance treated as a reduction of the obligation under revenue-sharing arrangements.
e. Employee Benefits
      As of January 1, 2005, the Company and its subsidiaries adopted PSAK 24R in accounting for the costs of pension benefit, post-retirement health care benefit and long service awards for Indonesian GAAP purposes. PSAK 24R requires the adoption of its provisions retrospectively as of January 1, 2004.

F-133


PERUSAHAAN PERSEROAN (PERSERO)
P.T. TELEKOMUNIKASI INDONESIA Tbk AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
DECEMBER 31, 20032005 AND 2004,2006, AND FOR YEARS ENDED
DECEMBER 31, 2002, 20032004, 2005 AND 2006
(Figures in tables are presented in millions of Rupiah, unless otherwise stated)
      The differences between the accounting by the Company and its subsidiaries for the pension benefit and post-retirement health care benefit under Indonesian GAAP and U.S. GAAP for the years ended December 31, 2004, 2005 and 2006 are as follows:
      i. Under Indonesian GAAP, the prior service cost is recognized immediately if vested or amortized on a straight line basis over the average period until the benefits become vested. Under U.S. GAAP, prior service cost (vested and non-vested benefits) is generally deferred and amortized systematically over the estimated remaining service period for active employees and the recognized amount is recorded in the consolidated statement of income.
      ii. Under Indonesian GAAP, the transition obligations were recognized on January 1, 2004, the date PSAK 24R was adopted. Under U.S GAAP, the transition obligations arising from the adoption of SFAS 87 “Employers’ Accounting for Pensions” and SFAS 106 “Employers’ Accounting for Postretirement Benefits Other Than Pensions” on January 1, 1992 and January 1, 1995, respectively, are deferred and amortized systematically over the estimated remaining service period for active employees and 20 years, respectively. In addition, different adoption dates resulted in significant difference in cumulative unrecognized actuarial gains and losses.
      Under Indonesian GAAP, recognition of a minimum liability for the pension plans is not required. Under U.S. GAAP, for the years ended December 31, 2004 and 2005, the Company and its subsidiaries were required to recognize an additional minimum liability when the accumulated benefits obligation exceeded the fair value of the plan assets with the equal amount recognized as an intangible asset, provided that the asset recognized did not exceed the amount of unrecognized prior service cost. If the additional liability required to be recognized exceeded unrecognized prior service cost, the excess was reported in other comprehensive income, net of tax.
      In addition, there is a difference between the accounting by the Company for certain benefits under long service awards under Indonesian GAAP and U.S. GAAP for the years ended December 31, 2004, 2005 and 2006. Under Indonesian GAAP, the prior service cost is recognized immediately if vested or amortized on a straight line basis over the average period until the benefits become vested. The amortized amount is recorded as a component of net periodic benefit cost for the year. Under U.S. GAAP, the obligation for the accumulating post-retirement benefits is measured in accordance with the guidance in SFAS 87, as permitted by SFAS 112 “Employers’ Accounting for Post-employment Benefits”. The prior service cost is deferred and amortized systematically over the estimated remaining service period for active employees and the recognized amount is recorded in the consolidated statement of income.
      In September 2006, the FASB issued SFAS 158 “Employers’ Accounting for Defined Benefit Pension and Other Postretirement Plans — an amendment of FASB Statement No. 87, 88, 106 and 132R”. The requirements of SFAS 158 to recognize the funded status and to provide the required disclosures are effective as of the end of the year ended after December 15, 2006. The Company and its subsidiaries have adopted the above recognition and disclosure requirements of SFAS 158 as of the end of the year ended December 31, 2006.

F-134


PERUSAHAAN PERSEROAN (PERSERO)
P.T. TELEKOMUNIKASI INDONESIA Tbk AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
DECEMBER 31, 2005 AND 2006, AND FOR YEARS ENDED
DECEMBER 31, 2004, 2005 AND 2006
(Figures in tables are presented in millions of Rupiah, unless otherwise stated)
      SFAS 158 does not change the determination of net periodic benefit costs under SFAS 87, SFAS 106 and SFAS 112. The impacts of the adoption of SFAS 158 as of the end of the year ended 31 December 2006 are as follow:
      i. The Company and its subsidiaries no longer report the additional minimum liability and any corresponding intangible asset for the unfunded pension obligation as the funded status for unfunded or underfunded benefit plans is now fully recognized as a net pension liability on the balance sheet. This is similar to the Indonesian GAAP requirements.
      ii. On adoption of SFAS 158, the unrecognised actuarial losses, prior service costs, and transition obligations were recognised, net of tax, in the accumulated other comprehensive income balance. These will continue to be amortised and reported as a component of net periodic benefit cost in the consolidated statement of income in accordance with the requirements of SFAS 87, SFAS 106 and SFAS 112.
f. Equity in Net Income or Loss of Associated Companies
      The Company records its equity in net income or loss of its associated companies based on those associated companies’ financial statements that have been prepared under Indonesian GAAP.
      For U.S. GAAP reporting purposes, the Company recognizes the effect of the differences between U.S. GAAP and Indonesian GAAP at the investee level in the investment accounts and its share of the net income or loss and other comprehensive income or loss of those associated companies.
g. 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 collateral for 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 land rights is amortized over the economic useful life which represents the contractual period of the land rights.
h. Revenue Recognition
      Under Indonesian GAAP, fees from connection of mobile cellular and fixed wireless services are recognized as revenue when connection takes place (for postpaid service). Sales of starter packs are recognized as revenue upon delivery to distributors, dealers, or customers (for prepaid services). Installation fees for wire line services are recognized at the time of installation. Revenues from calling cards are recognized when the Company sells the cards.
      Under U.S. GAAP, revenue from front-end fees and incremental costs up to, but not exceeding such fees, are deferred and recognized as income over the expected term of the customer relationships. Revenues from calling cards are recognized upon usage or expiration.

F-135


PERUSAHAAN PERSEROAN (PERSERO)
P.T. TELEKOMUNIKASI INDONESIA Tbk AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
DECEMBER 31, 2005 AND 2006, AND FOR YEARS ENDED
DECEMBER 31, 2004, 2005 AND 2006
(Figures in tables are presented in millions of Rupiah, unless otherwise stated)
i. Amortisation of Goodwill
      Under Indonesian GAAP, goodwill is amortized over a period not exceeding 20 years.
      Under U.S. GAAP, goodwill is not amortized but rather subjected to an annual test for impairment.
j. 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, (b) the sum of periodic lease payments, plus the residual value, will cover the acquisition price of the leased asset and the related interest, and (c) there is a minimum lease period of 2 years.
      Under U.S. GAAP, a leased asset is capitalized when any one of the following criteria is met: (a) there is an automatic transfer of ownership at the end of the lease term, (b) the lease contains a bargain purchase option, (c) the lease term is for 75% or more of the economic life of the asset, and (d) the net present value of the minimum lease payments amounts to at least 90% of the fair value of the asset.
k. Acquisition of Dayamitra
      On May 17, 2001 the Company acquired a 90.32% interest in Dayamitra and contemporaneously acquired a call option to buy the remaining 9.68% interest at a fixed price at a stated future date, and provided to the minority interest holder a put option to sell its 9.68% interest to the Company under those same terms. The fixed price of the call equaled the fixed price of the put option. Under U.S. GAAP, the Company accounted for the option contracts on a combined basis together with the minority interest and as a financing arrangement for 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 since May 17, 2001.
      On December 14, 2004, the Company exercised the call option to acquire the 9.68% interest in Dayamitra.
      Under Indonesian GAAP, prior to December 14, 2004, the Company accounted for the remaining 9.68% interest in Dayamitra as minority interest. In addition, the option price paid by the Company was presented as “Advance payments for investments in shares of stock.” The Company started consolidating the remaining 9.68% interest in Dayamitra only on December 14, 2004 following the exercise of the option.
      The difference in the timing of the recognition of the 9.68% ownership interest gives rise to differences in the timing and amounts of the purchase consideration recognized under Indonesian GAAP and U.S. GAAP.
l. Asset Retirement Obligations
      Under Indonesian GAAP, costs associated with the retirement of long-lived assets that the Company and its subsidiaries must cover by law as a result from the acquisition, construction,

F-136


PERUSAHAAN PERSEROAN (PERSERO)
P.T. TELEKOMUNIKASI INDONESIA Tbk AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
DECEMBER 31, 2005 AND 2006, AND FOR YEARS ENDED
DECEMBER 31, 2004, 2005 AND 2006
(Figures in tables are presented in millions of Rupiah, unless otherwise stated)
development and/or the normal operation of long-lived assets are charged to the consolidated statement of income as incurred.
      Under U.S. GAAP, the estimated fair value of such obligation is accrued at the time of the acquisition with an equal amount 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 their contractual agreements to determine whether the Company and its subsidiaries are required to settle any obligations as a result of the prevailing laws, statute and ordinance, or by legal construction of a contract under the doctrine of promissory estoppel. A present value technique is used to estimate the fair value of the obligations. The cash flows used in the estimates of fair value have incorporated the assumptions relating to the timing and the amount of the possible cash flows. Accretion expense resulting from the passage of time is recognized in the consolidated statement of income. In subsequent periods, changes resulting from the revisions to the timing and the amount of the original estimate of undiscounted cash flows are recognized as an increase or decrease in (a) the carrying amount of the liability, and (b) the related asset retirement cost capitalized as part of the carrying amount of the related long-lived asset.
m. Deferred Income Taxes
      Under Indonesian GAAP, the Company does not recognize deferred taxes on temporary differences between the carrying amounts and the tax bases of its equity method investments when it is not probable that these differences will reverse in the foreseeable future.
      Under U.S. GAAP, deferred taxes are recognized in full on temporary differences between the carrying amounts and the tax bases of equity method investments.
n. 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 a fixed asset 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 the current market assessment 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 its quoted market price in an active market or its discounted estimated future cash flows. Reversals of previously recognized impairment losses are prohibited.
      Through the year ended December 31, 2004, there were no impairment charges recognized by the Company or its subsidiaries. In 2005, the Company recognized impairment charges on BSS equipment which are part of transmission installation and equipment of fixed wireless assets. The sum of the expected future cash flows (undiscounted and without interest charges) relating to these impaired assets was less than their carrying amount. Therefore, for U.S. GAAP reporting purposes,

F-137


PERUSAHAAN PERSEROAN (PERSERO)
P.T. TELEKOMUNIKASI INDONESIA Tbk AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
DECEMBER 31, 2005 AND 2006, AND FOR YEARS ENDED
DECEMBER 31, 2004, 2005 AND 2006
(Figures in tables are presented in millions of Rupiah, unless otherwise stated)
these assets were written down to their estimated fair value based on their discounted estimated future cash flows. The estimated fair value of the impaired assets determined under U.S. GAAP was the same as that determined under Indonesian GAAP and accordingly, there were no differences between Indonesian GAAP and U.S. GAAP.
o. Gains (Losses) on Disposals of Property, Plant and Equipment
      Under Indonesian GAAP, the Company and its subsidiaries classify the gains (losses) on disposals of property, plant and equipment as a component of other income (expense) which is excluded from determination of operating income.
      Under U.S. GAAP, the gains (losses) on disposals of property, plant and equipment are classified as a component of operating expenses and hence included in the determination of operating income. For the years ended December 31, 2004, 2005 and 2006, the operating income would have been higher (lower) by (Rp.26,089) million, Rp.46,193 million, and (Rp.47,983) million, respectively, and other income (expenses) would have been lower (higher) by the same amounts due to the inclusion of the gains (losses) on disposals of property, plant and equipment in the determination of operating income.
p. Reclassification of Difference in Value of Restructuring Transactions between Entities under Common Control
      Under Indonesian GAAP, the Company is required to reclassify the difference in value of restructuring transactions between entities under common control as of January 1, 2005 as a direct adjustment to retained earnings when the common control relationship between the transacting parties no longer existed as of January 1, 2005.
      Under U.S. GAAP, the difference in value of restructuring transactions between entities under common control remains in equity indefinitely as part of the additional paid-in capital.
q. Available-For-Sale Securities
      Under Indonesian GAAP, available-for-sale securities are carried at fair value and changes in fair value are recognized in “Unrealized holding gain (loss) on available-for-sale securities” under stockholders’ equity section.
      Under U.S. GAAP, available-for-sale securities are carried at fair value and any unrealized gains or losses are reported as a component of other comprehensive income under stockholders’ equity section.
r. Cumulative Translation Adjustments
      Under Indonesian GAAP, investments in foreign companies using the equity method are reported by translating the assets and the liabilities of these companies as of the balance sheet date using the rate of exchange prevailing at that date. Revenues and expenses are translated using the exchange rates at the date of transaction or the average exchange rate for the year for practical reasons. The resulting translation adjustments are reported as part of “Translation Adjustments” in the stockholders’ equity section.
      Under U.S. GAAP, the resulting translation adjustments are reported in other comprehensive income under stockholders’ equity section.

F-138


PERUSAHAAN PERSEROAN (PERSERO)
P.T. TELEKOMUNIKASI INDONESIA Tbk AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
DECEMBER 31, 2005 AND 2006, AND FOR YEARS ENDED
DECEMBER 31, 2004, 2005 AND 2006
(Figures in tables are presented in millions of Rupiah, unless otherwise stated)
s. Amendment and Restatement of the Joint Operation Scheme in Regional Division VII
      As discussed in Note 5e, the Company has accounted for the amendment and restatement of the KSO VII agreement as a business combination using the purchase method of accounting.
      Under Indonesian GAAP, the fair value of the unearned income relating to the revenue-sharing arrangements was deemed to be equal to the fair value of the property, plant and equipment under those revenue-sharing arrangements based on the accounting treatment of revenue sharing agreements under Indonesian GAAP. Under U.S. GAAP, the fair value of the obligation under the revenue-sharing arrangements has been determined to be Rp.473,754 million based on the present value of the estimated future payments to BSI’s business partners under the revenue-sharing arrangements.
      Under Indonesian GAAP, the excess of the acquisition cost over the Company’s interest in the fair value of identifiable asset acquired and liabilities assumed is recorded as goodwill. After assigning the purchase consideration to all other identifiable assets and liabilities, the remaining residual amount was allocated to the intangible asset representing the right to operate the business in the KSO VII area, to be amortized over the remaining KSO VII term of 4.3 years. As a result, there was no goodwill recognized under Indonesian GAAP. For U.S. GAAP reporting purposes, the right to operate the KSO VII operation represented a reacquired right and was recognized by the Company as a separate intangible asset under EITF 04-1 “Accounting for Preexisting Relationships between the Parties to a Business Combination”. The intangible asset was directly valued to determine its fair value in accordance with the requirements in EITF Topic No. D-108 “Use of the Residual Method to Value Acquired Assets Other Than Goodwill”. The excess of the purchase consideration over the net of the amounts assigned to assets acquired and liabilities assumed of Rp.61,386 million was recognized as goodwill.

F-139


PERUSAHAAN PERSEROAN (PERSERO)
P.T. TELEKOMUNIKASI INDONESIA Tbk AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
DECEMBER 31, 2005 AND 2006, AND FOR YEARS ENDED
DECEMBER 31, 2004, 2005 AND 2006
(Figures in tables are presented in millions of Rupiah, unless otherwise stated)
(2) The significant adjustments to the consolidated net income for the years ended December 31, 2004, 2005 and 2006 and to the consolidated stockholders’ equity as of December 31, 2005 and 2006 which would be required if U.S. GAAP had been applied, instead of Indonesian GAAP, in the consolidated financial statements are set forth below:
                   
  Note 2004 2005 2006
         
Net income according to the consolidated statements of income prepared under Indonesian GAAP      6,614,568   7,993,566   11,005,577 
                
U.S. GAAP adjustments — increase (decrease) due to:                
 Voluntary termination benefits  (a)        1,461,149 
 Capitalization of foreign exchange losses, net of related depreciation of Rp.75,870 million, Rp.77,010 million and Rp.79,178 million, respectively  (b)  1,587   77,010   79,178 
 Interest capitalized on assets under construction, net of related depreciation of Rp.13,392 million, Rp.17,275 million and Rp.23,270 million, respectively  (c)  26,802   23,825   73,934 
 Revenue-sharing arrangements  (d)  155,369   69,173   58,545 
 Pension  (e)  (148,517)  (104,877)  (95,788)
 Post-retirement health care  (e)  (75,964)  (104,466)  (101,205)
 Long service awards  (e)  (122,462)  (90,933)  201,345 
 Equity in net income (loss) of associated companies  (f)  (177)  (192)  (223)
 Amortization of land rights  (g)  (13,907)  (4,881)  (16,947)
 Revenue recognition  (h)  54,159   5,046   (4,547)
 Amortization of goodwill  (i)  21,270   21,270   8,858 
 Capital leases  (j)  (3,435)  (47,524)  (27,580)
 Adjustment for consolidation of Dayamitra  (k)  (72,361)  5,084   11,127 
 Asset retirement obligations  (1)  (848)  (848)  (11,255)
 Amendment and restatement of the Joint Operation Scheme in Regional Division VII  (s)        4,479 
 Deferred income tax:                
  Deferred income tax on equity method investments  (m)  (11,234)  (3,206)  2,053 
  Deferred income tax effect on U.S. GAAP adjustments      61,742   18,288   (520,693)
                
       (127,976)  (137,231)  1,122,430 
 Minority interest      (18,019)  (16,244)  (16,559)
                
 Net adjustments      (145,995)  (153,475)  1,105,871 
                

F-140


PERUSAHAAN PERSEROAN (PERSERO)
P.T. TELEKOMUNIKASI INDONESIA Tbk AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
DECEMBER 31, 2005 AND 2006, AND FOR YEARS ENDED
DECEMBER 31, 2004, 2005 AND 2006
(Figures in tables are presented in millions of Rupiah, unless otherwise stated)
                 
  Note 2004 2005 2006
         
Net income in accordance with U.S. GAAP      6,468,573   7,840,091   12,111,448 
                
Net income per share — in full Rupiah amount      320.86   388.89   602.12 
                
Net income per ADS — in full Rupiah amount (40 Series B shares per ADS)      12,834.47   15,555.74   24,085.00 
                
                
  Note 2005 2006
       
Stockholders’ equity according to the consolidated balance sheets prepared under Indonesian GAAP      23,292,401   28,068,689 
            
U.S. GAAP adjustments — increase (decrease) due to:            
 Voluntary termination benefits  (a)     1,461,149 
 Capitalization of foreign exchange differences — net of related depreciation  (b)  (471,876)  (392,698)
 Interest capitalized on assets under construction — net of related depreciation  (c)  152,439   226,373 
 Revenue-sharing arrangements  (d)  (223,154)  (164,609)
 Pension  (e)  1,851,509   (115,601)
 Post-retirement health care  (e)  1,038,095   (1,786,355)
 Long service awards  (e)  (213,395)  (234,052)
 Equity in net income (loss) of associated companies  (f)  (18,621)  (18,844)
 Amortization of land rights  (g)  (83,999)  (100,946)
 Revenue recognition  (h)  (709,343)  (713,890)
 Amortization of goodwill  (i)  85,079   93,937 
 Capital leases  (j)  (29,836)  (57,416)
 Adjustment for consolidation of Dayamitra  (k)  (56,644)  (45,517)
 Asset retirement obligations  (l)  (2,544)  (13,799)
 Amendment and restatement of the Joint Operation Scheme in Regional Division VII  (s)     4,479 
 Deferred income tax:            
   Deferred income tax on equity method investments  (m)  35,040   38,768 
   Deferred income tax effect on U.S. GAAP adjustments      (66,182)  39,180 
            
       1,286,568   (1,779,841)
  Minority interest      (10,481)  19,724 
            
  Net adjustments      1,276,087   (1,760,117)
            
Stockholders’ equity in accordance with U.S. GAAP      24,568,488   26,308,572 
            

F-141


PERUSAHAAN PERSEROAN (PERSERO)
P.T. TELEKOMUNIKASI INDONESIA Tbk AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
DECEMBER 31, 2005 AND 2006, AND FOR YEARS ENDED
DECEMBER 31, 2004, 2005 AND 2006
(Figures in tables are presented in millions of Rupiah, unless otherwise stated)
      The methodschanges in stockholders’ equity in accordance with U.S. GAAP for the years ended December 31, 2004, 2005 and assumptions followed2006 are as follows:
              
  2004 2005 2006
       
Stockholders’ equity at beginning of year  16,284,692   19,570,912   24,568,488 
Changes during the year:            
 Net income under U.S. GAAP  6,468,573   7,840,091   12,111,448 
 Dividends  (3,186,991)  (2,921,227)  (5,371,107)
 Accumulated other comprehensive income, net of tax  4,638   (11,288)  (4,138,046)
 Compensation for early termination of exclusive rights     90,000   90,000 
 Treasury stock        (952,211)
             
Stockholders’ equity at end of period  19,570,912   24,568,488   26,308,572 
             
      With regard to determine the fair value estimatesconsolidated balance sheets, the following significant captions determined under U.S. GAAP would have been:
         
  2005 2006
     
Consolidated balance sheets        
Current assets  10,952,600   14,639,334 
Non-current assets  52,527,929   61,495,104 
         
Total assets  63,480,529   76,134,438 
         
Current liabilities  13,796,402   19,682,445 
Non-current liabilities  18,799,964   21,976,058 
         
Total liabilities  32,596,366   41,658,503 
         
Minority interest in net assets of subsidiaries  6,315,675   8,167,363 
Stockholders’ equity  24,568,488   26,308,572 
         
Total liabilities and stockholders’ equity  63,480,529   76,134,438 
         

F-142


PERUSAHAAN PERSEROAN (PERSERO)
P.T. TELEKOMUNIKASI INDONESIA Tbk AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
DECEMBER 31, 2005 AND 2006, AND FOR YEARS ENDED
DECEMBER 31, 2004, 2005 AND 2006
(Figures in tables are inherently judgmental and involve various limitations, including the following:presented in millions of Rupiah, unless otherwise stated)
(3) Additional financial 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:
              
  2004 2005 2006
       
Consolidated income before tax in accordance with U.S. GAAP  12,570,911   16,089,111   23,634,675 
Income tax in accordance with U.S. GAAP at 30% statutory tax rate  3,771,273   4,826,733   7,090,402 
             
Effect of non-deductible expenses (non-taxable income) at the enacted maximum tax rate (30%)            
 Net periodic post-retirement health care benefit cost  139,834   169,534   200,841 
 Amortization of discount on promissory notes and other borrowing costs  136,994   62,132   13,882 
 Tax penalty  1,941   24,155   25,288 
 Employee benefits  24,719   18,618   28,931 
 Permanent differences of the KSO Units  17,213   17,458   39,544 
 Income which was already subject to final tax  (30,743)  (68,336)  (137,915)
 Adjustment to deferred tax liability in relation with property, plant, and equipment        131,664 
 Others  66,787   118,511   165,929 
             
 Total  356,745   342,072   468,164 
             
Income tax expense in accordance with U.S. GAAP  4,128,018   5,168,805   7,558,566 
             
      For the year ended December 31, 2004, 2005 and 2006, all of the Company’s operating revenues occurred in Indonesia, and accordingly, the Company has not been subject to income tax in other countries.

F-143


PERUSAHAAN PERSEROAN (PERSERO)
P.T. TELEKOMUNIKASI INDONESIA Tbk AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
DECEMBER 31, 2005 AND 2006, AND FOR YEARS ENDED
DECEMBER 31, 2004, 2005 AND 2006
(Figures in tables are presented in millions of Rupiah, unless otherwise stated)
          
  2005 2006
     
Deferred tax assets        
Current
        
Unearned income  38,706   37,943 
Allowance for doubtful accounts  248,260   298,797 
Allowance for inventories obsolescence  13,884   14,212 
Tax losses carried forwards  123,309    
Accrued expense  63,002   124,536 
Deferred consideration for business combinations  159,411   260,596 
Others  58,783   6,697 
         
   705,355   742,781 
         
Non-current
        
Unearned income  179,660   176,225 
Long-term investments  41,706   38,768 
Deferred consideration for business combinations  785,992   1,006,149 
Accrued long service awards  225,454   247,235 
Accrued pension and other post-retirement benefits costs     344,750 
Others  50,881   45,854 
         
   1,283,693   1,858,981 
         
Total deferred tax assets (before offset)  1,989,048   2,601,762 
         
Deferred tax liabilities        
Current
        
Prepaid expenses  (38,096)  (65,301)
         
Non-current
        
Property, plant and equipment  (2,882,932)  (3,908,247)
Intangible assets  (1,327,225)  (1,186,358)
Prepaid pension benefit costs  (163,747)   
         
   (4,373,904)  (5,094,605)
         
Total deferred tax liabilities (before offset)  (4,412,000)  (5,159,906)
         
Net deferred tax liabilities        
presented after offset in the consolidated balance sheets as follows:        
 Current deferred tax assets  628,553   678,070 
 Current deferred tax liabilities     (590)
 Non-current deferred tax assets     6,171 
 Non-current deferred tax liabilities  (3,051,505)  (3,241,795)

F-144


PERUSAHAAN PERSEROAN (PERSERO)
P.T. TELEKOMUNIKASI INDONESIA Tbk AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
DECEMBER 31, 2005 AND 2006, AND FOR YEARS ENDED
DECEMBER 31, 2004, 2005 AND 2006
(Figures in tables are presented in millions of Rupiah, unless otherwise stated)
      As of the end of the year ended December 31, 2006, the Company and its subsidiaries adopted SFAS 158 and recognized deferred tax assets arising from the transition obligations, the prior service costs and the actuarial losses totaling Rp.606,015 million directly in the accumulated other comprehensive income.
      Deferred tax assets relating to deferred consideration for business combinations have arisen due to the tax deductions that could be claimed on the fixed monthly payments to MGTI and BSI for corporate income tax calculation.
b. Fair Values of Financial Instruments
      The following methods and assumptions are used to estimate the fair value of each class of financial instruments:
Cash and cash equivalents and temporary investments
      The carrying amounts approximate fair values because of the short-term nature of the financial assets.
Short-term bank loans
      The carrying amounts approximate fair values because of the short-term nature of the financial liabilities.
Long-term liabilities
      The fair values of long-term liabilities other than bonds and guaranteed notes are estimated by discounting the future cash flows of each liability at rates currently offered to the Company and its subsidiaries for similar debts of comparable maturities by the bankers of the Company and its subsidiaries.
      The fair values of bonds and guaranteed notes are based on market prices at the balance sheet date.

F-145


PERUSAHAAN PERSEROAN (PERSERO)
P.T. TELEKOMUNIKASI INDONESIA Tbk AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
DECEMBER 31, 2005 AND 2006, AND FOR YEARS ENDED
DECEMBER 31, 2004, 2005 AND 2006
(Figures in tables are presented in millions of Rupiah, unless otherwise stated)
      The estimated fair values of the Company’s and its subsidiaries’ financial assets and liabilities are as follows:
         ��
  Carrying  
  Amount Fair Value
     
2005
        
Cash and cash equivalents  5,374,684   5,374,684 
Temporary investments  22,064   22,064 
Short-term bank loans  173,800   173,800 
Long-term liabilities:        
 Two-step loans  5,329,477   5,001,102 
 Bonds  991,850   1,031,040 
 Medium-term notes  609,329   582,220 
 Bank loans  2,386,646   2,267,269 
 Deferred consideration for business combinations  3,990,353   4,162,814 
2006
        
Cash and cash equivalents  8,315,836   8,315,836 
Temporary investments  84,492   84,492 
Short-term bank loans  687,990   687,990 
Long-term liabilities:        
 Two-step loans  4,476,613   4,160,725 
 Bonds  997,137   1,027,305 
 Medium-term notes  464,819   460,316 
 Bank loans  4,845,048   4,765,933 
 Deferred consideration for business combinations  4,591,177   4,695,899 
      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.
 
       ii. Estimated fair values are not necessarily indicative of the amounts that the Company and its subsidiarysubsidiaries would record upon disposal/termination of the financial instruments.assets and liabilities.
     c. Research and Development
      Research and development expenditures, as determined under U.S. GAAP, amounted to approximately Rp8,995 million, Rp9,111 million and Rp13,225 million in 2002, 2003 and 2004, respectively.
     d. Comprehensive Income
             
  2002 2003 2004
       
Net income under U.S. GAAP  8,587,259   5,790,640   6,468,573 
Unrealized holding gain on available-for-sale securities  207      884 
Foreign exchange translation of associates  (21,009)  (78,703)  3,754 
          
   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) of 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 years ended December 31, 2002, 2003 and 2004, respectively. The components of accumulated other comprehensive income are as follows:
             
  2002 2003 2004
       
Unrealized holding gain on available-for-sale securities        884 
Foreign exchange translation of associates  235,665   156,962   160,716 
          
   235,665   156,962   161,600 
          

F-134F-146


PERUSAHAAN PERSEROAN (PERSERO)
P.T. TELEKOMUNIKASI INDONESIA Tbk AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
DECEMBER 31, 20032005 AND 2004,2006, AND FOR YEARS ENDED
DECEMBER 31, 2002, 20032004, 2005 AND 20042006
(Figures in tables are presented in millions of Rupiah, unless otherwise stated)
e. Employee Benefit Plans
c. Comprehensive Income
             
  2004 2005 2006
       
Net income under U.S. GAAP  6,468,573   7,840,091   12,111,448 
Unrealized holding gain (loss) on available-for-sale securities  884   (1,632)  9,613 
Foreign currency translation adjustments of associated companies, net of tax of Rp.l,609 million, Rp.l,097 million and (Rp.l,675) million in 2004, 2005 and 2006, respectively  3,754   2,560   (3,909)
Minimum pension liability adjustments, net of tax of Rp. nil, Rp.5,235 million and Rp. nil in 2004, 2005 and 2006, respectively     (12,216)   
             
   6,473,211   7,828,803   12,117,152 
             
The Companycomponents of accumulated other comprehensive income are as follow:
      The disclosures under SFAS No. 87 and SFAS No. 106 are as follows:
                         
  Pension Health Care
     
  2002 2003 2004 2002 2003 2004
             
Components of Net Periodic Benefit Cost
                        
Service cost  90,869   119,089   137,264   83,956   88,394   76,163 
Interest cost  418,044   537,797   740,494   424,834   493,596   411,110 
Expected return on plan assets  (343,121)  (421,706)  (436,672)  (33,744)  (56,004)  (61,084)
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       
                   
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 
                   
              
  2004 2005 2006
       
Unrealized holding gain (loss) on available-for-sale securities  884   (748)  8,865 
Foreign currency translation adjustments of associated companies  160,716   163,276   159,367 
Minimum pension liability adjustments     (12,216)   
Adjustments arising from the SFAS 158 adoption:            
 Transition obligations        (241,301)
 Prior service costs        (1,055,840)
 Actuarial losses        (2,858,825)
             
   161,600   150,312   (3,987,734)
             

F-135F-147


PERUSAHAAN PERSEROAN (PERSERO)
P.T. TELEKOMUNIKASI INDONESIA Tbk AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
DECEMBER 31, 20032005 AND 2004,2006, AND FOR YEARS ENDED
DECEMBER 31, 2002, 20032004, 2005 AND 20042006
(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, funded status of the plan and the net amount recognized in the Company’s balance sheets as of December 31, 2003 and 2004:
d. Employee Benefits
The Company
      The disclosures under SFAS 132 (Revised 2003) “Employers’ Disclosures about Pensions and Other Postretirement Benefits” and SFAS 106 are as follows:
                 
  Pension Health Care
     
  2003 2004 2003 2004
         
Change in benefit obligation
                
Benefit obligation at beginning of year  4,248,110   6,852,923   3,843,604   3,787,389 
Service cost  119,089   137,264   88,394   76,163 
Interest cost  537,797   740,494   493,596   411,110 
Plan participants’ contributions  35,173   43,906       
Actuarial loss (gain)  2,284,868   (155,128)  (539,593)  529,618 
Benefits paid  (372,114)  (304,277)  (98,612)  (123,275)
             
Benefit obligation at end of year  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  3,099,648   3,671,309   374,446   505,340 
Actual return on plan assets  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  (372,114)  (304,277)  (98,612)  (123,275)
             
Fair value of plan assets at end of year  3,671,309   4,884,523   505,340   1,138,768 
             
Funded status  (3,181,614)  (2,430,659)  (3,282,049)  (3,542,237)
Unrecognized prior service cost (gain)  2,062,830   1,861,565   (1,934)  (1,566)
Unrecognized net actuarial loss  1,378,701   974,763   952,885   1,459,408 
Unrecognized net transition obligation  148,891   120,257   267,574   243,249 
             
Net amount recognized  408,808   525,926   (2,063,524)  (1,841,146)
             
         
  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    
       
                         
  Pension Health Care
     
  2004 2005 2006 2004 2005 2006
             
Components of Net Periodic Benefit Cost
                        
Service cost  137,264   138,117   187,960   76,163   87,636   107,513 
Interest cost  740,494   789,830   768,586   411,110   507,994   605,573 
Expected return on plan assets  (436,672)  (533,333)  (677,602)  (61,084)  (103,498)  (145,264)
Amortization of prior service cost (gain)  201,265   201,265   201,265   (367)  (367)  (367)
Recognized actuarial loss (gain)  57,641   21,244      52,006   88,589   121,986 
Amortization of transition obligation  28,634   28,634   28,634   24,325   24,325   24,325 
                         
Net periodic benefit cost  728,626   645,757   508,843   502,153   604,679   713,766 
Amounts charged to KSO Units under contractual agreement  (16,369)  (18,660)  (16,159)  (9,913)  (11,627)  (7,812)
                         
Total net periodic benefit cost less amounts charged to KSO Units  712,257   627,097   492,684   492,240   593,052   705,954 
                         

F-136F-148


PERUSAHAAN PERSEROAN (PERSERO)
P.T. TELEKOMUNIKASI INDONESIA Tbk AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
DECEMBER 31, 20032005 AND 2004,2006, AND FOR YEARS ENDED
DECEMBER 31, 2002, 20032004, 2005 AND 20042006
(Figures in tables are presented in millions of Rupiah, unless otherwise stated)
      The following table presents the changes in the benefit obligations, the changes in the plan assets, the funded status of the plan and the prepaid or accrued cost amounts recognized in the Company’s U.S. GAAP balance sheets as of December 31, 2005 and 2006:
                 
  Pension Health Care
     
  2005 2006 2005 2006
         
Change in benefit obligation
                
Benefit obligation at beginning of year  7,315,182   7,140,100   4,681,005   5,574,489 
Service cost  138,117   187,960   87,636   107,513 
Interest cost  789,830   768,586   507,994   605,573 
Plan participants’ contributions  41,371   43,918       
Actuarial (gain) loss  (794,180)  306,254   423,833   850,037 
Benefits paid  (350,220)  (325,437)  (125,979)  (152,269)
                 
Benefit obligation at end of year  7,140,100   8,121,381   5,574,489   6,985,343 
                 
Change in plan assets
                
Fair value of plan assets at beginning of year  4,884,523   5,429,954   1,138,768   1,493,897 
Actual return on plan assets  155,754   1,368,816   45,209   196,778 
Employer contributions  698,526   693,498   435,899   714,854 
Plan participants’ contributions  41,371   43,918       
Benefits paid  (350,220)  (325,437)  (125,979)  (152,269)
                 
Fair value of plan assets at end of year  5,429,954   7,210,749   1,493,897   2,253,260 
                 
Funded status  (1,710,146)  (910,632)  (4,080,592)  (4,732,083)
Unrecognized prior service cost (gain)  1,660,300      (1,199)   
Unrecognized net actuarial loss  536,918      1,852,943    
Unrecognized net transition obligation  91,623      218,924    
                 
Prepaid (accrued) cost  578,695   (910,632)  (2,009,924)  (4,732,083)
                 
      As of December 31, 2006, the accrued cost amounts recognized for pension and health care benefits of Rp.910,632 million and Rp.4,732,083 million, respectively, consisted of non-current portions only. The accumulated benefit obligation of the Company’s defined benefit pension plan was Rp.4,829,227 million as of December 31, 2005.
      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 the years.
      The assumptions used by the independent actuary to determine the benefit obligation and net periodic benefit cost of the plans as of December 31, 2002, 2003 and 2004 were as follows:
      The assumptions used by the independent actuary to determine the benefit obligation of the plans as of December 31, 2005 and 2006 were as follows:
                         
  Pension Health Care
     
  2002 2003 2004 2002 2003 2004
             
Discount rate  13%  11%  11%  13%  11%  11%
Expected long-term return on plan assets  13%  11%  10.5%  13%  11%  8%
Rate of compensation increase  6%  8%  8%         
      Assumed health care cost trend rates at December 31, 2002, 2003 and 2004 are as follow:
             
  2002 2003 2004
       
Health care cost trend assumed for next year  14%   12%   12% 
Rate to which the cost trend is assumed to decline (the ultimate trend rate)  10%   8%   8% 
Year that the rate reaches the ultimate trend rate  2005   2006   2007 
      The actuarial valuations for the defined benefit pension plan and post-retirement health care plan as of December 31, 2002 were prepared on 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 an independent actuary.
      Discount rate is based on the yields available on Government Bond, i.e. 10% – 12% for Bonds maturing between 2008 and 2013. The rate of compensation increase assumed is 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 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)
                 
  Pension Health Care
     
  2005 2006 2005 2006
         
Discount rate  11%  10.5%  11%  10.5%
Rate of compensation increase  8.8%  8%      

F-137F-149


PERUSAHAAN PERSEROAN (PERSERO)
P.T. TELEKOMUNIKASI INDONESIA Tbk AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
DECEMBER 31, 20032005 AND 2004,2006, AND FOR YEARS ENDED
DECEMBER 31, 2002, 20032004, 2005 AND 20042006
(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:
      The assumption used by the independent actuary to determine the net periodic benefit cost of the plans for the years ended December 31, 2004, 2005 and 2006 were 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%
       
                         
  Pension Health Care
     
  2004 2005 2006 2004 2005 2006
             
Discount rate  11%  11%  10.5%  11%  11%  10.5%
Expected long-term return on plan assets  11%  10.5%  12.0%  11%  8%  8.5%
Rate of compensation increase  8%  8%  8%         
      Dana Pensiun Telkom is moving to a more long-term focused investment strategy and during 2005 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, 2003 and 2004, by asset category, are as follows:
      Future health care cost trend rates at December 31, 2004, 2005 and 2006 were assumed as follows:
         
  Plan Assets
  as of
  December 31
   
  2003 2004
     
Asset Category        
Debt securities     15%
Deposit securities  98%  84%
Other  2%  1%
       
Total  100%  100%
       
             
  2004 2005 2006
       
Health care cost trend assumed for next year  12%  9%  12%
Ultimate health care cost trend rate  8%  9%  8%
Year that the rate reaches the ultimate trend rate  2007   2006   2011 
      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 Rp697,529 million to its defined benefit pension plan and Rp516,538 million to its post-retirement health care plan during 2005.
      The actuarial valuations for the defined benefit pension plan and post-retirement health care plan as of December 31, 2004, 2005 and 2006 were prepared on March 15, 2005, February 27, 2006 and April 24, 2007 respectively, by an independent actuary.
      The discount rates were based on the Government Bond yields. The rates of compensation increase assumed were based on the long-term inflation rates in the order of between 6% and 7%. The expected long-term returns on the plan assets were based on the average rate of earnings expected on the funds invested or to be invested.
      Assumed future health care cost trends have a significant effect on the amounts reported for the health care plan. A one-percentage-point change in the assumed future 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  174,413   (137,032)
Effect on post-retirement benefit obligation  1,342,138   (1,058,800)

F-138F-150


PERUSAHAAN PERSEROAN (PERSERO)
P.T. TELEKOMUNIKASI INDONESIA Tbk AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
DECEMBER 31, 20032005 AND 2004,2006, AND FOR YEARS ENDED
DECEMBER 31, 2002, 20032004, 2005 AND 20042006
(Figures in tables are presented in millions of Rupiah, unless otherwise stated)
Expected Future Benefit Payments
      The expected benefit payments are as follows:
      The investment policies established by management for the pension plan require a minimum of 95% of the fund to be invested in the following asset types and a minimum overall rate of return of 10%;
         
  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 
Based on Percentage
of Fund Invested
Time depositsUp to 100%
Deposits on callUp to 100%
Certificates of depositUp to 100%
Listed sharesUp to 50%
Listed debt securitiesUp to 50%
Unlisted shares and debt securitiesUp to 20%
Real estateUp to 15%
Mutual fundsUp to 50%
Certificates by Bank IndonesiaUp to 100%
Securities by the Indonesian GovernmentUp to 75%
Telkomsel      The weighted average asset allocations of the Company’s pension plan at December 31, 2005 and 2006, by asset category, were as follows:
             
  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 
          
         
  Plan Assets
  as of
  December 31
   
Asset Category 2005 2006
     
Debt securities  75%  74%
Deposit securities  7%  4%
Equity securities  11%  18%
Real estate  1%  1%
Others  6%  3%
         
Total  100%  100%
         
      Equity securities included the Company’s common stock in the amounts of Rp.l24,189 million (2.3 percent of the total plan assets) and Rp.238,495 million (3.3 percent of the total plan assets) at December 31, 2005 and 2006, respectively.
      Debt securities included the Company’s bonds in the amounts of Rp.223,736 million (4.1 percent of the total plan assets) and Rp.217,531 million (3 percent of the total plan assets) at December 31, 2005 and 2006, respectively.

F-139F-151


PERUSAHAAN PERSEROAN (PERSERO)
P.T. TELEKOMUNIKASI INDONESIA Tbk AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
DECEMBER 31, 20032005 AND 2004,2006, AND FOR YEARS ENDED
DECEMBER 31, 2002, 20032004, 2005 AND 20042006
(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, funded status of the plan and the net amount recognized in Telkomsel’s balance sheets as of December 31, 2003 and 2004:
      Management has established investment policies for the health care benefit plan which require a minimum of 95% of the fund to be invested in the following asset types:
         
  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    
       
Based on
Percentage of Fund Invested
Time depositsUp to 100%
Deposits on callUp to 100%
Listed sharesNot exceeding 50%
Listed debt securitiesNot exceeding 50%
Mutual fundsNot exceeding 50%
Certificates by Bank IndonesiaUp to 50%
Securities by the Indonesian GovernmentNot exceeding 75%
      The actuarial calculation for the pension plan is prepared by an independent actuary. The measurement date used to determine pension benefit measures for the pension plan is December 31 of each of the years.
      The weighted average asset allocations of the Company’s post-retirement health care plan at December 31, 2005 and 2006, by asset category, were as follows:
         
  Plan Assets
  as of
  December 31
   
Asset Category 2005 2006
     
Deposit securities  60%  18%
Debt securities  31%  30%
Equity securities  4%  1%
Mutual fund  4%  32%
Others  1%  19%
         
Total  100%  100%
         
      Debt securities included the Company’s medium-term notes and bonds in the amounts of Rp.232,394 million (15.6 percent of the total plan assets) and Rp.l83,700 million (8.1 percent of the total plan assets) at December 31, 2005 and 2006, respectively.
      Equity securities include the Company’s stocks amounting to Rp.7,548 million (0.33 percent of the total plan assets) at December 31, 2006 (December 31, 2005: Rp. nil).
Contributions
      The Company expected to contribute Rp.700,161 million to its defined benefit pension plan and Rp.900,000 million to its post-retirement health care plan during 2007.

F-140F-152


PERUSAHAAN PERSEROAN (PERSERO)
P.T. TELEKOMUNIKASI INDONESIA Tbk AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
DECEMBER 31, 20032005 AND 2004,2006, AND FOR YEARS ENDED
DECEMBER 31, 2002, 20032004, 2005 AND 20042006
(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, 2002, 2003 and 2004 are as follows:
Telkomsel
Pension plan
             
  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%
             
  2004 2005 2006
       
Service cost  6,300   12,901   25,432 
Interest cost  5,199   8,412   18,900 
Expected return on plan assets  (824)  (832)  (2,126)
Amortization of prior service cost  125   24   24 
Recognized actuarial loss  1,157   1,920   6,080 
Amortization of transition obligation  458   458   458 
             
Net periodic benefit cost  12,415   22,883   48,768 
             
f. Recent Accounting Pronouncements      The following table presents the changes in the benefit obligations, the changes in the plan assets, the funded status of the plan and the accrued cost amounts recognized in Telkomsel’s U.S. GAAP balance sheets as of December 31, 2005 and 2006
      SFAS No. 151 “Inventory Cost — an amendment of ARB No. 43, Chapter 4.” In November 2004, FASB issued SFAS No. 151 which requires certain abnormal expenditures to be recognized as expenses in current period. It also requires that the amount of fixed production overhead allocated to inventory be based on the normal capacity of the production facilities. SFAS No. 151 shall be effective for financial statements for fiscal years beginning after June 15, 2005. It is not expected that the adoption of SFAS No. 151 will have a 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 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 transaction lacks commercial substance. It is not expected that the adoption of this standard will have a material effect on the Company’s consolidated financial statements.
         
  2005 2006
     
Change in benefit obligation
        
Benefit obligation at beginning of year  59,145   173,680 
Service cost  12,901   25,432 
Interest cost  8,412   18,900 
Actuarial loss  96,151   51,056 
Benefits paid  (2,929)  (3,732)
         
Benefit obligation at end of year  173,680   265,336 
         
Change in plan assets
        
Fair value of plan assets at beginning of year  11,182   20,971 
Actual return on plan assets  (2,210)  (18,792)
Employer contributions  14,928   29,731 
Benefits paid  (2,929)  (2,006)
         
Fair value of plan assets at end of year  20,971   29,904 
         
Funded status  (152,709)  (235,432)
Unrecognized prior service cost  274    
Unrecognized net actuarial loss  120,725    
Unrecognized transition obligation  6,190    
         
Accrued cost  (25,520)  (235,432)
         

F-141F-153


PERUSAHAAN PERSEROAN (PERSERO)
P.T. TELEKOMUNIKASI INDONESIA Tbk AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
DECEMBER 31, 20032005 AND 2004,2006, AND FOR YEARS ENDED
DECEMBER 31, 2002, 20032004, 2005 AND 20042006
(Figures in tables are presented in millions of Rupiah, unless otherwise stated)
57. RECONCILIATION OF NET INCOME TO NET CASH PROVIDED BY OPERATING ACTIVITIES      As of December 31, 2005, Telkomsel recognized an additional minimum pension liability as follows:
              
  2002 2003 2004
       
Net income  8,039,709   6,087,227   6,129,209 
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 
 Interest income  (479,802)  (366,024)  (317,941)
 Interest expense  1,582,750   1,383,446   1,270,136 
 Foreign exchange (gain) loss  (723,831)  (363,505)  1,192,842 
 Equity in net income of associated companies  (4,598)  (2,819)  (3,420)
 (Gain) loss on sale of property, plant and equipment  (130,450)  (182,883)  26,089 
 Loss on redemption of Telkomsel’s bonds        44,628 
 (Gain) loss on sale of trading and investment securities  (3,196,380)  46,595    
 Amortization of goodwill and other intangible assets  187,990   730,659   872,330 
 Amortization of unearned income  (59,691)  (61,812)  (93,164)
 Amortization of deferred charges  11,903   26,555   25,751 
 Net periodic post-retirement benefit cost  616,512   641,435   492,240 
 Net periodic long service award benefit cost  289,922   219,239   159,323 
 Provision for doubtful accounts and inventory obsolescence  31,103   326,419   357,096 
 Income tax expense  2,898,971   3,861,090   4,003,072 
 Minority interest in net income of subsidiaries  810,222   1,503,478   1,956,301 
Changes in assets and liabilities:            
 Trade accounts receivable  (373,125)  (827,772)  (670,103)
 Other accounts receivable  882   14,579   105,670 
 Inventories  31,398   76,486   (58,329)
 Prepaid expenses  (17,936)  (84,690)  (179,573)
 Prepaid taxes  (84,409)  (127,607)  173,189 
 Prepaid pension benefit costs     (260,041)  196,960 
 Trade accounts payable  1,303,288   593,826   (47,618)
 Other accounts payable  166,383   (27,837)  (96,022)
 Taxes payable  (1,601,223)  477,961   (105,991)
 Accrued expenses  347,910   (779,917)  (65,078)
 Unearned income  134,850   317,650   266,774 
 Advances from customers and suppliers  80,090   (30,884)  (78,028)
 Accrued pension and other post-retirement benefit costs     7,041   18,768 
Contributions to Yayasan Kesehatan Pegawai Telkom  (59,543)  (188,473)  (724,530)
Payments of long service award benefit  (76,525)  (222,743)  (78,057)
Interest paid  (900,660)  (1,178,332)  (1,348,919)
Interest received  480,288   369,982   321,677 
Income tax paid  (1,914,895)  (3,905,317)  (4,132,359)
          
Net cash provided by operating activities  10,864,473   12,852,532   16,051,480 
          
2005
Accumulated benefit obligation70,406
Fair value of plan assets(20,971)
Unfunded accumulated benefits (required minimum liability)49,435
Accrued pension cost(25,520)
Additional liability under US GAAP23,915
Intangible assets6,464
Other comprehensive income17,451
      As of December 31, 2006, the accrued cost amount recognized for pension benefits of Rp235,432 million consisted of non-current portion only.
      The actuarial calculation for the pension plan was prepared by an independent actuary. The measurement date used to determine pension benefit measures for the pension plan is December 31 of each of the years.
      The assumptions used by the independent actuary to determine the benefit obligation of the plan as of 31 December 31, 2005 and 2006 were as follows:
         
  2005 2006
     
Discount rate  11%  10.5%
Rate of compensation increase  8%  8%
      The assumptions used by the independent actuary to determine the net periodic pension cost of the plan for the years ended December 31, 2004, 2005 and 2006 were as follows:
             
  2004 2005 2006
       
Discount rate  11%  11%  10.5%
Expected long-term return on plan assets  7.5%  7.5%  7.5%
Rate of compensation increase  9%  9%  8%
      Telkomsel’s pension plan is managed by PT Asuransi Jiwasraya, a state owned insurance company (see Notes 43).

F-154


PERUSAHAAN PERSEROAN (PERSERO)
P.T. TELEKOMUNIKASI INDONESIA Tbk AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
DECEMBER 31, 2005 AND 2006, AND FOR YEARS ENDED
DECEMBER 31, 2004, 2005 AND 2006
(Figures in tables are presented in millions of Rupiah, unless otherwise stated)
      Expected Future Benefit Payments
      The expected benefit payments by TELKOM and its subsidiaries are as follows:
         
  Pension Health Care
     
2007  339,742   179,510 
2008  403,002   203,823 
2009  484,607   234,110 
2010  578,307   267,492 
2011  658,813   302,419 
2012-2016  4,374,074   2,116,311 
Adoption of SFAS 158
      The incremental effects of adopting the provision of SFAS 158 as of December 31, 2006 are presented in the following table. This adoption had no effect on the Company’s consolidated statement of income for the year ended December 31, 2006, or for any prior periods presented and it will not affect the Company’s operating result in the future.
             
  Prior to Adopting Effect of Adopting December 31, 2006
  SFAS 158 SFAS 158 as Reported
       
Prepaid (accrued) pension cost  702,653   (1,864,859)  (1,162,206)
Accrued post retirement healthcare  (2,008,838)  (2,723,246)  (4,732,084)
Accrued long service awards  (602,112)  (222,002)  (824,114)
Deferred tax assets (liabilities)  (30,162)  606,015   575,853 
Intangible asset  6,464   (6,464)   
Minority interest     66,806   66,806 
Accumulated other comprehensive income  12,216   4,143,750   4,155,966 
      The amounts recognized in accumulated other comprehensive income at December 31, 2006 consisted of:
                         
    Post-        
    Retirement        
  Pension Health Long Service      
  Benefit Care Awards Total Deferred Tax Net of Tax
             
Transition obligations  66,715   194,599      261,314   20,013   241,301 
Prior service costs  1,459,198   (833)  50,335   1,508,700   452,860   1,055,840 
Actuarial losses  296,054   2,529,480   171,667   2,997,201   138,376   2,858,825 
                         
Total�� 1,821,967   2,723,246   222,002   4,767,215   611,249   4,155,966 
                         

F-142F-155


PERUSAHAAN PERSEROAN (PERSERO)
P.T. TELEKOMUNIKASI INDONESIA Tbk AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
DECEMBER 31, 2005 AND 2006, AND FOR YEARS ENDED
DECEMBER 31, 2004, 2005 AND 2006
(Figures in tables are presented in millions of Rupiah, unless otherwise stated)
      The transition obligations, prior service costs and net actuarial losses included in accumulated other comprehensive income as of December 31, 2006 and expected to be recognized in net periodic costs for the year ending December 31, 2007 are as follows:
                 
    Post-    
    Retirement Long Service  
  Pension Healthcare Awards Total
         
Transition obligations  28,932   24,325      53,257 
Prior service costs  201,281   (367)  6,892   207,806 
Actuarial losses  6,013   183,645   12,625   202,283 
                 
Gross before taxes  236,226   207,603   19,517   463,346 
                 
Deferred taxes  (70,868)     (5,855)  (76,723)
                 
Net of taxes  165,358   207,603   13,662   386,623 
                 
e. Operating lease
      For the years ended December 31, 2004, 2005 and 2006, the Company and its subsidiaries recorded operating lease expenses for land and building, vehicle and office equipment totalling to Rp.710,569 million, Rp.551,882 million and Rp.729,839 million, respectively.
      Telkomsel entered into a non-cancelable office lease agreement up to 2008. The minimum lease payment for 2007 and 2008 amounting US$5.2 million (equivalent to Rp.46,989 million) for each year.
f. Recent Accounting Pronouncements
      In September 2006, the FASB issued SFAS 157, “Fair Value Measurements” which establishes a framework for measuring fair value in US GAAP. SFAS 157 applies under other accounting pronouncements that require or permit fair value measurements, the FASB having previously concluded in those accounting pronouncements that fair value is the relevant attribute. SFAS 157 shall be effective for financial statements issued for fiscal years beginning after November 15, 2007, and for an interim period within that fiscal year. The Company is currently evaluating what effect, if any, the adoption of SFAS 157 will have on the Company’s consolidated financial statements.
      SFAS 159, “The Fair Value Option for Financial Assets and Financial Liabilities-Including an Amendment of FASB Statement No. 115”. In February 2007, the FASB issued SFAS 159. Under the provisions of SFAS 159, companies may choose to account for financial assets and financial liabilities (as well as certain non-financial instruments that are similar to financial instruments) at fair value on an instrument-by-instrument basis. Changes in fair value shall be recognized in earnings for each reporting period. SFAS 159 shall be effective as of the beginning of the fiscal year that begins after November 15, 2007. The Company is currently evaluating what effect, if any, the adoption of SFAS 159 will have on the Company’s consolidated financial statements.
      In June 2006, FASB issued FIN 48 “Accounting for Uncertainty in Income Taxes — An interpretation of FASB Statement No. 109”. This interpretation clarifies the accounting for uncertainty in income taxes recognized in an enterprise’s financial statements in accordance with SFAS 109, “Accounting for Income Taxes” and prescribes a recognition threshold and the measurement attribute for the financial statement recognition and measurement of a tax position taken or expected to be taken in a tax return. It also provides guidance on derecognizing, classification, interest and penalties, accounting

F-156


PERUSAHAAN PERSEROAN (PERSERO)
P.T. TELEKOMUNIKASI INDONESIA Tbk AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
DECEMBER 31, 2005 AND 2006, AND FOR YEARS ENDED
DECEMBER 31, 2004, 2005 AND 2006
(Figures in tables are presented in millions of Rupiah, unless otherwise stated)
in interim periods, disclosure, and transition. The requirements in FIN 48 are effective after December 15, 2006. The Company is currently evaluating what effect, if any, the adoption of FIN 48 will have on the Company’s consolidated financial statements.
57. RECONCILIATION OF NET INCOME TO NET CASH PROVIDED BY OPERATING ACTIVITIES)
      The following table presents the reconciliation of net income to net cash provided by operating activities in accordance with SFAS 95.
              
  2004 2005 2006
       
Net income  6,614,568   7,993,566   11,005,577 
Adjustments to reconcile net income to net cash provided by operating activities:            
 Depreciation of property, plant and equipment  6,438,557   7,570,739   9,178,343 
 Write-down of assets     616,768   58,252 
 Loss on procurement commitments     79,359    
 Interest income  (317,941)  (344,686)  (654,984)
 Interest expense  1,270,136   1,177,268   1,286,354 
 Foreign exchange (gain) loss  1,192,842   420,419   (883,831)
 Equity in net income of associated companies  (3,420)  (10,879)  6,619 
 (Gain) loss on sale of property, plant and equipment  26,089   (46,193)  (9,463)
 Insurance proceeds     (27,580)   
 Loss on redemption of Telkomsel’s bonds  44,628   19,038    
 Loss on sale of long-term investments        (22,561)
 Amortization of goodwill and other intangible assets  872,330   918,153   944,403 
 Amortization of unearned income  (93,164)  (149,824)  (159,272)
 Amortization of deferred charges  25,751   26,921   28,462 
 Provision for doubtful accounts and inventory obsolescence  357,096   488,973   458,252 
 Compensation for early termination of exclusivity right        90,000 
 Income tax expense  4,178,526   5,183,887   7,097,202 
 Minority interest in net income of subsidiaries  1,956,301   3,063,971   3,948,101 

F-157


PERUSAHAAN PERSEROAN (PERSERO)
P.T. TELEKOMUNIKASI INDONESIA Tbk AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
DECEMBER 31, 2005 AND 2006, AND FOR YEARS ENDED
DECEMBER 31, 2004, 2005 AND 2006
(Figures in tables are presented in millions of Rupiah, unless otherwise stated)
              
  2004 2005 2006
       
Changes in assets and liabilities:            
 Trade receivables  (670,103)  (706,726)  (353,826)
 Other receivables  95,757   (124,746)  46,344 
 Inventories  (58,329)  (28,211)  6,948 
 Prepaid expenses  (179,573)  (578,364)  (217,718)
 Prepaid taxes  173,189   (1,217)   
 Prepaid pension benefit costs  208   722    
 Trade payables  (47,618)  284,599   405,434 
 Other payables  (96,022)  1,602   646 
 Taxes payable  (105,991)  156,089   91,040 
 Accrued expenses  (65,078)  419,465   1,986,005 
 Unearned income  266,774   562,719   454,970 
 Advances from customers and suppliers  (78,028)  (55,343)  (75,245)
 Accrued pension and other post-retirement benefit costs  (246,867)  (149,254)  (102,294)
 Accrued long service awards  (41,196)  74,683   71,801 
 Accrued post-retirement health care benefits  (298,341)  64,314   (240,521)
Interest paid  (1,348,919)  (1,200,484)  (1,217,131)
Interest received  321,677   341,848   642,959 
Income tax paid  (4,132,359)  (4,938,916)  (7,175,678)
             
Total adjustment  9,436,912   13,109,114   15,689,611 
             
Net cash provided by operating activities  16,051,480   21,102,680   26,695,188 
             

F-158