SEC Info℠

Home

Search

My Interests

Help

Sign In

Please Sign In

PT Indosat Tbk – ‘20-F’ for 12/31/03

On:  Friday, 6/18/04, at 2:13pm ET   ·   For:  12/31/03   ·   Accession #:  1193125-4-105174   ·   File #:  1-13330

Previous ‘20-F’:  ‘20-F’ on 6/30/03 for 12/31/02   ·   Next:  ‘20-F’ on 6/29/05 for 12/31/04   ·   Latest:  ‘20-F’ on 4/30/14 for 12/31/13

in

this entire Filing. an “Entity” Search.

Show

Documents searched

and

each “hit”. the 1st “hit”.

↓↑Hints

 Text Wildcards:  ? (any letter/digit),  * (many).  Search Logic:  for Documents:  & (and),  | (or);  for Text:  | (anywhere),  "(&)" (near).  Details... 

  As Of                Filer                Filing    For·On·As Docs:Size              Issuer               Agent

 6/18/04  PT Indosat Tbk                    20-F       12/31/03   12:4.6M                                   RR Donnelley/FA

Document/Exhibit                   Description                      Pages   Size 

 1: 20-F        Annual Report of a Foreign Private Issuer           HTML   2.94M 
 2: EX-1.1      Amended and Restated Articles of Association Dated  HTML    304K 
                          March 8, 2004                                          
 3: EX-4.1      Merger Deed, Dated November 20, 2003                HTML    101K 
 4: EX-7.1      Operating and Financial Ratios                      HTML     20K 
 5: EX-8.1      List of Subsidiaries                                HTML     51K 
 6: EX-11.1     Code of Ethics                                      HTML     30K 
 7: EX-12.1     Certification by the CEO in Accordance With         HTML     15K 
                          Section 302 of Sarbanes-Oxley Act                      
 8: EX-12.2     Certification by the CFO in Accordance With         HTML     15K 
                          Section 302 of Sarbanes-Oxley Act                      
 9: EX-13.1     Certification by the CEO Required by 18 U.S.C.      HTML     10K 
                          1350                                                   
10: EX-13.2     Certification by the CFO Required by 18 U.S.C.      HTML     10K 
                          1350                                                   
11: EX-14.1     Indenture, Dated November 5, 2003 by Indosat        HTML    504K 
                          Finance Company B.V.                                   
12: EX-14.2     English Summary of Third Indosat Bonds              HTML     80K 

Table of Contents

Index to Financial Statements

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 20-F

ANNUAL REPORT

PURSUANT TO SECTION 13 OR 15(d) OF

THE SECURITIES EXCHANGE ACT OF 1934

PT Indonesian Satellite Corporation Tbk.

(Exact name of Registrant as specified in its charter)

Indonesian Satellite Corporation

(A limited liability company)

(Translation of Registrant’s name into English)

REPUBLIC OF INDONESIA

(Jurisdiction of incorporation or organization)

Indosat Building

Jalan Medan Merdeka Barat, 21

Jakarta 10110 — Indonesia

(62) (21) 3802614

(Address and telephone number of principal executive offices)

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

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.

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

Yes  x        No  ¨

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

Item 17  x        Item 18  ¨

Table of Contents

Index to Financial Statements

TABLE OF CONTENTS

i

Table of Contents

Index to Financial Statements

CERTAIN DEFINITIONS, CONVENTIONS AND GENERAL INFORMATION

Unless the context otherwise requires, references in this Form 20-F to the “Company”, “we”, “us”, and “our” are to Indosat and its consolidated subsidiaries. All references to “Indonesia” are references to the Republic of Indonesia. All references to the “Government” herein are references to the Government of Indonesia. References to “United States” or “U.S.” are to the United States of America. References to “United Kingdom” are to the United Kingdom of Great Britain and Northern Ireland. References to “Rupiah” or “Rp” are to the lawful currency of Indonesia and references to “U.S. dollars” or “US$” are to the lawful currency of the United States. Certain figures (including percentages) have been rounded for convenience, and therefore indicated and actual sums, quotients, percentages and ratios may differ. Unless otherwise indicated, all financial information with respect to us has been presented in Rupiah in accordance with Indonesian GAAP.

Solely for the convenience of the reader, certain Rupiah amounts have been translated into U.S. dollars at specified rates. Unless otherwise indicated, U.S. dollar equivalent information for amounts in Rupiah is based on the Indonesian Central Bank Rate for December 31, 2003, which was Rp8,465 to US$1.00. The exchange rate of Rupiah for U.S. dollars on June 9, 2004 was approximately Rp9,278 to US$1.00. The Federal Reserve Bank of New York does not certify for customs purposes a noon buying rate for cable transfers in Rupiah. No representation is made that the Rupiah or U.S. dollar amounts shown herein could have been or could be converted into U.S. dollars or Rupiah, as the case may be, at any particular rate or at all. See “Exchange Rate Information” for further information regarding rates of exchange between Rupiah and U.S. dollars.

FORWARD-LOOKING STATEMENTS

This Form 20-F includes “forward-looking statements”, as defined in Section 27A of the Securities Act, Section 21E of the U.S. Securities Exchange Act of 1934, as amended (the “Exchange Act”) and within the meaning of the Private Securities Litigation Reform Act of 1995, including statements regarding our expectations and projections for future operating performance and business prospects. The words “believe”, “expect”, “anticipate”, “estimate”, “project”, and similar words identify forward-looking statements. In addition, all statements other than statements of historical facts included in this Form 20-F are forward-looking statements. Although we believe that the expectations reflected in the forward-looking statements herein are reasonable, we can give no assurance that such expectations will prove to be correct. This Form 20-F discloses, under “Part I – Item 3: Key Information—Risk Factors” and elsewhere, important factors that could cause actual results to differ materially from our expectations

1

Table of Contents

Index to Financial Statements

GLOSSARY

The explanations of technical terms set forth below are intended to assist the reader to understand such terms, but are not intended to be technical definitions.

2

Table of Contents

Index to Financial Statements

3

Table of Contents

Index to Financial Statements

4

Table of Contents

Index to Financial Statements

5

Table of Contents

Index to Financial Statements

PART I

Item 1:    IDENTITY OF DIRECTORS, SENIOR MANAGEMENT AND ADVISORS

Not Applicable.

Item 2:    OFFER STATISTICS AND EXPECTED TIMETABLE

Not Applicable.

Item 3:    KEY INFORMATION

Selected Financial Data

The following table presents our selected consolidated financial information and operating statistics for each of the periods indicated. This information should be read in conjunction with, and is qualified in its entirety by reference to, our audited consolidated financial statements, including the notes thereto, and the other information included elsewhere herein. Our consolidated financial statements are stated as of and for the years ended December 31, 2001, 2002 and 2003. Our consolidated financial statements as of and for the year ended December 31, 2001 were audited by Prasetio, Utomo & Co. (then a member of Andersen Worldwide, SC, in Indonesia), except with respect to PT Satelit Palapa Indonesia (“Satelindo”)’s consolidated financial statements, which were audited by Siddharta, Siddharta & Widjaja. Our consolidated financial statements as of and for the years ended December 31, 2002 and 2003 have been audited by Prasetio, Sarwoko & Sandjaja, the Indonesian member firm of Ernst & Young Global.

Our 1999 and 2000 audited consolidated financial statements were restated in 2001 to include our equity in Satelindo (previously accounted for by the cost method) and to consolidate the net assets of PT Aplikanusa Lintasarta (“Lintasarta”) (previously accounted for by the equity method), as if these acquisitions took place at the beginning of the earliest period presented in the 1999 audited consolidated financial statements.

Such audited consolidated financial statements have been prepared in accordance with Indonesian GAAP, which differs in certain significant respects from U.S. GAAP. See Notes 42 and 43 of the notes to our audited consolidated financial statements contained elsewhere herein, which provide a description of certain material differences between Indonesian GAAP and U.S. GAAP, as they relate to us and a reconciliation to the amount of U.S. GAAP net income for each of the years ended December 31, 2001, 2002, and 2003 and the amount of U.S. GAAP stockholders’ equity as of December 31, 2002 and 2003.

6

Table of Contents

Index to Financial Statements

7

Table of Contents

Index to Financial Statements

8

Table of Contents

Index to Financial Statements

Exchange Rate Information

The following table shows the exchange rate of Rupiah to U.S. dollars for the periods indicated. The Rupiah middle exchange rate is calculated based on the buying and selling rate of Bank Indonesia. No representations are made that the Rupiah or U.S. dollar amounts referred to herein could have been or could be converted into U.S. dollars or Rupiah, as the case may be, at the rate indicated or at any other rate at all.

Bank Indonesia is the sole issuer of Rupiah and is responsible 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 and permitted the exchange rate for the Rupiah to float without an announced level at which it would intervene. Since that date, the Rupiah has depreciated significantly against world currencies, from Rp2,530 per U.S. dollar on August 13, 1997 to a range of Rp7,300 to Rp14,900 per U.S. dollar during 1998, Rp6,726 to Rp8,950 per U.S. dollar during 1999, Rp6,935 to Rp9,595 per U.S. dollar during 2000, Rp8,425 to Rp11,145 per U.S. dollar during 2001, Rp8,460 to Rp10,473 per U.S. dollar during 2002 and Rp8,275 to Rp8,908 per U.S. dollar during 2003. At December 31, 2003, the exchange rate was at Rp8,465 per U.S. dollar, compared with the exchange rate of Rp10,400 and Rp8,940 per U.S. dollar at December 31, 2001, and December 31, 2002, respectively. On June 9, 2004, the exchange rate was Rp9,278 per U.S. dollar.

The Rupiah has been and in general is freely convertible or transferable. Bank Indonesia has introduced regulations to restrict the movement of Rupiah from banks within Indonesia to offshore banks without underlying

9

Table of Contents

Index to Financial Statements

trade or investment reasons, thereby limiting offshore trading to existing sources of liquidity. In addition, Bank Indonesia has the authority to request information and data concerning the foreign exchange activities of all people and legal entities that are domiciled, or plan to reside, in Indonesia for at least one year.

Foreign Exchange and Foreign Equity Ownership Restrictions

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 interests, are free from exchange controls. A number of regulations, however, have an impact on the exchange system. Bank Indonesia recently introduced regulations to restrict the movement of Rupiah from banks within Indonesia to offshore banks without underlying trade or investment reasons, thereby limiting offshore trading to existing sources of liquidity. In addition, Bank Indonesia has authority to request information and data concerning the foreign exchange activities of all people and legal entities that are domiciled in Indonesia or plan to domicile in Indonesia for at least one year.

Prior to September 1997, foreign investors were only permitted to purchase up to 49% of shares offered in a public offer and up to 49% of the publicly listed shares of all Indonesian listed companies regardless of the nature of their activities. On September 4, 1997, such restrictions were removed for most Indonesian companies, including us. Since 2000, the Indonesian government has permitted businesses operating in the telecommunications sector to enter into joint ventures with foreign entities without capital restrictions.

10

Table of Contents

Index to Financial Statements

RISK FACTORS

Risks relating to Indonesia

We are incorporated in Indonesia and substantially all of our operations, assets and customers are located in Indonesia. As a result, future political, economic, legal and social conditions in Indonesia, as well as certain actions and policies which the Government may, or may not, take or adopt may have a material adverse effect on our business, financial condition and results of operations.

The inability of the Government to secure funding from sources other than the International Monetary Fund could adversely affect the economy and our business.

The 1997 Asian economic crisis had a significant adverse impact on Indonesia, causing, among other adverse changes, a significant depreciation in the value of the Rupiah against the U.S. dollar and other currencies and depletion of the country’s foreign currency reserves. The crisis caused the Government to request assistance from the International Monetary Fund (the “IMF”) and, in October 1997, the IMF agreed to provide relief contingent upon the implementation of economic reforms, such as the Government undertaking asset sales and abolishing subsidies for commodities and other consumer products. In addition to the IMF, the World Bank has been an important source of funding for the Government. Indonesia has received assistance from the IMF and the World Bank since late 1997. The Government did not renew its program with the IMF when it expired at the end of 2003. Total external indebtedness of the Government and private sector companies in Indonesia amounted to US$134.85 billion as of December 31, 2003, which was approximately 64.7% of Indonesia’s GDP for that year. If the Government is not able to generate a fiscal budget surplus or secure alternative funding, it may default on its debts, which in turn is likely to have a material adverse impact on our business.

The members of the Paris Club, the Consultative Group in Indonesia (“CGI”) and the Inter-Governmental Group on Indonesia (“IGGI”) are all important sources of funding for the Government. The Paris Club is an informal voluntary group of 19 creditor countries that seeks to coordinate solutions for payment difficulties experienced by debtor nations. CGI is a group of 19 donor countries and 13 international organizations that meet annually to coordinate donor assistance to Indonesia. Lending from the Paris Club members to the Government accounts for approximately one-third of the Government’s total debt. Together, CGI and IGGI members were owed approximately US$45.86 billion as of June 30, 2003. In April 2002, the Paris Club agreed to reschedule the Government’s approximately US$5.4 billion of principal and interest that was due to certain creditors between April 2002 and December 2003 by extending the Government’s payment period. In determining whether to reschedule such debt, the Paris Club reviewed the economic reform program carried out by the Government with support from the IMF. The Government has several times successfully rescheduled its foreign debt. However, from 2004, the Paris Club has publicly stated that it will no longer reschedule debt owed to its members or to other creditors by the Government, as a result of the Government’s decision to end the IMF program. CGI and IGGI may also elect not to extend further aid should the Government depart from the precepts of the IMF program.

The Government may be unable to fund subsidies for staples such as food and fuel which, in turn, could have serious social, economic and political consequences and could have a material adverse effect on us or our business.

A slowdown in economic growth, or negative growth, in Indonesia could adversely affect our business.

Our performance and the quality and growth of our customer base and service offerings are necessarily dependent on the health of the overall Indonesian economy. A severe economic crisis in 1997 resulted in real GDP declining in 1998 by 13.1%, with 4.9%, 3.5%, 3.6% and 4.1% growth in 2000, 2001, 2002 and 2003, respectively. Indonesia’s economy remains significantly affected by the 1997 Asian economic crisis and substantially reliant on the support of international agencies to prevent sovereign debt defaults.

11

Table of Contents

Index to Financial Statements

The economic difficulties faced by Indonesia during the 1997 Asian economic crisis resulted in, among other things, significant volatility in interest rates. Such volatility had a material adverse impact on the ability of many Indonesian companies to service their existing indebtedness. High interest rates during the crisis made it difficult for Indonesian companies to raise necessary funding and to maintain payments on debt. The interest rate for one-month Bank Indonesia certificates (SBI) ranged from 10.5% in June 1997 to a peak of 70.8% in July 1998. The one-month SBI interest rate was 7.33% on April 30, 2004.

Indonesia continues to have a significant budget deficit, limited foreign currencies reserves, a volatile currency and a weak banking sector. High inflation continues to hinder economic recovery. During 2003, the inflation rate was approximately 5.1%. Any continuation or worsening of economic conditions, including significant depreciation of the Rupiah or increase in interest rates or inflation, could materially adversely affect us and our corporate and retail customers. This, in turn, could materially and adversely affect our financial condition and results of operations, including our ability to expand our cellular network, sell our services, implement our business strategy and service our U.S. dollar-denominated debt.

Social and civil unrest could adversely affect our business.

Indonesia has experienced social and civil unrest which has, on occasion, escalated into riots and violence. In June 2001, demonstrations and strikes affected at least 19 cities after the Government mandated a 30.0% increase in fuel prices. Similar demonstrations occurred in January 2003, when the Government attempted to increase fuel prices, electricity rates and telephone charges. In both instances, the Government was forced to repeal, defer or substantially reduce such proposed increases.

Separatist movements and clashes between religious and ethnic groups have also resulted in social and civil unrest in parts of Indonesia. In the provinces of Aceh and Papua (formerly Irian Jaya), there have been numerous clashes between supporters of separatist movements and the Indonesian military. In the province of Maluku, clashes between religious groups have resulted in thousands of casualties and displaced persons over the past several years. The Government has attempted to resolve problems in these troubled regions with limited success. In May 2003, peace talks between Government officials and supporters of the separatist movement in Aceh collapsed and the Government imposed martial law. Recently, the Government revoked martial law and imposed a state of civil emergency.

Social and civil conditions have and could continue to have a material adverse effect on our business and confidence in Indonesia’s economy. We cannot be certain that social and civil disturbances will not occur in the future. Future disturbances could lead to further political and economic instability, increased internal divisions within the Government and loss of confidence in Indonesia’s economy and could adversely affect our business.

Terrorist activities in Indonesia could destabilize the country, thereby adversely affecting our business.

An extensive bombing campaign struck religious buildings throughout Indonesia in 2000 and bombings have escalated in Jakarta over the last three years at Government buildings, foreign diplomatic facilities, night clubs and other locations. Past targets include the Jakarta Stock Exchange building, the Police Function Building in Jakarta, the departure lounge of Jakarta’s Soekarno-Hatta International Airport, the parliament building and a shopping mall. On October 12, 2002, over 200 people were killed in a bombing at a tourist area in Bali. On August 5, 2003, a bomb exploded at the Marriott Hotel in Jakarta killing 13 people and injuring 149 others. Indonesian and U.S. government officials have indicated that these bombings may be linked to international terrorist organizations.

No assurance can be given that further terrorist acts will not occur in the future. Such terrorist acts may be directed at foreigners in Indonesia or in relation to national elections scheduled for 2004. Following the commencement of hostilities in Iraq, a number of governments have issued warnings to their citizens in relation

12

Table of Contents

Index to Financial Statements

to a perceived increase in the possibility of terrorist activities in Indonesia, targeting foreign, particularly U.S., interests. Such acts could destabilize Indonesia and increase internal divisions within the Government as it evaluates responses to such instability and unrest. Violent acts arising from and leading to instability and unrest have had, and could continue to have, a material adverse effect on investment and confidence in, and the performance of, the Indonesian economy and our business.

Labor activism could adversely affect us, our customers and Indonesian companies in general, which in turn could adversely affect our 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. In 2000, the Government issued a labor regulation increasing the amount of severance, service and compensation payments payable to terminated employees. Employees who resign during a change of control of their employer are also entitled, under the regulation, to service and compensation payments, provided that such employees have worked for their employer for at least three years. A new labor law took effect on March 25, 2003 that permits employees to form unions without intervention from their employers. It is unclear what effect, if any, this law will have on labor relations in Indonesia or how this law will be interpreted with existing labor regulations.

These labor laws may make it more difficult for businesses, including our business, to downsize or have flexible labor policies. In August 1999, Indosat’s employees formed a labor union. After the Transformation Program, we had two labor unions (one each from Indosat employees and the legacy Satelindo’s labor union) with approximately 3,000 members, or 73.0% of our permanent workforce in the aggregate, as of December 31, 2003. Although the union has not taken industrial action to disrupt our operations in the past, it did threaten to do so in connection with our recent privatization, and no assurances can be given that it will not do so in the future. The labor unions may have significant bargaining power and may cause modification or delay in the implementation of policies that the unions determine may adversely impact the interests of its members. No assurances can be given that additional unions will not be formed by our employees or that the formation of such unions or activities of the current unions will not adversely affect our business.

Political instability in Indonesia could adversely affect the economy, which in turn could affect our business.

Indonesia has experienced political instability in recent years. As economic conditions in Indonesia worsened in 1998, many cities, including Jakarta, experienced rioting, unrest and destruction of property. This instability led to the resignation of President Suharto in May 1998. Promptly thereafter, Vice President Baharuddin Jusuf Habibie was sworn in as President and called for reforms and parliamentary elections to be held in October 1999. Following the elections, the People’s Consultative Assembly elected Abdurrahman Wahid as President and Megawati Sukarnoputri as Vice President. In February 2001, a committee of the Indonesian parliament, the People’s Representative Council alleged that President Wahid was involved in instances of corruption. In July 2001, the MPR voted to impeach President Wahid and elected Megawati Sukarnoputri in his place.

Since taking office in July 2001, President Megawati has appointed a new cabinet and announced plans to improve economic conditions and has generally received positive support both domestically and internationally. However, past political instability and the Government’s inability to prevent recent terrorist attacks has caused confidence in the Indonesian economy to remain low. National elections, including the first direct popular election of the President, are scheduled to occur in 2004, and any uncertainty or political instability associated with these upcoming elections may impact Indonesia’s economy and our business. Should there be a resurgence of political instability, there are likely to be adverse effects on the Indonesian economy and our business.

Political and related social developments in Indonesia have been unpredictable in the past, and there can be no assurance that social and civil disturbances will not occur in the future and on a wider scale, or that any such disturbances will not, directly or indirectly, have a material adverse effect on us.

13

Table of Contents

Index to Financial Statements

Future changes in the value of the Rupiah against the U.S. dollar or other currencies could adversely affect our business.

The Government’s exchange rate policies and any future changes in the value of the Rupiah against the U.S. dollar and other currencies could adversely affect our business. Since July 1997, the Rupiah has been subject to significant depreciation and volatility. 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 1997 to mid-1998, the value of the Rupiah relative to the U.S. dollar declined from a high of Rp2,360 = US$1.00 as of January 2, 1997 to a low of Rp15,250 = US$1.00 as of June 17, 1998. As of June 9, 2004, the exchange rate was Rp9,278 = US$1.00. See “Exchange Rate Information.” No assurances can be given that the Rupiah will not be subject to depreciation and continued volatility, that the current exchange rate policy will remain the same, or that the Government will, or will be able to, act when necessary to stabilize, maintain or increase the value of the Rupiah, and will not act to devalue the Rupiah, or that any such action, if taken, will be successful.

Since 1997, depreciation of the Rupiah has made it difficult for many Indonesian companies with Rupiah-denominated revenue streams and significant U.S. dollar or other foreign currency-denominated loans or costs to meet their repayment obligations. Depreciation or volatility of the Rupiah against the U.S. dollar or other currencies could adversely affect our ability to meet our foreign currency-denominated payment obligations, such as for payments of our indebtedness and additional equipment purchases, and adversely affect general economic conditions in Indonesia.

We currently hedge a portion of our foreign currency exposure. Our annual U.S. dollar-denominated revenues are less than the sum of our U.S. dollar-denominated expenses and annual payments of U.S. dollar-denominated principal and interest payments. No assurances can be given that we will be able to manage our exchange rate risk successfully in the future or that we will not be adversely affected by our exposure to exchange rate risk.

Downgrades of credit ratings of the Government or Indonesian companies could adversely affect our business.

Beginning in 1997, certain international credit rating agencies, including Moody’s, Standard & Poor’s (“S&P”) and Fitch Ratings (“Fitch”), 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. Since 1997, such international credit rating agencies have upgraded Indonesia’s sovereign rating on several separate occasions. Indonesia’s sovereign foreign currency long-term debt is rated “B2” by Moody’s, “B (positive outlook)” by S&P and “B+” by Fitch, and its foreign currency short-term debt was rated “B (positive outlook)” by S&P and “B” by Fitch. These ratings reflect an assessment of the Government’s overall financial capacity to pay its obligations, and its ability or willingness to meet its financial commitments as they become 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, including us. Any such downgrade could have an adverse impact on liquidity in the Indonesian financial markets, the ability of the Government and Indonesian companies, including us, to raise additional financing and the interest rates and other commercial terms at which such additional financing is available. Interest rates on our floating rate Rupiah-denominated debt would also likely increase.

We are 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 us, than is regularly disclosed by public companies in countries with more mature securities markets. Our audited consolidated financial statements have been prepared in accordance with Indonesian GAAP, which differs in certain material respects from U.S. GAAP, including accounting for amortization of goodwill, capitalization of foreign exchange losses-net of gain and revenue recognition.

14

Table of Contents

Index to Financial Statements

We are incorporated in Indonesia, and it may not be possible for investors to effect service of process, including certain judgments, on us within the United States.

We are a limited liability company incorporated in Indonesia, operating within the framework of Indonesian laws relating to foreign capital invested companies, and all of our significant assets are physically located in Indonesia. In addition, the majority of our 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 us or such persons within the United States, or to enforce against us or such persons in the U.S. judgments obtained in U.S. courts, including judgments predicated upon the civil liability provisions of the U.S. federal securities laws or the securities laws of any state within the United States, or upon other bases.

We have been advised by our Indonesian legal advisor that judgments of U.S. courts, including judgments predicated upon the civil liability provisions of the U.S. federal securities laws, are not enforceable in Indonesian courts, although such judgments could be admissible as non-conclusive evidence in a proceeding on the underlying claim in an Indonesian court. There is doubt as to whether Indonesian courts will enter judgments in original actions brought in Indonesian courts predicated solely upon the civil liability provisions of the U.S. federal securities laws. As a result, the claimant would be required to pursue claims against us or such persons in Indonesian courts.

Risks relating to us

We operate in a legal and regulatory environment that is undergoing significant reforms; such reforms may result in increased competition, reduced margins and reduced revenues, among other things, all of which may have a material adverse effect on our business.

The regulatory reform in the Indonesian telecommunications sector, which was initiated by the Government in 1999, has resulted in the limited liberalization of the telecommunications industry. For instance, the issuance of an international calls license to PT Telekomunikasi Indonesia Tbk. (“Telkom”) in May 2004 will introduce competition in this market sector.

As required under the new Indonesian Telecommunications Law of 1999 (“Telecommunications Law”), an independent regulatory and supervisory body was established on January 5, 2004 to regulate and supervise the telecommunications sector in Indonesia, while the Ministry of Communications (the “MoC”) maintained its authority to formulate industry policies.

In 2004, the MoC issued Ministerial Decree No. 28/2004, which amends Ministerial Decree No. 4/2001, with respect to the Fundamental Technical Plan, which sets forth the international access codes “001” and “008” as network and service identifiers for basic telephony providers. Other telecommunications operators in Indonesia interpreted prior legislation to mean that, with effect from the liberalization of international telecommunications services in Indonesia, network providers were only able to retain interconnection revenues, and not the additional usage tariffs from end users, arising from international call services. Currently, we receive such usage tariffs. No assurance can be given that future regulatory changes will not have a material adverse effect on us. The early termination of incumbent monopoly rights by the Government has had, and will continue to have, a significant impact on our business. Moreover, the Ministerial Decree stipulates that users may freely choose the operator of DLD an IDD telecommunications services.

We compete principally with other nationwide telecommunications providers in Indonesia. As the reform of the telecommunications sector continues, other entities, including those with greater resources than us, may enter the Indonesian telecommunications sector and compete directly with us. No assurance can be given that we will be able to compete successfully with other domestic and foreign telecommunications companies or that increased competition will not have a material adverse effect on our business.

15

Table of Contents

Index to Financial Statements

The Government is the majority shareholder of our major competitors Telkom and PT Telekomunikasi Selular (“Telkomsel”), and the Government of Singapore is a substantial shareholder of Telkomsel. Both governments may give priority to Telkom’s and Telkomsel’s businesses over ours.

The Government currently owns a 15.0% equity stake and one “Series A” special share (the “Special Share”), which has special voting rights and veto rights over certain strategic matters under our Articles of Association, including the decision to liquidate us. We understand that the Government and ST Telemedia, acting through its subsidiary, ICL, have entered into a Shareholders’ Agreement that limits the Government’s ability to elect and remove our Commissioners and Directors. Under such Shareholder Agreement, ICL may appoint a simple majority of the Board of Commissioners and the Board of Directors and the Government may appoint two nominees to each governing body, provided that if the Government reduces its ownership below a certain number of shares and remains the holder of the Series A Share, it may only nominate one Commissioner and one Director.

The Government also owns a 51.2% equity stake in Telkom, which is our foremost competitor in fixed telecommunications services and, which we expect will enter the international call services market by mid-2004. In addition, Telkom owns a 65.0% interest in Telkomsel, one of our two main competitors in the provision of cellular services. Following our recent privatization, the percentage of the Government’s ownership interest in Telkom is significantly greater than its ownership interest in us. No assurances can be given that significant Government policies and plans will support our business or that the Government will treat Telkom and us equally when evaluating future decisions and policies.

In addition, the Government, through the MoC, also exercises regulatory power over the Indonesian telecommunications industry with objectives not necessarily consistent with the maximization of profits. Certain Government policies or objectives may have a material adverse impact on our financial condition and results of operations.

The Government of Singapore, through its investment arm Temasek Holdings (Private) Limited, is indirectly our major shareholder. Temasek Holdings (Private) Limited also holds a substantial beneficial shareholding in our principal cellular competitor Telkomsel. No assurances can be given that significant Government of Singapore policies and plans will support our business or that the Government of Singapore will treat Telkomsel and us equally when evaluating future decisions and policies.

We may encounter difficulties in realizing cost savings, or achieving within the anticipated timeframe, expected strategic objectives and other benefits of the Transformation Program.

Our goal is to become a leading cellular/wireless-focused, fully-integrated telecommunications network and service provider in Indonesia. Prior to formulating the Transformation Program and merger (each as described more fully “Item 4: Information on the Company—Our Transformation”), Indosat, Satelindo and IM3 were affiliated, but operated largely independently. Our ability to realize cost savings from certain of the departments, systems and procedures previously operated independently by Satelindo and IM3 (e.g., back-office support departments and human resources), and to obtain synergies available as a result of the Transformation Program and merger, may be constrained by the separate operating history of Satelindo and IM3 and the technical complexity of the integration process. Moreover, the integration of these companies will require significant attention from our management and the merger of previously-distinct corporate cultures. No assurance can be given as to the timing or extent of cost savings and efficiencies that we will achieve.

We may also encounter difficulties implementing the Transformation Program if certain technical hurdles cannot be overcome, including integration of our billing systems and other information technology systems. In addition, the Transformation Program and merger will involve organizational restructuring to integrate companies with different corporate cultures and certain changes to the compensation structures of employees of Satelindo, IM3 and Bimagraha.

16

Table of Contents

Index to Financial Statements

Our controlling shareholders’ interests may differ from those of our other shareholders.

In December 2002, the Government sold 41.9% of our outstanding shares to ICL, a Mauritius company owned and controlled by ST Telemedia, a member of the Singapore Technologies Group. The entry of ST Telemedia as our new controlling shareholder may have certain positive effects on the performance of Indosat (including with respect to technology transfer and our financial position). However, no assurances can be given that ST Telemedia will elect or be able to influence our business in a way that benefits our other shareholders and creditors.

Furthermore, the Government’s sale to ST Telemedia triggered several demonstrations and protests, including two class action lawsuits, one lodged by an Indonesian non-governmental organization and one lodged by more than 100 parties, each alleging that proper government and parliamentary approvals, required by the constitution, were not obtained for the divestment of the Government’s 41.9% stake. These suits were dismissed by the Central Jakarta District Court, but appeals to the High Court are pending. There are only limited precedents with respect to such suits in Indonesia, and we are unable to assess the validity of the appellants’ claims. As a result, the outcome of the case is uncertain. No assurance can be given that this lawsuit and related demonstrations will not have a material adverse affect on our business or result in a change of control.

The pledge of our shares by ICL to guarantee ICL’s payment obligations to its creditors may have a material adverse effect on our business.

As our controlling shareholder, actions taken by ICL, and/or its controlling shareholder, ST Telemedia, may have a material adverse impact on our business. On December 10, 2003, ICL pledged its ownership interest in Indosat to its lenders as security for payment obligations of its parent company. No assurance can be given as to the ability to fulfill its payment obligations to its lenders. In the event that ICL fails to satisfy its payment obligations, such failure could result in a change in our controlling shareholder. Any new controlling shareholder may have a different investment purpose than ICL and will have the ability to influence our business signficantly. No assurance can be given that such new controlling shareholder will not have a material adverse impact on our business operations and financial prospects.

The Government may adjust or fail to adjust tariffs, which may have a material adverse effect on our business.

Based on the applicable rules and regulations, the Government, through the MoC, is responsible for setting a formula for all telecommunications tariffs. The MoC has established the local and DLD service tariff formula and is currently in the process of setting new tariff formulas for other telecommunications services. Regulated tariffs include activation fees, monthly fees, airtime usage fees for postpaid cellular services, interconnection fees and domestic and international long distance telephony rates. These tariff levels are subject to periodic review and adjustment. Tariff rates set by the Government may be changed in the near future due to further deregulation of the telecommunications sector in Indonesia. Since the establishment of the independent body to oversee the telecommunications sector, the Government has agreed to observe the proposal from such body that it set the appropriate tariff adjustments. Although there is no obligation for the Government to accept the body’s proposals, the Government and the House of Representatives have recognized such proposal as implementation of a duty of such body. In March 2004, the Government announced a tariff rebalancing policy. This policy eliminates the cross-subsidy between the DLD tariff and local call tariffs, thereby allowing the telecommunications operator to determine the increment of local call tariffs and its monthly fee. In 2004, the total rebalancing tariff for local, DLD and monthly charges may be adjusted upward 9.0% provided that the minimum reduction of the DLD tariff is 10.0%.

Since a significant portion of our operating revenues are dependent on tariffs fixed by the Government, any future action or inaction by the Government in connection with its tariff policies could have a material adverse

17

Table of Contents

Index to Financial Statements

effect on our business. In addition, prepaid cellular services prices are regulated by reference to postpaid tariff policies and, although not directly regulated by the Government, operating revenues from prepaid cellular services could also be adversely affected by future changes in the Government’s tariff policies.

We depend on the domestic telephone network and such reliance may decrease the performance of our cellular network and our ability to deliver international call services, resulting in substandard service quality and over-capacity issues that we may be unable to resolve.

We depend on access to the PSTN for termination and origination of cellular telephone calls to and from fixed-line telephones. A large percentage of our cellular call traffic must go through the PSTN. Our business has been negatively affected by the limited interconnection facilities to the PSTN that have been provided to date and our cellular business may be negatively affected by such causes in the future. Because of interconnection capacity constraints, our cellular customers have at times experienced high levels of blocked calls. We have increased the number and capacity of interconnection points in an attempt to alleviate these problems, but no assurances can be given that such interconnection points can be increased or maintained at current levels. Moreover, all switched calls carried by us either originate or terminate on Telkom’s PSTN or other cellular operator’s network, which we do not control. Demand for our international call services will depend, to a significant degree, on the development, quality and maintenance of Indonesia’s domestic telephone network.

We may not have the capital resources necessary to remain competitive in the telecommunications industry.

The delivery of telecommunications services is capital intensive. In order to be competitive, we must continually expand, modernize and update our technology, which involves substantial capital investment. We are investing in expanding the capacity and coverage of our cellular networks, which will require significant capital expenditures. No assurances can be given that we will have capital resources sufficient to develop our cellular networks or update our other technology to an extent necessary to remain competitive in the Indonesian telecommunications market.

We may be unable to obtain adequate financing to fund our capital requirements.

We expect that over the next several years, a substantial portion of our cash flow will be used to pay principal and interest with respect to our indebtedness and to finance capital expenditures. We may need to incur additional financing in order to fund our capital expenditures program. If we are unable to obtain adequate vendor or other third party financing for planned capital expenditures or otherwise source such additional financing through other financing arrangements, we may have to abandon, delay or postpone certain of our planned capital expenditures. We anticipate that we will invest approximately US$675.0 million in 2004 and US$500.0 million in 2005 in capital expenditures. In addition, we may need to increase our capital expenditures as a result of future developments in technology in the telecommunications industry to respond to actions taken by our competitors or to pursue business opportunities. The actual amounts of our capital expenditures during these periods may change depending on actual rates of our subscriber growth. Consequently, we may need to arrange additional financing beyond that required by our current capital expenditure forecasts.

As of December 31, 2003, we had outstanding long-term indebtedness, which amount includes bonds payable excluding the current portion, of Rp10,179.3 billion. Our ability to satisfy our financial obligations and to fund future capital expenditures will depend upon our future operating performance, which is subject to prevailing economic conditions, levels of interest rates and financial, business and other factors, many of which are beyond our control.

Our existing debt obligations and our future capital expenditures could limit our ability to respond to changing business or economic conditions or to respond to declines in operating results.

18

Table of Contents

Index to Financial Statements

We rely on key management personnel and our business may be adversely affected by an inability to recruit, train, retain and motivate key employees.

We believe that our current management team, as well as the management teams in place at our subsidiaries, contribute significant experience and expertise to the management of the respective entities. The continued success of our business and our ability to execute our business strategy in the future will depend in large part on the efforts of such key personnel. There is a shortage of skilled personnel in the telecommunications sector in Indonesia and this shortage is likely to continue. These shortages increase competition for certain specialist personnel, thereby causing increased turnover and employment costs.

In 2003, 104 employees participated in our voluntary unconditional early retirement program offered in connection with the merger of Satelindo, Bimagraha and IM3 into Indosat. As an impact of such participation, 102 employees from Indosat and two employees from Satelindo resigned. We incurred approximately Rp48.8 billion in personnel expenses to fund the early retirement program. No assurances can be given that additional employees will not participate in the early retirement program in future periods, thereby increasing our personnel expenses.

As a significant shareholder, ST Telemedia has seconded key management personnel to us. If any key members of our management become unable or unwilling to continue in their roles, and we are unable to attract or promote and retain other qualified executives, such staffing difficulties may have a material adverse effect on our business. No assurances can be given that we will be able to successfully recruit, train, retain and motivate key employees.

We may be unable to implement the technological changes necessary to remain competitive.

The telecommunications industry is subject to rapid and significant changes in technology. We may face increasing competition from technologies currently being developed or which may be developed in the future, including with respect to our cellular services, CDMA technology. New technologies, services or standards could require significant changes to our business model, the development of new products or the provision of additional services. In addition, we may need to substantially update and expand our billing and credit control systems to accommodate growth in and development of our 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. No assurances can be given that our technologies will not become obsolete, or be subjected to competition from new technologies in the future, or that we will be able to develop new technologies on terms necessary to compete in changed circumstances.

We may not be able to deliver our services if we experience systems failure or a shutdown in communications networks.

Our cellular services and international call services are currently carried through our own networks, the networks of local fixed-line operators including leased circuits that connect our base stations, international submarine cable lines, and the networks of international operators and other network-related infrastructure. The provision of our services depends on the stability of this integrated network. This network may be vulnerable to damage or interruptions in operation due to earthquake, fire, power loss, telecommunications failures, network software flaws, transmission cable cuts or other events beyond our control. Any failure of this integrated network or any link in the delivery chain that results in an interruption in our business, operations or our provision of any service, whether from operational disruption, natural disaster or otherwise, could damage our brand equity, reduce our ability to attract and retain customers and materially adversely affect us. In particular, our telecommunications control facilities are highly concentrated, with our headquarters and principal operating facilities located at two sites in Jakarta. Any damage or interruption in operation to either of these facilities may have material adverse impact on our operations.

19

Table of Contents

Index to Financial Statements

Our shareholders may not be able to assert claims against Prasetio, Utomo & Co., our independent auditors for the year ended December 31, 2001, nor may they be able to assert claims against our current independent auditors for financial statements previously audited by Prasetio, Utomo & Co.

Our financial statements for the year ended December 31, 2001 were audited by Prasetio, Utomo & Co., a former member firm of Andersen Worldwide, SC. On June 15, 2002, Arthur Andersen LLP (“Arthur Andersen”), which was the U.S. member firm of Andersen Worldwide, SC, was found guilty of obstruction of justice charges relating to its actions as independent auditors of Enron Corp. and its subsidiaries. Shareholders and employees of Enron have commenced legal proceedings against Arthur Andersen LLP, seeking substantial damages related to its audit of Enron. On August 31, 2002, Arthur Andersen voluntarily relinquished its licenses to practice public accountancy in all states of the United States, thereby effectively ceasing to exist as a global accounting firm. The Indonesian Ministry of Finance withdrew the business license of Prasetio, Utomo & Co. in August 2002, and Prasetio, Utomo & Co. ceased its operations as a public accounting firm.

Our current independent auditors, Prasetio, Sarwoko & Sandjaja, the Indonesian member firm of Ernst & Young Global, have not re-audited the financial statements previously audited by Arthur Andersen. Therefore, it is highly unlikely that our shareholders will be able to assert claims against, or recover any damages from, Prasetio, Sarwoko & Sandjaja in respect of the financial statements that were previously audited by Prasetio, Utomo & Co.

Risks relating to our cellular business

Our existing and potential cellular customers may find our competitors’ fixed wireless services competitive in price and comparable in service to our cellular services, which may have a material adverse effect on our cellular business.

In May 2003, Telkom introduced TelkomFlexi, a CDMA 2000.1x service, in the Jakarta area and Bakrie Communications launched a similar service in September 2003. These services are offered as a fixed wireless services, but currently possess similar mobility and features with those found in cellular services. Telkom applies local telephone tariffs for this service, which tariffs are substantially lower than those applied to cellular services, and pays lower regulatory fees than to provide cellular services. These regulatory cost advantages, combined with capital expenditure requirements similar to cellular network expansion, have resulted in Telkom offering this product at a lower cost than cellular services. The current mobility enjoyed by fixed wireless subscribers combined with the low price appeal to customers who roam infrequently and seek a low-cost telecommunications product—a large proportion of potential Indonesian cellular subscribers. Moreover, fixed wireless service quality may exceed GSM cellular service quality due to more efficient spectrum usage, thereby increasing capacity and improving service quality.

After petition by industry associations, the MoC issued Ministerial Decree No. KM 35/2004 stating that fixed wireless operators must limit the mobilility of their services. Furthermore, fixed wireless operators must adjust the regulatory fees and tariffs associated with fixed wireless service delivery. The introduction and availability of fixed wireless services and other similar technologies has increased competition in the cellular services market, including greater price competition among operators and more attractive product and service packages being offered. Fixed wireless services may have a material adverse impact on our cellular services business, including among other things a higher churn rate, lower ARPU, slower growth in total subscribers and increased subscriber acquisition cost.

Competition from industry incumbents may adversely affect our cellular business.

Our cellular businesses compete primarily against Telkomsel and PT Excelcomindo Pratama (“Excelcomindo”). Telkomsel is predominantly owned by Telkom, an Indonesian telecommunications industry incumbent, and Singapore Telecommunications Limited, one of the largest telecommunications providers in the

20

Table of Contents

Index to Financial Statements

Asia-Pacific region. This shareholding combination creates financial and operational resources that are greater than ours. Excelcomindo, a joint venture between Indonesia’s Rajawali Group and Verizon, also has substantial resources. We anticipate significant competition from Telkomsel, Excelcomindo and Mobile8, any of which has the resources to gain market share at our expense, and other cellular service operators. Competition between our cellular businesses and these operators is based on various factors, such as the pricing of services, network quality and coverage, range of services offered and customer service. In addition to the current operators, the MoC may license additional mobile cellular telecommunications service operators in the future and such new licensees may compete with us.

Cellular network congestion and limited spectrum availability could limit subscriber and revenue growth and reduce service quality.

The amount of spectrum available for use by a cellular system effectively limits its subscriber capacity. The Government allocates spectrum to cellular telecommunications operators in Indonesia. Our GSM cellular service operates using the allocated 30 MHz of bandwidth, comprised of 10 MHz in the GSM 900 MHz spectrum (originally allocated to the legacy Satelindo) and 20 MHz in the GSM 1800 MHz spectrum (originally comprised of 5 MHz spectrum allocated to the legacy Satelindo and 15 MHz spectrum allocated to the legacy IM3).

The rapid growth of our cellular subscriber base, together with increased usage of mobile data services, has led to high traffic usage in dense urban areas. As a result, radio frequency engineering techniques, including a combination of macro, micro and in-building cellular designs, need to be employed to increase “erlang per square kilometer” and to maintain network quality in view of radio frequency interference and tighter frequency re-use patterns. Such radio frequency techniques have already been employed in dense urban environments such as Hong Kong, and we intend to replicate them on our cellular networks when the erlang per square kilometer threshold approaches such a usage profile. However, if our cellular subscriber base should grow significantly larger in high-density areas, no assurance can be given that these efforts will continue to be sufficient to maintain and improve service quality, or that we will not be required to make greater capital expenditures in order to maintain and improve service quality based on our current spectrum capacity.

Our growth plans anticipate substantial expansion of our cellular networks and an accompanying increase in cellular subscribers. No assurances can be given that such expansion plans will materialize or, if they do materialize, that we will be able to integrate additional subscribers successfully. Failure to activate new subscribers on a timely basis and scale existing operational units to handle such increased usage may result in a material adverse effect on our business.

Our number of total cellular subscribers may increase without positively impacting our operating revenues from cellular services.

We believe that we will have an increasing number of cellular subscribers in future periods. However, given the uncertain economic situation in Indonesia and the increasing prices of primary goods that continue to decrease our customers’ overall purchasing power, we cannot predict whether a larger number of cellular subscribers will increase positively our operating revenues from cellular services. No assurances can be given that there will be a positive correlation between the total number of cellular subscribers and ARPU or, in general, our net revenue.

If the Government allocates additional spectrum or reallocates existing spectrum, additional competitors may enter the cellular service market, which may adversely affect our cellular business.

Although the MoC has allocated all available GSM 900 and 1800 cellular spectrum except 5 MHz, no assurances can be given that additional spectrum will not become available in the future or that the Government will not reallocate existing spectrum. The two largest spectrum allocations made to Indonesian cellular services

21

Table of Contents

Index to Financial Statements

providers are held by Telkomsel and us. If we are not able to continue to utilize our spectrum capacity successfully or in a timely manner, or if we cannot finance the requisite incremental capital expenditures to utilize such spectrum capacity successfully as and when needed, we may experience difficulty in attracting and retaining cellular subscribers, which could have a material adverse effect on our cellular business. To the extent our current or future competitors in GSM cellular services obtain additional spectrum, our competitive position, business margins and cellular business could be adversely affected.

In addition, the Government announced the winner of a bidding process for one third-generation mobile telecommunications system (“3G”) facilities-based operator license in 2003. Incumbent telecommunications providers are barred from participating in the bidding process and, therefore, we have not made a bid to obtain a 3G license. No assurances can be given that we will be able to compete effectively with GSM 900 and 1800 cellular services against 3G operators in the future or that the Government will issue only one 3G license.

Our ability to maintain and to expand our cellular networks or conduct our business may be affected by disruption of supplies and services from our principal suppliers.

We rely upon our main vendors to supply a substantial portion of the equipment required for our cellular networks, including the microwave backbone, and other suppliers in relation to goods required to conduct our business. We depend on equipment and services from such vendors to maintain and replace key components of our cellular networks and provide goods necessary to operate our business. If we are unable to obtain adequate supplies of equipment or services in a timely manner or on acceptable commercial terms, or if there are significant increases in the cost of these supplies, our ability to maintain and to expand our cellular networks may be materially and adversely affected.

Risks relating to our international call services business

The entry of Telkom, a well-established Indonesian telecommunications industry incumbent, into the international business could adversely affect our international call services operating margins, market share and results of operations.

Telkom, a well-established Indonesian telecommunications incumbent with significant political and financial resources, obtained a license to provide international call services on May 13, 2004 and launched its commercial service on June 7, 2004. Telkom’s entry into the international call services market poses a significant competitive threat to us. After Telkom’s entry into the international call services market, we will likely suffer loss of market share, declining margins and operating revenues and other adverse effects on our international call services business.

VoIP usage is increasing and certain customers use VoIP services rather than traditional international long distance services, which may continue to have a material adverse impact on our international call services business.

Worldwide and Indonesian trends indicate increased usage of VoIP services and a corresponding decrease in the usage of traditional international long distance services. The cost structure for providers of VoIP services is lower than that for traditional fixed line operators and as such, VoIP services are customarily offered at significant cost savings compared to traditional international long distance services. Availability of VoIP services, despite their lower quality as compared against traditional international long distance services, may continue to adversely impact our operating revenues from our international call services business due to lower customer usage and lower pricing plans for our traditional services.

22

Table of Contents

Index to Financial Statements

A decrease in applicable accounting rates may adversely affect our interconnection revenues.

Telecommunications providers make interconnection settlements based on established accounting rates. The accounting rates are based on agreements between such providers. These agreements are subject to periodic renegotiations and, in recent years, certain foreign telecommunications carriers have been seeking reductions in accounting rates. International accounting rates have been decreasing in recent years, and we expect that they will continue to decrease in the future. Any reduction in rates may result in reduced interconnection revenues on incoming calls.

Interconnection revenues from foreign telecommunications carriers may be unreliable, and we may not receive all monies due in connection with the provision of our international call services.

A significant portion of our revenues from international call services consists of amounts received from foreign telecommunications operators for handling incoming calls to Indonesia. Such operators may not make these interconnection payments to us promptly when such payments become due and payable. Further, adverse economic conditions at such operators in other countries may adversely affect such operators’ ability to make interconnection payments to us in a timely manner or at all.

The unstable economic and political situation in Indonesia may adversely affect the levels of international business activity in the country, which may have a material adverse effect on our operating revenues related to international call services.

Our international call services business is affected by the levels of international business activity and tourism in Indonesia, international accounting rates, tariffs for international calls, fluctuation in the exchange rate of the Rupiah against the U.S. dollar and compensation to telecommunications carriers and service providers. The continued unstable economic and political situation in Indonesia may adversely affect foreign investment and international business activity in Indonesia, which indirectly affects customer demand for international call services.

We may be unable to retain both international access codes and the future loss of our “008” access code would adversely impact our revenues from international call services and our marketing strategy for our international call services business.

On August 29, 2003, we received confirmation from the MoC regarding the operating licenses for the legacy Satelindo and IM3 and the allocation of frequency spectrum following the merger of Satelindo and IM3 into Indosat. The MoC approved the continuation of license and allocation of frequency spectrum from the legacy Satelindo and IM3 to Indosat, as the surviving entity following the legal merger. However, the Directorate General of Post and Telecommunication, a directorate under the MoC, in conjunction with the Independent Regulatory and Supervisory Body (the “IRSB”) are currently evaluating the issuance of a new license, which will replace our current licenses. In a hearing with the IRSB, we were advised that it is reviewing our licenses to the international access codes “001” and “008” and suggested that we may be forced to retain only one such access code.

Although we consider the IRSB’s legal basis to limit our international access codes to be weak, no assurance can be given that the IRSB will not require us to surrender one of the international access codes. In the event that we were forced to surrender one international access code, our marketing strategy for international call services, and revenues related to the operations of such services, would be impaired.

Risks related to our MIDI business

Competition for the MIDI business is increasing, and we may experience declining margins.

Our MIDI business is facing increased competition from established participants, such as Telkom, and certain foreign carriers providing such services illegally in Indonesia, which have wider customer bases and greater financial resources. Moreover, our satellite business faces increasing competition as new, more powerful satellites are prepared for launch and as companies acquire exclusive licenses to provide certain broadcast services in Indonesia, including Indovision’s recent acquisition of an exclusive license to provide DTH television services. We have leased the transponder space on our Palapa-C2 satellite for periods of only two to five years, while the remaining useful life of the satellite is estimated to be approximately eight years. As additional

23

Table of Contents

Index to Financial Statements

competing satellites are launched and become operational, and as our transponder leases expire or are terminated, our transponder lessees may utilize other satellites.

Our satellite has a limited life and the risk exists that our Palapa-C2 satellite will be damaged or completely destroyed during operation. The loss or reduced performance of our satellite may adversely affect our financial condition, results of operations and ability to provide certain services.

Our Palapa-C2 satellite has a limited operational life, which is presently estimated to end in early 2011. A number of factors affect the operational lives 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 satellite could fail before the end of its useful life, and repairing GEO satellites, such as the Palapa-C2 satellite, while in orbit is not feasible.

We maintain in-orbit insurance for the loss of the Palapa-C2 satellite, providing for a single payment of US$150 million in the event that the satellite is lost or destroyed. Palapa-C2’s satellite control processor (“SCP”) has been identified as prone to failure and our satellite insurance excludes from coverage satellite malfunction caused by failure of the SCP. If the damage or failure rendered Palapa-C2 unfit for future use, we might elect to cease its satellite operations. The termination of our satellite business could have a material adverse effect on our business and increase operating expenses associated with our provision of other telecommunications services.

Item 4:    INFORMATION ON THE COMPANY

Overview

We are a leading Indonesian telecommunications service provider and one of only two operators authorized to provide a full complement of national and international telecommunications services in Indonesia. We are the second-largest cellular operator, as measured by the number of subscribers, and the dominant provider of international call services, in Indonesia. We also provide MIDI services to Indonesian and regional corporate and retail customers. During the year period ended December 31, 2003, we generated total operating revenues of Rp8,235.3 billion (US$972.9 million). Our principal products and services include:

Our principal shareholders are ICL, which is wholly-owned by ST Telemedia, with an ownership interest of approximately 41.9% of our common stock, and the Government through the Ministry of State-Owned Enterprises with a 15.0% ownership interest as of December 31, 2003. ST Telemedia is a leading information-communications company in Singapore with operations and interests in the Asia-Pacific region and the United States. Through its group of companies, ST Telemedia offers an array of telecommunications, information and communications services, including fixed and mobile communications, Internet exchange and data communications, satellite, broadband and pay-TV. ST Telemedia was formed in 1994 as the telecommunications arm of STPL, a conglomerate directly and indirectly owned by Temasek Holdings (Private) Limited. Indosat represents ST Telemedia’s largest investment outside Singapore.

Prior to 2002, our primary business focus was the provision of international call services, which accounted for approximately 42.0% of our total revenues for the year ended December 31, 2001. Following regulatory

24

Table of Contents

Index to Financial Statements

developments in the Indonesian telecommunications industry in 1999, we began implementing a strategy designed to transform Indosat from being Indonesia’s primary international telecommunications provider into a leading cellular/wireless-focused, fully-integrated telecommunications network and service provider in Indonesia. In 2001, we increased our direct and indirect ownership interest in Satelindo to 75.0%, making us the second-largest cellular operator in Indonesia, as measured by the number of subscribers. In 2001, we launched IM3 to provide GSM 1800 cellular services. In 2002, we acquired the remaining 25.0% equity interest in Satelindo from DeTe Asia, making Satelindo a wholly-owned subsidiary of Indosat.

Transformation Program

We are continuing to integrate our cellular operations to create a platform for expansion of our cellular network to become a leading cellular/wireless-focused, fully-integrated telecommunications network and service provider in Indonesia.

We have developed the Transformation Program to achieve the following strategic objectives:

Since we began implementing our Transformation Program, we have achieved the following:

We anticipate that the Transformation Program will be fully implemented in 2005.

No assurances can be given that we will complete the Transformation Program, in whole or in part, within the anticipated timeframe or that, if completed, such Transformation Program will result in the projected cost savings, efficiencies and other strategic objectives discussed herein. See “Item 3: Key Information—Risk Factors—Risks related to Indosat and its Subsidiaries—We may encounter difficulties in realizing cost savings, or achieving within the anticipated timeframe, expected strategic objectives and other benefits of the Transformation Program.”

Corporate history

Indosat was established on November 10, 1967 by the Government to build, transfer and operate an International Telecommunications Satellite Organization (“Intelsat”) earth station in Indonesia to access Intelsat’s Indian Ocean Region satellites for a period of 20 years. Intelsat is a worldwide consortium of global international satellite communications organizations, which owns and operates a number of telecommunications

25

Table of Contents

Index to Financial Statements

satellites. We began commercial operations in September 1969 and have built our business to be the dominant international call services provider in Indonesia.

Our business was directly affected by the Telecommunications Law, which became effective on September 8, 2000, and was intended to promote competition in the telecommunications industry. In 2001, as part of the Government’s initiative to restructure the telecommunications industry, we entered into an agreement with Telkom to eliminate our respective cross-shareholdings in several operating subsidiaries, including:

Subsequent to the agreement with Telkom, we acquired an effective 45.0% ownership interest in Satelindo, through our acquisition of Bimagraha in 2001 and acquired the remaining 25% ownership interest in Satelindo from DeTe Asia in June 2002. To strengthen Satelindo’s capital structure and remove certain restrictive covenants arising from Satelindo’s indebtedness, we made an additional capital contribution to Satelindo totaling US$75 million in July 2002.

In August 2002, we entered the domestic telecommunications sector by obtaining a license to provide local fixed network services in the Jakarta and Surabaya areas. We deployed approximately 13,000 lines in those areas to provide its local fixed telephone services and announced our strategic objective to become a leading cellular/wireless-focused, fully-integrated telecommunications network and service provider in Indonesia, through a transformation process involving the creation of synergies between Satelindo and IM3.

In 2002, the Government divested 517.5 million shares (representing approximately 50% of our outstanding common stock) in two stages. In May 2002, the Government sold 8.1% of our outstanding common stock through an accelerated global tender. In December 2002, the Government divested 41.9% of our outstanding common stock to a subsidiary of ST Telemedia. As a result of these transactions, the Government owned 15% of the shares of our outstanding common stock and the Series A share (the “Special Share”) as of December 31, 2003. ST Telemedia owned 41.9% of our outstanding common stock, with the remaining 43.1% owned by public shareholders as of December 31, 2003. See “Share Ownership.”

Based on Merger Deed No. 57 dated November 20, 2003, we agreed to merge with Satelindo, Bimagraha and IM3, with Indosat as the surviving entity. All assets and liabilities owned by Satelindo, Bimagraha and IM3 were transferred to us on such date. These three companies were dissolved by operation of law without the need to undergo any liquidation process.

Historically, international call services has been our core business and largest revenue component. However, since entering the Indonesian cellular market through our acquisition of Satelindo and establishment of IM3 in 2001 and subsequent integration of such companies in 2003, cellular services have become the largest contributor to our total operating revenues. The following table shows the breakdown of our total consolidated operating revenues for each of the periods indicated and the percentage contribution of each revenue component to our total operating revenues:

26

Table of Contents

Index to Financial Statements

Cellular services

Cellular services contributed Rp5,117.6 billion for the year ended December 31, 2003, representing 62.1% of our 2003 total consolidated operating revenues. We are the second-largest cellular provider in Indonesia, as measured by subscribers, with approximately 5.9 million subscribers as of December 31, 2003. For the year ended December 31, 2003, we had an estimated market share of 32.3%, which figure is based on our estimates made using available market data. Our cellular network currently provides network coverage in all major cities in Java and Bali, as well as population centers in Sumatra, Sulawesi, Kalimantan and Papua. We provide our cellular services using GSM 900 and GSM 1800 technology.

Services

Our principal cellular service is the provision of airtime, which measures the usage of our cellular network by our customers. Airtime is sold through postpaid and prepaid plans. In addition to payment structure, the tariff structure differs between postpaid and prepaid airtime plans, with prepaid subscribers subject to higher tariffs to offset the absence of monthly subscription fees.

We offer postpaid plans under the brand names “Matrix” and “Bright.” Matrix is a basic service package with a postpaid payment plan. In order to serve our corporate customers, we also offer Matrix in program packages, which carry the brand names “Mitra” (Corporate Package) and “Matrix F2” (Family and Friends). We offer prepaid plans under the brand names “Mentari” and “Smart.” Mentari offers free national roaming and we believe our Mentari products have a high degree of brand awareness, thereby providing a competitive advantage when attempting to attract and retain customers in a competitive market. We have initiated studies to evaluate strategies to consolidate the Satelindo and IM3 products in an attempt to create an integrated approach to individual customer segments. We intend to maintain the “Matrix,” “Mentari” and “IM3” brands and have begun the elimination of the “Bright” and “Smart” brands.

Postpaid and prepaid customers have access to local, DLD and international direct long distance dialing. In addition, we offer a variety of additional, value-added services, functions and features for our customers, bundled according to the airtime package selected, including:

27

Table of Contents

Index to Financial Statements

Mobile data and facsimile, voicemail, call holding/waiting/forwarding, detailed billing and direct debit payments are only available to postpaid subscribers. Some of these services are offered free of charge while others, such as SMS, mobile data and facsimile services and detailed billing, are offered with an additional fee and to increase revenues per subscriber. We introduced our SMS service to postpaid cellular subscribers in 1995 and extended the service to prepaid subscribers in May 2000. Usage levels have risen consistently, from approximately 319,000 text messages per day in June 2000 to approximately 8.25 million text messages per day in December 2002 and approximately 15.04 million text messages per day in December 2003. In 2003, SMS usage fees accounted for substantially all of our revenues from value-added cellular services and features.

We launched our portfolio of mobile data services in 2000 under the brand name “Satelindo @ccess” with a companion suite of product offerings launched in 2001 under the brand name “M3-Access.” Mobile data services can be accessed over SMS or through a direct dial-up connection to a WAP server. Users are able to access a variety of information, including movie listings, stock quotes, exchange rates, sports and business news, astrological predictions and SMS Top Up. Satelindo @ccess subscribers can also send and receive e-mail through their mobile devices. We began offering mobile banking services in cooperation with Bank Mandiri, one of the largest banks in Indonesia, in 2002 and mobile financial transaction services in 2003.

We have entered into interconnection agreements, which allow our cellular networks to interconnect with the PSTN operated by Telkom, the international gateways operated by us and the networks of each of the other Indonesian cellular and fixed wireless operators. These agreements allow their cellular subscribers to communicate with customers of such other telecommunications service providers.

We offer roaming services to our customers, which allow them to make and receive calls and send and receive SMS text messages when outside Indonesia. Satelindo has entered into roaming agreements with operators of GSM cellular networks in Africa, Europe, North and South America and other Asian countries and regions. As of December 31, 2003, our postpaid cellular subscribers were able to roam internationally on 267 networks, owned by 232 operators in 106 countries, making us the largest international roaming operator in Indonesia.

Customers and marketing

We segment the Indonesian population by location, disposable income and other factors that we believe indicate the desire and ability of individuals and corporations to purchase our products and services. We then target areas populated with a higher density of potential subscribers. These areas are generally economically more developed and more prosperous than other areas in Indonesia. As we continue to integrate the subscriber bases of the legacy Satelindo and IM3 businesses, we hope to achieve a diversified subscriber base spread throughout Indonesia’s major population centers.

We have recorded cellular subscriber growth every year since the launch of our GSM cellular business in Indonesia. Our prepaid subscriber base has grown significantly over the past three years relative to our postpaid subscriber base. At the end of 2000, we had approximately 184,921 postpaid and 870,410 prepaid cellular subscribers. As of December 31, 2003, our subscriber base had grown to 361,562 postpaid and 5,600,882 prepaid cellular subscribers. We have focused on increasing the number of our prepaid subscribers, as prepaid subscriptions minimize subscriber credit risks, as well as reduce billing and collection costs. In addition, we

28

Table of Contents

Index to Financial Statements

believe that Indonesian cellular customers tend to favor the convenience, ease of activation and lack of credit checks associated with prepaid plans.

The following table presents selected information regarding our postpaid, prepaid and total subscriber base for the periods indicated:

When cellular services first became available in Indonesia, cellular subscribers consisted primarily of wealthy individuals and business customers, including government entities. As activation fees and handset prices declined and cellular service quality improved, cellular services have become increasingly affordable and much more popular with the broader middle-income market for both business and social uses. These subscribers generally have lower average monthly usage and are more price-sensitive than the original set of cellular users.

The following table sets forth selected information concerning our ARPU for the periods indicated:

Our integrated marketing strategy emphasizes our wide range of innovative services and the quality of our customer service. We regularly advertise in major newspapers, magazines and via direct mailings, and also engage in telemarketing. To consolidate the marketing channels for our cellular business units, we are implementing integrated walk-in centers, under the brand name “Galeri Indosat”, which offer our services through the same outlet. We have also started to implement our customer relationship management (“CRM”) initiative through the introduction of a CRM-tool for customer service workflow. To supplement our direct marketing channels, we maintain a network of independent dealers. These outlets act as branch outlets and offer a broad range of services, including product and service information, answering customer queries and bill payment services. Customers can register for, activate, and pay for all of our cellular services at these outlets.

We also use independent regional and multi-regional dealers who have their own networks throughout Indonesia to sell our wireless services, primarily to individuals. These dealers include major distributors of

29

Table of Contents

Index to Financial Statements

wireless phone handsets and tend to have their own retail networks, direct sales forces and sub-dealers in Indonesia. We also have a dedicated team of employees who coordinate sales and services to Indonesian corporations. In 2003, we began merging our cellular services marketing operations to reduce marketing costs. We are in the process of restructuring our relationships with our dealers in an attempt to generate higher sales volume through better product placement, an integrated dealer network and enhanced dealer loyalty.

Tariff structure and cellular services operating revenues

The Indonesian cellular telecommunications market uses a “calling party pays” system, which requires that the originators of telephone calls pay for calls. The tariffs for postpaid subscription services are established in accordance with the Mobile Cellular Tariff contained in MoC Decree No. 27/1998, and consist of activation, monthly subscription and usage charges.

The Mobile Cellular Tariff is the maximum tariff that can be charged for cellular services by Indonesian cellular operators. Pursuant to the Mobile Cellular Tariff, the maximum tariff chargeable for activation fees is Rp200,000, and the maximum monthly fee (including frequency charge) is Rp65,000. The maximum airtime charge is Rp325 per minute for non-peak hours and Rp406 per minute for peak hours. Although the MoC does not set specific tariffs levels for prepaid subscription services, it has limited the maximum amount chargeable for prepaid services to 140% of the Mobile Cellular Tariff. Prepaid tariffs are typically higher than tariffs for postpaid customers as there is no monthly subscription fee, and our prepaid airtime charges are generally at or close to the maximum rate chargeable (although we have recently lowered certain of our tariffs; see “Recent tariff reduction of Mentari Services” below).

Activation fees and monthly charges.    Activation fees represent the initial connection fees charged to new postpaid and prepaid customers when subscribing to a cellular network. Monthly charges represent fixed amounts charged only to postpaid cellular subscribers for maintaining access to the cellular network. Currently, our postpaid customers are charged a one-time activation fee of Rp75,000, a monthly subscription fee of Rp65,000 per month and an airtime tariff of Rp325 per minute for non-peak hours and Rp406 per minute during peak hours. We recognize the revenue from the service activation component of prepaid starter pack sales upon actual sale and delivery of starter packs to customers (dealers, distributors and subscribers). Sales of initial and reload vouchers are recorded as unearned revenues and recognized as revenue upon usage of available airtime or expiration of the voucher.

Airtime.    For local calls originating on the PSTN, our subscribers are charged a variable usage charge based on the location called and the time of the call. For local calls from a cellular subscriber to the PSTN, we are required to pay Telkom 50% of the prevailing tariff for local pulse per minute. For local calls from the PSTN to an Indosat cellular subscriber, Telkom collects the prevailing applicable local call tariff plus an airtime charge of between Rp325 and Rp406 per minute, which Telkom remits to us. We have similar arrangements if our subscribers make calls to or receive calls from subscribers of other domestic cellular networks. If our subscriber calls a subscriber of another domestic cellular network, we collect twice the applicable airtime tariff plus the prevailing tariff for local pulse per minute. We would then remit one half of the collected airtime tariff to the domestic cellular network operator on which the call was terminated. If a call is made to our subscriber, the other domestic cellular network operator collects the applicable fees and remits the appropriate portion thereof to us. If our subscriber calls another subscriber of ours, we keep all charges collected, which amount equals twice the applicable airtime tariff. For domestic and international long distance calls, we collect applicable long distance tariffs plus the applicable airtime tariff and recognize these amounts as airtime fees. Certain international and domestic roaming charges are also collected and recognized as airtime fees. If a postpaid subscriber makes calls when outside his home area, whether domestic or abroad, then the subscriber pays a roaming charge. Our prepaid subscribers do not pay for incoming calls from other of our subscribers and are able to roam internationally. Airtime fees also includes fees charged to other operators’ subscribers when they place calls to our subscribers. Such fees are collected by the calling party’s cellular or fixed-line network and remitted to us pursuant to interconnection agreements.

30

Table of Contents

Index to Financial Statements

Value-added services.    The MoC does not regulate the tariffs for SMS or other value-added services. Currently, we charge usage fees for SMS usage at Rp300 per message for postpaid subscribers and Rp350 per message for prepaid subscribers. We have increased our SMS charges since the inception of the service; the most recent increase was effected in January 2002. SMS operates on a “sender keep all” basis, which means that we earn revenues whenever one of our subscribers sends an SMS, however we do not earn any revenues if a non-Indosat subscriber sends an SMS to one of our subscribers. For our GPRS, which was launched in early 2002, subscribers are charged Rp20—kilobyte of data downloaded. We receive roaming settlements from foreign telecommunications operators when their subscribers roam on our network.

Recent tariff adjustments of our cellular services.    Following the tariff increase for local fixed telephony by Telkom, we adjusted our cellular services tariff with effect from June 1, 2004 for both prepaid and postpaid cellular services. For our prepaid services, this adjustment increases the cellular services tariff for outgoing calls terminating in the local PSTN by 1.0% to 4.2%. Previously, the cellular tariff for such calls for Smart customers was Rp890 per minute and for Mentari customers was Rp816 per minute. The new cellular services tariff increases such charges to Rp900 per minute and Rp850 per minute, respectively. For our postpaid services, this adjustment increases the cellular services tariff for every outgoing call to the local PSTN by 5.5% to 6.5% and outgoing calls to other cellular operators by 3.0% to 3.7%. In addition to these cellular services tariffs increases, we also reduced our tariffs for domestic long distance services by up to 18.0% and 17.6% for prepaid and postpaid services, respectively. We expect that the tariff reduction policy will increase our subscriber base, thus helping to maintain our revenue growth and offsetting the adverse effect of such policy on our revenue stream. We intend to reduce our cellular tariff for prepaid “Smart” customers in the near future to remain competitive with the pricing of our competitors’ services.

Interconnection

We currently interconnect with the PSTN operated by Telkom at numerous locations throughout Indonesia. In order to minimize its interconnection fees, we utilize our own backbone transmission facilities whenever possible and in compliance with applicable regulations. For example, routing a long distance call from a customer in Surabaya to a caller in Jakarta through our microwave transmission lines or satellite hook-up allows us to avoid the PSTN transmission altogether.

Activation, billing and collection

Potential customers can apply for our cellular services at our sales and distribution points. Our outlets and selected primary independent dealers are able to register, verify the address of potential new subscribers and then approve and activate new subscribers. The majority of its independent dealers, however, can only receive new applications for cellular services, which are then forwarded to us for processing. A potential subscriber for its postpaid service is required to provide proof that it meets its minimum credit requirements. If a potential subscriber does not meet our postpaid requirements, its sales representative recommends our prepaid services. Once approved, postpaid service SIM cards are activated within 24 hours.

We bill our postpaid subscribers on a monthly basis through our centralized billing division. In the case of prepaid subscribers, the wireless billing system automatically reduces the value of each prepaid subscriber’s account as airtime is used.

Our postpaid subscribers have a variety of payment options. Subscribers may pay by cash, major credit cards, direct deposit or automatic debit through banks or participating credit card companies. Subscribers may make payments in person at any outlet or by mail. Subscribers may also pay through BNI, Bank Mandiri or BCA ATMs or over the counter at BNI, Bank Mandiri or post office branches. We do not provide payment and collection services through its network of independent dealers. Payments are due 23 days after the account statement date. Thirty days after the statement date, we send a letter to subscribers who have not paid their balance and blocks their ability to make outgoing calls. For subscribers who remain unpaid 45 days after the statement date, we block the subscribers’ ability to make or receive calls. We permanently disconnect service, cancel the subscriber’s SIM card and make 100% provisions for accounts that are more than 60 days past due.

31

Table of Contents

Index to Financial Statements

We have taken a number of steps to prevent subscriber fraud and to minimize losses. We deliver prepaid vouchers to our independent dealers only on cash on delivery basis, and we do not collect payments for our services from cellular subscribers through our independent dealers. In addition, we require, in certain instances, refundable deposits from subscribers depending on usage levels and we review accounts of our high usage customers at regular intervals to ensure that the deposit levels continue to be adequate.

Competition

The cellular service business in Indonesia has become increasingly competitive over the past five years. Competition in the cellular communications industry is based principally on network coverage and technical quality, price, the availability of data services and special features, quality and responsiveness of customer service. Based on our estimates made using available market data, the three major providers of cellular services in Indonesia, Indosat, Telkomsel (which is majority-owned by Telkom) and Excelcomindo, provide approximately 99.9% of Indonesia’s cellular telecommunications services.

In early 2004, a new cellular operator named Mobile8 entered the market. Mobile8 uses CDMA 2000.1x and EVDO technology. Developed from previous AMPS operations including Telesera, Mobisel and Metrosel, Mobile8 has received a nationwide license to provide cellular telecommunications services. Bimantara is Mobile8’s major shareholder.

In May 2003, Telkom introduced TelkomFlexi, a CDMA 2000.1x service in the Jakarta area. Telkom offers this service as fixed wireless service, but the service has expanded mobility and value-added features similar to cellular services. After receiving requests from industry associations, the MoC issued Ministerial Decree No. 35/2004 stating that the service area of the fixed wireless network shall be limited to an area equal to one area code of the local fixed network service. An operator of fixed wireless service is therefore prohibited from extending its roaming services to other area codes. Depending on the regulatory framework for other wireless services, we may decide to increase our investment in fixed wireless networks and services, either through increased capital expenditures, reallocation of our existing planned expenditures, through revenue-sharing schemes or a combination of the foregoing. See “Item 3: Key Information—Risk Factors—Risks related to our cellular business—Our existing and potential cellular customers may find fixed wireless services competitive in price and comparable in service with our cellular services, which may have a material adverse effect on our cellular business.” On May 29, 2004, we launched our fixed wireless service, named “StarOne,” in Surabaya and the surrounding area in Eastern Java. StarOne uses CDMA 2001X technology with limited mobility within one area code or city code.

We believe that barriers to entry are currently comparatively high due to limited availability of frequency, a capital intensive operating environment and the established market presence of the three incumbents. Nevertheless, we are anticipating increased competition within the Indonesian cellular industry generally. In response to this, we intend to dedicate future capital expenditure to our wireless business to increase network capacity and service quality and to provide various value-added services.

International call services

Through our “001” and “008” IDD services, we currently handle substantially all of the traditional IDD business in Indonesia. However, the duopoly regime in the IDD business ended on May 13, 2004 with the licensing of Telkom to operate IDD services. See “—Regulation.” For the year ended December 31, 2003, IDD services contributed Rp1,807.7 billion, or 22.0%, of our total consolidated operating revenues.

Any “001” or “008” call dialed in Indonesia is routed through one of our six international gateways. From these gateways, international calls are transferred via satellite or submarine cable based on predetermined routing plans developed in collaboration with foreign telecommunications carriers. The foreign carriers receiving calls through the international gateways are responsible for terminating the calls to their recipients. Similarly, international calls received at our gateways are switched from the gateway to their destinations domestically through Telkom’s local network, our cellular networks, our fixed local network or one of the other cellular operators with which we maintain interconnection arrangements.

32