##### Table of Contents



As filed with the Securities and Exchange Commission on September 29, 2009
   UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
 WASHINGTON, DC 20549
 FORM 20-F
 o
    
    REGISTRATION STATEMENT PURSUANT TO SECTION 12(b) OR 12(g) OF THE SECURITIES EXCHANGE ACT OF 1934
 OR
 þ
    
    ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 For the fiscal year ended March 31, 2009
 OR
 o
    
    TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 For
the transition period from_____ to_____
 OR
 o
    
    SHELL COMPANY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 Date of event requiring this shell company report_____
 Commission file number: 0-30204
 Kabushiki Kaisha Internet Initiative
  Internet Initiative Japan Inc.
  Japan
 Jinbocho Mitsui Bldg., 1-105 Kanda Jinbo-cho, Chiyoda-ku, Tokyo 101-0051, Japan
 Yuko Kazama, +81-3-5259-6500, +81-3-5205-6395,
Jinbocho Mitsui Bldg., 1-105 Kanda Jinbo-cho, Chiyoda-ku, Tokyo 101-0051, Japan
 Title of Each Class
    
    Name of Each Exchange On Which RegisteredCommon Stock
    
    The NASDAQ Stock Market
 None
 None
  As of March 31, 2009, 206,478 shares of common stock were outstanding, including 15,990 shares
represented by an aggregate of 6,396,000 American Depositary Shares.
  o þ
  o þ
   þ o
  o o
  o þ o
  þ
 o
 o
  o o
  o þ




---



##### 



TABLE OF CONTENTS
 PART I
    
    
    2Item 1. Identity of Directors, Senior Management and Advisers
    
    
    2Item 2. Offer Statistics and Expected Timetable
    
    
    2Item 3. Key Information
    
    
    2Item 4. Information on the Company
    
    
    12Item 5. Operating and Financial Review and Prospects
    
    
    27Item 6. Directors, Senior Management and Employees
    
    
    50Item 7. Major Shareholders and Related Party Transactions
    
    
    54Item 8. Financial Information
    
    
    55Item 9. The Offer and Listing
    
    
    56Item 10. Additional Information
    
    
    57Item 11. Quantitative and Qualitative Disclosures about Market Risk
    
    
    66Item 12. Description of Securities Other than Equity Securities
    
    
    66PART II
    
    
    67Item 13. Defaults, Dividend Arrearages and Delinquencies
    
    
    67Item 14. Material Modifications to the Rights of Security Holders and Use of Proceeds
    
    
    67Item 15. Controls and Procedures
    
    
    67Item 16A.Audit Committee Financial Expert
    
    
    69Item 16B.Code of Ethics
    
    
    69Item 16C.Principal Accountant Fees and Services
    
    
    69Item 16D.Exemptions from the Listing Standards for Audit Committees
    
    
    7                                                                  0Item 16E.Purchases of Equity Securities by the Issuer and Affiliated Purchasers
    
    
    71Item 16F.Change in Registrants Certifying Accountant
    
    
    71Item 16G.Corporate Governance
    
    
    71PART III
    
    
    72Item 17. Financial Statements
    
    
    72Item 18. Financial Statements
    
    
    72Item 19. Exhibits
    
    
    73EX-1.1 Articles of Incorporation, as amended (English translation)EX-1.2 Share Handling Regulations, as amended (English translation)EX-4.6 Agreement on Limited Liability, dated June 27, 2008 and June 26, 2009,between Internet Initiative Japan Inc. and outside directors and outside company auditorsEX-12.1 Certification of the principal executive officer required by 17 C.F.R. 240. 13a-14(a)EX-12.2 Certification of the principal financial officer required by 17 C.F.R. 240. 13a-14(a)EX-13.1 Certification of the chief executive officer required by 18 U.S.C. Section 1350EX-13.2 Certification of the chief financial officer required by 18 U.S.C. Section 1350
  i




---



##### Table of Contents



Cautionary Note Regarding Forward-Looking Statements
   
    
    that we may not be able to achieve or sustain profitability in the near future,
    
    that we may not be able to compete effectively against competitors which have
greater financial, marketing and other resources, and
    
    that our investments in our subsidiaries and affiliated companies may not produce
the returns that we expect or may adversely affect our results of operations and
financial condition.
 1




---



##### Table of Contents



As used in this annual report, references to IIJ to Internet Initiative Japan Inc. and
references to the Company, the Group, we, our, our group and us are to Internet
Initiative Japan Inc. and its subsidiaries except as the context otherwise requires.
 
 PART I
 
 Item 1. Identity of Directors, Senior Management and Advisers.
  
 Item 2. Offer Statistics and Expected Timetable.
  
 Item 3. Key Information.
 A. Selected Financial Data.
  2




---



##### Table of Contents



As of and for the fiscal year ended March 31,2005
    
    
    2006
    
    
    2007
    
    
    2008
    
    
    2009
    
    
    2009(millions of yen, except per share and ADS data)
    
    
    (thousands ofU.S. dollars,except pershare and ADSdata(1))Statement of Operations Data:REVENUES:Connectivity and outsourcing services(2):Connectivity services (corporate use)
    
    ¥
    11,994
    
    
    ¥
    11,179
    
    
    ¥
    11,239
    
    
    ¥
    12,149
    
    
    ¥
    13,142
    
    
    $
    132,551Connectivity services (home use)
    
    
    2,316
    
    
    
    2,120
    
    
    
    1,969
    
    
    
    5,430
    
    
    
    6,538
    
    
    
    65,934Outsourcing services
    
    
    8,174
    
    
    
    9,924
    
    
    
    11,145
    
    
    
    13,724
    
    
    
    15,396
    
    
    
    155,278Total
    
    
    22,484
    
    
    
    23,223
    
    
    
    24,353
    
    
    
    31,303
    
    
    
    35,076
    
    
    
    353,763Systems integration (3):Systems construction
    
    
    7,598
    
    
    
    12,296
    
    
    
    16,660
    
    
    
    18,021
    
    
    
    14,658
    
    
    
    147,841Systems operation and
maintenance
    
    
    8,256
    
    
    
    11,209
    
    
    
    13,867
    
    
    
    15,993
    
    
    
    18,989
    
    
    
    191,514Total
    
    
    15,854
    
    
    
    23,505
    
    
    
    30,527
    
    
    
    34,014
    
    
    
    33,647
    
    
    
    339,355Equipment sales
    
    
    3,365
    
    
    
    3,085
    
    
    
    2,175
    
    
    
    1,514
    
    
    
    985
    
    
    
    9,930ATM operation business(4)
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    4
    
    
    
    23
    
    
    
    237Total revenues
    
    
    41,703
    
    
    
    49,813
    
    
    
    57,055
    
    
    
    66,835
    
    
    
    69,731
    
    
    
    703,285COST AND EXPENSES:Cost of connectivity and outsourcing services
    
    
    19,484
    
    
    
    20,078
    
    
    
    20,545
    
    
    
    26,040
    
    
    
    29,318
    
    
    
    295,690Cost of systems integration
    
    
    12,200
    
    
    
    18,120
    
    
    
    23,529
    
    
    
    25,526
    
    
    
    25,543
    
    
    
    257,617Cost of equipment sales
    
    
    3,111
    
    
    
    2,818
    
    
    
    1,894
    
    
    
    1,300
    
    
    
    863
    
    
    
    8,704Cost of ATM operation business(4)
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    17
    
    
    
    422
    
    
    
    4,259Total cost
    
    
    34,795
    
    
    
    41,016
    
    
    
    45,968
    
    
    
    52,883
    
    
    
    56,146
    
    
    
    566,270Sales and marketing
    
    
    2,795
    
    
    
    3,080
    
    
    
    3,439
    
    
    
    4,329
    
    
    
    4,631
    
    
    
    46,703General and administrative
    
    
    2,666
    
    
    
    3,147
    
    
    
    3,971
    
    
    
    4,624
    
    
    
    5,622
    
    
    
    56,701Research and development
    
    
    199
    
    
    
    159
    
    
    
    177
    
    
    
    240
    
    
    
    415
    
    
    
    4,187Total cost and expenses
    
    
    40,455
    
    
    
    47,402
    
    
    
    53,555
    
    
    
    62,076
    
    
    
    66,814
    
    
    
    673,861OPERATING INCOME
    
    
    1,248
    
    
    
    2,411
    
    
    
    3,500
    
    
    
    4,759
    
    
    
    2,917
    
    
    
    29,424OTHER INCOME (EXPENSES):Interest income
    
    
    13
    
    
    
    13
    
    
    
    23
    
    
    
    63
    
    
    
    45
    
    
    
    455Interest expense
    
    
    (686
    )
    
    
    (437
    )
    
    
    (397
    )
    
    
    (438
    )
    
    
    (408
    )
    
    
    (4,117
    )Other  net
    
    
    2,573
    
    
    
    3,392
    
    
    
    1,923
    
    
    
    (22
    )
    
    
    (520
    )
    
    
    (5,243
    )Other income (expenses)  net
    
    
    1,900
    
    
    
    2,968
    
    
    
    1,549
    
    
    
    (397
    )
    
    
    (883
    )
    
    
    (8,905
    )INCOME FROM OPERATIONS BEFORE INCOME TAX EXPENSE
(BENEFIT), MINORITY INTERESTS IN (EARNINGS)
LOSSES OF SUBSIDIARIES AND EQUITY
IN NET INCOME (LOSS) OF EQUITY METHOD
INVESTEES
    
    
    3,148
    
    
    
    5,379
    
    
    
    5,049
    
    
    
    4,362
    
    
    
    2,034
    
    
    
    20,519INCOME TAX EXPENSE (BENEFIT)
    
    
    100
    
    
    
    257
    
    
    
    (804
    )
    
    
    (861
    )
    
    
    1,002
    
    
    
    10,113MINORITY INTERESTS IN (EARNINGS) LOSSES OF
SUBSIDIARIES
    
    
    (109
    )
    
    
    (354
    )
    
    
    (233
    )
    
    
    97
    
    
    
    352
    
    
    
    3,555EQUITY IN NET INCOME (LOSS) OF EQUITY METHOD
INVESTEES
    
    
    (33
    )
    
    
    (14
    )
    
    
    (210
    )
    
    
    (143
    )
    
    
    35
    
    
    
    354NET INCOME
    
    ¥
    2,906
    
    
    ¥
    4,754
    
    
    ¥
    5,410
    
    
    ¥
    5,177
    
    
    ¥
    1,419
    
    
    $
    14,315
 3




---



##### Table of Contents



As of and for the fiscal year ended March 31,2005
    
    
    2006
    
    
    2007
    
    
    2008
    
    
    2009
    
    
    2009(millions of yen, except per share and ADS data)
    
    
    (thousands ofU.S. dollars,except pershare and ADSdata(1))Per Share and ADS Data(5):Basic net income per share
    
    ¥
    15,172
    
    
    ¥
    24,301
    
    
    ¥
    26,519
    
    
    ¥
    25,100
    
    
    ¥
    6,918
    
    
    $
    70Diluted net income per share
    
    
    15,172
    
    
    
    24,258
    
    
    
    26,487
    
    
    
    25,072
    
    
    
    6,917
    
    
    
    70Basic net income per ADS equivalent
    
    
    37.93
    
    
    
    60.75
    
    
    
    66.30
    
    
    
    62.75
    
    
    
    17.29
    
    
    
    0.17Diluted net income per ADS equivalent
    
    
    37.93
    
    
    
    60.65
    
    
    
    66.22
    
    
    
    62.68
    
    
    
    17.29
    
    
    
    0.17Cash dividends declared per share:Japanese Yen
    
    
    
    
    
    
    
    
    
    ¥
    1,500
    
    
    ¥
    1,750
    
    
    ¥
    2,000U.S. Dollars
    
    
    
    
    
    
    
    
    
    $
    12.76
    
    
    $
    17.53
    
    
    $
    20.17Basic weighted average number of shares
    
    
    191,559
    
    
    
    195,613
    
    
    
    203,992
    
    
    
    206,240
    
    
    
    205,165Diluted weighted average number of shares
    
    
    191,559
    
    
    
    195,955
    
    
    
    204,244
    
    
    
    206,465
    
    
    
    205,195Basic weighted average number of ADS equivalents
(thousands)
    
    
    76,624
    
    
    
    78,245
    
    
    
    81,597
    
    
    
    82,496
    
    
    
    82,066Diluted weighted average number of ADS
equivalents (thousands)
    
    
    76,624
    
    
    
    78,382
    
    
    
    81,698
    
    
    
    82,586
    
    
    
    82,078Balance Sheet Data:Cash and cash equivalents
    
    ¥
    5,286
    
    
    ¥
    13,727
    
    
    ¥
    13,555
    
    
    ¥
    11,471
    
    
    ¥
    10,188
    
    
    $
    102,751Total assets
    
    
    37,116
    
    
    
    50,705
    
    
    
    47,693
    
    
    
    55,703
    
    
    
    52,301
    
    
    
    527,496Short-term borrowings
    
    
    4,725
    
    
    
    4,555
    
    
    
    6,050
    
    
    
    9,150
    
    
    
    7,350
    
    
    
    74,130Current portion of long-term borrowings,
including capital lease obligations
    
    
    5,511
    
    
    
    4,994
    
    
    
    3,243
    
    
    
    3,456
    
    
    
    3,272
    
    
    
    33,003Long-term borrowings, including capital lease
obligations
    
    
    5,869
    
    
    
    5,271
    
    
    
    4,318
    
    
    
    4,738
    
    
    
    4,866
    
    
    
    49,078Common stock
    
    
    13,765
    
    
    
    16,834
    
    
    
    16,834
    
    
    
    16,834
    
    
    
    16,834
    
    
    
    169,782Total shareholders equity
    
    
    11,615
    
    
    
    20,222
    
    
    
    20,112
    
    
    
    24,981
    
    
    
    25,169
    
    
    
    253,849Operating Data:Capital expenditures, including capitalized
leases (6)
    
    ¥
    5,011
    
    
    ¥
    4,762
    
    
    ¥
    3,953
    
    
    ¥
    6,078
    
    
    ¥
    7,006
    
    
    $
    70,660Operating margin ratio (7)
    
    
    3.0
    %
    
    
    4.8
    %
    
    
    6.1
    %
    
    
    7.1
    %
    
    
    4.2
    %Net cash provided by (used in):Operating activities
    
    ¥
    5,238
    
    
    ¥
    6,559
    
    
    ¥
    7,402
    
    
    ¥
    4,538
    
    
    ¥
    8,631
    
    
    $
    87,049Investing activities
    
    
    1,974
    
    
    
    1,805
    
    
    
    (3,014
    )
    
    
    (5,444
    )
    
    
    (3,328
    )
    
    
    (33,566
    )Financing activities
    
    
    (14,213
    )
    
    
    39
    
    
    
    (4,560
    )
    
    
    (1,152
    )
    
    
    (6,573
    )
    
    
    (66,297
    )
 
 (1)
    
    The U.S. dollar amounts represent translation of yen amounts at the rate of ¥99.15 which was
the noon buying rate in New York City for cable transfers in foreign currencies as certified
for customs purposes by the Federal Reserve Bank of New York prevailing as of March 31, 2009.(2)
    
    Value-added services and Other of connectivity and value added services were combined and
renamed as Outsourcing services as it is considered more suitable to combine the two
together as one service to clearly indicate that they are services provided to customers for
the purpose of operating a customers information network systems. Related to this change,
Connectivity and value-added services were renamed as Connectivity and outsourcing
services. Reclassifications to prior years have also been made to conform to the current year
presentation.(3)
    
    Systems construction and Systems operation and maintenance, which were components of
systems integration revenues, were separately disclosed to clarify the contents of Systems
integration revenues. The same disclosure were done for the previous years to conform to the
current year presentation.(4)
    
    ATM operation business revenues and Cost of ATM operation business were disclosed due to
the increase in the materiality of the business. The same disclosure has been made to the
previous year to conform to the current year presentation.(5)
    
    IIJ conducted a 1 to 5 stock split effective on October 11, 2005. The per share data is
calculated based on the assumption that the stock split was made at the beginning of the
fiscal year ended March 31, 2005.(6)
    
    Further information regarding capital expenditures, including capitalized leases and a
reconciliation to the most directly comparable U.S. GAAP financial measure can be found in the
following page.(7)
    
    Operating income as a percentage of total revenues. 4




---



##### Table of Contents



Reconciliations of the Disclosed Non-GAAP Financial Measures to the Most Directly Comparable GAAP
Financial Measures
 Capital expenditures
   For the fiscal year ended March 31,2005
    
    
    2006
    
    
    2007
    
    
    2008
    
    
    2009(millions of yen)Capital expenditures:Acquisition of assets by entering into capital leases
    
    ¥
    4,434
    
    
    ¥
    3,843
    
    
    ¥
    2,665
    
    
    ¥
    4,222
    
    
    ¥
    4,015Purchases of property and equipment
    
    
    577
    
    
    
    919
    
    
    
    1,288
    
    
    
    1,856
    
    
    
    2,991Total capital expenditures
    
    ¥
    5,011
    
    
    ¥
    4,762
    
    
    ¥
    3,953
    
    
    ¥
    6,078
    
    
    ¥
    7,006
 Exchange Rates
   High
    
    Low
    
    Average(2)
    
    Period-endFiscal year ended March 31,(1)2005
    
    ¥
    114.30
    
    
    ¥
    102.26
    
    
    ¥
    107.28
    
    
    ¥
    107.222006
    
    
    120.93
    
    
    
    104.41
    
    
    
    113.67
    
    
    
    117.482007
    
    
    121.81
    
    
    
    110.07
    
    
    
    116.55
    
    
    
    117.562008
    
    
    124.09
    
    
    
    96.88
    
    
    
    113.61
    
    
    
    99.852009
    
    
    110.48
    
    
    
    87.80
    
    
    
    100.85
    
    
    
    99.15Calendar year 2009January
    
    ¥
    94.20
    
    
    ¥
    87.80
    
    
    ¥
    90.12
    
    
    ¥
    89.83February
    
    
    98.55
    
    
    
    89.09
    
    
    
    92.92
    
    
    
    97.74March
    
    
    99.34
    
    
    
    93.85
    
    
    
    97.86
    
    
    
    99.15April
    
    
    100.71
    
    
    
    96.49
    
    
    
    98.92
    
    
    
    98.76May
    
    
    99.24
    
    
    
    94.45
    
    
    
    96.64
    
    
    
    95.55June
    
    
    98.56
    
    
    
    95.19
    
    
    
    96.58
    
    
    
    96.42July
    
    
    96.41
    
    
    
    92.33
    
    
    
    94.30
    
    
    
    94.54August
    
    
    97.65
    
    
    
    92.82
    
    
    
    94.90
    
    
    
    92.82September (through September 25, 2009)
    
    
    93.09
    
    
    
    89.83
    
    
    
    91.54
    
    
    
    89.83
 
 (1)
    
    For December 2008 and prior periods, the exchange rate refers to the noon buying rate as
reported by the Federal Reserve Bank of New York. For January 2009 and later periods, the
exchange rate refers to the exchange rate as set forth in the H.10 statistical release of the
Federal Reserve Board.(2)
    
    For fiscal years, calculated from the average of the exchange rates on the last day of each
month during the period. For calendar year months, calculated based on the average of daily
exchange rates.  5




---



##### Table of Contents



B. Capitalization and Indebtedness.
  C. Reasons for the Offer and Use of Proceeds.
  D. Risk Factors.
 You should carefully consider the following information, together with the other information
contained in this annual report on Form 20-F , including our consolidated financial statements and
the related notes, before making an investment decision. Any risks described below could result in
a material adverse effect on our business, financial condition or results of operations.
 We may not maintain our current level of revenues or achieve our expected revenues and profits in
the future.
   
    
    a decrease in revenues from our connectivity services because of lower unit prices
per bandwidth and cancellation of large accounts, due, for example, to severe price
competition,
    
    lower revenue growth and lower margins if we fail to successfully differentiate our
services from those of our competitors, if corporate customers put off or stop placing
orders with us, if the number of systems construction projects decreases, or if the
average revenues for each projects decreases,
    
    an increase in backbone costs due to increased volume of Internet traffic and
tightened demands for leasing backbone lines, or a decline in the profitability of
connectivity services if we contract for more capacity than we actually require to
serve our customers,
    
    an increase in expenses for network infrastructure, research and development,
back-office systems and other similar investments which we may be forced to make in the
future in order to remain competitive, or an increase in expenses relating to the
leasing of additional equipment and an increase in amortization and depreciation,
    
    failure to control personnel and outsourcing costs, especially in our systems
integration, if personnel and outsourcing costs increase, or we fail to manage
outsourcing resource effectively or fail to cover outsourcing costs by raising enough
revenues from outsourced projects,
    
    an increase in SG&A costs, such as personnel expenses, advertising expenses and
office rent expenses, in conjunction with our expected or planned or continued business
expansion,
    
    the recording of an impairment loss as a result of an impairment test on the
non-amortized intangible assets such as goodwill that are recorded related to any
mergers and acquisitions,
    
    a decline in the value and trading volume of our holding of available-for-sale
securities from which we expect gains on sale,
    
    an impairment losses on available-for-sale securities, nonmarketable equity
securities and funds,
    
    the amount and timing of the recognition of deferred tax benefits or expenses
resulting from a release or an increase of valuation allowance against deferred income
tax assets related to tax operating loss carryforwards and other temporary differences,
and
    
    a negative effect on our revenues and profits if newly established consolidated
subsidiaries cannot achieve our expected levels of revenues or manage costs and
expenses in a timely and adequate manner.
  6




---



##### Table of Contents



We may not be able to compete effectively, especially against competitors with greater financial,
marketing and other resources.
   
    
    substantially greater financial resources,
    
    more extensive and well-developed marketing and sales networks,
    
    higher brand recognition among consumers,
    
    larger customer bases, and
    
    more diversified operations which allow profits from some operations to support
operations with lower profitability, such as network services, for which we are a
competitor.
  
    
    sustain downward pricing pressure, including pressure on low-price Internet
connectivity services offered to corporate customers, which are our target customers,
    
    develop, market and sell their services,
    
    adapt quickly to new and changing technologies,
    
    obtain new customers, and
    
    aggressively pursue mergers and acquisitions to enlarge their customer base and
market share.
 Our investments in our subsidiaries and affiliated companies may not produce the returns we expect
or may affect our results of operations and financial condition adversely.
   7




---



##### Table of Contents



If our systems integration revenues fluctuate or if we fail to execute our systems construction
projects in a timely or satisfactory manner, our results of operations and financial condition may
be adversely affected.
   We may have an impairment loss as a result of an impairment test on the intangible assets that are
recorded related to mergers and acquisitions.
  8




---



##### Table of Contents



If we fail to attract and retain qualified personnel, we may not be able to achieve our expected
business growth.
  Our business may be adversely affected if our network suffers interruptions, errors or delays.
  If we fail to keep and manage our confidential customer information, we could be subject to
lawsuits, incur expenses associated with our security systems or suffer damage to our reputation.
  Business growth and a rapidly changing operating environment may strain our limited resources.
  If we fail to keep up with the rapid technological changes in our industry, our services may become
obsolete and we may lose customers.
  
    
    rapid technological change, including the shift to new technology-based networks
such as IPv6,
    
    frequent new product and service introductions,
    
    continually changing customer requirements, and
    
    evolving industry standards.
 9




---



##### Table of Contents



We depend on our executive officers, and if we lose the service of our executive officers,
particularly Mr. Koichi Suzuki, our business and our relationships with our customers, major
shareholders of IIJ and other IIJ Group companies and our employees could suffer.
  The amounts and timing of recognition of deferred tax benefits or expenses related to tax operating
loss carryforwards may adversely affect our financial results.
  Fluctuations in the stock prices of companies or impairment losses on stocks of companies in which
we have invested may significantly influence our financial condition.
  NTT, IIJs largest shareholder, could exercise substantial influence over us in a manner which may
not necessarily be in our interest or that of our other shareholders.
  10




---



##### Table of Contents



We rely greatly on other telecommunications carriers and other suppliers, and could be affected by
disruptions in service or delays in the delivery of their products and services.
    Regulatory matters and new legislation could impact our ability to conduct our business.
    We may be named as defendants in litigation, which could have an adverse impact on our business,
financial condition and results of operations.
  In the event we need to raise capital, we may issue additional shares of IIJs common stock or
securities convertible into IIJs common stock, which may cause shareholders to incur substantial
dilution.
  11




---



##### Table of Contents



Item 4. Information on the Company.
 A. History and Development of the Company.
      B. Business Overview.
     12




---



##### Table of Contents



For the fiscal year ended March 31,(millions of yen except for percentage data)2007
    
    2008
    
    2009Connectivity services
    
    
    13,208
    
    
    
    23.2
    %
    
    
    17,579
    
    
    
    26.3
    %
    
    
    19,680
    
    
    
    28.2
    %Outsourcing services
    
    
    11,145
    
    
    
    19.5
    %
    
    
    13,724
    
    
    
    20.5
    %
    
    
    15,396
    
    
    
    22.1
    %Systems construction
    
    
    16,660
    
    
    
    29.2
    %
    
    
    18,021
    
    
    
    27.0
    %
    
    
    14,658
    
    
    
    21.0
    %Systems operation and maintenance
    
    
    13,867
    
    
    
    24.3
    %
    
    
    15,993
    
    
    
    23.9
    %
    
    
    18,989
    
    
    
    27.3
    %Equipment sales
    
    
    2,175
    
    
    
    3.8
    %
    
    
    1,514
    
    
    
    2.3
    %
    
    
    985
    
    
    
    1.4
    %ATM operation business
    
    
    
    
    
    
    
    
    
    
    4
    
    
    
    0.0
    %
    
    
    23
    
    
    
    0.0
    %Total revenues:
    
    
    57,055
    
    
    
    100.0
    %
    
    
    66,835
    
    
    
    100.0
    %
    
    
    69,731
    
    
    
    100.0
    %
 Connectivity Services
    As of March 31,2005
    
    
    2006
    
    
    2007
    
    
    2008
    
    
    2009Connectivity services (corporate use) (1):IP Service (-99 Mbps)
    
    
    749
    
    
    
    739
    
    
    
    751
    
    
    
    855
    
    
    
    938IP Service (100 Mbps  999 Mbps)
    
    
    90
    
    
    
    117
    
    
    
    161
    
    
    
    201
    
    
    
    225IP Service (1 Gbps )
    
    
    24
    
    
    
    40
    
    
    
    63
    
    
    
    70
    
    
    
    94IIJ Data Center Connectivity Service
    
    
    231
    
    
    
    247
    
    
    
    282
    
    
    
    288
    
    
    
    298IIJ FiberAccess/F and IIJ DSL/F
(Broadband Services)
    
    
    9,873
    
    
    
    13,297
    
    
    
    16,418
    
    
    
    23,539
    
    
    
    26,023Others (1)
    
    
    2,423
    
    
    
    1,760
    
    
    
    1,618
    
    
    
    3,002
    
    
    
    21,224Total connectivity
service (corporate use)
contracts
    
    
    13,390
    
    
    
    16,200
    
    
    
    19,293
    
    
    
    27,955
    
    
    
    48,802Connectivity services (home use) :Under IIJ Brand
    
    
    65,921
    
    
    
    60,525
    
    
    
    55,907
    
    
    
    51,051
    
    
    
    46,901hi-ho
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    189,700
    
    
    
    179,786OEM (2)
    
    
    625,908
    
    
    
    568,307
    
    
    
    476,483
    
    
    
    232,515
    
    
    
    216,725Total connectivity service (home use contracts)
    
    
    691,829
    
    
    
    628,832
    
    
    
    532,390
    
    
    
    473,266
    
    
    
    443,412
 
 (1)
    
    Includes IIJ Mobile Service.(2)
    
    OEM services provided to other service providers.
 13




---



##### Table of Contents



Connectivity Services for Corporate Use
  
    
    IP Service and Data Center Connectivity Service.Our IP Service and Data Center
Connectivity is a full-scale, high-speed access service that connects the customers
network to our backbone with dedicated access lines. The services are used mainly for
corporate headquarters or data centers, where reliable network service is
indispensable. The customer chooses the level of service it needs based upon its
bandwidth requirements. As of August 2009, we offer service at speeds ranging from 64
kbps to 10 Gbps.We believe that as business customers continue to increase their use of the Internet as
their business tool and increasingly rely on the Internet, our Internet connectivity
service will continue to be the foundation of our total network solutions offerings.Subscribers pay a monthly fee for the leased local access line from the customers
location to one of our POPs. The amount of this fee varies depending on the carrier, the
distance between the customers site and our POPs and its contracted bandwidth. We
collect the local access fee from the customer and pay the amount to the carrier. While
we prepare and arrange the leased access lines on behalf of customers under our name,
the usage fee collected from the customer and paid to the carriers is recorded gross in
our consolidated financial statements.For our IP Service, we offer Service Level Agreements (SLA) to our customers to better
define the quality of services our customers receive. We were the first ISP in Japan to
introduce this type of agreement. We are able to offer these SLA due to our high quality
and reliable network. Our SLA provide customers with credit against the amount invoiced
for the services if our service quality fails to meet the prescribed standards.
Subscribers to our IP Service receive technical support 24 hours a day and seven days a
week. We guarantee the performance of the following elements under our SLA:
 
    
    100% availability of our network,
    
    the maximum average latency, or time necessary to transmit a signal, between designated POPs, and
    
    prompt notification of outage or disruption.
 
    
    IIJ FiberAccess/F and IIJ DSL/F (Broadband Services).IIJ FiberAccess/F and IIJ
DSL/F are broadband Internet connectivity services that uses FLETS services for
fiber optic access and ADSL access provided by NTT East and West and others allowing
service on a best-efforts basis. The services are used mainly to connect branch offices
and headquarters. We support this service by providing guarantees of latency rates
under SLA.
    
    Dial-up Access Services.We offer a variety of dial-up access services for corporate
use. Our dial-up services allow employees that are out of the office or frequent
travelers, to access the Internet or their own internal networks through one of our
POPs or through our roaming access points. When accessing their internal network, for
security purposes, it is usually accessed using the VPN function that is provided by
our outsourcing services or systems integration. Our main dial-up access services are
our IIJ Dial-up Advanced, Enterprise Dial-up IP Service and IIJ Dial-up Standard.
    
    IIJ Mobile Service.This service, launched in January 2008, provides wireless
broadband Internet connectivity exclusively for corporate customers as a MVNO. We use
the wireless networks of NTT DoCoMo and EMOBILE (EMOBILE Ltd.) for mobile access
network.
    
    Other Internet connectivity services.We offer, other than the services mentioned
above, IIJ ISDN/F and IIJ Line Management/F service, which the former provides
dedicated Internet access for ISDN lines and the latter the procurement of FLETS
services on behalf of customers.
 Connectivity Services for Home Use
 mio mio mio mio mio mio mio mio mio
 14




---



##### Table of Contents



Outsourcing Services
    
    
    Security-related outsourcing services.We offer services that protect customers
internal network systems from unauthorized access and secure remote connections to the
internal networks such as, IIJ DDoS Solution Service, IIJ Security Scan Service, IIJ
Managed IPS Service, IIJ Managed Firewall Service and IIJ Secure Remote Access. We were
the first ISP in Japan to provide firewall services, which we introduced in 1994.
    
    Network-related outsourcing services.We offer Internet-VPN and router rental
services such as, IIJ Internet-LAN Service, IIJ SMFsx Service, IIJ Managed VPN PRO
Service, SEIL Rental Service and Managed Router Service. IIJ SMFsx Service is based on
the patent technology, the SEIL Management Framework (SMF) which enables centralized
management of network-configuration, administration and maintenance, reducing both
configuration and maintenance time and costs for large-scale network construction.
    
    Server-related outsourcing services.We offer services such as web hosting, e-mail
hosting, document storage and streaming services. Currently, the main service line ups
are, IIJ Secure MX Service, IIJ Secure Web Gateway Service, IIJ Document Exchange
Service, IIJ Download Site Service, IIJ URL Filtering Service, IIJ DNS Service and
Streaming Service.
    
    Data center-related services.We offer, IIJ data center facility services, IIJ data
center connectivity services and management and monitoring services. Our Internet data
center facility services are co-location services which allow companies to house their
servers and routers off-site on our premises. Our Internet data center facilities are
leased from third parties such as NTT Communications and are equipped with robust
security systems, 24-hours-a-day non-stop power supplies and fire extinguishing
systems, and have earthquake-resistant construction and high-speed Internet
connectivity with IIJ backbones. We also offer basic monitoring and maintenance
services for the equipment. This service enhances reliability because we provide
24-hours-a-day monitoring and have specialized maintenance personnel and facilities. We
offer management and monitoring services tailored to our customers requirements.
    
    Other services.Other than the above, we offer customer support and help desk
solutions, IP Phone service and other services.
 Systems Integration
   
    
    connecting over a hundred locations such as gas stations, bank branches and
retail shops via Internet-VPN, transmission of data over the Internet,
    
    outsourcing of large scale e-mail servers or systems to detect or delete e-mails
with viruses or spam or record all e-mails incoming to and outgoing from customers,
    
    online brokerage systems for securities firms,
    
    outsourcing of websites for online businesses,
    
    re-construction of overall corporate network systems suited to increased traffic
data,
    
    voice over IP systems to transmit voice among customer branch offices over the
Internet,
    
    construction of wireless local area networks (LAN), and
    
    consultation on corporate network security.
 15




---



##### Table of Contents



Equipment Sales
  SEIL Series.
 ATM Operation Business
  Network
    
    
    our backbone, which includes leased lines and network equipment, such as advanced
Internet routers,
    
    POPs in major metropolitan areas in Japan,
    
    Internet data centers, and
    
    a network operations center (NOC).
 16




---



##### Table of Contents



Backbone
 Leased lines
   Backbone Cost
 For the fiscal year ended March 31,2005
    
    2006
    
    2007
    
    2008
    
    2009Backbone cost (thousand yen)
    
    ¥
    3,550,885
    
    
    ¥
    3,516,322
    
    
    ¥
    3,515,934
    
    
    ¥
    3,469,717
    
    
    ¥
    3,692,286
 Network equipment
  Points of Presence .
   Internet Data Centers.
   Network operations center and technical and customer support.
  17




---



##### Table of Contents



Our Group Companies
    Jurisdiction of
    
    Proportion of ownershipCompany Name
    
    Incorporation
    
    and voting interestConsolidated Subsidiaries:IIJ Technology Inc.
    
    Japan
    
    
    100.0
    %Net Care, Inc.
    
    Japan
    
    
    100.0
    %IIJ Financial Systems Inc.
    
    Japan
    
    
    100.0
    %Net Chart Japan Inc.
    
    Japan
    
    
    100.0
    %hi-ho Inc.
    
    Japan
    
    
    100.0
    %On-Demand Solutions Incorporated
    
    Japan
    
    
    100.0
    %IIJ Innovation Institute Inc.
    
    Japan
    
    
    100.0
    %Trust Networks Inc.
    
    Japan
    
    
    73.8
    %GDX Japan Inc.
    
    Japan
    
    
    60.2
    %IIJ America Inc.
    
    
    U.S.A.
    
    
    
    100.0
    %Equity method investees:Taihei Computer Co., Ltd.
    
    Japan
    
    
    45.0
    %Internet Multifeed Co.
    
    Japan
    
    
    31.0
    %Internet Revolution Inc.
    
    Japan
    
    
    30.0
    %i-Heart Inc.
    
    Republic of Korea
    
    
    28.6
    %
 IIJ Technology Inc.
    Net Care, Inc.
    18




---



##### Table of Contents



IIJ Financial Systems Inc.
    Net Chart Japan Inc.
   hi-ho Inc.
   On-Demand Solutions Incorporated
  IIJ Innovation Institute Inc.
  Trust Networks Inc.
    GDX Japan Inc.
   19




---



##### Table of Contents



IIJ America Inc.
    Taihei Computer Co., Ltd.
  Internet Multifeed Co.
  Internet Revolution Inc.
  i-Heart Inc.
  Capital Expenditures
  For the fiscal year ended March 31,2007
    
    2008
    
    2009(millions of yen)Capital expenditures,
including capitalized
leases(1)
    
    ¥
    3,953
    
    
    ¥
    6,078
    
    
    ¥
    7,006
 
 (1)
    
    Further information regarding capital expenditures, including capitalized leases and a
reconciliation to the most directly comparable U.S. GAAP financial measure, can be found in Item
3.A., Selected Financial Data Reconciliations of the Disclosed Non-GAAP Financial Measures to
the Most Directly Comparable GAAP Financial Measures.    20




---



##### Table of Contents



Seasonality
  Sales and Marketing
    
    
    Five divisions focus on its total network solutions and work with large corporate
clients, including financial institutions, manufacturers, retail companies and others.
In order to provide total network solutions, personnel in its sales divisions work
closely with other IIJ Group companies such as IIJ-Tech as well as with other non-IIJ
Group companies.
    
    One division focuses on total network solutions and works with governmental
institutions, and universities and other schools.
    
    One division focuses on developing and strengthening partnerships with sales agents,
including large telecommunications carriers and systems integrators to expand our
marketing reach.
   Customers
  Research and Development
 Research and Development Organization
  IIJ Research Laboratory.
 Other Departments.
 IIJ Innovation Institute.
 21




---



##### Table of Contents



Research and Development Strategy
    
    
    continued improvement of our SEIL router and SMF, systems which we developed
specifically to be integrated into IIJs network-related services,
    
    research and development of the latest e-mail implementation technologies and spam
countermeasures,
    
    research and development of IPv6-based mobile communications technology,
    
    research relating to the methodology of configuration of routers and other servers,
    
    research relating to the technology for next generation IP networks,
    
    research relating to the behavior of Internet routing systems,
    
    research of the Internet traffic monitoring and management,
    
    research and development of the Distributed and Parallel Processing Platform for
very large data sets,
    
    research and analysis of the characteristics of the captured malware and spam mails,
and,
    
    development relating to proprietary video distribution server software specifically
designed for digital television.
   Proprietary Rights
  Licenses
   22




---



##### Table of Contents



Trademarks
  Patents
  Legal Proceedings
    23




---



##### Table of Contents



Regulation of the Telecommunications Industry in Japan
  The Telecommunications Business Law
  (1) (2)
 
 (1)
    
    The Exempted Business is the business related to facilities supplying broadcast services,
wire radio broadcasting, wire broadcast telephone services, wire television broadcasting
services, or the acceptance of applications for the use of the cable television broadcasting
facility.(2)
    
    The telecommunications business is defined as: (i)
    
    the telecommunications business which exclusively provides telecommunications
services to a single person (except one being a telecommunications carrier);(ii)
    
    the telecommunications business which provides telecommunications services with
telecommunications facilities, a part of which is to be established on the same premises
(including the areas regarded as the same premises) or in the same building where any
other part there of is also to be established, or with telecommunications facilities
which are below the standards stipulated in the ministerial ordinance of the MIC; and(iii)
    
    the telecommunications business installing no telecommunications circuit
facilities which provides telecommunications services other than the telecommunications
services which intermediate communications of others by using telecommunications
facilities;
  Start-up of Services
 
    
    RegistrationRegistration with the Minister of the MIC is required for a telecommunications business
which meets the following two requirements established by the ministerial ordinance of the
MIC: (i) areas of installation of terminal-related transmission facilities are limited to
a single municipality (city, town or village) and (ii) areas of installation of
relay-related transmission facilities are limited to a single prefecture.
    
    Notification
 (1)
 
 The Supplementary Provisions to the Telecommunications Business Law provide that the person who, at
the time of the enforcement of the provisions of Article 2 of the current Telecommunications
Business Law, is actually operating a Type II telecommunications business with registration under
Article 24 paragraph (1) of the old Telecommunications Business Law shall be deemed to be a person
who has submitted the notification of Article 16 paragraph (1) of the current Telecommunications
Business Law on the day of enforcement of the current Telecommunications Business Law. We were
actually operating a Type II telecommunications business at the time of the enforcement of the
provisions of Article 2 of the current Telecommunications Business Law with registration under
Article 24 paragraph (1) of the old Telecommunications Business Law, and therefore are deemed to have submitted the
notification of Article 16 paragraph (1) of the current Telecommunications Business Law on the day
of enforcement. In addition, the Supplementary Provisions to the Telecommunications Business Law
Implementation Rules provide that the person who, at the time of enforcement of the
Telecommunications Business Law Implementation Rules (i.e., April 1, 2004), is actually operating
a Type II telecommunications business with registration under Article 24 paragraph (1) of the old
Telecommunications Business Law, must submit a report prepared in the form of the notification of
Article 16 paragraph (1) of the current Telecommunications Business Law to the Minister of the MIC
without delay after the day of enforcement of the Telecommunications Business Law Implementation
Rules. We filed this report to the Minister of the MIC in April 2004. 24




---



##### Table of Contents



Terms and Conditions of Provision of Services and Charge
 
    
    Our business is unregulated, in general, as IIJ does not fall under either Basic
Telecommunications Services or Designated Telecommunications Services described below.
    
    Prior notification to the Minister of the MIC is required for Basic Telecommunications
Services (universal services specified by the ministerial ordinance of the MIC, i.e.,
analog or public fixed telephone services, analog or public remote island telephone
services, and analog or public emergency call telephone services). Providing these
telecommunications services other than pursuant to the terms and conditions and charges
notified to the Minister of the MIC is prohibited. Provided that the charges may be
discounted or waived pursuant to the exception criteria provided under the ministerial
ordinance of the MIC (i.e., an emergency call for the safety of ships and airplanes, an
emergency call for the safety of personal life and property in case of natural disaster,
calls to police agencies regarding crimes, and calls to the fire brigade (Emergency
Exception)
    
    Prior notification to the Minister of the MIC is required for Designated
Telecommunications Services (i.e., services provided through Category I Designated
Telecommunications Facilities and which meet the criteria provided by the ministerial
ordinance of the MIC as the services for which the guarantee of the terms and conditions
and charges are necessary for the protection of users, such as the basic fee). Category
I Designated Telecommunications Facilities are the facilities which meet the criteria
specified by the ministerial ordinance of the MIC as being the fixed telecommunications
facilities used for the services which are offered to a substantial percentage of users
in a given area, and which are currently only the facilities of NTT East and NTT West.
Providing these telecommunications services other than pursuant to the terms and
conditions and charges notified to the Minister of the MIC is prohibited, unless the
telecommunications carrier and the user agree otherwise, provided that the charges may be
discounted or waived in Emergency Cases, for emergency calls for injured persons in a
ship, and for use by a police agency, fire brigade and broadcasting companies.
    
    The Minister of the MIC at least once a year notifies the telecommunications carrier
providing the Specific Designated Telecommunications Services specified by the
ministerial ordinance of the MIC (i.e., Designated Telecommunications Services other than
voice services, except for telephone and general digital services and data transmission
services) the price cap regarding such services. The telecommunications carriers will be
required to obtain approval from the Minister of the MIC if a proposed change in charges
exceeds the price cap.
 Articles of Interconnection Agreements
 
    
    Our business is unregulated, in general, as IIJ does not fall under either Category I
Designated Telecommunications Facilities or Category II Designated Telecommunications
Facilities described below.
    
    Approval from the Minister of the MIC required for Category I Designated
Telecommunications Facilities.
    
    Prior notification to the Minister of the MIC required for Category II Designated
Telecommunications Facilities (i.e., the facilities which meet the criteria provided by
the ministerial ordinance of the MIC as being the mobile telecommunications facilities
used for the services which are offered to a substantial percentage of users in a given
area, and which are currently NTT DoCoMo, Okinawa Cellular and KDDI).
 Telecommunications Facilities of Carriers
 
    
    A telecommunications carrier that installs telecommunications circuit facilities must
maintain its telecommunications facilities (except telecommunications facilities
stipulated in the ministerial ordinance of the MIC as those having a minor influence on
the users benefit in the cases of damage or failure thereof) in conformity with the
technical standards provided in the ministerial ordinance of the MIC. Such
telecommunications carriers shall confirm that its telecommunications facilities are in
compliance with the technical standards specified in the ministerial ordinance of the
MIC.
 25




---



##### Table of Contents




    
    A telecommunications carrier that provides Basic Telecommunications Services must
maintain its telecommunications facilities for provision of Basic Telecommunications
Services in conformity with the technical standards provided in the ministerial ordinance
of the MIC.
    
    Telecommunications carriers that install telecommunications circuit facilities or
provide Basic Telecommunications Services must establish their own administrative rules
in accordance with the ministerial ordinance of the MIC in order to secure the reliable
and stable provision of telecommunications services. These administrative rules must
regulate the operation and manipulation of telecommunications facilities and the
safeguarding, inspecting and testing regarding the construction, maintenance and
administration of telecommunications facilities, etc. as provided for by the ministerial
ordinance of the MIC. Such administrative rules must be submitted to the Minister of the
MIC prior to the commencement of operations, and changes must be submitted to the
Minister of the MIC once after they are implemented without delay.
 Order to Improve Business Activities
 
    
    The Minister of the MIC may, if it is deemed that business activities of a
telecommunications carrier fall under inappropriate cases set forth in the
Telecommunications Business Law, insofar as it is necessary to ensure the users benefit
or the public interest, order the telecommunications carrier to take actions to improve
operations methods or other measures.
 Right of Way Privilege for Authorized Carriers
 
    
    A telecommunications carrier which is engaged, or intends to engage, in the
telecommunications business by installing telecommunications circuit facilities and which
wishes to have the privileged use of land or other public utilities for circuit
facilities deployment, must obtain the authorization on the entire or a part of the
relevant telecommunications business by the Minister of the MIC.
 Merger, Business Transfer or Divestiture of Carriers
 
    
    Post facto notification to the Minister of the MIC without delay is required.
 Business Suspension, Abolition or Dissolution of Carriers
 
    
    Post facto notification to the Minister of the MIC without delay is required. Prior
announcement of withdrawals to service users is required in accordance with ministerial
ordinances of the MIC.
 Foreign Capital Participation
 
    
    Prior notification is required under the Foreign Exchange and Foreign Trade Law for
the acquisition of shares of telecommunications carriers to which registration for
start-up services is applicable. This is not applicable to purchasers of ADSs. The
one-third foreign ownership restriction is applicable only to NTT East and NTT West.
 C. Organizational Structure.
  D. Property, Plants and Equipment.
  Item 4A. Unresolved Staff Comments
  26




---



##### Table of Contents



Item 5. Operating and Financial Review and Prospects.
 A. Operating Results.
 You should read the following discussion of our financial condition and results of operations
together with Item 3.A. of this annual report on Form 20-F and our consolidated financial
statements and the notes to those financial statements beginning on page F-1 of this annual report.
This discussion and analysis contains forward-looking statements that involve risks, uncertainties
and assumptions. Our actual results may differ materially from those anticipated in these
forward-looking statements as a result of factors including but not limited to those in Item 3.D.
of this annual report on Form 20-F .
 Overview
          27




---



##### Table of Contents



Results of Operations
  Fiscal year ended March 31,2007
    
    
    2008
    
    
    2009(millions of yen except for percentage data)
    
    
    (thousandsof U.S.dollars(1))REVENUES:Connectivity and outsourcing services:Connectivity services (corporate use)
    
    ¥
    11,239
    
    
    
    19.7
    %
    
    ¥
    12,149
    
    
    
    18.2
    %
    
    ¥
    13,142
    
    
    
    18.8
    %
    
    $
    132,551Connectivity services (home use)
    
    
    1,969
    
    
    
    3.5
    
    
    
    5,430
    
    
    
    8.1
    
    
    
    6,538
    
    
    
    9.4
    
    
    
    65,934Outsourcing services (2)
    
    
    11,145
    
    
    
    19.5
    
    
    
    13,724
    
    
    
    20.5
    
    
    
    15,396
    
    
    
    22.1
    
    
    
    155,278Total
    
    
    24,353
    
    
    
    42.7
    
    
    
    31,303
    
    
    
    46.8
    
    
    
    35,076
    
    
    
    50.3
    
    
    
    353,763Systems integration:(3)Systems construction
    
    
    16,660
    
    
    
    29.2
    
    
    
    18,021
    
    
    
    27.0
    
    
    
    14,658
    
    
    
    21.0
    
    
    
    147,841Systems operation and maintenance
    
    
    13,867
    
    
    
    24.3
    
    
    
    15,993
    
    
    
    23.9
    
    
    
    18,989
    
    
    
    27.3
    
    
    
    191,514Total
    
    
    30,527
    
    
    
    53.5
    
    
    
    34,014
    
    
    
    50.9
    
    
    
    33,647
    
    
    
    48.3
    
    
    
    339,355Equipment sales
    
    
    2,175
    
    
    
    3.8
    
    
    
    1,514
    
    
    
    2.3
    
    
    
    985
    
    
    
    1.4
    
    
    
    9,930ATM operation business (4)
    
    
    
    
    
    
    
    
    
    
    4
    
    
    
    0.0
    
    
    
    23
    
    
    
    0.0
    
    
    
    237Total revenues
    
    
    57,055
    
    
    
    100.0
    
    
    
    66,835
    
    
    
    100.0
    
    
    
    69,731
    
    
    
    100.0
    
    
    
    703,285COST AND EXPENSES:Cost of connectivity and outsourcing
services:Backbone cost
    
    
    3,516
    
    
    
    6.2
    
    
    
    3,470
    
    
    
    5.2
    
    
    
    3,692
    
    
    
    5.3
    
    
    
    37,239Local access line cost (5)
    
    
    4,616
    
    
    
    8.1
    
    
    
    7,102
    
    
    
    10.6
    
    
    
    8,113
    
    
    
    11.6
    
    
    
    81,828Other connectivity cost
    
    
    331
    
    
    
    0.6
    
    
    
    370
    
    
    
    0.6
    
    
    
    473
    
    
    
    0.7
    
    
    
    4,771Depreciation and amortization
    
    
    2,639
    
    
    
    4.6
    
    
    
    2,928
    
    
    
    4.4
    
    
    
    3,468
    
    
    
    5.0
    
    
    
    34,982Other
    
    
    9,443
    
    
    
    16.5
    
    
    
    12,170
    
    
    
    18.2
    
    
    
    13,572
    
    
    
    19.5
    
    
    
    136,870Total cost of connectivity and
outsourcing services
    
    
    20,545
    
    
    
    36.0
    
    
    
    26,040
    
    
    
    39.0
    
    
    
    29,318
    
    
    
    42.1
    
    
    
    295,690Cost of systems integration:Cost of equipment sales related to systems
integration
    
    
    4,206
    
    
    
    7.3
    
    
    
    4,409
    
    
    
    6.6
    
    
    
    4,931
    
    
    
    7.0
    
    
    
    49,733Other
    
    
    19,323
    
    
    
    33.9
    
    
    
    21,117
    
    
    
    31.6
    
    
    
    20,612
    
    
    
    29.6
    
    
    
    207,884Total cost of systems integration
    
    
    23,529
    
    
    
    41.2
    
    
    
    25,526
    
    
    
    38.2
    
    
    
    25,543
    
    
    
    36.6
    
    
    
    257,617Cost of equipment sales
    
    
    1,894
    
    
    
    3.4
    
    
    
    1,300
    
    
    
    1.9
    
    
    
    863
    
    
    
    1.2
    
    
    
    8,704Cost of ATM operation business (4)
    
    
    
    
    
    
    
    
    
    
    17
    
    
    
    0.0
    
    
    
    422
    
    
    
    0.6
    
    
    
    4,259Total cost
    
    
    45,968
    
    
    
    80.6
    
    
    
    52,883
    
    
    
    79.1
    
    
    
    56,146
    
    
    
    80.5
    
    
    
    566,270Sales and marketing
    
    
    3,439
    
    
    
    6.0
    
    
    
    4,329
    
    
    
    6.5
    
    
    
    4,631
    
    
    
    6.6
    
    
    
    46,703General and administrative
    
    
    3,971
    
    
    
    7.0
    
    
    
    4,624
    
    
    
    6.9
    
    
    
    5,622
    
    
    
    8.1
    
    
    
    56,701Research and development
    
    
    177
    
    
    
    0.3
    
    
    
    240
    
    
    
    0.4
    
    
    
    415
    
    
    
    0.6
    
    
    
    4,187Total cost and expenses
    
    
    53,555
    
    
    
    93.9
    
    
    
    62,076
    
    
    
    92.9
    
    
    
    66,814
    
    
    
    95.8
    
    
    
    673,861OPERATING INCOME
    
    
    3,500
    
    
    
    6.1
    
    
    
    4,759
    
    
    
    7.1
    
    
    
    2,917
    
    
    
    4.2
    
    
    
    29,424OTHER INCOME (EXPENSES):Interest income
    
    
    23
    
    
    
    0.0
    
    
    
    63
    
    
    
    0.1
    
    
    
    45
    
    
    
    0.1
    
    
    
    455Interest expense
    
    
    (397
    )
    
    
    (0.7
    )
    
    
    (438
    )
    
    
    (0.6
    )
    
    
    (408
    )
    
    
    (0.6
    )
    
    
    (4,117
    )Foreign exchange gains (losses)
    
    
    (0
    )
    
    
    (0.0
    )
    
    
    2
    
    
    
    0.0
    
    
    
    (29
    )
    
    
    (0.0
    )
    
    
    (288
    )Net gains on sales of other investments
    
    
    3,230
    
    
    
    5.7
    
    
    
    218
    
    
    
    0.3
    
    
    
    16
    
    
    
    0.0
    
    
    
    158Losses on write-down of other investments
    
    
    (1,363
    )
    
    
    (2.4
    )
    
    
    (289
    )
    
    
    (0.4
    )
    
    
    (524
    )
    
    
    (0.8
    )
    
    
    (5,288
    )Other  net
    
    
    56
    
    
    
    0.1
    
    
    
    47
    
    
    
    0.0
    
    
    
    17
    
    
    
    0.0
    
    
    
    175Other income (expenses)  net
    
    
    1,549
    
    
    
    2.7
    
    
    
    (397
    )
    
    
    (0.6
    )
    
    
    (883
    )
    
    
    (1.3
    )
    
    
    (8,905
    )INCOME FROM OPERATIONS BEFORE INCOME TAX
EXPENSE (BENEFIT), MINORITY INTERESTS IN
EARNINGS (LOSSES) OF SUBSIDIARIES AND EQUITY IN
NET INCOME (LOSS) OF EQUITY METHOD INVESTEES
    
    
    5,049
    
    
    
    8.8
    %
    
    
    4,362
    
    
    
    6.5
    %
    
    
    2,034
    
    
    
    2.9
    
    
    
    20,519INCOME TAX EXPENSE (BENEFIT)
    
    
    (804
    )
    
    
    (1.4
    )%
    
    
    (861
    )
    
    
    (1.3
    )%
    
    
    1,002
    
    
    
    1.4
    
    
    
    10,113MINORITY INTERESTS IN (EARNINGS) LOSSES OF
SUBSIDIARIES
    
    
    (233
    )
    
    
    (0.4
    )
    
    
    97
    
    
    
    0.1
    
    
    
    352
    
    
    
    0.5
    
    
    
    3,555EQUITY IN NET INCOME (LOSS) OF EQUITY METHOD
INVESTEES
    
    
    (210
    )
    
    
    (0.3
    )
    
    
    (143
    )
    
    
    (0.2
    )
    
    
    35
    
    
    
    0.0
    
    
    
    354NET INCOME
    
    ¥
    5,410
    
    
    
    9.5
    %
    
    ¥
    5,177
    
    
    
    7.7
    %
    
    ¥
    1,419
    
    
    
    2.0
    %
    
    $
    14,315
 
 (1)
    
    The U.S. dollar amounts represent translation of yen amounts at the rate of ¥99.15 which was
the noon buying rate in New York City for cable transfers in foreign currencies as certified
for customs purposes by the Federal Reserve Bank of New York prevailing as of March 31, 2009.(2)
    
    Value-added services and Other of connectivity and value added services were combined and
renamed as Outsourcing services as it is considered more suitable to combine the two
together as one service to clearly indicate that they are services provided to customers for
the purpose of operating a customers information network systems. Related to this change,
Connectivity and value-added services were renamed as Connectivity and outsourcing
services. Reclassifications to prior years have also been made to conform to the current year
presentation.(3)
    
    Systems construction and Systems operation and maintenance, which were components of
systems integration revenues, were separately disclosed to clarify the contents of Systems
integration revenues. The same disclosure were done for the previous years to conform to the
current year presentation.(4)
    
    ATM operation business revenues and Cost of ATM operation business were disclosed due to
the increase in the materiality of the business. The same disclosure has been made to the
previous year to conform to the current year presentation.(5)
    
    Telecommunications circuit cost of ¥2.9 billion for the fiscal year ended March 31, 2009 and
¥2.1 billion for the fiscal year ended March 31, 2008, related to hi-ho are included in local
access line cost. 28




---



##### Table of Contents



Year Ended March 31, 2009 Compared to the Year Ended March 31, 2008
 Total revenues
  Connectivity and outsourcing services revenues.
 
    
    Connectivity services for corporate use.Revenues from connectivity services for
corporate use increased by 8.2% to ¥13.1 billion for the fiscal year ended March 31,
2009 from ¥12.1 billion for the previous fiscal year. IP service revenues, the service
mainly used for corporate headquarters and data centers, increased by 2.8% for the
fiscal year ended March 31, 2009 compared to the previous year and broadband services
increased by 8.7% for the fiscal year ended March 31, 2009 as a result of steady
demands for network expansion and the shift to higher bandwidths. Contracts of over 1
Gbps increased to 94 contracts compared to 70 contracts at the end of March 2008,
especially among content business operators and ISPs. IIJ Mobile service, a mobile data
communication services for corporate use are performing well, contributing to revenue
growth.
    
    Connectivity services for home use.Despite the decrease in revenues from IIJ4U and
OEM, revenues from connectivity services for home use increased by 20.4% to ¥6.5
billion for the fiscal year ended March 31, 2009 from ¥5.4 billion for the previous
fiscal year. This significant increase was mainly due to additional revenues incurred
by hi-ho, which we acquired in June 2007, of ¥5.0 billion (12 months) for the fiscal
year ended March 31, 2009 compared to ¥3.8 billion for the fiscal year ended March 31,
2008 (10 months).
    
    Outsourcing services.Our outsourcing services revenues increased by 12.2% to ¥15.4
billion for the fiscal year ended March 31, 2009 from ¥13.7 billion for the previous
fiscal year. This increase was mainly due to a steady increase in revenues from
services such as security-related and e-mail related outsourcing services for anti-spam
protection, data center services and network related solutions. The steady increase in
outsourcing services revenues was affected by an increase in demand for outsourcing
services by corporate customers.
 Systems integration revenues.
 Equipment sales revenues.
 ATM Operation Business revenues.
 29




---



##### Table of Contents



Total cost of revenues
  Cost of connectivity and outsourcing services revenues
 Cost of systems integration revenues.
 Cost of equipment sales.
 Cost of ATM Operation Business.
 Total costs and expenses
  Sales and marketing.
 General and administrative.
 Research and development.
 30




---



##### Table of Contents



Operating income
  Other income (expenses) net
  Interest income.
 Interest expense.
 Foreign exchange gains (losses).
 Net gains on sales of other investments.
 Losses on write-down of other investments.
 Other-net.
 Income from operations before income tax expense (benefit), minority interests in losses of
subsidiaries and equity in net income (loss) of equity method investees
  Income tax expense (benefit)
  Minority interests in (earnings) losses of subsidiaries
  Equity in net income (loss) of equity method investees
  Net income
  31




---



##### Table of Contents



Year Ended March 31, 2008 Compared to the Year Ended March 31, 2007
 Total revenues
  Connectivity and outsourcing services revenues.
 
    
    Connectivity services for corporate use.Revenues from connectivity services for
corporate use increased by 8.1% to ¥12.1 billion for the fiscal year ended March 31,
2008 from ¥11.2 billion for the previous fiscal year. The increase was mainly due to an
increase in revenues from IP services, the service mainly used for corporate
headquarters and data centers, along with the shift to higher bandwidth, and an
increase in revenues from broadband services along with the expansion of broadband
utilization in the corporate internal network.
    
    Connectivity services for home use.Despite the decrease in revenues from IIJ4U and
OEM, revenues from connectivity services for home use increased by 175.8% to ¥5.4
billion for the fiscal year ended March 31, 2008 from ¥2.0 billion for the previous
fiscal year. This significant increase was mainly due to additional revenues for the
fiscal year ended March 31, 2008 of ¥3.8 billion from hi-ho, which we acquired in June
2007.
    
    Outsourcing services. Our outsourcing services revenues increased by 23.1% to ¥13.7
billion for the fiscal year ended March 31, 2008 from ¥11.1 billion for the previous
fiscal year. This increase was mainly due to a steady increase in revenues from
services such as security and e-mail related services for anti-spam protection, data
center services, network related solutions, customer support and Wide-are Ethernet
services. The steady increase in outsourcing services revenues is affected by an
increase in demand for outsourcing services by corporate customers.
 Systems integration revenues.
 Equipment sales revenues.
 ATM Operation Business revenues.
 Total cost of revenues
  32




---



##### Table of Contents



Cost of connectivity and outsourcing services revenues
 Cost of systems integration revenues.
 Cost of equipment sales.
 Cost of ATM Operation Business.
 Total costs and expenses
  Sales and marketing.
 General and administrative.
 Research and development.
 Operating income
  Other income (expenses) net
  33




---



##### Table of Contents



Interest income.
 Interest expense.
 Foreign exchange gains (losses).
 Net gains on sales and exchange of other investments.
 Losses on write-down of other investments.
 Other-net.
 Income from operations before income tax benefit, minority interests in (earnings) losses of
subsidiaries and equity in net loss of equity method investees
  Income tax benefit
  Minority interests in (earnings) losses of subsidiaries
  Equity in net loss of equity method investees
  Net income
  34




---



##### Table of Contents



Segment Reporting
    Segment Summary:
 Thousands ofMillions of Yen
    
    
    U.S.Dollars2008
    
    
    2009
    
    
    2009Net revenues:Network service and
systems integration
business
    
    ¥
    66,831
    
    
    ¥
    69,961
    
    
    $
    705,609ATM operation business
    
    
    4
    
    
    
    23
    
    
    
    237Elimination
    
    
    
    
    
    
    253
    
    
    
    2,561Total
    
    
    66,835
    
    
    
    69,731
    
    
    
    703,285Operating income (loss):Network service and
systems integration
business
    
    
    4,854
    
    
    
    3,663
    
    
    
    36,944ATM operation business
    
    
    (89
    )
    
    
    (705
    )
    
    
    (7,104
    )Elimination
    
    
    6
    
    
    
    41
    
    
    
    416Total
    
    ¥
    4,759
    
    
    ¥
    2,917
    
    
    $
    29,424
 Year Ended March 31, 2009 Compared to the Year Ended March 31, 2008
 Network services and Systems Integration Business
  ATM Operation Business
  35




---



##### Table of Contents



Application of Critical Accounting Policies
    Revenue recognition
     Systems construction revenues 
 
    
    The delivered item(s) has value to the client on a stand-alone basis,
    
    There is objective and reliable evidence of the fair value of the undelivered item(s), and
    
    If the arrangement includes a general right of return relative to the delivered
item(s), delivery or performance of the undelivered item(s) is considered probable and
substantially in the control of the company.
   36




---



##### Table of Contents



Systems operation and maintenance revenues 
    Useful lives of property and equipment
   Item
    
    Useful LivesData communications, office and other equipment
    
    
    2 to 15 yearsLeasehold improvements
    
    
    3 to 15 yearsPurchased software
    
    
    5 yearsCapitalized leases
    
    
    4 to 7 years
    Useful lives of intangible assets
  37




---



##### Table of Contents



Impairment of long-lived assets
  
    
    significant decline in the market value of an asset,
    
    current period operating cash flow loss,
    
    introduction of competing technologies or services,
    
    significant underperformance of expected or historical cash flows,
    
    significant or continuing decline in subscribers,
    
    changes in the manner or use of an asset,
    
    disruptions in the use of network equipment under capital lease arrangements, and
    
    other negative industry or economic trends.
  Allowance for doubtful accounts and uncollectible contractual prepayments
  Deferred tax assets
  Valuation of investments
  38




---



##### Table of Contents




    
    the length of time and the extent to which the market value has been less than cost,
    
    the financial condition and near-term prospects of the issuer, including any
specific events which may influence the operations of the issuer such as changes in
technology that may impair the earnings potential of the investment, and
    
    our intent and ability to retain the investment in the issuer for a period of time
sufficient to allow for any anticipated recovery in market value. If a decline in value
occurs and is deemed to be other-than-temporary, an impairment loss will be recorded to
write-down the carrying value of the investment to fair value. If, after taking into
account these considerations, the decline is judged to be other than temporary, the
cost basis of the individual security is written down to a new cost basis and the
amount of the write-down is accounted for as a realized loss.
    Pension benefits costs
     Change in Assumption
    
    Pre-Tax PBO
    
    Pension Expense
    
    Equity (Net of Tax)(millions of yen)50 basis point
increase/decrease
in discount rate
    
    
    (174)/194
    
    
    
    (*
    )
    
    
    (*
    )50 basis point
increase/decrease
in expected return
on assets
    
    
    
    
    
    
    (5)/5
    
    
    
    /(3
    )
 
 (*)
    
    It is not available because of curtailment and settlement. 39




---



##### Table of Contents



New Accounting Standards
         40




---



##### Table of Contents



B. Liquidity and Capital Resources.
 Liquidity and Capital Requirements
  Capital expenditures.
 For the fiscal year ended March 31,2007
    
    2008
    
    2009(millions of yen)Capital expenditures,
including capitalized
leases(1)
    
    ¥
    3,953
    
    
    ¥
    6,078
    
    
    ¥
    7,006
 
 (1)
    
    Further information regarding capital expenditures, including capitalized leases and a
reconciliation to the most directly comparable U.S. GAAP financial measure, can be found in
Item 3.A., Selected Financial Data Reconciliation of the Disclosed Non-GAAP Financial
Measures to the Most Directly Comparable GAAP Financial Measures.   Lease payments.
  41




---



##### Table of Contents



Payment due by period(millions of yen)Total contractualamount
    
    
    Less than 1 year
    
    
    1 to 3 years
    
    
    4 to 5 years
    
    
    More than 5 yearsConnectivity lines operating leases
    
    ¥
    2,398
    
    
    ¥
    1,206
    
    
    ¥
    1,039
    
    
    ¥
    153
    
    
    ¥
    Other operating leases
    
    
    5,730
    
    
    
    2,146
    
    
    
    1,258
    
    
    
    940
    
    
    
    1,386Capital leases
    
    
    8,514
    
    
    
    3,482
    
    
    
    4,390
    
    
    
    641
    
    
    
    1Total minimum lease
payments(1)
    
    ¥
    16,642
    
    
    ¥
    6,834
    
    
    ¥
    6,687
    
    
    ¥
    1,734
    
    
    ¥
    1,387
 
 (1)
    
    See Note 8 Leases to our consolidated financial statements included in this annual report. Payments of principal and interest on outstanding borrowings.
 Short-term borrowings.
 Long-term borrowings
 Collateral for borrowings
 Investments in current and former group companies.
 Working capital needs.
 Capital Resources
  Short-term and long-term Borrowings
 Cash flows from operating activities.
 Capital Leases.
 42




---



##### Table of Contents



Cash Flows
   Fiscal year ended March 31,2007
    
    
    2008
    
    
    2009(millions of yen)Net cash provided by operating activities
    
    ¥
    7,402
    
    
    ¥
    4,538
    
    
    ¥
    8,631Net cash used in investing activities
    
    
    (3,014
    )
    
    
    (5,444
    )
    
    
    (3,328
    )Net cash used in financing activities
    
    
    (4,560
    )
    
    
    (1,152
    )
    
    
    (6,573
    )Effect of exchange rate changes on cash and cash
equivalents
    
    
    (0
    )
    
    
    (26
    )
    
    
    (13
    )Net decrease in cash and cash equivalents
    
    
    (172
    )
    
    
    (2,084
    )
    
    
    (1,283
    )Cash and cash equivalents at beginning of the year
    
    
    13,727
    
    
    
    13,555
    
    
    
    11,471Cash and cash equivalents at end of the year
    
    ¥
    13,555
    
    
    ¥
    11,471
    
    
    ¥
    10,188
 Year Ended March 31, 2009 as Compared to the Year Ended March 31, 2008
    43




---



##### Table of Contents



Year Ended March 31, 2008 as Compared to the Year Ended March 31, 2007
    Contingencies
  C. Research and Development, Patents and Licenses, etc.
  D. Trend Information.
 Factors Affecting Our Future Financial Results
  Revenues
  Connectivity and outsourcing services revenues
  44




---



##### Table of Contents



Connectivity services for corporate use
  
    
    Increased contracted bandwidth.Total contracted bandwidth for connectivity services
for corporate user increased to 530.5 Gbps for the fiscal year ended March 31, 2009
from 392.4 Gbps for the previous fiscal year. The number of IP Service contracts for
the bandwidth over 100Mbps increased to 319 for the fiscal year ended March 31, 2009
from 271 for the previous fiscal year. This increase is mainly due to an increase in
customers demand for higher bandwidth for their Internet connectivity. The total
contracted bandwidth for connectivity services for corporate users are calculated by
adding the contracted bandwidth for the each of the following service: IP Service, IIJ
Data Center Connectivity Service and Broadband Services. The average monthly revenues
per contract for IP Services were approximately ¥0.5 million at the end of March 2009,
compared to the revenues per contract of ¥0.6 million at the end of March 2008. Though
we do not expect revenue per contract to grow in the fiscal year ending March 31, 2010
due to continuing competition, we believe that customer demand for higher bandwidth
will continue as the use of broadband by corporate customers expands, and we will try
to acquire new customers and increase the bandwidth of existing customers as well as
maintain the quality of our services to differentiate them from those of our
competitors.
    
    Increased demands for broadband services.Demand for broadband services such as IIJ
FiberAccess/F, IIJ DSL/F and IIJ DSL/A are increasing steadily as the services are
used more often to connect corporate branches and remote offices. The services uses
ADSL lines at maximum 47 Mbps speed or optical lines at maximum 10 Mbps, 100 Mbps or
1Gbps as access lines. The number of contracts for IIJ FiberAccess/F and IIJ DSL/F
increased to 26,023 for the fiscal year ended March 31, 2009 from 23,539 for the
previous fiscal year. We also expect that it will also contribute to the increase of
outsourcing services and systems integration revenues as usage and implementation of
these connectivity services will increase the demand for outsourcing services such as
security services and network systems integration.
    
    Increased demands for Mobile Data Communications services.Demand for our mobile
data communications service, IIJ Mobile Service, which is provided under MVNO is
increasing rapidly after the introduction in January 2008. Corporate customers who are
highly security conscious are looking for data communication services with high
security features such as VPN access and private access. We also expect that it will
also contribute to the increase of outsourcing services and systems integration
revenues as usage and implementation of these connectivity services will increase the
demand for outsourcing services such as security services and network systems
integration.
 Connectivity services for home use
    45




---



##### Table of Contents



Outsourcing Services
   Systems integration revenues, including related equipment sales revenues
     Equipment sales revenues
  ATM Operation Business revenues
   46




---



##### Table of Contents



Additional factors affecting revenues
  
    
    Increase in business usage.Our revenues will be affected by the extent and speed
with which businesses in Japan exploit the Internet and network solutions to their full
potential, including, for example, electronic transactions between businesses and
expanding the range of devices that access the Internet. Such services require
high-quality and high-capacity connectivity services for both businesses and
individuals. Such services also require provision of total network solutions including
various Internet connectivity services, systems integration and other outsourcing
services which we believe we are well positioned to provide. The degree of business
usage will also depend upon a variety of factors including:
 
    
    technological advances, reliability of security systems and users familiarity
with and confidence in new technologies,
    
    the rate at which Japanese companies in certain industries significantly
increases their Internet usage, and
    
    corporate budgets for information technologies, including Internet-related items.
 
    
    Range of service offerings.To increase our revenues from business users, we provide
a wide variety of services and are introducing new services. For Internet connectivity
services, we added mobile access service. Additionally, we introduced security options
for the mobile service which are accounted in outsourcing service revenues. We have
also opened a new Internet data centers to strengthen our multi-site data center
solutions. We believe these steps will allow us to sell a greater variety of services
to our high-end corporate users and to capture a greater amount of the current growth
and demand. However, we will still be strongly dependent on Japanese companies and by
their Information Technology budgets. The weak Japanese economy is also expected to
continue to affect our overall revenues, especially with respect to systems
construction revenues. We expect Internet usage to continue to grow rapidly in Japan
and that businesses will continue to diversify their uses of the Internet. Our ability
to offer a broad range of services to meet our customers demands will significantly
influence our future revenues.
    
    Synergies between connectivity services, outsourcing services and systems
integration.Most of our systems integration customers become Internet connectivity
service customers as well, and we expect these relationships to continue. As part of
our systems integration business, we offer solution services for corporate information
network systems, consulting, project planning, system design and systems/operation
outsourcing or Internet VPN solution services which combines the FLETS Internet
connectivity services with the SEIL, adopted by customers who have multiple locations,
such as branches, offices and factories. The number of contracts concerning these
services is steadily increasing and we seek to enlarge these network integration
services with relatively high gross margin services. The ability to introduce a wide
range of services, including solutions necessary to build corporate information network
systems, like disaster recovery services and Internet VPN, Voice over IP (VoIP),
SEIL, private mobile access solutions, SEIL/SMF and wireless LAN service, is an
important competitive factor.
    
    Synergies between group companies.The group works together as a team to provide
network solutions to our customers, mainly corporate and governmental organizations.
 Costs and expenses
  Cost of connectivity and outsourcing services revenues
   47




---



##### Table of Contents




    
    Backbone cost.Backbone cost for the fiscal year ended March 31, 2009 was ¥3.7
billion, a slight increase compared to the fiscal year ended March 31, 2008. We do not
expect that our backbone cost will increase significantly as compared with recent
fiscal years.
    
    Dedicated local access line costs.We collect dedicated local access line fees from
subscribers and pay these fees over to the carriers. Dedicated local access line costs
for the fiscal year ended March 31, 2009 were ¥8.1 billion, increased by 14.2%,
compared to the cost for the fiscal year ended March 31, 2008. This increase was mainly
resulted from the additional cost related to hi-ho, which we acquired in June 2007, of
¥2.9 billion (12 months) for the fiscal year ended March 31, 2009 compared to ¥2.1
billion (10 months) for the previous fiscal year. Other connectivity costs were ¥0.5
billion for the fiscal year ended March 31, 2009 compared to ¥0.4 billion for the
previous fiscal year.
  Costs of systems integration revenues and equipment sales
  Costs of ATM Operation Business
  Sales and marketing
  General and administrative
  Research and development
  48




---



##### Table of Contents



Other income (expenses)
  
    
    Interest expense.Most of our interest expense is from bank borrowing and capital
leases. Interest income and interest expenses are also affected by the fluctuation of
market interest rates and our total amount of outstanding borrowings. As we increase
capital leases or borrowings in order to finance further development of our backbone
and data centers and for other investments, interest expenses will also increase.
    
    Losses on write-down of other investments.We hold other investments comprised of
available-for-sale securities, nonmarketable equity securities and funds. The book
values of other investments are affected by the fluctuation in the market price or the
decrease in fair values of nonmarketable investments and funds. If a decrease below
cost in the market price or fair value of an investment is judged to be other than
temporary, we will have impairment losses on other investments.
 Income Tax Expense (Benefit)
  E. Off-Balance Sheet Arrangements.
  F. Tabular Disclosure of Contractual Obligations.
  Payments due by period (in millions of yen)Contractual Obligations
    
    Total
    
    
    less than 1 year
    
    
    1-3 years
    
    
    3-5 years
    
    
    more than 5 yearsCapital lease obligations
    
    
    8,514
    
    
    
    3,482
    
    
    
    2,297
    
    
    
    1,093
    
    
    
    1,386Operating lease obligations
    
    
    8,128
    
    
    
    3,352
    
    
    
    4,390
    
    
    
    641
    
    
    
    1Total (1) (2) (3) (4)
    
    ¥
    16,642
    
    
    ¥
    6,834
    
    
    ¥
    6,687
    
    
    ¥
    1,734
    
    
    ¥
    1,387
 
  
    
    We plan to contribute ¥167 million to our defined benefit pension plan for the fiscal
year ending March 31, 2009.
    
    In May 2006, in January 2007 and in January 2008, IIJ made agreements (three agreements
in total) to invest in funds which invest mainly in unlisted stocks with an investment
advisory company. IIJ committed to provide up to $5 million for each fund ($15 million in
total) at its request in several future years. IIJ has provided a total of ¥500,000
thousand ($5,043 thousand) to them as of March 31, 2008. (Please refer to Note 15 to our
consolidated financial statements).
 (2)
    
    The table above does not include short term borrowings. For short term borrowings, see Item
5.B Liquidity and Capital Resource and Note 9 Borrowings to our consolidated financial
statements included in this annual report on Form-20F.(3)
    
    The table above does not include obligations for interest payments on debt, as such payments
are not material. For interest payments regarding capital lease, see Note 8 Lease to our
consolidated financial statements included in this annual report on Form 20-F.(4)
    
    The table above does not include an unrecognized tax benefit of ¥66 million. For
unrecognized tax benefit, see Note 10 Income Taxes to our consolidated financial statements
included in this annual report on Form 20-F.
 49




---



##### Table of Contents



Item 6. Directors, Senior Management and Employees.
 A. Directors and Senior Management.
  Initial date ofappointment asdirector, executive
    
    Number of IIJofficer or company
    
    shares owned as ofName
    
    Position
    
    Date of birth
    
    Current term expires
    
    auditor
    
    September 18, 2009Koichi Suzuki
    
    President, Chief Executive Officer and Representative Director
    
    Sep. 3, 1946
    
    June 2012
    
    Dec. 1992
    
    
    12,846Hideshi Hojo
    
    Senior Managing Director
    
    Dec. 22, 1957
    
    June 2012
    
    June 2000
    
    
    *Hitoshi Imafuku
    
    Senior Managing Director
    
    Apr. 2,  1957
    
    June 2012
    
    June 2009
    
    
    *Chiaki Furuya
    
    Managing Director
    
    Jul. 11, 1949
    
    June 2012
    
    June 2009
    
    
    *Takamichi Miyoshi
    
    Director
    
    May 5, 1963
    
    June 2010
    
    June 2002
    
    
    *Akihisa Watai
    
    Director, Chief Financial Officer and Chief Accounting Officer
    
    Sep. 30, 1965
    
    June 2010
    
    June 2004
    
    
    *Kazuhiro Tokita
    
    Director
    
    Apr. 25, 1969
    
    June 2012
    
    June 2005
    
    
    *Junichi Shimagami
    
    Director
    
    Apr. 17, 1967
    
    June 2012
    
    June 2007
    
    
    *Kiyoshi Ishida
    
    Director
    
    Nov. 22, 1960
    
    June 2010
    
    June 2008
    
    
    *Yasurou Tanahashi
    
    Director
    
    Jan. 4, 1941
    
    June 2010
    
    June 2004
    
    Takashi Hiroi
    
    Director
    
    Feb. 13, 1963
    
    June 2010
    
    June 2004
    
    Junnosuke Furukawa
    
    Director
    
    Dec. 5, 1935
    
    June 2012
    
    June 2005
    
    Senji Yamamoto
    
    Director
    
    Apr. 14, 1946
    
    June 2010
    
    June 2006
    
    
    *Shingo Oda
    
    Director
    
    Nov. 8, 1944
    
    June 2010
    
    June 2008
    
    Junichi Tate
    
    Company Auditor
    
    Nov. 6, 1949
    
    June 2012
    
    June 2006
    
    Masaki Okada
    
    Company Auditor
    
    Jan. 9, 1959
    
    June 2012
    
    June 2004
    
    Masaaki Koizumi
    
    Company Auditor
    
    Oct. 4, 1964
    
    June 2012
    
    June 2004
    
    Hirofumi Takahashi
    
    Company Auditor
    
    Sep. 1, 1939
    
    June 2012
    
    June 2005
    
    
    *
 
 *
    
    Owns less than 1% of outstanding shares of IIJs common stock. Koichi Suzuki
 Hideshi Hojo
 Hitoshi Imafuku
 Chiaki Furuya
 Takamichi Miyoshi
 50




---



##### Table of Contents



Akihisa Watai
 Kazuhiro Tokita
 Junichi Shimagami
 Kiyoshi Ishida
 Yasurou Tanahashi
 Takashi Hiroi
 Junnosuke Furukawa
 Senji Yamamoto
 Shingo Oda
 Junichi Tate
 Masaki Okada
 Masaaki Koizumi
 51




---



##### Table of Contents



Hirofumi Takahashi
 B. Compensation.
  C. Board Practices.
        52




---



##### Table of Contents



D. Employees.
  For the fiscal year ended March 31,2007
    
    2008
    
    2009(number of employees)Engineering
    
    
    792
    
    
    
    941
    
    
    
    1,075Sales
    
    
    204
    
    
    
    245
    
    
    
    298Administration
    
    
    159
    
    
    
    187
    
    
    
    229
  E. Share Ownership.
  Stock Option Plan
 
    
    June 2001 Stock Option Plan. In June 2001, we implemented a stock option plan under
which 395 options to acquire a total of 1,975 shares or 790,000 ADS equivalents, or
approximately 1.8% of total outstanding shares on that date, were granted to 44
directors and employees on August 2, 2001. The option exercise price for the shares was
determined by setting the price 5% above the 30-days average of the closing market
prices beginning 45 days prior to the date of the grant which was ¥403,661 per share
and has been adjusted to ¥334,448 as a result of issuances of common shares. The
options are exercisable for eight years from the date the options became fully vested.
    
    April 2000 Stock Option Plan. In April 2000, we implemented a stock option plan
under which our directors and employees were granted 295 options to acquire a total of
1,475 shares or 590,000 ADS equivalents, or approximately 1.2% of total outstanding
shares on that date. The options were granted to 34 directors and employees on May 31,
2000. The option exercise price was determined by setting the price at 5% above the
30-day moving average of closing market prices beginning 45 days prior to the date of
grant, which was ¥2,611,112 per share and has been subsequently adjusted to ¥2,163,418
as a result of issuances of common shares. The options are exercisable for eight years
from the date the options became fully vested.
    
    March 2001 Warrant Issuance. On March 31, 2001, certain directors of IIJ were
provided with 375 warrants exercisable for shares of common stock of IIJ-Tech. Each
warrant is exercisable for one share of common stock up to seven or eight years from
the date of grant at an exercise price of ¥300,000 and was purchased for 1% of the
exercise price. In March 2006, 25 of those 375 warrants expired. In March, 2007, 250 of
those 375 warrants were exercised at the exercise price of ¥250,326. The exercise price
was revised from ¥300,000 to ¥250,326, due to the effects of issuances of new shares
during the year ended March 31, 2006. The remaining 100 warrants expired on March 29,
2007.
  Employee Stock Purchase Plan
  53




---



##### Table of Contents



Director Stock Purchase Plan
  
 Item 7. Major Shareholders and Related Party Transactions.
 A. Major Shareholders.
  Outstanding Voting Sharesas of March 31, 2009(3)Number
    
    PercentageNippon Telegraph and Telephone Corporation and affiliates (1)
    
    
    60,675
    
    
    
    30.0
    %Koichi Suzuki
    
    
    12,823
    
    
    
    6.3Itochu Corporation
    
    
    10,430
    
    
    
    5.1Directors and executive officers as a group (2)
    
    
    13,830
    
    
    
    6.8
 
 (1)
    
    Includes NTT, which owns 50,475 shares, or 24.9% of our outstanding voting shares and 24.4%
of our total issued shares, and NTT Communications, which owns 10,200 shares, or 5.0% of our
outstanding voting shares and 4.9% of our total issued shares.(2)
    
    Includes Koichi Suzukis holdings which are also separately set forth above and Hirofumi
Takahashis holdings of 6,000 ADRs, which are equivalent to 15 shares of common stock. No
other director or executive officer except for Koichi Suzuki is a beneficial owner of more
than 5%.(3)
    
    In October 2008, the Company resolved at the meeting of Board of directors to repurchase our
own shares. During the authorized repurchasing period, we have purchased 3,934 shares of the
Company and hold them as treasury stock. For details, see Item 16E. Purchase of Equity
Securities by the Issuer and Affiliated Purchasers.   B. Related Party Transactions.
 NTT-affiliated Companies.
 54




---



##### Table of Contents



Transactions with equity method affiliates.
 millions of yenAccounts receivable
    
    ¥
    67Accounts payable
    
    
    23Revenues
    
    
    672Costs and expenses
    
    
    258
   
    
    any enterprise that directly or indirectly controls, is controlled by, or is in common
control with us or any of our subsidiaries,
    
    any director, officer, company auditor or family member of any of the preceding or any
enterprise over which such person directly or indirectly is able to exercise significant
influence,
    
    any individual shareholder directly or indirectly having significant influence over us
or any of our subsidiaries or a family member of such individual or any enterprise over
which such person directly or indirectly is able to exercise significant influence, or
their respective family members or enterprises over which they exercise significant
influence, or
    
    any unconsolidated enterprise in which we have a significant influence or which has a
significant influence over us.
 C. Interests of Experts and Counsel.
  
 Item 8. Financial Information.
 A. Consolidated Statements and Other Financial Information.
 Financial Statements
  Legal or Arbitration Proceedings
  Dividend Policy
  55




---



##### Table of Contents



B. Significant Changes.
  
 Item 9. The Offer and Listing.
 A. Offer and Listing Details.
   Nasdaq(1)
    
    TSE(1) (2)(per ADS)
    
    (per share of common stock)Fiscal year ended/ending March 31,
    
    High
    
    Low
    
    High
    
    Low2005
    
    $
    6.24
    
    
    $
    2.112006
    
    
    14.88
    
    
    
    3.04
    
    
    ¥
    584,000
    
    
    ¥
    409,0002007
    
    
    10.65
    
    
    
    6.41
    
    
    
    517,000
    
    
    
    296,0002008
    
    
    11.00
    
    
    
    6.21
    
    
    
    490,000
    
    
    
    270,000First Quarter
    
    
    9.98
    
    
    
    7.45
    
    
    
    473,000
    
    
    
    351,000Second Quarter
    
    
    8.94
    
    
    
    6.21
    
    
    
    432,000
    
    
    
    284,000Third Quarter
    
    
    11.00
    
    
    
    8.11
    
    
    
    490,000
    
    
    
    378,000Fourth Quarter
    
    
    10.59
    
    
    
    6.98
    
    
    
    447,000
    
    
    
    270,0002009
    
    
    9.72
    
    
    
    1.80
    
    
    
    428,000
    
    
    
    71,800First Quarter
    
    
    9.72
    
    
    
    7.80
    
    
    
    428,000
    
    
    
    315,000Second Quarter
    
    
    9.40
    
    
    
    3.97
    
    
    
    417,000
    
    
    
    176,100Third Quarter
    
    
    5.38
    
    
    
    1.82
    
    
    
    251,900
    
    
    
    71,800Fourth Quarter
    
    
    3.43
    
    
    
    1.80
    
    
    
    107,800
    
    
    
    77,9002010First Quarter
    
    
    4.40
    
    
    
    2.50
    
    
    
    169,000
    
    
    
    99,500MonthJanuary 2009
    
    
    3.43
    
    
    
    2.19
    
    
    
    105,100
    
    
    
    79,000February 2009
    
    
    2.76
    
    
    
    1.88
    
    
    
    100,900
    
    
    
    79,000March 2009
    
    
    2.66
    
    
    
    1.80
    
    
    
    107,800
    
    
    
    77,900April 2009
    
    
    3.55
    
    
    
    2.50
    
    
    
    141,900
    
    
    
    99,500May 2009
    
    
    4.40
    
    
    
    3.40
    
    
    
    169,000
    
    
    
    136,100June 2009
    
    
    4.10
    
    
    
    3.46
    
    
    
    159,800
    
    
    
    143,000July 2009
    
    
    5.79
    
    
    
    3.65
    
    
    
    221,500
    
    
    
    137,800August 2009
    
    
    6.33
    
    
    
    5.95
    
    
    
    246,400
    
    
    
    192,000September 2009 (3)
    
    
    6.28
    
    
    
    5.67
    
    
    
    234,000
    
    
    
    204,600
 
 (1)
    
    Price data are based on prices throughout the sessions for each corresponding period at each
stock exchange.(2)
    
    Our shares of common stock had been quoted on the Mothers market of the TSE since December 2,
2005 and were transferred to the First Section of the TSE on December 14, 2006.(3)
    
    The high and low prices of our ADSs and shares of common stock were the prices quoted during
the period, from September 1, 2009 to September 25, 2009. B. Plan of Distribution.
  56




---



##### Table of Contents



C. Markets.
  D. Selling Shareholders.
  E. Dilution.
  F. Expenses of the issue.
  
 Item 10. Additional Information.
 A. Share Capital.
  B. Memorandum and Articles of Association.
 Organization
  Objects and Purposes in Our Articles of Incorporation
  
    
    Telecommunications business under the Telecommunications Business Law,
    
    Processing, mediation and provision of information and contents by using
telecommunications networks,
    
    Agency for the management business such as the management of networks and the
management of information and telecommunications systems,
    
    Planning, consulting service, development, operation and maintenance of or for
information and telecommunications systems,
    
    Development, sales, lease and maintenance of computer software,
    
    Development, sales, lease and maintenance of telecommunications machinery and
equipment,
    
    Telecommunications construction,
    
    Agency for non-life insurance,
    
    Research, study, education and training related to the foregoing, and
    
    Any and all businesses incidental or related to the foregoing.
 57




---



##### Table of Contents



Provisions Regarding Our Directors
      Rights of Shareholders of our Common Stock
  
    
    the right to receive dividends when the payment of dividends has been approved at a
shareholders meeting, with this right lapsing three full years after the due date for
payment according to a provision in our Articles of Incorporation,
    
    the right to receive interim dividends as provided for in our Articles of
Incorporation, with this right lapsing three full years after the due date for payment
according to a provision in our Articles of Incorporation,
    
    the right to vote at a shareholders meeting (cumulative voting is not allowed under
our Articles of Incorporation),
    
    the right to receive surplus in the event of liquidation, and
    
    the right to require us to purchase shares subject to certain requirements under the
Corporation Law of Japan when a shareholder opposes certain resolutions including (i)
the transfer of all or material part of the business, (ii) an amendment of the Articles
or Incorporation to establish a restriction on share transfer, (iii) a share exchange
or share transfer to establish a holding company, (iv) company split or (v) merger, all
of which must in principle, be approved by a Special Resolution of Shareholders
meeting.
    58




---



##### Table of Contents




    
    a reduction of the stated capital, (expect when a company reduces the stated capital
within certain amount provided for under the Corporation Law of Japan concurrently with
a share issue),
    
    amendment of our Articles of Incorporation (except amendments that the Board of
Directors are authorized to make under the Corporation Law of Japan),
    
    establishment of a 100% parent-subsidiary relationship through a share exchange or
share transfer requiring shareholders approval,
    
    a dissolution, merger or consolidation requiring shareholders approval,
    
    a company split requiring shareholders approval,
    
    a transfer of the whole or an important part of our business,
    
    the taking over of the whole of the business of any other corporation requiring
shareholders approval, and
    
    issuance of new shares at a specially favorable price, or issuance of stock
acquisition rights or bonds with stock acquisition rights with specially favorable
conditions to persons other than shareholders.
   
    
    dissolution, and
    
    commencement of reorganization proceedings as provided for in the Company
Reorganization Law of Japan.
  
    
    demand the convening of a general meeting of shareholders,
    
    apply to a competent court for removal of a director or company auditor,
    
    apply to a competent court for removal of a liquidator, and
    
    apply to a competent court for an order to inspect our business and assets in a
special liquidation proceeding.
  
    
    examine our accounting books and documents and make copies of them, and
    
    apply to a competent court for appointment of an inspector to inspect our operation
or financial condition.
    
    
    the institution of an action to enforce the liability of one of our directors or
company auditors,
    
    the institution of an action to recover from a recipient the benefit of a
proprietary nature given in relation to the exercise of the right of a shareholder, and
    
    a director on our behalf for the cessation of an illegal or ultra vires action.
 59




---



##### Table of Contents



Acquisition of Own Shares
  (i)
    
    through market transactions on a stock exchange on which our shares are listed
or by way of tender offer (in either case pursuant to a resolution of the Board of
Directors as currently authorized by our Articles of Incorporation);(ii)
    
    from a specific shareholder other than any of our subsidiaries (pursuant to a
special resolution of a general meeting of shareholders); or(iii)
    
    from any of our subsidiaries (pursuant to a resolution of the Board of
Directors).
    Restrictions on Holders of our Common Stock
      60




---



##### Table of Contents



C. Material Contracts.
  Limitation of Liability Agreements, dated June 27, 2008 and June 26, 2009, between Internet
Initiative Japan Inc. and outside directors and outside company auditors.
 D. Exchange Controls.
    
    
    individuals who are Non-residents of Japan;
    
    corporations which are organized under the laws of foreign countries or whose
principal offices are located outside of Japan; and
    
    corporations (i) of which 50% or more of their voting rights are held by
individuals who are Non-residents of Japan and/or corporations which are organized under
the laws of foreign countries or whose principal offices are located outside of Japan or
(ii) a majority of whose officers, or officers having the power of representation, are
individuals who are Non-residents of Japan.
    61




---



##### Table of Contents



E. Taxation.
 Japanese Taxation
  
    
    the overall tax consequences of the ownership and disposition of shares or ADSs,
including specifically the tax consequences under Japanese law,
    
    the laws of the jurisdiction of which they are resident, and
    
    any tax treaty between Japan and their country of residence, by consulting their own
tax advisers.
      
    
    a corporation that has owned, directly or indirectly through one or more residents
of either Japan or the U.S., more than 50% of the voting shares of the paying
corporation for the period of twelve months ending on the date on which entitlement to
the dividends is determined and which meets additional requirements, or
    
    a pension fund, provided that such dividends are not derived from the carrying on of
a business, directly or indirectly, by such pension fund.
  The Prior Treaty
    
    
    
    
    
    The Treaty10% or more of the voting shares
    
    
    10
    %
    
    More than 50% of the voting shares
    
    
    0
    %10% to 50% of the voting shares
    
    
    5
    %Others
    
    
    15
    %
    
    Others
    
    
    10
    %
  62




---



##### Table of Contents



United States Taxation
  
    
    tax-exempt entities,
    
    life insurance companies,
    
    dealers in securities,
    
    traders in securities that elect to use a mark-to-market method of accounting for
securities holdings,
    
    investors liable for alternative minimum tax,
    
    investors that actually or constructively own 10% or more of the voting stock of
IIJ,
    
    investors that hold shares or ADSs as part of a straddle or a hedging or conversion
transaction, or
    
    investors whose functional currency is not the U.S. dollar.
   
    
    a citizen or resident of the United States,
    
    a domestic corporation,
    
    an estate whose income is subject to United States federal income tax regardless of
its source, or
    
    a trust if a United States court can exercise primary supervision over the trusts
administration and one or more United States persons are authorized to control all
substantial decisions of the trust.
 63




---



##### Table of Contents



Taxation of Dividends
      Taxation of Capital Gains
  PFIC Rules
   
    
    at least 75% of our gross income for the taxable year is passive income, or
    
    at least 50% of the value, determined on the basis of a quarterly average, of our
assets is attributable to assets that produce or are held for the production of passive
income.
 64




---



##### Table of Contents




    
    any gain you realize on the sale or other disposition of your shares or ADSs, and
    
    any excess distribution that we make to you (generally, any distributions to you
during a single taxable year that are greater than 125% of the average annual
distributions received by you in respect of the shares or ADSs during the three
preceding taxable years or, if shorter, your holding period for the shares or ADSs).
  
    
    the gain or excess distribution will be allocated ratably over your holding period
for the shares or ADSs,
    
    the amount allocated to the taxable year in which you realized the gain or excess
distribution will be taxed as ordinary income,
    
    the amount allocated to each prior year, with certain exceptions, will be taxed at
the highest tax rate in effect for that year, and
    
    the interest charge generally applicable to underpayments of tax will be imposed in
respect of the tax attributable to each such year.
     F. Dividends and Paying Agents.
  G. Statement by Experts.
  65




---



##### Table of Contents



H. Documents on Display.
  I. Subsidiary Information.
  
 Item 11.   Quantitative and Qualitative Disclosures about Market Risk.
  Interest Rate Risk
    Equity Price Risk
  Foreign Currency Exchange Rate Risk
  
 Item 12.   Description of Securities Other than Equity Securities.
  66




---



##### Table of Contents



PART II
 
 Item 13.   Defaults, Dividend Arrearages and Delinquencies.
  
 Item 14.   Material Modifications to the Rights of Security Holders and Use of Proceeds.
  
 Item 15.   Controls and Procedures.
 (a) Disclosure Controls and Procedures
    (b) Managements Annual Report on Internal Control Over Financial Reporting
   
    
    pertain to the maintenance of records that in reasonable detail accurately and
fairly reflect the transactions and dispositions of our assets,
    
    provide reasonable assurance that transactions are recorded as necessary to
permit preparation of our financial statements in accordance with accounting principles
generally accepted in the United States of America, and that our receipts and
expenditures are being made only in accordance with authorizations of our management
and directors, and
    
    provide reasonable assurance regarding prevention or timely detection of
unauthorized acquisition, use or disposition of our assets that could have a material
effect on our financial statements.
    67




---



##### Table of Contents



(c) Attestation Report of the Registered Public Accounting Firm
 Report of Independent Registered Public Accounting Firm
         
 68




---



##### Table of Contents



(d) Changes in Internal Control Over Financial Reporting
  
 Item 16A.   Audit Committee Financial Expert
  
 Item 16B.   Code of Ethics.
  
 Item 16C.   Principal Accountant Fees and Services.
 Independent Auditor Fees and Services
  Fiscal year ended March 31,2008
    
    2009(millions of yen)Audit fees (1)
    
    
    105
    
    
    
    97Audit-related fees
    
    
    
    
    
    
    Tax fees (2)
    
    
    26
    
    
    
    12All other fees
    
    
    
    
    
    
    Total fees
    
    
    131
    
    
    
    109
 (1)
    
    These are the aggregate fees billed for the fiscal year for professional services rendered by
Deloitte Touche Tohmatsu for the audit of our annual financial statements, the audit of our
internal control over financial reporting and services that are normally provided in
connection with statutory and regulatory filings or engagements for those fiscal years.(2)
    
    These are the aggregate fees billed for the fiscal year for professional services rendered by
member firms of Deloitte Touche Tohmatsu, such as Deloitte Tax LLP, for tax compliance, tax
advice and tax planning. Board of Company Auditors Pre-Approval Policies and Procedures
   69




---



##### Table of Contents



Item 16D. Exemptions from the Listing Standards for Audit Committees.
  
    
    The Board of Company Auditors must be established, and its members must be selected,
pursuant to Japanese law expressly requiring such a board for Japanese companies that
elect to have a corporate governance system with company auditors,
    
    Japanese law must and does require the Board of Company Auditors to be separate from
the Board of Directors,
    
    None of the members of the Board of Company Auditors may be elected by management,
and none of the listed companys executive officers may be a member of the Board of
Company Auditors,
    
    Japanese law must and does set forth standards for the independence of the members
of the Board of Company Auditors from the listed company or its management, and
    
    The Board of Company Auditors, in accordance with Japanese law or the registrants
governing documents, must be responsible, to the extent permitted by Japanese law, for
the appointment, retention and oversight of the work of any registered public
accounting firm engaged (including, to the extent permitted by Japanese law, the
resolution of disagreements between management and the auditor regarding financial
reporting) for the purpose of preparing or issuing an audit report or performing other
audit, review or attest services for the listed company, including its principal
accountant which audits its consolidated financial statements included in its annual
reports on Form 20-F.
  
    
    The Board of Company Auditors must establish procedures for (i) the receipt,
retention and treatment of complaints received by us regarding accounting, internal
accounting controls, or auditing matters, and (ii) the confidential, anonymous
submission by our employees of concerns regarding questionable accounting or auditing
matters,
    
    The Board of Company Auditors must have the authority to engage independent counsel
and other advisers, as it determines necessary to carry out its duties, and
    
    The listed company must provide for appropriate funding, as determined by its Board
of Company Auditors, for payment of (i) compensation to any registered public
accounting firm engaged for the purpose of preparing or issuing an audit report or
performing other audit, review or attest services for us, (ii) compensation to any
advisers employed by the Board of Company Auditors, and (iii) ordinary administrative
expenses of the Board of Company Auditors that are necessary or appropriate in carrying
out its duties.
  70




---



##### Table of Contents



Item 16E.   Purchases of Equity Securities by the Issuer and Affiliated Purchasers.
 (c) Total Number of
    
    (d) Maximum Number ofShares Purchased as
    
    Shares that May Yet Be(a) Total Number of
    
    (b) Average Price
    
    Part of Publicly
    
    Purchased Under theShares Purchased
    
    Paid per Share
    
    Announced Plans or
    
    Plans orPeriod
    
    (shares)
    
    (yen)
    
    Programs
    
    Programs(1)Nov 1 to Nov 30, 2008
    
    
    1,337
    
    
    
    109,113.9
    
    
    
    1,337
    
    
    
    2,663Dec 1 to Dec 31, 2008
    
    
    1,408
    
    
    
    105,454.4
    
    
    
    1,408
    
    
    
    1,255Jan 1 to Jan 31, 2009
    
    
    1,189
    
    
    
    88,350.7
    
    
    
    1,189
    
    
    
    66Total
    
    
    3,934
    (2)
    
    
    101,528.7
    
    
    
    3,934
 
 (1)
    
    The numbers described in column (d) are based on the aggregate number of 4,000 shares
authorized at the meeting of IIJs Board of Directors held on October 28, 2008.(2)
    
    Of the 3,934 shares repurchased, 1,056 shares were repurchased through the U.S. NASDAQ Stock
Market as IIJs American Depository Shares (ADSs) and the aggregated repurchase amount was
JPY 110,500 thousand (The aggregate repurchase price below JPY 1 was rounded off). The ADSs
are quoted on the U.S. Nasdaq Stock Market and the current ADS/share ratio is 400 ADSs per 1
share of IIJs common stock which can be transferred through our depository. The ADSs
purchased were transferred and are currently held as common stock.  Type of shares to be repurchased
    
    : Common stock of IIJTotal number of shares to be repurchased
    
    : Up to 4,000 sharesTotal amount to be repurchased
    
    : Up to JPY 400,000 thousandRepurchasing period
    
    : From November 14, 2008 to January 30, 2009
 
 Item 16F.   Change in Registrants Certifying Accountant.
  
 Item 16G.   Corporate Governance.
   71




---



##### Table of Contents



PART III
 
 Item 17.   Financial Statements.
  
 Item 18.   Financial Statements.
  72




---



##### Table of Contents



Item 19.   Exhibits.
 1.1
    
    Articles of Incorporation, as amended (English translation)1.2
    
    Share Handling Regulations, as amended (English translation)1.3
    
    Regulations of the Board of Directors, as amended (English translation) *******1.4
    
    Regulations of the Board of Company Auditors, as amended (English translation)**2.1
    
    Bylaws of the IIJ Group Employee Shareholders Association (English translation) *******2.2
    
    Form of Deposit Agreement among IIJ, The Bank of New York Mellon as depositary and all
owners and holders from time to time of American Depositary Receipts, including the form
of American Depositary Receipt****2.3
    
    Bylaws of the IIJ Group Director Stock Purchase Plan (English translation) *******4.1
    
    Basic Agreement to Delegate Services, dated April 1, 1997, between Internet Initiative
Japan Inc. and IIJ Technology Inc. (English translation)***4.2
    
    Shareholders Agreement Relating to the Establishment of INTERNET MULTIFEED CO., dated
August 20, 1997, between Nippon Telegraph and Telephone Corporation and the Registrant
(English translation)***4.3
    
    Basic Agreement to Delegate Services, dated April 1, 1998, between Internet Initiative
Japan Inc. and Net Care, Inc. (English translation)***4.4
    
    Joint Venture Agreement, dated January 19, 2006, between Internet Initiative Japan Inc.
and Konami Corporation (English translation)*4.5
    
    Service Agreement, dated March 25, 2004, between Internet Initiative Japan Inc. and IIJ
America Inc.*****4.6
    
    Agreement on Limited Liability, dated June 27, 2008 and June 26, 2009, between Internet
Initiative Japan Inc. and outside directors and outside company auditors8.1
    
    List of Significant Subsidiaries (See Our Group Companies in Item 4.B. of this Form 20-F)11.1
    
    Internet Initiative Japan Code of Conduct*******12.1
    
    Certification of the principal executive officer required by 17 C.F.R. 240. 13a-14(a)12.2
    
    Certification of the principal financial officer required by 17 C.F.R. 240. 13a-14(a)13.1
    
    Certification of the chief executive officer required by 18 U.S.C. Section 135013.2
    
    Certification of the chief financial officer required by 18 U.S.C. Section 1350
 
 (*)
    
    Incorporated by reference to the corresponding exhibit to our annual report on Form 20-F
(File No. 0-30204) filed on July 11, 2006.(**)
    
    Incorporated by reference to the corresponding exhibit to our annual report on Form 20-F
(File No. 0-30204) filed on August 3, 2005.(***)
    
    Incorporated by reference to the corresponding exhibit to our Form F-1 Registration
Statement (File No. 333-10584) declared effective on August 3, 1999.(****)
    
    Incorporated by reference to the Registration Statement on Form F-6 (File No. 333-110862)
filed on December 2, 2003.(*****)
    
    Incorporated by reference to the corresponding exhibit to our annual report on Form 20-F
(File No. 0-30204) filed on July 23, 2004.(******)
    
    We entered into a Limitation of Liability Agreement with Mr. Yasurou Tanahashi, Mr.
Takashi Hiroi and Mr. Shingo Oda as our outside directors and Mr. Masaki Okada and Mr. Masaaki
Koizumi as our outside company auditors on June 27, 2008, and with Mr. Junnosuke Furukawa as
our outside director on June 26, 2009.(*******)
    
    Incorporated by reference to the corresponding exhibit to our annual report on Form 20-F
(File No. 0-30204) filed on June 30, 2008.  73




---



##### Table of Contents



SIGNATURE
  Internet Initiative Japan Inc.By:
    /s/ Koichi SuzukiName:
    Koichi SuzukiTitle:
    President, Chief Executive Officer
and Representative Director  74




---



##### Table of Contents



Internet Initiative Japan Inc. and Subsidiaries
 Index to Consolidated Financial Statements
 PageReport of Independent Registered Public Accounting Firm
    
    F-2Consolidated Balance Sheets as of March 31, 2008 and 2009
    
    F-3Consolidated Statements of Income for Each of the Three Years in the Period Ended March 31, 2009
    
    F-5Consolidated Statements of Shareholders Equity for Each of the Three Years in the Period Ended March 31, 2009
    
    F-7Consolidated Statements of Cash Flows for Each of the Three Years in the Period Ended March 31, 2009
    
    F-8Notes to Consolidated Financial Statements
    
    F-11
 F-1




---



##### Table of Contents



Report of Independent Registered Public Accounting Firm
     Internal Control  Integrated Framework
  
 F-2




---



##### Table of Contents



Internet Initiative Japan Inc. and Subsidiaries
 Consolidated Balance Sheets
March 31, 2008 and 2009
 Thousands ofU.S. DollarsThousands of Yen
    
    
    (Note 1)2008
    
    
    2009
    
    
    2009ASSETSCURRENT ASSETS:Cash and cash equivalents (Note 16)
    
    ¥
    11,470,980
    
    
    ¥
    10,187,724
    
    
    $
    102,751Short-term investment
    
    
    12,181
    
    
    
    
    
    
    
    Accounts receivable, net of allowance for
doubtful accounts of ¥24,677 thousand
and ¥22,072 thousand ($223 thousand)
at March 31, 2008 and 2009, respectively
(Notes 4, 5 and 20)
    
    
    12,255,163
    
    
    
    10,256,527
    
    
    
    103,445Inventories (Note 2)
    
    
    1,184,160
    
    
    
    529,756
    
    
    
    5,343Prepaid expenses
    
    
    2,005,274
    
    
    
    1,771,955
    
    
    
    17,871Other current assets, net of allowance for
doubtful accounts
of ¥7,470 thousand and ¥11,720 thousand ($118
thousand)
at March 31, 2008 and 2009, respectively
(Notes 4, 8 and 10)
    
    
    1,557,869
    
    
    
    1,610,807
    
    
    
    16,246Total current assets
    
    
    28,485,627
    
    
    
    24,356,769
    
    
    
    245,656INVESTMENTS IN EQUITY METHOD
INVESTEES (Note 5)
    
    
    956,692
    
    
    
    947,626
    
    
    
    9,558OTHER INVESTMENTS (Notes 3, 15, 16 and 17)
    
    
    2,363,770
    
    
    
    1,914,594
    
    
    
    19,310PROPERTY AND EQUIPMENTNet
(Notes 6 and 8)
    
    
    11,740,210
    
    
    
    13,172,891
    
    
    
    132,858GOODWILL (Note 7)
    
    
    2,507,258
    
    
    
    2,639,319
    
    
    
    26,619OTHER INTANGIBLE ASSETSNet (Note 7)
    
    
    3,400,117
    
    
    
    3,201,806
    
    
    
    32,293GUARANTEE DEPOSITS (Notes 8)
    
    
    2,037,165
    
    
    
    2,072,652
    
    
    
    20,904OTHER ASSETS, net of allowance for doubtful
accounts of ¥64,796 thousand and ¥72,800 thousand
($734 thousand) at March 31, 2008 and 2009,
respectively,
and net of loan loss valuation allowance of
¥16,701 thousand ($168 thousand) at March 31,
2008 and 2009,
respectively (Notes 4, 5, 8, 10 and 16)
    
    
    4,211,707
    
    
    
    3,995,542
    
    
    
    40,298TOTAL
    
    ¥
    55,702,546
    
    
    ¥
    52,301,199
    
    
    $
    527,496
  F-3




---



##### Table of Contents



Internet Initiative Japan Inc. and Subsidiaries
 Consolidated Balance Sheets
March 31, 2008 and 2009
 Thousands ofU.S. DollarsThousands of Yen
    
    
    (Note 1)2008
    
    
    2009
    
    
    2009LIABILITIES AND SHAREHOLDERS EQUITYCURRENT LIABILITIES:Short-term borrowings (Note 9)
    
    ¥
    9,150,000
    
    
    ¥
    7,350,000
    
    
    $
    74,130Capital lease obligationscurrent portion (Note 8)
    
    
    3,455,948
    
    
    
    3,272,257
    
    
    
    33,003Accounts payable (Notes 5 and 20)
    
    
    7,895,238
    
    
    
    6,064,829
    
    
    
    61,168Accrued expenses
    
    
    994,138
    
    
    
    1,069,310
    
    
    
    10,785Accrued retirement and pension costs-current (Note 11)
    
    
    11,436
    
    
    
    11,959
    
    
    
    121Deferred income
    
    
    1,552,896
    
    
    
    1,255,749
    
    
    
    12,665Other current liabilities
    
    
    864,366
    
    
    
    763,544
    
    
    
    7,701Total current liabilities
    
    
    23,924,022
    
    
    
    19,787,648
    
    
    
    199,573CAPITAL LEASE OBLIGATIONSNoncurrent (Note 8)
    
    
    4,738,359
    
    
    
    4,866,120
    
    
    
    49,078ACCRUED RETIREMENT AND PENSION COSTS
Noncurrent (Note 11)
    
    
    1,101,951
    
    
    
    1,399,592
    
    
    
    14,116OTHER NONCURRENT LIABILITIES (Note 10)
    
    
    663,399
    
    
    
    1,004,920
    
    
    
    10,135Total liabilities
    
    
    30,427,731
    
    
    
    27,058,280
    
    
    
    272,902MINORITY INTEREST
    
    
    294,102
    
    
    
    73,735
    
    
    
    744COMMITMENTS AND CONTINGENCIES (Note 15)SHAREHOLDERS EQUITY (Notes 3, 11, 12 and 13):Common stockauthorized, 377,600 shares;
issued and outstanding, 206,478 shares at
March 31, 2008 and 2009, respectively
    
    
    16,833,847
    
    
    
    16,833,847
    
    
    
    169,782Additional paid-in capital
    
    
    27,611,737
    
    
    
    27,611,737
    
    
    
    278,484Accumulated deficit
    
    
    (19,555,489
    )
    
    
    (18,549,142
    )
    
    
    (187,082
    )Accumulated other comprehensive income (loss)
    
    
    90,618
    
    
    
    (320,711
    )
    
    
    (3,235
    )Treasury stock3,934 shares at March 31, 2009
    
    
    
    
    
    
    (406,547
    )
    
    
    (4,100
    )Total shareholders equity
    
    
    24,980,713
    
    
    
    25,169,184
    
    
    
    253,849TOTAL
    
    ¥
    55,702,546
    
    
    ¥
    52,301,199
    
    
    $
    527,496
   F-4




---



##### Table of Contents



Internet Initiative Japan Inc. and Subsidiaries
 Consolidated Statements of Income
Three Years in the Period Ended March 31, 2009
 Thousands ofU.S. DollarsThousands of Yen
    
    
    (Note 1)2007
    
    
    2008
    
    
    2009
    
    
    2009REVENUES (Notes 5 and 20):Connectivity and Outsourcing services:Connectivity services (corporate use)
    
    ¥
    11,239,062
    
    
    ¥
    12,148,490
    
    
    ¥
    13,142,393
    
    
    $
    132,551Connectivity services (home use)
    
    
    1,968,948
    
    
    
    5,429,955
    
    
    
    6,537,370
    
    
    
    65,934Outsourcing services
    
    
    11,145,166
    
    
    
    13,724,218
    
    
    
    15,395,833
    
    
    
    155,278Total
    
    
    24,353,176
    
    
    
    31,302,663
    
    
    
    35,075,596
    
    
    
    353,763Systems integrationSystems construction
    
    
    16,659,629
    
    
    
    18,021,089
    
    
    
    14,658,502
    
    
    
    147,841Systems operation and maintenance
    
    
    13,867,452
    
    
    
    15,992,843
    
    
    
    18,988,595
    
    
    
    191,514Total
    
    
    30,527,081
    
    
    
    34,013,932
    
    
    
    33,647,097
    
    
    
    339,355Equipment sales
    
    
    2,174,324
    
    
    
    1,514,543
    
    
    
    984,585
    
    
    
    9,930ATM operation business
    
    
    
    
    
    
    4,161
    
    
    
    23,452
    
    
    
    237Total revenues
    
    
    57,054,581
    
    
    
    66,835,299
    
    
    
    69,730,730
    
    
    
    703,285COST AND EXPENSES (Notes 5, 8, 11 and 20):Cost of connectivity and Outsourcing
services
    
    
    20,545,358
    
    
    
    26,039,660
    
    
    
    29,317,645
    
    
    
    295,690Cost of systems integration
    
    
    23,529,045
    
    
    
    25,526,033
    
    
    
    25,542,758
    
    
    
    257,617Cost of equipment sales
    
    
    1,893,216
    
    
    
    1,299,793
    
    
    
    863,031
    
    
    
    8,704Cost of ATM operation business
    
    
    
    
    
    
    17,135
    
    
    
    422,285
    
    
    
    4,259Total cost
    
    
    45,967,619
    
    
    
    52,882,621
    
    
    
    56,145,719
    
    
    
    566,270Sales and marketing (Note 19)
    
    
    3,438,725
    
    
    
    4,328,598
    
    
    
    4,630,579
    
    
    
    46,703General and administrative
    
    
    3,970,692
    
    
    
    4,624,293
    
    
    
    5,621,870
    
    
    
    56,701Research and development
    
    
    177,273
    
    
    
    240,423
    
    
    
    415,180
    
    
    
    4,187Total cost and expenses
    
    
    53,554,309
    
    
    
    62,075,935
    
    
    
    66,813,348
    
    
    
    673,861OPERATING INCOME
    
    
    3,500,272
    
    
    
    4,759,364
    
    
    
    2,917,382
    
    
    
    29,424OTHER INCOME (EXPENSES):Interest income
    
    
    23,037
    
    
    
    63,030
    
    
    
    45,153
    
    
    
    455Interest expense
    
    
    (397,439
    )
    
    
    (438,163
    )
    
    
    (408,152
    )
    
    
    (4,117
    )Foreign exchange gains (losses)
    
    
    (297
    )
    
    
    1,409
    
    
    
    (28,515
    )
    
    
    (288
    )Net gains on sales of other investments
(Note 3)
    
    
    3,229,899
    
    
    
    217,957
    
    
    
    15,631
    
    
    
    158Losses on write-down of other investments
(Note 3)
    
    
    (1,363,389
    )
    
    
    (288,643
    )
    
    
    (524,287
    )
    
    
    (5,288
    )Othernet
    
    
    56,605
    
    
    
    46,715
    
    
    
    17,276
    
    
    
    175Other income (expenses)net
    
    
    1,548,416
    
    
    
    (397,695
    )
    
    
    (882,894
    )
    
    
    (8,905
    )INCOME FROM OPERATIONS BEFORE INCOME TAX
EXPENSE (BENEFIT), MINORITY INTERESTS IN
(EARNINGS) LOSSES OF SUBSIDIARIES AND
EQUITY IN NET INCOME(LOSS) OF EQUITY METHOD
INVESTEES
    
    
    5,048,688
    
    
    
    4,361,669
    
    
    
    2,034,488
    
    
    
    20,519INCOME TAX EXPENSE (BENEFIT)(Note 10)
    
    
    (803,943
    )
    
    
    (861,414
    )
    
    
    1,002,711
    
    
    
    10,113FORWARD
    
    ¥
    5,852,631
    
    
    ¥
    5,223,083
    
    
    ¥
    1,031,777
    
    
    $
    10,406
  F-5




---



##### Table of Contents



Internet Initiative Japan Inc. and Subsidiaries
 Consolidated Statements of Income
Three Years in the Period Ended March 31, 2009
 Thousands ofU.S. DollarsThousands of Yen
    
    
    (Note 1)2007
    
    
    2008
    
    
    2009
    
    
    2009FORWARD
    
    ¥
    5,852,631
    
    
    ¥
    5,223,083
    
    
    ¥
    1,031,777
    
    
    $
    10,406MINORITY INTERESTS
IN (EARNINGS)
LOSSES OF
SUBSIDIARIES
    
    
    (232,719
    )
    
    
    96,706
    
    
    
    352,428
    
    
    
    3,555EQUITY IN NET
INCOME (LOSS) OF
EQUITY METHOD
INVESTEES (Note
5):
    
    
    (210,199
    )
    
    
    (143,200
    )
    
    
    35,099
    
    
    
    354NET INCOME
    
    ¥
    5,409,713
    
    
    ¥
    5,176,589
    
    
    ¥
    1,419,304
    
    
    $
    14,315NET INCOME PER SHARE
(Note 14):BASIC WEIGHTED-AVERAGE
NUMBER OF COMMON
SHARES OUTSTANDING
    
    
    203,992
    
    
    
    206,240
    
    
    
    205,165DILUTED
WEIGHTED-AVERAGE
NUMBER
OF COMMON SHARES
OUTSTANDING
    
    
    204,244
    
    
    
    206,465
    
    
    
    205,195Yen
    
    
    U.S. DollarsBASIC NET INCOME PER
COMMON SHARE
    
    ¥
    26,519
    
    
    ¥
    25,100
    
    
    ¥
    6,918
    
    
    $
    70DILUTED NET INCOME PER
COMMON SHARE
    
    ¥
    26,487
    
    
    ¥
    25,072
    
    
    ¥
    6,917
    
    
    $
    70
   F-6




---



##### Table of Contents



Internet Initiative Japan Inc. and Subsidiaries
 Consolidated Statements of Shareholders Equity
Three Years in the Period Ended March 31, 2009
 Thousands of YenShares of
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    AccumulatedCommon Stock
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    OtherOutstanding
    
    
    
    
    
    
    Additional
    
    
    Accumulated
    
    
    Comprehensive
    
    
    Treasury(Including
    
    
    Common
    
    
    Paid-in
    
    
    Deficit
    
    
    Income (Loss)
    
    
    StockTreasury Stock)
    
    
    Stock
    
    
    Capital
    
    
    (Note 12)
    
    
    (Notes 11 and 13)
    
    
    (Note 12)
    
    
    TotalBALANCE, APRIL 1, 2006
    
    
    204,300
    
    
    ¥
    16,833,847
    
    
    ¥
    26,599,217
    
    
    ¥
    (29,680,482
    )
    
    ¥
    6,553,594
    
    
    ¥
    (84,238
    )
    
    ¥
    20,221,938Net income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    5,409,713
    
    
    
    
    
    
    
    
    
    
    
    5,409,713Other comprehensive loss, net of tax
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (5,492,154
    )
    
    
    
    
    
    
    (5,492,154
    )Total comprehensive loss
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (82,441
    )Adjustment to initially apply SFAS158, net of tax
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (111,731
    )
    
    
    
    
    
    
    (111,731
    )Dissolution of reciprocal interests due to sale of investment in an equity method investee
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    84,238
    
    
    
    84,238BALANCE, MARCH 31, 2007
    
    
    204,300
    
    
    
    16,833,847
    
    
    
    26,599,217
    
    
    
    (24,270,769
    )
    
    
    949,709
    
    
    
    
    
    
    
    20,112,004Net income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    5,176,589
    
    
    
    
    
    
    
    
    
    
    
    5,176,589Other comprehensive loss, net of tax
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (859,091
    )
    
    
    
    
    
    
    (859,091
    )Total comprehensive income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    4,317,498Dividends paid
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (461,309
    )
    
    
    
    
    
    
    
    
    
    
    (461,309
    )Issuance of common stock for the purchase of minority interests of consolidated subsidiaries,
net of issuance cost
    
    
    2,178
    
    
    
    
    
    
    
    1,012,520
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    1,012,520BALANCE, MARCH 31, 2008
    
    
    206,478
    
    
    
    16,833,847
    
    
    
    27,611,737
    
    
    
    (19,555,489
    )
    
    
    90,618
    
    
    
    
    
    
    
    24,980,713Net income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    1,419,304
    
    
    
    
    
    
    
    
    
    
    
    1,419,304Other comprehensive loss, net of tax
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (411,329
    )
    
    
    
    
    
    
    (411,329
    )Total comprehensive income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    1,007,975Dividends paid
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (412,957
    )
    
    
    
    
    
    
    
    
    
    
    (412,957
    )Purchase of treasury stock
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (406,547
    )
    
    
    (406,547
    )BALANCE, MARCH 31, 2009
    
    
    206,478
    
    
    ¥
    16,833,847
    
    
    ¥
    27,611,737
    
    
    ¥
    (18,549,142
    )
    
    ¥
    (320,711
    )
    
    ¥
    (406,547
    )
    
    ¥
    25,169,184
 Thousands of U.S. Dollars (Note 1)AccumulatedOtherAdditional
    
    
    Accumulated
    
    
    Comprehensive
    
    
    TreasuryCommon
    
    
    Paid-in
    
    
    Deficit
    
    
    Income (Loss)
    
    
    StockStock
    
    
    Capital
    
    
    (Note 12)
    
    
    (Notes 11 and 13)
    
    
    (Note 12)
    
    
    TotalBALANCE, MARCH 31, 2008
    
    $
    169,782
    
    
    $
    278,484
    
    
    $
    (197,231
    )
    
    $
    914
    
    
    $
    
    
    
    $
    251,949Net income
    
    
    
    
    
    
    
    
    
    
    14,315
    
    
    
    
    
    
    
    
    
    
    
    14,315Other comprehensive loss, net of tax
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (4,149
    )
    
    
    
    
    
    
    (4,149
    )Total comprehensive income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    10,166Dividends paid
    
    
    
    
    
    
    
    
    
    
    (4,166
    )
    
    
    
    
    
    
    
    
    
    
    (4,166
    )Purchase of treasury stock
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (4,100
    )
    
    
    (4,100
    )BALANCE, MARCH 31, 2009
    
    $
    169,782
    
    
    $
    278,484
    
    
    $
    (187,082
    )
    
    $
    (3,235
    )
    
    $
    (4,100
    )
    
    $
    253,849
  F-7




---



##### Table of Contents



Internet Initiative Japan Inc. and Subsidiaries
 Consolidated Statements of Cash Flows
Three Years in the Period Ended March 31, 2009
 Thousands ofU.S. DollarsThousands of Yen
    
    
    (Note 1)2007
    
    
    2008
    
    
    2009
    
    
    2009OPERATING ACTIVITIES:Net income
    
    ¥
    5,409,713
    
    
    ¥
    5,176,589
    
    
    ¥
    1,419,304
    
    
    $
    14,315Adjustments to reconcile net income
to net cash provided by
operating activities:Depreciation and amortization
    
    
    4,228,048
    
    
    
    4,774,804
    
    
    
    5,317,141
    
    
    
    53,628Impairment loss on other intangible assets
    
    
    
    
    
    
    
    
    
    
    113,360
    
    
    
    1,143Provision for retirement and
pension costs, less payments
    
    
    382,682
    
    
    
    191,057
    
    
    
    127,662
    
    
    
    1,288Provision for (reversal of) allowance for
doubtful accounts
    
    
    12,232
    
    
    
    (416
    )
    
    
    26,020
    
    
    
    262Loss on disposal of property and
equipment
    
    
    150,731
    
    
    
    72,086
    
    
    
    443,019
    
    
    
    4,468Net gains on sales of other investments
    
    
    (3,229,899
    )
    
    
    (217,957
    )
    
    
    (15,631
    )
    
    
    (158
    )Losses on write-down of other
investments
    
    
    1,363,389
    
    
    
    288,643
    
    
    
    524,287
    
    
    
    5,288Foreign exchange losses, net
    
    
    2,226
    
    
    
    10,415
    
    
    
    9,605
    
    
    
    97Equity in net (income) loss of equity
method investees, less dividends received
    
    
    210,199
    
    
    
    143,200
    
    
    
    (4,719
    )
    
    
    (48
    )Minority interests in earnings (losses) of
subsidiaries
    
    
    232,719
    
    
    
    (96,706
    )
    
    
    (352,428
    )
    
    
    (3,555
    )Deferred income tax expense (benefit)
    
    
    (1,494,685
    )
    
    
    (1,653,275
    )
    
    
    636,818
    
    
    
    6,423Others
    
    
    622
    
    
    
    
    
    
    
    1,741
    
    
    
    18Changes in operating assets and
liabilities net of effects from
acquisition of business and a company:Decrease (increase) in accounts
receivable
    
    
    2,376,126
    
    
    
    (2,584,327
    )
    
    
    1,947,490
    
    
    
    19,642Decrease (increase) in inventories,
prepaid expenses and other current
and noncurrent assets
    
    
    (1,235,003
    )
    
    
    (995,434
    )
    
    
    467,023
    
    
    
    4,710Decrease in accounts payable
    
    
    (1,872,969
    )
    
    
    (668,481
    )
    
    
    (2,005,074
    )
    
    
    (20,223
    )(Decrease) increase in income taxes
payable
    
    
    312,292
    
    
    
    (274,475
    )
    
    
    (188,517
    )
    
    
    (1,901
    )Increase in accrued
expenses and other current
and noncurrent liabilities
    
    
    553,084
    
    
    
    372,023
    
    
    
    163,768
    
    
    
    1,652Net cash provided by
operating
activities(Forward)
    
    ¥
    7,401,507
    
    
    ¥
    4,537,746
    
    
    ¥
    8,630,869
    
    
    $
    87,049
  F-8




---



##### Table of Contents



Internet Initiative Japan Inc. and Subsidiaries
 Consolidated Statements of Cash Flows
Three Years in the Period Ended March 31, 2009
 Thousands ofU.S. DollarsThousands of Yen
    
    
    (Note 1)2007
    
    
    2008
    
    
    2009
    
    
    2009Net cash provided by
operating activities(Forward)
    
    ¥
    7,401,507
    
    
    ¥
    4,537,746
    
    
    ¥
    8,630,869
    
    
    $
    87,049INVESTING ACTIVITIES:Purchases of property and equipment
    
    
    (1,287,906
    )
    
    
    (1,856,249
    )
    
    
    (2,991,378
    )
    
    
    (30,170
    )Purchases of available-for-sale securities
    
    
    (802,662
    )
    
    
    (609,787
    )
    
    
    (187,516
    )
    
    
    (1,891
    )Purchases of short-term and other investments
    
    
    (1,794,358
    )
    
    
    (232,122
    )
    
    
    (175,264
    )
    
    
    (1,768
    )Investment in an equity method investee
    
    
    
    
    
    
    (273,909
    )
    
    
    
    
    
    
    Purchases of subsidiary stock
from minority shareholders
    
    
    (3,077,764
    )
    
    
    (1,975,123
    )
    
    
    
    
    
    
    Proceeds from sales of available-for-sale
securities
    
    
    3,883,915
    
    
    
    616,920
    
    
    
    3,417
    
    
    
    34Proceeds from sales and redemption of
short-term and other investments
    
    
    110,446
    
    
    
    69,722
    
    
    
    111,509
    
    
    
    1,125Proceeds from sales of investment in an equity
method investee
    
    
    185,900
    
    
    
    
    
    
    
    
    
    
    
    Payments of guarantee deposits
    
    
    (146,172
    )
    
    
    (353,911
    )
    
    
    (109,929
    )
    
    
    (1,109
    )Refund of guarantee deposits
    
    
    27,761
    
    
    
    11,847
    
    
    
    66,124
    
    
    
    667Payments for refundable insurance policies
    
    
    (38,273
    )
    
    
    (49,753
    )
    
    
    (52,364
    )
    
    
    (528
    )Refund from insurance policies
    
    
    4,969
    
    
    
    3,905
    
    
    
    7,382
    
    
    
    74Acquisition of a newly controlled company,
net of cash acquired
    
    
    
    
    
    
    (788,608
    )
    
    
    
    
    
    
    Acquisition of business
    
    
    (74,751
    )
    
    
    
    
    
    
    
    
    
    
    Other
    
    
    (4,716
    )
    
    
    (6,698
    )
    
    
    (53
    )
    
    
    0Net cash used in investing activities
    
    
    (3,013,611
    )
    
    
    (5,443,766
    )
    
    
    (3,328,072
    )
    
    
    (33,566
    )FINANCING ACTIVITIES:Proceeds from issuance of short-term
borrowings with initial maturities over
three
months and long-term borrowings
    
    
    10,500,000
    
    
    
    17,525,000
    
    
    
    10,750,000
    
    
    
    108,422Repayments of short-term borrowings with
initial maturities over three months and
long-term borrowings
    
    
    (7,639,963
    )
    
    
    (15,940,000
    )
    
    
    (12,125,000
    )
    
    
    (122,289
    )Proceeds from securities loan agreement
    
    
    1,057,680
    
    
    
    
    
    
    
    
    
    
    
    Repayments of securities loan agreement
    
    
    (2,057,280
    )
    
    
    
    
    
    
    
    
    
    
    Principal payments under capital leases
    
    
    (3,259,875
    )
    
    
    (3,506,842
    )
    
    
    (3,953,833
    )
    
    
    (39,877
    )Net (decrease) increase in short-term
borrowings
    
    
    (3,355,000
    )
    
    
    1,225,000
    
    
    
    (425,000
    )
    
    
    (4,287
    )Proceeds from issuance of subsidiary
stock to minority shareholders
    
    
    194,679
    
    
    
    6,000
    
    
    
    
    
    
    
    Dividends paid
    
    
    
    
    
    
    (461,309
    )
    
    
    (412,957
    )
    
    
    (4,166
    )Payments for purchase of treasury stock
    
    
    
    
    
    
    
    
    
    
    (406,547
    )
    
    
    (4,100
    )Net cash used in financing
activities(Forward)
    
    ¥
    (4,559,759
    )
    
    ¥
    (1,152,151
    )
    
    ¥
    (6,573,337
    )
    
    $
    (66,297
    )
  F-9




---



##### Table of Contents



Internet Initiative Japan Inc. and Subsidiaries
 Consolidated Statements of Cash Flows
Three Years in the Period Ended March 31, 2009
 Thousands ofU.S. DollarsThousands of Yen
    
    
    (Note 1)2007
    
    
    2008
    
    
    2009
    
    
    2009Net cash used in financing activities(Forward)
    
    ¥
    (4,559,759
    )
    
    ¥
    (1,152,151
    )
    
    ¥
    (6,573,337
    )
    
    $
    (66,297
    )EFFECT OF EXCHANGE RATE
CHANGES ON CASH AND CASH
EQUIVALENTS
    
    
    (614
    )
    
    
    (25,393
    )
    
    
    (12,716
    )
    
    
    (128
    )NET DECREASE IN CASH AND CASH EQUIVALENTS
    
    
    (172,477
    )
    
    
    (2,083,564
    )
    
    
    (1,283,256
    )
    
    
    (12,942
    )CASH AND CASH EQUIVALENTS, BEGINNING OF YEAR
    
    
    13,727,021
    
    
    
    13,554,544
    
    
    
    11,470,980
    
    
    
    115,693CASH AND CASH EQUIVALENTS,
END OF YEAR
    
    ¥
    13,554,544
    
    
    ¥
    11,470,980
    
    
    ¥
    10,187,724
    
    
    $
    102,751Thousands ofU.S. DollarsThousands of Yen
    
    
    (Note 1)2007
    
    
    2008
    
    
    2009
    
    
    2009ADDITIONAL CASH FLOW
INFORMATION:Interest paid
    
    ¥
    383,461
    
    
    ¥
    438,850
    
    
    ¥
    408,712
    
    
    $
    4,122Income taxes paid
    
    
    347,826
    
    
    
    1,083,341
    
    
    
    772,533
    
    
    
    7,792NONCASH INVESTING AND
FINANCING ACTIVITIES:Acquisition of assets by
entering into capital leases
    
    
    2,664,706
    
    
    
    4,221,807
    
    
    
    4,014,537
    
    
    
    40,490Facilities purchase liabilities
    
    
    85,574
    
    
    
    72,966
    
    
    
    182,564
    
    
    
    1,841Purchase of minority interests of consolidated subsidiaries
through share exchanges
    
    
    
    
    
    
    1,012,520
    
    
    
    
    
    
    
    Acquisition of business and a company:Assets acquired
    
    
    236,307
    
    
    
    2,319,277
    
    
    
    
    
    
    
    Cash paid
    
    
    (74,751
    )
    
    
    (1,715,450
    )
    
    
    
    
    
    
    Liabilities assumed
    
    
    161,556
    
    
    
    367,989
    
    
    
    
    
    
    
    Minority interests assumed
    
    
    
    
    
    
    235,838
    
    
    
    
    
    
    
    
   F-10




---



##### Table of Contents



Internet Initiative Japan Inc. and Subsidiaries
 Notes to Consolidated Financial Statements
 1.
    
    DESCRIPTION OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIESInternet Initiative Japan Inc. (IIJ, a Japanese corporation) was founded in December 1992 to
develop and operate Internet access services and other Internet-related services in Japan.
30.0 percent of IIJs voting shares were jointly owned by Nippon Telegraph and Telephone
Corporation (NTT) and its subsidiary as of March 31, 2009. IIJ and subsidiaries
(collectively, the Company) provide Internet access services throughout Japan and into the
United States of America and the rest of Asia. The Company also provides Systems integration
which is consisted of systems construction and systems operation and maintenance. A subsidiary
engaged in a new business which operated Automated Teller Machines (ATM) and its network
systems in 2007. The subsidiary completed its field test of operations during 2008.Certain Significant Risks and UncertaintiesThe Company relies on telecommunications carriers for a significant portion of network
backbone and on regional NTT subsidiaries, electric power companies and their affiliates for
local connections to customers. Currently, NTT Communications, a wholly owned subsidiary of
NTT, is the largest provider of network infrastructure. The Company believes that its use of
multiple carriers and suppliers significantly mitigates damages from service disruptions.
However, any disruption of telecommunication services could have an adverse effect on
operating results.Financial instruments that potentially subject the Company to concentrations of credit risk
consist principally of cash investments, accounts receivable and guarantee deposits. The
Companys management believes that the risks associated with accounts receivable is mitigated
by the large number of customers comprising its customer base.Summary of Significant Accounting PoliciesBasis of PresentationIIJ maintains its records and prepares its financial statements in
accordance with generally accepted accounting principles in Japan. Certain adjustments and
reclassifications have been incorporated in the accompanying consolidated financial statements
to conform to generally accepted accounting principles in the United States of America (U.S.
GAAP). These adjustments were not recorded in the statutory accounts.Reclassification Certain reclassifications have been made to prior periods to conform
to the current year presentation: (1) Value-added services and Other of connectivity and
value added services were combined and renamed as Outsourcing services as it is considered
more suitable to combine the two together as one service to clearly indicate that they are
services provided to customers for the purpose of operating a customers information network
systems. Related to this change, Connectivity and value-added services were renamed as
Connectivity and Outsourcing services. (2) Systems construction and Systems operation and
maintenance, which were components of systems integration revenues, were separately disclosed
to clarify the contents of Systems integration revenues. (3) ATM operation business revenues
and Cost of ATM operation business were disclosed due to the increase in the materiality of
the business. (4)Loans to an equity method investee, which had been previously disclosed in
Investments in and advances to equity method investees, were reclassified to Other assets
because it has been not a permanent investment to equity method investees.Translation into U.S. DollarsIIJ maintains its accounts in Japanese yen, the currency of the
country in which it is incorporated and principally operates. The U.S. dollar amounts
included herein represent a translation using the noon buying rate in New York City for cable
transfers in yen as certified for customs purposes by the Federal Reserve Bank of New York at
March 31, 2009 of ¥99.15 = $1, solely for the convenience of the reader. The translation
should not be construed as a representation that the yen amounts have been, could have been,
or could in the future be converted into U.S. dollars.
 F-11




---



##### Table of Contents



ConsolidationThe consolidated financial statements include the accounts of IIJ and all of its
subsidiaries, Net Care, Inc. (Net Care), IIJ Technology
Inc. (IIJ-Tech), IIJ America, Inc. (IIJ America), IIJ Financial Systems Inc. (IIJ-FS), Netchart Japan Inc. (NCJ), which was
established on August 10, 2006, GDX Japan Inc.(GDX), which was invested in on April 9, 2007,
hi-ho Inc.(hi-ho), which was purchased from Panasonic network services Inc. on June 1, 2007,
Trust network Inc.(Trust), which was established on July 17, 2007, On-Demand Solutions Inc.
(ODS), which was established on April 4, 2008 and IIJ Innovation Institute Inc. (IIJII),
which was established on June 10, 2008, which all, except for IIJ America, have fiscal years
ending March 31. IIJ Americas fiscal year end is December 31 and such date was used for
purposes of preparing the consolidated financial statements as it is not practicable for the
subsidiary to report its financial results as of March 31. There were no significant events
that occurred during the intervening period that would require adjustment to or disclosure in
the accompanying consolidated financial statements. Intercompany transactions and balances
have been eliminated in consolidation.Investments in companies over which IIJ has significant influence but not control are
accounted for by the equity method. For other than a temporary decline in the value of
investments in equity method investees below the carrying amount, the investment is reduced to
fair value and an impairment loss is recognized.A subsidiary or equity method investee may issue its shares to third parties at amounts per
share in excess of or less than the Companys average per share carrying value. With respect
to such transactions, the resulting gains or losses arising from the change in ownership are
recorded in income for the year in which such shares are issued.Use of EstimatesThe preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities and disclosure of contingent assets and
liabilities at the date of the financial statements and reported amounts of revenues and
expenses during the reporting period. Significant estimates and assumptions used are
primarily in the areas of evaluation of cost method investments, valuation allowances for
deferred tax assets, allowance for doubtful accounts, determination of pension benefit costs
and obligations, estimated useful lives of fixed assets and intangible assets with finite
useful lives and impairment of long-lived assets, goodwill and intangible assets deemed to
have indefinite useful lives. Actual results could differ from those estimates.Revenue RecognitionRevenues from customer connectivity services consist principally of
connectivity services for corporate and home use. Connectivity services for corporate use
represent dedicated Internet access type services, such as IP services and ADSL, or optical
line broadband IP services such as IIJ DSL/F Service and IIJ FiberAccess/F Service.
Connectivity services for home use are provided under IIJ brand such as IIJ4U and IIJmio,
hi-ho brand and others, and consist of dial-up services, optical based or ADSL based broadband
services. The term of these contracts is one year for connectivity services for corporate use
and generally one month for connectivity services for home use. All these services are billed
and recognized monthly on a straight-line basis.Outsourcing services revenues consist principally of sales of various Internet access-related
services such as security related services, network related services, hosting related
services, data center related services, Wide-area Ethernet services and call-center services.
The terms of these services are generally for one year and revenues are recognized on a
straight-line basis during the service period.Initial set up fees received in connection with connectivity services and outsourcing services
are deferred and recognized over the contract period.Systems integration revenues consist principally of systems construction revenues and systems
operation and maintenance revenues. Systems construction revenues includes consulting, project
planning, system design, and development of network systems to meet each of our customers
requirements, and sales of equipment and software purchased from third parties. Systems
operation and maintenance revenues includes systems construction related maintenance,
monitoring and other operating services.
 (a)
    
    Systems construction revenues Systems integration service is subject to the
Emerging Issues Task Force (EITF) Issue No. 00-21, Revenue Arrangements with Multiple
Deliverables. For deliverables in multiple-element arrangements, the guidance below is
applied for separability and allocation. A multiple-element arrangement is separated into
more than one unit of accounting if all of the following criteria are met and is
allocated to the separate units of accounting based on each units relative fair values:
 F-12




---



##### Table of Contents




    
    The delivered item(s) has value to the client on a stand-alone basis;
    
    There is objective and reliable evidence of the fair value of the undelivered item(s); and
    
    If the arrangement includes a general right of return relative to the delivered
item(s), delivery or performance of the undelivered item(s) is considered probable and
substantially in the control of the company.
 Systems construction service, which generally completes in less than one year, has
stand-alone value as it is sometimes sold separately without undelivered items such as
maintenance, monitoring and other operating services . The Company maintains a standard
range of prices of those undelivered items, which is considered to be the reliable
evidence of fair value. In addition, the Company does not offer a general right of return
relative to constructed network systems. Therefore, the systems construction service is
considered a separate unit of accounting and the revenues are recognized when constructed
network systems including equipment are delivered and accepted by the customer.Elements of systems construction service are also considered as separate units of
accounting. However, when the equipment is delivered prior to other elements of the
systems construction arrangement, revenue is deferred until other systems construction
service elements are completed and accepted by the customer because in the event that the
Company does not complete other systems construction service elements, the customer may
return all of the equipment.(b)
    
    Systems operation and maintenance revenues Maintenance, monitoring and other
operating service revenues are separately accounted for from system constructions. These
revenues are recognized ratably over the period of contract for the respective services,
which is generally for one year.
 The Company evaluates the criteria outlined in EITF Issue No. 99-19, Reporting Revenue Gross
as Principal Versus Net as an Agent, in determining whether it is appropriate to record the
gross amount of revenues and related costs or the net amount earned in reporting Equipment
sales. The Company records the gross amounts billed to its customers based on the following
acts: (i)it is primary obligor in these transactions, (ii)it has latitude in establishing
prices and selecting suppliers, and (iii)it is involved in the determination of the service
specifications.Equipment sales are recognized when equipment is delivered and accepted by the customer. Title
to equipment passes when equipment is accepted by the customer.ATM operation business revenues are mainly comprised of commission fees charged when
customers withdraw their deposits from ATMs. The commission fees are recognized when the fees
are charged to customers.Cash and Cash EquivalentsCash and cash equivalents includes time deposit with original
maturities of three months or less.Allowance for Doubtful AccountsAn allowance for doubtful accounts is established in amounts
considered to be appropriate based primarily upon the Companys past credit loss experience
and an evaluation of potential losses in the receivables outstanding.Other InvestmentsIn accordance with Statement of Financial Accounting Standards (SFAS) No.
115, Accounting for Certain Investments in Debt and Equity Securities, the Company
classifies its marketable equity securities as available-for-sale securities, which are
accounted for at fair value with unrealized gains and losses excluded from earnings and
reported in accumulated other comprehensive income (loss). The cost of securities sold is
determined based on average cost.The Company reviews the fair value of available-for-sale securities on a regular basis to
determine if the fair value of any individual security has declined below its cost and if such
decline is other than temporary. If the decline in value is judged to be other than
temporary, the cost basis of the investment is written down to fair value. Other than
temporary declines in value are determined taking into consideration the extent of decline in
fair value, the length of time that the decline in fair value below cost has existed and
events that might accelerate the recognition of impairment. The resulting realized loss is
included in the consolidated statements of income in the period in which the decline is deemed
to be other than temporary.
 F-13




---



##### Table of Contents



Non-marketable equity securities are carried at cost as fair value is not readily
determinable. If the value of a security is estimated to have declined and such decline is
judged to be other than temporary, the security is written down to the fair value.
Determination of impairment is based on the consideration of such factors as operating results, business plans and change in the regulatory, economic or technological
environment of the investees. For purposes of computing an impairment loss, fair value is
determined as the Companys interest in the net assets of investees.
 InventoriesInventories consist mainly of network equipment purchased for resale and
work-in-process for development of Internet network systems. Network equipment purchased for
resale is stated at the lower of cost, which is determined by the average-cost method, or
market. Work-in-process for development of network systems is stated at the lower of actual
production costs, including overhead cost, or market. Inventories are reviewed periodically
and items considered to be slow-moving or obsolete are written down to their estimated net
realizable value.LeasesCapital leases, which meet specific criteria noted in SFAS No.13, Accounting for
Leases, are capitalized at the inception of the lease at the present value of the minimum
lease payments. All other leases are accounted for as operating leases. Lease payments for
capital leases are apportioned to interest expense and a reduction of the lease liability so
as to achieve a constant rate of interest on the remaining balance of the liability. Operating
lease payments are recognized as an expense on a straight-line basis over the lease term.Sales-type LeasesThe Company has some sales-type lease agreements with customers. The
Company recognizes revenues on sales-type leases when the assets under lease are delivered to
and accepted by the customers. The revenue recognized is calculated at the net present value
of the future receipt amounts. Interest income in sales-type leases is recognized in other
income using the interest method.Property and EquipmentProperty and equipment are recorded at cost. Depreciation and
amortization of property and equipment, including purchased software and capital leases, are
computed principally using the straight-line method based on either the estimated useful lives
of assets or the lease period, whichever is shorter.The useful lives for depreciation and amortization by major asset classes are as follows:
 Range ofUseful LivesData communications, office and other equipment
    
    
    2 to 15 yearsLeasehold improvements
    
    
    3 to 15 yearsPurchased software
    
    
    5 yearsCapital leases
    
    
    4 to 7 years
 Impairment of Long-lived AssetsLong-lived assets consist principally of property and
equipment, including those items leased under capital leases and amortized intangible assets.
The Company evaluates the impairment of long-lived assets whenever events or changes in
circumstances indicate that the carrying amount of an asset may not be recoverable in
accordance with SFAS No. 144, Accounting for the Impairment or Disposal of Long-Lived
Assets.Goodwill and Intangible AssetsIn accordance with SFAS No. 142, Goodwill and Other
Intangible Assets, goodwill (including equity-method goodwill) and intangible assets that are
deemed to have indefinite useful lives are not amortized, but are subject to impairment
testing. Impairment testing is performed annually or more frequently if events or changes in
circumstances indicate that the asset might be impaired. The Company performs annual
impairment tests on March 31. Intangible assets with finite useful lives, consisting of
customer relationship and licenses, are amortized using the straight-line method over the
estimated useful lives, which range from 3 to 10 years for customer relationship and 5 years
for licenses.Pension and severance indemnities plansThe Company has pension plans and /or severance
indemnities plans. The cost of the pension plans and severance indemnities plans are accrued
based on amounts determined using actuarial methods.On March 31, 2007, the Company adopted the recognition and disclosure provisions of SFAS No.
158, Employers Accounting for Defined Benefit Pension and Other Postretirement Plans, an
amendment of FASB statements No. 87, 88, 106 and 132(R) (SFAS No. 158). SFAS No. 158
required the Company to recognize the funded status of its pension plans, measured as the
difference between plan assets at fair value and the benefit obligation, in the March 31, 2007
consolidated balance sheet, with a corresponding adjustment to accumulated other comprehensive
income, net of tax. The adjustment to accumulated other
 F-14




---



##### Table of Contents



comprehensive income at adoption represented the unrecognized actuarial loss and unrecognized
transition obligation, which were previously netted against the plans funded status in the
consolidated balance sheet pursuant to the provisions of SFAS No. 87. These amounts are
subsequently recognized as net periodic pension cost pursuant to the Companys historical
accounting policy for amortizing such amounts. Further, actuarial gains and losses that arise
in subsequent periods and are not recognized as net periodic pension cost in the same periods
are recognized as a component of other comprehensive income (loss). Those amounts are
subsequently recognized as a component of net periodic pension cost on the same basis as the
amounts recognized in accumulated other comprehensive income (loss) at adoption of SFAS No.
158. On March 31, 2009, the Company adopted the measurement date provision of SFAS No. 158.
The adoption of the measurement date provision had no effect on the consolidated financial
statements, because the Companys measurement date was March 31 before the adoption.
 Income TaxesIncome tax expense is based on reported earnings before income taxes. Deferred
income taxes reflect the impact of temporary differences between assets and liabilities
recognized for financial reporting purposes and such amounts recognized for tax purposes and
tax loss carryforwards. These deferred taxes are measured using the currently enacted tax
rates in effect for the year in which the temporary differences or tax loss carryforwards are
expected to reverse. Valuation allowances are provided against deferred tax assets when it is
more likely than not that a tax benefit will not be realized.April 1, 2007, the Company adopted FASB interpretation No. 48 (FIN No. 48), Accounting for
Uncertainty in Income Taxes, which clarifies the accounting for uncertainty in income taxes
recognized in an enterprises financial statements in accordance with SFAS No. 109,
Accounting for Income Taxes.The Company recognizes the financial statement effect of tax positions when they are more
likely than not, based on the technical merits, that the tax positions will be sustained upon
examination by the tax authorities. Benefits from tax positions that meet more-likely-than-not
recognition threshold are measured at the largest amount of benefit that is greater than 50
percent likely of being realized upon settlement. Interest and penalties accrued related to
unrecognized tax benefits are included in income tax expense in the consolidated statements of
income. See Note 10 for further discussion of the effect of adopting FIN 48 on the Companys
financial statements.Foreign Currency TranslationForeign currency financial statements have been translated in
accordance with SFAS No. 52, Foreign Currency Translation. Pursuant to this statement, the
assets and liabilities of a foreign subsidiary and an equity method investee are translated
into Japanese yen at the respective year-end exchange rates. All income and expense accounts
are translated at average rates of exchange. The resulting translation adjustments are
included in accumulated other comprehensive income.Foreign currency assets and liabilities, which consist substantially of cash denominated in
U.S. dollars, are stated at the amount as computed by using year-end exchange rates and the
resulting transaction gain or loss is recognized in earnings.Stock-based CompensationOn April 1, 2006, the Company adopted SFAS No. 123R, Share-Based
Payment and the related interpretations, which requires compensation expense for stock
options and other share-based payments to be measured and recorded based on the instruments
fair value, by using the modified prospective application method. SFAS No. 123R requires
recognizing expenses for share-based payments granted prior to the adoption date equal to the
fair value of unvested amounts over the remaining requisite service period. The portion of
these share-based payments fair value attributable to vested awards prior to the adoption of
SFAS No. 123R is never recognized. As all existing granted stock-based awards of the Company
had vested, the adoption of SFAS No. 123R did not have any impact on the Companys
consolidated financial position or results of operations.Prior to April 1, 2006, the Company accounted for stock-based compensation using the intrinsic
value method prescribed in Accounting Principle Board Opinion (APB) No. 25, Accounting for
Stock Issued to Employers and related interpretations.Research and DevelopmentResearch and development costs are expensed as incurred.AdvertisingAdvertising costs are expensed as incurred and are recorded in Sales and
marketing.Basic and Diluted Net Income per Common ShareBasic net income per common share is computed
by dividing net income by the weighted-average number of shares of common stock outstanding
during the year. Diluted net income per common share reflects the potential dilutive effect
of stock options.
 F-15




---



##### Table of Contents



Other Comprehensive Income (Loss)Other comprehensive income (loss) consists of translation
adjustments resulting from the translation of financial statements of a foreign subsidiary,
unrealized gains or losses on available-for-sale securities, gains or losses on cash flow
hedging derivative instruments and defined benefit pension plans adjustment.
 Segment Reporting SFAS No. 131, Disclosures about Segments of an Enterprise and Related
Information, establishes standards for reporting information about operating segments.
Operating segments are defined as components of an enterprise that engage in business
activities from which it may earn revenues and incur expense and for which separate financial
information is available that is evaluated regularly by the chief operation decision maker in
deciding how to allocate resources and in assessing performance.The Company provides a comprehensive range of network solutions to meet its customers needs
by cross-selling a variety of services, including Internet connectivity services, outsourcing
services, systems integration and sales of network-related equipment, and ATM operation
services. The Companys chief operating decision maker, who is the Companys Chief Executive
Officer (CEO), regularly reviews the revenue and cost of sales on the two operating
segments, which are Network service and systems integration business segment and ATM operation
business segment. CEO also makes decisions regarding how to allocate resources and assess
performance based on the segments.New Accounting StandardsIn September 2006, the FASB issued SFAS No. 157, Fair Value Measurements which defines
fair value, establishes a framework for measuring fair value in generally accepted accounting
principles, and expands disclosures about fair value measurements. This statement clarifies
how to measure fair value as permitted or required under other accounting pronouncements, but
does not require any new fair value measurements. In February 2008, the FASB issued Staff
Positions (FSP) No. FAS 157-2, Effective Date of FASB Statement No.157, which partially
delay the effective date of SFAS No. 157 for one year for certain nonfinancial assets and
liabilities and remove certain leasing transactions from its scope. The Company adopted SFAS
No. 157 in the first quarter beginning April 1, 2008 for all financial assets and liabilities
that are recognized or disclosed at fair value in the financial statements. This adoption did
not have a material effect on the Companys financial position or results of operations. The
adoption of SFAS No. 157 for all nonfinancial asssets and liabilities beginning April 1, 2009
will not have a material effect upon the Company s financial position or results of
operations.In February 2007, the FASB issued SFAS No. 159, The Fair Value Option for Financial
Assets and Financial Liabilities, including an amendment of FASB Statement No. 115. SFAS No.
159 provides companies with an option to report selected financial assets and liabilities at
fair value. Unrealized gains and losses on items for which the fair value option has been
elected will be recognized in earnings. SFAS No. 159 is effective for fiscal years beginning
after November 15, 2007 and is required to be adopted by the Company in the first quarter
beginning April 1, 2008 and was adopted by the Company in the first quarter beginning April 1,
2008. The adoption of SFAS No. 159 did not have an impact upon the Companys financial
position or results of operations as the Company did not elect to report financial assets and
liabilities under fair value option.In December 2007, the FASB issued SFAS No. 141(R), Business Combinations. The Statement
establishes principles and requirements for how an acquirer recognizes and measures in its financial
statements the identifiable assets acquired, the liabilities assumed, any noncontrolling interest in the
acquiree and the goodwill acquired. SFAS No. 141(R) also establishes disclosure requirements to enable the
evaluation of the nature and financial effects of the business combination. SFAS No. 141(R) is effective for fiscal years beginning on or after December 15, 2008. In April 2009, the FASB issued FSP No.
FAS 141(R)-1, Accounting for Assets Acquired and Liabilities Assumed in a Business
Combination That Arise from Contingencies. FSP No. FAS 141(R)-1 amends the initial
recognition and measurement, subsequent measurement and accounting, and disclosure of assets
and liabilities arising from contingencies in a business combination. FSP No. FAS 141(R)-1 is
effective for assets and liabilities arising from contingencies in business combinations for
which the acquisition date is on or after the beginning of the first annual reporting period
beginning on or after December 15, 2008. The impact of the adoption of SFAS No. 141(R) and FSP
No. FAS 141(R)-1 on the Companys financial position or results of operations will be
dependent on the size and nature of business combinations completed after the adoption of this
statement.In December 2007, the FASB issued SFAS No. 160, Noncontrolling Interests in Consolidated
Financial Statements, an amendment of ARB No. 51. The Statement establishes accounting and reporting
standards for the noncontrolling interest in a subsidiary and for the deconsolidation of a subsidiary.
The Statement is effective on or after the beginning of the first annual reporting period beginning on or after
December 15, 2008. The adoption of SFAS No.160 will impact the presentation of the Companys balance sheets and statements of income, however, it will not have a material impact on the
Companys financial position or results of operations.
 F-16




---



##### Table of Contents



In October 2008, the FASB issued FSP No. FAS 157-3, Determining the Fair Value of a
Financial Asset When the Market for That Asset Is Not Active. FSP No. FAS 157-3 clarifies the application of
SFAS No. 157 in a market that is not active and provides an example to illustrate key
considerations in determining the fair value of a financial asset when market for that
financial asset is not active. FSP No. FAS 157-3 is effective upon issuance, including prior
periods for which financial statements have not been issued. The adoption of FSP No. FAS 157-3
did not have a material impact upon the Companys financial position or results of operations.In December 2008, the FASB issued FSP No. FAS 132(R)-1, Employers Disclosures about
Postretirement Benefit Plan Assets. FSP No. FAS 132(R)-1 requires additional disclosure about plan assets
including investment allocation, fair value of major categories of plan assets, development of fair
value measurements, and concentrations of risk. FSP No. FAS 132(R)-1 is effective for fiscal
years ending after December 15, 2009. The Company is currently evaluating the requirements of
these additional disclosures, but does not expect the adoption of FSP No. FAS 132(R)-1 to have
an impact on the Companys financial position or results of operations.In April 2009, the FASB issued FSP No. FAS 115-2 and No. FAS 124-2, Recogniton and
Presentation of Other-Than-Temporary Impairments. FSP No. FAS 115-2 and No. FAS 124-2 amends
the other-than-temporary impairment guidance in U.S. GAAP for debt securities to make the
guidance more operational and to improve the presentation and disclosure of
other-than-temporary impairments on debt and equity securities in the financial statements.
FSP No. FAS 115-2 and No. FAS 124-2 are effective for fiscal years ending after June 15, 2009
and early adoption is permitted. The adoption of FSP No. FAS 115-2 and No. FAS 124-2 will not
have a material impact on the Companys financial position and results of operations.In April 2009, the FASB issued FSP No. FAS 157-4, Determining Fair Value When the Volume and
Level of Activity for the Asset or Liability Have Significantly Decreased and Identifying
Transactions That Are Not Orderly. FSP No. FAS 157-4 provides additional guidance for estimating fair value in
accordance with SFAS No. 157 when the volume and level of activity for the asset or liability have
significantly decreased. This FSP also includes guidance on identifying circumstances that indicate a
transaction is not orderly. FSP No. FAS 157-4 is effective for interim and annual reporting periods ending after
June 15, 2009. The adoption of FSP No. FAS 157-4 will not have a material impact upon the
Companys financial position or results of operations.
 F-17




---



##### Table of Contents



2.
    
    INVENTORYThe components of inventories as of March 31, 2008 and 2009 are as follows:
 Thousands ofThousands of Yen
    
    
    U.S. Dollars2008
    
    
    2009
    
    
    2009Network equipment purchased for resale
    
    ¥
    74,622
    
    
    ¥
    130,730
    
    
    $
    1,319Work in process
    
    
    1,109,538
    
    
    
    399,026
    
    
    
    4,024Total inventories
    
    ¥
    1,184,160
    
    
    ¥
    529,756
    
    
    $
    5,343
 3.
    
    OTHER INVESTMENTSPursuant to SFAS No. 115, all of the Companys marketable equity securities were
classified as available-for-sale securities. Information regarding the securities classified
as available-for-sale at March 31, 2008 and 2009 is as follows:
 Thousands of YenUnrealized
    
    
    Unrealized
    
    
    FairCost
    
    
    Gains
    
    
    Losses
    
    
    ValueMarch 31, 2008Available-for-saleEquity
securities
    
    ¥
    489,172
    
    
    ¥
    423,362
    
    
    ¥
    68,053
    
    
    ¥
    844,481March 31, 2009Available-for-saleEquity
securities
    
    ¥
    507,391
    
    
    ¥
    225,811
    
    
    ¥
    58,948
    
    
    ¥
    674,254
 Thousands of U.S. DollarsUnrealized
    
    
    Unrealized
    
    
    FairCost
    
    
    Gains
    
    
    Losses
    
    
    ValueMarch 31, 2009Available-for-saleEquity
securities
    
    $
    5,117
    
    
    $
    2,278
    
    
    $
    595
    
    
    $
    6,800
 The following table provides the fair value and gross unrealized losses of the Companys
investments, which have been deemed to be temporarily impaired, aggregated by investment
category and length of time that individual securities have been in a continuous unrealized
loss position, as of March 31, 2008 and 2009:
 Thousands of YenLess than12 Months
    
    
    12 Months or More
    
    
    TotalFair
    
    
    Unrealized
    
    
    Fair
    
    
    Unrealized
    
    
    Fair
    
    
    UnrealizedValue
    
    
    Losses
    
    
    Value
    
    
    Losses
    
    
    Value
    
    
    LossesMarch 31, 2008Available-for-saleEquity
securities
    
    ¥
    219,962
    
    
    ¥
    68,053
    
    
    ¥
    
    
    
    ¥
    
    
    
    ¥
    219,962
    
    
    ¥
    68,053March 31, 2009Available-for-saleEquity
securities
    
    ¥
    293,704
    
    
    ¥
    48,136
    
    
    ¥
    35,120
    
    
    ¥
    10,812
    
    
    ¥
    328,824
    
    
    ¥
    58,948
 F-18




---



##### Table of Contents



Thousands of U.S. DollarsLess than12 Months
    
    
    12 Months or More
    
    
    TotalFair
    
    
    Unrealized
    
    
    Fair
    
    
    Unrealized
    
    
    Fair
    
    
    UnrealizedValue
    
    
    Losses
    
    
    Value
    
    
    Losses
    
    
    Value
    
    
    LossesMarch 31, 2009Available-for-saleEquity
securities
    
    $
    2,962
    
    
    $
    486
    
    
    $
    354
    
    
    $
    109
    
    
    $
    3,316
    
    
    $
    595
 The Company regularly reviews all of the Companys investments to determine if any are
other-than-temporarily impaired. The analysis includes reviewing industry analyst reports,
sector credit ratings and volatility of the securitys market price.The Companys unrealized loss on investments in marketable equity security relates to Japanese
companies (25 issuers) in various industries. The unrealized losses on these securities were
due principally to a temporary decline in the stock market. The fair value of each investment
is between 1.4% to 29.5% less than its cost except for an investment of which the fair value
has recovered to its cost after April 2009. The duration of the unrealized loss position was
less than 17 months. The Company evaluated the near-term prospects of the issuer and the
analyst reports in relation to the severity and duration of impairment. Based on that
evaluation and the Companys ability and intent to hold the investment for a reasonable period
of time sufficient for a recovery of fair value, the Company does not consider the investment
to be other-than-temporarily impaired at March 31, 2009.Proceeds from the sale of available-for-sale securities were ¥3,883,915 thousand, ¥616,920
thousand and ¥3,417 thousand ($34 thousand) for the years ended March 31, 2007, 2008 and 2009,
respectively. Gross realized gains of ¥3,242,257 thousand, ¥218,070 thousand were included in
other income (expenses) for the year ended March 31, 2007 and 2008, respectively, and gross
realized losses of ¥12,358 thousand, ¥113 thousand and ¥2,049 thousand ($21 thousand) were
included in other income (expenses) for the years ended March 31, 2007, 2008 and 2009,
respectively.The aggregate cost of the Companys cost method investments totaled ¥1,519,289 thousand and
¥1,240,340 thousand ($12,510 thousand) at March 31, 2008 and 2009, respectively.Losses on write-down of investments in certain marketable and nonmarketable equity securities,
included in other income (expenses), were recognized to reflect the decline in value
considered to be other than temporary, which were ¥103,243 thousand and ¥185,400 thousand,
respectively, for the year ended March 31, 2008 , and ¥163,836 thousand ($1,652 thousand) and
¥360,451 thousand ($3,635 thousand), respectively, for the year ended March 31, 2009. Such
losses in certain nonmarketable equity securities, included in other income (expenses), were
¥1,363,389 thousand for the year ended March 31, 2007.In Japan, there is a market in which participants lend and borrow debt and equity
securities without collateral from financial institutions under agreements known as lending
and borrowing debt and equity securities contracts. Under the agreement, the Company loans
equity securities without collateral. The Company has loaned ¥114,400 thousand and ¥12,760
thousand ($129 thousand) of available-for-sale securities to the financial institution as of
March 31, 2008 and 2009, respectively.
 F-19




---



##### Table of Contents



4.
    
    ALLOWANCE FOR DOUBTFUL ACCOUNTS AND LOANAn analysis of the allowance for doubtful accounts for the years ended March 31, 2007, 2008
and 2009 is as follows:
 Thousands of YenProvision forBalance at
    
    
    
    
    
    
    (Reversal of)Beginning of
    
    
    Credits
    
    
    Doubtful
    
    
    Balance atYear
    
    
    Charged Off
    
    
    Accounts
    
    
    End of YearYear ended March 31, 2007
    
    ¥
    114,342
    
    
    ¥
    (3,764
    )
    
    ¥
    12,232
    
    
    ¥
    122,810Year ended March 31, 2008
    
    ¥
    122,810
    
    
    ¥
    (8,750
    )
    
    ¥
    (416
    )
    
    ¥
    113,644Year ended March 31, 2009
    
    ¥
    113,644
    
    
    ¥
    (16,371
    )
    
    ¥
    26,020
    
    
    ¥
    123,293
 Thousands of U.S. dollarsBalance at
    
    
    
    
    
    
    Reversal ofBeginning of
    
    
    Credits
    
    
    Doubtful
    
    
    Balance atYear
    
    
    Charged Off
    
    
    Accounts
    
    
    End of YearYear ended March 31, 2009
    
    $
    1,146
    
    
    $
    (165
    )
    
    $
    262
    
    
    $
    1,243
 5.
    
    INVESTMENTS IN EQUITY METHOD INVESTEESIIJ utilizes various companies in Japan and neighboring countries to form and operate its
Internet business. Businesses operated by its equity method investees include multifeed technology services and
location facilities for connecting high-speed Internet backbones (Internet Multifeed Co., Multifeed),
data center services in Asian countries ( i-Heart Inc., i-Heart), comprehensive portal sites operations
(Internet Revolution Inc., i-revo) and point management systems operations (Taihei Computer Co., Ltd.,
TCC)On March 28, 2007, IIJ sold all its shares in atom for ¥185,900 thousand with a gain of ¥252
thousand. IIJ accounted for atom as an equity method investee through March 2007.On July 6, 2007, IIJ invested ¥235,389 thousand in TCC to partner with TCC on the management
of customer loyalty reward program systems.The aggregate amounts of balances and transactions of the Company with these equity method
investees as of March 31, 2008 and 2009, and for each of the three years in the period ended
March 31, 2009 are summarized as follows:
 Thousands ofThousands of Yen
    
    
    U.S. Dollars2007
    
    
    2008
    
    
    2009
    
    
    2009Accounts receivable
    
    ¥
    
    
    
    ¥
    60,420
    
    
    ¥
    66,880
    
    
    $
    675Accounts payable
    
    
    
    
    
    
    20,197
    
    
    
    23,373
    
    
    
    236Revenues
    
    
    481,850
    
    
    
    582,290
    
    
    
    672,014
    
    
    
    6,778Costs and expenses
    
    
    172,971
    
    
    
    207,670
    
    
    
    257,732
    
    
    
    2,599
 On June 30, 2008, the Company received ¥30,380 thousand ($306 thousand) of dividends from
Multifeed.
 F-20




---



##### Table of Contents



The Companys investments in these equity method investees and respective ownership percentage
at March 31, 2008 and 2009 consisted of the following:
 Thousands ofThousands of Yen
    
    
    U.S. Dollars2008
    
    
    
    
    
    
    2009
    
    
    2009Multifeed
    
    
    31.00
    %
    
    ¥
    621,906
    
    
    
    31.00
    %
    
    ¥
    713,375
    
    
    $
    7,195i-revo
    
    
    30.00
    
    
    
    80,567
    
    
    
    30.00
    
    
    
    24,114
    
    
    
    243TCC
    
    
    45.00
    
    
    
    218,176
    
    
    
    45.00
    
    
    
    188,775
    
    
    
    1,904i-Heart
    
    
    28.57
    
    
    
    36,043
    
    
    
    28.57
    
    
    
    21,362
    
    
    
    216Total
    
    
    
    
    
    ¥
    956,692
    
    
    
    
    
    
    ¥
    947,626
    
    
    $
    9,558
 The Company also had a loan of ¥34,545 thousand ($348 thousand) to i-Heart, net of loan loss
valuation allowance, which was included in the OTHER ASSETS in the Companys balance sheets
as of March 31, 2008 and 2009.
 F-21




---



##### Table of Contents



6. PROPERTY AND EQUIPMENT
  Thousands ofThousands of Yen
    
    
    U.S. Dollars2008
    
    
    2009
    
    
    2009Data communications equipment
    
    ¥
    646,592
    
    
    ¥
    1,010,283
    
    
    $
    10,189Office and other equipment
    
    
    1,037,273
    
    
    
    1,190,217
    
    
    
    12,004Leasehold improvements
    
    
    919,851
    
    
    
    1,010,805
    
    
    
    10,195Purchased software
    
    
    7,600,204
    
    
    
    9,459,207
    
    
    
    95,403Assets under capital leases, primarily data
communications equipment
    
    
    15,566,075
    
    
    
    16,946,896
    
    
    
    170,922Total
    
    
    25,769,995
    
    
    
    29,617,408
    
    
    
    298,713Less accumulated depreciation
and amortization
    
    
    (14,029,785
    )
    
    
    (16,444,517
    )
    
    
    (165,855
    )Property and equipmentnet
    
    ¥
    11,740,210
    
    
    ¥
    13,172,891
    
    
    $
    132,858
   7. GOODWILL AND OTHER INTANGIBLE ASSETS
  Thousands ofThousands of Yen
    
    
    U.S. Dollars2008
    
    
    2009
    
    
    2009Amortized intangible assets:Licenses
    
    ¥
    143,110
    
    
    ¥
    143,110
    
    
    $
    1,443Customer relationship
    
    
    289,000
    
    
    
    289,000
    
    
    
    2,915Backlog
    
    
    2,270
    
    
    
    
    
    
    
    Total
    
    
    434,380
    
    
    
    432,110
    
    
    
    4,358Less accumulated amortizationLicenses
    
    
    
    
    
    
    (16,697
    )
    
    
    (169
    )Customer relationship
    
    
    (53,083
    )
    
    
    (118,309
    )
    
    
    (1,193
    )Backlog
    
    
    (2,270
    )
    
    
    
    
    
    
    Total
    
    
    (55,353
    )
    
    
    (135,006
    )
    
    
    (1,362
    )Amortized intangible assetsnet
    
    
    379,027
    
    
    
    297,104
    
    
    
    2,997Non-amortized intangible assets:Telephone rights
    
    ¥
    12,513
    
    
    ¥
    9,485
    
    
    $
    96Trademark
    
    
    192,000
    
    
    
    192,000
    
    
    
    1,936Customer relationship
    
    
    2,816,577
    
    
    
    2,703,217
    
    
    
    27,264Goodwill
    
    
    2,507,258
    
    
    
    2,639,319
    
    
    
    26,619Total
    
    
    5,528,348
    
    
    
    5,544,021
    
    
    
    55,915Total intangible assets
    
    ¥
    5,907,375
    
    
    ¥
    5,841,125
    
    
    $
    58,912
 F-22




---



##### Table of Contents



Thousands ofYear Ending March 31
    
    Thousands of yen
    
    U.S. Dollars2010
    
    ¥
    92,322
    
    
    $
    9312011
    
    
    59,684
    
    
    
    6022012
    
    
    54,989
    
    
    
    5552013
    
    
    54,989
    
    
    
    5552014
    
    
    20,236
    
    
    
    204
   Thousands of Yen
    
    
    Thousands of U.S. DollarsNetwork
    
    
    
    
    
    
    
    
    
    
    Networkservice and
    
    
    
    
    
    
    
    
    
    
    service andsystems
    
    
    ATM
    
    
    
    
    
    
    systems
    
    
    ATMintegration
    
    
    operation
    
    
    
    
    
    
    integration
    
    
    operationbusiness
    
    
    business
    
    
    Total
    
    
    business
    
    
    business
    
    
    TotalBalance at March
31, 2007
    
    ¥
    1,386,252
    
    
    ¥
    
    
    
    ¥
    1,386,252Acquisitions
    
    
    997,234
    
    
    
    123,772
    
    
    
    1,121,006Balance at March
31, 2008
    
    
    2,383,486
    
    
    
    123,772
    
    
    
    2,507,258
    
    
    $
    24,039
    
    
    $
    1,248
    
    
    $
    25,287Acquisitions
    
    
    20,282
    
    
    
    111,779
    
    
    
    132,061
    
    
    
    205
    
    
    
    1,127
    
    
    
    1,332Balance at March
31, 2009
    
    ¥
    2,403,768
    
    
    ¥
    235,551
    
    
    ¥
    2,639,319
    
    
    $
    24,244
    
    
    $
    2,375
    
    
    $
    26,619
    F-23




---



##### Table of Contents



8. LEASES
   Operating Leases
  Thousands ofThousands of Yen
    
    
    U.S. Dollars2008
    
    
    2009
    
    
    2009Head office
    
    ¥
    1,262,508
    
    
    ¥
    1,268,634
    
    
    $
    12,795Sales and subsidiaries offices
    
    
    713,383
    
    
    
    754,987
    
    
    
    7,615Others
    
    
    61,274
    
    
    
    49,031
    
    
    
    494Total refundable guarantee deposits
    
    ¥
    2,037,165
    
    
    ¥
    2,072,652
    
    
    $
    20,904
 F-24




---



##### Table of Contents



Thousands ofThousands of Yen
    
    
    U.S. Dollars2009
    
    
    2009Year ending March 31:2010
    
    ¥
    25,559
    
    
    $
    2582011
    
    
    24,391
    
    
    
    246Total
    
    ¥
    49,950
    
    
    $
    504
 
 F-25




---



##### Table of Contents



Capital Leases
 Lessee Future Minimum Lease Payments
 Thousands of Yen
    
    
    Thousands of U.S. DollarsConnectivity
    
    
    
    
    
    
    
    
    
    
    ConnectivityLines
    
    
    Other
    
    
    
    
    
    
    Lines
    
    
    OtherOperating
    
    
    Operating
    
    
    Capital
    
    
    Operating
    
    
    Operating
    
    
    CapitalLeases
    
    
    Leases
    
    
    Leases
    
    
    Leases
    
    
    Leases
    
    
    LeasesYear ending March 31:2010
    
    ¥
    1,205,573
    
    
    ¥
    2,145,914
    
    
    ¥
    3,482,557
    
    
    $
    12,159
    
    
    $
    21,643
    
    
    $
    35,1242011
    
    
    855,671
    
    
    
    720,743
    
    
    
    2,732,294
    
    
    
    8,630
    
    
    
    7,269
    
    
    
    27,5572012
    
    
    183,187
    
    
    
    537,023
    
    
    
    1,657,567
    
    
    
    1,848
    
    
    
    5,416
    
    
    
    16,7172013
    
    
    76,800
    
    
    
    514,494
    
    
    
    580,805
    
    
    
    775
    
    
    
    5,189
    
    
    
    5,8582014
    
    
    76,800
    
    
    
    425,320
    
    
    
    59,661
    
    
    
    774
    
    
    
    4,290
    
    
    
    6022015 and thereafter
    
    
    0
    
    
    
    1,386,549
    
    
    
    838
    
    
    
    0
    
    
    
    13,985
    
    
    
    8Total minimum lease payments
    
    ¥
    2,398,031
    
    
    ¥
    5,730,043
    
    
    
    8,513,722
    
    
    $
    24,186
    
    
    $
    57,792
    
    
    
    85,866Less amounts representing interest
    
    
    
    
    
    
    
    
    
    
    375,345
    
    
    
    
    
    
    
    
    
    
    
    3,785Present value of net minimum capital
lease payments
    
    
    
    
    
    
    
    
    
    
    8,138,377
    
    
    
    
    
    
    
    
    
    
    
    82,081Less current portion
    
    
    
    
    
    
    
    
    
    
    3,272,257
    
    
    
    
    
    
    
    
    
    
    
    33,003Noncurrent portion
    
    
    
    
    
    
    
    
    
    ¥
    4,866,120
    
    
    
    
    
    
    
    
    
    
    $
    49,078
 Sales-type Leases
 Thousands ofThousands of Yen
    
    
    U.S. Dollars2008
    
    
    2009
    
    
    2009Year ending March 31:2010
    
    
    
    
    
    ¥
    345,571
    
    
    $
    3,4852011
    
    
    
    
    
    
    350,241
    
    
    
    3,5322012
    
    
    
    
    
    
    82,792
    
    
    
    8352013
    
    
    
    
    
    
    59,740
    
    
    
    6031,363
    
    
    
    14Total minimum lease payments to be received*
    
    ¥
    995,266
    
    
    
    839,707
    
    
    
    8,469Estimated residual value of leased property (unguaranteed)
    
    
    215,917
    
    
    
    215,917
    
    
    
    2,178Less unearned income
    
    
    45,246
    
    
    
    35,764
    
    
    
    361Net investment in sales-type leases
    
    
    1,165,937
    
    
    
    1,019,860
    
    
    
    10,286Less current portion
    
    
    383,177
    
    
    
    325,829
    
    
    
    3,286Non-current net investment in sales-type leases
    
    ¥
    782,760
    
    
    ¥
    694,031
    
    
    $
    7,000
 
 *
    
    Estimated executory costs, including profit thereon, of ¥315,619 thousand and ¥222,835
thousand ($2,247 thousand) were excluded from total minimum lease payments to be
received as of March 31, 2008 and 2009. F-26




---



##### Table of Contents



9. BORROWINGS
    10. INCOME TAXES
   Thousands ofThousands of Yen
    
    
    U.S. Dollars2007
    
    
    2008
    
    
    2009
    
    
    2009Income from operations before income tax
expense (benefit), minority interests
and equity in net income (loss)
of equity method investees:Domestic
    
    ¥
    5,055,155
    
    
    ¥
    4,382,741
    
    
    ¥
    2,060,855
    
    
    $
    20,785Foreign
    
    
    (6,467
    )
    
    
    (21,072
    )
    
    
    (26,367
    )
    
    
    (266
    )Total
    
    ¥
    5,048,688
    
    
    ¥
    4,361,669
    
    
    ¥
    2,034,488
    
    
    $
    20,519Income taxes current:Domestic
    
    ¥
    798,922
    
    
    ¥
    778,152
    
    
    ¥
    359,143
    
    
    $
    3,622Foreign
    
    
    (108,180
    )
    
    
    13,709
    
    
    
    6,750
    
    
    
    68Total
    
    ¥
    690,742
    
    
    ¥
    791,861
    
    
    ¥
    365,893
    
    
    $
    3,690Income taxes deferred:Domestic
    
    ¥
    (1,494,685
    )
    
    ¥
    (1,653,275
    )
    
    ¥
    636,818
    
    
    $
    6,423Foreign
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Total
    
    ¥
    (1,494,685
    )
    
    ¥
    (1,653,275
    )
    
    ¥
    636,818
    
    
    $
    6,423
   Thousands ofThousands of Yen
    
    
    U.S. Dollars2008
    
    
    2009
    
    
    2009Current Assets Other current assets
    
    ¥
    1,090,698
    
    
    ¥
    762,221
    
    
    $
    7,687Noncurrent Assets Other assets
    
    
    2,458,895
    
    
    
    2,253,464
    
    
    
    22,728Noncurrent liabilities Other noncurrent liabilities
    
    
    (92,908
    )
    
    
    (167,611
    )
    
    
    (1,690
    )Total
    
    ¥
    3,456,685
    
    
    ¥
    2,848,074
    
    
    $
    28,725
 F-27




---



##### Table of Contents



Thousands ofThousands of Yen
    
    
    U.S. Dollars2008
    
    
    2009
    
    
    2009Deferred
    
    
    Deferred
    
    
    Deferred
    
    
    Deferred
    
    
    Deferred
    
    
    DeferredTax
    
    
    Tax
    
    
    Tax
    
    
    Tax
    
    
    Tax
    
    
    TaxAssets
    
    
    Liabilities
    
    
    Assets
    
    
    Liabilities
    
    
    Assets
    
    
    LiabilitiesUnrealized gains on
available-for-sale securities
    
    ¥
    
    
    
    ¥
    146,201
    
    
    ¥
    
    
    
    ¥
    79,392
    
    
    $
    
    
    
    $
    801Capital leases
    
    
    93,409
    
    
    
    
    
    
    
    78,314
    
    
    
    
    
    
    
    790
    
    
    
    Accrued expenses
    
    
    325,448
    
    
    
    
    
    
    
    342,146
    
    
    
    
    
    
    
    3,451
    
    
    
    Retirement and pension cost
    
    
    456,073
    
    
    
    
    
    
    
    578,616
    
    
    
    
    
    
    
    5,836
    
    
    
    Allowance for doubtful accounts
    
    
    10,918
    
    
    
    
    
    
    
    19,997
    
    
    
    
    
    
    
    202
    
    
    
    Depreciation
    
    
    25,996
    
    
    
    
    
    
    
    44,077
    
    
    
    
    
    
    
    444
    
    
    
    Net loss on other investment
    
    
    665,594
    
    
    
    
    
    
    
    811,120
    
    
    
    
    
    
    
    8,181
    
    
    
    Operating loss carryforward
    
    
    6,207,609
    
    
    
    
    
    
    
    5,157,278
    
    
    
    
    
    
    
    52,015
    
    
    
    Transactions in transit*
    
    
    
    
    
    
    64,333
    
    
    
    
    
    
    
    72,397
    
    
    
    
    
    
    
    730Amortization of goodwill
    
    
    
    
    
    
    123,002
    
    
    
    
    
    
    
    108,663
    
    
    
    
    
    
    
    1,096Impairment loss on telephone rights
    
    
    85,727
    
    
    
    
    
    
    
    85,923
    
    
    
    
    
    
    
    866
    
    
    
    Accrued Enterprise tax
    
    
    58,954
    
    
    
    
    
    
    
    72,496
    
    
    
    
    
    
    
    731
    
    
    
    Other
    
    
    61,774
    
    
    
    93,407
    
    
    
    181,884
    
    
    
    97,609
    
    
    
    1,834
    
    
    
    984Total
    
    
    7,991,502
    
    
    
    426,943
    
    
    
    7,371,851
    
    
    
    358,061
    
    
    
    74,350
    
    
    
    3,611Valuation allowance
    
    
    (4,107,874
    )
    
    
    
    
    
    
    (4,165,716
    )
    
    
    
    
    
    
    (42,014
    )
    
    
    Total
    
    ¥
    3,883,628
    
    
    ¥
    426,943
    
    
    ¥
    3,206,135
    
    
    ¥
    358,061
    
    
    $
    32,336
    
    
    $
    3,611
 
 *
    
    This item was caused by the transactions between IIJ and IIJ America, which were recorded in
the different periods as a result of the difference in each companys fiscal year end.  F-28




---



##### Table of Contents



Thousand of YenCorporate tax
    
    
    Inhabitant andsubject to
    
    
    enterprise tax subjectYear Ending
    
    consolidation tax
    
    
    to consolidation taxMarch 31
    
    filing
    
    
    filing
    
    
    Others2010
    
    ¥
    2,322,336
    
    
    ¥
    3,758,736
    
    
    ¥
    2011
    
    
    7,353,136
    
    
    
    7,353,136
    
    
    
    2012
    
    
    415,384
    
    
    
    415,384
    
    
    
    2013
    
    
    
    
    
    
    
    
    
    
    2014 and thereafter
    
    
    
    
    
    
    354,309
    
    
    
    1,901,557Total
    
    ¥
    10,090,856
    
    
    ¥
    11,881,565
    
    
    ¥
    1,901,557
 Thousand of U.S. DollarsCorporate tax
    
    
    Inhabitant andsubject to
    
    
    enterprise tax subjectYear Ending
    
    consolidation tax
    
    
    to consolidation taxMarch 31
    
    filing
    
    
    filing
    
    
    Others2010
    
    $
    23,423
    
    
    $
    37,910
    
    
    $
    2011
    
    
    74,162
    
    
    
    74,162
    
    
    
    2012
    
    
    4,189
    
    
    
    4,189
    
    
    
    2013
    
    
    
    
    
    
    
    
    
    
    2014 and thereafter
    
    
    
    
    
    
    3,573
    
    
    
    19,179Total
    
    $
    101,774
    
    
    $
    119,834
    
    
    $
    19,179
  Thousands ofThousands of Yen
    
    
    U.S. Dollars2007
    
    
    2008
    
    
    2009
    
    
    2009Amount computed by using
normal Japanese statutory
tax rate
    
    ¥
    2,069,962
    
    
    ¥
    1,788,284
    
    
    ¥
    834,140
    
    
    $
    8,413Increase (decrease) in taxes
resulting from:Expenses not deductible for
tax purpose
    
    
    60,340
    
    
    
    81,117
    
    
    
    78,705
    
    
    
    794Provision for (reversal of) reserve
for tax contingencies
    
    
    (108,782
    )
    
    
    12,365
    
    
    
    6,707
    
    
    
    67Inhabitant tax-per capita
    
    
    25,141
    
    
    
    25,780
    
    
    
    27,475
    
    
    
    277Realization of tax benefit of
operating loss carryforwards
    
    
    (2,163,531
    )
    
    
    (769,583
    )
    
    
    
    
    
    
    Other change in valuation allowance
    
    
    (717,049
    )
    
    
    (1,980,018
    )
    
    
    38,046
    
    
    
    384Enterprise tax
- not based on income
    
    
    42,135
    
    
    
    45,283
    
    
    
    55,083
    
    
    
    556Othernet
    
    
    (12,159
    )
    
    
    (64,642
    )
    
    
    (37,445
    )
    
    
    (378
    )Income tax expense (benefit)
as reported
    
    ¥
    (803,943
    )
    
    ¥
    (861,414
    )
    
    ¥
    1,002,711
    
    
    $
    10,113
 F-29




---



##### Table of Contents



Thousands ofThousands of Yen
    
    
    U.S. Dollars2008
    
    
    2009
    
    
    2009Balance at April 1
    
    ¥
    77,417
    
    
    ¥
    79,434
    
    
    $
    801Increases related to
positions taken on
items from current
year
    
    
    5,410
    
    
    
    2,801
    
    
    
    28Translation adjustment
    
    
    (3,393
    )
    
    
    (16,424
    )
    
    
    (166
    )Balance at March 31
    
    ¥
    79,434
    
    
    ¥
    65,811
    
    
    $
    663
     F-30




---



##### Table of Contents



11. RETIREMENT AND PENSION PLANS
      Thousands ofThousands of Yen
    
    
    U.S. Dollars2007
    
    
    2008
    
    
    2009
    
    
    2009Service cost
    
    ¥
    257,960
    
    
    ¥
    325,065
    
    
    ¥
    372,954
    
    
    $
    3,762Interest cost
    
    
    26,589
    
    
    
    31,076
    
    
    
    36,307
    
    
    
    366Expected return on plan assets
    
    
    (26,942
    )
    
    
    (29,098
    )
    
    
    (26,952
    )
    
    
    (272
    )Amortization of transition
obligation
    
    
    402
    
    
    
    402
    
    
    
    402
    
    
    
    4Amortization of net actuarial loss
    
    
    2,505
    
    
    
    3,699
    
    
    
    8,098
    
    
    
    82Effect of curtailment
    
    
    
    
    
    
    
    
    
    
    (197,181
    )
    
    
    (1,989
    )Effect of settlement
    
    
    
    
    
    
    
    
    
    
    70,466
    
    
    
    711Net periodic pension cost
    
    ¥
    260,514
    
    
    ¥
    331,144
    
    
    ¥
    264,094
    
    
    $
    2,664
 F-31




---



##### Table of Contents



Thousands ofThousands of Yen
    
    
    U.S. Dollars2008
    
    
    2009
    
    
    2009Net actuarial loss
    
    ¥
    167,746
    
    
    ¥
    250,029
    
    
    $
    2,522Amortization of net actuarial loss
in net periodic pension cost
    
    
    (3,699
    )
    
    
    (8,098
    )
    
    
    (82
    )Amortization of transition
obligation in net periodic
pension cost
    
    
    (402
    )
    
    
    (402
    )
    
    
    (4
    )Effect of curtailment
    
    
    
    
    
    
    (561
    )
    
    
    (6
    )Effect of settlement
    
    
    
    
    
    
    (70,466
    )
    
    
    (711
    )Amounts recognized in other
comprehensive income
    
    
    163,645
    
    
    
    170,502
    
    
    
    1,719Total net periodic pension cost
and amounts recognized in other
comprehensive income
    
    ¥
    494,789
    
    
    ¥
    434,596
    
    
    $
    4,383
  Thousands ofThousands of Yen
    
    
    U.S. Dollars2008
    
    
    2009
    
    
    2009Change in benefit obligation:Benefit obligation at beginning of year
    
    ¥
    1,635,586
    
    
    ¥
    2,044,301
    
    
    $
    20,618Service cost
    
    
    325,065
    
    
    
    372,954
    
    
    
    3,762Interest cost
    
    
    31,076
    
    
    
    36,307
    
    
    
    366Actuarial loss
    
    
    89,636
    
    
    
    122,069
    
    
    
    1,231Benefit paid
    
    
    (37,062
    )
    
    
    (48,694
    )
    
    
    (491
    )Effect of curtailment
    
    
    
    
    
    
    (197,742
    )
    
    
    (1,994
    )Effect of settlement
    
    
    
    
    
    
    (140,103
    )
    
    
    (1,413
    )Benefit obligation at end of year
    
    ¥
    2,044,301
    
    
    ¥
    2,189,092
    
    
    $
    22,079Change in plan assets:Fair value of plan assets at beginning
of year
    
    ¥
    1,077,696
    
    
    ¥
    1,171,804
    
    
    $
    11,819Actual return on plan assets
    
    
    (49,012
    )
    
    
    (101,008
    )
    
    
    (1,019
    )Employer contribution
    
    
    164,873
    
    
    
    167,433
    
    
    
    1,688Benefits paid
    
    
    (21,753
    )
    
    
    (27,605
    )
    
    
    (278
    )Effect of settlement
    
    
    
    
    
    
    (140,103
    )
    
    
    (1,413
    )Fair value of plan assets at end of year
    
    ¥
    1,171,804
    
    
    ¥
    1,070,521
    
    
    $
    10,797Funded status at end of year
    
    
    (872,497
    )
    
    
    (1,118,571
    )
    
    
    (11,282
    )
 F-32




---



##### Table of Contents



Thousands ofThousands of Yen
    
    
    U.S. Dollars2008
    
    
    2009
    
    
    2009Accrued retirement and pension costs-current
    
    ¥
    (11,436
    )
    
    ¥
    (11,959
    )
    
    $
    (121
    )Accrued retirement and pension costs-non current
    
    
    (861,061
    )
    
    
    (1,106,612
    )
    
    
    11,161Net amount recognized
    
    ¥
    (872,497
    )
    
    ¥
    (1,118,571
    )
    
    $
    (11,282
    )
    Thousands ofThousands of Yen
    
    
    U.S. Dollars2008
    
    
    2009
    
    
    2009Net actuarial loss
    
    ¥
    312,889
    
    
    ¥
    484,354
    
    
    $
    4,885Obligation at transition
    
    
    3,212
    
    
    
    2,249
    
    
    
    23¥
    316,101
    
    
    ¥
    486,603
    
    
    $
    4,908
   BenefitObligations
    
    Net Periodic Costs2008
    
    2009
    
    2007
    
    2008
    
    2009Discount rate
    
    
    1.8
    %
    
    
    1.6
    %
    
    
    2.0
    %
    
    
    1.9
    %
    
    
    1.8
    %Expected long-term rate of return
on plan assets
    
    
    
    
    
    
    
    
    
    
    2.7
    
    
    
    2.7
    
    
    
    2.3Rate of increase in compensation
    
    
    3.6
    
    
    
    3.5
    
    
    
    3.4
    
    
    
    3.5
    
    
    
    3.6
   
  F-33




---



##### Table of Contents



2008
    
    
    2009Asset category:Equity securities
    
    
    20.2
    %
    
    
    (35.1
    )%
    
    
    21.2
    %
    
    
    (35.4
    )%Debt securities
    
    
    36.2
    
    
    
    (62.9
    )
    
    
    37.4
    
    
    
    (62.6
    )Life insurance pooled investment portfolios
    
    
    42.4
    
    
    
    ( 
    )
    
    
    40.2
    
    
    
    (
    )Other
    
    
    1.2
    
    
    
    (2.0
    )
    
    
    1.2
    
    
    
    (2.0
    )Total
    
    
    100.0
    %
    
    
    (100.0)
    %*
    
    
    100
    %
    
    
    (100.0)
    %*
 
 *
    
    The percentages in parentheses represent the Companys plan asset allocation excluding
life
insurance pooled investment portfolios.     Year Ending
    
    
    
    
    
    Thousands ofMarch 31
    
    Thousands of yen
    
    
    U.S. Dollars2010
    
    ¥
    37,607
    
    
    $
    3792011
    
    
    46,589
    
    
    
    4712012
    
    
    58,809
    
    
    
    5932013
    
    
    69,740
    
    
    
    7042014
    
    
    86,383
    
    
    
    8712015  2019
    
    
    582,610
    
    
    
    5,876Total
    
    ¥
    881,738
    
    
    $
    8,893
   F-34




---



##### Table of Contents



12. SHAREHOLDERS EQUITY
        th
     F-35




---



##### Table of Contents



Stock Option Plans
    Thousands of YenWeighted AverageNumber of
    
    
    Number of
    
    
    Exercise Price perOptions
    
    
    Shares
    
    
    Common SharesUnexercised options outstandingMarch 31, 2008
    
    
    515
    
    
    
    2,575
    
    
    ¥
    1,009Options granted
    
    
    
    
    
    
    
    
    
    
    Options exercised
    
    
    
    
    
    
    
    
    
    
    Options forfeited
    
    
    
    
    
    
    
    
    
    
    Unexercised options outstandingMarch 31, 2009
    
    
    515
    
    
    
    2,575
    
    
    ¥
    1,009
   Outstanding
    
    Exercisable
    
    Total IntrinsicExercise Price
    
    Number of Shares
    
    Remaining Life
    
    Number of Shares
    
    Value (Thousands of(Thousands of Yen)
    
    Underlying Options
    
    (in Years)
    
    Underlying Options
    
    Yen)¥2,163
    
    
    950
    
    
    
    1.0
    
    
    
    950
    
    
    
    334
    
    
    1,625
    
    
    
    2.3
    
    
    
    1,625
    
    
    
    
 F-36




---



##### Table of Contents



13. OTHER COMPREHENSIVE INCOME
  Thousands of YenBefore Tax
    
    
    Tax (Expense)
    
    
    Net of TaxAmount
    
    
    or Benefit
    
    
    AmountYear ended March 31, 2007:Foreign currency translation adjustments
    
    ¥
    11,653
    
    
    ¥
    
    
    
    ¥
    11,653Unrealized holding gain (loss) on
securities:Amount arising during the period
    
    
    (2,277,976
    )
    
    
    933,970
    
    
    
    (1,344,006
    )Less: Reclassification adjustments for
gains included in net income
    
    
    (3,229,899
    )
    
    
    1,324,259
    
    
    
    (1,905,640
    )Increase in deferred tax asset valuation
allowance*
    
    
    
    
    
    
    (2,258,229
    )
    
    
    (2,258,229
    )Net unrealized holding gain (loss) during
the period
    
    
    (5,507,875
    )
    
    
    
    
    
    
    (5,507,875
    )Gain on cash flow hedging derivative
instruments:Amount arising during the period
    
    
    (708
    )
    
    
    
    
    
    
    (708
    )Less: Reclassification adjustments for
losses included in net income
    
    
    4,776
    
    
    
    
    
    
    
    4,776Net gain on cash flow hedging derivative
instruments
    
    
    4,068
    
    
    
    
    
    
    
    4,068Other comprehensive income (loss)
    
    ¥
    (5,492,154
    )
    
    ¥
    
    
    
    ¥
    (5,492,154
    )Year ended March 31, 2008:Foreign currency translation adjustments
    
    ¥
    (20,029
    )
    
    ¥
    
    
    
    ¥
    (20,029
    )Unrealized holding gain (loss) on
securities:Amount arising during the period
    
    
    (574,683
    )
    
    
    235,620
    
    
    
    (339,063
    )Less: Reclassification adjustments for
gains included in net income
    
    
    (114,714
    )
    
    
    47,032
    
    
    
    (67,682
    )Increase in deferred tax asset valuation
allowance*
    
    
    
    
    
    
    (282,652
    )
    
    
    (282,652
    )Net unrealized holding gain (loss) during
the period
    
    
    (689,397
    )
    
    
    
    
    
    
    (689,397
    )Loss on cash flow hedging derivative
instruments:Amount arising during the period
    
    
    
    
    
    
    
    
    
    
    Less: Reclassification adjustments for
gains included in net income
    
    
    (45
    )
    
    
    
    
    
    
    (45
    )Loss on cash flow hedging derivative
instruments
    
    
    (45
    )
    
    
    
    
    
    
    (45
    )Defined benefit pension plans:Amount arising during the period
    
    
    (167,746
    )
    
    
    22,247
    
    
    
    (145,499
    )Less: Reclassification adjustments for losses
included in net income
    
    
    4,101
    
    
    
    (1,418
    )
    
    
    2,683Less: Other reclassification
    
    
    (11,522
    )
    
    
    4,718
    
    
    
    (6,804
    )Net defined benefit pension plans
    
    
    (175,167
    )
    
    
    25,547
    
    
    
    (149,620
    )Other comprehensive income (loss)
    
    ¥
    (884,638
    )
    
    ¥
    25,547
    
    
    ¥
    (859,091
    )
 F-37




---



##### Table of Contents



Thousands of YenBefore Tax
    
    
    Tax (Expense)
    
    
    Net of TaxAmount
    
    
    or Benefit
    
    
    AmountYear ended March 31, 2009:Foreign currency translation adjustments
    
    ¥
    (80,588
    )
    
    ¥
    
    
    
    ¥
    (80,588
    )Unrealized holding gain (loss) on
securities:Amount arising during the period
    
    
    (354,330
    )
    
    
    145,275
    
    
    
    (209,055
    )Less: Reclassification adjustments for
losses included in net income
    
    
    165,884
    
    
    
    (68,012
    )
    
    
    97,872Increase in deferred tax asset valuation
allowance*
    
    
    
    
    
    
    (77,263
    )
    
    
    (77,263
    )Net unrealized holding gain (loss) during
the period
    
    
    (188,446
    )
    
    
    
    
    
    
    (188,446
    )Defined benefit pension plans:Amount arising during the period
    
    
    (250,029
    )
    
    
    30,502
    
    
    
    (219,527
    )Less: Reclassification adjustments for losses
included in net income
    
    
    8,500
    
    
    
    (2,295
    )
    
    
    6,205Less: Reclassification adjustments on effect of
curtailment and settlement
    
    
    71,027
    
    
    
    
    
    
    
    71,027Net defined benefit pension plans
    
    
    (170,502
    )
    
    
    28,207
    
    
    
    (142,295
    )Other comprehensive income (loss)
    
    ¥
    (439,536
    )
    
    ¥
    28,207
    
    
    ¥
    (411,329
    )
 Thousands of U.S. DollarsBefore Tax
    
    
    Tax (Expense)
    
    
    Net of TaxAmount
    
    
    or Benefit
    
    
    AmountYear ended March 31, 2009:Foreign currency translation adjustments
    
    $
    (813
    )
    
    $
    
    
    
    $
    (813
    )Unrealized holding gain (loss) on
securities:Amount arising during the period
    
    
    (3,574
    )
    
    
    1,465
    
    
    
    (2,109
    )Less: Reclassification adjustments for
losses included in net income
    
    
    1,673
    
    
    
    (686
    )
    
    
    987Increase in deferred tax asset valuation
allowance*
    
    
    
    
    
    
    (779
    )
    
    
    (779
    )Net unrealized holding gain (loss) during
the period
    
    
    (1,901
    )
    
    
    
    
    
    
    (1,901
    )Defined benefit pension plans:Amount arising during the period
    
    
    (2,522
    )
    
    
    307
    
    
    
    (2,215
    )Less: Reclassification adjustments for losses
included in net income
    
    
    86
    
    
    
    (23
    )
    
    
    63Less: Reclassification adjustments on effect of
curtailment and settlement
    
    
    717
    
    
    
    
    
    
    
    717Net defined benefit pension plans
    
    
    (1,719
    )
    
    
    284
    
    
    
    (1,435
    )Other comprehensive income (loss)
    
    $
    (4,433
    )
    
    $
    284
    
    
    $
    (4,149
    )
 
 *
    
    The increase in the deferred tax asset valuation allowance has resulted from unrealized
losses on
available-for-sale securities. F-38




---



##### Table of Contents



Thousands ofThousands of Yen
    
    
    U.S. Dollars2008
    
    
    2009
    
    
    2009Foreign currency translation adjustments
    
    ¥
    (3,340
    )
    
    ¥
    (83,928
    )
    
    $
    (847
    )Unrealized holding gain on securities
    
    
    355,309
    
    
    
    166,863
    
    
    
    1,683Defined benefit pension plans
    
    
    (261,351
    )
    
    
    (403,646
    )
    
    
    (4,071
    )¥
    90,618
    
    
    ¥
    (320,711
    )
    
    $
    (3,235
    )
 14. BASIC AND DILUTED NET INCOME PER COMMON SHARE
  Thousands ofThousands of Yen
    
    
    U.S. Dollars2007
    
    
    2008
    
    
    2009
    
    
    2009Numerator:Net income-basic and diluted
    
    ¥
    5,409,713
    
    
    ¥
    5,176,589
    
    
    ¥
    1,419,304
    
    
    $
    14,315Number of shares2007
    
    
    2008
    
    
    2009Denominator:Weighted-average common shares
outstanding-basic
    
    
    203,992
    
    
    
    206,240
    
    
    
    205,165Dilutive effect of stock options
    
    
    252
    
    
    
    225
    
    
    
    30Weighted-average common shares
outstanding-diluted
    
    
    204,244
    
    
    
    206,465
    
    
    
    205,195
 Yen
    
    
    U.S. Dollars2007
    
    
    2008
    
    
    2009
    
    
    2009Basic net income per common share
    
    ¥
    26,519
    
    
    ¥
    25,100
    
    
    ¥
    6,918
    
    
    $
    70Diluted net income per common
share
    
    ¥
    26,487
    
    
    ¥
    25,072
    
    
    ¥
    6,917
    
    
    $
    70
   Year ended March 312007
    
    2008
    
    2009Shares issuable under stock options
    
    
    950
    
    
    
    950
    
    
    
    950
 F-39




---



##### Table of Contents



15. COMMITMENTS AND CONTINGENT LIABILITIES
     F-40




---



##### Table of Contents



16. FINANCIAL INSTRUMENTS
 Fair Value
 Thousands ofThousands of Yen
    
    U.S. Dollars2008
    
    2009
    
    2009Carrying
    
    Fair
    
    Carrying
    
    Fair
    
    Carrying
    
    FairAmount
    
    Value
    
    Amount
    
    Value
    
    Amount
    
    ValueOther
investments
for which it is:Practicable to
estimate
fair value
    
    ¥
    844,481
    
    
    ¥
    844,481
    
    
    ¥
    674,254
    
    
    ¥
    674,254
    
    
    $
    6,800
    
    
    $
    6,800Not practicable
    
    
    1,519,289
    
    
    
    
    
    
    
    1,240,340
    
    
    
    
    
    
    
    12,510
    
    
    
    Noncurrent
refundable
insurance
policies
(other assets)
    
    
    161,404
    
    
    
    161,404
    
    
    
    206,387
    
    
    
    206,387
    
    
    $
    2,082
    
    
    $
    2,082
  17. FAIR VALUE MEASUREMENTS
  Level 1 
    
    Inputs are quoted prices in active markets for identical assets or liabilities.Level 2 
    
    Inputs are quoted prices for similar assets or liabilities in active markets,
quoted prices for identical or similar assets or liabilities in markets that are not
active, inputs other than quoted prices that are observable, and inputs that are derived
principally from or corroborated by observable market data by correlation or other means.Level 3 
    
    Inputs are derived from valuation techniques in which one or more significant
inputs or value drivers are unobservable, which reflect the reporting entitys own
assumptions about the assumptions that market participants would use in establishing a
price.
 F-41




---



##### Table of Contents



Assets Measured at Fair Value on a Recurring Basis
  Thousands of Yen
    
    
    TotalLevel 1
    
    
    Level 2
    
    
    Level 3
    
    
    2009March 31, 2009Assets:Available-for-sale securities-equity securities
    
    ¥
    674,254
    
    
    
    
    
    
    
    
    
    
    ¥
    674,254
 Thousands of U.S Dollars
    
    
    TotalLevel 1
    
    
    Level 2
    
    
    Level 3
    
    
    2009March 31, 2009Assets:Available-for-sale securities-equity securities
    
    $
    6,800
    
    
    
    
    
    
    
    
    
    
    $
    6,800
  Assets Measured at Fair Value on a Nonrecurring Basis
 Thousands of YenLevel 1
    
    
    Level 2
    
    
    Level 3
    
    
    impairment lossMarch 31, 2009Assets:Non-marketable securities-equity securities
    
    
    
    
    
    
    
    
    
    ¥
    298,280
    
    
    ¥
    360,451
 Thousands of U.S DollarsLevel 1
    
    
    Level 2
    
    
    Level 3
    
    
    impairment lossMarch 31, 2009Assets:Non-marketable securities-equity securities
    
    
    
    
    
    
    
    
    
    $
    3,008
    
    
    $
    3,635
   F-42




---



##### Table of Contents



18. BUSINESS SEGMENT
     Revenues:
 Thousands ofThousands of Yen
    
    
    U.S. Dollars2008
    
    
    2009
    
    
    2009Network service and
systems integration
business:Customers
    
    ¥
    66,831,138
    
    
    ¥
    69,707,278
    
    
    $
    703,048Intersegment
    
    
    
    
    
    
    253,985
    
    
    
    2,561Total
    
    
    66,831,138
    
    
    
    69,961,263
    
    
    
    705,609ATM operation businessCustomers
    
    
    4,161
    
    
    
    23,452
    
    
    
    237Intersegment
    
    
    
    
    
    
    
    
    
    
    Total
    
    
    4,161
    
    
    
    23,452
    
    
    
    237Elimination
    
    
    
    
    
    
    253,985
    
    
    
    2,561Consolidated total
    
    ¥
    66,835,299
    
    
    ¥
    69,730,730
    
    
    $
    703,285
 Segment profit or loss:
 Thousands ofThousands of Yen
    
    
    U.S. Dollars2008
    
    
    2009
    
    
    2009Operating income (loss):Network service and
systems integration
business
    
    ¥
    4,854,309
    
    
    ¥
    3,663,040
    
    
    $
    36,944ATM operation business
    
    
    (89,195
    )
    
    
    (704,431
    )
    
    
    (7,104
    )Elimination
    
    
    5,750
    
    
    
    41,227
    
    
    
    416Consolidated operating
income
    
    ¥
    4,759,364
    
    
    ¥
    2,917,382
    
    
    $
    29,424
 F-43




---



##### Table of Contents



Segment assets:
 Thousands ofThousands of Yen
    
    
    U.S. Dollars2008
    
    
    2009
    
    
    2009Segment Assets:Network service and
systems integration
business
    
    ¥
    55,046,212
    
    
    ¥
    51,799,206
    
    
    $
    522,433ATM operation business
    
    
    656,334
    
    
    
    504,144
    
    
    
    5,085Elimination
    
    
    
    
    
    
    2,151
    
    
    
    22Consolidated total assets
    
    ¥
    55,702,546
    
    
    ¥
    52,301,199
    
    
    $
    527,496
 Other significant items:
 Thousands ofThousands of Yen
    
    
    U.S. Dollars2008
    
    
    2009
    
    
    2009Depreciation and
amortization:Network service and
systems integration
business
    
    ¥
    4,771,468
    
    
    ¥
    5,417,275
    
    
    $
    54,637ATM operation business
    
    
    3,336
    
    
    
    13,226
    
    
    
    133Consolidated total
    
    ¥
    4,774,804
    
    
    ¥
    5,430,501
    
    
    $
    54,770
    19. ADVERTISING EXPENSES
  F-44




---



##### Table of Contents



20. RELATED PARTY TRANSACTIONS
    Thousands ofThousands of Yen
    
    U.S. Dollars2007
    
    2008
    
    2009
    
    2009Accounts receivable
    
    ¥
    
    
    
    ¥
    283,238
    
    
    ¥
    194,258
    
    
    $
    1,959Accounts payable
    
    
    
    
    
    
    685,018
    
    
    
    1,184,399
    
    
    
    11,946Revenues
    
    
    1,308,843
    
    
    
    1,186,771
    
    
    
    1,129,160
    
    
    
    11,388Costs and expenses
    
    
    7,725,572
    
    
    
    9,437,253
    
    
    
    10,689,937
    
    
    
    107,816
  21. SUBSEQUENT EVENTS
   F-45