saRTOnO , Independent Commissioner TELKOM for web upload

TELKOM Annual Report 2005 TanRi aBeng , President Commissioner Mr. Abeng, 64, 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 attended the University of Hasanudin, and earned a masters degree in business administration from the State University of New York, Buffalo, and completed the Advanced Management Program at the Claremont Graduate School in Los Angeles. anggiTO aBimanyu , Commissioner Mr. Abimanyu, 43, has been a Commissioner of TELKOM since March 10, 2004. As of the date of this Annual Report, he is the Head of 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 a bachelor degree in Economics from Gadjah Mada University, a Master of Science Degree in International Development and a Ph.D. degree in Environmental Economics from the University of Pennsylvania. gaTOT TRiHaRgO , Commissioner Mr. Trihargo, 45, has been a Commissioner of TELKOM since March 10, 2004. As of the date of this Annual Report, he serves as a Assistant Deputy for Information Asset Administration of State-Owned Enterprises 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. aRiF aRRyman , Independent Commissioner Mr. Arryman, 50, has been an Independent Commissioner of TELKOM since June 21, 2002. Previously, he served as Independent Commissioner of PT Bank BNI 2001-2004 and as an advisor to the Coordinating Minister for Economy and a member of the assistance team to the Ministry of Finance. Mr. Arryman graduated with a degree in Industrial Engineering from Bandung Institute of Technology, a masters degree in Engineering from Asia Institute of Technology, Bangkok, Diploma d’Etude Approfondie from University Paris-IX Dauphine France and a doctoral degree in Economics from University of Paris-IX Dauphine France.

P. saRTOnO , Independent Commissioner

Mr. P. Sartono, 61, 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 1991 to 1995, until his retirement in 2000. During his tenure at TELKOM, he also held various positions at Directorate General of Post and Communications from 1972 to 1985 and served as President Director of PT Telekomindo Primabhakti. Mr. P. Sartono holds a degree in law from the University of Indonesia and a Master of Management Marketing degree from IPWI Jakarta and a Master of Law degree from the Institute Business Law and Management Sekolah Tinggi Ilmu Hukum IBLAM in Jakarta. TELKOM Annual Report 2005 20 Dear Shareholders, The year 2005 was a challenging one for the Indonesian economy and businesses in general. Rising oil and domestic fuel prices, as well as high inflation and interest rates have combined to deal a considerable blow to both the financial and real sectors of the economy. Amidst challenging macroeconomic conditions, however, the telecommunications sector has shown its resilience. “We need to transform ourselves into a customer-centric organization to be more responsive to customer needs, be more accountable for the quality of our services, and be more focused on specific target markets. TELKOM took firm steps in 2005 to becoming a customer-centric organization.” Arwin Rasyid TELKOM Annual Report 2005 2 Our outstanding results for the year, were in sharp contrast to the conditions of 2005. TELKOM’s challenge was to navigate through a time of change and to assess expanding opportunities while maintaining focus on sustaining growth of our existing businesses. Through the dedicated effort of all TELKOM group employees consisting of more than 30,000-person team, and the Company’s market leaderships in almost every telecommunications product and service category. TELKOM generated a consolidated net income of Rp 8.0 trillion in 2005, an increase of 20.8 from 2004. Our total consolidated revenues from the TELKOM group of companies were also higher in 2005 than the previous year, reflecting our growing markets even in times of great challenge and change. Revenues rose 23.2 while operating expenses grew by 27.3. Returns on equity were 36.5 and 34.3 in 2004 and 2005, respectively, and earnings per share in 2005 reached Rp 396.5. The price of our equity rose 22.3 to reach Rp 5,900 per share as at year-end 2005, compared against the Jakarta Composite Market Index growth of 16.2 and the NYSE Dow Jones Industrial Average Index negative growth of 0.6 during the year. in 2005, TelkOm enjoyed robust growth in all of its main business lines. Despite a slight year-on-year revenue decline of 2.6, our fixed wireline services maintained its leading position and subscribers grew by 1.5. Fixed wireless services grew significantly by 374 to approximately four million customers. Moving forward, we expect to see the growth in fixed wireless services compensating for any further future decline in fixed wireline revenues. Cellular services increased by 39.8 and Telkomsel maintained its position as Indonesia’s largest cellular service provider with more than 24 million customers. Data and internet services enjoyed a revenue growth of 44.2 despite intense competition from the private sector. Challenges and opportunities go hand-in-hand in the Indonesian telecommunications sector and have come to represent both sides of the same coin. Telecommunications density factor in Indonesia, for instance, remains the lowest among the major economies of Southeast Asia, and among one of the lowest in the world. However with nine players in its market, the telecommunications industry in Indonesia has become one of the most competitive in the region. Indonesia continues to witness rapid deployment of cellular and fixed-wireless infrastructure in which TELKOM remains the dominant player. Indonesia also experiences a shift in consumer behavior amongst its fixed wireline users resulting in declining revenues. TELKOM has taken the first strategic initiatives to upgrade its existing infrastructure and create an opportunity in expanding its service offerings. By applying ADSL technology to selective areas of our fixed wireline infrastructure, TELKOM has exclusively been able to provide broadband internet services. TELKOMSpeedy is now available in 15 major cities and continues to expand and to contribute significant revenue to our data and internet business. With this initiative, TELKOM has created a new pillar of revenues to compensate the decreasing trend in voice revenue in the fixed wireline market. This will pave the way for TELKOM to enter into a converging environment enabling the delivery of triple-play services. The year 2005 brought several regulatory changes that have direct bearings on our business. The most significant impact may yet come from the decision by the Government of Indonesia, acting pursuant to the ruling of the International Telecommunications Union as the highest world organizing body for telecommunications services, to rearrange the frequency spectrum for the fixed wireless service, including TELKOMFlexi, from 1900 MHz to 800 MHz. TELKOM recognized a loss of Rp 0.9 trillion, mainly resulting from a write- down of assets and accelerated depreciation of several existing network components that would immediately be obsolete at the time of migration. To ensure a smooth migration and service continuation, TELKOM may need to incur additional cost to replace Flexi equipment affected by this migration process. A further notable highlight in 2005 was the tender of 3G license, whereupon Telkomsel successfully secured a 5 MHz spectrum at a fair price. By adopting 3G technology, TELKOM Group will be able to broaden and enhance its product and service portfolio, and be in the position to preempt competition in the years to come. winning the hearts and minds of the consumer and achieving customer satisfaction are paramount to acquiring and maintaining a dominant market share. We need to transform ourselves into a customer-centric organization to be more responsive to customer needs, be more accountable for the quality of our services, and be more focused on specific target markets. TELKOM took firm steps in 2005 to becoming a customer-centric organization. Among other things, we have realigned our organization in order to differentiate and specialize between service frontliners and product owners. TELKOM formed strategic business units to serve two main segments namely i the consumer market and ii the enterprise and wholesale market. DIRECTORS’ REPORT TELKOM Annual Report 2005 22 In the consumer segment, TELKOM shall strengthen its efforts to retain customer satisfaction and loyalty. While in the enterprise and wholesale segment, TELKOM is mobilizing and synergizing resources within the group to increase our market share in enterprise and wholesale segment. Changes of mindset and business strategies are currently being developed and formulated to establish a strategic roadmap for TELKOM into the future. With this in mind, TELKOM shall engage a leading management consultant to assist in formulating future business strategies, product roadmap, service delivery models and action plans, going forward. New training and human resources development programs are being implemented to improve the skill sets of our motivated team. TELKOM has begun to recruit experienced talented professionals to enhance the company’s future performance. With these and other initiatives, we will be unlocking the vast potential of both TELKOM and the TELKOM Group of Companies. Currently, TELKOM is a market leader in fixed-wireline service approximately 98, fixed-wireless service 85, cellular service 52, and multimedia service 19. Within these four main categories, and especially in the multimedia segment, TELKOM has a defined opportunity and will leverage on its strategic advantages. Synergies between TELKOM and Telkomsel have been materialized through several initiatives, such as co-locating of base transceiver stations BTS, joint promotion and marketing campaigns and joint distributions of product and services. TELKOM can also benefit from synergizing with other subsidiaries through its dedicated forum in a more effective manner involving two or more entities within the TELKOM Group to minimize Capital Expenditures CAPEX, Operating Expenses OPEX, and to optimize service offerings through product bundling and resource sharing “TELKOM has a defined opportunity and will leverage on its strategic advantages” TELKOM Annual Report 2005 2 Aside from e-Learning, TELKOM is at the centre of the blueprint and prototype development of the National Communications and Defense System that has been in development since 2004 and is close to completion. The proposed system will also act as a standardized application for e-Government in Indonesia. To our valued customers, I would like to personally thank you for your trust in choosing TELKOM as your preferred InfoCom provider. We at TELKOM are always committed to deliver the best possible services to you. On behalf of the Board of Directors, I would like to convey our sincere appreciation to our employees and management, for their support and dedication. We also express our gratitude to our valued stakeholders, especially The Ministry of State Owned Enterprises, The Ministry of Information and Communication and our business partners who have played a significant role in the positive development of TELKOM group. Finally, I would like to extend my thanks to the former Board of Directors for their efforts in developing TELKOM. Jakarta, June 8, 2006 arwin Rasyid President Director CEO DIRECTOR’S REPORT The Board of Directors notes with great appreciation the major strides of TELKOM to comply with the Sarbanes Oxley Act SOA this year. TELKOM is amongst the first companies in Indonesia striving to achieve accountable corporate governance following international best practices of the highest standard. As such, TELKOM has recently established a dedicated unit to apply risk management processes in strategy settings across the enterprise and to identify potential events, that may effect the company. This process allows the company to review existing policy and procedures, to map end-to-end processes for identifying risk and assessing internal controls. TELKOM believes that this is one of the most important initiatives to further improve bottom line and shareholder value. TelkOm would like to reiterate its commitment to the community , as one of the largest corporations in Indonesia today, we contribute to the communities where we live and work. TELKOM would like to be a model to others of good corporate social responsibility and it is a core value of the Company to improve communities and assist people achieve better lives wherever we can - whether through education, micro-finance and cultural activities. TELKOM has played a pivotal role in supporting communities affected by natural disasters and assisted the NGOs in rebuilding societies in need. TELKOM is also pro-actively involved in the development of a national infrastructure for e-Learning, which is aimed at distributing educational material for the national school system through the Internet. A joint undertaking of the Ministry of Education, the Ministry of Communications and Information, the Ministry of Religious Affairs, the Technology Research and Development Board BPPT of the Republic of Indonesia and TELKOM, e-Learning will initially target more than 1,000 schools utilizing TELKOM donated terminals to access the web in order to retrieve learning materials on-line. Set for launch in 2006, the long- term development of e-Learning will be carried out in four phases until 2010. TELKOM Annual Report 2005 2 ARWIN RASYId JoHN WELLY GARudA SuGARdo ARIEF YAHYA GuNTuR SIREGAR RINALdI FIRMANSYAH ABduL HARIS TELKOM Annual Report 2005 25 aRwin Rasyid , President Director and CEO Mr. Rasyid, 49, 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 and Bank of America since 1980. 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 Master of Business Administration degree in International Business from University of Hawaii, USA. gaRuda sugaRdO , Vice President Director and Chief Operating Officer Mr. Sugardo, 56, 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 , Director of Finance Mr. Firmansyah, 45, has been Director of Finance of TELKOM since March 10, 2004. He previously served as the Vice President Commissioner of PT Bahana Securities from 2003 to 2004, President Director of PT Bahana Securities from 2001 to 2003, Director of Investment Banking of PT Bahana Securities from 1997 to 2001, and a 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. aBdul HaRis , Director of Network and Solution Mr. Haris, 50, 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. aRieF yaHya, Director of Enterprise and Wholesale Mr. Yahya, 44, 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. Mr. Yahya graduated with a degree in Electrical Engineering from Bandung Institute of Technology and a Masters degree in Telecommunication Engineering from University of Surrey. JOHn welly , Director of Human Resource Development Mr. Welly, 52, was appointed the Director of Human Resources Development of TELKOM on June 24, 2005. He joined TELKOM in 1981 and has held several positions in various departments. He previously served as President Director of PT INTI, Director of Operations and Marketing of TELKOM from 1998 to 2000, Commissioner of Telkomsel in 1998, Director of Human Resources and Support DivisionsSenior Executive Vice President for Human Resources and Support of TELKOM from 1995 to 1998, and Commissioner of PT Aplikanusa Lintasarta from 1995 to 1996. Mr. Welly graduated with a degree in Electrical Engineering from the Bandung Institute of Technology and a Masters degree in telecommunication and information from Essex University, UK. gunTuR siRegaR , Director of Consumer Mr. Siregar, 54, 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 Sumatera from 1995 to 1996. Mr. Siregar graduated with a degree in Electrical Engineering from the Bandung Institute of Technology. TELKOM Annual Report 2005 2 Usto dolent del dolent ut wis eum doloborem iniatum iniametum eliquip enit ate feu facil ipit amla conse dit eu facil ut at dolor se commy nisciduisim nis alit nos ero consequisl elit y nisciduisim nis alit nos ero consequisl elit adignit pprat nostrud molorem vel iuscipit luptat inciliquat landipit pratin ut lut vel iriurem zzriurem vullan venis er alit wis erosto od dolor in euis alis duis at, coan veros dolenim ver alit doUstie facinisisit veros aex etumsan dipisl euguerat et laore SOA Compliance During the past three years, TELKOM exerted tremendous efforts to comply with the Sarbanes-Oxley Act SOA which was passed by the US Congress in July 2002 in response to major inappropriate accounting practices found in a growing number of publicly-listed American companies. This Act has since been an important corporate disclosure requirement that applies to any company listed on US stock exchanges, including TELKOM. TELKOM Annual Report 2005 2 As part of the requirement to comply with the SOA, TELKOM formed a dedicated SOA Team in 2003. The team was assigned to assess, develop and implement the required standards that would qualify TELKOM to comply with SOA. Since its formation, the team has grown in size to 17 personnel. To date, TELKOM’s SOA Team has spent a total of more than 67,000 man-hour in working time. In broad terms, SOA has induced changes and adjustments towards regulatory environment, financial reporting and internal control processes, as well as governance and accountability structures within the corporation. It has also required higher disclosure standards and quality, stronger corporate governance, better oversight, broader insider accountability and sanctions, and greater independency of auditors. There are three sections of the SOA that are of particular importance. They are Section 302 pertaining to Disclosure Controls and Procedures, Section 404 on Internal Control Attestation, and Section 906 on Certification of Periodic Reports by the CEO and CFO of the company in question. These three sections contain main requirements that a company needs to fulfil, in order to comply with the SOA, with the objective of providing reasonable assurances that a company’s financial information and its system of disclosure control and procedures are adequate, regularly monitored and evaluated to ensure that shortcomings are corrected, and that, furthermore, these systems and procedures grow and evolve with the business. At a glance, the requirements of SOA are generally similar to other capital markets regulations including those of the Capital Market Supervisory Board of the Republic of Indonesia Bapepam. A comparison between SOA-302 and a number of Bapepam regulations underscores their similarities see following table. However, there is one major difference in the SOA requirement that is material in every respect, and that is the need for a reliable evaluation on the effectiveness of disclosure controls . SOA calls for not only the reliability and integrity of the financial statements that are being disclosed, but also on the evaluation and verifiability of the internal control processes that are put in place to ensure the integrity of the financial statements. In other words, in addition to the financial audit itself, intensive audit and related documentation works must be performed on the internal control processes. In TELKOM’s experience, before it can audit the Company’s internal control processes, it first has to establish standardised and documented procedures on the internal control process which would render the entire process auditable. The laying of groundworks and foundation for the implementation of the so-called, Integrated Audit - the audits of both TELKOM’s financial statements and internal control process over financial reporting – had taken up much of TELKOM’s management time and resources in the past three years. No Summary of SOA 302 Requirement Kep- 40 PM 2003 Kep- 42 PM 1996 Kep- 41 PM 1996 RI Law No. 8 1995 1 The report has been reviewed • • • • 2 The report does not contain any untrue or misleading statements • • • • 3 Fair presentation of the financial statement and other financial infor- mation included in the report • • • • 4 Responsible for establishing and maintaining Disclosure Control and Procedure • 4a Have designed control to ensure that material information is known to the CEO and CFO • • 4b Have designed internal controls over financial reporting to ensure the reli- ability of the financial reporting is in accordance with GAAP • • 4c Have evaluated the effectiveness of disclosure controls 4d Have indicated in the report any sig- nificant changes to internal control • 5a Have disclosed to the audit commit- tee and auditor significant controls deficiencies and material weakness • 5b Have disclosed to the audit commit- tee and auditor any fraud • TELKOM Annual Report 2005 2 Providing End-to-End Telecommunications Coverage TELKOM is the leading provider of fixed wireline and fixed wireless telecommunications services in Indonesia, providing over 98 of the fixed line penetration in the Indonesian telecommunications market today and is the majority owner of Telkomsel, the largest mobile cellular operator in the country, providing coverage to more than 90 of the population in 650 cities and towns across Indonesia. TELKOM Annual Report 2005 2 Within Indonesia’s relatively low teledensity rates - defined as the number of telecommunications lines or lines in service per 100 population - of approximately 5.2 and 20.5 for fixed telephony and mobile cellular services, respectively, as at year- end 2005: The size and scope of TELKOM’s telecommunications network is considerable as compared to other Indonesian telecommunication’s operator. As of December 31, 2005, the number of TELKOM’s fixed lines in service, including fixed wireless access, amounts to 12.8 million lines. TELKOM’s extensive and broad telecommunications network not only represents a powerful business and growth engine for TELKOM and its stakeholders, but also serves as a strategic asset. This network consists of transmission and switching facilities that connect several network access nodes. TELKOM’s transmission links between nodes and switching facilities to date include optical fiber cable, microwave, submarine cable and satellite systems with a total capacity of 582,840 circuits as at year-end 2005, up from 555,700 circuits in 2004. No telecommunications services provider other than TELKOM has that much backbone transmission facilities to link Indonesia’s telecommunications infrastructure from one end of the Archipelago to another. Having acquired four of the five KSO units in TELKOM’s regional divisions I Sumatera, III Banten and West Java, IV Central Java and VI Kalimantan –and having consolidated these units into TELKOM’s operating structure which initially comprised only of regional divisions II Greater Jakarta Area and V East Java– TELKOM is closer than ever to providing seamless end-to-end terrestrial telecommunications network linking throughout Indonesia. The only remaining KSO that is not under the ownership control of TELKOM pertains to regional division VII covering the Eastern Indonesian Islands from Sulawesi to the Mollucas and Papua. As per current agreement, however, the termination period of KSO VII will be in 2010, at which time TELKOM will have gained ownership rights to all of the assets of the last remaining KSO. TELKOM is fully committed to providing telecommunications coverage throughout the Indonesian Archipelago. Thus, in the effort to broaden its terrestrial network further, at a fraction of the cost of laying down digital telephone lines, TELKOM is relying on the CDMA 2000-1X fixed wireless technology to develop its fixed line network in order to increase Indonesia’s teledensity rate. The CDMA-based fixed wireless technology enables rapid deployment of telephony networks along with the significant reduction of capital expenditures per telephone line by reducing or altogether eliminating the need for cable layouting. The rate at which the fixed wireless network development has progressed is significant. Since the introduction of TELKOM’s fixed wireless telephone service, TELKOMFlexi, in December 2002, TELKOM has commissioned and built a total of 1,448 base transceiver stations BTS and approximately 3.7 million line units capacity. Deployment of TELKOM’s fixed wireless network is continuing at a rapid pace. As TELKOM pursues the rapid deployment of the fixed wireless network, it has also enhanced its fixed wireline network by using the Asymmetric Digital Subscriber Line ADSL feature to deliver high-speed Internet connection, TELKOMSpeedy, in addition to voice and data capacity. In the meantime, to bring telecommunications coverage to areas that are still underserved by terrestrial networks, TELKOM operates the TELKOM-1 and Palapa B-4 satellites and 199 satellite earth stations. On November 17, 2005, a newly commissioned satellite, the TELKOM-2, was launched to replace the Palapa B-4 satellite which operation has expired in August 2005. TELKOM-2 has 24 standard C-band transponders, a life- span of 15 years, and a broad coverage footprint area that extends throughout Asia including the Indian subcontinent. In addition to supporting voice, video and data communications, TELKOM uses its satellites among other things for network backbone transmission; rural telecommunications services; back- up transmission capacity for the national telecommunications network; satellite broadcasting, V-SAT and multimedia services. TELKOM Annual Report 2005 Awakening the Giant Within TELKOM’s vision is to become a leading InfoCom player in the region, with a mission to provide one-stop InfoCom services of quality products and networks with competitive pricing. In order to realize both its vision and mission, TELKOM needs to transform itself into a highly responsive and competitive organization capable of delivering consistently superior products and services to the market place. TELKOM Annual Report 2005 The Indonesian telecommunications market remains largely underserved with low teledensity rates for both fixed lines and mobile cellular connections compared to many countries in the region. Strong demand for telecommunications services will continue to drive investments in both fixed line and mobile cellular businesses, expanding their networks and increasing teledensity reach. However, with increasing investments comes increasing competition as well. TELKOM intends to compete in the market by deploying broad-based strategies to retain existing customers, acquire new ones, and further penetrate the market through customer relationship management, product differentiation, competitive pricing and one-stop delivery channels. Changing the mindset of TELKOM’s personnel and transforming the Company into a full fledged customer-centric organization is paramount to achieving TELKOM’s competitive edge in the market. How does TELKOM set about to achieve this? First, it is placing a much greater emphasis on quality service and how the service is delivered to the customer. Second, it is sharpening its focus on specific market segments as opposed to marketing to a broad audience all at once. Last but not least, it is intensifying human resources training and development programs to stimulate and accommodate the mindset change. There are essentially three large segments that comprise the telecommunications market today: residential market, mobile cellular and business. The residential segment is primarily driven by the extent of the network that serves the market; the broader the network, the more customer that can be reached. The mobile cellular segment is to a large extent also driven by network coverage, but increasingly as well by technological advances and product innovation; the more a cellular service offers life-styles and trends, the better chance it has of gaining market share. Meanwhile, the business segment, which includes interconnection customers, is primarily driven by the quality and delivery of service; better quality and better service mean more business. TELKOM sees its position in these three market segments as follows: In the residential market segment, with approximately 98 penetration in the fixed lines market, TELKOM is continuing its expansion of the fixed lines network. This is why TELKOM has recently formed a Consumer Services Directorate to focus solely on serving the needs and expectations of the residential customers, as well as responding effectively to customer queries and complaints. Walk-in customer services points provide convenient and comprehensive access to those and other services including activation of services, customer billing, payments, service features and marketing promotions. As at year-end 2005, TELKOM had a total of more than 800 of customer service points, including 53 large centers in Greater Jakarta and 48 in Surabaya. In the mobile cellular segment, through a 65 ownership of Telkomsel, TELKOM controls the largest cellular network coverage in Indonesia, and commands approximately 52 of the market share. TELKOM’s strategy is to maintain Telkomsel’s market leadership, and to increase it at every opportunity. It aims to achieve this by expanding Telkomsel’s network capacity in order to grow its customer base. In a strategic move that is aimed at strengthening Telkomsel’s position even further in the mobile cellular market of the future, Telkomsel has won the government tender for the 3G licence that was officially granted to Telkomsel in 2005. This licence will enable Telkomsel to go beyond GPRS and EDGE with the 3G technology that offers more exciting applications of voice, data and video transmissions on the mobile cellular platform. In the business segment, on which TELKOM has not specifically focused in the last five years, TELKOM is now placing more emphasis on the market. TELKOM has recently formed the Enterprise Services Center, with its enterprise service and account management teams to focus on the corporate customers, both at national and regional levels. The account management teams provide a single point of contact for all of the customer’s integrated communications solutions. The division works on integrating various products and services to provide total telecommunications solutions, including voice, data, multimedia and certain office automation and network monitoring and controlling services. TELKOM Annual Report 2005 2 Aiming for 135-3010 Goal Responding to the challenging but equally promising market opportunities, TELKOM has set its sight on the 135-3010 goal - a singular focus to grow market capitalization by three-folds in five years to reach USD 30 billion by year-end 2010. TELKOM Annual Report 2005 A company’s valuation is determined among other things by its profitability returns of past years to date, and a premium that the market is willing to attach to its value on the basis of future growth prospects. In TELKOM’s case, it has enjoyed strong and growing earnings over the past 5 consecutive years, and faces tremendous growth prospects as the largest telecommunications company in one of the fastest growing markets in the world. TELKOM’s share buyback program that was approved by the Extraordinary General Meeting of Shareholders on December 21, 2005, sharply illustrates the point of growth. A company may buy back its shares for a number of reasons, but, mainly, it is because the shares are deemed promising for its potential future valuation. TELKOM expects to buy back a maximum of 5 of its outstanding series B shares, over a period of 18 months from the date of shareholders’ approval. Funds for the share buyback have been allocated from the Company’s internal cash, not to exceed Rp 5.3 trillion. TELKOM’s share ended the year on the Jakarta Stock Exchange at Rp 5,900 per share, 22.3 higher than a year ago. aiming for 135-3010. In order to achieve 135-3010, TELKOM intends to strengthen its fixed-line business and backbone network, maintain Telkomsel’s leading position in the industry and increase the synergies between it and TELKOM, develop its fixed wireless as well as data and Internet businesses, reduce its cost of capital, continuously improve on customer service, broaden sales and distribution channels, and harness more of the resources of the TELKOM Group which as of December 31, 2005 comprised of nine consolidated subsidiaries and three unconsolidated associated companies. Unlocking TELKOM’s vast potential becomes a key element for the Company to achieve its goal. With fixed wireless technology, TELKOM can increase fixed line penetration more rapidly and with lower capital expenditure, thereby increasing Indonesia teledensity rate comparable to that of Southeast Asia. Additionally, TELKOM strives to grow its revenue from the use of TELKOMFlexi and value added services, as well as from the marketing concentration on the top 20 of corporate customers. In leveraging its substantial fixed line network, TELKOM will also strengthen its interconnection business and broadband services. Fixed line business will also see more dedicated efforts to develop and expand TELKOM’s IDD service TELKOMSLI-007 previously TIC 007 which it has only recently begun to offer. TELKOM will deploy the versatile CDMA-based fixed wireless telephone business more rapidly and expand quickly beyond the 231 cities in which the TELKOMFlexi service is currently available. Amid increasing competition and liberalization of the fixed-line market, TELKOM expects the rapid deployment of its fixed wireless network will provide it with a competitive market advantage. In maintaining mobile cellular market leadership, TELKOM will continue to take advantage of commercial, operational and network synergies between itself and Telkomsel, and sharing best-practices and know-how with SingTel Mobile as the 35 shareholder of Telkomsel. The marketing of the data and Internet service will also receive close attention as TELKOM focuses more on creating and delivering greater value with this service. This includes investing in TELKOM’s broadband infrastructure with ADSL, Hybrid Fiber Coaxial and satellite systems; offering competitive pricing for high- speed data and Internet services including value-added services; providing customers with broader Internet access options, and bundling with TELKOMFlexi or Telkomsel products; expanding international coverage through additional global carriers and wholesalers; and expanding the coverage and quality of TELKOM’s IP backbone to increase data and Internet traffic capacity. In strengthening its backbone network, some of the primary objectives include the continuous increase of capacity, coverage and quality of its network; expanding the optical network, upgrading to a next generation network by installing advanced switching systems; constructing international microwave and submarine links; and upgrading systems to provide integrated billing with the addition of new services. TELKOM Annual Report 2005 TELKOM has gradually strengthened its corporate governance policies and practices, among other things by developing internal structures and procedures that would enable it to conform to international compliance standards. One such standard is the Sarbanes Oxley Act SOA of 2002, a broad US financial reporting and corporate governance reform law that commits public companies listed on US stock exchanges to conform to certain requirements that are designed to provide greater assurance for the integrity of financial reporting. As a listed company on the ADR board of the New York Stock Exchange, TELKOM is bound by the rules and regulations of the US Securities and Exchange Commission SEC which has adopted the terms of SOA as a standard requirement for internal control over financial reporting. At the same time, the Company is also subject to the rules and regulations of the Indonesian Capital Market Supervisory Board Bapepam, which in certain material aspects, other than SOA, are consistent with those of the SEC. TelkOm’s views on Corporate governance TELKOM also recognizes the importance of corporate governance as a powerful tool to safeguard the Company’s assets and build long-term stakeholder value. The Company views GCG as a way to: • Maximize long-term stakeholder value by instituting transparency, independency, accountability, responsibility and fairness in order to increase the Company’s competitiveness in both domestic and international markets. • Ensure that the Company is managed in a professional and accountable manner, while enhancing the respective authority and independence of the General Meeting of Shareholders, Commissioners and Directors. • Provide a common reference for Commissioners and Directors to base their policy-making decision and execution. key initiatives on gCg TELKOM continues to develop and implement a number of policies and steps that are taken as part of the Company’s initiatives on GCG, including: • The formation of a dedicated SOA team which for the past three years have worked under the supervision of the Audit Committee, and with the assistance of independent consultants, to develop and establish new policies and procedures on internal control over financial reporting as part of the requirements of SOA. • The inclusion of GCG and corporate social responsibility CSR as part of the main responsibilities of the Chief Executive Officer to warrant support and commitment at the highest management level. • The establishment of a formal manual guideline on Corporate Governance Policies, Work Ethics governing the conduct of employees, and Business Ethics governing relationships with external parties. As a company that is listed both at home and abroad, TELKOM is fully committed to developing and implementing corporate governance policies and practices that conform to the standards of world-class capital markets. TELKOM recognizes the importance of Good Corporate Governance GCG as a tool to increase its level of performance and its accountability to the general public. TELKOM Annual Report 2005 5 • The establishments of various Committees at the Commissioner’s and Director’s level with appropriate charters to support the policies and practices of GCG within the Company. • The disclosures of timely information on the Company’s results of operations and other material information to the public by a variety of means, including public exposes, conference calls, press conferences and releases, as well as quarterly and annual financial reports. governance structure The governance structure of TELKOM comprises the General Meeting of Shareholders, the Board of Commissioners BOC, the Board of Directors BOD, and the various Board Committees which, as at year-end 2005, consisted of the Audit Committee, the Nomination and Remuneration Committee, and the Review and Planning Committee for committees of the BOC; and the Corporate Governance Committee, the Disciplinary Committee, the Investment Committee, the Disclosure Committee, the Policy Committee and the Performance Committee which constitute committees of the BOD. In addition to these Committees, the BOD is assisted by the SOA Task Force unit and the Corporate Secretary. The following sets forth the roles and responsibilities of the respective governance entity of the Company. general meeting of shareholders The Annual General Meeting of Shareholders AGMS and Extraordinary General Meeting of Shareholders EGMS both constitute the highest authority and governance body of the Company, and are the primary forums through which shareholders exercise their rights and authority over the management of the Company. They are also the highest authoritative bodies in which important resolutions are decided upon and passed into official policies of the Company. AGMS and EGMS have among others, the power to elect and terminate the Commissioners and Directors of the Company, determine the amount of remuneration and benefits of Commissioners and Directors, judge the performance of the Company during the fiscal year under review, decide on the use of the Company’s profit, dividend payment, and amendment of Articles of Association. The AGMS is held once a year, while EGMS can be convened in any number and at any time of the year as needed. In 2005, TELKOM undertook: • The AGMS on June 24, which gave its approval for the appointment of the new members of the Board of Directors with the term of office as of the closing of this Meeting up to the closing of the Annual General Meeting in the year 2010. • The EGMS on December 21, which approved the plan for share buy-back from the public amounting up to Rp 5.3 trillion. Rights of shareholders The rights of shareholders are protected by laws and regulations including covenants pertaining to such rights from the Company’s Articles of Association, the Company Law of 1995 and regulations of the Bapepam. They include the rights of shareholders to i vote at the General Meeting of Shareholders, ii obtain information on the Company, iii receive dividends, iv request the Company to buy back its shares at a reasonable price from shareholders who do not agree to certain corporate actions that may reduce shareholder value, and v sue the Company or on behalf of the Company sue the members of the Boards of Commissioners and Directors on the grounds of material loss of shareholder value due to management negligence or misrepresentation. Rights of shareholder of series a share The holder of a special series A “Dwi Warna” share remained the Government of Indonesia as at year-end 2005. Holder of this special share has the right to: i Elect and terminate Directors and or Commissioners through the resolution of either an annual general meeting of shareholders or an extraordinary general meeting of shareholders. ii Merge, acquire, divest or liquidate the Company through the resolution of a general meeting of shareholders. Board of Commissioners The BOC is responsible for supervising the policies and course undertaken by the Directors in the management of the Company, and advises the Directors on matters pertaining to the development of the Company, the annual budget and business plan, and statutes within the Company’s Articles of Association. The BOC also approves the Company’s financial statements and annual reports prepared by the Directors. In carrying out its duties, the Board of Commissioners is assisted by several committees whose tasks and responsibilities are explained below. As at year-end 2005, the Company’s BOC consisted of five Commissioners including the President Commissioner, two of which are Independent Commissioners who have been elected to the Board pursuant to Bapepam Regulation no. IX.1.5 on conflict of interest. The profiles of members of the BOC are presented on page 19. TELKOM Annual Report 2005 Board of Commissioners’ Committees audit Committee The Audit Committee is composed of seven members comprising of two Independent Commissioners, a Commissioner, and four independent members from outside of the Company. The Audit Committee is chaired by an Independent Commissioner of the Company. Two other committee members have expertise in finance and accounting, and internal control. The Audit Committee works on the basis of the Audit Committee Charter established upon the resolution of the BOC which among other things contain the aim, purpose, responsibility and authority of the Audit Committee. The Committee reviews financial statements prior to publication, selects and recommends the candidate for independent auditors, oversees the work of the independent auditors, monitors the effectiveness of internal control, supervises the Company’s compliance to prevailing rules and regulations, and undertakes special assignments from the BOC. As at year-end 2005, the members of the Audit Committee were: • Arif Arryman Chairperson and Independent Commissioner • P. Sartono Independent Commissioner • Gatot Trihargo Commissioner • Mohammad Ghazali Latief • Salam • Dodi Syaripudin, and • Sahat Pardede All of the members of the Audit Committee except for Mr. Arif Arryman, Mr. Sartono and Mr. Gatot Trihargo are independent external members and Mr. Pardede is an accounting and financial expert. 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 the Company’s external auditors; • Discussing with the Company’s internal and external auditors the overall scope and specific plans for their respective audits. The committee will also discuss the Company’s consolidated financial statements and the adequacy of the Company’s internal controls; • Meeting regularly with the Company’s internal and external auditors, without management present, to discuss the results of their examinations, their evaluation of the Company’s internal controls and the overall quality of the Company’s financial reporting; and • Carrying out additional tasks that are assigned by the Board of Commissioners, especially on financial and accounting related matters. nomination and Remuneration Committee The Nomination and Remuneration Committee is composed of: • Tanri Abeng Chairperson and President Commissioner • P. Sartono Secretary and Independent Commissioner • Gatot Trihargo Commissioner The committee was tasked with: • Formulating selection criteria and nomination procedures for strategic positions in the Company based on good corporate governance principles; • Assisting the Board of Commissioners and consulting with the Board of Directors in candidate selection for strategic positions in the Company; and • Formulating a remuneration system for the Board of Directors based on fairness and performance. Review and Planning Committee The objective of this committee is to review the Company’s long-term plans, as well as annual business budget plans, following which, recommendations would be made to the Board of Directors. The committee is also responsible for supervising and monitoring the implementation of the business plans of the Company. As at year-end 2005, the Review and Planning Committee consists of nine members: • Anggito Abimanyu Chairperson, Commissioner • Arif Arryman Vice Chairperson, Independent Commissioner • Yuki Indrayadi Secretary • P. Sartono Independent Commissioner • Kindy Syahrir • Ario Guntoro • Adam Wirahadi • Widuri M. Kusumawati • Arman Soeriasoemantri All of the members of the Review and Planning Committee except for Mr. Abimanyu, Mr. Arryman and Mr. Sartono are independent external members. The committee undertook a number of activities in 2005, including supervising the execution of capital expenditure according to the agreed budget for the year; submitting a proposal for the improvement of the Logistics Management Policy; evaluating management performance on a regular basis; and reviewing the Company’s corporate strategic scenario CSS for the period 2006-2010, its investments in subsidiary companies, the cost-and-benefit of dual stock listing; and comprehensively evaluating the Company’s business plan and budget for 2006. TELKOM Annual Report 2005 Board of directors The Directors of the Company are responsible for establishing the policy, business strategy and execution in the management of the Company. The President Director is responsible for integrating the policies and resources of the Company in order to achieve its goals and objectives, as well as ensuring the implementation of the policies and business plans of the Board of Directors. Whereas the Directors of the Company are responsible for formulating the policy, development plan, execution and administrative control in their respective areas. In discharging their duties, the BOD is assisted by several executive committees whose tasks and responsibilities are set forth below. As at year-end 2005, the Company’s BOD consisted of seven Directors, including the President Director as Chief Executive Officer and the Vice President Director as the Chief Operating Officer, and five Managing Directors. The five Managing Directors are separately responsible for Network and Solutions, Consumer, Enterprise and Wholesale, Finance, and Human Resources. The first three Directorates are under the coordination of the Chief Operating Officer. The profiles of members of the Board of Directors are presented on page 25. management Committees disclosure Committee The Disclosure Committee comprises of 14 senior personnel from various departments and is chaired by the CFO. The Committee’s role is to support the Management of the Company in designing and evaluating disclosure controls and procedures and participating in the disclosure process. Since its formation on February 18, 2005, the committee has established internal work procedures relating to the review and preparation of the Company’s annual report on Form 20-F. The establishment of the Disclosure Committee formalized the previous disclosure process where designated senior personnel from various departments were responsible for assisting with the necessary disclosures. good Corporate governance Committee The Good Corporate Governance Committee is composed of seven committee members and is chaired by the Human Resources Director. The committee is responsible for monitoring the administrative or legal sanctions taken by the Company. Board of Commissioners meeting Commissioners Meetings Attended Tanri Abeng 1212 Anggito Abimanyu 612 Gatot Trihargo 1212 P. Sartono 1212 Arif Arryman 1212 Board meetings 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 BOC, iii upon written request of the BOD, or iv upon request of a shareholder or a group of shareholders holding at least one-tenth of the outstanding shares of the Company with valid voting rights. The quorum for all BOC 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 at such meeting. Resolutions of a meeting of the BOC shall be by consensus. If consensus cannot be reached, it shall be by the affirmative vote of a majority of the members of the BOC present or represented at the meeting. In the event of a tie, the proposed resolution shall be deemed to have been rejected. Meetings of the Board of Directors may be held whenever deemed necessary upon the request of i the President Director, ii at least one-third of the members of the BOD, iii the BOC, or iv written notice from any shareholder or group of shareholders holding at least one-tenth of the outstanding shares of the Company with valid voting rights. The quorum for all Directors’ meetings is more than one-half of the members of the Board of Directors present or represented in person or by proxy granted to another Director of the Company 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. The following tables set forth the number of meetings and attendances of each of the members of the BOC and BOD in the year- ending December 31, 2005. TELKOM Annual Report 2005 companies. Each Director is granted a monthly salary and certain other allowances including a pension if eligible. Each Director also receives an annual bonus tantiem, 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. 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, 2005, the aggregate compensation paid by the Company and its consolidated subsidiaries to all of their Commissioners and Directors was Rp 71.9 billion, while the amount paid by the Company unconsolidated to all its Commissioners and Directors was approximately Rp 28.9 billion, in each case including bonuses and the cost of other benefits provided to Directors. The Company provides honoraria and facilities to support the operational duties of the Board of Commissioners. The total of such benefits amounted to Rp 6.2 billion in 2005. The Company provides salaries and facilities to support the operational duties of the Board of Directors. The total of such benefits amounted to Rp 17.4 billion in the year ended December 31, 2005 for Directors which were appointed on AGMS on June 24, 2005. Board of Commissioners directors meeting Commissioners Meetings Attended Tanri Abeng 1819 Anggito Abimanyu 919 Gatot Trihargo 1819 P. Sartono 1919 Arif Arryman 1919 Current Directors Arwin Rasyid 1011 Garuda Sugardo 1111 Abdul Haris 911 Arief Yahya 1011 Guntur Siregar 1011 Rinaldi Firmansyah 1111 John Welly 1111 Previous Directors Kristiono 68 Suryatin Setiawan 78 Woeryanto Soeradji 68 Abdul Haris 78 Rinaldi Firmansyah 68 Arwin Rasyid 2,628.9 Garuda Sugardo 2,487.3 Abdul Haris 2,712.6 Arief Yahya 2,270.1 Guntur Siregar 2,380.5 Rinaldi Firmansyah 2,673.9 John Welly 2,262.6 Total 17,415.9 Board of Commissioners Remuneration 2005 Tanri Abeng 1,386.5 Anggito Abimanyu 1,173.8 Gatot Trihargo 1,183.3 Arif Arryman 1,203.9 P. Sartono 1,203.9 Total 6,151.4 in million Rupiah Board of directors Remuneration 2005 in million Rupiah Board of directors meeting Current Directors Meetings Attended Arwin Rasyid 2121 Garuda Sugardo 2021 Abdul Haris 2121 Arief Yahya 2121 Guntur Siregar 2021 Rinaldi Firmansyah 2121 John Welly 2121 Previous Directors Kristiono 1515 Suryatin Setiawan 1515 Woeryanto Soeradji 1415 Abdul Haris 1515 Rinaldi Firmansyah 1515 Remuneration of Board members Each Commissioner is granted a monthly honorarium and certain other allowances and is paid an annual bonus, 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 Ministry of Finance MoF letter which applies to all state-owned TELKOM Annual Report 2005 sarbanes Oxley act sOa unit In addition to the corporate support group, the BOD has recourse to the SOA unit, which comprises of several senior personnel members from the finance, accounting, internal control and legal departments, whose main responsibilities are to coordinate the integration of the planning and execution of internal control activities within the Company. internal audit group TELKOM’s Internal Audit Unit forms part of the Company’s internal control structure which is responsible for carrying out audits and independent assessment of the reliability and effectiveness of the Company’s internal control system and mechanism, as well as assisting Management and other operating units to achieve their respective goals. Internal Audit reviews the accuracy and reliability of Company information; compliance towards Company policy, business plan, operating procedures and statutory rules and regulations; internal controls to safeguard Company assets; the deployment of human resources in an efficient and cost-effective manner; and the achievement of the Company’s goals and objectives. The Company has developed a forum for communications among internal auditors working in different units of TELKOM to share information related to audit activities within the Company. Being listed on the New York Stock Exchange, the Company is among other things subject to Section 404 of SOA pertaining to the internal control over financial reporting. With the help of the management consultant Ernst Young, the Company has developed the standard operating procedures for internal control processes over financial reporting which were applied to the preparation of the Company’s financial statements for the year ending December 31, 2005. Due to the vast and complex nature of the project, the Company has formed a special task force that is assigned to the Company’s Internal Control Integration Project. In addition, the Commissioners and Directors of the Company own TELKOM’s shares amounting to 78,332 series-B shares common shares or 0.00039. Corporate secretary The Corporate Secretary is responsible for among other things, ensuring that the BOC and BOD function in accordance with prevailing procedures and regulations; attending all board meetings and taking minutes; disseminating material information and acting as the principal liaison officer with capital market authorities; coordinating investor relations activities; and generally undertake secretariat duties for the BOC and BOD. Corporate Compliance group The Corporate Compliance Group comprises several senior personnel members from various departments, whose responsibilities are to assist and advise the BOD in managing compliance control and providing legal protection to the activities of the Company. Corporate Transformation group The Corporate Transformation Group consists of several senior personnel members from various departments, whose responsibilities are to assist and advise the BOD on issues involving the transformation of the Company into a more customer-centric, service organization. Corporate Planning group The Corporate Planning Group consists of several senior personnel members from various departments, whose responsibilities are to assist and advise the BOD in the formulation of the Company’s short- to long-term business plans. shares Owned by Commissioners directors Commissioners Number of Shares P. Sartono 19,116 Directors Garuda Sugardo 16,524 Abdul Haris 1,000 Guntur Siregar 19,980 John Welly 21,712 Total 78,332 TELKOM Annual Report 2005 work and Business ethics The Company’s work ethics policy requires every employee to understand the Company’s vision and mission, and espouse the seven core values of integrity, transparency, commitment, teamwork, discipline, care and responsibility. Employees are encouraged to cultivate five key habits - stretch the goals, simplify, involve everyone, quality is my job and reward the winner – and take concrete steps to support the Company policy among other things by enhancing individual capacity, keep confidentiality, nurture loyalty, comply with rules, protect Company assets, and care for one’s working environment. In addition to the work ethics policy, TELKOM also maintains a comprehensive business ethics policy that encourages employees to live, breathe and experience the principles of transparency, independency, accountability, responsibility and fairness in their daily activities. The business ethics policy provides the guidelines by which the Company, management and employees are expected to act and relate with others in a business capacity. The policy outlines the ways in which TELKOM and its personnel must act in maintaining proper relations with regulators and other stakeholders, as well as engaging in fair and transparent business practices. Transparency Transparency to shareholders and the general public is practiced at TELKOM through a wide range of media and disclosure activities, in accordance with securities exchange regulations at home and abroad, and in line with the Company’s policy to uphold and encourage transparency at every level of operations. Pursuant to capital market laws and regulations in Indonesia, TELKOM submits unaudited quarterly financial reports and an audited annual financial report in the Indonesian language. In addition, TELKOM undertakes public exposes, analyst meetings, conference calls and press releases. In 2005, the Company issued 20 press releases pertaining to various developments of materiality, and three quarterly financial statement. TELKOM undertook two general meetings of shareholders in 2005, an AGMS on 24 June and an EGMS on 21 December. With respect to the Company’s listing on NYSE, TELKOM filed the 2004 Annual Report on Form 20-F to the US Securities and Exchange Commission US-SEC on 14 July 2005. The Form 20-F report constitutes a comprehensively detailed account of the Company which among other things covers the positioning and business strategy of the Company, policies and procedures, risks, internal control, accounting treatment, litigation case, and information on subsidiary companies. independent auditors The Company’s financial statements for fiscal years 2000 and 2001 were audited by the Public Accounting Firm of Hans Tuanakotta Mustofa, a member firm of Deloitte Touche Tohmatsu. For fiscal year 2002, the Company’s financial statements were audited by the Public Accountant Firm of Edi Pianto, and reaudited by PricewaterhouseCoopers PwC. The Company’s consolidated financial statements for the years 2003, 2004 and 2005 were audited by KAP Siddharta Siddharta Widjaja, the member firm of KPMG International in Indonesia “KPMG”. The appointment of the independent auditors for fiscal year 2005 was carried out in accordance with the appropriate procedures for such an appointment, taking into account both the independency and qualification of the independent auditors that were required by the Company, as referred to in the Report of the Audit Committee for said fiscal year. Audit fees billed by KPMG in 2005 in connection with the audit of our consolidated financial statements amounted to Rp 42,390.3 million. Risk management One of the key aspects of effective corporate governance is the formulation and execution of an enterprise-wide risk management framework. Subsequent to year-end 2005, on February 3, 2006, the Company issued a formal risk management policies and guidelines, entitled the TELKOM Risk Management, which among other things covers the three major areas of financial risk, operational risk and strategic risk. A more detailed explanation of the Company’s risk management policies and issues are presented starting from page 48. TELKOM Annual Report 2005 Transparency in Financial Reporting To comply with Section 404 of SOA, TELKOM with the help of the management consultant, Ernst Young, has developed the standard policies and procedures to implement verifiable internal control over financial reporting. Transparency in Procurement Process To improve transparency in vendors relations, TELKOM has initiated the e-Procurement and e-Auction process for the purchase of certain goods and services. Through the e-Procurement, personal interactions between vendors and the purchasing personnel of the Company are minimized and all vendors receive similar information. Transparency in employee assessment The performance evaluation of TELKOM employees have been made more transparent through the use of a Competency Assessment Tool, an on-line Intranet evaluation system through which an employee can make a self-assessment of his or her performance, while also being assessed by their superior, subordinate as well as peer colleagues. An Assessment Service Center has also been utilized to enable employees to learn about their potential for promotion or the requirements for a particular position. independency With respect to independency, the Commissioners and Directors of TELKOM are fully independent in their opinion and decision making. All Commissioners and Directors have recourse to regular training on a number of relevant issues to the Company’s business. They also have access to professional opinion and counsel from independent outside consultants at the Company’s expense. Promotion to Board memberships are determined upon the recommendations of the Company’s Nomination and Remuneration Committee, while promotion to other senior management positions are also determined independently through open job tenders and evaluative processes that take place in several layers from the Assessment Service Center, Competency Assessment Tool, and Management Hearing. In other activities that enhance transparency, TELKOM publishes a quarterly information memorandum Info Memo which covers the Company’s financial and operational results for the particular quarter-period, followed by an international conference call between the Management and capital market analysts as well as investors at home and abroad. In 2005, TELKOM’s investor relations held no less than 112 meetings with investors; four international conference calls with investors and analysts in Asia, Europe and North America; three international roadshows in those three regions; and participated in the 10th anniversary celebration of TELKOM ”Go Public” at the Jakarta Stock Exchange as well as the New York Stock Exchange, where TELKOM had the honour of ringing the ”Closing Bell” on the day of its 10th anniversary, November 14, 2005. In addition, the Company publicized the resolutions of its AGMS of June 2005 and the EGMS of December 2005 in several dailies, and disclosed other material information through the investors’ mailing list as well as on the Company’s official website, www.telkom-indonesia. com. Transparency in internal Communication In efforts to implement a more effective channel of communication among employees, TELKOM introduced in 2005 an Intranet portal that incorporates a Knowledge Management System. The system allows every employee to submit ideas and solutions for work and business improvements. TELKOM has also developed a special communication channel between Management and employees through the President Director SMS 3010. This provides employees with direct access to the President Director for their grievances and other issues that they might want to share directly with the CEO of the Company. The Intranet also features updated clippings on on-line media news about the Company for internal information consumption. The following table sets forth the various disclosure activities which TELKOM undertook throughout 2005. information Transparency activities Number of Activities Date Conference Calls between Directors and Investor 4 Every 3 months Analyst Investor Meetings 112 2 or 3 times a week Public Expose 1 November 24, 2005 AGMS 1 June 24, 2005 EGMS 1 December 21, 2005 Press Releases 20 as published Investor Conferences 5 Every 3 months Road Shows 3 Sept. and Nov. 2005 Go Public Commemorations 2 November 14, 2005 TELKOM Annual Report 2005 2 accountability in governance To encourage and uphold professional accountability, TELKOM has put in place a comprehensive manual on the different roles and responsibilities of the various governance units of the Company, including but not limited to the Board of Commissioners, Board of Directors, the various Committees and Corporate Support Groups for both the Commissioners and Directors, and other supporting units such as the Corporate Secretary, the Risk Management Unit, the Sarbanes Oxley Act Unit and Internal Audit Group. These governance units are accountable for their respective roles and responsibilities as defined by the Articles of Association of the Company, the Committee Charters, and Commissioners or Management directives with respect to certain task force groups or units. accountability in Financial statements Accountability in TELKOM’s financial statements for the year ending December 31, 2005 will have been met in the next AGMS of June 30, 2006, in which shareholders may or may not approve the financial statements or results of operations of the Company for said fiscal year. Furthermore, pursuant to Section 302 of SOA, both the Chief Executive Officer and Chief Financial Officer of TELKOM are accountable for the accuracy and verity of the Company’s financial statements for the fiscal year. accountability at work In an effort to instill professional accountability at every level of TELKOM’s organization, a more inclusive rewards and disincentive system has recently been introduced in the Company, while also aligning the Company’s compensation policy on the basis of meritocracy. Responsibility TELKOM constantly strives to strike a balance between managing its business in accordance with the prevailing laws and regulations, and adhering to best-practice management principles. All operating units have their respective roles and responsibilities that are clearly defined in the policies and rules and regulations of the Company, and in accordance with prevailing laws and regulations as well as best-practice management principles. Fairness In order to achieve fair dissemination of information, TELKOM undertakes equal treatment of the public, the capital market authorities, the capital market communities and shareholders. TELKOM does not discriminate on the basis of age, race, religion or gender, and employees are ensured equal employment opportunities within the Company. employee union: sekar and Collective agreement In May 2000, TELKOM employees formed a union named Serikat Karyawan TELKOM or “Sekar”. Membership in Sekar is not compulsory, and currently comprises of employees of all rank- and-file including managers and senior executives. As at year- end 2005, the members of Sekar numbered 21,991 personnel, accounting for 78.1 of the total number of TELKOM employees. Sekar espouses the vision of advancing the growth of the Company, to go hand-in-hand with the welfare of its employees. Its motto is: To achieve the best solution through communications. In 2005, among several other programs, Sekar undertook the following initiatives: • The Care for Aceh Program. To help restore the conditions of the Tsunami victims in Aceh, especially TELKOM employees and their families, Sekar succeeded in convincing the Management to include in the Collective Work Agreement a provision for setting aside a portion of management and employee salaries for donation to Aceh. Use of this fund raising proceeds has been placed fully under the control of Management. A more detailed account of the Care for Aceh Program of Sekar is presented in the chapter of Corporate Social Responsibility starting on page 66. TELKOM Annual Report 2005 • Retaining TELKOM’s Rights over Existing Access Code in Domestic Long Distance. As a vehicle that represents the aspirations of TELKOM employees, Sekar is not averse to business competition, but views the government’s policy on the provision of access codes for domestic long-distance telephony as potentially damaging to TELKOM’s business, while creating unfair competition. The notion that TELKOM’s infrastructure and customer base, which had been painstakingly built and serviced by TELKOM for decades, could be used by other telecommunication operators without compensation, is anathema to a fair and just competition. Furthermore, Sekar believes that such a policy may lead to a disincentive for other telecommunications operators to build their own customer base, and thereby contribute to increasing teledensity rate by expanding telephone networks to new areas of development. litigation Case On August 13, 2004, the Commissions for Business Competition Watch Komisi Pengawas Persaingan Usaha or KPPU issued its verdict in Commission Court, which determined that the Company had breached several articles of Law No. 51999 on Anti Monopolistic Practices and Unfair Business Competition Competition Law’. In addition, KPPU also indicated that the Company should allow Warung Telkom kiosk to channel international calls to other international call operators, and abolish the clause in agreements between the Company and Warung Telkom providers which limits 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 has filed an appeal to the Indonesian Supreme Court. As of the date of issuance of this annual report, the Indonesian Supreme Court has not issued its verdicts. TELKOM does not believe that these proceedings presently pending will have a material adverse effect on TELKOM’s consolidated financial position, result of operations or liquidity. Others There are on-going investigations by the West Java Police Department as of the conduct of TELKOM’s Director of Human Resources, Director of Consumer, and several other TELKOM employees including one former TELKOM Director and one former President Director of Napsindo. As the details of the investigations have not been made public, TELKOM does not know the full nature or extent of the investigation or the matters to which they relate, or whether any charges are likely to be filed. Based on press reports, TELKOM understands that the investigations relate principally to an alleged violation of anti-corruption law regarding i the retention by TELKOM of a consultant and an alleged overpayment without compliance with proper procedure; and ii the alleged provision of interconnection services to Napsindo, TELKOM’s subsidiary, and Globalcom, a Malaysian company, at an incorrect tariff, and alleged use by NapsindoGlobalcom of TELKOM’s network for the provision of illegal VoIP services. It is also understood that one of the investigations relates to TELKOM’s guarantee of a bank loan obtained by Napsindo. To TELKOM’s knowledge, no charges have been filed against any of the persons investigated, although several of them not including TELKOM’s Director of Consumer were held in police custody in West Java pending completion of the investigations. On May 10, 2006, those individuals were released from custody because the police were unable to find any incriminating evidence to support the charges during the 120-day period they were held in police custody. 120 days is the maximum period allowed for the police custody of suspects for investigation purpose. However, the investigation is still on-going. There can be no assurance that the police will not find evidence of wrong doing, that charges will not be filed in relation to the foregoing or that such person or other TELKOM employees will not be found guilty of any offence. Although TELKOM believes that the investigations are without merits, to the extent any of such persons are in custody, or are found guilty of any offence, TELKOM is and would be deprived of their services. In addition, TELKOM does not believe that there are any financial ramifications as a result of the investigation. TELKOM Annual Report 2005 The following describes the 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 “NYSE” for U.S. companies that are listed on the NYSE. Overview of indonesian law Indonesian public companies are required to observe and comply with certain corporate governance practices. The requirements and the standards for good corporate governance practices for public companies are mainly embodied in the following regulations: Law No. 1 of 1995 on Limited Liability Companies “Company Law”; the Law No. 8 of 1995 on Capital Market “Capital Market Law”; the Regulations of the Indonesian Capital Market Supervisory Board “BAPEPAM Regulations”; and the rules issued by the Indonesian stock exchanges, namely Jakarta Stock Exchange “JSX” and Surabaya Stock Exchange “SSX”. In addition to the above statutory requirements, the articles of association “Articles” of public companies commonly incorporate provisions directing the corporate governance practices in such companies. Similar to the laws of the United States, Indonesian laws and regulations require public companies to observe and comply with the 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 capitalization and shareholder requirements applicable to a publicly- listed company. In 2000, the Government established the National Committee on Corporate Governance “NCGI”, an informal committee with the role of 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 committee members by the Boards of Commissioners, as well as increasing the scope of Indonesian companies’ disclosure obligations. Composition of Board of directors The NYSE listing standards provide that the majority of the board of directors of a U.S. listed company must be 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 stature, the Companies that are required to submit periodic reports to the SEC in the U.S. including TELKOM, must disclose in their Annual Reports whether they have adopted a code of ethics for their senior financial officers. TELKOM Annual Report 2005 5 Board of Commissioners “BoC” and the Board of Directors “BoD”. Generally, the BoD is responsible for 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 advise the BoD. To the BoC, the Company Law requires a public company’s BoC to have at least two members. Although the Company Law is silent as to the composition of the BoC, Listing Regulation No. 1A issued by the JSX states that at least 30 of the members of the BoC of a public company such as TELKOM must be independent. The Company Law states that the BoD has the authority to manage 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 Indonesian companies and that of their U.S. counterparts, Indonesian law does not require that certain members of the BoD must be independent nor 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, nominatingcorporate 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 of whom are independent commissioners, four members not currently affiliated with TELKOM and one is a non-independent commissioner but with no right to vote as he is affiliated with the Government. 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 auditors. TELKOM’s audit committee can only recommend the appointment of external auditors to the BoC, and the BoC’s decision is subject to shareholder approval. TELKOM’s BoC also re-established TELKOM’s nomination and remuneration committee on May 20, 2003. The committee was assigned to formulate: a selection criteria and nomination procedures for Commissioners and Directors; and b a compensation scheme for Commissioners and Directors for the fiscal year 2003. 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 discussion on “Governance” starting on page 34. disclosure regarding corporate governance The NYSE listing standards require U.S. listed 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. 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, in particular 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. This is not required 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. TELKOM Annual Report 2005 The Audit Committee performs its duties within the guidelines of the Audit Committee Charter which describe the tasks and responsibilities of the Committee in detail. The Charter is reviewed and updated periodically, with the latest update having been made on February 11, 2005, and approved by the Board of Commissioners’ Decision Letter No. 001KEPDK2005. TELKOM’s Audit Committee has been established pursuant to the regulations of the Indonesian Capital Market Supervisory Board Bapepam and the U.S. Securities and Exchange Commission SEC, with a strong emphasis on the independence of the committee. On the basis of the Board of Commissioners’ Decision Letter No. 009 KEPDK2004 of August 2, 2004, the Audit Committee is comprised of the following members: Chairman: arif arryman Independent Commissioner Secretary: salam Independent Member Members:

P. sartono Independent Commissioner