UNITED STATES SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

Form 20-F

o	REGISTRATION STATEMENT PURSUANT TO SECTION 12(b) OR (g) OF THE SECURITIES EXCHANGE ACT OF 1934
OR
þ	ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
	For the fiscal year ended December 31, 2006
o	TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
OR
o	SHELL COMPANY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
	Date of event requiring this shell company report

Commission file number 1-14406

Perusahaan Perseroan (Persero)

P.T. Telekomunikasi Indonesia Tbk.

(Exact name of Registrant as specified in its charter)

Telecommunications Indonesia

(a state-owned public limited liability company)

(Translation of Registrant’s name into English)

Republic of Indonesia

(State or other jurisdiction of incorporation or organization)

Jalan Japati, 1

Bandung 40133

Indonesia

(62) (22) 452-1510

(62) (21) 521-5109*

(Address of Registrant’s principal executive offices)

         Securities registered or to be registered pursuant to Section 12(b) of the Act.

Title of	Name of each exchange
Each class	on which registered
American Depositary Shares representing Series B Shares, par value 250 Rupiah per share	New York Stock Exchange
Series B Shares, par value 250 Rupiah per share	New York Stock Exchange**

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

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

     Indicate the number of outstanding shares of each of the issuer’s classes of capital or common stock as of the close of the period covered by the annual report:

Series A Dwiwarna Share, par value 250 Rupiah per share	1
Series B Shares, par value 250 Rupiah per share	20,159,999,279

     Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.    Yes þ        No o

     If this report is an annual or transition report, indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934.    Yes o        No þ

     Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports) and (2) has been subject to such filing requirements for the past 90 days.    Yes þ        No o

     Indicate by check mark whether the registrant is a large accelerate filer, an accelerated filer, or an non-accelerated filer. See definition of “accelerated filer and large accelerated filer” in Rule 12b-2 of the Exchange Act. (Check one):

Large accelerated filer þ        Accelerated filer o        Non-accelerated filer o

     Indicate by check mark which financial statement item the Registrant has elected to follow.    Item 17 o        Item 18 þ

     If this is an annual report, indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    Yes o        No þ

*  Investor Relations Unit, Graha Citra Caraka, Jl. Gatot Subroto, No. 52, 5th Floor, Jakarta 12570.

**  The Series B Shares were registered in connection with the registration of the American Depositary Shares. The Series B Shares are not listed for trading on the New York Stock Exchange.

TABLE OF CONTENTS

		Page
DEFINITIONS			1
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		79
Item 6.	DIRECTORS, SENIOR MANAGEMENT AND EMPLOYEES		141
Item 7.	MAJOR STOCKHOLDERS AND RELATED PARTY TRANSACTIONS		152
Item 8.	FINANCIAL INFORMATION		161
Item 9.	THE OFFER AND LISTING		162
Item 10.	ADDITIONAL INFORMATION		166
Item 11.	QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK		180
Item 12.	DESCRIPTION OF SECURITIES OTHER THAN EQUITY SECURITIES*		184
PART II
Item 13.	DEFAULTS, DIVIDEND ARREARAGES AND DELINQUENCIES*		184
Item 14.	MATERIAL MODIFICATIONS TO THE RIGHTS OF SECURITY HOLDERS AND USE OF PROCEEDS*		184
Item 15.	CONTROLS AND PROCEDURES		184
Item 16.	RESERVED		187
Item 16A.	AUDIT COMMITTEE FINANCIAL EXPERT		187
Item 16B.	CODE OF ETHICS		187
Item 16C.	PRINCIPAL ACCOUNTANT FEES AND SERVICES		188
Item 16D.	EXEMPTIONS FROM THE LISTING STANDARDS FOR AUDIT COMMITTEES		189
Item 16E.	PURCHASES OF EQUITY SECURITIES BY THE ISSUER AND AFFILIATED PURCHASERS		190
PART III
Item 17.	CONSOLIDATED FINANCIAL STATEMENTS*		190
Item 18.	CONSOLIDATED FINANCIAL STATEMENTS		190
Item 19.	EXHIBITS		190
EX-4.48 Second Amendment to Contract on Procurement of TELKOM-2 Satellite between TELKOM and Orbital Sciences Corporation, dated 31 March 2004.
EX-4.49 Third Amendment to Contract on Procurement of TELKOM-2 Satellite between TELKOM and Orbital Sciences Corporation, dated 29 October 2004.
EX-4.50 Fourth Amendment to Contract on Procurement of TELKOM-2 Satellite between TELKOM and Orbital Sciences Corporation, dated 21 February 2005.
EX-4.51 Fifth Amendment to Contract on Procurement of TELKOM-2 Satellite between TELKOM and Orbital Sciences Corporation, dated 30 August 2005.
EX-4.52 First Amendment To Supply Contract For The Procurement and Installation of Ring Jasuka Backbone between TELKOM and NEC-Siemens Consortium, dated 6 February 2006.
EX-4.53 Second Amendment of the Supply Contract for the Procurement and Installation of Ring JASUKA Backbone between TELKOM and NEC-Siemens Consortium, dated 16 March 2006.
EX-4.54 Third Amendment of the Supply Contract for the Procurement and Installation of Ring JASUKA Backbone between TELKOM and NEC-Siemens Consortium, dated 7 February 2007.
EX-4.55 Amended and Restated KSO7 Agreement, between TELKOM and PT Bukaka Singtel International, dated 19 October 2006.
EX-4.56 First Amendment of Supply Contract for Tanjung Pandan - Pontianak Capacity Expansion between TELKOM and NEC Corporation, dated 12 January 2006.
EX-4.57 Supply Agreement for Surabaya - Ujung Pandang - Banjarmasin (SUB) Capacity Expansion between TELKOM and NEC Corporation, dated 16 August 2006.
EX-4.58 First Amendment to Supply Contract for Surabaya - Ujung Pandang - Banjarmasin (SUB) Capacity Expansion between TELKOM and NEC Corporation, dated 29 December 2006.
EX-4.59 Second Amendment to Supply Contract for Surabaya - Ujung Pandang - Banjarmasin (SUB) Capacity Expansion between TELKOM and NEC Corporation, dated 26 January 2007.
EX-4.60 Third Amendment to Supply Contract for Surabaya - Ujung Pandang - Benjarmasin (SUB) Capacity Expansion between TELKOM and NEC Corporation, dated 21 February 2007.
EX-4.61 Fourth Amendment to Supply Contract for Surabaya - Ujung Pandang - Banjarmasin (SUB) Capacity Expansion between TELKOM and NEC Corporation, dated 12 March 2007.
EX-4.62 Procurement and Installation Agreement for Ring JDCS Project (JEMBER DENPASAR Cable System) between TELKOM and ZTE Consortium, dated 29 December 2006.
EX-4.63 First Amendment for Procurement and Establishment of Regional Metro Junction and Optical Access Network for Regional Division-III between TELKOM and PT Industri Telekomunikasi Indonesia (INTI)
EX-4.64 Second Amendment of Procurement and Establishment of Regional Metro Junction and Optical Access Network for Regional Division-III between TELKOM and PT Industri Telekomunikasi Indonesia (INTI)
EX-4.65 Third Amendment of Procurement and Establishment of Regional Metro Junction and Optical Access Network for Regional Division-III between TELKOM and PT Industri Telekomunikasi Indonesia (INTI)
EX-4.66 Partnership Agreement for FWA CDMA Expansion Project NSS, BSS and PDN System in DIVRE I and DIVRE IV between TELKOM and Huawei Consortium, dated 6 January 2006.
Ex-4.67 Agreement for Procurement and Installation on the CDMA 2000-IX Equipment in Division Regional V East Java between TELKOM and Samsung Consortium dated 8 June 2006.
EX-4.68 First Amendment to Agreement for Procurement and Installation on CDMA 2000-IX Equipment in Divre V East Java between TELKOM and Samsung Consortuim, dated 1 August 2006.
EX-4.69 Second Amendment to Agreement for Procurement and Installation on CDMA 2000-IX Equipment in Divre V East Java between TELKOM and Samsung Consortium, dated 18 December 2006.
EX-4.70 Procurement and Installation Agreement of MSOAN Package III Divre-I Sumatera between TELKOM and PT Industri Telekomunikasi Indonesia (INTI), dated 29 June 2006.
EX-4.71 First Amendment to the Procurement and Installation Agreement of MSOAN Package III Divre-I Sumatera between TELKOM and PT Industri Telekomunikasi Indonesia (INTI), dated 29 December 2006.
EX-4.72 Procurement and Installation Agreement of OSP for Regional Metro Junction (RMJ) Banda Aceh - Sigli Divre I Sumatera between TELKOM and PT Telekomindo Primakarya, dated 3 July 2006.
EX-4.73 Procurement and Installation Agreement of Digital Micro Wave Radio ("GMD Radio") for Regional Metro Junction (RMJ) Package II Java and Kalimantan, between TELKOM and PT Fujitsu Indonesia
EX-4.74 Procurement and Installation Agreement of MSOAN Divre II year 2005 Phase II Location Divre II between TELKOM and ZTE - Temasindo Consortium 6 October 2005.
EX-4.75 First Amendment to Procurement and Installation Agreement of MSOAN Divre II year 2005 Phase II Location Divre II between TELKOM and ZTE - Temasindo Consortium dated 30 December 2005.
EX-4.76 Second Amendment to Procurement and Installation Agreement of MSOAN Divre II year 2005 Phase II Location Divre II between TELKOM and ZTE - Temasindo Consortium dated 15 September 2006.
EX-4.77 Procurement and Installation Agreement on IP Core Backbone Expansion Package-1 between TELKOM and PT Siemens Indonesia, dated 26 September 2006.
EX-4.78 Procurement and Installation Agreement on Expansion of Interface VS.2, E1 Circuit, E1 PRA, CCS#7P, Clip and Enhancement of PSTN Central EWSD between TELKOM and PT Siemens Indonesia
EX-4.79 Procurement and Installation Agreement for FWA CDMA Expansion Project NSS, BSS and PDN System in Divre V between TELKOM and Samsung Consortium dated 13 October 2006.
EX-4.80 Agreement for Procurement and Installation for FWA CDMA Expansion Project NSS, BSS and PDN Systems in Divre VI between TELKOM and ZTE Consortium, dated 28 November 2006.
EX-4.81 Procurement and Installation Agreement on Expansion of Interface VS.2, E1 Circuit, E1 PRA, CCS#7P, Clip and Enhancement of PSTN Central 5ESS between TELKOM and PT Lintas Teknologi Indonesia
EX-4.82 Procurement and Installation Agreement on Expansion of Interface VS.2, E1 Circuit, E1 PRA, CCS#7P, Clip and Enhancement of PSTN Central NEAX between TELKOM and PT NEC Indonesia
EX-4.83 Agreement for Procurement and Installation for Optical Access Network (OAN) Project Package-III between TELKOM and Huawei Consortium, dated 30 November 2006.
EX-4.84 Agreement for Procurement and Installation for FWA CDMA Expansion Project NSS, BSS and PDN Systems in Divre III between TELKOM and Huawei Consortium, dated 8 December 2006.
EX-4.85 Agreement for Procurement and Installation for FWA CDMA Expansion Project NSS, BSS and PDN Systems in Divre II between TELKOM and Huawei Consortium, dated 8 December 2006.
EX-4.86 Agreement for Procurement and Installtion for Optical Access Network (OAN) Project Package-IV between TELKOM and Alcatel-INTI Consortium dated 18 December 2006.
EX-4.87 First Amendment to Procurement and Installation Agreement of MSOAN Divre I Sumatera Package I between TELKOM and PT Dharmala Kumala Utama, dated 28 December 2006.
EX-4.88 Procurement and Installation Agreement of MSOAN Aceh Area Divre I Sumatera between TELKOM and PT NEC Indonesia, dated 16 August 2006.
EX-4.89 First Amendment to Procurement and Installation Agreement of MSOAN Aceh Area Divre I Sumatera between TELKOM and PT NEC Indonesia, dated 29 December 2006.
EX-4.90 Agreement for Procurement and Installation for Secondary Cable Network Package I between TELKOM and Olex Cables Indonesia (OLEXINDO), dated 29 December 2006.
EX-4.91 Agreement for Procurement and Installation for Optical Access Network (OAN) Project Package-I (Divre I and Divre III) between TELKOM and Opnet - Olexindo Consortium, dated 29 December 2006.
EX-4.92 Agreement for Procurement and Installation for Optical Access Network (OAN) Project Package-II (DIVRE-II) between TELKOM and Opnet - Olexindo Consortium, dated 29 December 2006.
EX-4.93 Contract on the CDMA2000-1X Initial Purchase Order Between TELKOM and SAMSUNG Electronics Co., Ltd., dated 9 October 2002.
EX-12.1 Certification Pursuant to Section 302, The Sarbanes-Oxley Act of 2002
EX-12.2 Certification Pursuant to Section 302, The Sarbanes-Oxley Act of 2002
EX-13.1 Certification Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
EX-13.2 Certification Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002

*  Omitted because the item is not applicable.

i

DEFINITIONS

“3G”	is the generic term for third generation mobile phone technologies. 3G offers very high speed connections to cellular phones, enabling video conference and other applications requiring broadband connectivity to the internet. Users connecting to the internet from a laptop using either a cell phone and data cable or a PCcard also benefit from 3G.
“ADS”	American Depositary Share, which is a certificate (known as an ADR) being traded on a U.S. securities market (such as New York Stock Exchange) representing a number of foreign shares. One ADS of TELKOM represents 40 of TELKOM’s Series B Shares. The ratio of shares to ADS is 40:1.
“ARPU”	(Average Revenue Per User) serves as an evaluation statistic in connection with a network operator’s subscriber base. It is computed by dividing total revenues (including gross interconnection revenues) for a given period by the respective average number of subscribers for such period, except that for the mobile cellular service, revenues do not include connection fees, interconnection revenues, international roaming revenues from non-subscribers and dealer discounts.
“ASR”	(Answer to Seizure Ratio). See “call completion rate.”
“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 communication 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.”

1

“capacity utilization”	refers to the ratio of lines in service to local exchange capacity or installed lines.
“CDMA”	(Code Division Multiple Access) is a wide-band spread-spectrum network technology.
“DCS1800”	(Digital Communication System) is a mobile cellular system using GSM technology operating in the 1800 MHz frequency band.
“DGPT”	is the Director General of Post and Telecommunications.
“Directors’ Decree on Internal Control”	is the decree of the Board of Directors, dated October 29, 2004, titled “Internal Control over Financial Reporting in Compliance with the Sections 302 and 404 of the Sarbanes Oxley Act of 2002” on certain policies and procedures for effective internal controls and good corporate governance and early detection of errors, frauds and other misuses.”
“distribution point”	is the point of interconnection between the dropwire and the secondary cable running to a cabinet and/or a local exchange.
“DLD”	refers to domestic long-distance telecommunications services such as long-distance telephone calls and leased lines services.
“downlink”	refers to the receiving portion of a satellite circuit extending from the satellite to the Earth.
“dropwire”	is the wire connecting the subscriber’s premises to the distribution point.
“DSL”	(Digital Subscriber Line) is a technology that allows combinations of services including voice, data and one way full motion video to be delivered over existing copper feeder distribution and subscriber lines.
“DTR”	(Distributable TELKOM Revenues) is the monthly revenue share payable by each KSO 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.
“dualband”	refers to the capability of a mobile cellular network and mobile cellular handsets to operate across two frequency bands, for example GSM 900 and GSM 1800.
“duopoly system”	is a system allowing only two national operators, which in Indonesia’s case are TELKOM and Indosat, to provide fixed line telecommunication services including domestic long-distance and international long- distance.
“e-business”	refers to electronic business solutions including electronic payment services, Internet data centers and content and application solutions.
“earth station”	is the antenna and associated equipment used to receive or transmit telecommunication signals via satellite.
“Erlang”	refers to a unit of measurement of telephone traffic equal to one hour of conversation.

2

“existing installations”	refer to telecommunications facilities, including telephone lines, network infrastructure and related assets in existence in each KSO Division as of the beginning of each KSO Period plus certain facilities and equipment constructed or installed by TELKOM in the KSO Units after such dates to be managed by a KSO Investor.
“fixed cellular”	refers to a form of fixed wireless technology which uses conventional cellular network configurations to link a subscriber at a fixed location to a local exchange.
“fixed line”	refers to fixed wireline and fixed wireless.
“fixed wireless”	refers to a local wireless transmission link using cellular, microwave or radio technology to link a subscriber at a fixed location to a local exchange.
“fixed wireline”	refers to a fixed path (wire or cable) linking a subscriber at a fixed location to a local exchange, usually with an individual phone number.
“frame relay”	is a packet-switching protocol (in which messages are divided into packets before they are sent) for connecting devices on a computer network that spans a relatively large geographical area.
“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.
“ITRB”	refers to the Indonesian Telecommunications Regulatory Body.
“Kbps”	(Kilobits per second) is a measure of speed for digital signal transmission expressed in thousands of bits per second.
“KSO”	(Kerjasama Operasi) or Joint Operating Scheme, is a unique type of Build, Operate and Transfer arrangement with a consortium of partners in which the consortium invests and operates TELKOM

3

	facilities in regional divisions. The consortium partners are owned by international operators and private domestic companies, or in cases where TELKOM has acquired the consortium partner, by TELKOM.
“KSO Agreements”	refer to the agreements, as amended from time to time, governing the operation of the network in the relevant KSO region for the KSO Period. See “KSO Period.”
“KSO Period”	refers to the period covered by a 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.
“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. See “MoCI.”
“MoCI”	refers to the Ministry of Communication and Information, to which telecommunications regulatory responsibility was transferred from the MoC in February 2005.
“Modern License”	is an operational license, contemplated in the Telecommunication Law, which replaces the existing operational license for basic telecommunications services.
“MoF”	refers to the Ministry of Finance.
“MTR”	(Minimum TELKOM Revenues) is the specified minimum amount payable monthly by each KSO Unit to TELKOM under the KSO Agreements.
“optical fiber”	refers to cables using optical fiber and laser technology whereby modulating light beams representing data are transmitted through thin filaments of glass.
“outside plant”	is the equipment and facilities used to connect subscriber premises to the local exchange.
“PBH” or “Revenue-Sharing Arrangement”	(Pola Bagi Hasil) is a type of Build, Operate and Transfer arrangement scheme between TELKOM and domestic private

4

	companies. Under this scheme the private company invests in the telecommunication facilities to be operated by TELKOM.
“PPLT”	refers to Penyediaan dan Pengembangan Layanan Telekomunikasi or Provision and Development of Telecommunications Services program established by TELKOM to provide telecommunication infrastructure to certain regions where telecommunication services are not available.
“PSDN”	(Packet Switched Data Networks) is a network using a switch device and sending packets of data through the network to some remote location.
“PSTN”	(Public Switched Telephone Network) is a telephone network operated and maintained by TELKOM and the KSO Units for and on behalf of TELKOM.
“RSA”	refers to the Revenue-Sharing Agreement.
“RUIM” or “RUIM card”	(Removable User Identity Module) is a “smart” card designed to be inserted into a fixed wireless telephone that uniquely identifies a CDMA network subscription and that contains subscriber-related data such as phone numbers, service details and memory for storing messages.
“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) is a technology allowing the exchange of text messages between mobile cellular phones and between fixed wireless phones.
“switch”	is a mechanical, electrical or electronic device that opens or closes circuits, completes or breaks an electrical path, or selects paths or circuits, used to route traffic in a telecommunications network.
“trunk exchange”	is a switch that has the function of connecting one telephony switch to another telephony switch, which can be either a local or trunk switch.
“USO”	(Universal Service Obligation) is the service obligation imposed by the Government on all providers of telecommunications services for the purpose of providing public services in Indonesia.
“VoIP”	(Voice over Internet Protocol) is a means of sending voice information using the Internet Protocol.
“VPN”	(Virtual Private Network) is a secure private network connection, built on top of publicly-accessible infrastructure, such as the Internet or the public telephone network. VPNs typically employ some combination of encryption, digital certificates, strong user authentication and access control to provide security to the traffic

5

	they carry. They usually provide connectivity to many machines behind a gateway or firewall.
“VSAT”	(Very Small Aperture Terminal) is a relatively small antenna, typically 1.5 to 3.0 meters in diameter, placed in the user’s premises and used for two-way communications by satellite.
“WAP”	(Wireless Application Protocol) is an open and global standard of technology platform that enables mobile users to access and interact with mobile information services such as e-mail, Web sites, financial information, on-line banking, information and entertainment (infotainment), games and micro payments.
“WLL”	(Wireless Local Loop) is a means of providing local loop (the physical connection from the subscriber’s premises to the carrier’s point of presence or POP) facility without wires, which allows carriers to provide local loop with approximately 1 Gbps or more in aggregate bandwidth per coverage area. WLL is particularly effective in rocky or soggy terrain.

6

FORWARD LOOKING STATEMENTS

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

CONVENTIONS

      In this Annual Report, unless otherwise specified or the context otherwise requires, all references to “Indonesia” are references to the Republic of Indonesia and all references to the “U.S.” and “United States” are references to the United States of America. All references to the “Government” herein are references to the government of the Republic of Indonesia. References herein to “Rupiah” and “Rp.” are to the lawful currency of Indonesia and all references to “US Dollars” or “US$” are to the lawful currency of the United States of America. For convenience, unless otherwise specified, certain Rupiah amounts have been translated into US Dollar amounts, based on the prevailing exchange rate of Rp.9,000 = US$1, being the middle market spot rate of exchange for Rupiah against US Dollar quoted by Reuters on December 31, 2006. Such translations should not be construed as representations that the Rupiah or US Dollar amounts referred to could have been, or could be, converted into Rupiah or US Dollars, as the case may be, at that or any other rate or at all. The average middle market spot rate of exchange for Rupiah against US Dollar quoted by Bank Indonesia on December 31, 2006 was Rp.9,020 to US$1. See Item 3. “Key Information — A. Selected financial data — Exchange Rate Information” for further information regarding rates of exchange between Rupiah and US Dollars.

      Unless expressly stated to the contrary, this Annual Report includes information as of and for the year ended December 31, 2006, and has not been updated or amended for events or circumstances occurring after such date.

7

PART I

ITEM 1. IDENTITY OF DIRECTORS, SENIOR MANAGEMENT AND ADVISERS

      Not applicable.

ITEM 2. OFFER STATISTICS AND EXPECTED TIMETABLE

      Not applicable.

ITEM 3. KEY INFORMATION

A.     Selected financial data

      TELKOM’s consolidated financial statements for the years 2002 and 2006 have been audited by KAP Haryanto Sahari & Rekan (formerly KAP Drs. Hadi Sutanto & Rekan), the member firm of PricewaterhouseCoopers in Indonesia (“PwC”). TELKOM’s consolidated financial statements for the years 2003, 2004 and 2005 have been audited by KAP Siddharta Siddharta & Widjaja, the member firm of KPMG International in Indonesia (“KPMG”). KPMG is a Swiss cooperative of which all firms are members. See Item 5. “Operating and Financial Review and Prospects — A. Operating Results — Changes in Methods of Accounting under Indonesian GAAP.” All such consolidated financial statements were prepared in accordance with Indonesian GAAP, which differs in certain significant respects from U.S. GAAP. See Item 5. “Operating and Financial Review and Prospects — A. Operating Results — Summary of Significant Differences between Indonesian GAAP and U.S. GAAP” and Note 56 to the Company’s consolidated financial statements, which provide a description of the significant differences between Indonesian GAAP and U.S. GAAP and a reconciliation to the amounts of U.S. GAAP net income and stockholders’ equity of TELKOM for and as of the end of each of the periods indicated in the consolidated financial statements.

      For the year 2006, 9 companies and their subsidiaries were consolidated into TELKOM’s consolidated financial statements, namely: PT AriaWest International (“AriaWest”, 100% owned by TELKOM), PT Multimedia Nusantara (“Metra”, 100%), PT Graha Sarana Duta (“GSD”, 99.9%), PT Pramindo Ikat Nusantara (“Pramindo”, 100%), PT Indonusa Telemedia (“Indonusa”, 96%), PT Dayamitra Telekomunikasi (“Dayamitra”, 100%), PT Telekomunikasi Selular (“Telkomsel”, 65%), PT Napsindo Primatel Internasional (“Napsindo”, 60%) and PT Infomedia Nusantara (“Infomedia”, 51%). See Item 4. “Information on the Company — C. Business and Organizational Structure — Information on Subsidiaries and Associated Companies” and Note 1c to TELKOM’s consolidated financial statements.

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      The following tables set forth a summary of the financial information of TELKOM as of and for the years specified. This information should be read in conjunction with Item 5. “Operating and Financial Review and Prospects” and is qualified in its entirety by reference to TELKOM’s consolidated financial statements and the related notes thereto included elsewhere in this Annual Report.

					Year ended December 31,
					2002		2003		2004		2005		2006		2006
															(US$
					(Rp. in billion, except for data relating to shares,										million,
					dividends and ADS)										except for
															data relating
															to shares,
															dividends
															and ADS)(1)
Consolidated Income Statement Data
Indonesian GAAP
OPERATING REVENUES
	Telephone
		Fixed lines
			Local and domestic long-distance usage			5,448		6,562		7,439		7,223		7,131		792
			Monthly subscription charges			1,475		1,949		2,935		3,290		3,492		388
			Installation charges			130		223		201		197		170		19
			Others			211		163		70		71		186		21
				Total fixed lines revenues		7,264		8,897		10,645		10,781		10,979		1,220
		Cellular
			Air time charges			5,454		7,678		9,826		13,666		19,257		2,140
			Monthly subscription charges			593		581		448		384		298		33
			Features			8		6		91		457		959		106
			Connection fee charges			172		194		56		64		109		12
				Total cellular revenues		6,227		8,459		10,421		14,571		20,623		2,291
		Total telephone revenues				13,491		17,356		21,066		25,352		31,602		3,511
	Joint Operation Schemes
			Minimum TELKOM Revenues (MTR)			1,320		900		296		269		207		23
		Share in Distributable KSO Revenues (DKSOR)				801		583		350		319		275		30
		Amortization of unearned initial investor payments				7		3		11		1		7		1
				Total revenue under Joint Operation Schemes		2,128		1,486		657		589		489		54
	Interconnection — net					2,831		4,162		6,188		7,742		8,682		965
	Network					316		518		654		587		719		80
	Data and Internet					1,552		3,109		4,809		6,934		9,065		1,007
	Revenue-Sharing Arrangements					264		258		281		302		415		46
	Other telecommunications services					221		227		293		301		322		36
		Total Operating Revenues				20,803		27,116		33,948		41,807		51,294		5,699

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		Year ended December 31,
		2002			2003			2004			2005			2006			2006
																	(US$
		(Rp. in billion, except for data relating to shares,															million,
		dividends and ADS)															except for
																	data relating
																	to shares,
																	dividends
																	and ADS)(1)
OPERATING EXPENSES
	Personnel		4,388			4,440			4,910			6,563			8,514			946
	Depreciation		3,474			4,779			6,438			7,571			9,178			1,020
	Operations, maintenance and telecommunication services		2,290			3,339			4,530			5,916			7,496			833
	General and administrative		1,146			2,079			2,600			2,764			3,271			363
	Marketing		375			503			882			1,126			1,242			138
	Write-down of assets		—			—			—			617			—			—
	Loss on procurement commitments		—			—			—			79			—			—
Total Operating Expenses			11,673			15,140			19,360			24,636			29,701			3,300
Operating Income			9,130			11,976			14,588			17,171			21,593			2,399
Other income (expenses)
	Gain on sale of long-term investment in Telkomsel		3,196			—			—			—			—			—
	Interest expense		(1,583	)		(1,383	)		(1,270	)		(1,177	)		(1,286	)		(143	)
	Interest income		480			366			318			345			655			73
	Gain (loss) on foreign exchange — net		557			126			(1,221	)		(517	)		836			93
	Equity in net income (loss) of associated companies		5			3			3			11			(7	)		(1	)
	Others — net		(36	)		364			331			409			202			23
Other Income (Expenses) — net			2,619			(524	)		(1,839	)		(929	)		400			45
Income Before Tax			11,749			11,452			12,749			16,242			21,993			2,444
Tax expense			(2,899	)		(3,861	)		(4,178	)		(5,184	)		(7,040	)		(782	)
Income before minority interest in net income of subsidiaries			8,850			7,591			8,571			11,058			14,953			1,662
Minority interest in net income of subsidiaries, net			(810	)		(1,504	)		(1,956	)		(3,064	)		(3,948	)		(439	)
Net Income			8,040			6,087			6,615			7,994			11,005			1,223
Weighted average shares outstanding (millions)			20,160			20,160			20,160			20,160			20,115			—
	Net income per share		398.80			301.95			328.10			396.51			547.15			0.06
	Net income per ADS		15,951.80			12,077.83			13,124.14			15,860.25			21,886.00			2.43
	Dividends declared per share(2)		105.41			165.58			158.09			144.90			267.27			0.03
U.S. GAAP(3)
	Net income		8,587			5,791			6,468			7,840			12,111			1,346
	Net income per share		425.96			287.23			320.86			388.89			602.12			0.07
	Net income per ADS		17,038.21			11,489.40			12,834.47			15,555.74			24,085			2.68

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		As of December 31,
		2002		2003		2004		2005		2006		2006
		(Rp. in		(Rp. in		(Rp. in		(Rp. in		(Rp. in		(US$
		billion)		billion)		billion)		billion)		billion)		million)(1)
Consolidated Balance Sheet Data
Indonesian GAAP
	Total assets		44,307		50,283		56,179		62,171		75,136		8,348
	Current liabilities(4)		9,708		11,170		11,677		13,513		20,536		2,282
	Other liabilities		5,383		6,258		8,222		7,728		8,095		899
	Long-term debts		12,006		11,834		13,214		11,332		10,249		1,139
	Total liabilities		27,097		29,262		33,113		32,573		38,880		4,320
	Minority interest		2,596		3,708		4,938		6,305		8,187		909
	Capital stock(5)		5,040		5,040		5,040		5,040		5,040		560
	Total stockholders’ equity		14,614		17,313		18,128		23,292		28,069		3,119
U.S. GAAP(3)
	Total assets		44,623		51,347		56,702		63,481		76,134		8,459
	Total stockholders’ equity		13,911		16,285		19,571		24,568		26,308		2,923

(1)	The translations of Rupiah amounts into US Dollars are included solely for the convenience of the readers and have been made using the average of the market buy and sell rates of Rp.9,000 to US$1 published by Reuters on December 31, 2006. The convenience translations should not be construed as representations that the Rupiah amounts have been, could have been, or can in the future be, converted into US Dollars at this or any other rate of exchange.
(2)	Dividends declared per share in 2002 and 2003 represent dividends per share after adjusting for the stock split that was effected in 2004. Dividends declared per share in 2004 comprised cash dividends for 2003 of Rp.150.98 per share and interim cash dividends declared in December 2004 of Rp.7.11 per share. Dividends declared per share in 2005 represent cash dividends for 2004 of Rp.152.01 per share deducted by interim cash dividends declared in 2004 of Rp.7.11 per share. Dividends declared per share in 2006 represent cash dividends for 2005 of Rp.218.86 per share and interim cash dividends declared in 2006 of Rp.48.41 per share.
(3)	U.S. GAAP amounts reflect adjustments resulting from differences in the accounting treatment of voluntary termination benefits, foreign exchange differences capitalized to assets under construction, interest capitalized on assets under construction, revenue-sharing arrangements, employee benefits, equity in net income or loss of associated companies, amortization of land rights, revenue recognition, amortization of goodwill, capital leases, acquisition of Dayamitra, asset retirement obligations, deferred income taxes, and amendment and restatement of the Joint Operation Scheme in Regional Division VII. See Item 5. “Operating and Financial Review and Prospects — A. Operating Results — Summary of Significant Differences between Indonesian GAAP and U.S. GAAP” and Note 56 to the consolidated financial statements.
(4)	Includes current maturities of long-term debts.
(5)	As of December 31, 2005 and 2006, Issued and Paid-Up Capital Stock consists of one Series A Dwiwarna Share having a par value of Rp.250 each and 20,159,999,279 Series B Shares having a par value of Rp.250 each from an authorized capital stock comprising one Series A Dwiwarna Share and 79,999,999,999 Series B Shares.

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Exchange Rate Information

      The following table shows the exchange rate of Rupiah to US Dollar based on the middle exchange rates at the end of each month for the periods indicated. The Rupiah middle exchange rate is calculated based on Bank Indonesia buying and selling rates. No representations are made that the Rupiah or US Dollar amounts referred to herein could have been or could be converted into US Dollar or Rupiah, as the case may be, at any particular rate or at all.

Year		At period end		Average(1)		High(2)		Low(2)
		(Rp. Per US$1)
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
2005			9,830		9,711		10,800		9,133
	First Quarter		9,480		9,276		9,520		9,133
	Second Quarter		9,713		9,548		9,755		9,435
	Third Quarter		10,310		10,006		10,800		9,735
	Fourth Quarter		9,830		9,992		10,300		9,735
2006			9,020		9,167		9,795		8,720
	First Quarter		9,075		9,304		9,795		9,030
	Second Quarter		9,300		9,107		9,520		8,720
	Third Quarter		9,235		9,121		9,245		9,030
	Fourth Quarter		9,020		9,134		9,228		9,020
	December		9,020		9,087		9,165		9,020
2007
	January		9,090		9,067		9,135		8,950
	February		9,160		9,068		9,160		9,045
	March		9,118		9,164		9,225		9,100
	April		9,083		9,098		9,120		9,080
	May		8,828		8,844		9,083		8,672

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

Source: Bank Indonesia

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     The exchange rates used for translation of monetary assets and liabilities denominated in foreign currencies are the buy and sell rates published by Reuters in 2004, 2005 and 2006. The Reuters buy and sell rates, applied respectively to monetary assets and liabilities, were Rp.9,280 and Rp.9,300 to US$1 as of December 31, 2004, Rp.9,825 and Rp.9,835 to US$1 as of December 31, 2005 and Rp.8,995 and Rp.9,005 to US$1 as of December 31, 2006. The Company does not guarantee that assets and liabilities denominated in foreign currencies can be converted into Indonesian Rupiah at the rates of exchange as of December 31, 2006.

      The consolidated financial statements are stated in Rupiah. The translations of Rupiah amounts into US Dollars are included solely for the convenience of the readers and have been made using the average of the market buy and sell rates of Rp.9,000 to US$1 published by Reuters on December 31, 2006. The convenience translations should not be construed as representations that the Rupiah amounts have been, could have been, or can in the future be, converted into US Dollars at this or any other rate of exchange.

      On June 27, 2007, the Reuters buy and sell rates were Rp.9,120 and Rp.9,123 to US$1.

B.  Capitalization and Indebtedness

      Not applicable.

C.  Reason for the Offer and Use of Proceeds

      Not applicable.

D.  Risk Factors

TELKOM has identified a number of material weaknesses in its internal control over financial reporting as of December 31, 2004, 2005 and 2006, and concluded that, as of December 31, 2006, its internal control over financial reporting and disclosures controls and procedures were not effective, which could adversely impact the reliability of its internal control over financial reporting.

      TELKOM identified a number of material weaknesses in its internal control over financial reporting as of December 31, 2004, 2005 and 2006. As a result, TELKOM’s management concluded that TELKOM’s disclosure controls and procedures as of each such period were not effective to ensure that information required to be disclosed in the reports that TELKOM files and submits under the Exchange Act is recorded, processed, summarized and reported as and when required, and is accumulated and communicated to TELKOM’s management, including TELKOM’s principal executive officer and principal financial officer, to allow timely decisions regarding required disclosure. In addition, TELKOM’s management concluded that because of the material weaknesses identified, TELKOM’s internal control over financial reporting as of December 31, 2006 was not effective based on the criteria set forth in the Internal Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (“COSO”). See Item 15. “Control and Procedures.”

      Since the identification of the material weaknesses, TELKOM has been working to improve its internal control over financial reporting, including those needed to enable it to comply with Section 404 of the Sarbanes-Oxley Act of 2002, as well as its disclosure controls and procedures, and has taken a number of steps to address these issues. For a discussion of the material weaknesses and the remediation efforts, see Item 15. “Control and Procedures.” Any control system, regardless of how well designed, operated and evaluated, can provide only reasonable, not absolute, assurance that its objectives will be met. In the future, TELKOM may identify further material weaknesses or significant deficiencies in its internal control over financial reporting or disclosure controls and procedures that TELKOM has not discovered to date. In addition, TELKOM cannot be certain that it will be able to maintain adequate controls over its financial processes and reporting in the future. Any failure to implement required new or improved controls, or difficulties encountered in their implementation, could adversely affect TELKOM’s ability to report financial results on a timely and accurate basis or cause TELKOM to fail to meet its reporting obligations. Inadequate internal controls over financial reporting or disclosure controls and procedures could also cause investors to lose confidence in TELKOM’s

13

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

Risks Relating to Indonesia

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

      Since 1998, Indonesia has experienced a process of democratic change, resulting in political and social events that have highlighted the unpredictable nature of Indonesia’s changing political landscape. These events have resulted in political instability, as well as general social and civil unrest on a number of occasions in the past few years. For example, in June 2001, demonstrations and strikes affected at least 19 cities after the Government mandated a 30% increase in fuel prices. Similar demonstrations occurred in January 2003, when the Government again tried to increase fuel prices, as well as electricity and telephone charges. In both instances, the Government was forced to drop or substantially reduce such proposed increases. In October 2005 following substantial increases in the market price of crude oil, the Government raised fuel prices by approximately 80%, which also led to numerous demonstrations and strikes.

      Actions by separatist movements and clashes between religious and ethnic groups have also resulted in social and civil unrest in parts of Indonesia. For example, in the province of Papua (formerly Irian Jaya), there have been numerous clashes between supporters of separatist movements and the Indonesian military. In the provinces of Maluku and Central Sulawesi (Poso), clashes between religious groups have resulted in thousands of casualties and displaced persons in recent years. The Government has attempted to resolve problems in these troubled regions with limited success.

      Political and related social developments in Indonesia have been unpredictable in the past and there can be no assurance that social and civil disturbances will not occur in the future and on a wider scale, or that any such disturbances will not, directly or indirectly, have a material adverse effect on TELKOM or on an investment in the ADSs or Common Stock. Further, these social and civil disturbances could continue to have a material adverse effect on investment and confidence in and the performance of the Indonesian economy and in turn our business.

Terrorist activities in Indonesia could destabilize Indonesia, which could adversely affect TELKOM’s business.

      Bombings have occurred in recent years, at government buildings, foreign diplomatic facilities, night clubs and other locations, including the Jakarta Stock Exchange building, the Police Function Building in Jakarta, the departure lounge of Jakarta’s Soekarno-Hatta International Airport, the parliament building in Jakarta and a shopping mall in Jakarta. A bombing campaign struck religious buildings throughout Indonesia in 2000. On October 12, 2002, over 200 people were killed in a bombing at a tourist area in Bali. This terrorist attack resulted in a significant decline in international tourism. On August 5, 2003 a bomb exploded at the J.W. Marriott Hotel in Jakarta killing at least 12 people and injuring more than 150 people. On September 9, 2004, a bomb exploded outside the Australian Embassy in Jakarta’s central business district, killing at least nine people and injuring over 180 people. On May 28, 2005, two bombs exploded in a crowded market in Tentena in central Indonesia, killing at least 20 people and injuring at least 40. In October 2005, multiple bombs exploded in two locations in Bali, killing 22 people and injuring at least 50. Indonesian and United States government officials have indicated that some of these bombings may be the responsibility of Jemaah Islamiya, a Southeast Asian-based terrorist network allegedly linked to the international terrorist organization, Al-Qaeda. In May 2005, the United States also closed its embassy in Indonesia for a few days following an unspecified threat.

      There can be no assurance that further terrorist acts will not occur in the future. A number of governments have from time to time issued warnings to their citizens in relation to a perceived increase in the possibility of terrorist activities in Indonesia, targeting foreign, particularly United States, interests. Such acts could destabilize Indonesia and increase internal divisions within the Government as it considers responses to such instability and unrest. Violent acts arising from and leading to instability and unrest have in the past had,

14

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

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

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

      Continued depreciation or volatility of the Rupiah against the US Dollar or other currencies could adversely affect general economic conditions in Indonesia. Rupiah depreciation would also drive up the Rupiah cost of TELKOM’s capital expenditure program since most of the equipment to be used in the expansion of TELKOM’s network capacity is sourced off-shore and priced in foreign currencies, mainly in US Dollars and Euros, while almost all of TELKOM’s revenues are in Rupiah. Changes in the current exchange rate policy may result in significantly higher domestic interest rates, liquidity shortages, capital or exchange controls or the withholding of additional financial assistance by multilateral institutions. The foregoing consequences, if they occur, could have a material adverse effect on TELKOM’s business. As of December 31, 2006, the average exchange rate of Rupiah to US Dollar, based on the Reuters middle buy and sell rates, was Rp.9,000 per US Dollar.

      Fluctuations in the exchange rate between the Rupiah and the US Dollar could adversely affect, among other things, the Rupiah cost of TELKOM’s network equipment purchases, the dollar value of any amounts a holder or beneficial owner of ADSs will receive in the event TELKOM issues dividends, the US Dollar value of the proceeds a holder or beneficial owner would receive upon the sale in Indonesia of shares of the Common Stock and the secondary market price of the ADSs.

Indonesia ended its Extended Financing Facility with the International Monetary Fund and the consequences thereof are unpredictable.

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

Indonesia no longer has access to the Paris Club but continues to rely on loans from the World Bank and the Asian Development Bank.

      Since the financial crisis of 1997, the members of the Paris Club have been an important source of funding for the Government. The Paris Club is an informal voluntary group of 19 creditor countries that coordinates solutions for payment difficulties experienced by debtor nations. The last debt rescheduling took place in April 2002 when the Paris Club rescheduled approximately US$5.4 billion of principal and interest

15

due from the Government between April 2002 and December 2003. This was done by extending the period within which the amounts could be repaid.

      In addition to the Paris Club, the World Bank and the Asian Development Bank have been major sources of financing. Disbursements from these sources have been slower than expected in recent years due to the slow pace of institutional reforms in Indonesia and concerns regarding the Government’s decentralization plan. As of the date of this Annual Report, regional governments in Indonesia are not allowed to borrow in foreign currency and any change to Indonesian law allowing them to borrow in foreign currency could be a source of potential debt service problems. The World Bank and Asian Development Bank lending programs are subject to regular compliance reviews and can be reduced or withdrawn at any time. The impact of any elimination of lending cannot be assessed but is likely to be materially adverse.

Indonesia’s high level of sovereign debts may result in it being unable to service its debt obligations when they become due.

      Indonesia’s high level of sovereign debts has forced it to negotiate with its major creditors several times since the 1997 financial crisis. For example, the Government held a round of talks with the Paris Club donor countries and the IMF in April 2002 to discuss the rescheduling of Indonesia’s debt due in 2002. In these talks, the Government sought to restructure not just debt principal, but interest payments as well, totaling US$2.6 billion. The meeting resulted in the rescheduling of debt principal payments only, but no assurance can be given as to Indonesia’s capacity to meet these rescheduled debt payments. While no further rescheduling has taken place, future decisions to renegotiate Indonesia’s existing sovereign indebtedness cannot be ruled out. Such decisions may affect Indonesia’s sovereign credit rating and could have a material adverse impact on investor confidence in Indonesia.

Indonesia’s sovereign debt rating continues to be reviewed and revised by international rating agencies.

      Beginning in 1997, certain recognized statistical rating organizations, including Moody’s Investors Service, Inc. (“Moody’s”) and Standard & Poor’s Rating Services (“S&P”), downgraded Indonesia’s sovereign rating and the credit ratings of various credit instruments of the Government and a large number of Indonesian banks and other companies. As of May 22, 2007, the Government’s long-term foreign currency debt was rated B1 by Moody’s, rated BB-by Fitch Ratings (“Fitch”), and rated BB- by S&P. These ratings reflect an assessment of the Government’s overall ability to pay its obligations and its willingness to meet its financial commitments as they come due. No assurance can be given that Moody’s, S&P, Fitch or any other international credit rating agency will not downgrade the credit ratings of Indonesia or Indonesian companies. Any such downgrade would have an adverse impact on liquidity in the Indonesian financial markets and the ability of Indonesian companies, including TELKOM, to raise additional financing and the interest rates at which such additional financing is available.

Indonesia is vulnerable to natural disasters and other events beyond TELKOM’s control, which could severely disrupt the normal operation of TELKOM’s business and adversely affect TELKOM’s operating results.

      TELKOM’s existing operations are primarily in Indonesia, parts of which are vulnerable to natural disasters. Disruption of operations for any reason, including earthquakes, tsunamis, floods, volcanic eruptions, droughts, power outages or other events beyond TELKOM’s control, could cause disruptions to operations and damage to equipment which would adversely affect TELKOM’s financial condition and results of operations.

      In 2002, a major flood in Jakarta affected TELKOM’s operations in Jakarta, where a significant portion of its revenues are derived. In December 2004, northern parts of the Indonesian island of Sumatra, and particularly the province of Aceh, suffered severe damage following a massive earthquake estimated to be of magnitude 9.3 on the Richter scale and a series of tsunami waves on December 26, 2004. The tsunami and the earthquake caused approximately Rp.54.9 billion (US$5.6 million) of damages to TELKOM’s assets and equipment in the Aceh province, including damages to TELKOM’s switching facilities and transmission facilities, and disrupted over 35,000 telephone lines out of approximately 99,000 lines.

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      On March 28, 2005, a major earthquake estimated to be of magnitude 8.7 on the Richter scale struck off the western coast of Sumatra. Scientists and seismic experts believe that rather than relieving stresses along the Sunda fault, located to the south of Sumatra, the seismic stresses along the Sunda fault continue unabated or have increased, and warned of the possibility of further earthquakes and tsunamis. On May 27, 2006, a tectonic earthquake estimated to be of magnitude 6.3 on the Richter scale, and at least two related aftershocks each measuring over 4.0 on the Richter scale, struck central Java and Yogyakarta. On July 17, 2006, another major earthquake estimated at 6.8 on the Richter scale occurred in Tasikmalaya in West Java. In addition, since May 2006, a hot mud flow occurring in Sidoarjo, East Java, has devastated several villages in the region. As a result of these natural disasters, TELKOM suffered asset and income losses from our network in those affected regions.

      In February 2007, Jakarta and its surrounding areas were affected by a major flood caused by heavy rainfall. As a result of the flood, TELKOM’s facilities located in several areas of Jakarta and its surrounding areas were damaged and TELKOM’s services to its customers in several areas were interrupted for up to 72 hours.

      While TELKOM maintains several insurance policies relating to TELKOM’s assets which covered the losses resulting from natural disasters, it does not maintain business interruption insurance, and there can be no assurance that the insurance coverage will be sufficient to protect TELKOM from potential losses resulting from natural disasters and other events beyond its control. In addition, there can be no assurance that the premium payable for these insurance policies upon renewal will not increase substantially, which may adversely affect TELKOM’s financial condition and results of operations.

Risks relating to TELKOM and its subsidiaries

TELKOM’s expansion plans may strain key resources and thereby adversely affect its business, financial condition and prospects.

      To remain competitive and position TELKOM in gaining market share, TELKOM has identified its primary business objective as becoming a full service and network provider. To achieve this objective, TELKOM has determined that it should increase its focus on multimedia and other types of services in addition to its present core business concentration on local, domestic long-distance and mobile cellular services. The implementation of measures designed to achieve these objectives could strain TELKOM’s managerial, financial and other resources, which could adversely affect TELKOM’s business, financial condition and prospects.

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

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

Certain systems failures could, if they occur, adversely affect TELKOM’s results of operations.

      TELKOM operates fixed line networks (PSTN), fixed wireless networks, data networks and GSM cellular networks. The integrated networks consist of a copper access network, a optical access network, BTS, switches, optimal transmissions, satellites and an application server. Any failure of this integrated network, TELKOM’s servers, or any link in the transmission chain that results in an interruption in TELKOM’s operations or the provision of any service, whether from operational disruption, natural disaster or otherwise,

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could damage TELKOM’s ability to attract and retain subscribers and adversely affect its results of operations, financial condition and prospects.

Regulators and other telecommunications operators may challenge TELKOM’s ability to apply PSTN tariffs to its new CDMA-based fixed wireless phone service, which is marketed under the brand name TELKOMFlexi.

      In December 2002, TELKOM introduced new CDMA-based fixed wireless phone service, which is marketed under the brand name TELKOMFlexi for both fixed and portable handsets. As of December 31, 2006, this service was offered in 236 cities. CDMA-based fixed wireless technology enables rapid development of telephone networks and reduces the capital expenditures per line by obviating the need for the installation of underground cables. TELKOMFlexi offers customers the ability to use a wireless handset with limited mobility (within the same area code). Customers generally have all features offered by cellular services except roaming to other area codes and internationally. Postpaid TELKOMFlexi customers are charged tariffs that are similar to PSTN tariff rates for this service while prepaid customers are charged tariffs slightly higher than postpaid rates but with no monthly fees. In each case, both TELKOMFlexi postpaid and prepaid tariffs are substantially lower than tariffs for cellular services. Telecommunications regulators, cellular operators and cellular trade associations have sought and may in the future seek to impose limitations on TELKOM’s ability to provide fixed wireless services at PSTN rates. If any such limitations are imposed, TELKOM could lose part or all of the benefit of its investment in the network that supports the TELKOMFlexi service. TELKOM may also be subject to disputes with its regulators or competitors.

TELKOM may need to raise funds required for certain future expenditure requirements and the terms of any debt financing may subject TELKOM to restrictive covenants.

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

TELKOM’s ability to develop adequate financing arrangements is critical to support its capital expenditures.

      The telecommunications industry is capital intensive in nature. In order to satisfy customer demand and provide service and technology that is comparable to and compatible with other telecommunications service providers, TELKOM must continue to expand and modernize its network, which involves substantial capital investment. TELKOM relies heavily on its internal funds, two-step loans obtained through the Government and third-party financing, including vendor financing to support the development of its fixed line network. If TELKOM does not have sufficient internal funds or is unable to obtain adequate vendor or other third-party financing for its planned capital expenditures or otherwise fund such expenditures through other financing arrangements, TELKOM may have to forego, delay or postpone certain of its planned capital expenditures. This may prevent TELKOM from being able to expand sufficiently and upgrade its network, which could adversely affect its revenues and growth.

Employee unions may negatively affect TELKOM’s business.

      Laws permitting the formation of labor unions, combined with weak economic conditions, have resulted and may continue to result in labor unrest and activism in Indonesia. On February 25, 2003, the Indonesian Parliament passed a new employment law, Law No. 13 of 2003 (the “Employment Law”), which took effect on March 25, 2003. The Employment Law provides more protection for the employee, such as requiring a

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ruling from the Industrial Relations Court for termination of an employee in certain situations, and covers the increment of severance amount, service and compensation payment payable to terminated employees as well as to allow employees to unionize without intervention from employers. The Employment Law and new implementation regulations that may be issued thereunder may substantially affect labor relations in Indonesia. In May 2000, TELKOM employees formed a union named “Serikat Karyawan TELKOM” or “SEKAR.” In May 2006, TELKOM employees formed another union named “Serikat Pekerja” or “SP” as an alternative to SEKAR. Both unions are recognized by TELKOM, though membership with either union is not compulsory. TELKOM believes that its relations with each of SEKAR and SP are good. However, there can be no assurance that the activities of employee unions will not materially and adversely affect TELKOM’s business, financial condition and prospects.

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

      The telecommunications industry is characterized by rapid and significant changes in technology. TELKOM may face increasing competition from technologies being developed or that may be developed in the future. New technologies, services or standards could require significant changes to its business model, the development of new products or the provision of additional services. In addition, due to changes in customer preferences or inefficiencies in existing infrastructure, TELKOM may need to substantially upgrade to a next generation network to implement convergent and cost-effective technologies and upgrade its billing and credit control systems to accommodate growth in its business and the adoption of new technologies and services. New products and services may be expensive to develop and may result in the introduction of additional competitors into the marketplace. TELKOM cannot accurately predict how emerging and future technological changes will affect its operations or the competitiveness of its services. Similarly, TELKOM cannot provide any assurances that the technologies it adopts will not soon thereafter become obsolete or subject to intense competition from new technologies in the future. If TELKOM is unable to keep pace with rapid technological changes, its business, financial condition and results of operations could be materially and adversely affected.

TELKOM operates in a legal and regulatory environment that is undergoing significant reforms and such reforms may adversely affect TELKOM’s business.

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

•  Interconnection: TELKOM, including its subsidiaries such as Telkomsel, is obligated to allow other operators to interconnect their networks with those of TELKOM subject to entering into interconnection agreements with those other operators. As of the date of this Annual Report, TELKOM’s ability to negotiate such interconnection agreements is limited by the provisions set forth in various ministerial decrees governing interconnection rates. On February 8, 2006, the MoCI issued Regulation No. 8/ Per/ M.KOMINFO/02/2006, which mandates a new cost-based interconnection tariff scheme for all telecommunications network and services operators. Under the new scheme, the operator of the network on which calls terminate would determine the interconnection charge to be received by it based on a formula stipulated in Regulation No. 8/ Per/ M.KOMINFO/02/2006, which would be intended to have the effect of requiring that operators charge for calls based on the costs of carrying such calls. Such calculated interconnection charges must be presented in a Reference Interconnection Offer (“RIO”) and reported to the ITRB. TELKOM submitted its RIO in April 2006. In August 2006, ITRB completed its review of RIOs submitted by large network operators, including TELKOM. ITRB issued its final RIO (DJPT No. 279/ DIRJEN/2006) with respect to TELKOM on August 4, 2006. The new interconnection tariff scheme became effective on January 1, 2007. For further

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	information on the interconnection scheme, see Item 4. “Information on the Company — B. Business Overview — Regulations — Interconnection.” TELKOM can give no assurance regarding the impact of such adjustment on the interconnection revenues and costs on TELKOM and there can be no assurance that such impact would not have a material adverse effect on TELKOM’s business, financial condition, results of operations and prospects.
•	Licenses: TELKOM’s separate licenses to provide fixed line services, DLD services and IDD services were replaced and combined into a single license issued on May 13, 2004. TELKOM also has a multimedia license that includes services such as Internet service, data communication, network access and VoIP. The Government, with due regard to prevailing laws and regulations, may amend the terms of TELKOM’s licenses and business authority at its discretion. It may also impose certain mandatory obligations on the license holders. See Item 4. “Information on the Company — B. Business Overview — Regulations — 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 adjust their tariffs, with the resulting weighted average of tariffs increasing by 9%. On February 8, 2006, the Government issued Decree No. 09/Per/ M.KOMINFO/02/2006 on the Procedure on Determination of Current Tariff and Adjusted Tariff of Fixed Network Basic Telephony, which established new formulas for calculating subsequent tariff increases. For further information on the tariff scheme, see Item 4. “Information on the Company — B. Business Overview — Regulations — Interconnection.” There can be no assurance that the Government will implement further tariff increases or that tariffs will keep pace with costs over time. Any failure of the Government to implement regular tariff increases could have a material adverse effect on TELKOM’s business, financial condition and results of operations.
•	Migration of Frequencies for 3G Service Providers: On August 31, 2005, the MoCI issued a press release which announced that in order to conform with the international standards of the industry and as recommended by the International Telecommunications Union — Radiocommunication Sector (“ITU-R”), the 1900 MHz frequency spectrum would only be used for the International Mobile Telecommunications-2000 (“IMT-2000” or “3G”) network. The MoCI also announced that the CDMA-based technology network which TELKOM uses for its fixed wireless services can only operate in the 800 MHz frequency spectrum. At present, TELKOM utilizes the 1900 MHz frequency spectrum for its fixed wireless network in the Jakarta and West Java areas while for other areas, TELKOM utilizes the 800 MHz frequency spectrum. As a result of the Government’s decision, TELKOM’s Base Station System (“BSS”) equipment in Jakarta and West Java which are part of transmission installation and equipment for the fixed wireless network can no longer be used commencing at the end of 2007. TELKOM expects that the BSS equipment will be completely replaced with the BSS equipment operating in 800 MHz by the end of June 2007. On January 13, 2006, the MoCI issued MoCI Regulation No. 01/ PER/ M.KOMINFO/1/2006 which reaffirmed the Government’s decision that TELKOM’s fixed wireless network can only operate in the 800 MHz frequency spectrum and that the 1900 MHz is allocated for the 3G network. See Item 5. “Operating and Financial Review and Prospects — A. Operating Results — Overview — Write-down of Assets,

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	Depreciation Expense, Loss on Procurement Commitments, and Operations Maintenance and Telecommunication Services Expenses.” TELKOM has incurred significant costs in replacing the BSS equipment and there can be no assurance that TELKOM will not recognize further loss as a result of such Government decisions. In addition, in response to the frequency migration regulation, TELKOM initiated a registration plan for its fixed wireless customers in June 2007. Currently, TELKOM is registering its customers to identify the number of affected customers in need of handset replacements upon the effective date of the frequency migration. TELKOM is also considering the form and amount of compensation to such customers in connection with the frequency migration which formula has not been finalized yet as of the date of this Annual Report.
•	Termination of Wireless Local Loop (“WLL”) License: In the first quarter of 2005, the Government, in its efforts to rearrange the frequency spectra utilized by the telecommunications industry, issued a series of regulations which resulted in TELKOM not being able to utilize certain frequency spectra it currently uses to support its fixed wireline cable network commencing at the end of 2006. As a result of these regulations, certain of TELKOM’s cable network facilities within the fixed wireline segment, which comprise primarily WLL and approach link equipment (a transmission equipment to link BTSs to a local exchange) operating in the affected frequency spectra, can no longer be used commencing at the end of 2006. See Item 5. “Operating and Financial Review and Prospects — A. Operating Results — Overview — Write-down of Assets, Depreciation Expense, Loss on Procurement Commitments, and Operations Maintenance and Telecommunication Services Expenses.” There can be no assurance that TELKOM will not recognize further loss as a result of such Government decisions. In addition, TELKOM initiated a replacement program to replace the affected WLL services with TELKOMFlexi home services. Currently, TELKOM has identified that the number of WLL subscribers affected by the regulations consists of 173,418 subscribers and plans to complete the replacement at end of 2007.
•	Indonesian Telecommunications Regulatory Body (“ITRB”): The Telecommunications Law allows the Government to delegate its authority to regulate, supervise and control the telecommunications sector in Indonesia to an independent regulatory body, while maintaining the authority to formulate policies over the industry. Such delegation of authority to the ITRB was implemented under MoC Decree No. 31/2003, dated July 11, 2003. The ITRB comprises officials from the Directorate General of Post and Telecommunication and the Committee of Telecommunications Regulations. There can be no assurance that the ITRB will not take actions that may be detrimental to TELKOM’s business, financial condition, results of operations or prospects.
•	Competition in the Fixed Line Domestic Telecommunications Market: Historically, TELKOM had the exclusive right to provide fixed line domestic telecommunications services in Indonesia. Pursuant to regulations introduced to implement the Telecommunications Law, the Government terminated TELKOM’s monopoly in providing fixed line domestic telecommunications services. The MoC issued Indosat a license to provide local telephone services from August 2002. On May 13, 2004, Indosat received its commercial license to provide domestic long-distance telephone services. Indosat launched its CDMA fixed wireless access service under the brand name “StarOne” in Surabaya on May 29, 2004 and in Jakarta on July 25, 2004, thereby creating a “duopoly system” in Indonesia’s fixed line domestic telecommunications market. As of December 31, 2005, Indosat offered this service in Jakarta, Bogor, Depok, Tangerang, Bekasi, Banten, Surabaya, Yogyakarta, Malang, Sidoarjo, Gresik, Batu, Madura (Bangkalan, Sampang, Sumenep), Pasuruan, and Medan. Based on the interconnection agreement between TELKOM and Indosat dated September 23, 2005, TELKOM and Indosat have agreed to open interconnection (i) of TELKOM’s local fixed line network with Indosat’s long-distance fixed line network; (ii) of Indosat’s local fixed line network with TELKOM’s long-distance fixed line network; (iii) between TELKOM’s and Indosat’s long-distance fixed line networks; (iv) of TELKOM’s domestic fixed line network with Indosat’s international fixed line network; and (v) Indosat’s local fixed line network with TELKOM’s international fixed line network, with the interconnection tariff being calculated on a call-by-call basis. On December 1, 2005, TELKOM and Indosat entered into an interconnection agreement for the interconnection of TELKOM’s fixed

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	network with Indosat’s mobile cellular network and allowing Indosat’s mobile customers to access TELKOM’s IDD services. Therefore, Indosat is expected to expand its service coverage to other cities in Indonesia. Indosat also commenced offering limited domestic long-distance services for calls within its network in late 2004. This greater competition in the fixed line market, including fixed wireless, could lead to a decline in TELKOM’s existing subscriber base as subscribers choose to receive services from other providers. TELKOM’s interconnection arrangements will be affected by the new cost-based interconnection scheme which was publicly announced in February 2006. An amendment to the interconnection agreement with Indosat reflecting the new cost-based interconnection scheme took effect on January 1, 2007.
•	DLD and IDD Services: On March 11, 2004, the MoC issued Decree No. 28/2004, Decree No. 29/2004 and Decree No. 30/2004 that further implement the Government’s policy of encouraging competition in the markets for DLD and IDD services. 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 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 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, the interconnection agreement between Indosat and TELKOM in these five cities does not contain any provisions on technical and business arrangements regarding the use of “011” and “017” DLD access codes. In the five-year interim period and thereafter, the “0” prefix may continue to be used by all operators, including TELKOM, as default code 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. On May 17, 2005, the MoCI issued decree No. 6/2005. According to Decree No. 6/2005, the three digit access code in the form of “01X” and “0” access code for access to DLD services may be used. The “0” access code is being used to accommodate customers who prefer not to choose their long-distance carrier, while the “01X” access code has to be implemented gradually in local areas in which TELKOM has technical capabilities to support such services. By April 1, 2010, the “01X” long-distance services must be commenced in all TELKOM’s local areas to accommodate customers who prefer to choose their long- distance carrier. For further information, see Item 4. “Information on the Company — B. Business Overview — Regulations — DLD and 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. TELKOM’s exclusive right to provide fixed local telecommunications services was terminated by the Government in August 2002 and TELKOM’s exclusive right to provide domestic long-distance services was terminated on March 30, 2004. The Government has determined the scheme of compensation for the termination of

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TELKOM’s exclusive rights, which will consist of (i) expedited issuance of an IDD license to TELKOM, which was issued on May 13, 2004; (ii) approval of the reissuance and transfer of TELKOM’s DCS 1800 license to Telkomsel, which took place on July 12, 2002; and (iii) a net cash payment to TELKOM of Rp.478.0 billion (net of tax). While the amount of the compensation payable to TELKOM has been determined, payment was contingent on appropriations to the State Budget for the MoCI, which requires approval by Parliament. On December 15, 2005, TELKOM signed an agreement on Implementation of Compensation for Termination of Exclusive Rights with the Directorate General of Post and Telecommunications of the MoCI. Pursuant to this agreement, the Government agreed to pay Rp.478.0 billion to TELKOM over a five-year period. Under the plan, the Government paid Rp.90.0 billion in each of 2005 and 2006 and shall then pay the remaining Rp.298.0 billion thereafter in installments or in lump-sum, depending upon the Government’s budgetary considerations. In addition, TELKOM is required by the Government to use funds received thereunder for development of Indonesian telecommunications infrastructure. TELKOM can provide no assurance that the Government will honor its promise to pay the balance within the five year period.

•

Identity Registration: For prepaid subscribers, there is a new obligation regulated under MoCI Decree No. 23/2005, issued on October 28, 2005. Pursuant to this Decree, TELKOM and other operators are required to obtain identity information for all prepaid customers on or prior to April 28, 2006. As of December 31, 2006, TELKOM registered over 98% of its prepaid customers and removed the remaining inactive or low-activity unregistered customers from its customer database. TELKOM’s continuing obligations to update the registry may slow down revenue growth and have an adverse impact on TELKOM’s profit as TELKOM will have to incur additional expenditures on support systems and dealers’ compensation. It may also present difficulties for TELKOM in retaining existing customers and expose TELKOM customers’ identities to illegal use or government investigations. This identity registration requirement, however, will affect other competitors as well.

      There can be no assurance that the amendment or interpretation or implementation of current laws and regulations, or the introduction of additional laws or regulations, will not adversely affect TELKOM’s business, financial condition and prospects.

TELKOM’s increasingly important cellular operations face significant constraints and competitive pressures.

      TELKOM provides cellular telecommunications services primarily through its subsidiary Telkomsel. Telkomsel has experienced rapid growth in its subscriber-base in recent years and its revenue has become an increasingly large component of TELKOM’s consolidated revenue. Telkomsel’s future growth depends upon its ability to manage capacity and spectrum constraints. Telkomsel experienced such constraints in the past and has therefore deployed significant resources to eliminate such constraints. Although Telkomsel is not currently experiencing such difficulties, there is no guarantee that Telkomsel would not face such constraints in the future, which may result in network congestion, reduced service quality and an inability to increase and retain its subscriber base.

      The Indonesian cellular telecommunications market is highly competitive. Currently, Telkomsel competes primarily with Indosat and PT Excelcomindo Pratama (“Excelcomindo”) in attracting and retaining subscribers for its mobile cellular telecommunications services. In particular, Telkomsel faces increasing and substantial competition from Excelcomindo, which outperformed Indosat in 2006 in terms of subscriber and network infrastructure growth. There are also several other new competitors. For example, PT Hutchison CP Telecommunications (“HCPT”) launched its cellular services during the end of March 2007. TELKOM also expects PT Lippo Telecom (Natrindo Telepon Selular) to launch its cellular services in 2007. New CDMA cellular operators will also likely emerge and compete with Telkomsel. Accordingly, TELKOM expects competition in the cellular market to intensify. Increased competition could adversely affect Telkomsel’s market share and results of operations. Competition between Telkomsel and all of these operators is based on various factors such as pricing, network quality and coverage, range of services offered and customer service. While TELKOM believes Telkomsel has been successful in maintaining its market share to date, there can be no assurance that Telkomsel will be successful in competing in the cellular market in the future.

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TELKOM’s satellites have limited life spans and substantial risks exist for TELKOM-1 and TELKOM-2 to be damaged or interrupted during operation and satellite loss or reduced performance may adversely affect TELKOM’s financial condition, results of operations and ability to provide certain services.

      TELKOM’s TELKOM-1 and TELKOM-2 satellites have limited operational lifespan. A number of factors affect the operational lifespan of satellites, including the quality of their construction, the durability of their component parts, the amount of fuel on board, the launch vehicle used and the manner in which the satellite is monitored and operated. The satellites could fail before the end of their useful lives and repairing these satellites while in orbit is not feasible. For further information on the insurance coverage for TELKOM-1 and TELKOM-2 satellites, see Item 4. “Information of the Company — B. Business Overview — Insurance.” While TELKOM has provided insurance for its satellites, there can be no assurance that such insurance will offer adequate coverage. The loss of its satellites may have a material adverse effect on TELKOM’s financial condition, results of operations and ability to provide certain services, particularly in the eastern parts of Indonesia which currently rely largely on satellite coverage for telecommunication services.

TELKOM is subject to Indonesian accounting and corporate disclosure standards that differ in significant respects from those applicable in other countries.

      There may be less publicly-available information about Indonesian public companies, including TELKOM, than is regularly disclosed by public companies in countries with more mature securities markets. TELKOM’s audited consolidated financial statements have been prepared in accordance with Indonesian GAAP, which varies in certain significant respects from U.S. GAAP. See Item 5. “Operating and Financial Review and Prospects — A. Operating Results — Summary of Significant Differences between Indonesian GAAP and U.S. GAAP” and Note 56 to TELKOM’s consolidated financial statements.

Certain TELKOM employees, including former TELKOM directors, are subject to on-going litigation, police investigations, and criminal charges.

      There are pending litigation, criminal charges and on-going investigations by the West Java Police Department, the Office of the Attorney General, the Makassar District Court and the Denpasar District Court as to the conduct of former TELKOM directors, a former President Director of Napsindo and several TELKOM employees. For details regarding such litigation, criminal charges and investigations, see Item 6. “Directors, Senior Management and Employees — D. Employees — On-going Litigation and Investigations.” There can be no assurance that the police will not find evidence of wrong-doing, that charges or additional charges will not be filed in relation to the foregoing or that such persons or other TELKOM employees will not be found guilty of any offense. Although TELKOM believes that the investigations are without merit, to the extent any TELKOM employees are in custody, or are found guilty of any offense, TELKOM is and would be deprived of their services. TELKOM does not believe that any subsequent investigation or court decision will have significant financial impact to the Company, though there can be no assurance that this is the case.

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

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

      TELKOM has been advised by its Indonesian legal advisor that judgments of United States courts, including judgments predicated upon the civil liability provisions of the United States federal securities laws,

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are not enforceable in Indonesian courts, although such judgments could be admissible as non-conclusive evidence in a proceeding on the underlying claim in an Indonesian court. There is doubt as to whether Indonesian courts will enter judgments in original actions brought in Indonesian courts predicated solely upon the civil liability provisions of the United States federal securities laws. As a result, holders of ADSs or Common Stock would be required to pursue claims against TELKOM or its Commissioners and Directors in an Indonesian court.

Forward-looking statements reflect current expectations and may not be correct.

      This document contains various forward-looking statements, including statements regarding TELKOM’s expectations and projections for future operating performance and business prospects. The words “believe”, “expect”, “anticipate”, “estimate”, “project” and similar words identify forward-looking statements. In addition, all statements other than statements of historical facts included herein are forward-looking statements. These statements reflect TELKOM’s current expectations. Although TELKOM believes that the expectations reflected in the forward-looking statements are reasonable, TELKOM can give no assurance that such expectations will prove to be correct. They are subject to a number of risks and uncertainties, including changes in the economic, social and political environments in Indonesia. In light of the many risks and uncertainties surrounding Indonesia, investors in the ADSs or the Common Stock should bear in mind that TELKOM cannot guarantee that the forward-looking statements described herein will transpire. All subsequent written and oral forward-looking statements attributable to TELKOM or persons acting on TELKOM’s behalf are expressly qualified in their entirety by reference to these risks.

ITEM 4. INFORMATION ON THE COMPANY

A. History and Development of the Company

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

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

      In 1991, Perumtel was transformed into a “Persero”, or state-owned limited liability corporation with commercial purposes and renamed Perusahaan Perseroan (Persero) P.T. Telekomunikasi Indonesia, known as TELKOM. Prior to 1995, TELKOM’s business operations were segregated into twelve regional operating units, known as “Witels,” which were centrally controlled from TELKOM’s headquarters in Bandung, West Java. Each Witel had a management structure responsible for all aspects of TELKOM’s business in their respective regions, from the provision of telephone services to property management and security.

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

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Division IV Central Java; Division V East Java; Division VI Kalimantan; and Division VII Eastern part of Indonesia) and one Network Division. The Company also entered into KSO Agreements pursuant to which it transferred the right to operate five of its seven regional divisions (regional divisions I, III, IV, VI and VII) to private sector consortia, each of which involved one or more prominent international telecommunications operators. The KSO Agreements provided for the relevant KSO partner to manage and operate the regional division for a fixed term, undertake the construction of a specified number of fixed lines and, at the end of the fixed term, transfer the existing and new telecommunications facilities in the region to TELKOM for an agreed amount of compensation. The KSO Agreements also provided for TELKOM and the KSO partner to share revenues generated during the term of the agreement.

      On November 14, 1995, the Government sold TELKOM shares through an initial public offering. TELKOM shares are listed on the Jakarta Stock Exchange and the Surabaya Stock Exchange and its shares, in the form of ADSs, are listed on the New York Stock Exchange and the London Stock Exchange. Its shares were also publicly offered without listing on the Tokyo Stock Exchange. TELKOM is currently the largest company by market capitalization in Indonesia, with a market capitalization of approximately Rp.203,616 billion as of December 31, 2006 and of approximately Rp.190,511 billion as of January 31, 2007. The Government currently has an aggregate interest of approximately 51.2% of the issued and outstanding shares of TELKOM. The Government also holds the Dwiwarna share of TELKOM, which has special voting and veto rights over certain matters.

      Based on the resolution of the Extraordinary General Meeting of Stockholders on December 21, 2005, the Stockholders authorized a plan to repurchase up to a maximum of 5% of TELKOM’s 20,159,999,279 total issued and outstanding Series B Shares for a total repurchase amount not exceeding Rp.5,250.0 billion. Pursuant to the share repurchase plan, as of June 27, 2007, TELKOM has cumulatively repurchased an aggregate of 211,290,500 Series B Shares on either the Jakarta Stock Exchange or the New York Stock Exchange, representing approximately 1.05% of the total issued and outstanding Series B Shares of 20,159,999,279 for a total repurchase amount of Rp.1,829.1 billion (US$203.1 million). These transactions are in compliance with the limitations set forth in the resolution. For further information on the share repurchase, see Item 7. “Major Stockholders and Related Party Transactions — A. Major Stockholders.”

      Following the Indonesian economic crisis that began in mid-1997, certain KSO partners experienced difficulties in fulfilling their obligations to TELKOM, which led to certain disputes. As a result, TELKOM has in recent years acquired or entered into agreements to acquire control of its KSO partners in regions I, III and VI, and amended the terms of the KSO agreement with its KSO partners in regions IV and VII to obtain legal right to control financial and operating decisions of Regional Divisions IV and VII. For a more complete description of the acquisition of control of its KSO partners in regions I, III and VI, acquisition of control of regions IV and VII, and TELKOM’s KSO arrangements, see Item 10. “Additional Information — C. Material Contracts” and Item 4. “Information on the Company — B. Business Overview — Joint Operation Scheme.”

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

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

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August 2003. On May 13, 2004, TELKOM received its commercial license to provide IDD fixed line services and began offering such services on June 7, 2004. The MoC issued Indosat a license to provide local telephone services from August 2002. On May 13, 2004, Indosat received its commercial license to provide domestic long-distance telephone services. Indosat launched its CDMA fixed wireless access service under the brand name “StarOne” in Surabaya on May 29, 2004 and in Jakarta on July 25, 2004, thereby creating a “duopoly system” in Indonesia’s fixed line domestic telecommunications market. Indosat is currently able to provide nationwide DLD services through its CDMA-based fixed wireless network and its interconnection arrangements with TELKOM.

      For a description of the important events in the development of the Company’s business since the beginning of the Company’s last three financial years to the date of this Annual Report, see Item 5. “Operating and Financial Review and Prospects — A. Operating Results — Overview.” A description of the Company’s principal capital expenditures and divestitures, since the beginning of the Company’s last three financial years to the date of this Annual Report is set forth in Item 5. “Operating and Financial Review and Prospects — B. Liquidity and Capital Resources.” Information concerning the principal capital expenditures and divestitures currently in progress is also described in Item 5. “Operating and Financial Review and Prospects — B. Liquidity and Capital Resources.” The Company is domiciled in the Republic of Indonesia. It is incorporated in and under the legislation of the Republic of Indonesia. The address of the Company’s registered office is No. 1, Jalan Japati, Bandung, 40133, Indonesia and the telephone number of the Company’s registered office is (62) (22) 452-1510.

B. Business Overview

General

      TELKOM is the main provider of fixed line telecommunications services in Indonesia and is the majority owner of Telkomsel, which is the largest Indonesian mobile cellular operator, as measured by subscribers and revenue. The Company also provides a wide range of other telecommunications services including interconnection, network, data and Internet services and other telecommunications services. TELKOM reports revenues in the following categories:

•  Fixed lines (which consists of fixed wireline and fixed wireless);

•  Cellular;

•  Joint Operation Schemes (KSO);

•  Interconnection;

•  Network;

•  Data and Internet;

•  Revenue-Sharing Arrangements; and

•  Other services (including revenues from telephone directory services and building management services).

      For segment reporting purposes, TELKOM has four segments: (i) fixed wireline, (ii) fixed wireless, (iii) cellular and (iv) other. See Note 47 to the consolidated financial statements. The fixed wireline segment provides local, domestic long-distance and international (starting 2004) telephone services, and other telecommunications services (including, among others, leased lines, telex, transponder, satellite and Very Small Aperture Terminal-VSAT) as well as ancillary services. The fixed wireless segment provides local and domestic long-distance CDMA-based telephone services, as well as other telecommunication services using limited-mobility wireless handsets within a local area code. The cellular segment provides basic telecommunication services, particularly mobile cellular telecommunication services. Operating segments that do not individually represent more than 10% of TELKOM’s revenues are presented as “Other” comprising the telephone directories and building management businesses.

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      For 2006, no single customer, other than interconnection customers, accounted for more than 0.3% of TELKOM’s total operating revenues and TELKOM’s top 100 customers, other than interconnection customers, together accounted for no more than 24% of its total operating revenues. For the purpose of calculating operating revenues, TELKOM treats each state-owned enterprise owned by the Government as a single customer.

      TELKOM’s business does not experience significant seasonality.

Fixed Line Services

      Fixed line services are comprised mainly of local and domestic long-distance services. TELKOM is the principal provider of fixed line services in Indonesia. In 2006, TELKOM provided fixed line services in Divisions I, II, III, IV, V, VI and VII. In 2006, revenues from fixed line services in these divisions contributed Rp.10,979.0 billion (US$1,219.9 million), or 21.4% of total operating revenues. TELKOM began providing fixed line services in Divisions IV and VII in January 2004 and October 2006, respectively, when TELKOM acquired control of their operations on January 20, 2004 and October 19, 2006, respectively. For a more complete description of the acquisition of control of Divisions IV and VII, see Item 4. Information on the Company — B. Business Overview — Joint Operation Scheme.” And item 10. “Additional Information — C. Material Contracts”.

Fixed Wireline Services

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

      TELKOM began offering IDD services, under the brand name “Telkom International Call 007”, or “TIC-007,” on June 7, 2004. TELKOM reports its IDD revenues under international interconnection revenues as this service requires interconnection between TELKOM and network operators in other countries. See “— Interconnection Services” below. Through its VoIP service, which is known as “TelkomGlobal 01017” (formerly, “TelkomGlobal 017” prior to December 31, 2006), TELKOM already provides international call services based on VoIP technology. TELKOM records its revenues from the VoIP service under “Data and Internet Services” as this service uses IP and data-based infrastructure. See “— Data and Internet Services” below.

      In May 2006, TELKOM began offering corporate customers an integrated direct call center service under the brand name “TELKOM Call 500.” TELKOM Call 500 is a basic communication service solution for corporate customers providing an integrated contact center to support their marketing programs and customer service. TELKOM Call 500 is targeted at companies in various segments including banking and finance, manufacturing, trade and industry, government, and mining and construction.

Fixed Wireless Services

      In December 2002, TELKOM began offering a limited mobility (within a local area code) CDMA-based fixed wireless phone service under the brand name “TELKOMFlexi” for both fixed and portable handsets. TELKOM’s rollout of this service began in the three cities of Surabaya, Denpasar and Balikpapan and, as of December 31, 2006, was available in 236 cities. TELKOM’s rollout of this limited mobility fixed wireless service is occurring concurrently with its use of CDMA fixed wireless technology for the development of its fixed line network. CDMA-based fixed wireless technology enables rapid development of telephone networks and the reduction of capital expenditures per line by reducing and often eliminating the need for layout of cables. TELKOM intends to continue to rapidly develop its CDMA-based fixed wireless network and expand its TELKOMFlexi service to other cities and regions in Indonesia. As of December 31, 2006, TELKOM had 1,531 BTSs and 7.7 million line units deployed, of which 1,460 BTSs and 7.2 million line units

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were financed by TELKOM and 71 BTSs and 0.5 million line units were established under the RSA scheme. As of December 31, 2006, TELKOM had 4,175,853 TELKOMFlexi lines in service.

      TELKOMFlexi subscribers have the option of postpaid and prepaid services. Postpaid subscribers pay one-time activation charges, ongoing monthly subscription charges and usage charges for local, domestic-long distance and international services, which charges are generally the same as those paid by fixed line subscribers. Prepaid subscribers are required to purchase starterpacks containing RUIM cards and vouchers or refills, and pay only usage charges, which are typically higher than those paid by postpaid subscribers. Prepaid subscribers may purchase starterpacks ranging from Rp.20,000 to Rp.35,000, which include vouchers ranging from Rp.15,000 to Rp.35,000. As of June 2006, TELKOMFlexi only offers Rp.30,000 starterpacks. However, existing Rp.20,000 and Rp.35,000 starterpacks were still available in the market as of December 31, 2006. Prepaid subscribers using Electronic Serial Number (ESN) based handsets are also required to purchase starterpacks containing RUIM cards. Refills are made through purchasing vouchers, or through voucherless electronic and ATM channels, in amounts ranging from Rp.10,000 to Rp.500,000, depending on the refill method used. Vouchers and refills purchased remain active for limited periods from the date of purchase, ranging from 15 days for a Rp.10,000 voucher or refill to 210 days for a Rp.500,000 voucher or refill. TELKOM generally provides a 30-day grace period after the expiry of the active period in which only incoming calls are allowed.

      TELKOMFlexi subscribers are also provided with a number of value-added features, such as SMS, WAP, a web portal, ring tones, voicemail and information services, such as billing, directory assistance and other content services. The revenues from these services are reported in the Data and Internet category. See “— Data and Internet Services” below. Customers generally have all features offered by cellular services except roaming to other local area codes and internationally. In June 2004, TELKOM launched a “FlexiCombo” service which allows each subscriber to have up to three telephone numbers, with each number assigned for use in one of three different cities (area codes), but without local area code or international roaming. In August 2006, TELKOM launched a new FlexiCombo service to allow TELKOMFlexi subscribers to use TELKOMFlexi throughout Indonesia with a primary number and up to two temporary numbers on the same RUIM card. Charges for this new service will be billed to the primary number. Through the call forwarding feature of this service for a flat fee, subscribers can receive calls to their primary numbers even though they are using a temporary number for a flat fee without time or zone limitation.

Cellular Services

      TELKOM provides its mobile cellular services through its 65%-owned subsidiary Telkomsel. Cellular revenues grew by 41.5% from Rp.14,571.0 billion, for the year ended December 31, 2005 to Rp.20,622.6 billion (US$2,291.4 million), or 40.2% of TELKOM’s total operating revenue for the year ended December 31, 2006. Over the same period, the total number of Telkomsel’s mobile cellular subscribers (prepaid and postpaid) increased by 46.5% from approximately 24.3 million at the end of 2005 to approximately 35.6 million as of December 31, 2006. Of the total subscribers as of December 31, 2006, approximately 33.9 million were prepaid and approximately 1.7 million were postpaid. Based on data developed by Telkomsel from various sources, Telkomsel had an estimated 56% share of the cellular market (full mobility) in Indonesia as of December 31, 2006, compared to an estimated 52% market share as of December 31, 2005.

      Telkomsel provided GSM cellular services in Indonesia through its own network and internationally through the 463 networks operated by 268 international roaming partners in 155 countries as of the end of 2006. As of December 31, 2006, Telkomsel had the largest network of any of the cellular operators in Indonesia, providing coverage to over 90% of Indonesia’s population, including all counties in Indonesia and all sub-counties in Java, Bali and Sumatra.

      Telkomsel provides its subscribers with the option of a prepaid service under the brand name “SimPATI,” or a postpaid service under the brand name “KartuHALO”. In May 2004, Telkomsel launched a new prepaid brand “Kartu As,” which was intended to target the lower segment of the market as well as customers who travel frequently within Indonesia, by offering free domestic roaming and lower tariffs on local

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and domestic long-distance calls, with no difference between tariffs for calls during peak and off-peak hours. On February 1, 2005, Telkomsel introduced new flat tariff for SimPATI — Rp.150 per 30 seconds for any call within Telkomsel’s network throughout Indonesia during off-peak time. Further, on March 15, 2005, in order to accelerate SimPATI growth and to decrease the SimPATI churn rate, Telkomsel launched a new starter pack edition called “SimPATI 10HOKI” which offers ten new benefits, including 10 free SMSs, a free 10 minute call and 10 free contents download. Telkomsel also offers tailor-made postpaid services for corporate customers and a postpaid family service under the brand name “HALOkeluarga”. In August 2005, Telkomsel launched new “HALObebas” packages for its postpaid customers which allow customers who subscribe to any kartuHALO package to enjoy free roaming facilities as part of their basic service. Generally, postpaid subscribers pay one-time activation charges, ongoing monthly subscription charges and usage charges for roaming, SMS, local, domestic-long distance and international services. All postpaid subscribers enjoy free national roaming and also choose among the following options: (a) special tariff for calls to five favorite numbers within Telkomsel’s network; (b) 150 free SMSs per month; or (c) waiver of the monthly subscription charge subject to minimum monthly usage.

      In early 2006, Telkomsel launched a new off-peak/ on-net discount tariff for SimPATI customers. Previously off-peak time started from 23:00 to 06:59. For a call from 22:00 to 22:59, a special tariff of Rp.300 per 30 seconds is assessed.

      In January 2006, Telkomsel launched a new SimPATI starter pack edition called “SimPATI Jitu”. The package costs Rp.15,000 and includes a regular credit of Rp.10,000 plus Rp.10,000 credit upon first recharge and 20 free SMSs. In April 2006, Telkomsel introduced Indonesia’s first flat-tariff per-second prepaid plan as part of its Kartu As product. A call to any Telkomsel, PSTN and other cellular subscriber is charged Rp.20 per second, Rp.30 per second and Rp.40 per second, respectively. Under this plan, SMSs among Kartu As users cost Rp.99 per SMS, while SMSs to KartuHALO, SimPATI and TELKOMFlexi users cost Rp.149 per SMS, and to other cellular users, Rp.299 per SMS. In June 2006, a new KartuHALO package was launched called “HALObebas Bicara”. This package includes nationwide flat-rate tariffs and offers one of the country’s longest off-peak periods.

      Prepaid customers purchase a starter package, the price of which starts at Rp.10,000 for Kartu As and SimPATI customers, depending on the value of the prepaid voucher included in the package. For Kartu As customers, the Rp.10,000 starter package contains a SIM card and a voucher worth Rp.10,000. The Rp.15,000 “SLANK” starter package contains a SIM card and a voucher worth Rp.15,000. For SimPATI customers, the Rp.10,000 “SimPATI Ekstra” starter package, which was launched in February 2007, contains a SimPATI SIM card and a voucher worth Rp.5,000 plus a credit of Rp.5,000 for intra-Telkomsel calls and a Rp.10,000 credit bonus after the first refill.

      SimPATI subscribers can buy prepaid vouchers ranging in value from Rp.10,000 to Rp.1,000,000 to increase the value of their SIM cards, while Kartu As subscribers can buy prepaid vouchers ranging from Rp.5,000 to Rp.100,000. The customer’s prepaid account can be topped up electronically or by supplemental refill vouchers. When refill vouchers are purchased, subscribers call an automated telephone number and enter a 14-digit code printed on their voucher in order to activate or supplement their account with the new prepaid amount. Kartu As and SimPATI starter packages and refill vouchers may be purchased at any of Telkomsel’s service centers and distribution outlets. Electronic refills may also be purchased at selected automatic teller machines, via telephone banking and over the internet. In June 2004, Telkomsel introduced a new electronic refill service called “M-KIOS” which allows prepaid customers to refill with a mobile handset as the transaction terminal through secure means. In September 2004, Telkomsel introduced an automatic refill service that permits payments through VISA credit cards, pursuant to which a prepaid customer can elect to have a prepaid account refilled automatically in one of the following ways: (i) whenever the prepaid account balance falls below Rp.10,000; (ii) a fixed amount monthly; or (iii) on demand, through SMS. The prepaid customer credits generally have a predetermined expiry date.

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

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While Kartu As and SimPATI customers do not pay an activation fee or monthly subscription charges, they pay higher usage charges than postpaid subscribers.

      On May 26, 2005, Telkomsel launched its trial run of 3G services in Jakarta. Telkomsel became the first Indonesian telecommunication company to implement a trial run of such services. In February 2006, Telkomsel, Indosat, Excelcomindo, HCPT and PT Lippo Telekom (Natrindo Telepon Selular) were awarded separate licenses to operate the 3G network. The licenses will expire in ten years. In August 2006, Telkomsel initiated a comprehensive customer education pre-registration campaign to introduce its 3G services. In September 2006, Telkomsel launched its 3G services in Jakarta for both postpaid and prepaid customers. As of December 31, 2006, Telkomsel’s 3G services were available in Jakarta, Bandung, Surabaya, Medan, Semarang, Yogyakarta, Batam, Bali, Makasar and surrounding cities. The 3G services provide Telkomsel’s subscribers (over 500,000 3G network subscribers as of December 31, 2006) with various features including video calls, mobile television, mobile download and high-speed data access. Telkomsel continues to expand and optimize its 3G network and is conducting various marketing and educational campaigns for its 3G services.

      Telkomsel also offers cellular users value added services such as SMS, international roaming, GPRS, MMS, multi-party calling, call forwarding, call waiting, caller number display and non-display, ring back tone (which allows callers to the subscriber of the ring back tone service to hear a pre-selected ringing tone), mobile banking, SMS to e-mail services, missed call alert features (“MCA”), “Notify Me” notifications services (which informs the calling parties when the called party becomes active) and other personal mobile data services, the revenues from which are reported in the Data and Internet category. See “— Data and Internet Services” below.

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

	As of or for the Year Ended December 31,
	2004			2005			2006(1)
Cellular subscribers
KartuHALO (Postpaid)		1,327,549			1,470,755			1,661,925
SimPATI (Prepaid)		11,557,758			16,004,631			21,377,995
Kartu As (Prepaid)		3,405,201			6,793,967			12,557,251
Deactivations(2)
KartuHALO (Postpaid)		317,020			372,921			376,748
SimPATI (Prepaid)		8,470,819			15,836,633			27,256,632
Kartu As (Prepaid)		824,489			12,105,848			17,724,133
Average monthly churn rate(3)
KartuHALO (Postpaid)		2.3	%		2.1	%		2.0	%
SimPATI (Prepaid)		6.8	%		8.2	%		11.9	%
Kartu As (Prepaid)		5.0	%		14.9	%		16.8	%
ARPU(4)
KartuHALO (Postpaid) (Rp. ’000)		304			291			274
SimPATI (Prepaid) (Rp. ’000)		84			84			83
Kartu As (Prepaid) (Rp. ’000)		48			45			54

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      The following table shows the respective active periods for Telkomsel’s SimPATI and Kartu As refill vouchers, respectively:

	Period during which subscribers
SimPATI Value of Voucher	will have access to services
Rp.10,000		37 days
Rp.20,000		45 days
Rp.50,000		60 days
Rp.100,000		90 days
Rp.150,000		150 days
Rp.200,000		180 days
Rp.300,000		210 days
Rp.500,000		240 days
Rp.1,000,000		270 days

	Period during which subscribers
Kartu As Value of Voucher	will have access to services
Rp.5,000		30 days
Rp.10,000		30 days
Rp.25,000		30 days
Rp.50,000		30 days
Rp.100,000		30 days

(1)	For 2006, prepaid subscribers could purchase SIM cards with values ranging from Rp.10,000 to Rp.50,000 and refill vouchers with values ranging from Rp.5,000 to Rp.100,000.
(2)	Includes voluntary and involuntary deactivations.
(3)	The average monthly churn rate for a year is computed by adding the monthly churn rates during the year and dividing by 12. The monthly churn rate is computed by dividing the number of subscribers deactivated during the month by the number of subscribers at the beginning of the month.
(4)	Refers to Average Revenue per User which is calculated by taking the sum of the ARPU for each month of the year and dividing by 12. ARPU is computed by dividing total cellular revenues for either postpaid or prepaid subscribers (excluding connection fees, interconnection revenues, international roaming revenues from non-subscribers and dealer discounts) for each month by the respective average number of postpaid or prepaid cellular subscribers for that month.

     In June 2004, Telkomsel introduced an enhanced data transmission technology known as “EDGE,” or Enhanced Data rates for GSM Evolution, which offers enhanced data transmission speeds for handsets equipped to handle EDGE. As of December 31, 2006, EDGE was available in Jakarta, Surabaya, Batam, Semarang and Bali. Telkomsel has ceased further development of EDGE.

Joint Operation Scheme

      TELKOM entered into agreements to establish the KSOs in 1995 and pursuant to such agreements transferred the right to operate Regional Divisions I, III, IV, VI and VII to private sector consortia, each of which involved one or more prominent international telecommunications operators. TELKOM then retained the right to operate divisions II and V, its two largest divisions. The KSO Agreements provided for the relevant KSO partner to manage and operate the Regional Division for a fixed term, undertake the construction of a specified number of fixed lines and, at the end of the fixed term, transfer the existing and new telecommunications facilities in the region to TELKOM for a pre-determined agreed amount of compensation. The KSO Agreements also provided for TELKOM to receive the following: (a) one-time initial payment from the KSO partners; (b) guaranteed minimum monthly payments or Minimum TELKOM Revenues (“MTR”); and (c) additional monthly revenue-sharing payments or Distributable TELKOM Revenues (“DTR”) from the revenues of the KSO Unit after payments of MTR and certain operating expenses. The KSO partners were granted licenses to provide fixed line services in the respective regions.

      Following the Indonesian economic crisis that began in mid-1997, certain KSO partners experienced difficulties in fulfilling their obligations to TELKOM. In order to assist the KSO partners in meeting their obligations and to maintain the continuity of the KSO Agreements, all of the KSO partners entered into a

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Memorandum of Understanding with TELKOM on June 5, 1998 which reduced the minimum line construction obligations of the KSO partners, decreased TELKOM’s share of KSO revenues for 1998 and 1999 and cancelled TELKOM’s option to purchase the assets of the KSO before the end of the KSO period. Beginning January 1, 2000, the parties reverted to the terms of the original KSO agreements with respect to MTR and DTR payments. Due to the severity of the crisis, these measures did not solve the significant difficulties faced by the KSO partners and TELKOM has in recent years acquired or entered into agreements to acquire control of its KSO partners in Regional Divisions I, III and VI, and amended the terms of the KSO Agreement with respect to Regional Divisions IV and VII to acquire control of the KSO IV and KSO VII operations.

      TELKOM consolidated the revenues from Regional Division I (Sumatra), Regional Division VI (Kalimantan) and Regional Division III (West Java and Banten) following their acquisitions in 2001, 2002 and 2003, respectively. TELKOM’s portion of KSO revenues for the last three years (2004 — 2006) are indicated in the following table:

		2004				2005				2006
KSO Division		MTR		DTR		MTR		DTR		MTR		DTR
		(Rp. in billion)				(Rp. in billion)				(Rp. in billion)
Division IV (Central Java)(1)			35.2		15.7		—		—		—		—
Division VII (Eastern Indonesia)(2)			260.8		333.8		268.6		318.6		207.5		274.6
	Total		296.0		349.5		268.6		318.6		207.5		274.6

(1)

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 (Central Java). See Item 10. “Additional Information — C. Material Contracts — PT Mitra Global Telekomunikasi Indonesia (MGTI)” As a result of the amended and restated KSO agreement, TELKOM acquired Regional Division IV. TELKOM consolidated Rp.1,398.0 billion, Rp.1,653.2 billion and Rp.1,662.4 billion of operating revenues from Regional Division IV (Central Java) from February 1, 2004 through December 31, 2004 and in 2005 and 2006, respectively. For 2004, MTR and DTR for Regional Division IV represented MTR and DTR generated by Regional Division IV in January 2004.

(2)

On October 19, 2006, TELKOM and PT Bukaka Singtel International (BSI) entered into an agreement to amend and restate the KSO Agreement with respect to Regional Division VII (Eastern Indonesia). See Item 10. “Additional Information — C. Material Contracts — PT Bukaka Singtel International (BSI).” As a result of the amended and restated KSO agreement, TELKOM acquired Regional Division VII. TELKOM consolidated Rp.796.5 billion of operating revenues from Regional Division VII (Eastern Indonesia) from October 1, 2006 through December 31, 2006. For 2006, MTR and DTR for Regional Division VII represent MTR and DTR generated by Regional Division VII in January 1, 2006 through September 30, 2006.

     The following describes the developments in recent years in which TELKOM acquired or entered into agreements to acquire control of its KSO partners in Regional Divisions I, III and VI, and amended the terms of the KSO Agreements with respect to Regional Divisions IV and VII to acquire control of the operations of KSO IV and KSO VII.

      On April 19, 2002, TELKOM entered into a Conditional Sale and Purchase Agreement to acquire 100% of the issued and paid up share capital of its KSO partner in Regional Division I, Pramindo. Under the terms of the agreement, TELKOM agreed to acquire the shares of Pramindo in three tranches: in August 2002 (30%), September 2003 (15%) and December 2004 (55%). TELKOM has provided US$384.4 million in its accounts as the aggregate consideration for this transaction. Of the US$384.4 million, TELKOM made an initial payment of US$9.3 million (Rp.82 billion) in August 2002 and issued promissory notes (series I and II) dated August 2002 for the remaining amount. The agreement granted the selling shareholders a number of protective rights and was conditional upon TELKOM meeting its payment obligations under the promissory notes. The series I promissory notes had a face value of approximately US$372.2 million, while the aggregate amount of the series II promissory notes was estimated to be approximately US$2.9 million. The promissory notes were payable in ten unequal quarterly installments through December 2004 which were funded by monthly amounts transferred by TELKOM to an escrow account. Under the agreement, TELKOM also provided a loan of US$86 million (Rp.765 billion) to Pramindo which was used to repay loans from the IFC, one of the selling shareholders. TELKOM also made an additional payment of Rp.250 billion in respect of a working capital reimbursement to the selling shareholders. TELKOM obtained control of Pramindo as of the

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closing in August 2002. On January 28, 2004, TELKOM signed a short-term loan agreement with ABN AMRO Bank N.V. Jakarta in the amount of approximately US$130 million and on March 15, 2004 TELKOM used the loan proceeds to repurchase the outstanding promissory notes that were due on June 15, 2004, September 15, 2004 and December 15, 2004. This allowed TELKOM to accelerate the purchase of the remaining 55% of Pramindo that it did not yet own. As of the date of this Annual Report, TELKOM beneficially owns 100% of Pramindo.

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

      On January 20, 2004, TELKOM and MGTI entered into an agreement to amend and restate the KSO Agreement with respect to Regional Division IV. Under the amended and restated KSO agreement, the rights to operate fixed-line telecommunication services in KSO IV region are transferred to TELKOM and KSO IV is operated under the management, supervision, control and responsibility of TELKOM. In addition, for the remaining KSO period, TELKOM is entitled at its sole discretion and expense to construct new telecommunications facilities in Regional Division IV. MGTI receives fixed monthly payments, while TELKOM is entitled to the balance of the KSO revenues after the monthly amounts due to MGTI and operating expenses. If the KSO IV unit is unable to or does not for any reason pay MGTI the fixed monthly payments due to it, TELKOM is obligated to make up any deficiency. At the end of the KSO period (December 31, 2010), all rights, title and interest of MGTI in existing property, plant and equipment (including new additional installations) and inventories shall be transferred to TELKOM at no cost. As a result of the amended and restated KSO agreement, TELKOM obtained the legal right to control financial and operating decisions of Regional Division IV for a purchase price of US$390.7 million, or Rp.3,285 billion, which represents the present value of the fixed monthly payments (totaling US$517.1 million) to be paid by TELKOM to MGTI from 2004 through 2010 plus direct cost of the business combination. TELKOM has accounted for this transaction as a business combination using the purchase method of accounting in 2004.

      On May 17, 2001, TELKOM acquired 90.32% of the issued and outstanding shares of its KSO partner for Regional Division VI, Dayamitra, and purchased a call option and granted a put option with respect to the 9.68% remaining shares of Dayamitra, for an aggregate consideration of approximately US$130.8 million (including a US$8.9 million post-closing working capital adjustment to the purchase price, and excluding consultants’ fees of approximately US$3.3 million, which was capitalized as part of the acquisition cost) which was to be paid in installments. TELKOM paid an initial amount of US$18.3 million on May 17, 2001, the US$8.9 million post-closing working capital adjustment to the purchase price on August 10, 2001 and the balance of US$103.6 million in eight quarterly installments of approximately US$12.9 million between August 17, 2001 and May 17, 2003. On December 14, 2004, TELKOM exercised its call option to acquire the remaining 9.68% of the shares of Dayamitra with a strike price of US$16.2 million. The purchase price for 9.68% shares of Dayamitra was US$22.1 million (Rp.203.0 billion), which represents the present value of the

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option strike price of US$16.2 million to be paid to an escrow account from December 26, 2004 through March 26, 2006, plus the option purchase price of US$6.3 million and payment for Dayamitra’s adjusted working capital of US$1.0 million.

      On June 11, 2002, TELKOM and its KSO partner for Regional Division VII, PT Bukaka Singtel (BSI) International (“Bukaka Singtel (BSI)”), entered into a Memorandum of Understanding pursuant to which they agreed to cooperate in providing infrastructure for fixed wireless access using CDMA 2000 1x in KSO VII region. On January 14, 2003, TELKOM and Bukaka Singtel (BSI) entered into a Co-Operation Agreement on Fixed Wireless CDMA Facilities Construction in KSO Regional Division VII (the “Co-Operation Agreement”) that implemented the terms of the Memorandum of Understanding. Under the terms of the Co-Operation Agreement, TELKOM, through its Fixed Wireless Division, will invest US$30.2 million and Rp.28.4 billion for the construction of fixed wireless CDMA facilities for 146,700 line units in Denpasar, Makasar, Manado, Kupang and Mataram, which facilities will be managed, operated and maintained by Bukaka Singtel (BSI). The new facilities were completed in March 2006, with TELKOM and Bukaka Singtel (BSI) sharing the revenues generated by these new facilities. See Item 10. “Additional Information — C. Material Contracts.”

      On October 19, 2006, TELKOM announced that it had entered into an agreement with PT Bukaka Singtel International (BSI), TELKOM’s KSO partner for Regional Division VII Eastern Indonesia, to amend and restate the KSO VII Agreement. Under the amended and restated KSO VII Agreement, the rights to operate telecommunication services in KSO VII region were transferred to TELKOM with KSO VII being operated under the sole management, supervision, control and responsibility of TELKOM. For the remaining KSO period, TELKOM is entitled at its sole discretion and expense to construct new telecommunications facilities in Regional Division VII. PT Bukaka Singtel International (BSI) will receive fixed monthly payments, while TELKOM is entitled to the balance of the KSO revenues after the monthly amounts due to PT Bukaka Singtel International (BSI) and operating expenses. At the end of the KSO period on December 31, 2010, all rights, title and interest of PT Bukaka Singtel International (BSI) in existing property, plant and equipment (including new additional installations) and inventories of KSO VII shall be transferred to TELKOM without requiring any further action by any party, upon payment by TELKOM to PT Bukaka Singtel International (BSI) of Rp.1,000. As a result of the amended and restated KSO VII Agreement, TELKOM obtained the legal right to control financial and operating decisions of Regional Division VII, and TELKOM must pay to PT Bukaka Singtel International (BSI) a fixed monthly payment of Rp.55.64 billion from October 2006 to June 2007, and Rp.44.25 billion from July 2007 to December 2010. TELKOM has accounted for this transaction as a business combination using the purchase method of accounting in 2006.

      TELKOM consolidated Dayamitra in 2001, Pramindo in 2002 and AriaWest in 2003, upon acquisition of a majority ownership interest or control in those KSO partners. In addition, under the amended and restated KSO Agreement with respect to Regional Division IV entered into on January 20, 2004, TELKOM consolidated the operating results of KSO IV from February 1, 2004, being the nearest convenient balance date. On October 19, 2006, TELKOM amended the KSO VII agreement and as of that date, obtained operational control over KSO VII. TELKOM consolidated the operating results of KSO VII from October 1, 2006, being the nearest convenient balance date.

Interconnection Services

      TELKOM receives revenues from other telecommunications operators providing fixed line, cellular, international long-distance and other services that interconnect with TELKOM’s network. In 2006, revenues from interconnection services contributed Rp.8,681.5 billion (US$964.6 million), or 16.9% of total operating revenues.

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

35

merger of Indosat, Indosat Multi Media Mobile (“IM3”) and Satelindo in 2003, Indosat assumed the obligations of Satelindo and IM3 under their respective interconnection agreements with TELKOM.

      In 2006, as a result of new regulations regarding DLD and IDD services, TELKOM entered into an agreement with Indosat governing DLD interconnection fees. TELKOM also entered into a series of agreements governing IDD interconnection fees with all network operators, including Indosat. In December 2006, as a result of the implementation of the cost-based interconnection scheme, which was promulgated on February 8, 2006, TELKOM amended all of its interconnection agreements with other domestic network operators to cover the cost-based interconnection scheme. These amendments became effective on January 1, 2007. For further information on the interconnection scheme, see “— Regulations  — Interconnection” below; and Item 3. “Key Information” — D. Risk Factors — Risks relating to TELKOM and its subsidiaries — TELKOM operates in a legal and regulatory environment that is undergoing significant reforms and such reforms may adversely affect TELKOM’s business.”

      TELKOM’s interconnection traffic volumes are set forth in the following table for the periods indicated:

		Year Ended December 31,
		2002		2003		2004		2005		2006
		(millions of minutes)
Mobile Cellular Interconnection(1)
	Incoming paid minutes		2,830.9		3,463.7		4,235.1		4,863.6		5,162.2
	Outgoing paid minutes		3,854.5		4,872.1		6,448.0		7,514.9		7,704.2
Fixed Line Interconnection(2)
	Incoming paid minutes		128.4		130.1		136.7		612.3		864.9
	Outgoing paid minutes		39.6		30.9		51.1		493.5		965.2
Satellite Phone Interconnection
	Incoming paid minutes		12.6		16.1		14.7		10.7		9.3
	Outgoing paid minutes		5.6		7.5		8.2		6.5		4.5
International Interconnection(3)
	Incoming paid minutes		303.3		444.1		427.6		596.4		861.9
	Outgoing paid minutes		200.3		149.7		158.1		185.5		177.6
Total
Total Incoming paid minutes			3,275.2		4,054.0		4,814.1		6,083.0		6,898.3
Outgoing paid minutes			4,100.0		5,060.2		6,665.4		8,200.4		8,851.5

(1)	Includes interconnection with Telkomsel.
(2)	Fixed line interconnection minutes reflect interconnection with the networks of PT Bakrie Telecom (formerly PT Radio Telepon Indonesia or Ratelindo), PT Batam Bintan Telekomunikasi, and starting 2004, Indosat.
(3)	International interconnection minutes are derived from interconnection with Indosat’s international network and, starting 2004, incoming and outgoing calls using TIC-007 as well.

     TELKOM’s paid minutes from Telkomsel for 2002 — 2006 are set forth in the following table.

	Year Ended December 31,
	2002		2003		2004		2005		2006
	(millions of minutes)
Incoming paid minutes		1,672.6		2,011.8		2,354.1		2,709.1		2,914
Outgoing paid minutes		2,001.6		2,610.3		3,422.1		4,251.5		4,546

      On June 7, 2004, TELKOM began offering IDD fixed line services under the brand name “TIC-007.” Revenues from IDD services are reported as international interconnection revenues. In order to facilitate interconnection of international calls, TELKOM entered into international telecommunications service agreements with telecommunications operators in several countries. In addition, as TELKOM did not have agreements with telecommunication operators in each of its IDD destinations, TELKOM entered into agreements with certain major carriers such as Singapore Telecommunications Limited (“SingTel”),

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Telekom Malaysia Berhad (“Telekom Malaysia”), MCI Inc. (“MCI”) and others for such operators to act as hubs to route international calls to their destinations.

Network Services

      TELKOM provides satellite transponder leasing, satellite broadcasting, VSAT, audio distribution, satellite-based leased lines and terrestrial-based leased lines. In 2006, revenues from network services contributed Rp.718.7 billion (US$79.9 million), or 1.4% of total operating revenues. TELKOM’s customers for network services include businesses and other telecommunications operators. Customers may enter into agreements that can be for services as brief as a few minutes in the case of broadcasts or long-term agreements for services over the course of one to five years.

Data and Internet Services

      TELKOM provides SMS for fixed line, fixed wireless and cellular phones, dial-up and broadband Internet access, data network services (including VPN frame relay and IP VPN), VoIP services for international calls, ISDN lines and other multimedia services. In 2006, revenues from data and Internet services contributed Rp.9,065.2 billion (US$1,007.2 million), or 17.7% of total operating revenues.

      In October 2004, TELKOM introduced a premium prepaid dial-up Internet access service. In 2006, an average of approximately 680,000 telephone subscribers accessed its TELKOMNet Instan, representing an increase of 36% over the prior year. Subscribers utilized a total of 3.7 billion minutes of TELKOMNet Instan, representing an increase of 32% over the prior year. As of December 31, 2006, TELKOM also had approximately 93,200 broadband Internet access subscribers, representing an increase of 204% over the prior year. As of December 31, 2006, TELKOMNet Instan was available in major cities in Indonesia.

      In September 2002, TELKOM began offering a premium VoIP international calling service under the name “TELKOMGlobal-017” (which changed to “TELKOMGlobal-01017” as of December 31, 2006), and a standard VoIP international calling service under the name “TELKOMSave” and TELKOM is currently providing both services in several cities in Indonesia, including Jakarta, Surabaya, Bandung, Medan and Denpasar. As of December 31, 2006, TELKOM’s VoIP services allowed subscribers access to 633 destination points in 236 countries through agreements which TELKOM has entered into with eight global carriers (including two global carriers for outgoing only, three global carriers for incoming only and three global carriers for incoming and outgoing) and wholesalers that allow TELKOM to access their international networks. VoIP is a low-cost phone service for international calls that is accessed by dialing a special international long-distance prefix. On March 11, 2004, the MoC issued Decree No. 28/2004 and Decree No. 31/2004, which stated that VoIP access codes must be changed from three digits to five digits (“010XY”), and on April 1, 2005, the MoCI announced that the five digit VoIP access codes must be implemented by all operators by December 31, 2005. On May 17, 2005, MoCI Regulation No. 7/2005 was ratified, which changes the VoIP access codes to (i) “010XY” for single stage method; and (ii) “170XY” for double stage method, respectively, effective January 1, 2006. The single stage method refers to direct dialing services without subscription validation. The double stage method refers to direct dialing services whereby subscription validation is required before dialing the destination number. In 2006, the access codes for TELKOM’s VoIP service were “017” (which changed to “01017” as of December 31, 2006) for single stage and “17017” (prepaid) and “17071” (postpaid) for double stage.

      The Company plans to increase the number of access points in Indonesia and abroad from which its customers are able to access its VoIP services. In 2006, there was a total of 275.9 million outgoing (using TELKOMSave or TELKOMGlobal 017) and incoming (from TELKOM’s global partners) VoIP minutes called, representing a decrease in VoIP minutes called of 24.7 million, or 8.2%, over the prior year. Incoming VoIP minutes called increased by 7.7% from 215.6 million minutes in 2005 to 232.3 million minutes in 2006. However, outgoing VoIP minutes called decreased by 48.6% from 85.0 million minutes in 2005 to 43.7 million minutes in 2006. VoIP revenues (consisting of incoming and outgoing) decreased by Rp.14.7 billion, or 5.0%, in 2006, principally due to a 22.7% decrease in traffic of outgoing international VoIP calls, primarily resulting

37

from increased price competition from TELKOM’s competitors and focused marketing efforts to promote TELKOM’s IDD service (TIC-007), an alternative to VoIP.

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

Item	TELKOMGlobal 017/01017	TELKOMSave
Tariff	Discount up to 40% of normal IDD rate	Discount up to 60% of normal IDD rate
Dial	One stage	Two stage
Quality/ Technology	Premium VoIP	Standard VoIP

Revenue-Sharing Arrangements (PBHs)

      TELKOM has entered into separate agreements with several investors under revenue-sharing arrangements to develop fixed lines, public card-phone booths (including their maintenance) and related supporting telecommunications facilities. In 2006, revenues from revenue-sharing arrangements amounted to Rp.415.5 billion (US$46.2 million), or 0.8% of TELKOM’s total operating revenues.

      As of December 31, 2006, the Company had 90 revenue-sharing arrangements with 67 partners. The revenue-sharing arrangements were located mostly in Palembang, Pekanbaru, Jakarta, East Java, Kalimantan, Makasar, Parepare, Manado, Denpasar, Mataram and Kupang with concession periods ranging from 24 to 176 months.

      Under the revenue-sharing arrangements, the investors finance the costs incurred in constructing telecommunications facilities. Upon completion of the construction, the Company manages and operates the facilities and generally bears the cost of repairs and maintenance during the revenue-sharing period. The investors legally retain the rights to the property, plant and equipment constructed by them during the revenue-sharing periods. At the end of each revenue-sharing period, the investors transfer the ownership of the facilities to the Company.

      Generally, the revenues earned from the customers in the form of line installation charges are allocated in full to the investors. The revenues from outgoing telephone pulses and monthly subscription charges are shared between the investors and the Company based on certain agreed ratios.

      Under revenue-sharing arrangements entered into before October 2002, TELKOM guaranteed a specific internal rate of return to the investors. However, since October 2002, TELKOM no longer guarantees an internal rate of return for new revenue sharing arrangements it enters into. In February 2004, TELKOM began implementing its PPLT program in the Regional Divisions that it controls. Pursuant to the PPLT program, division heads are allowed to enter into agreements for the development of telecommunications facilities with partners within each regional division. In deciding what agreements to enter into, division heads are required to consider certain business factors and act within specified parameters. Priority is also given to the development of CDMA facilities.

      As of December 31, 2006, TELKOM has entered into 25 PPLTs for fixed wireless services and 42 PPLTs for fixed wireline services.

Other Services

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

•  telephone directory services, which TELKOM provides through its majority-owned subsidiary, Infomedia;

•  cable and pay television and related services (42,351 subscribers as of December 31, 2006), which it provides through its majority-owned subsidiary, Indonusa; and

•  telex and telegram services.

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      In 2006, revenues from other services amounted to Rp.322.1 billion (US$35.8 million), or 0.6% of TELKOM’s total operating revenues.

Network Infrastructure

Fixed line Network and Backbone

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

      TELKOM’s total number of fixed wireline lines in service in all divisions has remained at approximately 8.7 million as of December 31, 2005 and December 31, 2006.

      The following table sets forth statistics relating to TELKOM’s fixed wireline network since 2002:

		As of or for the Year Ended December 31,
Operating Statistics		2002(1)		2003(2)		2004(3)		2005(3)		2006(4)
Exchange capacity
	Non-KSO Divisions		6,643,688		7,810,766		8,786,887		9,138,167		10,439,658
	KSO Divisions(9)		2,459,950		1,608,455		954,465		1,045,366		—
	Total		9,103,638		9,419,221		9,741,352		10,183,533		10,439,658
Installed lines
	Non-KSO Divisions		6,157,149		7,235,035		8,264,999		8,497,255		9,634,910
	KSO Divisions(9)		2,234,892		1,548,070		931,999		998,901		—
	Total		8,392,041		8,783,105		9,196,998		9,496,156		9,634,910
Lines in service(5)
	Non-KSO Divisions		5,701,900		6,792,300		7,714,977		7,787,693		8,709,211
	KSO Divisions(9)		2,039,608		1,422,028		844,373		898,438		—
	Total		7,741,508		8,214,328		8,559,350		8,686,131		8,709,211
Subscriber lines
	Non-KSO Divisions		5,386,430		6,441,973		7,323,304		7,413,769		8,328,179
	KSO Divisions(9)		1,952,226		1,365,114		816,208		869,631		—
	Total		7,338,656		7,807,087		8,139,512		8,283,400		8,328,179
Public telephones
	Non-KSO Divisions		315,470		350,327		391,673		373,924		381,032
	KSO Divisions(9)		87,382		56,914		28,165		28,807		—
	Total		402,852		407,241		419,838		402,731		381,032
Leased lines in service
	Non-KSO Divisions(6)		8,193		8,213		8,887		11,333		7,476
	KSO Divisions(9)		1,879		1,162		382		575		—
	Total		10,072		9,375		9,269		11,908		7,476

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		As of or for the Year Ended December 31,
Operating Statistics		2002(1)		2003(2)		2004(3)		2005(3)		2006(4)
Fixed wireline subscriber pulse production(7) (millions)
	Non-KSO Divisions		44,326		50,848		58,314		57,926		64,012
	KSO Divisions		16,788		11,413		6,838		9,743		—
	Total		61,114		62,261		65,152		67,669		64,012
Call completion rate(%)
Local
	Non-KSO Divisions		75.8		76.8		78.6		80.4		77.1
	KSO Divisions(9)		75.5		78.4		77.9		80.8		—
	Combined		75.6		77.3		78.5		80.4		77.1
Domestic long-distance
	Non-KSO Divisions		65.5		67.5		70.9		74.0		72.1
	KSO Divisions(9)		68.1		74.7		74.9		75.8		—
	Combined		66.6		69.5		71.5		74.3		72.1
Fault rate(8)
	Non-KSO Divisions		4.6		4.4		3.4		3.8		3.6
	KSO Divisions(9)		8.9		3.5		1.9		2.0		—
	Combined		5.2		4.1		3.2		3.6		3.6

(1)	For 2002, Non-KSO Divisions refer to Divisions I, II, V and VI, while KSO Divisions refer to Divisions III, IV and VII.
(2)	For 2003, Non-KSO Divisions refer to Divisions I, II, III, V and VI, while KSO Divisions refer to Divisions IV and VII.
(3)	For 2004 and 2005, Non-KSO Divisions refer to Divisions I, II, III, IV, V and VI, while KSO Divisions refer to Division VII.
(4)	For 2006, Non-KSO Divisions refer to Divisions I, II, III, IV, V, VI and VII.
(5)	Lines in service are comprised of subscriber lines and public telephone lines and include the following number of lines in service operated by TELKOM pursuant to revenue-sharing arrangements. Such lines in service under revenue-sharing arrangements amounted to 443,316, 511,108, 396,926, 201,485 and 166,142 as of December 31, 2002, 2003, 2004, 2005 and 2006, respectively.
(6)	Excludes leased lines for TELKOM’s network and multimedia businesses.
(7)	Consists of pulses generated from local and domestic long-distance calls, excluding calls made from pay phones and mobile cellular phones.
(8)	Faults per 100 connected lines per month.
(9)	Divisions classified as KSO Divisions differ year by year due to acquisitions in certain years. See footnotes (1) to (4) above.

     The following table sets forth certain information relating to TELKOM’s fixed line network in each of its operating divisions as of December 31, 2006:

					Division III
					(West Java								Division VII
	Division I		Division II		and		Division IV		Division V		Division VI		(East
	(Sumatra)		(Jakarta)		Banten)		(Central Java)		(East Java)		(Kalimantan)		Indonesia)		Total
Local exchange capacity		2,816,477		5,137,211		1,868,454		1,346,527		3,687,753		826,718		1,412,409		17,095,549
Total lines in service		1,875,708		3,829,992		1,087,786		1,268,933		2,824,922		656,969		1,340,754		12,885,064
Capacity utilization(%)(1)		66.60		74.55		58.22		94.24		76.60		79.47		94.93		75.37
Installed lines(2)		2,593,002		5,236,124		1,876,421		1,578,092		3,511,639		973,106		1,564,565		17,332,949
Utilization rate(%)(1)		72.34		73.15		57.97		80.41		80.44		67.51		85.70		74.34
Employees(3)		3,059		5,552		1,585		1,709		2,154		765		3,129		17,953
Population (millions)(4)		55.97		31.18		27.34		47.61		39.47		14.76		34.23		250.56
TELKOM line penetration(%)(5)		3.35		12.28		3.98		2.67		7.16		4.45		3.92		5.14

(1)	Capacity utilization (lines in service/exchange capacity) and utilization rate (lines in service/installed lines) consist of fixed wireline and fixed wireless. The rate can exceed 100% since the exchange capacity in fixed wireless (MSC and BTS) is calculated by assuming traffic allocation per subscriber of 60 mE (mili Erlang).
(2)	Total includes 113,048 fixed wireless line units established under RSA scheme.

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

     Fixed Wireless Network. TELKOM’s fixed wireless network comprises a hierarchy of exchanges originating from MSC (Mobile Switching Center) and connecting with each other through trunk exchanges. Each MSC is connected to BSS (Base Station Sub System) that comprises BSC (Base Station Controller) and BTS (Base Transceiver Station), which connect equipment at a customer’s premises (handheld device and fixed wireless terminal) to TELKOM’s fixed wireless network.

      TELKOM’s total number of fixed wireless lines in service increased from approximately 4.1 million as of December 31, 2005 to approximately 4.2 million as of December 31, 2006.

      The following table sets forth statistics relating to TELKOM’s fixed wireless network since 2002:

		As of or for the Year Ended December 31,
		2002(1)		2003(2)		2004(3)		2005(3)		2006(4)
Exchange capacity (MSC)(8)
	Non-KSO Divisions		—		666,050		1,952,644		2,687,348		6,655,891
	KSO Divisions(7)		—		61,550		179,700		329,708		—
	Total		—		727,600		2,132,344		3,017,056		6,655,891
Installed lines (BTS)(8)
	Non-KSO Divisions		8,621		659,497		2,291,212		3,332,893		7,698,039
	KSO Divisions(7)		—		116,150		179,717		340,568		—
	Total		8,621		775,647		2,470,929		3,673,461		7,698,039
Lines in service(5)
	Non-KSO Divisions		8,527		237,749		1,317,673		3,750,821		4,175,853
	KSO Divisions(7)		—		27,038		111,695		311,046		—
	Total		8,527		264,787		1,429,368		4,061,867		4,175,853
Subscriber lines
	Non-KSO Divisions		8,510		237,200		1,313,978		3,739,095		4,163,284
	KSO Divisions(7)		—		27,038		111,695		311,046		—
	Total		8,510		264,238		1,425,673		4,050,141		4,163,284
Public telephones
	Non-KSO Divisions		17		549		3,695		11,726		12,569
	KSO Divisions(7)		—		—		—		—		—
	Total		17		549		3,695		11,726		12,569
Fixed wireless subscriber pulse production/minutes production(6)(9) (millions)
	Non-KSO Divisions		14		214		989		3,254		5,512
	KSO Divisions(7)		—		4		125		299		—
	Total		14		218		1,114		3,553		5,512

(1)	For 2002, Non-KSO Divisions refer to Divisions I, II, V and VI, while KSO Divisions refer to Divisions III, IV and VII.
(2)	For 2003, Non-KSO Divisions refer to Divisions I, II, III, V and VI, while KSO Divisions refer to Divisions IV and VII.
(3)	For 2004 and 2005, Non-KSO Divisions refer to Divisions I, II, III, IV, V and VI, while KSO Divisions refer to Division VII.
(4)	For 2006, Non-KSO Divisions refer to Divisions I, II, III, IV, V, VI and VII.

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

     TELKOM began offering a limited mobility CDMA-based fixed wireless phone service under the brand name “TELKOMFlexi” in December 2002. For more information on TELKOMFlexi, see “— General — Fixed Wireless Services” above. As of December 31, 2006, TELKOM had 4,175,853 TELKOMFlexi lines in service.

      Backbone. TELKOM’s backbone telecommunications network consists of transmission, trunk switches and core routers connecting several network access nodes. The transmission links between nodes and switching facilities include microwave, submarine cable, satellite, optical fiber and other transmission technology.

      The following table sets forth certain information on the transmission capacity of TELKOM’s backbone transmission facilities as of December 31, 2006.

	Capacity		Percentage
	(number of transmission		of total
	medium circuits)		capacity
Optical fiber cable		21,272		76.01	%
Microwave		4,472		15.98	%
Submarine cable		1,763		6.30	%
Satellite		480		1.71	%
Total		27,987		100.00	%

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

Mobile Cellular Network

      Telkomsel. Since its incorporation in 1995, Telkomsel has been providing GSM cellular services throughout Indonesia through its own network. Telkomsel has the largest network coverage of any of the cellular operators in Indonesia, providing coverage to over 90% of Indonesia’s population, including all counties in Indonesia and all sub-counties in Java, Bali and Sumatra. Telkomsel currently operates a nationwide GSM/ DCS cellular network using a total of 30 MHz of radio frequency bandwidth. This consists of 7.5 MHz in the 900 MHz band and 22.5 MHz in the 1800 MHz band. Both networks operate as a single integrated dual band network. Telkomsel has rolled out GPRS services nationwide since October 2002. In February 2004, Telkomsel introduced an enhanced data transmission technology known as “EDGE,” or Enhanced Data rates for GSM Evolution, which offers enhanced data transmission speeds for handsets equipped to handle EDGE. As of December 31, 2006, EDGE was available in Jakarta, Surabaya, Batam, Semarang and Bali. In September 2006, Telkomsel launched its 3G services in Jakarta for both postpaid and prepaid customers with 5 MHz bandwidth at 2 GHz frequency.

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

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and towers. As of December 31, 2006, Telkomsel’s digital network had 16,057 BTSs, 82 cellular switching centers, 386 base station controllers and 138,442 transmitting and receiving exchanges, with an overall network capacity capable of supporting 38.8 million subscribers.

      For each of the years ended December 31, 2004, 2005 and 2006, Telkomsel made capital expenditures for the development and expansion of its cellular network of approximately Rp.4,982.7 billion, Rp.10,085.7 billion and Rp. 16,496.0 billion (US$1,832.9 million), respectively.

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

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

Data and Internet Network

      TELKOM began operating data network services in 1997 and has since continued to develop and expand its network progressively. As of December 31, 2006, TELKOM’s IP-based network covered 142 locations with 217 router nodes nationwide. TELKOM will continue to improve the speed and quality of its IP-based network. The IP-based network serves as the transport network is used for high quality VPNs, VoIP, and dial-up and broadband Internet services. TELKOM has remote access servers in 96 locations with 132 nodes nationwide used for its “TELKOMNet Instan” dial-up Internet services and corporate dial-up Internet services.

      Since 2004, TELKOM has provided fixed-line based broadband access services under the brand name “Speedy” by using DSL technology. As of December 31, 2006, there were over 93,200 subscribers in the areas where such services were available, such as Jakarta, Surabaya and Makasar. TELKOM expects the subscriber base of Speedy to grow significantly over the next 12 months. As of December 31, 2006, Speedy is available in all of Divisions I to VII. Subscribers of Speedy typically are residential dial-up users with a monthly usage of more than Rp.250,000, small office/home office (“SOHO”) companies, travel agents, Internet cafes and schools.

International Network

      TELKOM received its commercial license from the Government to provide IDD services on May 13, 2004 and began offering IDD fixed line services under the brand name “TIC-007” on June 7, 2004. According to an internal study, TELKOM’s market share in terms of call volume (incoming and outgoing) in this market was 50.8% in 2006, an increase of 5.1% from 45.7% in 2005. TELKOM’s market share in 2006 in terms of incoming IDD call volume was 50.3%, an increase of 6.1% from 44.2% in 2005. In terms of outgoing IDD call volume, TELKOM’s market share was 53.9% in 2006, an increase of 1.5% from 52.4% in 2005. To route outgoing IDD and incoming international calls, TELKOM has three international gateways, in Batam, Jakarta and Surabaya. At present, TELKOM has no intention to develop any new gateways. According to a study conducted by TELKOM in September 2005, three gateways are sufficient to accommodate TELKOM’s international call volume. Nonetheless, TELKOM plans to improve the capacities of each gateway and the bandwidth of its international links.

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      To connect its domestic network to the global network, TELKOM primarily relies on the following microwave, international cable and satellite links: (i) microwave link between Batam and Johor (Malaysia); (ii) TIS (Thailand-Indonesia-Singapore) cable system, which is an international submarine fiber optic cable system deployed by TELKOM, SingTel and CAT Telecom Public Company Limited and completed in November 2003, which connects Indonesia (Batam), Singapore (Changi) and Thailand (Songkhla) and was extended to Hong Kong in July 2004; (iii) Intelsat satellites, which TELKOM completed developing the ground segment to link its network to the Intelsat satellites in December 2004; and (iv) Dumai Melaka cable system, which is an international submarine fiber optic cable system deployed by TELKOM and Telekom Malaysia to connect Dumai (Indonesia) to Melaka (Malaysia) and completed in December 2004. These multiple international links provide flexibility for TELKOM to interconnect with foreign operators. In 2006, TELKOM completed a comprehensive upgrade of its microwave, international cable and satellite links.

      In order to facilitate interconnection of international calls, TELKOM has entered into international telecommunications service agreements with telecommunications operators in several countries. In addition, as TELKOM does not have agreements with telecommunication operators in each of its IDD destinations, TELKOM has entered into agreements with SingTel, Telekom Malaysia, MCI and other entities for such operators to act as hubs to route international calls to their destinations. As of December 31, 2006, TELKOM has entered into international telecommunications service agreements with 21 international operators in 16 countries, compared to 18 international operators in 13 countries as of December 31, 2005. TELKOM plans to enter into additional international telecommunications service agreements with telecommunications operators for direct interconnection, particularly operators in the top 20 destinations for its outgoing IDD traffic.

Other Network Infrastructure

      As of December 31, 2006, the Company also operated the TELKOM-1 and TELKOM-2 satellites and 275 earth stations, including one satellite control system. TELKOM-1 has 36 transponders, including 12 extended C-band transponders and 24 standard C-band transponders and TELKOM-2 has 24 standard C-band transponders. TELKOM uses its satellites for the following purposes:

•  Network backbone transmission;

•  Rural telecommunications services;

•  Back-up transmission capacity for the national telecommunications network;

•  Satellite broadcasting, VSAT and multimedia services;

•  Satellite transponder capacity leasing;

•  Satellite-based lease line; and

•  Teleport (earth station satellite uplinking and downlinking services to and from other satellites).

Network Development

Fixed Line Network Development

     1. Fixed Wireline Network Development

      In 2004, TELKOM substantially completed the expansion of its Java fiber optic backbone. TELKOM entered into an agreement on June 10, 2005 with a consortium consisting of NEC Corporation and PT Siemens Indonesia to further develop its Java-Sumatra-Kalimantan network, which was completed in May 2006.

      TELKOM also had several network developments projects (both new and ongoing) as of December 31, 2006, which included the development of:

•  capacity expansion of the Surabaya — Ujung Pandang — Banjarmasin (SUB) submarine backbone infrastructure;

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•  the Jember — Denpasar submarine backbone;

•  the fiber optic regional junction in Bandung — Cirebon (West Java);

•  IP DSLAM project offering broadband access to all users in Indonesia;

•  capacity expansion of local exchange switches;

•  wireline access network in Divisions I to VI; and

•  expansion of the IP-based network.

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

•  continue to implement the deployment of additional line units;

•  continue to implement the next generation network by deployment and expansion of softswitch system, IP transport, broadband access and transmission network;

•  continue to improve the quality of its network through enhancements in its copper access network, ring system transmission network and redundancy system for all equipment, including battery and rectifier; and

•  continue network integration and quality improvement through the national operational support system.

     2. Fixed Wireless Network Development

      TELKOM continues to develop and expand its network infrastructure. TELKOM signed agreements with a consortium led by Samsung Electronics Co. Ltd. in December 2002, with a consortium led by Ericsson in December 2002, with Motorola, Inc. in March 2003, and with PT INTI in August 2003, for the development of a total of 1,656,300 base station subsystem lines and network and switching subsystem lines based on CDMA fixed wireless technology. These projects were to be completed by mid-2006 but were accelerated and completed in 2005 to satisfy increasing market demand. See Item 10. “Additional Information  — C. Material Contracts.” In 2006, TELKOM also completed the development of fixed wireless services in 44 locations, consisting of 40 locations in Jakarta, two locations in Sumatra and two locations in Sulawesi.

      In 2006, TELKOM entered into agreements with PT Samsung Telecommunication Indonesia for the procurement of CDMA 2000-1X Equipment & Services in Division V; a procurement and installation agreement with a Samsung Consortium for expansion of the NSS, BSS and PDN FWA CDMA System Project in Regional Division V (East Java); agreements with a Huawei Consortium for the fixed wireless access (“FWA”) CDMA expansion in Divisions I to IV; and an agreement with a ZTE Consortium for the FWA CDMA expansion in Division VI. For details on these agreements, see Item 10. “Additional Information — C. Material Contracts.”

     Mobile Cellular Network Development

      Since 2004, Telkomsel has extended its GSM coverage to cover all counties in Indonesia. It also continued to improve the quality of its coverage in Jakarta, Surabaya and other major cities through the addition of microcells and expansion of its fiber optic transmission backbone. In 2006, Telkomsel added, among other equipment, 6,162 BTSs (including 942 nodes for 3G services) and 58,530 transmitting and receiving exchanges, thereby expanding its cellular network to cover all the sub-counties in Sumatra. Telkomsel plans to continue to install additional BTSs to further expand its coverage to the sub-county level in Kalimantan, Sulawesi and East Indonesia, to expand its 3G network since it had launched in September 2006, to further expand its fiber optic transmission backbone for major cities in Java, to install additional microcells and to install additional transmitting and receiving exchanges, particularly in provincial areas, to further improve the quality of its coverage, upgrade its switching equipment to increase network capacity, and to expand its intelligent network used in connection with its prepaid products.

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Data Network Development

      In 2005, TELKOM continued to improve the quality of its data network by adding capacity and coverage. In 2005, TELKOM expanded its data network coverage in 15 cities. In 2006, TELKOM further expanded its IP/MPLS-based core infrastructure with additional multiservice router platforms. The new deployments consist of expansion of existing IP core and additional nodes in 10 cities, and connecting softswitch systems and legacy routers. TELKOM also developed additional host-to-host systems by installation of collecting agents in eight banks for a total of 36 banks, enabling customers to pay their bills (e.g., utilities, airline tickets and phone bills) using channel payment banks.

      In 2006, TELKOM also improved the quality and coverage of its broadband Internet access network by continuing to expand its DSL broadband access network nationwide. TELKOM continues to improve on its quality enhancement program for the broadband access network called the “JAWARA Broadband” program to modernize the broadband access networks of TELKOM and improve the quality of such access networks. In 2006, the program resulted in an increase in the number of broadband access networks supported by DSL technology by 41.7%.

TELKOM-2 Satellite

      TELKOM signed a US$73.1 million contract with Orbital Sciences Corporation to build the TELKOM-2 satellite based on Orbital’s STAR-2 platform, to replace TELKOM’s Palapa B-4 satellite, which was taken out of service in August 2005. The TELKOM-2 satellite has a capacity of 24 standard C-band transponders, with transponder specifications similar to those of the TELKOM-1 satellite. TELKOM-2 has a 15 year in-orbit life and is expected to provide increased coverage of the Asian region and the Indian subcontinent compared to Palapa B-4. TELKOM believes that the satellite will support TELKOM’s network for voice, video and data communications.

      On November 8, 2002, TELKOM signed a US$62.9 million agreement with Arianespace S.A., which covers the cost of launching TELKOM-2. TELKOM launched TELKOM-2 on November 17, 2005. TELKOM launched the TELKOM-2 satellite into service on December 20, 2005 following the completion of its final acceptance test. Traffic migration from TELKOM-1 to TELKOM-2 satellites was completed in early 2006.

Capital Expenditures

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

Business Strategy

      TELKOM’s objective is to become a leading full telecommunication services and network company in Indonesia providing a wide range of communications services. The Company’s vision is to become a leading “InfoCom” player in the region, with a mission to provide one-stop services with excellent quality and competitive prices to customers and to manage its business using best practices, utilizing competitive advantages and maximizing synergies.

      TELKOM believes that Indonesia’s telecommunications market remains underdeveloped with low penetration rates for both fixed lines and mobile cellular lines compared to other countries in Southeast Asia. TELKOM believes that the strong demand for telecommunications services has largely been responsible for the growth of its fixed line and wireless business in recent years and will continue to offer favorable growth opportunities in the future. TELKOM expects that fixed line and wireless services will continue to contribute the substantial majority of its operating revenues in the near term. It has developed broad strategies to retain its existing customers, to acquire new and lost customers and to further penetrate the market through customer relationship management (such as the setting up of its enterprise service division and account management teams), product leadership and diversification, competitive pricing and one-gate distribution channels.

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      The key elements of TELKOM’s strategy are:

Strengthening the Fixed Wireline and Fixed Wireless Business

      Indonesia has one of the lowest fixed line penetration rates in Southeast Asia. As of December 31, 2006, a majority of total lines in service were in the major metropolitan areas of Jakarta, Surabaya, Semarang, Bandung, Medan and Denpasar.

      TELKOM aims to strengthen its fixed wireline and fixed wireless business by:

•  increasing its fixed line penetration rate more quickly and with lower capital expenditure per line through the rapid roll-out of fixed wireless technology, new partnership agreements and pay as you grow schemes;

•  increasing the use of TELKOMFlexi and value added services;

•  strengthening its interconnection business by establishing a service center dedicated to telecommunications operators and other interconnection customers, opening more gateways to other telecommunications operators, offering more attractive pricing and providing enhanced billing services;

•  strengthening Plasa TELKOM as a point of sale for TELKOM’s services;

•  developing and expanding its IDD fixed line business, which TELKOM began offering to customers on June 7, 2004; and

•  enhancing fixed wireline access network to provide broadband capability.

Strengthening its Backbone Network

      In order to provide a better quality of service to its customers, TELKOM intends to continue to increase the capacity, coverage and quality of its backbone network by, among other things, using an optical network for high speed backbone transmission infrastructure such as its Java optical backbone, Trans Borneo and Trans Sulawesi, ring configuration in the Java-Sumatra-Kalimantan submarine backbone, JASUKA and the Surabaya-Ujung Pandang-Banjarmasin submarine backbone.

Maintaining Telkomsel’s Leading Position in the Industry

      The Company regards the cellular business as having the greatest opportunity for revenue growth. The Company provides its cellular services through Telkomsel, a market leader in the cellular business in Indonesia. Based on industry statistics, Telkomsel had an estimated market share as of December 31, 2006 of approximately 56% of the full-mobility cellular market, maintaining its position as the largest nationwide licensed GSM cellular operator in Indonesia and representing an increase from its estimated market share of 52% as of December 31, 2005. TELKOM intends to promote the further development of Telkomsel’s business by, among other things, offering bundling of and one-stop shopping for, TELKOM’s and Telkomsel’s products and services, and expanding Telkomsel’s network capacity to enable Telkomsel to meet the projected needs of its customer base through 2007. In order to focus on Telkomsel and GSM technology, TELKOM sold its interests in PT Telekomindo Selular Raya (“Telesera”), PT Metro Selular Nusantara (“Metrosel”) and PT Komunikasi Selular Indonesia (“Komselindo”) on August 8, 2003 and PT Mandara Selular Indonesia (“MSI”) on January 13, 2006.

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

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

•  taking advantage of commercial, operational and network synergies with TELKOM and sharing best-practices and know-how with SingTel Mobile;

•  continuous capacity and coverage expansion at pre-defined quality levels to handle subscriber growth;

•  maintaining or improving market share by continuously aligning the characteristics and features of Telkomsel’s service offerings to the evolving needs of its customer, enhancing its products and services portfolio (including its GPRS, EDGE and 3G services), expanding network capacity and improving service quality;

•  ensuring that Telkomsel has the IT infrastructure in place to fulfill its vision and mission, with special focus on areas such as billing, service delivery and customer service; and

•  achieving service levels at par with world class mobile service providers through its call center footprint and aggressive pursuit of service oriented goals.

Developing its Fixed Wireless Business

      TELKOM began offering a limited mobility CDMA-based fixed wireless phone service under the brand name “TELKOMFlexi” in December 2002. For more information on TELKOMFlexi, see “— Fixed Wireless Services” above. TELKOM plans to continue to expand its CDMA-based fixed wireless networks in all of its regional divisions by constructing CDMA-based fixed wireless networks. Compared to fixed wireline networks, CDMA-based networks are generally faster and easier to construct and provide customers with greater flexibility and mobility. TELKOM believes the deployment of a CDMA-based fixed wireless network and its TELKOMFlexi business will provide to TELKOM a competitive advantage in the face of liberalization and increased competition in the fixed line market.

Developing its Data and Internet Business

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

•  increased investment in TELKOM’s broadband infrastructure (such as DSL and satellite);

•  focusing on retaining and acquiring customers with high demand for data services by offering competitive pricing for high-speed data and Internet services (including value-added services) and full VPN IPs, and expanding TELKOM’s backbone and network access technology;

•  giving customers greater Internet access options, such as through wireless hotspot technology and the bundling of Internet access services with TELKOMFlexi and Telkomsel products;

•  developing and offering new value-added services and products, such as e-payment services for banks and other financial institutions and wireless data content for GPRS and MMS users;

•  expanding the international coverage of TELKOM’s data and Internet services by entering into agreements with additional global carriers and wholesalers; and

•  expanding the coverage and quality of its Internet Protocol backbone to increase data and Internet traffic capacity.

Reducing Cost of Capital

      TELKOM recognizes that the increasingly competitive Indonesian telecommunications market requires TELKOM to develop additional network capacity, improve operational efficiency and diversify its sources of financing. TELKOM’s internally generated cash flows and direct borrowing from banks and other lenders may

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not be sufficient to fund its aggressive plans to grow its business. As a result, since the end of 2002 TELKOM has sought to implement a “pay as you grow” scheme for its additional network capacity in order to:

•  share investment risks with its suppliers;

•  reduce its asset base and outsource non-core businesses; and

•  mitigate financing, commercial, operational, technical and capacity risks.

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

Increasing TELKOM and Telkomsel Synergy

      TELKOM seeks to increase its synergy with Telkomsel, and to promote the sharing of facilities and information, the combining of resources and increased coordination. These resources include network, marketing, infrastructure support (such as information technology, logistics, human resources development and procurement) as well as products and services (such as new product development, bundling/packaging of services and interconnection). Specific examples include:

• utilizing the group’s combined customer base to deliver each other’s relevant products (such as the offering of TELKOM’s 007 IDD service to Telkomsel’s customers with specific benefits and a joint promotion campaign);

• joint promotion and marketing activities on a case-by-case basis whenever this is expected to generate additional benefits to the group;

• utilizing available distribution channels to improve services and selling activities to customers (such as joint customer services officers (“CSO”)); and

• sharing of operational facilities (such as sites, towers, mechanical and electrical facilities).

Customer Service

TELKOM

      TELKOM provides customer services through:

• Walk-in customer service points. TELKOM’s walk-in customer service points (“Plasa TELKOM”) provide convenient and comprehensive access to TELKOM’s customer services including product and service information requests and complaints, activation of services, customer billing, payments, account suspensions, service features and marketing promotions. As of December 31, 2006, TELKOM had more than 850 customer service points in total. Since June 2006, TELKOM expanded its services at customer service points to include electronic payment services via Electronic Data Capture (“EDC”) using on-site terminals in 50 Plasa TELKOM points.

• Call centers and Internet. TELKOM operates call centers in many cities in Indonesia, whereby customers are provided a contact number “147” to speak directly to customer service operators who are trained to handle customer requests and complaints and provide up-to-date information on

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	matters such as customer bills, promotions and service features. Corporate customers in particular locations are provided an additional toll-free number “08001TELKOM” (“0800183556”). Customers are also provided access to directory services for which a charge is levied. TELKOM promotes the use of call centers, SMS and the Internet over walk-in customer service points for its retail customers.
•	Enterprise service and account management teams. To focus on its corporate customers that contribute between Rp.50 million to Rp.500 million to TELKOM’s monthly revenues, particularly corporations with national operations, TELKOM has set up an enterprise service division in Jakarta in August 2004, which seeks to develop its business in this segment of the market. TELKOM provides these customers with account management teams, each comprising an account manager supported by personnel from the relevant operational departments, to provide a single point of contact for all of the customer’s communications needs, including integrated communications solutions. Since August 2004, TELKOM has also divided its enterprise service and account management teams into six segments, namely, (i) Financial and Banking, (ii) Government, Army & Police, (iii) Manufacturing, (iv) Mining & Construction, (v) Trade & Industrial Park, and (vi) Trading & Service. To cater to such customers, the enterprise service division works on integrating various product and service offerings to provide total telecommunications solutions, including voice telecommunications services, multimedia services and certain office automation and network monitoring and controlling services. TELKOM has also set up similar account management teams at the regional level to focus on corporations with regional operations within Indonesia. As of December 31, 2006, TELKOM had 658 national and regional-level account managers that cover Divisions I to VII.
•	Service level guarantee program. TELKOM has had a service level guarantee program for its fixed line customers since June 2002 and has been implementing a service level guarantee program for TELKOMFlexi and Speedy since August 2006. The service level guarantee program provides guarantees of certain minimum levels of service relating to, among others, new line installations, restoration of disconnected lines and billing complaints, and provides for non-cash compensation, such as free subscription for a certain period, to be awarded to customers where such minimum service levels are not met.

Telkomsel

      Telkomsel provides customer services through:

• GraPARI customer services centers. As of December 31, 2006, Telkomsel had 68 GraPARI customer services centers (“GraPARI centers”). Telkomsel’s GraPARI centers provide convenient and comprehensive access to Telkomsel’s customer services. GraPARI centers handle product and service information requests and complaints and typically focus on activation of services, customer billing, payments, account suspensions, service features, network coverage, IDD, roaming information and marketing promotions. See “— Sales, Marketing and Distribution”.

• Gerai HALO service outlets. Gerai HALO service outlets are service outlets operated by third parties. As of December 31, 2006, Telkomsel had 207 Gerai HALO service outlets.

• Caroline. “Caroline”, or Customer Care On-Line, is a 24 hour toll-free telephone service. Telkomsel’s customers may speak directly to customer service operators who are trained to handle customer requests and complaints and provide up-to-date information on matters such as customer bills, payments, promotions and service features.

• Anita. “Anita”, or Aneka Informasi dan Tagihan, is an SMS service available only to Telkomsel’s KartuHALO subscribers.

      Subscribers may use dedicated Anita telephone lines to obtain billing information as well as usage information through SMS.

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Sales, Marketing and Distribution

TELKOM

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

• Walk-in customer service points. Customers have access to certain products and services in these walk-in customer service points. See “— Customer Service” above.

• Account management teams. Account management teams promote TELKOM’s products and services in an integrated manner to TELKOM’s larger business customers. See “— Customer Service” above.

• Public telecommunications kiosks. Small businesses in cooperation with TELKOM have established public telecommunications kiosks throughout Indonesia. Customers can access basic telecommunications services, including local, domestic long-distance and international telephony, send facsimiles, telexes and telegrams, access the Internet and purchase phone-cards and TELKOMFlexi starter packs and vouchers. TELKOM generally provides discounts to such kiosks of 30% compared with subscriber telephone rates. Kiosks operate on a non-exclusive basis and may also provide products and services of other operators.

• Authorized dealers and retail outlets. These are located throughout Indonesia and primarily sell phone-cards and TELKOMFlexi subscriptions, starter packs and vouchers. Independent dealers and retail outlets pay for all products they receive at a discount, operate on a non-exclusive basis and may also sell products and services of other operators. As of December 31, 2006, Telkomsel had 740 direct retail outlets.

• Website. Through its website, customers can obtain information on TELKOM’s major products and services and gain access to certain of its multimedia products.

• Public telephones. Customers can make local, domestic long-distance and international telephone calls through public telephones.

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

Telkomsel

      Telkomsel sells its cellular services through the following distribution channels:

(i)	its 68 GraPARI centers (as of December 31, 2006);
(ii)	its 207 Gerari HALO service outlets (as of December 31, 2006);
(iii)	a network of authorized dealers (operating 248,185 retail outlets throughout Indonesia as of December 31, 2006) selling primarily prepaid SIM cards and vouchers;
(iv)	joint outlets with Plasa TELKOM and PT Pos Indonesia; and
(v)	other outlets such as banks and photo shops.

      Independent dealers and other outlets pay for all products they receive, such as starter packs and prepaid vouchers, at a discount. Independent dealers sell Telkomsel’s cellular services on a non-exclusive basis and may also sell products and services of other cellular operators.

      Telkomsel markets its KartuHALO product and services to specific target groups, focusing on corporate end-users, and HALOkeluarga, product and services to professionals who tend to generate higher usage and,

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therefore, higher revenues. Telkomsel has established dedicated corporate account teams to market its services to large corporate customers and manage on-going client relationships. Its prepaid products and services are targeted at a much broader customer base.

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

Billing, Payment and Collection

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

      The following is a summary of TELKOM’s overdue payment policy for “Lines in Service” (“Sambungan Pokok Telepon”) and TELKOMFlexi (excluding Government subscribers), effective since April 1, 2006:

Stage	Overdue Payment	Charge	Penalty
I	1-10 days	5% of the total outstanding receivables, subject to a minimum charge of Rp.5,000	Out-going isolation (i.e., restricted to receiving incoming calls only)
II	11-40 days	10% of the overdue bill subject to a minimum charge of Rp.10,000	Total isolation (i.e., no outgoing or incoming calls)
III	41-60 days	15% of the overdue bill subject to a minimum charge of Rp.15,000	Service disconnected
IV	More than 60 days	15% of the overdue bill subject to a minimum charge of Rp.15,000	Service disconnected and the associated number subject to termination

      The following is a summary of TELKOM’s overdue payment policy for Speedy (excluding Government subscribers), effective since April 1, 2006:

Stage	Overdue Payment	Charge	Penalty
I	1-10 days	5% of the total outstanding receivables	Total isolation
II	11-40 days	10% of the overdue bill	Total isolation
III	41-60 days	15% of the overdue bill	Service disconnected
IV	More than 60 days	15% of the overdue bill	Service disconnected and the associated number subject to termination

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      The following is a summary of TELKOM’s overdue payment policy for WARTEL and Warung TELKOM, kiosk telephone operators which use TELKOM’s networks, effective since April 1, 2006:

Stage	Overdue Payment	Charge	Penalty
I	1-20 days	5% of the total outstanding receivables	Total isolation
II	21-50 days	10% of the overdue bill	Service disconnected
III	More than 50 days	15% of the overdue bill	Service disconnected and the associated number subject to termination

      TELKOM currently provides billing services for Indosat in connection with their IDD services, for which it charges a flat fee for each bill.

Management of Customer Receivables

     TELKOM

      TELKOM does not collect deposits from its subscribers. TELKOM has historically been the primary provider of fixed line telecommunication services in Indonesia and, as of December 31, 2006, TELKOM had approximately 12.9 million subscriber lines comprising 8.7 million subscriber lines on its fixed wireline network and 4.2 million subscriber lines on its fixed wireless network. A delinquent subscriber, except for Government, police and military customers, is subject to late fees, increasing levels of call barring and, eventually, disconnection of the service after approximately 3 months of delinquency. Since the monthly bill for an average customer is insignificant and the customer is required to pay a reinstallation fee, the overdue payment and all late fees when the customer intends to re-subscribe, there is little incentive for the customer not to pay his outstanding bill. In addition, TELKOM screens potential customers for fixed line by reviewing identity card and electricity billing statements and by visiting the residence of such potential customers. Accordingly, TELKOM believes that the collectibility of its receivables is reasonably assured.

      In the case of private retail customers, TELKOM generally provides for 100% of the outstanding debt where the amount has been outstanding for more than three months. In the case of non-retail customers over a specified amount, TELKOM review the outstanding debt individually for collectibility, except for Government subscribers. For Government, police and military customers, TELKOM generally provides for 25% of the outstanding debt where the amount has been outstanding between 7 and 12 months, 50% where the amount has been outstanding between 13 and 24 months and 100% where the amount has been outstanding for more than 24 months. TELKOM does not charge any late fees or interest on its overdue accounts for Government subscribers.

Telkomsel

      Telkomsel bills its KartuHALO postpaid subscribers on a monthly basis, in arrears based on: (i) the minutes of use for cellular services; (ii) any additional, chargeable value-added services utilized during the period; and (iii) subscription charges for basic and other services included in their subscription plan. Postpaid subscribers can choose among four options: (a) special tariff for calls to five favorite numbers within Telkomsel’s network; (b) 150 free SMSs per month; (c) waiver of the monthly subscription charge; or (d) nationwide flat-rate tariffs.

      Telkomsel offers its KartuHALO postpaid subscribers a variety of payment options, including payment by cash, cheque, credit card, direct deposit via telephone transfer or automatic debit through banks and participating credit card companies. Payments may be made at any of Telkomsel’s GraPARI centers, designated automatic-teller machines or through over-the-counter facilities (mostly at post offices and banks with whom Telkomsel has an arrangement).

      Telkomsel issues bills to its non-corporate customers on one of five billing cycles. It issues bills to each customer on the customer’s respective billing cycle each month and payment of the bill is due by the 20th day after the end of the usage period. Corporate customers can also choose any of five billing cycle that they would

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like their bill due and Telkomsel issues the bill approximately 15 days prior to that date. If payment is not received by the due date of the bill, the subscriber is provided with reminders by way of automated telephone calls or SMS, and the customer will be barred from making any outgoing calls or receiving any incoming roaming calls. If there is no payment of the overdue sum within one month from the due date of the relevant bill, the customer will be further barred from receiving all incoming calls. If no payment is received within two months of the due date of payment, the customer’s account will then be terminated, although Telkomsel will continue to seek payment and may seek the assistance of a debt collection agency. After an account is terminated, the customer may only re-subscribe for services after making the overdue payment and by completing a new application. Telkomsel does not charge any late fees or interest on its overdue accounts.

Insurance

      As of December 31, 2006, property, plant and equipment, of the Company and its subsidiaries, except for land, were insured with PT Asuransi Jasa Indonesia (“Jasindo”), PT Asuransi Ramayana, PT Asuransi Wahana Tata and PT Asuransi Export Indonesia (“ASEI”) against fire, theft and other specified risks. Total cost of assets being insured amounted to Rp.27,794,300 million and US$3.84 billion, which was covered by Sum Insured Basis with maximum loss claim of Rp.2,064,903 million and covered by First Loss Basis of US$250 million and Rp.824,000 million including business recovery of Rp.324,000 million with Automatic Reinstatement of Loss Clausul. In addition, the TELKOM-1 and TELKOM-2 satellite were insured separately for US$45.2 million and US$57.9 million respectively. Management believes that the insurance coverage is adequate.

      TELKOM’s subsidiaries separately insure their property in such amounts and in accordance with the policies determined and implemented by the subsidiaries themselves. Telkomsel has an electronic equipment and industrial all-risk insurance policy underwritten by a consortium led by PT Asuransi Ramayana Tbk. The policy provides cover for Telkomsel’s network equipment, facilities, infrastructure and buildings although it excludes losses suffered as a result of war, civil war, rebellion, revolution, terrorism, insurrection or military or usurped power, amongst other exclusions. Telkomsel has general insurance for motor vehicle liabilities and comprehensive general liabilities. As of December 31, 2006, property, plant and equipment were insured under policies covering property damage and business interruption, limited to an aggregate coverage amount of US$3.83 billion for property damage, Rp. 8.41 billion for vehicle damage and Rp.324.00 billion for business interruption. Management believes that this coverage is adequate to cover potential losses. See Item 3. “Key Information — D. Risk Factors — Risks relating to Indonesia — Indonesia is vulnerable to natural disasters and other events beyond TELKOM’s control, which could severely disrupt the normal operation of TELKOM’s business and adversely affect TELKOM’s operating results.

Indonesian Telecommunications Industry

Overview

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

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

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      Fixed line and cellular penetration are low in Indonesia by international standards. As of December 31, 2006, Indonesia had an estimated fixed line penetration (including fixed wireless subscribers) of 6.2% and an estimated cellular penetration of 27.0%, according to an internal study.

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

•  Continued growth. TELKOM believes the telecommunications industry will continue to grow, as continued development of Indonesia’s economy is expected to increase demand for telecommunications services.

•  Migration to wireless networks. TELKOM anticipates that wireless services will become increasingly popular as a result of wider coverage areas and improving wireless network quality, declining handset costs and the proliferation of prepaid services.

•  Increasing competition. TELKOM anticipates an increasingly competitive Indonesian telecommunications market as a result of the Government’s regulatory reforms.

Regulations

Overview

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

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

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

•  Deregulation;

•  Promoting competition;

•  Liberalization;

•  Restructuring;

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•  Improving market access; and

•  Introducing market-oriented regulations.

      The Government’s telecommunications reform policy was formulated in its “Blueprint of the Indonesian Government’s Policy on Telecommunications”, as contained in the MoC’s Decree No. KM 72 of 1999 dated July 20, 1999 (the “Blueprint”). The policies stated in the Blueprint are intended to:

•  Increase the sector’s performance in the era of globalization;

•  Liberalize the sector with a competitive structure by removing monopolistic controls;

•  Increase transparency and predictability of the regulatory framework;

•  Create opportunities for national telecommunications operators to form strategic alliances with foreign partners;

•  Create business opportunities for small and medium enterprises; and

•  Facilitate new job opportunities.

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

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

Telecommunications Law

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

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

      The role of the Government is to become that of an impartial policy maker and supervisor of the telecommunications sector. As stipulated in the Telecommunications Law and in order to ensure transparency in the regulatory process, an independent regulatory body was established on July 11, 2003 to regulate, monitor and control the telecommunication industry. The ITRB is comprised of officials from the DGPT and the Committee of Telecommunication Regulations and is headed by the Director General of Post and Telecommunication Services. Members of the Committee of Telecommunication Regulations were appointed on December 19, 2003.

      MoC Decree No. 67/2003 stipulates the relationship between the MoC, from which telecommunications regulatory responsibility was transferred to the MoCI in February 2005, and the ITRB. As part of its regulatory function, the ITRB is authorized to (i) carry out the selection or evaluation for licensing of telecommunications networks and services in accordance with the MoCI’s policy, and (ii) propose to the MoCI the operation performance standards for telecommunications networks and services, service quality

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standards, interconnection charges and equipment standardization. As part of its monitoring function, the ITRB is authorized to monitor and is required to report to the MoCI on (i) the implementation of the operation performance standards for telecommunications networks and services, (ii) the competition among network and service operators, and (iii) compliance with the utilization of telecommunication equipment in accordance to the applicable standards. As part of its controlling function, the ITRB is also authorized and required to report to the MoCI regarding (i) the facilitation of any dispute resolution among network and service operators, and (ii) the control of the use of telecommunications equipment and implementation of service quality standards. Decisions of the ITRB are in the form of a DGPT decree.

New Service Categories

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

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

Modern License

      Pursuant to the Telecommunications Law the existing licenses for telecommunication services were replaced with the so-called “Modern Licenses”, which TELKOM received in May 2004. In addition to granting the license holder the right to provide telecommunication services, the Modern License also imposes certain mandatory obligations on the license holder. These obligations include, among others, construction obligations, service obligations, network performance obligations and contributing 0.75% of their gross revenues for Universal Service Obligations (“USO”). The license holder is required to fulfill the mandatory obligations set forth in its Modern License and the failure to comply with such obligations may result in the revocation of its Modern License. TELKOM’s separate licenses to provide fixed line services, DLD services and IDD services were replaced and combined into a single license issued on May 13, 2004. TELKOM also has a multimedia license that includes services such as Internet service provider, data communication, network access provider and VoIP.

Exclusivity

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

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

      On August 1, 2001, the Government through the DGPT, announced the early termination of TELKOM’s and Indosat’s exclusivity rights for local and domestic-long distance telecommunications services (in the case

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of TELKOM) and IDD (in the case of Indosat). The announcement stated that it is the Government’s intention that Indosat would receive a license to provide local telephone services and a license to provide domestic long-distance and that TELKOM would receive a license to provide IDD services at the end of 2003. The Government appointed an appraiser to resolve the differences of opinion regarding the amounts of compensation to be provided to TELKOM and Indosat for the early terminations of their exclusivity rights. On March 30, 2004, the MoC announced that the Government shall pay to TELKOM Rp.478 billion (net of taxes) as compensation. The Parliament approved the Rp.478 billion compensation amount, the payment of which will be made over a 5-year period. See Item 3. “Key Information — D. Risk Factors — Risks Relating to TELKOM and its Subsidiaries — TELKOM operates in a legal and regulatory environment that is undergoing significant reforms and such reforms may adversely affect TELKOM’s business.”

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

Competition

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

Interconnection

      Pursuant to the express prohibitions on activities that may create monopolistic practices and unfair business competition, the Telecommunications Law provides for fair interconnection of networks to allow “any to any connectivity”. Interconnection fees are to be agreed by each network provider and calculated in a transparent manner. The Telecommunications Law provides guidance with respect to the interconnection scheme between telecommunication network providers. On February 8, 2006, the MoCI issued Regulation No. 8/ Per/ M.KOMINFO/02/2006, which mandates a cost-based interconnection tariff scheme for all telecommunications network and services operators. Under the new scheme, the operator of the network on which calls terminate would determine the interconnection charge to be received by it based on a cost-based formula. Pursuant to Decree No. 8/ Per/ M.KOMINFO/02/2006, each telecommunication network operator is required to prepare and submit to the ITRB a RIO, which must prescribe the type of interconnection services offered by the network operators and the tariffs charged for each of the offered services. Such calculated interconnection charges must be presented in a RIO and reported to the ITRB. TELKOM submitted its RIO in April 2006. In August 2006, ITRB completed its review of the RIOs submitted by large network operators, including TELKOM. Due to significant modifications by the ITRB on TELKOM’s RIO, TELKOM proposed certain amendments to it. Following correspondence between TELKOM and the ITRB, the ITRB decided that the final TELKOM RIO is as had been determined by DJPT No. 279/ DIRJEN/2006 issued on August 4, 2006. The interconnection tariff scheme took effect on January 1, 2007. Pursuant to a transition clause in MoCI Regulation No. 8/ Per/ M.KOMINFO/02/2006, the existing interconnection agreements remain valid as long as the parties to the agreements mutually agree and to the extent that the existing agreements do not conflict with Regulation No. 8/ Per/ M.KOMINFO/02/2006. On December 28, 2006, TELKOM and all existing network operators signed amendments to their respective interconnection agreements for the implementation of the cost-based tariffs obligated under Regulation No. 8/ Per/ M.KOMINFO/02/2006. These amendments took effect on January 1, 2007. See Item 3. “Key Information” — D. Risk Factors — Risks relating to TELKOM and its subsidiaries — TELKOM operates in a legal

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and regulatory environment that is undergoing significant reforms and such reforms may adversely affect TELKOM’s business”.

DLD and IDD Services

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

•  DLD and IDD network operators may offer DLD and IDD services as part of their basic telephony services;

•  Each DLD and IDD operator must use a distinct 3-digit access code for its DLD and IDD services;

•  Customers may freely select their DLD and IDD providers; and

•  DLD and IDD fixed telecommunication network operators (currently only TELKOM and Indosat) may now provide DLD and IDD basic telephony services.

      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 implement a three digit access code in the form of “01X” for access to its DLD service. However, TELKOM has not implemented within the given deadline, and does not expect to implement in the near future, 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 MoC Decree No. 28/2004, in June 2004, TELKOM submitted a letter to the ITRB highlighting the technical difficulties in implementing the three digit DLD access codes within the given deadline and the substantial costs involved, and requesting that TELKOM be allowed to continue using the “0” prefix for its DLD access prefix and that it be given an additional five year period to implement the three digit DLD access codes. On April 1, 2005, the MoCI announced that it would make available to Indosat the “011” DLD access in five major cities that were 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. 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 customer to access the DLD service selected by the respective operator. On March 31, 2005, TELKOM and Indosat entered into an amended interconnection agreement, extending the coverage of their local fixed line network from Jakarta, Surabaya and Malang to cover Medan, Batam, Bandung, Bogor, Balikpapan, Yogyakarta and their surrounding areas. This amendment also allows automatic renewal of local coverage without entering into further amendments, except when there is a change in the business scheme, such as a change in the tariff scheme or a change in the settlement method from call-by-call basis to wholesale basis. On September 23, 2005, TELKOM and Indosat entered into an interconnection agreement related to interconnection between (i) TELKOM’s local fixed line network and Indosat’s long-distance fixed line network; (ii) Indosat’s local fixed line network and TELKOM’s long-distance fixed line network; (iii) TELKOM’s and Indosat’s long-distance fixed line networks; (iv) TELKOM’s domestic fixed line network and Indosat’s international fixed line network; and (v) Indosat’s local fixed line network and TELKOM’s international fixed line network, with the interconnection tariff being calculated on a call-by-call basis. Six cities, which include Medan, Batam, Jakarta, Surabaya, Balikpapan and Denpasar, are covered under this interconnection agreement.

      TELKOM has been granted the authority to use “007” as its IDD access code. On December 1, 2005, TELKOM and Indosat entered into another interconnection agreement enabling each party’s customers to make domestic calls between Indosat’s mobile network and TELKOM’s fixed line network and allowing

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Indosat’s mobile customers to access TELKOM’s IDD service by dialing “007”. This agreement overrides all existing interconnection agreements on mobile and fixed line network between TELKOM and Indosat.

      On May 17, 2005, the MoCI issued Decree No. 6/2005. According to Decree No. 6/2005, the three digit access code in the form of “01X” and “0” access code for access to DLD services may be used. The “0” access code is being used to accommodate customers who prefer not to choose their long-distance carrier, while the “01X” access code has to be implemented gradually in local areas in which TELKOM has technical capabilities to support such services. By April 1, 2010, the “01X” long-distance services must be commenced in all TELKOM’s local areas to accommodate customers who prefer to choose their long-distance carrier.

Indonesian Telecommunications Regulatory Body

      On July 11, 2003, the ITRB was established as the implementing agency of the Telecommunications Law. Under MoC Decree No. KM 31/2003, as amended by MoC Decree No. 25/2005, the ITRB is authorized to regulate, monitor and control the operations of the telecommunications sector. The ITRB is composed of officials from the DGPT and the Committee of Telecommunication Regulations. Combined with further privatization of TELKOM and Indosat, the establishment of such an independent regulatory body is intended to reduce the Government’s role in the telecommunications industry from that of being the telecommunications industry’s financier, operator, regulator and licenser to becoming primarily the industry’s licenser and regulator.

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

Consumer Protection

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

Universal Service Obligations

      Under the Telecommunications Law, all telecommunications network operators and service providers are bound by a Universal Service Obligation, which requires such network operators and telecommunication service providers to make contribution towards providing universal telecommunication facilities and infrastructure or other forms of compensation. On September 3, 2003, the DGPT issued a letter stating that telecommunications operators in Indonesia will be required to contribute 0.75% of gross revenues (with due consideration for bad debt and interconnection charges) for USO development. On March 11, 2004, the MoC issued Decree No. 34/2004, which stated that USO facilities must meet the following minimum requirements: (a) the facilities should meet the standards of basic telephony services, including facsimile and dial-up Internet services; (b) the facilities should provide basic public telephony services, with domestic long-distance, international and mobile access; (c) the facilities should provide telecommunication services that are capable to transmit and receive data; (d) the facilities should be accessible for emergency services; and (e) the facilities should utilize equipment that has been certified by the DGPT. Tariffs for services provided under the USO program are based on the applicable PSTN tariffs. On March 30, 2004, the MoC issued Announcement No. PM. 2/2004, which sets forth the basic policies underlying the USO program and required telecommunications operators in Indonesia to contribute 0.75% of gross revenues (with due consideration for bad debt and interconnection charges) for USO development. On September 30, 2005, the MoCI issued Regulation No. 15/2005 which provides that the USO contribution in the amount of 0.75% of the gross revenues is to be made payable per quarter, per semester or annually, at the latest on March 31 of the

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following year, to the State Treasury through a certain determined account. As of the date of this Annual Report, TELKOM paid the total USO amount payable of Rp.307.7 billion for the fiscal year 2005 and Rp.383.8 billion for the fiscal year 2006.

Implementing Regulations

      To date, the Government has issued several implementing regulations relating to the Telecommunications Law, including Government Regulation No. 52/2000 (“Operation of Telecommunications”) and Government Regulation No. 53/2000 (“Utilization of Radio Frequency Spectrum and Satellite Orbit”), as well as ministerial decrees, including No. KM 20/2001 (“Operation of Telecommunications Networks”), No. KM 21/2001 (“Operation of Telecommunications Services”), No. KM 12/2002 (“Completing MPPT Decree No. KM. 79/ PR-301/ MPPT-95 on Procedures for the Tariff Adjustment of Domestic Basic Telecommunications Services”), No. KM 40/2002 (“Guidance for Tariff Implementation of State Revenue on Tax from Cost of Utilization Right of Radio Frequency Spectrum”), No. KM 23/2002 (“Internet Telephony Service for Public”), No. KM 31/2003 (“Indonesian Telecommunication Regulatory Body”), No. KM 28/2004 (“Amendments to the Decree of the Minister of Communication No. KM. 4/2001 of Fundamental Technical Plan National 2000), No. KM 29/2004 (“Amendments to the Decree of the Minister of Communication No. 20 of 2001 on the Provision of Telecommunication Network”), No. KM 30/2004 (“Amendments to the Decree of the Minister of Communication No. 21 of 2001 on the provision of Telecommunication Services”), No. KM 31/2004 (“Amendment to the Decree of the Minister of Communication No. 23/2002 on the Provisions of Internet Telephony Services for Public Needs”), No. KM 32/2004 (“Interconnection Charges for Telecommunication”), No. KM 33/2004 (“Supervision of Fair Competition in the Provision of Fixed Network and Basic Telephony Services”), No. KM 34/2004 (“Universal Service Obligation”), No. KM 35/2004 (“Provision of Wireless Local Fixed Network with Limited Mobility”), MoCI Regulation No. 6/2005 (“Second Amendments to the Decree of the Minister of Communication No. KM 4/2001 of Fundamental Technical Plan National 2000”), MoCI Regulation No. 7/2005 (“Second Amendments to the Decree of the Minister of Communication No. KM 23/2002 on Internet Telephony Service for Public”), MoCI Regulation No. 13/2005 (“Operation of Telecommunications using Satellite”), MoCI Regulation No. 15/2005 (“Implementing Guidance on Tariff for Non-Tax State Income from USO Contribution”), MoCI Regulation No. 23/2005 (“Prepaid Card Registration”), MoCI Regulation No. 24/2005 (“Provision of Value Added Features”), MoCI Regulation No. 01/2006 (“Operation of Radio Frequency Band 2.1 GHz for Cellular Network), MoCI Regulation No. 8/ Per/ M.KOMINFO/02/2006 (“Interconnection”) and MoCI Decree No. 181/2006 (“Frequency Migration”). The MoCI and DGPT are in the process of finalizing a number of additional ministerial decrees that are intended to implement other aspects of the Telecommunications Law, including decrees relating to special telecommunications operations and implementation of the cost-based interconnection system.

Satellite regulation

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

Fixed Wireless Access regulation

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

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Competition

Fixed Wireline and Fixed Wireless

      Historically, TELKOM had the exclusive right to provide fixed line domestic telecommunications services in Indonesia. Pursuant to regulations introduced to implement the Telecommunications Law, the Government terminated TELKOM’s monopoly in providing fixed line domestic telecommunications services. The MoC issued Indosat a license to provide local telephone services from August 2002. On May 13, 2004, Indosat received its commercial license to provide domestic long-distance telephone services. Indosat launched its CDMA fixed wireless access service under the brand name “StarOne” in Surabaya on May 29, 2004 and in Jakarta on July 25, 2004, thereby creating a “duopoly system” in Indonesia’s fixed line domestic telecommunications market. As of December 31, 2005, Indosat is able to provide nationwide DLD services through its CDMA-based fixed wireless network, its own fixed line network and its interconnection arrangements with TELKOM. Based on the interconnection agreement between TELKOM and Indosat dated September 23, 2005, TELKOM has agreed to open interconnection with Indosat’s local fixed line service in certain areas such as Jakarta, Surabaya, Batam, Medan, Balikpapan and Denpasar. To date, Indosat has expanded the coverage of its local fixed network to major areas in Sumatra, Java, Bali, Kalimantan and Sulawesi. Indosat also commenced offering limited domestic long-distance services for calls within its network in late 2004.

      TELKOM’s fixed line services also faces direct and indirect competition from other fixed wireline and fixed wireless service providers, such as PT Bakrie Telecom (formerly Ratelindo) and PT Batam Bintan Telecom, mobile cellular services, fixed cellular services, SMS, VoIP services and e-mail. TELKOM expects that the increasing uses of these services may adversely affect future demand for its fixed line services.

Cellular

      As of the date of this Annual Report, the cellular market in Indonesia is dominated by Telkomsel, Indosat and Excelcomindo. As of December 31, 2006, these nationwide cellular operators (full mobility) collectively had over 90% of the Indonesian cellular market. The number of full-mobility cellular subscribers in Indonesia totaled approximately 47.1 million at the end of 2005 and approximately 63.7 million at the end of 2006, representing an annual growth rate of approximately 34% during that period. Despite this rapid growth, the cellular penetration rate in Indonesia, at approximately 27% at the end of 2006, has remained relatively low compared to many other countries. During recent years, competition among cellular operators has intensified.

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

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

      TELKOM’s new CDMA-based fixed wireless phone service, TELKOMFlexi, which offers limited mobility and charges customers at PSTN tariff rates that are substantially lower than tariffs for cellular services, may over time offer a competitive alternative to GSM services and attract Telkomsel customers that prefer lower tariff rates in exchange for limited mobility. See Item 3. “Key Information — D. Risk Factors — Risk Relating to TELKOM and its subsidiaries  — Regulators and other telecommunications operators may challenge TELKOM’s ability to apply PSTN tariffs to its new CDMA-based fixed wireless phone service, which is marketed under the brand name TELKOMFlexi”.

      As of December 31, 2006, Telkomsel remained the largest national licensed provider of cellular services in Indonesia, with approximately 35.6 million cellular subscribers and a market share of approximately 56% of the full-mobility cellular market, which represented an increase compared to its approximately 52% market

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share as of December 31, 2005. Indosat, as a result of its merger with Satelindo, was the second largest provider with approximately 16.7 million cellular subscribers and a market share of approximately 26% as of December 31, 2006. Excelcomindo had approximately 9.5 million subscribers and a market share of approximately 15% as of December 31, 2006. Since 2003, Mobile 8 has also operated a nationwide CDMA mobile cellular service. Mobile 8 had approximately 1.8 million subscribers and a market share of approximately 3% as of December 31, 2006. In addition to the nationwide GSM operators, a number of smaller regional GSM, analog and CDMA cellular providers operate in Indonesia.

      The following table sets forth summary information as of December 31, 2006 on each of the three leading nationwide licensed GSM mobile cellular operators:

Nationwide Licensed GSM Mobile Cellular Operators in Indonesia

	Operator
	Telkomsel	Indosat	Excelcomindo
Launch date	May 1995	November 1994(2)	October 1996
2G Licensed frequency bandwidth (GSM 900 & 1800)	30 MHz	30 MHz	25 MHz
3G Licensed frequency bandwidth (2 GHz)	5 MHz	5 MHz	5 MHz
Licensed coverage	Nationwide	Nationwide	Nationwide
Network coverage	Nationwide	Information not available	Information not available
Market share (as of December 31, 2006)(1)	56%	26%	15%
Subscribers (as of December 31, 2006)(1)	35.6 million	16.7 million	9.5 million

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

IDD

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

VoIP

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

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services in Indonesia. Other unlicensed operators also provide VoIP services that may be accessed through the Internet as well as from software that allows PC-to-PC voice communications through the Internet. VoIP operators offering international services also compete with IDD operators, such as Indosat and, beginning on June 7, 2004, TELKOM.

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

Satellite

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

Other

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

Licenses

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

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

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

      Third-Generation Mobile Telecommunications System (3G). In February 2006, the Indonesian Government conducted the tender for three radio frequency spectrum licenses of 2.1 GHz, each having a bandwidth of 5 MHz, to be used in conjunction with the new licenses to operate nation-wide 3G cellular

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telecommunication network in Indonesia. The winning bidders would become the operators of 3G cellular telecommunication networks along with two existing license holders (HCPT and PT Lippo Telekom (Natrindo Telepon Selular)) that had received the 3G licences through a competitive bid in 2003. On February 14, 2006, under MoCI Regulation No. 19/2006, the 3G licenses were awarded to Telkomsel, Indosat and Excelcomindo. As winning bidders, Telkomsel, Indosat and Excelcomindo are subject to an upfront fee of up to 200% of the bidding price, payable within 30 business days of the award. Telkomsel, Indosat and Excelcomindo are also subject to a radio frequency spectrum usage fee based on certain formula in accordance with Decision Letter No. 07/ PER/ M.KOMINFO/2/2006 of the Minister of Communication and Information Technology. See Note 51c (ii) to the consolidated financial statements.

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

      VoIP and ISP. TELKOM holds a Modern License to provide VoIP and ISP services, pursuant to DGPT Decree No. SK01/ DIRJEN/2004, which also permits TELKOM to provide data communications services.

      Network access provider. TELKOM holds a license to provide Internet interconnection services beginning on July 31, 2006, pursuant to DGPT Decree No. 275/ DIRJEN/2006.

Tariffs and Interconnection Charges

      The Government divides tariffs into two categories:

•  Tariffs for the provision of telecommunications services; and

•  Tariffs for the provision of telecommunications networks.

Tariffs for the Provision of Telecommunications Services

      Generally, the MoCI regulates prices and the amount TELKOM can charge is based on a tariff formula for telecommunications services in Indonesia. Telecommunications operators may set the amount of tariff. In this regard, TELKOM’s operating business units have authority to make adjustments to prices based on specific guidelines fixed by the directors of TELKOM.

Fixed Wireline Tariffs

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

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

      On January 29, 2002, the MoC announced that fixed wireline tariffs would be increased by an average of 45.49% over three years. Effective February 1, 2002, the MoC increased fixed wireline tariffs by a weighted average of 15%. Although fixed wireline tariffs were expected to be increased again effective January 1, 2003, public opposition following the announcement by TELKOM of tariff increases led to the suspension on January 16, 2003 of the implementation of such increases. See Item 3. “Key Information — D. Risk

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Factors — Risks relating to TELKOM and its subsidiaries — TELKOM operates in a legal and regulatory environment that is undergoing significant reforms and such reforms may adversely affect TELKOM’s business”.

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

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

Tariff Rate Schedule (effective April 1, 2004):

Installation and Monthly Charges:

Access charges	Business		Residential		Social
	(Rp.)		(Rp.)		(Rp.)
Installation		175,000 – 450,000		75,000 – 295,000		50,000 – 205,000
Monthly Subscription		38,400 –  57,600		20,600 – 32,600		12,500 –  18,500

Usage Charges:

	Price per Pulse		Pulse Duration
	(Rp.)
Local
Up to 20 km		250	3 minutes (off peak) and 2 minutes (peak)
Over 20 km		250	2 minutes (off peak) and 1.5 minutes (peak)

Domestic Long-Distance

			Rounding Time
			Block
	Price Per Minute		Duration
	(Rp.)
0-20 km		83 – 122		1 minute
20-30 km		122 – 163		1 minute
30-200 km		325 – 1,290		6 seconds
200-500 km		460 – 1,815		6 seconds
Over 500 km		570 – 2,270		6 seconds

      The Government did not carry out its plan to further increase fixed wireline tariffs to reach the 45.49% average increase announced in January 2002 by January 2005. In an announcement by the MoCI on April 1, 2005 regarding access codes, the MoCI indicated that there would be another rebalancing of tariffs in the future. On February 8, 2006, the Government issued Decree No. 09/ Per/ M.KOMINFO/02/2006 on the Procedure on Determination of Current Tariff and Adjusted Tariff of Fixed Network Basic Telephony, which established new formulas for calculating subsequent tariff increases.

CDMA Fixed Wireless Tariffs

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

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

Usage Charges:

	Price Per Pulse		Pulse Duration
	(Rp.)
Local		250	2 minutes (off peak) and 1.5 minutes (peak)

Domestic Long-Distance

			Rounding Time
			Block
	Price Per Minute		Duration
	(Rp.)
0-200 km		325 – 1,290		6 seconds
200-500 km		460 – 1,815		6 seconds
Over 500 km		570 – 2,270		6 seconds

      For SMS, postpaid subscribers are charged Rp.250 per message. Postpaid subscribers who use TELKOM Internet access via wireless dial-up are charged Rp.165 per minute. Postpaid subscribers who use Public Data Network based dedicated lines for Internet access are charged Rp.5 per KBps.

      Prepaid. Usage charges for prepaid subscribers, effective February 10, 2004, including VAT of 10%, are summarized as follows:

Usage Charges:

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

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

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IDD Tariffs

      TELKOM commenced offering IDD fixed line services on June 7, 2004. Tariffs for IDD calls are set by service providers, subject to specified maximum limits established by the Government. As of the date of this Annual Report, TELKOM’s IDD tariffs are as follows:

			Rounding Time
			Block
Region	Price Per Minute		Duration
	(Rp.)
Africa		5,090 – 6,440		6 seconds
Americas and Caribbean		5,090 – 7,470		6 seconds
Asia and Oceania		4,410 – 9,630		6 seconds
Europe		5,090 – 9,630		6 seconds
Middle East		5,090 – 8,460		6 seconds

Cellular Tariffs

      The Indonesian cellular telecommunications market generally operates on a “calling party pays” system, which requires that the originators of telephone calls pay for calls. Cellular operators in Indonesia set their own tariffs, subject to the specified maximum limits established by the Government. On February 8, 2006, the MoCI issued Decree No. 8/ Per/ M.KOMINFO/02/2006, which mandates the new cost-based interconnection tariff scheme for all telecommunications network and services operators. This scheme became effective on January 1, 2007. See Item 3. “Key Information — D. Risk Factors — Risks relating to TELKOM and its subsidiaries — TELKOM operates in a legal and regulatory environment that is undergoing significant reforms and such reforms may adversely affect TELKOM’s business” and “— Regulations — Interconnection” above.

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

Mobile Cellular Tariff (maximum postpaid tariff):

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

(1)  Beginning in mid-2005, Telkomsel provides free roaming services to its subscribers.

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

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      Telkomsel charges new postpaid subscribers a maximum one-time connection fee of Rp.200,000 for service activation, although discounts may be granted. After initial connection, Telkomsel charges a monthly subscription fee ranging from Rp.nil (provided minimum monthly usage reaches Rp.25,000) to Rp.65,000 per month (depending on the chosen tariff plan). Usage charges as of December 31, 2006 are as follows:

			Rounding Time
			Block
	Price Per Minute		Duration
	(Rp.)
Mobile cellular to mobile cellular:
Local		650 – 938		20 seconds
Domestic Long-Distance
DLD1 (neighboring point-of-charging areas)		650 – 2,628		15 seconds
DLD2 (other areas)		650 – 3,083		15 seconds
Mobile cellular to fixed line:
Local		450 – 531		20 seconds
Domestic Long-Distance
30-200 km		650 – 1,696		15 seconds
200-500 km		785 – 2,221		15 seconds
Over 500 km		895 – 2,676		15 seconds
International Long-Distance:
Group I		3,675 – 5,880		15 seconds
Group II		4,237 – 6,780		15 seconds
Group III		4,687 – 7,500		15 seconds
Group IV		5,362 – 8,580		15 seconds
Group V		6,225 – 9,960		15 seconds
Group VI		7,050 – 11,280		15 seconds
Group VII		8,025 – 12,840		15 seconds

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      Prepaid Tariffs. For prepaid cellular services, activation charges may be freely determined by cellular operators while usage charges are limited to a maximum of 140% above the peak usage charges for postpaid services. As of December 31, 2006, Telkomsel charged its prepaid customers (SimPATI/ Kartu As) usage charges as follows:

						Rounding Time
		Price Per Minute				Block Duration
		(Rp.)
		SimPATI		Kartu As		SimPATI		Kartu As
Calls within Telkomsel:
Local			300 – 1,500		1,200		30 seconds		per second
Domestic Long-Distance
	Zone 1		300 – 4,000		1,200		30 seconds		per second
	Zone 2		300 – 4,500		1,200		30 seconds		per second
Calls to other cellular:
Local			1,300 – 1,600		2,400		30 seconds		per second
Domestic Long-Distance
	Zone 1		3,500 – 4,000		2,400		30 seconds		per second
	Zone 2		4,000 – 4,500		2,400		30 seconds		per second
Calls to fixed line/fixed wireless:
Local			750 – 950		1,800		30 seconds		per second
Domestic Long-Distance
	30-200 km		2,000 – 2,300		1,800		30 seconds		per second
	200-500 km		3,200 – 3,720		1,800		30 seconds		per second
	Over 500 km		3,600 – 4,150		1,800		30 seconds		per second
International Long-Distance:
Group I-III			7,500 – 8,000		8,000		15 seconds		60 seconds
Group IV-VII			11,000 – 12,000		12,000		15 seconds		60 seconds

Leased Line Tariffs

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

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      The following table sets forth the maximum leased line tariffs, effective January 1, 1998 and still valid as of the date hereof:

		Maximum Tariff
		(Rp.)
Installation charge
Customer access			600,000 – 700,000	(1)
Other operator access			900,000
Monthly subscription charge
Analog line
	Local (or up to 25 km)		60,000 – 250,000	(2)
	Inter-local (over 25 km)		779,400 – 3,557,750	(3)
Digital line
	Local (or up to 25 km)		190,000 – 172,268,000	(4)
	Inter-local (over 25 km)		478,800 – 2,308,628,250	(5)

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

VoIP Tariffs

      Charges for VoIP services may be freely determined by VoIP operators, based on cost. TELKOM has launched its VoIP services, which as of the date of this Annual Report consist of TELKOM Global-01017 and its lower-cost alternative, TELKOMSave. TELKOM believes that the tariff for TELKOM Global-01017 service and the TELKOMSave service are approximately 40% and 60%, respectively, of the tariffs charged by Indosat and TELKOM for IDD calls.

Kiosk phone Tariffs

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

Satellite Tariffs

      TELKOM generally charges an annual tariff of between US$1.05 million to US$1.20 million per transponder, although in some instances TELKOM may offer discounted tariffs for long-term commitments or loyal customers.

Broadband Access

      The following table sets forth the tariffs for TELKOM’s broadband access services as of December 31, 2006:

					Monthly Usage		Excess Usage
Speedy Services	Activation Fee		Monthly Fee		Allowance		Charge
	(Rp.)		(Rp.)				(Rp.)
Speedy for Personal		150,000		300,000		750MB		700/MB
Speedy for Professional		150,000		700,000		2.0GB		700/MB
Speedy for Office		150,000		2,000,000		Unlimited		—
Speedy for Warnet		150,000		3,000,000		Unlimited		—

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      Since April 1, 2007, the tariff for TELKOM’s broadband access services has changed as follows:

					Monthly Usage		Excess Usage
Speedy Services	Activation Fee		Monthly Fee		Allowance		Charge
	(Rp.)		(Rp.)				(Rp.)
Speedy for Personal		75,000		200,000		1.0GB		500/MB
Speedy for Professional		75,000		400,000		3.0GB		500/MB
Speedy for Office		75,000		750,000		Unlimited		—
Speedy for Warnet		75,000		1,750,000		Unlimited		—
Speedy Time Based		75,000		200,000		50 hours		25/minutes

Tariffs for Other Services

      The amount of the tariffs for telephony and other multimedia services are determined by the service provider by taking into account the expenditures and market price. The Government only determines the tariff formula for basic telephony services, while there is no stipulation for the tariff of other services.

Tariffs for the Provision of Telecommunications Networks

Tariffs for Interconnection and Access

      As of December 31, 2006, the Government establishes the percentage of tariffs and amount of interconnection charges to be received by each operator in respect of calls that transit multiple networks. Interconnection costs paid for interconnection with TELKOM’s fixed line network vary, depending on the type of interconnected operator (e.g., IDD, cellular, fixed wireline, fixed wireless or satellite networks), and are determined in accordance with MoC Decree No. 46/1998 (between IDD networks, between domestic fixed networks, domestic fixed and IDD networks, between cellular networks, cellular and domestic fixed networks, cellular and IDD networks), as amended by MoC Decree No. 37/1999 (domestic fixed and IDD networks) and MoC Decree No. KU506/1997 (between local fixed and domestic networks). For interconnection with satellite operators, interconnection costs are based on MoC Decree No. 30/2000. Interconnection costs for local fixed and domestic networks are based on Decree No. KU506/1997. Interconnection costs paid by interconnecting operators are based principally on negotiations between the network providers and in the event no agreement is reached by the providers, the interconnection costs are to be determined in accordance with above mentioned Decrees.

      According to MoCI Regulation No. 8/ Per/ M.KOMINFO/02/2006, each operator shall prescribe its tariff on its RIO, and each dominant operator’s RIO shall be approved by the ITRB. On April 12, 2006, DJPT issued Decree No. 141/2006 regarding Determination of Dominant Operators, in which TELKOM, Indosat and Telkomsel were declared as dominant operators for RIO purposes. The tariffs for interconnection with TELKOM’s network are presented in TELKOM’s RIO, as determined by DJPT No. 279/ DIRJEN/2006 on August 4, 2006, and vary depending on the type of interconnected operator (local fixed network, cellular network, international, satellite mobile network and international network). On December 28, 2006, TELKOM and all other network operators signed amendments to their respective existing interconnection agreements for the implementation of the cost-based tariffs obligated under the MoCI Regulation No. 8/ Per/ M.KOMINFO/02/2006. These amendments became effective on January 1, 2007. For more information about the scheme, see “— Regulations — Interconnection” above.

      On February 8, 2006, the MoCI issued Decree No. 8/ Per/ M.KOMINFO/02/2006, which mandates the new cost-based interconnection tariff scheme for all telecommunications network and services operators. This scheme became effective on January 1, 2007. See Item 3. “Key Information — D. Risk Factors — Risks relating to TELKOM and its subsidiaries — TELKOM operates in a legal and regulatory environment that is undergoing significant reforms and such reforms may adversely affect TELKOM’s business” and “— Regulations — Interconnection” above.

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Interconnection with Fixed line Network

      The Government’s National Fundamental Technical Plan set forth in Decree 4 of 2001, as amended by Decree 28 of 2004 and MoCI Regulation No. 6/2005, sets out the technical requirements, routing plans and numbering plans for interconnection of the networks of various telecommunications operators among themselves and with TELKOM’s fixed line network. As of the date of this Annual Report, the fees for interconnection within TELKOM’s fixed line network are mainly referred to in Decree No. 506/1997, Decree No. 46/1998, Decree No. 37/1999, Decree No. 30/2000 and Law No. 36/1999. Certain interconnection fees are determined based on negotiations between interconnecting parties. On December 28, 2006, TELKOM and all other network operators signed amendments to their respective existing interconnection agreements for the implementation of the cost-based tariffs obligated under Regulation No. 8/ Per/ M.KOMINFO/02/2006. The amendments took effect on January 1, 2007.

      Local Fixed line Interconnection with Indosat. Indosat launched its CDMA fixed wireless access service under the brand name “StarOne” in Surabaya on May 29, 2004 and in Jakarta on July 25, 2004, thereby creating a “duopoly system” in Indonesia’s fixed line domestic telecommunications market. Based on the interconnection agreement between TELKOM and Indosat for interconnection of local and domestic long distance calls, dated September 23, 2005, the operator of the network on which the calls terminate receives an agreed amount per minute.

      Other Fixed Wireless Interconnection. Fixed wireless networks may interconnect to TELKOM’s fixed line network at TELKOM’s gateway. As of the date of this Annual Report, other than TELKOM and Indosat, PT Bakrie Telecom (formerly Ratelindo) also operates a fixed wireless network in Indonesia. The fixed wireless interconnection between TELKOM and PT Bakrie Telecom is currently based on the most recent interconnection agreement signed in 2005. Pursuant to the agreement, for interconnection of local calls, the operator of the network on which the calls terminate receives an agreed amount per minute. For local calls originating on PT Bakrie Telecom’s network and terminating on a cellular network and vice versa which transit through TELKOM’s fixed line network, TELKOM receives an agreed percentage of the prevailing tariff for local calls. For domestic long-distance calls that originate on TELKOM’s fixed line network and terminate on PT Bakrie Telecom’s network, PT Bakrie Telecom receives an agreed amount per minute. For domestic long-distance calls that originate on PT Bakrie Telecom’s fixed line network and terminate on TELKOM’s network and for transit long-distance calls through TELKOM’s fixed line network, TELKOM receives an agreed percentage of the prevailing long-distance tariff. In addition, PT Bakrie Telecom receives a certain fixed amount for each minute of incoming and outgoing international calls to and from PT Bakrie Telecom that transit through TELKOM’s fixed line network and use TELKOM’s IDD service. It also receives 25% of the prevailing interconnection tariff of incoming and outgoing international calls that transit through TELKOM’s fixed line network but use Indosat’s IDD service.

      Other Fixed Wireline Interconnection. Since September 1, 1998, TELKOM has been receiving a share of the tariffs from Batam Bintan Telekomunikasi (“BBT”), which is a local operator with a special coverage area on Batam Island, for each successful call that transits or terminates on TELKOM’s fixed line network. Under the interconnection agreement, for local interconnection calls, revenues are shared on a “sender-keeps-all” basis. For local calls originating on BBT’s network and terminating on a cellular network and vice versa which transit through TELKOM’s fixed line network, TELKOM receives an agreed percentage of the prevailing tariff for local calls. For interconnection of DLD calls, the operator of the network on which the calls terminate or transit receives an agreed percentage of the prevailing long-distance tariff. In addition, BBT receives a certain fixed amount for each minute of incoming and outgoing international calls from and to BBT that transit through TELKOM’s fixed line network and use TELKOM’s IDD service and 50% of the prevailing interconnection tariff for incoming and outgoing international calls that transit through TELKOM’s fixed line network and use Indosat’s IDD service.

Cellular Interconnection

      In respect of local interconnection calls, including transit calls, between a cellular network and TELKOM’s fixed line network, TELKOM receives 50% of the prevailing fixed-line usage tariff for local

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pulse. For local calls from TELKOM’s fixed line network to a cellular network, TELKOM charges its subscribers the applicable local call tariff plus an airtime charge, and pays the cellular operator the airtime charge. For local calls between cellular telecommunications networks, the originating cellular operator pays the terminating cellular operator air time charges.

      The Interconnection Decree, effective April 1, 1998, assumes that it is possible for long-distance calls to be carried by more than one network. Pursuant to the Interconnection Decree, for DLD calls which originate on TELKOM’s fixed line network, TELKOM is entitled to retain a portion of the prevailing DLD tariff, which ranges from 40% of the tariff in cases where the entire DLD portion is carried by a cellular operator up to 85% of the tariff in cases where the entire DLD portion is carried by TELKOM’s fixed line network. For DLD calls that originate from a cellular subscriber, TELKOM is entitled to retain a portion of the prevailing DLD tariff, which ranges from 25% of the tariff in cases where the call originates from a cellular subscriber, transits through TELKOM’s fixed line network and terminates on another cellular subscriber with the entire DLD portion carried by a cellular operator, up to 85% of the tariff in cases where the entire DLD portion is carried by TELKOM’s fixed line network and terminates on TELKOM’s fixed line network.

International Interconnection

      Interconnection on TELKOM’s domestic fixed line network for international calls consists of access charges and usage charges. The following table sets forth the current international interconnection tariff in 2006 for IDD calls which are routed through Indosat’s international gateways and which originate, transit or terminate on TELKOM’s domestic fixed line network and Telkomsel’s cellular network, pursuant to Ministerial Decree No. 37 of 1999:

Description	Tariff
Access Charge		Rp.850/successful call
Usage Charge		Rp.550/paid minute

      A new interconnection tariff scheme became effective on January 1, 2007. For further information on the interconnection scheme, see “— Regulations — Interconnection” above.

      In addition, since June 2004, TELKOM has provided IDD services. As of the date of this Annual Report, TELKOM’s IDD service can be accessed by subscribers of all telecommunication operators in Indonesia. Interconnection and access charges for originating calls using TELKOM’s IDD service or terminating incoming international calls routed through TELKOM’s international voice telecommunications gateway are negotiated with each respective domestic operator.

Satellite Phone Interconnection

      Since the fourth quarter of 2001, TELKOM has been receiving a share of revenues arising from interconnection transactions with PSN, a national satellite operator. Under the agreement, in respect of the interconnection calls between TELKOM and PSN, TELKOM receives Rp.800 per minute for network charges and an additional Rp.300 per minute origination fee if the call originates from TELKOM’s fixed line network.

VoIP Interconnection

      Previously, MoC Decree No. 23/2002 provided that access charges and network lease charges for the provision of VoIP services were to be agreed between network operators and VoIP operators. On March 11, 2004, the MoC issued Decree No. 31/2004, which stated that interconnection charges for VoIP were to be fixed by the MoC. As of the date of this Annual Report, the MoCI, to which telecommunications regulatory responsibility was transferred in February 2005, has not yet determined what the new VoIP interconnection charges will be. Until such time as the new charges are fixed, TELKOM will continue to receive connection fees for calls that originate or terminate on TELKOM’s fixed line network at agreed fixed amounts per minute.

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Trademarks, Copyrights and Patents

      TELKOM has a number of registered intellectual property rights consisting of trademarks, copyrights and patents. TELKOM has registered with the Directorate General of Intellectual Property Rights of the Ministry of Justice and Human Rights of the Republic of Indonesia (i) trademarks for its corporate name, logo and certain services including the names of TELKOM’s products; (ii) copyrights of books and artworks; and (iii) a patent for SMS grouping services. In addition, TELKOM is in the process of applying for copyrights of certain books. These intellectual property rights are important to TELKOM’s business.

C. Business and Organizational Structure

Information on Subsidiaries and Associated Companies

Subsidiaries

      As of December 31, 2006, TELKOM had interests in nine consolidated direct subsidiaries and five unconsolidated direct associated companies. The business activities of the consolidated subsidiaries (as further described below) are described as part of TELKOM’s business in this Annual Report, as well as in Note 1c to the consolidated financial statements. For a description of the activities of TELKOM’s unconsolidated associated companies, see “Unconsolidated Associated Companies” below and Note 11 to the consolidated financial statements.

      The following table sets forth TELKOM’s direct ownership interest in companies as of December 31, 2006. TELKOM’s ownership interests in associated companies may be increased or diluted as a result of TELKOM’s planned restructuring of its legal ownership interests in these companies to focus on fixed phone, mobile phone and multimedia businesses. In January 2006, TELKOM’s subsidiary, PT Multimedia Nusantara (“Metra”) together with PT Mekar Prana Indah (owned by Dana Pensiun Bank Indonesia or Bank Indonesia’s Pension Fund) and Yayasan Kesejahteraan Karyawan Bank Indonesia) established a company called PT Finnet Indonesia. The new company will provide nationwide financial network services transmitting banking data and e-payments throughout Indonesia.

	Legal
	Ownership (%)
	As of
	December 31,
Company	2006		Notes		Business Operations
CONSOLIDATED
A. Direct subsidiaries
Fixed Phone:
PT AriaWest International (“AriaWest”)		100		(1)	Telecommunications
PT Dayamitra Telekomunikasi (“Dayamitra”)		100		(2)	Telecommunications
PT Pramindo Ikat Nusantara (“Pramindo”)		100		(3)	Telecommunications construction & services
Cellular:
PT Telekomunikasi Selular (“Telkomsel”)		65		(4)	Telecommunications (GSM cellular phone services)
Application, Content, Datacom:
PT Multimedia Nusantara (“Metra”)		100		(5)	Multimedia
PT Infomedia Nusantara (“Infomedia”)		51		(6)	Data and information service
PT Indonusa Telemedia (“Indonusa”)		96		(7)	Pay TV
PT Napsindo Primatel Internasional (“Napsindo”)		60		(8)	Telecommunications
Property & Construction:
PT Graha Sarana Duta (“GSD”)		99.9		(9)	Real estate, construction and services
B. Indirect subsidiaries
Telekomunikasi Selular Finance Limited (“TSFL”)		100		(10)	Finance
Telkomsel Finance B.V.(“TFBV”)		100		(11)	Finance
Aria West International Finance B.V. (“AWI BV”)		100		(12)	Finance
PT Balebat Dedikasi Prima (“Balebat”)		65		(13)	Printing
PT Finnet Indonesia (“Finnet”)		60		(14)	Banking data and communication

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	Legal
	Ownership (%)
	As of
	December 31,
Company	2006		Notes		Business Operations
UNCONSOLIDATED
A. Direct associated companies
Where TELKOM owns between 20% to 50%:
PT Patra Telekomunikasi Indonesia (“Patrakom”)		40		(15)	VSAT services
PT Citra Sari Makmur (“CSM”)		25		(16)	VSAT and other telecommunication services
PT Pasifik Satelit Nusantara (“PSN”)		22.38		(17)	Satellite transponder and communications
Where TELKOM owns less than 20%:
PT Batam Bintan Telekomunikasi (“BBT”)		5		(18)	Fixed-phone (in Batam and Bintan islands)
PT Pembangunan Telekomunikasi Indonesia (“Bangtelindo”)		3.18		(19)	Telco network and equipment maintenance
B. Indirect associated companies
Bridge Mobile Pte. Ltd. (“BMP”)		12.5		(20)	Mobile services (in the Asia Pacific)

(1)	TELKOM fully controlled AriaWest from July 31, 2003, after acquiring 100% of AriaWest from PT.Aria Infotek (52.50%), MediaOne International I B.V. (35%) and The Asian Infrastructure Fund (12.50%). Pursuant to the Sale and Purchase Agreement dated September 12, 2005, one share in AriaWest was transferred to Mr. John Welly in order to comply with the legal requirement that Indonesian limited liability companies should be owned by more than one shareholder. On March 6, 2007, the name of PT Aria West International was changed to PT Telekomunikasi Indonesia International (See note 54b to the consolidated financial statements).
(2)	TELKOM controlled 100% of the shares of Dayamitra from December 14, 2004, following the acquisition of 9.68% shares of Dayamitra from TM Communications (HK) Ltd., which increased TELKOM’s ownership in Dayamitra from 90.32% to 100%. One TELKOM’s share in Dayamitra was transferred to Mr. Robby Rubama Sadeli in order to comply with the legal requirement that Indonesian limited liability companies be owned by more than one shareholder.
(3)	TELKOM and the shareholders of Pramindo signed a Conditional Sale and Purchase Agreement for the sale of the Pramindo shares on April 19, 2002, pursuant to which TELKOM received 30% of the shares of Pramindo in August 2002 and additional 15% in September 2003 while the remaining 55% was to be transferred to TELKOM on December 15, 2004. Although TELKOM only had 30% of the shares of Pramindo, TELKOM acquired control of Pramindo on August 15, 2002 and accordingly, TELKOM consolidated 100% of Pramindo from August 15, 2002. TELKOM signed a short-term loan agreement with ABN AMRO Bank N.V. Jakarta in the amount of approximately US$130 million on January 29, 2004 to finance the accelerated purchase of the remaining 55%. On March 15, 2004, TELKOM used the loan proceeds to repurchase the promissory notes that were due on June 15, 2004, September 15, 2004 and December 15, 2004. Following this transaction, TELKOM owned 100% of Pramindo. One of TELKOM’s shares in Pramindo was transferred to Mr. Adek Julianwar in order to comply with the legal requirement that Indonesian limited liability companies be owned by more than one shareholder.
(4)	Telkomsel was established in 1995 by TELKOM (5 1%) and PT Indosat Tbk (49%). Following various transactions and changes in ownership, Telkomsel is currently owned by TELKOM (65%) and Singapore Telecom Mobile Pte. Ltd. (35%).
(5)	TELKOM increased its ownership in Metra on April 8, 2003 to 100% by acquiring 69% of the shares of Metra from PT Indocitra Grahabawana under a share-swap transaction. TELKOM intends to use Metra to operate multimedia services in line with TELKOM’s strategy to focus on phone, mobile and multimedia services. Pursuant to a sale and purchase agreement dated September 12, 2005, one share in Metra was transferred by TELKOM to Mr. John Welly in order to comply with the legal requirement that Indonesian limited liability companies be owned by more than one shareholder. On July 21, 2005, the Annual General Meeting of Stockholders of Metra resolved to issue additional share capital totaling Rp. 26,000 million to the Company. The Company paid the entire amount on October 21, 2005.
(6)	Infomedia was established in 1984 and is currently owned by TELKOM (51%) and PT Elnusa (49%), a subsidiary of PERTAMINA, an Indonesian state-owned oil company. Infomedia provides telephone directory and other information services.
(7)	On August 8, 2003, TELKOM and PT Centralindo Pancasakti Cellular (“CPSC”) signed a share-swap agreement pursuant to which TELKOM received an additional 31% of the shares of Indonusa from CPSC. Following this transaction, TELKOM’s ownership in Indonusa increased from 57% to 88%. Pursuant to an extraordinary general meeting of the shareholders of Indonusa on October 29, 2003, all of the stockholders agreed to convert an additional Rp.13,500 million of debt owed by Indonusa to TELKOM into newly issued shares of Indonusa. Following such conversion, TELKOM’s ownership in Indonusa increased from 88% to 90%. As of December 31, 2005, CPSC did not hold any shares in Indonusa. CPSC is not a major customer of TELKOM. In November 2005, TELKOM increased its ownership in Indonusa from 90% to 96% by acquiring 5.29% of the shares in Indonusa, owned by PT Megacell Media.
(8)	TELKOM increased its ownership in Napsindo from 32% to 60% by acquiring 28% of the shares of Napsindo from PT Info Asia Sukses Mandiri (“InfoAsia”) on January 28, 2003. Napsindo is currently owned by TELKOM (60%) and PT Info Asia Sukses Mandiri (40%). As of January 13, 2006, Napsindo had ceased operations. On April 18, 2007, Napsindo’s NAP license was revoked

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	by the DGPT under Decree No. 109/2007 concerning the Revocation of ISP and NAP Operational Licenses. As disclosed in TELKOM’s consolidated financial statements as of and for the year ended December 31, 2006, Napsindo has ceased its operation since January 13, 2006 and accordingly, no material adverse effect on TELKOM is expected from the revocation of Napsindo’s NAP license.
(9)	TELKOM acquired 100% of GSD on April 6, 2001, from Koperasi Mitra Duta and Dana Pensiun Bank Duta. TELKOM transferred one of such shares to Mr. Martono in order to comply with the legal requirement that Indonesian limited liability companies should be owned by more than one shareholder.

(10)	Telkomsel has 100% direct ownership interest in TSFL, a company established in Mauritius on April 22, 2002. TSFL’s objective is to raise funds for the development of Telkomsel’s business through the issuance of debenture stock, bonds, mortgages or any other securities.
(11)	TFBV, a wholly owned subsidiary of Telkomsel, was established in Amsterdam, the Netherlands, on February 7, 2005, for the purpose of borrowing, lending and raising funds, including issuance of bonds, promissory notes or debt instruments.
(12)	AWI BV, a company established in the Netherlands, is a wholly owned subsidiary of AWI. AWI BV is engaged in rendering services in the field of trade and finance service.
(13)	Balebat is a company engaged in the printing business, domiciled in Bogor, Indonesia. On July 1, 2006 Infomedia purchased 14% of Balebat’s shares from other shareholders, thereby increasing Infomedia’s ownership interest from 51% to 65%.
(14)	Finnet was established in January 2006 by Metra (60%), a wholly-owned subsidiary of TELKOM and PT Mekar Prana Indah, owned by Dana Pensiun Bank Indonesia/ Bank Indonesia Pension Fund and Yayasan Kesejahteraan Bank Indonesia. Finnet provides nationwide financial network services transmitting banking data and e-payments.
(15)	On August 26, 2005, TELKOM purchased a 10% stake in PT Patra Telekomunikasi Indonesia (“Patrakom”) from Indosat. As a result, TELKOM’s ownership in Patrakom increased from 30% to 40%, and the remaining shares are owned by PT Elnusa (40%) and PT Tanjung Mustika (20%).
(16)	CSM was established in 1986 by Mr. Subagio Wirjoatmodjo and Bell Atlantic Indonesia Inc. Currently, CSM is owned by PT Tigatra Media (38.29%), Media Trio (L) Inc. Malaysia (36.71%), and TELKOM (25%).
(17)	As part of the agreement signed on August 8, 2003 between TELKOM and CPSC, TELKOM was entitled to receive CPSC’s 21.12% interest in PSN within a period of one year from the date the agreement was signed. During this period, all of CPSC’s rights in respect of the shares were granted to TELKOM. TELKOM received the shares of CPSC in PSN on August 9, 2004, increasing its legal ownership interest in PSN to 43.69%. PSN and its creditors have consummated a debt-to-equity conversion, pursuant to which PSN issued 18,180,660 new shares to the creditors. The conversion has the effect of diluting the shareholding percentage of the existing shareholders of PSN, including TELKOM. In 2005, TELKOM’s ownership interest in PSN was diluted to 35.5% as a result of the debt-to-equity conversion. In January 2006, TELKOM’s ownership interest in PSN was further diluted to 22.38% as a result of issuance of new shares to a new shareholder.
(18)	BBT was established in 1996 by PT Batamindo Investment Co (95%) and TELKOM (5%). BBT provides fixed line services at Batamindo Industrial Park in Muka Kuning, Batam Island and at Bintan Beach International Resort and Bintan Industrial Estate in Bintan Island. There are special economic and tourist development zones on those islands.
(19)	Bangtelindo was established in 1993 by TELKOM (15%), PT Indosat (15%), PT Inti (15%) and other shareholders (55%). Bangtelindo is currently owned by Dana Pensiun TELKOM (82%), TELKOM (3.18%) and other shareholders (14.82%).
(20)	BMP was established in 2004 by Telkomsel (14.286%) and six other international mobile operators in the Asia-Pacific region. On April 14, 2005, Telkomsel’s ownership interest was diluted to 12.5% following the issuance of new shares by BMP to a new shareholder, namely, Hong Kong CSL Limited.

Unconsolidated Associated Companies

PT Patra Telekomunikasi Indonesia (“Patrakom”)

      Patrakom was established in September 1995 and as of the date of this Annual Report is owned by TELKOM (40%), PT Elnusa (40%) and PT Tanjung Mustika (20%). Patrakom provides satellite communication (VSAT) and related services and facilities to companies in various industries.

PT Citra Sari Makmur (“CSM”)

      CSM was established in February 1986 and as of the date of this Annual Report is owned by TELKOM (25%), PT Tigatra Media (38.29%) and Media Trio (L) Inc. Malaysia (36.71%). CSM is incorporated in Indonesia and provides telecommunications services relating to VSAT applications and other telecommunications technology and related facilities.

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PT Pasifik Satelit Nusantara (“PSN”)

      PSN was established in July 1991 and as of the date of this Annual Report, PSN is legally owned by Magic Alliance Labuan Limited (42.67%), TELKOM (22.38%), Bank of New York (9.97%), Pulsa Labuan Limited (3.95%), Skaisnetindo Teknotama (3.77%), PT Trinur Cakrawala (3.75%), Hughes Space and Communications International (3.71%), Telesat Canada (3.71%) and others (6.10%). PSN provides satellite leasing and satellite-based communication services to countries within the Asia Pacific region. PSN conducted an initial public offering of its common stock and listing on NASDAQ in June 1996, but was delisted on November 6, 2001 due to its failure to meet certain NASDAQ National Market Listing requirements.

      As part of the agreement signed on August 8, 2003 between TELKOM and CPSC, TELKOM was entitled to receive CPSC’s 21.12% interest in PSN within a period of one year from the date the agreement was signed. During this period, all of CPSC’s rights in respect of the shares were granted to TELKOM. TELKOM received the shares of CPSC in PSN on August 9, 2004, increasing its legal ownership interest in PSN to 43.69%. In 2005, TELKOM’s ownership interest in PSN was diluted to 35.5% as a result of the debt-to-equity conversion by PSN. In 2006, TELKOM’s ownership interest in PSN was further diluted to 22.38% as a result of issuance of new shares to a new shareholder.

      As of the date of this Annual Report, TELKOM is evaluating the costs and benefits associated with an increase of its ownership in PSN to develop a retail satellite based service such as cellular via satellite and to support the government program for providing telecommunications lines to remote areas.

PT Batam Bintan Telekomunikasi (“BBT”)

      BBT was established in June 1996 and as of the date of this Annual Report is owned by TELKOM (5%) and Batamindo Investment (95%). BBT provides fixed line telecommunications services at Batamindo Industrial Park in Muka Kuning, Batam Island and at Bintan Beach International Resort and Bintan Industrial Estate in Bintan Island which are special economic and tourist development zones on those islands.

PT Pembangunan Telekomunikasi Indonesia (“Bangtelindo”)

      Bangtelindo was established in December 1993 in Indonesia. The shareholders of Bangtelindo are TELKOM (3.18%), TELKOM’s Pension Fund (82%) and others (14.82%). Bangtelindo’s primary business is providing telecommunications network maintenance services and consultancy services on the installation and maintenance of telecommunications facilities.

Bridge Mobile Pte. Ltd.

      On November 3, 2004, Telkomsel together with six other international mobile operators in the Asia Pacific established Bridge Mobile Pte. Ltd. (Singapore), a company that is engaged in providing regional mobile services in the Asia Pacific.

      Telkomsel previously held a 14.286% ownership interest. In 2005, Telkomsel’s ownership interest in Bridge Mobile Pte. Ltd. was diluted to 12.5% as a result of the issuance of shares by Bridge Mobile Pte. Ltd. to a new shareholder, namely, Hong Kong CSL Limited.

PT Mandara Selular Indonesia (“MSI”), previously referred to as PT Mobile Selular Indonesia (“Mobisel”)

      On January 13, 2006, TELKOM sold its entire ownership interest in MSI to a third party, namely, Twinwood Venture Limited. The resulting gain was not significant to TELKOM’s consolidated statement of income.

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D. Property, Plants and Equipment

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

      As of December 31, 2006, TELKOM, excluding its subsidiaries, had land use rights to approximately 2,578 properties. TELKOM holds registered rights to build for the majority of its real property. Pursuant to Government Regulation No. 40 of 1996, the maximum initial periods for rights to build are 30 years and may be extended for an additional 20 years. Most of TELKOM’s real property is used to host equipment for the provision of telecommunications operations including exchanges, transmission stations and microwave radio equipment. None of TELKOM’s properties are mortgaged. TELKOM is not aware of any environmental issues which may affect the utilization of its properties.

ITEM 5. OPERATING AND FINANCIAL REVIEW AND PROSPECTS

      The following discussion and analysis should be read in conjunction with the consolidated financial statements of TELKOM for the three years ended December 31, 2004, 2005 and 2006 included elsewhere in this Annual Report. These consolidated financial statements were prepared in accordance with Indonesian GAAP, which differs in certain significant respects from U.S. GAAP. See Note 56 to the consolidated financial statements for our reconciliation to U.S. GAAP.

A. Operating Results

Overview

      TELKOM is the principal provider of local and domestic telecommunications services in Indonesia, as well as the leading provider of mobile cellular services through its majority owned subsidiary Telkomsel. TELKOM’s objective is to become a leading full service and network provider in Indonesia through the provision of a wide range of communications services. As of December 31, 2006, TELKOM had approximately 12.9 million fixed lines in service comprising 8.7 million lines on its fixed wireline network and 4.2 million lines on its fixed wireless network and Telkomsel had approximately 35.6 million mobile cellular subscribers. TELKOM also provides a wide range of other communication services, including telephone network interconnection services, multimedia, data and Internet communication-related services, satellite transponder leasing, leased line, intelligent network and related services, cable television and VoIP services.

      TELKOM believes that its operating results in 2004 were significantly affected by:

•  the general economic situation in Indonesia, particularly the depreciation of the Rupiah during 2004;

•  an increase in fixed line tariffs by 9%;

•  increased competition among cellular operators, particularly in the prepaid market;

•  the growth in the Indonesian cellular market and the corresponding increase in Telkomsel’s revenues;

•  the growth in TELKOM’s revenues from interconnection, data and Internet services;

•  the amendment of the KSO agreement with MGTI on January 20, 2004 which resulted in TELKOM obtaining the legal right to control financial and operating decisions of KSO IV, and the subsequent consolidation of KSO IV; and

•  increased depreciation expense and operations and maintenance expenses associated with Telkomsel’s expansion of its network capacity and an increase in TELKOM’s fixed assets due to TELKOM’s aggressive deployment of fixed wireless.

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      TELKOM believes that its operating results in 2005 were significantly affected by:

•  the increase in fixed lines, particularly in fixed wireless lines;

•  increased competition among cellular operators, particularly in the prepaid market;

•  the growth in the Indonesian cellular market and the corresponding increase in Telkomsel’s revenues;

•  increased demand for data and Internet services, particularly in SMS, broadband Internet, and data communication network services using frame relay, SMS and IP VPN;

•  increased operations and maintenance expenses associated with Telkomsel’s expansion of its network capacity and an increase in TELKOM’s fixed assets due to TELKOM’s aggressive deployment of fixed wireless;

•  increased depreciation expense, primarily due to Telkomsel’s expansion of its network capacity, increase in TELKOM’s fixed wireless assets and change in TELKOM’s estimate of remaining useful lives for certain cable network facilities (WLL and Approach Link equipment) and certain Jakarta and West Java transmission and installation equipment (BSS equipment); and

•  write-down of assets and loss on procurement commitments due to the Government’s decision to allocate the 1900 MHz frequency spectrum for exclusive use in 3G services commencing at the end of 2007 which resulted in TELKOM no longer being able to use its BSS equipment operating in the 1900 MHz in the Jakarta and West Java areas commencing at the end of 2007.

      TELKOM believes that the factors that have materially affected TELKOM’s operating results, as well as the environment in which it operates, during 2006 were:

•  the increase in fixed lines, particularly in fixed wireless lines;

•  increased competition among cellular operators, particularly in the prepaid market;

•  the growth in the Indonesian cellular market and the corresponding increase in Telkomsel’s revenues;

•  increased demand for data and Internet services, particularly in SMS;

•  increased operations and maintenance expenses associated with TELKOM’s aggressive deployment of network infrastructure, mainly due to Telkomsel’s expansion of its network capacity;

•  increased depreciation expenses, primarily due to Telkomsel’s expansion of its network capacity and the increase in TELKOM’s fixed wireless assets; and

•  the amendment of the KSO agreement with PT Bukaka Singtel International (BSI) on October 19, 2006 which resulted in TELKOM obtaining the legal right to control financial and operating decisions of KSO VII, and the subsequent consolidation of KSO VII.

      TELKOM’s operating results, discussed below under “— Results of Operations”, for the three-year period from 2004 through 2006 reflected significant growth in operating revenues, particularly in the fixed wireless, cellular, interconnection, and data and Internet. The growth in operating revenues in the fixed wireless business reflected growth in subscribers’ wireless pulse production. The growth of revenues in the cellular business primarily reflected growth in the number of Telkomsel’s cellular subscribers. The growth of revenues in data and Internet services primarily reflected the increase in SMS traffic from Telkomsel subscribers and increased usage of TELKOM’s multimedia services. Interconnection revenues have also increased as a result of higher interconnection charges received from mobile cellular operators and from the launch of its international long-distance services under the “TIC-007” brand in June 2004. KSO revenues have declined in the three-year period from 2004 through 2006 due to the acquisitions of KSO IV and VII.

      TELKOM’s operating results for the three-year period from 2004 to 2006 also reflected significant growth in operating expenses. From 2004 to 2005, the growth of operating expenses was primarily driven by write-down of assets, and an increase in depreciation expense, personnel expenses and operations, maintenance and telecommunication services expenses. From 2005 to 2006, the growth of operating expenses was primarily

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driven by an increase in depreciation expense, personnel expenses and operations, maintenance and telecommunication services expenses.

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

      The increase in operations, maintenance and telecommunication services expenses in 2006 was primarily due to a network expansion by TELKOM, an increase of concession and USO fees as well as an increase of radio frequency usage charges, including 3G’s annual BHP fee (“Beban Hak Penyelenggaraan” or annual rights of usage fee).

      Personnel expenses increased in 2006 primarily due to an increase in early retirement program expense.

      In 2005, TELKOM recognized loss on foreign exchange of Rp.516.8 billion primarily due to foreign exchange losses on its US Dollar borrowings. In 2006, TELKOM recognized gain on foreign exchange of Rp.836.3 billion primarily due to foreign exchange gain on its US Dollar borrowings. The gain on foreign exchange was due to the relatively modest appreciation of the Rupiah during 2006, compared to the modest depreciation of the Rupiah during 2005.

Economic Situation in Indonesia

      In the three-year period from 2004 through 2006, the Rupiah experienced the following (based on Bank Indonesia’s middle exchange rate):

•  in 2004, a depreciation from Rp.8,465 per US Dollar at December 31, 2003 to Rp.9,290 per US Dollar at December 31, 2004;

•  in 2005, a depreciation from Rp.9,290 per US Dollar at December 31, 2004 to Rp.9,830 per US Dollar at December 31, 2005; and

•  in 2006, an appreciation from Rp.9,830 per US Dollar at December 31, 2005 to Rp.9,020 per US Dollar at December 31, 2006.

      As of June 27, 2007, Bank Indonesia’s middle exchange rate was Rp.9,114 to US$1.

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      For the years ended December 31, 2004, 2005 and 2006, the annual inflation rate was 6.4%, 17.1% and 6.6%, respectively. The interest rate on a one-month Bank Indonesia Certificate (SBI) as of December 31, 2004, 2005 and 2006 was 7.4%, 12.8% and 9.8%, respectively. See Item 3. “Key Information — D. Risk Factors — Risks relating to Indonesia — Declines or volatility in Indonesia’s currency exchange rates can have a material adverse impact on business activity in Indonesia” and Item 3. “Key Information — A. Selected Financial Data — Exchange Rate Information”.

Limited Increases in Tariffs

      Since 1995, Indonesian law has provided for domestic fixed line tariff adjustments to be determined by a price cap formula that calculates the maximum total percentage increase in tariffs for a particular year. The maximum increase equals the Indonesian inflation rate (referred to by the Government as the Consumer Price Index (“CPI”)) typically for the last two years, as published by the Indonesian Central Bureau of Statistics, minus an efficiency factor (the “X-factor”), which the Government determines by taking into consideration certain factors including improvements in the cost efficiency of the services resulting from technological improvements, the interests of affected telecommunications operators and the purchasing power of customers. Based on Announcement No. PM.2 year 2004 of the Minister of Communications dated March 30, 2004, TELKOM adjusted the tariffs effective April 1, 2004 as follows:

•  Local charges increased by an average of 28%;

•  Direct long distance charges decreased by an average of 10%; and

•  Monthly subscription charges increased by an average of 12% to 25%, depending on customer’s segment.

      See Item 3. “Key Information — D. Risk Factors — Risk relating to TELKOM and its subsidiaries — TELKOM operates in a legal and regulatory environment that is undergoing significant reforms and such reforms may adversely affect TELKOM’s business”. For details of the increase and rebalancing of tariffs by the Government, see Item 4. “Information on the Company — B. Business Overview  — Competition — Tariffs for the Provision of Telecommunication Services — Fixed Wireline Tariffs”.

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

      The Indonesian cellular market has increased significantly in recent years. Telkomsel experienced a 37.9% growth in net operating revenues from 2005 to 2006, due to a 46.7% growth in its total number of cellular subscribers, as a result of the increased usage of mobile cellular phones in Indonesia and a corresponding increase in revenues from air time charges. Telkomsel experienced a 43.1% growth in net operating revenues from 2004 to 2005, due to a 49.0% growth in its total number of cellular subscribers, as a result of the increased usage of mobile cellular phones in Indonesia and a corresponding increase in revenues from air time charges. Telkomsel’s revenues from cellular phone services (air time charges — net) accounted for approximately 40.4% of TELKOM’s consolidated total operating revenues for the year ended December 31, 2006, compared to 34.9% for the year ended December 31, 2005 and 30.7% for the year ended December 31, 2004.

      Due to the growth in the cellular market, competition has increased among cellular operators, particularly in the prepaid market. These cellular operators also compete to a lesser extent with fixed wireless operators, with the growing number of fixed wireless lines in service.

Increase in TELKOM’s Interconnection Revenues

      TELKOM’s interconnection revenues accounted for approximately 16.9% of TELKOM’s consolidated operating revenues for the year ended December 31, 2006, compared to 18.5% for the year ended December 31, 2005 and 18.2% for the year ended December 31, 2004. From 2005 to 2006, the 12.1% increase in interconnection revenues was primarily due to a 11.3% increase in net interconnection charges paid to TELKOM by mobile cellular operators to Rp.7,442.3 billion and a 17.1% increase in interconnection revenue from international calls to Rp.1,001.3 billion. TELKOM recognizes these international long-distance revenues

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as interconnection revenues. From 2004 to 2005, the 25.1% increase in interconnection revenues was primarily due to a 24.9% increase in net interconnection charges paid to TELKOM by mobile cellular operators to Rp.6,685.1 billion and a 33.3% increase in interconnection revenues from international calls to Rp.854.8 billion. On February 8, 2006, the MoCI issued Regulation No. 8/ Per/ M.KOMINFO/02/2006, which mandates a new cost-based interconnection tariff scheme for all telecommunications network and service operators and became effective on January 1, 2007. On December 28, 2006, TELKOM and all network operators signed amendments to their interconnection agreements for their fixed line networks (local, domestic long distance and international) and mobile network for the implementation of the cost-based tariff obligations. Under the new scheme, the operator of the network on which calls terminate will determine the interconnection charge to be received by it based on a formula to be mandated by the Government, which will require the operators to charge for calls based on the costs of carrying such calls. For further information on the interconnection scheme, see Item 4. “Information on the Company — B. Business Overview — Regulations — Interconnection”; and Item 3. “Key Information” — D. Risk Factors — Risks relating to TELKOM and its subsidiaries — TELKOM operates in a legal and regulatory environment that is undergoing significant reforms and such reforms may adversely affect TELKOM’s business”.

Increase in TELKOM’s Data and Internet Revenues

      Data and Internet revenues accounted for approximately 17.7% of TELKOM’s consolidated operating revenues for the year ended December 31, 2006, compared to 16.6% for the year ended December 31, 2005 and 14.2% for the year ended December 31, 2004. TELKOM’s revenues from its data and Internet services increased by 30.7% from 2005 to 2006 and by 44.2% from 2004 to 2005. The increase in data and Internet revenues in 2006 was primarily due to a 26.8% increase in revenues generated from SMS services, an 83.9% increase in revenues from data communication and a 27.6% increase in revenues from Internet connectivity services. The increase in 2005 was primarily due to a 49.0% increase in revenues generated from SMS services, a 69.2% increase in revenues from data communication and a 28.2% increase in revenues from Internet connectivity services. From 2005 to 2006, revenues from VoIP services decreased by 5.0% to Rp.278.0 billion (US$30.9 million) due to a decrease in total outgoing VoIP traffic.

Acquisition and Consolidation of KSO IV and VII

      TELKOM’s operating revenues and expenses for the three-year period from 2004 through 2006 have been affected by the acquisition and subsequent consolidation of KSO IV in January 2004, and the acquisition and subsequent consolidation of KSO VII in October 2006. Prior to consolidation of KSO IV and VII, TELKOM received revenues from these KSO regions in the form of guaranteed minimum monthly payments and additional monthly revenue sharing payments from the revenues of the KSO regions after payment of the minimum monthly payments and certain operating expenses. TELKOM was not directly allocated any of the operating expenses for the KSO regions. See Item 4. “Information on the Company  — B. Business Overview — Joint Operation Scheme.” Upon consolidation, TELKOM no longer receives the minimum monthly payments and revenue sharing payments and instead consolidates all of the revenues and expenses of such KSO regions on its books. As a result, KSO revenues have declined in the three-year period from 2004 through 2006 due to the acquisitions of KSO IV and VII discussed above.

      In connection with the acquisition of KSO IV in January 2004, TELKOM recognized the full amount of the liability for the purchase price of approximately US$390.7 million or equivalent to Rp.3,285.4 billion, which represents the present value of the fixed monthly payments (totaling US$517.1 million) to be paid to MGTI (the investor in KSO IV) beginning in February 2004 through December 2010 using a discount rate of 8.3% plus direct costs of the business combination. TELKOM is entitled to the balance of KSO revenues net of operating expenses and payments to MGTI for Fixed Investor Revenues. The allocation of the acquisition cost consisted of Rp.2,377.1 billion for property, plant and equipment and Rp.908.2 billion for intangible assets. The allocation of the acquisition cost was based on an independent appraisal of fair values. Intangible assets identified from this acquisition represent the right to operate the business in the KSO area and the amount is being amortized over the remaining term of the KSO agreement of 6.9 years.

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      On October 19, 2006, TELKOM entered into an agreement with Bukaka Singtel (PT Bukaka Singtel International (BSI)) to amend and restate the KSO VII Agreement, with the purchase price at approximately Rp.1,770.9 billion. As a result, TELKOM obtained the legal right to control financial and operating decisions of KSO VII, in return TELKOM will pay PT Bukaka Singtel International (BSI) a fixed monthly payment of Rp.55.64 billion using a discount rate of 15% between October 2006 to June 2007, and Rp.44.25 billion from July 2007 until the end of the KSO period on December 2010. As a condition precedent to the coming into effect of the amended KSO agreement, TELKOM has entered into a separate assignment agreement with PT Bukaka Singtel International (BSI) and its business partners whereby PT Bukaka Singtel International (BSI) has assigned its interests in the revenue sharing agreements with its business partners to TELKOM. TELKOM is entitled to the balance of KSO revenues net of operating expenses and payments to PT Bukaka Singtel International (BSI) for Fixed Investor Revenues. The allocation of the acquisition cost consisted of Rp.1,288.9 billion for property, plant and equipment, Rp.452.2 billion for property, plant and equipment under revenue sharing arrangements, Rp.451.7 billion for intangible assets, Rp.266.3 billion for receivables, Rp.143.6 billion for cash and cash equivalents, Rp.70.0 billion for other current assets, Rp.7.0 billion for deferred tax assets, Rp.(456.6) billion for current liabilities, and Rp.(452.2) billion for unearned income on revenue sharing arrangements. Unearned income on revenue sharing arrangements represent the periodic payments to be made to the investors based on the costs incurred by the investor as agreed upon in the revenue sharing agreements with the investors. The fair value of the property, plant and equipment and property, plant and equipment under revenue sharing arrangements described above was determined by an independent appraisal whereas the fair value of other assets and liabilities was determined by management. The intangible assets represent the right to operate the business in the KSO VII area and the amount is being amortized over the remaining term of the KSO agreement of 4.3 years.

      As of December 31, 2006, the remaining monthly payments to be made to MGTI and PT Bukaka Singtel International (BSI), before unamortized discount, amounted to US$319.2 million (Rp.2,874.1 billion) and Rp.2,226.4 billion, respectively, is presented in TELKOM’s balance sheet as “Deferred consideration for business combinations”.

Write-down of Assets, Depreciation Expense, Loss on Procurement Commitments, and Operations Maintenance and Telecommunication Services Expenses

      TELKOM’s depreciation expense and operations, maintenance and telecommunication services expenses have increased significantly during the three-year period from 2004 through 2006. These increases are primarily related to Telkomsel’s expansion of its network capacity due to the growth in its subscriber base and an increase in TELKOM’s fixed assets due to deployment of fixed wireless. In particular, TELKOM began an aggressive deployment of fixed wireless in KSO IV and KSO VII following TELKOM’s acquisitions of KSO IV in January 2004 and KSO VII in October 2006. Telkomsel’s subscriber base has increased from 16,290,508 subscribers as of December 31, 2004 to 24,269,353 subscribers as of December 31, 2005 and 35,597,171 subscribers as of December 31, 2006. TELKOM’s fixed wireless service grew substantially from 1,429,368 lines in service as of December 31, 2004 to 4,061,867 lines in service as of December 31, 2005 and 4,175,853 lines in service as of December 31, 2006.

      As a result of the Government’s decision issued in the first quarter of 2005 to rearrange the frequency spectra used by the telecommunication service providers, TELKOM can no longer be able to utilize certain frequency spectra it currently uses to support fixed wireline cable network commencing at the end of 2006. Consequently, certain of TELKOM’s cable network facilities within the fixed wireline segment which comprise primarily of WLL and Approach Link Equipment operating in the affected frequency spectra, can no longer be used commencing at the end of 2006. Accordingly, TELKOM shortened its estimate of the remaining useful lives for WLL and Approach Link Equipment in the first quarter of 2005 and began depreciating the then remaining net book value of those assets through December 31, 2006. The effect of this change in estimate increased depreciation expense by Rp.471.2 billion (Rp.329.8 billion after tax) in 2005 and Rp.240.4 billion (Rp.168.3 billion after tax) in 2006.

      In August 2005, the MoCI decided to set aside 1900 MHz for the exclusive use in the 3G services and 800 MHz frequency spectrum for the exclusive use in CDMA-based technology network commencing at the

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end of 2007. As a result, TELKOM’s BSS equipment in the Jakarta and West Java areas, which operates in 1900 MHz and are part of the fixed wireless transmission installation and equipment, can no longer be used commencing at the end of 2007. On January 13, 2006, the MoCI issued MoCI Regulation No. 01/ PER/ M.KOMINFO/1/2006 which reaffirmed the Government’s decision that TELKOM’s fixed wireless network could only operate in the 800 MHz frequency spectrum and that the 1900 MHz will be allocated for 3G network. Following the MoCI’s decision, TELKOM’s reviewed the recoverable amount of cash-generating units to which the affected fixed wireless asset belongs. The recoverable amount was estimated using value in use which represented the present value of estimated future cash flows from cash-generating units using a pretax discount rate of 16.89%, representing TELKOM’s weighted average cost of capital as of December 31, 2005. TELKOM recognized a write-down of Rp.616.8 billion relating to this equipment in 2005. In addition, TELKOM changed its estimate of the remaining useful lives for the Jakarta and West Java BSS equipment and depreciated the remaining net book value of those assets through June 30, 2007, the date when all of TELKOM’s 1900 MHz BSS equipment are expected to be completely replaced with the 800 MHz BSS equipment. The effect of this change in estimate increased depreciation expense by Rp.159.0 billion (Rp.111.3 billion after tax) and Rp.173.8 billion (Rp.121.7 billion after tax) in 2005 and 2006, respectively. In addition, TELKOM recognized a loss relating to non-cancellable contracts for procurement of the 1900 MHz transmission installation and equipment in the Jakarta and West Java areas amounting to Rp.79.4 billion in 2005.

Intangible Assets

      Intangible assets comprised intangible assets from subsidiaries and business acquisitions (see Note 2d to the consolidated financial statements) and license. An intangible asset shall be recognized if it is probable that the expected future economic benefits that are attributable to the asset will flow to the Company and the cost of the asset can be reliably measured. An intangible asset is stated at cost less accumulated amortization and impairment, if any. An intangible asset is amortized over its useful life. The Company shall estimate the recoverable value of its intangible assets. When the carrying amount of an asset exceeds its estimated recoverable amount, the asset is written down to its estimated recoverable amount.

      In 2006, Telkomsel was granted the right to operate the 3G license. Telkomsel is required to pay an up-front fee and annual rights of usage (“BHP”) fee for the next ten years. The up-front fee is recorded as an intangible asset and amortized using the straight line method over the term of the right to operate the 3G license (10 years). Amortization commenced from the date when the assets attributable to the provision of the related services were available for use.

      Based on management interpretation of the license conditions and the written confirmation from the Directorate General of Post and Telecommunication, it is believed that the license could be returned at any time without any financial obligation to pay the remaining outstanding BHP fees. Based on this fact, Telkomsel concluded that it has purchased the right to make annual operating payments to operate the 3G license. Accordingly, Telkomsel recognizes the BHP fees as expenses when incurred.

      Management of Telkomsel assess its plan to continue to use the 3G license on an annual basis.

Changes in Methods of Accounting under Indonesian GAAP

      In July 2004, the Indonesian Financial Accounting Standards Board issued PSAK No. 38 (Revised 2004), “Accounting for Restructuring Transactions between Entities under Common Control,” (“PSAK 38R”). PSAK 38R changes TELKOM’s method of accounting for previously recorded restructuring transactions between entities under common control when certain conditions are met. The provisions of PSAK 38R were effective for TELKOM beginning January 1, 2005, the initial application date. Pursuant to a ruling issued by the Indonesian Capital Market and Financial Institution Supervisory Agency (“BAPEPAM”) regarding the initial application of PSAK 38R by public entities, TELKOM is required to reclassify the previously recorded difference in value of restructuring transactions between entities under common control as a direct adjustment to retained earnings as of the initial application date when the common control relationship between the transacting parties no longer exists as of January 1, 2005. The difference in value of

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restructuring transactions between entities under common control as of January 1, 2005 amounting to Rp.7,288.3 billion arose from transactions between TELKOM and Indosat, which at the time of the transactions was also controlled by the Government and therefore was an entity under common control with TELKOM. This common control relationship ceased to exist in December 2002 when the Government sold its 41.94% ownership interest in Indosat to STT Communications Ltd. (“STTC”) and waived its special voting rights with respect to the Series A Dwiwarna Share. In accordance with the BAPEPAM ruling, TELKOM has reclassified the difference in value of restructuring transactions between entities under common control resulting from the cross-ownership transactions and acquisition of Pramindo as a charge to retained earnings as of January 1, 2005. This reclassification has no effect on net consolidated stockholders’ equity. See Note 4 to TELKOM’s consolidated financial statements.

Basis of Presentation

Consolidation of TELKOM’s Financial Statements

      TELKOM consolidates its financial statements and those of subsidiaries in which TELKOM has direct ownership interest of more than 50% or where TELKOM controls the subsidiaries, even though the ownership is less than or equal to 50%.

      TELKOM consolidated the results of operations of KSO IV from February 1, 2004 being the nearest convenient balance date, after it obtained the legal right to control financial and operating decisions of KSO IV on January 20, 2004.

      TELKOM consolidated the results of operations of KSO VII from October 1, 2006 being the nearest convenient balance date, after it obtained the legal right to control financial and operating decisions of KSO VII on October 19, 2006.

Foreign Exchange Translations

      The functional currency of TELKOM and its subsidiaries is the Indonesian Rupiah and the books of accounts of TELKOM and its subsidiaries are maintained in Indonesian Rupiah. Transactions in foreign currencies are translated into Indonesian Rupiah at the rates of exchange prevailing at the transaction date. At the balance sheet date, monetary assets and monetary liability balances denominated in foreign currencies are translated into Indonesian Rupiah based on the buy and sell rates quoted by Reuters prevailing at the balance sheet date. The Reuters buy and sell rates, applied respectively to translate monetary assets and monetary liability balances, were as follows:

•  Rp.9,280 and Rp.9,300 to US$1, Rp.12,652 and Rp.12,682 to Euro1 and Rp.90.45 and Rp.90.72 to Japanese Yen1, as of December 31, 2004;

•  Rp.9,825 and Rp.9,835 to US$1, Rp.11,638 and Rp.11,652 to Euro1 and Rp.83.78 and Rp.83.89 to Japanese Yen1, as of December 31, 2005; and

•  Rp.8,995 and Rp.9,005 to US$1, Rp.11,839 and Rp.11,853 to Euro1 and Rp.75.58 and Rp.75.68 to Japanese Yen1, as of December 31, 2006.

      Telkomsel used the middle rates of Bank Indonesia, which were Rp.9,830 to US$1 and Rp.11,660 to Euro1 as of December 31, 2005 and Rp.9,020 to US$1 and Rp.11,858 to as Euro1 as of December 31, 2006. Management concluded that the difference between the exchange rates used by TELKOM and Telkomsel are not material to the consolidated financial statements. See Note 2e to the consolidated financial statements.

      The resulting foreign exchange gains and losses, realized and unrealized, are credited or charged to income of the current year, except for foreign exchange differences incurred on borrowings during the construction of qualifying assets which are capitalized to the extent that the borrowings can be attributed to the construction of those qualifying assets. See Note 2k to the consolidated financial statements.

      The consolidated financial statements are stated in Indonesian Rupiah. The translations of Indonesian Rupiah amounts for 2006 into US Dollars are included solely for the convenience of the readers and have been

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made using the average of the market buy and sell rates of Rp.9,000 to US$1 published by Reuters on December 31, 2006. The convenience translations should not be construed as representations that the Indonesian Rupiah amounts have been, could have been, or could in the future be, converted into US Dollars at this or any other rate of exchange. See Note 3 to the consolidated financial statements.

TELKOM’s Operating Revenues

      The following table sets out TELKOM’s operating revenues, itemized according to TELKOM’s main products and services, for the three years 2004 through 2006, with each item also expressed as a percentage of total operating revenues:

		Year Ended December 31,
		2004				2005				2006				2006
		Rp. (billion)		%		Rp. (billion)		%		Rp. (billion)		%		US$ (million)
Operating Revenues
Telephone
	Fixed lines		10,645.0		31.4		10,781.3		25.8		10,979.0		21.4		1,219.8
	Cellular		10,421.3		30.7		14,570.9		34.9		20,622.6		40.2		2,291.4
Revenue under Joint Operation Schemes (KSO)			656.6		1.9		588.7		1.4		489.4		1.0		54.4
Interconnection-net			6,188.0		18.2		7,742.1		18.5		8,681.5		16.9		964.6
Data and Internet			4,808.8		14.2		6,934.3		16.6		9,065.2		17.7		1,007.2
Network			654.3		1.9		586.6		1.4		718.7		1.4		79.9
Revenue-sharing Arrangements			280.6		0.8		302.3		0.7		415.5		0.8		46.1
Other telecommunications Services			293.2		0.9		301.0		0.7		322.1		0.6		35.8
Total Operating Revenues			33,947.8		100.0		41,807.2		100.0		51,294.0		100.0		5,699.3

      Subsequent to an announcement by the DGPT in August 2001 that the Government intended to terminate TELKOM’s exclusive right to provide local and domestic long-distance services, TELKOM’s exclusive rights to provide domestic local services was finally terminated in August 2002 and TELKOM’s exclusive rights to provide domestic long-distance service was likewise terminated in August 2003. TELKOM, however, received its commercial license to provide IDD fixed line services on May 13, 2004. As a result of the termination of TELKOM’s exclusive rights to provide local and domestic long-distance services, Indosat, a competitor of TELKOM, received its commercial license to provide domestic long-distance services on May 13, 2004 and began offering fixed wireless services in August 2004. Indosat began offering its domestic long-distance service in late 2004. TELKOM expects that revenues from providing interconnection services to new entrants in the domestic local and domestic long-distance markets will increase and its market share of fixed line services will decrease slightly in the future because of the liberalization of these markets. With regard to IDD fixed line services, TELKOM began offering these services to its customers on June 7, 2004 under the “TIC-007” brand. TELKOM recognizes international long-distance revenues from TELKOM’s IDD service (TIC-007) as interconnection revenues.

Fixed Line Telephone Revenues

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

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

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time band, while installation charges, phone cards and other services charges are set by individual operators. See “— Overview — Limited Increases in Tariffs” above.

      Most fixed line revenues are recognized as services are provided, except the installation charges are recognized as revenue when a fixed line (referred to as an “installation” in the consolidated financial statements) is placed in service and ready for use.

      Fixed line telephone revenues for the three years 2004 through 2006 are set out below, with each item also expressed as a percentage of operating revenues:

		Year Ended December 31,
		2004				2005				2006				2006
		Rp. (billion)		%		Rp. (billion)		%		Rp. (billion)		%		US$ (million)
Fixed Line Telephone Revenues
Local and domestic long-distance usage			7,439.3		21.9		7,223.1		17.3		7,130.9		13.9		792.3
Monthly subscription charges			2,934.9		8.6		3,289.8		7.9		3,491.5		6.8		387.9
Installation charges			201.3		0.6		197.3		0.5		170.2		0.3		18.9
Phone cards			15.6		0.1		10.9		0.0		4.0		0.0		0.4
Others			53.9		0.2		60.2		0.1		182.4		0.4		20.3
	Total		10,645.0		31.4		10,781.3		25.8		10,979.0		21.4		1,219.8

Cellular Telephone Revenues

      The main component of cellular telephone revenues is air time charges. Cellular telephone revenues also include monthly subscription charges, connection fee charges and features.

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

      In the case of postpaid subscribers, monthly subscription charges are recognized when earned (i.e., in the month to which they apply), while connection fee revenue is recognized as income when connections take place. In the case of prepaid subscribers, revenues from “starter packs” are recognized upon delivery to distributors, dealers or directly to customers, while revenues from pulse reload vouchers are recognized initially as unearned income and thereafter recognized proportionately as revenue based on duration of successful calls made using the stored value of the voucher or when the unused stored value has expired. Revenues recognized are net of dealer discounts.

      Cellular telephone revenues for the three years 2004 through 2006 are set out below, with each item also expressed as a percentage of operating revenues:

	Year Ended December 31,
	2004				2005				2006				2006
	Rp. (billion)		%		Rp. (billion)		%		Rp. (billion)		%		US$ (million)
Cellular Telephone Revenues
Air time charges		9,825.7		28.9		13,666.3		32.7		19,257.3		37.5		2,139.7
Monthly subscription charges		448.5		1.3		383.5		0.9		297.4		0.6		33.1
Connection fee charges		55.8		0.2		64.1		0.2		109.2		0.2		12.1
Features		91.3		0.3		457.0		1.1		958.7		1.9		106.5
Total		10,421.3		30.7		14,570.9		34.9		20,622.6		40.2		2,291.4

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Joint Operation Scheme (“KSO”) Revenues

KSO revenues consist of:

•  Initial payments made by the KSO partners, which were amortized over the life of the KSO Agreement;

•  Minimum TELKOM Revenues (“MTR”), being a specified minimum payment, which were payable monthly; and

•  Distributable KSO Revenues (“DKSOR”), being a specified percentage of KSO revenues after deduction of operating expenses and MTR obligation, which were payable monthly.

      KSO revenues have been decreasing due to the acquisition of KSO partners’ interests in the KSO units, resulting in the revenues of the KSO units being consolidated and included under Fixed Line revenues. The decrease in KSO revenues for 2006 resulted from the acquisition and consolidation of KSO VII in October 2006.

      KSO revenues for the three years 2004 through 2006 are set out below, with each item also expressed as a percentage of operating revenues:

		Year Ended December 31,
		2004				2005				2006				2006
		Rp. (billion)		%		Rp. (billion)		%		Rp. (billion)		%		US$ (million)
KSO Revenues
Minimum TELKOM Revenues			296.0		0.9		268.6		0.6		207.5		0.4		23.1
Share in Distributable KSO Revenues			349.5		1.0		318.6		0.8		274.6		0.6		30.5
Amortization of unearned initial investor payments under Joint Operation Schemes			11.1		0.0		1.5		0.0		7.3		0.0		0.8
	Total		656.6		1.9		588.7		1.4		489.4		1.0		54.4

Interconnection Revenues

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

      Fees charged for interconnection are determined contractually between operators, subject to maximum fee levels established by Government regulation. Revenues from network interconnection with other domestic and international telecommunications carriers are recognized as incurred based on agreement and are presented net of interconnection expenses paid to other operators. Interconnection revenues are typically accrued initially and settled among operators monthly and can fluctuate significantly as a result of adjustments among operators to accrued amounts at the time of settlement. On February 8, 2006, the MoCI issued Regulation No. 8/ Per/ M.KOMINFO/02/2006, which mandates a new cost-based interconnection tariff scheme for all telecommunications network and services operators that effectively applied on 1 January 2007. For further information on the interconnection scheme, see Item 4. “Information on the Company — B. Business Overview — Regulations — Interconnection”; and Item 3. “Key Information” — D. Risk Factors — Risks relating to TELKOM and its subsidiaries — TELKOM operates in a legal and regulatory environment that is undergoing significant reforms and such reforms may adversely affect TELKOM’s business”.

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      Interconnection revenues for the three years 2004 through 2006 are set out below, with each item also expressed as a percentage of operating revenues:

		Year Ended December 31,
		2004				2005				2006				2006
		Rp. (billion)		%		Rp. (billion)		%		Rp. (billion)		%		US$ (million)
Interconnection Revenues
Cellular			5,351.6		15.7		6,685.1		16.0		7,442.3		14.5		826.9
International			641.2		1.9		854.8		2.0		1,001.4		1.9		111.3
Other			195.2		0.6		202.2		0.5		237.8		0.5		26.4
	Total		6,188.0		18.2		7,742.1		18.5		8,681.5		16.9		964.6

Data and Internet Revenues

      The components of data and Internet revenues are revenues from SMS, internet, data communication, VoIP and e-business services. Data and Internet revenues for the three years 2004 through 2006 are set out below, with each item also expressed as a percentage of operating revenues:

		Year Ended December 31,
		2004				2005				2006				2006
		Rp. (billion)		%		Rp. (billion)		%		Rp. (billion)		%		US$ (million)
Data and Internet Revenues
SMS			3,562.7		10.5		5,309.2		12.7		6,730.5		13.1		747.8
Internet			554.9		1.6		711.4		1.7		907.5		1.8		100.8
Data communication			360.7		1.1		610.4		1.5		1,122.3		2.2		124.7
VoIP			318.9		1.0		292.7		0.7		278.0		0.5		30.9
e-business			11.6		0.0		10.6		0.0		26.9		0.1		3.0
	Total		4,808.8		14.2		6,934.3		16.6		9,065.2		17.7		1,007.2

Network Revenues

      The components of network revenues are revenues from satellite transponder leases and leased lines. Network revenues for the three years 2004 through 2006 are set out below, with each item also expressed as a percentage of operating revenues:

		Year Ended December 31,
		2004				2005				2006				2006
		Rp. (billion)		%		Rp. (billion)		%		Rp. (billion)		%		US$ (million)
Network Revenues
Satellite transponder lease			210.9		0.6		239.5		0.6		294.1		0.6		32.7
Leased lines			443.4		1.3		347.1		0.8		424.6		0.8		47.2
	Total		654.3		1.9		586.6		1.4		718.7		1.4		79.9

Revenues under Revenue-Sharing Arrangements

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

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      Revenues under revenue-sharing arrangements for the three years 2004 through 2006 are set out below, with each item also expressed as a percentage of operating revenues:

		Year Ended December 31,
		2004				2005				2006				2006
		Rp. (billion)		%		Rp. (billion)		%		Rp. (billion)		%		US$ (million)
Revenues Under Revenue- Sharing Arrangements
Net share in revenue earned under Revenue-Sharing Arrangements			198.6		0.6		165.6		0.4		263.5		0.5		29.3
Amortization of unearned income under Revenue-Sharing Arrangements			82.0		0.2		136.7		0.3		152.0		0.3		16.9
	Total		280.6		0.8		302.3		0.7		415.5		0.8		46.2

Other Telecommunications Services Revenues

      Other telecommunications services revenues primarily represent telex and telegram revenues, revenues from the telephone directory assistance business and revenues from cable television services. In 2006, TELKOM’s revenues from other telecommunications services increased by Rp.21.1 billion, or 7.0%, from Rp.301.0 billion in 2005 to Rp.322.1 billion in 2006. The increase in other telecommunications services revenues was primarily due to an increase in directory assistance revenues by Rp.23.1 billion, or 8.2%, from Rp.281.1 billion in 2005 to Rp.304.2 billion in 2006.

TELKOM’s Operating Expenses

      The following table sets out TELKOM’s operating expenses for the three years 2004 through 2006, with each item also expressed as a percentage of operating revenues:

		Year Ended December 31,
		2004				2005				2006				2006
		Rp. (billion)		%		Rp. (billion)		%		Rp. (billion)		%		US$ (million)
Operating Expenses
Depreciation			6,438.6		19.0		7,570.7		18.1		9,178.3		17.9		1,019.8
Operations, maintenance and telecommunications services			4,529.6		13.3		5,916.3		14.1		7,495.7		14.6		832.9
Personnel			4,910.0		14.5		6,563.0		15.7		8,513.8		16.6		946.0
General and Administrative			2,599.8		7.7		2,764.0		6.6		3,271.5		6.4		363.5
Marketing			881.9		2.6		1,126.2		2.7		1,241.5		2.4		137.9
Write-down of assets			—		—		616.8		1.5		—		—		—
Loss on procurement Commitments			—		—		79.4		0.2		—		—		—
	Total Operating Expenses		19,359.9		57.1		24,636.4		58.9		29,700.8		57.9		3,300.1

Depreciation Expense, Write-down of Assets and Loss on Procurement Commitments

      Depreciation expense relates to TELKOM’s property, plant and equipment. TELKOM depreciates its property, plant and equipment, except land, using the straight-line method, based on the useful lives of the assets, commencing in the month when such assets are placed into service. Equipment temporarily unused is reclassified into equipment not used in operation and depreciated over its estimated useful life using the straight line method. See Note 2k to the consolidated financial statements.

      In accordance with Indonesian GAAP, TELKOM capitalizes interest expenses and foreign exchange gains or losses for assets under construction and depreciates these amounts over the useful lives of such assets. TELKOM capitalized interest expenses for qualifying assets under construction of Rp.57.7 billion, Rp.nil and

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Rp.nil in 2004, 2005 and 2006, respectively. TELKOM also capitalized foreign exchange for those assets of Rp.74.3 billion, Rp.nil and Rp.nil in 2004, 2005 and 2006, respectively.

      As a result of the MoCI’s decisions issued in 2005 on the rearrangement of frequency spectra utilized by the telecommunication industry, certain of TELKOM’s fixed wireline cable network facilities, which comprise primarily WLL and approach link, and TELKOM’s BSS equipment in the Jakarta and West Java areas, which are part of transmission installation and equipment for fixed wireless assets, cannot be used through the end of their initial estimated useful lives. In 2005, TELKOM recognized a write-down of assets of Rp.616.8 billion related to transmission installation and equipment of fixed wireless assets and loss on procurement commitments of Rp.79.4 billion related to non-cancelable contracts for procurement of the 1900 MHz transmission installation and equipment in the Jakarta and West Java areas. TELKOM also shortened its estimate of the remaining useful lives for fixed wireline WLL and approach link equipment and the Jakarta and West Java fixed wireless BSS equipment. See “— Write-down of Assets, Depreciation Expense, Loss on Procurement Commitments, and Operations, Maintenance and Telecommunication Services Expenses” above.

Operations, Maintenance and Telecommunications Services Expenses

      Operations, maintenance and telecommunications services expenses for the three years 2004 through 2006 are set out below, with each item also expressed as a percentage of operating revenues:

		Year Ended December 31,
		2004				2005				2006				2006
		Rp. (billion)		%		Rp. (billion)		%		Rp. (billion)		%		US$ (million)
Operations, Maintenance and Telecommunications Services Expenses
Operations and Maintenance			2,398.2		7.1		3,075.1		7.3		4,209.1		8.2		467.7
Radio Frequency Usage Charges			492.6		1.5		548.2		1.3		722.6		1.4		80.3
Concession fees and Universal Service Obligation (USO) charges			314.7		0.9		709.2		1.7		881.8		1.7		98.0
Cost of phone, SIM and RUIM Cards			366.7		1.1		582.3		1.4		579.3		1.1		64.4
Electricity, gas and Water			385.7		1.1		372.5		0.9		417.3		0.8		46.4
Vehicles and supporting Facilities			181.7		0.5		217.2		0.5		246.2		0.5		27.4
Insurance			151.3		0.4		136.4		0.3		145.1		0.3		16.1
Leased lines			132.8		0.4		124.2		0.3		236.4		0.5		26.3
Traveling			42.2		0.1		33.5		0.1		39.1		0.1		4.3
Call Center			59.6		0.2		105.0		0.3		14.7		0.0		1.6
Others			4.1		0.0		12.7		0.0		4.1		0.0		0.5
	Total		4,529.6		13.3		5,916.3		14.1		7,495.7		14.6		833.0

Personnel Expenses

      The main components of personnel expenses in 2006 were salaries and related benefits, which were Rp.2,400.6 billion (US$266.7 million), vacation pay, incentives and other benefits, which were Rp.2,209.1 billion (US$245.5 million), and early retirement expenses, which were Rp.1,461.2 billion (US$162.4 million).

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      Personnel expenses for the three years 2004 through 2006 are set out below, with each item also expressed as a percentage of operating revenues:

		Year Ended December 31,
		2004				2005				2006				2006
		Rp. (billion)		%		Rp. (billion)		%		Rp. (billion)		%		US$ (million)
Personnel Expenses
Salaries and related benefits			1,796.9		5.3		2,165.9		5.2		2,400.6		4.7		266.7
Vacation pay, incentives and other benefits			1,156.1		3.4		1,615.6		3.8		2,209.1		4.3		245.5
Early retirements			243.5		0.7		486.4		1.2		1,461.2		2.8		162.4
Net periodic post-retirement health care benefit cost			416.3		1.2		488.6		1.2		604.7		1.2		67.2
Net periodic pension cost			572.4		1.7		532.3		1.3		438.4		0.9		48.7
Employee income tax			523.8		1.5		856.4		2.0		889.1		1.7		98.8
Long service awards			36.9		0.1		201.9		0.5		215.8		0.4		24.0
Housing			103.4		0.3		113.7		0.3		168.4		0.3		18.7
Medical			12.2		0.1		18.0		0.0		25.1		0.0		2.8
Other employee benefits			11.5		0.1		6.0		0.0		14.3		0.0		1.6
Others			37.0		0.1		78.2		0.2		87.1		0.3		9.6
	Total		4,910.0		14.5		6,563.0		15.7		8,513.8		16.6		946.0

General and Administrative Expenses

      The main components of general and administrative expenses in 2006 were amortization of goodwill and other intangible assets, which totaled Rp.944.4 billion (US$104.9 million), arising from the acquisitions of GSD, Dayamitra, Pramindo, AriaWest and KSO IV in previous years, the acquisition of KSO VII by TELKOM and 3G license by Telkomsel in 2006, provision for doubtful accounts and inventory obsolescence, which totaled Rp.458.2 billion (US$50.9 million), and collection expenses, which totaled Rp.542.5 billion (US$60.3 million).

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      General and administrative expenses for the three years 2004 through 2006 are set out below, with each item also expressed as a percentage of operating revenues:

		Year Ended December 31,
		2004				2005				2006				2006
		Rp. (billion)		%		Rp. (billion)		%		Rp. (billion)		%		US$ (million)
General and Administrative Expenses
Professional fees			137.3		0.4		131.0		0.3		221.0		0.4		24.6
Collection expenses			359.0		1.1		379.1		0.9		542.5		1.1		60.3
Amortization of goodwill and other intangible assets			872.3		2.6		918.2		2.2		944.4		1.8		104.9
Training, education and recruitment			228.5		0.7		177.9		0.4		224.3		0.4		24.9
Travel			192.6		0.6		171.7		0.4		229.7		0.4		25.5
Security and screening			143.9		0.4		164.4		0.4		197.4		0.4		21.9
General and social contribution			111.8		0.3		204.3		0.5		301.8		0.6		33.5
Printing and stationery			81.0		0.2		50.2		0.1		51.9		0.1		5.7
Meetings			58.3		0.2		40.3		0.1		64.0		0.1		7.1
Provision for doubtful accounts and inventory obsolescence			357.7		1.1		489.0		1.2		458.2		0.8		50.9
Research and development			13.2		0.0		8.4		0.0		8.7		0.0		1.0
Others			44.2		0.1		29.5		0.1		27.6		0.1		3.2
	Total		2,599.8		7.7		2,764.0		6.6		3,271.5		6.4		363.5

Marketing Expenses

      Marketing expenses consist of advertising, customer education and other marketing expenses.

	Year Ended December 31,
	2004				2005				2006				2006
	Rp. (billion)		%		Rp. (billion)		%		Rp. (billion)		%		US$ (million)
Marketing Expenses
Advertising		699.6		2.1		795.6		1.9		944.3		1.8		104.9
Customer education		152.4		0.4		305.3		0.7		267.7		0.5		29.7
Others		29.9		0.1		25.3		0.1		29.5		0.1		3.3
Total		881.9		2.6		1,126.2		2.7		1,241.5		2.4		137.9

Results of Operations

Year ended December 31, 2006 compared to year ended December 31, 2005

Operating Revenues

      Total operating revenues increased by Rp.9,486.8 billion, or 22.7%, from Rp.41,807.2 billion in 2005 to Rp.51,294.0 billion in 2006. The increase in operating revenues in 2006 was primarily due to the increase in revenues from cellular, interconnection and data and Internet.

Fixed Line Telephone Revenues

      Fixed line revenues increased by Rp.197.7 billion, or 1.8%, from Rp.10,781.3 billion in 2005 to Rp.10,979.0 billion in 2006. The increase in fixed line revenues was primarily due to an increase in fixed wireless revenues, partially offset by a slight decrease in fixed wireline revenues. Fixed wireless revenues

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increased by Rp.548.5 billion, or 107.6%, from Rp.509.9 billion in 2005 to Rp.1,058.4 billion in 2006. Fixed wireline revenues decreased by Rp.350.7 billion, or 3.4%, from Rp.10,271.3 billion in 2005 to Rp.9,920.6 billion in 2006.

      The increase in fixed wireless revenues was primarily attributable to a 52.8% growth in the wireless pulse production from 3.6 billion minutes in 2005 to 5.5 billion minutes in 2006. Such increase was partially offset by a slight decrease in fixed wireline revenues which was primarily due to a 7.3% decrease in local and domestic long-distance revenues from Rp.6,920.2 billion in 2005 to Rp.6,413.8 billion in 2006.

Cellular Telephone Revenues

      Cellular telephone revenues increased by Rp.6,051.7 billion, or 41.5%, from Rp.14,570.9 billion in 2005 to Rp.20,622.6 billion in 2006. The increase in cellular telephone revenues was primarily due to an increase in air time charges, partially offset by a decrease in monthly subscription charges. Air time charges increased by Rp.5,591.0 billion, or 40.9%, from Rp.13,666.3 billion in 2005 to Rp.19,257.3 billion in 2006. Connection fee charges increased by Rp.45.1 billion, or 70.4%, from Rp.64.1 billion in 2005 to Rp.109.2 billion in 2006 due to the growth in net-additional KartuHALO cellular subscribers. Features charges increased by Rp.501.7 billion, or 109.8%, from Rp.457.0 billion in 2005 to Rp.958.7 billion in 2006 due to an increase in sales from new features services, including ring back tone, message boards and mobile fax services. Monthly subscription charges decreased by Rp.86.1 billion, or 22.4%, from Rp.383.5 billion in 2005 to Rp.297.4 billion in 2006, primarily due to the special exemption from subscription charges for Telkomsel subscribers to match similar programs offered by its competitors. The increase in cellular telephone revenues was primarily attributable to a 47% growth in Telkomsel’s total cellular subscribers from 24.3 million subscribers in 2005 to 35.6 million subscribers in 2006. This increase was caused by a 41% growth in net-additional subscribers from 8.0 million subscribers in 2005 to 11.3 million subscribers in 2006. Postpaid subscribers grew by 13.0% to 1.7 million subscribers and prepaid subscribers grew by 48.8% to 33.9 million subscribers, in each case as of December 31, 2006.

      As a result of the higher rate of growth in the number of prepaid subscribers, the proportion of prepaid subscribers to total subscribers increased from 93.9% in 2005 to 95.3% in 2006. As a result of the change in the subscriber mix, with the increased number of prepaid subscribers as a percentage of total subscribers, blended monthly ARPU decreased from approximately Rp.87,000 in 2005 to approximately Rp.84,000 in 2006. The SMS/non-voice ARPU for postpaid remained stable at Rp.47,000 in 2005 and 2006.

Interconnection Revenues

      Net interconnection revenues increased by Rp.939.4 billion, or 12.1%, from Rp.7,742.1 billion in 2005 to Rp.8,681.5 billion in 2006. Net interconnection revenues comprised net interconnection revenues from TELKOM’s fixed line network (after eliminating net interconnection revenues for interconnections with Telkomsel’s mobile cellular network) and net interconnection revenues from Telkomsel’s mobile cellular network (after eliminating net interconnection expense from interconnections with TELKOM’s fixed line network). Interconnection revenues included incoming international long-distance revenues from TELKOM’s IDD service (TIC-007), net of interconnection charges for outgoing international long-distance calls.

      Cellular interconnection revenues increased by Rp.757.2 billion, or 11.3%, from Rp.6,685.1 billion in 2005 to Rp.7,442.3 billion in 2006, primarily due to the growth of cellular subscribers in Indonesia. International interconnection revenues increased by Rp.146.6 billion, or 17.1%, from Rp.854.8 billion in 2005 to Rp.1,001.4 billion in 2006, primarily due to an increase in incoming and outgoing IDD traffic from domestic operators. Other interconnection revenues increased by Rp.35.6 billion, or 17.6%, from Rp.202.2 billion in 2005 to Rp.237.8 billion in 2006, primarily due to the growth of fixed wireless subscribers of Indosat and PT Bakrie Telecom.

      TELKOM’s interconnection revenues accounted for approximately 16.9% of TELKOM’s consolidated operating revenues for the year ended December 31, 2006, compared to 18.5% for the year ended December 31, 2005.

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KSO Revenues (Joint Operation Scheme Revenues)

      KSO revenues decreased by Rp.99.3 billion, or 16.9%, from Rp.588.7 billion in 2005 to Rp.489.4 billion in 2006. The decrease in KSO revenues was a result of the consolidation of KSO VII in October 2006. MTR decreased by Rp.61.1 billion, or 22.8%, from Rp.268.6 billion in 2005 to Rp.207.5 billion in 2006. DKSOR decreased by Rp.44.0 billion, or 13.8%, from Rp.318.6 billion in 2005 to Rp.274.6 billion in 2006. Amortization of unearned initial payments increased by Rp.5.8 billion, or 386.7%, from Rp.1.5 billion in 2005 to Rp.7.3 billion in 2006.

Data and Internet Revenues

      Data and Internet revenues increased by Rp.2,130.9 billion, or 30.7%, from Rp.6,934.3 billion in 2005 to Rp.9,065.2 billion in 2006. The increase in data and Internet revenues was primarily due to significant increases in SMS revenues, internet connectivity revenues, data communication revenues and e-business service. SMS revenues increased by Rp.1,421.3 billion, or 26.8%, from Rp.5,309.2 billion in 2005 to Rp.6,730.5 billion in 2006 mainly due to a significant growth in SMS traffic from Telkomsel subscribers. Internet connectivity revenues increased by Rp.196.1 billion, or 27.6%, from Rp.711.4 billion in 2005 to Rp.907.5 billion in 2006 due to increased marketing efforts to boost sales of data and Internet services, an increase in usage of the dial-up Internet for TELKOMNet Instant and an increase in Speedy subscribers in 2006. Data communication revenues increased by Rp.511.9 billion, or 83.9%, from Rp.610.4 billion in 2005 to Rp.1,122.3 billion in 2006, due to an increase in new subscribers of data network services, particularly, frame relay and IP VPN, primarily used for the internal data networks of commercial banks. E-business service revenues increased by Rp.16.3 billion, or 153.8%, from Rp.10.6 billion in 2005 to Rp.26.9 billion in 2006, primarily due to the increase in e-payment transactions. VoIP revenues decreased by Rp.14.7 billion, or 5.0%, from Rp.292.7 billion in 2005 to Rp.278.0 billion in 2006, due to the decrease in traffic of outgoing international VoIP calls, which was slightly offset by an increase in total incoming (international termination) VoIP traffic.

Network Revenues

      Network revenues increased by Rp.132.1 billion, or 22.5%, from Rp.586.6 billion in 2005 to Rp.718.7 billion in 2006. Satellite transponder revenues increased by Rp.54.6 billion, or 22.8%, from Rp.239.5 billion in 2005 to Rp.294.1 billion in 2006, primarily due to an increase in satellite transponder usage. Leased lines revenues increased by Rp.77.5 billion, or 22.3%, from Rp.347.1 billion in 2005 to Rp.424.6 billion in 2006 as a result of an increase in the number of telecommunications operators that use TELKOM’s network.

Revenues under Revenue-Sharing Arrangements

      Revenues under revenue-sharing arrangements increased by Rp.113.2 billion, or 37.5%, from Rp.302.3 billion in 2005 to Rp.415.5 billion in 2006. The increase in revenue under revenue-sharing arrangements was due to additional RSA following the consolidation of KSO VII. Amortization of unearned income under revenue-sharing arrangements increased by Rp.15.3 billion, or 11.2%, from Rp.136.7 billion in 2005 to Rp.152.0 billion in 2006. Net share in revenue earned under revenue-sharing arrangements increased by Rp.97.9 billion, or 59.1%, from Rp.165.6 billion in 2005 to Rp.263.5 billion in 2006. The total number of revenue-sharing arrangements was 90 contracts with 63 partners and 90 contracts with 67 partners as of December 31, 2005 and December 31, 2006, respectively.

Other Telecommunications Services Revenues

      Other telecommunications services revenues increased by Rp.21.1 billion, or 7.0%, from Rp.301.0 billion in 2005 to Rp.322.1 billion in 2006. The increase in other telecommunications services revenues was primarily due to an increase in directory assistance revenues, although this was partially offset by a decrease in operator service assistance revenues.

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Operating Expenses

      Total operating expenses increased by Rp.5,064.4 billion, or 20.6%, from Rp.24,636.4 billion in 2005 to Rp.29,700.8 billion in 2006. The increase in total operating expenses was attributable to substantial increases in personnel expenses, depreciation expenses, and operations, maintenance and telecommunications services expenses.

Personnel Expenses

      Personnel expenses increased by Rp.1,950.8 billion, or 29.7%, from Rp.6,563.0 billion in 2005 to Rp.8,513.8 billion in 2006. The main contributors were the increase in early retirement expenses due to the implementation of TELKOM’s early retirement program in December 2006, the increase in vacation pay, incentives and other benefits expenses, salaries and related benefits expense due to TELKOM’s improved financial performance in 2006, management premium, and the consolidation of personnel expenses related to KSO VII employees following the acquisition of KSO VII in October 2006. These led to an increase in recurring employee expenses, as follows:

•  early retirement expenses increased by Rp.974.8 billion, or 200.4%, from Rp.486.4 billion in 2005 to Rp.1,461.2 billion in 2006. The number of employees taking early retirement increased from 1,017 in 2005 to 1,871 in 2006;

•  vacation pay, incentives and other benefits expenses increased by Rp.593.5 billion, or 36.7%, from Rp.1,615.6 billion in 2005 to Rp.2,209.1 billion in 2006;

•  salaries and related benefits increased by Rp.234.7 billion, or 10.8%, from Rp.2,165.9 billion in 2005 to Rp.2,400.6 billion in 2006, primarily due to increased base salaries; and

•  post retirement benefit costs increased by Rp.116.1 billion, or 23.8%, from Rp.488.6 billion in 2005 to Rp.604.7 billion in 2006.

      In addition, long service awards increased by Rp.13.9 billion, or 6.9%, from Rp.201.9 billion in 2005 to Rp.215.8 billion in 2006. Pension costs decreased by Rp.93.9 billion, or 17.6%, from Rp.532.3 billion in 2005 to Rp.438.4 billion in 2006.

      Other components of personnel expenses did not contribute significantly to operating expenses in 2006.

Depreciation Expenses

      Depreciation expenses increased by Rp.1,607.6 billion, or 21.2%, from Rp.7,570.7 billion in 2005 to Rp.9,178.3 billion in 2006. The increase in depreciation expense was primarily due to Telkomsel’s BTS deployment of 6,162 units in 2006, an increase in the capacity of its transmitting and receiving stations and switching and intelligence network equipment, and an increase in TELKOM’s capital expenditures for network infrastructure (transmission network, backbone and access network).

Operations, Maintenance and Telecommunications Services Expenses

      Operations, maintenance and telecommunications services expenses increased by Rp.1,579.4 billion, or 26.7%, from Rp.5,916.3 billion in 2005 to Rp.7,495.7 billion in 2006. The increase in operations, maintenance and telecommunications services expenses was mainly attributable to:

•  an increase in operations and maintenance expenses by Rp.1,134.0 billion to Rp.4,209.1 billion, an increase of 36.9%, due to the growth in Telkomsel’s overall capacity to support the increase in its subscribers from 24.3 million subscribers as of 2005 to 35.6 million subscribers as of 2006. The number of Telkomsel’s BTSs grew by 62.3% from 9,895 units in 2005 to 16,057 units in 2006. Telkomsel also increased the capacity of its transmitting and receiving stations and switching and Intelligent Network equipment;

•  total concession fees and Universal Service Obligation (USO) charges increased by Rp.172.6 billion to Rp.881.8 billion in 2006, an increase of 24.3%, primarily due to an increase of 24.7% or Rp.75.9 billion

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

      Other components of operations, maintenance and telecommunications services expenses did not contribute significantly to operating expenses in 2006.

General and Administrative Expenses

      General and administrative expenses increased by Rp.507.5 billion, or 18.4%, from Rp.2,764.0 billion in 2005 to Rp.3,271.5 billion in 2006. In particular, in 2006:

•  collection expenses increased by Rp.163.4 billion to Rp.542.5 billion, an increase of 43.1%, generally in line with the growth in TELKOM’s fixed line subscriber base and Telkomsel’s mobile cellular subscriber base, which resulted in higher collection charges paid to third party collection agents;

•  security and screening expenses increased by Rp.33.0 billion, or 20.1%, to Rp.197.4 billion in 2006, primarily due to an increase in the salary of security guards by Rp.27.8 billion;

•  training, education and recruitment expenses, which increased by Rp.46.4 billion to Rp.224.3 billion, or 26.1%, following an increase in the number of TELKOM’s employee training programs;

•  general and social contributions expenses increased by Rp.97.5 billion, or 47.7%, to Rp.301.8 billion, primarily due to an increase in social contribution fund and community development expenses by Rp.48.9 billion to Rp.159.7 billion in 2006;

•  travel expenses increased by Rp.58.0 billion, or 33.8%, to Rp.229.7 billion in 2006, primarily due to an increase in local travel cost by Rp.48.5 billion;

•  professional fees increased by Rp.90.0 billion, or 68.7%, to Rp.221.0 billion in 2006, primarily due to an increase in management consultancy expenses by Rp.87.7 billion; and

•  amortization of intangible assets increased by Rp.26.2 billion, or 2.9%, to Rp.944.4 billion in 2006, due to the higher amortization amounts of the rights to operate the KSO operations as a result of the KSO VII acquisition and the up-front fees for the 3G license.

      This increase was partially offset by:

•  a decrease in the provision for doubtful accounts and inventory obsolescence of Rp.30.8 billion, or 6.3%, to Rp.458.2 billion in 2006, resulting from the implementation of bad debt reduction programs in 2006.

      Other components of general and administrative expenses did not contribute significantly to operating expenses in 2006.

Marketing Expenses

      Marketing expenses increased by Rp.115.3 billion, or 10.2%, from Rp.1,126.2 billion in 2005 to Rp.1,241.5 billion in 2006. The increase in marketing expenses was primarily due to an increase in Telkomsel’s marketing expenses, which increased by Rp.206.7 billion, or 41.9%, primarily due to increases in advertising and promotion expenses.

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      This increase was partially offset by a decrease in TELKOM (parent company) marketing expenses, which decreased by Rp.128.3 billion, or 24.5%, primarily due to decreases in advertising and promotion expenses.

Operating Income and Operating Margin

      As a result of the foregoing, operating income increased by Rp.4,422.5 billion, or 25.8%, from Rp.17,170.8 billion in 2005 to Rp.21,593.2 billion in 2006. TELKOM’s operating margin slightly increased from 41.1% in 2005 to 42.1% in 2006.

Other Income (Expenses)

      Other income increased by Rp.1,329.7 billion, or 143.1%, from expenses of Rp.929.3 billion in 2005 to income of Rp.400.4 billion in 2006. The increase in other income was primarily due to an increase of 261.8% in foreign exchange gain, due to appreciation of the Rupiah in 2006 compared to 2005. In particular, in 2006:

•  gain on foreign exchange (net) increased by Rp.1,353.1 billion, or 261.8% from a net loss of Rp.516.8 billion in 2005 to a net gain of Rp.836.3 billion in 2006, primarily due to the relatively modest appreciation of the Rupiah, which resulted in translation gains on TELKOM’s US Dollar borrowings;

•  interest expenses increased by Rp.109.1 billion, or 9.3%, from Rp.1,177.3 billion in 2005 to Rp.1,286.4 billion in 2006, reflecting primarily increases in short-term bank loans and medium term loan of Telkomsel;

•  interest income increased by Rp.310.3 billion, or 90.0%, from Rp.344.7 billion in 2005 to Rp.655.0 billion in 2006, primarily due to a slight increase in the average balance of time deposits. See Note 6 to the consolidated financial statements; and

•  other income (net) decreased by Rp.207.2 billion, or 50.6% from Rp.409.2 billion in 2005 to Rp.202.0 billion in 2006, primarily resulting from an increase in expenses from losses on sales of fixed assets and decrease in vendor’s penalty income but offset by an increase in the penalty income on overdue services, income from the service charge of building management.

      Other components did not contribute significantly to other income (expenses) in 2006.

Income Before Tax and Pre-Tax Margin

      As a result of the foregoing, income before tax increased by Rp.5,752.2 billion, or 35.4%, from Rp.16,241.4 billion in 2005 to Rp.21,993.6 billion in 2006. Pre-tax margin increased from 38.8% in 2005 to 42.9% in 2006.

Income Tax Expenses

      Income tax expenses increased by Rp.1,856.0 billion, or 35.8%, from Rp.5,183.9 billion in 2005 to Rp.7,039.9 billion in 2006, in line with the increase in income before tax by Rp.5,752.2 billion, or 35.4%, from Rp.16,241.4 billion in 2005 to Rp.21,993.6 billion in 2006.

Minority Interest in Net Income of Subsidiaries

      Minority interest in the net income of subsidiaries increased by Rp.884.1 billion, or 28.9%, from Rp.3,064.0 billion in 2005 to Rp.3,948.1 billion in 2006. The increase was primarily due to the improved financial performance by Telkomsel.

Net Income

      As a result of the foregoing, net income increased by Rp.3,012.0 billion, or 37.7%, from Rp.7,993.6 billion in 2005 to Rp.11,005.6 billion in 2006. TELKOM’s net income margin increased from 19.1% in 2005 to 21.5% in 2006.

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Equity

      Total shareholders’ equity increased by Rp.4,776.3 billion, or 20.5%, from Rp.23,292.4 billion in 2005 to Rp.28,068.7 billion in 2006. The increase in total shareholders’ equity was primarily the result of net income of Rp.11,005.6 billion in 2006 offset by cash dividend of Rp.5,371.1 billion. As of December 31 2006, TELKOM has repurchased 118,376,500 Series B shares of TELKOM’s issued and outstanding Series B shares representing 0.59% of TELKOM’s issued and outstanding Series B shares, for a total repurchased amount of Rp.952.2 billion (including the broker and custodian fees). This contributed to a decrease of equity by Rp.952.2 billion.

Retained Earnings

      Appropriated and unappropriated retained earnings increased by Rp.5,634.5 billion from Rp.16,471.0 billion as of December 31, 2005 to Rp.22,105.4 billion as of December 31, 2006. The increase in appropriated and unappropriated retained earnings was due to net income of Rp.11,005.6 billion in 2006, partially offset by the declaration of cash dividends of Rp.4,400.1 billion.

Year ended December 31, 2005 compared to year ended December 31, 2004

Operating Revenues

      Total operating revenues increased by Rp.7,859.4 billion, or 23.2%, from Rp.33,947.8 billion in 2004 to Rp.41,807.2 billion in 2005. Increase in operating revenues in 2005 was primarily due to increases in revenues from cellular, interconnection and data and Internet.

Fixed Line Telephone Revenues

      Fixed line revenues increased by Rp.136.3 billion, or 1.3%, from Rp.10,645.0 billion in 2004 to Rp.10,781.3 billion in 2005. The increase in fixed line revenues was primarily due to an increase in fixed wireless revenues, partially offset by a decrease in fixed wireline revenues. Fixed wireless revenues increased by Rp.411.3 billion, or 417.1%, from Rp.98.6 billion in 2004 to Rp.509.9 billion in 2005. Fixed wireline revenues decreased by Rp.275.0 billion, or 2.6%, from Rp.10,546.4 billion in 2004 to Rp.10,271.4 billion in 2005.

      The increase in fixed wireless revenues was primarily attributable to a 184.2% growth in the number of subscribers and lines in service for fixed wireless, from 1,429,368 lines in service as of December 31, 2004 to 4,061,867 lines in service as of December 31, 2005, particularly, the 184.7% growth in the number of lines in service in the non-KSO regions, resulting in an increase of lines in service from 1,317,673 as of December 31, 2004 to 3,750,821 as of December 31, 2005 primarily due to an aggressive marketing campaign in those regions from April to June 2005. Such increase was partially offset by a decrease in fixed wireline revenues which was primarily due to a 7.6% decrease in local and domestic long-distance revenues from Rp.7,493.1 billion in 2004 to Rp.6,920.2 billion.

Cellular Telephone Revenues

      Cellular telephone revenues increased by Rp.4,149.6 billion, or 39.8%, from Rp.10,421.3 billion in 2004 to Rp.14,570.9 billion in 2005. The increase in cellular telephone revenues was primarily due to an increase in air time charges, connection fee charges for new subscribers and features, partially offset by a decrease in monthly subscription charges. Air time charges increased by Rp.3,840.6 billion, or 39.1%, from Rp.9,825.7 billion in 2004 to Rp.13,666.3 billion in 2005. Connection fee charges increased by Rp.8.3 billion, or 14.9%, from Rp.55.8 billion in 2004 to Rp.64.1 billion in 2005 due to the growth in KartuHALO and SimPATI net-additional cellular subscribers. Features increased by Rp.365.7 billion, or 400.6%, from Rp.91.3 billion in 2004 to Rp.457.0 billion in 2005 due to an increase in sales from the new feature services introduced in 2005, including ring back tone, message boards and mobile fax services. Monthly subscription charges decreased by Rp.65.0 billion, or 14.5%, from Rp.448.5 billion in 2004 to Rp.383.5 billion in 2005, primarily due to the special exemption from subscription charges for certain customers offered by Telkomsel to match similar

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programs offered by its competitors. The increase in cellular telephone revenues was primarily attributable to 49% growth in Telkomsel’s total cellular subscribers from 16,290,508 subscribers as of December 31, 2004 to 24,269,353 subscribers as of December 31, 2005. This increase was caused by a 19% growth in net-additional subscribers from 6,701,701 subscribers in 2004 to 7,978,845 subscribers in 2005. Postpaid subscribers grew by 11% to 1,470,755 subscribers and prepaid subscribers grew by 52% to 22,798,598 subscribers, in each case as of December 31, 2005.

      As a result of the higher rate of growth in the number of prepaid subscribers than postpaid subscribers, the proportion of prepaid subscribers to total subscribers increased from 91.9% as of December 31, 2004 to 93.9% as of December 31, 2005. As a result of the change in the subscriber mix, with the increased number of prepaid subscribers as a percentage of total subscribers, blended monthly ARPU decreased from approximately Rp.102,000 in 2004 to approximately Rp.87,000 in 2005. Despite the decrease in overall ARPU for voice, the SMS/non-voice ARPU for postpaid increased (by approximately 15%) due to the increase in premium SMS, mobile banking services and other value-added services.

Interconnection Revenues

      Net interconnection revenues increased by Rp.1,554.1 billion, or 25.1%, from Rp.6,188.0 billion in 2004 to Rp.7,742.1 billion in 2005. Net interconnection revenues comprises net interconnection revenues from TELKOM’s fixed line network (after eliminating net interconnection revenues for interconnections with Telkomsel’s mobile cellular network) and net interconnection revenues from Telkomsel’s mobile cellular network (after eliminating net interconnection expense from interconnections with TELKOM’s fixed line network). Interconnection revenues included incoming international long-distance revenues from TELKOM’s IDD service (TIC-007), net of interconnection charges for outgoing international long-distance calls.

      Cellular interconnection revenues increased by Rp.1,333.5 billion, or 24.9%, from Rp.5,351.6 billion in 2004 to Rp.6,685.1 billion in 2005, primarily due to the growth of cellular subscribers in Indonesia. International interconnection revenues increased by Rp.213.6 billion, or 33.3%, from Rp.641.2 billion in 2004 to Rp.854.8 billion in 2005, primarily due to an increase in incoming and outgoing IDD traffic from domestic operators. Other interconnection revenues increased by Rp.7.0 billion, or 3.6%, from Rp.195.2 billion in 2004 to Rp.202.2 billion in 2005, primarily due to the growth of fixed wireless subscribers of Indosat and PT Bakrie Telecom.

      TELKOM’s interconnection revenues accounted for approximately 18.5% of TELKOM’s consolidated operating revenues for the year ended December 31, 2005, compared to 18.2% for the year ended December 31, 2004.

KSO Revenues (Joint Operation Scheme Revenues)

      KSO revenues decreased by Rp.67.9 billion, or 10.3%, from Rp.656.6 billion in 2004 to Rp.588.7 billion in 2005. The decrease in KSO revenues was primarily due to a decrease in MTR and DTR in 2005, resulting from the business acquisition of KSO IV. MTR decreased by Rp.27.4 billion, or 9.2%, from Rp.296.0 billion in 2004 to Rp.268.6 billion in 2005. DTR decreased by Rp.30.9 billion, or 8.8%, from Rp.349.5 billion in 2004 to Rp.318.6 billion in 2005. Amortization of unearned initial payments decreased by Rp.9.6 billion, or 86.5%, from Rp.11.1 billion in 2004 to Rp.1.5 billion in 2005 due to the recognition in 2004 of the remaining portion of unearned initial payments for KSO IV following the acquisition of KSO IV.

Data and Internet Revenues

      Data and Internet revenues increased by Rp.2,125.5 billion, or 44.2%, from Rp.4,808.8 billion in 2004 to Rp.6,934.3 billion in 2005. The increase in data and Internet revenues was primarily due to significant increases in SMS revenues, internet connectivity revenues and data communications revenues, partially offset by a decrease in VoIP revenues. SMS revenues increased by Rp.1,746.5 billion, or 49.0%, from Rp.3,562.7 billion in 2004 to Rp.5,309.2 billion in 2005 mainly due to a significant growth in SMS traffic from Telkomsel subscribers. Internet connectivity revenues increased by Rp.156.5 billion, or 28.2%, from Rp.554.9 billion in 2004 to Rp.711.4 billion in 2005 due to increased marketing efforts to boost sales of data

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and Internet services, an increase in usage of the dial-up Internet for TELKOMNet Instant and premium prepaid dial-up internet access and an increase in Speedy subscribers in 2005. Data communication revenues increased by Rp.249.7 billion, or 69.2%, from Rp.360.7 billion in 2004 to Rp.610.4 billion in 2005, due to an increase in new subscribers of data network services, particularly, frame relay and IP VPN, primarily used for the internal data networks of commercial banks. VoIP revenues decreased by Rp.26.2 billion, or 8.2%, from Rp.318.9 billion in 2004 to Rp.292.7 billion in 2005, due to the decrease in traffic of outgoing international VoIP calls, primarily resulting from TELKOM’s focused marketing efforts to promote TELKOM’s IDD service (TIC-007), an alternative to VoIP.

Network Revenues

      Network revenues decreased by Rp.67.7 billion, or 10.3%, from Rp.654.3 billion in 2004 to Rp.586.6 billion in 2005. Satellite transponder revenues increased by Rp.28.6 billion, or 13.6%, from Rp.210.9 billion in 2004 to Rp.239.5 billion in 2005, primarily due to an increase in satellite transponder usage by VSAT providers. Leased lines revenues decreased by Rp.96.3 billion, or 21.7%, from Rp.443.4 billion in 2004 to Rp.347.1 billion in 2005 as a result of an increase in the number of telecommunications operators that use their own networks.

Revenues under Revenue-Sharing Arrangements (“PBHs”)

      Revenues under revenue-sharing arrangements increased by Rp.21.7 billion, or 7.7%, from Rp.280.6 billion in 2004 to Rp.302.3 billion in 2005. The increase in revenue under revenue-sharing arrangements was due to an increase in amortization of unearned income under the revenue-sharing arrangements, which is in line with the increase in the number of revenue-sharing arrangements. Amortization of unearned income under revenue-sharing arrangements increased by Rp.54.7 billion, or 66.7%, from Rp.82.0 billion in 2004 to Rp.136.7 billion in 2005. Net share in revenue earned under revenue-sharing arrangements decreased by Rp.33.0 billion, or 16.6%, from Rp.198.6 billion in 2004 to Rp.165.6 billion in 2005. The total number of revenue-sharing arrangements increased from 79 contracts as of December 31, 2004 to 90 contracts as of December 31, 2005. Although the total number of revenue-sharing arrangements increased, most of them did not generate significant pulse in 2005.

Other Telecommunications Services Revenues

      Other telecommunications services revenues increased by Rp.7.8 billion, or 2.7%, from Rp.293.2 billion in 2004 to Rp.301.0 billion in 2005. The increase in other telecommunications services revenues was primarily due to an increase in pay-TV revenues and directory assistance revenues, which increase was partially offset by a decrease in telex and telegram revenues due to technological advancement.

Operating Expenses

      Total operating expenses increased by Rp.5,276.5 billion, or 27.3%, from Rp.19,359.9 billion in 2004 to Rp.24,636.4 billion in 2005. The increase in total operating expenses was attributable to substantial increases in depreciation, operations, maintenance and telecommunications services expenses and personnel expenses, and write-down of assets.

Personnel Expenses

      Personnel expenses increased by Rp.1,653.0 billion, or 33.7%, from Rp.4,910.0 billion in 2004 to Rp.6,563.0 billion in 2005. The main contributors were the increase in salaries and related benefits, and vacation pay, incentives and other benefits, primarily due to the implementation of performance-based remuneration system in July 2004 which resulted in increased base salary, allowances, incentives and bonuses. These led to an increase in recurring employee expenses, as follows:

•  salaries and related benefits increased by Rp.369.0 billion, or 20.5%, from Rp.1,796.9 billion in 2004 to Rp.2,165.9 billion in 2005;

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•  vacation pay, incentives and other benefits increased by Rp.459.5 billion, or 39.7%, from Rp.1,156.1 billion in 2004 to Rp.1,615.6 billion in 2005; and

•  employee income tax increased by Rp.332.6 billion, or 63.5%, from Rp.523.8 billion in 2004 to Rp.856.4 billion in 2005 which is in line with the increase in salaries and related benefits and vacation pay, incentives and other benefits.

      In addition, long service awards increased by Rp.165.0 billion, or 447.2%, from Rp.36.9 billion in 2004 to Rp.201.9 billion in 2005, primarily due to the recognition of actuarial gain of Rp.106.5 billion in 2004, compared to the recognition of actuarial loss of Rp.82.9 billion in 2005.

      Early retirement expenses increased by Rp.242.9 billion, or 99.8%, from Rp.243.5 billion in 2004 to Rp.486.4 billion in 2005. The number of employees taking early retirement increased from 804 in 2004 to 1,017 in 2005.

      Other components of personnel expenses did not contribute significantly to operating expenses in 2005.

Depreciation Expense

      Depreciation expense increased by Rp.1,132.1 billion, or 17.6%, from Rp.6,438.6 billion in 2004 to Rp.7,570.7 billion in 2005. The increase in depreciation expense was primarily due to Telkomsel’s expansion of its network capacity due to the growth in its subscriber base and an increase in TELKOM’s capital expenditures for network infrastructure (transmission network, backbone and access network), particularly for fixed wireless. In addition, the increase in depreciation expense was also because TELKOM shortened the estimate of remaining useful lives for WLL and approach link equipment and the Jakarta and West Java BSS equipment, which contributed to increase in depreciation expense by Rp.471.2 billion and Rp.159.0 billion, respectively, in 2005. See “— Write-down of Assets, Depreciation Expense, Loss on Procurement Commitments, and Operations, Maintenance and Telecommunication Services Expenses” above.

Write-down of Assets

      In 2005, TELKOM recognized a write-down of assets of Rp.616.8 billion related to transmission installation and equipment of fixed wireless assets. This write-down was made as a result of TELKOM’s review of the recoverable amount of the cash-generating unit of its fixed wireless assets following the Government’s decision to set aside the 1900 MHz frequency spectrum for exclusive use in 3G services and the 800 MHz frequency spectrum for CDMA-based technology network commencing at the end of 2007. As a result of this decision, TELKOM’s BSS equipment in Jakarta and West Java, which currently operates in the 1900 MHz frequency spectrum, will no longer be operational commencing at the end of 2007 and, furthermore, this equipment must be replaced with BSS equipment operating in 800 MHZ. See “— Write-down of Assets, Depreciation Expense, Loss on Procurement Commitments, and Operations, Maintenance and Telecommunication Services Expenses” above.

Loss on Procurement Commitments

      In 2005, TELKOM recognized a loss relating to non-cancelable contracts for procurement of the 1900 MHz transmission installation and equipment in the Jakarta and West Java areas amounting to Rp.79.4 billion. See “— Write-down of Assets, Depreciation Expense, Loss on Procurement Commitments, and Operations, Maintenance and Telecommunication Services Expenses” above.

Operations, Maintenance and Telecommunications Services Expenses

      Operations, maintenance and telecommunications services expenses increased by Rp.1,386.7 billion, or 30.6%, from Rp.4,529.6 billion in 2004 to Rp.5,916.3 billion in 2005. The increase in operations, maintenance and telecommunications services expenses was mainly attributable to:

•  an increase in operations and maintenance expenses by Rp.676.9 billion to Rp.3,075.1 billion, an increase of 28.2%, due to an increase in Telkomsel’s operations and maintenance expenses arising from

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	the growth in the Telkomsel’s overall capacity from 17.9 million subscribers as of December 31, 2004 to 26.2 million subscribers as of December 31, 2005. The number of Telkomsel’s BTSs grew by 59.5% from 6,205 units in 2004 to 9,895 units in 2005. Telkomsel also increased the capacity of its transmitting and receiving stations and switching and Intelligent Network equipment;
•	an increase in the cost of phones and SIM and RUIM cards by Rp.215.6 billion to Rp.582.3 billion in 2005, an increase of 58.8%, due to increases in expenses for TELKOM and Telkomsel prepaid cards. TELKOM’s cost of fixed wireless cards (starterpack/voucher/replacement) increased by Rp.72.5 billion, or 220.4%, from Rp.32.9 billion in 2004 to Rp.105.4 billion in 2005. Telkomsel’s cost of cards increased by Rp.142.2 billion, or 44.9%, from Rp.316.5 billion in 2004 to Rp.458.7 billion in 2005, due to a substantial increase in subscribers, particularly prepaid subscribers; and
•	total concession fees increased by Rp.450.1 billion to Rp.1,257.4 billion in 2005, an increase of 55.8%, primarily due to 125.3% increase or Rp.394.5 billion in concession fees paid to the Government from Rp.314.7 billion in 2004 to Rp.709.2 billion in 2005, in line with the growth in operating revenues and incurrence of USO contributions by TELKOM and Telkomsel to the Government beginning in 2005. Total USO contribution incurred by TELKOM and Telkomsel for the fiscal year 2005 amounted to Rp.307.7 billion.

      This increase was partially offset by electricity, gas and water charges, which slightly decreased by Rp.13.2 billion, or 3.4%, from Rp.385.7 billion in 2004 to Rp.372.5 billion in 2005, reflecting primarily conservation and more efficient use of utilities, which decrease was partially offset by an increase in electricity and gas rates in 2005 compared to 2004.

      Other components of operations, maintenance and telecommunications services expenses did not contribute significantly to operating expenses in 2005.

General and Administrative Expenses

      General and administrative expenses increased by Rp.164.2 billion, or 6.3%, from Rp.2,599.8 billion in 2004 to Rp.2,764.0 billion in 2005. In particular, in 2005:

•  amortization of goodwill and other intangible assets increased by Rp.45.9 billion to Rp.918.2 billion, or 5.3%, mainly due to an increase in amortization of intangible assets resulting from acquisitions of KSO IV on January 20, 2004 and the remaining 9.68% interest in Dayamitra on December 14, 2004. The intangible assets resulting from such acquisitions were amortized for the full year in 2005, compared to 2004 when it was only amortized from the date of acquisition;

•  collection expenses increased by Rp.20.1 billion to Rp.379.1 billion, an increase of 5.6%, generally in line with the growth in TELKOM’s fixed line subscriber base and Telkomsel’s mobile cellular subscriber base, which resulted in higher collection charges paid to third party collection agents;

•  security and screening expenses increased by Rp.20.5 billion, or 14.3%, to Rp.164.4 billion in 2005, primarily due to an increase in the salary of security guards by Rp.21.5 billion;

•  provision for doubtful accounts and inventory obsolescence increased by Rp.131.3 billion, or 36.7%, to Rp.489.0 billion in 2005, primarily due to an increase in TELKOM and Telkomsel customer defaults as subscriber numbers increased; and

•  general and social contributions expenses increased by Rp.92.5 billion, or 82.7%, to Rp.204.3 billion, which increase was primarily due to an increase in social contribution funding and community development expenses by Rp.60.6 billion to Rp.91.9 billion in 2005, pursuant to TELKOM’s AGMS resolution on June 24, 2005.

      This increase was partially offset by:

•  training, education and recruitment expenses, which decreased by Rp.50.6 billion to Rp.177.9 billion, or 22.2%, following a decrease in TELKOM’s employee training programs primarily due to a more rigorous selection process for its overseas training;

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•  travel expenses, which decreased by Rp.20.9 billion, or 10.9%, to Rp.171.7 billion in 2005, primarily due to a decrease in local travel cost by Rp.12.7 billion; and

•  printing and stationery expenses, which decreased by Rp.30.8 billion, or 38.0%, to Rp.50.2 billion in 2005, primarily due to a decrease in printing and photocopy expenses by Rp.14.8 billion, as well as a decrease in stationery expenses by Rp.15.6 billion, resulting from the implementation of cost-saving plans.

      Other components of general and administrative expenses did not contribute significantly to operating expenses in 2005.

Marketing Expenses

      Marketing expenses increased by Rp.244.3 billion, or 27.7%, from Rp.881.9 billion in 2004 to Rp.1,126.2 billion in 2005. The increase in marketing expenses was primarily due to an increase in Telkomsel’s marketing expenses, which increased by Rp.148.1 billion, or 41.6%, primarily due to increases in customer education expenses, advertising, promotions and exhibitions.

Operating Income and Operating Margin

      As a result of the foregoing, operating income increased by Rp.2,582.9 billion, or 17.7%, from Rp.14,587.9 billion in 2004 to Rp.17,170.8 billion in 2005. TELKOM’s operating margin slightly decreased from 43.0% in 2004 to 41.1% in 2005.

Other Income (Expenses)

      Other expenses decreased by Rp.909.2 billion, or 49.5%, from Rp.1,838.5 billion in 2004 to Rp.929.3 billion in 2005. The decrease in other expenses was primarily due to a decrease of 57.7% in foreign exchange losses, primarily due to a decrease in TELKOM’s borrowings denominated in foreign currencies and the relatively modest depreciation of the Rupiah in 2005 compared to 2004. In particular, in 2005:

•  Loss on foreign exchange-net decreased by Rp.704.0 billion from a net loss of Rp.1,220.8 billion in 2004 to a net loss of Rp.516.8 billion in 2005, primarily due to lower foreign exchange losses on US Dollar borrowings in 2005 compared to 2004, resulting from a decrease in TELKOM’s US Dollar borrowings and the relatively modest depreciation of the Rupiah;

•  Interest expense decreased by Rp.92.8 billion, or 7.3%, from Rp.1,270.1 billion in 2004 to Rp.1,177.3 billion in 2005, reflecting primarily decreases in short-term bank loans and long-term debts of TELKOM;

•  Interest income increased by Rp.26.8 billion, or 8.4%, from Rp.317.9 billion in 2004 to Rp.344.7 billion in 2005, primarily due to a slight increase in the average balance of time deposits. See Note 6 to the consolidated financial statements; and

•  Others (net) increased by Rp.78.1 billion, from Rp.331.1 billion in 2004 to Rp.409.2 billion in 2005, primarily resulting from an increase in income from penalties on overdue payments.

      Other components did not contribute significantly to other income (expenses) in 2005.

Income Before Tax and Pre-Tax Margin

      As a result of the foregoing, income before tax increased by Rp.3,492.0 billion, or 27.4%, from Rp.12,749.4 billion in 2004 to Rp.16,241.4 billion in 2005. Pre-tax margin increased from 37.6% in 2004 to 38.8% in 2005.

Income Tax Expense

      Income tax expense increased by Rp.1,005.4 billion, or 24.1%, from Rp.4,178.5 billion in 2004 to Rp.5,183.9 billion in 2005, in line with the increase in income before tax.

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Minority Interest in Net Income of Subsidiaries

      Minority interest in the net income of subsidiaries increased by Rp.1,107.7 billion, or 56.6%, from Rp.1,956.3 billion in 2004 to Rp.3,064.0 billion in 2005. The increase was primarily due to improved financial performance by Telkomsel.

Net Income

      As a result of the foregoing, net income increased by Rp.1,379.0 billion, or 20.8%, from Rp.6,614.6 billion in 2004 to Rp.7,993.6 billion in 2005. TELKOM’s net income margin decreased from 19.5% in 2004 to 19.1% in 2005.

Equity

      Total shareholders’ equity increased by Rp.5,164.4 billion, or 28.5%, from Rp.18,128.0 billion in 2004 to Rp.23,292.4 billion in 2005. The increase in total shareholders’ equity was primarily the result of net income of Rp.7,993.6 billion for the year 2005, partially offset by cash dividends of Rp.2,921.2 billion.

Retained Earnings

      Appropriated and unappropriated retained earnings decreased by Rp.2,215.9 billion from Rp.18,686.9 billion in 2004 to Rp.16,471.0 billion in 2005. The decrease in appropriated and unappropriated retained earnings was due to the change in method of accounting for restructuring transactions between entities under common control, which resulted in TELKOM reclassifying the difference in value of restructuring transactions between entities under common control amounting to Rp.7,288.3 billion as a charge to unappropriated retained earnings as of January 1, 2005, and cash dividends of Rp.2,921.2 billion, which decrease was offset by net income for the year 2005 of Rp.7,993.6 billion. The reclassification of the difference in value of restructuring transactions between entities under common control amounting to Rp.7,288.3 billion as a charge to unappropriated retained earnings as of January 1, 2005 has no effect on net consolidated stockholders’ equity. See “— Changes in Methods of Accounting under Indonesian GAAP” above and Note 4 to TELKOM’s consolidated financial statements.

TELKOM’s Results of Operations by Segment

      TELKOM has three main business segments: fixed wireline, fixed wireless and cellular. Operating segments that do not individually represent more than 10% of TELKOM’s revenues are presented as “Other” and comprise the telephone directories and building management business. See Note 47 to TELKOM’s consolidated financial statements.

	Year Ended December 31,
	2004			2005			2006			2006
	Rp.(billion)			Rp.(billion)			Rp.(billion)			US$(million)
Fixed Wireline Segment results
External operating revenues		18,860.8			19,637.4			20,137.8			2,237.5
Inter-segment operating revenues		4.3			305.4			514.6			57.2
Total revenues		18,865.1			19,942.8			20,652.4			2,294.7
Segment expense		(12,207.7	)		(14,378.8	)		(16,257.5	)		(1,806.4	)
Segment result		6,657.4			5,564.0			4,394.9			488.3
Depreciation and amortization		(3,568.2	)		(4,006.2	)		(4,290.9	)		(476.8	)
Amortization of goodwill and other intangible assets		(851.1	)		(896.9	)		(932.7	)		(103.6	)
Other non-cash expenses		(244.4	)		(292.4	)		(325.1	)		(36.1	)

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	Year Ended December 31,
	2004			2005			2006			2006
	Rp.(billion)			Rp.(billion)			Rp.(billion)			US$(million)
Fixed Wireless
Segment results
External operating revenues		575.4			1,449.7			2,806.2			311.8
Inter-segment operating revenues		(51.1	)		(167.9	)		(253.4	)		(28.2	)
Total revenues		524.3			1,281.8			2,552.8			283.6
Segment expense		(789.6	)		(2,174.7	)		(1,815.8	)		(201.8	)
Segment result		(265.3	)		(892.9	)		737.0			81.8
Depreciation and amortization		(230.0	)		(537.3	)		(452.8	)		(50.3	)
Write-down of assets and loss on procurement commitments		—			(696.1	)		—			—
Other non-cash expenses		—			(21.6	)		—			—
Cellular
Segment results
External operating revenues		14,201.8			20,384.9			28,205.1			3,133.9
Inter-segment operating revenues		534.8			691.2			863.2			95.9
Total revenues		14,736.6			21,076.1			29,068.3			3,229.8
Segment expense		(6,757.2	)		(8,775.0	)		(12,839.5	)		(1,426.6	)
Segment result		7,979.4			12,301.1			16,228.8			1,803.2
Depreciation and amortization		(2,651.0	)		(3,046.6	)		(4,427.8	)		(492.0	)
Amortization of goodwill and other intangible assets		—			—			(11.7	)		(1.3	)
Other non-cash expenses		(100.7	)		(171.2	)		(127.5	)		(14.2	)
Other
Segment results
External operating revenues		309.7			335.2			144.9			16.1
Inter-segment operating revenues		51.1			70.5			333.9			37.1
Total revenues		360.8			405.7			478.8			53.2
Segment expense		(320.7	)		(328.2	)		(384.3	)		(42.7	)
Segment result		40.1			77.5			94.5			10.5
Depreciation and amortization		(18.7	)		(23.3	)		(34.5	)		(3.8	)
Amortization of goodwill and other intangible assets		(21.3	)		(21.3	)		—			—
Other non-cash expenses		(5.3	)		(4.8	)		(5.7	)		(0.6	)

Results of Segments

Year ended December 31, 2006 compared to year ended December 31, 2005

Fixed Wireline Segment

      TELKOM’s fixed wireline segment revenues increased by Rp.709.7 billion, or 3.6%, from Rp.19,942.8 billion in 2005 to Rp.20,652.4 billion in 2006. This increase was in line with a 0.3% growth in the number of subscribers for fixed wireline, from 8,686,131 lines in service as of December 31, 2005 to 8,709,211

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lines in service as of December 31, 2006. The increase in the fixed wireline segment revenues was primarily due to an increase in data and Internet revenues by Rp.364.8 billion, primarily due to an increase in Internet connection revenues from TELKOMNet Instant and the broadband access. This increase also contributed to an increase in network revenues by Rp.132.1 billion. The increases were partially offset by a decrease in fixed wireline’s voice revenues by Rp.382.0 billion, primarily due to a decrease in call volumes.

      TELKOM’s fixed wireline segment’s expenses increased by Rp.1,878.7 billion, or 13.1% from Rp.14,378.8 billion in 2005 to Rp.16,257.5 billion in 2006. The increase in fixed wireline segment expense was primarily due to an increase in personnel expenses by Rp.1,365.8 billion, or 24.2%, from Rp.5,648.6 billion in 2005 to Rp.7,014.5 billion in 2006. The increase in personnel expenses was caused by the increase in early retirement expenses and salaries and related benefits, vacation pay, incentives and other benefits. The increase in fixed wireline segment expense was also a result of an increase of Rp.144.5 billion in general and administrative expenses.

Fixed Wireless Segment

      TELKOM’s fixed wireless segment’s revenues increased by Rp.1,271.0 billion, or 99.2%, from Rp.1,281.8 billion in 2005 to Rp.2,552.8 billion in 2006. The increase in the fixed wireless segment revenues was due to the increase in fixed wireless’s voice revenues by Rp.590.9 billion in line with a 2.8% growth in the number of subscribers for fixed wireless, from 4,061,867 lines in service as of December 31, 2005 to 4,175,853 lines in service as of December 31, 2006. This increase was also contributed to by an increase of Rp.521.7 billion in fixed wireless’s Interconnection revenues.

      TELKOM’s fixed wireless segment’s expenses decreased by Rp.358.9 billion, or 16.5%, from Rp.2,174.7 billion in 2005 to Rp.1,815.8 billion in 2006. The decrease in the fixed wireless segment expense was primarily due to a decrease in operations, maintenance and telecommunication services expenses of Rp.642.8 billion from 2005 to 2006.

Cellular Segment

      TELKOM’s cellular segment’s revenues increased by Rp.7,992.3 billion, or 37.9%, from Rp.21,076.1 billion in 2005 to Rp.29,068.3 billion in 2006. The increase in the cellular segment revenues was primarily due to the increase in cellular voice revenues by Rp.6,051.7 billion, cellular SMS revenues by Rp.1,267.0 billion, and cellular data communication revenues by Rp.340.6 billion in line with the 46.7% growth in Telkomsel’s total cellular subscribers from 24,269,353 subscribers as of December 31, 2005 to 35,597,171 subscribers as of 2006.

      TELKOM’s cellular segment’s expenses increased by Rp.4,064.5 billion, or 46.3%, from Rp.8,775.0 billion in 2005 to Rp.12,839.5 billion in 2006. The increase in the cellular segment expense was primarily due to increases in operations, maintenance and telecommunication services expenses and depreciation expenses by Rp.1,676.2 billion and Rp.1,381.1 billion, respectively, in line with the growth in Telkomsel’s overall subscriber base from 24.3 million subscribers as of December 31, 2005 to 35.6 million subscribers as of December 31, 2006 as well as the number of Telkomsel’s BTSs from 9,895 units as of December 31, 2005 to 16,057 units as of December 31, 2006.

Other Segments

      TELKOM’s other segment’s revenues increased by Rp.73.1 billion, or 18.0%, from Rp.405.7 billion in 2005 to Rp.478.8 billion in 2006, due to the increase in Infomedia’s call center services revenue by Rp.49.1 billion.

      TELKOM’s other segment’s expenses increased by Rp.56.1 billion, or 17.1%, from Rp.328.2 billion in 2005 to Rp.384.3 billion in 2006, primarily due to an increase in the consulting costs of Infomedia.

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Year ended December 31, 2005 compared to year ended December 31, 2004

Fixed Wireline Segment

      TELKOM’s fixed wireline segment revenues increased by Rp.1,077.7 billion, or 5.7%, from Rp.18,865.1 billion in 2004 to Rp.19,942.8 billion in 2005. The increase in fixed wireline segment revenues was primarily due to an increase in fixed wireline’s interconnection revenues by Rp.1,377.0 billion, primarily due to increases in international call volumes and outgoing calls to cellular users, and data and internet revenues by Rp.329.3 billion, primarily due to an increase in Internet connection revenues from TELKOMNet Instant and the broadband access services, partially offset by a decrease in fixed wireline’s voice revenues by Rp.862.5 billion, primarily due to a decrease in the call volumes.

      TELKOM’s fixed wireline segment expenses increased by Rp.2,171.1 billion, or 17.8% from Rp.12,207.7 billion in 2004 to Rp.14,378.8 billion in 2005. The increase in fixed wireline segment expenses was primarily due to an increase in personnel expenses by Rp.1,436.5 billion, or 34.1%, from Rp.4,212.1 billion in 2004 to Rp.5,648.6 billion in 2005. The increase in personnel expenses was caused by the increase in salaries and related benefits, vacation pay, incentives and other benefits primarily due to the implementation of a performance based remuneration system in July 2004 which resulted in increased base salary, allowances, incentives and bonuses. The increase in fixed wireline segment expense was also contributed to by an increase of Rp.425.4 billion in depreciation expense, due primarily to a change in the estimate of the remaining useful lives for WLL and approach link equipment. See “— Write-down of Assets, Depreciation Expense, Loss on Procurement Commitments, and Operations, Maintenance and Telecommunication Services Expenses” above.

Fixed Wireless Segment

      TELKOM’s fixed wireless segment revenues increased by Rp.757.5 billion, or 144.5%, from Rp.524.3 billion in 2004 to Rp.1,281.8 billion in 2005. The increase in fixed wireless segment revenues was due to the increase in fixed wireless’s voice revenues by Rp.975.5 billion in line with a 184.2% growth in the number of subscribers for fixed wireless, from 1,429,368 lines in service as of December 31, 2004 to 4,061,867 lines in service as of December 31, 2005. This increase was partially offset by the decrease in fixed wireless interconnection revenues, resulting from a decrease in incoming and outgoing calls to and from cellular users.

      TELKOM’s fixed wireless segment expenses increased by Rp.1,385.1 billion, or 175.4%, from Rp.789.6 billion in 2004 to Rp.2,174.7 billion in 2005. The increase in fixed wireless segment expenses was primarily due to a write-down of assets of Rp.616.8 billion, loss on procurement commitments of Rp.79.4 billion and an increase in depreciation expense by Rp.307.3 billion, due primarily to an increase in TELKOM’s fixed wireless assets and a change in the estimate of the remaining useful lives for the Jakarta and West Java BSS equipment. See “— Write-down of Assets, Depreciation Expense, Loss on Procurement Commitments, and Operations, Maintenance and Telecommunication Services Expenses” above.

Cellular Segment

      TELKOM’s cellular segment revenues increased by Rp.6,339.5 billion, or 43.0%, from Rp.14,736.6 billion in 2004 to Rp.21,076.1 billion in 2005. The increase in cellular revenues was primarily due to the increase in cellular telephone revenues by Rp.4,149.6 billion as well as in cellular SMS revenues by Rp.1,656.8 billion in line with 49% growth in Telkomsel’s total cellular subscribers from 16,290,508 subscribers as of December 31, 2004 to 24,269,353 subscribers as of December 31, 2005.

      TELKOM’s cellular segment expenses increased by Rp.2,017.8 billion, or 29.9%, from Rp.6,757.2 billion in 2004 to Rp.8,775.0 billion in 2005. The increase in cellular segment expenses was primarily due to increases in operations, maintenance and telecommunications services expenses and depreciation expenses by Rp.1,116.5 billion and Rp.395.6 billion, respectively, in line with the growth in Telkomsel’s overall capacity from 17.9 million subscribers as of December 31, 2004 to 26.2 million subscribers as of December 31, 2005 as well as the number of Telkomsel’s BTSs from 6,205 units as of December 31, 2004 to 9,895 units as of December 31, 2005.

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Other Segment

      TELKOM’s other segment revenues increased by Rp.44.9 billion, or 12.4%, from Rp.360.8 billion in 2004 to Rp.405.7 billion in 2005, due to the increase in Infomedia’s call center service revenue by Rp.43.1 billion.

      TELKOM’s other segment expenses increased by Rp.7.5 billion, or 2.3%, from Rp.320.7 billion in 2004 to Rp.328.2 billion in 2005, primarily due to an increase in the printing costs of Infomedia.

Reconciliation to U.S. GAAP

      TELKOM prepares its consolidated financial statements in accordance with Indonesian GAAP and prepares a reconciliation of consolidated net income and stockholders’ equity in accordance with U.S. GAAP pursuant to the requirements of the U.S. Securities and Exchange Commission. The following table sets out consolidated net income for the years ended and consolidated stockholders’ equity as of December 31, 2004, 2005 and 2006 in accordance with Indonesian GAAP and U.S. GAAP:

	Year Ended December 31,
	2004		2005		2006		2006
	Rp. (billion)		Rp. (billion)		Rp. (billion)		US$ (million)
Net income in accordance with:
Indonesian GAAP		6,614.6		7,993.6		11,005.6		1,222.8
U.S. GAAP		6,468.6		7,840.1		12,111.5		1,345.7

	Year Ended December 31,
	2004		2005		2006		2006
	Rp. (billion)		Rp. (billion)		Rp. (billion)		US$ (million)
Stockholders’ equity in accordance with:
Indonesian GAAP		18,128.0		23,292.4		28,068.7		3,118.7
U.S. GAAP		19,570.9		24,568.5		26,308.6		2,923.2

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

      The consolidated financial statement of the Company and its subsidiaries have been prepared in accordance with accounting principles generally accepted in Indonesia (“Indonesian GAAP”), which differ in certain significant respects from accounting principles generally accepted in the United States of America (“U.S. GAAP”). The consolidated statements of cash flows together with the reconciliation in Note 57 comply with SFAS 95 “Statement of Cash Flows”. A description of the differences and their effects on net income and stockholders’ equity are set forth below:

(1) Description of differences between Indonesian GAAP and U.S. GAAP

Voluntary Termination Benefits

      Under Indonesian GAAP, voluntary termination benefits are recognized as liabilities when the Company is demonstratively committed to provide termination benefits as a result of an offer made in order to encourage voluntary redundancy.

      Under U.S. GAAP, voluntary termination benefits liabilities are recognized only when the employees have accepted the offer and the related amount can be reasonably estimated.

Foreign Exchange Differences Capitalized to Assets under Construction

      Under Indonesian GAAP, foreign exchange gains and losses resulting from borrowings used to finance the construction of the qualifying assets are capitalized as part of the cost of the qualifying assets. Capitalization of foreign exchange gains and losses ceases when the construction of the qualifying asset is substantially completed and the constructed property is ready for its intended use.

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      Under U.S. GAAP, foreign exchange gains and losses are credited and charged to the consolidated statement of income.

Interest Capitalized on Assets under Construction

      Under Indonesian GAAP, qualifying assets, to which interest cost can be capitalized, should be those that take a minimum of 12 months to get ready for their intended use or sale. To the extent that funds are borrowed specifically to finance the construction of a qualifying asset, the amount of the interest cost eligible for capitalization on that asset should be determined based on the actual interest cost incurred on that borrowing during the period of construction less any investment income on the temporary investment of those borrowings.

      Under U.S. GAAP, there is no minimum limit (i.e., a minimum 12-month construction period requirement) on the length of the construction period in which the interest cost could be capitalized. The amount of interest cost to be capitalized for qualifying assets is intended to be that portion of the interest cost incurred during the construction periods that theoretically could have been avoided if expenditures for the assets had not been made. The interest cost need not arise from borrowings specifically made to acquire the qualifying assets. The amount capitalized in a period is determined by applying an interest rate to the average amount of accumulated expenditures for the assets during the period. Interest income arising from any unused borrowings is recognized directly to current operations.

Revenue-Sharing Arrangements

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

      Under U.S. GAAP, the revenue-sharing arrangements are recorded in a manner similar to capital leases where the fixed assets and obligation under revenue-sharing arrangements are reflected on the balance sheet. All the revenues generated from the revenue-sharing arrangements are recorded as a component of operating revenues, while a portion of the investors’ share of the revenues from the revenue-sharing arrangements is recorded as interest expense with the balance treated as a reduction of the obligation under revenue-sharing arrangements.

Employee Benefits

      As of January 1, 2005, the Company and its subsidiaries adopted PSAK 24R in accounting for the costs of pension benefit, post-retirement health care benefit and long service awards for Indonesian GAAP purposes. PSAK 24R requires the adoption of its provisions retrospectively as of January 1, 2004.

      The differences between the accounting by the Company and its subsidiaries for the pension benefit and post-retirement health care benefit under Indonesian GAAP and U.S. GAAP for the years ended December 31, 2004, 2005 and 2006 are as follows:

i.

Under Indonesian GAAP, the prior service cost is recognized immediately if vested or amortized on a straight line basis over the average period until the benefits become vested. Under U.S. GAAP, prior service cost (vested and non-vested benefits) is generally deferred and amortized systematically over the estimated remaining service period for active employees and the recognized amount is recorded in the consolidated statement of income.

ii.

Under Indonesian GAAP, the transition obligations were recognized on January 1, 2004, the date PSAK 24R was adopted. Under U.S. GAAP, the transition obligations arising from the adoption of SFAS 87 “Employers’ Accounting for Pensions” and SFAS 106 “Employers’ Accounting for Postretirement Benefits Other Than Pensions” on January 1, 1992 and January 1, 1995, respectively are deferred and

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

      Under Indonesian GAAP, recognition of a minimum liability for the pension plans is not required. Under U.S. GAAP, for the years ended December 31, 2004 and 2005, the Company and its subsidiaries were required to recognize an additional minimum liability when the accumulated benefits obligation exceeded the fair value of the plan assets with the equal amount recognized as an intangible assets, provided that the asset recognized did not exceed the amount of unrecognized prior service cost. If the additional liability required to be recognized exceeded unrecognized prior service cost, the excess was reported in other comprehensive income, net of tax.

      In addition, there is a difference between the accounting by the Company for certain benefits under long service awards under Indonesian GAAP and U.S. GAAP for the years ended December 31, 2004, 2005 and 2006. Under Indonesian GAAP, the prior service cost is recognized immediately if vested or amortized on a straight line basis over the average period until the benefits become vested. The amortized amount is recorded as a component of net periodic benefit cost for the year. Under U.S. GAAP, the obligation for the accumulating post-retirement benefits is measured in accordance with the guidance in SFAS 87, as permitted by SFAS 112 “Employers’ Accounting for Post-employment Benefits”. The prior service cost is deferred and amortized systematically over the estimated remaining service period for active employees and the recognized amount is recorded in the consolidated statement of income.

      In September 2006, the FASB issued SFAS 158 “Employers’ Accounting for Defined Benefit Pension and Other Postretirement Plans — an amendment of FASB Statement No. 87, 88, 106 and 132R”. The requirements of SFAS 158 to recognize the funded status and to provide the required disclosures are effective as of the end of the year ended after December 15, 2006. The Company and its subsidiaries have adopted the above recognition and disclosure requirements of SFAS 158 as of the end of the year ended December 31, 2006.

SFAS 158 does not change the determination of net periodic benefit costs under SFAS 87, SFAS 106 and SFAS 112. The impacts of the adoption of SFAS 158 as of the end of the year ended December 31, 2006 are as follow:

i.	The Company and its subsidiaries no longer report the additional minimum liability and any corresponding intangible asset for the unfunded pension obligation as the funded status for unfunded or underfunded benefit plans is now fully recognized as a net pension liability on the balance sheet. This is similar to the Indonesian GAAP requirements.
ii.	On adoption of SFAS 158, the unrecognised actuarial losses, prior service costs, and transition obligations were recognised, net of tax, in the accumulated other comprehensive income balance. These will continue to be amortised and reported as a component of net periodic benefit cost in the consolidated statement of income in accordance with the requirements of SFAS 87, SFAS 106 and SFAS 112.

Equity in Net Income or Loss of Associated Companies

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

      For U.S. GAAP reporting purposes, the Company recognizes the effect of the differences between U.S. GAAP and Indonesian GAAP at the investee level in the investment accounts and its share of the net income or loss and other comprehensive income or loss of those associated companies.

Land Rights

      In Indonesia, the title of land rests with the State under the Basic Agrarian Law No. 5 of 1960. Land use is accomplished through land rights whereby the holder of the right enjoys the full use of the land for a stated period of time, subject to extensions. The land rights generally are freely tradeable and may be pledged as

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collateral for borrowing agreements. Under Indonesian GAAP, land ownership is not depreciated unless it can be foreseen that the possibility for the holder to obtain an extension or renewal of the rights is remote.

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

Revenue Recognition

      Under Indonesian GAAP, fees from connection of mobile cellular and fixed wireless services are recognized as revenue when connection takes place (for postpaid services). Sales of starter packs are recognized as revenue upon delivery to distributors, dealers, or customers (for prepaid services). Installation fees for wire line services are recognized at the time of installation. Revenues from calling cards are recognized when the Company sells the cards.

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

Amortization of Goodwill

      Under Indonesian GAAP, goodwill is amortized over a period not exceeding 20 years.

      Under U.S. GAAP, goodwill is not amortized but rather subjected to an annual test for impairment.

Capital Leases

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

      Under U.S. GAAP, a leased asset is capitalized when any one of the following criteria is met: (a) there is an automatic transfer of ownership at the end of the lease term, (b) the lease contains a bargain purchase option, (c) the lease term is for 75% or more of the economic life of the asset, and (d) the net present value of the minimum lease payments amounts to at least 90% of the fair value of the asset.

Acquisition of Dayamitra

      On May 17, 2001 the Company acquired a 90.32% interest in Dayamitra and contemporaneously acquired a call option to buy the remaining 9.68% interest at a fixed price at a stated future date, and provided to the minority interest holder a put option to sell its 9.68% interest to the Company under those same terms. The fixed price of the call equaled the fixed price of the put option. Under U.S. GAAP, the Company accounted for the option contracts on a combined basis together with the minority interest and as a financing arrangement for the purchase of the remaining 9.68% minority interest. As such, under U.S. GAAP, the Company has consolidated 100% of Dayamitra and attributed the stated yield earned under the combined derivative and minority interest position to interest expense since May 17, 2001.

      On December 14, 2004, the Company exercised the call option to acquire the 9.68% interest in Dayamitra.

      Under Indonesian GAAP, prior to December 14, 2004, the Company accounted for the remaining 9.68% interest in Dayamitra as minority interest. In addition, the option price paid by the Company was presented as “Advance payments for investments in shares of stock.” The Company started consolidating the remaining 9.68% interest in Dayamitra only on December 14, 2004 following the exercise of the option.

      The difference in the timing of the recognition of the 9.68% ownership interest gives rise to differences in the timing and amounts of the purchase consideration recognized under Indonesian GAAP and U.S. GAAP.

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Asset Retirement Obligations

      Under Indonesian GAAP, costs associated with the retirement of long-lived assets that the Company and its subsidiaries must cover by law as a result from the acquisition, construction, development and/or the normal operation of long-lived assets are charged to the consolidated statement of income as incurred.

      Under U.S. GAAP, the estimated fair value of such obligation is accrued at the time of the acquisition with an equal amount capitalized to the related long-lived assets and depreciated over the useful life of the assets. The Company and its subsidiaries identified their asset retirement obligations by reviewing their contractual agreements to determine whether the Company and its subsidiaries are required to settle any obligations as a result of the prevailing laws, statute and ordinance, or by legal construction of a contract under the doctrine of promissory estoppel. A present value technique is used to estimate the fair value of the obligations. The cash flows used in the estimates of fair value have incorporated the assumptions relating to the timing and the amount of the possible cash flows. Accretion expense resulting from the passage of time is recognized in the consolidated statement of income. In subsequent periods, changes resulting from the revisions to the timing and the amount of the original estimate of undiscounted cash flows are recognized as an increase or decrease in (a) the carrying amount of the liability, and (b) the related asset retirement cost capitalized as part of the carrying amount of the related long-lived asset.

Deferred Income Taxes

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

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

Impairment of Assets

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

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

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

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Gain (loss) on Disposal of Property, Plant and Equipment

      Under Indonesian GAAP, the Company and its subsidiaries classify the gains (losses) on disposals of property, plant and equipment as a component of other income (expense) which is excluded from determination of operating income.

      Under U.S. GAAP, the gains (losses) on disposals of property, plant and equipment are classified as a component of operating expenses and hence included in the determination of operating income. For the years ended December 31, 2004, 2005 and 2006, the operating income would have been higher (lower) by (Rp.26,089) million, Rp.46,193 million, and (Rp.47,983) million, respectively, and other income (expenses) would have been lower (higher) by the same amounts due to the inclusion of the gains (losses) on disposals of property, plant and equipment in the determination of operating income.

Reclassification of Difference in Value of Restructuring Transactions Between Entities Under Common Control

      Under Indonesian GAAP, the Company is required to reclassify the difference in value of restructuring transactions between entities under common control as of January 1, 2005 as a direct adjustment to retained earnings when the common control relationship between the transacting parties no longer existed as of January 1, 2005.

      Under U.S. GAAP, the difference in value of restructuring transactions between entities under common control remains in equity indefinitely as part of the additional paid-in capital.

Available-For-Sale-Securities

      Under Indonesian GAAP, available-for-sale securities are carried at fair value and changes in fair value are recognized in “Unrealized holding gain (loss) on available-for-sale securities” under equity.

      Under U.S. GAAP, available-for-sale securities are carried at fair value and any unrealized gains or losses are reported as a component of other comprehensive income.

Cumulative Translation Adjustments

      Under Indonesian GAAP, investments in foreign companies using the equity method are reported by translating the assets and the liabilities of these companies as of the balance sheet date using the rate of exchange prevailing at that date. Revenues and expenses are translated using the exchange rates at the date of transaction or the average exchange rate for the year for practical reasons. The resulting translation adjustments are reported as part of “Translation Adjustments” in the stockholders’ equity section.

      Under U.S. GAAP, the resulting translation adjustments are reported in other comprehensive income.

Amendment and Restatement of the Joint Operation Scheme in Regional Division VII

      As discussed in Note 5e to the consolidated financial statements, the Company has accounted for the amendment and restatement of the KSO VII agreement as a business combination using the purchase method of accounting.

      Under Indonesian GAAP, the fair value of the unearned income relating to the revenue-sharing arrangements was deemed to be equal to the fair value of the property, plant and equipment under those revenue-sharing arrangements based on the accounting treatment of revenue sharing agreements under Indonesian GAAP. Under U.S. GAAP, the fair value of the obligation under the revenue-sharing arrangements has been determined to be Rp.473,754 million based on the present value of the estimated future payments to PT Bukaka Singtel International (BSI)’s business partners under the revenue-sharing arrangements.

      Under Indonesian GAAP, the excess of the acquisition cost over the Company’s interest in the fair value of identifiable asset acquired and liabilities assumed is recorded as goodwill. After assigning the purchase

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consideration to all other identifiable assets and liabilities, the remaining residual amount was allocated to the intangible asset representing the right to operate the business in the KSO VII area, to be amortized over the remaining KSO VII term of 4.3 years. As a result, there was no goodwill recognized under Indonesian GAAP. For U.S. GAAP reporting purposes, the right to operate the KSO VII operation represented a reacquired right and was recognized by the Company as a separate intangible asset under EITF 04-1 “Accounting for Preexisting Relationships between the Parties to a Business Combination”. The intangible asset was directly valued to determine its fair value in accordance with the requirements in EITF Topic No. D-108 “Use of the Residual Method to Value Acquired Assets Other Than Goodwill”. The excess of the purchase consideration over the net of the amounts assigned to assets acquired and liabilities assumed of Rp.61,386 million was recognized as goodwill.

      (2) The significant adjustments to the consolidated net income for the years ended December 31, 2004, 2005 and 2006 and to the consolidated stockholders’ equity as of December 31, 2005 and 2006 which would be required if U.S. GAAP had been applied, instead of Indonesian GAAP, in the consolidated financial statements are set forth below:

		2004			2005			2006
		Rp. million			Rp. million			Rp. million
Net income according to the consolidated statements of income prepared under Indonesian GAAP			6,614,568			7,993,566			11,005,577
U.S. GAAP adjustments — increase (decrease) due to:
	Voluntary termination benefits		—			—			1,461,149
	Capitalization of foreign exchange losses, net of related depreciation of Rp.75,870 million, Rp.77,010 million and Rp.79,178 million, respectively		1,587			77,010			79,178
	Interest capitalized on assets under construction, net of related depreciation of Rp.13,392 million, Rp.17,275 million and Rp.23,270 million, respectively		26,802			23,825			73,934
	Revenue-sharing arrangements		155,369			69,173			58,545
	Pension		(148,517	)		(104,877	)		(95,788	)
	Post-retirement health care		(75,964	)		(104,466	)		(101,205	)
	Long service awards		(122,462	)		(90,933	)		201,345
	Equity in net income (loss) of associated companies		(177	)		(192	)		(223	)
	Amortization of land rights		(13,907	)		(4,881	)		(16,947	)
	Revenue recognition		54,159			5,046			(4,547	)
	Amortization of goodwill		21,270			21,270			8,858
	Capital leases		(3,435	)		(47,524	)		(27,580	)
	Adjustment for consolidation of Dayamitra		(72,361	)		5,084			11,127
	Asset retirement obligations		(848	)		(848	)		(11,255	)
	Amendment and restatement of the Joint Operation Scheme in Regional Division VII		—			—			4,479

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			2004			2005			2006
			Rp. million			Rp. million			Rp. million
	Deferred income tax:
		Deferred income tax on equity method investments		(11,234	)		(3,206	)		2,053
		Deferred income tax effect on U.S. GAAP adjustments		61,742			18,288			(520,693	)
				(127,976	)		(137,231	)		1,122,430
	Minority interest			(18,019	)		(16,244	)		(16,559	)
	Net adjustments			(145,995	)		(153,475	)		1,105,871
Net income in accordance with U.S. GAAP				6,468,573			7,840,091			12,111,448
Net income per share — in full Rupiah amount				320.86			388.89			602.12
Net income per ADS — in full Rupiah amount (40 Series B shares per ADS)				12,834.47			15,555.74			24,085.00

			2005			2006
			Rp. million			Rp. million
Stockholders’ equity according to the consolidated balance sheets prepared under Indonesian GAAP				23,292,401			28,068,689
U.S. GAAP adjustments — increase (decrease) due to:
	Voluntary termination benefits			—			1,461,149
	Capitalization of foreign exchange differences — net of related depreciation			(471,876	)		(392,698	)
	Interest capitalized on property under construction  — net of related depreciation			152,439			226,373
	Revenue-sharing arrangements			(223,154	)		(164,609	)
	Pension			1,851,509			(115,601	)
	Post-retirement health care			1,038,095			(1,786,355	)
	Long service awards			(213,395	)		(234,052	)
	Equity in net income (loss) of associated companies			(18,621	)		(18,844	)
	Amortization of land rights			(83,999	)		(100,946	)
	Revenue recognition			(709,343	)		(713,890	)
	Amortization of Goodwill			85,079			93,937
	Capital leases			(29,836	)		(57,416	)
	Adjustment for consolidation of Dayamitra			(56,644	)		(45,517	)
	Asset retirement obligations			(2,544	)		(13,799	)
	Amendment and restatement of the Joint Operation Scheme in Regional Division VII			—			4,479
	Deferred income tax:
		Deferred income tax on equity method investments		35,040			38,768
		Deferred income tax effect on U.S. GAAP adjustments		(66,182	)		39,180
				1,286,568			(1,779,841	)
	Minority interest			(10,481	)		19,724
	Net adjustments			1,276,087			(1,760,117	)
	Stockholders’ equity in accordance with U.S. GAAP			24,568,488			26,308,572

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B. Liquidity and Capital Resources

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

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

•  capital expenditures for existing and new network and backbone infrastructure, including a backbone transmission network on Ring JASUKA (Java, Sumatra and Kalimantan), Submarine Cable JDM (Jember-Denpasar- Mataram), the expansion of TELKOM’s fixed wireless access networks, the expansion of Submarine Cable SUB (Surabaya-UjungPandang-Banjarmasin), an additional ground satellite segment in Jakarta, fiber optic transmission network Medan-Padang, softswitch development, the installation and upgrading of fixed lines and increased capacity in its mobile cellular service conducted through Telkomsel (see “— Capital Expenditures” below);

•  debt service requirements relating to existing indebtedness, including two-step loans, its short-term loans with Bank Central Asia and Bank Niaga, and its medium-term notes of Rp.465 billion, IDR bonds of Rp.1 trillion, its loan facility from Bank Central Asia in relation to the construction of the Sumatra backbone network, its loan from a consortium of banks for the Regional Division V junction project, its loans from Citibank N.A. through its Hermes Export facility, the High Performance Backbone facility and the EKN-Backed facility and a loan from the Export and Import Bank of Korea in connection with the CDMA project;

•  installment payments of the purchase price for shares of AriaWest which are expected to be fully paid by January 31, 2009;

•  payments of contributions to TELKOM’s defined benefit pension plan and post-retirement health care plan;

•  fixed monthly payments to MGTI pursuant to the amended and restated agreement for KSO IV, commencing February 2004 and terminating in 2010; and

•  fixed monthly payments to PT Bukaka Singtel International (BSI) pursuant to the amended and restated agreement for KSO VII, commencing October 2006 and terminating in 2010.

      Liquidity and capital resources will also be required for TELKOM to change its current DLD access code as a result of the end of TELKOM’s exclusive right to provide DLD services, with possible expenditures for the creation of a new routing database and the costs for customer education and marketing. TELKOM will be required to fully implement this change in its DLD access code by April 1, 2010. See Item 4. “Information on the Company — B. Business Overview  — Regulations — DLD and IDD Services.”

      In addition, liquidity and capital resources will be required for the share repurchase plan. See Item 7. “Major Stockholders and Related Party Transactions — A. Major stockholders — General.”

      The primary sources of financing available to TELKOM consist of: (i) cash flow from its operating activities; (ii) financing from bonds issuance; (iii) financing from banks or export credit agencies (including financing procured by its vendors); and (iv) deferred vendor payment arrangements.

      TELKOM believes that these sources of financing will be sufficient to fund its planned capital expenditures, its anticipated working capital needs and its likely contractual obligations and commitments in the short and long term. Nonetheless, if global or Indonesian economic conditions worsen, competition or product substitution accelerates beyond current expectations or the value of the Rupiah depreciates significantly against the US Dollar, TELKOM’s net cash flow from its operating activities may decrease and the amount of the required capital expenditures in Rupiah terms may increase, any of which may negatively impact its liquidity.

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      TELKOM manages the liquidity for all of its businesses, including KSO units controlled by TELKOM, on a total group basis. However, Telkomsel manages its own liquidity and accesses capital resources, independently of TELKOM. With regard to Telkomsel, its management expects to continue focusing on enhancing and expanding Telkomsel’s network capacity and infrastructure. It is expected that these expenditures will allow Telkomsel to maintain its position as the leading provider of mobile cellular services in Indonesia in an increasingly competitive market for such services. In recent years, Telkomsel’s primary source of financing has been cash flow from operating activities and bank loans. Telkomsel’s management believes that Telkomsel will continue to generate sufficient cash flow from its operating activities to fund planned capital expenditures in the short and long term and should it require additional financing, it will use external financing sources such as bank facilities or debt market instruments such as bonds or MTNs (medium-term notes).

Defaults and Waivers of Defaults under TELKOM Debt Facilities

      In 2005 and 2006, TELKOM was in breach of certain covenants in the debt facilities from Bank Central Asia (for High Performance Backbone) and the indenture in connection with TELKOM’s IDR bonds of Rp.1 trillion, whilst for debt facilities from Citibank (for High Performance Backbone), TELKOM was in breach only in 2005. Based on the covenants, TELKOM is not permitted to make any loans to or for the benefit of any person which in the aggregate exceed a certain amount. TELKOM has obtained written waivers from Citibank International plc, acting as agent for lenders under the relevant facility agreements, Bank Central Asia and PT Bank Rakyat Indonesia Tbk., acting as trustee of the IDR bonds.

Net Cash Flows

      The following table sets forth information concerning TELKOM’s consolidated cash flows, as set out in (and prepared on the same basis as) the consolidated financial statements:

		Year Ended December 31,
		2004			2005			2006			2006
		Rp. (billion)			Rp. (billion)			Rp. (billion)			US$ (million)
Net cash flows:
	from operating activities		16,051.5			21,102.7			26,695.2			2,966.1
	used in investing activities		(9,598.1	)		(12,212.7	)		(16,461.1	)		(1,829.0	)
	used in financing activities		(6,904.9	)		(8,339.4	)		(7,382.8	)		(820.3	)
Change in cash and cash equivalents			(451.5	)		550.6			2,851.3			316.8
Effect of foreign exchange changes on cash and cash equivalents			213.1			(32.0	)		89.8			10.0
Cash and cash equivalents, beginning of Year			5,094.5			4,856.1			5,374.7			597.2
Cash and cash equivalents, end of year			4,856.1			5,374.7			8,315.8			924.0

Net Cash Flows from Operating Activities

      TELKOM’s primary sources of liquidity in recent years was cash flows from its operating activities. Net cash flows from its operating activities totaled Rp.16,051.5 billion, Rp.21,102.7 billion, and Rp.26,695.2 billion (US$2,966.1 million) in 2004, 2005, and 2006, respectively. In 2005 and 2006, the growth in operating cash flows principally resulted from the higher cash receipts from operating revenues as a result of growth in mobile cellular business conducted through Telkomsel, the higher interconnection revenues from mobile cellular operators and IDD operators, as well as from the IDD service business (TIC-007), and the higher data and internet revenues due to increased SMS, data communication and broadband internet access network usage.

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Year ended December 31, 2006 compared to year ended December 31, 2005.

      In 2006 compared to 2005, net cash flows from operating activities increased by Rp.5,592.5 billion, or 26.5%, primarily due to:

•  an increase of Rp.6,017.0 billion, or 40.6%, in cash receipts from cellular business, primarily due to a growth in the mobile cellular business of Telkomsel;

•  an increase of Rp.1,252.6 billion, or 16.9%, in cash receipts from interconnection services, primarily due to an increase in cellular interconnection fees, resulting from an increased mobile cellular subscriber base in Indonesia; and

•  an increase of Rp.1,962.0 billion, or 28.2%, in cash receipts from data and Internet primarily due to increases in SMS usage by Telkomsel subscribers and the number of Speedy subscribers.

      This increase was partially offset by:

•  an increase of Rp.1,510.6 billion, or 10.1%, in cash payments for operating expenses, which is in line with the increase in operating expenses (excluding depreciation and amortization); and

•  an increase of Rp.2,236.8 billion, or 45.3%, in cash payments for income tax, which is in line with the increase in net income.

Year ended December 31, 2005 compared to year ended December 31, 2004.

      In 2005 compared to 2004, net cash flows from operating activities increased by Rp.5,051.2 billion, or 31.5%, primarily due to:

•  an increase of Rp.4,327.7 billion, or 41.2%, in cash receipts from cellular business, primarily due to a growth in the mobile cellular business of Telkomsel;

•  an increase of Rp.1,636.9 billion, or 28.4%, in cash receipts from interconnection services, primarily due to an increase in cellular interconnection fees, resulting from an increased mobile cellular subscriber base in Indonesia; and

•  an increase of Rp.1,978.8 billion, or 39.8%, in cash receipts from data and Internet primarily due to increases in SMS usage by Telkomsel subscribers and the number of Speedy subscribers.

      This increase was partially offset by:

•  an increase of Rp.2,684.1 billion, or 21.9%, in cash payments for operating expenses, which is in line with the increase in operating expenses (excluding depreciation and amortization, write-down of assets and loss on procurement commitments).

Net Cash Flows from Investing Activities

      Net cash flows used in investing activities totaled Rp.9,598.1 billion, Rp.12,212.7 billion, and Rp.16,461.1 billion (US$1,829.0) in 2004, 2005 and 2006, respectively. In 2004, 2005 and 2006, the net cash used in investing activities were primarily used for capital expenditures.

      Apart from cash on hand and cash in banks, TELKOM invests the majority of its excess cash from time to time in time deposits. Since May 14, 2004, TELKOM also has been investing a part of its excess cash in Rupiah-based mutual funds and other marketable securities. At December 31, 2006, no amount of time deposits had a maturity greater than three months, and Rp.84.5 billion (US$9.4 million) of mutual funds and other marketable securities were outstanding.

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Year ended December 31, 2006 compared to year ended December 31, 2005.

      In 2006 compared to 2005, net cash flows used in investment activities increased by Rp.4,248.4 billion, or 34.8%, primarily due to:

•  an increase of Rp.3,793.7 billion, or 31.3%, in the acquisition of property, plant and equipment, primarily due to the installation of additional transmission stations, earth stations and equipment, cable network and the investment in data processing equipment; and

•  an increase of Rp.436.0 billion, in the payment of the 3G license up-front fee by Telkomsel.

Year ended December 31, 2005 compared to year ended December 31, 2004.

      In 2005 compared to 2004, net cash flows used in investment activities increased by Rp.2,614.6 billion, or 27.2%, primarily due to:

•  an increase of Rp.3,538.1 billion, or 41.3%, in the acquisition of property, plant and equipment, primarily due to an additional installation of transmission stations, earth stations and equipment, cable network and an investment in data processing equipment.

      This increase was partially offset by a decrease of Rp.851.2 billion, or 80%, in cash payments for advances for the purchase of property, plant and equipment.

Net Cash Flows from Financing Activities

      Net cash flows used in financing activities totaled Rp.6,904.9 billion, Rp.8,339.4 billion, and Rp.7,382.8 billion (US$820.3 million) in 2004, 2005 and 2006, respectively. In all three years, net cash flows from financing activities were comprised primarily of proceeds from borrowing, repayments of outstanding indebtedness and payments of cash dividends. In 2006, cash flow used in financing activities decreased by Rp.956.5 billion, or 11.5%, primarily resulting from an increase of Rp.1,962.3 billion in the proceeds from long-term borrowings, and Rp.1,226.7 billion in the repayments of short-term borrowings, offset by a 80.3% increase in the payments of cash dividends of Rp.2,390.5 billion and an increase of Rp.952.2 billion for the purchase of treasury stock.

Repayments of Current Indebtedness

      At December 31, 2004, 2005 and 2006, approximately 72.7%, 72.7%, and 47.1%, respectively, of TELKOM’s current indebtedness for borrowed money (consisting of current maturities of long-term liabilities and short-term bank loans) were denominated in foreign currencies, principally the US Dollar, such that the Rupiah amount of TELKOM’s cash flows used for the repayment of long-term liabilities was significantly affected by the appreciation of the Rupiah in 2006, compared to the depreciation of the Rupiah in 2004 and 2005.

      In 2004, 2005 and 2006, TELKOM made net repayments of current indebtedness for borrowed money of Rp.7,601.6 billion, Rp.4,096.8 billion, and Rp.2,542.1 billion (US$282.5 million), respectively. Cash outflows in 2006 reflected payments for:

•  short-term borrowings of Rp.507.1 billion;

•  medium-term notes of Rp.145.0 billion;

•  long-term borrowings of Rp.1,674.5 billion; and

•  promissory notes of Rp.201.3 billion and capital lease obligation of Rp.14.1 billion.

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Payment of Cash Dividends

      TELKOM paid cash dividends, as determined by the Company’s annual shareholder meeting, as follows:

Date of Annual General Meeting	Dividend		Total Cash			Dividend
of Shareholders	Year		Dividends			Per Share
			(Rp. billion)			(Rp.)
July 30, 2004		2003		3,043.6			301.95
June 24, 2005		2004		3,064.6	(1)		152.01
June 30, 2006		2005		4,400.1			218.86
December 5, 2006		2006		971.0	(2)		48.41

(1)	Including interim cash dividends distributed in December 2004 of Rp.143.4 billion.
(2)	Interim cash dividends distributed in December 2006 of Rp.971.0 billion

     In 2004, 2005 and 2006, the amounts of cash dividends paid were effectively determined by the Government, which holds a majority of TELKOM’s issued and outstanding common shares. TELKOM believes that the Government considers various factors, including the views of TELKOM’s board of directors and the Government’s own funding needs in determining the portion of each year’s net income to be paid out as cash dividends.

      In 2004, 2005 and 2006, cash dividends paid to minority shareholders of subsidiaries amounted to Rp.682.4 billion, Rp.1,694.3 billion and Rp.2,067.7 billion, respectively, which primarily represented cash dividends paid to minority shareholders of Telkomsel.

      On June 22, 2007, Telkomsel held an Annual General Meeting of Shareholders that approved a change in the composition of Telkomsel’s Board of Commissioners and the Board of Directors and cash dividends of Rp.9,505.0 billion representing 85% of Telkomsel’s 2006 net income. Of the declared dividends, 35% will be paid to Singtel.

Escrow Accounts

      In 2006, TELKOM recorded a net decrease in escrow accounts of Rp.94.1 billion, or US$10.4 million, primarily resulting from a decrease in funds deposited into the escrow accounts established in connection with TELKOM’s acquisition of the remaining shares of Dayamitra. See Item 4. “Information on the Company — B. Business Overview — General — Joint Operation Scheme.”

Working Capital

      Net working capital, calculated as the difference between current assets and current liabilities, was Rp.(3,208.6) billion at December 31, 2005, and Rp.(6,614.9) billion (US$(735.0) million) at December 31, 2006. The decrease in net working capital was principally due to increases in trade accounts payable, taxes payable, accrued expenses, unearned income, short term bank loans, and current maturities of long-term liabilities. These increases were partially offset by increases in cash and cash equivalents, trade receivables, prepaid expenses, claims for tax refunds and a decrease in other current assets.

Current Assets

      Current assets were Rp.10,304.6 billion at December 31, 2005, and Rp.13,920.8 billion (US$1,546.8 million) at 2006, reflecting an increase of Rp.3,616.2 billion, or 35.1%. The increase in current assets was primarily due to:

•  an increase of Rp.2,941.1 billion, or 54.7%, in cash and cash equivalents from Rp.5,374.7 billion in 2005 to Rp.8,315.8 billion in 2006;

•  an increase of Rp.295.4 billion, or 38.0%, in prepaid expenses from Rp.777.9 billion in 2005 to Rp.1,073.3 billion in 2006;

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•  an increase of Rp.139.4 billion, or 3.9%, in trade receivables from Rp.3,577.9 billion in 2005 to Rp.3,717.3 billion in 2006;

•  an increase of Rp.359.6 billion in claims for tax refunds from Rp.nil in 2005 to Rp.359.6 billion in 2006; and

•  an increase of Rp.62.4 billion, or 282.4%, in temporary investment from Rp.22.1 billion in 2005 to Rp.84.5 billion in 2006.

      These increases were partially offset by:

•  a decrease of Rp.5.5 billion, or 3.6%, in other receivables from Rp.153.2 billion in 2005 to Rp.147.7 billion in 2006;

•  a decrease of Rp.152.7 billion, or 95.7%, in other current assets from Rp.159.5 billion in 2005 to Rp.6.8 billion in 2006;

•  a decrease of Rp.16.5 billion, or 87.3%, in prepaid taxes from Rp.18.9 billion in 2005 to Rp.2.4 billion in 2006; and

•  a decrease of Rp.7.0 billion, or 3.2%, in inventories from Rp.220.3 billion in 2005 to Rp.213.3 billion in 2006.

      At December 31, 2004, 2005 and 2006, approximately 22.3%, 17.8% and 19.4%, respectively, of TELKOM’s current assets were denominated in foreign currencies, principally the Euro and the US Dollar in 2004 and the US Dollar in 2005 and 2006, such that the movements of the Rupiah exchange rate against US Dollar and Euro across these years affected TELKOM’s current assets.

Trade Receivables

      Trade receivables from related parties (net of allowance for doubtful accounts) decreased by Rp.9.7 billion, or 1.8%, from Rp.530.4 billion at December 31, 2005 to Rp.520.7 billion (US$57.9 million) at December 31, 2006, The decrease was primarily due to an elimination transaction in trade receivables from KSO VII as result of the business combination with KSO VII, and the increase of allowance for doubtful accounts for trade receivables by Rp.0.8 billion, or 0.9%, from Rp.84.3 billion at December 31, 2005 to Rp.85.1 billion (US$9.5 million) at 2006.

      Trade receivables from third parties (net of allowance for doubtful accounts) increased by Rp.149.1 billion, or 4.9%, from Rp.3,047.5 billion at December 31, 2005 to Rp.3,196.6 billion (US$355.2 million) at 2006, primarily due to an increase in trade receivables from residential and business subscribers.

      At December 31, 2006, compared to December 31, 2005, the allowance for doubtful accounts for trade receivables from third parties increased by Rp.98.3 billion, or 16.3%, from Rp.601.4 billion to Rp.699.7 billion (US$77.7 million), due to increase in the amount of trade receivables from third parties.

Other Current Assets

      At December 31, 2006, Rp.6.8 billion (US$0.8 million) of TELKOM’s time deposits with maturity of less than one year were restricted for security interests for bank guarantees.

Current Liabilities

      Current liabilities were Rp.13,513.2 billion at December 31, 2005 and Rp.20,535.7 billion (US$2,281.7 million) at December 31, 2006, reflecting an increase of Rp.7,022.5 billion, or 52.0% which is mainly due to increase in Rupiah denominated current liabilities. The increase in current liabilities primarily

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arose from increases in the following: (a) trade accounts payable; (b) taxes payable; (c) accrued expenses; (d) unearned income; and (e) short-term bank loans; and (f) current maturities of long-term liabilities.

Current Maturities of Long-term Liabilities

      Current maturities of long-term liabilities increased by Rp.2,448.5 billion, or 109.9%, from Rp.2,226.9 billion at December 31, 2005, to Rp.4,675.4 billion (US$519.5 million) at December 31, 2006. This increase was primarily due to the increases in current maturities of bank loans, notes and bonds, and deferred consideration for business combinations.

Accrued Expenses

      Accrued expenses increased by Rp.1,954.5 billion, or 128.5%, from Rp.1,521.2 billion at December 31, 2005, to Rp.3,475.7 billion (US$386.2 million) at December 31, 2006. The increase was primarily due to an increase of Rp.48.0 billion, or 10.8%, in accruals for general, administrative and marketing expenses from Rp.444.1 billion at December 31, 2005 to Rp.492.1 billion at December 31, 2006, an increase of Rp.258.4 billion, or 57.1%, in accrued salaries and benefits from Rp.452.4 billion at December 31, 2005 to Rp.710.8 billion at December 31, 2006, and an increase of Rp.144.6 billion, or 35.2% in accruals for operations, maintenance and telecommunication services expenses from Rp.411.1 billion at December 31, 2005 to Rp.555.7 billion at December 31, 2006, and an increase of Rp.1,528.4 billion or 100% in accrued expenses for the early retirement program from Rp.nil at December 31, 2005 to Rp.1,528.4 billion at December 31, 2006.

Indebtedness

      Consolidated total indebtedness (consisting of long-term liabilities, current maturities of long-term liabilities, short-term bank loans and deferred consideration for business combinations) at December 31, 2004, 2005 and 2006 were as follows:

	At December 31,
	2004		2005		2006		2006
	(Rp. in billion)		(Rp. in billion)		(Rp. in billion)		(US$ in million)
Indonesian Rupiah(1)		4,550.0		4,009.0		8,260,0		917.3
US Dollar(2),(3)		9,904.2		7,993.9		6,002.8		666.6
Japanese Yen(4)		1,512.4		1,302.6		1,088.6		121.0
Euro(5)		649.7		427.7		261.0		29.0
Total		16,616.3		13,733.2		15,612.4		1,733.9

(1)	For 2004, 2005 and 2006, the amounts also included bond issuance costs for TELKOM bonds of Rp.13.4 billion, Rp.8.15 billion and Rp.2.9 billion. In addition, the amount at December 31, 2006 included the present value of the future fixed monthly payments to be made for the deferred consideration for business combinations relating to the acquisition of KSO VII (the interest to be accreted over time amounting to Rp.536.8 billion (US$59.6 million)).
(2)	The amounts at December 31, 2004, 2005 and 2006 translated into Rupiah at Rp.9,300, Rp.9,835, and Rp.9,005 = US$1, respectively, being the Reuters sell rates for US Dollars at each of those dates.
(3)	The amounts at December 31, 2004 included the present values of the future payments to be made for the deferred consideration for business combinations relating to: a. the acquisition of AriaWest (the interest to be accreted over time amounting to US$9.7 million (Rp.90.2 billion)); b. the purchase of the remaining 9.68% interest in Dayamitra shares (the interest to be accreted over time amounting to US$1.3 million (Rp.11.9 billion)); and c. the acquisition of KSO IV (the interest to be accreted over time amounting to US$101.0 million (Rp.938.7 billion)).

The amounts at December 31, 2005 included the present values of the future payments to be made for the deferred consideration for business combinations relating to: a. the acquisition of AriaWest (the interest to be accreted over time amounting to US$5.8 million (Rp.57.3 billion);) b. the purchase of the remaining 9.68% interest in Dayamitra shares (the interest to be accreted over time amounting to US$0.3 million (Rp.2.5 billion)); and c. the acquisition of KSO IV (the interest to be accreted over time amounting to US$72.9 million (Rp.717.1 billion)).

The amounts at December 31, 2006 included the present values of the future payments to be made for the deferred consideration for business combinations relating to the acquisitions of AriaWest and KSO IV (the interests to be accreted over time amounting to US$2.9 million (Rp.26.1 billion) and US$48.6 million (Rp.437.7 billion), respectively).

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(4)	The amounts at December 31, 2004, 2005 and 2006, translated into Rupiah at Rp.90.6, Rp.83.9, and Rp.75.7 = Yen 1, respectively, being the prevailing exchange rates for buying Yen at each of those dates.
(5)	The amounts at December 31, 2004, 2005 and 2006, translated into Rupiah at Rp.12,666.9, Rp.11,651.5 and Rp.11,853.3 = Euro 1, respectively, being the prevailing exchange rate for buying Euro at each of those dates.

     Of the total indebtedness at December 31, 2006, Rp.5,363.4 billion, Rp.3,011.4 billion and Rp.7,237.6 billion were scheduled for repayments in 2007, 2008, and 2009-2024, respectively. Of these amounts, Telkomsel was scheduled to repay Rp.1,666.7 billion in 2007, Rp.1,000.0 billion in 2008 and Rp.500.0 billion in 2009. Infomedia was scheduled to repay Rp.12.1 billion, Rp.10.3 billion and Rp.8.2 billion in 2007, 2008 and 2009-2011, respectively.

      TELKOM expects scheduled repayments of indebtedness to be financed primarily from the net cash flows from its operating activities and refinancing by TELKOM (Parent Company), Telkomsel, Dayamitra, and Infomedia.

      At December 31, 2006, approximately 52.2% of TELKOM’s Rupiah-denominated indebtedness and approximately 20.8% of its US Dollar-denominated indebtedness bore interest at floating rates. TELKOM’s Rupiah-denominated floating rate indebtedness bore interest rates between 11.2% and 13.7%, with rates generally based on interest rates on three-month Certificates of Bank Indonesia (SBI) plus a margin of 1.5%. The weighted average interest rate on Rupiah-denominated floating rate indebtedness at December 31, 2006 was 12.3%. TELKOM’s US Dollar-denominated floating rate indebtedness was subject to interest rates between 4.00% and 6.48%, with rates generally based on floating interest rates offered by the lenders or LIBOR plus a margin of between 0.5% and 0.75%. The weighted average interest rate on US Dollar-denominated floating rate indebtedness at December 31, 2006 was 6.5%. TELKOM’s Rupiah-denominated fixed rate indebtedness at that date bore a weighted average interest rate of 16.6%, while its US Dollar-denominated fixed rate indebtedness bore a weighted average interest rate of 6.56%. All of TELKOM’s Japanese Yen-denominated indebtedness was fixed rate and bore a weighted average interest rate at December 31, 2006 of 3.1%.

      At December 31, 2006, TELKOM had the following outstanding significant indebtedness:

•  Rp.4,476.6 billion (US$497.1 million) (including current maturities) in two-step loans through the Government;

•  Rp.997.1 billion (US$110.7 million) (after bond issuance costs) in IDR bonds issued by TELKOM;

•  Rp.465.1 billion (US$51.6 million) (including current maturities) in the indebtedness relating to TELKOM’s acquisition of 100% equity interest in AriaWest (after discount);

•  Rp.2,436.4 billion (US$270.6 million) representing the present value of the fixed monthly payments to be paid to MGTI in respect of the acquisition of KSO IV;

•  Rp.1,689.6 billion (US$187.6 million) representing the present value of the fixed monthly payments to be paid to PT Bukaka Singtel International (BSI) in respect of the acquisition of KSO VII;

•  Rp.464.8 billion (US$51.6 million) in medium-term notes (net of debt issuance costs) issued by TELKOM;

•  Rp.952.8 billion (US$105.8 million) in project financing from the Export and Import Bank of Korea in connection with the CDMA Project;

•  Rp.488.0 billion (Euro 22.0 million and US$25.2 million) (including current maturities) of Telkomsel’s loan from Citibank International plc through its Hermes Export facility (Rp.261.0 billion) and EKN-Backed facility (Rp.227.0 billion); and

•  Rp.3,166.7 billion (US$351.9 million) Telkomsel’s short-term and medium-term loans received from Mandiri, BCA, Citibank NA and BNI.

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Two-Step Loans

      Since 1982, TELKOM has entered into a series of two-step loans, which were obtained by the Government from overseas banks and companies, which are then re-loaned to TELKOM to fund the development of telecommunications infrastructure and supporting equipment. TELKOM obtained its last two-step loan in 1994 and, as a public company, is no longer eligible to obtain Government-assisted financing of this type.

      At December 31, 2006, TELKOM’s outstanding principal indebtedness under the two-step loans totaled Rp.4,476.6 billion (US$497.4 million), of which US$199.5 million (Rp.1,795.8 billion) was denominated in US Dollars and ¥14,384.7 million (Rp.1,088.6 billion) was denominated in Japanese Yen. As of December 31, 2006, TELKOM has used all facilities of two-step loans and the draw period for the two-step loan has expired.

      Two-step loans bear fixed or floating rates. Floating rates are determined by reference to interest rates on the average of 3-month Certificates of Bank Indonesia (SBI) during the six months preceding the installment due date plus 1.0% per annum or the interest rate offered by lenders plus 5.25% for two-step loans which are payable in Rupiah and the interest rate offered by offshore lenders plus 0.5% for two-step loans which are payable in foreign currencies. Repayments of principal are due on the loans at various dates through 2024. For the years 2007 through 2011, aggregate scheduled repayments of principal range from Rp.368.6 billion to Rp.469.7 billion per year and average Rp.417.1 billion per year.

      The Company must maintain financial ratios as follows:

•  Projected net revenue to projected debt service ratio should exceed 1.5:1 and 1.2:1 for two-step loans originating from World Bank and Asian Development Bank (“ADB”), respectively; and

•  Internal financing (earnings before depreciation and interest expenses) should exceed 50% and 20% compared to capital expenditures for loans originally from the World Bank and ADB, respectively.

      As of December 31, 2006, the Company was in compliance with the above covenants.

Direct Borrowings

      Beginning in 2002, TELKOM began funding a significant portion of its capital expenditures through vendor-procured and other direct borrowings from banks and other lenders, including the capital markets.

      On April 10, 2002, TELKOM borrowed US$51.4 million and Rp.173.0 billion from Citibank N.A. and PT Bank Central Asia to finance the development of a high performance backbone in Sumatra. Citibank loans, which were supported by an export credit guarantee of Hermes Kreditversicherungs AG and Servizi Assicurativi del Commercio Estero (“SACE” Italy), bear interest rate at a rate equal to 6-month LIBOR plus 0.75% and fixed interest rate of 4.14%, respectively. Bank Central Asia loan bears interest at 4.35% plus the 3-month time deposit rate. As of December 31, 2006, the outstanding amounts under these facilities were US$14.0 million and Rp.28.7 billion.

      On June 21, 2002, as amended on April 4, 2003, TELKOM entered into a loan agreement with several Indonesian banks in which Bank Bukopin acted as facility agent for Rp.150 billion to fund the development of the regional junction Regional Division V project. The lenders charged interest at the rate of 19.5% for the first year and at the average three-month deposit rate plus 4% for the remaining years. A substantial portion of these loans was supported by export credit agency guarantees procured by the equipment vendors for the project. As of December 31, 2006, the outstanding amounts under these facilities was Rp.32.6 billion with the interest rate charged on the loan at 12.7%.

      On August 27, 2003 TELKOM entered into a Loan Agreement with The Export-Import Bank of Korea for approximately US$124.0 million, with a portion of the loan amount to be used by TELKOM to finance the CDMA procurement from the Samsung Consortium. The loan bears interest, commitment, and other fees totaling 5.68%. The loan is unsecured and payable in 10 semi-annual installments on June 30 and December

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30 of each year beginning in December 2006. As of December 31, 2006, the outstanding amounts under this facility was US$105.8 million.

      On December 3, 2004, Telkomsel entered into a short-term loan agreement with Bank Central Asia for a total facility of Rp.170 billion. The loan bears interest at the 3-month Bank Indonesia Certificate plus 1% (13.09% as of December 31, 2005), payable in arrears. The principal outstanding as of December 31, 2005 was Rp.170.0 billion. The loan was fully repaid on February 1, 2006.

      On August 15, 2006, Telkomsel signed a loan agreement with Bank Central Asia for a Rp.350.0 billion short-term facility. The loan amount under the short-term facility would be repaid in three quarterly installments commencing after three months from the availability period (i.e., the earlier of November 15, 2006 and the date when the facility had been fully drawn down). The loan bears a floating interest rate of three-month Certificate of Bank Indonesia plus 1.5% (i.e., 11.00% as of December 31, 2006) and is unsecured. The principal outstanding as of December 31, 2006 amounted to Rp.233.3 billion.

      On August 15, 2006, Telkomsel signed a loan agreement with Bank Mandiri for a Rp.350,000 million short-term facility. The short-term facility is to be repaid in three quarterly installment commencing after three months from the availability period (i.e the earlier of November 15, 2006 or the date when the facility had been fully drawn down). The loan bears a floating interest rate of three-month Certificate of Bank Indonesia plus 1.5% (i.e., 11.00% as of December 31, 2006) and is unsecured. The principal outstanding as of December 31, 2006 amounted to Rp.233,333 million.

      On August 15, 2006, Telkomsel signed a loan agreement with BNI for a Rp.300.0 billion short-term facility. The short-term facility is to be repaid in three quarterly installments commencing after three months from the availability period (i.e., the earlier of November 15, 2006 and the date when the facility had been fully drawn down). The loan bears a floating interest rate of three-month Certificate of Bank Indonesia plus 1.5%. (i.e., 11.00% as of December 31, 2006) and is unsecured. The principal outstanding as of December 31, 2006 amounted to Rp.200.0 billion. For further details regarding TELKOM’s Short-Term Bank Loans, see Note 20 to the consolidated financial statements.

      On June 15, 2007, Telkomsel entered into loan agreements with Bank Central Asia Tbk, Bank Negara Indonesia Tbk and Bank Mandiri Tbk with total facilities of Rp.2,400 billion which consists of short-term loans and medium term loans. Subsequently, on the same date, Telkomsel entered into a loan agreement with Bank Rakyat Indonesia Tbk for a medium term loan facility of Rp.400 billion. The short term loans are repayable in 3 (three) equal quarterly installments beginning 3 (three) months after the end of availability period (the earlier of 3 (three) months after the date of agreements and the date on which the facilities have been fully drawn). The medium-term loans are repayable in 5 (five) equal semi-annual installments; the first installment shall be due 6 (six) months after the end of the availability period (the earlier of 12 (twelve) months after the date of the agreements and the date on which the facilities have been fully drawn). The loans bear interest at rate equal to the average rate for three-month Jakarta Inter Bank Offered Rate plus 1.25% which becomes due quarterly in arrears.

      On April 25, 2005, Balebat entered into a loan agreement with Bank Niaga for a 12% per annum fixed rate revolving credit facility of Rp.800 million and an investment credit facility of Rp.1,600 million (Note 24g). These credit facilities are secured by Balebat’s property located in West Java up to a maximum of Rp.3,350 million. The applicable fixed interest rate and maturity date of the revolving credit facility was amended on July 26, 2005 to 12.5% per annum and May 30, 2006, respectively and subsequently on June 13, 2006 to 16.5% per annum and May 30, 2007, respectively. Based on the amendment on June 13, 2006, the revolving credit facility amounted to Rp.800 million was combined with the short-term fixed credit facility of Rp.4,000 million as described in Note 24g. Additionally, Balebat obtained credit facility of Rp.500 million at a fixed interest rate of 16.75% per annum maturing on May 30, 2007. As of December 31, 2005 and 2006, the principal outstanding balance amounted to Rp.800 million and Rp.1,323 million, respectively.

      On October 18, 2005, GSD entered into a loan agreement with Bank Niaga for a short-term facility of Rp.3,000 million for a one-year term. The loan facility was secured by certain of GSD’s property, carried interest at 14.5% per annum and would expire on October 18, 2006. On June 7, 2006, the loan agreement was

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amended to increase the maximum facility amount and interest rate to Rp.8,000 million and 16.25% per annum, respectively. On November 3, 2006, the loan agreement was amended (2nd amendment agreement) to change the interest rate to 15.5% for the period October 18, 2006 to October 18, 2007. As of December 31, 2005 and 2006, the principal outstanding amounted to Rp.3,000 million and Rp.8,000 million, respectively.

      In October 2005, GSD also entered into a loan agreement with the Bank Niaga to obtain a Rp.12,000 million short-term facility, which would expire on October 18, 2006. The borrowing under this facility carried interest at 14.5% per annum. On June 7, 2006, the credit agreement was amended to reduce the maximum facility to Rp.7,000 million and to change the interest rate to 16.25% per annum. On November 3, 2006, the loan agreement was amended (2nd amendment agreement) to change the interest rate to 15.5% for the period October 18, 2006 to October 18, 2007. The principal outstanding as of December 31, 2005 and 2006 was Rp.nil and Rp.4,000 million, respectively.

      The credit facilities of Rp.8,000 million and Rp.7,000 million are secured by GSD’s property located in Jakarta.

      On February 15, 2006, GSD entered into a loan agreement with Bank Bumiputera Indonesia amounted to Rp.8,000 million with interest at 17% per annum, unsecured and repayable by monthly installments. The loan is payable within 12 months from the signing date and will mature on February 15, 2007. As of December 31, 2006, the loan was fully drawn-down and the principal outstanding amounted to Rp.8,000 million.

IDR Bond Issuance

      On July 16, 2002, TELKOM issued bonds denominated in Rupiah amounting to Rp.1,000 billion. The bonds were issued at par value and have a term of five years. The bonds bear interest at a fixed rate of 17% per annum, payable quarterly beginning October 16, 2002 and secured with all assets owned by TELKOM. The bonds are traded on the Surabaya Stock Exchange and will mature on July 16, 2007. Net proceeds after bond issuance costs of Rp.19.2 billion amounted to Rp.980.8 billion.

      As of December 31, 2004, all of the bond proceeds have been used, primarily for the CDMA project with the remainder for the access network.

      The Company must maintain the following consolidated financial ratios:

•  Debt service coverage ratio to exceed 1.5:1;

•  Debt to equity ratio to exceed (i) 3:1 for the period January 1, 2002 to December 31, 2002; (ii) 2.5:1 for the period January 1, 2003 to December 31, 2003; and (iii) 2:1 for the period January 1, 2004 to the date the bonds are redeemed; and

•  Debt to EBITDA ratio to not exceed 3:1.

      TELKOM also covenanted in the bonds indenture that during the periods the bonds are outstanding, TELKOM would not make any loans to or for the benefit of any person which in the aggregate exceed Rp.500 billion. In 2005 and 2006, TELKOM breached this covenant with regard to providing loans to certain subsidiary which in aggregate exceed Rp.500,000 million. However, TELKOM had obtained a written waiver from PT Bank Rakyat Indonesia Tbk, the trustee of the bonds. See “— Defaults and Waivers of Defaults under TELKOM Debt Facilities” above.

Medium-Term Notes

      On December 13, 2004, TELKOM issued unsecured medium-term notes (“MTN”) in the principal amount of Rp.1,125 billion in four series, pursuant to a Medium-Term Notes Issuance Agreement dated December 13, 2004. Series A and Series B have matured and have been repaid as of December 31, 2005. Series C in the principal amount of Rp.145 billion matured on June 15, 2006 and bore interest at the rate of 8.2% per annum, and Series D is in the principal amount of Rp.465 billion, matured on June 15, 2007 and bore interest at the rate of 9.4% per annum. Interests on the outstanding MTN payable on June 15, 2006,

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December 15, 2006 and June 15, 2007, have been paid on their due dates as of the date of this Annual Report. The MTN were offered at their principal amounts. TELKOM is expected to redeem the Series D MTN at the maturity date.

      Under the terms and conditions of the MTN, TELKOM cannot, without prior approval of holders of a majority of the outstanding principal amount of the MTN, take certain actions, including (i) encumber, pledge or charge any part of its assets, with certain exceptions; (ii) provide, or to cause its subsidiaries to provide, any corporate guarantee to any third party, except corporate guarantees relating to the obligations of its subsidiaries, for the purpose of tendering or acquiring assets through export credit; (iii) merge or consolidate with other companies which results in a material adverse effect to the operations and financial condition of TELKOM; and (iv) dispose of assets which are in aggregate more than 5% of TELKOM’s net fixed assets.

      TELKOM is required at the end of each calendar quarter during the life of the MTN to maintain certain financial ratios, namely: (i) debt service coverage ratio to exceed 1.5 to 1; (ii) debt to equity ratio not to exceed 2 to 1; and (iii) debt to EBITDA ratio not to exceed 3 to 1. As of the date of this Annual Report, TELKOM is in compliance with these ratios.

Acquisition Indebtedness and Option Purchase Price

Dayamitra

      On December 14, 2004, TELKOM exercised the option to buy the remaining 9.68% shares owned by TM Communication in Dayamitra to complete its 100% acquisition of Dayamitra. Payment for the shares in the amount of US$16.2 million was made on March 26, 2006 through an escrow account in Citibank Singapore. TELKOM has been making monthly payments of US$787,390 to the escrow account starting from December 26, 2004, which was ended on March 26, 2006. TELKOM issued a non-transferable promissory note to TM Communications as a guarantee to buy the shares on March 26, 2006, during which TM Communications will concurrently transfer the 9.68% share certificate of Dayamitra to TELKOM. As a result, TELKOM currently controls 100% of Dayamitra.

AriaWest

      On July 31, 2003, TELKOM acquired all the shares of AriaWest. As a result of the acquisition, TELKOM owes the former shareholders of AriaWest US$109.1 million, which is being repaid in ten semi-annual installments from July 31, 2004 through January 31, 2009. As of December 31, 2006, the amount payable to AriaWest’s former shareholders, before unamortized discount, totaled US$54.5 million.

KSO IV

      On January 20, 2004, TELKOM and MGTI entered into an agreement to amend and restate the KSO Agreement with respect to Regional Division IV. For details, see Item 4. “Information on the Company — B. Business Overview — General — Joint Operation Scheme.”

      At December 31, 2006, the remaining monthly payments to be made by TELKOM to MGTI, before unamortized discount, amounted to US$319.2 million (Rp.2,874.1 billion).

KSO VII

      On October 19, 2006, TELKOM and PT Bukaka Singtel International (BSI) entered into an agreement to amend and restate the KSO Agreement with respect to Regional Division VII. For details, see Item 4. “Information on the Company — B. Business Overview — General — Joint Operation Scheme.”

      TELKOM must pay to PT Bukaka Singtel International (BSI) a fixed monthly payment of Rp.55.64 billion from October 2006 to June 2007, and Rp.44.25 billion from July 2007 to December 2010.

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Sumatra High Performance Backbone Network

      On April 10, 2002, TELKOM entered into four term loan facilities to finance the construction of the Sumatra high performance backbone network. These four facilities were entered into with (i) Bank Central Asia, for Rp.173 billion; (ii) Citibank N.A., for US$6.95 million; (iii) Citibank International plc as agent for certain lenders under a syndicated loan, for US$23.40 million (supported by an export credit guarantee of Hermes Kreditversicherungs AG); and (iv) Citibank International plc as agent for certain lenders under a syndicated loan, for US$21.00 million (supported by an export credit guarantee of Servizi Assicurativi del Commercio Estero). As of December 31, 2006, all of these facilities have been fully or partially utilized, with the US$6.95 million loan to Citibank N.A being fully repaid in May 2003.

Bank Central Asia

      The loan facility from Bank Central Asia provides a total facility of Rp.173 billion to finance the Rupiah portion of the high performance backbone network in Sumatra pursuant to the “Partnership Agreement” dated November 30, 2001 with PT Pirelli Cables Indonesia and PT Siemens Indonesia.

      The amounts drawn from the facility bear interest at 4.35% plus the three-month time deposit rate (i.e., 13.27% and 13.18% as of December 31, 2005 and 2006, respectively). The loans would be repaid in twelve unequal quarterly installments beginning in July 2004. The loan was originally scheduled to mature in October 2006 but was amended in 2004 to mature in April 2007 instead.

      Total principal outstanding as of December 31, 2005 and 2006 was Rp.86,093 million and Rp.28,698 million, respectively. The loan facility from Bank Central Asia is not collateralized.

      During the period when the loan is outstanding, the Company is required to comply with all covenants or restrictions including maintaining financial ratios as follows:

      • EBITDA to interest ratio to exceed 4:1

      • EBITDA to interest and principal ratio to exceed 1.5:1

      • Debt to EBITDA ratio not to exceed 3:1

      In 2005 and 2006, the Company breached a covenant in the loan agreement which stipulates that the Company will not make any loans to or for the benefit of any person which in aggregate exceed Rp.500,000 million. The Company has obtained a written waiver from Bank Central Asia with regard to providing loans to certain subsidiaries which in aggregate exceed Rp.500,000 million.

Citibank N.A. and Citibank International

      The loan facility with Citibank N.A. as arranger and Citibank International plc as agent which was supported by an export credit guarantor of Hermes Kreditversicherungs AG as lender, provides a total facility of US$23.4 million to finance up to 85% of the cost of supplies and services sourced in Germany relating to the design, manufacture, construction, installation and testing of high performance backbone networks in Sumatra pursuant to the Partnership Agreement dated November 30, 2001, with PT Pirelli Cables Indonesia and PT Siemens Indonesia. The credit facility is unsecured. The lender required a fee of 8.4% of the total facility. This fee was paid in two installments during the agreement period, 15% of the fee was required to be paid in cash and 85% was included in the loan balance.

      As of December 31, 2005 and 2006, the outstanding loan was US$12.6 million (equivalent to Rp.123,665 million) and US$8.4 million (equivalent to Rp.75,486 million), respectively. The loan is payable in ten semi-annual installments beginning in April 2004. The amounts drawn from the facility bear interest at a rate equal to the six-month LIBOR plus 0.75% (i.e., 5.04% and 6.11% as of December 31, 2005 and 2006, respectively).

      On April 10, 2002, the Company entered into a loan agreement with Citibank N.A. as arranger and Citibank International plc as agent which was supported by an export credit guarantee obtained from Servizi Assicurativi del Commercio Estero (“SACE Italy”) providing a total maximum facility of US$21.0 million.

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The facility was used to finance up to 85% of material and services procured in Italy in connection with the design, manufacture, development, installation and testing of Sub System VI, as part of HP Backbone network.

      The amounts drawn from the facility bear a fixed interest rate of 4.14%. The loans are payable in ten semi-annual installments beginning in December 2003. Total principal outstanding as of December 31, 2005 and 2006 was US$9.3 million (equivalent to Rp.91,257 million) and US$5.6 million (equivalent to Rp.50,133 million), respectively. The credit facility is unsecured.

      During the period when the loans are outstanding, the Company is required to comply with all covenants or restrictions including maintaining financial ratios as follows:

•  Debt service coverage ratio to exceed 1.5:1

•  Debt to equity ratio not to exceed:

a.  3:1 for the period April 10, 2002 to January 1, 2003

b.  2.75:1 for the period January 2, 2003 to January 1, 2004

c.  2.5:1 for the period January 2, 2004 to January 1, 2005

d.  2:1 for the period January 2, 2005 to the full repayment date of the loans

•  Debt to EBITDA ratio not to exceed:

a.  3.5:1 for the period April 10, 2002 to January 1, 2004

b.  3:1 for the period January 2, 2004 to the full repayment date of the loans

      In 2005, the Company breached a covenant in the loan agreements which stipulates that the Company will not make any loans or grant any credit to or for the benefit of any person which in aggregate exceed 3% of shareholders’ equity. On May 12, 2006, the Company obtained a written waiver from Citibank International plc with regard to providing loans to certain subsidiaries which in aggregate exceed 3% of stockholders’ equity. In 2006, the Company has complied with the above covenant.

Regional Division V Junction Project

      On June 21, 2002, TELKOM entered into a loan agreement with a consortium of banks for a Rp.400 billion facility in order to finance the Regional Division V Junction Project. The original loan was to be repaid in 14 quarterly installments starting from April 2004. The loan agreement was amended on April 4, 2003 to reduce the facility amount to Rp.150 billion and provided for repayments to be made in 14 quarterly installments starting on May 21, 2004. As of December 31, 2005, TELKOM had drawn down a total of Rp.148.9 billion of this loan. As of December 31, 2006, the outstanding amount of the loan was Rp.32.6 billion.

      Under this loan agreement, TELKOM is required at the end of each calendar quarter during the life of the facility to maintain certain financial ratios, namely: (i) debt to equity ratio not to exceed 3 to 1; and (ii) EBITDA to interest expense ratio to exceed 5 to 1. As of the date of this Annual Report, TELKOM was in compliance with these ratios.

Telkomsel’s Indebtedness (including facilities)

Hermes Export Facility

      On December 2, 2002, pursuant to the partnership agreement with Siemens Aktiengesellschaft (AG), Telkomsel entered into a Hermes Export Facility Agreement with Citibank International plc (as “Original Lender” and “Agent”) covering a total facility of Euro 76.2 million divided into several tranches. The agreement was subsequently amended on October 15, 2003, amending the facility amount to Euro 73.4 million and the payment dates. The interest rate per annum on the facility is determined based on the EURIBOR plus 0.75% per annum (i.e., 2.96% as of December 31, 2004, 3.33% as of December 2005 and 4.48% as of

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December 2006). Interest is payable semi-annually, starting on the utilization date of the Facility (May 29, 2003). As of December 31, 2006, total loans drawn from the facility amounted to Euro 73.4 million and the outstanding balance was Euro 22.0 million.

EKN-Backed Facility

      On December 2, 2002, pursuant to the partnership agreement with PT Ericsson Indonesia, Telkomsel entered into the EKN-Backed Facility Agreement with Citibank International plc (as “Original Lender” and “Agent”) and Citibank N.A., Jakarta branch (“Arranger”), covering a total facility amount of US$70.5 million divided into several tranches. In December 2004, the agreement was amended to reduce the facility amount to US$68.9 million. The interest rate on the facility is based on CIRR (Commercial Interest Reference Rate) of 3.52% plus 0.5% per annum (i.e., 4.02% as of December 31, 2005 and 2006) and unsecured. Interest is paid semi-annually, starting on the utilization date (July 31, 2003). In addition to the interest, in 2004, Telkomsel was also charged an insurance premium for the insurance guarantee given by EKN in favor of Telkomsel for the loan utilization amounting to US$1.5 million, 15% of which was paid in cash. The remaining balance was settled through utilization of the Facility. No amounts were drawn down from the facility in 2005 and 2006. As of December 31, 2005 and 2006, the outstanding balance was US$40.6 million (equivalent to Rp.399,579 million) and US$25.2 million (equivalent to Rp.226,993 million), respectively.

Short-term and Medium-term Loans

      Pursuant to the purchase of the Notes from BCA, on December 3, 2004, Telkomsel entered into a Loan Agreement with Deutsche Bank AG, Jakarta (as “Arranger” and “Agent”) and BCA (as “Lender”) covering a total facility of Rp.170,000,000,000 (“Facility”). The facility bore interest at three-month Bank Indonesia certificate plus 1%, paid quarterly in arrears. The repayment of the amounts drawn was made on February 1, 2006.

      In March 2006, Telkomsel entered into medium-term loan agreements with Bank Central Asia, Citibank N.A. and Bank Mandiri for loan facilities of Rp.400 billion, Rp.500 billion and Rp.600 billion, respectively. Under the agreements, the availability period of the facilities commences on the date of the agreements and ends on the earlier of (a) the date falling twelve months after the date of the agreements and (b) the date on which the facilities are fully drawn, cancelled or terminated. The repayment of loans shall be made by five equal semi-annual installment, of which the first repayment shall be due six months after the end of the availability period. Borrowings under the facilities bear interest at a rate equal to the three-month certificate of Bank Indonesia plus 1.75% per annum, which becomes due quarterly in arrears.

      Subsequently, on August 15, 2006, Telkomsel entered into loan agreements with Bank Mandiri, Bank Central Asia and Bank Negara Indonesia for loan facilities of Rp.700 billion, Rp.700 billion and Rp.600 billion, respectively. The facilities consist of a Short-term Loan (Facility A) and Medium-term Loan (Facility B) of equal proportions.

      Based on the agreements, the availability period of Facility A commences on the date of the agreements and ends on the earlier of (a) the date falling three months after the date of the agreements, (b) the date on which the facility is fully drawn, cancelled or terminated. The repayment of loans shall be made by three equal quarterly installments with the first installment due three months after the end of the availability period.

      The availability period of Facility B commences on the date of the agreements and ends on the earlier of (a) the date falling twelve months after the date of the agreements, (b) the date on which the Facility is fully drawn, cancelled or terminated. The repayment of loans shall be made in five equal semi-annual installments; the first installment shall be due six months after the end of the availability period.

      The loans under Facility A and B bear interest at a rate equal to the three-month certificate of Bank Indonesia plus 1.5% which becomes due quarterly in arrears.

      As of December 31, 2006, the loan facilities were fully drawn.

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      The outstanding balance of the borrowings under the facilities as of December 31, 2006 was scheduled to be repaid as follows:

		Amount (Rp.)
Years Ended		Short-Term		Medium-Term
2007			666,666,666,666		1,000,000,000,000
2008			—		1,000,000,000,000
2009			—		500,000,000,000
	Total		666,666,666,666		2,500,000,000,000

Dayamitra’s Indebtedness

      As of December 31, 2006, Dayamitra had fully repaid its indebtedness loan facilities from Bank Mandiri pursuant to the terms of loan agreements entered into on December 20, 2003. The loans were payable on a quarterly basis with interest at 14% per annum.

Capital Expenditures

      At December 31, 2006, TELKOM (Parent Company) incurred capital expenditures of Rp.2,203.6 billion (US$244.8 million), which was Rp.4,609.8 billion less than the amount originally budgeted for in its capital expenditure plan.

      TELKOM groups its capital expenditures into the following categories for planning purposes of:

•  Infrastructure, which consists of the transmission and switching network and backbone (including data backbone and fixed line network backbone infrastructure), access network (including fixed wireless networks) and BTS of Fixed Wireless;

•  Phone, which consists of Soft Switch # 4 and 5, Local Central (V52 and QE Central), Trunk Expand, Signaling CCS#7 for Fixed Wireline and NSS or MSC for Fixed Wireless.

•  Multimedia, which consists of Internet access, data communication services, content and community development and e-business services; and

•  Service Net, which consists of various commercial services intended to increase traffic on TELKOM’s network, including interconnection, Internet network and third-party call centers.

      In addition, Telkomsel incurred capital expenditures of Rp.16,496 billion (US$1,832.9 million) for network infrastructure and other investments and TELKOM’s other subsidiaries incurred capital expenditures of Rp.196.5 billion (US$21.8 million).

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      The following table sets out TELKOM’s historical and planned capital expenditure requirements for the periods indicated, including historical and planned capital expenditures for Telkomsel, Dayamitra and TELKOM’s other consolidated subsidiaries:

	Years Ended December 31,
	2004(1)		2005(1)		2006(1)		2007(2)		2008(3)
	Rp. (billion)
TELKOM (Parent Company):
Infrastructure:
Transmission Network and Backbone		560.4		277.7		714.8		1,285.5		330.1
Access Network		1,831.2		1,577.0		668.6		4,244.4		1,089.9
Subtotal Infrastructure		2,391.6		1,854.7		1,383.4		5,529.9		1,420.0
Commercial Services:
Phone		901.5		524.5		220.8		1,137.7		292.1
Multimedia		92.7		334.2		155.9		767.7		197.1
Services-Net		34.2		94.9		8.9		41.7		10.7
Subtotal Commercial Services		1,028.4		953.6		385.6		1,947.1		499.9
Supporting Services		295.6		559.5		434.6		1,014.3		260.5
Subtotal for TELKOM (Parent Company)		3,715.6		3,367.8		2,203.6		8,491.3		2,180.4
TELKOM’s Subsidiaries:
Telkomsel		4,982.7		10,085.7		16,496.0		18,517.0		18,146.7
Dayamitra		50.4		—		—		—		—
Infomedia Nusantara		63.0		37.9		89.1		127.6		97.7
Pramindo Ikat Nusantara		1.7		29.4		12.0		38.1		45.4
Indonusa Telemedia		1.4		8.9		—		82.4		21.8
Graha Sarana Duta		3.7		2.4		2.1		27.3		8.2
PT Pro Infokom Indonesia		0.6		—		—		—		—
PT Metra		0.9		19.3		45.4		15.2		60.0
AriaWest		0.1		1.1		47.9		4.0		—
Napsindo		0.3		0.5		—		—		—
Subtotal for subsidiaries		5,104.8		10,185.2		16,692.5		18,811.6		18,379.8
Total for TELKOM (consolidated)		8,820.4		13,553.0		18,896.1		27,302.9		20,560.2

(1)	Amounts for 2004, 2005 and 2006 are actual capital expenditures.
(2)	Amounts for 2007 are planned capital expenditures included in TELKOM’s budget and are subject to upward or downward adjustment.
(3)	Amounts for 2008 are projected capital expenditures for such year, and actual capital expenditures may be significantly different from projected amounts.

     Actual future capital expenditures may differ from the amounts indicated above due to various factors, including but not limited to the Indonesian economy, the Rupiah/ US Dollar and Rupiah/ Euro exchange rates and other applicable foreign exchange rates, the availability of vendor or other financing on terms acceptable to TELKOM, technical or other problems in obtaining or installing equipment and whether TELKOM enters any new lines of business. In particular, TELKOM’s ability to make substantial future capital expenditures will depend on whether it is successful in implementing one or more forms of financing, including “pay as you grow.” See Item 3. “Key Information — D. Risk Factors — TELKOM’s ability to develop adequate financing arrangements is critical to support its capital expenditures” and Item 4. “Information on the Company — B. Business Overview — Business Strategy — Reducing Cost of Capital.”

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Planned Investments in 2007

      In 2007, TELKOM plans to make capital investments in infrastructure, commercial services and supporting services.

Planned Investments in Infrastructure

      TELKOM’s planned capital investments in infrastructure in 2007 total Rp.5,529.9 billion. This will be used for capital investments in transmission infrastructure, which are expected to include investments in a fiber optic transmission network, expansion of the backbone transmission network on Jawa, Sumatra and Kalimantan (JASUKA), a submarine cable system between Kalimantan and Sulawesi and a submarine cable system between Denpasar and Mataram. Substantial investment will also be made in replacing and expanding access infrastructure, which includes fiber optic cable fixed line, copper wire fixed line and CDMA wireless access networks.

      For a more complete discussion of TELKOM’s planned infrastructure investments, see Item 4. “Information on the Company — B. Business Overview — Network Infrastructure.”

Planned Investments in Commercial Services

      TELKOM also plans to spend Rp.1,947.2 billion in 2007 for capital investments in commercial services, including:

•  capital investments in fixed line commercial services (including fixed wireless services), which include additional capacity, service enhancements and upgrades, including its value added services and software and mechanical and electrical systems;

•  enhancing TELKOM’s multimedia network (including core network of IR Transport and IP Metro Junction), which includes increases in the bandwidth capacity of international internet gateway, internet multiflexing (IMUX) system for internet and data access, internet value added service in commercial services such as B2B e-commerce access, broadband access (Speedy), NGN platform services and broadband contents and applications; and

•  investing in service-net, including the establishment of fixed wireless services, e-commerce, internet connectivity and value added services.

Planned Investments in Supporting Services

      TELKOM plans to spend Rp.1,014.3 billion in 2007 for capital investments in supporting facilities, including:

•  investments in information systems to improve and increase the capability of the IT support system, billing systems, operating support system (“OSS”), customer care and billing system (“CCBS”);

•  buildings (for operations and equipment) and power supply; and

•  other supporting facilities such as network measurement tools, research and development, training equipment, and office facilities.

Other Financing Techniques

      In common with many Indonesian state-owned enterprises, TELKOM has historically relied on two-step loans financed by the Government and revenue sharing with co-investors to fund investment in property, plant and equipment. In recent years, however, TELKOM has funded its capital investments largely through internally generated cash flows from operating activities and direct borrowing from commercial banks. In addition, TELKOM has in recent years accessed the debt capital markets for a portion of its financing needs. On July 16, 2002, TELKOM issued a fixed rate IDR Bond in the amount of Rp.1,000 billion with maturity of five years with fixed interest rate of 17% per annum. On December 15, 2004, TELKOM issued unsecured medium-term notes (“MTN”) in the principal amount of Rp.1,125 billion in four series with interest rates

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ranging from 7.7% to 9.4% per annum. TELKOM is presently in the process of exploring alternative sources of financing for capital investment, including vendor-procured and other bank financing, as well as other potential sources of borrowed funds.

Revenue Sharing

      Until recently, TELKOM made use of revenue-sharing arrangements to develop fixed line networks in heavily populated urban areas of Indonesia, public card-phone booths and its analog mobile cellular networks. Under these revenue-sharing arrangements, investors finance the costs incurred in procuring and installing equipment, while TELKOM manages and operates the equipment, and bears the cost of repairs and maintenance, after installation and until the end of the revenue-sharing period. The investors legally retain rights to the equipment during the revenue-sharing period but transfer ownership to TELKOM at the end of such period. See Item 4. “Information on the Company — B. Business Overview — General — Revenue Sharing Arrangements (PBHs).”

      TELKOM did not fund any capital investments (other than capital investments in fixed line telephone services and broadband Internet services) through revenue-sharing arrangements in 2004, 2005 or 2006 and does not intend to fund any such capital investments (other than capital investments in fixed line telephone services) through such arrangements in the future, except in the context of its efforts to promote the “pay as you grow” program to fund capital investments. See “Pay as You Grow” below. Since 2004, TELKOM has been trying to replace existing revenue-sharing arrangements with new partnership schemes on more favorable terms.

Pay as You Grow

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

Critical Accounting Policies, Estimates and Judgments

      The preparation of TELKOM’s consolidated financial statements in conformity with Indonesian GAAP, as well as the reconciliation to U.S. GAAP, requires TELKOM to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and revenue and expenses for the years reported. Management continually evaluates its estimates and judgments including those related to useful lives and carrying value of property, plant and equipment and intangible assets, valuation allowance for receivables, pension and other post-retirement benefits, income taxes and legal contingencies. Management bases its estimates and judgments on historical experience and other factors that are believed to be reasonable under the circumstances. For a complete discussion of the application of these and other significant accounting policies, see Note 2 to the Company’s consolidated financial statements. Actual results could differ from those estimates under different assumptions and conditions. TELKOM believes that of its significant accounting policies, the following may involve a

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higher degree of judgment or complexity or are areas where assumptions and estimates are particularly critical to the financial statements:

Allowances for Doubtful Accounts

      The allowance for doubtful accounts is the Company’s best estimate of the amount of probable credit losses in the Company’s existing accounts receivable. The amount of the allowance is recognized in the consolidated statements of income under operating, general and administrative expenses. The Company determines the allowance based on historical write-off experience. The Company reviews its allowance for doubtful accounts monthly. Past due balances over 90 days for retail customers are fully provided, and past due balance for non-retail customers over a specified amount are reviewed individually for collectibility. Account balances are charged off against the allowance after all means of collection have been exhausted and the potential for recovery is considered remote. The Company does not have any off-balance sheet credit exposure related to its customers.

Carrying Amount of Property, Plant and Equipment and Goodwill and Other Intangible Assets

      TELKOM estimates the useful lives of property, plant and equipment and goodwill and other intangible assets in order to determine the amount of depreciation and amortization expense to be recorded during any reporting period. The useful lives are estimated at the time the asset is acquired and are based on historical experience with similar assets as well as taking into account anticipated technological or other changes and, in the case of rights to operate intangible assets, the remaining term of the KSO agreement. When the carrying amount of the asset exceeds its recoverable value due to, among others, technological changes, significant adverse change in legal factors or business climate, unanticipated competition, industry changes or physical damage, the useful lives assigned to these assets may either need to be shortened, resulting in the recognition of increased depreciation and amortization expense in future periods or these changes could result in the recognition of an impairment charge to reflect the write-down in value of the asset. TELKOM reviews these types of assets for impairment periodically, when events or circumstances indicate that the carrying amount may not be recoverable over the remaining lives of the assets. Assessment of the timing and/or the amount of such impairment is a matter of significant judgment. In assessing impairments, TELKOM uses discounted cash flows that take into account management’s estimates of future operations. The most important estimates that TELKOM uses in projecting TELKOM’s future cash flows involve TELKOM’s expectations of the future prices at which TELKOM’s services will be charged, the number of access lines that TELKOM will have in service and the discount rate that is used to arrive at the discounted present value of the projected future cash flows. The prices at which TELKOM’s services are charged are subject to government regulation. The number of access lines that TELKOM will have in service will depend upon TELKOM’s ability to source sufficient, affordable financing to build new access lines.

      In 2006, Telkomsel was granted the right to operate the 3G license. Telkomsel is required to pay an up-front fee and the annual rights of usage (“BHP”) fees for the next ten years. The up-front fee is recorded as an intangible asset and amortized using the straight line method over the term of the right to operate the 3G license (10 years). Amortization commences from the date when the assets attributable to the provision of the related services are available for use. Based on Telkomsel’s management interpretation of the license conditions and the written confirmation from the Directorate General of Post and Telecommunication, it is believed that the license could be returned at any time without any financial obligation to pay the remaining outstanding BHP fees. Based on this fact, Telkomsel concluded that it has purchased the right to make annual operating payments to operate the 3G license. Accordingly, Telkomsel recognized the BHP fees as expenses when incurred. Management of Telkomsel assesses its plan to continue using the 3G license on an annual basis.

Pension and Post-retirement Benefits

      TELKOM has a commitment, mainly through its pension fund, to pay pension and other post-retirement benefits to its employees and former employees who have reached 56 years of age. The cost of these benefits and the present value of its pension and other post-retirement liabilities depend on a number of factors which

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are determined on an actuarial basis utilizing a number of assumptions. The assumptions used in determining the net periodic cost (income) for pension and post-retirement benefits include the expected long-term rate of return on the relevant plan’s assets and the discount rate. In the case of the post-retirement healthcare plan, the expected rate of increase in medical costs is also used. Any changes in these assumptions will impact the net periodic cost (income) recorded for pension and post-retirement benefits.

      TELKOM uses the long-term historical actual return information and the estimated future long-term investment return information by reference to external sources, taking into account the current and expected asset allocations, to develop its expected rate of return on plan assets.

      At the end of each year, TELKOM determines the appropriate discount rate, which represents the interest rate that should be used to determine the present value of future cash flows currently expected to be required to settle the pension and post-retirement benefit obligations. TELKOM has not been able to identify suitable investments in Indonesia with a corresponding maturity to the expected duration of the benefit obligations and has therefore used the yield-to-maturity of Indonesian Government Bonds at year end. At December 31, 2006, TELKOM’s discount rate was 10.5%. Due to the fact that there are very limited types of high-quality debt instruments in Indonesia coupled with the lack of ability to estimate interest rates, TELKOM believes that the yield-to-maturity of the Indonesian Government Bonds represents the most appropriate discount rate to measure the present value of the benefit obligations at year end. Changes in such rates due to changes in the reference Indonesian Government Bonds brought about by changing economic conditions in Indonesia and throughout the world would affect the recognition of TELKOM’s pension and post-retirement benefit obligations and as a consequence, could materially affect TELKOM’s financial position and results of operations.

      The expected rate of medical cost has been determined by comparing the historical relationship of its actual medical cost increases with the rate of general inflation in the Indonesian economy and health care utilization patterns. Past experience has shown that its actual medical costs have on average increased by a factor of 2% above the general rate of inflation. The projected medical cost trend was 9% and 12% as of December 31, 2005 and 2006, respectively.

      The assumed health care cost trends have a significant effect on the amounts reported for the health care plan. A one-percentage-point change in assumed health care cost trend rates would have the following effects:

	1-Percentage-		1-Percentage-
	Point Increase		Point Decrease
Effect on total of service and interest cost components		174,413		(137,032	)
Effect on post-retirement benefit obligation		1,342,138		(1,058,800	)

      Other assumptions include life expectancy of the members, the rate of increase in compensation levels and the average remaining years of service.

      Early retirement benefits are recognized at the time TELKOM makes a commitment to provide early retirement benefits as a result of an offer made in order to encourage voluntary redundancy. TELKOM is demonstrably committed to a termination when and only when, TELKOM has a detailed formal plan for the early retirement and such plan is without realistic possibility of withdrawal.

Income Taxes

      Deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the amounts of assets and liabilities recognized for financial reporting purposes and the amounts recognized for income tax purposes. Deferred tax liabilities are recognized for all taxable temporary differences and deferred tax assets are recognized for deductible temporary differences to the extent that it is probable that taxable income will be available in future periods against which the deductible temporary differences can be utilized or the tax asset will be realized in future periods.

      Under Indonesian tax regulations as of the date of this Annual Report, a dividend distributed by a company to a corporate shareholder, that has a minimum share ownership of 25% and has businesses other

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than as a holding company, is not subject to tax whereas a capital gain on the sale of shares is subject to tax at the normal corporate tax rate. As long as TELKOM continues to hold its investments in its affiliated companies with a minimum share ownership of 25% and have businesses other than as a holding company, and dividend distributions from a company to a corporate shareholder that meets the criteria described above continues to be not subject to tax, TELKOM does not need to record a deferred tax liability in respect of the undistributed earnings of these affiliated companies.

      A change in our intention to hold an investment or other facts and circumstances may lead TELKOM to determine that it no longer expects to realize its interest in the undistributed earnings of the particular affiliated company in a manner which enables TELKOM to take advantage of the zero percent tax rate applicable to dividend distributions. Such a change in the future would require TELKOM to recognize a deferred tax liability with a commensurate charge to TELKOM’s income statement.

      Deferred tax is calculated at the enacted tax rates at the balance sheet date. If enacted tax rates changed, TELKOM would adjust its deferred tax assets and liabilities, through the income tax expense in the period of change, to reflect the enacted tax rate expected to be in effect when the deferred tax items reverse.

Legal Contingencies

      As of the date of this Annual Report, TELKOM is involved in certain legal proceedings and has accrued amounts that represent an estimate of the probable outcome of these matters. Such estimates of outcome are derived from consultation with outside counsel, as well as an assessment of litigation and settlement strategies. While TELKOM believes that the current accruals are adequate, a future event or change in the facts and circumstances may require the Company to make additional accruals that would be charged to TELKOM’s income statement in the future. See Note 52 to the consolidated financial statements and Item 8. “Financial Information — A. Consolidated statements and other financial information — Material Litigation.”

C.     Research and Development and Intellectual Property

      TELKOM makes investments to improve its product and service offerings. Such expenditure amounted to approximately Rp.27.8 billion in 2004, Rp.8.4 billion in 2005 and Rp.8.7 billion (US$1.0 million) in 2006. In 2006, these expenditures related to video conferencing, SMS development, CMS system, CDMA lab, measuring system and other content development.

D.     Trend Information

      A number of developments have had and may have in the future a material impact on TELKOM’s results of operations, financial condition and capital expenditures. These developments include:

•  upgrading of the network with soft switching technology;

•  development of broadband access network;

•  increasing relative contribution of Telkomsel to our consolidated revenues;

•  the ability of the Government to implement regulatory changes regarding interconnection, access codes and licenses for 3G services;

•  implementation of cost-based interconnection tariff;

•  changes in foreign exchange rates and interest rates;

•  increase in the usage of high speed broadband Internet in Indonesia;

•  development of triple play, application and content multimedia services;

•  the acquisition of KSO VII;

•  competition in the market for TELKOM’s international services;

•  expansion of TELKOM’s international services;

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•  fixed wireless development and deployment;

•  development of the flexi business unit;

•  implementation of competence-based human resource management; and

•  implementation of integrated customer centric application.

      See “— A. Operating Results” above.

E.     Off-Balance Sheet Arrangements

      TELKOM is party to a number of operating leases. These operating leases relate principally to motor vehicles, computers, circuits, towers, land and buildings. TELKOM believes some of these operating leases are material to its business.

      TELKOM has entered into certain agreements, including with Samsung Corporation relating to the remaining purchase commitment under the MPPA; PT INTI for the construction and procurement of an optical network management system; NEC-Siemens Consortium for the procurement and installation of Ring JASUKA Backbone; ZTE Consortium for procurement and installation of Speedy Access I; Huawei Consortium for the procurement and installation of Speedy Access II and III; PT Samsung Indonesia for procurement of CDMA 2000-1X in Division V; Siemens for the expansion of the IP Core Network and additional capacity for PSTN local and trunk switch; Huawei Consortium for CDMA expansion in Divisions II and III; and ZTE Consortium for CDMA expansion in Division VI and deployment of submarine cable system. For more details, relating to these agreements, see Item 10. “Additional Information — C. Material Contracts.”

      Based on Decision Letter No. 19/ KEP/ M.KOMINFO/2/2006 of the Minister of Communication and Information Technology in February 2006, Telkomsel obtained a 3G mobile cellular operating license for 2.1 GHz frequency bandwidth for a 10-year period, which is extendable subject to evaluation. The upfront fee for the 3G license, which amounted to Rp.436,000 million, was recognized as an intangible asset and is amortized over the term of the 3G license.

      Except as disclosed above, TELKOM does not have other off-balance sheet arrangements that are material.

F.     Tabular Disclosure of Contractual Obligations

      The following summarizes TELKOM’s contractual obligations at December 31, 2006 and the effect such obligations are expected to have on liquidity and cash flow in future periods:

		Payments Due by Period
				Less than						More than
Contractual Obligations		Total		1 year		1-3 years		3-5 years		5 years
		(Rp. billion)
Short-Term Loans(1)(6)			688.0		688.0		—		—		—
Long-Term Debts(2)(6)			10,095.6		3,600.8		3,020.1		1,083.8		2,390.9
Capital Lease Obligations(3)			436.5		73.4		146.9		146.9		69.3
Interest on Short-term Loans, Long-term Debts and Capital Lease Obligations			3,906.5		1,271.8		1,375.2		547.6		711.9
Operating Leases(4)			1,769.1		483.6		807.9		313.6		164.0
Unconditional Purchase Obligations(5)			12,585.6		12,585.6		—		—		—
Deferred consideration for business combination			5,591.7		1,472.4		2,753.1		1,366.2		—
	Total		35,073.0		20,175.6		8,103.2		3,458.1		3,336.1

(1)  Related to liabilities under short term loans obtained from Bank Central Asia, Bank Mandiri, and Bank BNI. See Note 20 to the consolidated financial statements.

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

     In addition to the above contractual obligations, as of December 31, 2006, TELKOM had long-term liabilities for pension, post-retirement health care benefits and long service awards. TELKOM expects to contribute Rp.900.0 billion to its post-retirement health care benefits plan and Rp.736.4 billion to its defined benefit pension plan in 2007. See Notes 43, 44, 45 and 56 to the consolidated financial statements.

ITEM 6.     DIRECTORS, SENIOR MANAGEMENT AND EMPLOYEES

A.     Directors and Senior Management

      In accordance with Indonesian law, the Company has a two-tier board structure, consisting of a Board of Commissioners and a Board of Directors. The executive management functions are carried out by the Board of Directors, whose members are comprised of the top executives of the Company, comparable to the chief executive officer, chief financial officer and other such officers of corporations incorporated under the laws of many of the States in the United States of America.

Board of Commissioners

      TELKOM’s Articles of Association (the “Articles”), referring to the Indonesian Company Law, states that the principal statutory duties of the Board of Commissioners are to supervise the policies of the Board of Directors in the operation and management of the Company and to give advice to the Board of Directors. In carrying out its supervisory activities, the Board of Commissioners is accountable to the stockholders of the Company.

      The Board of Commissioners, which supervises the management of TELKOM and the implementation of TELKOM business plan by the Board of Directors, does not have day-to-day management functions or authority, except in limited circumstances where all members of the Board of Directors have been suspended for any reason.

      The current Board of Commissioners of TELKOM consists of one President Commissioner and four Commissioners, two of whom are independent commissioners.

      Pursuant to the Articles, each Commissioner is appointed for a term commencing from the date of the appointment by the general meeting of stockholders until the closing of the fifth annual general meeting of stockholders following the date of appointment, without prejudice to the right of the general meeting of stockholders to discharge a Commissioner at any time before his or her term of office expires. If the position of a Commissioner becomes vacant for any reason, the Articles further provide that within 60 days of the occurrence of such vacancy, an announcement that there will be notice for a general meeting of stockholders must be made to nominate a successor.

      Pursuant to the Articles, meetings of the Board of Commissioners are presided over by the President Commissioner. If the President Commissioner is absent, another member of the Board of Commissioners chosen from the Commissioners present presides over the meeting.

      Meetings of the Board of Commissioners must be held at least once every three months and at any other time (i) upon request of the President Commissioner, (ii) upon request of one-third of the members of the Board of Commissioners, (iii) upon written request of the Board of Directors, or (iv) upon request of a shareholder or a group of stockholders holding at least one-tenth of the outstanding shares of TELKOM with valid voting rights. The quorum for all Board of Commissioners meetings is more than one-half of the total number of the Commissioners then represented in person or by proxy granted to one of the other Commissioners of TELKOM at such meeting.

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      Resolutions of a meeting of the Board of Commissioners shall be by consensus. If consensus cannot be reached, it shall be by the affirmative vote of a majority of the members of the Board of Commissioners present or represented at the meeting. In the event of a tie, the proposed resolution shall be deemed to have been rejected.

      The members of the Board of Commissioners as of December 31, 2006 were:

	Age as of
Name	January 1, 2007		Title	Since
Tanri Abeng		64	President Commissioner	March 10, 2004
P. Sartono		62	Independent Commissioner	June 21, 2002
Arif Arryman		50	Independent Commissioner	June 21, 2002
Anggito Abimanyu		43	Commissioner	March 10, 2004
Gatot Trihargo		46	Commissioner	March 10, 2004

Tanri Abeng

      Mr. Abeng has been President Commissioner of TELKOM since March 10, 2004. From 1980 to 1998, Mr. Abeng served as President Director (1980-1991) and President Commissioner (1991-1998) of PT Multi Bintang Indonesia, Indonesia’s largest brewery. He also served as President Director of PT Bakrie & Brothers from 1991 to 1998, was President Commissioner of PT B.A.T. Indonesia from 1993 to 1998 and was a Commissioner of PT Sepatu BATA from 1989 to 1998. He was also a member of Parliament from 1993 to 1999 and was Minister of State-Owned Enterprises from 1998 to 1999. Mr. Abeng holds a degree from the University of Hasanudin, a masters degree in business administration from the State University of New York, Buffalo and has completed the Advanced Management Program at the Claremont Graduate School in Los Angeles.

P. Sartono

      Mr. P. Sartono has been an Independent Commissioner of TELKOM since June 21, 2002. Mr. P. Sartono became an employee of TELKOM in 1972 and has served in various management positions, including as Corporate Secretary from 1992 to 1995. Prior his tenure at TELKOM, he held various positions at Directorate General of Post and Communications from 1973 to 1985 and served as President Director of PT Telekomindo Primabhakti from 1995 to 1998. Mr. P. Sartono holds a degree in law from the University of Indonesia and a Master of Management (Marketing) degree from IPWI Jakarta and a Master of Law degree from the Institute Business Law and Management (Sekolah Tinggi Ilmu Hukum IBLAM) in Jakarta.

Arif Arryman

      Mr. Arryman has been an Independent Commissioner of TELKOM since June 21, 2002. In addition, he has served as Independent Commissioner of PT Bank BNI Tbk. from 2001 to 2005. Previously, he served as an advisor to the Coordinating Minister for Economy and a member of the Assistancy Team to the Ministry of Finance. Mr. Arryman graduated with a degree in Industrial Engineering from Bandung Institute of Technology, a masters degree in Engineering from Asia Institute of Technology in Bangkok, Thailand, Diploma d’etude Approfondie in economics from Universite Paris-IX Dauphine in France and a doctoral degree in economics from Universite of Paris-IX Dauphine in France.

Anggito Abimanyu

      Mr. Abimanyu has been a Commissioner of TELKOM since March 10, 2004. As of the date of this Annual Report, he is the Head of the Agency for Research in Economics, Finance and International Cooperation of the Ministry of Finance and has been a member of the expert staff to the Finance Minister since 2000. Mr. Abimanyu previously served as a member of the Board of Commissioners of Bank Lippo and of Bank Internasional Indonesia. Mr. Abimanyu is also a lecturer in the Faculty of Economics of Gadjah Mada University. Mr. Abimanyu holds both a bachelor and a master degree in economics from Gadjah Mada

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University, a master in science degree in International Development from the University of Pennsylvania and a Ph.D. degree in Environmental Economics from the University of Pennsylvania.

Gatot Trihargo

      Mr. Trihargo has been a Commissioner of TELKOM since March 10, 2004. As of the date of this Annual Report, he serves as a member of the Special Staff of the Ministry of State-Owned Enterprises. Mr. Trihargo holds a degree in accounting from Sekolah Tinggi Akuntansi Negara, Jakarta, and a masters degree in Accountancy and Financial Information Systems from Cleveland State University in Ohio.

Board of Commissioners’ Committees

      As of the date of this Annual Report, the Board of Commissioners has three standing committees: the Audit Committee, the Planning and Risk Assessment Committee (formerly, the Review and Planning Committee) and the Nomination and Remuneration Committee. An Independent Commissioner chairs each committee. In addition, external members to the Audit Committee, in order to be considered independent under applicable Indonesian rules: (a) must not be a member of any Indonesian registered public accountant that has provided audit and/or non-audit services to TELKOM within one year prior to his appointment to the Audit Committee; (b) must not have been a TELKOM employee within one year prior to his appointment to the Audit Committee; (c) must not own, directly or indirectly, any shares in TELKOM; and (d) must not have any business relationship that relates to TELKOM’s businesses.

      As of the date of this Annual Report, the Audit Committee of the Board of Commissioners is composed of seven members: (i) Mr. Arif Arryman, an Independent Commissioner and the Chairman; (ii) Mr. P. Sartono, an Independent Commissioner; (iii) Mr. Mohammad Ghazali Latief; (iv) Mr. Salam; (v) Mr. Sahat Pardede; (vi) Mr. Gatot Trihargo; and (vii) Mr. Jarot Kristiono. All of the members of the Audit Committee (except for Mr. Arif Arryman, Mr. Sartono and Mr. Trihargo) are independent external members and Mr. Pardede is an accounting and financial expert. New listing rules adopted pursuant to Rule 10A-3 under the Exchange Act require a foreign private issuer with securities listed on the NYSE to have an audit committee comprised of independent directors. The rules became effective on July 31, 2005. Under Rule 10A-3 (c) (3), however, foreign private issuers are exempt from the independence requirements if (i) the home country government or stock exchange requires the company to have an audit committee; (ii) the audit committee is separate from the board of directors and has members from both inside and outside the board of directors; (iii) the audit committee members are not elected by the management and no executive officer of the company is a member of the audit committee; (iv) the home country government or stock exchange has requirements for an audit committee independent from the management of the company; and (v) the audit committee is responsible for the appointment, retention and oversight of the work of external auditors. TELKOM avails itself of this exemption as set forth in its Section 303A Annual Written Affirmation that it submits to the NYSE. An Audit Committee Charter (the “Charter”) that has been adopted by the Board of Commissioners governs the committee. The Charter outlines the committee’s purpose, function and responsibilities and specifies that the committee is responsible for:

•  Overseeing the Company’s financial reporting process on behalf of the Board of Commissioners. As part of its responsibilities, the committee will recommend to the Board of Commissioners, subject to shareholder approval, the selection of TELKOM’s external auditor;

•  Discussing with TELKOM’s internal and external auditors the overall scope and specific plans for their respective audits. The committee will also discuss TELKOM’s consolidated financial statements and the adequacy of TELKOM’s internal controls;

•  Meeting regularly with TELKOM’s internal and external auditors, without management present, to discuss the results of their examinations, their evaluation of TELKOM’s internal controls and the overall quality of TELKOM’s financial reporting; and

•  Carrying out additional tasks that are assigned by the Board of Commissioners, especially on financial and accounting related matters.

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      The Planning and Risk Assessment Committee (formerly, the Review and Planning Committee) was established on August 1, 2003. The original objective of this committee was to review the company’s long-term plans, as well as annual business budget plans, following which recommendations would be made by this committee to the Board of Directors. The committee is also responsible for supervising and monitoring the implementation of the business plans of the company. On May 19, 2006, the Board of Commissioners redefined and expanded the objectives of this committee to include strategic risk assessment and changed the committee’s name accordingly. As of the date of this Annual Report, the Planning and Risk Assessment Committee consists of nine members: (i) Mr. Anggito Abimanyu (the Chairman); (ii) Mr. Gatot Trihargo (the Vice Chairman); (iii) Mr. Yuki Indrayadi (Secretary); (iv) Mr. P. Sartono; (v) Mr. Arif Arryman (an Independent Commissioner); (vi) Mr. Ario Guntoro; (vii) Mr. Adam Wirahadi; (viii) Mrs. Widuri M. Kusumawati; and (ix) Mr. Arman Soeriasoemantri. All of the members of the Planning and Risk Assessment Committee (except for Mr. Abimanyu, Mr. Trihargo, Mr. Arryman and Mr. Sartono) are independent external members.

      On May 20, 2003, following TELKOM’s 2003 Annual General Meeting of stockholders, the Board of Commissioners re-established the Nomination and Remuneration Committee. As of the date of this Annual Report, the Nomination and Remuneration Committee is composed of: (i) Mr. Tanri Abeng, the President Commissioner and the Chairman; (ii) Mr. P. Sartono, an Independent Commissioner and the Secretary; and (iii) Mr. Gatot Trihargo, a Commissioner. The committee was tasked with: (a) formulating selection criteria and nomination procedures for strategic positions in the Company based on good corporate governance principles; (b) assisting the Board of Commissioners and consulting with the Board of Directors in candidate selection for strategic positions in the Company; and (c) formulating a remuneration system for the Board of Directors based on fairness and performance.

      The Commissioners’ business address is 5th Floor, Grha Citra Caraka Building, Jalan Gatot Subroto Kav. 52, Jakarta 12710, Indonesia.

Board of Directors

      In 2006, the Board of Directors was comprised of one President Director and six Directors. Following the Extraordinary General Meeting of Stockholders on February 28, 2007, the number of Directors increased from six to seven. Directors are elected and dismissed by stockholder resolutions at a general meeting of stockholders at which the holder of the Series A Dwiwarna Share is present and such holder approves the aforementioned stockholder resolutions. In order to be eligible for election, candidates for Director must be nominated by the holder of the Series A Dwiwarna Share. Each Director is appointed for a term commencing from the date of appointment by the general meeting of stockholders until the closing of the fifth annual general meeting of stockholders after the date of appointment, without prejudice to the right of the general meeting of stockholders to discharge a Director at any time before his/her term of office expires.

      The principal functions of the Board of Directors are to lead and manage TELKOM and to control and manage TELKOM’s assets. The Board of Directors is responsible for the day-to-day management of TELKOM under the supervision of the Board of Commissioners. The Articles provide that the Board of Directors shall consist of at least three Directors, one of whom shall be the President Director and another, the Deputy President Director (upon appointment).

      The President Director, or in case of his absence, the Deputy President Director or another Director as provided for in the Articles shall have authority to represent TELKOM and execute documents on behalf of TELKOM, subject to the provisions of the Articles. The President Director shall preside over meetings of the Board of Directors or in his absence, any other member of the Board of Directors appointed from among and by those present may preside over such meetings.

      The Articles provide that meetings of the Board of Directors may be held whenever considered necessary upon the request of (i) the President Director, (ii) at least one-third of the members of the Board of Directors, (iii) the Board of Commissioners, or (iv) written notice from any shareholder or group of shareholders holding at least one-tenth of the outstanding shares of TELKOM with valid voting rights. The Articles further provide that the quorum for all Directors’ meetings is more than one-half of the members of

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the Board of Directors present or represented in person or by proxy granted to another Director of TELKOM in such meeting. At Directors’ meetings, each Director shall have one vote and one additional vote for each other Director he represents as proxy.

      Resolutions of a meeting of the Board of Directors shall be by consensus. If consensus cannot be reached, it shall be by the affirmative vote of a majority of the members of the Board of Directors present or represented at the meeting. In the event of a tie, the matter shall be determined by the Chairman of the meeting.

      TELKOM has a disclosure committee comprised of 14 senior members from various departments and chaired by the chief financial officer. The disclosure committee’s role is to support TELKOM’s management in designing and evaluating TELKOM’s disclosure controls and procedures and participating in the disclosure process. TELKOM formally established its disclosure committee on February 18, 2005. Since its formal establishment, the disclosure committee has established internal work procedures relating to the preparation of TELKOM’s annual reports on Form 20-F, and participated in the review and preparation of TELKOM’s annual reports on Form 20-F. The establishment of the disclosure committee formalized the previous disclosure process where designated senior employees from various departments were responsible for assisting with the necessary disclosures.

      The members of the Board of Directors as of December 31, 2006 were:

	Age as of
Name	January 1, 2007		Title	Since
Arwin Rasyid		49	President Director	June 24, 2005
Garuda Sugardo		56	Vice President Director and Chief Operating Officer	June 24, 2005
Rinaldi Firmansyah		45	Director of Finance	March 10, 2004
Arief Yahya		45	Director of Enterprise & Wholesale	June 24, 2005
Abdul Haris		51	Director of Network & Solution	March 10, 2004
John Welly		52	Director of Human Resources	June 24, 2005
Guntur Siregar		55	Director of Consumer	June 24, 2005

Arwin Rasyid

      Mr. Rasyid was appointed the President Director of TELKOM on June 24, 2005. He previously served as Vice President Director of PT Bank Negara Indonesia from 2003 to 2005, President Director of Bank Danamon Indonesia from 2000 to 2003, Vice Chairman of Badan Penyehatan Perbankan Nasional (the Indonesian Banks Restructuring Agency) in 2000, Vice President Director of Bank Niaga from 1998 to 1999, Assistant Vice President of Bank of America from 1986 to 1987 as well in various positions in Bank Niaga since 1987. Mr. Rasyid graduated with a degree in economics from the University of Indonesia. He also holds a master of arts degree in international economics and a masters degree in business administration (international business) from the University of Hawaii, USA.

Garuda Sugardo

      Mr. Sugardo was appointed the Chief Operating Officer and Vice President Director of TELKOM on June 24, 2005. He joined TELKOM in 1977 and has held several positions in various departments. He previously served as Senior Consultant Marketing in the Management Consulting Center of TELKOM, Director of Telecommunication Service Business of TELKOM from 2002 to 2004, Director of Operation and Technical of Indosat as well as a number of positions in TELKOM from 1977 to 2000. Mr. Sugardo graduated with a degree in electrical engineering from the University of Indonesia.

Rinaldi Firmansyah

      Mr. Firmansyah has been Director of Finance of TELKOM since March 10, 2004. He previously served as Vice President Commissioner, President Director and Director of Investment Banking of PT Bahana

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Securities from 2003 to 2004, 2001 to 2003 and 1997 to 2001, respectively, and Commissioner and Head of the Audit Committee of PT Semen Padang in 2003. Mr. Firmansyah graduated with a degree in electrical engineering from the Bandung Institute of Technology and a masters degree in business administration from the Indonesian Institute of Management Development, Jakarta. Mr. Firmansyah is also a Chartered Financial Analyst (CFA).

Arief Yahya

      Mr. Yahya was appointed the Director of Enterprise & Wholesale of TELKOM on June 24, 2005. He joined TELKOM in 1986 and has held several positions in various departments. Previously, he served as TELKOM’s Head of Regional Division V (East Java) and Head of Regional Division VI (Kalimantan). Mr. Yahya graduated with a degree in electrical engineering from the Bandung Institute of Technology and a masters degree in telecommunications engineering from the University of Surrey.

Abdul Haris

      Mr. Haris was appointed the Director of Network & Solution of TELKOM on June 24, 2005. He joined TELKOM in 1980 and has held several positions in various departments. He previously served as Director of Telecommunications and Network Business of TELKOM from 2004 to 2005, and as Deputy Head of TELKOM’s Regional Division II (Jakarta). Mr. Haris has a degree in electrical engineering from North Sumatra University and a masters degree in business administration from Prasetya Mulya Management Institute.

John Welly

      Mr. Welly was appointed the Director of Human Resources of TELKOM on June 24, 2005. He joined TELKOM in 1981 and has held several positions in various departments. He previously served as President Director of PT INTI from 2001 to 2005, Director of Operations and Marketing of TELKOM from 1998 to 2000, Commissioner of Telkomsel in 1998, Director of Human Resources and Support Divisions/ Senior Executive Vice President for Human Resources and Support of TELKOM from 1995 to 1998, and Commissioner of PT Aplikanusa Lintasarta from 1995 to 1996. Mr. Welly graduated with a degree in electrical engineering from the Bandung Institute of Technology and a masters degree in telecommunications and information from Essex University, UK. See “— D. Employees — On-going Litigation and Investigations” below and Item 3. “Key Information — D. Risk Factors — Risks relating to TELKOM and its subsidiaries — Certain TELKOM employees, including former TELKOM directors, are subject to on-going litigation, police investigations, and criminal charges.”

Guntur Siregar

      Mr. Siregar was appointed the Director of Consumer of TELKOM on June 24, 2005. He joined TELKOM in 1975 and has held several positions in various departments. He previously served as Senior Consultant Financial Management in Management Consulting Center of TELKOM, Director of Finance of TELKOM from 2002 to 2004, Director of Commerce of Indosat from 2000 to 2002, Commissioner of PT Aplikanusa Lintasarta from 1996 to 2000, Head of Regional Division II (Jakarta) from 1996 to 2000, and Head of Regional Division I (Sumatra) from 1995 to 1996. Mr. Siregar graduated with a degree in Electrical Engineering from the Bandung Institute of Technology. See “— D. Employees — On-going Litigation and Investigations” below and Item 3. “Key Information — D. Risk Factors — Risks relating to TELKOM and its subsidiaries — Certain TELKOM employees, including former TELKOM directors, are subject to on-going litigation, police investigations, and criminal charges.”

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      At the Extraordinary General Meeting of Stockholders on February 28, 2007, the Board of Directors was changed and since that date, the Board of Directors is as follows:

	Age as of
Name	February 28, 2007		Title	Since
Rinaldi Firmansyah		46	President Director	February 28, 2007
Sudiro Asno		49	Director of Finance	February 28, 2007
Faisal Syam		51	Director of Human Capital & General Affairs	February 28, 2007
I Nyoman G Wiryanata		47	Director of Network & Solution	February 28, 2007
Ermady Dahlan		53	Director of Consumer	February 28, 2007
Arief Yahya		45	Director of Enterprise & Wholesale	June 24, 2005
Prasetio		46	Director of Compliance & Risk Management	February 28, 2007
Indra Utoyo		44	Director of Information Technology & Supply	February 28, 2007

Rinaldi Firmansyah

      Mr. Firmansyah was appointed the President Director of TELKOM in an Extraordinary General Meeting of Shareholders on February 28, 2007. He was Director of Finance of TELKOM since March 10, 2004. He previously served as Vice President Commissioner, President Director and Director of Investment Banking of PT Bahana Securities from 2003 to 2004, 2001 to 2003 and 1997 to 2001, respectively, and Commissioner and Head of the Audit Committee of PT Semen Padang in 2003. Mr. Firmansyah graduated with a degree in electrical engineering from the Bandung Institute of Technology and a masters degree in business administration from the Indonesian Institute of Management Development, Jakarta. Mr. Firmansyah is also a Chartered Financial Analyst (CFA).

Sudiro Asno

      Mr. Asno was appointed the Director of Finance of TELKOM on February 28, 2007. He joined TELKOM in 1985 and has held several positions in TELKOM’s finance department. He previously served as Senior General Manager Finance Center of TELKOM. Mr. Asno has a degree in accounting from the University of Padjajaran Bandung.

Faisal Syam

      Mr. Syam was appointed the Director of Human Capital & General Affairs of TELKOM on February 28, 2007. He joined TELKOM in 1983 and has held several positions in various departments, including Senior General Manager of the Human Resource Center of TELKOM. Mr. Syam has a degree in mathematics from North Sumatra University and a masters degree in management from the Bandung School of Management.

I Nyoman G Wiryanata

      Mr. Wiryanata was appointed the Director of Network & Solution of TELKOM on February 28, 2007. He joined TELKOM in 1983 and has held several positions in various departments, including Executive General Manager, Regional Division I (Sumatra). Mr. Wiryanata has a degree in electrical engineering from Surabaya Institute of Technology and a masters degree in business administration from Prasetya Mulya Management Institute.

Ermady Dahlan

      Mr. Dahlan was appointed the Director of Consumer of TELKOM on February 28, 2007. He joined TELKOM in 1973 and has held several positions in various departments. He previously served as Executive

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General Manager, Regional Division II (Jakarta). Mr. Dahlan has a degree in telecommunications from the National Telecommunication Academy Bandung.

Arief Yahya

      Mr. Yahya was appointed the Director of Enterprise & Wholesale of TELKOM on June 24, 2005. He joined TELKOM in 1986 and has held several positions in various departments. Previously, he served as TELKOM’s Head of Regional Division V (East Java) and Head of Regional Division VI (Kalimantan). Mr. Yahya graduated with a degree in electrical engineering from the Bandung Institute of Technology and a masters degree in telecommunications engineering from University of Surrey.

Prasetio

      Mr. Prasetio was appointed the Director of Compliance and Risk Management of TELKOM on February 28, 2007. He joined TELKOM in 2006 as Executive Vice President of Risk Management, Legal and Compliance. He previously served as Director of PT Merpati Nusantara Airline from 2004 to 2005, Executive Vice President & Managing Director of PT Bank Danamon Indonesia from 2001 to 2004 and Senior Vice President of the Indonesian Banking Restructuring Agency from 1999 to 2001. Mr. Prasetio has a degree in accounting from the University of Airlangga Surabaya.

Indra Utoyo

      Mr. Utoyo was appointed the Director of Information Technology & Supply of TELKOM on February 28, 2007. He joined TELKOM in 1986 and has held several positions in various departments, including Senior General Manager, Information System Center. Mr. Utoyo has a degree in telecommunications from the Bandung Institute of Technology and a masters degree in science (communication and signal processing) from Imperial College of Science, Technology and Medicine, University of London.

      None of the Directors has a service contract with TELKOM nor are any such contracts proposed. The Directors’ business address is Jalan Japati, 1, Bandung 40133, Indonesia. None of the Directors or Commissioners are related to one another.

B.     Compensation

      Each Commissioner is granted a monthly honorarium and certain other allowances and is paid an annual bonus if TELKOM surpasses certain financial and operating targets, the amounts of which are determined by the stockholders at the general meeting of stockholders. Each Commissioner also receives a lump-sum bonus paid at the end of the Commissioner’s term pursuant to an MoF letter which applies to all state-owned companies. Each Director is granted a monthly salary and certain other allowances (including a pension if such Director is otherwise eligible). Each Director also receives an annual bonus (tantiem) if TELKOM surpasses certain financial and operating targets, the amounts of which are determined by the stockholders at the general meeting of the stockholders. Bonuses and incentives are budgeted annually and are based on the recommendation of the Board of Directors which recommendation must be approved by the Board of Commissioners before submission to the stockholders. No fees are paid to the Commissioners or Directors for their attendance at their respective board meetings. In addition, Directors receive certain other in-kind benefits, such as housing, car and driver. For the year ended December 31, 2006, the aggregate compensation paid by TELKOM and its consolidated subsidiaries to all of their Commissioners and Directors was Rp.94.7 billion (US$10.5 million), in each case including bonuses and the cost of benefits provided to Directors, such as housing facilities.

      The Company and its subsidiaries provide honoraria and facilities to support the operational duties of the Board of Commissioners. The total of such benefits amounted to Rp.22.7 billion, Rp.19.7 billion and Rp.23.2 billion in 2004, 2005 and 2006, respectively, which reflected 0.1% of total operating expenses in each respective year.

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      The Company and its subsidiaries provide salaries and facilities to support the operational duties of the Board of Directors. The total of such benefits amounted to Rp.50.3 billion, Rp.52.1 billion and Rp.71.5 billion (US$7.9 million) in 2004, 2005 and 2006, respectively, which reflected 0.3%, 0.2% and 0.2% of total operating expenses in 2004, 2005 and 2006, respectively.

C.     Board practices

      Individual Directors are charged with specific responsibilities. In the event that a vacancy occurs in the Board of Directors, so long as the position remains vacant, one of the other directors will be nominated by the Board of Commissioners to perform the work of the absent director. If, for any reason, the Company ceases to have any Directors, the Board of Commissioners is to assume the ongoing obligations of the Board of Directors and must convene a general meeting of stockholders to elect a new Board of Directors within 60 days.

      The Board of Directors is required to obtain the written approval of the Board of Commissioners for the following actions: (i) buying or selling the shares of listed companies in excess of the amount stipulated by the Board of Commissioners; (ii) participating in or disposing of other capital investments in excess of the amount stipulated by the Board of Commissioners; (iii) establishing, transferring its interests in or dissolving subsidiaries; (iv) transferring, trading, disposing or acquiring any business segments; (v) entering into licensing agreements, management contracts or similar agreements with other entities; (vi) selling or otherwise disposing of fixed assets in excess of the amount stipulated by the Board of Commissioners; (vii) ceasing to collect or writing off bad debts from the Company’s books or inventory in excess of the amount stipulated by the Board of Commissioners; (viii) binding the Company as surety in excess of the amount stipulated by the Board of Commissioners; and (ix) assuming or granting medium or long-term loans and assuming short-term loans not in the ordinary course of business in excess of the amount stipulated in the Company’s work plan and budget, as approved by the Board of Commissioners. In addition, any of the above transactions which involves 10% or more of the Company’s revenues or 20% or more of stockholders’ equity or such other amount as specified in Indonesian capital market regulations must be authorized by the stockholders at the general meeting of stockholders. In the performance of its duties, the Board of Directors must act in the interests of the Company.

      The Articles provide that members of the Board of Directors are prohibited from assuming the following: (i) a position as director of another state-owned corporation or private companies, (ii) any position within the structural or functional department of the central or district government, or (iii) other positions outside TELKOM which may directly or indirectly raise conflicts of interest with TELKOM and/or which violate the provisions of applicable laws and regulations. The Articles further provide that if members of the Board of Directors wish to assume any other position not prohibited above or wish to obtain an exemption from the foregoing prohibitions, such Director would require permission from the Board of Commissioners. In addition, such appointment shall be reported to the general meeting of stockholders.

      In addition, the Articles prohibit a Director with conflicting interests representing TELKOM in the issues causing such conflict of interest. In such cases, TELKOM shall be represented by another member of the Board of Directors with the consent of the Commissioners. In the event that TELKOM faces a conflict of interest with all members of its Board of Directors, TELKOM shall be represented by the Board of Commissioners or a member of the Board of Commissioners chosen by the Commissioners in the issues causing such conflict.

      Each Director is appointed for a term commencing from the date of appointment by the general meeting of stockholders until the closing of the fifth annual general meeting of stockholders after the date of appointment, without prejudice to the right of the general meeting of stockholders to discharge a Director at any time before his/her term of office expires. For further information on the composition and terms of the Board of Directors, see “— A. Directors and Senior Management — Board of Directors” above.

      None of the Directors or Commissioners has any substantial interest, direct or indirect, in any company carrying on a similar trade as TELKOM.

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D.     Employees

      As of December 31, 2006, TELKOM and its subsidiaries had 34,021 employees in total, of which 27,658 were employed by TELKOM, and 6,363 were employed by TELKOM’s subsidiaries.

      As of December 31, 2005, TELKOM and its subsidiaries had 34,004 employees in total, of which 28,179 were employed by TELKOM, and 5,825 were employed by TELKOM’s subsidiaries. As of December 31, 2004, TELKOM and its subsidiaries had 34,657 employees in total, of which 29,375 were employed by TELKOM, and 5,282 were employed by TELKOM’s subsidiaries.

      The table below sets forth a breakdown of TELKOM’s employees by position as at December 31, 2006:

	TELKOM as at		TELKOM’s subsidiaries as at
	December 31, 2006		December 31, 2006
Senior management		169		167
Middle management		2,331		529
Supervisors		9,832		602
Others		15,326		5,065
Total		27,658		6,363

      In general, TELKOM employees receive a base salary and salary-related allowances, a bonus and various benefits, including a pension plan and a post-retirement health care plan, medical benefits for themselves and certain members of their immediate family, housing allowance, other allowances and certain other benefits, including those related to performance of the employee’s working unit.

      Bonuses are budgeted in advance by the Board of Directors and the Board of Commissioners and are paid out in the year following the year in which they are earned. Over the past five years, the size of the annual bonus pool has ranged from Rp.114 billion to Rp.304 billion. In 2006, bonuses were paid by TELKOM to all employees, including TELKOM’s employees in KSO and Non-KSO divisions. After the size of the bonus pool is determined, management allocates the pool among the Divisions depending upon their respective performances and uniform bonuses for employees at each staff level for each Division are then determined.

      Except in connection with its initial public offering in 1995, TELKOM does not maintain an employee share scheme for any of its employees or senior management.

      TELKOM’s mandatory retirement age for all employees is 56. TELKOM sponsors a defined benefit pension plan and a defined contribution pension plan. The defined benefit pension plan is for permanent employees hired prior to July 1, 2002. The amount of the pension entitlement under the defined benefit pension plan is based on the employee’s years of service and salary level upon retirement and is transferable to dependents upon the employee’s death. The main sources of pension fund are the contributions from the employees and TELKOM. The participating employees contribute 18% of basic salary (prior to March 2003 the employee contribution rate was 8.4%) and TELKOM contributes the remaining amount required to fund the plan. TELKOM’s contributions to the pension fund were Rp.845.7 billion, Rp.698.5 billion and Rp.693.5 billion (US$77.1 million), for the years ended December 31, 2004, 2005 and 2006, respectively. See Note 43 to the consolidated financial statements.

      Effective January 1, 2003, TELKOM (a) increased the minimum pension benefit for retired employee to approximately Rp.425,000 per month and (b) increased pension benefits for employees who retired prior to August 1, 2000 by 50%. Current employees who effectively retired on or after July 1, 2002 receive an increase of monthly pension benefit amounting to twice the amount of their basic monthly salary. This policy applied to employees who retired at the normal pension age of 56.

      The defined contribution plan is provided for employees hired with permanent status on or after July 1, 2002. The plan is managed by a financial institution pension fund (Dana Pensiun Lembaga Keuangan). The Company’s annual contribution to the defined contribution plan is determined based on a certain percentage

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of the participants’ salaries and amounted to Rp.399 million, Rp.971 million and Rp.1,858 million in 2004, 2005 and 2006, respectively.

      The Company’s employees are entitled to receive certain cash awards based on length of services and after completing certain years of services which are either paid at the time the employee reaches a certain anniversary date or upon retirement or at the time of termination if the employee has met the required number of years of service.

      TELKOM also provides post-retirement healthcare benefits for all of its retired employees, including their immediate family. There are two types of funding for post-retirement healthcare benefits: (i) for employees hired before November 1, 1995 who retired prior to June 3, 1995 or who have 20 years of service for those retired after June 3, 1995, such benefits are funded by the TELKOM Healthcare Foundation; (ii) for employees hired before November 1, 1995 who retire with years of service of less than 20 years; and for employees hired after November 1, 1995, such benefits will be granted in the form of an insurance allowance by TELKOM. TELKOM’s contributions (including contributions paid by all KSO units) to the plan for employees hired before November 1, 1995 who retired prior to June 3, 1995, and who have had 20 years of service when they retired after June 3, 1995 were Rp.724.5 billion, Rp.435.9 billion and Rp.714.8 billion (US$79.4 million), for the years ended December 31, 2004, 2005 and 2006, respectively.

      In May 2000, TELKOM employees formed a union named “Serikat Karyawan TELKOM” or “SEKAR.” In May 2006, several TELKOM employees formed another union named “Serikat Pekerja” or “SP” as an alternative to SEKAR. The formation of each of SEKAR and SP is in accordance with the Presidential Decree No. 83 of 1998 regarding ratification of ILO Convention No. 87 of 1948 concerning the freedom to form a union and the protection of the right to form an organization. Membership with the unions is not compulsory. TELKOM believes that its relations with each of SEKAR and SP are good. However, there can be no assurance that the activities of employee unions will not materially and adversely affect TELKOM’s business, financial condition and prospects.

     On-going Litigation and Investigations

      A former Director of Human Resources and an employee of TELKOM were indicted under the anti-corruption law in the Bandung District Court relating to allegations of misuse of authority in procuring consultancy services resulting in losses of Rp.789 million. On May 2, 2007, the Bandung District Court found the defendants guilty and sentenced each defendant to a one-year prison term. The defendants have filed an appeal with the West Java High Court objecting to the District Court ruling. As of the date of this Annual Report, no decision has been rendered on appeal.

      In December 2005, the West Java Police Department initiated investigations related to an alleged violation of anti-corruption law, in particular the provision of interconnection services to Napsindo, TELKOM’s subsidiary, and Globalcom, a Malaysian company, at an incorrect tariff for TELKOM’s network for the provision of illegal VoIP services, and misuse of authority in procuring telecommunications equipment. It is also understood that one of the investigations relates to TELKOM’s guarantee of a bank loan obtained by Napsindo. During the investigation, former Directors and employees of TELKOM were held in custody by the West Java Police Department pending the completion of the investigation. On May 10, 2006, such individuals were released from police custody after the expiration of the maximum period of 120 days allowed for police custody of suspects for investigation purposes. These investigations are on-going. As of the date of this Annual Report, the police have not found sufficient evidence to properly transfer the case to the Office of the Attorney General for indictment.

      On January 2, 2006, the Office of the Attorney General launched an investigation into allegations of misuse of telecommunications facilities in connection with the provision of VoIP services, whereby one of TELKOM’s former employee and four of TELKOM’s employees in KSO VII were named suspects. As a result of the investigations, one of TELKOM’s former employee and two of TELKOM’s employees were indicted in the Makasar District Court, and two other employees were indicted in the Denpasar District Court for their alleged corruption in KSO VII. As of the date of this Annual Report, the District Courts have not rendered their verdicts.

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      TELKOM does not believe that any subsequent investigation or court decision will have significant financial impact to TELKOM. See Item 3. “Key Information — D. Risk Factors — Certain TELKOM employees, including former TELKOM directors, are subject to on-going police investigations, litigation and criminal charges.”

E.     Share ownership

      All the directors and commissioners individually beneficially own less than one percent of the shares of the Company and their respective beneficial share ownership in the Company has not been disclosed to stockholders or otherwise made public.

ITEM 7.     MAJOR STOCKHOLDERS AND RELATED PARTY TRANSACTIONS

A.     Major stockholders

General

      The following table sets forth certain information as of December 31, 2006 with respect to (1) persons known to the Company to be the owner of more than 5% of the Company’s Common Stock (whether directly or beneficially through ADSs); and (2) the total amount of any class of the Company’s Common Stock owned by the Commissioners and Directors of the Company as a group.

Title of Class	Identity of Person or Group	Amount Owned		Percent of Class
Series A	Government		1		100.00%
Series B	Government		10,320,470,711		51.19%
Series B	JPMCB US Resident (Norbax Inc.)		1,756,681,581		8.71%
Series B	The Bank of New York (BoNY)		1,487,512,256		7.38%
Series B	Board of Directors and		56,624		<0.01%
	Commissioners

      As of December 31, 2006, a total of 37,187,806 American Depositary Shares (“ADSs”) and 20,159,999,279 Series B Shares (including the Series B Shares represented by these ADSs) and one Series A Dwiwarna Share were outstanding.

      The Government holds a majority of the outstanding Series B Shares of TELKOM. In addition, the Government is the holder of the Series A Dwiwarna Share, which has special voting rights. See “— Relationship with the Government — Government as Shareholder” below.

      The Government holds a majority of the outstanding Common Stock of the Company and so retains control of the Company and has the power to elect all of its Board of Commissioners and all of its Board of Directors and to determine the outcome of substantially all actions requiring the approval of the stockholders. In addition, the Company’s Common Stock is also owned by Pension Funds, Insurance Funds and other institutions, owned or controlled, directly or indirectly, by the Government.

      The Government is also the holder of the Series A Dwiwarna Share, which has special voting rights. The material rights and restrictions which are applicable to the Common Stock are also applicable to the Dwiwarna Share, except that the Government may not transfer the Dwiwarna Share and it has a veto with respect to (i) election and removal of Directors; (ii) election and removal of Commissioners; and (iii) amendments to the Articles of Association, including amendments to merge or dissolve the Company prior to the expiration of its term of existence, increase or decrease its authorized capital and reduce its subscribed capital. Accordingly, the Government will have effective control of these matters even if it were to beneficially own less than a majority of the outstanding shares of Common Stock.

      TELKOM’s total number of shares immediately prior to its initial public offering was 8,400,000,000, which consisted of 8,399,999,999 Series B Shares and 1 Series A Dwiwarna Share, all of which were owned by the Government. On November 14, 1995, the Government sold some of its TELKOM shares through an

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initial public offering on the Jakarta Stock Exchange and Surabaya Stock Exchange. The shares offered consisted of 933,333,000 new Series B Shares and 233,334,000 Series B Shares owned by the Government. The Government also conducted a global share offering listed on the New York Stock Exchange and the London Stock Exchange for 700 million Series B Shares owned by the State of the Republic of Indonesia, which were converted into 35 million ADSs. Each ADS represented 20 Series B Shares at that time.

      In December 1996, the Government completed a block sale of 388 million Series B Shares. In 1997, the Government distributed 2,670,300 Series B Shares as an incentive to stockholders who did not sell their shares within one year from the date of the initial public offering.

      In May 1999, the Government completed another block sale of 898 million Series B Shares.

      Under Law No. 1/1995 on Limited Liability Companies, the minimum total par value of TELKOM’s issued share capital has to be at least 25% of the total par value of TELKOM’s authorized share capital, or in TELKOM’s case, Rp.5 trillion. To comply with the law, it was resolved at the annual general meeting of stockholders on April 16, 1999 to increase the issued share capital by way of capitalization of certain additional paid-in capital. The bonus shares were distributed to the then existing stockholders in August 1999.

      In December 2001, the Government conducted another block-sale of 1,200 million shares (or 11.90% of the total outstanding Series B Shares).

      On July 16, 2002, the Government sold 312 million Series B Shares (3.1% of the Series B Shares) through an accelerated placement of TELKOM’s shares to institutional investors in Indonesia and globally at Rp.3,635 per share.

      At TELKOM’s Annual General Meeting of Shareholders in July 2004, the shareholders approved the split of nominal value of the Series A Dwiwarna Share and Series B Shares of the Company from Rp.500 per share to Rp.250 per share. The number of authorized shares increased from 40,000,000,000 shares to 80,000,000,000 shares while the number of issued shares as of such date increased from 10,079,999,640 shares to 20,159,999,280 shares. As a result of the split of the nominal value, the previous one Series A Dwiwarna Share became two shares with the following criteria: (i) one Series A Dwiwarna Share was preserved as a Series A Dwiwarna Share owned by the Government with a nominal value of Rp.250 per share and (ii) the other share was issued as one Series B Share owned by the Government.

      At TELKOM’s Extraordinary General Meeting of Shareholders on December 21, 2005, the shareholders approved a share repurchase plan, pursuant to which TELKOM may repurchase up to a maximum of 5% of issued and outstanding Series B Shares for a total repurchase amount not exceeding Rp.5.25 trillion, in accordance with the rules and regulations of Badan Pengawas Pasar Modal dan Lembaga Keuangan (“BAPEPAM”) and the stock exchanges on which TELKOM shares and ADSs are trading, as well as other applicable regulatory bodies. Such repurchases are intended to be made from time to time over the eighteen month period following the announcement. Repurchases may be made at the discretion of the Company’s management through purchases of shares on the Jakarta and Surabaya Stock Exchanges, purchase of shares in ADS form on the New York Stock Exchange, off-exchange transactions and agreements, or any other legal means the Company deems appropriate. Through its share repurchase plan, TELKOM intends to: (i) achieve greater flexibility in managing its capital; (ii) lower its overall cost of financing and increase its Earnings Per Share, Earnings Per ADS and return on equity; and (iii) achieve greater flexibility to undertake share repurchases during the approved period.

      TELKOM has appointed Morgan Stanley Services Limited as the agent and PT. Danareksa Securities as the local broker for the share repurchase.

      Pursuant to the share repurchase plan, as of June 27, 2007, TELKOM has cumulatively repurchased an aggregate of 211,290,500 Series B Shares on either the Jakarta Stock Exchange or the New York Stock Exchange, representing approximately 1.05% of the total issued and outstanding Series B Shares of 20,159,999,279 for a total repurchase amount of Rp.1,829.1 billion (US$203.1 million).

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Relationship with the Government

Government as Shareholder

      As of December 31, 2006, the Government held approximately 51.19% of TELKOM’s Common Stock and the Series A share (the “Dwiwarna Share”), which carries special voting rights. As its largest shareholder, the Government is interested in TELKOM’s performance both in terms of the benefits it provides to the nation as well as its ability to operate on a commercial basis. The material rights and restrictions that are applicable to the Common Stock are also applicable to the Dwiwarna Share, except that the Government may not transfer the Dwiwarna Share and as the holder of the Dwiwarna Share has a veto with respect to (i) the nomination, election and removal of Directors; (ii) the nomination, election and removal of Commissioners; (iii) the issuance of new shares; and (iv) amendments to the Articles, including actions to merge or dissolve TELKOM, increase or decrease its authorized capital, or reduce its subscribed capital. Accordingly, the Government will have effective control of these matters even if it were to beneficially own less than a majority of the outstanding shares of Common Stock. The Government’s rights with respect to the Dwiwarna Share will not terminate unless the Articles of Association of the Company are amended, which would require the consent of the Government as holder of such Dwiwarna Share.

      It is the policy of the Company not to enter into transactions with affiliates unless the terms thereof are no less favorable to the Company than those which could be obtained by the Company on an arm’s-length basis from an unaffiliated third party. The State Minister of State-owned Enterprise (“SMSOE”) has advised the Company that the MoF, in its capacity as controlling shareholder of the Company, will not cause the Company to enter into transactions with other entities under its control unless the terms thereof are consistent with the Company’s policy set forth in the preceding sentence. The SMSOE has adopted a similar policy.

      Under regulations of BAPEPAM, Indonesia’s capital markets and financial institution supervisory agency, because the Company is listed on Indonesia’s stock exchanges, any transaction in which there is a conflict of interest (as defined below) must be approved by a majority of the holders of shares of Common Stock who do not have a conflict of interest in the proposed transaction, unless the conflict existed before the Company was listed and was fully disclosed in the offering documents. A conflict of interest is defined in BAPEPAM regulations to mean the difference between the economic interests of the Company and its stockholders, on the one hand and the personal economic interests of the members of the board of commissioners, board of directors or principal stockholders (a holder of 20% or more of the issued shares) and their respective affiliates jointly or separately on the other. A conflict of interest also exists when members of the board of commissioners, board of directors or a principal shareholder of the Company or their respective affiliates is involved in a transaction in which their personal interests may be in conflict with the interest of the Company. BAPEPAM has powers to enforce this rule; stockholders of the Company may also be entitled to seek enforcement or bring enforcement action based on this rule.

      Transactions between TELKOM and other state-owned or controlled enterprises could constitute “conflict of interest” transactions under the BAPEPAM regulations and the approval of disinterested stockholders would have to be obtained if a conflict of interest were to exist. TELKOM believes that many transactions conducted with state-owned or controlled enterprises in the ordinary course of their businesses and TELKOM’s business are on an arms-length, commercial basis and do not constitute “conflict of interest” transactions for which a disinterested stockholder vote would be required. Such transactions might include the sale by TELKOM of telephone services to state-owned or controlled enterprises or the purchase by TELKOM of electricity from a state-owned enterprise. Moreover, the BAPEPAM regulations do not require TELKOM to obtain disinterested shareholder approval of any transaction, the principal terms of which were disclosed in the Indonesian prospectus for the Initial Public Offering. TELKOM expects, however, in light of the substantial presence of enterprises owned or controlled by the Government, through the MoF, SMSOE, or one of its or their affiliates have in Indonesia, it may be desirable, in connection with the development and growth of TELKOM’s business, for TELKOM to enter into joint ventures, arrangements or transactions with such enterprises from time to time. Under such circumstances, TELKOM may seek to consult BAPEPAM in determining whether the proposed joint venture, arrangement or transaction would require a vote of disinterested stockholders under the terms of the BAPEPAM regulations. If BAPEPAM were of the view that

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the proposed joint venture, arrangement or transaction would not require a vote of disinterested stockholders under its regulations, TELKOM would proceed without seeking disinterested stockholders approval. If, however, BAPEPAM were to take the position that the proposal would require a vote of disinterested stockholders under its rule, TELKOM would either seek to obtain the requisite disinterested stockholder approval or abandon the proposal.

Government as Regulator

      The Government regulates the telecommunications sector through the MoCI. In particular, the MoCI has authority to issue decrees implementing laws, which are typically broad in scope, thereby giving the Ministry considerable latitude in implementing and enforcing regulatory policy. Pursuant to such decrees, the MoCI defines the industry structure, determines the tariff formula, determines TELKOM’s USO obligations and otherwise controls many factors that may affect TELKOM’s competitive position, operations and financial condition. Through the DGPT, the Government regulates frequency and bandwidth allocation and TELKOM must obtain a license from the DGPT for each of its services as well as the utilization of frequency and bandwidths. The Company and other operators are also required to pay radio frequency usage fees. Telkomsel also holds several licenses issued by the MoCI (or previously issued by the MoC) for the provision of its cellular services and from the Indonesian Investment Coordinating Board relating to investment by Telkomsel for the development of cellular phone line services with national coverage, including the expansion of its network coverage. The Government, through the MoCI as regulator, has the power to grant new licenses for the establishment of new joint ventures and other arrangements, particularly in the telecommunications sector.

      The Company and its subsidiaries pay concession fees for telecommunication services provided and radio frequency usage charges to the MoCI. Concession fees amounted to Rp.314.7 billion, Rp.558.5 billion and Rp.497.9 billion (US$55.3 million) in 2004, 2005 and 2006, respectively. Concession fees accounted for 1.6%, 2.3% and 1.7% of total operating expenses in 2004, 2005 and 2006, respectively. Radio frequency usage charges amounted to Rp.492.6 billion, Rp.548.2 billion and Rp.722.6 billion (US$80.3 million) in 2004, 2005 and 2006, respectively. Radio frequency usage charges accounted for 2.5%, 2.2% and 2.4% of total operating expenses in 2004, 2005 and 2006, respectively. Beginning in 2005, the Company and its subsidiaries pay Universal Service Obligation (“USO”) charges to the MoCI, which amounted to Rp.307.7 billion and Rp.383.8 billion (US$42.6 million) in 2005 and 2006, respectively, reflecting 1.2% and 1.3% of total operating expenses in 2005 and 2006, respectively.

Government as Lender

      As of December 31, 2006, the Government had sub-loaned borrowings from foreign lenders to TELKOM as “two-step loans” amounting to Rp.4,476.6 billion (US$497.4 million), including current maturities. TELKOM is obligated to pay to the Government interest and principal repayment that is subsequently remitted by the Government to the respective lenders. As of December 31, 2006, foreign currency loans represented 64.4% of the outstanding total of such loans. The remaining 35.6% of such outstanding loans is denominated in Rupiah. In 2006, the annual interest rates charged on loans repayable in Rupiah range from 11.2% to 13.7%, on those repayable in US Dollar range from 4.0% to 6.5%, and on the loan repayable in Japanese Yen is 3.1%. See Item 5. “Operating and Financial Review and Prospects — B. Liquidity and Capital Resources — Indebtedness.”

Government as Customer

      The Government purchases services from the Company on a commercial basis. Government entities, in the aggregate, constitute the largest user of the Company’s services. The Company, however, deals with the various departments and agencies of the Government as separate customers and the provision of services to any single department or agency does not constitute a material part of TELKOM’s revenues. The Government and government agencies are treated for tariff purposes in respect to its connection charges and monthly charges as “residential”, which rates are lower than the business service rates. This special treatment does not apply to the tariff for local, long distance and IDD calls.

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Other

Proportion of securities of TELKOM held in Indonesia and outside Indonesia

      As of December 31, 2006, 14,196 persons, including the Government, were registered as holders of 20,159,999,279 Series B Shares of TELKOM’s Common Stock in Indonesia. There were a total of 37,187,806 ADSs held by 134 registered holders as of December 31, 2006. The ADSs are traded on the NYSE and the LSE.

Change in Control

      There are no arrangements which are known to the Company which may result in a change in control of TELKOM.

B.     Related party transactions

      TELKOM is a party to certain agreements and engages in transactions with a number of entities that are related to the Company, such as joint venture companies, cooperatives and foundations, as well as the Government and entities that are related to or owned or controlled by the Government, such as state-owned entities. See Note 46 to the Company’s consolidated financial statements. The most significant of these transactions include:

Government of the Republic of Indonesia

      TELKOM obtained two-step loans from the Government of the Republic of Indonesia, TELKOM’s majority stockholder. See Note 22 to the consolidated financial statements. Interest expense for two-step loans amounted to Rp.489.2 billion, Rp.324.7 billion and Rp.366.7 billion in 2004, 2005 and 2006, respectively. Interest expense for the two-step loan represented 38.5%, 27.6% and 28.5% of total interest expense in 2004, 2005 and 2006, respectively.

      TELKOM pays concession fees for the telecommunications services provided and radio frequency usage charges to the MoCI (formerly, the Ministry of Tourism, Post and Telecommunications) of the Republic of Indonesia. Concession fees amounted to Rp.314.7 billion, Rp.558.5 billion and Rp.497.9 billion in 2004, 2005 and 2006, respectively, representing 1.6%, 2.3% and 1.7% of total operating expenses for each year. Radio frequency usage charges amounted to Rp.492.6 billion, Rp.548.2 billion and Rp.722.6 billion in 2004, 2005 and 2006, respectively, representing 2.5%, 2.2% and 2.4% of total operating expenses in 2004, 2005, 2006, respectively. See Note 38 to the consolidated financial statements. Telkomsel paid the upfront fee for the 3G license amounted to Rp.436,000 million and recognized it as an intangible asset. See Note 15 to the consolidated financial statements.

      Starting in 2005, TELKOM began paying Universal Service Obligation (“USO”) charges to the MoCI of the Republic of Indonesia pursuant to MoCI Regulation No. 15/ PER/ M.KOMINFO/9/2005 dated September 30, 2005. USO charges amounted to Rp.307,705 million and Rp.383,829 million in 2005 and 2006, respectively, representing 1.2% and 1.3% of total operating expenses in 2005 and 2006, respectively. See Note 38 to the consolidated financial statements.

Indosat

      At the time TELKOM acquired Pramindo in August 2002, 13% of the issued and paid up share capital of Pramindo was owned by Indosat, a company that, at that time, was majority owned and controlled by TELKOM’s major shareholder, the Government of Indonesia. Since December 20, 2002, Indosat has been controlled by Singapore Technologies Telemedia Pte. Ltd. TELKOM still considers Indosat a related party because the Government can exert significant influence over the financial and operating policies of Indosat by virtue of its right to appoint one director and one commissioner of Indosat.

      Following the merger of Indosat, PT Indosat Multimedia Mobile (“IM3”), Satelindo and PT Bimagraha Telekomindo on November 20, 2003, with Indosat as the surviving entity, all the rights and obligations of

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Satelindo and IM3 arising from their agreements with TELKOM and Telkomsel, as the case may be, were transferred to or assumed by Indosat.

      The Company has an agreement with Indosat for the provision of international telecommunication services to the public. The principal matters covered by the agreement are as follows:

•  The Company provides a local network for customers to make or receive international calls. Indosat provides the international network for the customers, except for certain border towns, as determined by the Director General of Post and Telecommunication of the Republic of Indonesia. The international telecommunication services include telephone, telex, telegram, package switched data network, television, teleprinter, Alternate Voice/ Data Telecommunication (AVD), hotline and teleconferencing. The Company receives compensation for the services, based on the interconnection tariff determined by the MoC of the Republic of Indonesia;

•  The Company has also entered into an interconnection agreement between the Company’s PSTN network and Indosat’s cellular network in connection with the implementation of Indosat Multimedia Mobile services and the settlement of the related interconnection rights and obligations; and

•  The Company’s compensation relating to leased lines/channel services, such as International Broadcasting System, AVD and bill printing is calculated at 15% of Indosat’s revenues from such services. Indosat also leased circuits from the Company to link Jakarta, Medan and Surabaya through year-end 2003.

      In 1994, the Company transferred to Satelindo (now Indosat) the right to use a parcel of Company-owned land located in Jakarta that had been previously leased to PT Telekomindo Primabhakti. Based on the transfer agreement, Satelindo is given the right to use the land for 30 years and can apply for the right to build properties thereon. The ownership of the land is retained by the Company. Satelindo agreed to pay Rp.43.0 billion to the Company for the thirty-year right. Satelindo paid Rp.17.2 billion in 1994 but the remaining Rp.25.8 billion was not paid because the Utilization Right (“Hak Pengelolaan Lahan”) on the land could not be delivered as provided in the transfer agreement. In 2000, the Company and Satelindo agreed on an alternative solution by accounting for the above payment as a lease expense up to 2006. In 2001, Satelindo paid an additional amount of Rp.59.9 billion as a lease expense up to 2024.

      Telkomsel also entered into an agreement with Indosat for the provision of international telecommunication services to GSM mobile cellular customers. The principal matters covered by the agreement are as follows:

•  Telkomsel’s GSM mobile cellular telecommunication network is connected with Indosat’s international gateway exchanges to make outgoing or receive incoming international calls through Indosat’s international gateway exchanges;

•  Telkomsel receives as compensation for the interconnection a specific percentage of Indosat’s revenues from the related services made through Indosat’s international gateway exchanges;

•  Billing for international calls made by Telkomsel’s customers of GSM mobile cellular telecommunication is handled by Telkomsel. Telkomsel is obliged to pay Indosat’s share of revenue regardless of whether billing to customers has been collected; and

•  The agreement dated March 29, 1996, was initially valid for one year, but extendable as agreed by both parties. The latest amended agreement is valid until March 2008, but extendable as agreed by both parties. Pending negotiations on a new agreement, Telkomsel and Indosat have entered into an interim agreement with terms similar to those set forth above. Under the terms of the interim agreement, Telkomsel will receive 27% of the applicable tariff for outgoing international calls from Telkomsel subscribers and Rp.800 per minute for incoming international calls to Telkomsel subscribers. The interim agreement became effective on March 1, 2004 and continues until such date that Telkomsel and Indosat enter into a new agreement.

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      Telkomsel also has an agreement for the usage of Indosat’s telecommunication facilities. The agreement, which was made in 1997, is valid for eleven years and subject to change based on an annual review and agreement by both parties. The charges for the usage of the facilities amounted to Rp.19.1 billion, Rp.19.1 billion and Rp.17.7 billion (US$2.0 million) in 2004, 2005 and 2006, respectively, or 0.1% of total operating expenses in each of 2004, 2005 and 2006.

      Other agreements between Telkomsel and Indosat are as follows:

Agreement on Construction and Maintenance for the Jakarta-Surabaya Cable System (“J-S Cable System”)

      Telkomsel, Lintasarta, Satelindo and Indosat entered into the Construction and Maintenance for J-S Cable System Agreement. The parties formed a management committee consisting of a chairman and a representative of each party to direct the construction and operation of the cable system. The construction of the cable system was completed in 1998. Based on the agreement, Telkomsel shared 19.325% of the total construction cost. Operation and maintenance costs are shared based on an agreed formula.

      Telkomsel’s share in operation and maintenance costs amounted to Rp.2.1 billion, Rp.1.2 billion and Rp.0.4 billion (US$44.4 thousand) in 2004, 2005 and 2006, respectively.

Indefeasible Right of Use Agreement

      On September 21, 2000, Telkomsel entered into an agreement with Indosat for the use of the SEA — ME — WE 3 and tail link in Jakarta and Medan. Based on the agreement, Telkomsel was granted an indefeasible right to use a certain capacity of the network commencing from September 21, 2000 to 2015 by prepaying compensation amounting to US$2.7 million. In addition to the prepayment, Telkomsel is also charged annual operation and maintenance costs amounting to US$0.1 million.

Interconnection Revenues

      The Company and its subsidiaries were charged net interconnection charges from Indosat of Rp.158.3 billion, Rp.52.8 billion and Rp.168.3 billion (US$18.7 million) in 2004, 2005 and 2006, respectively, representing 0.5%, 0.1% and 0.3%, of total operating revenues in 2004, 2005 and 2006, respectively.

Leased Lines

      The Company provides leased lines to Indosat and its subsidiaries, namely Indosat Mega Media and Lintasarta. The leased lines can be used by those companies for telephone, telegraph, data, telex, facsimile or other telecommunication services. Revenue earned from these transactions amounted to Rp.109.8 billion, Rp.126.4 billion and Rp.164.9 billion (US$18.3 million) in 2004, 2005 and 2006, respectively, representing 0.3% of total operating revenues in each of 2004, 2005 and 2006.

Satellite Transponder Lease

      Lintasarta utilizes the Company’s satellite transponders or frequency channels. Revenue earned from these transactions amounted to Rp.14.5 billion, Rp.8.1 billion and Rp.7.0 billion (US$0.8 million) in 2004, 2005 and 2006, respectively, representing less than 0.1% of total operating revenues in each of 2004, 2005 and 2006.

Data communication network

      Telkomsel has an agreement with Lintasarta and PT Artajasa Pembayaran Elektronis (“Artajasa” which 39.8% of the shares are owned by Indosat) for the usage of the data communication network system. The charges from Lintasarta and Artajasa for the services amounted to Rp.21.4 billion, Rp.23.1 billion and Rp.44.2 billion (US$4.9 million) in 2004, 2005 and 2006, respectively, representing 0.1% of total operating revenues in each of 2004, 2005 and 2006.

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Agreement with Government agencies and associated companies

      The Company provides telecommunication services to Government agencies.

      The Company has entered into agreements with Government agencies and associated companies, namely, CSM, Patrakom and KSO VII (for 2004 and 2005, and for the period between January to September 2006), for utilization of the Company’s satellite transponders or frequency channels. Revenues earned from these transactions amounted to Rp.51.0 billion, Rp.66.8 billion and Rp.87.3 billion (US$9.7 million) in 2004, 2005 and 2006 respectively, representing 0.2% of total operating revenues in each of 2004, 2005 and 2006.

      The Company provides leased lines to associated companies, namely CSM, Patrakom and PSN. The leased lines can be used by these companies for telephone, telegraph, data, telex, facsimile or other telecommunication services. Revenue earned from these transactions amounted to Rp.25.7 billion, Rp.30.7 billion and Rp.44.4 billion (US$4.9 million) in 2004, 2005 and 2006, respectively, representing 0.1% of total operating revenues in each of 2004, 2005 and 2006.

      The Company purchases property and equipment including construction and installation services from a number of related parties. These related parties include among others PT Industri Telekomunikasi Indonesia (“PT INTI”) and Koperasi Pegawai TELKOM, a related party cooperative. Total purchases made from these related parties amounted to Rp.268.9 billion, Rp.337.7 billion and Rp.153.5 billion (US$17.1 million) in 2004, 2005 and 2006, respectively, representing 2.4%, 2.5% and 0.9% of total fixed assets purchases in 2004, 2005 and 2006, respectively.

      PT INTI is also a major contractor and supplier providing equipment, including construction and installation services, for Telkomsel. Total purchases from PT INTI in 2004, 2005 and 2006 amounted to Rp.217.7 billion, Rp.67.6 billion and Rp.90.5 billion (US$10.1 million), respectively, representing 1.9%, 0.5% and 0.5% of total fixed assets purchases in 2004, 2005 and 2006, respectively.

      Telkomsel has an agreement with PSN for the lease of PSN’s transmission link. Based on the agreement, which was made on March 14, 2001, the minimum lease period is 2 years since the operation of the transmission link and is extendable subject to agreement by both parties. The lease charges amounted to Rp.49.7 billion, Rp.95.2 billion and Rp.131.4 billion (US$14.6 million) in 2004, 2005 and 2006, respectively, representing 0.3%, 0.4% and 0.4% of total operating expenses in 2004, 2005 and 2006, respectively.

      TELKOM and its subsidiaries carry insurance (on their property, plant and equipment against property losses, inventory and on employees’ social security) obtained from PT Asuransi Jasa Indonesia, PT Asuransi Tenaga Kerja and PT Persero Asuransi Jiwasraya, which are state-owned insurance companies. Insurance premiums amounted to Rp.148.3 billion, Rp.58.3 billion and Rp.105.5 billion (US$11.7 million) in 2004, 2005 and 2006, respectively, representing 0.8%, 0.2% and 0.4% of total operating expenses in 2004, 2005 and 2006, respectively.

      TELKOM and its subsidiaries maintain current accounts and time deposits in several state-owned banks. In addition, some of those banks are appointed as collecting agents for the Company. Total placements in the form of current accounts and time deposits, and mutual funds in state-owned banks amounted to Rp.3,315.4 billion and Rp.5,737.7 billion (US$637.5 million) as of December 31, 2005 and 2006, respectively, representing 5.3% and 7.6% of total assets as of December 31, 2005 and 2006, respectively. Interest income recognized during 2004, 2005 and 2006 was Rp.150.4 billion, Rp.124.0 billion and Rp.405.2 billion (US$45.0 million), representing 47.3%, 36.0% and 62.0% of total interest income in 2004, 2005 and 2006, respectively.

      TELKOM’s subsidiaries have loans from state-owned banks. Interest expense on the loans for 2004, 2005 and 2006 amounted to Rp.9.1 billion, Rp.5.1 billion and Rp.86.3 billion (US$9.6 million), respectively, representing 0.7%, 0.4% and 6.7% of the total interest expense in 2004, 2005 and 2006, respectively.

      TELKOM (a) leases buildings, (b) purchases materials and construction services and (c) utilizes maintenance and cleaning services from Dana Pensiun Telkom and PT Sandhy Putra Makmur, a subsidiary of Yayasan Sandikara Putra Telkom. Total charges from these transactions amounted to Rp.24.9 billion,

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Rp.39.1 billion and Rp.79.6 billion (US$8.8 million) in 2004, 2005 and 2006, respectively, representing 0.1%, 0.2% and 0.3% of total operating expenses in 2004, 2005 and 2006, respectively.

      TELKOM and its subsidiaries earned (were charged) interconnection revenues (charges) from PSN of Rp.(5.5) billion, Rp.1.1 billion and Rp.9.7 billion (US$1.1 million) in 2004, 2005 and 2006, respectively, representing (0.02)%, less than 0.01% and less than 0.02% of total operating revenues in 2004, 2005 and 2006, respectively.

      In addition to revenues earned under the KSO Agreements, the Company also earned income from building rental, repairs and maintenance services and training services provided to the KSO Units, amounting to Rp.18.4 billion, Rp.26.8 billion and Rp.14.5 billion (US$1.6 million) in 2004, 2005 and 2006, respectively, representing 0.1%, 0.1% and less than 0.1% of total operating revenues in 2004, 2005 and 2006, respectively.

      TELKOM has a revenue-sharing arrangement with Koperasi Pegawai TELKOM (“Kopegtel”). Kopegtel’s share in the revenues from these arrangements amounted to Rp.20.6 billion, Rp.31.9 billion and Rp.28.9 billion (US$3.2 million) in 2004, 2005 and 2006, respectively, representing 0.1% of total operating revenues for each year.

      Telkomsel has operating lease agreements with Patrakom and CSM for the usage of their transmission link for a period of three years, subject to extensions. The lease charges amounted to Rp.25.0 billion, Rp.123.9 billion and Rp.192.1 billion (US$21.3 million) in 2004, 2005 and 2006, respectively, representing 0.1%, 0.5% and 0.6% of total operating expenses in 2004, 2005 and 2006, respectively.

      Kisel is a cooperative that was established by Telkomsel’s employees to provide car rental services, printing and distribution of customer bills, collection and other services, principally servicing Telkomsel. For Kisel’s services, Telkomsel paid Rp.109.5 billion, Rp.78.7 billion and Rp.322.9 billion (US$35.9 million) in 2004, 2005 and 2006, respectively. Telkomsel also has dealership agreements with Kisel for the distribution of SIM cards and pulse reload vouchers. Total SIM cards and pulse reload vouchers sold to Kisel amounted to Rp.816.6 billion, Rp.1,158.6 billion and Rp.1,568.7 billion (US$174.3 million) in 2004, 2005 and 2006, respectively.

      Infomedia provided electronic media and call center services to KSO Unit VII (for 2004 and 2005, and for the period between January to September 2006) based on an agreement dated March 4, 2003. Revenue earned from these transactions in 2004, 2005 and 2006 amounted to Rp.5.5 billion, Rp.9.2 billion and Rp.6.9 billion (US$0.8 million), respectively, representing 0.02%, 0.02% and 0.01% of total operating revenues in 2004, 2005 and 2006, respectively.

      TELKOM has also seconded a number of its employees to related parties to assist them in operating their business. In addition, the Company provides certain of its related parties with the right to use its buildings free of charge.

      Telkomsel has procurement agreements with PT Graha Informatika Nusantara, a subsidiary of Dana Pensiun Telkom for installation and maintenance of equipment. Total procurement for installations of equipment amounted to Rp.nil, Rp.127.7 billion and Rp.103.0 billion (US$11.4 million) in 2004, 2005 and 2006, respectively; and the maintenance of equipment amounted to Rp.nil, Rp.36.5 billion and Rp.45.4 billion (US$5.0 million) in 2004, 2005 and 2006, respectively.

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C.     Interest of experts and counsel

      Not applicable.

ITEM 8.     FINANCIAL INFORMATION

A.     Consolidated statements and other financial information

      See Item 18. “Consolidated Financial Statements,” which is incorporated herein by reference.

Material Litigation

Commissions for Business Competition Watch (Komisi Pengawas Persaingan Usaha) (“KPPU”)

      On August 13, 2004, the KPPU issued its verdict in Commission Court, which determined that the Company had breached several articles of Law No. 5/1999 on Anti Monopolistic Practices and Unfair Business Competition (“Competition Law”). In addition, KPPU also indicated that the Company should allow Warung TELKOM (“kiosks”) to channel international calls to other international call operators, and abolish the clause in agreements between the Company and Warung TELKOM providers which limit Warung TELKOM to sell telecommunication services of other operators. The Company filed an appeal to the Bandung District Court which on December 7, 2004 issued its verdicts in favor of the Company. On January 4, 2005, KPPU filed an appeal to the Indonesian Supreme Court. On January 15, 2007, the Indonesian Supreme Court rendered its decision in favor of KPPU, whereby TELKOM must comply with the verdict of KPPU within eight days as of the date of a formal notice from the Chief of Bandung District Court requesting TELKOM to comply with the decision of the Supreme Court. The Company does not believe that the Supreme Court decision will have a material adverse effect on the Company’s consolidated financial position, results of operations or liquidity.

The Audit Board of the Republic of Indonesia (Badan Pemeriksa Keuangan Republik Indonesia) (“BPK-RI”)

      The Audit Board of the Republic of Indonesia have initiated investigations related to procurement of goods and services for the years of 2004, 2005, and first semester of 2006. Currently they have initiated investigation related to the execution of a co-operative joint operation schemes (KSO) in Division regional IV. As of the date of this Annual Report, these investigations are on going.

B.     Significant changes

      See Note 54 to the Company’s consolidated financial statements in Item 18 for information relating to material subsequent events occurring after December 31, 2006. See also the important disclosures regarding changes in the regulations governing the Indonesian telecommunications industry in Item 4. “Information on the Company — B. Business Overview — Regulations.”

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ITEM 9.     THE OFFER AND LISTING

A.     Offer and listing details

      The table below sets forth, for the periods indicated, the reported high and low quoted prices for the currently outstanding Common Stock on the JSX.

SHARE PRICE INFORMATION

		Price per Share*
Calendar Year		High		Low
		(In Rupiah)
2002			4,725		2,350
	First Quarter		4,300		2,825
	Second Quarter		4,725		3,700
	Third Quarter		3,900		3,125
	Fourth Quarter		4,000		2,350
2003			6,750		3,225
	First Quarter		3,725		3,225
	Second Quarter		4,950		3,650
	Third Quarter		6,000		4,125
	Fourth Quarter		6,750		5,650
2004			5,200		3,300
	First Quarter		4,025		3,300
	Second Quarter		4,350		3,300
	Third Quarter		4,225		3,650
	Fourth Quarter		5,200		4,175
2005			6,150		4,175
	First Quarter		5,125		4,300
	Second Quarter		5,350		4,175
	Third Quarter		5,800		4,775
	Fourth Quarter		6,150		4,925
2006			10,550		5,950
	First Quarter		7,000		5,950
	Second Quarter		8,400		6,750
	Third Quarter		8,450		7,100
	Fourth Quarter		10,550		8,200
	October		8,450		8,200
	November		10,000		8,500
	December		10,550		9,700
2007
	January		10,350		9,450
	February		9,700		8,900
	March		9,850		9,000
	April		10,800		9,900

*  On October 1, 2004, TELKOM effected a two-for-one split of its Common Stock from Rp.500 par value per share to Rp.250 par value per share as resolved in the AGMS on July 30, 2004. The price per share reflects this split for all periods shown.

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

      The table below sets forth, for the periods indicated, the reported high and low quoted prices of the ADSs on the NYSE and LSE.

ADS PRICE INFORMATION

		Price per ADS				Price per ADS
		(NYSE)				(LSE)
Calendar Year		High		Low		High		Low
		(In US Dollars)				(In US Dollars)
2002			9.77		5.56		9.83		5.28
	First Quarter		8.60		5.56		8.58		5.48
	Second Quarter		9.77		8.40		9.83		8.45
	Third Quarter		8.70		7.00		8.70		7.13
	Fourth Quarter		8.93		5.62		8.88		5.28
2003			16.42		7.30		16.05		7.27
	First Quarter		8.44		7.30		8.53		7.27
	Second Quarter		12.09		8.19		11.78		8.33
	Third Quarter		13.73		9.85		13.90		9.60
	Fourth Quarter		16.42		13.13		16.05		13.40
2004			23.33		14.13		23.21		14.08
	First Quarter		19.45		15.13		18.97		15.29
	Second Quarter		19.91		14.13		20.27		14.08
	Third Quarter		18.55		15.81		19.00		15.73
	Fourth Quarter		23.33		18.30		23.21		19.37
2005			25.50		16.85		29.76		16.88
	First Quarter		21.96		18.11		21.86		18.17
	Second Quarter		21.96		16.85		21.99		16.88
	Third Quarter		23.66		18.10		29.76		17.97
	Fourth Quarter		25.50		19.81		25.47		19.71
2006			46.68		24.65		46.70		23.78
	First Quarter		31.51		24.65		31.38		23.78
	Second Quarter		38.28		27.95		38.35		27.90
	Third Quarter		36.56		30.32		36.15		30.08
	Fourth Quarter		46.68		35.64		46.69		36.00
	October		37.13		35.64		37.07		36.00
	November		43.96		37.00		43.66		36.10
	December		46.68		42.93		46.70		42.64
2007
	January		46.98		41.94		46.82		41.95
	February		43.31		37.74		42.90		39.46
	March		43.55		37.90		43.05		39.30
	April		47.02		44.03		47.15		42.91

      On December 29, 2006 (the last trading day in 2006 on the NYSE), the closing price for an ADS was US$45.60 on the NYSE. On December 28, 2006 (the last trading day in 2006 on the LSE), the closing price for an ADS was US$45.49 on the LSE.

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B.     Plan of distribution

      Not applicable.

C.     Markets

      TELKOM’s Common Stock is listed on the Jakarta Stock Exchange (“JSX”) and the Surabaya Stock Exchange (“SSX”). The JSX is the principal non-U.S. trading market for the Company’s Common Stock. In addition, American Depositary Shares (“ADSs”), each representing 40 shares of Common Stock, are listed on the New York Stock Exchange (“NYSE”) and the London Stock Exchange (“LSE”). TELKOM’s Common Stock has also been publicly offered without listing in Japan.

The Indonesian Securities Market

      As of the date of this Annual Report, there are two stock exchanges in Indonesia. The primary market is the JSX located in Jakarta and the other is the SSX located in Surabaya, East Java. The JSX is the larger and more prominent of the two exchanges, with an aggregate equity market capitalization of Rp.1,249.1 trillion at year end 2006 as compared to Rp.1,083 trillion for the SSX. Total trading value on the JSX during 2006 was Rp.445.7 trillion, compared with Rp.5.22 trillion on the SSX.

Overview of the JSX

      As of December 31, 2006, the JSX comprised of 124 members. Trading rules on the JSX are, at present, generated in the form of decisions by the JSX. There are currently two daily trading sessions for regular market and negotiated market from Monday to Thursday, a morning session from 9.30 a.m. to 12.00 noon, followed by an afternoon session from 1.30 p.m. to 4.00 p.m. There are two trading sessions on Friday, from 9.30 a.m. to 11.30 a.m. and from 2.00 p.m. to 4.00 p.m. There is only one cash market trading session from Monday to Thursday, 9.30 a.m. to 12.00 noon, and on Friday, 9.30 a.m. to 11.30 a.m.

      Trading of securities is divided into three market segments: regular market, negotiated market and cash market (except for right issues which may only be traded in the cash and negotiated markets). The regular market is the mechanism for trading stock in standard lots on a continuous auction market during exchange hours. Regular market and cash market trading is generally carried out in unit lots of 500 shares. The price movements:

• for shares with previous price under Rp.500, in multiples of Rp.5 and each price movement should be no more than Rp.50;

• for shares with previous price between the range of Rp.500 up to Rp.2,000, in multiples of Rp.10 and each price movement should be no more than Rp.100;

• for shares with previous price between the range of Rp.2,000 up to Rp.5,000, in multiples of Rp.25 and each price movement should be no more than Rp.250; and

• for shares with previous price between the range of Rp.5,000 or more, in multiples of Rp.50 and each price movement should be no more than Rp.500.

      Auctioning takes place according to price priority and time priority. Price priority refers to the giving of priority to buying orders at a higher price or selling orders at a lower price. If buying or selling orders are placed at the same price, priority is given to the buying or selling order placed first (i.e., time priority).

      The negotiated market trading is carried out by (i) direct negotiation between members of JSX or (ii) between clients through one member of JSX or (iii) between client and a member of JSX or (iv) between a member of JSX with Kustodi Penjaminan Efek Indonesia (Indonesian Clearing Guarantee Corporation) (“KPEI”). The negotiated market trading does not use round lots.

      Transactions on the JSX regular market are required to be settled no later than the third trading day after the transactions except for cross trading. Transactions on the negotiated market are settled based on agreement between the selling exchange member and the buying exchange member, and are settled per

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transaction. Transactions on the JSX cash market are required to be settled on the trading day of the transactions. In case of a default by an exchange member on settlement, cash market trading takes place, pursuant to which trading of securities by means of direct negotiation on cash and carry terms will be conducted. All cash market transactions must be reported to the JSX. An exchange member is obliged to pay a transaction cost as regulated by the JSX, delay in payment of the transaction cost will be subject to a fine of 1.0% of the outstanding amount for each day of delay. For any violation on JSX rules, JSX may impose to exchange member sanctions: (i) fine up to Rp.500 million; (ii) a written warning; (iii) suspension; or (iv) revocation of license as an exchange member.

      All transactions involving shares listed only on the JSX which use the services of brokers must be conducted through the JSX. In order for a trade (except a block trade) to be made on the JSX, both the cash and securities settlement must be conducted through the facilities of the JSX. Engaging in short selling is prohibited under the applicable regulations. Furthermore, the JSX may cancel a transaction if proof exists of fraud, market manipulation or the use of insider information. The JSX may also suspend trading if there are indications of fraudulent transactions or artificial inflation of share prices, misleading information, use of insider information, counterfeit securities or securities blocked from trading, or any other material event. The JSX may suspend trading of certain securities or suspend certain members of the stock exchange. For transactions involving shares listed on both the JSX and the SSX, either exchange may be used to effect the trade.

      Members of the JSX charge a brokerage fee for their services, based on agreement with their client, up to a maximum of 1.0% of the transaction value. When conducting share transactions on the JSX, exchange members are required to pay a transaction cost in the amount of 0.03% of the transaction value (for transactions in the regular and cash markets) and a transaction cost in the amount of 0.03% of the transaction value or based on the exchange policy (for transactions in the negotiated markets). The transaction cost is minimum Rp.2 million per month as contribution for the provision of stock exchange’s facilities (which continues to apply for stock exchange members in suspension). The clients are also responsible for paying a 10.0% value added tax on the amount of brokerage fee and transaction cost. Also, Indonesian sellers are required to pay a withholding tax of 0.1% (0.6% for founder shares) of the total transaction value. Additionally, stamp duty of Rp.3,000 is payable on any transaction with a value between Rp.250,000 and Rp.1,000,000 and stamp duty of Rp.6,000 is payable on every transaction with a value of more than Rp.1,000,000.

      Shareholders or their appointees may request at any time during working hours, the issuer or a securities administration bureau appointed by the issuer of such shares to register their shares in the issuer’s registry of shareholders. Reporting of share ownership to BAPEPAM is mandatory for shareholders whose ownership has reached 5.0% or more of issued and fully paid up capital, upon meeting such share ownership level or upon changes of such ownership.

Trading on the NYSE and LSE

      The Bank of New York serves as depositary (the “Depositary”) with respect to the ADSs traded on the NYSE and the LSE. Each ADS represents 40 shares of Common Stock. As of December 31, 2006, 37,187,806 ADSs were outstanding in either the New York Stock Exchange or London Stock Exchange and there were 134 registered holders of ADSs.

D.     Selling Stockholders

      Not applicable.

E.     Dilution

      Not applicable.

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F.     Expenses of the issue

      Not applicable.

ITEM 10.     ADDITIONAL INFORMATION

A.     Share capital

      Not applicable.

B.     Memorandum and articles of association

      The Company’s articles of association (“Articles”) have been registered with the Ministry of Justice in accordance with the Limited Liability Company Law No. 1 Year 1995 (“Indonesian Company Law”) and was announced by Ministerial Decree number C2-7468.HT.01.04.TH.97 year 1997, as amended by the Decree of the Minister of Justice No. C-12265.HT.01.04 TH 2006. According to article 3, the objectives and purposes of the Company are to operate telecommunications networks and provide telecommunications and information services.

      In accordance with Indonesian company law, TELKOM has a Board of Commissioners and a Board of Directors. The two Boards are separate and no individual may be a member of both Boards. See Item 6. “Directors, Senior Management and Employees — A. Directors and Senior Management.” The Articles state that any transaction involving a conflict of interest between the Company and its directors, commissioners and stockholders should be approved by a stockholders meeting, in which approval is required from a majority of independent stockholders.

      Each director also receives an annual bonus and other incentives if TELKOM surpasses certain financial and operating targets, the amounts of which are determined by the stockholders at the general meeting of stockholders. Bonuses and incentives are budgeted annually and are based on the recommendation of the Board of Directors which recommendation must be approved by the Board of Commissioners before submission to the stockholders. Each commissioner is granted a monthly honorarium and certain other allowances and is paid an annual bonus if TELKOM surpasses certain financial operating targets, the amounts of which are determined by the stockholders at the general meeting of stockholders. Each commissioner also receives a lump sum bonus paid at the end of the commissioner’s term pursuant to a letter of the Ministry of Finance which applies to all state-owned companies. No fees are paid to the Commissioners or Directors for attendance at their respective board meetings.

      The Board of Directors are tasked with the responsibility of leading and managing the Company in accordance with its objectives and purposes and to control, preserve and manage the assets of the Company. Within such broad scope of responsibility, the Board of Directors are authorized to cause the Company to borrow such sums as it may require from time to time subject to the limitations set forth in the Articles. The borrowing powers of the Board of Directors may only be varied through an amendment to the Articles.

      The Articles do not contain any requirement for (i) the directors to retire by a specified age, or (ii) the directors to own any or a specified number of shares of the Company. The rights, preferences and restrictions attaching to each class of the shares of the Company in respect of specified matters are set forth below:

• dividend rights. Dividends are to be paid based upon the financial condition of TELKOM and in accordance with the resolution of the stockholders in a general meeting, which will also determine the form of and time for payment of the dividend;

• voting rights. The holder of each voting share is entitled to one vote at a general meeting of stockholders;

• rights to share in the Company’s profits. See dividend rights;

• rights to share in any surplus in the event of liquidation. Stockholders are entitled to surplus in the event of liquidation in accordance with their proportion of shareholding, provided the nominal value of the Common Stock that they hold is fully paid-up;

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• redemption provisions. There are no stock redemption provisions in the Articles. However, based on Article 30 of Indonesian Company Law, TELKOM may buy back at the maximum 10% of its issued shares;

• reserved fund provisions. Retained earnings up to a minimum of 20% of the issued capital of the Company is to be set aside to cover potential losses suffered by the Company. If the amount in the reserved fund exceeds 20% of the issued capital of the Company, general meeting of stockholders may authorize the Company to utilize such excess funds as dividends;

• liability to further capital calls. Stockholders of the Company may be asked to subscribe for new shares in the Company from time to time. Such right is to be offered to stockholders prior to being offered to third parties and may be transferred at the option of the shareholder. The Board of Directors of the Company is authorized to offer the new shares to third parties in the event that the existing shareholder is unable or unwilling to subscribe for such new shares; and

• provisions discriminating against any existing or prospective holder of such securities as a result of such shareholder owning a substantial number of shares. The Articles do not contain any such provision.

      In order to change the rights of holders of stock, an amendment to the relevant provisions of the Articles would be required. Any amendment to the Articles requires the approval of the holder of the Series A Dwiwarna Share and two thirds of the holders of the Series B Shares present at a general meeting. Such meeting must also be attended by the holder of the Series A Dwiwarna Share.

      General meetings of stockholders may only be convened upon the issuance of the requisite notice by the Company. The notice is to be published in at least two newspapers in Indonesian and one newspaper in English having general circulation within Indonesia. The notice period for convening annual general meetings and extraordinary general meetings is 21 days (not including the date the meeting was called and the date of the meeting) and 14 days (not including the date the meeting was called and the date of the meeting) respectively. The quorum for the general meeting is stockholders representing more than 50% of the outstanding share capital of the Company. In the event that quorum is not achieved, another meeting is to be held, which meeting does not require the issue of a notice. At the second meeting, the quorum for the meeting is stockholders representing one third of the outstanding share capital of the Company. In the event that quorum is not achieved at the second meeting, a third meeting may be held, the quorum for which shall be determined by the Head of the District Court that has a judicial jurisdiction over TELKOM. Stockholders may vote by proxy. All resolutions are to be passed by consensus. If consensus cannot be reached, resolutions are passed by simple majority, unless a larger majority is required by the Articles.

      The Articles do not contain any limitations on the right of any person, to own shares of the Company. Indonesian capital market regulations do not contain any limitation on the right of any person, whether local or foreign, to own shares in a company listed on an Indonesian stock exchange.

      Any takeover of the Company is required to be approved by the holder of the Series A Dwiwarna Share and a majority constituting 75% of the holders of the Series B Shares at a general meeting of stockholders that must be attended by the holder of the Series A Dwiwarna Share. There are no other provisions in the Articles that would have the effect of delaying, deferring or preventing a change in control of the Company.

      Each director and commissioner has an obligation to report to BAPEPAM with regard to their ownership and the changes of their ownership in the Company and this obligation also applies to stockholders who have an ownership of 5% or more in the paid up capital of the Company. TELKOM believes that the Articles are not significantly different from those generally prevailing in Indonesia in respect of public companies listed on an Indonesian stock exchange. TELKOM also believes that the provisions in the Articles relating to changes in the capital of TELKOM are not more stringent than that required by Indonesian law.

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Summary of significant differences between Indonesian corporate governance practices and the NYSE’s corporate governance standards

      The following sets forth a brief, general summary of significant differences between the corporate governance practices followed by Indonesian companies, such as TELKOM, and those required by the listing standards of the New York Stock Exchange (the “NYSE”) of U.S. companies that have common stock listed on the NYSE. The NYSE listing standards are available on the NYSE’s website at http://www.nyse.com.

Overview of Indonesian law

      Indonesian public companies are required to observe and comply with certain good corporate governance practices. The requirements and the standards for good corporate governance practices for public companies are mainly embodied in the following regulations: Law No. 1 of 1995 on Limited Liability Companies (“Company Law”); the Law No. 8 of 1995 on Capital Market (“Capital Market Law”); the Law No. 19 of 2003 on State-Owned Enterprises; the Decree of the Minister of State-Owned Enterprises No. KEP-117/M.MBU/2002 on the Implementation of Good Corporate Governance Practice; the Regulations of the Indonesian Capital Market Supervisory Board (“BAPEPAM Regulations”); and the rules issued by the Indonesian stock exchanges, namely Jakarta Stock Exchange (“JSX”) and Surabaya Stock Exchange (“SSX”). In addition to the above statutory requirements, the articles of association (“Articles”) of public companies commonly incorporate provisions directing the corporate governance practices in such companies.

      Similar to the laws of the United States, Indonesian laws require public companies to observe and comply with standards of corporate governance practices that are more stringent than those applied to privately-owned companies. It should be noted that in Indonesia, the term “public company” does not necessarily refer to a company whose shares are listed on a securities exchange. Under the Capital Market Law, a non-listed company may be deemed a public company, and subjected to the laws and regulations governing public companies, if such company meets or exceeds the capital and shareholder requirements applicable to a publicly-listed company.

      In 2000, the Government established the National Committee on Corporate Governance (“NCGI”), an informal committee that was tasked with formulating good corporate governance standards for Indonesian companies. As a result, the NCGI formulated the Code for Good Corporate Governance (“Code”) which recommended setting more stringent corporate governance standards for Indonesian companies, such as the appointment of independent audit and compensation committees by the Boards of Commissioners, as well as increasing the scope of Indonesian companies’ disclosure obligations. Although the NCGI recommended that the Code be adopted by the Government as a basis for legal reform, as of the date of this Annual Report the Government has not enacted regulations that fully implement the provisions of the Code. For example, while public companies such as TELKOM are now required to have independent audit committees, they are not yet required to have independent compensation committees. Accordingly, many of the Code’s provisions have not been implemented by Indonesian companies.

Composition of Board of Directors; Independence

      The NYSE listing standards provide that the board of directors of a U.S. listed company must consist of a majority of independent directors and that certain committees must consist solely of independent directors. A director qualifies as independent only if the board affirmatively determines that the director has no material relationship with the company, either directly or indirectly.

      Unlike companies incorporated in the United States, the management of an Indonesian company consists of two organs of equal stature, the Board of Commissioners (“BoC”) and the Board of Directors (“BoD”). Generally, the BoD is responsible for the day-to-day business activities of the company and is authorized to act for and on behalf of the company, while the BoC has the authority and responsibility to supervise the BoD and is statutorily mandated to provide advice to the BoD.

      With regard to the BoC, the Company Law requires a public company’s BoC to have at least two members. Although the Company Law is silent as to the composition of the BoC, Listing Regulation No. 1A

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issued by the JSX states that at least 30% of the members of the BoC of a public company (such as TELKOM) must be independent.

      As to the BoD, the Company Law states that the BoD has the authority to manage the daily operation of the company and must have at least two members, each of whom must meet the minimum qualification requirements set forth in the Company Law. Given the difference between the role of the members of the BoD in an Indonesian company and that of their counterparts in a U.S. company, Indonesian law does not require that certain members of the BoD must be independent and neither does it require the creation of certain committees composed entirely of independent directors.

Committees

      The NYSE listing standards require that a U.S. listed company must have an audit committee, a nominating/corporate governance committee and a compensation committee. Each of these committees must consist solely of independent directors and must have a written charter that addresses certain matters specified in the listing standards.

      The Company Law does not require Indonesian public companies to form any of the committees described in the NYSE listing standards. However, Listing Regulation No. 1A issued by the JSX does require the BoC of a listed public company (such as TELKOM) to form committees that will oversee the company’s audit process (which committee must be headed by an independent member of the BoC).

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

      TELKOM’s BoC also re-established TELKOM’s nomination and remuneration committee on May 20, 2003. The committee was tasked with formulating: (a) selection criteria and nomination procedures for Commissioners and Directors; and (b) a compensation system for Commissioners and Directors for the 2003 fiscal year. In accordance with its mandate from the BoC, the committee delivered its report regarding its activities during the 2004 Annual General Meeting of TELKOM’s stockholders.

      For more information on TELKOM’s BoC committees, see Item 6. “Directors, Senior Management and Employees — A. Directors and Senior Managers — Board of Commissioners’ Committees.”

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Disclosure regarding corporate governance

      The NYSE listing standards require U.S. companies to adopt, and post on their websites, a set of corporate governance guidelines. The guidelines must address, among other things: director qualification standards, director responsibilities, director access to management and independent advisers, director compensation, director orientation and continuing education, management succession, and an annual performance evaluation itself. In addition, the CEO of a U.S. company must certify to the NYSE annually that he or she is not aware of any violations by the company of the NYSE’s corporate governance listing standards. The certification must be disclosed in the company’s annual report to shareholders. There are no disclosure requirements in Indonesian law similar to the NYSE listing standards described above. However, the Capital Market Law generally requires Indonesian public companies to disclose certain types of information to shareholders and to BAPEPAM, particularly information relating to changes in the public company’s shareholdings and material facts that may affect the decision of shareholders to maintain their share ownership in such public company.

Code of Business Conduct and Ethics

      The NYSE listing standards require each U.S. listed company to adopt, and post on its website, a code of business conduct and ethics for its directors, officers and employees. There is no similar requirement under Indonesian law. However, companies that are required to submit periodic reports to the SEC, including TELKOM, must disclose in their Annual Reports whether they have adopted a code of ethics for their senior financial officers. Although the requirements as to the contents of the code of ethics under SEC rules are not identical to those set forth in the NYSE listing standards, there are significant similarities. Under SEC rules, the code of ethics must be designed to promote: (a) honest and ethical conduct, including the handling of conflicts of interest between personal and professional relationships; (b) full, fair, accurate and timely disclosure in reports and documents filed with or submitted to the SEC; (c) compliance with applicable laws and regulations; (d) prompt internal reporting of violations of the code; and (e) accountability for adherence to the code. Furthermore, shareholders must be given access to physical or electronic copies of the code. See Item 16B. “Code of Ethics.”

C.     Material contracts

Master of Procurement Partnership Agreement (MPPA) with Samsung Consortium

      On October 9, 2002, TELKOM signed an Initial Purchase Order Contract for CDMA 2000 IX with a consortium lead by Samsung Corporation (“Samsung Consortium”) for BSS procurement in Regional Divisions V, VI and VII and on December 23, 2002, TELKOM signed a MPPA for the construction of Network and Switching Subsystem (“NSS”) nationwide and BSS for Regional Divisions IV, V, VI and VII. In 2006, TELKOM completed its remaining purchase commitment in connection with this MPPA, which amounted to US$5.6 million and Rp.1,826 million.

Procurement Agreements

      In August 2004, Telkomsel entered into the following agreements with Motorola Inc and PT Motorola Indonesia, Ericsson AB and PT Ericsson Indonesia, Nokia Corporation and PT Nokia Network, and Siemens AG, for the maintenance and procurement of equipment and related services, involving:

• Joint Planning and Process Agreement;

• Equipment Supply Agreement (“ESA”);

• Technical Services Agreement (“TSA”); and

• Site Acquisition and Civil, Mechanical and Engineering Agreement (“SITAC” and “CME”).

      The agreements contain lists of charges to be used in determining the fees payable by Telkomsel for all equipment and related services to be procured during the roll-out period, upon the issuance of the Purchase Order (“PO”). The agreements are valid and effective as of the execution date by the respective parties for a

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period of three years, provided that the suppliers are able to meet requirements set out in each PO. In the event that the suppliers fail to meet those requirements, Telkomsel may terminate the agreements at its sole discretion with prior written notice.

      In accordance with the agreements, the parties also agreed that the charges specified in the price list would apply to equipment and services (ESA and TSA) and services (SITAC and CME) acquired from the suppliers between May 26, 2004 and the effective date, except for those acquired from Siemens under TSA relating to equipment and the maintenance of Telkomsel’s Switching Sub System (“SSS”) and Base Station Subsystem (“BSS”) that were acquired between July 1, 2004 and the effective date. Prices are subject to quarterly review.

Metro Junction and Optical Network Access Agreement for Regional Division III with PT INTI

      On November 12, 2003, TELKOM entered into an agreement with PT INTI for the construction and procurement of an optical network, as well as a network management system and other related services and equipment, with respect to Regional Division III (West Java). Under this agreement, TELKOM is obligated to pay PT INTI a total consideration of US$6.6 million and Rp.111.7 billion. Pursuant to an amendment dated November 27, 2006, TELKOM’s payment obligation including value added taxes was amended to US$3.2 million and Rp.130.3 billion.

Co-Operation Agreement on Fixed Wireless CDMA Facilities Construction in KSO Division VII Area

      On January 14, 2003, TELKOM and Bukaka Singtel (BSI) entered into a Co-Operation Agreement on Fixed Wireless CDMA Facilities Construction in KSO Division VII Area (the “Co-Operation Agreement”) that implemented the terms of the June 11, 2002 Memorandum of Understanding between TELKOM and Bukaka Singtel (BSI). Under the terms of the Co-Operation Agreement, TELKOM, through its Fixed Wireless Division, will invest US$30.8 million for the construction of fixed wireless CDMA facilities for 146,700 line units in Denpasar, Makasar, Manado, Kupang and Mataram, which facilities will be managed, operated and maintained by Bukaka Singtel (BSI). The new facilities are expected to be completed by 2007, with TELKOM and its Fixed Wireless Division receiving 95% of net revenues generated by the new facilities until such time as an internal rate of return of 28% is achieved, after which TELKOM and Bukaka Singtel (BSI) will each receive 50% of net revenues. The Co-Operation Agreement will expire on December 31, 2010, at which time ownership of the new facilities will vest in TELKOM.

NEC-Siemens Consortium for Ring Jakarta-Sumatra-Kalimantan (JASUKA) Backbone

      On June 10, 2005, TELKOM entered into a partnership agreement with NEC-Siemens Consortium, a consortium consisting of NEC Corporation and PT Siemens Indonesia for the procurement and installation of Ring JASUKA Backbone amounting to US$46.9 million and Rp.169.6 billion. The scope of work under this agreement covers the procurement and installation of Ring JASUKA Backbone, which is the optical cable transmission system consisting of (i) Ring-I (Link Jakarta-Tanjung-Pandan-Pontianak-Batam-Dumai-Pekanbaru-Palembang-Jakarta) and (ii) Ring-II (Link Medan-Padang-Pekanbaru-Medan). Pursuant to an amendment dated March 26, 2006, the amount of the contract was amended to US$45.0 million and Rp.156.9 billion. Pursuant to an amendment dated February 7, 2007, the amount of the contract was further amended to US$45.0 million and Rp.156.9 billion.

Tanjung-Pandan-Pontianak Capacity Expansion with NEC Corporation

      On July 8, 2005, TELKOM entered into a supply contract with NEC Corporation for the Tanjung-Pandan-Pontianak capacity expansion amounting to US$4,636,493.96, excluding 10% VAT. The scope of work under this agreement includes expansion of the capacity of the existing undersea optical cable transmissions system. Pursuant to an amendment dated January 12, 2006, the amount of the contract was amended to US$4.1 million, excluding 10% VAT. The work was completed on January 24, 2006.

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The Capacity Expansion of Submarine Cable System (Surabaya — Ujung Pandang — Banjarmasin) with NEC

      On August 16, 2006, TELKOM entered into an agreement with NEC Corporation for a supply contract for the capacity expansion of Submarine Cable System (Surabaya-Ujung Pandang-Banjarmasin) The contract covered the procurement and installation of the system on a turn-key basis and is to be completed within 210 days from the effective date of the contract for US$6.16 million and Rp.7.39 billion, excluding 10% VAT.

The CDMA 2000-1X Equipment in Regional Division V (East Java) with Samsung Consortium

      On June 8, 2006, TELKOM entered into an agreement with PT Samsung Telecommunication Indonesia for the procurement of CDMA 2000-1X Equipment & Services in Division V. This agreement was for an amount of US$7.18 million and Rp.16.8 billion. The project was to be completed on a turn-key basis within three months after the effective date of the contract. On August 1, 2006, TELKOM entered into a first amendment with PT Samsung Telecommunication Indonesia and two other companies, INTI and Samsung Electronics, to complete the contract together. On December 18, 2006, TELKOM entered into a second amendment for additional services under the same scope of work for an amount of US$7.67 million and Rp.10.9 billion, excluding 10% VAT.

IP Core Expansion with Siemens and Juniper Networks, Inc.

      On September 26, 2006, TELKOM entered into an agreement with Siemens for the expansion of its IP core network for an amount of Rp.22.05 billion. TELKOM further expanded its IP/MPLS-based core infrastructure with additional Juniper networks M-series multiservice routing platforms, including the M320. The upgrade, performed by Siemens, builds on TELKOM’s existing M-series routers, deployed last year as part of an initial Next Generation Network (“NGN”) rollout. The new deployment spans 16 cities, connecting softswitch systems and legacy routers.

Additional Capacity for PSTN Local and Trunk Switch

      On September 27, 2006, TELKOM entered into an agreement with Siemens for capacity expansion of its local and trunk switch for an amount of Rp.209 billion, excluding VAT 10%. TELKOM further expanded capacity for its local and trunk switch with PT Lintas Teknologi Indonesia and NEC on November 29, 2006 and November 30, 2006, respectively, for Rp.63.45 billion and Rp.22.0 billion, excluding 10% VAT.

Optical Access Network Deployment in Divisions I and III

      On December 29, 2006, TELKOM entered into an agreement with OPNET Technologies — OLEX Cables Consortium for Rp.61.17 billion and US$2.76 million, excluding 10% VAT, for the optical access network (“OAN”) deployment of a 115k-line unit. The OAN will be connected to the switched networks in Divisions I and III.

Optical Access Network Deployment in Division II

      On December 29, 2006, TELKOM entered into an agreement with OPNET Technologies — OLEX Cables Consortium for Rp.55.78 billion and US$3.67 million, excluding 10% VAT, for the OAN deployment of a 165k-line unit. The OAN will be connected to the switched network in Division II.

Optical Access Network Deployment in Division IV

      On November 30, 2006, TELKOM entered into an agreement with Huawei — Andi Arta Consortium for Rp.58.89 billion and US$2.94 million, excluding 10% VAT, for the OAN deployment of a 130k-line unit. The OAN will be connected to the switched network in Division IV.

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Optical Access Network Deployment in Division VI

      On December 18, 2006, TELKOM entered into an agreement with ALCATEL — INTI Consortium for Rp.63.66 billion and US$3.44 million, excluding 10% VAT, for the OAN deployment of a 133k line unit. The OAN will be connected to the switched network in Division VI.

Agreement for FWA CDMA Expansion Project in Regional Divisions I and IV with Huawei Consortium

      On January 6, 2006, TELKOM entered into an agreement with Huawei Consortium for the fixed wireless access (“FWA”) CDMA expansion in Divisions I and IV. The scope of work in this contract consists of two stages. The first stage consists of preparation and testing activities, while the second stage consists of the installation and service-level agreement (“SLA”) maintenance of 1,942,888 lines in Divisions I and IV. The scope of work is to be executed within three years of the date of issuance of the Buy or Return Acceptance Test Certificate (“BAT Certificate”) by TELKOM certifying the completion of stage one. The total contract price, including 10% VAT, was US$27.7 million and Rp.150.2 billion.

Agreement for FWA CDMA Expansion Project in Regional Division II with Huawei Consortium

      On December 8, 2006, TELKOM entered into an agreement with Huawei Consortium for the FWA CDMA expansion in Division II. The scope of work in this contract consists of two stages. The first stage consists of preparation and testing activities, while the second stage consists of the installation and SLA maintenance of 3,584,489 lines in Division II. The scope of work is to be executed within three years of the date of issuance of the BAT Certificate. The total contract price, including 10% VAT, was US$25.31 million and Rp.142.55 billion.

Agreement for FWA CDMA Expansion Project in Regional Division III with Huawei Consortium

      On December 8, 2006, TELKOM entered into an agreement with Huawei Consortium for the FWA CDMA expansion in Division III. The scope of work in this contract consists of two stages. The first stage consists of preparation and testing activities, while the second stage consists of the installation and SLA maintenance of 1,478,910 lines in Division III. The scope of work is to be executed within three years of the date of issuance of the BAT Certificate. The total contract price, including 10% VAT, was US$9.87 million and Rp.59.48 billion.

Agreement for the Expansion of the NSS, BSS and PDN FWA CDMA System Project in Regional Division V with Samsung Consortium

      On October 13, 2006, the Company entered into a procurement and installation agreement with Samsung Consortium for the expansion of the NSS, BSS and PDN FWA CDMA System Project in Regional Division V (East Java) for the amounts of US$59.9 million plus Rp.94.8 billion. Samsung Consortium will provide service and maintenance support for structures that it constructs, pursuant to a Service Level Agreement for a period of three years (2006-2008) in return for a consideration of Rp.30.0 billion. As of December 31, 2006, total purchase commitment amounted to US$59.9 million and Rp.124.8 billion.

Agreement for FWA CDMA Expansion Project in Regional Division VI with ZTE Consortium

      On November 28, 2006, TELKOM entered into an agreement with ZTE Consortium for the FWA CDMA expansion in Division VI. The scope of work in this contract consists of two stages. The first stage consists of preparation and testing activities, while the second stage consists of the installation and SLA maintenance of 2,103,617 lines in Division VI. The scope of work is to be executed within three years of the date of issuance of the BAT Certificate. The total contract price, including 10% VAT, was US$22.53 million and Rp.66.09 billion.

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Jember-Denpasar Submarine Backbone

      On December 29, 2006, TELKOM entered into an agreement with ZTE Consortium for a supply contract for the deployment of the Jember-Denpasar Submarine Cable System. The contract covered the procurement and installation of the system on a turn key basis, which is to be carried out and completed within 6.5 months from the effective date of the contract for an amount, including 10% VAT, of US$10.19 million and Rp.16.14 billion.

Acquisition of Dayamitra

      On May 17, 2001, TELKOM acquired 90.32% of the issued and fully paid shares of Dayamitra, the KSO VI investor, for US$134.2 million (including consultant’s fee of US$3.3 million) and also purchased a call option and granted a put option with respect to the remaining 9.68% partner shares of Dayamitra for the amount of US$6.3 million which was fully paid in 2003. An initial payment of US$18.3 million was paid on the closing date occurring on May 17, 2001, US$8.9 million was paid on August 10, 2001 as an adjustment to the purchase price based on Dayamitra’s adjusted working capital. The balance of US$103.6 million was to be paid through an escrow account in eight quarterly installments of US$12.9 million each, beginning on August 17, 2001. TELKOM paid the last quarterly installment on May 17, 2003. On December 14, 2004, TELKOM exercised its call option to purchase, and acquired, the remaining 9.68% of the shares of Dayamitra, for an aggregate consideration of approximately US$22.1 million which represents the present value of the option strike price of US$16.2 million plus the option purchase price of US$6.3 million and payment for Dayamitra’s adjusted working capital of US$1.0 million. TELKOM is required to pay the option strike price less funds available in the escrow account on November 30, 2004 in 16 equal installments, the last of which was made on March 26, 2006.

PT Mitra Global Telekomunikasi Indonesia (MGTI)

      On January 20, 2004, TELKOM and MGTI entered into an agreement to amend and restate the KSO Agreement with respect to Regional Division IV. Under the amended and restated KSO IV Agreement, the rights to operate fixed-line telecommunication services in KSO IV region are transferred to TELKOM and KSO IV is operated under the management, supervision, control and responsibility of TELKOM. In addition, for the remaining KSO period, TELKOM is entitled at its sole discretion and expense to construct new telecommunication facilities in Regional Division IV. MGTI receives fixed monthly payments, while TELKOM is entitled to the balance of the KSO revenues after the monthly amounts due to MGTI and operating expenses. If the KSO IV unit is unable to or does not for any reason pay MGTI the fixed monthly payments due to it, TELKOM is obligated to make up any deficiency. At the end of the KSO period (December 31, 2010), all rights, title and interest of MGTI in existing property, plant and equipment (including new additional installations) and inventories shall be transferred to TELKOM at no cost. As a result of the amended and restated KSO IV Agreement, TELKOM obtained the legal right to control financial and operating decisions of Regional Division IV for a purchase price of US$390.7 million, or Rp.3,285 billion, which represents the present value of the fixed monthly payments (totaling US$517 million) to be paid by TELKOM to MGTI from 2004 through 2010 plus direct cost of the business combination.

Restatement and Amendment of KSO VII Agreement

      On October 19, 2006, TELKOM announced that the Company and PT Bukaka Singtel International (BSI), TELKOM’s KSO partner for Regional Division VII Eastern Indonesia, entered into an agreement to amend and restate the KSO VII Agreement. Under the amended and restated KSO VII Agreement, the rights to operate telecommunication services in KSO VII region were transferred to TELKOM with KSO VII being operated under the sole management, supervision, control and responsibility of TELKOM. For the remaining KSO period, TELKOM is entitled at its sole discretion and expense to construct new telecommunications facilities in Regional Division VII. PT Bukaka Singtel International (BSI) receives fixed monthly payments, while TELKOM is entitled to the balance of the KSO revenues after the monthly amounts due to PT Bukaka Singtel International (BSI) and operating expenses. At the end of the KSO period on December 31, 2010, all rights, title and interest of PT Bukaka Singtel International (BSI) in existing property,

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plant and equipment (including new additional installations) and inventories of KSO VII shall be transferred to TELKOM without requiring any further action by any party, upon payment by TELKOM to PT Bukaka Singtel International (BSI) of Rp.1,000. As a result of the amended and restated KSO VII Agreement, TELKOM obtained the legal right to control the financial and operating decisions of Regional Division VII, and TELKOM must pay to PT Bukaka Singtel International (BSI) a fixed monthly payment of Rp.55.64 billion from October 2006 to June 2007, and Rp.44.25 billion from July 2007 to December 2010. Payment is derived from the revenue of KSO VII. TELKOM believes that the transaction will not have a material impact on TELKOM’s financial position or operating results.

Medium-Term Notes Issuance Agreement

      See Item 5. “Operating and Financial Review and Prospects — B. Liquidity and Capital Resources — Medium-Term Notes.”

      See Exhibit 4.43 for an English summary of the terms and conditions of the MTN.

TELKOM appoints PwC as its External Auditor for 2006

      On August 11, 2006, TELKOM announced that it has selected KAP Drs. Haryanto Sahari & Rekan, the Indonesian affiliate of PricewaterhouseCoopers (“PwC”) as its independent auditor to perform an integrated audit for 2006, consisting of the audits of TELKOM’s consolidated financial statements and its internal control over financial reporting for 2006.

Interconnection Agreement with Indosat

      On September 23, 2005, TELKOM entered into an interconnection agreement with Indosat. This agreement provides for the interconnection (i) of TELKOM’s local fixed line network with Indosat’s long-distance fixed line network; (ii) of Indosat’s local fixed line network with TELKOM’s long-distance fixed line network; (iii) between TELKOM’s and Indosat’s long-distance fixed line networks; (iv) of TELKOM’s domestic fixed line network with Indosat’s international fixed line network; and (v) of Indosat’s local fixed line network with TELKOM’s international fixed line network. In each case, the interconnection tariff is calculated on a call-by-call basis. This agreement replaced the previous interconnection agreements with Indosat regulating interlocal interconnection, namely, (i) Interconnection Agreement and the Settlement of Interconnection Financial Rights and Obligations No. PKS 162/HK81OPSAR-00/2002 — 26/DNI/HK720/02 dated September 3, 2002 as amended by Addendum No. PKS 56/HK.810/JAR-30/2005 — 065/100-ICO/REL/2005 dated March 31, 2005; (ii) Agreement on the Performance of Telecommunications Services No. 63/HK.800/UTA-00/97 — 092/DRU.HK.720/97 dated August 21, 1997; and (iii) Interconnection Agreement No. 64/HK.81OPSAR-00/97 — 1000/NDN/HK.720/97 dated August 21, 1997. On July 13, 2006, TELKOM and Indosat amended this interconnection agreement to accommodate changes in technical and operational issues regarding signaling and call scenarios.

      On December 1, 2005, TELKOM and Indosat entered into another interconnection agreement enabling each party’s customers to make domestic calls between Indosat’s mobile network and TELKOM’s fixed line network and allowing Indosat’s mobile customers to access TELKOM’s IDD service by dialing “007.” This agreement replaces those existing interconnection agreements relating to TELKOM’s fixed line network and Indosat’s mobile network. This agreement is valid for three years from its execution date, and thereafter, may be amended upon agreement by both parties.

Interconnection Agreement with HCPT

      On January 25, 2006, TELKOM entered into an interconnection agreement with HCPT, a 3G-licensed cellular operator. This agreement provides for the interconnection of TELKOM’s fixed line networks, including local, long distance, and international networks with HCPT’s mobile network. It enables each party’s customers to make a call between each others’ networks and also allows customers access to certain services provided by the other party.

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Interconnection Agreement with STI

      On May 8, 2006, TELKOM signed a side letter in connection with an interconnection agreement with PT Sampoerna Telekomunikasi Indonesia (“STI”) following the change of the name from PT Mandara Selular Indonesia to PT Sampoerna Telekomunikasi Indonesia. STI assumed the obligations of Mandara under their respective interconnection agreements with TELKOM.

Amendments to Interconnection Agreements under Cost-Based Scheme

      On December 28, 2006, TELKOM and all network operators including Indosat, HCPT and STI signed amendments to their interconnection agreements for its fixed line network (local, long distance, and international) and mobile network for the implementation of the cost-based tariff obligations under the MoCI Regulation No. 8/2006. These amendments took effect on January 1, 2007. These amendments are limited to changes to tariff rates and do not fully cover the requirements under the RIO. TELKOM expects that all existing interconnection agreements and amendments will be replaced by new interconnection agreements which address all requirements under the RIO by the end of 2007.

D.     Exchange controls

Foreign Equity Ownership Restrictions

      Prior to September 1997, foreign investors were only permitted to purchase up to 49% of shares offered in a public offering and up to 49% of the publicly listed shares of any Indonesian listed company regardless of the nature of their activities. On September 4, 1997, such restrictions were removed for most Indonesian companies, including TELKOM.

Foreign Exchange

      Foreign exchange controls were abolished in 1971 and Indonesia now maintains a liberal foreign exchange system that permits the free flow of foreign exchange. Capital transactions, including remittances of capital, profits, dividends and interest, are free of exchange controls. A number of regulations, however, have an impact on the exchange system. For example, only banks are authorized to deal in foreign exchange and execute exchange transactions related to the import and export of goods. In addition, Indonesian banks (including branches of foreign banks in Indonesia) are required to report to Bank Indonesia (the Indonesian Central Bank) any fund transfers exceeding US$10,000. As a state-owned company, TELKOM, based on the decree of the Head of Foreign Commercial Loan Coordinating Team (“PKLN”), is required to obtain an approval from PKLN prior to acquiring foreign commercial loans and must submit periodical reports to PKLN during the term of the loans.

      Bank Indonesia holds the authority to issue Rupiah currency and has responsibility for maintaining the stability of the Rupiah. Prior to August 14, 1997, Bank Indonesia maintained stability of the Rupiah through a trading band policy, pursuant to which Bank Indonesia would enter the foreign currency market and buy or sell Rupiah, as required, when trading in the Rupiah exceeded bid and offer prices announced by Bank Indonesia on a daily basis. On August 14, 1997, Bank Indonesia terminated the trading band policy, effectively free floating the Rupiah against other currencies. Since that date, the Rupiah has depreciated significantly against world currencies.

      During the past 25 years, the Rupiah has been devalued three times against the US Dollar. These downward adjustments occurred in November 1978, when the exchange rate was realigned from Rp.415 to Rp.623 to the US Dollar; in March 1983, when the rate went from Rp.703 to Rp.970 to the US Dollar; and in September 1986, when the rate fell from Rp.1,134 to Rp.1,644 to the US Dollar. Between the time of the 1986 devaluation and August 14, 1997 the value of the Rupiah has gradually adjusted downward against the US Dollar by about 4% annually. Since the free-floating regime was implemented in August 1997, the Rupiah fluctuation has been significant. During 2006, the average rate of Rupiah to the US Dollar was Rp.9,167, with the highest and lowest rates being Rp.9,795 and Rp.8,720, respectively.

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E. Taxation

      THE FOLLOWING SUMMARY OF INDONESIAN AND UNITED STATES FEDERAL INCOME TAX MATTERS CONTAINS A DESCRIPTION OF THE PRINCIPAL INDONESIAN AND U.S. FEDERAL TAX CONSEQUENCES OF THE PURCHASE, OWNERSHIP AND DISPOSITION OF ADSs OR SHARES OF COMMON STOCK. INVESTORS SHOULD CONSULT THEIR TAX ADVISORS ABOUT THE INDONESIAN AND UNITED STATES FEDERAL, STATE AND LOCAL TAX CONSEQUENCES TO THEM OF THE PURCHASE, OWNERSHIP AND DISPOSITION OF ADSs OR SHARES OF COMMON STOCK.

Indonesian Taxation

      The following is a summary of the principal Indonesian tax consequences of the ownership and disposition of Common Stock or ADSs to a non-resident individual or non-resident entity that holds Common Stock or ADSs (a “Non-Indonesian Holder”). As used in the preceding sentence, a “non-resident individual” is a foreign national individual who is not physically present in Indonesia for 183 days or more during any twelve month period or present for any period with the intent to reside in Indonesia, during which period such non-resident individual receives income in respect of the ownership or disposition of Common Stock or ADSs and a “non-resident entity” is a corporation or a non-corporate body that is established, domiciled or organized under the laws of a jurisdiction other than Indonesia and does not have a fixed place of business or otherwise conducts business or carries out activities through a permanent establishment in Indonesia during an Indonesian tax year in which such non-Indonesian entity receives income in respect of the ownership or disposition of Common Stock or ADSs. In determining the residency of an individual or entity, consideration will be given to the provisions of any applicable double taxation treaty to which Indonesia is a party.

Dividends

      Dividends declared by the Company out of retained earnings and distributed to a Non-Indonesian Holder in respect of Common Stock or ADSs are subject to Indonesian withholding tax, which, as of the date of this Annual Report is at the rate of 20%, on the amount of the distribution (in the case of cash dividends) or on the stockholders’ proportional share of the value of the distribution. A lower rate provided under double taxation treaties may be applicable provided the recipient is the beneficial owner of the dividend and has provided to the Company (with a copy to the Indonesian Office of Tax Services where the Company is registered) a Certificate of Tax Residence issued by the competent authority, or its designee, of the jurisdiction where the Non-Indonesian Holder is domiciled (the “Certificate of Residence”). Indonesia has concluded double taxation treaties with a number of countries, including Australia, Belgium, Canada, France, Germany, Japan, Malaysia, Mauritius, The Netherlands, Singapore, Sweden, Switzerland, the United Kingdom and the United States of America. Under the U.S.-Indonesia double taxation treaty, the withholding tax on dividends is generally, in the absence of a 25% voting interest, reduced to 15%.

Capital Gains

      The sale or transfer of Common Stock through an Indonesian stock exchange is subject to a final withholding tax at the rate of 0.1% of the value of the transaction. The broker executing the transaction is obligated to withhold such tax. The holding of founder shares or the sale or transfer of founder shares through an Indonesian stock exchange may, under current Indonesian tax regulations, be subject to additional 0.5% final income tax.

      Subject to the promulgation of implementing regulations, the estimated net income received or accrued from the sale of movable assets in Indonesia, which may include Common Stock not listed on an Indonesian stock exchange or ADSs, by a Non-Indonesian holder (with the exception of the sale of assets under Article 4 paragraph (2) of the Indonesian income tax law) may be subject to Indonesian withholding tax at the rate of 20%. In 1999, the Ministry of Finance issued a Decision that stipulates the estimated net income for the sale of shares received by a non-resident taxpayer in a non-public company to be 25% of the sale price, resulting in an effective withholding tax rate of 5% of the sales price. This is a final withholding tax and the obligation to

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pay lies with the buyer (if it is an Indonesian taxpayer) or the Company (if the buyer is a non-resident taxpayer). Exemption from withholding tax on income from the sale of shares in a non-public company may be available to non-resident sellers of shares depending on the provisions of the relevant double taxation treaties. In order to benefit from the exemption under the relevant double taxation treaty, the non-resident seller must provide the Certificate of Tax Residence to the buyer or the Company and to the Indonesian Tax Office that has jurisdiction over the buyer or the Company (if the buyer is a non-resident taxpayer).

      In cases where a purchaser or Indonesian broker will be required under Indonesian tax laws to withhold tax on payment of the purchase price for Common Stock or ADSs, that payment may be exempt from Indonesian withholding or other Indonesian income tax under applicable double taxation treaties to which Indonesia is a party (including the U.S.-Indonesia double taxation treaty). However, except for the sale or transfer of shares in a non-public company, the current Indonesian tax regulations do not provide specific procedures for removing the purchaser’s or Indonesian broker’s obligation to withhold tax from the proceeds of such sale. To take advantage of the double taxation treaty relief, Non-Indonesian Holders may have to seek a refund from the Indonesian Tax Office by making a specific application accompanied by a Certificate of Residence issued by the competent tax authority, or its designee; of the jurisdiction in which the Non-Indonesian Holder is domiciled.

Stamp Duty

      Any documents that are prepared in the transactions in common stock in Indonesia, which documents will be used as evidence in Indonesia, are subject to stamp duty of Rp.6,000. Generally, the stamp duty is due at the time the document is executed.

Certain U.S. Federal Income Tax Considerations

      The following is a summary of certain United States federal income tax considerations relating to the acquisition, ownership, and disposition of ADSs or Common Stock by U.S. Holder’s (as defined below) that hold their ADSs or Common Stock as “capital assets” (generally, property held for investment) under the United States Internal Revenue Code (the “Code”). This summary is based upon existing United States federal income tax law, which is subject to differing interpretations or change, possibly with retroactive effect. This summary does not discuss all aspects of United States federal income taxation which may be important to particular investors in light of their individual investment circumstances, including investors subject to special tax rules (for example, financial institutions, insurance companies, broker-dealers, partnerships and their partners, and tax-exempt organizations (including private foundations)), holders who are not U.S. Holders, investors that will hold ADSs or Common Stock as part of a straddle, hedge, conversion, constructive sale, or other integrated transaction for United States federal income tax purposes, or investors that have a functional currency other than the US Dollar, all of whom may be subject to tax rules that differ significantly from those summarized below. In addition, this summary does not discuss any state, local, or non-United States tax considerations. Each holder is urged to consult their tax advisors regarding the United States federal, state, local, and non-United States income and other tax considerations of their investment in the ADSs or Common Stock.

      For purposes of this summary, a “U.S. Holder” is a beneficial owner of ADSs or Common Stock that is, for United States federal income tax purposes, (i) an individual who is a citizen or resident of the United States, (ii) a corporation, or other entity treated as a corporation for United States federal income tax purposes, created in, or organized under the law of, the United States or any State or political subdivision thereof, (iii) an estate the income of which is includible in gross income for United States federal income tax purposes regardless of its source, or (iv) a trust (A) the administration of which is subject to the primary supervision of a United States court and which has one or more United States persons who have the authority to control all substantial decisions of the trust or (B) that has otherwise elected to be treated as a United States person under the Code.

      If a partnership is a beneficial owner of ADSs or Common Stock, the tax treatment of a partner in the partnership will generally depend upon the status of the partner and the activities of the partnership.

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

Threshold PFIC Classification Matters

      A non-United States corporation, such as the Company, will be treated as a “passive foreign investment company” (a “PFIC”), for United States federal income tax purposes, if 75% or more of its gross income consists of certain types of “passive” income or 50% or more of its assets are passive. Based on the Company’s current income and assets, the Company presently does not believe that it should be classified as a PFIC. Because PFIC status is a fact-intensive determination made on an annual basis, no assurance can be given that the Company is not or will not become classified as a PFIC. The discussion below under “Dividends” and “Sale or Other Disposition of ADSs or Common Stock” is written on the basis that the Company will not be classified as a PFIC for United States federal income tax purposes.

Dividends

      Any cash distributions paid by the Company out of earnings and profits, as determined under United States federal income tax principles, will be subject to tax as dividend income and will be includible in the gross income of a U.S. Holder upon receipt. A non-corporate recipient of dividend income will generally be subject to tax on dividend income from a “qualified foreign corporation” at a maximum United States federal tax rate of 15% rather than the marginal tax rates generally applicable to ordinary income provided that certain holding period requirements are met. A non-United States corporation (other than a PFIC) generally will be considered to be a qualified foreign corporation (i) if it is eligible for the benefits of a comprehensive tax treaty with the United States which the Secretary of Treasury of the United States determines is satisfactory for purposes of this provision and which includes an exchange of information program or (ii) with respect to any dividend it pays on stock (or ADSs backed by such stock) which is readily tradable on an established securities market in the United States. There is currently a tax treaty in effect between the United States and Indonesia which the Secretary of Treasury has determined is satisfactory for these purposes and the Company believes it should be eligible for the benefits of the treaty. Additionally, because the ADSs are listed on the New York Stock Exchange, an established securities market in the United States, they are considered readily tradable on that exchange.

      Cash distributions in excess of our earnings and profits will be treated as a tax-free return of capital to the extent of the U.S. Holder’s adjusted tax basis in its ADSs or Common Stock, and thereafter as gain from the sale or exchange of a capital asset. The amount of any cash distribution paid in Rupiah should equal the US Dollar value of such Rupiah on the date of receipt of the distribution, regardless of whether the Rupiah are actually converted into US Dollars at that time. Gain or loss, if any, recognized on a subsequent sale, conversion, or other disposition of Rupiah generally will be United States source ordinary income or loss. Dividends received on the ADSs or Common Stock will generally not be eligible for the dividends received deduction allowed to corporations.

      Dividends generally will be treated as income from foreign sources for United States foreign tax credit purposes. A U.S. Holder may be eligible, subject to a number of complex limitations, to claim a foreign tax credit in respect of any foreign withholding taxes imposed on dividends received on ADSs or Common Stock. A U.S. Holder who does not elect to claim a foreign tax credit for foreign tax withheld, may instead claim a deduction, for United States federal income tax purposes, in respect of such withholdings, but only for a year in which such holder elects to do so for all creditable foreign income taxes.

Sale or Other Disposition of ADSs or Common Stock

      A U.S. Holder will generally recognize capital gain or loss upon the sale or other disposition of ADSs or Common Stock in an amount equal to the difference between the amount realized upon the disposition and the holder’s adjusted tax basis in such ADSs or Common Stock. Any capital gain or loss will be long-term if the ADSs or Common Stock have been held for more than one year and will generally be United States source

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gain or loss for United States foreign tax credit purposes. The deductibility of a capital loss may be subject to limitations.

Passive Foreign Investment Company Considerations

      If the Company were to be classified as a PFIC in any taxable year, a U.S. Holder would be subject to special rules generally intended to reduce or eliminate any benefits from the deferral of United States federal income tax that a U.S. Holder could derive from investing in a non-United States company that does not distribute all of its earnings on a current basis. In such event, a U.S. Holder may be subject to tax at ordinary income tax rates on (i) any gain recognized on the sale of ADSs or Common Stock and (ii) any “excess distribution” paid on ADSs or Common Stock (generally, a distribution in excess of 125% of the average annual distributions paid by us in the three preceding taxable years). In addition, a U.S. Holder may be subject to an interest charge on such gain or excess distribution. Finally, the 15% maximum rate on Company dividends would not apply if the Company becomes classified as a PFIC. Each U.S. Holder is urged to consult its tax advisor regarding the potential tax consequences to such holder if the Company is or becomes classified as a PFIC, as well as certain elections that may be available to mitigate such consequences.

F. Dividends and paying agents

      Not applicable.

G. Statement by experts

      Not applicable.

H. Documents on display

      TELKOM files reports, including annual reports on Form 20-F and other information, with the SEC pursuant to the rules and regulations of the SEC that apply to foreign private issuers. You may read and copy any materials filed with the SEC at the Public Reference Room at 100 F Street, N.E., Washington, D.C. 20459. You may obtain information on the operation of the Public Reference Room by calling the SEC at 1-800-SEC-0330. Subject to some exceptions, TELKOM is required to file its periodic reports electronically through the SEC’s EDGAR system. Any filings TELKOM makes electronically will be available to the public over the Internet at the SEC’s Website at http://www.sec.gov.

I. Subsidiary Information

      Not applicable.

ITEM 11. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK

A. Disclosure About Market Risk

General

      The Company is exposed to market risks primarily from changes in foreign currency exchange rates, changes in interest rates and equity price risk on the value of its long-term investments. The Company does not generally hedge its long-term foreign currency liabilities as it believes that the expenses associated with fully hedging such liabilities are not justified. Instead the Company hedges its obligations for the current year. As of December 31, 2006, foreign currency time deposits provided approximately 45% coverage against foreign currency denominated current liabilities. The Company’s exposure to interest rate risk is managed through maintaining a mix of fixed and variable rate liabilities and assets, including short-term fixed rate assets, the rates for which are reset periodically. The Company’s exposure to such market risks fluctuated significantly during 2004, 2005 and 2006 as the Indonesian economy has been affected by a significant fluctuation of the Rupiah and interest rates. The Company is not able to predict whether such conditions will continue during the remainder of 2007 or thereafter.

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Interest Rate Risk

      The Company’s exposure to interest rate fluctuations results primarily from floating rate long-term debt pursuant to loans under the Government on-lending program which have been used to finance the Company’s capital expenditures which bear interest at rates for the Rupiah portion based on the average for the preceding six months for three month certificates issued by Bank Indonesia plus 1% or based on floating interest rates offered by the lenders plus 5.25% and for the non-Rupiah portion based on floating interest rate offered by the lenders plus 0.5%. See Note 22 to the Company’s consolidated financial statements. To the extent interest rates in Indonesia fluctuate significantly, the Company’s interest obligations under its long-term debt could increase.

      The table below provides information about the Company’s material financial instruments, some of which are sensitive to changes in interest rates. For debt obligations and time deposits, the table presents principal cash flows and related weighted average interest rates by expected maturity dates. The information is presented in Rupiah equivalents, which is the Company’s reporting currency. The instrument’s actual cash flows are denominated in Rupiah, US Dollar, Euro and Japanese Yen, as appropriate and as indicated in the table. The information presented in the table has been determined based on the following assumptions: (i) fixed interest rates on Rupiah time deposits are based on average interest rates offered for 3-month placements in effect as of December 31, 2006 by the banks where such deposits were located; (ii) variable interest rates on Rupiah denominated long-term liabilities are calculated as of December 31, 2006 and are based on contractual terms setting interest rates based on average rates for the preceding six months on three month certificates issued by Bank Indonesia or based on the average 3-month deposit rate offered by the lenders; (iii) fixed interest rates on US Dollar deposits are based on average interest rates offered for 3-month placements by the various lending institutions where such deposits are located as of December 31, 2006; and (iv) the value of marketable securities is based on the value of such securities at December 31, 2006. However, no assurance can be given that such assumptions will be correct for future periods. Such assumptions and the information described in the table may be influenced by a number of factors, including changes in interest rates in Indonesia and other monetary and macro economic factors affecting Indonesia. Such assumptions are different from the rates used in the Company’s consolidated financial statements and accordingly amounts shown in the table may vary from amounts shown in the Company’s consolidated financial statements.

		Outstanding Balance as at
		December 31, 2006						Expected Maturity Date
		Foreign		Rp.														2012-		Fair
		Currency		Equiv.		Rate		2007		2008		2009		2010		2011		2024		Value
		(in million)		(Rp. in		(%)														(Rp. in
				million)				(Rp. in million)												million)
ASSETS
Fixed Rate
Cash and cash equivalents
Time deposit
Rupiah
	Principal				5,601,885				5,601,885		—		—		—		—		—		5,601,885
	Interest						9.96
US Dollar
	Principal		152.33		1,370,251				1,370,251		—		—		—		—		—		1,370,251
	Interest						3.75
Euro
	Principal		68.97		816,498				816,498		—		—		—		—		—		816,498
	Interest						2.90
Temporary Investments — Available-for-Sale Securities
Rupiah					47,036				47,036		—		—		—		—		—		47,036
US Dollar			3.98		37,456				37,456												37,456

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

(1)  Long-term debts consist of loans which are subject to interest; namely two-step loans, notes and bonds, liabilities of business acquisitions and long-term bank loans, in each case including their current maturities.

Exchange Rate Risk

      The Company’s exposure to exchange rate fluctuations results primarily from long-term debt obligations and accounts receivable and payable, which are primarily paid for through draw downs under the Government on-lending program and are expressed in US Dollar, Japanese Yen, Euro, Singapore Dollar and Great Britain Pound Sterling. For a description of the Company’s foreign currency assets and liabilities, see Note 53 to the Company’s consolidated financial statements. Part of these obligations might be offset by increases in the value of foreign currency time deposits and by increases in the value of foreign currency accounts receivable, assuming that the counter-parties are able to meet their foreign currency obligations to TELKOM at market rates.

      The table below provides information about the Company’s financial instruments by functional currency and presents such information in Rupiah equivalents, which is the Company’s reporting currency. The information on instruments and transactions that are sensitive to foreign exchange rates, including US Dollar,

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Euro, Singapore Dollar, Great Britain Pound Sterling and Japanese Yen debt obligations and term deposits and the Company’s accounts payable and receivable. The table presents principal cash flows by expected maturity dates. The information presented in the table has been determined based on assumptions for the exchange rates for US Dollar as well as other currencies, which are based on the selling and buying rates quoted by Reuters on December 29, 2006, applied respectively to monetary assets and liabilities. The buying and selling rates as of December 29, 2006 were Rp.8,995 and Rp.9,005 to US$1, respectively. Telkomsel applied the Bank Indonesia middle buy and sell rate for its monetary asset and liabilities which was Rp.9,020 to US$1 as of December 31, 2006. However, no assurance can be given that such assumptions will be correct for future periods. Such assumptions and the information described in the table may be influenced by a number of factors, including a fluctuation and/or depreciation of the Rupiah in future periods.

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

(1)  Long-term debts for the purpose of this table consist of loans denominated in foreign currencies namely, two-step loans, liabilities of business acquisitions, long-term bank loans, notes and bonds, in each case including their current maturities.

Equity Price Risk

      The Company’s long-term investments consist primarily of minority investments in the equity of private Indonesian companies. With respect to the Indonesian companies in which the Company has investments, the

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financial performance of such companies may be affected by the fluctuation of macro economic and social conditions such as the level of economic activity, Rupiah exchange rates against other currencies, inflation and interest rates.

ITEM 12. DESCRIPTION OF SECURITIES OTHER THAN EQUITY SECURITIES

      Not applicable.

PART II

ITEM 13. DEFAULTS, DIVIDEND ARREARAGES AND DELINQUENCIES

      There are no defaults, dividend arrearages or delinquencies to which this Item applies. But see Item 5. “Operating and Financial Review and Prospects — B. Liquidity and Capital Resources — Indebtedness” for information on covenant defaults for which waivers have been obtained.

ITEM 14. MATERIAL MODIFICATIONS TO THE RIGHTS OF SECURITY HOLDERS AND USE OF PROCEEDS

      Not applicable.

ITEM 15. CONTROLS AND PROCEDURES

DISCLOSURE CONTROLS AND PROCEDURES

      Under the supervision and with the participation of the Company’s management, including the Company’s Chief Executive Officer and Chief Financial Officer, management conducted an evaluation of the effectiveness of the Company’s disclosure controls and procedures (as such term is defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended (the “Exchange Act”)), as of December 31, 2006. Based on this evaluation and as a result of the material weaknesses discussed below, the Company’s Chief Executive Officer and Chief Financial Officer have concluded that, as of December 31, 2006, the Company’s disclosure controls and procedures were not effective. The Company’s disclosure controls and procedures are designed to ensure that information required to be disclosed in reports filed or submitted under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms, and that such information is accumulated and communicated to the Company’s management, including the Chief Executive Officer and Chief Financial Officer, as appropriate, to allow timely discussions regarding required disclosure.

MANAGEMENT’S REPORT ON INTERNAL CONTROL OVER FINANCIAL REPORTING

      Management of the Company is responsible for establishing and maintaining adequate internal control over financial reporting, as such term is defined in Exchange Act Rules 13a-15(f) and 15d-15(f). The Company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with applicable generally accepted accounting principles.

      Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.

      The Company’s management has evaluated the effectiveness of the Company’s internal control over financial reporting based upon criteria established in Internal Control — Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (“COSO”).

      A material weakness is a control deficiency, or combination of control deficiencies, that results in more than a remote likelihood that a material misstatement of the annual or interim financial statements, will not be

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prevented or detected. In connection with management’s evaluation of the Company’s internal control over financial reporting, the following material weaknesses have been identified as of December 31, 2006.

1. The Company did not have an effective control environment based on the COSO criteria. The following material weaknesses related to the Company’s control environment were identified:

•  The Company did not adequately design and maintain effective controls over the assignment of authority and responsibility with respect to its internal control over financial reporting and the necessary lines of communication throughout the organization. Specifically, certain key members of management had inappropriate access to the Company’s financial application systems and related data with the ability to effect accounting entries within such systems without adequate mechanisms for identifying and evaluating the results of any such actions.

•  The Company did not adequately design and maintain effective information technology policies, including those related to security and access to its financial application programs and data. Specifically, the Company had inadequate controls to identify and monitor conflicting user roles (i.e., segregation of duties) and lacked independent monitoring of access by employees to its financial application systems and data.

•  The Company did not maintain a sufficient complement of personnel with an appropriate level of accounting knowledge, experience and training in the application of applicable generally accepted accounting principles commensurate with the Company’s financial reporting requirements.

•  The Company did not adequately perform a risk assessment to identify risks so as to ensure that it adequately designed and implemented effective controls that would prevent and detect material misstatements to its financial statements.

These control environment material weaknesses contributed to the existence of the additional material weaknesses below.

2.	The Company did not maintain effective controls, including monitoring, over its financial close and reporting process. Specifically, the Company did not maintain effective controls over the completeness and accuracy of its financial consolidation and disclosure process including matters relating to: the disclosure of fixed assets and accounting for business combinations. In addition, controls related to the accuracy of financial statement preparation and disclosures relating to consolidated statements of cash flows, segment information and the acquisition of a joint operation were not operating effectively.
3.	The Company did not adequately design and maintain effective controls over its accounting for property, plant and equipment. Specifically, the Company’s controls were not adequately designed or operating effectively to ensure the completeness, accuracy and valuation of its fixed assets, including related additions and dispositions/retirements.
4.	The Company did not design and maintain effective controls over its accounting for revenue and related accounts receivable. Specifically, the Company’s controls were not designed and operating effectively to ensure the completeness and accuracy of leased line revenue and provisions for uncollectible balances. In addition, the controls to ensure the completeness and accuracy of fixed line and fixed wireless revenue and collections were not operating effectively.

All of the above material weaknesses resulted in audit adjustments to the Company’s consolidated financial statements for the year ended December 31, 2006. Additionally, each of the material weaknesses described above could result in misstatements of the aforementioned financial statement accounts and disclosures that would result in a material misstatement to the Company’s annual consolidated financial statements that would not be prevented or detected.

      Because of the material weaknesses described above, management has concluded that the Company did not maintain effective internal control over its financial reporting as of December 31, 2006 based on the Internal Control — Integrated Framework issued by the COSO.

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      As permitted by Securities and Exchange Commission guidance, management has excluded the operations related to the Regional Division VII (“KSO VII”) (acquired on October 19, 2006) from its assessment of internal control over financial reporting as of December 31, 2006. The KSO VII operations represented approximately 2.1 percent of the Company’s 2006 consolidated total operating revenues and 3.9 percent of consolidated total assets as at December 31, 2006. The controls for these acquired operations are required to be evaluated and tested by the end of 2007.

      Management’s assessment of the effectiveness of the Company’s internal control over financial reporting as of December 31, 2006 has been audited by Kantor Akuntan Publik Haryanto Sahari & Rekan, an independent registered public accounting firm, as stated in their report which appears on page F-2 herein.

CHANGES IN INTERNAL CONTROL OVER FINANCIAL REPORTING

Remediation of Material Weaknesses and Plan for Future Remediation

      Since 2006, the Company has undertaken substantial efforts to address its previously reported material weaknesses. To fully remediate the material weaknesses necessitates designing new business process controls, and testing them to ensure that they address the previously reported control deficiencies. The Company continues to review and make necessary changes to the design of its internal control environment, through critical assessments of the roles and responsibilities of each functional group within the organization, enhancing and documenting policies and procedures and providing relevant training where appropriate.

      The Company previously reported in its fiscal 2005 Annual Report on Form 20-F, material weaknesses pertaining to: 1) inadequate personnel resources with sufficient knowledge and experience in the application of applicable generally accepted accounting principles commensurate with the Company’s financial reporting requirements; 2) deficiencies in the organizational structure in the accounting department, including inadequate management, supervision and review of the accounting functions; 3) inadequate internal processes for the assessment of critical, significant and judgmental accounting areas; and 4) insufficient written policies and procedures for the accounting and financial reporting function, insufficient knowledge of and compliance with, existing policies and procedures.

      In 2006, the Company implemented the following changes; 1) recruited and integrated personnel into the finance function; 2) a structured training program for all relevant accounting personnel; 3) significant enhancements were made to the financial reporting process, including the U.S. GAAP reconciliation analysis and documentation; 4) in February 2006, the Company adopted a new organizational structure in the accounting and finance department, including a dedicated unit responsible for the oversight function of accounting and financial reporting; and 5) enhanced accounting and reporting policies and related supplements were also issued in February 2006. As of June 27, 2007, the Company believes that it has now designed effective controls to address these material weaknesses; however, these controls require further time to be embedded in the organization to have a permanent and sustainable effect. The Company has therefore not fully remediated the above material weaknesses and has included them in material weaknesses under item 1 point 3 and item 3 of “Management’s Report on Internal Control over Financial Reporting.”

      The Company expects its remediation efforts for all material weaknesses to continue in fiscal year 2007, as further described below.

      The Company has taken, or will take, the following actions:

•  Form a Remediation Committee, under the coordination of the Compliance and Risk Management Director; comprised of key members of management from a variety of functions across the organization, this committee will monitor, oversee implementation and regularly report to the Board of Directors and Audit Committee on the progress of our remediation activities;

•  Perform a full evaluation of the assignment of authority and responsibility with respect to the Company’s internal control over financial reporting and the necessary lines of communication throughout the organization;

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•  Commence a comprehensive review of access privileges granted to all personnel to ensure access is commensurate with their respective roles and responsibilities;

•  Review the design of the information technology policies and procedures, including those relating to security and access to the Company’s application programs and data;

•  Continue to maintain and enhance the quality of staff in accounting and finance, through a structured training and development program and by engaging with a qualified external consultant;

•  Develop an enterprise risk management system under the coordination of the Compliance & Risk Management Director;

•  Perform a comprehensive review of the existing monitoring and supervision procedures of the financial close and reporting process;

•  Review the design of and implement enhanced controls over the accounting for property, plant and equipment; and

•  Design and implement controls to ensure the completeness and accuracy of TELKOM’s leased line revenue, provision for uncollectible balances and fixed line and fixed wireless revenues and collections.

Management’s Conclusions on the Remediation Plan

      The remediation measures described above that have been, or are to be, implemented and/or tested are expected to strengthen the Company’s internal control over financial reporting and remediate the material weaknesses the Company has identified. The Company is committed to continuing to improve its internal control processes and intends to continue to diligently review its financial reporting controls and procedures in order to ensure compliance with the requirements of the Sarbanes-Oxley Act and the related rules promulgated by the Commission.

      Management has concluded that the consolidated financial statements included in this Annual Report on Form 20-F fairly present, in all material respects, TELKOM’s financial position, results of operations and cash flows for the periods presented in conformity with GAAP.

Changes in Internal Control over Financial Reporting

      Other than as stated above, there have been no other changes in TELKOM’s internal control over financial reporting during the most recently completed fiscal quarter that have materially affected or are reasonably likely to materially affect, TELKOM’s internal control over financial reporting.

ITEM 16. RESERVED

ITEM 16A. AUDIT COMMITTEE FINANCIAL EXPERT

      The Board of Commissioners has determined that Mr. Sahat Pardede, a member of TELKOM’s Audit Committee, qualifies as an Audit Committee Financial Expert in accordance with the requirements of Item 16A of Form 20-F. Mr. Pardede has been a member of TELKOM’s Audit Committee since February 17, 2004. Prior to his appointment as a member of TELKOM’s Audit Committee, Mr. Pardede practiced, and is currently practicing, as a Certified Public Accountant in Indonesia and provided auditing services and other financial services to numerous private companies and public institutions. Mr. Pardede graduated with a degree in accounting from the State College of Accountancy, Jakarta and holds a master degree in business administration from Saint Mary’s University, Canada. He is a Certified Public Accountant and is also a member of the Indonesian Institute of Accountants.

ITEM 16B. CODE OF ETHICS

      The Company has adopted a code of ethics in accordance with the provisions of Section 406 of the Sarbanes-Oxley Act of 2002. The Company’s code of ethics applies to its President Director, Finance Director (being its officers in equivalent positions to a Chief Executive Officer and a Chief Financial Officer) and

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persons performing similar functions as well as to its Commissioners, Directors and other officers and employees. The Company’s code of ethics may be viewed on the company web site at www.telkom-indonesia.com/investor-relation/corporate-governance. If the Company amends the provisions of its code of ethics that applies to its President Director, Finance Director and persons performing similar functions, or if the Company grants any waiver of such provisions, the Company will disclose such amendment or waiver on the company web site at the same address.

ITEM 16C. PRINCIPAL ACCOUNTANT FEES AND SERVICES

      The following table summarizes the aggregate fees billed to the Company by KPMG and PwC in 2005 and 2006, respectively:

	Year Ended
	December 31,
	2005		2006
	(KPMG)		(PwC)
	(in Rp. million)
Audit Fees		42,390.3		55,558.0
Audit-Related Fees		—		—
Tax Fees		—		—
All Other Fees		—		—

A. Audit Fees

      Audit fees in the above table are the aggregate fees billed by KPMG in 2005 and by PwC in 2006, in each case in connection with the audits of TELKOM’s annual consolidated financial statements.

B. Audit-Related Fees

      None.

C. Tax Fees

      Neither KPMG nor PwC performed any tax compliance, tax advisory or tax planning services for TELKOM in 2005 and 2006.

D. All Other Fees

      Neither KPMG nor PwC perform any other services than audit for TELKOM in 2005 and 2006.

E. Audit Committee Pre-Approval Policies and Procedures

      TELKOM has adopted pre-approval policies and procedures under which all non-audit services provided by its independent public accounting firm must be pre-approved by TELKOM’s audit committee as set forth in the audit committee’s charter. Pursuant to the charter, permissible non-audit services may be performed by TELKOM’s independent registered public accounting firm provided that: (a) TELKOM’s Board of Directors must deliver to the Audit Committee (through the Board of Commissioners) a detailed description of the non-audit service that is to be performed by the independent public accounting firm; and (b) the Audit Committee will determine whether the proposed non-audit service will affect the independence of TELKOM’s independent public accounting firm or would give rise to any conflict of interest.

      Consistent with Section 10(i)(1)(B) of the Exchange Act and paragraph (c)(7)(i)(C) of Rule 2-01 of Regulation S-X issued thereunder, the charter of TELKOM’s audit committee waives the pre-approval requirement for permissible non-audit services (x) where the aggregate amount of the fees for such non-audit services constitutes no more than five percent of the total amount of fees paid by TELKOM to its independent registered public accounting firm during the fiscal year in which the services are provided or (y) the proposed services are not regarded as non-audit services at the time the contract to perform the same is signed. In either

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case, the performance of such non-audit services must subsequently be approved either by a member of the Audit Committee who has been delegated pre-approval authority by the full Audit Committee or by the full Audit Committee itself. Notwithstanding the foregoing, none of TELKOM’s independent public accounting firms performed non-audit services for TELKOM during the fiscal years ended December 31, 2004, 2005 and 2006.

ITEM 16D. EXEMPTIONS FROM THE LISTING STANDARDS FOR AUDIT COMMITTEES

      In accordance with Indonesian law, the Company has a two-tier board structure, consisting of a Board of Commissioners and a Board of Directors. The executive management functions are carried out by the Board of Directors, while the principal statutory duties of the Board of Commissioners are to supervise the policies of the Board of Directors in the operation and management of the Company and to give advice to the Board of Directors.

      Under Jakarta Stock Exchange rules (the “JSX Audit Committee Rule”), TELKOM’s audit committee must consist of at least three members, one of whom must be an Independent Commissioner of TELKOM and concurrently the chairman of the audit committee, while the other two members must be external independent parties of whom at least one such party shall have accounting and/or finance expertise. TELKOM’s audit committee is composed of seven members and is chaired by an Independent Commissioner. Members of TELKOM’s audit committee are appointed and dismissed by the Board of Commissioners.

      TELKOM relies on the general exemption under Rule 10A-3(c)(3) of the Securities Exchange Act of 1934 with respect to the composition of its audit committee. For further information on the Rule 10A-3(c)(3) exemption, see Item 6. “Directors, Senior Management and Employees — A. Directors and Senior Management — Board of Commissioners’ Committees” and Item 10. “Additional Information — B. Memorandum and articles of association — Committees.”

      TELKOM believes that its reliance on the exemption would not materially adversely affect the ability of the audit committee to act independently. TELKOM believes that the intent of the provision in requiring that each member of the audit committee to be a member of the board of directors or commissioners, as applicable, and to be otherwise independent, is to ensure that the audit committee is independent from influence by management and would provide a forum separate from management in which auditors and other interested parties can candidly discuss concerns. The JSX Audit Committee Rule requires that each member of the audit committee be independent. The JSX Audit Committee Rule goes on to require that at least two of the members, the external independent members, in effect be independent not only of the management but also of the Board of Commissioners and Board of Directors and the Company as a whole. TELKOM therefore believes that the standard established by the JSX Audit Committee Rule is at least equally effective in ensuring the ability of the audit committee to act independently.

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ITEM 16E. PURCHASES OF EQUITY SECURITIES BY THE ISSUER AND AFFILIATED PURCHASERS

      The following table sets forth certain information concerning purchases by TELKOM of its Series B Shares in 2006.

	Total Number of				Total Number of Shares		Maximum Number of Shares
	Shares		Average Price Paid		Purchased as Part of		that May Yet Be Purchased
Period (2006)	Purchased		per Share in Rp.		Publicly Announced Plans(1)		Under the Plans(2)
January		—		—		—		1,007,999,964
February		—		—		—		1,007,999,964
March		—		—		—		1,007,999,964
April		—		—		—		1,007,999,964
May		8,373,500		7,332.40		8,373,500		999,626,464
June		47,070,000		7,064.26		55,443,500		952,556,464
July		21,925,000		7,235.40		77,368,500		930,631,464
August		5,668,000		7,935.67		83,036,500		924,963,464
September		1,750,000		7,803.90		84,786,500		923,213,464
October		—		—		84,786,500		923,213,464
November		4,820,000		9,902.79		89,606,500		918,393,464
December		28,770,000		10,194.30		118,376,500		889,623,464
TOTAL		118,376,500		8,043.87		118,376,500		889,623,464

(1)

Represents Series B Shares repurchased pursuant to TELKOM’s share repurchase plan approved at TELKOM’s Extraordinary General Meeting of Shareholders on December 21, 2005. Under the share repurchase program, TELKOM may repurchase up to a maximum of 5% of issued and outstanding Series B Shares for a total repurchase amount not exceeding Rp.5.25 trillion, in accordance with the rules and regulations of the BAPEPAM and the stock exchanges on which TELKOM’s Common Stock and ADSs are trading, as well as other applicable regulatory bodies. Such repurchases are intended to be made from time to time over the eighteen month period following the announcement. Repurchases may be made at the discretion of the Company’s management through purchases of shares on the Jakarta and Surabaya Stock Exchanges, purchases of shares in ADS form on the New York Stock Exchange, off-exchange transactions and agreements, or any other legal means the Company deems appropriate. For further information on the share repurchase, see Item 7. “Major Stockholders and Related Party Transactions — A. Major Stockholders.”

(2)

Represents a maximum of 1,007,999,964 Series B Shares (equivalent to 5% of issued and outstanding Series B Shares) initially available for repurchase under TELKOM’s share repurchase plan.

PART III

ITEM 17. CONSOLIDATED FINANCIAL STATEMENTS

      Not applicable.

ITEM 18. CONSOLIDATED FINANCIAL STATEMENTS

      See pages F-1 through F-158.

ITEM 19. EXHIBITS

      Exhibit 1 — The Articles of Incorporation of TELKOM, amended as of July 30, 2004, together with an English translation thereof (incorporated herein by reference to Exhibit 1 to the Annual Report on Form 20-F for the year ended December 31, 2004 filed July 14, 2005 and incorporated herein by reference).

      Exhibit 2 — Not applicable.

      Exhibit 3 — Not applicable.

      Exhibit 4 — Material Contracts Exhibits:

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4.1*	Settlement Agreement between TELKOM and the shareholders of AriaWest, dated July 31, 2003.
4.2*	Credit Agreement between TELKOM and the AriaWest lenders, dated July 31, 2003.
4.3*	First Amendment to the Conditional Sale and Purchase Agreement between TELKOM and the shareholders of AriaWest, dated July 31, 2003.
4.4*	Conditional Sale and Purchase Agreement between TELKOM and the shareholders of AriaWest, dated May 8, 2002.
4.5*	Conditional Sale and Purchase Agreement between TELKOM and the shareholders of Pramindo, dated April 19, 2002.
4.6*	Cooperation Agreement on the Interconnection between TELKOM’s Fixed Network and Indosat’s Local Fixed Network and the Settlement of the Interconnection Financial Rights and Obligations between TELKOM and Indosat, dated September 3, 2002, including an English translation thereof.
4.7**	Contract on Procurement of TELKOM-2 Satellite between TELKOM and Orbital Sciences Corporation, dated October 24, 2002.
4.8+	First Amendment to Contract on Procurement of TELKOM-2 Satellite between TELKOM and Orbital Sciences Corporation, dated December 15, 2003.
4.9**	Agreement on Launch Services of TELKOM-2 Satellite between TELKOM and Arianespace S.A., dated November 8, 2002.
4.10*	Master Procurement Partnership Agreement between TELKOM and a consortium led by Samsung Electronics, dated December 23, 2003.
4.11*	Amendment No. 1 to the Master Procurement Partnership Agreement between TELKOM and a consortium led by Samsung Electronics, dated December 31, 2003.
4.12*	Service Level Agreement between TELKOM and a consortium led by Samsung Electronics, dated December 23, 2002.
4.13*	Loan Agreement between TELKOM and The Export-Import Bank of Korea, dated August 27, 2003.
4.14*	Master Procurement Partnership Agreement between TELKOM and a consortium led by Ericsson, dated December 23, 2002.
4.15*	Service Level Agreement between TELKOM and a consortium led by Ericsson, dated December 23, 2002.
4.16*	Master Procurement Partnership Agreement between TELKOM and PT Industri Telekomunikasi Indonesia (Persero), dated August 26, 2003, including an English translation thereof.
4.17*	Service Level Agreement between TELKOM and PT Industri Telekomunikasi Indonesia Tbk., dated August 26, 2003.
4.18*	Partnership Agreement for the Procurement and Construction of Backbone Transmission Network between TELKOM and a consortium led by Siemens AG, dated September 24, 2003.
4.19**	Development Contract PSTN Excellence Regional Junction Division-II between TELKOM and the Olex-Lucent-Brimbun consortium, dated February 8, 2002.
4.20+	Co-Operation Agreement on Fixed Wireless CDMA Facilities Construction in KSO Division VII Area between TELKOM and PT Bukaka Singtel (BSI) International, dated January 14, 2003.
4.21*	Amendment No. 1 to the Development Contract PSTN Excellence Regional Junction Division-II between TELKOM and the Olex-Lucent-Brimbun consortium, dated August 22, 2002.
4.22*	Amendment No. 2 to the Development Contract PSTN Excellence Regional Junction Division-II between TELKOM and the Olex-Lucent-Brimbun consortium, dated October 25, 2002.
4.23*	Amendment No. 3 to the Development Contract PSTN Excellence Regional Junction Division-II between TELKOM and the Olex-Lucent-Brimbun consortium, dated December 20, 2002.

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4.24*	Amendment No. 4 to the Development Contract PSTN Excellence Regional Junction Division-II between TELKOM and the Olex-Lucent-Brimbun consortium, dated March 20, 2003.
4.25*	Amendment No. 5 to the Development Contract PSTN Excellence Regional Junction Division-II between TELKOM and the Olex-Lucent-Brimbun consortium, dated June 26, 2003.
4.26+	Amendment No. 6 to the Development Contract PSTN Excellence Regional Junction Division-II between TELKOM and the Olex-Lucent-Brimbun consortium, dated October 9, 2003.
4.27+	Amendment No. 7 to the Development Contract PSTN Excellence Regional Junction Division-II between TELKOM and the Olex-Lucent-Brimbun consortium, dated December 4, 2003.
4.28*	Master Procurement Partnership Agreement between TELKOM and Motorola, Inc., dated March 24, 2003.
4.29*	Partnership Agreement for Procurement and Construction of Regional Metro Junction and Optic Access Network for Regional Division III between TELKOM and PT Industri Telekomunikasi Indonesia (Persero), dated November 12, 2003, including an English translation thereof.
4.30*	Contract Agreement in connection with the Softswitch System Class-4 Procurement Program Through Buy or Return Scheme between TELKOM and the Santera-Olex consortium, dated December 18, 2003.
4.31*	Side Letter to the Partnership Agreement for the Construction and Provision of the High Performance Backbone in Sumatra, dated June 12, 2003.
4.32*	Amendment No. 1 to the Partnership Agreement for the Development of a PSTN Regional Junction for Regional Division V (East Java), dated September 27, 2002.
4.33*	Amendment No. 2 to the Partnership Agreement for the Development of a PSTN Regional Junction for Regional Division V (East Java), dated December 30, 2002.
4.34+	Amendment No. 3 to the Partnership Agreement for the Development of a PSTN Regional Junction for Regional Division V (East Java), dated December 11, 2003.
4.35*	Supply Contract among TELKOM, NEC Corporation, the Communication Authority of Thailand and Singapore Telecommunications Limited, dated November 27, 2002.
4.36*	Amended and Restated KSO Agreement between TELKOM and PT Mitra Global Telekomunikasi Indonesia, dated January 20, 2004.
4.37*	Service Level Agreement between TELKOM and Motorola, Inc., dated March 24, 2003.
4.38*	Indemnity Agreement between TELKOM and KAP Hans Tuanakotta Mustofa & Halim (formerly KAP Hans Tuanakotta & Mustofa), dated February 9, 2004.
4.39+	Supply Contract for the Procurement and Installation of Dumai-Melaka Cable System among TELKOM, Telekom Malaysia Berhad and NEC Corporation, dated May 14, 2004.
4.40+	Loan Agreement and Acknowledgement of Indebtedness between TELKOM and ABN AMRO Bank N.V. Jakarta Branch, dated January 28, 2004.
4.41+	Letter Agreement between Indosat and TELKOM, dated December 11, 2003 (with regard to the merger of PT Indonesian Satellite Corporation Tbk with PT Indosat Multi Media Mobile, PT Satelit Palapa Indonesia and PT Bimagraha Telekomindo), including an English translation thereof.
4.42+	Indemnity Agreement between TELKOM and KAP Hans Tuanakotta Mustofa & Halim (formerly KAP Hans Tuanakotta & Mustofa), dated June 29, 2004.
4.43++	Medium Term Notes Issuance Agreement dated December 13, 2004 (English summary).
4.44++	Indemnity Agreement between TELKOM and KAP Hans Tuanakotta Mustofa & Halim (formerly KAP Hans Tuanakotta & Mustofa), dated April 25, 2005.
4.45+++	Supply Contract For The Procurement and Installation of Ring JASUKA Backbone between TELKOM and NEC-SIEMENS CONSORTIUM, dated June 10, 2005.
4.46+++	Supply Contract For Capacity Expansion of Submarine Cable System Tanjung Pandan-Pontianak between TELKOM and NEC Corporation, dated 8 July 2005.

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

193

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

194

4.90#	Agreement for Procurement and Installation for Secondary Cable Network Package I between TELKOM and Olex Cables Indonesia (OLEXINDO), dated 29 December 2006.
4.91#	Agreement for Procurement and Installation for Optical Access Network (OAN) Project Package-I (Divre I and Divre III) between TELKOM and Opnet — Olexindo Consortium, dated 29 December 2006.
4.92#	Agreement for Procurement and Installation for Optical Access Network (OAN) Project Package-II (DIVRE-II) between TELKOM and Opnet — Olexindo Consortium, dated 29 December 2006.
4.93#	Contract on the CDMA2000-1X Initial Purchase Order Between TELKOM and SAMSUNG Electronics Co., Ltd., dated 9 October 2002.
*	Filed with Amendment No. 2 to the Annual Report on Form 20-F/A for the year ended December 31, 2002 filed February 9, 2004 and incorporated herein by reference.
**	Filed with original Annual Report on Form 20-F for the year ended December 31, 2002 filed April 17, 2003 and incorporated herein by reference.
+	Filed with original Annual Report on Form 20-F for the year ended December 31, 2003 filed June 30, 2004 and incorporated herein by reference.
++	Filed with original Annual Report on Form 20-F for the year ended December 31, 2004 filed July 15, 2005 and incorporated herein by reference.
+++	Filed with original Annual Report on Form 20-F for the year ended December 31, 2005 filed June 23, 2006 and incorporated herein by reference.
++++	Filed with Amendment No. 1 to the Annual Report on Form 20-F/A for the year ended December 31, 2005 filed June 29, 2006 and incorporated herein by reference.
#	Filed herewith.

Exhibit 5 — Not applicable.

Exhibit 6 — Earnings per share is computed by dividing net income by the weighted average number of shares outstanding during the year, totaling 20,159,999,280 shares in 2003, 2004 and 2005. TELKOM does not have potentially dilutive ordinary shares.

Exhibit 7 — Not applicable.

Exhibit 8 — List of subsidiaries as of December 31, 2005 (incorporated herein by reference to the annual report on the Form 20-F, which was filed with the Securities and Exchange Commission on June 23, 2006).

Exhibit 9 — Not applicable.

Exhibit 10 — Not applicable.

Exhibit 11 — Not applicable. TELKOM intends to comply with its obligation to disclose its code of ethics by posting a copy of the code of ethics on its company web site at www.telkom-indonesia.com/english/hubunganinvestor/index.asp.

Exhibit 12 — See Exhibits 12.1 and 12.2 attached hereto.

Exhibit 13 — See Exhibits 13.1 and 13.2 attached hereto.

Exhibit 14 — Not applicable.

195

SIGNATURES

      The Registrant hereby certifies that it meets all of the requirements for filing on Form 20-F and that it has duly caused this annual report to be signed on its behalf by the undersigned, there unto duly authorized, in Jakarta, on the twenty-eighth day of June, 2007.

PERUSAHAAN PERSEROAN (PERSERO)

P.T. TELEKOMUNIKASI INDONESIA Tbk.

By:  /s/ Rinaldi Firmansyah

Rinaldi Firmansyah

President Director

Date: June 28, 2007

196

PERUSAHAAN PERSEROAN (PERSERO)

P.T. TELEKOMUNIKASI INDONESIA Tbk AND SUBSIDIARIES

TABLE OF CONTENTS

	Page
Reports of Independent Registered Public Accounting Firms		F-2
Consolidated Financial Statements
1. Consolidated Balance Sheets		F-8
2. Consolidated Statements of Income		F-10
3. Consolidated Statements of Changes in Stockholders’ Equity		F-11
4. Consolidated Statements of Cash Flows		F-14
5. Notes to Consolidated Financial Statements		F-16

F-1

INDEPENDENT REGISTERED PUBLIC ACCOUNTANTS’ REPORT

TO THE STOCKHOLDERS OF

PERUSAHAAN PERSEROAN (PERSERO) PT TELEKOMUNIKASI INDONESIA Tbk

      We have completed an integrated audit of Perusahaan Perseroan (Persero) PT Telekomunikasi Indonesia Tbk and its subsidiaries (the “Company”)’s 2006 consolidated financial statements and of its internal control over financial reporting as of 31 December 2006, in accordance with the standards of the Public Company Accounting Oversight Board (United States). The Company’s consolidated balance sheet as of 31 December 2005 and the related consolidated statements of income, changes in stockholders’ equity and cash flows for the years ended 31 December 2005 and 2004 were audited by other independent auditors whose report dated 8 June 2006, except for Note 56, as to which the date was 16 June 2006, expressed an unqualified opinion on those statements. Our opinions, based on our audit, are presented below.

Consolidated financial statements

      In our opinion, the accompanying consolidated balance sheet and the related consolidated statements of income, changes in stockholders’ equity and cash flows present fairly, in all material respects, the financial position of the Company at 31 December 2006, and the results of their operations and their cash flows for the year ended 31 December 2006 in conformity with accounting principles generally accepted in Indonesia. These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements based on our audit.

      We conducted our audit of these statements in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit of financial statements includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audit provides a reasonable basis for our opinion.

      Accounting principles generally accepted in Indonesia vary in certain significant respects from accounting principles generally accepted in the United States of America. Information relating to the nature and effect of such differences is presented in Note 56 to the consolidated financial statements.

Internal control over financial reporting

      Also, we have audited management’s assessment, included in the accompanying Management’s Report On Internal Control Over Financial Reporting presented in Item 15, that the Company did not maintain effective internal control over financial reporting as of 31 December 2006, because of the effect of the following material weaknesses: The Company did not have an effective control environment; The Company did not maintain effective controls, including monitoring, over its financial close and reporting process; The Company did not adequately design and maintain effective controls over its accounting for property, plant and equipment; and, The Company did not design and maintain effective controls over its accounting for revenue

F-2

and related accounts receivable, based on criteria established in Internal Control -Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (“COSO”). The Company’s management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting. Our responsibility is to express opinion on management’s assessment and on the effectiveness of the Company’s internal control over financial reporting based on our audit.

      We conducted our audit of internal control over financial reporting in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. An audit of internal control over financial reporting includes obtaining an understanding of internal control over financial reporting, evaluating management’s assessment, testing and evaluating the design and operating effectiveness of internal control, and performing such other procedures as we consider necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinions.

      A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (i) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the Company; (ii) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the Company are being made only in accordance with authorizations of management and directors of the Company; and (iii) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the Company’s assets that could have a material effect on the financial statements.

      Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.

      A material weakness is a control deficiency, or combination of control deficiencies, that results in more than a remote likelihood that a material misstatement of the annual or interim financial statements, will not be prevented or detected. In connection with management’s evaluation of the Company’s internal control over financial reporting, the following material weaknesses have been identified as of December 31, 2006:

      1. The Company did not have an effective control environment based on the COSO criteria. The following material weaknesses related to the Company’s control environment were identified:

•  The Company did not adequately design and maintain effective controls over the assignment of authority and responsibility with respect to its internal control over financial reporting and the necessary lines of communication throughout the organization. Specifically, certain key members of management had inappropriate access to the Company’s financial application systems and related data with the ability to effect accounting entries within such systems without adequate mechanisms for identifying and evaluating the results of any such actions.

•  The Company did not adequately design and maintain effective information technology policies, including those related to security and access to its financial application programs and data. Specifically, the Company had inadequate controls to identify and monitor conflicting user roles (i.e.,

F-3

	segregation of duties) and lacked independent monitoring of access by employees to its financial application systems and data.
•	The Company did not maintain a sufficient complement of personnel with an appropriate level of accounting knowledge, experience and training in the application of applicable generally accepted accounting principles commensurate with the Company’s financial reporting requirements.
•	The Company did not adequately perform a risk assessment to identify risks so as to ensure that it adequately designed and implemented effective controls that would prevent and detect material misstatements to its financial statements.

      These control environment material weaknesses contributed to the existence of the additional material weaknesses below.

      2. The Company did not maintain effective controls, including monitoring, over its financial close and reporting process. Specifically, the Company did not maintain effective controls over the completeness and accuracy of its financial consolidation and disclosure process including matters relating to: the disclosure of fixed assets and accounting for business combinations. In addition, controls related to the accuracy of financial statement preparation and disclosures relating to consolidated statements of cash flows, segment information and the acquisition of a joint operation were not operating effectively

      3. The Company did not adequately design and maintain effective controls over its accounting for property, plant and equipment. Specifically, the Company’s controls were not adequately designed or operating effectively to ensure the completeness, accuracy and valuation of its fixed assets, including related additions and dispositions/retirements.

      4. The Company did not design and maintain effective controls over its accounting for revenue and related accounts receivable. Specifically, the Company’s controls were not designed and operating effectively to ensure the completeness and accuracy of leased line revenue and provisions for uncollectible balances. In addition, the controls to ensure the completeness and accuracy of fixed line and fixed wireless revenue and collections were not operating effectively.

      These material weaknesses were considered in determining the nature, timing, and extent of audit tests applied in our audit of the 2006 consolidated financial statements, and our opinion regarding the effectiveness of the Company’s internal control over financial reporting does not affect our opinion on those consolidated financial statements.

      As permitted by Securities and Exchange Commission guidance, management has excluded the operation related to the Regional Division VII (“KSO VII”) (acquired on October 19, 2006) from its assessment of internal control over financial reporting as of December 31, 2006. The KSO VII operations represented approximately 2.1 percent of the Company’s 2006 consolidated total operating revenues and 3.9 percent of consolidated total assets as at December 31, 2006. The controls for these acquired operations are required to be evaluated and tested by the end of 2007.

      In our opinion, management’s assessment that Perusahaan Perseroan (Persero) PT Telekomunikasi Indonesia Tbk did not maintain effective internal control over financial reporting as of 31 December 2006, is fairly stated, in all material respects, based on criteria established in Internal Control — Integrated Framework issued by the COSO. Also, in our opinion, because of the effects of the material weaknesses described above on the achievement of the objectives of the control criteria, Perusahaan Perseroan (Persero) PT Telekomunikasi Indonesia Tbk has not maintained effective internal control over financial reporting as of

F-4

31 December 2006, based on criteria established in Internal Control — Integrated Framework issued by the COSO.

JAKARTA,

27 June 2007

/s/ Drs. Irhoan Tanudiredja, BAP

Drs. Irhoan Tanudiredja, BAP

Public Accountant Licence No. 99.1.0683

F-5

Report of Independent Registered Public Accounting Firm

No. L.05 — 3737 — 06/ US

The Shareholders, Board of Commissioners and Board of Directors

Perusahaan Perseroan (Persero) PT Telekomunikasi Indonesia Tbk.:

      We have audited the consolidated balance sheet of Perusahaan Perseroan (Persero) PT Telekomunikasi Indonesia Tbk. and subsidiaries (the “Company”) as of December 31, 2005, and the related consolidated statements of income, changes in stockholders’ equity, and cash flows for each of the years in the two-year period ended December 31, 2005. These consolidated financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits.

      We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States) and auditing standards generally accepted in Indonesia. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.

      In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Perusahaan Perseroan (Persero) PT Telekomunikasi Indonesia Tbk. and subsidiaries as of December 31, 2005, and the results of their operations and their cash flows for each of the years in the two-year period ended December 31, 2005, in conformity with accounting principles generally accepted in Indonesia.

      Accounting principles generally accepted in Indonesia vary in certain significant respects from accounting principles generally accepted in the United States of America. Information relating to the nature and effect of such differences is presented in Note 56 to the consolidated financial statements.

Kantor Akuntan Publik Siddharta Siddharta & Widjaja

Member Firm of KPMG International

License No.: KEP-232/ KM.6/2002

/s/ Lucas Kurniawan, BAP

Lucas Kurniawan, BAP

Public Accountant License No. 04.1.0934

Jakarta-Indonesia, June 8, 2006, except for Note 56, as to which the date is June 16, 2006.

F-6

PERUSAHAAN PERSEROAN (PERSERO)

P.T. TELEKOMUNIKASI INDONESIA Tbk

AND SUBSIDIARIES

CONSOLIDATED FINANCIAL STATEMENTS

DECEMBER 31, 2005 AND 2006,

AND FOR YEARS ENDED

DECEMBER 31, 2004, 2005 AND 2006

F-7

PERUSAHAAN PERSEROAN (PERSERO)

P.T. TELEKOMUNIKASI INDONESIA Tbk AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

AS OF DECEMBER 31, 2005 AND 2006

(Figures in tables are presented in millions of Rupiah and thousands of United States Dollars)

		Notes		2005		2006
				Rp.		Rp.		US$ (Note 3)
ASSETS
CURRENT ASSETS
Cash and cash equivalents			2c,2f,6,46		5,374,684		8,315,836		923,982
Temporary investments			2c,2g,46		22,064		84,492		9,388
Trade receivables			2c,2h,7,46
	Related parties — net of allowance for doubtful accounts of Rp.84,275 million in 2005 and Rp.85,053 million in 2006				530,370		520,689		57,854
	Third parties — net of allowance for doubtful accounts of Rp.601,393 million in 2005 and Rp.699,736 million in 2006				3,047,539		3,196,588		355,176
Other receivables — net of allowance for doubtful accounts of Rp.4,402 million in 2005 and Rp.1,685 million in 2006			2c,2h,46		153,247		147,735		16,415
Inventories — net of allowance for obsolescence of Rp.48,347 million in 2005 and Rp.48,098 million in 2006			2i,8		220,327		213,329		23,703
Prepaid expenses			2c,2j,9,46		777,869		1,073,329		119,259
Claim for tax refund			40a		—		359,582		39,954
Prepaid taxes			40b		18,913		2,390		266
Other current assets			2c,10,46		159,537		6,822		758
Total Current Assets					10,304,550		13,920,792		1,546,755
NON-CURRENT ASSETS
Long-term investments — net			2g,11		101,400		89,197		9,911
Property, plant and equipment — net of accumulated depreciation of Rp.37,092,663 million in 2005 and Rp.45,043,380 million in 2006			2k,2l,12		45,643,243		54,267,060		6,029,673
Property, plant and equipment under revenue-sharing arrangements — net of accumulated depreciation of Rp.458,234 million in 2005 and Rp.493,381 million in 2006			2m,13,49		549,405		965,632		107,292
Prepaid pension benefit cost			2r,43c		640		103		11
Advances and other non-current assets			2c,2k,14,46		946,037		1,454,283		161,587
Goodwill and other intangible assets — net of accumulated amortization of Rp.2,764,187 million in 2005 and Rp.3,708,590 million in 2006			2x,5,15		4,493,272		4,436,605		492,956
Escrow accounts			2c,16,46		132,497		2,073		230
Total Non-current Assets					51,866,494		61,214,953		6,801,660
TOTAL ASSETS					62,171,044		75,135,745		8,348,415

See accompanying notes to consolidated financial statements, which form an integral part of the consolidated financial statements.

F-8

PERUSAHAAN PERSEROAN (PERSERO)

P.T. TELEKOMUNIKASI INDONESIA Tbk AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS — (Continued)

AS OF DECEMBER 31, 2005 AND 2006

(Figures in tables are presented in millions of Rupiah and thousands of United States Dollars)

		Notes		2005			2006
				Rp.			Rp.			US$ (Note 3)
LIABILITIES AND STOCKHOLDERS’ EQUITY
CURRENT LIABILITIES
Trade payables			2c,17,46
	Related parties				1,014,389			1,116,496			124,055
	Third parties				4,281,285			5,801,457			644,606
Other payables					6,677			9,219			1,024
Taxes payable			2s,40c		2,469,765			2,569,002			285,446
Dividends payable					3,276			1,380			153
Accrued expenses			2c,18,46		1,521,247			3,475,698			386,189
Unearned income			19		1,592,718			2,037,772			226,419
Advances from customers and suppliers					223,086			161,262			17,918
Short-term bank loans			2c,20,46		173,800			687,990			76,443
Current maturities of long-term liabilities			2c,21,46		2,226,925			4,675,409			519,490
Total Current Liabilities					13,513,168			20,535,685			2,281,743
NON-CURRENT LIABILITIES
Deferred tax liabilities — net			2s,40g		2,391,810			2,665,397			296,155
Unearned income on revenue-sharing arrangements			2m,13,49		425,484			817,174			90,797
Unearned initial investor payments under joint operation scheme			2n,48		7,311			—			—
Accrued long service awards			2c,2r,44,46		524,524			596,325			66,258
Accrued post-retirement health care benefits			2c,2r,45,46		3,048,021			2,945,728			327,303
Accrued pension and other post-retirement benefits costs			2r,43		1,330,664			1,070,622			118,958
Long-term liabilities — net of current maturities
	Obligations under capital leases		2l,12		235,537			217,108			24,123
	Two-step loans — related party		2c,22,46		4,760,199			4,006,935			445,215
	Notes and bonds		23		1,456,669			—			—
	Bank loans		2c,24,46		1,752,104			2,487,913			276,435
	Deferred consideration for business combinations		25		3,127,959			3,537,082			393,009
Total Non-current Liabilities					19,060,282			18,344,284			2,038,253
MINORITY INTEREST			26		6,305,193			8,187,087			909,676
STOCKHOLDERS’ EQUITY
Capital stock — Rp.250 par value per Series A Dwiwarna share and Series B share
	Authorized — one Series A Dwiwarna share and 79,999,999,999 Series B shares
	Issued and fully paid — one Series A Dwiwarna share and 20,159,999,279 Series B shares		1b,27		5,040,000			5,040,000			560,000
Additional paid-in capital			28		1,073,333			1,073,333			119,259
Treasury stock (118,376,500 shares)			2p,29		—			(952,211	)		(105,801	)
Difference in value of restructuring transactions between entities under common control			30		90,000			180,000			20,000
Difference due to change of equity in associated companies			2g		385,595			385,595			42,844
Unrealized holding gain (loss) from available-for-sale securities			2g		(748	)		8,865			985
Translation adjustment			2g		233,253			227,669			25,297
Retained earnings Appropriated					1,803,397			1,803,397			200,377
	Unappropriated				14,667,571			20,302,041			2,255,782
Total Stockholders’ Equity					23,292,401			28,068,689			3,118,743
TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY					62,171,044			75,135,745			8,348,415

See accompanying notes to consolidated financial statements, which form an integral part of the consolidated financial statements.

F-9

PERUSAHAAN PERSEROAN (PERSERO)

P.T. TELEKOMUNIKASI INDONESIA Tbk AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF INCOME

FOR THE YEARS ENDED DECEMBER 31, 2004, 2005 AND 2006

(Figures in tables are presented in millions of Rupiah and thousands of United States Dollars,

except per share and per ADS data)

			Notes		2004			2005			2006
					Rp.			Rp.			Rp.			US$ (Note 3)
OPERATING REVENUES
	Telephone			2q,31
		Fixed lines				10,645,021			10,781,252			10,979,033			1,219,893
		Cellular				10,421,298			14,570,958			20,622,647			2,291,405
	Interconnection — net			2q,32,46		6,187,981			7,742,084			8,681,461			964,607
	Joint operation schemes			2n,33,48		656,614			588,647			489,414			54,379
	Data and Internet			2q,34		4,808,742			6,934,324			9,065,187			1,007,243
	Network			2q,35,46		654,309			586,636			718,738			79,860
	Revenue-sharing arrangements			2m,36,49		280,576			302,282			415,477			46,163
	Other telecommunications services					293,225			301,001			322,051			35,783
	Total Operating Revenues					33,947,766			41,807,184			51,294,008			5,699,333
OPERATING EXPENSES
	Personnel			37		4,909,965			6,563,047			8,513,765			945,974
	Depreciation			2k,2l,2m,12,13,14		6,438,557			7,570,739			9,178,343			1,019,816
	Write-down of assets			2k,12		—			616,768			—			—
	Loss on procurement commitments			12		—			79,359			—			—
	Operations, maintenance and telecommunication services			38,46		4,529,587			5,916,341			7,495,728			832,859
	General and administrative			39		2,599,847			2,763,951			3,271,427			363,492
	Marketing					881,930			1,126,229			1,241,504			137,946
	Total Operating Expenses					19,359,886			24,636,434			29,700,767			3,300,087
OPERATING INCOME						14,587,880			17,170,750			21,593,241			2,399,246
OTHER INCOME (EXPENSES)
	Interest income			46		317,941			344,686			654,984			72,776
	Interest expense			46		(1,270,136	)		(1,177,268	)		(1,286,354	)		(142,928	)
	Gain (loss) on foreign exchange — net			2e		(1,220,760	)		(516,807	)		836,328			92,925
	Equity in net income (loss) of associated companies			2g,11		3,420			10,879			(6,619	)		(735	)
	Others — net					331,050			409,184			202,025			22,447
	Other income (expenses) — net					(1,838,485	)		(929,326	)		400,364			44,485
INCOME BEFORE TAX						12,749,395			16,241,424			21,993,605			2,443,731
TAX (EXPENSE) BENEFIT				2s,40d
	Current tax					(4,267,111	)		(5,719,644	)		(7,097,202	)		(788,578	)
	Deferred tax					88,585			535,757			57,275			6,364
						(4,178,526	)		(5,183,887	)		(7,039,927	)		(782,214	)
INCOME BEFORE MINORITY INTEREST IN NET INCOME OF SUBSIDIARIES						8,570,869			11,057,537			14,953,678			1,661,517
MINORITY INTEREST IN NET INCOME OF SUBSIDIARIES — net				26		(1,956,301	)		(3,063,971	)		(3,948,101	)		(438,678	)
NET INCOME						6,614,568			7,993,566			11,005,577			1,222,839
BASIC EARNINGS PER SHARE				2t,41
	Net income per share					328.10			396.51			547.15			0.06
	Net income per ADS (40 Series B shares per ADS)					13,124.14			15,860.25			21,886.00			2.43

See accompanying notes to consolidated financial statements, which form an integral part of

the consolidated financial statements.

F-10

PERUSAHAAN PERSEROAN (PERSERO)

P.T.TELEKOMUNIKASI INDONESIA Tbk AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY

FOR THE YEARS ENDED DECEMBER 31, 2004, 2005 AND 2006

(Figures in tables are presented in millions of Rupiah)

								Difference in
								value of
								restructuring			Difference
								transactions			due to change		Unrealized
						Additional		between entities			of equity		holding gain on				Retained earnings					Total
				Capital		paid-in		under common			in associated		available-for-sale		Translation							stockholders’
Description		Notes		stock		capital		control			companies		securities		adjustment		Appropriated		Unappropriated			equity
				Rp.		Rp.		Rp.			Rp.		Rp.		Rp.		Rp.		Rp.			Rp.
Balance as of January 1, 2004					5,040,000		1,073,333		(7,288,271	)		385,595		—		224,232		1,559,068		13,700,255			14,694,212
Unrealized holding gain on available- for-sale securities			2g		—		—		—			—		884		—		—		—			884
Foreign currency translation of associated company			2g		—		—		—			—		—		5,363		—		—			5,363
Resolved during the Annual General Meeting of the Stockholders on July 30, 2004 Declaration of cash dividends			2w,42		—		—		—			—		—		—		—		(3,043,614	)		(3,043,614	)
	Appropriation for general reserve		42		—		—		—			—		—		—		121,745		(121,745	)		—
Declaration of interim cash dividends			2w,42		—		—		—			—		—		—		—		(143,377	)		(143,377	)
Net income for the year					—		—		—			—		—		—		—		6,614,568			6,614,568
Balance as of December 31, 2004					5,040,000		1,073,333		(7,288,271	)		385,595		884		229,595		1,680,813		17,006,087			18,128,036

See accompanying notes to consolidated financial statements, which form an integral part of the consolidated financial statements.

F-11

PERUSAHAAN PERSEROAN (PERSERO)

P.T.TELEKOMUNIKASI INDONESIA Tbk AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY — (Continued)

FOR THE YEARS ENDED DECEMBER 31, 2004, 2005 AND 2006

(Figures in tables are presented in millions of Rupiah)

								Difference in
								value of
								restructuring			Difference
								transactions			due to change		Unrealized
						Additional		between entities			of equity		holding gain (loss) on					Retained earnings					Total
				Capital		paid-in		under common			in associated		available-for-sale			Translation							stockholders’
Description		Notes		stock		capital		control			companies		securities			adjustment		Appropriated		Unappropriated			equity
				Rp.		Rp.		Rp.			Rp.		Rp.			Rp.		Rp.		Rp.			Rp.
Balance as of January 1, 2005					5,040,000		1,073,333		(7,288,271	)		385,595		884			229,595		1,680,813		17,006,087			18,128,036
Change in accounting policy for restructuring transactions between entities under common control			4,30		—		—		7,288,271			—		—			—		—		(7,288,271	)		—
Unrealized holding loss on available- for-sale securities			2g		—		—		—			—		(1,632	)		—		—		—			(1,632	)
Foreign currency translation of associated company			2g,11		—		—		—			—		—			3,658		—		—			3,658
Compensation for early termination of exclusive rights			30		—		—		90,000			—		—			—		—		—			90,000
Resolved during the Annual General Meeting of the Stockholders on June 24, 2005 Declaration of cash dividends			2w,42		—		—		—			—		—			—		—		(2,921,227	)		(2,921,227	)
	Appropriation for general reserve		42		—		—		—			—		—			—		122,584		(122,584	)		—
Net income for the year					—		—		—			—		—			—		—		7,993,566			7,993,566
Balance as of December 31, 2005					5,040,000		1,073,333		90,000			385,595		(748	)		233,253		1,803,397		14,667,571			23,292,401

See accompanying notes to consolidated financial statements, which form an integral part of the consolidated financial statements

F-12

PERUSAHAAN PERSEROAN (PERSERO)

P.T.TELEKOMUNIKASI INDONESIA Tbk AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY — (Continued)

FOR THE YEARS ENDED DECEMBER 31, 2004, 2005 AND 2006

(Figures in tables are presented in millions of Rupiah)

										Difference in
										value of
										restructuring		Difference
										transactions		due to change		Unrealized
					Additional					between entities		of equity		holding gain (loss) on						Retained earnings					Total
			Capital		paid-in					under common		in associated		available-for-sale			Translation								stockholders’
Description	Notes		stock		capital		Treasury stock			control		companies		securities			adjustment			Appropriated		Unappropriated			equity
			Rp.		Rp.		Rp.			Rp.		Rp.		Rp.			Rp.			Rp.		Rp.			Rp.
Balance as of January 1, 2006				5,040,000		1,073,333		—			90,000		385,595		(748	)		233,253			1,803,397		14,667,571			23,292,401
Unrealized holding gain on available- for-sale securities		2g		—		—		—			—		—		9,613			—			—		—			9,613
Foreign currency translation of associated company		2g,11		—		—		—			—		—		—			(5,584	)		—		—			(5,584	)
Compensation for early termination of exclusive rights		30		—		—		—			90,000		—		—			—			—		—			90,000
Resolved during the Annual General Meeting of the Stockholders on June 30, 2006 Declaration of cash dividends		2w,42		—		—		—			—		—		—			—			—		(4,400,090	)		(4,400,090	)
Payment of interim cash dividends		2w,42		—		—		—			—		—		—			—			—		(971,017	)		(971,017	)
Treasury stock acquired — at cost		29		—		—		(952,211	)		—		—		—			—			—		—			(952,211	)
Net income for the year				—		—		—			—		—		—			—			—		11,005,577			11,005,577
Balance as of December 31, 2006				5,040,000		1,073,333		(952,211	)		180,000		385,595		8,865			227,669			1,803,397		20,302,041			28,068,689

See accompanying notes to consolidated financial statements, which form an integral part of the consolidated financial statements

F-13

PERUSAHAAN PERSEROAN (PERSERO)

P.T. TELEKOMUNIKASI INDONESIA Tbk AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS

FOR THE YEARS ENDED DECEMBER 31, 2004, 2005 AND 2006

(Figures in tables are presented in millions of Rupiah and thousands of United States Dollars)

				2004			2005			2006
				Rp.			Rp.			Rp.			US$ (Note 3)
CASH FLOWS FROM OPERATING ACTIVITIES
	Cash receipts from operating revenues
		Telephone
			Fixed lines		10,084,558			10,668,915			10,673,901			1,185,989
			Cellular		10,497,763			14,825,437			20,842,406			2,315,823
		Interconnection — net			5,766,444			7,403,322			8,655,917			961,768
		Joint operation schemes			547,487			614,652			596,423			66,269
		Data and Internet			4,973,559			6,952,323			8,914,019			990,447
		Other services			1,689,941			1,445,668			1,285,275			142,808
		Total cash receipts from operating revenues			33,559,752			41,910,317			50,967,941			5,663,104
	Cash payments for operating expenses				(12,270,643	)		(14,954,742	)		(16,465,320	)		(1,829,480	)
	Cash receipt (refund) from (to) customers				(78,028	)		(55,343	)		(57,580	)		(6,398	)
Cash generated from operations					21,211,081			26,900,232			34,445,041			3,827,226
	Interest received				321,677			341,848			642,959			71,440
	Income tax paid				(4,132,359	)		(4,938,916	)		(7,175,681	)		(797,298	)
	Interest paid				(1,348,919	)		(1,200,484	)		(1,217,131	)		(135,237	)
Net Cash Provided by Operating Activities					16,051,480			21,102,680			26,695,188			2,966,131
CASH FLOWS FROM INVESTING ACTIVITIES
	Proceeds from sale of temporary investments and maturity of time deposits				285,264			227,633			46,081			5,120
	Purchase of temporary investments and placements in time deposits				(404,268	)		(226,054	)		(98,896	)		(10,988	)
	Proceeds from sale of property, plant and equipment				67,196			84,621			17,269			1,919
	Proceeds from insurance claim				—			27,580			—			—
	Acquisition of property, plant and equipment				(8,568,862	)		(12,106,930	)		(15,900,628	)		(1,766,736	)
	Increase in advances for the purchase of													—
		property, plant and equipment			(1,063,382	)		(212,187	)		(293,920	)		(32,658	)
	Decrease in advances and others				123,026			874			38,395			4,266
	Business combinations, net of cash (paid) acquired				(27,797	)		(4,000	)		143,648			15,961
	Acquisition of intangible assets				—			—			(436,000	)		(48,444	)
	Proceeds from sale of long-term investments				—			—			22,561			2,507
	Cash dividends received				—			—			382			42
	Acquisition of long-term investments				(9,290	)		(4,250	)		—			—
Net Cash Used in Investing Activities					(9,598,113	)		(12,212,713	)		(16,461,108	)		(1,829,011	)

See accompanying notes to consolidated financial statements, which form an integral part of

the consolidated financial statements.

F-14

PERUSAHAAN PERSEROAN (PERSERO)

P.T. TELEKOMUNIKASI INDONESIA Tbk AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS — (Continued)

FOR THE YEARS ENDED DECEMBER 31, 2004, 2005 AND 2006

(Figures in tables are presented in millions of Rupiah and thousands of United States Dollars)

		2004			2005			2006
		Rp.			Rp.			Rp.			US$ (Note 3)
CASH FLOWS FROM FINANCING ACTIVITIES
	Cash dividends paid		(3,129,225	)		(2,980,640	)		(5,371,102	)		(596,789	)
	Cash dividends paid to minority shareholders of subsidiaries		(682,366	)		(1,694,261	)		(2,067,696	)		(229,744	)
	Increase in escrow accounts		(1,341,546	)		(96,216	)		(2,073	)		(230	)
	Proceeds from short-term borrowings		1,062,183			739,153			1,020,000			113,333
	Repayments of short-term borrowings		—			(1,733,862	)		(507,133	)		(56,348	)
	Payments for debt issuance cost		(2,394	)		—			—			—
	Proceeds from Medium-term Notes		1,080,000			—			—			—
	Repayments of Medium-term Notes		—			(470,000	)		(145,000	)		(16,111	)
	Redemption of Telkomsel’s notes		(504,101	)		(780,565	)		—			—
	Proceeds from long-term borrowings		2,386,748			569,995			2,532,313			281,368
	Repayments of long-term borrowings		(5,734,156	)		(1,723,126	)		(1,674,516	)		(186,057	)
	Payment for purchase of treasury stock		—			—			(952,211	)		(105,801	)
	Repayments of promissory notes		(40,008	)		(164,186	)		(201,307	)		(22,368	)
	Repayments of obligations under capital leases		—			(5,643	)		(14,095	)		(1,566	)
Net Cash Used in Financing Activities			(6,904,865	)		(8,339,351	)		(7,382,820	)		(820,313	)
NET (DECREASE) INCREASE IN CASH AND CASH EQUIVALENTS			(451,498	)		550,616			2,851,260			316,807
EFFECT OF EXCHANGE RATE CHANGES ON CASH AND CASH EQUIVALENTS			213,149			(32,055	)		89,892			9,988
CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR			5,094,472			4,856,123			5,374,684			597,187
CASH AND CASH EQUIVALENTS AT END OF YEAR			4,856,123			5,374,684			8,315,836			923,982
SUPPLEMENTAL CASH FLOW INFORMATION
Noncash investing and financing activities:
	Payment of insurance premium through the incurrence of long-term debt		11,658			—			—			—
	Acquisition of minority interest through the issuance of Promissory Notes		126,692			—			—			—
	Acquisition of business through the incurrence of long-term liability		3,257,566			—			1,770,925			196,769
	Acquisition of property, plant and equipment through capital leases		—			257,380			8,440			938
	Exchange of property, plant and equipment		—			—			440,358			48,929
	Acquisition of property, plant and equipment through incurrence of payable		3,029,489			3,786,014			4,540,200			504,467
	Acquisition of property, plant and equipment through Revenue-Sharing Arrangements		330,633			201,833			543,651			60,406

See accompanying notes to consolidated financial statements, which form an integral part of the consolidated financial statements.

F-15

PERUSAHAAN PERSEROAN (PERSERO)

P.T. TELEKOMUNIKASI INDONESIA Tbk AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

DECEMBER 31, 2005 AND 2006, AND FOR YEARS ENDED

DECEMBER 31, 2004, 2005 AND 2006

(Figures in tables are presented in millions of Rupiah, unless otherwise stated)

1. GENERAL

     a.  Establishment and General Information

      Perusahaan Perseroan (Persero) P.T. Telekomunikasi Indonesia Tbk (the “Company”) was originally part of “Post en Telegraafdienst”, which was established in 1884 under the framework of Decree No. 7 dated March 27, 1884 of the Governor General of the Dutch Indies and published in State Gazette No. 52 dated April 3, 1884.

      In 1991, based on Government Regulation No. 25 year 1991, the status of the Company was changed into a state-owned limited liability corporation (“Persero”). The Company was established based on notarial deed No. 128 dated September 24, 1991 of Imas Fatimah, S.H. The deed of establishment was approved by the Minister of Justice of the Republic of Indonesia in his decision letter No. C2-6870.HT.01.01.Th.1991 dated November 19, 1991, and was published in State Gazette of the Republic of Indonesia No. 5 dated January 17, 1992, Supplement No. 210. The Articles of Association have been amended several times, the most recent amendment based on notarial deed No. 4 dated April 6, 2006 of A. Partomuan Pohan, S.H., LLM. and was published in State Gazette of the Republic of Indonesia No. 51 dated June 27, 2006, Supplement No. 666, among others, to amend the directors’ and commissioners’ authorities and responsibilities.

      In accordance with Article 3 of its articles of association, the scope of the Company’s activities is as follows:

      1. The Company’s objective is to provide telecommunications and information facilities and services, in accordance with prevailing regulations.

      2. To achieve the above objective, the Company is involved in the following activities:

      i. Planning, building, providing, developing, operating, marketing or selling, leasing and maintaining telecommunications and information networks in accordance with prevailing regulations.

      ii. Planning, developing, providing, marketing or selling and improving telecommunications and information services in accordance with prevailing regulations.

      iii. Performing activities and other undertakings in connection with the utilization and development of the Company’s resources and optimizing the utilization of the Company’s property, plant and equipment, information systems, education and training, and repairs and maintenance facilities.

      The Company’s head office is located at Jalan Japati No. 1, Bandung, West Java.

      The Company’s business in the provision of domestic telecommunications services including telephone, telex, telegram, satellite, leased lines, electronic mail, mobile communication and cellular services. In order to accelerate the construction of telecommunications facilities, to make the Company a world-class operator, and to increase the technology as well as the knowledge and skills of its employees, in 1995, the Company entered into agreements with investors to develop, manage and operate telecommunications facilities in five of the Company’s seven regional divisions under Joint Operation Schemes (known as “Kerja Sama Operasi” or “KSO”) (Note 5).

      Pursuant to Law No. 3/1989 on Telecommunications which took effect on April 1, 1989, Indonesian legal entities are allowed to provide basic telecommunications services in cooperation with the Company as the domestic telecommunications organizing body (or “badan penyelenggara”). Government Regula-

F-16

PERUSAHAAN PERSEROAN (PERSERO)

P.T. TELEKOMUNIKASI INDONESIA Tbk AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

DECEMBER 31, 2005 AND 2006, AND FOR YEARS ENDED

DECEMBER 31, 2004, 2005 AND 2006

(Figures in tables are presented in millions of Rupiah, unless otherwise stated)

tion No. 8/1993, concerning the provision of telecommunications services, further regulates that cooperation to provide basic telecommunications services can be in the form of joint venture, joint operation or contract management and that the entities cooperating with the domestic telecommunications organizing body must use the organizing body’s telecommunications networks. If the telecommunications networks are not available, the Government Regulation requires that the cooperation be in the form of a joint venture that is capable of constructing the necessary networks.

      The Minister of Tourism, Post and Telecommunications of the Republic of Indonesia (“MTPT”), through two decision letters both dated August 14, 1995, reaffirmed the status of the Company as the organizing body for the provision of domestic telecommunications services.

      Further, effective from January 1, 1996, the Company was granted the exclusive right to provide local wireline and fixed wireless services for a minimum period of 15 years and the exclusive right to provide domestic long-distance telecommunications services for a minimum period of 10 years. The exclusive rights also applied to telecommunications services provided for and on behalf of the Company through a KSO. This grant of rights did not affect the Company’s right to provide other domestic telecommunications services.

      Under Law No. 36/1999 on Telecommunications, which took effect from September 2000, telecommunications activities cover:

      i. Telecommunications networks

      ii. Telecommunications services

      iii. Special telecommunications

      National state-owned companies, regional state-owned companies, privately-owned companies and cooperatives are allowed to provide telecommunications networks and services. Special telecommunications can be provided by individuals, government agencies and legal entities other than telecommunications networks and service providers.

      Under Law No. 36/1999, activities that result in monopolistic practices and unfair competition are prohibited. In connection with this law, Government Regulation No. 52/2000 was issued, which provides that interconnection fees shall be charged to originating telecommunications network operators where telecommunications service is provided by two or more telecommunications network operators.

      Based on press release No. 05/ HMS/ JP/ VIII/2000 dated August 1, 2000 from the Director General of Post and Telecommunications and the correction thereto No. 1718/ UM/ VIII/2000 dated August 2, 2000, the period of exclusive rights granted to the Company to provide local and domestic long-distance fixed-line telecommunications services, which initially would expire in December 2010 and December 2005, respectively, were shortened to expire in August 2002 and August 2003, respectively. In return, the Government was required to pay compensation to the Company (Note 30).

      Based on a press release from the Coordinating Minister of Economics dated July 31, 2002, the Government decided to terminate the Company’s exclusive rights as a network provider for local and long-distance services with effect from August 1, 2002. On August 1, 2002, PT Indonesian Satellite Corporation Tbk (“Indosat”) was granted a license to provide local and long-distance telecommunications services.

      On May 13, 2004, pursuant to the Ministry of Communications Decree No. KP. 162/2004, the Company was granted a commercial license to provide International Direct Dialing (IDD) services.

F-17

PERUSAHAAN PERSEROAN (PERSERO)

P.T. TELEKOMUNIKASI INDONESIA Tbk AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

DECEMBER 31, 2005 AND 2006, AND FOR YEARS ENDED

DECEMBER 31, 2004, 2005 AND 2006

(Figures in tables are presented in millions of Rupiah, unless otherwise stated)

      Based on the resolution of the Annual General Meeting of Stockholders, the minutes of which have been summarized by deed No. 36 dated June 24, 2005 of A. Partomuan Pohan, S.H., LLM., the composition of the Company’s Board of Commissioners and Board of Directors as of December 31, 2005 and 2006 was as follows:

President Commissioner	: Tanri Abeng
Commissioner	: Anggito Abimanyu
Commissioner	: Gatot Trihargo
Independent Commissioner	: Arif Arryman
Independent Commissioner	: Petrus Sartono
President Director	: Arwin Rasyid
Vice President Director/ Chief Operating Officer	: Garuda Sugardo
Director of Finance	: Rinaldi Firmansyah
Director of Network and Solution	: Abdul Haris
Director of Enterprise and Wholesale	: Arief Yahya
Director of Human Resources	: John Welly
Director of Consumer	: Guntur Siregar

      Subsequently, based on Extraordinary General Meeting of Stockholders, the minutes of which have been summarized by deed No. 45/ II/2007 dated February 28, 2007 of A. Partomuan Pohan, S.H., LLM., the composition of the Company’s Board of Commissioners and Board of Directors was as follows:

President Commissioner	: Tanri Abeng
Commissioner	: Anggito Abimanyu
Commissioner	: Gatot Trihargo
Independent Commissioner	: Arif Arryman
Independent Commissioner	: Petrus Sartono
President Director	: Rinaldi Firmansyah
Director of Finance	: Sudiro Asno
Director of Network and Solution	: I Nyoman Gede Wiryanata
Director of Enterprise and Wholesale	: Arief Yahya
Director of Human Capital and General Affairs	: Faisal Syam
Director of Consumer	: Ermady Dahlan
Chief Information Technology Officer	: Indra Utoyo
Director of Compliance and Risk Management	: Prasetio

      As of December 31, 2005 and 2006, the Company had 28,179 employees and 27,658 employees, respectively, while the subsidiaries had 5,825 employees and 6,363 employees, respectively.

     b.  Public offering of shares of the Company

      The Company’s total number of shares immediately prior to its initial public offering was 8,400,000,000, which consisted of 8,399,999,999 Series B shares and 1 Series A Dwiwarna share, all of which were owned by the Government of the Republic of Indonesia (the “Government”). On November 14, 1995, the Government sold the Company’s shares through an initial public offering on the Jakarta Stock Exchange and Surabaya

F-18

PERUSAHAAN PERSEROAN (PERSERO)

P.T. TELEKOMUNIKASI INDONESIA Tbk AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

DECEMBER 31, 2005 AND 2006, AND FOR YEARS ENDED

DECEMBER 31, 2004, 2005 AND 2006

(Figures in tables are presented in millions of Rupiah, unless otherwise stated)

Stock Exchange. The shares offered consisted of 933,333,000 new Series B shares and 233,334,000 Series B shares owned by the Government. A share offering was also conducted on the New York Stock Exchange (“NYSE”) and London Stock Exchange (“LSE”) for 700,000,000 Series B shares owned by the Government, which were converted into 35,000,000 American Depositary Shares (ADS). Each ADS represented 20 Series B shares at that time.

      In December 1996, the Government completed a block sale of 388,000,000 Series B shares, and later in 1997, distributed 2,670,300 Series B shares as an incentive to stockholders who did not sell their shares within one year from the date of the initial public offering. In May 1999, the Government sold 898,000,000 Series B shares.

      Under Law No. 1/1995 on Limited Liability Companies, the minimum total par value of the Company’s issued shares of capital stock must be at least 25% of the total par value of the Company’s authorized capital stock, or in the Company’s case Rp.5,000,000 million. To comply with the Law, it was resolved at the Annual General Meeting of Stockholders on April 16, 1999 to increase the issued share capital by distribution of 746,666,640 bonus shares through the capitalization of certain additional paid-in capital. The bonus shares were distributed to the existing stockholders in August 1999.

      In December 2001, the Government conducted another block sale of 1,200,000,000 shares or 11.9% of the total outstanding Series B shares. In July 2002, the Government sold 312,000,000 shares or 3.1% of the total outstanding Series B shares.

      On July 30, 2004, the Annual General Meeting of Stockholders, the minutes of which were notarized by deed No. 26 dated July 30, 2004 of A. Partomuan Pohan, S.H., LLM., resolved to decrease the par value of the Company’s shares from Rp.500 to Rp.250 by means of a 2-for-1 stock split. The Series A Dwiwarna share with par value of Rp.500 was split to one Series A Dwiwarna share with par value of Rp.250 and one Series B share with par value of Rp.250. As a result of the stock split, the number of the Company’s authorized capital stock increased from one Series A Dwiwarna share and 39,999,999,999 Series B shares to one Series A Dwiwarna share and 79,999,999,999 Series B shares, and the number of the Company’s issued capital stock increased from one Series A Dwiwarna share and 10,079,999,639 Series B shares to one Series A Dwiwarna share and 20,159,999,279 Series B shares. After the stock split, each ADS represented 40 Series B shares.

      Based on the resolution of the Extraordinary General Meeting of Stockholders on December 21, 2005, the Stockholders authorized the plan to repurchase up to a maximum of 5% of the Company’s issued Series B shares for a total repurchase amount not exceeding Rp.5,250,000 million. As of June 27, 2007, the Company has repurchased 211,290,500 shares of the Company’s issued and outstanding Series B shares, representing approximately 1.05% of the Company’s issued and outstanding Series B shares, for a total repurchase amount of Rp.1,829,113 million, including the broker and custodian fees (Note 29).

      As of December 31, 2006, all of the Company’s Series B shares were listed on the Jakarta Stock Exchange and Surabaya Stock Exchange and 37,187,806 ADS shares were listed on the NYSE and LSE.

F-19

PERUSAHAAN PERSEROAN (PERSERO)

P.T. TELEKOMUNIKASI INDONESIA Tbk AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

DECEMBER 31, 2005 AND 2006, AND FOR YEARS ENDED

DECEMBER 31, 2004, 2005 AND 2006

(Figures in tables are presented in millions of Rupiah, unless otherwise stated)

     c.  Subsidiaries

      The Company has consolidated the following direct subsidiaries in Indonesia which it controls as a result of its majority ownership:

			Percentage of						Total Assets Before
			Ownership				Start of		Eliminations
							Commercial
Subsidiaries	Domicile	Nature of Business	2005		2006		Operations		2005		2006
			%		%
PT Pramindo Ikat Nusantara	Medan	Telecommunications construction & services		100		100		1995		1,356,634		1,372,524
PT AriaWest International	Jakarta	Telecommunications		100		100		1995		1,127,772		806,542
PT Multimedia Nusantara	Jakarta	Multimedia		100		100		1998		53,738		94,187
PT Graha Sarana Duta	Jakarta	Real estate, construction and services		99.99		99.99		1982		101,910		134,840
PT Dayamitra Telekomunikasi	Jakarta	Telecommunications		100		100		1995		622,662		503,299
PT Indonusa Telemedia	Jakarta	Pay TV		96		96		1997		66,445		66,862
PT Telekomunikasi Selular	Jakarta	Telecommunications		65		65		1995		25,754,321		37,300,784
PT Napsindo Primatel Internasional	Jakarta	Telecommunications		60		60		1999		7,884		6,297
PT Infomedia Nusantara	Jakarta	Data and information service		51		51		1984		376,160		437,028

      The Company has also consolidated the following indirect subsidiaries:

				Ownership
				Percentage
				by
				Subsidiaries				Start of
								Commercial
Indirect Subsidiaries	Stockholders	Domicile	Nature of Business	2005		2006		Operations
				%		%
Telekomunikasi Selular Finance Limited	PT Telekomunikasi Selular	Mauritius	Finance		100		100		2002
Telkomsel Finance B.V.	PT Telekomunikasi Selular	Netherlands	Finance		100		100		2005
Aria West International Finance B.V.	PT AriaWest International	Netherlands	Finance		100		100		1996
PT Balebat Dedikasi Prima	PT Infomedia Nusantara	Indonesia	Printing		51		65		2000
PT Finnet Indonesia	PT Multimedia Nusantara	Indonesia	Banking data and communication		—		60		2006

PT Pramindo Ikat Nusantara (“Pramindo”)

      Pramindo is the investor in KSO I, the joint operating scheme that provides telecommunications services in Sumatra. On April 19, 2002, the Company entered into a Conditional Sale and Purchase Agreement (“CSPA”) (as amended on August 1, 2002) to acquire 100% of the issued and paid-up share capital of Pramindo. The Company acquired control of Pramindo on August 15, 2002, the date when the Company entered into a Stockholders Voting Agreement pursuant to which the Company obtained the right to vote all

F-20

PERUSAHAAN PERSEROAN (PERSERO)

P.T. TELEKOMUNIKASI INDONESIA Tbk AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

DECEMBER 31, 2005 AND 2006, AND FOR YEARS ENDED

DECEMBER 31, 2004, 2005 AND 2006

(Figures in tables are presented in millions of Rupiah, unless otherwise stated)

Pramindo’s shares and the right to nominate all the members of the Board of Directors and Board of Commissioners of Pramindo (Note 5b).

PT AriaWest International (“AWI”)

      AWI is the investor in KSO III, the joint operating scheme that provides telecommunication services in West Java. On May 8, 2002, the Company entered into a Conditional Sale and Purchase Agreement to acquire 100% of the issued and paid-up capital of AWI. The acquisition was effective on July 31, 2003, the date when the Company entered into the First Amendment to the Conditional Sale and Purchase Agreement with the stockholders of AWI in which both parties agreed to the Company’s acquisition of AWI (Note 5c).

      On March 6, 2007, the name of PT Aria West International has been changed to PT Telekomunikasi Indonesia International (Note 54b).

PT Multimedia Nusantara (“Metra”)

      Metra is engaged in providing multimedia telecommunications services.

      On July 21, 2005, the Annual General Meeting of Stockholders of Metra resolved to issue additional share capital totaling Rp.26,000 million to the Company. The Company paid the entire amount on October 21, 2005.

PT Graha Sarana Duta (“GSD”)

      GSD is currently engaged primarily in leasing of offices as well as providing building management and maintenance services, civil consultant and developer.

      On April 6, 2001, the Company acquired its 99.99% ownership interest in GSD from Koperasi Mitra Duta and Dana Pensiun Bank Duta, for a purchase consideration of Rp.119,000 million. This acquisition resulted in goodwill of Rp.106,348 million which was amortized over a period of five years (Note 15).

PT Dayamitra Telekomunikasi (“Dayamitra”)

      Dayamitra is the investor in KSO VI, the joint operating scheme that provides telecommunications services in Kalimantan. The Company’s acquisition of a 90.32% ownership interest in Dayamitra was effective on May 17, 2001, the date when the Deed of Share Transfer was signed. The Company also entered into an Option Agreement to acquire the remaining 9.68% interest from the selling stockholders. On December 14, 2004, the Company exercised the option to acquire the remaining 9.68% outstanding shares of Dayamitra by entering into a Sale and Purchase Agreement with TM Communications (HK) Ltd. (Note 5a).

PT Indonusa Telemedia (“Indonusa”)

      Indonusa is engaged in providing pay television and content services.

      On August 8, 2003, the Company increased its investment in Indonusa from 57.5% to 88.08% through a share-swap agreement with PT Centralindo Pancasakti Cellular (“CPSC”) (Note 11c).

      Pursuant to the extraordinary meeting of stockholders of Indonusa on October 29, 2003, Indonusa agreed to convert its payable to the Company amounting to Rp.13,500 million into 1,350,000 shares of Indonusa. Following such conversion, the Company’s ownership in Indonusa increased from 88.08% to 90.39%.

F-21

PERUSAHAAN PERSEROAN (PERSERO)

P.T. TELEKOMUNIKASI INDONESIA Tbk AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

DECEMBER 31, 2005 AND 2006, AND FOR YEARS ENDED

DECEMBER 31, 2004, 2005 AND 2006

(Figures in tables are presented in millions of Rupiah, unless otherwise stated)

      The Company purchased 5.29% of Indonusa’s shares from PT Megacell Media for Rp.4,000 million, thereby increasing the Company’s ownership interest from 90.39% to 95.68% after the settlement of payment on November 22, 2005.

PT Telekomunikasi Selular (“Telkomsel”)

      Telkomsel is engaged in providing telecommunications facilities and mobile cellular services using Global System for Mobile Communication (“GSM”) technology on a nationwide basis.

      The Company’s cross-ownership transaction with Indosat in 2001 increased the Company’s ownership interest in Telkomsel to 77.72% (Note 30).

      On April 3, 2002, the Company entered into a Conditional Sale and Purchase Agreement with Singapore Telecom Mobile Pte. Ltd. (“Singtel”). Pursuant to the agreement, the Company sold 23,223 ordinary registered shares of Telkomsel, representing 12.72% of the issued and paid-up capital of Telkomsel for a total consideration of US$429 million (equivalent to Rp.3,948,945 million). This transaction reduced the Company’s ownership in Telkomsel from 77.72% to 65%.

      Based on Decision Letter No. 19/ KEP/ M.KOMINFO/2/2006 of the Minister of Communication and Information Technology dated February 14, 2006, the Government granted Telkomsel an IMT-2000 license in the 2.1 GHz frequency bandwidth for a ten year period (3G license), extendable subject to evaluation (Note 15 and 51c). In September 2006, Telkomsel started its commercial 3G service.

      Based on the Decision Letter No. 101/ KEP/ M.KOMINFO/10/2006 dated October 11, 2006 of the Minister of Communication and Information Technology, Telkomsel operating licenses were updated granting Telkomsel the rights to provide:

      a. Mobile telecommunication services with radio frequency bandwith in the 900 MHz and 1800 MHz bands;

      b. Mobile telecommunication services IMT-2000 with radio frequency bandwith in the 2.1 GHz bands (3G); and

      c. Basic telecommunication services.

PT Napsindo Primatel Internasional (“Napsindo”)

      Napsindo is engaged in providing “Network Access Point” (NAP), “Voice Over Data” (VOD) and other related services.

      Based on the notarial deed No. 47 dated December 30, 2002 of H. Yunardi, S.H., the Company purchased 28% of Napsindo’s shares from PT Info Asia Sukses Makmur Mandiri for US$4.9 million (equivalent to Rp.43,620 million), thereby increasing the Company’s ownership interest from 32% to 60% after the settlement of payment on January 28, 2003. Starting January 13, 2006 Napsindo’s operation has ceased.

PT Infomedia Nusantara (“Infomedia”)

      Infomedia is engaged in providing telecommunications information services and other information services in the form of print and electronic media. In 2002, Infomedia established a new line of business to provide call center services.

F-22

PERUSAHAAN PERSEROAN (PERSERO)

P.T. TELEKOMUNIKASI INDONESIA Tbk AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

DECEMBER 31, 2005 AND 2006, AND FOR YEARS ENDED

DECEMBER 31, 2004, 2005 AND 2006

(Figures in tables are presented in millions of Rupiah, unless otherwise stated)

Telekomunikasi Selular Finance Limited (“TSFL”)

      Telkomsel has 100% direct ownership interest in TSFL, a company established in Mauritius on April 22, 2002. TSFL’s objective is to raise funds for the development of Telkomsel’s business through the issuance of debenture stock, bonds, mortgages or any other securities.

Telkomsel Finance B.V. (“TFBV”)

      TFBV, a wholly owned subsidiary of Telkomsel, was established in Amsterdam, the Netherlands, on February 7, 2005, for the purpose of borrowing, lending and raising funds, including issuance of bonds, promissory notes or debt instruments.

Aria West International Finance B.V. (“AWI BV”)

      AWI BV, a company established in the Netherlands, is a wholly owned subsidiary of AWI. AWI BV is engaged in rendering services in the field of trade and finance service.

PT Balebat Dedikasi Prima (“Balebat”)

      Balebat is a company engaged in the printing business, domiciled in Bogor, Indonesia. On July 1, 2006 Infomedia purchased 14% of Balebat’s shares from other shareholders, thereby increasing Infomedia’s ownership interest from 51% to 65%.

PT Finnet Indonesia (“Finnet”)

      Finnet is a company established in January 2006 that engaged in banking data and communication. Metra has 60% direct ownership interest in Finnet.

PT Pro Infokom Indonesia (“PII”)

      On January 29, 2003, the Company together with PT Indonesia Comnets Plus, a subsidiary of Perusahaan Perseroan (Persero) PT Perusahaan Listrik Negara (“PLN”) and PT Prima Infokom Indonesia established PT Pro Infokom Indonesia (“PII”). The establishment was notarized by deed of A. Partomuan Pohan, S.H., LLM., notary in Jakarta, under Article of Association No. 24, dated January 29, 2003.

      PII was established to develop a national information network system as the back-bone for the development of the Indonesian e-Government. PII was intended to maximize the utilization of both the Company’s and PLN’s existing infrastructures.

      On January 20, 2005, the Company sold its entire 51% equity interest in PII to PT Prima Infokom Indonesia for Rp.471 million. The revenues and expenses of PII as well as the related loss on the sale of the subsidiary were not significant to the consolidated statement of income.

     d.  Authorization of the financial statements

      The consolidated financial statements were authorized for issue by the Board of Directors on June 27, 2007.

F-23

PERUSAHAAN PERSEROAN (PERSERO)

P.T. TELEKOMUNIKASI INDONESIA Tbk AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

DECEMBER 31, 2005 AND 2006, AND FOR YEARS ENDED

DECEMBER 31, 2004, 2005 AND 2006

(Figures in tables are presented in millions of Rupiah, unless otherwise stated)

2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

      The consolidated financial statements of the Company and subsidiaries have been prepared in accordance with accounting principles generally accepted in Indonesia (“Indonesian GAAP”). Indonesian GAAP varies in certain significant respects from accounting principles generally accepted in the United States of America (“U.S. GAAP”). Information relating to the nature and effect of such differences is presented in Note 56.

     a.  Basis for preparation of financial statements

      The consolidated financial statements, except for the statements of cash flows, are prepared on the accrual basis of accounting. The measurement basis used is historical cost, except for certain accounts recorded on the basis described in the related accounting policies.

      The consolidated statements of cash flows are prepared using the direct method and present the changes in cash and cash equivalents from operating, investing and financing activities.

      Figures in the consolidated statements are rounded and presented in millions of Indonesian Rupiah (“Rp.”), unless otherwise stated.

     b.  Principles of consolidation

      The consolidated financial statements include the financial statements of the Company and its subsidiaries in which the Company directly or indirectly has ownership of more than 50%, or the Company has the ability to control the entity, even though the ownership is less than or equal to 50%. Subsidiaries are consolidated from the date on which every effective control is obtained and are no longer consolidated from the date of disposal.

      All significant inter-company balances and transactions have been eliminated in consolidation.

     c.  Transactions with related parties

      The Company and subsidiaries have transactions with related parties. The definition of related parties used is in accordance with Indonesian Statement of Financial Accounting Standards (“PSAK”) No. 7, “Related Party Disclosures”.

     d.  Acquisitions of subsidiaries

      The acquisition of a subsidiary from a third party is accounted for by using the purchase method of accounting. Intangible assets acquired in a purchase business combination are amortized over their respective contractual lives. The excess of the acquisition cost over the Company’s interest in the fair value of identifiable assets acquired and liabilities assumed is recorded as goodwill and amortized using the straight-line method over a period of not more than five years.

      The Company continually assesses whether events or changes in circumstances have occurred that would require revision of the remaining useful life of intangible assets and goodwill, or whether there is any indication of impairment. If any indication of impairment exists, the recoverable amount of intangible assets and goodwill is estimated based on the expected future cash flows which are discounted to their present value using a pre-tax discount rate that reflects current market assessments of the time value of money and the risks specific to the asset.

F-24

PERUSAHAAN PERSEROAN (PERSERO)

P.T. TELEKOMUNIKASI INDONESIA Tbk AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

DECEMBER 31, 2005 AND 2006, AND FOR YEARS ENDED

DECEMBER 31, 2004, 2005 AND 2006

(Figures in tables are presented in millions of Rupiah, unless otherwise stated)

      In July 2004, the Indonesian Financial Accounting Standard Board issued PSAK No. 38 (Revised 2004), “Accounting for Restructuring Transactions between Entities under Common Control”, (PSAK 38R). Under PSAK 38R, the acquisition transaction with entities under common control is accounted for using book value, in a manner similar to that in pooling of interests accounting (carryover basis). The difference between the consideration paid or received and the related historical carrying amount, after considering income tax effects, is recognized directly in equity and reported as “Difference in value of restructuring transactions between entities under common control” in the stockholders’ equity section.

      The balance of “Difference in value of restructuring transactions between entities under common control” is reclassified to retained earnings when the common control relationship has ceased (see Note 4).

     e.  Foreign currency translation

      The functional currency of the Company and its subsidiaries is the Indonesian Rupiah and the books of accounts of the Company and its subsidiaries are maintained in Indonesian Rupiah. Transactions in foreign currencies are translated into Indonesian Rupiah at the rates of exchange prevailing at transaction date. At the balance sheet date, monetary assets and monetary liability balances denominated in foreign currencies are translated into Indonesian Rupiah based on the buy and sell rates quoted by Reuters prevailing at the balance date. The Reuters buy and sell rates, applied respectively to translate monetary assets and monetary liability balances, were Rp.9,825 and Rp.9,835 to US$1, Rp.11,638 and Rp.11,652 to Euro1 and Rp.83.78 and Rp.83.89 to Japanese Yen1 as of December 31, 2005 and Rp.8,995 and Rp.9,005 to US$1, Rp.11,839 and Rp.11,853 to Euro1 and Rp.75.58 and Rp.75.68 to Japanese Yen1 as of December 31, 2006. Telkomsel used Bank Indonesia middle rate, which were Rp.9,830 to US$1 and Rp.11,660 to Euro1 as of December 31, 2005 and Rp.9,020 to US$1 and Rp.11,858 to as Euro1 of December 31, 2006. Management concludes that the difference of those exchange rates is not material to the consolidated financial statements.

      The resulting foreign exchange gains or losses, realized and unrealized, are credited or charged to income of the current year, except for foreign exchange differences incurred on borrowings during the construction of qualifying assets which are capitalized to the extent that the borrowings can be attributed to the construction of those qualifying assets (Note 2k).

     f.  Cash and cash equivalents

      Cash and cash equivalents consist of cash on hand and in banks and all unrestricted time deposits with maturities of not more than three months from the date of placement.

     g.  Investments

     i.  Time deposits

      Time deposits with maturities of more than three months are presented as temporary investments.

     ii.  Investments in securities

      Investments in available-for-sale securities are stated at fair value. Unrealized holding gains or losses from available-for-sale securities are excluded from income of the current year and are reported as a separate component in the stockholders’ equity section until realized. Realized gains or losses from the sale of available-for-sale securities are recognized in the income of the current year, and are determined on a

F-25

PERUSAHAAN PERSEROAN (PERSERO)

P.T. TELEKOMUNIKASI INDONESIA Tbk AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

DECEMBER 31, 2005 AND 2006, AND FOR YEARS ENDED

DECEMBER 31, 2004, 2005 AND 2006

(Figures in tables are presented in millions of Rupiah, unless otherwise stated)

specific-identification basis. A decline in the fair value of any available-for-sale securities below cost that is deemed to be other-than-temporary is charged to income of the current year.

     iii. Investments in associated companies

      Investments in shares of stock in which the Company has 20% to 50% of the voting rights, and through which the Company exerts significant influence, but not control, over the financial and operating policies are accounted for using the equity method. Under this method, the Company recognizes the Company’s proportionate share in the income or loss of the associated company from the date that significant influence commences until the date that significant influence ceases. When the Company’s share of loss exceeds the carrying amount of the associated company, the carrying amount is reduced to nil and recognition of further losses is discontinued except to the extent that the Company has guaranteed obligations of the associated company or committed to provide further financial support to the associated company.

      On a continuous basis, but no less frequently than at the end of each year, the Company evaluates the carrying amount of its ownership interests in investee companies for possible impairment. Factors considered in assessing whether an indication of other-than-temporary impairment exists include the achievement of business plan objectives and milestones including cash flow projections and the results of planned financing activities, the financial condition and prospects of each investee company, the fair value of the ownership interest relative to the carrying amount of the investment, the period of time the fair value of the ownership interest has been below the carrying amount of the investment and other relevant factors. Impairment to be recognized is measured based on the amount by which the carrying amount of the investment exceeds the fair value of the investment. Fair value is determined based on quoted market prices (if any), projected discounted cash flows or other valuation techniques as appropriate.

      Changes in the value of investments due to changes in the equity of associated companies arising from capital transactions of such associated companies with other parties are recognized directly in equity and are reported as “Difference due to change of equity in associated companies” in the stockholders’ equity section. Differences previously credited directly to equity as a result of equity transactions in associated companies are released to the statement of income upon the sale of an interest in the associate in proportion with percentage of the interest sold.

      The functional currency of PT Pasifik Satelit Nusantara and PT Citra Sari Makmur is the U.S. Dollar. For the purpose of reporting these investments using the equity method, the assets and liabilities of these companies as of the balance sheet date are translated into Indonesian Rupiah using the rates of exchange prevailing at that date, while revenues and expenses are translated into Indonesian Rupiah at the average rates of exchange for the year. The resulting translation adjustments are reported as part of “Translation adjustment” in the equity section.

     iv. Other investments

      Investments in shares of stock with ownership interests of less than 20% that do not have readily determinable fair values and are intended for long-term investments are carried at cost and are adjusted only for other-than-temporary decline in the value of individual investments. Any such write-down is charged directly to income of the current year.

F-26

PERUSAHAAN PERSEROAN (PERSERO)

P.T. TELEKOMUNIKASI INDONESIA Tbk AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

DECEMBER 31, 2005 AND 2006, AND FOR YEARS ENDED

DECEMBER 31, 2004, 2005 AND 2006

(Figures in tables are presented in millions of Rupiah, unless otherwise stated)

     h. Trade and other receivables

      Trade and other receivables are recorded net of an allowance for doubtful accounts, based upon a review of the collectibility of the outstanding amounts. Accounts are written off against the allowance during the period in which they are determined to be not collectible.

      Trade and other receivables are recorded at the invoiced amount. The allowance for doubtful accounts is the Company’s best estimate of the amount of probable credit losses in the Company’s existing accounts receivable. The amount of the allowance is recognized in the consolidated statement of income within operating expenses — general and administrative. The Company determines the allowance based on historical write-off experience. The Company reviews its allowance for doubtful accounts monthly. Past due balances over 90 days for retail customers are fully provided, and past due balance for non-retail customers over a specified amount are reviewed individually for collectibility. Account balances are charged off against the allowance after all means of collection have been exhausted and the potential for recovery is considered remote. The Company does not have any off-balance sheet credit exposure related to its customers.

     i. Inventories

      Inventories consist of components and modules which are expensed or transferred to property, plant and equipment upon use. Inventories also include Subscriber Identification Module (“SIM”) cards, Removable User Identity Module (“RUIM”) cards and pulse reload voucher blanks, which are expensed upon sale. Inventories are stated at the lower of costs or net realizable value.

      Cost is determined using the weighted average cost method for components, SIM cards, RUIM cards and prepaid voucher blanks, and the specific-identification method for modules.

      Allowance for obsolescence is primarily based on the estimated forecast of future usage of these items.

     j. Prepaid expenses

      Prepaid expenses are amortized over their beneficial periods using the straight-line method.

     k. Property, plant and equipment — direct acquisitions

      Property, plant and equipment directly acquired are stated at cost, less accumulated depreciation and impairment losses.

F-27

PERUSAHAAN PERSEROAN (PERSERO)

P.T. TELEKOMUNIKASI INDONESIA Tbk AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

DECEMBER 31, 2005 AND 2006, AND FOR YEARS ENDED

DECEMBER 31, 2004, 2005 AND 2006

(Figures in tables are presented in millions of Rupiah, unless otherwise stated)

      Property, plant and equipment, except land, are depreciated using the straight-line method, based on the estimated useful lives of the assets as follows:

	Years
Buildings		20
Switching equipment		5-15
Telegraph, telex and data communication equipment		5-15
Transmission installation and equipment		5-20
Satellite, earth station and equipment		3-15
Cable network		5-15
Power supply		3-10
Data processing equipment		3-10
Other telecommunications peripherals		5
Office equipment		2-5
Vehicles		5-8
Other equipment		5

      Land is stated at cost and is not depreciated.

      When the carrying amount of an asset exceeds its estimated recoverable amount, the asset is written down to its estimated recoverable amount, which is determined based upon the greater of its net selling price or value in use.

      The cost of maintenance and repairs is expensed as incurred. Expenditures, which extend the useful life of the asset or result in increased future economic benefits such as increase in capacity or improvement in the quality of output or standard of performance, are capitalized and depreciated in conjunction with the depreciation of the related property, plant and equipment over their remaining useful lives or their newly estimated useful lives.

      When assets are retired or otherwise disposed of, their carrying values and the related accumulated depreciation are eliminated from the consolidated financial statements, and the resulting gains or losses on the disposal or sale of property, plant and equipment are recognized in the statements of income.

      Computer software used for data processing is included in the value of the associated hardware.

      Property under construction is stated at cost until construction is complete, at which time it is reclassified to the specific property, plant and equipment account to which it relates. During the construction period, borrowing costs, which include interest expense and foreign exchange differences incurred to finance the construction of the asset, are capitalized in proportion to the average amount of accumulated expenditures during the period. Capitalisation of borrowing cost ceases when the assets are ready for its intended use.

      Equipment temporarily unused are reclassified into equipment not used in operation and depreciated over their estimated useful life using straight line method.

     l. Property, plant and equipment under capital leases

      Property, plant and equipment acquired under capital leases are stated at the present value of minimum lease payments along with the residual values (option price) paid by the lessee at the end of lease period. At

F-28

PERUSAHAAN PERSEROAN (PERSERO)

P.T. TELEKOMUNIKASI INDONESIA Tbk AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

DECEMBER 31, 2005 AND 2006, AND FOR YEARS ENDED

DECEMBER 31, 2004, 2005 AND 2006

(Figures in tables are presented in millions of Rupiah, unless otherwise stated)

inception of the lease, a corresponding liability, which equals to the present value of minimum lease payments, is also recorded and subsequently reduced by the principal component of each minimum lease payment. The interest component of each minimum lease payment is recognized in the statements of income.

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

      Leased assets are depreciated using the same method and over the same estimated useful lives used for directly acquired property, plant and equipment.

     m.  Revenue-sharing arrangements

      Revenues from revenue-sharing arrangements are recognized based on Company’s share as agreed upon in the contracts.

      The Company records assets under revenue-sharing agreements as “Property, plant and equipment under revenue-sharing arrangements” (with a corresponding initial credit to “Unearned income on revenue-sharing arrangements” presented in the liabilities section of the balance sheet) based on the costs incurred by the investors as agreed upon in the contracts entered into between the Company and the investors. Property, plant and equipment are depreciated over their estimated useful lives using the straight-line method (Note 2k).

      Unearned income related to the acquisition of the property, plant and equipment under revenue-sharing arrangements is amortized over the revenue-sharing period using the straight-line method.

      At the end of the revenue-sharing period, the respective property, plant and equipment under revenue-sharing arrangements are reclassified to the “Property, plant and equipment” account.

     n.  Joint operation schemes

      Revenues from joint operation schemes include amortization of the investor’s initial payments, Minimum TELKOM Revenues (“MTR”) and the Company’s share of Distributable KSO Revenues (“DKSOR”).

      Unearned initial investor payments received as compensation from the KSO Investors were presented net of all direct costs incurred in connection with the KSO agreement and amortized using the straight-line method over the KSO period of 15 years starting from January 1, 1996.

      MTR were recognized on a monthly basis, based upon the contracted MTR amount for the current year, in accordance with the KSO agreement.

      The Company’s share of DKSOR was recognized on the basis of the Company’s percentage share of the KSO revenues, net of MTR and operational expenses of the KSO Units, as provided in the KSO agreements.

      Under PSAK No. 39, “Accounting for Joint Operation Schemes”, which supersedes paragraph 14 of PSAK No. 35, “Accounting for Telecommunication Services Revenue”, the assets built by the KSO Investors under the joint operation schemes were recorded in the books of the KSO Investors which operate the assets and would be transferred to the Company at the end of the KSO period or upon termination of the KSO agreement.

F-29

PERUSAHAAN PERSEROAN (PERSERO)

P.T. TELEKOMUNIKASI INDONESIA Tbk AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

DECEMBER 31, 2005 AND 2006, AND FOR YEARS ENDED

DECEMBER 31, 2004, 2005 AND 2006

(Figures in tables are presented in millions of Rupiah, unless otherwise stated)

      As of December 31, 2006 the Company has obtained full control over all of the KSO operations by acquisition of its KSO investors or the businesses.

     o.  Deferred charges for landrights

      Costs incurred to process and extend the landrights are deferred and amortized using the straight-line method over the term of the landrights.

     p.  Treasury stock

      The reacquired Company’s stocks is accounted for using the reacquisition cost and presented as “Treasury Stock” to be deducted against the equity. The cost of reacquired Company’s stocks sold is accounted for using the weighted average method. The difference resulting from the cost and the proceeds from the sale of treasury stock is credited to “Paid-in Capital”.

     q.  Revenue and expense recognition

     i.  Fixed line telephone revenues

      Revenues from fixed line installations are recognized at the time the installations are placed in service and ready for use. Revenues from usage charges are recognized as customers incur the charges.

     ii.  Cellular and fixed wireless telephone revenues

      Revenues from postpaid services, which consist of connection fee as well as usage and monthly charges, are recognized as follows:

•  Connection fees for service connection are recognized as revenues at the time the connection occurs.

•  Airtime and charges for value added services are recognized based on usage by subscribers.

•  Monthly subscription charges are recognized as revenues when incurred by subscribers.

      Revenues from prepaid card customers, which consist of the sale of starter packs (also known as SIM cards in the case of cellular or RUIM in the case of fixed wireless telephone and start-up load vouchers) and pulse reload vouchers, are recognized as follows:

•  Sale of SIM and RUIM card is recognized as revenue upon delivery of the starter packs to distributors, dealers or directly to customers.

•  Sale of pulse reload vouchers (either bundled in starter packs or sold as separate items) is recognized initially as unearned income and recognized proportionately as usage revenue based on duration of successful calls made and the value added services used by the subscribers or the expiration of the unused stored value of the voucher.

     iii.  Interconnection revenues

      Revenues from network interconnection with other domestic and international telecommunications carriers are recognized as incurred based on agreement and are presented net of interconnection expenses.

F-30

PERUSAHAAN PERSEROAN (PERSERO)

P.T. TELEKOMUNIKASI INDONESIA Tbk AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

DECEMBER 31, 2005 AND 2006, AND FOR YEARS ENDED

DECEMBER 31, 2004, 2005 AND 2006

(Figures in tables are presented in millions of Rupiah, unless otherwise stated)

     iv.  Data and internet revenues

      Revenues from installations (set-up) of internet, data communication and e-Business are recognized upon the completion of installations. Revenues from data communication and internet are recognized based on usage.

     v.  Revenues from network

      Revenues from network consist of revenues from leased lines and satellite transponder leases. Revenues are recognized based on subscription fee as specified in the agreements.

      Expenses are recognized on an accrual basis and unutilized promotional credits and allowances are netted against unearned income.

     r.  Employee benefits

     i.  Pension and post-retirement health care benefit plans

      The net obligations in respect of the defined pension benefit and post-retirement health care benefit plans are calculated at the present value of estimated future benefits that the employees have earned in return for their service in the current and prior periods, deducted by any plan assets, unrecognized actuarial gains or losses, and unrecognized past service cost. The calculation is performed by an independent actuary using the projected unit credit method. The present value of the defined benefit obligation is determined by discounting the estimated future cash outflows using interest rates of government bonds that have terms to maturity approximating the terms of the related liability.

      Actuarial gains or losses arising from experience adjustments and changes in actuarial assumptions, when exceeding the greater of 10% of present value of the defined benefit obligation and 10% of fair value of plan assets, are charged or credited to the income statement over the average remaining service lives of the relevant employees. Prior service cost is recognized immediately if vested or amortized over the vesting period.

      For defined contribution plans, the regular contributions constitute net periodic costs for the year in which they are due and as such are included in staff costs.

     ii.  Long service awards (“LSA”)

      Employees are entitled to receive certain cash awards based on length of service requirement. The benefits are either paid at the time the employee reaches certain anniversary dates during employment or proportionately upon retirement or at the time of termination.

      Actuarial gains or losses arising from experience adjustment and changes in actuarial assumptions are charged immediately to current income statement.

      The obligation with respect to LSA is calculated by an independent actuary using the projected unit credit method.

     iii.  Early retirement benefits

      Early retirement benefits are accrued at the time a commitment to provide early retirement benefits is made as a result of an offer made in order to encourage voluntary redundancy. A commitment to a termination arises when, and only when a detailed formal plan for the early retirement cannot be withdrawn.

F-31

PERUSAHAAN PERSEROAN (PERSERO)

P.T. TELEKOMUNIKASI INDONESIA Tbk AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

DECEMBER 31, 2005 AND 2006, AND FOR YEARS ENDED

DECEMBER 31, 2004, 2005 AND 2006

(Figures in tables are presented in millions of Rupiah, unless otherwise stated)

      Gains or losses on curtailment are recognized when there is a commitment to make a material reduction in the number of employees covered by a plan or when there is an amendment of a defined benefit plan terms such that a material element of future services by current employees will no longer qualify for benefits, or will qualify only for reduced benefits.

      Gains or losses on settlement are recognized when there is a transaction that eliminates all further legal or constructive obligation for part or all of the benefits provided under a defined benefit plan.

     s.  Income tax

      The Company and its subsidiaries recognized deferred tax assets and liabilities for temporary differences between the financial and tax bases of assets and liabilities at each reporting date. The Company and its subsidiaries recognized deferred tax assets resulting from the recognition of future tax benefits, such as the benefit of tax loss carryforwards, to the extent their future realization is probable. Deferred tax assets and liabilities are measured using enacted tax rates at each reporting date which are expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled.

      Income tax is charged or credited to the statement of income, except to the extent that it relates to items recognized directly in equity, such as difference in value of restructuring transactions between entities under common control (Note 2d) and effect of foreign currency translation adjustment for certain investments in associated companies (Note 2g.iii), in which case income tax is also charged or credited directly to equity.

      Amendments to taxation obligations are recorded when an assessment is received or if appealed against, when the results of the appeal are determined.

     t.  Basic earnings per share and earnings per American Depositary Share (“ADS”)

      Basic earnings per share are computed by dividing net income by the weighted average number of shares outstanding during the year. Net income per ADS is computed by multiplying basic earnings per share by 40, the number of shares represented by each ADS.

     u.  Segment information

      The Company and its subsidiaries’ segment information is presented based upon identified business segments. A business segment is a distinguishable unit that provides different products and services and is managed separately. Business segment information is consistent with operating information routinely reported to the Company’s chief operating decision maker.

     v.  Derivative instruments

      Derivative transactions are accounted for in accordance with PSAK 55, “Accounting for Derivative Instruments and Hedging Activities” which requires that all derivative instruments be recognized in the financial statements at fair value. To qualify for hedge accounting, PSAK 55 requires certain criteria to be met, including documentation required to have been in place at the inception of the hedge.

      Changes in fair value of derivative instruments that do not qualify for hedge accounting are recognized in the statement of income. If a derivative instrument is designated and qualifies for hedge accounting, changes in fair value of derivative instruments are recorded as adjustments to the assets or liabilities being hedged in

F-32

PERUSAHAAN PERSEROAN (PERSERO)

P.T. TELEKOMUNIKASI INDONESIA Tbk AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

DECEMBER 31, 2005 AND 2006, AND FOR YEARS ENDED

DECEMBER 31, 2004, 2005 AND 2006

(Figures in tables are presented in millions of Rupiah, unless otherwise stated)

the income for the current year or in the stockholders’ equity, depending on the type of hedge transaction represented and the effectiveness of the hedge.

     w.  Dividends

      Dividend distribution to the Company’s shareholders is recognized as liability in the Company’s consolidated financial statements in the period in which the dividends are approved by the Company’s shareholders. For interim dividends, the Company recognized as liability based on Board of Directors’ decision with the approval from Board of Commissioners.

     x.  Intangible Assets

      Intangible assets comprised of intangible assets from subsidiaries and business acquisition (see note 2d) and license. Intangible asset shall be recognized if it is probable that the expected future economic benefits that are attributable to the asset will flow to the Company and the cost of the asset can be reliably measured. Intangible asset is stated at cost less accumulated amortization and impairment, if any. Intangible asset is amortized over its useful life. The Company shall estimate the recoverable value of its intangible assets. When the carrying amount of an asset exceeds its estimated recoverable amount, the asset is written down to its estimated recoverable amount.

      In 2006, Telkomsel was granted the right to operate the 3G license. Telkomsel is required to pay an up-front fee and annual rights of usage (“BHP”) fee for the next ten years. The up-front fee is recorded as intangible asset and amortized using the straight line method over the term of the right to operate the 3G license (10 years). Amortization commences from the date when the assets attributable to the provision of the related services are available for use.

      Based on management interpretation of the license conditions and the written confirmation from the Directorate General of Post and Telecommunication, it is believed that the license could be returned at any time without any financial obligation to pay the remaining outstanding BHP fees. Based on this fact, Telkomsel concluded that it has purchased the right to make annual operating payments to operate the 3G license. Accordingly, Telkomsel recognizes the BHP fees as expense when incurred.

      Management of Telkomsel assess its plan to continue to use the license on an annual basis.

     y.  Use of estimates

      The preparation of the consolidated financial statements requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the consolidated financial statements and the reported amounts of revenues and expenses during the reporting period. Significant items subject to such estimates and assumptions include the carrying amount of property, plant and equipment and intangible assets, valuation allowance for receivables and obligations related to employee benefits. Actual results could differ from those estimates.

3. TRANSLATION OF RUPIAH INTO UNITED STATES DOLLARS

      The consolidated financial statements are stated in Indonesian Rupiah. The translations of Indonesian Rupiah amounts into United States Dollars are included solely for the convenience of the readers and have been made using the average of the market buy and sell rates of Rp.9,000 to US$1 published by Reuters on December 31, 2006. The convenience translations should not be construed as representations that the

F-33

PERUSAHAAN PERSEROAN (PERSERO)

P.T. TELEKOMUNIKASI INDONESIA Tbk AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

DECEMBER 31, 2005 AND 2006, AND FOR YEARS ENDED

DECEMBER 31, 2004, 2005 AND 2006

(Figures in tables are presented in millions of Rupiah, unless otherwise stated)

Indonesian Rupiah amounts have been, could have been, or could in the future be, converted into United States Dollars at this or any other rate of exchange.

4. CHANGES IN ACCOUNTING POLICY

      In July 2004, the Indonesian Financial Accounting Standards Board issued PSAK No. 38 (Revised 2004), “Accounting for Restructuring Transactions between Entities under Common Control,” (“PSAK 38R”). PSAK 38R changed the Company’s accounting policy for the previously recorded restructuring transactions between entities under common control when certain conditions were met. The provisions of PSAK 38R were effective for the Company beginning January 1, 2005, the initial application date.

      Pursuant to a ruling issued by the Indonesian Capital Market and Financial Institution Supervisory Agency (“BAPEPAM”) regarding the initial application of PSAK 38R by public entities, the Company was required to reclassify the previously recorded difference in value of restructuring transactions between entities under common control as a direct adjustment to retained earnings as of the initial application date when the common control relationship between the transacting parties no longer exists as of January 1, 2005.

      As discussed in Note 30, the difference in value of restructuring transactions between entities under common control as of January 1, 2005 amounting to Rp.7,288,271 million arose from transactions between the Company and Indosat, which at the time of the transactions was also controlled by the Government and therefore was an entity under common control with the Company. This common control relationship ceased to exist in December 2002 when the Government sold its 41.94% ownership interest in Indosat to STT Communications Ltd. (“STTC”) and waived its special voting rights with respect to the Series A Dwiwarna share. In accordance with the BAPEPAM ruling, the Company has reclassified the difference in value of restructuring transactions between entities under common control resulting from the cross-ownership transactions and acquisition of Pramindo as a charge to retained earnings as of January 1, 2005. This reclassification has no net effect on the consolidated stockholders’ equity.

5. ACQUISITIONS OF KSO INVESTORS, KSO IV AND KSO VII

     a.  Dayamitra

      The Company acquired control of Dayamitra (previously the Company’s KSO VI partner) on May 17, 2001 by acquiring 90.32% of the shares and has consequently consolidated Dayamitra from that date.

F-34

PERUSAHAAN PERSEROAN (PERSERO)

P.T. TELEKOMUNIKASI INDONESIA Tbk AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

DECEMBER 31, 2005 AND 2006, AND FOR YEARS ENDED

DECEMBER 31, 2004, 2005 AND 2006

(Figures in tables are presented in millions of Rupiah, unless otherwise stated)

      The allocation of the acquisition cost was as follows:

		Rp.
Purchase consideration — net			1,351,299
Fair value of net assets acquired:
	— Cash and cash equivalents		93,652
	— Distributable KSO revenue receivable		62,398
	— Other current assets		9,450
	— Property, plant and equipment		1,401,479
	— Intangible assets		1,276,575
	— Other non-current assets		19,510
	— Current liabilities		(236,265	)
	— Deferred tax liabilities		(581,816	)
	— Non-current liabilities		(693,684	)
Fair value of net assets			1,351,299

      The Company also entered into the following agreements:

     1.  Option Agreement

      The Company entered into an Option Agreement with TM Communications (HK) Ltd (“TMC”), providing the Company with an option to acquire the remaining 9.68% equity interest in Dayamitra, referred to as the Option Share. Under the agreement, TMC, the selling stockholder, granted the Company an exclusive option to purchase full and legal title to the Option Share (the “Call Option”), and the Company granted the selling stockholder an exclusive option to sell to the Company full legal title to those shares (the “Put Option”).

      In consideration for the grant of the options, the Company paid to the selling stockholder the option purchase price of US$6.3 million plus US$1 million as payment for Dayamitra’s adjusted working capital, or a total of US$7.3 million. The amount was paid in eight quarterly installments of US$0.9 million beginning on August 17, 2001 and ending on May 17, 2003. Payments were made through an escrow account established under the Escrow Agreement discussed below.

      The Company was entitled to exercise the option any time after Dayamitra satisfied all of its obligations under the JBIC (formerly J-Exim) loan beginning on May 17, 2003 and until five business days prior to March 26, 2006. The strike price payable by the Company to the selling stockholder for the Option Shares upon exercise of the option would be US$16.2 million less certain amounts that are stipulated in the Option Agreement.

      Dayamitra repaid the JBIC loan and the JBIC loan agreement was terminated on March 25, 2003.

      On December 14, 2004, the Company exercised the option by entering into a Sale and Purchase Agreement to acquire TMC’s 9.68% outstanding shares in Dayamitra with the strike price of US$16.2 million with the payment be due on March 26, 2006. Payment of the strike price would be made through an escrow account established under the Escrow Agreement discussed below. The Company was required to deposit US$12.6 million (representing the strike price of US$16.2 million less funds available in the escrow account

F-35

PERUSAHAAN PERSEROAN (PERSERO)

P.T. TELEKOMUNIKASI INDONESIA Tbk AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

DECEMBER 31, 2005 AND 2006, AND FOR YEARS ENDED

DECEMBER 31, 2004, 2005 AND 2006

(Figures in tables are presented in millions of Rupiah, unless otherwise stated)

on November 30, 2004 of US$2.4 million and withholding tax of US$1.2 million) in sixteen monthly installments of US$0.8 million beginning on December 26, 2004 through March 26, 2006.

      The purchase price for 9.68% outstanding shares of Dayamitra was US$22.1 million or equivalent to Rp.203,028 million which represented the present value of the option strike price (US$16.2 million) using a discount rate of 7.5% at the acquisition date plus the option purchase price (US$6.3 million) and the payment for Dayamitra’s adjusted working capital (US$1 million). This additional acquisition resulted in intangible assets represents the rights to operate the business in KSO VI of Rp.231,477 million. The amount is being amortized over the then remaining term of the KSO agreement of 6 years (Note 15). There was no goodwill arising from this additional acquisition. Had this acquisition taken place on January 1, 2004, the consolidated net income for the year ended December 31, 2004 would not have been significantly different from the reported amounts.

      As of December 31, 2005, the remaining option strike price to be paid to TMC, before unamortized discount, amounted to US$15 million (equivalent Rp.147,791 million) (Note 25). On March 27, 2006, the option strike price had been fully repaid.

     2.  Escrow Agreement

      An Escrow Agreement dated May 17, 2001, was entered into by and among the Company, Dayamitra, PT Intidaya Sistelindomitra (“Intidaya”), Cable and Wireless plc (“C&W plc”), PT Mitracipta Sarananusa (“Mitracipta”), TMC, Tomen Corporation (“Tomen”), Citibank N.A. Singapore (the Singapore Escrow Agent) and Citibank N.A. Jakarta (the Jakarta Escrow Agent), to establish an Escrow Account to facilitate the payment. In 2006, the Company repaid the entire obligation and the remaining funds available in the escrow account was transferred to the Company’s account (Note 16).

     b.  Pramindo

      On April 19, 2002, the Company and the stockholders of Pramindo (previously the Company’s KSO I partner), namely France Cables et Radio SA, PT Astratel Nusantara, Indosat, Marubeni Corporation, International Finance Corporation (“IFC”) and NMP Singapore Pte. Ltd. (“NMP Singapore”) (collectively the “Selling Stockholders”) entered into a Conditional Sale and Purchase Agreement pursuant to which the Company acquired all of Pramindo’s shares. The Selling Stockholders shares were transferred to an escrow account (hereafter referred as “escrow shares”).

      The aggregate purchase price amounted to US$390.3 million (equivalent to Rp3,464,040 million) plus Rp250,000 million, represented by an initial payment of approximately US$9.3 million (equivalent to Rp82,218 million), consultants’ fees of US$5.9 million (equivalent to Rp52,818 million), working capital reimbursement of Rp250,000 million, and the issue by the Company of Promissory Notes (series I and series II) with an aggregate face value of US$375.1 million, of which the present value at the discount rate of 8.76% at the effective date of the acquisition was estimated to be US$332.8 million (equivalent to Rp2,953,617 million). The series I Promissory Notes were non-interest bearing and the series II Promissory Notes carried a market interest rate. The Promissory Notes would be repaid in 10 unequal quarterly installments beginning September 15, 2002 and were irrevocable, unconditional and transferable.

      The total purchase consideration was allocated first to the net monetary assets and then the fixed assets acquired. An intangible asset of Rp2,752,267 million was identified representing the right to operate the

F-36

PERUSAHAAN PERSEROAN (PERSERO)

P.T. TELEKOMUNIKASI INDONESIA Tbk AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

DECEMBER 31, 2005 AND 2006, AND FOR YEARS ENDED

DECEMBER 31, 2004, 2005 AND 2006

(Figures in tables are presented in millions of Rupiah, unless otherwise stated)

business in the KSO I Area. The amount is being amortized over the then remaining term of the KSO agreement of 8.4 years (Note 15). There was no goodwill arising from this acquisition.

      In addition, the portion that related to Indosat’s 13% equity interest in Pramindo has been accounted for as a restructuring of entities under common control. On the acquisition date, the difference between the purchase consideration and the historical amount of the net assets acquired amounting to Rp296,038 million was included as “Difference in value of restructuring transactions between entities under common control” in the stockholders’ equity section (see Note 30) and was calculated as follows:

	Rp
Purchase consideration — net of discount on promissory notes		3,338,653
Historical amount of net assets		1,061,437
Difference in value for 100% ownership		2,277,216
Difference adjusted to stockholders’ equity for Indosat’s 13% ownership in Pramindo		296,038

      The Company acquired control of Pramindo on August 15, 2002 and has consequently consolidated Pramindo from August 1, 2002 being the nearest convenient balance date.

      The allocation of the acquisition cost was as follows:

	Rp.
Purchase consideration — net of discount on promissory notes		3,338,653
Fair value of net assets acquired:
— Cash and cash equivalents		141,475
— Distributable KSO revenue receivable		187,468
— Other current assets		13,839
— Property, plant and equipment		1,807,338
— Intangible assets		2,752,267
— Other non-current assets		160,139
— Current liabilities		(284,120	)
— Deferred tax liabilities		(1,115,645	)
— Non-current liabilities		(620,146	)
Fair value of net assets		3,042,615
Difference adjusted to equity for 13% Indosat’s ownership in Pramindo		296,038
Total purchase consideration		3,338,653

      On January 28, 2004, the Company obtained a loan to finance the payment of the outstanding promissory notes issued for the acquisition of Pramindo. On March 15, 2004, the Company repaid the remaining balance of these promissory notes and legal title to all of Pramindo’s shares has been completely transferred to the Company.

F-37

PERUSAHAAN PERSEROAN (PERSERO)

P.T. TELEKOMUNIKASI INDONESIA Tbk AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

DECEMBER 31, 2005 AND 2006, AND FOR YEARS ENDED

DECEMBER 31, 2004, 2005 AND 2006

(Figures in tables are presented in millions of Rupiah, unless otherwise stated)

     c.  AWI

      Effective on July 31, 2003 (the “closing date”), the Company acquired 100% of the outstanding common stock of AWI (previously the Company’s KSO III partner), for approximately Rp.1,141,752 million plus the assumption of AWI’s debts of Rp.2,577,926 million. The purchase consideration included non-interest bearing promissory notes with a face value of US$109.1 million (equivalent to Rp.927,272 million), the present value of which at the discount rate of 5.16% at the closing date was estimated to be US$92.7 million (equivalent to Rp.788,322 million). The promissory notes would be paid in 10 equal semi-annual installments beginning July 31, 2004.

      The acquisition of AWI has been accounted for using the purchase method of accounting. There was no goodwill arising from this acquisition. The following table summarizes the final purchase price allocation of the acquired assets and assumed liabilities based on estimates of their respective fair values at the closing date:

	Rp.
Distributable KSO revenue receivable		540,267
Property, plant and equipment		1,556,269
Intangible assets		1,982,564
Other assets		34,372
Deferred tax liabilities		(393,794	)
Fair value of net assets acquired		3,719,678
Borrowings assumed		(2,577,926	)
Total purchase consideration		1,141,752

      Intangible assets identified from this acquisition represent the right to operate the business in the KSO III area and the amount is being amortized over the then remaining term of the KSO agreement of 7.4 years (Note 15).

      The Company’s consolidated results of operations had included the operating results of AWI since July 31, 2003, the date of acquisition.

      The outstanding promissory notes issued for the acquisition of AWI are presented as “Deferred consideration for business combinations” in the consolidated balance sheets (Note 25). As of December 31, 2005 and 2006, the outstanding promissory notes, before unamortized discount, amounted to US$76.4 million (equivalent to Rp.751,036 million) and US$54.5 million (equivalent to Rp.491,182 million), respectively.

      The allocation of the acquisition cost described above was based on an independent appraisal report of fair values.

F-38

PERUSAHAAN PERSEROAN (PERSERO)

P.T. TELEKOMUNIKASI INDONESIA Tbk AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

DECEMBER 31, 2005 AND 2006, AND FOR YEARS ENDED

DECEMBER 31, 2004, 2005 AND 2006

(Figures in tables are presented in millions of Rupiah, unless otherwise stated)

     d.  Amendment and Restatement of the Joint Operation Scheme in Regional Division IV (“KSO IV”)

      On January 20, 2004, the Company and PT Mitra Global Telekomunikasi Indonesia (“MGTI”), the investor in KSO IV, entered into an agreement to amend and restate their joint operation agreement (“KSO agreement”). The principal provisions in the original KSO agreement that have been amended are as follows:

•  The rights to operate fixed-line telecommunications services had been transferred to the Company, where KSO IV is operated under the management, supervision, control and responsibility of the Company.

•  Responsibilities for funding construction of new telecommunication facilities and payments of operating expenses incurred in KSO IV had been assigned to the Company.

•  Risk of loss from damages or destruction of assets operated by KSO IV is transferred to the Company.

•  At the end of the KSO period (December 31, 2010), all rights, title and interest of MGTI in the existing property, plant and equipment (including new additional installations) and inventories will be transferred to the Company at no cost.

•  The Company’s rights to receive Minimum TELKOM Revenues (“MTR”) and share in Distributable KSO Revenues (“DKSOR”) under the original KSO agreement were amended so that MGTI receives fixed monthly payments (“Fixed Investor Revenues”) beginning in February 2004 through December 2010 totaling US$517.1 million and the Company is entitled to the balance of KSO revenues net of operating expenses and payments to MGTI for Fixed Investor Revenues. In addition, payments for Fixed Investor Revenues must be made to MGTI before any payments can be made to the Company.

•  In the event funds in KSO IV are insufficient to pay Fixed Investor Revenues to MGTI, the Company is required to pay the shortfall to MGTI.

      As a result of the amendment of the KSO agreement, the Company obtained the legal right to control the financial and operating decisions of KSO IV. Accordingly, the Company has accounted for this transaction as a business combination using the purchase method of accounting.

      The purchase price for this transaction was approximately US$390.7 million (equivalent to Rp.3,285,362 million) which represented the present value of fixed monthly payments (totaling US$517.1 million) to be paid to MGTI beginning in February 2004 through December 2010 using a discount rate of 8.3% plus the direct cost of the business combination. The allocation of the acquisition cost was as follows:

	Rp.
Property, plant and equipment		2,377,134
Intangible assets		908,228
Total purchase consideration		3,285,362

      The allocation of the acquisition cost described above was based on an independent appraisal of fair values. Intangible assets identified from this acquisition represent right to operate the business in the KSO area and the amount is being amortized over the remaining term of the KSO agreement of 6.9 years (Note 15). There was no goodwill arising from this acquisition.

F-39

PERUSAHAAN PERSEROAN (PERSERO)

P.T. TELEKOMUNIKASI INDONESIA Tbk AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

DECEMBER 31, 2005 AND 2006, AND FOR YEARS ENDED

DECEMBER 31, 2004, 2005 AND 2006

(Figures in tables are presented in millions of Rupiah, unless otherwise stated)

      The Company’s consolidated results of operations has included the operating results of KSO IV since February 1, 2004 being the nearest convenient balance date.

      As of December 31, 2005 and 2006, the remaining monthly payments to be made to MGTI, before unamortized discount, amounted to US$393.3 million (Rp.3,868,433 million) and US$319.2 million (Rp.2,874,128 million) and is presented as “Deferred consideration for business combinations” (Note 25).

     e.  Amendment and Restatement of the Joint Operation Scheme in Regional Division VII (“KSO VII”)

      On October 19, 2006, the Company and PT Bukaka Singtel International (“BSI”), the investor in KSO VII, entered into an agreement to amend and restate their joint operation agreement (“KSO agreement”). The principal provisions in the original KSO agreement that have been amended and restated are as follow:

•  The rights to operate fixed-line telecommunications services had been transferred to the Company, where KSO VII is operated under the management, supervision, control and responsibility of the Company.

•  The responsibilities for funding construction of new telecommunication facilities and payments of operating expenses incurred in KSO VII had been assigned to the Company.

•  The risk of loss from damages or destruction of assets operated by KSO VII will be transferred to the Company.

•  At the end of the KSO period (December 31, 2010), all rights, title and interest of BSI in existing property, plant and equipment (including new additional installations) and inventories will be transferred to the Company at no cost.

•  The Company’s rights to receive Minimum TELKOM Revenues (“MTR”) and share in Distributable KSO Revenues (“DKSOR”) under the original KSO agreement were amended so that BSI receives fixed monthly payments (“Fixed Investor Revenues”) amounting to Rp.55.64 billion beginning in October 2006 through June 2007 and amounting to Rp.44.25 billion in July 2007 through December 2010. The Company is entitled to the balance of KSO revenues net of operating expenses and payments to BSI for Fixed Investor Revenues. In addition, payments for Fixed Investor Revenues must be made to BSI before any payments could be made to the Company.

•  In the event funds in KSO VII are insufficient to pay Fixed Investor Revenues to BSI, the Company is required to pay the shortfall to BSI.

      As a result of the amendment and restatement of the KSO agreement, the Company obtained the legal right to control financial and operating decisions of KSO VII. Accordingly, the Company has accounted for this transaction as a business combination using the purchase method of accounting. As a condition precedent to the coming into effect of the amended KSO agreement, the Company has entered into assignment agreement with BSI and its business partners whereby BSI assigned its revenue sharing agreements with its business partners to the Company. The Company has accounted for these transactions in accordance with the accounting treatment for revenue sharing arrangements.

      The purchase price for this transaction was approximately Rp.1,770,925 million which represents the present value of fixed monthly payments (totaling Rp.2,359,230 million) to be paid to BSI beginning in

F-40

PERUSAHAAN PERSEROAN (PERSERO)

P.T. TELEKOMUNIKASI INDONESIA Tbk AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

DECEMBER 31, 2005 AND 2006, AND FOR YEARS ENDED

DECEMBER 31, 2004, 2005 AND 2006

(Figures in tables are presented in millions of Rupiah, unless otherwise stated)

October 2006 through December 2010 using a discount rate of 15% plus the direct cost of the business combination. The allocation of the acquisition cost was as follows:

		Rp.
Purchase consideration — at present value			1,770,925
Fair value of net assets acquired:
	— Cash and cash equivalents		143,648
	— Receivables		266,337
	— Other current assets		69,960
	— Property, plant and equipment		1,288,888
	— Deferred tax assets		6,993
	— Property, plant and equipment under revenue sharing arrangements		452,205
	— Intangible assets		451,736
	— Current liabilities		(456,637	)
	— Unearned income on revenue sharing arrangements		(452,205	)
Fair value of net assets			1,770,925

      The fair value of the property, plant and equipment and property, plant and equipment under revenue sharing arrangements described above was determined by an independent appraisal whereas the fair value of other assets and liabilities was determined by management. The intangible assets represent right to operate the business in the KSO VII area and the amount is being amortized over the remaining term of the KSO agreement of 4.3 years (Note 15). There was no goodwill arising from this acquisition.

      The Company’s consolidated results of operations has included the operating results of KSO VII since October 1, 2006 being the nearest convenient balance date.

      As of December 31, 2006, the remaining monthly payments to be made to BSI, before unamortized discount, amounted to Rp.2,226,431 million and is presented as “Deferred consideration for business combinations” (Note 25).

     f.  Pro forma operating results related to acquisition of KSO VII

      The following unaudited pro forma financial information reflects the consolidated results of operations of the Company as if the acquisition of KSO VII had taken place on January 1, 2005. The pro forma information includes adjustments for amortization of intangible assets, depreciation expense on property, plant and equipment based on the allocated purchase price, interest expense on incremental borrowings and income

F-41

PERUSAHAAN PERSEROAN (PERSERO)

P.T. TELEKOMUNIKASI INDONESIA Tbk AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

DECEMBER 31, 2005 AND 2006, AND FOR YEARS ENDED

DECEMBER 31, 2004, 2005 AND 2006

(Figures in tables are presented in millions of Rupiah, unless otherwise stated)

taxes. The pro forma financial information is not necessarily indicative of the results of operations as it would have been had the transactions been effected on the assumed dates or indicative of future operations.

	Unaudited
	2005		2006
Operating revenues		43,331,841		52,410,229
Operating income		17,568,948		21,896,658
Income before tax		16,461,991		22,205,996
Net income		8,147,616		11,245,085
Net income per share — in full Rupiah amount		404.15		559.05
Net income per ADS — in full Rupiah amount		16,165.91		22,362.13

6. CASH AND CASH EQUIVALENTS

				2005		2006
Cash on hand					6,070		8,281
Cash in banks
	Related parties
		Rupiah
			Bank Negara Indonesia		54,590		207,365
			Bank Mandiri		89,128		136,481
			Bank Rakyat Indonesia		5,095		15,395
			Bank Pos Nusantara		879		1,447
		Total			149,692		360,688
		Foreign currencies
			Bank Mandiri		55,797		32,039
			Bank Negara Indonesia		2,701		5,818
			Bank Rakyat Indonesia		657		607
		Total			59,155		38,464
	Total — related parties				208,847		399,152

F-42

PERUSAHAAN PERSEROAN (PERSERO)

P.T. TELEKOMUNIKASI INDONESIA Tbk AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

DECEMBER 31, 2005 AND 2006, AND FOR YEARS ENDED

DECEMBER 31, 2004, 2005 AND 2006

(Figures in tables are presented in millions of Rupiah, unless otherwise stated)

				2005		2006
	Third parties
		Rupiah
			Deutsche Bank		15,954		18,274
			Bank Central Asia		8,398		15,326
			Bank Bukopin		15,800		8,058
			ABN AMRO Bank		34,453		4,851
			BPD Papua		—		2,717
			Bank Niaga		498		2,104
			Citibank NA		1,595		1,426
			Bank Mega		1,321		941
			Bank Permata		—		927
			Lippo Bank		1,361		700
			Bank Danamon		324		338
			Bank Muamalat Indonesia		601		252
			Bank Bumiputera Indonesia		242		158
			Bank Buana Indonesia		1,189		123
			Bank Internasional Indonesia		53		31
		Total			81,789		56,226
		Foreign currencies
			ABN AMRO Bank		54,575		51,781
			Citibank NA		5,737		8,568
			Deutsche Bank		5,309		2,921
			Standard Chartered Bank		99		91
			Bank Central Asia		142		89
			Bank Internasional Indonesia		30		48
			The Bank of Tokyo Mitsubishi		46		33
		Total			65,938		63,531
	Total — third parties				147,727		119,757
Total cash in banks					356,574		518,909

F-43

PERUSAHAAN PERSEROAN (PERSERO)

P.T. TELEKOMUNIKASI INDONESIA Tbk AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

DECEMBER 31, 2005 AND 2006, AND FOR YEARS ENDED

DECEMBER 31, 2004, 2005 AND 2006

(Figures in tables are presented in millions of Rupiah, unless otherwise stated)

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

F-44

PERUSAHAAN PERSEROAN (PERSERO)

P.T. TELEKOMUNIKASI INDONESIA Tbk AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

DECEMBER 31, 2005 AND 2006, AND FOR YEARS ENDED

DECEMBER 31, 2004, 2005 AND 2006

(Figures in tables are presented in millions of Rupiah, unless otherwise stated)

				2005		2006
		Foreign currencies
			Deutsche Bank		873,772		816,497
			Citibank NA		202,883		632,122
			Bank Bukopin		—		3,608
			Bank Mega		—		1,805
		Total			1,076,655		1,454,032
	Total — third parties				2,162,033		2,633,414
Total time deposits					5,012,040		7,788,646
Total cash and cash equivalents					5,374,684		8,315,836

      Range of interest rates per annum for time deposits is as follows:

	2005		2006
Rupiah		2.00% — 14.50%		4.00% — 16.00%
Foreign currencies		0.60% — 3.70%		1.65% — 5.10%

      The related parties which the Company places its funds are Government-owned banks. The Company places a majority of its cash and cash equivalents in these banks because they have the most extensive branch network in Indonesia and are considered to be financially sound banks as they are owned by the Government.

      Refer to Note 46 for details of related party transactions.

F-45

PERUSAHAAN PERSEROAN (PERSERO)

P.T. TELEKOMUNIKASI INDONESIA Tbk AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

DECEMBER 31, 2005 AND 2006, AND FOR YEARS ENDED

DECEMBER 31, 2004, 2005 AND 2006

(Figures in tables are presented in millions of Rupiah, unless otherwise stated)

7. TRADE RECEIVABLES

      Trade receivables from related parties and third parties arise from services provided to both retail and non-retail customers.

     a.  By Debtor

Related parties:

	2005			2006
Government agencies		432,982			518,943
PT Citra Sari Makmur		31,242			20,627
PT Patra Telekomunikasi Indonesia		2,921			13,751
PT Graha Informatika Nusantara		1,880			6,949
PT Pasifik Satelit Nusantara		2,401			4,286
Kopegtel		8,959			4,256
PT Aplikanusa Lintasarta		437			3,217
KSO VII		111,599			—
Others		22,224			33,713
Total		614,645			605,742
Allowance for doubtful accounts		(84,275	)		(85,053	)
Net		530,370			520,689

      Trade receivables from certain related parties are presented net of the Company’s liabilities to such parties due to legal right of offset in accordance with agreements with those parties.

Third parties:

	2005			2006
Residential and business subscribers		3,452,176			3,551,270
Overseas international carriers		196,756			345,054
Total		3,648,932			3,896,324
Allowance for doubtful accounts		(601,393	)		(699,736	)
Net		3,047,539			3,196,588

F-46

PERUSAHAAN PERSEROAN (PERSERO)

P.T. TELEKOMUNIKASI INDONESIA Tbk AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

DECEMBER 31, 2005 AND 2006, AND FOR YEARS ENDED

DECEMBER 31, 2004, 2005 AND 2006

(Figures in tables are presented in millions of Rupiah, unless otherwise stated)

     b.  By Age

Related parties:

	2005			2006
Up to 6 months		505,519			490,643
7 to 12 months		27,390			30,007
13 to 24 months		25,574			14,468
More than 24 months		56,162			70,624
Total		614,645			605,742
Allowance for doubtful accounts		(84,275	)		(85,053	)
Net		530,370			520,689

Third parties:

	2005			2006
Up to 3 months		2,938,326			2,932,542
More than 3 months		710,606			963,782
Total		3,648,932			3,896,324
Allowance for doubtful accounts		(601,393	)		(699,736	)
Net		3,047,539			3,196,588

     c.  By Currency

Related parties

	2005			2006
Rupiah		598,533			597,415
United States Dollar		16,112			8,327
Total		614,645			605,742
Allowance for doubtful accounts		(84,275	)		(85,053	)
Net		530,370			520,689

Third parties

	2005			2006
Rupiah		3,444,914			3,535,904
United States Dollar		204,018			360,420
Total		3,648,932			3,896,324
Allowance for doubtful accounts		(601,393	)		(699,736	)
Net		3,047,539			3,196,588

F-47

PERUSAHAAN PERSEROAN (PERSERO)

P.T. TELEKOMUNIKASI INDONESIA Tbk AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

DECEMBER 31, 2005 AND 2006, AND FOR YEARS ENDED

DECEMBER 31, 2004, 2005 AND 2006

(Figures in tables are presented in millions of Rupiah, unless otherwise stated)

     d.  Movements in the allowance for doubtful accounts

	2004			2005			2006
Beginning balance		443,892			522,066			685,668
Additions		342,895			478,005			453,045
Bad debts write-off		(264,721	)		(314,403	)		(353,924	)
Ending balance		522,066			685,668			784,789

      Management believes that the allowance for doubtful accounts is adequate to cover probable losses on uncollectible accounts.

      Except for the amounts receivable from the Government agencies, management believes that there were no significant concentrations of credit risk on these receivables.

      Refer to Note 46 for details of related party transactions.

8. INVENTORIES

	2005			2006
Components		50,520			57,074
Allowance for obsolescence		(8,605	)		(4,360	)
Net		41,915			52,714
Modules		103,520			109,978
Allowance for obsolescence		(39,553	)		(43,549	)
Net		63,967			66,429
SIM cards, RUIM cards and prepaid voucher blanks		114,634			94,375
Allowance for obsolescence		(189	)		(189	)
Net		114,445			94,186
Total		220,327			213,329

      Movements in the allowance for obsolescence are as follows:

	2004			2005			2006
Beginning balance		40,489			54,733			48,347
Additions		14,800			10,968			5,207
Inventory write-off		(556	)		(17,354	)		(5,456	)
Ending balance		54,733			48,347			48,098

      Components and modules represent telephone terminals, cables, transmission installation spare parts and other spare parts.

      Management believes that the allowance is adequate to cover probable losses from decline in inventory value due to obsolescence.

F-48

PERUSAHAAN PERSEROAN (PERSERO)

P.T. TELEKOMUNIKASI INDONESIA Tbk AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

DECEMBER 31, 2005 AND 2006, AND FOR YEARS ENDED

DECEMBER 31, 2004, 2005 AND 2006

(Figures in tables are presented in millions of Rupiah, unless otherwise stated)

      At December 31, 2006, inventory held by a certain subsidiary was insured against fire, theft and other specified risks to PT Asuransi AIOI Indonesia for US$0.6 million. Management believes that the insurance amount is adequate to cover such risks.

9. PREPAID EXPENSES

	2005		2006
Frequency license		275,359		425,482
Salary		289,632		356,227
Rental		112,078		200,092
Insurance		66,449		40,710
Telephone directory issuance cost		26,527		29,692
Others		7,824		21,126
Total		777,869		1,073,329

      Refer to Note 46 for details of related party transactions.

10. OTHER CURRENT ASSETS

	2005		2006
Restricted time deposits — Bank Mandiri (Note 46)		159,537		6,822

      As of December 31, 2005, the balance consists of the Company’s time deposits of US$13.6 million (equivalent to Rp.133,926 million) and Rp.25,611 million pledged as collateral for bank guarantees.

      As of December 31, 2006, the balance consists of the Company’s time deposits of US$0.1 million (equivalent to Rp.937 million) and Rp.4,208 million and Infomedia’s time deposit of Rp.1,677 million pledged as collateral for bank guarantees.

F-49

PERUSAHAAN PERSEROAN (PERSERO)

P.T. TELEKOMUNIKASI INDONESIA Tbk AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

DECEMBER 31, 2005 AND 2006, AND FOR YEARS ENDED

DECEMBER 31, 2004, 2005 AND 2006

(Figures in tables are presented in millions of Rupiah, unless otherwise stated)

11. LONG-TERM INVESTMENTS

	2005
	Percentage
	of		Beginning				Share of		Translation		Ending
	Ownership		Balance		Addition		Net Income		Adjustment		Balance
Equity method:
PT Citra Sari Makmur		25.00		60,116		—		2,480		3,658		66,254
PT Patra Telekomunikasi Indonesia		40.00		12,421		4,250		8,399		—		25,070
PT Pasifik Satelit Nusantara		35.50		—		—		—		—		—
				72,537		4,250		10,879		3,658		91,324
Cost method:
Bridge Mobile Pte. Ltd.		12.50		9,290		—		—		—		9,290
PT Batam Bintan Telekomunikasi		5.00		587		—		—		—		587
PT Pembangunan Telekomunikasi Indonesia		3.18		199		—		—		—		199
PT Mandara Selular Indonesia		1.33		—		—		—		—		—
				10,076		—		—		—		10,076
				82,613		4,250		10,879		3,658		101,400

	2006
	Percentage						Share of
	of		Beginning				Net Income			Translation			Ending
	Ownership		Balance		Addition		(Loss)			Adjustment			Balance
Equity method:
PT Citra Sari Makmur		25.00		66,254		—		(7,556	)		(5,584	)		53,114
PT Patra Telekomunikasi Indonesia		40.00		25,070		—		937			—			26,007
PT Pasifik Satelit Nusantara		22.38		—		—		—			—			—
				91,324		—		(6,619	)		(5,584	)		79,121
Cost method:
Bridge Mobile Pte. Ltd.		12.50		9,290		—		—			—			9,290
PT Batam Bintan Telekomunikasi		5.00		587		—		—			—			587
PT Pembangunan Telekomunikasi Indonesia		3.18		199		—		—			—			199
PT Mandara Selular Indonesia		0.00		—		—		—			—			—
				10,076		—		—			—			10,076
				101,400		—		(6,619	)		(5,584	)		89,197

     a.  PT Citra Sari Makmur (“CSM”)

      CSM is engaged in providing Very Small Aperture Terminal (“VSAT”), network application services and consulting services on telecommunications technology and related facilities.

F-50

PERUSAHAAN PERSEROAN (PERSERO)

P.T. TELEKOMUNIKASI INDONESIA Tbk AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

DECEMBER 31, 2005 AND 2006, AND FOR YEARS ENDED

DECEMBER 31, 2004, 2005 AND 2006

(Figures in tables are presented in millions of Rupiah, unless otherwise stated)

      As of December 31, 2005 and 2006, the carrying amount of investment in CSM was equal to the Company’s share in net assets of CSM.

     b.  PT Patra Telekomunikasi Indonesia (“Patrakom”)

      Patrakom is engaged in providing satellite communication system services, related services and facilities to companies in the petroleum industry.

      On August 26, 2005, the Company purchased 10% of Patrakom’s outstanding shares from Indosat for Rp.4,250 million, thereby increasing the Company’s ownership interest from 30% to 40%.

      As of December 31, 2005 and 2006, the carrying amount of investment in Patrakom was approximate to the Company’s share in net assets of Patrakom.

     c.  PT Pasifik Satelit Nusantara (“PSN”)

      PSN is engaged in providing satellite transponder leasing and satellite-based communication services in the Asia Pacific region.

      As of December 31, 2001, the Company’s share of losses in PSN has exceeded the carrying amount of the investment. Accordingly, the investment value has been reduced to nil.

      On August 8, 2003, as a result of share-swap transaction with PT Centralindo Pancasakti Cellular, the Company’s interest in PSN effectively increased to 43.69%. The Company’s decision to increase its ownership interest in PSN as part of the share-swap transactions was premised on the Company’s assessment that PSN’s satellite services would allow it to capitalize on a government program which called for the provision of telecommunication services to remote areas of Indonesia.

      In 2005, the Company’s ownership interest was diluted to 35.5% as a result of debt to equity conversions consummated by PSN.

      On January 20, 2006, PSN’s stockholders agreed to issue new shares to a new stockholder. The issuance of new shares resulted in dilution of the Company’s interest in PSN to 22.38%

     d.  Bridge Mobile Pte. Ltd

      On November 3, 2004, Telkomsel together with six other international mobile operators in Asia Pacific established Bridge Mobile Pte. Ltd. (Singapore), a company that is engaged in providing regional mobile services in the Asia Pacific region.

      Telkomsel contributed US$1.0 million (equivalent to Rp.9,290 million) which represents a 14.286% ownership interest.

      On April 14, 2005, Telkomsel’s ownership interest was diluted to 12.50% following issuance of new shares by Bridge Mobile Pte. Ltd to a new stockholder.

     e.  PT Batam Bintan Telekomunikasi (“BBT”)

      BBT is engaged in providing fixed line telecommunication services at Batamindo Industrial Park in Muka Kuning, Batam Island and at Bintan Beach International Resort and Bintan Industrial Estate in Bintan Island.

F-51

PERUSAHAAN PERSEROAN (PERSERO)

P.T. TELEKOMUNIKASI INDONESIA Tbk AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

DECEMBER 31, 2005 AND 2006, AND FOR YEARS ENDED

DECEMBER 31, 2004, 2005 AND 2006

(Figures in tables are presented in millions of Rupiah, unless otherwise stated)

     f.  PT Pembangunan Telekomunikasi Indonesia (“Bangtelindo”)

      Bangtelindo is primarily engaged in providing consultancy services on the installation and maintenance of telecommunications facilities.

     g.  PT Mandara Selular Indonesia (“Mobisel”)

      Mobisel is engaged in providing mobile cellular services and related facilities. These services were previously provided by the Company under a revenue-sharing arrangement with PT Rajasa Hazanah Perkasa (“RHP”). The capital contribution made by the Company of Rp.10,398 million represented a 25% equity ownership in Mobisel.

      As of December 31, 2002, the value of investment has been reduced to nil because the Company’s share of loss exceeded the carrying amount of investment in Mobisel.

      In July 2003 and January 2004, Mobisel carried out a series of debt to equity conversions resulting in dilution of the Company’s ownership interest to 6.4%.

      On December 20, 2004, Mobisel’s stockholders agreed to issue 306,000,000 new Series B shares to a new stockholder and an existing stockholder. The issuance of 306,000,000 new Series B shares resulted in dilution of the Company’s interest in Mobisel to 3.63%.

      On May 27, 2005, the Company’s ownership interest was further diluted to 1.33% following the issuance of 1,179,418,253 new Series B shares by Mobisel.

      On January 13, 2006, the Company sold its entire ownership interest in Mobisel to Twinwood Ventures Limited (third party) for Rp.22,561 million. The gain on the sale amounted to Rp.22,561 million.

F-52

PERUSAHAAN PERSEROAN (PERSERO)

P.T. TELEKOMUNIKASI INDONESIA Tbk AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

DECEMBER 31, 2005 AND 2006, AND FOR YEARS ENDED

DECEMBER 31, 2004, 2005 AND 2006

(Figures in tables are presented in millions of Rupiah, unless otherwise stated)

12. PROPERTY, PLANT AND EQUIPMENT

			January 1,				Write-down of								December 31,
			2005		Additions		Assets		Deductions			Reclassifications			2005
At cost
Direct acquisitions
	Land			327,339		30,444		—		(22,104	)		(1,232	)		334,447
	Buildings			2,170,055		65,622		—		(4,553	)		336,435			2,567,559
	Switching equipment			10,360,100		324,748		—		(13,547	)		158,580			10,829,881
	Telegraph, telex and data communication equipment			213,855		2,410		—		(120	)		(353	)		215,792
	Transmission installation and equipment			26,922,143		846,944		—		(28,747	)		3,813,794			31,554,134
	Satellite, earth station and equipment			3,354,803		697,304		—		(427,836	)		1,319,733			4,944,004
	Cable network			17,701,074		868,823		—		(20,853	)		148,456			18,697,500
	Power supply			1,194,710		73,492		—		(7,198	)		51,391			1,312,395
	Data processing equipment			3,786,741		261,442		—		(6,132	)		3,800,322			7,842,373
	Other telecommunications peripherals			824,634		69,469		—		(5,675	)		15,723			904,151
	Office equipment			661,666		69,501		—		(1,772	)		(79,457	)		649,938
	Vehicles			191,403		975		—		(5,090	)		(905	)		186,383
	Other equipment			112,626		2,923		—		—			(5	)		115,544
	Property under construction:
		Buildings		53,412		235,354		—		—			(266,991	)		21,775
		Switching equipment		—		13,172		—		—			—			13,172
		Transmission installation and equipment		175,131		7,518,740		—		—			(6,979,472	)		714,399
		Satellite, earth station and equipment		776,899		—		—		—			(776,766	)		133
		Cable network		25,508		213		—		—			(21,950	)		3,771
		Power supply		69		8,711		—		—			(8,719	)		61
		Data processing equipment		16,681		2,167,465		—		—			(616,886	)		1,567,260
		Other telecommunications peripherals		—		37,825		—		—			(34,301	)		3,524

F-53

PERUSAHAAN PERSEROAN (PERSERO)

P.T. TELEKOMUNIKASI INDONESIA Tbk AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

DECEMBER 31, 2005 AND 2006, AND FOR YEARS ENDED

DECEMBER 31, 2004, 2005 AND 2006

(Figures in tables are presented in millions of Rupiah, unless otherwise stated)

		January 1,				Write-down of								December 31,
		2005		Additions		Assets		Deductions			Reclassifications			2005
Leased assets
	Vehicles		413		—		—		—			(83	)		330
	Transmission installation and equipment		—		257,380		—		—			—			257,380
	Total		68,869,262		13,552,957		—		(543,627	)		857,314			82,735,906
Accumulated depreciation and impairment:
Direct acquisitions
	Buildings		952,638		143,894		—		(1,789	)		15,095			1,109,838
	Switching equipment		5,601,273		766,155		—		(13,547	)		118,711			6,472,592
	Telegraph, telex and data communication equipment		198,653		3,004		—		(120	)		(10	)		201,527
	Transmission installation and equipment		8,208,259		3,281,208		552,828		(15,239	)		(35,774	)		11,991,282
	Satellite, earth station and equipment		1,532,282		220,658		—		(427,836	)		(19,043	)		1,306,061
	Cable network		8,235,661		2,019,324		—		(21,012	)		97,771			10,331,744
	Power supply		904,780		84,438		—		(7,198	)		50,170			1,032,190
	Data processing equipment		2,112,821		796,921		—		(6,132	)		34,521			2,938,131
	Other telecommunications peripherals		712,578		76,882		—		(5,675	)		10,198			793,983
	Office equipment		562,757		43,274		—		(1,562	)		(61,331	)		543,138
	Vehicles		180,864		4,758		—		(5,089	)		(932	)		179,601
	Other equipment		94,527		7,042		—		—			(5	)		101,564
Leased assets
	Vehicles		70		65		—		—			(65	)		70
	Transmission installation and equipment		—		27,002		63,940		—			—			90,942
	Total		29,297,163		7,474,625		616,768		(505,199	)		209,306			37,092,663
Net Book Value			39,572,099												45,643,243

F-54

PERUSAHAAN PERSEROAN (PERSERO)

P.T. TELEKOMUNIKASI INDONESIA Tbk AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

DECEMBER 31, 2005 AND 2006, AND FOR YEARS ENDED

DECEMBER 31, 2004, 2005 AND 2006

(Figures in tables are presented in millions of Rupiah, unless otherwise stated)

			January 1,		Acquisition										December 31,
			2006		KSO VII		Additions		Deductions			Reclassifications			2006
At cost
Direct acquisitions
	Land			334,447		—		64,891		—			—			399,338
	Buildings			2,567,559		1,944		108,868		—			80,302			2,758,673
	Switching equipment			10,829,881		241,040		129,011		(1,950	)		10,137,530			21,335,512
	Telegraph, telex and data communication equipment			215,792		—		—		(2,172	)		(23,919	)		189,701
	Transmission installation and equipment			31,554,134		107,014		760,937		(785,515	)		2,984,732			34,621,302
	Satellite, earth station and equipment			4,944,004		9,757		290,668		(3	)		324,383			5,568,809
	Cable network			18,697,500		909,876		538,985		(6,316	)		(624,728	)		19,515,317
	Power supply			1,312,395		9,719		65,904		(1,823	)		1,883,491			3,269,686
	Data processing equipment			7,842,373		6,438		308,528		(18,964	)		(2,805,528	)		5,332,847
	Other telecommunications peripherals			904,151		2,381		14,183		(2	)		(294,082	)		626,631
	Office equipment			649,938		70		98,709		(2,235	)		13,477			759,959
	Vehicles			186,383		580		7,173		(4,718	)		(17,640	)		171,778
	Other equipment			115,544		69		2,914		—			(5,434	)		113,093
	Property under construction:
		Buildings		21,775		—		72,620		—			(59,290	)		35,105
		Switching equipment		13,172		—		3,806,405		—			(2,484,621	)		1,334,956
		Transmission installation and equipment		714,399		—		9,952,261		—			(7,679,566	)		2,987,094
		Satellite, earth station and equipment		133		—		—		—			(133	)		—
		Cable network		3,771		—		4,366		(5,375	)		4,397			7,159
		Power supply		61		—		743,403		—			(725,820	)		17,644
		Data processing equipment		1,567,260		—		121,201		—			(1,688,445	)		16
		Other telecommunications peripherals		3,524		—		—		—			(3,524	)		—
Leased assets
	Vehicles			330		—		—		—			(330	)		—
	Transmission installation and equipment			257,380		—		—		—			8,440			265,820
	Total			82,735,906		1,288,888		17,091,027		(829,073	)		(976,308	)		99,310,440

F-55

PERUSAHAAN PERSEROAN (PERSERO)

P.T. TELEKOMUNIKASI INDONESIA Tbk AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

DECEMBER 31, 2005 AND 2006, AND FOR YEARS ENDED

DECEMBER 31, 2004, 2005 AND 2006

(Figures in tables are presented in millions of Rupiah, unless otherwise stated)

		January 1,		Acquisition										December 31,
		2006		KSO VII		Additions		Deductions			Reclassifications			2006
Accumulated depreciation and impairment
Direct acquisitions
	Buildings		1,109,838		—		172,492		—			7,690			1,290,020
	Switching equipment		6,472,592		—		2,412,237		(1,950	)		2,312,126			11,195,005
	Telegraph, telex and data communication equipment		201,527		—		463		(2,172	)		(14,082	)		185,736
	Transmission installation and equipment		11,991,282		—		2,889,113		(345,654	)		(2,370,798	)		12,163,943
	Satellite, earth station and equipment		1,306,061		—		411,947		(3	)		229,870			1,947,875
	Cable network		10,331,744		—		1,760,530		(3,691	)		(592,705	)		11,495,878
	Power supply		1,032,190		—		224,572		(1,523	)		245,196			1,500,435
	Data processing equipment		2,938,131		—		1,031,187		(18,964	)		(262,154	)		3,688,200
	Other telecommunications peripherals		793,983		—		17,121		(2	)		(223,557	)		587,545
	Office equipment		543,138		—		41,676		(2,235	)		10,459			593,038
	Vehicles		179,601		—		3,663		(4,718	)		(17,528	)		161,018
	Other equipment		101,564		—		5,205		—			(5,558	)		101,211
Leased assets
	Vehicles		70		—		—		—			(70	)		—
	Transmission installation and equipment		90,942		—		42,534		—			—			133,476
	Total		37,092,663		—		9,012,740		(380,912	)		(681,111	)		45,043,380
Net Book Value			45,643,243												54,267,060

	2005		2006
Proceeds from sale of property, plant and equipment		84,621		17,269
Net book value		38,428		7,806
Gain on disposal		46,193		9,463

      In accordance with the amended and restated KSO VII agreement with BSI (Note 5e) dated October 19, 2006, the ownership rights to the acquired property, plant and equipment in KSO VII are legally retained by BSI until the end of the KSO period (December 31, 2010). As of December 31, 2006, the net book value of these property, plant and equipment items was Rp.1,156,829 million.

      In accordance with the amended and restated KSO IV agreement with MGTI (Note 5d), the ownership rights to the acquired property, plant and equipment in KSO IV are legally retained by MGTI until the end of the KSO period (December 31, 2010). As of December 31, 2005 and 2006, the net book value of these property, plant and equipment was Rp.1,469,700 million and Rp.1,127,365 million, respectively.

F-56

PERUSAHAAN PERSEROAN (PERSERO)

P.T. TELEKOMUNIKASI INDONESIA Tbk AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

DECEMBER 31, 2005 AND 2006, AND FOR YEARS ENDED

DECEMBER 31, 2004, 2005 AND 2006

(Figures in tables are presented in millions of Rupiah, unless otherwise stated)

      In the first quarter of 2005, the Government of Indonesia issued a series of regulations in its efforts to rearrange the frequency spectra utilized by the telecommunications industry. This action has resulted in the Company not being able to utilize certain frequency spectra it had used to support its fixed wireline cable network by the end of 2006. As a result of these regulations, certain of the Company’s cable network facilities within the fixed wireline segment, which comprised primarily of Wireless Local Loop (“WLL”) and Approach Link equipment operating in the affected frequency spectra, could no longer be used by the end of 2006. The Company had accordingly shortened its estimate of the remaining useful lives for WLL and Approach Link equipment in the first quarter in 2005 and depreciated the remaining net book value of these assets through December 31, 2006. The effect of this change in estimate increased depreciation expense by Rp.471,187 million (Rp.329,831 million after tax) and Rp.240,398 million (Rp.168,279 million after tax) in 2005 and 2006, respectively.

      Further, on August 31, 2005, the Minister of Communication and Information Technology (“MoCI”) issued a press release which announced that in order to conform with the international standards and as recommended by the International Telecommunications Union — Radiocommunication Sector (“ITU-R”), the 1900 MHz frequency spectrum would only be used for the International Mobile Telecommunications-2000 (“IMT-2000” or “3G”) network. In its press release, the MoCI also announced that the CDMA-based technology network which the Company used for its fixed wireless services could only operate in the 800 MHz frequency spectrum. The Company utilizes the 1900 MHz frequency spectrum for its fixed wireless network in Jakarta and West Java areas while for other areas, the Company utilizes the 800 MHz frequency spectrum. As a result of this Government’s decision, the Company’s Base Station System (“BSS”) equipment in Jakarta and West Java areas which are part of transmission installation and equipment for fixed wireless network could no longer be used by the end of 2007. Management expects the BSS equipment will be completely replaced with BSS equipment operating in 800 MHz by the end of June 2007. On January 13, 2006, the MoCI issued MoCI Regulation No. 01/ PER/ M.KOMINFO/1/2006 which reaffirmed the Government’s decision that the Company’s fixed wireless network could only operate in the 800 MHz frequency spectrum and that the 1900 MHz will be allocated for 3G network.

      Following the preceding Government’s decisions, the Company reviewed the recoverable amount of cash-generating unit to which the affected fixed wireless asset belongs. The recoverable amount was estimated using value in use which represented the present value of estimated future cash flows from cash-generating unit using a pretax discount rate of 16.89%, representing the Company’s weighted average cost of capital as of December 31, 2005. In determining cash-generating unit to which an asset belongs, assets were grouped at the lowest level that included the asset and generated cash inflows that were largely independent of the cash inflows from other assets or group of assets. Based on this review, in 2005, the Company recognized a write-down of Rp.616,768 million related to transmission installation and equipment of fixed wireless assets and recorded the amount as a component of operating expenses in the consolidated statements of income. In addition, the Company recognized a loss relating to non-cancelable contracts for procurement of the 1900 MHz transmission installation and equipment in Jakarta and West Java areas amounting to Rp.79,359 million. The loss was included as a component of operating expenses in the consolidated statement of income with a corresponding liability included in “Accrued Expenses” in the consolidated balance sheet. In addition, the Company changed its estimate of the remaining useful lives for the Jakarta and West Java BSS equipment and depreciates the remaining net book value of these assets through June 30, 2007. The effect of this change in estimate increased depreciation expense by Rp.159,042 million (Rp.111,329 million after tax) and Rp.173,826 million (Rp.121,678 million after tax) in 2005 and 2006, respectively.

F-57

PERUSAHAAN PERSEROAN (PERSERO)

P.T. TELEKOMUNIKASI INDONESIA Tbk AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

DECEMBER 31, 2005 AND 2006, AND FOR YEARS ENDED

DECEMBER 31, 2004, 2005 AND 2006

(Figures in tables are presented in millions of Rupiah, unless otherwise stated)

      On August 18, 2005, the Company disposed of its Palapa B-4 satellite which had been fully depreciated as of July 1, 1999. On November 17, 2005, the Company’s TELKOM-2 satellite was launched, and on December 20, 2005, the TELKOM-2 satellite passed the final acceptance test and was put into service.

      As of December 31, 2006, the Company operated two satellites, TELKOM-1 and TELKOM-2 primarily providing backbone transmission links for its network and earth station satellite up-linking and down-linking services to domestic and international users. As of December 31, 2006, there were no events or changes in circumstances that would indicate that the carrying amount of the Company’s satellites may not be recoverable.

      Interest capitalized to property under construction amounted to Rp.57,690 million, Rp. nil and Rp. nil for 2004, 2005 and 2006, respectively.

      Foreign exchange loss capitalized as part of property under construction amounted to Rp.74,283 million, Rp. nil and Rp. nil in 2004, 2005, 2006, respectively.

      In 2006, certain accounts related to telecommunication equipments of subsidiaries were reclassified to a more detail group of assets to conform with the Company’s presentation. The reclassification have no impact to the economic useful life of the assets.

      The Company and its subsidiaries own several pieces of land located throughout Indonesia with Building Use Rights (“Hak Guna Bangunan” or “HGB”) for a period of 20-30 years, which will expire between 2007 and 2036. Management believes that there will be no difficulty in obtaining the extension of the landrights when they expire.

      The Company was granted the right to use certain parcels of land by the Ministry of Communications and Information Technology of the Republic of Indonesia (formerly Ministry of Tourism, Post and Telecommunications) where they are still under the name of the Ministry of Tourism, Post and Telecommunications and the Ministry of Transportation of the Republic of Indonesia. The transfer to the Company of the legal title of ownership on those parcels of land is still in progress.

      As of December 31, 2006, property, plant and equipment, of the Company and its subsidiaries, except for land, were insured with PT Asuransi Jasa Indonesia (“Jasindo”), PT Asuransi Ramayana, PT Asuransi Wahana Tata and PT Asuransi Export Indonesia (“ASEI”) against fire, theft and other specified risks. Total cost of assets being insured amounted to Rp.27,794,300 million and US$3.84 billion, which was covered by Sum Insured Basis with maximum loss claim of Rp.2,064,903 million and covered by First Loss Basis of US$250 million and Rp.824,000 million including business recovery of Rp.324,000 million with Automatic Reinstatement of Loss Clausul. In addition, the TELKOM-1 and TELKOM-2 satellite were insured separately for US$45.2 million and US$57.9 million respectively. Management believes that the insurance coverage is adequate.

      As of December 31, 2006 the completion of assets construction was around 25% of contract value. Management believes that there is no impediment to the completion of the construction in progress.

      On December 26, 2004, telecommunication facilities of the Company and its subsidiaries in Banda Aceh and certain areas nearby in Nanggroe Aceh Darussalam with a net book value of Rp.54,863 million were destroyed by earthquake and tsunami. For the year ended December 31, 2004, the Company has recorded the loss in “Other income (expenses)” in the consolidated statements of income. These telecommunication facilities were covered by insurance. In 2005, the Company and its subsidiaries received a portion of its

F-58

PERUSAHAAN PERSEROAN (PERSERO)

P.T. TELEKOMUNIKASI INDONESIA Tbk AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

DECEMBER 31, 2005 AND 2006, AND FOR YEARS ENDED

DECEMBER 31, 2004, 2005 AND 2006

(Figures in tables are presented in millions of Rupiah, unless otherwise stated)

insurance claims amounting to Rp.27,580 million and recorded this amount within “Other income (expenses)” in the consolidated statements of income.

      On May 27, 2006, Yogyakarta within Division Regional IV Central Java experienced an earthquake where an insurance claim amounting to Rp.14,934 million has been made. Operationally, the facilities have been re-operated gradually since June 2006.

      On July 17, 2006, the Pangandaran, area of Division Regional III West Java and Banten experienced a tsunami with the estimated total loss of Rp.368 million. The Company did not file a claim since the estimated total loss still below the deductible level.

      In 2006, Telkomsel exchanged its certain infrastructures equipment with a net book value of Rp.440,355 million for new equipment with a value of Rp.440,357 million. The resulting gain of Rp.2 million was charged to current operation.

      Certain property, plant and equipment of the Company and subsidiaries have been pledged as collateral for lending agreements (Notes 20 and 24).

      The Company has lease commitments for certain transmission installation and equipment, and vehicles with the option to purchase the leased assets at the end of the lease terms. Future minimum lease payments for the assets under capital leases as of December 31, 2005 and 2006 are as follows:

Year	2005			2006
2006		73,443			—
2007		73,443			73,443
2008		73,443			73,443
2009		73,443			73,443
2010		73,443			73,443
2011		73,443			73,443
Later		69,332			69,332
Total minimum lease payments		509,990			436,547
Interest		(258,252	)		(198,904	)
Net present value of minimum lease payments		251,738			237,643
Current maturities (Note 21a)		(16,201	)		(20,535	)
Long-term portion (Note 21b)		235,537			217,108

F-59

PERUSAHAAN PERSEROAN (PERSERO)

P.T. TELEKOMUNIKASI INDONESIA Tbk AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

DECEMBER 31, 2005 AND 2006, AND FOR YEARS ENDED

DECEMBER 31, 2004, 2005 AND 2006

(Figures in tables are presented in millions of Rupiah, unless otherwise stated)

13. PROPERTY, PLANT AND EQUIPMENT UNDER REVENUE-SHARING ARRANGEMENTS

		January 1,							December 31,
		2005		Additions		Reclassifications			2005
At cost:
	Land		3,382		46		—			3,428
	Buildings		13,422		338		(5,739	)		8,021
	Switching equipment		418,137		25,419		(168,521	)		275,035
	Transmission installation and equipment		259,119		36,214		(11,895	)		283,438
	Cable network		396,140		13,629		(141,356	)		268,413
	Other telecommunications peripherals		103,497		126,187		(60,380	)		169,304
	Total		1,193,697		201,833		(387,891	)		1,007,639
Accumulated depreciation:
	Land		1,601		170		—			1,771
	Buildings		7,077		480		(3,191	)		4,366
	Switching equipment		286,122		25,421		(125,854	)		185,689
	Transmission installation and equipment		68,966		26,223		(11,895	)		83,294
	Cable network		227,517		21,257		(134,648	)		114,126
	Other telecommunications peripherals		103,287		22,563		(56,862	)		68,988
	Total		694,570		96,114		(332,450	)		458,234
Net Book Value			499,127							549,405

		January 1,		Acquisition of							December 31,
		2006		KSO VII		Additions		Reclassifications			2006
At cost:
	Land		3,428		—		—		1,218			4,646
	Buildings		8,021		—		—		(2,911	)		5,110
	Switching equipment		275,035		108,810		27,294		(45,846	)		365,293
	Transmission installation and equipment		283,438		19,219		7,837		(14,129	)		296,365
	Cable network		268,413		321,756		56,119		(27,443	)		618,845
	Other telecommunications peripherals		169,304		2,420		196		(3,166	)		168,754
	Total		1,007,639		452,205		91,446		(92,277	)		1,459,013

F-60

PERUSAHAAN PERSEROAN (PERSERO)

P.T. TELEKOMUNIKASI INDONESIA Tbk AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

DECEMBER 31, 2005 AND 2006, AND FOR YEARS ENDED

DECEMBER 31, 2004, 2005 AND 2006

(Figures in tables are presented in millions of Rupiah, unless otherwise stated)

		January 1,		Acquisition of							December 31,
		2006		KSO VII		Additions		Reclassifications			2006
Accumulated depreciation:
	Land		1,771		—		212		720			2,703
	Buildings		4,366		—		360		(1,800	)		2,926
	Switching equipment		185,689		—		25,774		(39,122	)		172,341
	Transmission installation and equipment		83,294		—		33,870		(13,911	)		103,253
	Cable network		114,126		—		30,949		(20,335	)		124,740
	Other telecommunications peripherals		68,988		—		21,597		(3,167	)		87,418
	Total		458,234		—		112,762		(77,615	)		493,381
Net Book Value			549,405									965,632

      In accordance with revenue-sharing arrangements agreements, the ownership rights to the property, plant and equipment under revenue-sharing arrangements are legally retained by the investors until the end of the revenue-sharing period.

      The balances of unearned income on revenue-sharing arrangements as of December 31, 2004, 2005 and 2006 are as follows:

	2004			2005			2006
Gross amount		1,193,697			1,007,639			1,459,013
Accumulated amortization:
Beginning balance		(984,954	)		(833,365	)		(582,155	)
Addition (Note 36)		(82,033	)		(136,681	)		(151,961	)
Deduction		233,622			387,891			92,277
Ending balance		(833,365	)		(582,155	)		(641,839	)
Net		360,332			425,484			817,174

F-61

PERUSAHAAN PERSEROAN (PERSERO)

P.T. TELEKOMUNIKASI INDONESIA Tbk AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

DECEMBER 31, 2005 AND 2006, AND FOR YEARS ENDED

DECEMBER 31, 2004, 2005 AND 2006

(Figures in tables are presented in millions of Rupiah, unless otherwise stated)

14. ADVANCES AND OTHER NON-CURRENT ASSETS

      Advances and other non-current assets as of December 31, 2005 and 2006 consist of:

	2005		2006
Prepaid rent, long-term portion		428,564		621,834
Advances for purchase of property, plant and equipment		253,123		354,730
Equipment not used in operation-net		4,236		203,002
Restricted cash		90,749		91,862
Deferred landrights charges		87,863		82,529
Security deposits		30,570		32,072
Others		50,932		68,254
Total		946,037		1,454,283

      As of December 31, 2006, equipment not used in operation represented Base Transceiver Station (“BTS”) and other equipments of the Company and Telkomsel temporarily taken out from operations but planned to be reinstalled.

      During 2006, the Company and Telkomsel wrote off certain equipment with a total net book value of Rp.58,252 million and charged depreciation expense to current operations amounting to Rp.52,841 million.

      As of December 31, 2005 and 2006, restricted cash represented cash received from the Government relating to compensation for early termination of exclusive rights to be used for construction of certain infrastructures (Note 30) and time deposits with original maturities of more than one year pledged as collateral for bank guarantees.

      Deferred landrights charges represented costs to extend the contractual life of the landrights which have been deferred and amortized over the contractual life.

      Refer to Note 46 for details of related party transactions.

F-62

PERUSAHAAN PERSEROAN (PERSERO)

P.T. TELEKOMUNIKASI INDONESIA Tbk AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

DECEMBER 31, 2005 AND 2006, AND FOR YEARS ENDED

DECEMBER 31, 2004, 2005 AND 2006

(Figures in tables are presented in millions of Rupiah, unless otherwise stated)

15. GOODWILL AND OTHER INTANGIBLE ASSETS

      The changes in the carrying amount of goodwill and other intangible assets for the years ended December 31, 2005 and 2006 are as follows:

					Other
					intangible
		Goodwill			assets			License			Total
Gross carrying amount:
	Balance as of December 31, 2005		106,348			7,151,111			—			7,257,459
Accumulated amortization:
	Balance as of December 31, 2004		(76,221	)		(1,769,813	)		—			(1,846,034	)
	Amortization expense for 2005		(21,270	)		(896,883	)		—			(918,153	)
	Balance as of December 31, 2005		(97,491	)		(2,666,696	)		—			(2,764,187	)
Net book value			8,857			4,484,415			—			4,493,272
Weighted-average amortization period			5 years			7.97  years
Gross carrying amount:
	Balance as of December 31, 2005		106,348			7,151,111			—			7,257,459
	Addition-3G License Telkomsel		—			—			436,000			436,000
	Addition-KSO VII acquisition (Note 5e)		—			451,736			—			451,736
	Balance as of December 31, 2006		106,348			7,602,847			436,000			8,145,195
Accumulated amortization:
	Balance as of December 31, 2005		(97,491	)		(2,666,696	)		—			(2,764,187	)
	Amortization expense for 2006		(8,857	)		(923,867	)		(11,679	)		(944,403	)
	Balance as of December 31, 2006		(106,348	)		(3,590,563	)		(11,679	)		(3,708,590	)
Net book value			—			4,012,284			424,321			4,436,605
Weighted-average amortization period			5 years			7.58  years			9.5  years

      Other intangible assets resulted from the acquisitions of Dayamitra, Pramindo, AWI, KSO IV and KSO VII, and represented the rights to operate the business in the KSO areas (Note 5). Goodwill resulted from the acquisition of GSD (Note 1c).

      The estimated annual amortization expense relating to other intangible assets for each of the next four years beginning from January 1, 2007 would be Rp.1,003,071 million per year.

      In February 2006, Telkomsel obtained a 3G mobile cellular operating license for 2.1 GHz frequency bandwidth for a 10-year period, which is extendable subject to evaluation. The upfront fee for the 3G license amounted to Rp.436,000 million was recognized as an intangible asset and is amortized over the term of the 3G license.

      As of December 31, 2006, management believed that there was no indication of impairment.

F-63

PERUSAHAAN PERSEROAN (PERSERO)

P.T. TELEKOMUNIKASI INDONESIA Tbk AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

DECEMBER 31, 2005 AND 2006, AND FOR YEARS ENDED

DECEMBER 31, 2004, 2005 AND 2006

(Figures in tables are presented in millions of Rupiah, unless otherwise stated)

16. ESCROW ACCOUNTS

      Escrow accounts as of December 31, 2005 and 2006 consist of the following:

	2005		2006
Citibank N.A., Singapore		126,128		—
Bank Mandiri		6,369		—
Bank Danamon		—		1,849
Bank Negara Indonesia		—		116
Bank Internasional Indonesia		—		108
		132,497		2,073

     a.  Citibank N.A., Singapore

      This escrow account with Citibank N.A., Singapore (“Dayamitra Escrow Agent”) was established to facilitate the payment of the Company’s obligations under the Conditional Sale and Purchase Agreement and Option Agreement entered between the Company and the selling stockholders of Dayamitra (Note 5a).

      In 2004, the Company repaid the entire obligations under the Conditional Sale and Purchase Agreement, and since then this escrow account had been used to facilitate the payment of the Company’s obligations under the Option Agreement with TM Communications (Hk) Ltd.

      The escrow account earned interest at LIBOR minus 0.75% per annum, computed on a daily basis. The interest income earned was included as part of the escrow funds. The remaining funds available would be transferred to the Company after all of the obligations related to the Dayamitra transaction had been satisfied. As of March 27, 2006, the Company has fully repaid the option strike price.

     b.  Bank Mandiri

      The escrow account with Bank Mandiri was established by Dayamitra in relation with the credit facilities from Bank Mandiri (Note 24b).

      On September 23, 2006, the Company repaid the entire obligation and the remaining funds available in the escrow account was transferred to the Company on December 6, 2006.

     c.  Bank Danamon, Bank Internasional Indonesia, and Bank Negara Indonesia

      The escrow accounts with Bank Danamon, Bank Internasional Indonesia, and Bank Negara Indonesia were established in relation with the revenue sharing arrangement in telecommunications equipment in Divre VII East Indonesia.

F-64

PERUSAHAAN PERSEROAN (PERSERO)

P.T. TELEKOMUNIKASI INDONESIA Tbk AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

DECEMBER 31, 2005 AND 2006, AND FOR YEARS ENDED

DECEMBER 31, 2004, 2005 AND 2006

(Figures in tables are presented in millions of Rupiah, unless otherwise stated)

17. TRADE PAYABLES

		2005		2006
Related parties
	Concession fees		648,950		818,121
	Payables to other telecommunications providers		99,980		102,702
	Purchases of equipment, materials and services		265,459		195,673
	Total		1,014,389		1,116,496
Third parties
	Purchases of equipment, materials and services		4,011,444		5,499,254
	Payables to other telecommunication providers		163,646		111,963
	Payables related to revenue-sharing arrangements		106,195		190,240
	Total		4,281,285		5,801,457
Total			5,295,674		6,917,953

      Trade payables by currency are as follows:

	2005		2006
Rupiah		3,112,303		6,636,507
U.S. Dollar		1,381,473		259,996
Euro		796,343		18,377
Singapore Dollar		33		2,431
Great British Pound Sterling		14		630
Myanmar Kyat		—		12
Japanese Yen		5,508		—
Total		5,295,674		6,917,953

      Refer to Note 46 for details of related party transactions.

18. ACCRUED EXPENSES

	2005		2006
Early retirement program		—		1,528,429
Salaries and benefits		452,413		710,814
Operations, maintenance and telecommunications services		411,075		555,653
General, administrative and marketing		444,101		492,054
Interest and bank charges		134,299		188,748
Loss on procurement commitments (Note 12)		79,359		—
Total		1,521,247		3,475,698

      Based on the Board of Directors’ resolutions dated December 20, 2006 on early retirement, the Company planned an early retirement program for interested and eligible employees. The early retirement program has

F-65

PERUSAHAAN PERSEROAN (PERSERO)

P.T. TELEKOMUNIKASI INDONESIA Tbk AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

DECEMBER 31, 2005 AND 2006, AND FOR YEARS ENDED

DECEMBER 31, 2004, 2005 AND 2006

(Figures in tables are presented in millions of Rupiah, unless otherwise stated)

been communicated to all employees, and the Company’s calculation was based on the number of eligible employees by grade who were expected to enroll. Accrued early retirement benefit as of December 31, 2006 amounting to Rp.1,528,429 million, consisted of Rp.1,461,150 million (Note 37) charged to the 2006 consolidated statement of income and Rp.67,279 million in a reclassification from the balance for accrued long service awards.

19. UNEARNED INCOME

	2005		2006
Prepaid pulse reload vouchers		1,582,762		1,976,868
Other telecommunication services		3,917		3,492
Others		6,039		57,412
Total		1,592,718		2,037,772

20. SHORT-TERM BANK LOANS

	2005		2006
Bank Central Asia		170,000		233,334
Bank Mandiri		—		233,333
Bank Negara Indonesia		—		200,000
Bank Niaga		3,800		13,323
Bank Bumiputera Indonesia		—		8,000
Total		173,800		687,990

     a.  Bank Central Asia

      On December 3, 2004, Telkomsel entered into a loan agreement with Deutsche Bank AG, Jakarta (as “Arranger” and “Agent”) and Bank Central Asia (as “Lender”) with a total facility of Rp.170,000 million. Under the agreement, the Lender may transfer its rights, benefits and obligations to any bank or financial institution by delivering the Transfer Agreement to the Agent and notifying Telkomsel. The facility carried interest at a rate equal to the 3-month Certificates of Bank Indonesia plus 1% (i.e., 13.09% as of December 31, 2005) payable quarterly in arrears and unsecured. The loan was due on February 1, 2006. As of December 31, 2005, the principal outstanding amounted to Rp.170,000 million. On February 1, 2006, Telkomsel repaid the entire loan balance and the loan agreement was terminated.

      On August 15, 2006, Telkomsel signed a loan agreement with Bank Central Asia for a Rp.350,000 million short-term facility. The loan amount under the short-term facility would be repaid in three quarterly installments commencing after three months from the availability period (i.e., the earlier of November 15, 2006 and the date when the facility had been fully drawn down). The loan bears a floating interest rate of three-month Certificate of Bank Indonesia plus 1.5% (i.e., 11.00% as of December 31, 2006) and is unsecured. The principal outstanding as of December 31, 2006 amounted to Rp.233,334 million.

F-66

PERUSAHAAN PERSEROAN (PERSERO)

P.T. TELEKOMUNIKASI INDONESIA Tbk AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

DECEMBER 31, 2005 AND 2006, AND FOR YEARS ENDED

DECEMBER 31, 2004, 2005 AND 2006

(Figures in tables are presented in millions of Rupiah, unless otherwise stated)

     b.  Bank Mandiri

      On August 15, 2006, Telkomsel signed a loan agreement with Bank Mandiri for a Rp.350,000 million short-term facility. The short-term facility would be repaid in three quarterly installment commencing after three months from the availability period (i.e the earlier of November 15, 2006 or the date when the facility had been fully drawn down). The loan bears a floating interest rate of three-month Certificate of Bank Indonesia plus 1.5% (i.e., 11.00% as of December 31, 2006) and is unsecured. The principal outstanding as of December 31, 2006 amounted to Rp.233,333 million.

     c.  Bank Negara Indonesia (“BNI”)

      On August 15, 2006, Telkomsel signed a loan agreement with BNI for a Rp.300,000 million short-term facility. The short-term facility would be repaid in three quarterly installments commencing after three months from the availability period (i.e the earlier of November 15, 2006 and the date when the facility had been fully drawn down). The loan bears a floating interest rate of three-month Certificate of Bank Indonesia plus 1.5%. (i.e., 11.00% as of December 31, 2006) and is unsecured. The principal outstanding as of December 31, 2006 amounted to Rp.200,000 million.

     d.  Bank Niaga

      On April 25, 2005, Balebat entered into a loan agreement for a 12% per annum fixed rate revolving credit facility of Rp.800 million and an investment credit facility of Rp.1,600 million (Note 24g). These credit facilities are secured by Balebat’s property located in West Java up to a maximum of Rp.3,350 million. The applicable fixed interest rate and maturity date of the revolving credit facility was amended on July 26, 2005 to 12.5% per annum and May 30, 2006, respectively and subsequently on June 13, 2006 to 16.5% per annum and May 30, 2007, respectively. Based on the amendment on June 13, 2006, the revolving credit facility amounted to Rp.800 million was combined with the short-term fixed credit facility of Rp.4,000 million as described in Note 24g. Additionally, Balebat obtained credit facility of Rp.500 million at a fixed interest rate of 16.75% per annum maturing on May 30, 2007. As of December 31, 2005 and 2006, the principal outstanding balance amounted to Rp.800 million and Rp.1,323 million, respectively.

      On October 18, 2005, GSD entered into a loan agreement with Bank Niaga for a short-term facility of Rp.3,000 million for a one-year term. The loan facility was secured by certain GSD’s property, carried interest at 14.5% per annum and would expire on October 18, 2006. On June 7, 2006, the loan agreement was amended to increase the maximum facility amount and interest rate to Rp.8,000 million and 16.25% per annum, respectively. On November 3, 2006, the loan agreement was amended (2nd amendment agreement) to change the interest rate to 15.5% for the period October 18, 2006 to October 18, 2007. As of December 31, 2005 and 2006, the principal outstanding amounted to Rp.3,000 million and Rp.8,000 million, respectively.

      In October 2005, GSD also entered into a loan agreement with the Bank Niaga to obtain a Rp.12,000 million short-term facility, which would expire on October 18, 2006. The borrowing under this facility carried interest at 14.5% per annum. On June 7, 2006, the credit agreement was amended to reduce the maximum facility to Rp.7,000 million and to change the interest rate to 16.25% per annum. On November 3, 2006, the loan agreement was amended (2nd amendment agreement) to change the interest rate to 15.5% for the period October 18, 2006 to October 18, 2007. The principal outstanding as of December 31, 2005 and 2006 was Rp. nil and Rp.4,000 million, respectively.

F-67

PERUSAHAAN PERSEROAN (PERSERO)

P.T. TELEKOMUNIKASI INDONESIA Tbk AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

DECEMBER 31, 2005 AND 2006, AND FOR YEARS ENDED

DECEMBER 31, 2004, 2005 AND 2006

(Figures in tables are presented in millions of Rupiah, unless otherwise stated)

      The credit facilities of Rp.8,000 million and Rp.7,000 million are secured by GSD’s property located in Jakarta.

     e.  Bank Bumiputera Indonesia

      On February 15, 2006, GSD entered into a loan agreement with Bank Bumiputera Indonesia amounted to Rp.8,000 million with interest at 17% per annum, unsecured and repayable by monthly installments. The loan is payable within 12 months from the signing date and will mature on February 15, 2007. As of December 31, 2006 the loan was fully drawn-down and the principal outstanding amounted to Rp.8,000 million.

21. MATURITIES OF LONG-TERM LIABILITIES

     a.  Current maturities

	Notes		2005		2006
Bank loans		24		634,542		1,669,146
Notes and Bonds		23		144,510		1,461,955
Deferred consideration for business combinations		25		862,394		1,054,095
Two-step loans		22		569,278		469,678
Obligations under capital leases		12		16,201		20,535
Total				2,226,925		4,675,409

     b.  Long-term portion

			(In billions of Rupiah)
	Notes		Total		2008		2009		2010		2011		Later
Two-step loans		22		4,006.9		432.1		419.3		396.0		368.6		2,390.9
Bank loans		24		2,487.9		1,450.9		717.8		213.1		106.1		—
Deferred consideration for business combinations		25		3,537.1		1,102.4		1,141.4		1,188.1		105.2		—
Obligations under capital leases		12		217.1		26.0		33.0		41.9		116.2		—
Total				10,249.0		3,011.4		2,311.5		1,839.1		696.1		2,390.9

22. TWO-STEP LOANS

      Two-step loans are loans, which were obtained by the Government from overseas banks and consortium of contractors, which are then re-loaned to the Company. The loans entered into up to July 1994 were recorded and are payable in Rupiah based on the exchange rate at the date of drawdown. The loans are unsecured. Loans entered into after July 1994 are payable in their original currencies and any resulting foreign exchange gain or loss is borne by the Company.

      On December 15, 2004, the Company repaid a portion of its Rupiah denominated two-step loans totaling Rp.701,272 million before its maturity. Further, on December 24, 2004, the Company repaid a portion of its U.S. Dollar denominated two-step loans amounting to US$48.8 million and its entire Euro denominated two-step loans amounting to Euro14.5 million before their maturities. These early repayments of two-step loans

F-68

PERUSAHAAN PERSEROAN (PERSERO)

P.T. TELEKOMUNIKASI INDONESIA Tbk AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

DECEMBER 31, 2005 AND 2006, AND FOR YEARS ENDED

DECEMBER 31, 2004, 2005 AND 2006

(Figures in tables are presented in millions of Rupiah, unless otherwise stated)

have been approved by the Ministry of Finance of the Republic of Indonesia — Directorate General of Treasury.

      The details of the two-step loans are as follows:

	Interest Rate				Outstanding
Creditors	2005		2006		2005			2006
Overseas banks		3.10% — 10.71%		3.10% — 13.67%		5,250,829			4,434,041
Consortium of contractors		3.20%		3.20%		78,648			42,572
Total						5,329,477			4,476,613
Current maturities (Note 21a)						(569,278	)		(469,678	)
Long-term portion (Note 21b)						4,760,199			4,006,935

      The details of two-step loans obtained from overseas banks as of December 31, 2005 and 2006 are as follows:

	Interest Rate				Outstanding
Currencies	2005		2006		2005		2006
U.S. Dollar		4.00% — 6.81%		4.00% — 6.48%		2,232,752		1,795,782
Rupiah		8.30% — 10.71%		11.23% — 13.67%		1,794,149		1,592,198
Japanese Yen		3.10%		3.10%		1,223,928		1,046,061
Total						5,250,829		4,434,041

      The loans are intended for the development of telecommunications infrastructure and supporting equipment. The loans are repayable in semi-annual installments and are due on various dates through 2024.

      Details of two-step loans obtained from a consortium of contractors as of December 31, 2005 and 2006 are as follows:

	Interest Rate				Outstanding
Currencies	2005		2006		2005		2006
Japanese Yen		3.20%		3.20%		78,648		42,572
Total						78,648		42,572

      The consortium of contractors consists of Sumitomo Corporation, PT NEC Nusantara Communications and PT Humpuss Elektronika (SNH Consortium). The loans were obtained to finance the second digital telephone exchange project. The loans are repayable in semi-annual installments and are due on various dates through June 15, 2008.

      Two-step loans which are payable in Rupiah bear either a fixed interest rate or a floating rate based upon the average interest rate on three-month Certificates of Bank Indonesia during the six-months preceding the installment due date plus 1%, or a floating interest rate offered by the lenders plus 5.25%. Two-step loans which are payable in foreign currencies bear either a fixed rate interest or the floating interest rate offered by the lenders, plus 0.5%.

F-69

PERUSAHAAN PERSEROAN (PERSERO)

P.T. TELEKOMUNIKASI INDONESIA Tbk AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

DECEMBER 31, 2005 AND 2006, AND FOR YEARS ENDED

DECEMBER 31, 2004, 2005 AND 2006

(Figures in tables are presented in millions of Rupiah, unless otherwise stated)

      As of December 31, 2006, the Company has used all facilities under the two-step loans program and the draw-down period for the two-step loans has expired.

      The Company is required to maintain financial ratios as follows:

      a. Projected net revenue to projected debt service ratio should exceed 1.5:1 and 1.2:1 for the two-step loans originating from World Bank and Asian Development Bank (“ADB”), respectively.

      b. Internal financing (earnings before depreciation and interest expenses) should exceed 50% and 20% compared to annual average capital expenditures for loans originating from World Bank and ADB, respectively.

      As of December 31, 2006, the Company complied with the above mentioned ratios.

23. NOTES AND BONDS

	2005			2006
Bonds		991,850			997,137
Medium-term Notes		609,329			464,818
Total		1,601,179			1,461,955
Current maturities (Note 21a)		(144,510	)		(1,461,955	)
Long-term portion		1,456,669			—

     a.  Bonds

      On July 16, 2002, the Company issued bonds amounting to Rp.1,000,000 million. The bonds were issued at par value and have a term of five years. The bonds bear interest at a fixed rate of 17% per annum, payable quarterly beginning October 16, 2002 and secured with all assets owned by the Company. The bonds are traded on the Surabaya Stock Exchange and will mature on July 16, 2007. The trustee of the bonds is PT Bank Rakyat Indonesia Tbk (effective from January 17, 2006 replacing PT Bank Negara Indonesia (Persero) Tbk) and the custodian is PT Kustodian Sentral Efek Indonesia.

      As of December 31, 2006, the ratings for the bonds were AAA and BB+ by Pefindo and Standard and Poor’s, respectively.

      As of December 31, 2005 and 2006, the outstanding principal amount of the bonds and the unamortized bond issuance costs are as follows:

	2005			2006
Principal		1,000,000			1,000,000
Bond issuance costs		(8,150	)		(2,863	)
Net		991,850			997,137

F-70

PERUSAHAAN PERSEROAN (PERSERO)

P.T. TELEKOMUNIKASI INDONESIA Tbk AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

DECEMBER 31, 2005 AND 2006, AND FOR YEARS ENDED

DECEMBER 31, 2004, 2005 AND 2006

(Figures in tables are presented in millions of Rupiah, unless otherwise stated)

     During the period when the bonds are outstanding, the Company is required to comply with all covenants or restrictions including maintaining consolidated financial ratios as follows:

      1. Debt service coverage ratio should exceed 1.5:1

      2. Debt to equity ratio should not exceed:

      a. 3:1 for the period January 1, 2002 to December 31, 2002

      b. 2.5:1 for the period January 1, 2003 to December 31, 2003

      c. 2:1 for the period January 1, 2004 to the redemption date of the bonds

      3. Debt to EBITDA ratio should not exceed 3:1

      The Company also covenanted in the bonds indenture that during the periods the bonds are outstanding, the Company would not make any loans to or for the benefits of any person which in the aggregate exceed Rp.500,000 million. In 2005 and 2006, the Company breached this covenant with regard to providing loans to certain subsidiary which in aggregate exceed Rp.500,000 million. However, the Company has obtained a written waiver from PT Bank Rakyat Indonesia Tbk, the trustee of the bonds.

     b.  Medium-term Notes

      On December 13, 2004, the Company entered into an agreement with PT ABN AMRO Asia Securities Indonesia, PT Bahana Securities, PT BNI Securities and PT Mandiri Sekuritas (collectively referred as “Initial Purchasers”) to issue medium-term notes (the “Notes”) for a total principal amount of Rp.1,125,000 million. Proceeds from issuance of the Notes were used to finance the payment of the remaining balance of the borrowings assumed in connection with the AWI acquisition amounting to US$123.0 million.

      The Notes consist of four Series with the following maturities and interest rates:

Series		Principal		Maturity		Interest Rate
	A		290,000		June 15, 2005		7.70	%
	B		225,000		December 15, 2005		7.95	%
	C		145,000		June 15, 2006		8.20	%
	D		465,000		June 15, 2007		9.40	%
Total			1,125,000

      Interest on the Notes is payable semi-annually beginning June 15, 2005 through June 15, 2007. The Notes are unsecured and will at all times rank pari passu with other unsecured debts of the Company. The Company may at any time, before the maturity dates of the Notes, repurchase the Notes in whole or in part.

      On June 15, 2005, December 15, 2005 and June 15, 2006, the Company repaid the Series A, Series B and Series C Notes.

F-71

PERUSAHAAN PERSEROAN (PERSERO)

P.T. TELEKOMUNIKASI INDONESIA Tbk AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

DECEMBER 31, 2005 AND 2006, AND FOR YEARS ENDED

DECEMBER 31, 2004, 2005 AND 2006

(Figures in tables are presented in millions of Rupiah, unless otherwise stated)

      As of December 31, 2005 and 2006, the outstanding principal and unamortized debt issuance costs are as follows:

	2005			2006
Principal		610,000			465,000
Debt issuance costs		(671	)		(182	)
		609,329			464,818
Current maturities		(144,510	)		(464,818	)
Long-term portion		464,819			—

      As of December 31, 2006, the Pefindo’s rating for the Notes was AAA.

      During the period when the Notes are outstanding, the Company must comply with all covenants or restrictions including maintaining financial ratios as follows:

      1. Debt service coverage ratio should exceed 1.5:1

      2. Debt to equity ratio should not exceed 2:1

      3. Debt to EBITDA ratio should not exceed 3:1

      The Company complied with the covenants for the whole financial years.

F-72

PERUSAHAAN PERSEROAN (PERSERO)

P.T. TELEKOMUNIKASI INDONESIA Tbk AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

DECEMBER 31, 2005 AND 2006, AND FOR YEARS ENDED

DECEMBER 31, 2004, 2005 AND 2006

(Figures in tables are presented in millions of Rupiah, unless otherwise stated)

24. BANK LOANS

      The details of long-term bank loans as of December 31, 2005 and 2006 are as follows:

					2005					2006
			2006		Outstanding					Outstanding
					Original					Original
			Total Facility		Currency		Rupiah			Currency		Rupiah
Lenders	Currency		(in millions)		(in millions)		Equivalent			(in millions)		Equivalent
The Export-Import Bank of Korea	US$			124.0		117.6		1,156,296			105.8		952,842
Bank Mandiri		Rp.		950,000.0		—		14,918			—		950,000
Bank Central Asia		Rp.		923,000.0		—		86,093			—		778,698
Citibank N.A	US$			113.3		62.5		614,501			39.2		352,612
		Euro		73.4		36.7		427,718			22.0		260,994
		Rp.		500,000.0		—		—			—		500,000
Bank BNI		Rp.		300,000.0		—		—			—		300,000
Consortium of banks		Rp.		150,000.0		—		74,890			—		32,606
Lippo Bank		Rp.		18,500.0		—		—			—		18,401
Bank Niaga		Rp.		11,300.0		—		7,229			—		6,705
Bank Bukopin		Rp.		5,300.0		—		5,001			—		4,201
Total								2,386,646					4,157,059
Current maturities of bank loans (Note 21a)								(634,542	)				(1,669,146	)
Long-term portion (Note 21b)								1,752,104					2,487,913

     a.  The Export-Import Bank of Korea

      On August 27, 2003, the Company entered into a loan agreement with The Export-Import Bank of Korea for a loan facility of US$124.0 million. The loan was used to finance the CDMA procurement from the Samsung Consortium and the facility was available until April 2006. The loan bears interest, commitment and other fees totaling 5.68%. The loan is unsecured and payable in 10 semi-annual installments on June 30 and December 30 of each year beginning in December 2006. As of December 31, 2005 and 2006, the principal outstanding amounted to US$117.6 million (equivalent to Rp.1,156,296 million) and US$105.8 million (equivalent to Rp.952,842 million), respectively.

     b.  Bank Mandiri

      On December 20, 2003, Dayamitra obtained a Rp.40,000 million credit facility from Bank Mandiri. The loan amount under the facility would be repaid on a quarterly basis beginning from the end of the third quarter of 2004 until the end of the fourth quarter of 2006 and carried interest at 14% per annum which would be subject to change to reflect any changes in the market rate (14% as of December 31, 2005). The loan was obtained to finance the construction of the Fixed Wireless CDMA project pursuant to the procurement

F-73

PERUSAHAAN PERSEROAN (PERSERO)

P.T. TELEKOMUNIKASI INDONESIA Tbk AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

DECEMBER 31, 2005 AND 2006, AND FOR YEARS ENDED

DECEMBER 31, 2004, 2005 AND 2006

(Figures in tables are presented in millions of Rupiah, unless otherwise stated)

agreement entered into between Dayamitra and Samsung Electronic Co. Ltd. As of December 31, 2005, the principal outstanding under this facility was Rp.14,328 million and the loan was fully repaid in July 2006.

      The above loan was collateralized by Dayamitra’s telecommunications equipment/network with the CDMA technology financed by these facilities, and Dayamitra’s share in the DKSOR of KSO VI. In addition, Dayamitra was required to maintain a minimum balance of Rp.6,000 million in an escrow account established to facilitate loan repayments (Note 16b).

      On March 13, 2003, Balebat entered into a loan agreement with Bank Mandiri for a facility of Rp.2,500 million. This facility was secured by Balebat’s operating equipment and matured in July 2006. As of December 31, 2005, the interest rate charged on the loan was 17% per annum, and was payable on a monthly basis. The principal was repayable by monthly installments. As of December 31, 2005, the principal outstanding under this facility amounted to Rp.590 million and the loan was fully repaid in July 2006.

      On March 20, 2006, Telkomsel signed a loan agreement with Bank Mandiri for a facility of Rp.600,000 million. The loan is payable to Bank Mandiri in five (5) equal semi-annual installments beginning six (6) months after the end of availability period (the earlier of March 20, 2007 and the date on which the facility has been fully drawn). The loan bears floating interest rate of three-month Certificate of Bank Indonesia plus 1.75% (i.e., 11.25% as of December 31, 2006) and unsecured. The principal outstanding as of December 31, 2006 amounted to Rp.600,000 million.

      On August 15, 2006, Telkomsel signed a medium-term facility loan agreement with Bank Mandiri of Rp.350,000 million. This facility is in 5 quarterly installments commencing six months after the end of the availability period (the earlier of August 15, 2007 or the date when the facility has been fully drawn down). The loan bears floating interest rate of three-month Certificate of Bank Indonesia plus 1.5% (i.e., 11.00% as of December 31, 2006) and unsecured. The principal outstanding as of December 31, 2006 amounted to Rp.350,000 million.

     c.  Bank Central Asia

      On April 10, 2002, the Company entered into a “Term Loan Agreement HP Backbone Sumatra Project” with Bank Central Asia, providing a total facility of Rp.173,000 million. The facility was obtained to finance the Rupiah portion of the high performance backbone network in Sumatra pursuant to the “Partnership Agreement” dated November 30, 2001 with PT Pirelli Cables Indonesia and PT Siemens Indonesia.

      The amounts drawn from the facility bear interest at 4.35% plus the three-month time deposit rate (i.e 13.27% and 13.18% as of December 31, 2005 and 2006, respectively). The loans would be repaid in twelve unequal quarterly installments beginning in July 2004. The loan was originally scheduled to mature in October 2006 but was amended in 2004 to mature in April 2007 instead.

      Total principal outstanding as of December 31, 2005 and 2006 was Rp.86,093 million and Rp.28,698 million, respectively.

      The loan facility from Bank Central Asia is not collateralized.

      During the period when the loan is outstanding, the Company is required to comply with all covenants or restrictions including maintaining financial ratios as follows:

      1. EBITDA to interest ratio should exceed 4:1

F-74

PERUSAHAAN PERSEROAN (PERSERO)

P.T. TELEKOMUNIKASI INDONESIA Tbk AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

DECEMBER 31, 2005 AND 2006, AND FOR YEARS ENDED

DECEMBER 31, 2004, 2005 AND 2006

(Figures in tables are presented in millions of Rupiah, unless otherwise stated)

      2. EBITDA to interest and principal ratio should exceed 1.5:1

      3. Debt to EBITDA ratio should not exceed 3:1

      In 2006 and 2005, the Company breached a covenant in the loan agreement which stipulates that the Company will not make any loans to or for the benefit of any person which in aggregate exceed Rp.500,000 million. The Company obtained a written waiver from Bank Central Asia with regard to providing loans to certain subsidiaries which in aggregate exceed Rp.500,000 million.

      On March 16, 2006, Telkomsel signed a loan agreement with Bank Central Asia for a facility of Rp.400,000 million. The loan is payable to Bank Central Asia in five (5) equal semi-annual installments beginning six (6) months after the end of availability period (the earlier of March 16, 2007 and the date on which the facility has been fully drawn). The loan bears a floating an interest rate of three-month Certificate of Bank Indonesia plus 1.75% (i.e., 11.25% as of December 31, 2006) and unsecured. The principal outstanding as of December 31, 2006 amounted to Rp.400,000 million.

      On August 15, 2006, Telkomsel signed a medium-term facility loan agreement with Bank Central Asia for Rp.350,000 million. This facility is payable for 5 quarterly installments commencing six months after the end of the availability period (the earlier of August 15, 2007 and the date when the facility has been fully drawn down). The loan bears a floating interest rate of three-month Certificate of Bank Indonesia plus 1.5% (i.e., 11.00% as of December 31, 2006) and unsecured. The principal outstanding as of December 31, 2006 amounted to Rp.350,000 million.

     d.  Citibank N.A.

     1. Hermes Export Facility

      On December 2, 2002, pursuant to the partnership agreement with Siemens Aktiengesellschaft (AG) (Note 51a.i), Telkomsel entered into the Hermes Export Facility Agreement (“Facility”) with Citibank International plc (as “Original Lender” and “Agent”) and Citibank N.A., Jakarta branch (“Arranger”) covering a total facility of Euro76.2 million divided into several tranches.

      The agreement was subsequently amended on October 15, 2003, amending the Facility amount to Euro73.4 million and the payment dates.

      The interest rate per annum on the Facility is determined based on the EURIBOR plus 0.75% per annum (i.e., 3.33% as of December 31, 2005 and 4.48% as of December 31, 2006) and unsecured. Interest is payable semi-annually, starting on the utilization date of the Facility (May 29, 2003). As of December 31, 2005 and 2006, the outstanding balance was Euro36.7 million (equivalent to Rp.427,718 million) and Euro22.0 million (equivalent to Rp.260,994 million), respectively.

      The schedule of the principal payments on this long-term loan as of December 31, 2006 is as follows:

	Amount
	Euro		Rupiah
Year	(in millions)		equivalent
2007		14.7		173,996
2008		7.3		86,998
		22.0		260,994

F-75

PERUSAHAAN PERSEROAN (PERSERO)

P.T. TELEKOMUNIKASI INDONESIA Tbk AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

DECEMBER 31, 2005 AND 2006, AND FOR YEARS ENDED

DECEMBER 31, 2004, 2005 AND 2006

(Figures in tables are presented in millions of Rupiah, unless otherwise stated)

     2.  High Performance Backbone (“HP Backbone”) Loans

      a. On April 10, 2002, the Company entered into a “Loan Agreement” with Citibank N.A. (“Arranger”) and Citibank International plc (“Agent”), which was supported by an export credit guarantee of Hermes Kreditversicherungs AG (“Lender” and “Guarantor”), providing a total facility of US$23.4 million.

      The facility was obtained to finance up to 85% of the cost of supplies and services sourced in Germany relating to the design, manufacture, construction, installation and testing of high performance backbone networks in Sumatra pursuant to the “Partnership Agreement” dated November 30, 2001, with PT Pirelli Cables Indonesia and PT Siemens Indonesia for the construction and provision of a high performance backbone in Sumatra. The credit facility is unsecured.

      The lender required a fee of 8.4% of the total facility. This fee was paid twice during the agreement period, 15% of the fee was required to be paid in cash and 85% was included in the loan balance.

      As of December 31, 2005 and 2006, the outstanding loan was US$12.6 million (equivalent to Rp.123,665 million) and US$8.4 million (equivalent to Rp.75,486 million), respectively. The loan is payable in ten semi-annual installments beginning in April 2004.

      The amounts drawn from the facility bear interest at a rate equal to the six-month LIBOR plus 0.75% (i.e., 5.04% and 6.11% as of December 31, 2005 and 2006, respectively).

      b. On April 10, 2002, the Company entered into a loan agreement with Citibank N.A. (“Arranger”) and Citibank International plc (“Agent”), which was supported by an export credit guarantee obtained from Servizi Assicurativi del Commercio Estero (“SACE Italy”) providing a total maximum facility to US$21.0 million. The facility was used to finance up to 85% of material and services procured in Italy in connection with the design, manufacture, development, installation and testing of Sub System VI, as part of HP Backbone network.

      The amounts drawn from the facility bear a fixed interest rate of 4.14%. The loans are payable in ten semi-annual installments beginning in December 2003. Total principal outstanding as of December 31, 2005 and 2006 was US$9.3 million (equivalent to Rp.91,257 million) and US$5.6 million (equivalent to Rp.50,133 million), respectively. The credit facility is unsecured.

      During the period when the loans are outstanding, the Company is required to comply with all covenants or restrictions including maintaining financial ratios as follows:

      1. Debt service coverage ratio should exceed 1.5:1

      2. Debt to equity ratio should not exceed:

      a. 3:1 for the period April 10, 2002 to January 1, 2003

      b. 2.75:1 for the period January 2, 2003 to January 1, 2004

      c. 2.5:1 for the period January 2, 2004 to January 1, 2005

      d. 2:1 for the period January 2, 2005 to the full repayment date of the loans

      3. Debt to EBITDA ratio should not exceed:

      a. 3.5:1 for the period April 10, 2002 to January 1, 2004

      b. 3:1 for the period January 2, 2004 to the full repayment date of the loans

F-76

PERUSAHAAN PERSEROAN (PERSERO)

P.T. TELEKOMUNIKASI INDONESIA Tbk AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

DECEMBER 31, 2005 AND 2006, AND FOR YEARS ENDED

DECEMBER 31, 2004, 2005 AND 2006

(Figures in tables are presented in millions of Rupiah, unless otherwise stated)

      In 2005, the Company has breached a covenant in the loan agreements which stipulate that the Company will not make any loans or grant any credit to or for the benefit of any person which in aggregate exceed 3% of shareholders’ equity. On May 12, 2006, the Company obtained a written waiver from Citibank International plc with regard to providing loans to certain subsidiaries which in aggregate exceed 3% of stockholders’ equity. In 2006, the Company has complied with the above covenant.

     3.  EKN-Backed Facility

      On December 2, 2002, pursuant to the partnership agreement with PT Ericsson Indonesia (Note 51a.i), Telkomsel entered into the EKN-Backed Facility agreement (“Facility”) with Citibank International plc (“Original Lender” and “Agent”) and Citibank N.A., Jakarta branch (“Arranger”) covering a total facility amount of US$70.5 million, divided into several tranches.

      The agreement was subsequently amended on December 17, 2004, to reduce the total Facility to US$68.9 million.

      The interest rate per annum on the Facility is determined based on CIRR (Commercial Interest Reference Rate) of 3.52% plus 0.5% per annum (i.e., 4.02% as of December 31, 2005 and 2006) and unsecured. Interest is payable semi-annually, starting on the utilization date of the Facility (July 31, 2003).

      In addition to the interest, in 2004, Telkomsel was also charged an insurance premium for the insurance guarantee given by EKN in favor of Telkomsel for the loan utilization amounting to US$1.5 million, 15% of which was paid in cash. The remaining balance was settled through utilization of the Facility.

      No amount were drawn down from the Facility in 2005 and 2006. As of December 31, 2005 and 2006, the outstanding balance was US$40.6 million (equivalent to Rp.399,579 million) and US$25.2 million (equivalent to Rp.226,993 million), respectively.

      The schedule of the principal payments on this long-term loan as of December 31, 2006 is as follows:

	Amount
	US$ (in		Rupiah
Year	millions)		Equivalent
2007		15.5		139,660
2008		9.7		87,333
		25.2		226,993

     4.  Medium Term Loan

      On March 21, 2006, Telkomsel signed a medium term loan agreement with Citibank, N.A., Jakarta Branch for a facility of Rp.500,000 million. The loan is repayable to Citibank in five (5) equal semi-annual installments beginning six (6) months after the end of availability period (the earlier of March 21, 2007 and the date on which the facility has been fully drawn). The loan bears a floating interest rate of three-month Certificate of Bank Indonesia plus 1.75% (i.e., 11.25% as of December 31, 2006) and unsecured. The principal outstanding as of December 31, 2006 amounted to Rp.500,000 million.

F-77

PERUSAHAAN PERSEROAN (PERSERO)

P.T. TELEKOMUNIKASI INDONESIA Tbk AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

DECEMBER 31, 2005 AND 2006, AND FOR YEARS ENDED

DECEMBER 31, 2004, 2005 AND 2006

(Figures in tables are presented in millions of Rupiah, unless otherwise stated)

      The following table summarizes the principal outstanding on the various long-term loans from Citibank N.A. as of December 31, 2005 and 2006:

		2005					2006
		Foreign					Foreign
		Currencies		Rupiah			Currencies		Rupiah
		(in millions)		Equivalent			(in millions)		Equivalent
Hermes Export Facility	Euro		36.7		427,718			22.0		260,994
HP Backbone loans	US$		21.9		214,922			14.0		125,619
EKN-Backed Facility	US$		40.6		399,579			25.2		226,993
Medium Term Loan	Rp.		—		—			—		500,000
Total					1,042,219					1,113,606
Current maturities					(401,013	)				(584,821	)
Long-term portion					641,206					528,785

     e.  Bank Negara Indonesia (“BNI”)

      On August 15, 2006, Telkomsel signed a medium-term facility loan agreement with BNI for Rp.300,000 million. This facility is payable for 5 quarterly installment commencing six months after the end of the availability period (the earlier date of August 15, 2007 and the date when the facility has been fully drawn down). The loan bears a floating interest rate of three-month Certificate of Bank Indonesia plus 1.5% (i.e., 11.00% as of December 31, 2006) and unsecured. The principal outstanding as of December 31, 2006 amounted to Rp.300,000 million.

     f.  Consortium of banks

      On June 21, 2002, the Company entered into a loan agreement with a consortium of banks for a facility of Rp.400,000 million to finance the Regional Division V Junction Project. Bank Bukopin, acting as the facility agent, charged interest at the rate of 19% for the first year from the signing date and at the rate of the highest average three-month deposit rate of each creditors plus 4% for the remaining years. The draw-down period expires 19 months from the signing of the loan agreement and the principal is payable in 14 quarterly installments starting from April 2004. The loan facility is secured by project equipment, with a value of not less than Rp.500,000 million.

      Subsequently, based on an addendum to the loan agreement dated April 4, 2003, the loan facility was reduced to Rp.150,000 million, the draw-down period was amended to expire 18 months from the signing of the addendum, the repayment schedule was amended to 14 quarterly installments starting from May 21, 2004 and ending on June 21, 2007, and the value of the project equipment secured was reduced to Rp.187,500 million.

      As of December 31, 2005 and 2006, interest rate charged on the loan was 12.94% and 12.69%, respectively, and principal outstanding was Rp.74,890 million and Rp.32,606 million, respectively.

F-78

PERUSAHAAN PERSEROAN (PERSERO)

P.T. TELEKOMUNIKASI INDONESIA Tbk AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

DECEMBER 31, 2005 AND 2006, AND FOR YEARS ENDED

DECEMBER 31, 2004, 2005 AND 2006

(Figures in tables are presented in millions of Rupiah, unless otherwise stated)

      During the period when the loan is outstanding, the Company is required to comply with all covenants or restrictions including maintaining financial ratios as follows:

      1. Debt to equity ratio should not exceed 3:1

      2. EBITDA to interest expense should exceed 5:1

      As of December 31, 2006, the Company complied with the above mentioned ratios.

     g.  Bank Niaga

      On December 28, 2004, Balebat entered into a loan agreement with Bank Niaga providing a total facility of Rp.7,200 million comprising Rp.5,000 million to finance the construction of plant (“Investment Facility”) with interest at 13.5% per annum and Rp.2,200 million to finance certain purchases of machinery (“Specific Transaction Facility”) with the interest at 12% per annum. The interest rate was subsequently increased to 17% per annum on December 1, 2005. The Investment Facility is repayable in 36 monthly installments commencing from March 31, 2005. The Specific Transaction Facility is repayable in 60 monthly installments commencing from June 29, 2005. These facilities are secured by Balebat’s property, plant and equipment with a value of Rp.8,450 million. As of December 31, 2005 and 2006, principal outstanding under these facilities amounted to Rp.5,696 million and Rp.3,631 million, respectively.

      On December 22, 2005 the loan agreement was amended to include a short term credit facility of Rp.4,000 million with maturity date and interest rate of December 22, 2006 and 12.5% per annum, respectively. On June 13, 2006, the facility was combined with the revolving credit facility of Rp.800 million (Note 20d).

      On June 13, 2006, Balebat also received additional facility of Rp.2,500 million which consist of transaction facility of Rp.2,000 million to finance the purchase of printing machine and Rp.500 million to finance the purchase of operational vehicle with interest rate 16.5% per annum. These facilities will be due on October 30, 2011 and November 28, 2009, respectively. Both facilities secured by Balebat’s property located in West Java. As of December 31, 2006, the outstanding loans of the facilities were Rp.1,628 million and Rp.312 million, respectively.

      As discussed in Note 20d, on April 25, 2005, Balebat entered into a loan agreement with Bank Niaga for a total facility of Rp.2,400 million which includes an investment credit facility of Rp.1,600 million with maturity date of October 25, 2009. The investment credit facility loan is payable in 48 unequal monthly installments beginning in November 2005 through October 2009. The investment credit facility bears interest at a rate equal to market rate plus 2% (17% as of December 31, 2005 and 2006). As of December 31, 2005 and 2006, the principal outstanding amounted to Rp.1,533 million and Rp.1,134 million, respectively.

     h.  Bank Bukopin

      On May 11, 2005, Infomedia entered into loan agreements with Bank Bukopin for various facilities totaling Rp.5,300 million. The loans were obtained to finance the acquisition of a property. The loan is payable in 60 monthly installments. A portion of the facilities of Rp.4,200 million will mature in June 2010 and the remainder of Rp.1,100 million will mature in December 2010. As of December 31, 2005 and 2006, interest rate charged on the loan was 15.75%. The facilities are secured by certain Infomedia’s property. As of December 31, 2005 and 2006, the principal outstanding amounted to Rp.5,001 million and Rp.4,201 million, respectively.

F-79

PERUSAHAAN PERSEROAN (PERSERO)

P.T. TELEKOMUNIKASI INDONESIA Tbk AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

DECEMBER 31, 2005 AND 2006, AND FOR YEARS ENDED

DECEMBER 31, 2004, 2005 AND 2006

(Figures in tables are presented in millions of Rupiah, unless otherwise stated)

     i.  Bank Lippo

      On May 29, 2006, Infomedia entered into a loan agreement with Bank Lippo for a facility of Rp.18,500 million to finance its Call Center project with Telkomsel. The facility bears interest at 15.5% per annum and is secured by Infomedia’s receivables on the Call Center contract with Telkomsel amounted to Rp.23,125 million until the due date of the loan within 36 months from the withdrawal date. As of December 31, 2006, the principal outstanding amounted to Rp.18,401 million.

25. DEFERRED CONSIDERATION FOR BUSINESS COMBINATIONS

      These represent the Company’s obligation to the Selling Stockholders of AWI in respect of the Company’s acquisition of 100% of AWI, TM Communication (HK) Ltd. in respect of the Company’s exercise of the Option Agreement to purchase the remaining 9.68% of Dayamitra shares, MGTI in respect of the Company’s acquisition of KSO IV, and BSI in respect of the Company’s acquisition of KSO VII.

		2005			2006
AWI transaction (Note 5c)
	PT Aria Infotek		394,294			257,870
	The Asian Infrastructure Fund		93,879			61,398
	MediaOne International I B.V		262,863			171,914
	Less discount on promissory notes		(57,298	)		(26,064	)
			693,738			465,118
Dayamitra transaction (Note 5a)
	TM Communication (HK) Ltd.		147,791			—
	Less discount on promissory notes		(2,519	)		—
			145,272			—
KSO IV transaction (Note 5d)
	MGTI		3,868,433			2,874,128
	Less discount		(717,090	)		(437,710	)
			3,151,343			2,436,418
KSO VII transaction (Note 5e)
	BSI		—			2,226,431
	Less discount		—			(536,790	)
			—			1,689,641
Total			3,990,353			4,591,177
Current maturity — net of discount (Note 21a)			(862,394	)		(1,054,095	)
Long-term portion — net of discount (Note 21b)			3,127,959			3,537,082

F-80

PERUSAHAAN PERSEROAN (PERSERO)

P.T. TELEKOMUNIKASI INDONESIA Tbk AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

DECEMBER 31, 2005 AND 2006, AND FOR YEARS ENDED

DECEMBER 31, 2004, 2005 AND 2006

(Figures in tables are presented in millions of Rupiah, unless otherwise stated)

26. MINORITY INTEREST

		2005		2006
Minority interest in net assets of subsidiaries:
	Telkomsel		6,208,354		8,074,595
	Infomedia		96,835		110,912
	Metra		—		1,573
	GSD		4		7
Total			6,305,193		8,187,087

		2004			2005		2006
Minority interest in net income (loss) of subsidiaries:
	Telkomsel		1,915,543			3,026,029		3,913,743
	Infomedia		37,088			37,940		36,784
	Dayamitra		9,139			—		—
	Indonusa		(1,959	)		—		—
	Napsindo		(2,068	)		—		—
	PII		(1,443	)		—		—
	GSD		1			2		2
	Metra		—			—		(2,428	)
Total			1,956,301			3,063,971		3,948,101

F-81

PERUSAHAAN PERSEROAN (PERSERO)

P.T. TELEKOMUNIKASI INDONESIA Tbk AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

DECEMBER 31, 2005 AND 2006, AND FOR YEARS ENDED

DECEMBER 31, 2004, 2005 AND 2006

(Figures in tables are presented in millions of Rupiah, unless otherwise stated)

27. CAPITAL STOCK

			2005
					Percentage		Total Paid-up
Description			Number of Shares		of Ownership		Capital
					%		Rp.
Series A Dwiwarna share
	Government of the Republic of Indonesia			1		—		—
Series B shares
	Government of the Republic of Indonesia			10,320,470,711		51.19		2,580,118
	JPMCB US Resident (Norbax Inc.)			1,992,333,765		9.88		498,083
	The Bank of New York			1,291,002,696		6.41		322,751
	Board of Commissioners (Note 1a):
		Petrus Sartono		19,116		—		5
	Board of Directors (Note 1a):
		Garuda Sugardo		16,524		—		4
		Guntur Siregar		19,980		—		5
		John Welly		21,712		—		5
		Abdul Haris		1,000		—		—
	Public (individually less than 5%)			6,556,113,775		32.52		1,639,029
Total				20,159,999,280		100.00		5,040,000

F-82

PERUSAHAAN PERSEROAN (PERSERO)

P.T. TELEKOMUNIKASI INDONESIA Tbk AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

DECEMBER 31, 2005 AND 2006, AND FOR YEARS ENDED

DECEMBER 31, 2004, 2005 AND 2006

(Figures in tables are presented in millions of Rupiah, unless otherwise stated)

			2006
					Percentage		Total Paid-up
Description			Number of Shares		of Ownership		Capital
					%		Rp.
Series A Dwiwarna share
	Government of the Republic of Indonesia			1		—		—
Series B shares
	Government of the Republic of Indonesia			10,320,470,711		51.19		2,580,118
	JPMCB US Resident (Norbax Inc.)			1,756,681,581		8.71		439,170
	The Bank of New York			1,487,512,256		7.38		371,878
	Board of Commissioners (Note 1a):
		Petrus Sartono		19,116		—		5
	Board of Directors (Note 1a):
		Garuda Sugardo		16,524		—		4
		Guntur Siregar		19,980		—		5
		John Welly		4		—		—
		Abdul Haris		1,000		—		—
	Public (individually less than 5%)			6,476,901,607		32.13		1,619,226
	Total			20,041,622,780		99.41		5,010,406
	Treasury Stock (Note 29)			118,376,500		0.59		29,594
Total				20,159,999,280		100.00		5,040,000

      The Company only issued one Series A Dwiwarna Share which is held by the Government and cannot be transferred to any party, and has a veto in the General Meeting of the Stockholders with respect to election and removal of Commissioners and Directors and to amend the Company’s article of association.

      Series B shares give the same and equal rights to all the Series B shareholders.

28. ADDITIONAL PAID-IN CAPITAL

	2005			2006
Proceeds from sale of 933,333,000 shares in excess of par value through initial public offering in 1995		1,446,666			1,446,666
Capitalization into 746,666,640 series B shares in 1999		(373,333	)		(373,333	)
Total		1,073,333			1,073,333

29. TREASURY STOCK

      Based on the resolution of the Extraordinary General Meeting of Stockholders on December 21, 2005, the Stockholders authorized the plan to repurchase the Company’s issued and outstanding Series B shares. The proposals to a stock repurchase programs, under the following terms and conditions: (i) maximum stock repurchase would be 5% of the Company’s issued Series B shares with total cost not to exceed

F-83

PERUSAHAAN PERSEROAN (PERSERO)

P.T. TELEKOMUNIKASI INDONESIA Tbk AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

DECEMBER 31, 2005 AND 2006, AND FOR YEARS ENDED

DECEMBER 31, 2004, 2005 AND 2006

(Figures in tables are presented in millions of Rupiah, unless otherwise stated)

Rp.5,250,000 million; (ii) the period determined for the acquisition would not be longer than 18 months (December 21, 2005 to June 20, 2007), in accordance with BAPEPAM Regulation No.XI.B.2.

      As of December 31, 2006 the Company has repurchased 118,376,500 Series B shares of the Company’s issued and outstanding Series B shares representing 0.59% of the Company’s issued and outstanding Series B shares, for a total repurchased amount of Rp.952,211 million (included broker commission and custodian fee).

      The movement of shares held in treasury arising from the programs for repurchase of shares was the following:

	2006
	Number of share		Rp.
Balance as of January 1, 2006		—		—
Number of shares acquired		118,376,500		952,211
Balance as of December 31, 2006		118,376,500		952,211

      Historical unit cost of repurchase of treasury shares:

	Rp.
Weighted average		8,044
Minimum		6,633
Maximum		10,620

      The acquisition unit cost has included the total cost for the shares repurchase programs i.e., broker commission and custodian fee. Up to balance sheet date none of the shares acquired were sold.

30. DIFFERENCE IN VALUE OF RESTRUCTURING TRANSACTIONS BETWEEN ENTITIES UNDER COMMON CONTROL

Cross-ownership transactions and acquisition of Pramindo

      On April 3, 2001, the Company signed a Conditional Sale and Purchase Agreement with Indosat, for a series of transactions to consolidate their cross-ownership in certain companies. The transactions under the agreement are as follows:

      i. The acquisition by the Company of Indosat’s 35% equity interest in Telkomsel for US$945.0 million (“Telkomsel Transaction”);

      ii. The acquisition by Indosat of the Company’s 22.5% equity interest in PT Satelit Palapa Indonesia (“Satelindo”) for US$186.0 million (“Satelindo Transaction”);

      iii. The acquisition by Indosat of the Company’s 37.66% equity interest in PT Aplikanusa Lintasarta (“Lintasarta”) and convertible bonds of Rp.4,051 million issued by Lintasarta for US$38.0 million (“Lintasarta Transaction”); and

      iv. The acquisition by Indosat of all of the Company’s rights and novation of all of the Company’s obligations, under the KSO IV Agreement dated October 20, 1995, between the Company and PT Mitra Global Telekomunikasi Indonesia (“MGTI”), together with all of the Company’s assets being used as KSO IV assets, for US$375.0 million (“KSO IV Transaction”).

F-84

PERUSAHAAN PERSEROAN (PERSERO)

P.T. TELEKOMUNIKASI INDONESIA Tbk AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

DECEMBER 31, 2005 AND 2006, AND FOR YEARS ENDED

DECEMBER 31, 2004, 2005 AND 2006

(Figures in tables are presented in millions of Rupiah, unless otherwise stated)

      Lintasarta’s convertible bonds were subsequently converted into shares, thereby reducing the Company’s 37.66% equity interest to 37.21% prior to the consummation of the Lintasarta Transaction.

      The Telkomsel and Lintasarta Transactions were consummated on May 16, 2001 based on Deed of Share Transfer No. 1/ V/2001/triplo and No. 2/ V/2001/duplo, respectively, of Notary Ny. Liliana Arif Gondoutomo, S.H.

      The Satelindo Transaction was consummated on July 23, 2001 after DeTeAsia Holding GmbH and PT Bimagraha Telekomindo (the other Satelindo stockholders) waived their pre-emptive rights on 7.26% and 13.06% of Satelindo’s shares, respectively.

      On February 1, 2002, the Company and Indosat announced the cancellation of the KSO IV Transaction. As a result, the Company settled this portion of the cross-ownership transaction in cash.

      At the time of the transactions, the Government was the majority and controlling shareholder of both the Company and Indosat. Accordingly, the Telkomsel, Satelindo and Lintasarta Transactions have been accounted for as a restructuring of entities under common control. The Company’s acquisition of a controlling interest in Telkomsel was accounted for in a manner similar to that of pooling of interests accounting (carryover basis). Accordingly, for reporting purposes, the financial statements of the Company and those of Telkomsel have been combined, as if they had been combined from the beginning of the earliest period presented. The effects of the transactions between the Company and Telkomsel before the combination were eliminated in preparing the combined financial statements. On the consummation dates of the transactions, the difference between the consideration paid or received and the historical amount of the net assets of the investee acquired or carrying amount of the investment sold was included as “Difference in value of restructuring transactions between entities under common control” in the stockholders’ equity section.

      In connection with the acquisition of Pramindo on August 15, 2002, the portion representing Indosat’s 13% equity interest in Pramindo has been accounted for as a restructuring of entities under common control. On the acquisition date, the difference between the purchase consideration and the historical amount of the net assets acquired amounting to Rp.296,038 million was included as “Difference in value of restructuring transactions between entities under common control” in the stockholders’ equity section.

F-85

PERUSAHAAN PERSEROAN (PERSERO)

P.T. TELEKOMUNIKASI INDONESIA Tbk AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

DECEMBER 31, 2005 AND 2006, AND FOR YEARS ENDED

DECEMBER 31, 2004, 2005 AND 2006

(Figures in tables are presented in millions of Rupiah, unless otherwise stated)

      The difference in the value of the restructuring transactions between the entities under common control arising from the cross-ownership transactions and acquisition of Pramindo can be summarized as follows:

					Historical
		Consideration			Amount of
		Paid/			Net Assets/		Deferred		Change in
		(Received)			Investment		Income Tax		Equity			Total			Tax			Net
Cross-ownership transactions with Indosat in 2001:
Acquisition of 35% equity interest in Telkomsel			10,782,450			1,466,658		337,324		—			8,978,468			—			8,978,468
Sale of 22.5% equity interest in Satelindo			(2,122,260	)		—		—		(290,442	)		(2,412,702	)		(627,678	)		(1,785,024	)
Sale of 37.66% equity interest in Lintasarta			(437,631	)		116,834		—		—			(320,797	)		(119,586	)		(201,211	)
	Total		8,222,559			1,583,492		337,324		(290,442	)		6,244,969			(747,264	)		6,992,233
Acquisition of 13% equity interest in Pramindo in 2002 from Indosat (Note 5b)			434,025			137,987		—		—			296,038			—			296,038
Total			8,656,584			1,721,479		337,324		(290,442	)		6,541,007			(747,264	)		7,288,271

      On December 20, 2002, the Government sold its 41.94% ownership interest in Indosat to STTC and waived its special voting rights with respect to the Series A Dwiwarna share. As a result, as of December 20, 2002, the Government ceased to be the majority and controlling shareholder of Indosat and consequently, the Company no longer considered Indosat as a common control entity from that date. As discussed in Note 4, in connection with the adoption of PSAK 38R and pursuant to a ruling issued by BAPEPAM regarding the initial application of PSAK 38R by public companies, the Company has reclassified the difference in the value of the restructuring transactions between the entities under common control account resulting from the cross-ownership transactions and acquisition of Pramindo as a charge to retained earnings as of January 1, 2005.

Compensation for early termination of exclusive rights

      As discussed in Note 1a, on July 31, 2002, the Government decided to terminate the Company’s exclusive rights to provide local and domestic long-distance fixed-line telecommunications services taking effect since August 1, 2002.

      On March 30, 2004, the Minister of Communications issued Announcement No. PM.2 year 2004 regarding the Implementation of Restructuring in the Telecommunications Sector which, among others, stipulates that the Government shall pay compensation for early termination of exclusive rights to the Company amounting to Rp.478,000 million, net of tax.

      On December 15, 2005, the Company signed an agreement on Implementation of Compensation for Termination of Exclusive Rights with the State Minister of Communication and Information — Directorate General of Post and Telecommunications, which was amended on October 18, 2006. Pursuant to this agreement, the Government agreed to pay Rp.478,000 million to the Company over a five-year period where Rp.90,000 million shall be paid from the 2005 State budget, Rp.90,000 million from the 2006 State budget

F-86

PERUSAHAAN PERSEROAN (PERSERO)

P.T. TELEKOMUNIKASI INDONESIA Tbk AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

DECEMBER 31, 2005 AND 2006, AND FOR YEARS ENDED

DECEMBER 31, 2004, 2005 AND 2006

(Figures in tables are presented in millions of Rupiah, unless otherwise stated)

and the remaining Rp.298,000 million shall be paid gradually or in one lump-sum payment based on the State’s financial ability. In addition, the Company is required by the Government to use the funds received from this compensation for the development of telecommunications infrastructure.

      As of December 31, 2006, the Company has received Rp.180,000 million in relation to the compensation for the early termination of exclusivity right, being Rp.90,000 million paid on December 30, 2005 and Rp.90,000 million on December 28, 2006. The Company recorded these amounts in “Difference in value of restructuring transactions between entities under common control” in the stockholders’ equity section. These amounts are recorded as a component of stockholders’ equity because the Government is the majority and controlling shareholder of the Company. The Company will record the remaining amount of Rp.298,000 million when it is received.

      As of December 31, 2006, the development of the related infrastructure amounted to Rp.90,702 million.

31.     TELEPHONE REVENUES

		2004		2005		2006
Fixed lines
	Local and domestic long-distance usage		7,439,310		7,223,137		7,130,861
	Monthly subscription charges		2,934,899		3,289,750		3,491,497
	Installation charges		201,313		197,266		170,205
	Phone cards		15,561		10,943		4,036
	Others		53,938		60,156		182,434
	Total		10,645,021		10,781,252		10,979,033
Cellular
	Air time charges		9,825,738		13,666,286		19,257,290
	Monthly subscription charges		448,472		383,537		297,450
	Connection fee charges		55,797		64,110		109,251
	Features		91,291		457,025		958,656
	Total		10,421,298		14,570,958		20,622,647
Total Telephone Revenues			21,066,319		25,352,210		31,601,680

32.     INTERCONNECTION REVENUES — NET

	2004		2005		2006
Cellular		5,351,613		6,685,138		7,442,340
International		641,210		854,766		1,001,304
Others		195,158		202,180		237,817
Total		6,187,981		7,742,084		8,681,461

      Refer to Note 46 for details of related party transactions.

F-87

PERUSAHAAN PERSEROAN (PERSERO)

P.T. TELEKOMUNIKASI INDONESIA Tbk AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

DECEMBER 31, 2005 AND 2006, AND FOR YEARS ENDED

DECEMBER 31, 2004, 2005 AND 2006

(Figures in tables are presented in millions of Rupiah, unless otherwise stated)

33.     REVENUE UNDER JOINT OPERATION SCHEMES

	2004		2005		2006
Minimum TELKOM Revenues		295,955		268,629		207,516
Share in Distributable KSO Revenues		349,528		318,556		274,587
Amortization of unearned initial investor payments under Joint Operation Schemes		11,131		1,462		7,311
Total		656,614		588,647		489,414

      KSO revenues were shares of the Company’s revenues under joint operation agreement with the KSO investors. On October 19, 2006, the Company has amended the KSO VII agreement and as of that date the Company has obtained the operational control over KSO VII (Note 5e and 48). As of December 31, 2006 the Company has obtained full control over all of the KSO operations by acquisition of its KSO investors or the businesses.

34.     DATA AND INTERNET REVENUES

	2004		2005		2006
SMS		3,562,726		5,309,244		6,730,463
Internet		554,948		711,375		907,467
Data communication		360,642		610,367		1,122,285
VoIP		318,854		292,750		278,057
e-Business		11,572		10,588		26,915
Total		4,808,742		6,934,324		9,065,187

35.     NETWORK REVENUES

	2004		2005		2006
Leased lines		443,408		347,105		424,633
Satellite transponder lease		210,901		239,531		294,105
Total		654,309		586,636		718,738

      Refer to Note 46 for details of related party transactions.

36.     REVENUE-SHARING ARRANGEMENTS REVENUES

	2004		2005		2006
Revenue-Sharing Arrangements revenues		198,543		165,601		263,516
Amortization of unearned income (Note 13)		82,033		136,681		151,961
Total		280,576		302,282		415,477

F-88

PERUSAHAAN PERSEROAN (PERSERO)

P.T. TELEKOMUNIKASI INDONESIA Tbk AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

DECEMBER 31, 2005 AND 2006, AND FOR YEARS ENDED

DECEMBER 31, 2004, 2005 AND 2006

(Figures in tables are presented in millions of Rupiah, unless otherwise stated)

37.     OPERATING EXPENSES — PERSONNEL

	2004		2005		2006
Salaries and related benefits		1,796,914		2,165,895		2,400,631
Vacation pay, incentives and other benefits		1,156,069		1,615,640		2,209,056
Early retirements program (Note 18)		243,466		486,374		1,461,150
Employee income tax		523,787		856,451		889,083
Net periodic post-retirement health care benefit cost (Note 45)		416,276		488,586		604,748
Net periodic pension cost (Note 43)		572,419		532,331		438,383
Long service awards (Note 44)		36,861		201,878		215,840
Housing		103,459		113,673		168,416
Medical		12,190		18,019		25,117
Other employee benefits (Note 43)		11,510		5,954		14,341
Others		37,014		78,246		87,000
Total		4,909,965		6,563,047		8,513,765

38. OPERATING EXPENSES — OPERATIONS, MAINTENANCE AND TELECOMMUNICATION SERVICES

	2004		2005		2006
Operations and maintenance		2,398,159		3,075,092		4,209,145
Concession fees and Universal Service Obligation (USO) charges		314,741		709,190		881,757
Radio frequency usage charges		492,568		548,186		722,600
Cost of phone, SIM and RUIM cards		366,661		582,351		579,334
Electricity, gas and water		385,662		372,526		417,349
Vehicles and supporting facilities		181,737		217,217		246,184
Leased lines		132,829		124,253		236,394
Insurance		151,297		136,378		145,075
Call center		59,634		104,989		14,679
Travelling		42,213		33,455		39,106
Others		4,086		12,704		4,105
Total		4,529,587		5,916,341		7,495,728

      Refer to Note 46 for details of related party transactions.

F-89

PERUSAHAAN PERSEROAN (PERSERO)

P.T. TELEKOMUNIKASI INDONESIA Tbk AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

DECEMBER 31, 2005 AND 2006, AND FOR YEARS ENDED

DECEMBER 31, 2004, 2005 AND 2006

(Figures in tables are presented in millions of Rupiah, unless otherwise stated)

39.     OPERATING EXPENSES — GENERAL AND ADMINISTRATIVE

	2004		2005		2006
Amortization of goodwill and other intangible assets (Note 15)		872,330		918,153		944,403
Collection expenses		358,957		379,056		542,466
Provision for doubtful accounts and inventory obsolescence		357,695		488,973		458,252
General and social contribution		111,838		204,326		301,826
Travelling		192,567		171,657		229,670
Training, education and recruitment		228,524		177,853		224,321
Professional fees		137,355		131,047		221,043
Security and screening		143,892		164,416		197,416
Meetings		58,333		40,311		63,953
Stationery and printing		80,972		50,190		51,864
Research and development		13,225		8,396		8,653
Others		44,159		29,573		27,560
Total		2,599,847		2,763,951		3,271,427

40.     TAXATION

      a. In 2006, Telkomsel recognized a claim for tax refund amounting to Rp.337,855 million as a result of the revision to the 2004 and 2005 tax returns and Rp.21,727 million as a result of its objection to the 2002 tax assessment (Note 40f).

			2005		2006
b. Prepaid taxes
	Subsidiaries
		Corporate income tax		13,352		—
		Value added tax		5,561		896
		Income tax Article 23 — Services Delivery		—		1,494
				18,913		2,390

F-90

PERUSAHAAN PERSEROAN (PERSERO)

P.T. TELEKOMUNIKASI INDONESIA Tbk AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

DECEMBER 31, 2005 AND 2006, AND FOR YEARS ENDED

DECEMBER 31, 2004, 2005 AND 2006

(Figures in tables are presented in millions of Rupiah, unless otherwise stated)

				2005		2006
c. Taxes payable
	The Company
		Income taxes
			Article 21 — Individual income tax		64,793		80,626
			Article 22 — Witholding tax on goods delivery and import		5,055		3,137
			Article 23 — Witholding tax on services delivery		46,132		36,258
			Article 25 — Installment of corporate income tax		117,281		128,291
			Article 26 — Witholding tax on non-resident income tax		1,143		73,872
			Article 29 — Underpayment of corporate income tax		376,140		602,159
		Value added tax			256,523		275,657
					867,067		1,200,000
	Subsidiaries
		Income taxes
			Article 4 — Final tax		3,318		7,829
			Article 21 — Individual income tax		25,059		55,340
			Article 22 — Witholding tax on goods delivery and import		—		639
			Article 23 — Witholding tax on services delivery		55,928		75,577
			Article 25 — Installment of corporate income tax		203,254		272,803
			Article 26 — Witholding tax on non-resident income tax		72,252		34,115
			Article 29 — Underpayment of corporate income tax		1,207,247		808,838
		Value added tax			35,640		113,861
					1,602,698		1,369,002
					2,469,765		2,569,002

      d. The components of income tax expense (benefit) are as follows:

		2004			2005			2006
Current
	The Company		1,922,238			2,034,248			2,536,459
	Subsidiaries		2,344,873			3,685,396			4,560,743
			4,267,111			5,719,644			7,097,202
Deferred
	The Company		(330,630	)		(694,843	)		(713,200	)
	Subsidiaries		242,045			159,086			655,925
			(88,585	)		(535,757	)		(57,275	)
			4,178,526			5,183,887			7,039,927

F-91

PERUSAHAAN PERSEROAN (PERSERO)

P.T. TELEKOMUNIKASI INDONESIA Tbk AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

DECEMBER 31, 2005 AND 2006, AND FOR YEARS ENDED

DECEMBER 31, 2004, 2005 AND 2006

(Figures in tables are presented in millions of Rupiah, unless otherwise stated)

      e. Corporate income tax is computed for each individual company as a separate legal entity (consolidated financial statements are not applicable for computing corporate income tax).

      The reconciliation between the consolidated income before tax and taxable income attributable to the Company and the consolidated income tax expense are as follows:

	2004			2005			2006
Consolidated income before tax		12,749,395			16,241,424			21,993,605
Add back consolidation eliminations		3,936,524			5,737,400			7,529,604
Consolidated income before tax and eliminations		16,685,919			21,978,824			29,523,209
Less: income before tax of the subsidiaries		(8,485,296	)		(12,645,854	)		(16,694,373	)
Income before tax attributable to the Company		8,200,623			9,332,970			12,828,836
Less: income subject to final tax		(206,601	)		(285,075	)		(690,760	)
		7,994,022			9,047,895			12,138,076
Tax calculated at progressive rates		2,398,189			2,714,351			3,641,405
Non-taxable income		(1,181,983	)		(1,724,483	)		(2,256,896	)
Non-deductible expenses		322,884			315,041			321,880
Deferred tax assets originating from previously unrecognized temporary differences, net		(14,940	)		(6,900	)		—
Deferred tax assets that cannot be utilized, net		24,045			—			(3,071	)
Corporate income tax expense		1,548,195			1,298,009			1,703,318
Final income tax expense		43,413			41,396			119,940
Total income tax expense of the Company		1,591,608			1,339,405			1,823,258
Income tax expense of the Subsidiaries		2,586,918			3,844,482			5,216,669
Total consolidated income tax expense		4,178,526			5,183,887			7,039,927

F-92

PERUSAHAAN PERSEROAN (PERSERO)

P.T. TELEKOMUNIKASI INDONESIA Tbk AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

DECEMBER 31, 2005 AND 2006, AND FOR YEARS ENDED

DECEMBER 31, 2004, 2005 AND 2006

(Figures in tables are presented in millions of Rupiah, unless otherwise stated)

      The reconciliation between income before tax attributable to the Company and estimated taxable income for the years ended December 31, 2004, 2005 and 2006 is as follows:

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

F-93

PERUSAHAAN PERSEROAN (PERSERO)

P.T. TELEKOMUNIKASI INDONESIA Tbk AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

DECEMBER 31, 2005 AND 2006, AND FOR YEARS ENDED

DECEMBER 31, 2004, 2005 AND 2006

(Figures in tables are presented in millions of Rupiah, unless otherwise stated)

		2004			2005			2006
Permanent differences:
	Net periodic post-retirement health care benefit cost		408,498			483,045			596,108
	Amortization of goodwill		21,270			21,270			8,858
	Amortization of discount on promissory notes		109,786			74,632			46,183
	Tax penalties		14,645			59,850			(2,925	)
	Equity in net income of associates and subsidiaries		(3,939,944	)		(5,748,277	)		(7,522,986	)
	Gain on sales of investment		—			—			(10,397	)
	Others		523,568			411,339			435,104
Total permanent differences			(2,862,177	)		(4,698,141	)		(6,450,055	)
Taxable income			6,262,809			6,642,898			8,055,119
Corporate income tax expense			1,878,825			1,992,852			2,416,519
Final income tax expense			43,413			41,396			119,940
Total current income tax expense of the Company			1,922,238			2,034,248			2,536,459
Current income tax expense of the Subsidiaries			2,344,873			3,685,396			4,560,743
Total current income tax expense			4,267,111			5,719,644			7,097,202

      Calculation of corporate income tax liability above was in accordance with annual tax return submitted by the Company to the Tax Office.

      f. Tax assessment

      In 2006, the Company received a tax assessment letter (SKPKB) from the Tax Office confirming an underpayment of its corporate income tax for fiscal year 2004 amounting to Rp.4,363 million. The underpayment was paid in August 2006.

      During 2006, Telkomsel was assessed for underpayments of withholding taxes and value added tax (self assessed) including penalty covering the fiscal year 2002 totaling Rp.129 billion and overpayment of corporate income tax of Rp.5 billion. The net underpayment was settled through the use of the payment of income tax in 2003 of Rp.24 billion and a cash payment of Rp.100 billion. Of the Rp.100 billion cash payment made, Telkomsel has filed an objection for Rp.99 billion. Of the net underpayment of Rp.105 billion, Rp.83 billion was charged to expense in 2006 with the remaining amount of Rp.22 billion recorded as part of its claims for tax refund (Note 40a).

      In 2006, Telkomsel filed revisions of its tax returns for the fiscal years 2004 and 2005 due to a recalculation of the depreciation of property, plant and equipment for tax purposes. As a result of the recalculation, Telkomsel recognized claims for overpayments with a corresponding addition to the deferred tax liability of property, plant and equipment amounting to Rp.338 billion (Note 40a). Accordingly, Telkomsel is being audited by the Tax Office.

F-94

PERUSAHAAN PERSEROAN (PERSERO)

P.T. TELEKOMUNIKASI INDONESIA Tbk AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

DECEMBER 31, 2005 AND 2006, AND FOR YEARS ENDED

DECEMBER 31, 2004, 2005 AND 2006

(Figures in tables are presented in millions of Rupiah, unless otherwise stated)

      g. Deferred tax assets and liabilities

      The details of the Company’s and subsidiaries’ deferred tax assets and liabilities are as follows:

					(Charged)/
					credited to
		December 31,			statements of			December 31,
		2004			income			2005
The Company
Deferred tax assets:
	Allowance for doubtful accounts		207,679			(2,283	)		205,396
	Allowance for inventory obsolescence		15,494			(1,842	)		13,652
	Long-term investments		4,685			1,981			6,666
	Accrued employee benefits		42,665			20,338			63,003
	Accrued long service awards		128,011			20,780			148,791
	Net periodic pension cost		433,439			(49,202	)		384,237
	Capital leases		—			6,408			6,408
	Deferred consideration for business combinations		1,009,932			(64,529	)		945,403
	Accrued expenses		—			58,265			58,265
Total deferred tax assets			1,841,905			(10,084	)		1,831,821
Deferred tax liabilities:
	Difference between book and tax property, plant and equipment’s net book value		(2,198,654	)		432,437			(1,766,217	)
	Landrights		(1,571	)		(1,033	)		(2,604	)
	Revenue-sharing arrangements		(41,637	)		4,461			(37,176	)
	Intangible assets		(1,614,386	)		269,062			(1,345,324	)
Total deferred tax liabilities			(3,856,248	)		704,927			(3,151,321	)
Deferred tax liabilities of the Company, net			(2,014,343	)		694,843			(1,319,500	)
Deferred tax liabilities of the subsidiaries, net			(913,224	)		(159,086	)		(1,072,310	)
Total deferred tax liabilities, net			(2,927,567	)		535,757			(2,391,810	)

F-95

PERUSAHAAN PERSEROAN (PERSERO)

P.T. TELEKOMUNIKASI INDONESIA Tbk AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

DECEMBER 31, 2005 AND 2006, AND FOR YEARS ENDED

DECEMBER 31, 2004, 2005 AND 2006

(Figures in tables are presented in millions of Rupiah, unless otherwise stated)

					(Charged)/
					Credited to
		December 31,			Statements of			Business			Prior Year			December 31,
		2005			Income			Acquisition			Overpayment			2006
The Company
Deferred tax assets:
	Allowance for doubtful accounts		205,396			57,925			—			—			263,321
	Allowance for inventory obsolescence		13,652			447			—			—			14,099
	Long-term investments		6,666			(6,666	)		—			—			—
	Accrued for employee benefits		63,003			466,659			—			—			529,662
	Accrued long service awards		148,791			28,228			—			—			177,019
	Net periodic pension cost		384,237			(81,977	)		—			—			302,260
	Capital Leases		6,408			6,000			—			—			12,408
	Deferred consideration for business combinations		945,403			(227,349	)		531,278			—			1,249,332
	Accrued expenses		58,265			(1,080	)		—			—			57,185
Total deferred tax assets			1,831,821			242,187			531,278			—			2,605,286
Deferred tax liabilities:
	Difference between book and tax property, plant and equipment’s net book value		(1,766,217	)		205,534			(386,666	)		—			(1,947,349	)
	Landrights		(2,604	)		(1,196	)		—			—			(3,800	)
	Revenue-sharing arrangements		(37,176	)		(10,485	)		—			—			(47,661	)
	Intangible assets		(1,345,324	)		277,160			(137,619	)		—			(1,205,783	)
Total deferred tax liabilities			(3,151,321	)		471,013			(524,285	)		—			(3,204,593	)
Deferred tax liabilities of the Company, net			(1,319,500	)		713,200			6,993			—			(599,307	)
Deferred tax liabilities of the subsidiaries, net			(1,072,310	)		(655,925	)		—			(337,855	)		(2,066,090	)
Total deferred tax liabilities, net			(2,391,810	)		57,275			6,993			(337,855	)		(2,665,397	)

      The net deferred tax liabilities of subsidiaries as of December 31, 2005 included deferred tax assets of Rp.123,309 million arising from tax losses carry forwards from PT Aria West Indonesia. As of December 31, 2006, tax losses carry forwards balance had been utilised for fiscal year 2006.

      Realization of the deferred tax assets is dependent upon profitable operations. Although realization is not assured, the Company and its subsidiaries believe that it is probable that these deferred tax assets will be realized through the reduction of future taxable income. The amount of deferred tax assets is considered realizable, however, could be reduced if actual future taxable income is lower than estimated.

F-96

PERUSAHAAN PERSEROAN (PERSERO)

P.T. TELEKOMUNIKASI INDONESIA Tbk AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

DECEMBER 31, 2005 AND 2006, AND FOR YEARS ENDED

DECEMBER 31, 2004, 2005 AND 2006

(Figures in tables are presented in millions of Rupiah, unless otherwise stated)

      h. Administration

      Under the taxation laws of Indonesia, the Company and each subsidiary submit tax returns on the basis of self-assessment. The tax authorities may assess or amend taxes within ten years from the date the tax became payable.

      The Company has been audited by the Tax Office up to the fiscal year of 2004.

41.     BASIC EARNINGS PER SHARE

      Basic earnings per share is computed by dividing net income by the weighted average number of shares outstanding during the year, totaling 20,159,999,280, 20,159,999,280 and 20,114,511,886 in 2004, 2005 and 2006, respectively. See also Notes 1b and 2t.

      The Company does not have potentially dilutive ordinary shares.

42.     CASH DIVIDENDS AND GENERAL RESERVE

      Pursuant to the Annual General Meeting of Stockholders as stated in notarial deed No. 25 dated July 30, 2004 of A. Partomuan Pohan, S.H., LLM., the stockholders approved the distribution of cash dividends for the year 2003 amounting to Rp.3,043,614 million or Rp.301.95 per share (pre-stock split) and the appropriation of Rp.121,745 million for general reserve.

      On December 7, 2004, the Company decided to distribute the 2004 interim cash dividends of Rp.143,377 million or Rp.7.11 per share to the Company’s stockholders.

      Pursuant to the Annual General Meeting of Stockholders as stated in notarial deed No. 36 dated June 24, 2005 of A. Partomuan Pohan, S.H., LLM., the stockholders approved the distribution of cash dividends for the year 2004 amounting to Rp.3,064,604 million or Rp.152.01 per share (of which Rp.143,377 million or Rp.7.11 per share was distributed as interim cash dividends in December 2004) and the appropriation of Rp.122,584 million for general reserve.

      Pursuant to the Annual General Meeting of Stockholders as stated in notarial deed No. 68 dated June 30, 2006 of A. Partomuan Pohan, S.H., LLM., the stockholders approved the distribution of cash dividends for the year 2005 amounting to Rp.4,400,090 million or minimum of Rp.218.86 per share.

      On December 5, 2006, the Company decided to distribute the 2006 interim cash dividends of Rp.971,017 million or Rp.48.41 per share to the Company’s stockholders.

43.     PENSION PLANS

     a.  The Company

      The Company sponsors a defined benefit pension plan and a defined contribution pension plan.

      The defined benefit pension plan is provided for employees hired with permanent status prior to July 1, 2002. The pension benefits are paid based on the participating employees’ latest basic salary at retirement and the number of years of their service. The plan is managed by TELKOM Pension Fund (“Dana Pensiun TELKOM”). The participating employees contribute 18% (before March 2003: 8.4%) of their basic salaries to the plan. The Company’s contributions to the pension fund for the years ended December 31, 2004, 2005 and 2006 amounted to Rp.845,743 million, Rp.698,526 million and Rp.693,497 million, respectively.

F-97

PERUSAHAAN PERSEROAN (PERSERO)

P.T. TELEKOMUNIKASI INDONESIA Tbk AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

DECEMBER 31, 2005 AND 2006, AND FOR YEARS ENDED

DECEMBER 31, 2004, 2005 AND 2006

(Figures in tables are presented in millions of Rupiah, unless otherwise stated)

      The defined contribution pension plan is provided for employees hired with permanent status on or after July 1, 2002. The plan is managed by financial institutions pension fund (“DPLK”). The Company’s contribution is determined based on a certain percentage of the participants’ salaries and amounted to Rp.399 million, Rp.971 million and Rp.1,858 million for the years December 31, 2004, 2005 and 2006, respectively.

      The following table presents the change in projected benefit obligation, the change in plan assets, funded status of the plan and the net amount recognized in the Company’s balance sheets for the years ended December 31, 2004, 2005 and 2006 for its defined benefit pension plan:

	2004			2005			2006
Change in projected benefit obligation
Projected benefit obligation at beginning of year		6,852,923			7,315,182			7,140,100
Service cost		137,264			138,117			187,960
Interest cost		740,494			789,830			768,586
Plan participants’ contributions		42,838			41,371			43,918
Actuarial gain (loss)		(216,025	)		(874,573	)		286,733
Expected benefits paid		(242,312	)		(269,827	)		(305,916	)
Projected benefit obligation at end of the year		7,315,182			7,140,100			8,121,381
Change in plan assets
Fair value of plan assets at beginning of year		3,671,309			4,884,523			5,429,954
Expected return on plan assets		436,672			533,333			677,602
Employer contribution		845,743			698,526			693,497
Plan participants’ contributions		42,838			41,371			43,918
Actuarial gain (loss)		130,273			(457,972	)		671,693
Expected benefits paid		(242,312	)		(269,827	)		(305,916	)
Fair value of plan assets at end of the year		4,884,523			5,429,954			7,210,748
Funded status		(2,430,659	)		(1,710,146	)		(910,633	)
Unrecognized prior service cost		1,329,046			1,190,024			1,051,002
Unrecognized net actuarial gain		(346,298	)		(762,899	)		(1,143,369	)
Accrued pension benefit cost		(1,447,911	)		(1,283,021	)		(1,003,000	)

      The actual return on plan assets was Rp.627,842 million, Rp.155,754 million and Rp.1,300,632 million for the years ended 2004, 2005 and 2006, respectively.

F-98

PERUSAHAAN PERSEROAN (PERSERO)

P.T. TELEKOMUNIKASI INDONESIA Tbk AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

DECEMBER 31, 2005 AND 2006, AND FOR YEARS ENDED

DECEMBER 31, 2004, 2005 AND 2006

(Figures in tables are presented in millions of Rupiah, unless otherwise stated)

      The movement of the accrued pension benefit cost during the years ended December 31, 2004, 2005 and 2006 is as follows:

	2004			2005			2006
Accrued pension benefit cost at beginning of the year		1,713,546			1,447,911			1,283,021
Net periodic benefit cost less amounts charged to KSO Units		563,739			514,976			397,317
Amounts charged to KSO Units under contractual agreement		16,369			18,660			16,159
Employer contributions		(845,743	)		(698,526	)		(693,497	)
Accrued pension benefit cost at end of the year		1,447,911			1,283,021			1,003,000

      As of December 31, 2005 and 2006, plan assets consisted mainly of Indonesian Government bonds and corporate bonds. As of December 31, 2006 plan assets included bonds and Series B shares issued by the Company with fair values of Rp.217,531 million and Rp.238,495 million, respectively (December 31, 2005: Rp.223,736 million and Rp.124,189 million, respectively).

      The actuarial valuation for the defined benefit pension plan was performed based on measurement date of December 31, 2004, 2005 and 2006, with the reports prepared on March 15, 2005, February 27, 2006, and April 24, 2007, respectively, by PT Watson Wyatt Purbajaga, an independent actuary in association with Watson Wyatt Worldwide. The principal actuarial assumptions used by the independent actuary as of December 31, 2004, 2005 and 2006 are as follows.

	2004		2005		2006
Discount rate		11%		11%		10.5%
Expected long-term return on plan assets		10.5%		10.5%		12%
Rate of compensation increase		8%		8.8%		8%

      The components of net periodic pension cost are as follows:

	2004			2005			2006
Service Cost		137,264			138,117			187,960
Interest Cost		740,494			789,830			768,586
Expected return on plan assets		(436,672	)		(533,333	)		(677,602	)
Amortization of prior service cost		139,022			139,022			139,022
Recognized actuarial loss (gain)		—			—			(4,490	)
Net periodic pension cost		580,108			533,636			413,476
Amount charged to KSO Units under contractual agreement		(16,369	)		(18,660	)		(16,159	)
Total net periodic pension cost less amounts charged to KSO Units (Note 37)		563,739			514,976			397,317

     b.  Telkomsel

      Telkomsel provides a defined benefit pension plan for its employees. Under this plan, employees are entitled to pension benefits based on their latest basic salary or take-home pay and the number of years of their

F-99

PERUSAHAAN PERSEROAN (PERSERO)

P.T. TELEKOMUNIKASI INDONESIA Tbk AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

DECEMBER 31, 2005 AND 2006, AND FOR YEARS ENDED

DECEMBER 31, 2004, 2005 AND 2006

(Figures in tables are presented in millions of Rupiah, unless otherwise stated)

service. PT Asuransi Jiwasraya (“Jiwasraya”), a state-owned life insurance company, manages the plan. Until 2004, the employees contributed 5% of their monthly salaries to the plan and Telkomsel contributed any remaining amount required to fund the plan. Starting 2005, the entire contributions are fully made by Telkomsel.

      Telkomsel’s contributions to Jiwasraya amounted to Rp. Nil, Rp.14,928 million and Rp.29,731 million for the years ended 2004, 2005 and 2006, respectively.

      The following table reconciles the unfunded status of the plan with the amounts included in the consolidated balance sheets as of December 31, 2004, 2005 and 2006:

	2004			2005			2006
Projected benefit obligation		(43,547	)		(147,103	)		(230,172	)
Fair value of plan assets		11,182			20,971			29,904
Unfunded status		(32,365	)		(126,132	)		(200,268	)
Unrecognized items in the balance sheet:
Unrecognized prior service cost		1,328			1,213			1,098
Unrecognized net actuarial loss		20,707			103,391			166,676
Accrued pension benefit cost		(10,330	)		(21,528	)		(32,494	)

      The components of the net periodic pension cost are as follows:

	2004			2005			2006
Service cost		4,155			10,072			21,321
Interest cost		3,889			6,650			16,169
Expected return on plan assets		(824	)		(832	)		(2,124	)
Amortization of past service cost		115			115			115
Recognized actuarial loss		1,158			1,320			5,216
Net periodic pension cost (Note 37)		8,493			17,325			40,697

      The net periodic pension cost for the pension plan was calculated based on measurement date of December 31, 2004, 2005 and 2006, with the reports prepared on January 17, 2005, January 13, 2006, and February 16, 2007 respectively, by PT Watson Wyatt Purbajaga, an independent actuary in association with Watson Wyatt Worldwide. The principal actuarial assumptions used by the independent actuary based on measurement date of December 31, 2004, 2005 and 2006 for each of the years are as follows:

	2004			2005			2006
Discount rate		11	%		11	%		10.5	%
Expected long-term return on plan assets		7.5	%		7.5	%		7.5	%
Rate of compensation increase		9	%		8	%		8	%

F-100

PERUSAHAAN PERSEROAN (PERSERO)

P.T. TELEKOMUNIKASI INDONESIA Tbk AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

DECEMBER 31, 2005 AND 2006, AND FOR YEARS ENDED

DECEMBER 31, 2004, 2005 AND 2006

(Figures in tables are presented in millions of Rupiah, unless otherwise stated)

     c.  Infomedia

      Infomedia provides a defined benefit pension plan for its employees. The reconciliation of the funded status of the plan with the net amount recognized in the balance sheets as of December 31, 2004, 2005 and 2006 are as follows:

	2004			2005			2006
Projected benefit obligation		(4,051	)		(5,225	)		(6,188	)
Fair value of plan assets		5,413			5,865			6,291
Funded status		1,362			640			103
Prepaid pension benefit cost		1,362			640			103

      The net periodic pension cost of Infomedia amounted to Rp.187 million, Rp.30 million and Rp.369 million for the years ended December 31, 2004, 2005 and 2006, respectively (Note 37).

     d.  Obligation Under Labor Law

      Under Law No. 13/2003 concerning labor regulation, the Company and its subsidiaries are required to provide a minimum pension benefit, if not already covered by the sponsored pension plans, to their employees upon retiring at the age of 55. The total related obligation recognized as of December 31, 2005 and 2006 amounted to Rp.26,115 million and Rp.35,128 million, respectively. The total related employee benefit cost charged to expense amounted to Rp.11,510 million, Rp.5,954 million and Rp.14,341 million for the years ended December 31, 2004, 2005 and 2006, respectively (Note 37).

44.     LONG SERVICE AWARDS

     a.  The Company

      The Company provides certain cash awards for its employees who meet certain length of service requirement. The benefits are either paid at the time the employee reaches certain anniversary dates during employment, or proportionately upon retirement or termination.

      The actuarial valuation for the long service awards was prepared based on the measurement date of December 31 2004, 2005, and 2006 with the reports prepared on March 15, 2005, February 27, 2006 and April 24, 2007 respectively, by PT Watson Wyatt Purbajaga, an independent actuary in association with Watson Wyatt Worldwide. The principal actuarial assumptions used by the independent actuary as of December 31, 2004, 2005 and 2006 are as follows:

	2004			2005			2006
Discount rate		11	%		11	%		10.5	%
Rate of compensation increase		8	%		8	%		8	%

F-101

PERUSAHAAN PERSEROAN (PERSERO)

P.T. TELEKOMUNIKASI INDONESIA Tbk AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

DECEMBER 31, 2005 AND 2006, AND FOR YEARS ENDED

DECEMBER 31, 2004, 2005 AND 2006

(Figures in tables are presented in millions of Rupiah, unless otherwise stated)

      The movement of the accrued long service awards during the years ended December 31, 2004, 2005 and 2006 is as follows:

	2004			2005			2006
Accrued long service awards at beginning of year		473,614			426,705			495,969
Net periodic benefit cost less amounts charged to KSO Units (Note 37)		31,148			192,450			150,741
Amounts to charged to KSO Units under contractual agreement		—			—			10,321
Benefits paid		(78,057	)		(123,186	)		(66,968	)
Accrued long service awards at end of year		426,705			495,969			590,063
Benefits to be paid for early retirement program (Note 18)		—			—			(67,279	)
Accrued long service awards — non current		426,705			495,969			522,784

     b.  Telkomsel

      Telkomsel provides certain cash awards for its employees based on the employees’ length of service. The benefits are either paid at the time the employee reaches certain anniversary dates during employment, or proportionately upon retirement or at the time of termination.

      The obligation with respect to these awards was determined based on the actuarial valuation using the Projected Unit Credit Method, and amounted to Rp.28,555 million and Rp.73,541 million as of December 31, 2005 and 2006, respectively. The related benefit cost charged to expense amounted to Rp.5,713 million, Rp.9,428 million and Rp.65,099 million for the years ended December 31, 2004, 2005 and 2006, respectively (Note 37).

45.     POST-RETIREMENT HEALTH CARE BENEFITS

      The Company provides a post-retirement health care plan for all of its employees hired before November 1, 1995 who have worked for the Company for 20 years or more when they retire, and to their eligible dependents. The requirement of working for over 20 or more years does not apply to employees who retired prior to June 3, 1995. However, the employees hired by the Company starting from November 1, 1995 will no longer be entitled to this plan. The plan is managed by Yayasan Kesehatan Pegawai TELKOM (“YKPT”).

F-102

PERUSAHAAN PERSEROAN (PERSERO)

P.T. TELEKOMUNIKASI INDONESIA Tbk AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

DECEMBER 31, 2005 AND 2006, AND FOR YEARS ENDED

DECEMBER 31, 2004, 2005 AND 2006

(Figures in tables are presented in millions of Rupiah, unless otherwise stated)

      The following table presents the change in projected benefit obligation, the change in plan assets, funded status of the plan and the net amount recognized in the Company’s balance sheets as of December 31, 2004, 2005 and 2006:

	2004			2005			2006
Change in projected benefit obligation
Projected benefit obligation at beginning of the year		3,787,389			4,681,005			5,574,489
Service cost		76,163			87,636			107,513
Interest cost		411,110			507,994			605,573
Actuarial loss		506,397			423,606			836,334
Expected benefits paid		(100,054	)		(125,752	)		(138,566	)
Projected benefit obligation at end of the year		4,681,005			5,574,489			6,985,343
Change in plan assets
Fair value of plan assets at beginning of the year		505,340			1,138,768			1,493,897
Expected return on plan assets		61,084			103,498			145,264
Employer contributions		724,530			435,899			714,854
Actuarial gain (loss)		(52,132	)		(58,516	)		37,812
Expected benefits paid		(100,054	)		(125,752	)		(138,566	)
Fair value of plan assets at end of the year		1,138,768			1,493,897			2,253,261
Funded status		(3,542,237	)		(4,080,592	)		(4,732,082	)
Unrecognized net actuarial loss		558,530			1,032,571			1,786,354
Accrued post-retirement health care benefit cost		(2,983,707	)		(3,048,021	)		(2,945,728	)

      The actual return on plan assets was Rp.32,173 million, Rp.45,209 million and Rp.144,659 million for the years ended December 31, 2004, 2005 and 2006.

      The components of net periodic post-retirement health care benefit cost are as follows:

	2004			2005			2006
Service cost		76,163			87,636			107,513
Interest cost		411,110			507,994			605,573
Expected return on plan assets		(61,084	)		(103,498	)		(145,264	)
Recognized actuarial loss		—			8,081			44,738
Net periodic post-retirement benefit cost		426,189			500,213			612,560
Amounts charged to KSO Units under contractual agreement		(9,913	)		(11,627	)		(7,812	)
Total net periodic post-retirement health care benefits cost less amounts charged to KSO Units (Note 37)		416,276			488,586			604,748

      As of December 31, 2005, plan assets included bonds and Medium-term Notes issued by the Company with a total fair value of Rp.232,394 million. As of December 31, 2006, plan assets included stocks and Medium-term Notes issued by the Company with a total fair value of Rp.191,248 million.

F-103

PERUSAHAAN PERSEROAN (PERSERO)

P.T. TELEKOMUNIKASI INDONESIA Tbk AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

DECEMBER 31, 2005 AND 2006, AND FOR YEARS ENDED

DECEMBER 31, 2004, 2005 AND 2006

(Figures in tables are presented in millions of Rupiah, unless otherwise stated)

      The movement of the accrued post-retirement health care benefit cost during the years ended December 31, 2004, 2005 and 2006 is as follows:

	2004			2005			2006
Accrued post-retirement health care benefit cost at beginning of year		3,282,048			2,983,707			3,048,021
Net periodic post-retirement health care benefit cost less amounts charged to KSO Units (Note 37)		416,276			488,586			604,748
Amounts charged to KSO Units under contractual agreement		9,913			11,627			7,812
Employer contributions		(724,530	)		(435,899	)		(714,853	)
Accrued post-retirement health care benefits cost at end of the year		2,983,707			3,048,021			2,945,728

      The actuarial valuation for the post-retirement health care benefits was performed based on the measurement date as of December 31, 2004, 2005 and 2006 with the reports prepared on March 15, 2005, February 27, 2006 and April 24, 2007 respectively, by PT Watson Wyatt Purbajaga, an independent actuary in association with Watson Wyatt Worldwide. The principal actuarial assumptions used by the independent actuary as of December 31, 2004, 2005 and 2006 are as follows:

	2004			2005			2006
Discount rate		11	%		11	%		10.5	%
Expected long-term return on plan assets		8	%		8	%		8.5	%
Health care cost trend rate assumed for next year		12	%		9	%		12	%
Ultimate health care cost trend rate		8	%		9	%		8	%
Year that the rate reaches the ultimate trend rate		2007			2006			2011

      A 1% increase in the health care cost trend rate would result in service cost and interest costs, and accumulated post-retirement health care benefit obligation as of December 31, 2004, 2005 and 2006 as follows:

	2004		2005		2006
Service cost and interest cost		723,941		872,159		1,011,620
Accumulated post-retirement health care benefit obligation		5,597,965		6,718,434		8,327,481

46.     RELATED PARTY INFORMATION

      In the normal course of business, the Company and its subsidiaries entered into transactions with related parties. It is the Company’s policy that the pricing of these transactions be the same as those of arms-length transactions.

      The following are significant agreements/transactions with related parties:

     a.  Government of the Republic of Indonesia

      i. The Company obtained two-step loans from the Government of the Republic of Indonesia, the Company’s majority stockholder (Note 22).

F-104

PERUSAHAAN PERSEROAN (PERSERO)

P.T. TELEKOMUNIKASI INDONESIA Tbk AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

DECEMBER 31, 2005 AND 2006, AND FOR YEARS ENDED

DECEMBER 31, 2004, 2005 AND 2006

(Figures in tables are presented in millions of Rupiah, unless otherwise stated)

      Interest expense for two-step loans amounted to Rp.489,220 million, Rp.324,652 million and Rp.366,679 million in 2004, 2005 and 2006, respectively. Interest expense for two-step loan represented 38.5%, 27.6% and 28.5% of total interest expense in 2004, 2005 and 2006, respectively.

      ii. The Company and its subsidiaries pay concession fees for telecommunications services provided and radio frequency usage charges to the Ministry of Communications (formerly, Ministry of Tourism, Post and Telecommunications) of the Republic of Indonesia.

      Concession fees amounted to Rp.314,741 million, Rp.558,485 million and Rp.497,928 million in 2004, 2005 and 2006, respectively (Note 38), representing 1.6%, 2.3% and 1.7% of total operating expenses for each year. Radio frequency usage charges amounted to Rp.492,568 million, Rp.548,186 million and Rp.722,600 million in 2004, 2005 and 2006, respectively (Note 38), representing 2.5%, 2.2% and 2.4% of total operating expenses in 2004, 2005, 2006, respectively.

      Telkomsel paid the upfront fee for the 3G license amounted to Rp.436,000 million and recognized as an intangible asset (Note 15).

      iii. Starting 2005, the Company and its subsidiaries pay Universal Service Obligation (“USO”) charges to the MoCI of the Republic of Indonesia pursuant to the MoCI Regulation No. 15/PER/ M.KOMINFO/9/2005 of September 30, 2005.

      USO charges amounted to Rp.307,705 million and Rp.383,829 million in 2005 and 2006, respectively (Note 38), representing 1.2% and 1.3% of total operating expenses in 2005 and 2006, respectively.

     b.  Commissioners and Directors Remuneration

      i. The Company and its subsidiaries provide honorarium and facilities to support the operational duties of the Board of Commissioners. The total of such benefits amounted to Rp.22,700 million, Rp.19,707 million and Rp.23,173 million in 2004, 2005 and 2006, respectively, which reflect 0.1% of total operating expenses for each year.

      ii. The Company and its subsidiaries provide salaries and facilities to support the operational duties of the Board of Directors. The total of such benefits amounted to Rp.50,327 million, Rp.52,147 million and Rp.71,526 million in 2004, 2005 and 2006, respectively, which reflected 0.3%, 0.2% and 0.2% of total operating expenses in 2004, 2005 and 2006, respectively.

     c.  Indosat

      Through December 19, 2002, the Government was the majority and controlling shareholder of Indosat and therefore, Indosat was under the same common control as the Company. Following the sale of the Government’s 41.94% ownership interest in Indosat on December 20, 2002 (Note 30), the Government’s ownership interest in Indosat was reduced to approximately 15%. The Company still considers Indosat as a related party because the Government can exert significant influence over the financial and operating policies of Indosat by virtue of its right to appoint one director and one commissioner of Indosat.

      Following the merger of Indosat, PT Indosat Multimedia Mobile (“IM3”), Satelindo and PT Bimagraha Telekomindo on November 20, 2003, all rights and obligations arising from the agreements entered by the Company with IM3 and Satelindo were transferred to Indosat.

F-105

PERUSAHAAN PERSEROAN (PERSERO)

P.T. TELEKOMUNIKASI INDONESIA Tbk AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

DECEMBER 31, 2005 AND 2006, AND FOR YEARS ENDED

DECEMBER 31, 2004, 2005 AND 2006

(Figures in tables are presented in millions of Rupiah, unless otherwise stated)

      The Company has an agreement with Indosat for the provision of international telecommunications services to the public.

      The principal matters covered by the agreement are as follows:

      i. The Company provides a local network for customers to make or receive international calls. Indosat provides the international network for the customers, except for certain border towns, as determined by the Director General of Post and Telecommunications of the Republic of Indonesia. The international telecommunications services include telephone, telex, telegram, package switched data network, television, teleprinter, Alternate Voice/ Data Telecommunications (“AVD”), hotline and teleconferencing.

      ii. The Company and Indosat are responsible for their respective telecommunications facilities.

      iii. Customer billing and collection, except for leased lines and public phones located at the international gateways, are handled by the Company.

      iv. The Company receives compensation for the services provided in the first item above, based on the interconnection tariff determined by the Minister of Communications of the Republic of Indonesia.

      The Company has also entered into an interconnection agreement between the Company’s fixed- line network and Indosat’s cellular network in connection with implementation of Indosat Multimedia Mobile services and the settlement of the related interconnection rights and obligations.

      The Company also has an agreement with Indosat for the interconnection of Indosat’s GSM mobile cellular telecommunications network with the Company’s PSTN, enabling each party’s customer to make domestic calls between Indosat’s GSM mobile network and TELKOM’s fixed line network and allowing Indosat’s mobile customer to access TELKOM’s IDD service by dialing “007”.

      The Company has been handling customer billings and collections for Indosat. Indosat is gradually taking over the activities and performing its own direct billing and collection. The Company receives compensation from Indosat computed at 1% of the collections made by the Company beginning January 1, 1995, plus the billing process expenses which are fixed at a certain amount per record.

      On December 28, 2006, the Company and Indosat signed amendments to the interconnection agreements for the fixed line networks (local, long distance and international) and mobile network for the implementation of the cost-based tariff obligations under the MoCI Regulations No. 8/2006 (Note 50). These amendments took effect on January 1, 2007.

      Telkomsel also entered into an agreement with Indosat for the provision of international telecommunications services to its GSM mobile cellular customers. The principal matters covered by the agreement are as follows:

      i. Telkomsel’s GSM mobile cellular telecommunications network is connected to Indosat’s international gateway exchanges to make outgoing or receive incoming international calls through Indosat’s international gateway exchanges.

      ii. Telkomsel’s GSM mobile cellular telecommunications network is connected to Indosat’s mobile cellular telecommunications network, enabling Telkomsel’s cellular subscribers to make outgoing calls to or receive incoming calls from Indosat’s cellular subscribers.

F-106

PERUSAHAAN PERSEROAN (PERSERO)

P.T. TELEKOMUNIKASI INDONESIA Tbk AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

DECEMBER 31, 2005 AND 2006, AND FOR YEARS ENDED

DECEMBER 31, 2004, 2005 AND 2006

(Figures in tables are presented in millions of Rupiah, unless otherwise stated)

      iii. Telkomsel receives compensation for the interconnection, a specific percentage of Indosat’s revenues from the related services which are made through Indosat’s international gateway exchanges and mobile cellular telecommunications network.

      iv. Billings for calls made by Telkomsel’s customers are handled by Telkomsel. Telkomsel is obliged to pay Indosat’s share of revenue regardless whether billings to customers have been collected.

      v. The provision and installation of the necessary interconnection equipment is Telkomsel’s responsibility. Interconnection equipment installed by one of the parties in another party’s locations shall remain the property of the party installing such equipment. Expenses incurred in connection with the provision of equipment, installation and maintenance are borne by Telkomsel.

      Pursuant to the expiration of the agreement between Telkomsel and Indosat with regard to the provision of international telecommunication services to GSM mobile cellular customers, in April 2004 Telkomsel and Indosat entered into an interim agreement. Under the terms of the interim agreement, Telkomsel receives 27% of the applicable tariff for outgoing international calls from Telkomsel subscribers and Rp.800 per minute for incoming international calls to Telkomsel subscribers. The interim agreement is effective from March 1, 2004 until such date that Telkomsel and Indosat have entered into a new agreement.

      The Company and its subsidiaries were charged net interconnection charges from Indosat of Rp.158,285 million, Rp.52,798 million and Rp.168,295 million in 2004, 2005 and 2006, respectively, representing 0.5%, 0.1% and 0.3% of the total operating revenues in 2004, 2005 and 2006, respectively.

      Telkomsel also has an agreement with Indosat on the usage of Indosat’s telecommunications facilities. The agreement, which was made in 1997 and is valid for eleven years, is subject to change based on an annual review and mutual agreement by both parties. The charges for the usage of the facilities amounted to Rp.19,101 million, Rp.19,066 million, Rp.17,669 million in 2004, 2005, and 2006, respectively, representing 0.1% of the total operating expenses in each year.

      Other agreements between Telkomsel and Indosat are as follows:

     i.  Agreement on Construction and Maintenance for Jakarta-Surabaya Cable System (“J-S Cable System”).

      On October 10, 1996, Telkomsel, Lintasarta, Satelindo and Indosat (the “Parties”) entered into an agreement on the construction and maintenance of the J-S Cable System. The Parties have formed a management committee which consists of a chairman and one representative from each of the Parties to direct the construction and operation of the cable system. The construction of the cable system was completed in 1998. In accordance with the agreement, Telkomsel shared 19.325% of the total construction cost. Operating and maintenance costs are shared based on an agreed formula.

      Telkomsel’s share in operating and maintenance costs amounted to Rp.2,098 million, Rp.1,187 million and Rp.380 million for the years 2004, 2005 and 2006, respectively.

     ii.  Indefeasible Right of Use Agreement

      On September 21, 2000, Telkomsel entered into agreement with Indosat on the use of SEA — ME — WE 3 and tail link in Jakarta and Medan. In accordance with the agreement, Telkomsel was granted an indefeasible right to use certain capacity of the Link starting from September 21, 2000 until September 20,

F-107

PERUSAHAAN PERSEROAN (PERSERO)

P.T. TELEKOMUNIKASI INDONESIA Tbk AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

DECEMBER 31, 2005 AND 2006, AND FOR YEARS ENDED

DECEMBER 31, 2004, 2005 AND 2006

(Figures in tables are presented in millions of Rupiah, unless otherwise stated)

2015 in return for an upfront payment of US$2.7 million. In addition to the upfront payment, Telkomsel is also charged annual operating and maintenance costs amounting to US$0.1 million.

      In 1994, the Company transferred to Satelindo the right to use a parcel of Company-owned land located in Jakarta which had been previously leased to Telekomindo. Based on the transfer agreement, Satelindo is given the right to use the land for 30 years and can apply for the right to build properties thereon. The ownership of the land is retained by the Company. Satelindo agreed to pay Rp.43,023 million to the Company for the 30 years right. Satelindo paid Rp.17,210 million in 1994 and the remaining Rp.25,813 million was not paid because the Utilization Right (“Hak Pengelolaan Lahan”) on the land could not be delivered as provided in the transfer agreement. In 2000, the Company and Satelindo agreed on an alternative solution resulting in the payment being treated as a lease expense up to 2006. In 2001, Satelindo paid an additional amount of Rp.59,860 million as lease expense up to 2024. As of December 31, 2005 and 2006, the prepaid portion is shown in the consolidated balance sheets as “Advances from customers and suppliers”.

      The Company provides leased lines to Indosat and its subsidiaries, namely Indosat Mega Media and Lintasarta. The leased lines can be used by those companies for telephone, telegraph, data, telex, facsimile or other telecommunication services. Revenue earned from these transactions amounted to Rp.109,814 million, Rp.126,425 million and Rp.164,900 million in 2004, 2005 and 2006, respectively, representing 0.3% of total operating revenues for each year.

      Lintasarta utilizes the Company’s satellite transponders or frequency channels. Revenue earned from these transactions amounted to Rp.14,486 million, Rp.8,125 million and Rp.6,987 million in 2004, 2005 and 2006, respectively, representing less than 0.1% of total operating revenues for each year.

      Telkomsel has an agreement with Lintasarta and PT Artajasa Pembayaran Elektronis (“Artajasa” which 39.8% shares owned by Indosat) for the usage of data communication network system. The charges from Lintasarta and Artajasa for the services amounted to Rp.21,407 million, Rp.23,109 million and Rp.44,208 million in 2004, 2005 and 2006, respectively, representing 0.1% of total operating expenses for each year.

     d.  Others

      Transactions with all stated owned enterprises are considered as related parties transactions:

      (i) The Company provides telecommunication services to substantially all Government agencies in Indonesia which the transaction is treated as well as the transaction with third parties customers.

      (ii) The Company has entered into agreements with Government agencies and associated companies, namely CSM, Patrakom and KSO VII (for the years 2004 and 2005, and for the period January — September 2006), for utilization of the Company’s satellite transponders or frequency channels. Revenue earned from these transactions amounted to Rp.51,046 million, Rp.66,804 million and Rp.87,275 million in 2004, 2005 and 2006, respectively, representing 0.2% of total operating revenues for each year.

      (iii) The Company provides leased lines to associated companies, namely CSM, Patrakom and PSN. The leased lines can be used by the associated companies for telephone, telegraph, data, telex, facsimile or other telecommunications services. Revenue earned from these transactions amounted to Rp.25,714 million, Rp.30,678 million and Rp.44,368 million in 2004, 2005 and 2006, respectively, representing 0.1% of the total operating revenues for each year.

F-108

PERUSAHAAN PERSEROAN (PERSERO)

P.T. TELEKOMUNIKASI INDONESIA Tbk AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

DECEMBER 31, 2005 AND 2006, AND FOR YEARS ENDED

DECEMBER 31, 2004, 2005 AND 2006

(Figures in tables are presented in millions of Rupiah, unless otherwise stated)

      (iv) The Company purchases property and equipment including construction and installation services from a number of related parties. These related parties include, among others, PT Industri Telekomunikasi Indonesia (“PT INTI”) and Koperasi Pegawai TELKOM. Total purchases made from these related parties amounted to Rp.268,901 million, Rp.337,648 million and Rp.153,541 million in 2004, 2005 and 2006, respectively, representing 2.4%, 2.5% and 0.9% of the total fixed asset purchased in 2004, 2005 and 2006, respectively.

      (v) PT INTI is also a major contractor and supplier of equipment, including construction and installation services for Telkomsel. Total purchases from PT INTI in 2004, 2005 and 2006 amounted to Rp.217,668 million, Rp.67,555 million and Rp.90,519 million, respectively, representing 1.9%, 0.5% and 0.5% of the total fixed assets purchased in 2004, 2005, and 2006, respectively.

      (vi) Telkomsel has an agreement with PSN for the lease of PSN’s transmission link. Based on the agreement, which was made on March 14, 2001, the minimum lease period is 2 years since the operation of the transmission link and is extendable subject to agreement by both parties. The lease charges amounted to Rp.49,710 million, Rp.95,206 million and Rp.131,414 million in 2004, 2005 and 2006, respectively, representing 0.3%, 0.4% and 0.4% of the total operating expenses for each year.

      (vii) The Company and its subsidiaries carry insurance on their property, plant and equipment against property losses, inventory and on employees’ social security obtained from PT Asuransi Jasa Indonesia, PT Asuransi Tenaga Kerja and PT Persero Asuransi Jiwasraya, which are state-owned insurance companies. Insurance premiums charged amounted to Rp.148,279 million, Rp.58,338 million and Rp.105,463 million in 2004, 2005 and 2006, respectively, representing 0.8%, 0.2% and 0.4% of total operating expenses in 2004, 2005 and 2006, respectively.

      (viii) The Company and its subsidiaries maintain current accounts and time deposits in several state-owned banks. In addition, some of those banks are appointed as collecting agents for the Company. Total placements in form of current accounts and time deposits, and mutual funds in state-owned banks amounted to Rp.3,315,428 million and Rp.5,737,676 million as of December 31, 2005 and 2006, respectively, representing 5.3% and 7.6% of the total assets as of December 31, 2005 and 2006, respectively. Interest income recognized during 2004, 2005 and 2006 were Rp.150,367 million, Rp.123,951 million and Rp.405,176 million representing 47.3%, 36% and 62% of total interest income in 2004, 2005 and 2006, respectively.

      (ix) The Company’s subsidiaries have loans from state-owned banks. Interest expense on the loans for 2004, 2005 and 2006 amounted to Rp.9,115 million, Rp.5,055 million and Rp.86,270 million, respectively, representing 0.7%, 0.4% and 6.7% of the total interest expense in 2004, 2005 and 2006, respectively.

      (x) The Company leases buildings, purchases materials and construction services, and utilizes maintenance and cleaning services from Dana Pensiun TELKOM and PT Sandhy Putra Makmur, a subsidiary of Yayasan Sandikara Putra TELKOM — a foundation managed by Dharma Wanita TELKOM. Total charges from these transactions amounted to Rp.24,921 million, Rp.39,146 million and Rp.79,599 million in 2004, 2005 and 2006, respectively, representing 0.1%, 0.2% and 0.3% of the total operating expenses in 2004, 2005 and 2006, respectively.

      (xi) The Company and its subsidiaries earned (were charged for) interconnection revenues (charges) from PSN, with a total of (Rp.5,495 million), Rp.1,072 million and Rp.9,715 million in 2004,

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

DECEMBER 31, 2005 AND 2006, AND FOR YEARS ENDED

DECEMBER 31, 2004, 2005 AND 2006

(Figures in tables are presented in millions of Rupiah, unless otherwise stated)

2005 and 2006, respectively, representing (0.02%), less than 0.01% and less than 0.02% of the total operating revenues in 2004, 2005 and 2006, respectively.

      (xii) In addition to revenues earned under the KSO Agreement (Note 48), the Company also earned income from building rental, repairs and maintenance services and training services provided to the KSO Units, amounting to Rp.18,449 million, Rp.26,769 million and Rp.14,549 million in 2004, 2005 and 2006, respectively, representing 0.1%, 0.1% and less than 0.1% of the total operating revenues in 2004, 2005 and 2006, respectively.

      (xiii) The Company has revenue-sharing arrangements with Koperasi Pegawai TELKOM (“Kopegtel”). Kopegtel’s share in the revenues from these arrangements amounted to Rp.20,560 million, Rp.31,909 million and Rp.28,913 million in 2004, 2005 and 2006, respectively, representing 0.1% of the total operating revenues for each year.

      (xiv) Telkomsel has operating lease agreements with Patrakom and CSM for the usage of their transmission link for a period of 3 years, subject to extensions. The lease charges amounted to Rp.25,032 million, Rp.123,857 million and Rp.192,146 million in 2004, 2005 and 2006, respectively, representing 0.1%, 0.5% and 0.6% of the total operating expenses in 2004, 2005 and 2006, respectively.

      (xv) Kisel is a cooperative that was established by Telkomsel’s employees to engage in car rental services, printing and distribution of customer bills, collection and other services principally for the benefit of Telkomsel. For these services, Kisel charged Telkomsel Rp.109,548 million, Rp.78,714 million and Rp.322,851 million in 2004, 2005 and 2006, respectively. Telkomsel also has dealership agreements with Kisel for distribution of SIM cards and pulse reload vouchers. Total SIM cards and pulse reload vouchers which were sold to Kisel amounted to Rp.816,591 million, Rp.1,158,559 million and Rp.1,568,701 million in 2004, 2005 and 2006, respectively.

      (xvi) Infomedia provides electronic media and call center services to KSO Unit VII (for the years 2004 and 2005, and for the period January — September 2006) based on an agreement dated March 4, 2003. Revenue earned from these transactions in 2004, 2005 and 2006 amounted to Rp.5,541 million, Rp.9,221 million and Rp.6,874 million, representing 0.02% 0.02% and 0.01% of total operating revenues in 2004, 2005 and 2006, respectively.

      (xvii) The Company has also seconded a number of its employees to related parties to assist them in operating their business. In addition, the Company provided certain of its related parties with the right to use its buildings free of charge.

      (xviii) Telkomsel has procurement agreements with PT Graha Informatika Nusantara, a subsidiary of Dana Pensiun TELKOM for installation and maintenance of equipment. Total procurement for installations of equipment amounted to Rp. nil, Rp.127,661 million and Rp.102,982 million in 2004, 2005 and 2006, respectively; and for maintenance of equipment amounted to Rp. nil, Rp.36,486 million and Rp.45,422 million in 2004, 2005 and 2006, respectively.

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PERUSAHAAN PERSEROAN (PERSERO)

P.T. TELEKOMUNIKASI INDONESIA Tbk AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

DECEMBER 31, 2005 AND 2006, AND FOR YEARS ENDED

DECEMBER 31, 2004, 2005 AND 2006

(Figures in tables are presented in millions of Rupiah, unless otherwise stated)

      Presented below are balances of accounts with related parties:

		2005				2006
				% of Total				% of Total
		Amount		Assets		Amount		Assets
a. Cash and cash equivalents (Note 6)			3,058,854		4.92		5,554,384		7.39
b. Temporary investments			22,064		0.04		84,492		0.11
c.  Trade receivables, net (Note 7)			530,370		0.85		520,689		0.69
d. Other receivables
	KSO Units		93,959		0.15		—		—
	State-owned banks (interest)		8,555		0.01		19,242		0.03
	Government agencies		421		0.00		716		0.00
	Other		16,304		0.03		3,133		0.00
	Total		119,239		0.19		23,091		0.03
e.  Prepaid expenses (Note 9)			299,799		0.48		451,845		0.60
f.  Other current assets (Note 10)			159,537		0.26		6,822		0.01
g. Advances and other non-current assets (Note 14)
	Bank Mandiri		90,668		0.15		91,862		0.12
	Peruri		813		0.00		813		0.00
	Total		91,481		0.15		92,675		0.12
h. Escrow accounts (Note 16)			6,369		0.01		116		0.00
i.  Trade payables (Note 17)
	Government agencies		660,166		2.03		828,771		2.13
	KSO Units		15,281		0.05		—		—
	Indosat		46,372		0.14		71,417		0.18
	Koperasi Pegawai TELKOM		78,673		0.24		103,758		0.27
	PSN		—		—		62		0.00
	PT INTI		125,792		0.39		37,820		0.10
	Others		88,105		0.27		74,668		0.19
	Total		1,014,389		3.12		1,116,496		2.87

F-111

PERUSAHAAN PERSEROAN (PERSERO)

P.T. TELEKOMUNIKASI INDONESIA Tbk AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

DECEMBER 31, 2005 AND 2006, AND FOR YEARS ENDED

DECEMBER 31, 2004, 2005 AND 2006

(Figures in tables are presented in millions of Rupiah, unless otherwise stated)

		2005				2006
				% of Total				% of Total
		Amount		Assets		Amount		Assets
j.  Accrued expenses (Note 18)
	Government agencies and state-owned banks		395,791		1.22		93,101		0.24
	Employees		452,413		1.39		2,239,243		5.76
	PT Asuransi Jasa Indonesia		2,038		0.01		—		—
	Others		38,442		0.11		—		—
	Total		888,684		2.73		2,332,344		6.00
k. Short-term bank loans (Note 20)
	Bank Mandiri		—		—		233,333		0.60
	Bank BNI		— —		— —	200,000 433,333			0.51 1.11
	Total		5,329,477		16.36		4,476,613		11.51
l.  Two-step loans (Note 22)
m. Accrued long service awards (Note 44)			524,524		1.61		596,325		1.53
n. Accrued post-retirement health care benefits (Note 45)			3,048,021		9.36		2,945,728		7.58
o. Long-term bank loans (Note 24)			14,918		0.05		950,000		2.44
	Bank Mandiri		—		—		300,000		0.77
	Bank BNI		14,918		0.05		1,250,000		3.21
	Total

47.     SEGMENT INFORMATION

      The Company and its subsidiaries have three main business segments operated in Indonesia: fixed wireline, fixed wireless and cellular. The fixed wireline segment provides local, domestic long-distance and international (starting 2004) telephone services, and other telecommunications services (including among others, leased lines, telex, transponder, satellite and Very Small Aperture Terminal-VSAT) as well as ancillary services. The fixed wireless segment provides CDMA-based telecommunication services which offer customers the ability to use a wireless handset with limited mobility (within a local code area). The cellular segment provides basic telecommunication services, particularly mobile cellular telecommunication services. Operating segments that do not individually represent more than 10% of the Company’s revenues are presented as “Other” comprising the telephone directories and building management businesses.

      Segment revenues and expenses include transactions between business segments and are accounted for at prices that management believes represent market prices.

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PERUSAHAAN PERSEROAN (PERSERO)

P.T. TELEKOMUNIKASI INDONESIA Tbk AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

DECEMBER 31, 2005 AND 2006, AND FOR YEARS ENDED

DECEMBER 31, 2004, 2005 AND 2006

(Figures in tables are presented in millions of Rupiah, unless otherwise stated)

	2004
	Fixed			Fixed									Total Before						Total
	Wireline			Wireless			Cellular			Other			Elimination			Elimination			Consolidated
Segment results
External operating revenues		18,860,835			575,436			14,201,786			309,709			33,947,766			—			33,947,766
Inter-segment operating revenues		4,302			(51,083	)		534,790			51,063			539,072			(539,072	)		—
Total segment revenues		18,865,137			524,353			14,736,576			360,772			34,486,838			(539,072	)		33,947,766
Segment expenses		(12,207,726	)		(789,599	)		(6,757,243	)		(320,698	)		(20,075,266	)		715,380			(19,359,886	)
Segment result		6,657,411			(265,246	)		7,979,333			40,074			14,411,572			176,308			14,587,880
Interest expense																				(1,270,136	)
Interest income																				317,941
Gain (loss) on foreign exchange — net																				(1,220,760	)
Other income (expenses) — net																				331,050
Tax expense																				(4,178,526	)
Equity in net income (loss) of associated companies																				3,420
Income before minority interest																				8,570,869
Unallocated minority interest																				(1,956,301	)
Net income																				6,614,568
Other information
Segment assets		34,493,795			3,048,671			18,988,939			414,165			56,945,570			(2,396,426	)		54,549,144
Investments in associates		73,323			—			9,290			—			82,613			—			82,613
Unallocated corporate assets																				1,547,435
Total consolidated assets																				56,179,192
Segment liabilities		(2,821,945	)		(86,780	)		(1,712,623	)		(87,346	)		(4,708,694	)		987,442			(3,721,252	)
Unallocated corporate liabilities																				(29,391,472	)
Total consolidated liabilities																				(33,112,724	)
Capital expenditures		(4,340,591	)		(1,807,518	)		(4,982,744	)		(66,691	)		(11,197,544	)		—			(11,197,544	)
Depreciation and amortization		(3,568,196	)		(229,983	)		(2,651,028	)		(18,740	)		(6,467,947	)		14,590			(6,453,357	)
Amortization of goodwill and other intangible assets		(851,060	)		—			—			(21,270	)		(872,330	)		—			(872,330	)
Other non-cash expenses		(244,356	)		—			(100,737	)		(5,338	)		(350,431	)		—			(350,431	)

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PERUSAHAAN PERSEROAN (PERSERO)

P.T. TELEKOMUNIKASI INDONESIA Tbk AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

DECEMBER 31, 2005 AND 2006, AND FOR YEARS ENDED

DECEMBER 31, 2004, 2005 AND 2006

(Figures in tables are presented in millions of Rupiah, unless otherwise stated)

	2005
	Fixed			Fixed									Total Before						Total
	Wireline			Wireless			Cellular			Other			Elimination			Elimination			Consolidated
Segment results
External operating revenues		19,637,386			1,449,725			20,384,856			335,217			41,807,184			—			41,807,184
Inter-segment operating revenues		305,382			(167,935	)		691,188			70,475			899,110			(899,110	)		—
Total segment revenues		19,942,768			1,281,790			21,076,044			405,692			42,706,294			(899,110	)		41,807,184
Segment expenses		(14,378,819	)		(2,174,656	)		(8,774,996	)		(328,184	)		(25,656,655	)		1,020,221			(24,636,434	)
Segment result		5,563,949			(892,866	)		12,301,048			77,508			17,049,639			121,111			17,170,750
Interest expense																				(1,177,268	)
Interest income																				344,686
Gain (loss) on foreign exchange — net																				(516,807	)
Other income (expenses) — net																				409,184
Tax expense																				(5,183,887	)
Equity in net income (loss) of associated companies																				10,879
Income before minority interest																				11,057,537
Unallocated minority interest																				(3,063,971	)
Net income																				7,993,566
Other information
Segment assets		33,980,509			3,617,374			25,444,587			455,644			63,498,114			(2,260,681	)		61,237,433
Investments in associates		92,110			—			9,290			—			101,400			—			101,400
Unallocated corporate assets		—			—			—			—			—			—			832,211
Total consolidated assets																				62,171,044
Segment liabilities		(2,890,445	)		(459,284	)		(2,547,874	)		(111,620	)		(6,009,223	)		886,435			(5,122,788	)
Unallocated corporate liabilities		—			—			—			—			—			—			(27,450,662	)
Total consolidated liabilities																				(32,573,450	)
Capital expenditures		(2,037,866	)		(1,388,876	)		(10,085,755	)		(40,460	)		(13,552,957	)		—			(13,552,957	)
Depreciation and amortization		(4,006,246	)		(537,284	)		(3,046,632	)		(23,322	)		(7,613,484	)		11,919			(7,601,565	)
Write-down of assets and loss on procurement commitments		—			(696,127	)		—			—			(696,127	)		—			(696,127	)
Amortization of goodwill and other intangible assets		(896,883	)		—			—			(21,270	)		(918,153	)		—			(918,153	)
Other non-cash expenses		(292,357	)		(21,582	)		(171,192	)		(4,783	)		(489,914	)		—			(489,914	)

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PERUSAHAAN PERSEROAN (PERSERO)

P.T. TELEKOMUNIKASI INDONESIA Tbk AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

DECEMBER 31, 2005 AND 2006, AND FOR YEARS ENDED

DECEMBER 31, 2004, 2005 AND 2006

(Figures in tables are presented in millions of Rupiah, unless otherwise stated)

	2006
	Fixed			Fixed									Total Before						Total
	Wireline			Wireless			Cellular			Other			Elimination			Elimination			Consolidated
Segment results
External operating revenues		20,137,847			2,806,204			28,205,052			144,905			51,294,008			—			51,294,008
Inter-segment operating revenues		514,589			(253,397	)		863,268			333,849			1,458,309			(1,458,309	)		—
Total segment revenues		20,652,436			2,552,807			29,068,320			478,754			52,752,317			(1,458,309	)		51,294,008
Segment expenses		(16,257,545	)		(1,815,803	)		(12,839,526	)		(384,263	)		(31,297,137	)		1,596,370			(29,700,767	)
Segment result		4,394,891			737,004			16,228,794			94,491			21,455,180			138,061			21,593,241
Interest expense																				(1,286,354	)
Interest income																				654,984
Gain (loss) on foreign exchange — net																				836,328
Other income (expenses) — net																				202,025
Tax expense																				(7,039,927	)
Equity in net income (loss) of associated companies																				(6,619	)
Income before minority interest																				14,953,678
Unallocated minority interest																				(3,948,101	)
Net income																				11,005,577
Other information
Segment assets		33,406,552			5,856,074			37,280,255			575,823			77,118,704			(2,072,156	)		75,046,548
Investments in associates		79,907			—			9,290			—			89,197			—			89,197
Total consolidated assets																				75,135,745
Total consolidated liabilities		(26,270,257	)		(1,714,144	)		(12,688,285	)		(284,995	)		(40,957,681	)		2,077,712			(38,879,969	)
Capital expenditures		(1,822,867	)		(338,795	)		(14,838,596	)		(90,769	)		(17,091,027	)		—			(17,091,027	)
Depreciation and amortization		(4,290,872	)		(452,766	)		(4,427,771	)		(34,536	)		(9,205,945	)		9,916			(9,196,029	)
Amortization of goodwill and other intangible assets		(932,724	)		—			(11,679	)		—			(944,403	)		—			(944,403	)
Other non-cash expenses		(325,055	)		—			(127,521	)		(5,676	)		(458,252	)		—			(458,252	)

48.     JOINT OPERATION SCHEMES (“KSO”)

      In 1995, the Company and five investors (PT Pramindo Ikat Nusantara, PT AriaWest International, PT Mitra Global Telekomunikasi Indonesia, PT Dayamitra Telekomunikasi and PT Bukaka Singtel International) entered into agreements for Joint Operation Schemes (“KSO”) and KSO construction agreements for the provision of telecommunication facilities and services for the Sixth Five-Year Development Plan (“Repelita VI”) of the Republic of Indonesia. The five investors undertook the development and operation of the basic fixed telecommunications facilities and services in five of the Company’s seven regional divisions.

      Following the Indonesian economics crisis that began in mid-1997, certain KSO investors experienced difficulties in fulfilling their commitment under the KSO agreements. As remedial measures instituted by

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PERUSAHAAN PERSEROAN (PERSERO)

P.T. TELEKOMUNIKASI INDONESIA Tbk AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

DECEMBER 31, 2005 AND 2006, AND FOR YEARS ENDED

DECEMBER 31, 2004, 2005 AND 2006

(Figures in tables are presented in millions of Rupiah, unless otherwise stated)

both the Company and those KSO investors did not fully remedy this situation, the Company acquired those KSO investors (Dayamitra in 2001, Pramindo in 2002 and AWI in 2003 — Note 5a, 5b, 5c) and currently controls the related KSOs through its ownership of such KSO investors. The Company acquired full operational control of the KSO IV operation in January 2004 (Note 5d) and KSO VII operations in October 2006 (Note 5e). Accordingly, the revenue sharing percentage in those KSOs is no longer relevant as the financial statements of the acquired KSO investors and the related KSOs are consolidated into the Company’s financial statements since the date of acquisition.

49.     REVENUE-SHARING ARRANGEMENTS

      The Company has entered into separate agreements with several investors under Revenue-Sharing Arrangements (“RSA”) to develop fixed lines, public card-phone booths (including their maintenance), data and internet network and related supporting telecommunications facilities.

      As of December 31, 2006, the Company has 90 RSA with 67 partners. The RSA are located mainly in Palembang, Pekanbaru, Jakarta, East Java, Kalimantan, Makassar, Pare-pare, Manado, Denpasar, Mataram and Kupang with concession periods ranging from 24 to 176 months.

      Under the RSA, the investors finance the costs incurred in developing telecommunications facilities. Upon completion of the construction, the Company manages and operates the facilities and bears the cost of repairs and maintenance during the revenue-sharing period. The investors legally retain the rights to the property, plant and equipment constructed by them during the RSA periods. At the end of each the RSA period, the investors transfer the ownership of the facilities to the Company at a nominal price.

      Generally, the revenues earned from the customers in the form of line installation charges are allocated in full to the investors. The revenues from outgoing telephone pulses and monthly subscription charges are shared between the investors and the Company based on certain agreed ratio.

      The net book value of property, plant and equipment under RSA which have been transferred to property, plant and equipment amounted to Rp.55,441 million and Rp.14,662 million on December 31, 2005 and 2006, respectively (Note 13).

      The investors’ share of revenues amounted to Rp.891,165 million, Rp.513,528 million and Rp.413,263 million in 2004, 2005 and 2006, respectively.

50.     TELECOMMUNICATIONS SERVICES TARIFFS

      Under Law No. 36 year 1999 and Government Regulation No. 52 year 2000, tariffs for the use of telecommunications network and telecommunication services are determined by providers based on the tariffs category, structure and with respect to fixed line telecommunication services price cap formula set by the Government.

Fixed Line Telephone Tariffs

      Fixed line telephone tariffs are imposed for network access and usage. Access charges consist of a one-time installation charge and a monthly subscription charge. Usage charges are measured in pulses and classified as either local or domestic long-distance. The tariffs depend on call distance, call duration, the time of day, the day of the week and holidays.

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P.T. TELEKOMUNIKASI INDONESIA Tbk AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

DECEMBER 31, 2005 AND 2006, AND FOR YEARS ENDED

DECEMBER 31, 2004, 2005 AND 2006

(Figures in tables are presented in millions of Rupiah, unless otherwise stated)

      Tariffs for fixed line telephone are regulated under Minister of Communications Decree No. KM.12 year 2002 dated January 29, 2002 concerning the addendum of the decree of Minister of Tourism, Post and Telecommunication (“MTPT”) No. 79 year 1995, concerning the Method for Basic Tariff Adjustment on Domestic Fixed Line Telecommunication Services. Furthermore, the Minister of Communications issued Letter No. PK 304/1/3 PHB-2002 dated January 29, 2002 concerning increase in tariffs for fixed line telecommunications services. According to the letter, tariffs for fixed line domestic calls would increase by 45.49% over three years. The average increase in 2002 was 15%. This increase was effective on February 1, 2002. The implementation of the planned increase in the tariff in 2003, however, was postponed by the Minister of Communications through letter No. PR.304/1/1/ PHB-2003 dated January 16, 2003.

      Based on the Announcement No. PM.2 year 2004 of the Minister of Communications dated March 30, 2004, the Company adjusted the tariffs effective April 1, 2004 as follows:

•  Local charges increased by an average of 28%

•  Direct long distance charges decreased by an average of 10%

•  Monthly subscription charges increased by an average of 12% to 25%, depending on customer’s segment.

      For the subsequent tariff establishment, the Government has issued initial tariff formula and adjustment tariff which are stipulated in Minister Decree No. 09/Per/ M.KOMINFO/02/2006 concerning Procedure for Initial Tariff Establishment and Tariff Change for Basic Telephone Service Through Fixed Line dated February 8, 2006, replacing Minister of Communications Decree No. KM. 12 year 2002 on January 29, 2002 regarding the addendum of the decree of Minister of Tourism, Post and Telecommunication (“MTPT”) No. 79 year 1995 concerning Method for Basic Tariff Adjustment on Domestic Fixed Line Telecommunication Services.

Mobile Cellular Telephone Tariffs

      Tariffs for cellular providers are set on the basis of the MTPT Decree No. KM.27/PR.301/ MPPT-98 dated February 23, 1998. Under the regulation, the cellular tariffs consist of activation fees, monthly charges and usage charges.

      The maximum tariff for the activation fee is Rp.200,000 per new subscriber number. The maximum tariff for the monthly charges is Rp.65,000. Usage charges consist of the following:

     a.  Airtime

      The maximum basic airtime tariff charged to the originating cellular subscriber is Rp.325/minute. Charges to the originating cellular subscriber are calculated as follows:

1. Cellular to cellular	2 times airtime rate
2. Cellular to PSTN	1 time airtime rate
3. PSTN to cellular	1 time airtime rate
4. Card phone to cellular	1 time airtime rate plus 41% surcharge

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PERUSAHAAN PERSEROAN (PERSERO)

P.T. TELEKOMUNIKASI INDONESIA Tbk AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

DECEMBER 31, 2005 AND 2006, AND FOR YEARS ENDED

DECEMBER 31, 2004, 2005 AND 2006

(Figures in tables are presented in millions of Rupiah, unless otherwise stated)

     b.  Usage tariffs

      1. Usage local tariffs charged to a cellular subscriber who makes a call to a fixed line (“PSTN”). For the use of network, the tariffs per minute are computed at 50% of the prevailing local PSTN tariffs.

      2. The long-distance usage tariffs between two different service areas charged to a cellular subscriber are the same as the prevailing tariffs for domestic long-distance call (“SLJJ”) applied to PSTN subscribers.

      Based on the Decree No. KM. 79 year 1998 of the Ministry of Communications, the maximum tariff for prepaid customers may not exceed 140% of the peak time tariffs for postpaid subscribers.

      Based on the Announcement No. PM.2 year 2004 of the Minister of Communications dated March 30, 2004, Telkomsel adjusted its tariffs by eliminating the tariff subsidy from long-distance calls. This resulted in a 9% tariff increase.

      For the subsequent tariff setting, the Government has issued calculation formula for tariff change on basic telephone service through mobile cellular network which is stipulated in Minister Decree No. 12/ Per/ M.KOMINFO/02/2006 concerning Procedure for Tariff Change Establishment for Basic Telephone Service Through Mobile Cellular Network dated February 28, 2006, replacing Minister of Communications Decree No. KM.12 year 2002 on January 29, 2002 regarding the addendum of the decree of Minister of Tourism, Post and Telecommunication No. KM.27/ PR.301/ MPPT-98 date February 23, 1998 concerning Mobile Cellular Telephone Line Tariff.

      Due to the commencing of Minister Decree No. 12/Per/ M.KOMINFO/02/2006 concerning the interconnection charges thereby implemented after Minister Decree No. 08/Per/ M.KOMINFO/02/2006 concerning Interconnection.

Interconnection Tariffs

      The Government establishes the percentage of tariffs to be received by each operator in respect of calls that transit multiple networks. The Telecommunications Law and Government Regulation No. 52 of 2000 provides for the implementation of a new policy to replace the current revenue sharing policy. Under the new policy, which has not yet been implemented, the operator of the network on which calls terminate would determine the interconnection charge to be received by it based on a formula to be mandated by the Government, which would be intended to have the effect of requiring that operators charge for calls based on the costs of carrying such calls. On March 11, 2004, the MoCI issued Decree No. 32/2004, which stated that cost-based interconnection fees shall be applicable beginning January 1, 2005. The effective date of this decree was subsequently postponed until January 1, 2007 based on the Ministry Regulation No. 08/ Per/ M.KOMINF/02/2006 dated February 8, 2006. On December 28, 2006 the Company and all network operators signed amendments to their interconnection agreements for its fixed line networks (local, domestic long distance and international) and mobile network for the implementation of the cost-based tariff obligations under the MoCI Regulations No. 08/ Per/ M.KOMINFO/02/2006. These amendments took effect on January 1, 2007.

     i.  Interconnection with Fixed line Network

      The Government’s National Fundamental Technical Plan set forth in Decree No. KM.4/2001, as amended by Decree No. KM.28/2004, sets out the technical requirements, routing plans and numbering plans

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PERUSAHAAN PERSEROAN (PERSERO)

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

DECEMBER 31, 2005 AND 2006, AND FOR YEARS ENDED

DECEMBER 31, 2004, 2005 AND 2006

(Figures in tables are presented in millions of Rupiah, unless otherwise stated)

for interconnection of the networks of various telecommunications operators among themselves and with the Company’s fixed line network. Under the National Fundamental Technical Plan, all operators are permitted to interconnect with the Company’s fixed line network for access thereto and to other networks, such as international gateways and the networks of other cellular operators. In addition, cellular operators may interconnect directly with other networks without connecting to the Company’s fixed line network. Currently, the fees for interconnection are set forth in Decree No. KU.506/1997, Decree No. KM.46/1998, Decree No. KM.37/1999 and Decree No. KM.30/2000.

      Fixed line Interconnection with Indosat. Currently, the fixed line interconnection between the Company and Indosat is generally based on their agreement signed in 2005. Pursuant to the agreement between the Company and Indosat, for interconnection of local and domestic long-distance calls, the operator of the network on which the calls terminate receives an agreed amount per minute.

      Other Fixed Wireline Interconnection. Since September 1, 1998, the Company has been receiving a share of the tariffs from Batam Bintan Telekomunikasi (“BBT”), which is a local operator with a special coverage area on Batam Island, for each successful call that transits or terminates on the Company’s fixed line network. Under the interconnection agreement, for local interconnection calls, revenues are shared on a “sender keeps all” basis. For local calls originating on BBT’s network terminating on a cellular network and vice versa which transit through the Company’s fixed line network, the Company receives an agreed percentage of the prevailing tariff for local calls. For interconnection of domestic long-distance calls, the operator of the network on which the calls terminate or transit receives an agreed percentage of the prevailing long-distance tariff. In addition, BBT is to receive a certain fixed amount for each minute of incoming and outgoing international calls, from and to BBT that transit through the Company’s fixed line network and use the Company’s IDD service and 50% of the prevailing interconnection tariff for incoming and outgoing international calls that transit through the Company’s fixed line network and use Indosat’s IDD service.

      Other Fixed Wireless Interconnection. Fixed wireless networks may interconnect with the Company’s fixed line network at the Company’s gateway. At present, other than the Company and Indosat, PT Bakrie Telecom (“BT”) also operates a fixed wireless network in Indonesia. The fixed wireless interconnection between the Company and BT is currently based on the most recent interconnection agreement signed in 2005. Pursuant to the agreement, for interconnection of local calls, the operator of the network on which the calls terminate receives an agreed amount per minute. For local calls originating on BT’s network terminating on a cellular network and vice versa which transit through the Company’s fixed line network, the Company receives an agreed percentage of the prevailing tariff for local calls. For domestic long-distance calls that originate on the Company’s fixed line network and terminate on BT’s network, BT receives an agreed amount per minute. In the reverse situation and for transit long-distance calls through the Company’s fixed line network, the Company receives an agreed percentage of the prevailing long-distance tariff. In addition, BT is to receive a certain fixed amount for each minute of incoming and outgoing international calls to and from BT that transit through the Company’s fixed line network and use the Company’s IDD service and 25% of prevailing interconnection tariff of incoming and outgoing international calls that transit through the Company’s fixed line network and use Indosat’s IDD service.

     ii.  Cellular Interconnection

      In respect of local interconnection calls, including transit calls, between a cellular network and the Company’s fixed line network, the Company receives 50% of the prevailing fixed-line usage tariff for local pulse. For local calls from the Company’s fixed line network to a cellular network, the Company charges its

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PERUSAHAAN PERSEROAN (PERSERO)

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

DECEMBER 31, 2005 AND 2006, AND FOR YEARS ENDED

DECEMBER 31, 2004, 2005 AND 2006

(Figures in tables are presented in millions of Rupiah, unless otherwise stated)

subscribers the applicable local call tariff plus an airtime charge, and pays the cellular operator the airtime charge. For local calls between cellular telecommunications networks, the originating cellular operator pays the terminating cellular operator the airtime charges.

      The current Interconnection Decree, effective April 1, 1998, assumes that it is possible for long-distance calls to be carried by more than one network. Pursuant to the Interconnection Decree, for long-distance calls which originate on the Company’s fixed line network, the Company is entitled to retain a portion of the prevailing long-distance tariff, which ranges from 40% of the tariff in cases where the entire long-distance portion is carried by a cellular operator up to 85% of the tariff in cases where the entire long-distance portion is carried by the Company’s fixed line network. For long-distance calls that originate from a cellular subscriber, the Company is entitled to retain a portion of the prevailing long-distance tariff, which ranges from 25% of the tariff in cases where the call originates from a cellular subscriber, transits the Company’s fixed line network and terminates on another cellular subscriber with the entire long-distance portion carried by a cellular operator, up to 85% of the tariff in cases where the entire long-distance portion is carried by the Company’s fixed line network and terminates on the Company’s fixed line network.

     iii.  International Interconnection

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

Description	Tariff
Access charge	Rp.850/ successful call
Usage charge	Rp.550/ successful paid minute

      In addition, since June 2004, the Company has provided IDD services. Currently, the Company’s IDD service can be accessed by subscribers of all telecommunication operators in Indonesia. Interconnection and access charges for originating calls using the Company’s IDD service or terminating incoming international calls routed through the Company’s international voice telecommunications gateway are negotiated with each respective domestic operator.

     iv.  Satellite Phone Interconnection

      Since the fourth quarter of 2001, the Company has been receiving a share of revenues arising from interconnection transactions with PSN, a national satellite operator. Under the agreement, in respect of the interconnection calls between the Company and PSN, the Company receives Rp.800 per minute for network charges and an additional Rp.300 per minute origination fee if the call originates from the Company’s fixed line network.

     v.  VoIP Interconnection

      Previously, Minister of Communications Decree No. KM.23/2002 provided that access charges and network lease charges for the provision of VoIP services were to be agreed between network operators and VoIP operators. On March 11, 2004, the Minister of Communications issued Decree No. 31/2004, which stated that interconnection charges for VoIP are to be fixed by the Minister of Communications. Currently,

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PERUSAHAAN PERSEROAN (PERSERO)

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

DECEMBER 31, 2005 AND 2006, AND FOR YEARS ENDED

DECEMBER 31, 2004, 2005 AND 2006

(Figures in tables are presented in millions of Rupiah, unless otherwise stated)

the Minister of Communications has not yet determined what the new VoIP interconnection charges will be. Until such time as the new charges are fixed, the Company will continue to receive connection fees for calls that originate or terminate on the Company’s fixed line network at agreed fixed amount per minute.

Public Phone Kiosk (“Wartel”) Tariff

      On August 7, 2002, the Minister of Communications issued Decree No. KM. 46 year 2002 regarding the operation of phone kiosks. The decree provides that the Company is entitled to retain a maximum of 70% of the phone kiosk basic tariffs for domestic calls and up to 92% of phone kiosk basic tariffs for international calls. It also provides that the airtime from the cellular operators shall generate at a minimum 10% of the kiosk phones’ revenue.

      The Government issued Ministry Regulation No. PM.05/ Per/ M.KOMINFO/ I/2006 dated January 30, 2006 about Public Phone Kiosk Operation which replace the Minister of Communications Decree No. KM.46 year 2002. There are no tariff differences between both decrees. This regulation is effective upon its issuance date.

Tariff for Other Services

      The tariffs for satellite rental, and other telephony and multimedia services are determined by the service provider by taking into account the expenditures and market price. The Government only determines the tariff formula for basic telephony services. There is no stipulation for the tariff of other services.

Universal Service Obligation (“USO”)

      On September 30, 2005, the MoCI issued Regulation No. 15/ PER/ M.KOMINFO/9/2005, which sets forth the basic policies underlying the USO program and requires telecommunications operators in Indonesia to contribute 0.75% of gross revenues (with due consideration for bad debt and interconnection charges) for USO development.

51.     COMMITMENTS

     a.  Capital Expenditures

      As of December 31, 2006, the amount of capital expenditures committed under contractual arrangements, principally relating to procurement and installation of switching equipment, transmission equipment and cable network, are as follows:

	Amounts in
Currencies	Foreign Currencies		Equivalent
	(in millions)		in Rupiah
Rupiah		—		6,484,482
U.S. Dollar		504		4,554,896
Euro		130		1,546,220
Total				12,585,598

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PERUSAHAAN PERSEROAN (PERSERO)

P.T. TELEKOMUNIKASI INDONESIA Tbk AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

DECEMBER 31, 2005 AND 2006, AND FOR YEARS ENDED

DECEMBER 31, 2004, 2005 AND 2006

(Figures in tables are presented in millions of Rupiah, unless otherwise stated)

      The above balance includes the following significant agreements:

     (i)  Procurement Agreements

      In August 2004, Telkomsel entered into the following agreements with Motorola Inc and PT Motorola Indonesia, Ericsson AB and PT Ericsson Indonesia, Nokia Corporation and PT Nokia Network, and Siemens AG, for the maintenance and procurement of equipment and related services, involving:

•  Joint Planning and Process Agreement

•  Equipment Supply Agreement (“ESA”)

•  Technical Service Agreement (“TSA”)

•  Site Acquisition and Civil, Mechanical and Engineering Agreement (“SITAC” and “CME”)

      The agreements contain lists of charges to be used in determining the fees payable by Telkomsel for all equipment and related services to be procured during the roll-out period, upon the issuance of Purchase Order (“PO”).

      The agreements are valid and effective as of the execution date by the respective parties for a period of three years, provided that the suppliers are able to meet requirements set out in each PO. In the event that the suppliers fail to meet those requirements, Telkomsel may terminate the agreements at its sole discretion with a prior written notice.

      In accordance with the agreements, the parties also agreed that the charges specified in the price list would apply to equipment and services (ESA and TSA) and services (SITAC and CME) acquired from the suppliers between May 26, 2004 and the effective date, except for those acquired from Siemens under TSA relating to equipment and the maintenance of Telkomsel’s Switching Sub System (“SSS”) and Base Station Subsystem (“BSS”) that were acquired between July 1, 2004 and the effective date. Prices are subject to quarterly review.

      Subsequently, for the purpose of providing telecommunications services with 3G technology, in September and October 2006, Telkomsel entered into agreements with Nokia Corporation and PT Nokia Network, Ericsson AB and PT Ericsson Indonesia, and Siemens Network GmbH and Co.KG, for network construction (Roll-out Agreement) and PT Nokia Network, Ericsson Indonesia; and Siemens Network GmbH and Co.KG for network operations and maintenance (Managed Operations Agreement and Technical Support Agreement). The agreements are valid and effective as of the execution date by the respective parties (the effective date) until the later of December 31, 2008 and the date on which the last PO terminates under the agreement or expires in respect of any PO issued prior to December 31, 2008 providing that the supplier are able to meet requirements set out in each PO.

     (ii)  Metro Junction and Optical Network Access Agreement for Regional Division III with PT INTI

      On November 12, 2003 which then amended on November 27, 2006, the Company entered into an agreement with PT INTI for the construction and procurement of optical network, as well as a network management system and other related services and equipment, for Regional Division III (West Java) amounting to US$3.2 million and Rp.130,293 million. As of December 31, 2006, total purchase commitment amounting Rp.58,575 million.

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PERUSAHAAN PERSEROAN (PERSERO)

P.T. TELEKOMUNIKASI INDONESIA Tbk AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

DECEMBER 31, 2005 AND 2006, AND FOR YEARS ENDED

DECEMBER 31, 2004, 2005 AND 2006

(Figures in tables are presented in millions of Rupiah, unless otherwise stated)

     (iii)  Ring JASUKA Backbone with NEC-Siemens Consortium

      On June 10, 2005, the Company entered into an agreement with NEC-Siemens Consortium for the procurement and installation of an optical cable transmission of RING I (link Jakarta — Tanjung Pandan — Pontianak — Batam — Dumai — Pekanbaru — Palembang — Jakarta) and RING II (link Medan — Padang — Pekanbaru — Medan). The agreement has been amended several times and the total contract based on the latest amendment dated 7 February 2007 amounting to US$45 million and Rp.156,855 million. This agreement is based on a turnkey arrangement. As of December 31, 2006, total purchase commitment amounting Rp.2,444 million.

     (iv)  Expansion NSS, BSS and PDN FWA CDMA System Project in Regional Division I and IV with Huawei Consortium

      On January 6, 2006, the Company entered into a Partnership Agreement with Huawei Consortium for FWA CDMA expansion Project NSS, BSS and PDN system in Regional Division I and IV amounting to US$27.7 million and Rp.150,234 million for period 3 years (2006-2008) with option of 2 years extension (2009-2010) amounting to US$12.3 million and Rp.39,972 million. Huawei consortium will provide service and maintenance support that it constructs, pursuant to a Service Level Agreement, for period of 3 years (2006-2008) in return for a consideration of Rp.10,450 million. As of December 31, 2006, total purchase commitment amounting US$40 million and Rp.190,206 million.

     (v)  CDMA 2000 IX in Regional Division V with PT Samsung Telecommunication Indonesia

      On June 8, 2006, which was amended on August 1, 2006 and later on December 18, 2006, the Company entered into an agreement with PT Samsung Telecommunication Indonesia for Procurement and Installation of CDMA 2000 IX in Regional Division V (East Java) amounting to US$8.4 million plus Rp.12,008 million. As of December 31, 2006, total purchase commitment amounting US$0.8 million and Rp.12,008 million.

     (vi)  Expansion of Submarine Cable System Capacity Surabaya-Ujung Pandang-Banjarmasin with NEC Corporation

      On August 16, 2006, the Company entered into an agreement with NEC Corporation for Expansion of Submarine Cable System Capacity Surabaya — Ujung Pandang — Banjarmasin amounting to US$6.7 million plus Rp.8,132 million. The payment will be made based on 100% of contract value for each sub-system after Acceptance Report-1 issued by the Company. As of December 31, 2006, total purchase commitment amounting US$6.7 million and Rp.8,132 million.

     (vii)  PSTN Interface Expansion and Enhancement in 114 locations with PT Siemens Indonesia

      On September 27, 2006, the Company entered into a procurement and installation agreement with PT Siemens Indonesia for the PSTN Interface Expansion and Enhancement in 114 locations amounting to Rp.229,900 million. The payment will be made based on the completion in each location which is 100% of lump-sum price for the location. As of December 31, 2006, total purchase commitment amounting Rp.187,144 million.

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PERUSAHAAN PERSEROAN (PERSERO)

P.T. TELEKOMUNIKASI INDONESIA Tbk AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

DECEMBER 31, 2005 AND 2006, AND FOR YEARS ENDED

DECEMBER 31, 2004, 2005 AND 2006

(Figures in tables are presented in millions of Rupiah, unless otherwise stated)

     (viii)  Expansion NSS, BSS and PDN FWA CDMA System Project in Regional Division V with Samsung Consortium

      On October 13, 2006, the Company entered into a procurement and installation agreement with Samsung Consortium for Expansion NSS, BSS and PDN FWA CDMA System Project in Regional Division V (East Java) amounting to US$59.9 million plus Rp.94,759 million. Samsung Consortium will provide service and maintenance support that it constructs, pursuant to a Service Level Agreement for period 3 years (2006-2008) in return for a consideration of Rp.29,998 million. As of December 31, 2006, total purchase commitment amounting US$59.9 million and Rp.124,757 million.

     (ix)  Expansion NSS, BSS and PDN System Project in Regional Division VI with ZTE Consortium

      On November 28, 2006, the Company entered into a procurement and installation agreement with ZTE Consortium for Expansion NSS, BSS and PDN System Project in Regional Division VI (Kalimantan) amounting to US$22.5 million plus Rp.57,168 million. ZTE Consortium will provide service and maintenance support that it constructs, pursuant to a Service Level Agreement, for period 3 years (2006-2008) in return for a consideration of Rp.8,925 million. As of December 31, 2006, total purchase commitment amounting US$22.5 million and Rp.66,093 million.

     (x)  Interface Expansion V.52, E1, Circuit, E1 PRA, CCS#7, CLIP and Enhancement PSTN Central 5ESS Project with PT Lintas Teknologi Indonesia

      On November 29, 2006, the Company entered into a procurement and installation agreement with PT Lintas Teknologi Indonesia for Interface Expansion V.52, E1, Circuit, E1 PRA, CCS#7, CLIP and Enhancement PSTN Central 5ESS Project amounting to Rp.69,795 million. As of December 31, 2006, total purchase commitment amounting Rp.38,305 million.

     (xi)  Optical Access Network (“OAN”) Project Batch III in Regional Division IV with Huawei Consortium

      On November 30, 2006, the Company entered into a procurement and installation agreement with Huawei Consortium for Optical Access Network (OAN) Project Batch III in Regional Division IV (Central Java and Daerah Istimewa Yogyakarta) amounting to US$3.2 million plus Rp.64,776 million. As of December 31, 2006, total purchase commitment amounting US$3.2 million and Rp.64,776 million.

     (xii)  Expansion NSS, BSS and PDN System Project in Regional Division II with Huawei Consortium

      On December 8, 2006, the Company entered into a procurement and installation agreement with Huawei Consortium for Expansion NSS, BSS and PDN System Project in Regional Division II (Jakarta) amounting to US$25.3 million plus Rp.131,045 million. Huawei Consortium will provide service and maintenance support that it constructs, pursuant to a Service Level Agreement for period 3 years (2006-2008) in return for a consideration of Rp.11,509 million. As of December 31, 2006, total purchase commitment amounting US$25.3 million and Rp.142,554 million.

     (xiii)  Expansion NSS, BSS and PDN System Project in Regional Division III with Huawei Consortium

      On December 8, 2006, the Company entered into a procurement and installation agreement with Huawei Consortium for Expansion NSS, BSS and PDN System Project in Regional Division III (West Java and

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PERUSAHAAN PERSEROAN (PERSERO)

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

DECEMBER 31, 2005 AND 2006, AND FOR YEARS ENDED

DECEMBER 31, 2004, 2005 AND 2006

(Figures in tables are presented in millions of Rupiah, unless otherwise stated)

Banten) amounting to US$9.8 million plus Rp.55,261 million. Huawei Consortium will provide service and maintenance support that it constructs, pursuant to a Service Level Agreement, for period 3 years (2006-2008) in return for a consideration of Rp.4,217 million. As of December 31, 2006, total purchase commitment amounting US$9.8 million and Rp.59,478 million.

     (xiv)  Optical Access Network (“OAN”) Project Batch IV in Regional Division VI with Alcatel — Inti Consortium

      On December 18, 2006, the Company entered into a procurement and installation agreement with Alcatel-Inti Consortium for Optical Access Network (OAN) Batch IV in Regional Division VI (Kalimantan) amounting to US$3.7 million plus Rp.70,022 million. As of December 31, 2006, total purchase commitment amounting US$3.7 million and Rp.70,022 million.

     (xv)  Optical Access Network (“OAN”) Project Batch I in Regional Divison I and III with Opnet-Olexindo Consortium

      On December 29, 2006, the Company entered into a procurement and installation agreement with Opnet — Olexindo Consortium for OAN Project Batch I in Regional Division I and III amounting to US$3.0 million and Rp.67,288 million. As of December 31, 2006, total purchase commitment amounting to US$3.0 million and Rp.67,288 million.

     (xvi)  Optical Access Network (“OAN”) Project Batch II in Regional Division II with Opnet-Olexindo Consortium

      On December 29, 2006, the Company entered into a procurement and installation agreement with Opnet-Olexindo Consortium for OAN Project Batch II in Regional Division II (Jakarta) amounting to US$4.0 million plus Rp.61,355 million. As of December 31, 2006, total purchase commitment amounting to US$4.0 million and Rp.61,355 million.

     (xvii)  Ring JDCS (Jember-Denpasar Cable System) with ZTE Consortium.

      On December 29, 2006, the Company entered into a procurement and installation agreement with ZTE Consortium for ring JDCS (Jember-Denpasar Cable System) amounting to US$10.2 million and Rp.16,136 million. As of December 31, 2006, total purchase commitment amounting US$10.2 million and Rp.16.136 million.

     b.  Borrowings and other credit facilities

      (i) Telkomsel has a combined US$20 million facility with Standard Chartered Bank, Jakarta for import L/C, bank guarantee, standby L/C and foreign exchange. The borrowing facility expires in December 2006 and has been rolled over up to December 2007. Under the facility, at December 31, 2006, Telkomsel has issued bank guarantees totaling Rp.120 billion (equivalent to US$13.3 million). The bank guarantees consists of guarantees for the import facility and 3G performance bond (Note 51c(ii)) amounting to Rp.100 billion and Rp.20 billion, respectively. Borrowings under the facility bear interest at SIBOR plus 2% per annum (US$), and at a rate equal to the three-month Bank Indonesia certificate plus 2% per annum (Rupiah); for other currencies the interest rate is based on the bank cost of funds plus 2%. As of December 31, 2005 and 2006, there were no outstanding loans under this facility.

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PERUSAHAAN PERSEROAN (PERSERO)

P.T. TELEKOMUNIKASI INDONESIA Tbk AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

DECEMBER 31, 2005 AND 2006, AND FOR YEARS ENDED

DECEMBER 31, 2004, 2005 AND 2006

(Figures in tables are presented in millions of Rupiah, unless otherwise stated)

      (ii) Telkomsel has not collateralized any of its assets for its bank borrowings or other credit facilities. The terms of the various agreements with Telkomsel’s lenders and financiers require compliance with a number of pledges and negative pledges as well as financial and other covenants, which include inter alia, certain restrictions on the amount of dividends and other profit distributions which could adversely affect Telkomsel’s capacity to comply with its obligation under the facility. The terms of the relevant agreements also contain default and cross default clauses. Management of Telkomsel is not aware of any breaches of the terms of these agreements and does not foresee any such breaches occurring in the future.

     c.  Others

     (i)  Employee Benefits

      On March 24, 2006, Telkomsel and its Labour Union (Serikat Pekerja Telkomsel) signed a collective labour agreement which is valid until March 23, 2008. Based on the agreement, Telkomsel shall provide Long Service Leave and Post Retirement Insurance to its employees. Those benefits are subject to further agreement between Telkomsel and Labour Union which has not been made until the date of this report. Accordingly, it is not possible to determine the amount of the benefits as of December 31, 2006.

     (ii)  3G License

      With reference to Decision Letter No. 07/ PER/ M.KOMINFO/2/2006 of the Minister of Communication and Information Technology, as one of the successful bidders, Telkomsel amongst other requirements, is required to:

      1. Pay an annual right of usage (BHP) fee which is determined based on a certain formula over the license term of 10 years. The BHP for the first year was paid in March 2006. The commitments as of December 31, 2006 arising from the BHP up to the expiry period of the license using the formula set forth in the decision letter are as follow:

						Radio Frequency Usage
Year	BI Rates (%)		Index (multiplier)			Tariff
1		—		—			20% x HL
2		R1		I1 = (1 + R1	)		40% x I1 x HL
3		R2		I2 = I1(1 + R2	)		60% x I2 x HL
4		R3		I3 = I2(1 + R3	)		100% x I3 x HL
5		R4		I4 = I3(1 + R4	)		130% x I4 x HL
6		R5		I5 = I4(1 + R5	)		130% x I5 x HL
7		R6		I6 = I5(1 + R6	)		130% x I6 x HL
8		R7		I7 = I6(1 + R7	)		130% x I7 x HL
9		R8		I8 = I7(1 + R8	)		130% x I8 x HL
10		R9		I9 = I8(1 + R9	)		130% x I9 x HL

Notes:
Ri	= average Bank Indonesia rate from previous year
HL (auction price)	= Rp. 160 billion
Index	= adjustment to the bidding price for respective year

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PERUSAHAAN PERSEROAN (PERSERO)

P.T. TELEKOMUNIKASI INDONESIA Tbk AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

DECEMBER 31, 2005 AND 2006, AND FOR YEARS ENDED

DECEMBER 31, 2004, 2005 AND 2006

(Figures in tables are presented in millions of Rupiah, unless otherwise stated)

      The BHP is payable upon receipt of Surat Pemberitahuan Pembayaran (notification letter) from the Directorate General of Post and Telecommunication.

      2. Provide roaming access for the existing 3G operators

      3. Contribute to USO development

      4. Construct a 3G network which cover at least the following provinces:

	Minimum number
Year	of provinces
1		2
2		5
3		8
4		10
5		12
6		14

      5. Issue a performance bond each year amounting to Rp.20 billion or 5% of the annual fee to be paid for the subsequent year, whichever is higher. Such performance bond shall be redeemed by the Government if Telkomsel is not able to meet the requirements set out in the above mentioned decision letter or upon cancellation/termination of the license, or if Telkomsel decides to return the license voluntarily.

52.     CONTINGENCIES

      a. In the ordinary course of business, the Company has been named as a defendant in various legal actions in relation with land disputes, other disputes involving premium call billing and telecommunication billing. Based on management’s estimate of the probable outcomes of these matters, the Company accrued Rp.33,116 million as of December 31, 2005 and 2006.

      b. On August 13, 2004, the Commissions for Business Competition Watch (Komisi Pengawas Persaingan Usaha, “KPPU”) issued a verdict with its dictum stating that the Company had breached article 15 verse (3) and article 19 verse a and b of Law No. 5/1999 on Anti Monopolistic Practices and Unfair Business Competition (“Competition Law”). As consequences, KPPU has dropped the agreement clauses between the Company and Warung TELKOM (“kiosk”) provider which stated that Warung TELKOM provider can only sell the Company’s telecommunication service and/or product. KPPU subsequently ordered the Company to open the channel of international calls to other international call operators in Warung TELKOM. Pursuant to the KPPU verdict, the Company has filed an objection to District Court of Bandung which then issued a verdict on December 7, 2004 that granted the Company’s objection and dropped the KPPU’s verdict on August 13, 2004. On January 4, 2005, KPPU filed an appeal to the Indonesian Supreme Court. On January 15, 2007, the Indonesian Supreme Court issued a verdict which granted the KPPU’s appeal and dropped the verdict of District Court of Bandung. The Company believes that there is no significant losing revenue impact.

      c. In December 2005, the West Java Police Department initiated investigations related to an alleged violation of anti-corruption law, in particular the provision of interconnection services to Napsindo, the Company’s subsidiary, and Globalcom, a Malaysian company, at an incorrect tariff for the Company’s

F-127

PERUSAHAAN PERSEROAN (PERSERO)

P.T. TELEKOMUNIKASI INDONESIA Tbk AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

DECEMBER 31, 2005 AND 2006, AND FOR YEARS ENDED

DECEMBER 31, 2004, 2005 AND 2006

(Figures in tables are presented in millions of Rupiah, unless otherwise stated)

network for the provision of illegal VoIP services, and misuse of authority in procuring telecommunication equipment. It is also understood that one of the investigations relates to the Company’s guarantee of a bank loan obtained by Napsindo. During the investigation, former directors and employees of the Company were held in custody by the West Java Police Department for further investigation. On May 10, 2006, such individuals were released from police custody after the expiration of the maximum period of 120 days allowed for police custody of suspects for investigation purposes. These investigations are on-going. As of the date of the consolidated financial statements, the police have not found sufficient evidence to properly transfer the case to the High Attorney Office for indictment.

      A former Director of Human Resources and an employee of the Company were indicted under the anti-corruption law in Bandung District Court relating to allegations of misuse of authority in producing consultancy services resulting in losses of Rp.789 million. On May 2, 2007, the Bandung District Court found the defendants guilty and sentenced each defendant to a one-year prison term and given Rp.50 million for penalty. The defendant have filed and appeal with the West Java High Court objecting to the District Court ruling. As of the date of the consolidated financial statements, no decision has been reached on appeal.

      On January 2, 2006, the Office of the Attorney General launched an investigation into allegations of misuse of telecommunications facilities in connection with the provision of VoIP services, whereby one of Company’s former employees and four of the Company’s employees in KSO VII were named suspects. As a result of the investigations, one of Company’s former employees and two of the Company’s employees were indicted in the Makassar District Court, and two other employees were indicted in the Denpasar District Court for their alleged corruption in KSO VII. As of the date of the consolidated financial statements, the District Courts have not issued their verdicts.

      The Company does not believe that any subsequent investigation or court decision will have significant financial impact to the Company.

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PERUSAHAAN PERSEROAN (PERSERO)

P.T. TELEKOMUNIKASI INDONESIA Tbk AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

DECEMBER 31, 2005 AND 2006, AND FOR YEARS ENDED

DECEMBER 31, 2004, 2005 AND 2006

(Figures in tables are presented in millions of Rupiah, unless otherwise stated)

53.     ASSETS AND LIABILITIES DENOMINATED IN FOREIGN CURRENCIES

      The balances of monetary assets and liabilities denominated in foreign currencies are as follows:

		2005				2006
		Foreign		Rupiah		Foreign		Rupiah
		Currencies		Equivalent		Currencies		Equivalent
		(in millions)				(in millions)
Assets
Cash and cash equivalents
	U.S. Dollar		81.96		805,489		159.59		1,443,160
	Euro		59.14		689,472		71.30		845,448
	Japanese Yen		—		—		1.95		148
Trade receivables
Related parties
	U.S. Dollar		1.64		16,112		0.93		8,327
Third parties
	U.S. Dollar		19.46		191,199		40.10		360,420
Other receivables
	U.S. Dollar		0.30		2,910		0.56		5,077
	Euro		0.01		88		0.03		402
	Great Britain Poundsterling		—		—		—		37
Other current assets
	U.S. Dollar		13.63		133,926		0.10		937
Advances and other non-current assets
	U.S. Dollar		2.25		22,162		3.59		32,314
Escrow accounts
	U.S. Dollar		12.89		126,128		—		—
Total assets					1,987,486				2,696,270

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PERUSAHAAN PERSEROAN (PERSERO)

P.T. TELEKOMUNIKASI INDONESIA Tbk AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

DECEMBER 31, 2005 AND 2006, AND FOR YEARS ENDED

DECEMBER 31, 2004, 2005 AND 2006

(Figures in tables are presented in millions of Rupiah, unless otherwise stated)

			2005					2006
			Foreign		Rupiah			Foreign		Rupiah
			Currencies		Equivalent			Currencies		Equivalent
			(in millions)					(in millions)
Liabilities
Trade payables
	Related parties
		U.S. Dollar		15.09		148,423			0.28		2,501
		Singapore Dollar		—		—			—		20
	Third parties
		U.S. Dollar		125.40		1,233,050			28.58		257,495
		Euro		68.30		796,343			1.55		18,377
		Japanese Yen		66.03		5,508			—		—
		Singapore Dollar		0.01		33			0.41		2,411
		Great Britain Pound Sterling		—		14			0.04		630
		Myanmar Kyat		—		—			—		12
Other payables
		U.S. Dollar		—		—			0.06		573
		Great Britain Pound Sterling		—		—			—		2
Accrued expenses
		U.S. Dollar		21.01		206,639			199.18		1,793,609
		Euro		8.79		102,509			104.61		1,239,946
		Japanese Yen		52.85		4,433			74.13		5,610
		Singapore Dollar		0.42		2,497			0.35		2,039
Advances from customers and suppliers U.S. Dollar				0.15		1,474			—		—
Current maturities of long-term liabilities
		U.S. Dollar		150.43		1,479,401			142.84		1,286,306
		Euro		14.67		171,087			14.68		173,996
		Japanese Yen		1,142.91		95,876			1,142.91		86,496
Long-term liabilities
		U.S. Dollar		662.39		6,514,501			523.76		4,716,467
		Euro		22.01		256,631			7.34		86,998
		Japanese Yen		14,384.68		1,206,700			13,241.77		1,002,137
Total liabilities						12,225,119					10,675,625
Net liabilities						(10,237,633	)				(7,979,355	)

      The Company and subsidiaries’ activities expose it to a variety of financial risks, including the effects of changes in debt and equity market prices, foreign currency exchange rates and interest rates.

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PERUSAHAAN PERSEROAN (PERSERO)

P.T. TELEKOMUNIKASI INDONESIA Tbk AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

DECEMBER 31, 2005 AND 2006, AND FOR YEARS ENDED

DECEMBER 31, 2004, 2005 AND 2006

(Figures in tables are presented in millions of Rupiah, unless otherwise stated)

      The Company and subsidiaries’ overall risk management program focused on the unpredictability of financial markets and seeks to minimize potential adverse effects on the financial performance of the Company and subsidiaries. Management provides written policy for foreign currency risk management mainly through time deposits placement and hedging to cover foreign currency risk exposure for the time range of 3 up to 12 months.

54.     SUBSEQUENT EVENT

      a. On February 2, 2007, Jakarta and the area of Regional Division II (Jakarta) were massively flooded. At the date of issuance of these consolidated financial statements, the Company and subsidiaries are still calculating loss resulting from that catastrophe. The damaged telecommunication infrastructures have been covered by insurance.

      b. On March 6, 2007, based on notarial deed No. 3 of Titien Suwartini, S.H. and approved by Ministry of Justice and Human Rights in its decision letter No. W8-00573.HT.01.04-TH.2007 in relation to the amendment of the Company’s Articles of Association, the name of PT Aria West International, a subsidiary, has been changed to PT Telekomunikasi Indonesia International. At the same time, its business operation has been expanded to include international businesses. All changes have been approved by Capital Investment Coordinating Board in its decision letter No. 20/ III/ PMDN/2007 dated March 1, 2007.

      c. On April 27, 2007, the Company became a member of Asia-America Gateway (AAG) consortium by signing Construction and Maintenance Agreement (C&MA) and Supply Contract with AAG. AAG is an undersea cable consortium comprising 19 companies. The Company paid US$30 million to be the part of AAG consortium. Through AAG, the Company will acquire 30 Gbps international bandwith at the end of 2008 in the AAG configuration that will be laid from Malaysia to the United States.

      d. On June 15, 2007, Telkomsel entered into loan agreements with Bank Central Asia Tbk, Bank Negara Indonesia Tbk and Bank Mandiri Tbk with total facilities of Rp2,400 billion which consists of short-term loans and medium term loans. Subsequently, on the same date, Telkomsel entered into a loan agreement with Bank Rakyat Indonesia Tbk for a medium term loan facility of Rp400 billion. The short term loans are repayable in 3 (three) equal quarterly installments beginning 3 (three) months after the end of availability period (the earlier of 3 (three) months after the date of agreements and the date on which the facilities have been fully drawn). The medium-term loans are repayable in 5 (five) equal semi-annual installments; the first installment shall be due 6 (six) months after the end of the availability period (the earlier of 12 (twelve) months after the date of the agreements and the date on which the facilities have been fully drawn). The loans bear interest at rate equal to the average rate for three-month Jakarta Inter Bank Offered Rate plus 1.25% which becomes due quarterly in arrears.

      e. On June 12, 2007, the Company has initiated a compensation plan to its fixed wireless’ customers related to the Government’s decision of frequency migration. Currently, the Company is registering its customers in Regional Division II and III to identify the number of customers whom should be compensated upon the date of the frequency migration. Subsequently, the Company is considering the compensation form to its customers.

      f. On June 22, 2007, Telkomsel held an Annual General Meeting of Shareholders that approved a change in the composition of Telkomsel’s Board of Commissioners and the Board of Directors and cash dividends of Rp9,505 billion that represents 85% of 2006 Telkomsel’s net income. The 35% of declared dividend should be paid to Singtel.

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PERUSAHAAN PERSEROAN (PERSERO)

P.T. TELEKOMUNIKASI INDONESIA Tbk AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

DECEMBER 31, 2005 AND 2006, AND FOR YEARS ENDED

DECEMBER 31, 2004, 2005 AND 2006

(Figures in tables are presented in millions of Rupiah, unless otherwise stated)

55.     RECENT ACCOUNTING PRONOUNCEMENTS IN INDONESIA

      PSAK 50 (Revised 2006), “Financial Instruments: Presentations and Disclosures”. In December 2006, the Financial Accounting Standard Board in Indonesia issued PSAK 50 (Revised 2006), “Financial Instruments: Presentations and Disclosures” which amends PSAK 50, “Accounting for Investments in Certain Securities”. PSAK 50 (Revised 2006) gives guidance on how to disclose and present financial instruments in the financial statements and whether a financial instrument is a financial liability or an equity instrument. This Standard applies to the classification of financial instruments, from the perspective of the issuer, into financial assets, financial liabilities and equity instruments; the classification of related interest, dividends, losses and gains; and the circumstances in which financial assets and financial liabilities should be offset. PSAK 50 (Revised 2006) complements the principles for recognizing and measuring financial assets and financial liabilities in PSAK 55 (Revised 2006). PSAK 50 (Revised 2006) shall be effective after January 1, 2009. It is not expected that the adoption of PSAK 50 (Revised 2006) will have material effect on the Company’s consolidated financial statements.

      PSAK 55 (Revised 2006), “Financial Instruments: Recognition and Measurement”. In December 2006, the Financial Accounting Standard Board in Indonesia issued PSAK 55 (Revised 2006), “Financial Instruments: Recognition and Measurement” which amends PSAK 55 (Revised 1999), “Accounting for Derivatives Instruments and Hedging Activities”. PSAK 55 (Revised 2006) provides guidance on how to recognize, measure and derecognize financial asset and liability including derivative instruments. It also provides guidance on the recognition and measurement of sales and purchase contracts of non-financial items. PSAK 55 (Revised 2006) shall be effective after January 1, 2009. It is not expected that the adoption of PSAK 55 (Revised 2006) will have material effect on the Company’s consolidated financial statements.

56. SUMMARY OF SIGNIFICANT DIFFERENCES BETWEEN ACCOUNTING PRINCIPLES GENERALLY ACCEPTED IN INDONESIA AND ACCOUNTING PRINCIPLES GENERALLY ACCEPTED IN THE UNITED STATES OF AMERICA

      The consolidated financial statements of the Company and its subsidiaries have been prepared in accordance with accounting principles generally accepted in Indonesia (“Indonesian GAAP”), which differ in certain significant respects from accounting principles generally accepted in the United States of America (“U.S. GAAP”). The consolidated statements of cash flows together with the reconciliation in Note 57 comply with SFAS 95 “Statement of Cash Flows”. A description of the differences and their effects on net income and stockholders’ equity are set forth below:

      (1) Description of differences between Indonesian GAAP and U.S. GAAP

      a. Voluntary Termination Benefits

      Under Indonesian GAAP, voluntary termination benefits are recognized as liabilities when the Company is demonstratively committed to provide termination benefits as a result of an offer made in order to encourage voluntary redundancy.

      Under U.S. GAAP, voluntary termination benefits liabilities are recognized only when the employees have accepted the offer and the related amount can be reasonably estimated.

      b. Foreign Exchange Differences Capitalized to Assets under Construction

      Under Indonesian GAAP, foreign exchange gains and losses resulting from borrowings used to finance the construction of the qualifying assets are capitalized as part of the cost of the qualifying

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PERUSAHAAN PERSEROAN (PERSERO)

P.T. TELEKOMUNIKASI INDONESIA Tbk AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

DECEMBER 31, 2005 AND 2006, AND FOR YEARS ENDED

DECEMBER 31, 2004, 2005 AND 2006

(Figures in tables are presented in millions of Rupiah, unless otherwise stated)

assets. Capitalization of foreign exchange gains and losses ceases when the construction of the qualifying asset is substantially completed and the constructed property is ready for its intended use.

      Under U.S. GAAP, foreign exchange gains and losses are credited and charged to the consolidated statement of income.

      c. Interest Capitalized on Assets under Construction

      Under Indonesian GAAP, qualifying assets, to which interest cost can be capitalized, should be those that take a minimum of 12 months to get ready for their intended use or sale. To the extent that funds are borrowed specifically to finance the construction of a qualifying asset, the amount of the interest cost eligible for capitalization on that asset should be determined based on the actual interest cost incurred on that borrowing during the period of construction less any investment income on the temporary investment of those borrowings.

      Under U.S. GAAP, there is no minimum limit (i.e., a minimum 12-month construction period requirement) on the length of the construction period in which the interest cost could be capitalized. The amount of interest cost to be capitalized for qualifying assets is intended to be that portion of the interest cost incurred during the construction periods that theoretically could have been avoided if expenditures for the assets had not been made. The interest cost need not arise from borrowings specifically made to acquire the qualifying assets. The amount capitalized in a period is determined by applying an interest rate to the average amount of accumulated expenditures for the assets during the period. Interest income arising from any unused borrowings is recognized directly to current operations.

      d. Revenue-Sharing Arrangements

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

      Under U.S. GAAP, the revenue-sharing arrangements are recorded in a manner similar to capital leases where the fixed assets and obligation under revenue-sharing arrangements are reflected on the balance sheet. All the revenues generated from the revenue-sharing arrangements are recorded as a component of operating revenues, while a portion of the investors’ share of the revenues from the revenue-sharing arrangements is recorded as interest expense with the balance treated as a reduction of the obligation under revenue-sharing arrangements.

      e. Employee Benefits

      As of January 1, 2005, the Company and its subsidiaries adopted PSAK 24R in accounting for the costs of pension benefit, post-retirement health care benefit and long service awards for Indonesian GAAP purposes. PSAK 24R requires the adoption of its provisions retrospectively as of January 1, 2004.

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PERUSAHAAN PERSEROAN (PERSERO)

P.T. TELEKOMUNIKASI INDONESIA Tbk AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

DECEMBER 31, 2005 AND 2006, AND FOR YEARS ENDED

DECEMBER 31, 2004, 2005 AND 2006

(Figures in tables are presented in millions of Rupiah, unless otherwise stated)

      The differences between the accounting by the Company and its subsidiaries for the pension benefit and post-retirement health care benefit under Indonesian GAAP and U.S. GAAP for the years ended December 31, 2004, 2005 and 2006 are as follows:

      i. Under Indonesian GAAP, the prior service cost is recognized immediately if vested or amortized on a straight line basis over the average period until the benefits become vested. Under U.S. GAAP, prior service cost (vested and non-vested benefits) is generally deferred and amortized systematically over the estimated remaining service period for active employees and the recognized amount is recorded in the consolidated statement of income.

      ii. Under Indonesian GAAP, the transition obligations were recognized on January 1, 2004, the date PSAK 24R was adopted. Under U.S GAAP, the transition obligations arising from the adoption of SFAS 87 “Employers’ Accounting for Pensions” and SFAS 106 “Employers’ Accounting for Postretirement Benefits Other Than Pensions” on January 1, 1992 and January 1, 1995, respectively, are deferred and amortized systematically over the estimated remaining service period for active employees and 20 years, respectively. In addition, different adoption dates resulted in significant difference in cumulative unrecognized actuarial gains and losses.

      Under Indonesian GAAP, recognition of a minimum liability for the pension plans is not required. Under U.S. GAAP, for the years ended December 31, 2004 and 2005, the Company and its subsidiaries were required to recognize an additional minimum liability when the accumulated benefits obligation exceeded the fair value of the plan assets with the equal amount recognized as an intangible asset, provided that the asset recognized did not exceed the amount of unrecognized prior service cost. If the additional liability required to be recognized exceeded unrecognized prior service cost, the excess was reported in other comprehensive income, net of tax.

      In addition, there is a difference between the accounting by the Company for certain benefits under long service awards under Indonesian GAAP and U.S. GAAP for the years ended December 31, 2004, 2005 and 2006. Under Indonesian GAAP, the prior service cost is recognized immediately if vested or amortized on a straight line basis over the average period until the benefits become vested. The amortized amount is recorded as a component of net periodic benefit cost for the year. Under U.S. GAAP, the obligation for the accumulating post-retirement benefits is measured in accordance with the guidance in SFAS 87, as permitted by SFAS 112 “Employers’ Accounting for Post-employment Benefits”. The prior service cost is deferred and amortized systematically over the estimated remaining service period for active employees and the recognized amount is recorded in the consolidated statement of income.

      In September 2006, the FASB issued SFAS 158 “Employers’ Accounting for Defined Benefit Pension and Other Postretirement Plans — an amendment of FASB Statement No. 87, 88, 106 and 132R”. The requirements of SFAS 158 to recognize the funded status and to provide the required disclosures are effective as of the end of the year ended after December 15, 2006. The Company and its subsidiaries have adopted the above recognition and disclosure requirements of SFAS 158 as of the end of the year ended December 31, 2006.

F-134

PERUSAHAAN PERSEROAN (PERSERO)

P.T. TELEKOMUNIKASI INDONESIA Tbk AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

DECEMBER 31, 2005 AND 2006, AND FOR YEARS ENDED

DECEMBER 31, 2004, 2005 AND 2006

(Figures in tables are presented in millions of Rupiah, unless otherwise stated)

      SFAS 158 does not change the determination of net periodic benefit costs under SFAS 87, SFAS 106 and SFAS 112. The impacts of the adoption of SFAS 158 as of the end of the year ended 31 December 2006 are as follow:

      i. The Company and its subsidiaries no longer report the additional minimum liability and any corresponding intangible asset for the unfunded pension obligation as the funded status for unfunded or underfunded benefit plans is now fully recognized as a net pension liability on the balance sheet. This is similar to the Indonesian GAAP requirements.

      ii. On adoption of SFAS 158, the unrecognised actuarial losses, prior service costs, and transition obligations were recognised, net of tax, in the accumulated other comprehensive income balance. These will continue to be amortised and reported as a component of net periodic benefit cost in the consolidated statement of income in accordance with the requirements of SFAS 87, SFAS 106 and SFAS 112.

      f. Equity in Net Income or Loss of Associated Companies

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

      For U.S. GAAP reporting purposes, the Company recognizes the effect of the differences between U.S. GAAP and Indonesian GAAP at the investee level in the investment accounts and its share of the net income or loss and other comprehensive income or loss of those associated companies.

      g. Land Rights

      In Indonesia, the title of land rests with the State under the Basic Agrarian Law No. 5 of 1960. Land use is accomplished through land rights whereby the holder of the right enjoys the full use of the land for a stated period of time, subject to extensions. The land rights generally are freely tradeable and may be pledged as collateral for borrowing agreements. Under Indonesian GAAP, land ownership is not depreciated unless it can be foreseen that the possibility for the holder to obtain an extension or renewal of the rights is remote.

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

      h. Revenue Recognition

      Under Indonesian GAAP, fees from connection of mobile cellular and fixed wireless services are recognized as revenue when connection takes place (for postpaid service). Sales of starter packs are recognized as revenue upon delivery to distributors, dealers, or customers (for prepaid services). Installation fees for wire line services are recognized at the time of installation. Revenues from calling cards are recognized when the Company sells the cards.

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

F-135

PERUSAHAAN PERSEROAN (PERSERO)

P.T. TELEKOMUNIKASI INDONESIA Tbk AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

DECEMBER 31, 2005 AND 2006, AND FOR YEARS ENDED

DECEMBER 31, 2004, 2005 AND 2006

(Figures in tables are presented in millions of Rupiah, unless otherwise stated)

      i. Amortisation of Goodwill

      Under Indonesian GAAP, goodwill is amortized over a period not exceeding 20 years.

      Under U.S. GAAP, goodwill is not amortized but rather subjected to an annual test for impairment.

      j. Capital Leases

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

      Under U.S. GAAP, a leased asset is capitalized when any one of the following criteria is met: (a) there is an automatic transfer of ownership at the end of the lease term, (b) the lease contains a bargain purchase option, (c) the lease term is for 75% or more of the economic life of the asset, and (d) the net present value of the minimum lease payments amounts to at least 90% of the fair value of the asset.

      k. Acquisition of Dayamitra

      On May 17, 2001 the Company acquired a 90.32% interest in Dayamitra and contemporaneously acquired a call option to buy the remaining 9.68% interest at a fixed price at a stated future date, and provided to the minority interest holder a put option to sell its 9.68% interest to the Company under those same terms. The fixed price of the call equaled the fixed price of the put option. Under U.S. GAAP, the Company accounted for the option contracts on a combined basis together with the minority interest and as a financing arrangement for the purchase of the remaining 9.68% minority interest. As such, under U.S. GAAP, the Company has consolidated 100% of Dayamitra and attributed the stated yield earned under the combined derivative and minority interest position to interest expense since May 17, 2001.

      On December 14, 2004, the Company exercised the call option to acquire the 9.68% interest in Dayamitra.

      Under Indonesian GAAP, prior to December 14, 2004, the Company accounted for the remaining 9.68% interest in Dayamitra as minority interest. In addition, the option price paid by the Company was presented as “Advance payments for investments in shares of stock.” The Company started consolidating the remaining 9.68% interest in Dayamitra only on December 14, 2004 following the exercise of the option.

      The difference in the timing of the recognition of the 9.68% ownership interest gives rise to differences in the timing and amounts of the purchase consideration recognized under Indonesian GAAP and U.S. GAAP.

      l. Asset Retirement Obligations

      Under Indonesian GAAP, costs associated with the retirement of long-lived assets that the Company and its subsidiaries must cover by law as a result from the acquisition, construction,

F-136

PERUSAHAAN PERSEROAN (PERSERO)

P.T. TELEKOMUNIKASI INDONESIA Tbk AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

DECEMBER 31, 2005 AND 2006, AND FOR YEARS ENDED

DECEMBER 31, 2004, 2005 AND 2006

(Figures in tables are presented in millions of Rupiah, unless otherwise stated)

development and/or the normal operation of long-lived assets are charged to the consolidated statement of income as incurred.

      Under U.S. GAAP, the estimated fair value of such obligation is accrued at the time of the acquisition with an equal amount capitalized to the related long-lived assets and depreciated over the useful life of the assets. The Company and its subsidiaries identified their asset retirement obligations by reviewing their contractual agreements to determine whether the Company and its subsidiaries are required to settle any obligations as a result of the prevailing laws, statute and ordinance, or by legal construction of a contract under the doctrine of promissory estoppel. A present value technique is used to estimate the fair value of the obligations. The cash flows used in the estimates of fair value have incorporated the assumptions relating to the timing and the amount of the possible cash flows. Accretion expense resulting from the passage of time is recognized in the consolidated statement of income. In subsequent periods, changes resulting from the revisions to the timing and the amount of the original estimate of undiscounted cash flows are recognized as an increase or decrease in (a) the carrying amount of the liability, and (b) the related asset retirement cost capitalized as part of the carrying amount of the related long-lived asset.

      m. Deferred Income Taxes

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

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

      n. Impairment of Assets

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

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

      Through the year ended December 31, 2004, there were no impairment charges recognized by the Company or its subsidiaries. In 2005, the Company recognized impairment charges on BSS equipment which are part of transmission installation and equipment of fixed wireless assets. The sum of the expected future cash flows (undiscounted and without interest charges) relating to these impaired assets was less than their carrying amount. Therefore, for U.S. GAAP reporting purposes,

F-137

PERUSAHAAN PERSEROAN (PERSERO)

P.T. TELEKOMUNIKASI INDONESIA Tbk AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

DECEMBER 31, 2005 AND 2006, AND FOR YEARS ENDED

DECEMBER 31, 2004, 2005 AND 2006

(Figures in tables are presented in millions of Rupiah, unless otherwise stated)

these assets were written down to their estimated fair value based on their discounted estimated future cash flows. The estimated fair value of the impaired assets determined under U.S. GAAP was the same as that determined under Indonesian GAAP and accordingly, there were no differences between Indonesian GAAP and U.S. GAAP.

      o. Gains (Losses) on Disposals of Property, Plant and Equipment

      Under Indonesian GAAP, the Company and its subsidiaries classify the gains (losses) on disposals of property, plant and equipment as a component of other income (expense) which is excluded from determination of operating income.

      Under U.S. GAAP, the gains (losses) on disposals of property, plant and equipment are classified as a component of operating expenses and hence included in the determination of operating income. For the years ended December 31, 2004, 2005 and 2006, the operating income would have been higher (lower) by (Rp.26,089) million, Rp.46,193 million, and (Rp.47,983) million, respectively, and other income (expenses) would have been lower (higher) by the same amounts due to the inclusion of the gains (losses) on disposals of property, plant and equipment in the determination of operating income.

      p. Reclassification of Difference in Value of Restructuring Transactions between Entities under Common Control

      Under Indonesian GAAP, the Company is required to reclassify the difference in value of restructuring transactions between entities under common control as of January 1, 2005 as a direct adjustment to retained earnings when the common control relationship between the transacting parties no longer existed as of January 1, 2005.

      Under U.S. GAAP, the difference in value of restructuring transactions between entities under common control remains in equity indefinitely as part of the additional paid-in capital.

      q. Available-For-Sale Securities

      Under Indonesian GAAP, available-for-sale securities are carried at fair value and changes in fair value are recognized in “Unrealized holding gain (loss) on available-for-sale securities” under stockholders’ equity section.

      Under U.S. GAAP, available-for-sale securities are carried at fair value and any unrealized gains or losses are reported as a component of other comprehensive income under stockholders’ equity section.

      r. Cumulative Translation Adjustments

      Under Indonesian GAAP, investments in foreign companies using the equity method are reported by translating the assets and the liabilities of these companies as of the balance sheet date using the rate of exchange prevailing at that date. Revenues and expenses are translated using the exchange rates at the date of transaction or the average exchange rate for the year for practical reasons. The resulting translation adjustments are reported as part of “Translation Adjustments” in the stockholders’ equity section.

      Under U.S. GAAP, the resulting translation adjustments are reported in other comprehensive income under stockholders’ equity section.

F-138

PERUSAHAAN PERSEROAN (PERSERO)

P.T. TELEKOMUNIKASI INDONESIA Tbk AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

DECEMBER 31, 2005 AND 2006, AND FOR YEARS ENDED

DECEMBER 31, 2004, 2005 AND 2006

(Figures in tables are presented in millions of Rupiah, unless otherwise stated)

      s. Amendment and Restatement of the Joint Operation Scheme in Regional Division VII

      As discussed in Note 5e, the Company has accounted for the amendment and restatement of the KSO VII agreement as a business combination using the purchase method of accounting.

      Under Indonesian GAAP, the fair value of the unearned income relating to the revenue-sharing arrangements was deemed to be equal to the fair value of the property, plant and equipment under those revenue-sharing arrangements based on the accounting treatment of revenue sharing agreements under Indonesian GAAP. Under U.S. GAAP, the fair value of the obligation under the revenue-sharing arrangements has been determined to be Rp.473,754 million based on the present value of the estimated future payments to BSI’s business partners under the revenue-sharing arrangements.

      Under Indonesian GAAP, the excess of the acquisition cost over the Company’s interest in the fair value of identifiable asset acquired and liabilities assumed is recorded as goodwill. After assigning the purchase consideration to all other identifiable assets and liabilities, the remaining residual amount was allocated to the intangible asset representing the right to operate the business in the KSO VII area, to be amortized over the remaining KSO VII term of 4.3 years. As a result, there was no goodwill recognized under Indonesian GAAP. For U.S. GAAP reporting purposes, the right to operate the KSO VII operation represented a reacquired right and was recognized by the Company as a separate intangible asset under EITF 04-1 “Accounting for Preexisting Relationships between the Parties to a Business Combination”. The intangible asset was directly valued to determine its fair value in accordance with the requirements in EITF Topic No. D-108 “Use of the Residual Method to Value Acquired Assets Other Than Goodwill”. The excess of the purchase consideration over the net of the amounts assigned to assets acquired and liabilities assumed of Rp.61,386 million was recognized as goodwill.

F-139

PERUSAHAAN PERSEROAN (PERSERO)

P.T. TELEKOMUNIKASI INDONESIA Tbk AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

DECEMBER 31, 2005 AND 2006, AND FOR YEARS ENDED

DECEMBER 31, 2004, 2005 AND 2006

(Figures in tables are presented in millions of Rupiah, unless otherwise stated)

      (2) The significant adjustments to the consolidated net income for the years ended December 31, 2004, 2005 and 2006 and to the consolidated stockholders’ equity as of December 31, 2005 and 2006 which would be required if U.S. GAAP had been applied, instead of Indonesian GAAP, in the consolidated financial statements are set forth below:

			Note			2004			2005			2006
Net income according to the consolidated statements of income prepared under Indonesian GAAP							6,614,568			7,993,566			11,005,577
U.S. GAAP adjustments — increase (decrease) due to:
	Voluntary termination benefits			(a	)		—			—			1,461,149
	Capitalization of foreign exchange losses, net of related depreciation of Rp.75,870 million, Rp.77,010 million and Rp.79,178 million, respectively			(b	)		1,587			77,010			79,178
	Interest capitalized on assets under construction, net of related depreciation of Rp.13,392 million, Rp.17,275 million and Rp.23,270 million, respectively			(c	)		26,802			23,825			73,934
	Revenue-sharing arrangements			(d	)		155,369			69,173			58,545
	Pension			(e	)		(148,517	)		(104,877	)		(95,788	)
	Post-retirement health care			(e	)		(75,964	)		(104,466	)		(101,205	)
	Long service awards			(e	)		(122,462	)		(90,933	)		201,345
	Equity in net income (loss) of associated companies			(f	)		(177	)		(192	)		(223	)
	Amortization of land rights			(g	)		(13,907	)		(4,881	)		(16,947	)
	Revenue recognition			(h	)		54,159			5,046			(4,547	)
	Amortization of goodwill			(i	)		21,270			21,270			8,858
	Capital leases			(j	)		(3,435	)		(47,524	)		(27,580	)
	Adjustment for consolidation of Dayamitra			(k	)		(72,361	)		5,084			11,127
	Asset retirement obligations			(1	)		(848	)		(848	)		(11,255	)
	Amendment and restatement of the Joint Operation Scheme in Regional Division VII			(s	)		—			—			4,479
	Deferred income tax:
		Deferred income tax on equity method investments		(m	)		(11,234	)		(3,206	)		2,053
		Deferred income tax effect on U.S. GAAP adjustments					61,742			18,288			(520,693	)
							(127,976	)		(137,231	)		1,122,430
	Minority interest						(18,019	)		(16,244	)		(16,559	)
	Net adjustments						(145,995	)		(153,475	)		1,105,871

F-140

PERUSAHAAN PERSEROAN (PERSERO)

P.T. TELEKOMUNIKASI INDONESIA Tbk AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

DECEMBER 31, 2005 AND 2006, AND FOR YEARS ENDED

DECEMBER 31, 2004, 2005 AND 2006

(Figures in tables are presented in millions of Rupiah, unless otherwise stated)

	Note	2004		2005		2006
Net income in accordance with U.S. GAAP			6,468,573		7,840,091		12,111,448
Net income per share — in full Rupiah amount			320.86		388.89		602.12
Net income per ADS — in full Rupiah amount (40 Series B shares per ADS)			12,834.47		15,555.74		24,085.00

				Note			2005			2006
Stockholders’ equity according to the consolidated balance sheets prepared under Indonesian GAAP								23,292,401			28,068,689
U.S. GAAP adjustments — increase (decrease) due to:
	Voluntary termination benefits				(a	)		—			1,461,149
	Capitalization of foreign exchange differences — net of related depreciation				(b	)		(471,876	)		(392,698	)
	Interest capitalized on assets under construction — net of related depreciation				(c	)		152,439			226,373
	Revenue-sharing arrangements				(d	)		(223,154	)		(164,609	)
	Pension				(e	)		1,851,509			(115,601	)
	Post-retirement health care				(e	)		1,038,095			(1,786,355	)
	Long service awards				(e	)		(213,395	)		(234,052	)
	Equity in net income (loss) of associated companies				(f	)		(18,621	)		(18,844	)
	Amortization of land rights				(g	)		(83,999	)		(100,946	)
	Revenue recognition				(h	)		(709,343	)		(713,890	)
	Amortization of goodwill				(i	)		85,079			93,937
	Capital leases				(j	)		(29,836	)		(57,416	)
	Adjustment for consolidation of Dayamitra				(k	)		(56,644	)		(45,517	)
	Asset retirement obligations				(l	)		(2,544	)		(13,799	)
	Amendment and restatement of the Joint Operation Scheme in Regional Division VII				(s	)		—			4,479
	Deferred income tax:
			Deferred income tax on equity method investments		(m	)		35,040			38,768
			Deferred income tax effect on U.S. GAAP adjustments					(66,182	)		39,180
								1,286,568			(1,779,841	)
		Minority interest						(10,481	)		19,724
		Net adjustments						1,276,087			(1,760,117	)
Stockholders’ equity in accordance with U.S. GAAP								24,568,488			26,308,572

F-141

PERUSAHAAN PERSEROAN (PERSERO)

P.T. TELEKOMUNIKASI INDONESIA Tbk AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

DECEMBER 31, 2005 AND 2006, AND FOR YEARS ENDED

DECEMBER 31, 2004, 2005 AND 2006

(Figures in tables are presented in millions of Rupiah, unless otherwise stated)

      The changes in stockholders’ equity in accordance with U.S. GAAP for the years ended December 31, 2004, 2005 and 2006 are as follows:

		2004			2005			2006
Stockholders’ equity at beginning of year			16,284,692			19,570,912			24,568,488
Changes during the year:
	Net income under U.S. GAAP		6,468,573			7,840,091			12,111,448
	Dividends		(3,186,991	)		(2,921,227	)		(5,371,107	)
	Accumulated other comprehensive income, net of tax		4,638			(11,288	)		(4,138,046	)
	Compensation for early termination of exclusive rights		—			90,000			90,000
	Treasury stock		—			—			(952,211	)
Stockholders’ equity at end of period			19,570,912			24,568,488			26,308,572

      With regard to the consolidated balance sheets, the following significant captions determined under U.S. GAAP would have been:

	2005		2006
Consolidated balance sheets
Current assets		10,952,600		14,639,334
Non-current assets		52,527,929		61,495,104
Total assets		63,480,529		76,134,438
Current liabilities		13,796,402		19,682,445
Non-current liabilities		18,799,964		21,976,058
Total liabilities		32,596,366		41,658,503
Minority interest in net assets of subsidiaries		6,315,675		8,167,363
Stockholders’ equity		24,568,488		26,308,572
Total liabilities and stockholders’ equity		63,480,529		76,134,438

F-142

PERUSAHAAN PERSEROAN (PERSERO)

P.T. TELEKOMUNIKASI INDONESIA Tbk AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

DECEMBER 31, 2005 AND 2006, AND FOR YEARS ENDED

DECEMBER 31, 2004, 2005 AND 2006

(Figures in tables are presented in millions of Rupiah, unless otherwise stated)

      (3) Additional financial statement disclosures required by U.S. GAAP and U.S. SEC

      a. Income Tax

      The reconciliation between the expected income tax provision in accordance with U.S. GAAP and the actual provision for income tax recorded in accordance with U.S. GAAP is as follows:

		2004			2005			2006
Consolidated income before tax in accordance with U.S. GAAP			12,570,911			16,089,111			23,634,675
Income tax in accordance with U.S. GAAP at 30% statutory tax rate			3,771,273			4,826,733			7,090,402
Effect of non-deductible expenses (non-taxable income) at the enacted maximum tax rate (30%)
	Net periodic post-retirement health care benefit cost		139,834			169,534			200,841
	Amortization of discount on promissory notes and other borrowing costs		136,994			62,132			13,882
	Tax penalty		1,941			24,155			25,288
	Employee benefits		24,719			18,618			28,931
	Permanent differences of the KSO Units		17,213			17,458			39,544
	Income which was already subject to final tax		(30,743	)		(68,336	)		(137,915	)
	Adjustment to deferred tax liability in relation with property, plant, and equipment		—			—			131,664
	Others		66,787			118,511			165,929
	Total		356,745			342,072			468,164
Income tax expense in accordance with U.S. GAAP			4,128,018			5,168,805			7,558,566

      For the year ended December 31, 2004, 2005 and 2006, all of the Company’s operating revenues occurred in Indonesia, and accordingly, the Company has not been subject to income tax in other countries.

F-143

PERUSAHAAN PERSEROAN (PERSERO)

P.T. TELEKOMUNIKASI INDONESIA Tbk AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

DECEMBER 31, 2005 AND 2006, AND FOR YEARS ENDED

DECEMBER 31, 2004, 2005 AND 2006

(Figures in tables are presented in millions of Rupiah, unless otherwise stated)

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

F-144

PERUSAHAAN PERSEROAN (PERSERO)

P.T. TELEKOMUNIKASI INDONESIA Tbk AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

DECEMBER 31, 2005 AND 2006, AND FOR YEARS ENDED

DECEMBER 31, 2004, 2005 AND 2006

(Figures in tables are presented in millions of Rupiah, unless otherwise stated)

      As of the end of the year ended December 31, 2006, the Company and its subsidiaries adopted SFAS 158 and recognized deferred tax assets arising from the transition obligations, the prior service costs and the actuarial losses totaling Rp.606,015 million directly in the accumulated other comprehensive income.

      Deferred tax assets relating to deferred consideration for business combinations have arisen due to the tax deductions that could be claimed on the fixed monthly payments to MGTI and BSI for corporate income tax calculation.

      b. Fair Values of Financial Instruments

      The following methods and assumptions are used to estimate the fair value of each class of financial instruments:

      Cash and cash equivalents and temporary investments

      The carrying amounts approximate fair values because of the short-term nature of the financial assets.

      Short-term bank loans

      The carrying amounts approximate fair values because of the short-term nature of the financial liabilities.

      Long-term liabilities

      The fair values of long-term liabilities other than bonds and guaranteed notes are estimated by discounting the future cash flows of each liability at rates currently offered to the Company and its subsidiaries for similar debts of comparable maturities by the bankers of the Company and its subsidiaries.

      The fair values of bonds and guaranteed notes are based on market prices at the balance sheet date.

F-145

PERUSAHAAN PERSEROAN (PERSERO)

P.T. TELEKOMUNIKASI INDONESIA Tbk AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

DECEMBER 31, 2005 AND 2006, AND FOR YEARS ENDED

DECEMBER 31, 2004, 2005 AND 2006

(Figures in tables are presented in millions of Rupiah, unless otherwise stated)

      The estimated fair values of the Company’s and its subsidiaries’ financial assets and liabilities are as follows:

		Carrying
		Amount		Fair Value
2005
Cash and cash equivalents			5,374,684		5,374,684
Temporary investments			22,064		22,064
Short-term bank loans			173,800		173,800
Long-term liabilities:
	Two-step loans		5,329,477		5,001,102
	Bonds		991,850		1,031,040
	Medium-term notes		609,329		582,220
	Bank loans		2,386,646		2,267,269
	Deferred consideration for business combinations		3,990,353		4,162,814
2006
Cash and cash equivalents			8,315,836		8,315,836
Temporary investments			84,492		84,492
Short-term bank loans			687,990		687,990
Long-term liabilities:
	Two-step loans		4,476,613		4,160,725
	Bonds		997,137		1,027,305
	Medium-term notes		464,819		460,316
	Bank loans		4,845,048		4,765,933
	Deferred consideration for business combinations		4,591,177		4,695,899

      The methods and assumptions followed to determine the fair value estimates are inherently judgmental and involve various limitations, including the following:

      i. Fair values presented do not take into consideration the effect of future currency fluctuations.

      ii. Estimated fair values are not necessarily indicative of the amounts that the Company and its subsidiaries would record upon disposal/termination of the financial assets and liabilities.

F-146

PERUSAHAAN PERSEROAN (PERSERO)

P.T. TELEKOMUNIKASI INDONESIA Tbk AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

DECEMBER 31, 2005 AND 2006, AND FOR YEARS ENDED

DECEMBER 31, 2004, 2005 AND 2006

(Figures in tables are presented in millions of Rupiah, unless otherwise stated)

      c. Comprehensive Income

	2004		2005			2006
Net income under U.S. GAAP		6,468,573		7,840,091			12,111,448
Unrealized holding gain (loss) on available-for-sale securities		884		(1,632	)		9,613
Foreign currency translation adjustments of associated companies, net of tax of Rp.l,609 million, Rp.l,097 million and (Rp.l,675) million in 2004, 2005 and 2006, respectively		3,754		2,560			(3,909	)
Minimum pension liability adjustments, net of tax of Rp. nil, Rp.5,235 million and Rp. nil in 2004, 2005 and 2006, respectively		—		(12,216	)		—
		6,473,211		7,828,803			12,117,152

      The components of accumulated other comprehensive income are as follow:

		2004		2005			2006
Unrealized holding gain (loss) on available-for-sale securities			884		(748	)		8,865
Foreign currency translation adjustments of associated companies			160,716		163,276			159,367
Minimum pension liability adjustments			—		(12,216	)		—
Adjustments arising from the SFAS 158 adoption:
	Transition obligations		—		—			(241,301	)
	Prior service costs		—		—			(1,055,840	)
	Actuarial losses		—		—			(2,858,825	)
			161,600		150,312			(3,987,734	)

F-147

PERUSAHAAN PERSEROAN (PERSERO)

P.T. TELEKOMUNIKASI INDONESIA Tbk AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

DECEMBER 31, 2005 AND 2006, AND FOR YEARS ENDED

DECEMBER 31, 2004, 2005 AND 2006

(Figures in tables are presented in millions of Rupiah, unless otherwise stated)

      d. Employee Benefits

      The Company

      The disclosures under SFAS 132 (Revised 2003) “Employers’ Disclosures about Pensions and Other Postretirement Benefits” and SFAS 106 are as follows:

	Pension									Health Care
	2004			2005			2006			2004			2005			2006
Components of Net Periodic Benefit Cost
Service cost		137,264			138,117			187,960			76,163			87,636			107,513
Interest cost		740,494			789,830			768,586			411,110			507,994			605,573
Expected return on plan assets		(436,672	)		(533,333	)		(677,602	)		(61,084	)		(103,498	)		(145,264	)
Amortization of prior service cost (gain)		201,265			201,265			201,265			(367	)		(367	)		(367	)
Recognized actuarial loss (gain)		57,641			21,244			—			52,006			88,589			121,986
Amortization of transition obligation		28,634			28,634			28,634			24,325			24,325			24,325
Net periodic benefit cost		728,626			645,757			508,843			502,153			604,679			713,766
Amounts charged to KSO Units under contractual agreement		(16,369	)		(18,660	)		(16,159	)		(9,913	)		(11,627	)		(7,812	)
Total net periodic benefit cost less amounts charged to KSO Units		712,257			627,097			492,684			492,240			593,052			705,954

F-148

PERUSAHAAN PERSEROAN (PERSERO)

P.T. TELEKOMUNIKASI INDONESIA Tbk AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

DECEMBER 31, 2005 AND 2006, AND FOR YEARS ENDED

DECEMBER 31, 2004, 2005 AND 2006

(Figures in tables are presented in millions of Rupiah, unless otherwise stated)

      The following table presents the changes in the benefit obligations, the changes in the plan assets, the funded status of the plan and the prepaid or accrued cost amounts recognized in the Company’s U.S. GAAP balance sheets as of December 31, 2005 and 2006:

	Pension						Health Care
	2005			2006			2005			2006
Change in benefit obligation
Benefit obligation at beginning of year		7,315,182			7,140,100			4,681,005			5,574,489
Service cost		138,117			187,960			87,636			107,513
Interest cost		789,830			768,586			507,994			605,573
Plan participants’ contributions		41,371			43,918			—			—
Actuarial (gain) loss		(794,180	)		306,254			423,833			850,037
Benefits paid		(350,220	)		(325,437	)		(125,979	)		(152,269	)
Benefit obligation at end of year		7,140,100			8,121,381			5,574,489			6,985,343
Change in plan assets
Fair value of plan assets at beginning of year		4,884,523			5,429,954			1,138,768			1,493,897
Actual return on plan assets		155,754			1,368,816			45,209			196,778
Employer contributions		698,526			693,498			435,899			714,854
Plan participants’ contributions		41,371			43,918			—			—
Benefits paid		(350,220	)		(325,437	)		(125,979	)		(152,269	)
Fair value of plan assets at end of year		5,429,954			7,210,749			1,493,897			2,253,260
Funded status		(1,710,146	)		(910,632	)		(4,080,592	)		(4,732,083	)
Unrecognized prior service cost (gain)		1,660,300			—			(1,199	)		—
Unrecognized net actuarial loss		536,918			—			1,852,943			—
Unrecognized net transition obligation		91,623			—			218,924			—
Prepaid (accrued) cost		578,695			(910,632	)		(2,009,924	)		(4,732,083	)

      As of December 31, 2006, the accrued cost amounts recognized for pension and health care benefits of Rp.910,632 million and Rp.4,732,083 million, respectively, consisted of non-current portions only. The accumulated benefit obligation of the Company’s defined benefit pension plan was Rp.4,829,227 million as of December 31, 2005.

      The measurement date used to determine pension and health care benefit measures for the pension plan and the health care plan is December 31 for each of the years.

      The assumptions used by the independent actuary to determine the benefit obligation of the plans as of December 31, 2005 and 2006 were as follows:

	Pension						Health Care
	2005			2006			2005			2006
Discount rate		11	%		10.5	%		11	%		10.5	%
Rate of compensation increase		8.8	%		8	%		—			—

F-149

PERUSAHAAN PERSEROAN (PERSERO)

P.T. TELEKOMUNIKASI INDONESIA Tbk AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

DECEMBER 31, 2005 AND 2006, AND FOR YEARS ENDED

DECEMBER 31, 2004, 2005 AND 2006

(Figures in tables are presented in millions of Rupiah, unless otherwise stated)

      The assumption used by the independent actuary to determine the net periodic benefit cost of the plans for the years ended December 31, 2004, 2005 and 2006 were as follows:

	Pension									Health Care
	2004			2005			2006			2004			2005			2006
Discount rate		11	%		11	%		10.5	%		11	%		11	%		10.5	%
Expected long-term return on plan assets		11	%		10.5	%		12.0	%		11	%		8	%		8.5	%
Rate of compensation increase		8	%		8	%		8	%		—			—			—

      Future health care cost trend rates at December 31, 2004, 2005 and 2006 were assumed as follows:

	2004			2005			2006
Health care cost trend assumed for next year		12	%		9	%		12	%
Ultimate health care cost trend rate		8	%		9	%		8	%
Year that the rate reaches the ultimate trend rate		2007			2006			2011

      The actuarial valuations for the defined benefit pension plan and post-retirement health care plan as of December 31, 2004, 2005 and 2006 were prepared on March 15, 2005, February 27, 2006 and April 24, 2007 respectively, by an independent actuary.

      The discount rates were based on the Government Bond yields. The rates of compensation increase assumed were based on the long-term inflation rates in the order of between 6% and 7%. The expected long-term returns on the plan assets were based on the average rate of earnings expected on the funds invested or to be invested.

      Assumed future health care cost trends have a significant effect on the amounts reported for the health care plan. A one-percentage-point change in the assumed future health care cost trend rates would have the following effects:

	1-Percentage-		1-Percentage-
	Point Increase		Point Decrease
Effect on total of service and interest cost components		174,413		(137,032	)
Effect on post-retirement benefit obligation		1,342,138		(1,058,800	)

F-150

PERUSAHAAN PERSEROAN (PERSERO)

P.T. TELEKOMUNIKASI INDONESIA Tbk AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

DECEMBER 31, 2005 AND 2006, AND FOR YEARS ENDED

DECEMBER 31, 2004, 2005 AND 2006

(Figures in tables are presented in millions of Rupiah, unless otherwise stated)

      The investment policies established by management for the pension plan require a minimum of 95% of the fund to be invested in the following asset types and a minimum overall rate of return of 10%;

	Based on Percentage
	of Fund Invested
Time deposits		Up to 100	%
Deposits on call		Up to 100	%
Certificates of deposit		Up to 100	%
Listed shares		Up to 50	%
Listed debt securities		Up to 50	%
Unlisted shares and debt securities		Up to 20	%
Real estate		Up to 15	%
Mutual funds		Up to 50	%
Certificates by Bank Indonesia		Up to 100	%
Securities by the Indonesian Government		Up to 75	%

      The weighted average asset allocations of the Company’s pension plan at December 31, 2005 and 2006, by asset category, were as follows:

	Plan Assets
	as of
	December 31
Asset Category	2005			2006
Debt securities		75	%		74	%
Deposit securities		7	%		4	%
Equity securities		11	%		18	%
Real estate		1	%		1	%
Others		6	%		3	%
Total		100	%		100	%

      Equity securities included the Company’s common stock in the amounts of Rp.l24,189 million (2.3 percent of the total plan assets) and Rp.238,495 million (3.3 percent of the total plan assets) at December 31, 2005 and 2006, respectively.

      Debt securities included the Company’s bonds in the amounts of Rp.223,736 million (4.1 percent of the total plan assets) and Rp.217,531 million (3 percent of the total plan assets) at December 31, 2005 and 2006, respectively.

F-151

PERUSAHAAN PERSEROAN (PERSERO)

P.T. TELEKOMUNIKASI INDONESIA Tbk AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

DECEMBER 31, 2005 AND 2006, AND FOR YEARS ENDED

DECEMBER 31, 2004, 2005 AND 2006

(Figures in tables are presented in millions of Rupiah, unless otherwise stated)

      Management has established investment policies for the health care benefit plan which require a minimum of 95% of the fund to be invested in the following asset types:

	Based on
	Percentage of Fund Invested
Time deposits		Up to 100%
Deposits on call		Up to 100%
Listed shares		Not exceeding 50%
Listed debt securities		Not exceeding 50%
Mutual funds		Not exceeding 50%
Certificates by Bank Indonesia		Up to 50%
Securities by the Indonesian Government		Not exceeding 75%

      The weighted average asset allocations of the Company’s post-retirement health care plan at December 31, 2005 and 2006, by asset category, were as follows:

	Plan Assets
	as of
	December 31
Asset Category	2005			2006
Deposit securities		60	%		18	%
Debt securities		31	%		30	%
Equity securities		4	%		1	%
Mutual fund		4	%		32	%
Others		1	%		19	%
Total		100	%		100	%

      Debt securities included the Company’s medium-term notes and bonds in the amounts of Rp.232,394 million (15.6 percent of the total plan assets) and Rp.l83,700 million (8.1 percent of the total plan assets) at December 31, 2005 and 2006, respectively.

      Equity securities include the Company’s stocks amounting to Rp.7,548 million (0.33 percent of the total plan assets) at December 31, 2006 (December 31, 2005: Rp. nil).

      Contributions

      The Company expected to contribute Rp.700,161 million to its defined benefit pension plan and Rp.900,000 million to its post-retirement health care plan during 2007.

F-152

PERUSAHAAN PERSEROAN (PERSERO)

P.T. TELEKOMUNIKASI INDONESIA Tbk AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

DECEMBER 31, 2005 AND 2006, AND FOR YEARS ENDED

DECEMBER 31, 2004, 2005 AND 2006

(Figures in tables are presented in millions of Rupiah, unless otherwise stated)

      Telkomsel

      Pension plan

	2004			2005			2006
Service cost		6,300			12,901			25,432
Interest cost		5,199			8,412			18,900
Expected return on plan assets		(824	)		(832	)		(2,126	)
Amortization of prior service cost		125			24			24
Recognized actuarial loss		1,157			1,920			6,080
Amortization of transition obligation		458			458			458
Net periodic benefit cost		12,415			22,883			48,768

      The following table presents the changes in the benefit obligations, the changes in the plan assets, the funded status of the plan and the accrued cost amounts recognized in Telkomsel’s U.S. GAAP balance sheets as of December 31, 2005 and 2006

	2005			2006
Change in benefit obligation
Benefit obligation at beginning of year		59,145			173,680
Service cost		12,901			25,432
Interest cost		8,412			18,900
Actuarial loss		96,151			51,056
Benefits paid		(2,929	)		(3,732	)
Benefit obligation at end of year		173,680			265,336
Change in plan assets
Fair value of plan assets at beginning of year		11,182			20,971
Actual return on plan assets		(2,210	)		(18,792	)
Employer contributions		14,928			29,731
Benefits paid		(2,929	)		(2,006	)
Fair value of plan assets at end of year		20,971			29,904
Funded status		(152,709	)		(235,432	)
Unrecognized prior service cost		274			—
Unrecognized net actuarial loss		120,725			—
Unrecognized transition obligation		6,190			—
Accrued cost		(25,520	)		(235,432	)

F-153

PERUSAHAAN PERSEROAN (PERSERO)

P.T. TELEKOMUNIKASI INDONESIA Tbk AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

DECEMBER 31, 2005 AND 2006, AND FOR YEARS ENDED

DECEMBER 31, 2004, 2005 AND 2006

(Figures in tables are presented in millions of Rupiah, unless otherwise stated)

      As of December 31, 2005, Telkomsel recognized an additional minimum pension liability as follows:

	2005
Accumulated benefit obligation		70,406
Fair value of plan assets		(20,971	)
Unfunded accumulated benefits (required minimum liability)		49,435
Accrued pension cost		(25,520	)
Additional liability under US GAAP		23,915
Intangible assets		6,464
Other comprehensive income		17,451

      As of December 31, 2006, the accrued cost amount recognized for pension benefits of Rp235,432 million consisted of non-current portion only.

      The actuarial calculation for the pension plan was prepared by an independent actuary. The measurement date used to determine pension benefit measures for the pension plan is December 31 of each of the years.

      The assumptions used by the independent actuary to determine the benefit obligation of the plan as of 31 December 31, 2005 and 2006 were as follows:

	2005			2006
Discount rate		11	%		10.5	%
Rate of compensation increase		8	%		8	%

      The assumptions used by the independent actuary to determine the net periodic pension cost of the plan for the years ended December 31, 2004, 2005 and 2006 were as follows:

	2004			2005			2006
Discount rate		11	%		11	%		10.5	%
Expected long-term return on plan assets		7.5	%		7.5	%		7.5	%
Rate of compensation increase		9	%		9	%		8	%

      Telkomsel’s pension plan is managed by PT Asuransi Jiwasraya, a state owned insurance company (see Notes 43).

F-154

PERUSAHAAN PERSEROAN (PERSERO)

P.T. TELEKOMUNIKASI INDONESIA Tbk AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

DECEMBER 31, 2005 AND 2006, AND FOR YEARS ENDED

DECEMBER 31, 2004, 2005 AND 2006

(Figures in tables are presented in millions of Rupiah, unless otherwise stated)

      Expected Future Benefit Payments

      The expected benefit payments by TELKOM and its subsidiaries are as follows:

	Pension		Health Care
2007		339,742		179,510
2008		403,002		203,823
2009		484,607		234,110
2010		578,307		267,492
2011		658,813		302,419
2012-2016		4,374,074		2,116,311

      Adoption of SFAS 158

      The incremental effects of adopting the provision of SFAS 158 as of December 31, 2006 are presented in the following table. This adoption had no effect on the Company’s consolidated statement of income for the year ended December 31, 2006, or for any prior periods presented and it will not affect the Company’s operating result in the future.

	Prior to Adopting			Effect of Adopting			December 31, 2006
	SFAS 158			SFAS 158			as Reported
Prepaid (accrued) pension cost		702,653			(1,864,859	)		(1,162,206	)
Accrued post retirement healthcare		(2,008,838	)		(2,723,246	)		(4,732,084	)
Accrued long service awards		(602,112	)		(222,002	)		(824,114	)
Deferred tax assets (liabilities)		(30,162	)		606,015			575,853
Intangible asset		6,464			(6,464	)		—
Minority interest		—			66,806			66,806
Accumulated other comprehensive income		12,216			4,143,750			4,155,966

      The amounts recognized in accumulated other comprehensive income at December 31, 2006 consisted of:

			Post-
			Retirement
	Pension		Health			Long Service
	Benefit		Care			Awards		Total		Deferred Tax		Net of Tax
Transition obligations		66,715		194,599			—		261,314		20,013		241,301
Prior service costs		1,459,198		(833	)		50,335		1,508,700		452,860		1,055,840
Actuarial losses		296,054		2,529,480			171,667		2,997,201		138,376		2,858,825
Total		1,821,967		2,723,246			222,002		4,767,215		611,249		4,155,966

F-155

PERUSAHAAN PERSEROAN (PERSERO)

P.T. TELEKOMUNIKASI INDONESIA Tbk AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

DECEMBER 31, 2005 AND 2006, AND FOR YEARS ENDED

DECEMBER 31, 2004, 2005 AND 2006

(Figures in tables are presented in millions of Rupiah, unless otherwise stated)

      The transition obligations, prior service costs and net actuarial losses included in accumulated other comprehensive income as of December 31, 2006 and expected to be recognized in net periodic costs for the year ending December 31, 2007 are as follows:

				Post-
				Retirement			Long Service
	Pension			Healthcare			Awards			Total
Transition obligations		28,932			24,325			—			53,257
Prior service costs		201,281			(367	)		6,892			207,806
Actuarial losses		6,013			183,645			12,625			202,283
Gross before taxes		236,226			207,603			19,517			463,346
Deferred taxes		(70,868	)		—			(5,855	)		(76,723	)
Net of taxes		165,358			207,603			13,662			386,623

      e. Operating lease

      For the years ended December 31, 2004, 2005 and 2006, the Company and its subsidiaries recorded operating lease expenses for land and building, vehicle and office equipment totalling to Rp.710,569 million, Rp.551,882 million and Rp.729,839 million, respectively.

      Telkomsel entered into a non-cancelable office lease agreement up to 2008. The minimum lease payment for 2007 and 2008 amounting US$5.2 million (equivalent to Rp.46,989 million) for each year.

      f. Recent Accounting Pronouncements

      In September 2006, the FASB issued SFAS 157, “Fair Value Measurements” which establishes a framework for measuring fair value in US GAAP. SFAS 157 applies under other accounting pronouncements that require or permit fair value measurements, the FASB having previously concluded in those accounting pronouncements that fair value is the relevant attribute. SFAS 157 shall be effective for financial statements issued for fiscal years beginning after November 15, 2007, and for an interim period within that fiscal year. The Company is currently evaluating what effect, if any, the adoption of SFAS 157 will have on the Company’s consolidated financial statements.

      SFAS 159, “The Fair Value Option for Financial Assets and Financial Liabilities-Including an Amendment of FASB Statement No. 115”. In February 2007, the FASB issued SFAS 159. Under the provisions of SFAS 159, companies may choose to account for financial assets and financial liabilities (as well as certain non-financial instruments that are similar to financial instruments) at fair value on an instrument-by-instrument basis. Changes in fair value shall be recognized in earnings for each reporting period. SFAS 159 shall be effective as of the beginning of the fiscal year that begins after November 15, 2007. The Company is currently evaluating what effect, if any, the adoption of SFAS 159 will have on the Company’s consolidated financial statements.

      In June 2006, FASB issued FIN 48 “Accounting for Uncertainty in Income Taxes — An interpretation of FASB Statement No. 109”. This interpretation clarifies the accounting for uncertainty in income taxes recognized in an enterprise’s financial statements in accordance with SFAS 109, “Accounting for Income Taxes” and prescribes a recognition threshold and the measurement attribute for the financial statement recognition and measurement of a tax position taken or expected to be taken in a tax return. It also provides guidance on derecognizing, classification, interest and penalties, accounting

F-156

PERUSAHAAN PERSEROAN (PERSERO)

P.T. TELEKOMUNIKASI INDONESIA Tbk AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

DECEMBER 31, 2005 AND 2006, AND FOR YEARS ENDED

DECEMBER 31, 2004, 2005 AND 2006

(Figures in tables are presented in millions of Rupiah, unless otherwise stated)

in interim periods, disclosure, and transition. The requirements in FIN 48 are effective after December 15, 2006. The Company is currently evaluating what effect, if any, the adoption of FIN 48 will have on the Company’s consolidated financial statements.

57. RECONCILIATION OF NET INCOME TO NET CASH PROVIDED BY OPERATING ACTIVITIES)

      The following table presents the reconciliation of net income to net cash provided by operating activities in accordance with SFAS 95.

		2004			2005			2006
Net income			6,614,568			7,993,566			11,005,577
Adjustments to reconcile net income to net cash provided by operating activities:
	Depreciation of property, plant and equipment		6,438,557			7,570,739			9,178,343
	Write-down of assets		—			616,768			58,252
	Loss on procurement commitments		—			79,359			—
	Interest income		(317,941	)		(344,686	)		(654,984	)
	Interest expense		1,270,136			1,177,268			1,286,354
	Foreign exchange (gain) loss		1,192,842			420,419			(883,831	)
	Equity in net income of associated companies		(3,420	)		(10,879	)		6,619
	(Gain) loss on sale of property, plant and equipment		26,089			(46,193	)		(9,463	)
	Insurance proceeds		—			(27,580	)		—
	Loss on redemption of Telkomsel’s bonds		44,628			19,038			—
	Loss on sale of long-term investments		—			—			(22,561	)
	Amortization of goodwill and other intangible assets		872,330			918,153			944,403
	Amortization of unearned income		(93,164	)		(149,824	)		(159,272	)
	Amortization of deferred charges		25,751			26,921			28,462
	Provision for doubtful accounts and inventory obsolescence		357,096			488,973			458,252
	Compensation for early termination of exclusivity right		—			—			90,000
	Income tax expense		4,178,526			5,183,887			7,097,202
	Minority interest in net income of subsidiaries		1,956,301			3,063,971			3,948,101

F-157

PERUSAHAAN PERSEROAN (PERSERO)

P.T. TELEKOMUNIKASI INDONESIA Tbk AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

DECEMBER 31, 2005 AND 2006, AND FOR YEARS ENDED

DECEMBER 31, 2004, 2005 AND 2006

(Figures in tables are presented in millions of Rupiah, unless otherwise stated)

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

F-158