Table of Contents

**SECURITIES AND EXCHANGE COMMISSION****Washington, D.C. 20549** **Form 20-F****ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF****THE SECURITIES EXCHANGE ACT OF 1934****For the fiscal year ended December 31, 2004****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 toSection 12(b) of the Act.       **Name of each exchange on****Title of Each class** **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 toSection 12(g) of the Act.None    Securities for which there is a reporting obligation pursuant toSection 15(d) of the Act.None    Indicate the number of outstanding shares of each of theissuer’s classes of capital or common stock as of the closeof the period covered by the annual report:       Series A Shares, par value 250 Rupiah per share     1    Series B Shares, par value 250 Rupiah per share     20,159,999,279    Indicate by check mark whether the registrant (1) has filedall reports required to be filed by Section 13 or 15(d) ofthe Securities Exchange Act of 1934 during the preceding12 months (or for such shorter period that the Registrantwas required to file such reports) and (2) has been subjectto such filing requirements for the past 90 days.Yes  X     No      Indicate by check mark which financial statement item theRegistrant has elected to follow.Item 17      Item 18 X    *     Investor Relations Unit, Graha Citra Caraka, Jl. Gatot Subroto,    No. 52, 5th Floor, Jakarta 12570.**     The Series B Shares were registered in connection with the    registration of the American Depositary Shares. The    Series B Shares are not listed for trading on the New York    Stock Exchange.

**TABLE OF CONTENTS**           **Page**          DEFINITIONS  2      FORWARD LOOKING STATEMENTS  7      CONVENTIONS  7 ** PART I**         Item    1.      IDENTITY OF DIRECTORS, SENIOR MANAGEMENT    AND ADVISERS*  8      Item    2.      OFFER STATISTICS AND EXPECTED TIMETABLE*  8      Item    3.      KEY INFORMATION  8      Item    4.      INFORMATION ON THE COMPANY  25      Item    5.      OPERATING AND FINANCIAL REVIEW AND    PROSPECTS  77      Item    6.      DIRECTORS, SENIOR MANAGEMENT AND    EMPLOYEES  135      Item    7.      MAJOR STOCKHOLDERS AND RELATED PARTY    TRANSACTIONS  143      Item    8.      FINANCIAL INFORMATION  152      Item    9.      THE OFFER AND LISTING  154      Item   10.      ADDITIONAL INFORMATION  158      Item   11.      QUANTITATIVE AND QUALITATIVE DISCLOSURE    ABOUT MARKET RISK  173      Item   12.      DESCRIPTION OF SECURITIES OTHER THAN EQUITY    SECURITIES*  176 ** PART II**         Item   13.      DEFAULTS, DIVIDEND ARREARAGES AND    DELINQUENCIES*  176      Item   14.      MATERIAL MODIFICATIONS TO THE RIGHTS OF    SECURITY HOLDERS AND USE OF PROCEEDS*  177      Item   15.      CONTROL AND PROCEDURES  177      Item   16.      RESERVED  191      Item 16A.      AUDIT COMMITTEE FINANCIAL EXPERT  191      Item 16B.      CODE OF ETHICS  192      Item 16C.      PRINCIPAL ACCOUNTANT FEES AND SERVICES  192      Item 16D.      EXEMPTIONS FROM THE LISTING STANDARDS FOR    AUDIT COMMITTEES  193      Item 16E.      PURCHASES OF EQUITY SECURITIES BY THE    ISSUER AND AFFILIATED PURCHASERS*  193 ** PART III**         Item   17.      CONSOLIDATED FINANCIAL STATEMENTS*  194      Item   18.      CONSOLIDATED FINANCIAL STATEMENTS  194      Item   19.      EXHIBITS  194  Ex-1 The Articles of Incorporation of TELKOM EX-4.43 MEDIUM TERM NOTES ISSUANCE AGREEMENT EX-4.44 INDEMNITY AGREEMENT DATED APRIL 25, 2005 EX-12.1  CERTIFICATION PURSUANT TO SECTION 302 EX-12.2  CERTIFICATION PURSUANT TO SECTION 302 EX-13.1  CERTIFICATION PURSUANT TO SECTION 906 EX-13.2  CERTIFICATION PURSUANT TO SECTION 906 *     Omitted because the item is not applicable.
1

Table of Contents
**DEFINITIONS**    “ADS”    American Depositary Share, which is a certificate (known as an    ADR) being traded on a U.S. securities market (such as New    York Stock Exchange) representing a number of foreign shares.    One ADS of TELKOM represents 40 of TELKOM’s Series B    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.     “ASR”    (Answer to Seizure Ratio). See “Call Completion Rate”.     “ATM”    (Asynchronous Transfer Mode) is a transfer mode in which the    information is organized into cells. It is asynchronous in the    sense that the recurrence of cells containing information from    an individual user is not necessarily periodic.     “B2B”    (Business-to-Business Electronic Commerce) is a    technology-enabled application environment to facilitate the    exchange of business information and automate commercial    transaction designed to automate and optimize interactions    between business partners.     “backbone”    refers to the main telecommunications network consisting of    transmission and switching facilities connecting several network    access nodes. The transmission links between nodes and switching    facilities include microwave, submarine cable, satellite,    optical fiber and other transmission technology.     “bandwidth”    refers to the capacity of a communications link.     “BTS”    (Base Transceiver Station) refers to equipment that transmits    and receives radio telephony signals to and from other    telecommunication systems.     “call completion rate”    is the percentage of calls that are successfully completed, as    measured by the number of calls successfully answered divided by    the number of call attempts that are recognized by the    caller’s local exchange, in the case of call completion    rates for local calls and call attempts that are recognized by    the trunk exchange, in the case of call completion rates for    long-distance calls. Call completion rate is measured by the    answer to seizure ratio, or “ASR”.     “capacity utilization”    refers to the ratio of lines in service to local exchange    capacity or installed lines.     “CDMA”    (Code Division Multiple Access) is a wide-band spread-spectrum    network technology.
2

Table of Contents
    “DCS 1800”    (Digital Communication System) is a mobile cellular system using    GSM technology operating in the 1800Mhz frequency band.     “DGPT”    is the Director General of Post and Telecommunications.     “distribution point”    is the point of interconnection between the dropwire and the    secondary cable running to a cabinet and/or a local exchange.     “DLD”    refers to domestic long-distance telecommunications services    such as long-distance telephone calls and leased lines services.     “downlink”    refers to the receiving portion of a satellite circuit extending    from the satellite to the Earth.     “dropwire”    is the wire connecting the subscriber’s premises to the    distribution point.     “DTR”    (Distributable TELKOM Revenues) is the monthly revenue share    payable by each KSO Unit to TELKOM under the KSO Agreements,    being a specified percentage of total KSO revenues in a KSO Unit    after deduction of specified KSO operating expenses and MTR.     “dual band”    refers to the capability of a mobile cellular network and mobile    cellular handsets to operate across two frequency bands, for    example GSM 900 and GSM 1800.     “duopoly system”    is a system allowing only two national operators, which in    Indonesia’s case are TELKOM and Indosat, to provide fixed    line telecommunication services including domestic long-distance    and international long-distance.     “earth station”    is the antenna and associated equipment used to receive or    transmit telecommunication signals via satellite.     “existing installations”    refer to telecommunications facilities, including telephone    lines, network infrastructure and related assets in existence in    each KSO Division as of the beginning of each KSO Period plus    certain facilities and equipment constructed or installed by    TELKOM in the KSO Units after such dates to be managed by a    KSO Investor.     “fixed cellular”    refers to a form of fixed wireless technology which uses    conventional cellular network configurations to link a    subscriber at a fixed location to a local exchange.     “fixed wireless”    refers to a local wireless transmission link using cellular,    microwave or radio technology to link a subscriber at a fixed    location to a local exchange.     “fixed wireline”    refers to a fixed path (wire or cable) linking a subscriber at a    fixed location to a local exchange, usually with an individual    phone number.     “frame relay”    is a packet-switching protocol (in which messages are divided    into packets before they are sent) for connecting devices on a    computer network that spans a relatively large geographical area.
3

Table of Contents
    “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-end digital connectivity and allows simultaneous    transmission of voice, data and video and provides high-speed    Internet connectivity.     “Kbps”    (Kilobits per second) is a measure of speed for digital signal    transmission expressed in thousands of bits per second.     “KSO”    (Kerjasama Operasi) or Joint Operating Scheme, is a unique type    of Build, Operate and Transfer arrangement with a consortium of    partners in which the consortium invests and operates TELKOM    facilities in regional divisions. The consortium partners are    owned by international operators and private domestic companies,    or in cases where TELKOM has acquired the consortium partner, by    TELKOM.     “KSO Agreements”    refer to the agreements, as amended from time to time, governing    the operation of the network in the relevant KSO region for the    KSO Period.     “KSO Period”    refers to period covered by the KSO Agreement.     “KSO Unit”    refers to a regional division of TELKOM managed and    operated — pursuant to the relevant KSO Agreement.     “leased line”    is a dedicated telecommunications transmissions line linking one    fixed point to another, rented from an operator for exclusive    use.     “lines in service”    refer to revenue-generating lines connected to subscribers,    including payphones, but not including mobile cellular    subscribers or lines used internally by TELKOM.     “local call”    is the call among subscribers in the same numbering area without    any prefix number being required.
4

Table of Contents
    “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.     “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    companies. Under this scheme the private company invests in the    telecommunication facilities to be operated by TELKOM.     “PSDN”    (Packet Switched Data Networks) is a network using a switch    device and sending packets of data through the network to some    remote location.     “PSTN”    (Public Switched Telephone Network) is a telephone network    operated and maintained by TELKOM and the KSO Units for and on    behalf of TELKOM.     “RUIM” or “RUIM card”    (Removable 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

Table of Contents
    “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, a technology allowing the exchange of    text messages between mobile cellular phones and between fixed    wireless phones.     “switch”    is a mechanical, electrical or electronic device that opens or    closes circuits, completes or breaks an electrical path, or    selects paths or circuits, used to route traffic in a    telecommunications network.     “trunk exchange”    is a switch that has the function of connecting one telephony    switch to another telephony switch, which can be either a local    or trunk switch.     “USO”    (Universal Service Obligation) is the service obligation imposed    by the Government on all providers of telecommunications    services for the purpose of providing public services in    Indonesia.     “VoIP”    (Voice over Internet Protocol) is a means of sending voice    information using the Internet Protocol.     “VPN”    (Virtual Private Network) is a secure private network    connection, built on top of publicly-accessible infrastructure,    such as the Internet or the public telephone network. VPNs    typically employ some combination of encryption, digital    certificates, strong user authentication and access control to    provide security to the traffic they carry. They usually provide    connectivity to many machines behind a gateway or firewall.     “VSAT”    (Very Small Aperture Terminal) is a relatively small antenna,    typically 1.5 to 3.0 meters in diameter, placed in the    user’s premises and used for two-way communications by    satellite.     “WAP”    (Wireless Application Protocol) is an open and global standard    of technology platform that enables mobile users to access and    interact with mobile information services such as e-mail, Web    sites, financial information, on-line banking, information and    entertainment (infotainment), games and micro payments.
6

Table of Contents
**FORWARD LOOKING STATEMENTS**     This document contains certain forward looking statements withinthe meaning of Section 27A of the Securities Act of 1933,as amended (the “Securities Act”) and Section 21Eof the Securities Exchange Act of 1934, as amended (the“Exchange Act”) and the Private Securities LitigationReform Act of 1995, with respect to the financial condition,results of operations and business of Perusahaan Perseroan(Persero) P.T. Telekomunikasi Indonesia Tbk.(“TELKOM” or the “Company”) and itssubsidiaries and certain plans and objectives of the Company orthe Company and its subsidiaries, wherever applicable, withrespect to these items — in particular, among otherstatements, certain statements in Item 5. “Operatingand Financial Review and Prospects” including, withoutlimitation, those concerning the Company’s expectations andplans, strategy, management’s objectives, trends in marketshares, market standing, overall market trends, risk management,exchange rates and revenues and general and administrationexpenses and forward looking statements concerning theCompany’s operations, performance and financial condition.Such statements can be generally identified by the use of termssuch as “believes,” “expects,”“may,” “will,” “would,”“could,” “plans,” or“anticipates,” and the negatives of such terms orcomparable terms. By their nature, forward looking statementsinvolve risk and uncertainty because they are related to eventswhich depend on circumstances that will occur in the future.There are a number of factors that could cause actual resultsand developments to differ materially from those expressed orimplied by these forward looking statements. Importantinformation regarding risks and uncertainty is set forthelsewhere in this annual report, including in Item 3.“Key Information — D. Risk Factors,”Item 5. “Operating and Financial Review andProspects — E. Off-Balance Sheet Arrangements,”Item 5. “Operating and Financial Review andProspects — F. Tabular Disclosure of ContractualObligations” and Item 11. “Quantitative andQualitative Disclosures About Market Risk.”**CONVENTIONS**     In this Annual Report, unless otherwise specified or the contextotherwise requires, all references to “Indonesia” arereferences to the Republic of Indonesia and all references tothe “U.S.” and “United States” arereferences to the United States of America. All references tothe “Government” herein are references to thegovernment of the Republic of Indonesia. References herein to“Rupiah” and “Rp.” are to the lawfulcurrency of Indonesia and all references to “USDollars” or “US$” are to the lawful currency ofthe United States of America. For convenience, unless otherwisespecified, certain Rupiah amounts have been translated into USDollar amounts, based on the prevailing exchange rate ofRp.9,290 = US$1.00, being the middle market spot rateof exchange for Rupiah against US Dollar quoted by Reuters onDecember 31, 2004. Such translations should not beconstrued as representations that the Rupiah or US Dollaramounts referred to could have been, or could be, converted intoRupiah or US Dollars, as the case may be, at that or any otherrate or at all. The average middle market spot rate of exchangefor Rupiah against US Dollar quoted by Bank Indonesia onDecember 31, 2004 was Rp.9,290 to US$1.00. See Item 3.“Key Information — A. Selected financialdata — Exchange Rate Information” for furtherinformation regarding rates of exchange between Rupiah and USDollars.
7

Table of Contents
**PART I****ITEM 1.     IDENTITY OF DIRECTORS,SENIOR MANAGEMENT AND ADVISERS**     Not applicable.**ITEM 2.     OFFER STATISTICS ANDEXPECTED TIMETABLE**     Not applicable.**ITEM 3.     KEY INFORMATION****A.     Selected financial data**     The Company’s consolidated financial statements for theyears 2000 and 2001 were audited by KAP Hans TuanakottaMustofa & Halim (formerly KAP Hans Tuanakotta &Mustofa), the member firm of Deloitte Touche Tohmatsu inIndonesia (“Deloitte”). The Company’sconsolidated financial statements for the year 2002 have beenaudited by KAP Drs. Haryanto Sahari & Rekan (formerlyKAP Drs. Hadi Sutanto & Rekan), the member firm ofPricewaterhouseCoopers in Indonesia (“PwC”). TheCompany’s consolidated financial statements for the years2003 and 2004 have been audited by KAP SiddhartaSiddharta & Widjaja, the member firm of KPMGInternational in Indonesia (“KPMG”). All suchconsolidated financial statements were prepared in accordancewith Indonesian GAAP, which differs in certain significantrespects from U.S. GAAP. See Item 5. “Operating andFinancial Review and Prospects — Summary ofSignificant Differences between Indonesian GAAP and U.S.GAAP” and Note 56 to the Company’s consolidatedfinancial statements, which provide a description of thesignificant differences between Indonesian GAAP and U.S. GAAPand a reconciliation to the amount of U.S. GAAP net income andstockholders’ equity of TELKOM for and as of the end ofeach of the periods indicated in the consolidated financialstatements.     For the year 2004, ten companies were consolidated into theCompany’s consolidated financial statements, namely: PTAriaWest International (“AriaWest”, 100%), PTMultimedia Nusantara (“Metra”, 100%), PT Graha SaranaDuta (“GSD”, 100%), PT Pramindo Ikat Nusantara(“Pramindo”, 100%), PT Indonusa Telemedia(“Indonusa”, 90%), PT Dayamitra Telekomunikasi(“Dayamitra”, 100%), PT Telekomunikasi Selular(“Telkomsel”, 65%), PT Napsindo Primatel Internasional(“Napsindo”, 60%), PT Infomedia Nusantara(“Infomedia”, 51%) and PT Pro Infokom Indonesia(“PII”, 51%).
8

Table of Contents
     The following tables set forth a summary of the financialinformation of TELKOM as of and for the years specified. Thisinformation should be read in conjunction with Item 5.“Operating and Financial Review and Prospects” and isqualified in its entirety by reference to TELKOM’sconsolidated financial statements and the related notes theretoincluded elsewhere in this Annual Report.                                **Year Ended December 31,**     **2000** **2001** **2002** **2003** **2004** **2004**                 **(US$ million)**  **(Rp. in billion, except for data relating to shares,**    **dividends and ADS)**  **Consolidated Income Statement Data**                            Indonesian GAAP                             Operating revenues                              Telephone                               Fixed lines                                Local and domestic long-distance usage  4,097   5,226   5,448   6,562   7,439   801         Monthly subscription charges  887   998   1,475   1,949   2,935   316         Installation charges  75   98   130   223   201   22         Others  119   93   211   163   70   7                             Total fixed lines revenues  5,178   6,415   7,264   8,897   10,645   1,146        Cellular                                Air time charges  2,484   3,988   5,454   7,678   9,826   1,058         Monthly subscription charges  356   581   593   581   448   48         Features  7   10   8   6   91   10         Connection fee charges  43   129   172   194   56   6                             Total cellular revenues  2,890   4,708   6,227   8,459   10,421   1,122        Total telephone revenues  8,068   11,123   13,491   17,356   21,066   2,268       Joint Operation Schemes                               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        Amortization of unearned initial investor payments  15   13   7   3   11   1                             Total revenue under Joint Operation Schemes  2,267   2,220   2,128   1,486   657   71       Interconnection  981   1,424   2,831   4,162   6,188   666       Network  340   415   316   518   654   70       Data and Internet  108   673   1,552   3,109   4,809   518       Revenue-Sharing Arrangements  288   264   264   258   281   30       Other telecommunications services  138   165   221   227   293   31                           Total Operating Revenues  12,190   16,284   20,803   27,116   33,948   3,654                         Operating expenses                              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

Table of Contents
                            **Year Ended December 31,**     **2000** **2001** **2002** **2003** **2004** **2004**                 **(US$ million)**  **(Rp. in billion, except for data relating to shares,**    **dividends and ADS)**      Operating Income  5,596   7,420   9,130   11,976   13,927   1,499     Other income (expense)                             Gain on sale of long-term investment in Telkomsel  —   —   3,196   —   —   —      Interest expense  (817)  (1,330)  (1,583)  (1,383)  (1,270)  (137)     Interest income  692   572   480   366   318   34      Gain (loss) on foreign exchange — net  (944)  (379)  557   126   (1,221)  (131)     Equity in net income (loss) of associated companies  (232)  (86)  5   3   3   0      Other — net  313   353   (36)  364   331   36                        Other Income (Expense) — net  (988)  (870)  2,619   (524)  (1,839)  (198)                       Income Before Tax  4,608   6,550   11,749   11,452   12,088   1,301     Tax expense  (1,520)  (2,007)  (2,899)  (3,861)  (4,003)  (431)                       Income before minority interest in net income of subsidiaries  3,088   4,543   8,850   7,591   8,085   870     Minority interest in net income of subsidiaries, net  (313)  (475)  (810)  (1,504)  (1,956)  (210)                       Net Income  2,775   4,068   8,040   6,087   6,129   660                        Weighted average shares outstanding    (millions)(1)  20,160   20,160   20,160   20,160   20,160          Net income per    share(1)  137.65   201.81   398.80   301.95   304.03          Net income per    ADS(1)  5,505.96   8,072.20   15,951.80   12,077.83   12,161.13          Dividends declared per    share(2)  53.88   44.08   105.41   165.58   158.09         U.S.    GAAP(3)                             Net income  2,216   4,298   8,587   5,791   6,468          Net income per    share(1)  109.94   213.20   425.96   287.23   320.86          Net income per    ADS(1)  4,397.47   8,528.17   17,038.21   11,489.40   12,834.47                                 **As of December 31,**     **2000** **2001** **2002** **2003** **2004** **2004**                 **(US$ million)**  **(Rp. in billion)**  **Consolidated Balance Sheet Data**                            Indonesian GAAP                             Total assets  32,019   33,036   44,307   50,283   56,269   6,057      Current    liabilities(4)  4,138   9,543   9,708   11,170   11,677   1,257      Other liabilities  3,048   3,447   5,383   6,258   6,178   665      Long-term debts  9,546   9,730   12,006   11,834   13,214   1,422      Total liabilities  16,732   22,720   27,097   29,262   31,069   3,344      Minority interest  814   1,235   2,596   3,708   4,938   532      Capital    stock(5)  5,040   5,040   5,040   5,040   5,040   543      Total stockholders’ equity  14,473   9,081   14,614   17,313   20,261   2,181     U.S.    GAAP(3)                             Total assets  30,900   32,449   44,623   51,347   56,702   6,104      Total stockholders’ equity  12,928   7,766   13,911   16,285   19,571   2,107  (1)     The prior years’ weighted average shares, net income per    share and net income per ADS have been restated to reflect a    two-for-one stock split as resolved in the Annual General    Meeting of Shareholders (“AGMS”) on July 30, 2004.
10

Table of Contents
(2)     Dividends declared per share in 2000, 2001, 2002 and 2003    represents dividends per share after adjusting for the stock    split that was effected in 2004. Dividends declared per share in    2004 comprised cash dividends for 2003 of Rp.150.98 per share    and interim cash dividends declared in December 2004 of Rp.7.11    per share. (3)     U.S. GAAP amounts reflect adjustments resulting from differences    in the accounting treatment of termination benefits, foreign    exchange differences capitalized to property under construction,    interest capitalized on property under construction,    revenue-sharing arrangements, revaluation of property, plant and    equipment, pension, equity in net income or loss of associated    companies, land rights, equipment to be installed, revenue    recognition, goodwill, capital leases, acquisition of Dayamitra,    reversal of difference due to change of equity in associated    companies, asset retirement obligations, and deferred income    taxes. See Item 5. “Operating and Financial Review and    Prospects — A. Operating Results — Summary    of Significant Differences between Indonesian GAAP and U.S.    GAAP” and Note 56(1) to the Company’s    consolidated financial statements. (4)     Includes current maturities of long-term debt. (5)     Issued and Paid-Up Capital Stock consists of one Series A    Dwiwarna share having a par value of Rp.250 and 20,159,999,279    Series B shares having a par value of Rp.250 from an    authorized capital stock comprising one Series A Dwiwarna share    and 79,999,999,999 Series B shares, after the stock split.**Exchange Rate Information**     The following table shows the exchange rate of Rupiah to USDollar based on the middle exchange rates at the end of eachmonth for the periods indicated. The Rupiah middle exchange rateis calculated based on Bank Indonesia buying and selling rates.No representations are made that the Rupiah or US Dollaramounts referred to herein could have been or could be convertedinto US Dollar or Rupiah, as the case may be, at anyparticular 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

Table of Contents
                    **At period**      **Year** **end** **Average(1)** **High(2)** **Low(2)**           **(Rp. per US$1.00)**    2005                     January  9,165   9,204   9,305   9,133      February  9,260   9,245   9,300   9,166      March  9,480   9,371   9,520   9,250      April  9,570   9,539   9,755   9,475      May  9,495   9,480   9,545   9,435      June  9,713   9,616   9,713   9,528      July (through July 13, 2005)  9,750   9,785   9,860   9,740  (1)     The average of the middle exchange rate announced by Bank    Indonesia applicable for the period. (2)     The high and low amounts are determined based upon the daily    middle exchange rate announced by Bank Indonesia during the    applicable period.*Source:*     Bank Indonesia    The exchange rates used for translation of monetary assets andliabilities denominated in foreign currencies are the buy andsell rates published by Reuters in 2002, 2003 and 2004. TheReuters buy and sell rates, applied respectively to monetaryassets and liabilities, were Rp.8,940 and Rp.8,960 to US$1 as ofDecember 31, 2002, Rp.8,430 and Rp.8,450 to US$1 as ofDecember 31, 2003 and Rp.9,280 and Rp.9,300 to US$1 as ofDecember 31, 2004. The Company does not guarantee thatassets and liabilities denominated in foreign currencies can beconverted into Indonesian Rupiah at the rates of exchange as ofDecember 31, 2004.     The consolidated financial statements are stated in Rupiah. Thetranslations of Rupiah amounts into US Dollars are includedsolely for the convenience of the readers and have been madeusing the average of the market buy and sell rates of Rp.9,290to US$1 published by Reuters on December 31, 2004. Theconvenience translations should not be construed asrepresentations that the Rupiah amounts have been, could havebeen, or can in the future be, converted into US Dollars at thisor any other rate of exchange.**B.     Capitalization andIndebtedness**     Not applicable.**C.     Reason for the Offer and Useof 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 tofile a fully compliant Annual Report on Form 20-F for thefiscal year ended December 31, 2002 (“2002 AnnualReport on Form 20-F”) because the audit firm it hadoriginally appointed to perform its 2002 audit was not qualifiedfor SEC purposes, and TELKOM’s SEC-qualified 2002 auditors,PwC, did not begin their audit work until their appointment inJuly 2003. TELKOM filed a non- compliant 2002 Annual Report onForm 20-F on April 17, 2003 and then filed anon-compliant Amendment No. 1 to the Annual Report onForm 20-F/ A for the fiscal year ended December 31,2002 (“Amendment No. 1 to 2002 Annual Report onForm 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;
12

Table of Contents
 •     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 AnnualReport on Form 20-F/ A for the fiscal year endedDecember 31, 2002 (“Amendment No. 2 to 2002Annual Report on Form 20-F/ A”) until February 9,2004, which was over 7 months past the June 30, 2003filing deadline. Amendment No. 2 to 2002 Annual Report onForm 20-F/ A contained audited consolidated financialstatements as of and for the years ended December 31, 2000,2001 and 2002 which restated previously filed auditedconsolidated financial statements as of and for the years endedDecember 31, 2000 and 2001 and previously filed unauditedconsolidated financial statements as of and for the year endedDecember 31, 2002, and revised or updated variousdisclosures. Such restated consolidated financial statements(and the related selected financial information) reflectedcertain adjustments and modified certain disclosures for severalitems under Indonesian GAAP and with respect to thereconciliation of those items to US GAAP.     Because of the foregoing and because TELKOM did not file acompliant 2002 Annual Report on Form 20-F until after theJune 30, 2003 deadline, TELKOM may face an SEC enforcementaction under U.S. securities law and incur other legal liabilityand adverse consequences such as a delisting of its ADSs fromthe New York Stock Exchange. In addition, the staff of the SECdescribed a press release that TELKOM issued and furnished tothe SEC on Form 6-K in May 2003 as “grosslyunderstating the nature and severity of the staff’sconcerns” regarding matters related to TELKOM’s filingof a non-compliant 2002 Annual Report on Form 20-F. Suchpress release could also form the basis of an SEC enforcementaction and other legal liability. TELKOM cannot at this timepredict the likelihood or severity of an SEC enforcement actionor any other legal liability or adverse consequences.     As a result of TELKOM’s failure to timely file a compliant2002 Annual Report on Form 20-F with the SEC by theJune 30, 2003 deadline and the May 2003 press releaserelating thereto, TELKOM was in breach of certain covenants inits Citibank and Bank Central Asia (BCA) debt facilitiesthat require TELKOM, among other things, to comply with all lawsand regulations applicable to it and deliver financialstatements to the lenders. TELKOM has obtained written waiversfrom both Citibank, acting as agent for the lenders under therelevant facility agreements, and BCA with respect to suchbreaches. During the period prior to obtaining such waivers,neither Citibank nor BCA issued any notice of acceleration ofthe debt under the relevant facility agreements. Nevertheless,any of the adverse consequences referred to in the immediatelypreceding paragraph (such as, but not limited to, an SECenforcement action) could give rise to defaults under one ormore of TELKOM’s debt facilities and cross defaults underother debt facilities with respect to such defaults. If TELKOMwere unable to obtain waivers of any such defaults, indebtednessoutstanding under such debt facilities could become immediatelydue and payable, which could have a material adverse effect onTELKOM’s financial condition and results of operations.
13

Table of Contents
***TELKOM had a number of material weaknesses in its internal    control over financial reporting and concluded that as of    December 31, 2003 and 2004, its disclosures and controls    were ineffective, which could cause investors to lose confidence    in its reported financial results and have an adverse effect on    the trading price of its securities.***     In the course of the audit of TELKOM’s consolidatedfinancial statements as of and for the year endedDecember 31, 2002 by PwC, TELKOM identified certain errorsin and made certain adjustments to its consolidated financialstatements as of and for the year ended December 31, 2002that had been previously filed with the SEC. These errors wereidentified during the seven-month period ended onJanuary 29, 2004, resulting in TELKOM’s makingadjustments during that seven-month period to its consolidatedfinancial statements as of and for the year endedDecember 31, 2002. Following discussions between TELKOM andDeloitte, the auditor of TELKOM’s consolidated financialstatements as of and for the years ended December 31, 2000and 2001, TELKOM also identified certain errors in and madecertain adjustments to, its previously issued consolidatedfinancial statements as of and for the years endedDecember 31, 2000 and 2001. These errors were identifiedduring the seven-month period ended on January 29, 2004,resulting in TELKOM’s making adjustments during thatseven-month period to its consolidated financial statements asof and for the years ended December 31, 2000 and 2001.     Reportable conditions (as defined under standards established bythe American Institute of Certified Public Accountants) relatingto TELKOM’s internal control over financial reporting (asdefined in Rules 13a-15(f) and 15d-15(f) of the ExchangeAct) were also identified and communicated by PwC in theirreport dated January 9, 2004 in connection with its auditof the consolidated financial statements as of and for the yearended December 31, 2002, and by KPMG in connection with itsaudit of the consolidated financial statements as of and for theyears ended December 31, 2003 and 2004. Both PwC and KPMGidentified the same material weaknesses as part of theirrespective audits. As part of their communications, both PwC andKPMG informed the Audit Committee that they had identified“reportable conditions” each of which constituted a“material weakness” (as each such term is definedunder standards established by the American Institute ofCertified Public Accountants) in TELKOM’s internal controlover financial reporting. TELKOM’s principal executiveofficer and principal financial officer concluded that becauseof the “material weaknesses” identified, TELKOM’sdisclosure controls and procedures as of December 31, 2003and 2004 were not effective to ensure that information requiredto be disclosed by TELKOM in the reports that TELKOM files orsubmits under the Exchange Act is recorded, processed,summarized and reported within the time periods specified in theCommission’s rules and forms and is accumulated andcommunicated to TELKOM’s management, includingTELKOM’s principal executive officer and principalfinancial officer, as appropriate to allow timely decisionsregarding required disclosure. See Item 15. “Controland Procedures”.     Since November 2003, TELKOM has been working to improve itsinternal control over financial reporting, including thoseneeded to enable it to comply with Section 404 of theSarbanes-Oxley Act of 2002, as well as its disclosure controlsand procedures, and has taken a number of steps to address theseissues. See Item 15. “Control and Procedures”.TELKOM cannot provide any assurance that the steps that it hastaken and is continuing to take will result in all materialweaknesses being identified and corrected. TELKOM expects thatits internal controls over financial reporting and disclosurecontrols and procedures will continue to evolve in the future.Any control system, regardless of how well designed, operatedand evaluated, can provide only reasonable, not absolute,assurance that its objectives will be met. Any failure toimplement required new or improved controls, or difficultiesencountered in their implementation, could adversely affectTELKOM’s ability to report financial results on a timelyand accurate basis or cause TELKOM to fail to meet its reportingobligations. Inadequate internal controls could also causeinvestors to lose confidence in TELKOM’s reported financialinformation, which could have an adverse effect on the tradingprice of TELKOM’s securities.
14

Table of Contents
**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 democraticchange, resulting in political and social events that havehighlighted the unpredictable nature of Indonesia’schanging political landscape. These events have resulted inpolitical instability, as well as general social and civilunrest on a number of occasions in the past few years. Forexample, in June 2001, demonstrations and strikes affected atleast 19 cities after the Government mandated a 30%increase in fuel prices. Similar demonstrations occurred inJanuary 2003, when the Government again tried to increase fuelprices, as well as electricity and telephone charges. In bothinstances, the Government was forced to drop or substantiallyreduce such proposed increases.     Actions by separatist movements and clashes between religiousand ethnic groups have also resulted in social and civil unrestin parts of Indonesia. In the provinces of Aceh and Papua(formerly Irian Jaya), there have been numerous clashes betweensupporters of separatist movements and the Indonesian military.In the province of Maluku, clashes between religious groups haveresulted in thousands of casualties and displaced persons inrecent years. The Government has attempted to resolve problemsin these troubled regions with limited success.     Political and related social developments in Indonesia have beenunpredictable in the past and there can be no assurance thatsocial and civil disturbances will not occur in the future andon a wider scale, or that any such disturbances will not,directly or indirectly, have a material adverse effect on us oron an investment in the ADSs or Common Stock. Further, thesesocial and civil disturbances could continue to have a materialadverse effect on investment and confidence in and theperformance 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 PoliceFunction Building in Jakarta, the departure lounge ofJakarta’s Soekarno-Hatta International Airport, theparliament building in Jakarta and a shopping mall in Jakarta. Abombing campaign struck religious buildings throughout Indonesiain 2000. On October 12, 2002, over 200 people were killedin a bombing at a tourist area in Bali. This terrorist attackresulted in a significant decline in international tourism. OnAugust 5, 2003 a bomb exploded at the J.W. Marriott Hotel inJakarta killing at least 12 people and injuring more than 150people. On September 9, 2004, a bomb exploded outside theAustralian embassy in Jakarta’s central business district,killing at least nine people and injuring over 180 people.On May 28, 2005, two bombs exploded in a crowded market inTentena in central Indonesia, killing at least 20 peopleand injuring at least 40. Indonesian and United Statesgovernment officials have indicated that some of these bombingsmay be the responsibility of Jemaah Islamiya, a SoutheastAsian-based terrorist network allegedly linked to theinternational terrorist organization, Al-Qaeda. In May 2005, theUnited States also closed its embassy in Indonesia for a fewdays following an unspecified threat.     There can be no assurance that further terrorist acts will notoccur in the future. A number of governments have from time totime issued warnings to their citizens in relation to aperceived increase in the possibility of terrorist activities inIndonesia, targeting foreign, particularly United States,interests. Such acts could destabilize Indonesia and increaseinternal divisions within the Government as it considersresponses to such instability and unrest. Violent acts arisingfrom and leading to instability and unrest have in the past had,and could continue to have, a material adverse effect oninvestment and confidence in, and the performance of, theIndonesian economy and our business.
15

Table of Contents
***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 futurechanges in the value of the Rupiah against the US Dollar orother currencies could adversely affect TELKOM’s financialcondition and results of operations. On August 14, 1997,Bank Indonesia permitted the exchange rate for the Rupiah tofloat without announcing a level at which it would intervene.From August 1997 to mid-1998, the month-end value of the Rupiahrelative to the US Dollar declined from approximately Rp.2,600per US Dollar to as low as approximately Rp.15,000 per USDollar. There can be no assurance that: (a) the Rupiah willnot 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 suchaction, if taken, will be successful.     Continued depreciation or volatility of the Rupiah against theUS Dollar or other currencies could adversely affect generaleconomic conditions in Indonesia. Rupiah depreciation would alsodrive up the Rupiah cost of TELKOM’s capital expenditureprogram since most of the equipment to be used in the expansionof TELKOM’s network capacity is sourced off-shore andpriced 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 insignificantly higher domestic interest rates, liquidityshortages, capital or exchange controls or the withholding ofadditional financial assistance by multilateral institutions.The foregoing consequences, if they occur, could have a materialadverse effect on TELKOM’s business. As ofDecember 31, 2004, the average exchange rate of Rupiah toUS Dollar, based on the Reuters middle buy and sell rates, wasRp.9,290 per US Dollar.     Fluctuations in the exchange rate between the Rupiah and the USDollar could affect, among other things, the dollar value of anyamounts a holder or beneficial owner of ADSs will receive in theevent we issue dividends, the US Dollar value of the proceeds aholder or beneficial owner would receive upon the sale inIndonesia of shares of the Common Stock and the secondary marketprice 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 FinancingFacility (“EFF”) program with the InternationalMonetary Fund (“IMF”) and began to drawdown on itsgross foreign reserves, as well as on its outstanding balancesat the IMF. Considering the Government’s current fiscaldeficit and modest foreign exchange reserves, the end of the EFFhas raised concerns about the ability of the Government to fundsubsidies 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 theGovernment’s ability to reschedule Indonesia’s ParisClub bilateral foreign loans. Other consequences of ending theEFF are not known at this stage. While the Government has soughtto address these concerns by issuing a White Paper setting forthits fiscal strategy and policy objectives for 2004, there can beno assurance that the Government’s strategy will besuccessful or that its objectives will be met in full or in part.***Indonesia no longer has access to the Paris Club but    continues to rely on loans from official creditors.***     Since the financial crisis of 1997, the members of the ParisClub have been an important source of funding for theGovernment. The Paris Club is an informal voluntary group of19 creditor countries that coordinates solutions forpayment difficulties experienced by debtor nations. The lastdebt rescheduling took place in April 2002 when the Paris Clubrescheduled approximately US$5.4 billion of principal andinterest due from the Government between April 2002 and December2003. This was done by extending the period within which theamounts could be repaid.     In addition to the Paris Club, the World Bank and the AsianDevelopment Bank have been major sources of financing.Disbursements from these sources have been slower than expectedin recent years
16

Table of Contents
due to the slow pace of institutional reforms in Indonesia andconcerns regarding the Government’s decentralization plan.As of the date of this Annual Report, regional governments inIndonesia are not allowed to borrow in foreign currency and anychange to Indonesian law allowing them to borrow in foreigncurrency could be a source of potential debt service problems.The World Bank and Asian Development Bank lending programs aresubject to regular compliance reviews and can be reduced orwithdrawn at any time. The impact of any elimination of lendingcannot 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 tonegotiate with its major creditors several times since the 1997financial crisis. For example, the Government held a round oftalks with the Paris Club donor countries and the IMF in April2002 to discuss the rescheduling of Indonesia’s debt due in2002. In these talks, the Government sought to restructure notjust debt principal, but interest payments as well, totalingUS$2.6 billion. The meeting resulted in the rescheduling ofdebt principal payments only, but no assurance can be given asto Indonesia’s capacity to meet these rescheduled debtpayments. While no further rescheduling has taken place, futuredecisions to renegotiate Indonesia’s existing sovereignindebtedness cannot be ruled out. Such decisions may affectIndonesia’s sovereign credit rating and could have amaterial 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 ratingorganizations, including Moody’s Investors Service, Inc.(“Moody’s”) and Standard & Poor’s RatingServices (“S&P”), downgraded Indonesia’ssovereign rating and the credit ratings of various creditinstruments of the Government and a large number of Indonesianbanks and other companies. As of July 13, 2005, theGovernment’s long-term foreign currency debt and itsshort-term foreign currency debt were rated “B2” and“NP”, respectively, by Moody’s and rated“B+” and “B”, respectively, by S&P.These ratings reflect an assessment of the Government’soverall ability to pay its obligations and its willingness tomeet its financial commitments as they come due. No assurancecan be given that Moody’s, S&P or any otherinternational credit rating agency will not downgrade the creditratings of Indonesia or Indonesian companies. Any such downgradewould have an adverse impact on liquidity in the Indonesianfinancial markets and the ability of Indonesian companies,including TELKOM, to raise additional financing and the interestrates 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. Disruptionof operations for any reason, including earthquakes, tsunamis,floods, volcanic eruptions, droughts, power outages or otherevents beyond TELKOM’s control, could cause disruptions tooperations and damage to equipment which would adversely affectTELKOM’s financial condition and results of operations.     In 2002, a major flood in Jakarta affected TELKOM’soperations in Jakarta, where a significant portion of itsrevenues are derived. In December 2004, northern parts of theIndonesian island of Sumatra, and particularly the province ofAceh, suffered severe damage following a massive earthquakeestimated to be of magnitude 9.3 on the Richter scale and aseries of tsunami waves on December 26, 2004. The tsunamiresulted in 18 TELKOM employees being killed or missing, causedan estimated Rp.54.9 billion (US$5.9 million) ofdamage to TELKOM’s assets and equipment in the Acehprovince, including 22 out of 44 switching facilities andtransmission facilities and disrupted over 35,000 telephonelines out of approximately 99,000 lines.
17

Table of Contents
     On March 28, 2005, a major earthquake estimated to be ofmagnitude 8.7 on the Richter scale struck off the western coastof Sumatra. Scientists and seismic experts believe that ratherthan relieving stresses along the Sunda fault, located to thesouth of Sumatra, the seismic stresses along the Sunda faultcontinue unabated or have increased, and warned of thepossibility of further earthquakes and tsunamis. The increasedseismic activity has also coincided with a volcano in Sumatraspewing ash in April 2005, as well as increased volcanicactivity and build up of gases in a volcano in Sumatra andanother one near Bandung, where TELKOM’s headquarters isbased.     While TELKOM maintains several insurance policies relating toTELKOM’s assets which covered the losses resulting fromtsunami damage, it does not maintain business interruptioninsurance, and there can be no assurance that the insurancecoverage will be sufficient to protect TELKOM from potentiallosses resulting from natural disasters and other events beyondits control. In addition, there can be no assurance that thepremium payable for these insurance policies upon renewal willnot increase substantially, which may adversely affectTELKOM’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 marketshare, TELKOM has identified its primary business objective asbecoming a full service and network provider. To achieve thisobjective, TELKOM has determined that it should increase itsfocus on multimedia and other types of services in addition toits present core business concentration on local, domesticlong-distance and mobile cellular services. TELKOM has alsoreceived its commercial license to provide IDD services and hasbegun offering IDD services beginning June 7, 2004. Theimplementation of measures designed to achieve these objectivescould strain TELKOM’s managerial, financial and otherresources, 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 controlof TELKOM and the ability to determine the outcome ofsubstantially all actions requiring the approval of TELKOMshareholders. The Government is also the holder of the Dwiwarnashare of TELKOM, which has special voting rights and veto rightsover certain matters, including the election and removal of theDirectors and Commissioners of TELKOM. Through the Ministry ofCommunication and Information (“MoCI”), the Governmentalso exercises regulatory power over the Indonesiantelecommunications industry. There might be situations where theobjectives of the Government, as TELKOM’s regulator and itscontrolling shareholder, conflict with TELKOM’s businessgoals. In addition, there can be no assurance that theGovernment will not direct opportunities to othertelecommunications service providers in which it holds aninterest.**     *****Certain systems failures could, if they occur, adversely    affect TELKOM’s results of operations.***     TELKOM’s telecommunications services are carried throughits fixed line, cellular and data networks. All types ofnetworks use last mile access, regional metro junction and longhaul transmission networks as a common network resource. Forlast mile access, TELKOM operates Copper Access Network, OpticalAccess Network and Wireless Access Network. The regional metrojunction and long haul transmission network operated by TELKOMconsists of optical fiber cable, microwave, submarine cable andsatellite transmission links.     Any failure of this integrated network, TELKOM’s servers,or any link in the transmission chain that results in aninterruption in TELKOM’s operations or the provision of anyservice, whether from
18

Table of Contents
operational disruption, natural disaster or otherwise, coulddamage TELKOM’s ability to attract and retain subscribersand adversely affect its results of operations, financialcondition 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 fixedwireless phone service, which is marketed under the brand nameTELKOMFlexi for both fixed and portable handsets. As ofDecember 31, 2004, this service was offered in 192 cities,130 of which are financed entirely by TELKOM and the remaining62 are financed through revenue sharing-arrangements(“RSAs”). CDMA-based fixed wireless technology enablesrapid development of telephone networks and reduces the capitalexpenditures per line by obviating the need for the installationof underground cables. TELKOMFlexi offers customers the abilityto use a wireless handset with limited mobility (within the samearea code). Customers generally have all features offered bycellular services except roaming to other area codes andinternationally. Postpaid TELKOMFlexi customers are chargedtariffs that are similar to PSTN tariff rates for this servicewhile prepaid customers are charged tariffs slightly higher thanpostpaid rates but with no monthly fees. In each case, bothTELKOMFlexi postpaid and prepaid tariffs are substantially lowerthan tariffs for cellular services. Telecommunicationsregulators, cellular operators and cellular trade associationshave sought and may in the future seek to impose limitations onTELKOM’s ability to provide fixed wireless services at PSTNrates. If any such limitations are imposed, TELKOM could losepart or all of the benefit of its investment in the network thatsupports the TELKOMFlexi service. TELKOM may also be subject todisputes 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 orderto support its growth, undertake acquisitions, meet unexpectedcontingencies and develop new or enhanced services and products.It may also need to respond to competitive pressures, acquirecomplementary businesses or technologies or take advantage ofopportunities. TELKOM cannot be certain that such additionalfunding, if needed, will be available on acceptable terms, if atall. Furthermore, any debt financing, if available, may involverestrictive covenants, which may limit TELKOM’s operatingflexibility with respect to certain business matters. Ifadequate funds are not available on acceptable terms, TELKOM maybe unable to develop or enhance its services. It may also beunable to take advantage of future opportunities or respond tocompetitive pressures, any of which could have a materialadverse effect on TELKOM’s business, results of operationsand 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 andtechnology that is comparable to and compatible with, othertelecommunications service providers, TELKOM must continue toexpand and modernize its network, which involves substantialcapital investment. TELKOM historically has relied heavily ontwo-step loans obtained through the Government and third-partyfinancing, including vendor financing, to support thedevelopment of its fixed line network. If TELKOM is unable toobtain adequate vendor or other third-party financing for itsplanned capital expenditures or otherwise fund such expendituresthrough other financing arrangements, including free cash flows,TELKOM may have to forego, delay or postpone certain of itsplanned capital expenditures. This may prevent TELKOM from beingable to expand sufficiently and upgrade its network.
19

Table of Contents
**     *****Employee unions may negatively affect TELKOM’s    business.***     Laws permitting the formation of labor unions, combined withweak economic conditions, have resulted and may continue toresult, in labor unrest and activism in Indonesia. OnFebruary 25, 2003, the Indonesian Parliament passed a newemployment law, Law No. 13 of 2003 (the “EmploymentLaw”), which took effect on March 25, 2003. TheEmployment Law covered the increment of severance amount,service and compensation payment payable to terminated employeesas well as to allow employees to unionize without interventionfrom employers. The Employment Law and new implementationregulations that may be issued thereunder may substantiallyaffect labor relations in Indonesia. In May 2000, TELKOMemployees formed a union named “Serikat KaryawanTELKOM” or “SEKAR”. Membership with SEKAR is notcompulsory. TELKOM believes that its relations with SEKAR aregood. However, there can be no assurance that the activities ofemployee unions will not materially and adversely affectTELKOM’s business, financial condition and prospects.**     *****New technologies may adversely affect TELKOM’s    ability to remain competitive.***     The telecommunications industry is characterized by rapid andsignificant changes in technology. TELKOM may face increasingcompetition from technologies being developed or that may bedeveloped in the future. New technologies, services or standardscould require significant changes to its business model, thedevelopment of new products or the provision of additionalservices. In addition, TELKOM may need to substantially upgradeto a next generation network to implement convergenttechnologies and upgrade its billing and credit control systemsto accommodate growth in its business and the adoption of newtechnologies and services. New products and services may beexpensive to develop and may result in the introduction ofadditional competitors into the marketplace. TELKOM cannotaccurately predict how emerging and future technological changeswill affect its operations or the competitiveness of itsservices. Similarly, TELKOM cannot provide any assurances thatthe technologies it adopts will not soon thereafter becomeobsolete or subject to intense competition from new technologiesin the future.**     *****TELKOM operates in a legal and regulatory environment that    is undergoing significant reforms and such reforms may adversely    affect TELKOM’s business.***     There are a number of uncertainties in the current regulatoryenvironment for the Indonesian telecommunications industry. Inparticular, the Telecommunications Law No. 36 of 1999(“Telecommunications Law”) provides key guidelines forindustry reforms, including industry liberalization,facilitation of new entrants and changes to the industry’scompetition structure. The Telecommunications Law only outlinesthe framework and substantive principles for the liberalizationof the telecommunications industry. TELKOM considers that thereis uncertainty in the Indonesian regulatory environment withregard to, among other things: • *Interconnection:*TELKOM is obligated to allow other    operators to interconnect their networks with those of TELKOM    subject to entering into interconnection agreements with those    other operators. As of the date of this Annual Report,    TELKOM’s ability to negotiate such interconnection    agreements is limited by the provisions set forth in various    Ministerial Decrees governing interconnection rates. Following    the enactment of the Telecommunications Law, a restructuring of    the interconnection policy was proposed based upon a cost-based    tariff approach as mutually 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, the MoCI has not issued implementing regulations. TELKOM    expects that the current interconnection fees may be adjusted as    a result of the new cost-based interconnection scheme but TELKOM    can give no assurance regarding the impact, if
20

Table of Contents
     any, of such adjustment 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 and VoIP. The    Government, with due regard to prevailing laws and regulations,    may amend the terms of TELKOM’s licenses and business    authority at its discretion. It may also impose certain    mandatory obligations on the license holders. See Item 4.B.    “Business Overview — Regulation —    Modern License”. Any breach of the terms and conditions of    its licenses or business authority or failure to comply with    applicable regulations may result in such licenses or business    authority being revoked. Any revocation or unfavorable amendment    of the licenses or business authority, or any failure to renew    them on comparable terms, could have a materially adverse effect    on TELKOM’s business, financial condition, results of    operations and prospects.  • *Tariffs:*In 1995, the Government implemented regulations    providing a formula to establish the tariff adjustment for    domestic fixed line telecommunications services. However, such    annual tariff review adjustment has not been applied on a    consistent basis. In addition, amendments to the current price    cap policy allow operators to calculate yearly tariff    adjustments beginning 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 rebalance their    tariffs, with the resulting weighted average of tariffs    increasing by 9%. The Government did not effect the remaining    tariff increases by January 2005, and there is no assurance as    to when or whether the remaining tariff increases will be    implemented by the Government.  • *Indonesian Telecommunications Regulatory Body    (“ITRB”):*The Telecommunications Law allows    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 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 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, Indosat    only offered this service in Jakarta, Surabaya, Malang and their    surrounding areas. Based on amendment to the interconnection    agreement between TELKOM and Indosat dated March 31, 2005,    TELKOM has agreed to open interconnection with Indosat’s    local fixed line service in certain areas such as Batam,    Bandung, Medan, Balikpapan and Malang. Therefore, Indosat is    expected to expand its service coverage to other cities in    Indonesia. Indosat also commenced offering limited domestic    long-distance services for calls within its network in late
21

Table of Contents
     2004. This greater competition in the fixed line market,    including fixed wireless, could lead to a decline in    TELKOM’s existing subscriber base as subscribers choose to    receive services from other providers.  • *DLD and IDD Services:*On March 11, 2004, the MoC    issued Decree No. 28/2004, Decree No. 29/2004 and Decree    No. 30/2004 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    year period to implement the three digit DLD access codes. On    April 1, 2005, the MoCI, to which telecommunications    regulatory responsibility was transferred, announced that it    would make available to Indosat the “011” DLD access    in five major cities that were technically ready for    interconnection, including Jakarta, and progressively extend it    to all other area codes within five years. TELKOM has also been    assigned “017” as its DLD access code. However,    interconnection between Indosat and TELKOM in these five cities    would still be subject to the parties reaching agreement on    technical and business arrangements and entering into an    interconnection agreement. In the five-year interim period and    thereafter, the “0” prefix may continue to be used by    all operators, including TELKOM, as default codes for each    operator’s customers to access the DLD service selected by    the respective operator.     Competition in the market for DLD services could lead to a    decline in TELKOM’s DLD revenues as subscribers choose to    receive DLD services from other providers, such as Indosat. With    regard to IDD services, on May 13, 2004 TELKOM received its    commercial license from the Government to provide IDD services    and began offering such services to customers on June 7,    2004. Nevertheless, competition among IDD service providers may    limit TELKOM’s ability to generate significant IDD    revenues. TELKOM is currently in the process of negotiating with    Indosat to allow TELKOM’s customers to access    Indosat’s DLD services, and for Indosat’s customers to    access TELKOM’s IDD services.      On May 17, 2005, the MoCI issued decree No.6/2005.    According to Decree No.6/2005, the three digit access code in    the form of “01X” and “0” access code for    access to DLD services may be used. The “0” access    code is being used to accommodate customers who prefer not to    choose their long-distance carrier, while the “01X”    access code has to be implemented gradually in local areas in    which TELKOM has technical capabilities to support such    services. By April 1, 2010, the “01X”    long-distance services must be commenced in all TELKOM’s    local areas to accomodate customers who prefer to choose their    long-distance carrier. TELKOM is in the process of negotiating    with Indosat to allow TELKOM’s customers to access    Indosat’s DLD services and for Indosat’s fixed and    mobile customers to access TELKOM’s IDD services. • *Compensation Risk:*The Telecommunications Law provides    that TELKOM and Indosat will be compensated for the early    termination of their exclusive rights. TELKOM previously had    exclusive rights to provide fixed local and domestic    long-distance services in Indonesia.
22

Table of Contents
     TELKOM’s exclusive right to provide fixed local    telecommunications services was terminated by the Government in    August 2002 and TELKOM’s exclusive right to provide    domestic long-distance services was terminated on March 30,    2004. The Government has determined the scheme of compensation    for the termination of TELKOM’s exclusive rights, which    will consist of (i) expedited issuance of an IDD license to    TELKOM, which was issued on May 13, 2004;    (ii) approval of the reissuance and transfer of    TELKOM’s DCS 1800 license to Telkomsel, which took place on    July 12, 2002; and (iii) a net cash payment to TELKOM    and its KSO partners of Rp.478 billion (after taxes). While    the amount of the compensation payable to TELKOM and its KSO    partners has been determined, payment is contingent on    appropriations to the State Budget for the MoCI, which requires    approval by Parliament. As of the date of this Annual Report,    TELKOM can provide no assurance with regard to when Parliament    will approve the necessary appropriations or as to the effects    the net cash payment will have on TELKOM’s financial    condition, results of operations and prospects.  • *USO Risk:*All telecommunications network operators and    service providers are bound by a Universal Service Obligation,    or USO, which requires provision of certain telecommunications    facilities and infrastructure in rural and remote areas. As a    local network provider, TELKOM is obligated to build and operate    telecommunications networks in the USO areas. Historically,    TELKOM has been obligated to contribute 5% of its capital    expenditures to its USO requirements. 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 regulations or    announcement as to when such contribution will take effect. The    Government is also in the process of drafting detailed    regulations that will fully implement the USO program for    telecommunications operators in Indonesia.     There can be no assurance that the amendment or interpretationor implementation of current laws and regulations, or theintroduction of additional laws or regulations, will notadversely affect TELKOM’s business, financial condition andprospects.***TELKOM’s increasingly important cellular operations    face significant constraints and competitive pressures.***     TELKOM provides cellular telecommunications services primarilythrough its subsidiary Telkomsel (GSM 900 Mhz and 1800 Mhz).Telkomsel has experienced rapid growth in its subscriber-base inrecent years and its revenue has become an increasingly largecomponent of TELKOM’s consolidated revenue.Telkomsel’s future growth depends upon its ability tomanage capacity and spectrum constraints. Telkomsel hasexperienced such constraints in the past and may face suchconstraints in the future, which may result in networkcongestion, reduced service quality and an inability to increaseand retain its subscriber-base and as a result may impede futuregrowth. Telkomsel is seeking to substantially increase thecapacity of its cellular network over the next three years.However, spectrum and capacity are subject to regulatoryapproval and allocation.     The Indonesian cellular telecommunications market is highlycompetitive. Currently, Telkomsel competes primarily withIndosat and Excelcomindo in attracting and retaining subscribersfor its mobile cellular telecommunications services. There arealso several other new competitors, including new CDMA cellularoperators. Competition between Telkomsel and all of theseoperators is based on various factors such as pricing, networkquality and coverage, range of services offered and customerservice.
23

Table of Contents
***TELKOM’s satellites have a limited life and    substantial risk exists for TELKOM-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    our financial condition, results of operations and ability to    provide certain services.***     TELKOM’s TELKOM-1, Palapa B-4 and to be launched TELKOM-2satellites have limited operational lifespans. A number offactors affect the operational livespans of satellites,including the quality of their construction, the durability oftheir component parts, the amount of fuel on board, the launchvehicle used and the manner in which the satellite is monitoredand operated. The satellites could fail before the end of theiruseful lives and repairing these satellites while in orbit isnot feasible. TELKOM maintains insurance coverage for TELKOM-1satellite. As of December 31, 2004, such coverage wasUS$51.6 million, in the event of a total loss of thesatellite. In connection with its planned launch of the TELKOM-2satellite, TELKOM has procured insurance coverage to cover boththe satellite and the launch services. With regard to theTELKOM-2 satellite, TELKOM has procured (i) a satellitelaunch and in-orbit insurance providing coverage of US$79.3million to cover the event of a total loss of the satellite inthe period between lift-off and up to one year in orbit, and(ii) post separation and in-orbit insurance coverage ofUS$71.0 million to cover the event of a total loss in theperiod between the separation of the satellite from the launcherup to one year in orbit. With regard to launch services, TELKOMhas procured a launch risk guarantee from Arianespace thatprovides reflight in the event of a launch failure in the periodbetween lift-off and separation. However, the loss of itssatellites and the failure to launch the new satellite may havea 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 currentlyrelies largely on satellite coverage for telecommunicationservices.***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 aboutIndonesian public companies, including TELKOM, than is regularlydisclosed by public companies in countries with more maturesecurities markets. TELKOM’s audited consolidated financialstatements have been prepared in accordance with IndonesianGAAP, which differs in certain material respects from U.S. GAAP.See Item 5. “Operating and Financial Review andProspects — A. Operating Results — Summary ofSignificant Differences between Indonesian GAAP and U.S.GAAP” and Note 56(1) to TELKOM’s consolidatedfinancial statements.***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 topublic companies and all of TELKOM’s significant assets arephysically located in Indonesia. In addition, the majority ofTELKOM’s Commissioners and Directors reside in Indonesiaand a substantial portion of the assets of such persons islocated outside the United States. As a result, it may not bepossible for investors to effect service of process, includingjudgments, on TELKOM or such persons within the United States,or to enforce against TELKOM or such persons in the UnitedStates judgments obtained in United States courts, includingjudgments predicated upon the civil liability provisions of theUnited States federal securities laws or the securities laws ofany state within the United States, or upon other bases.     TELKOM has been advised by its Indonesian legal advisor thatjudgments of United States courts, including judgmentspredicated upon the civil liability provisions of the UnitedStates federal securities laws, are not enforceable inIndonesian courts, although such judgments could be admissibleas non-conclusive evidence in a proceeding on the underlyingclaim in an Indonesian court. There is doubt as to whetherIndonesian courts will enter judgments in original actionsbrought in Indonesian courts predicated solely upon the civilliability provisions of the United States federal securitieslaws. As a
24

Table of Contents
result, holders of ADSs or Common Stock would be required topursue claims against TELKOM or its Commissioners and Directorsin an Indonesian court.***Forward-looking statements reflect current expectations    and may not be correct.***     This document contains various forward-looking statements,including statements regarding our expectations and projectionsfor future operating performance and business prospects. Thewords “believe”, “expect”,“anticipate”, “estimate”,“project” and similar words identify forward-lookingstatements. In addition, all statements other than statements ofhistorical facts included herein are forward-looking statements.These statements reflect TELKOM’s current expectations.Although TELKOM believes that the expectations reflected in theforward-looking statements are reasonable, TELKOM can give noassurance that such expectations will prove to be correct. Theyare subject to a number of risks and uncertainties, includingchanges in the economic, social and political environments inIndonesia. In light of the many risks and uncertaintiessurrounding Indonesia, investors in the ADSs or the commonshares should bear in mind that TELKOM cannot guarantee that theforward-looking statements described herein will transpire. Allsubsequent written and oral forward-looking statementsattributable to TELKOM or persons acting on our behalf areexpressly qualified in their entirety by reference to theserisks.**ITEM 4.     INFORMATION ON THECOMPANY****A.  History and development of the Company**     TELKOM, a majority state-owned company, is the principalprovider of fixed line services in Indonesia. TELKOM’smajority-owned subsidiary Telkomsel is also the largestIndonesian mobile cellular operator, as measured by subscribersand revenues. The Company also provides a wide range of othertelecommunications services including interconnection, network,data and Internet services and other telecommunicationsservices. Pursuant to its Articles of Association, TELKOM wasestablished for an unlimited period of time. The Company’spurposes and objectives are to operate telecommunicationsnetworks and provide telecommunications and information services.     In 1884, the Dutch colonial government established a privatecompany to provide postal services and domestic telegraphservices and, subsequently, international telegraph services.Telephone services were first made available in Indonesia in1882 and, until 1906, were provided by privately-owned companiespursuant to a 25-year government license. In 1906, the Dutchcolonial government formed a government agency to assume controlof all postal and telecommunications services in Indonesia. In1961, most of these services were transferred to anewly-established state-owned company to provide postal andtelecommunications services in Indonesia, apart from services inSumatera, which were transferred in the 1970’s. TheGovernment separated postal and telecommunications services in1965 into two state-owned companies, PN Pos and Giro and PNTelekomunikasi. In 1974, PN Telekomunikasi was further dividedinto two state-owned companies, Perusahaan Umum Telekomunikasi(“Perumtel”) to provide domestic and internationaltelecommunications services and PT Industri TelekomunikasiIndonesia Tbk (“PT INTI”), to providetelecommunications equipment manufacturing. In 1980, theinternational telecommunications business was transferred toIndosat.     In 1991, Perumtel was transformed into a “Persero”, orstate-owned limited liability corporation with commercialpurposes and renamed Perusahaan Perseroan (Persero) P.T.Telekomunikasi Indonesia, known as TELKOM. Prior to 1995,TELKOM’s business operations were segregated into twelveregional operating units, known as “Witels,” whichwere centrally controlled from TELKOM’s headquarters inBandung, West Java. Each Witel had a management structureresponsible for all aspects of TELKOM’s business in theirrespective regions, from the provision of telephone services toproperty management and security. The Company has its place ofdomicile 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 convertingall twelve Witels into seven regional divisions (Division ISumatera; Division II Jakarta and the surrounding areas;Division III West
25

Table of Contents
Java; Division IV Central Java; Division V East Java;Division VI Kalimantan; and Division VII Eastern part ofIndonesia) and one Network Division. The Company also enteredinto KSO Agreements pursuant to which it transferred the rightto operate five of its seven regional divisions (regionaldivisions I, III, IV, VI and VII) to private sectorconsortia, each of which involved one or more prominentinternational telecommunications operators. The KSO Agreementsprovided for the relevant KSO partner to manage and operate theregional division for a fixed term, undertake the constructionof a specified number of fixed lines and, at the end of thefixed term, transfer the existing and new telecommunicationsfacilities in the region to TELKOM for an agreed amount ofcompensation. The KSO Agreements also provided for TELKOM andthe KSO partner to share revenues generated during the term ofthe agreement.     On November 14, 1995, the Government sold TELKOM sharesthrough an initial public offering. TELKOM shares are listed onthe Jakarta Stock Exchange and the Surabaya Stock Exchange andits shares, in the form of ADSs, are listed on the New YorkStock Exchange and the London Stock Exchange. Its shares havealso been publicly offered without listing on the Tokyo StockExchange. TELKOM is currently one of the largest companies bymarket capitalization in Indonesia, with a market capitalizationof approximately Rp.97,272 billion as of December 31, 2004and of approximately Rp.93,740 billion as of May 31,2005. The Government currently has an aggregate interest ofapproximately 51.19% of the issued and outstanding shares ofTELKOM. The Government also holds the Dwiwarna share of TELKOM,which has special voting and veto rights over certain matters.     Following the Indonesian economic crisis that began in mid-1997,certain KSO partners experienced difficulties in fulfillingtheir obligations to TELKOM leading to certain disputes. As aresult, TELKOM has in recent years acquired or entered intoagreements to acquire control of its KSO partners inregions I, III and VI, and amended the terms of the KSOagreement with its KSO partner in region IV to obtain legalright to control financial and operating decisions of RegionalDivision 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
26

Table of Contents
     operating decisions of Regional Division IV for a purchase price    of US$390.7 million, or Rp.3,285 billion, which    represents the present value of the fixed monthly payments    (totaling US$517 million) to be paid by TELKOM to MGTI from    2004 through 2010 plus direct cost of the business combination.For a more complete description of the foregoing transactionsand TELKOM’s KSO arrangements, see Item 10.“Additional Information — C. MaterialContracts” and Item 4. “Information on theCompany — B. Business Overview — JointOperation Scheme (KSO).”     In 1999, the Government passed Telecommunications LawNo. 36 which became effective in September 2000. TheTelecommunications Law provides key guidelines for industryreforms, including industry liberalization, facilitation of newentrants and enhanced competition. Under the priortelecommunications law, TELKOM and PT Indonesian SatelliteCorporation (“Indosat”) maintained joint ownership inmost telecommunications companies in Indonesia. The Governmentsreforms called for the progressive elimination of these jointshareholdings 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 andIndosat acquired TELKOM’s 22.5% interest in Satelindo and37.7% interest in Lintasarta. In 2002, TELKOM sold 12.72% ofTelkomsel to Singapore Telecom Mobile Pte Ltd (“SingTelMobile”), resulting in TELKOM’s ownership beingreduced to 65% of the shares of Telkomsel. For a more completedescription of the foregoing transactions, see Item 10.“Additional Information — C. MaterialContracts.”     Pursuant to the Telecommunications Law, the Government as ofAugust 1, 2001 terminated the exclusive rights of TELKOM toprovide fixed line services in Indonesia and Indosat to provideinternational direct dial services. TELKOM’s exclusiveright to provide domestic local service was terminated in August2002 and TELKOM’s exclusive right to provide domesticlong-distance service was likewise terminated in August 2003. OnMay 13, 2004, TELKOM received its commercial license toprovide IDD fixed line services and began offering such serviceson June 7, 2004. The MoC issued Indosat a license toprovide local telephone services from August 2002. OnMay 13, 2004, Indosat received its commercial license toprovide domestic long-distance telephone services. Indosatlaunched its CDMA fixed wireless access service under the brandname “StarOne” in Surabaya on May 29, 2004 and inJakarta on July 25, 2004, thereby creating a “duopolysystem” in Indonesia’s fixed line domestictelecommunications market. As of the date of this Annual Report,Indosat only offers this service in limited areas, but isexpected to expand service coverage to additional cities inIndonesia. Indosat also commenced offering limited domesticlong-distance services for calls within its network in late 2004.     For a description of the important events in the development ofthe Company’s business since the beginning of theCompany’s last three financial years to the date of thisAnnual Report, see Item 5. “Operating and FinancialReview and Prospects — A. OperatingResults — Overview”. A description of theCompany’s principal capital expenditures and divestitures,since the beginning of the Company’s last three financialyears to the date of this Annual Report is set forth inItem 5. “Operating and Financial Review andProspects — B. Liquidity and Capital Resources”.Information concerning the principal capital expenditures anddivestitures currently in progress is also described in Item 5.“Operating and Financial Review and Prospects — B.Liquidity and Capital Resources”.**B.  Business Overview****General**     TELKOM is the main provider of fixed line telecommunicationsservices in Indonesia and is the majority owner of Telkomsel,which is the largest Indonesian mobile cellular operator, asmeasured by subscribers and revenue. The Company also provides awide range of other telecommunications
27

Table of Contents
services including interconnection, network, data and Internetservices and other telecommunications services. TELKOM reportsrevenues 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 Services (including revenues from    telephone directory services and building management services).     For segment reporting purposes, TELKOM has three segments:(i) fixed lines, (ii) cellular and (iii) other.See Note 48 to the consolidated financial statements. Thefixed line segment provides local, domestic long-distance andinternational (starting 2004) telephone services, and othertelecommunications services (including among others, leasedlines, telex, transponder, satellite and Very Small ApertureTerminal-VSAT) as well as ancillary services. The cellularsegment provides basic telecommunication services, particularlymobile cellular telecommunication services. Operating segmentsthat do not individually represent more than 10% of theCompany’s revenues are presented as “Other”comprising the telephone directories and building managementbusinesses.     For 2004, no single customer, other than interconnectioncustomers, accounted for more than 1% of TELKOM’s totaloperating revenues and TELKOM’s top 100 customers, otherthan interconnection customers, together accounted for more than5% of its total operating revenues. For the purpose ofcalculating operating revenues, TELKOM treats each state-ownedenterprise owned by the Government as a single customer.     TELKOM’s business does not experience significantseasonality.**Fixed Line Services**     Fixed line services are comprised mainly of local and domesticlong-distance services. TELKOM is the principal provider offixed line services in Indonesia. In 2004, TELKOM provided fixedline services in Divisions I, II, III, IV, V and VI. In2004, revenues from fixed line services in these divisionscontributed Rp.10,645.0 billion (US$1,145.9 million),or 31.4% of total operating revenues. Beginning January 20,2004, when TELKOM acquired Regional Division IV, TELKOM beganproviding fixed line services in Division IV. Fixed lineservices in Division VII continue to be provided through KSO, ajoint operation arrangement, and revenue to TELKOM from KSO VIIis reported under Joint Operation Schemes. See“— Joint Operation Scheme” below.     Fixed line subscribers pay one-time installation charges,ongoing monthly subscription charges and usage charges for localand domestic long-distance services. Usage charges are generallyuniform nationwide and are based on call distance, call durationand 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 anddirectory assistance, which are billed on a monthly basis.     TELKOM has historically been the principal provider of fixedline services and Indosat has historically been the principalprovider of international direct dial services in Indonesia.However, the Government as of August 1, 2002 has terminatedTELKOM’s exclusive rights to provide local fixed lineservices and Indosat’s exclusive rights to provideinternational direct dial services, and the MoC issued Indosat alicense to provide local telephone services from August 2002. OnMay 13, 2004, the Government issued TELKOM’scommercial license to provide IDD fixed line services andIndosat’s
28

Table of Contents
commercial license to provide DLD fixed line services. As aresult, TELKOM and Indosat now engage in competition with eachother in the markets for these services.*     CDMA Fixed Wireless*     In December 2002, TELKOM began offering a limited mobility(within a local area code) CDMA-based fixed wireless phoneservice under the brand name “TELKOMFlexi” for bothfixed and portable handsets. TELKOM’s rollout of thisservice began in the three cities of Surabaya, Denpasar andBalikpapan and, as of December 31, 2004, was available in192 cities. TELKOM’s rollout of this limited mobility fixedwireless service is occurring concurrently with its use of CDMAfixed wireless technology for the development of its fixed linenetwork. CDMA-based fixed wireless technology enables rapiddevelopment of telephone networks and the reduction of capitalexpenditures per line by reducing and often eliminating the needfor layout of cables. TELKOM intends to continue to rapidlydevelop its CDMA-based fixed wireless network and expand itsTELKOMFlexi service to other cities and regions in Indonesia. Asof December 31, 2004, TELKOM had 1,139 BTSs and 2,470,929line units deployed, of which 1,057 BTSs and 2,213,579 lineunits were financed by TELKOM and 82 BTSs and 257,350 line unitswere established under the RSA scheme. As of December 31,2004, TELKOM had 1,429,368 TELKOMFlexi subscribers (including63,005 subscribers in areas financed by RSA schemes).     TELKOMFlexi revenues are reported under fixed line services.These revenues are being reported as fixed line revenues becausethis business is being conducted pursuant to TELKOM’s fixedline license. See “— Regulation” below.     TELKOMFlexi subscribers have the option of postpaid and prepaidservices. Postpaid subscribers pay one-time activation charges,ongoing monthly subscription charges and usage charges for localdomestic-long distance and international services, which chargesare generally the same as those paid by fixed line subscribers.Prepaid subscribers are required to purchase starterpackscontaining RUIM cards and vouchers or refills, and pay onlyusage charges, which are typically higher than those paid bypostpaid subscribers. Prepaid subscribers may purchase aRp.35,000 starterpack, which include a Rp.50,000 voucher, orRp.80,000 starterpack, which includes a Rp.100,000 voucher.Refills are made through purchasing vouchers, or throughvoucherless electronic and ATM channels, in amounts ranging fromRp.10,000 to Rp.500,000, depending on the refill method used.Vouchers and refills purchased remain active for limited periodsfrom the date of purchase, ranging from 15 days for aRp.10,000 voucher or refill to 210 days for a Rp.500,000voucher or refill. TELKOM generally provides a 30-day graceperiod after the expiry of the active period in which onlyincoming calls are allowed.     TELKOMFlexi subscribers are also provided with a number ofvalue-added features, such as SMS, WAP, a web portal, voicemailand information services, such as billing, directory assistanceand other content services. The revenues from these services arereported in the Data and Internet category. See“— Data and Internet Services” below.Customers generally have all features offered by cellularservices except roaming to other local area codes andinternationally. In June 2004, TELKOM launched a“FlexiCombo” service which allows each subscriber tohave up to three telephone numbers, with each number assignedfor use in one of three different cities, but without local areacode or international roaming. As of December 31, 2004, the“Flexicombo” service was available in 130 cities.**     ***IDD Services*     TELKOM received its commercial license from the Government toprovide IDD services on May 13, 2004. TELKOM began offeringIDD services, under the brand name “Telkom InternationalCall 007”, or “TIC 007,” on June 7,2004. TELKOM reports its IDD revenues under internationalinterconnection revenues as this service requiresinterconnection between TELKOM and network operators in othercountries. See “— Interconnection Services”below. Through its VoIP service, which is known as“TelkomGlobal 017”, TELKOM already providesinternational call services based on VoIP technology. TELKOMrecords its revenues from the VoIP service under “Data andInternet Services” as this service uses IP and data-basedinfrastructure. See “— Data and InternetServices” below.
29

Table of Contents
**     *****Cellular Services***     TELKOM provides its mobile cellular services through its65%-owned subsidiary Telkomsel. Cellular revenues grew by 23.2%from Rp.8,458.8 billion (US$1,002.2 million), or 31.2%of TELKOM’s total operating revenues, for the year endedDecember 31, 2003 to Rp.10,421.3 billion(US$1,121.8 million), or 30.7% of TELKOM’s totaloperating revenues, for the year ended December 31, 2004.Over the same period, the total number of Telkomsel’smobile cellular subscribers (pre-paid and post-paid) increasedby 69.8% from approximately 9.6 million at the end of 2003 toapproximately 16.3 million as of December 31, 2004. Ofthe total subscribers as of December 31, 2004,approximately 15.0 million were pre-paid and approximately1.3 million were post-paid. Based on data developed byTelkomsel from various sources, Telkomsel had an estimated 54%share of the GSM cellular market in Indonesia as ofDecember 31, 2004, compared to an estimated 51% marketshare as of December 31, 2003.     Telkomsel provided GSM cellular services in Indonesia throughits own network and internationally through the networks of 356international roaming partners in 145 countries as of the end of2004. As of December 31, 2004, Telkomsel had the largestnetwork of any of the cellular operators in Indonesia, providingcoverage to over 90% of Indonesia’s population and morethan 650 cities.     Telkomsel provides its subscribers with the option of a prepaidservice under the brand name “SimPATI Nusantara,” or apostpaid service under the brand name “KartuHALO.” InMay 2004, Telkomsel launched a new prepaid brand “KartuAs,” which is intended to target the lower segment of themarket as well as customers who travel frequently withinIndonesia, by offering free domestic roaming and lower tariffson local and domestic long-distance calls, with no differencebetween tariffs for calls during peak and off-peak hours.Telkomsel also offers tailor-made postpaid services forcorporate customers and a postpaid family service under thebrand name “HALOkeluarga.”     Generally, postpaid subscribers pay one-time activation charges,ongoing monthly subscription charges and usage charges forroaming, SMS, local, domestic-long distance and internationalservices. Beginning April 2004, postpaid subscribers can alsochoose among the following options: (a) free nationalroaming; (b) 150 free SMS per month; or (c) waiver ofthe monthly subscription charge.     Prepaid customers purchase a starter package, the price of whichstarts at Rp.25,000 for Kartu As customers and Rp.25,000 forSimPATI customers, depending on the value of the pre-paidvoucher included in the package. For Kartu As customers, theRp.25,000 starter package contains a SIM card and a voucherworth Rp.25,000. For SimPATI customers, the Rp.25,000 starterpackage contains a SimPATI SIM card and a voucher worthRp.15,000. SimPATI subscribers can buy pre-paid vouchers rangingin value from Rp.20,000 to Rp.1,000,000 to increase the value oftheir SIM cards, while Kartu As subscribers can buy prepaidvouchers of either Rp.20,000 or Rp.50,000. The customer’sprepaid account can be topped up electronically or bysupplemental refill vouchers. When refill vouchers arepurchased, subscribers call an automated telephone number andenter a 14-digit code printed on their voucher in order toactivate or supplement their account with the new prepaidamount. Kartu As and SimPATI starter packages and refillvouchers may be purchased at any of Telkomsel’s servicecenters and distribution outlets. Electronic refills may also bepurchased at selected automatic teller machines, via telephonebanking and over the Internet. In June 2004, Telkomselintroduced a new electronic refill service called“M-KIOS” which allows prepaid customers to refill witha mobile handset as the transaction terminal through securemeans. In September 2004, Telkomsel introduced an automaticrefill service that permits payments through VISA credit cards,pursuant to which a prepaid customer can elect to have a prepaidaccount refilled automatically in one of the following ways:(i) whenever the prepaid account balance falls belowRp.10,000; (ii) a fixed amount monthly; or (iii) ondemand, through SMS. The prepaid customer credits generally havea predetermined expiry date and irrespective of usage willexpire on such date, although in August 2004, Telkomselintroduced a “Kartu As always On” package under whichprepaid customer credits do not expire but a minimum monthlyusage of Rp.25,000 is required, or failing which a chargeamounting to the shortfall is imposed.
30

Table of Contents
     Provided that they meet certain credit-related eligibilityrequirements, SimPATI customers may sign up for Telkomsel’spost-paid KartuHALO services at any time without having tochange their telephone numbers. While Kartu As and SimPATIcustomers do not pay an activation fee or monthly subscriptioncharges, they pay higher usage charges than postpaid subscribers.     Telkomsel also offers cellular users value added services suchas SMS, international roaming, GPRS, MMS, multi-party calling,call forwarding, call waiting, caller number display andnon-display, ring back tone (which allows callers to thesubscriber of the ring back tone service to hear a pre-selectedringing tone), mobile banking, SMS to e-mail services and otherpersonal mobile data services, the revenues from which arereported in the Data and Internet category. See“— Data and Internet Services” below.     The following table sets forth selected historical informationon Telkomsel’s subscriber base for the periods indicated:                **As of or for the**  **Year Ended December 31,**     **2002** **2003** **2004**           Cellular    subscribers(1)                 KartuHALO (Postpaid)  923,005   1,007,034   1,327,549      SimPATI (Prepaid)  5,087,767   8,581,773   11,557,758      Kartu As (Prepaid)  —   —   3,405,201     Deactivations(2)                 KartuHALO (Postpaid)  279,648   265,355   317,020      SimPATI (Prepaid)  470,298   2,823,025   8,470,819      Kartu As (Prepaid)  —   —   824,489     Average monthly churn    rate(3)                 KartuHALO (Postpaid)  2.5%  2.3%  2.3%     SimPATI (Prepaid)  1.1%  4.0%  6.8%     Kartu As (Prepaid)  —   —   5.0%    ARPU(4)                 KartuHALO (Postpaid) (Rp.’000)  298   314   304      SimPATI (Prepaid) (Rp.’000)  103   95   84      Kartu As (Prepaid)  —   —   48  (1)     Prepaid subscribers may purchase SIM-cards and refill vouchers    with values ranging from Rp.20,000 to as much as Rp.1,000,000.    For Kartu As, 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**  **subscribers will have****SimPATI Value of Voucher** **access to services**       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(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
31

Table of Contents
connection fees, interconnection    revenues, international roaming revenues from visitors and    dealer discounts) for each month by the respective average    number of postpaid or prepaid cellular subscribers for that    month.        In June 2004, Telkomsel introduced an enhanced data transmissiontechnology known as “EDGE,” or Enhanced Data rates forGSM Evolution, which offers enhanced data transmission speedsfor handsets equipped to handle EDGE. As of December 31,2004, EDGE was available in Jakarta and Surabaya.**     *****Joint Operation Scheme***     TELKOM and its remaining KSO partner, PT Bukaka SingTelInternational, provide fixed line and other services in RegionalDivision VII. Until January 20, 2004, when TELKOM acquiredRegional Division IV, TELKOM and its KSO partner, MGTI,provided fixed line and other services in RegionalDivision IV. In 2004, TELKOM’s revenues from KSOdivisions in Regional Division VII and RegionalDivision IV before its consolidation (including, in eachcase, amortization of unearned initial investor payments)contributed Rp.656.6 billion (US$70.7 million), or 1.9% oftotal operating revenues.     TELKOM entered into agreements to establish the KSOs in 1995 andpursuant to such agreements transferred the right to operateRegional Divisions I, III, IV, VI and VII to private sectorconsortia, each of which involved one or more prominentinternational telecommunications operators. TELKOM then retainedthe right to operate divisions II and V, its two largestdivisions. The KSO Agreements provided for the relevant KSOpartner to manage and operate the Regional Division for a fixedterm, undertake the construction of a specified number of fixedlines and, at the end of the fixed term, transfer the existingand new telecommunications facilities in the region to TELKOMfor a pre-determined agreed amount of compensation. The KSOAgreements 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 TELKOMRevenues (“MTR”); and (c) additional monthlyrevenue sharing payments or Distributable TELKOM Revenues(“DTR”) from the revenues of the KSO Unit afterpayments of MTR and certain operating expenses. The KSO partnerswere granted licenses to provide fixed line services in therespective regions.     Following the Indonesian economic crisis that began in mid-1997,certain KSO partners experienced difficulties in fulfillingtheir obligations to TELKOM. In order to assist the KSO partnersin meeting their obligations and to maintain the continuity ofthe KSO Agreements, all of the KSO partners entered into aMemorandum of Understanding with TELKOM on June 5, 1998which reduced the minimum line construction obligations of theKSO partners, decreased TELKOM’s share of KSO revenues for1998 and 1999 and cancelled TELKOM’s option to purchase theassets of the KSO before the end of the KSO period. BeginningJanuary 1, 2000, the parties reverted to the terms of theoriginal KSO agreements with respect to MTR and DTR payments.Due to the severity of the crisis, these measures did not solvethe significant difficulties faced by the KSO partners andTELKOM has in recent years acquired or entered into agreementsto acquire control of its KSO partners in RegionalDivisions I, III and VI, and amended the terms of the KSOAgreement with respect to Regional Division IV to acquirecontrol of the KSO IV operations.
32

Table of Contents
     TELKOM’s portion of KSO revenues for the last three years(2002 — 2004) are indicated in the following table:                           **2002** **2003** **2004**       **KSO Division** **MTR** **DTR** **MTR** **DTR** **MTR** **DTR**               **(Rp. in billion)** **(Rp. in billion)** **(Rp. in billion)**    Division I    (Sumatera)(1)  296.3   197.3   —   —   —   —     Division III (West Java and    Banten)(2)  390.1   157.8   242.4   90.0   —   —     Division IV (Central    Java)(3)  387.5   183.2   404.3   184.6   35.2   15.7     Division VI    (Kalimantan)(4)  —   —   —   —   —   —     Division VII (Eastern Indonesia)  245.8   262.7   253.2   308.4   260.8   333.8                        Total  1,319.7   801.0   899.9   583.0   296.0   349.5                     (1)     TELKOM consolidated Regional Division I (Sumatera) from    August 2002, following an agreement to acquire 100% of the    equity interest in and control of Pramindo on August 15,    2002. For 2002, the numbers included in this table for Regional    Division I 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 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.” As a result of the amended and restated KSO    agreement, TELKOM acquired Regional Division IV. TELKOM    consolidated Rp.1,398.0 billion of operating revenues from    Regional Division IV (Central Java) from February 1,    2004 through December 31, 2004. For 2004, MTR and DTR for    Regional Division IV represent MTR and DTR generated by    Regional Division IV in January 2004.(4)     TELKOM consolidated Regional Division VI (Kalimantan)    following the 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.802.4 billion of operating revenues from Regional    Division VI (Kalimantan) in 2002, 2003 and 2004,    respectively.    The following describes the developments in recent years inwhich TELKOM acquired or entered into agreements to acquirecontrol of its KSO partners in Regional Divisions I, IIIand VI, and amended the terms of the KSO Agreement with respectto Regional Division IV to acquire control of theKSO IV operations.     On April 19, 2002, TELKOM entered into a Conditional Saleand Purchase Agreement to acquire 100% of the issued and paid upshare capital of its KSO partner in Regional Division I,Pramindo. Under the terms of the agreement, TELKOM agreed toacquire the shares of Pramindo in three tranches: in August 2002(30%), September 2003 (15%) and December 2004 (55%). TELKOM hasprovided US$384.4 million in its accounts as the aggregateconsideration for this transaction. Of theUS$384.4 million, TELKOM made an initial payment of US$9.3million (Rp.82 billion) in August 2002 and issuedpromissory notes (series I and II) dated August 2002 forthe remaining amount. The agreement granted the sellingshareholders a number of protective rights and was conditionalupon TELKOM meeting its payment obligations under the promissorynotes. The series I promissory notes had a face value ofapproximately US$372.2 million, while the aggregate amountof the series II promissory notes was estimated to beapproximately US$2.9 million. The promissory notes werepayable in ten unequal quarterly installments through December2004 which were funded by monthly amounts transferred by TELKOMto an escrow account. Under the agreement, TELKOM also provideda loan of US$86 million (Rp.765 billion) to Pramindowhich was used to repay loans from the IFC, one of the sellingshareholders. TELKOM also made an additional payment ofRp.250 billion in respect of a working capitalreimbursement to the selling shareholders. TELKOM obtainedcontrol of Pramindo as of the closing in August 2002. OnJanuary 28, 2004, TELKOM signed a short-term loan agreementwith ABN AMRO Bank N.V. Jakarta in the amount of approximatelyUS$130 million and on March 15, 2004 TELKOM used theloan proceeds to repurchase the outstanding promissory notesthat were due on
33

Table of Contents
June 15, 2004, September 15, 2004 and December 15,2004. This allowed TELKOM to accelerate the purchase of theremaining 55% of Pramindo that it did not yet own. As of thedate of this Annual Report, TELKOM beneficially owns 100% ofPramindo.     On July 31, 2003, TELKOM acquired 100% of the shares of itsKSO partner for Regional Division III, AriaWest for anaggregate consideration of US$38.67 million in cash(US$20 million of which was paid when the purchaseagreement was signed on May 8, 2002 and the remainingUS$18.67 million was paid on July 31, 2003) andUS$109.1 million in promissory notes. The promissory notes,which are interest-free, are payable in 10 semi-annualinstallments. At the same time, in consideration of the releaseof AriaWest’s outstanding obligations to its lenders,TELKOM also repaid approximately US$99 million ofAriaWest’s debt (including interest ofUS$25.0 million) on behalf of AriaWest and entered into anew loan agreement for approximately US$197 million withAriaWest’s lenders. TELKOM and AriaWest also entered into asettlement agreement settling claims and disputes involvingalleged material breaches of the KSO Agreement by each party.Pursuant to the settlement agreement, TELKOM and AriaWestirrevocably settled, discharged and released claims andcounterclaims in their ICC arbitration proceeding and TELKOMagreed to pay a settlement amount of US$20 million. As a resultof the acquisition of AriaWest and the settlement of the ICCarbitration in 2002, for the year ended December 31, 2002TELKOM reversed the provision of Rp.511.9 billion which waspreviously made with respect to certain receivables from KSOUnit III and accrued the settlement amount ofRp.179.0 billion in its consolidated financial statementsfor the year ended December 31, 2002. The ICC arbitrationproceeding was settled as of July 31, 2003. OnDecember 30, 2004, TELKOM fully repaid the balance of theAriaWest loan that it assumed, amounting toUS$151.9 million (including principal due in December 2004of US$24.6 million and interest of US$4.3 million).     In 2001, TELKOM entered into an agreement with Indosat pursuantto which Indosat agreed, subject to the satisfaction of certainconditions precedent, to acquire TELKOM’s assets inRegional Division IV for US$375 million. Thisagreement was part of the cross-ownership transaction in 2001.The closing was subject to several conditions precedentincluding (i) obtaining necessary approvals of the KSOinvestors and certain lenders to the KSO; (ii) theresolution to the satisfaction of Indosat of disputes relatingto TELKOM’s liabilities to the KSO investors under the KSOagreement and the KSO construction agreement; (iii) Indosator its nominee obtaining authorization or license from theGovernment to own and operate a public switchingtelecommunications fixed line and fixed wireless network in theKSO Territory; (iv) the parties having identified andagreed on the asset register of the KSO; and (v) theparties having agreed on the arrangements for the transfer ofemployees to Indosat. In February 2002, TELKOM and Indosatannounced the cancellation of the acquisition as certainconditions precedent had not been satisfied. The acquisition wascancelled primarily because Indosat and TELKOM were unable toagree on appropriate arrangements for the transfer ofTELKOM’s employees to Indosat due to the substantialresistance from TELKOM’s employees. As a result of thecancellation of the acquisition, TELKOM paid US$198 millionto Indosat, which represented the net balance of TELKOM’spayment obligations as a result of certain other cross-ownershiptransactions between TELKOM and Indosat. Such net balance ofUS$198 million was originally intended to be set off fromthe US$375 million to be paid by Indosat to TELKOM for theacquisition of TELKOM’s assets in RegionalDivision IV, but became payable by TELKOM to Indosat as aresult of the cancellation of the acquisition. The net balanceof US$198 million was calculated as follows:       **US$’million**       Acquisition of Telkomsel by Telkom  (945)    Sale of Satelindo to Indosat  186     Sale of Lintasarta to Indosat  38     Amount paid in advance by Telkom for acquisition and sales of    the above entities  523         Net amount to be settled by Telkom  (198)    
34

Table of Contents
     On January 20, 2004, TELKOM and MGTI entered into anagreement to amend and restate the KSO Agreement with respect toRegional Division IV. Under the amended and restated KSOagreement, the rights to operate fixed-line telecommunicationservices in KSO IV region are transferred to TELKOM andKSO IV is operated under the management, supervision,control and responsibility of TELKOM. In addition, for theremaining KSO period, TELKOM is entitled at its sole discretionand expense to construct new telecommunications facilities inRegional Division IV. MGTI receives fixed monthly payments,while TELKOM is entitled to the balance of the KSO revenuesafter the monthly amounts due to MGTI and operating expenses. Ifthe KSO IV unit is unable to or does not for any reason payMGTI the fixed monthly payments due to it, TELKOM is obligatedto make up any deficiency. At the end of the KSO period(December 31, 2010), all rights, title and interest of MGTIin existing property, plant and equipment (including newadditional installations) and inventories shall be transferredto TELKOM at no cost. As a result of the amended and restatedKSO agreement, TELKOM obtained the legal right to controlfinancial and operating decisions of Regional Division IVfor a purchase price of US$390.7 million, orRp.3,285 billion, which represents the present value of thefixed monthly payments (totaling US$517.1 million) to bepaid by TELKOM to MGTI from 2004 through 2010 plus direct costof the business combination. TELKOM has accounted for thistransaction as a business combination using the purchase methodof accounting in 2004.     On May 17, 2001, TELKOM acquired 90.32% of the issued andoutstanding shares of its KSO partner for Regional Division VI,Dayamitra, and purchased a call option and granted a put optionwith respect to the 9.68% remaining shares of Dayamitra, for anaggregate consideration of approximately US$130.8 million(including a US$8.9 million post-closing working capitaladjustment to the purchase price, and excludingconsultants’ fees of approximately US$3.3 million, whichwas capitalized as part of the acquisition cost) which was to bepaid in installments. TELKOM paid an initial amount ofUS$18.3 million on May 17, 2001, the US$8.9 millionpost-closing working capital adjustment to the purchase price onAugust 10, 2001 and the balance US$103.6 million ineight quarterly installments of approximatelyUS$12.9 million between August 17, 2001 andMay 17, 2003. On December 14, 2004, TELKOM exercisedits call option to acquire the remaining 9.68% of the shares ofDayamitra with a strike price of US$16.2 million. Thepurchase price for 9.68% shares of Dayamitra was US$22.1 million(Rp.203 billion), which represents the present value of theoption strike price of US$16.2 million to be paid to anescrow account from December 26, 2004 through March 26,2006, plus the option purchase price of US$6.3 million andpayment for Dayamitra’s adjusted working capital ofUS$1.0 million.     On June 11, 2002, TELKOM and its KSO partner for RegionalDivision VII, PT Bukaka SingTel International (“BukakaSingTel”), entered into a Memorandum of Understandingpursuant to which they agreed to cooperate in providinginfrastructure for fixed wireless access using CDMA 2000 1x inKSO VII region. On January 14, 2003, TELKOM and BukakaSingTel entered into a Co-Operation Agreement on Fixed WirelessCDMA Facilities Construction in KSO Regional Division VII (the“Co-Operation Agreement”) that implemented the termsof the Memorandum of Understanding. Under the terms of theCo-Operation Agreement, TELKOM, through its Fixed WirelessDivision, will invest US$30.2 million and Rp.28.4 billion for the construction of fixed wireless CDMAfacilities for 146,700 line units in Denpasar, Makasar, Manado,Kupang and Mataram, which facilities will be managed, operatedand maintained by Bukaka SingTel. The new facilities areexpected to be completed by 2006, with TELKOM and Bukaka SingTelsharing the revenues generated by these new facilities. SeeItem 10 “Additional Information —C. Material Contracts.”     TELKOM consolidated Dayamitra in 2001, Pramindo in 2002 andAriaWest in 2003, upon acquisition of a majority ownershipinterest or control in those KSO partners. In addition, underthe amended and restated KSO Agreement with respect to RegionalDivision IV entered into on January 20, 2004, TELKOMconsolidated the operating results of KSO IV fromFebruary 1, 2004, being the nearest convenient balancedate. Accordingly, the revenue sharing percentage in those KSOsis no longer relevant. As of December 31, 2004, PT BukakaSingTel International is the only remaining KSO partner that hasnot been acquired or is not controlled by TELKOM. The followingtable sets forth certain
35

Table of Contents
information regarding KSO VII as of December 31, 2004,which has been derived from the KSO Agreements, amendments tothe KSO Agreements and other related sources.     **Division VII**       KSO Partner     PT Bukaka SingTel International    Shareholders in the KSO partner: