The Dutch East Indies, which is what Indonesia used to be called, had for years been subject to a regime that protected Christians (and allowed for missionary work) and Hindus, suppressed political Islam (among the advisors to the Dutch administration, in previous decades, had been C. Snouck Hurgronje, whose knowledge and understanding of Islam prevented a good deal of wasted time and wasted attempts at winning (fleetingly, falsely) hearts and minds, but instead sensibly focussed on limiting the appeal, emotional and practical, and hence the power, of Islam. In any case, it is anecdotal evidence of nothing more than one sultan, and one PT boat.
Indonesia is not and has not been an "ally" of the United States. Tell me in what way it has been an "ally" in the way, say, that Australia has, or Singapore, to take two countries right nearby? Did the Indonesians engage in mass murders of non-Muslims, including ethnic Chinese? Has it made life difficult for Hindus in Bali? Did the Indonesian army kill 200,000 Christian East Timorese until the Australians, with U.N. approval, moved in? Have Christians been routinely killed in the Moluccas, and thousands of churches destroyed? the answer to all of those question is Yes.
There are ways to limit the appeal of Islam. One way, in Indonesia in particular, is to emphasize its pre-Islamic past and non-Islamic elements in its present. Gamelans and batik. A visit by an American dignitary (too late for Condoleeza Rice) to Borobudur, with expressions of wonder and delight -- given plenty of publicity. Indonesians invited to conferences on "Belief-systems and Diversity" (a word ordinarily put to awful, and now being put to good, use), at which Berbers, Kurds, a black African Muslim from a group massacred by Arabs, and yes, some Indonesians, will discuss Arab supremacist ideology and how Islam has always been a vehicle for it, and how, therefore, Islam needs to be reformed. No more Sunna, based on seventh-century Arabs. No more "Arabic-only" Qur'an readings, a change which would help to contextualize the Qur'an and put it back into history, undercutting its sacred authority. No more taking of Arabic names, so that descendants of Hindus and Buddhists are running around Indonesia (or Pakistan) claiming to be Sayeeds, or descendants of the Prophet.
No, we need to weaken the hold Islam has on people. And if Infidels insist on thinking that we must appeal to "moderate Muslims" and must do nothing to offend them, they will be doing what is being done now -- and what is being done is not working. It is not working to create some kind of Light Unto the Muslim Nations in Iraq. It is not working to diminish Muslim oil revenues, that is to say the "wealth" weapon. It is not working in putting Muslims on notice that more and more of us will not be fooled about the nature of Islam; we will read Qur'an and Haditha and the biographies of Muhammad; we will figure out what Muslims naturally make of these texts; we will study abrogation; we will analyze how that handful of seemingly reasonable remarks, such as Sura 2.256, are used to fool Infidels about Islam; we will study the history of Muslim conquests and subjugation of non-Muslims in detail, and learn what, beyond the Jizyah (which is quite enough) was demanded of all those non-Muslims so subjugated; we will compare, and notice the astonishing similarity, in the treatment of non-Muslims over time (1350 years) and space(from Spain to the East Indies); we will not accept the nonseense offered by the Michael-Sellses brigade of apologists, even if they rise high in the academic ranks (we will simply revise our opinion downward even more, at the current state of standards in American academic life).
And that can't be stopped. Whether it is done by enough people, in time, so that they may force changes in governments run by people who are unwilling, unable, too stupid, too lazy, too obstinate, too something, to do what they should be doing, learning what they should be learning -- that's another question.