##### Table of Contents



As filed with the Securities and Exchange Commission on June 30, 2008
   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, 2008
 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, 2008, 206,478 shares of common stock were outstanding, including 21,585 shares
represented by an aggregate of 8,634,000 American Depositary Shares.
  o þ
  o þ
   þ o
  o þ o
  þ
 o
 o
  o o
  o þ




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##### 



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 4A. Unresolved Staff Comments
    
    
    31Item 5. Operating and Financial Review and Prospects
    
    
    32Item 6. Directors, Senior Management and Employees
    
    
    53Item 7. Major Shareholders and Related Party Transactions
    
    
    58Item 8. Financial Information
    
    
    59Item 9. The Offer and Listing
    
    
    60Item 10. Additional Information
    
    
    61Item 11. Quantitative and Qualitative Disclosures about Market Risk
    
    
    71Item 12. Description of Securities Other than Equity Securities
    
    
    71PART II
    
    
    71Item 13. Defaults, Dividend Arrearages and Delinquencies
    
    
    71Item 14. Material Modifications to the Rights of Security Holders and Use of
Proceeds
    
    
    71Item 15. Controls and Procedures
    
    
    72Item 16A.Audit Committee Financial Expert
    
    
    74Item 16B.Code of Ethics
    
    
    75Item 16C.Principal Accountant Fees and Services
    
    
    75Item 16D.Exemptions from the Listing Standards for Audit Committees
    
    
    75Item 16E.Purchases of Equity Securities by the Issuer and Affiliated Purchasers
    
    
    76PART III
    
    
    76Item 17. Financial Statements
    
    
    76Item 18. Financial Statements
    
    
    76Item 19. Exhibits
    
    
    77EX-1.1 Articles of Incorporation, as amended ( English Translation )EX-1.3 Regulations of the Board of Directors, as amended ( English Tranlsation )EX-2.2 Bylaws of the IIJ Group Employee Shareholders' Association ( English Translation )EX-2.4 Bylaws of the IIJ Group Director Stock Purchase Plan ( English Translation )EX-4.6 Agreement on Limited Liability, dated June 26, 2007 and June 27, 2008, between Internet Initiative Japan Inc. and outside directors and outside comapny auditorsEX-11.1 Internet Initiative Japan Code of ConductEX-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




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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




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##### Table of Contents



As used in this annual report, references to IIJ, the Company, 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




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##### Table of Contents



As of and for the fiscal year ended March 31,2004
    
    
    2005
    
    
    2006
    
    
    2007
    
    
    2008
    
    
    2008(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 value-added
services(2)::Connectivity services
(corporate use)
    
    ¥
    13,561
    
    
    ¥
    11,994
    
    
    ¥
    11,179
    
    
    ¥
    11,239
    
    
    ¥
    12,148
    
    
    $
    121,668Connectivity services
(home use)
    
    
    2,389
    
    
    
    2,316
    
    
    
    2,120
    
    
    
    1,969
    
    
    
    5,430
    
    
    
    54,381Value-added services
    
    
    4,296
    
    
    
    5,005
    
    
    
    6,250
    
    
    
    7,416
    
    
    
    9,546
    
    
    
    95,606Other
    
    
    2,118
    
    
    
    3,169
    
    
    
    3,674
    
    
    
    3,729
    
    
    
    4,178
    
    
    
    41,842Total
    
    
    22,364
    
    
    
    22,484
    
    
    
    23,223
    
    
    
    24,353
    
    
    
    31,303
    
    
    
    313,497Systems integration
    
    
    11,848
    
    
    
    15,854
    
    
    
    23,505
    
    
    
    30,527
    
    
    
    34,018
    
    
    
    340,692Equipment sales
    
    
    4,567
    
    
    
    3,365
    
    
    
    3,085
    
    
    
    2,175
    
    
    
    1,515
    
    
    
    15,168Total revenues
    
    
    38,779
    
    
    
    41,703
    
    
    
    49,813
    
    
    
    57,055
    
    
    
    66,835
    
    
    
    669,357COST AND EXPENSES:Cost of connectivity and
value-added services
    
    
    20,047
    
    
    
    19,484
    
    
    
    20,078
    
    
    
    20,545
    
    
    
    26,040
    
    
    
    260,788Cost of systems integration
    
    
    9,852
    
    
    
    12,200
    
    
    
    18,120
    
    
    
    23,529
    
    
    
    25,543
    
    
    
    255,815Cost of equipment sales
    
    
    4,346
    
    
    
    3,111
    
    
    
    2,818
    
    
    
    1,894
    
    
    
    1,300
    
    
    
    13,018Total cost
    
    
    34,245
    
    
    
    34,795
    
    
    
    41,016
    
    
    
    45,968
    
    
    
    52,883
    
    
    
    529,621Sales and marketing
    
    
    3,528
    
    
    
    2,795
    
    
    
    3,080
    
    
    
    3,439
    
    
    
    4,329
    
    
    
    43,351General and administrative
    
    
    2,098
    
    
    
    2,666
    
    
    
    3,147
    
    
    
    3,971
    
    
    
    4,624
    
    
    
    46,312Research and development
    
    
    358
    
    
    
    199
    
    
    
    159
    
    
    
    177
    
    
    
    240
    
    
    
    2,408Total cost and expenses
    
    
    40,229
    
    
    
    40,455
    
    
    
    47,402
    
    
    
    53,555
    
    
    
    62,076
    
    
    
    621,692OPERATING INCOME (LOSS)
    
    
    (1,450
    )
    
    
    1,248
    
    
    
    2,411
    
    
    
    3,500
    
    
    
    4,759
    
    
    
    47,665OTHER INCOME (EXPENSES):Interest income
    
    
    38
    
    
    
    13
    
    
    
    13
    
    
    
    23
    
    
    
    63
    
    
    
    631Interest expense
    
    
    (702
    )
    
    
    (686
    )
    
    
    (437
    )
    
    
    (397
    )
    
    
    (438
    )
    
    
    (4,388
    )Other  net
    
    
    1,646
    
    
    
    2,573
    
    
    
    3,392
    
    
    
    1,923
    
    
    
    (23
    )
    
    
    (226
    )Other income
(expenses)  net
    
    
    982
    
    
    
    1,900
    
    
    
    2,968
    
    
    
    1,549
    
    
    
    (398
    )
    
    
    (3,983
    )INCOME (LOSS) FROM OPERATIONS BEFORE
INCOME TAX EXPENSE (BENEFIT),
MINORITY INTERESTS AND EQUITY IN NET
LOSS OF EQUITY METHOD INVESTEES
    
    
    (468
    )
    
    
    3,148
    
    
    
    5,379
    
    
    
    5,049
    
    
    
    4,362
    
    
    
    43,682INCOME TAX EXPENSE (BENEFIT)
    
    
    33
    
    
    
    100
    
    
    
    257
    
    
    
    (804
    )
    
    
    (861
    )
    
    
    (8,627
    )MINORITY INTERESTS IN (EARNINGS)
LOSSES OF SUBSIDIARIES
    
    
    236
    
    
    
    (109
    )
    
    
    (354
    )
    
    
    (233
    )
    
    
    97
    
    
    
    969EQUITY IN NET LOSS OF EQUITY METHOD
INVESTEES:Equity method net loss
    
    
    (286
    )
    
    
    (33
    )
    
    
    (14
    )
    
    
    (210
    )
    
    
    (143
    )
    
    
    (1,434
    )Impairment loss on advance
for
Crosswave(3)
    
    
    (1,720
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Total equity in net
loss of equity method
investees
    
    ¥
    (2,006
    )
    
    ¥
    (33
    )
    
    ¥
    (14
    )
    
    ¥
    (210
    )
    
    ¥
    (143
    )
    
    $
    (1,434
    )NET INCOME (LOSS)
    
    ¥
    (2,271
    )
    
    ¥
    2,906
    
    
    ¥
    4,754
    
    
    ¥
    5,410
    
    
    ¥
    5,177
    
    
    $
    51,844Per Share and ADS Data(4):Basic net income (loss) per share
    
    ¥
    (14,321
    )
    
    ¥
    15,172
    
    
    ¥
    24,301
    
    
    ¥
    26,519
    
    
    ¥
    25,100
    
    
    
    251.38
 3




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##### Table of Contents



As of and for the fiscal year ended March 31,2004
    
    
    2005
    
    
    2006
    
    
    2007
    
    
    2008
    
    
    2008(millions of yen, except per share and ADS data)
    
    
    
    
    
    
    (thousands ofU.S. dollars,except pershare and ADSdata(1))Diluted net income (loss) per share
    
    
    (14,321
    )
    
    
    15,172
    
    
    
    24,258
    
    
    
    26,487
    
    
    
    25,072
    
    
    
    251.10Basic net income (loss) per ADS
equivalent
    
    
    (35.80
    )
    
    
    37.93
    
    
    
    60.75
    
    
    
    66.30
    
    
    
    62.75
    
    
    
    0.63Diluted net income (loss) per ADS
equivalent
    
    
    (35.80
    )
    
    
    37.93
    
    
    
    60.65
    
    
    
    66.22
    
    
    
    62.68
    
    
    
    0.63Cash dividends declared per share
    
    
    
    
    
    
    
    
    
    
    
    
    
    ¥
    1,500
    
    
    ¥
    1,750
    
    
    $
    17.53Basic weighted average number of
shares
    
    
    158,554
    
    
    
    191,559
    
    
    
    195,613
    
    
    
    203,992
    
    
    
    206,240Diluted weighted average number of
shares
    
    
    158,554
    
    
    
    191,559
    
    
    
    195,955
    
    
    
    204,244
    
    
    
    206,465Basic weighted average number of ADS
equivalents (thousands)
    
    
    63,422
    
    
    
    76,624
    
    
    
    78,245
    
    
    
    81,597
    
    
    
    82,496Diluted weighted average number of
ADS equivalents (thousands)
    
    
    63,422
    
    
    
    76,624
    
    
    
    78,382
    
    
    
    81,698
    
    
    
    82,586Balance Sheet Data:Cash and cash equivalents
    
    ¥
    12,284
    
    
    ¥
    5,286
    
    
    ¥
    13,727
    
    
    ¥
    13,555
    
    
    ¥
    11,471
    
    
    $
    114,882Total assets
    
    
    42,737
    
    
    
    37,116
    
    
    
    50,705
    
    
    
    47,693
    
    
    
    55,703
    
    
    
    557,862Short-term borrowings
    
    
    6,564
    
    
    
    4,725
    
    
    
    4,555
    
    
    
    6,050
    
    
    
    9,150
    
    
    
    91,637Current portion of long-term
borrowings, including capital lease
obligations
    
    
    3,936
    
    
    
    5,511
    
    
    
    4,994
    
    
    
    3,243
    
    
    
    3,456
    
    
    
    34,611Long-term borrowings, including
capital lease obligations
    
    
    5,188
    
    
    
    5,869
    
    
    
    5,271
    
    
    
    4,318
    
    
    
    4,738
    
    
    
    47,455Convertible notes (5)
    
    
    11,832
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Common stock
    
    
    13,765
    
    
    
    13,765
    
    
    
    16,834
    
    
    
    16,834
    
    
    
    16,834
    
    
    
    168,591Total shareholders equity (capital
deficiency)
    
    
    6,214
    
    
    
    11,615
    
    
    
    20,222
    
    
    
    20,112
    
    
    
    24,981
    
    
    
    250,182Operating Data:Capital expenditures, including
capitalized leases (6)
    
    ¥
    3,523
    
    
    ¥
    5,011
    
    
    ¥
    4,762
    
    
    ¥
    3,953
    
    
    ¥
    6,078
    
    
    $
    60,872Operating margin ratio (7)
    
    
    (3.7
    )%
    
    
    3.0
    %
    
    
    4.8
    %
    
    
    6.1
    %
    
    
    7.1
    %Net cash provided by (used in):Operating activities
    
    ¥
    1,923
    
    
    ¥
    5,238
    
    
    ¥
    6,559
    
    
    ¥
    7,402
    
    
    ¥
    4,538
    
    
    $
    45,446Investing activities
    
    
    (852
    )
    
    
    1,974
    
    
    
    1,805
    
    
    
    (3,014
    )
    
    
    (5,444
    )
    
    
    (54,519
    )Financing activities
    
    
    7,669
    
    
    
    (14,213
    )
    
    
    39
    
    
    
    (4,560
    )
    
    
    (1,152
    )
    
    
    (11,539
    )
 
 (1)
    
    The U.S. dollar amounts represent translation of yen amounts at the rate of ¥99.85 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, 2008.(2)
    
    The classifications for the revenues from connectivity services were changed in the fiscal
year ended March 31, 2008. Dedicated access and Dial-up access in the former presentation
were reclassified to Connectivity services (corporate use) and Connectivity services (home
use) reflecting the acquisition of hi-ho, Inc. (hi-ho), a company mainly engaged in the
Internet business for home users. Along with this, reclassifications have been made to prior
periods to conform to the current year presentation. For further information, please refer to
Note 1 to our consolidated financial statements.(3)
    
    In August 2003, our former equity method investee, Crosswave Communications Inc.
(Crosswave), filed a voluntary petition for the commencement of corporate reorganization
proceedings in Japan.(4)
    
    We 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, 2004.(5)
    
    In April 2000, we issued 1.75 percent unsecured convertible yen notes due March 2005 in the
aggregate principal amount of ¥15,000 million. In November 2003 and June 2004, we repurchased
and cancelled a portion of the aforementioned notes, in the aggregate principal amount of
¥3,168 million and ¥744 million, respectively. We redeemed the remainder of the unsecured
convertible notes in March 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 (loss) as a percentage of total revenues. 4




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Reconciliations of the Disclosed Non-GAAP Financial Measures to the Most Directly Comparable
GAAP Financial Measures
 Capital expenditures
   For the fiscal year ended March 31,2004
    
    
    2005
    
    
    2006
    
    
    2007
    
    
    2008(millions of yen)Capital expenditures:Acquisition of assets by entering into capital leases
    
    ¥
    1,866
    
    
    ¥
    4,434
    
    
    ¥
    3,843
    
    
    ¥
    2,665
    
    
    ¥
    4,222Purchases of property and equipment
    
    
    1,657
    
    
    
    577
    
    
    
    919
    
    
    
    1,288
    
    
    
    1,856Total capital expenditures
    
    ¥
    3,523
    
    
    ¥
    5,011
    
    
    ¥
    4,762
    
    
    ¥
    3,953
    
    
    ¥
    6,078
 Exchange Rates
   High
    
    Low
    
    Average(1)
    
    Period-endFiscal year ended March 31,2004
    
    ¥
    120.55
    
    
    ¥
    104.18
    
    
    ¥
    112.75
    
    
    ¥
    104.182005
    
    
    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
    
    
    
    99.85Calendar year 2008January
    
    ¥
    109.70
    
    
    ¥
    105.42
    
    
    ¥
    107.82
    
    
    ¥
    106.74February
    
    
    108.15
    
    
    
    104.19
    
    
    
    107.03
    
    
    
    104.19March
    
    
    103.99
    
    
    
    96.88
    
    
    
    100.76
    
    
    
    99.85April
    
    
    104.56
    
    
    
    100.87
    
    
    
    102.68
    
    
    
    104.53May
    
    
    105.52
    
    
    
    103.01
    
    
    
    104.36
    
    
    
    105.46June (through June 25, 2008)
    
    
    108.29
    
    
    
    104.41
    
    
    
    106.97
    
    
    
    108.29
 
 (1)
    
    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




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##### 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 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 Internet 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 in our growing value-added services and
systems integration, if we fail to successfully differentiate our services from those
of our competitors, or experience a significant decrease in systems integration
revenues from period to period due to the cancellation of one or more large projects or
changes in the number of projects resulting from a seasonal fluctuation in the systems
integration business in Japan,
    
    an increase in backbone costs due to increased volume of Internet traffic and demand
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 and
other similar investments which we may be forced to make in the future in order to
remain competitive, or increased expenses relating to the leasing of additional
equipment,
    
    an increase in personnel and outsourcing costs, especially in our systems
integration, if personnel and outsourcing costs increase, or we fail to manage
outsourcing projects 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 or impairment losses on stocks of
companies,
    
    an increase of equity in net loss of equity method investees affected by an increase
in net losses of our equity method investees,
    
    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 factors, 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




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##### 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




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If our systems integration revenues fluctuate or if we fail to execute our systems integration
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 non-amortized
intangible assets that are recorded related to mergers and acquisitions.
  8




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##### 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.
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##### 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, our 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




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##### 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 our common stock or
securities convertible into our common stock, which may cause shareholders to incur substantial
dilution.
  11




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##### Table of Contents



Item 4. Information on the Company.
 A. History and Development of the Company.
      B. Business Overview.
    For the fiscal year ended March 31,2006
    
    
    2007
    
    
    2008Connectivity services
    
    
    26.7%
    
    
    
    23.1%
    
    
    
    26.3%Value-added services
    
    
    12.5%
    
    
    
    13.0%
    
    
    
    14.3%Systems integration
    
    
    47.2%
    
    
    
    53.5%
    
    
    
    50.9%
  12




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##### Table of Contents



Total network solutions
   
    
    our Internet connectivity services,
    
    our line-up of value-added services such as security, network and server-related
outsourcing,
    
    our Internet data center services,
    
    our systems integration, including consulting, project planning, systems design,
construction of network systems and systems operation and management, and
    
    other network and application services that our group companies provide.
  Internet Connectivity Services
   As of March 31,2004
    
    
    2005
    
    
    2006
    
    
    2007
    
    
    2008Connectivity services (corporate use) (1):IP Service (-99 Mbps)
    
    
    656
    
    
    
    749
    
    
    
    739
    
    
    
    751
    
    
    
    855IP Service (100 Mbps  999 Mbps)
    
    
    66
    
    
    
    90
    
    
    
    117
    
    
    
    161
    
    
    
    201IP Service (1 Gbps )
    
    
    16
    
    
    
    24
    
    
    
    40
    
    
    
    63
    
    
    
    70IIJ Data Center Connectivity Service
    
    
    196
    
    
    
    231
    
    
    
    247
    
    
    
    282
    
    
    
    288IIJ FiberAccess/F and IIJ DSL/F
(Broadband Services)
    
    
    5,788
    
    
    
    9,873
    
    
    
    13,297
    
    
    
    16,418
    
    
    
    23,539Others
    
    
    2,905
    
    
    
    2,423
    
    
    
    1,760
    
    
    
    1,618
    
    
    
    3,002Total connectivity
service (corporate
use) contracts
    
    
    9,627
    
    
    
    13,390
    
    
    
    16,200
    
    
    
    19,293
    
    
    
    27,955Connectivity services (home use) (1):Under IIJ Brand
    
    
    72,735
    
    
    
    65,921
    
    
    
    60,525
    
    
    
    55,907
    
    
    
    51,051hi-ho
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    189,700OEM
    
    
    620,731
    
    
    
    625,908
    
    
    
    568,307
    
    
    
    476,483
    
    
    
    232,515Total connectivity
service (home use)
contracts
    
    
    693,466
    
    
    
    691,829
    
    
    
    628,832
    
    
    
    532,390
    
    
    
    473,266
 
 (1)
    
    The classifications for the number of our Internet connectivity service subscribers were
changed in the fiscal year ended March 31, 2008. Dedicated access service contracts and
Dial-up access service contracts in the former presentation were reclassified to
Connectivity services (corporate use) and Connectivity services (home use) reflecting the
acquisition of hi-ho.
  13




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##### Table of Contents



PricingService Type
    
    Summary Description
    
    (excluding consumption tax)For corporate useIP Service
    
    Full-scale
dedicated line
service with
high-speed access
for businesses and
other network
operators with
demanding bandwidth
requirements.
    
    Initial setup and monthly
fees vary according to
carrier, line speed, line
type and distance
involved.IIJ Data Center Connectivity Service
    
    Full-scale
dedicated line
service for Data
Center connectivity
with bandwidth from
64kbps up to
10Gbps.
    
    Initial setup and monthly
fee vary depending on the
carrier, line speed and
line type.IIJ FiberAccess/F
    
    Service for
dedicated line
Internet-access
using optical lines
at speeds of up to
10 Mbps, 100 Mbps
or 1Gbps. Optical
fiber access lines
can be selected
from FLETS
provided by NTT
East and West,
BBIQ Select
provided by Kyushu
Telecommunication
Network Co.,
Inc(QTnet) and
Access Commufa
provided by Chubu
Telecommunications
Co. Inc, (CTC).
    
    Initial setup fee of
¥50,000. Monthly fees
range from ¥14,000 to
¥200,000, depending on the
speed of connection and
the number of IP addresses
allocated. Monthly fees do
not include local optical
line charges.IIJ DSL/F and IIJ DSL/A
    
    Service for
dedicated line
Internet-access
using ADSL lines at
speeds of up to 47
Mbps. ADSL access
is limited to
FLETS lines
provided by NTT
East and West for
IIJ DSL/F and ADSL
services provided
by ACCA Networks,
Co., Ltd. (ACCA
Networks) for IIJ
DSL/A.
    
    Initial setup fee of
¥30,000 or ¥75,000.
Monthly fees range from
¥9,800 to ¥52,000,
depending on the number of
allocated IP addresses.
Monthly charges for IIJ
DSL/F do not include local
ADSL charges.IIJ ISDN/F
    
    Service for
dedicated line
Internet-access
using ISDN lines at
speeds of up to 64
kbps, mainly used
for customer sites
where ADSL lines
are not available.
ISDN access is
limited to FLETS
lines provided by
NTT East and West.
    
    Initial setup fee of
¥5,000. Monthly fees range
from ¥4,800 to ¥6,800,
depending on the number of
allocated IP addresses.
Monthly charges do not
include local ISDN
charges.IIJ Line Management/F
    
    Service for us to
prepare optical
fiber or ADSL
access provided by
NTT East and West
for IIJ
FiberAccess/F, IIJ
DSL/F and IIJ
ISDN/F on behalf of
customers. We
provide customer
support functions
for the access
lines.
    
    Initial setup fee range
from ¥5,000 to ¥37,900.
Monthly fees range from
¥2,300 to ¥44,400.
 14




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##### Table of Contents



PricingService Type
    
    Summary Description
    
    (excluding consumption tax)IIJ Dial-up Advanced (Advanced),
Enterprise Dial-up IP Service
(Edip) and IIJ Dial-up Standard
(Standard)
    
    Dial-up services
for corporate
users. Advanced
offers bundled
low-cost dial-up
accounts. Edip
offers multiple
dial-up accounts at
a fixed monthly
fee. Standard
allows
Internet-access at
the same time using
the same ID.
Optical, ADSL and
other lines are
available for local
access.
    
    Initial setup fee range
from ¥5,000 to ¥20,000.
Monthly basic fee for
Advanced is ¥10,000 for
the first 50 accounts
including the first two
hours access per account,
plus ¥5 per minute after
two hours. For Edip, basic
fees range from ¥3,000 to
¥4,900 per account
depending on the number of
accounts. For Standard,
basic fee is ¥2,000 plus
access charges of ¥10 per
minute.IIJ Mobile
    
    Broadband mobile
data communications
service for
corporate users
provided under a
scheme of MVNO.
Mobile network from
NTT DoCoMo, Inc.
(NTT Docomo) and
Emobile Ltd.
(Emobile) are
available.
    
    Fees vary depending on the
type of contract. The most
inexpensive one,
Packet-share Plans
monthly fee ranges from
¥1,800 in addition to the
rental fee of ¥1,500 for
the terminal.For home useIIJ4U and IIJmio (IIJ Brands)
    
    Service for home
users. IIJ4U
provides
Internet-access, 5
megabytes disk
space for Web pages
and e-mail account
options for
multiple users as a
package. IIJmio
offers
Internet-access,
e-mail and other
server-related
services as
separate services.
Various access
options such as
ISDN, ADSL, optical
fiber and mobile
access are
available.
    
    No initial setup fee for
both IIJ4U and IIJmio.
Monthly service fee for
IIJ4U is ¥800 for the
first eight hours and a
charge of ¥5 per each
additional minute, with a
ceiling of ¥4,100. Monthly
service fee for IIJmio is
¥300 or ¥12,000. Monthly
charges do not include
ADSL, optical fiber or
mobile access charges,
which are paid directly by
the customer to NTT East
and West, CTC or mobile
telecommunications
companies.hi-ho
    
    Service for home
users offering
Internet
connectivity,
security, e-mail
and other
server-related
services provided
by hi-ho. Internet
connectivity
services are
provided over ADSL,
optical fiber,
mobile or dial-up
access.
    
    Initial setup and monthly
fees vary according to
type of access and
contract.
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##### Table of Contents



Connectivity Services for Corporate Use
  IP Service.
       
    
    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 Data Center Connectivity Service.
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##### Table of Contents



IIJ FiberAccess/F.
 IIJ DSL/F and IIJ DSL/A.
 IIJ ISDN/F.
 IIJ Line Management/F.
 Dial-up Access Services.
 IIJ Mobile.
 Connectivity Services for Home Use
 mio mio mio mio mio mio mio mio
  Value-Added Services
    
    
    Security-related outsourcing services.As of June 25, 2008, we offered five main
security-related outsourcing services (described below) that protect customers
internal networks from unauthorized access and secure remote connections to internal
networks. We were the first ISP in Japan to provide firewall services, which we
introduced in 1994.
 17




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##### Table of Contents



IIJ DDoS Solution Service.
 IIJ Security Scan Service.
 IIJ Managed IPS Service.
 IIJ Managed Firewall Service.
 IIJ Secure Remote Access.
 
    
    Network-related outsourcing services.As of June 25, 2008, we offered six main
network-related outsourcing services (described below), including provision, monitoring
and maintenance of network equipment and VPN to connect customers branch and remote
offices.
 IIJ Internet-LAN Service.
 IIJ SMFsx Service.
 Ultra Send-back Service.
 IIJ Managed VPN PRO Service.
 SEIL Rental Service.
 Managed Router Service.
 
    
    Server-related outsourcing services.As of June 25, 2008, we offered fourteen main
server-related outsourcing services (described below), including provision of e-mail
and web services and operation and management of e-mail systems.
 IIJ Secure MX Service.
 18




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##### Table of Contents



IIJ Post Office Service.
 IIJ Mail Box Service.
 E-mail distribution services.
 IIJ Web High-grade service.
 IIJ Secure Web Platform service.
 IIJ Web Standard Service.
 IIJ Document Exchange Service.
 IIJ Download Site Service.
 IIJ URL Filtering Service.
 IIJ SSL Certificate Management Service.
 IIJ DNS Services.
 Streaming services.
 IIJmio Safety Mail Service.
 
    
    Internet data center services.Our Internet data center services include three
primary services which are typically bundled together for our customers: 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
 19




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##### Table of Contents



24-hours-a-day monitoring and have specialized maintenance personnel and facilities. We
offer management and monitoring services tailored to our customers requirements.
    
    Customer support and help desk solutions.We provide comprehensive customer support
and help desk solutions that include network monitoring and trouble-shooting services.
Most of our customer support services are provided as an integral part of other
services we sell.
    
    IP Phone.We began IP Phone service for individual users of IIJ4U and IIJmioin May
2003, and for corporate users who are using IIJs Internet connectivity services
through NTT FLETS network in December 2003. The telephone service is provided via NTT
FLETS network and customers can make telephone calls with other users connected to NTT
FLETS network or legacy telephones by interconnection with the Publicly Switched
Telephone Network, the legacy telephone network.
 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 with an
encryption feature and our proprietary SEIL Series routers and SMF,
    
    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.
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##### Table of Contents



Equipment Sales
  SEIL Series.
 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).
 Backbone
 Leased lines
   Backbone Cost
 For the fiscal year ended March 31,2004
    
    
    2005
    
    
    2006
    
    
    2007
    
    
    2008Backbone cost (thousand yen)
    
    ¥
    4,719,638
    
    
    ¥
    3,550,885
    
    
    ¥
    3,516,322
    
    
    ¥
    3,515,934
    
    
    ¥
    3,469,717
 Network upgrades
  Network equipment
  21




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##### Table of Contents



Points of Presence .
   Internet Data Centers.
    Network operations center and technical and customer support.
  22




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##### 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
    
    
    60.2
    %GDX Japan Inc.
    
    Japan
    
    
    51.0
    %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.
   23




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##### 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.
   IIJ America Inc.
  24




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##### Table of Contents



Taihei Computer Co., Ltd.
  Internet Multifeed Co.
  Internet Revolution Inc.
  i-Heart Inc.
  Capital Expenditures
  For the fiscal year ended March 31,2006

    
    2007

    
    2008(millions of yen)Capital expenditures,
including capitalized
leases(1)
    
    ¥
    4,762
    
    
    ¥
    3,953
    
    
    ¥
    6,078
 
 (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.   Seasonality
  25




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##### Table of Contents



Sales and Marketing
    
    
    Five divisions focus on our 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 our 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.
 26




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##### Table of Contents



Other Departments.
 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, and
    
    research of the Internet traffic monitoring and management.
 Proprietary Rights
  Licenses
   Trademarks
  Patents
  27




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##### Table of Contents



Legal Proceedings
   Regulation of the Telecommunications Industry in Japan
  28




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##### Table of Contents



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)
 
 (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. 29




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##### 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.
    
    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
 
 30




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##### Table of Contents



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
  31




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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
           32




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33




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##### Table of Contents



Results of Operations
  Fiscal year ended March 31,2006
    
    
    2007
    
    
    2008(millions of yen except for percentage data)
    
    
    
    
    
    
    (thousandsof U.S.dollars)REVENUES:Connectivity and value-added services (1):Connectivity services (corporate use)
    
    ¥
    11,179
    
    
    
    22.4
    %
    
    ¥
    11,239
    
    
    
    19.7
    %
    
    ¥
    12,148
    
    
    
    18.2
    %
    
    $
    121,668Connectivity services (home use)
    
    
    2,120
    
    
    
    4.3
    
    
    
    1,969
    
    
    
    3.5
    
    
    
    5,430
    
    
    
    8.1
    
    
    
    54,381Value-added services
    
    
    6,250
    
    
    
    12.5
    
    
    
    7,416
    
    
    
    13.0
    
    
    
    9,546
    
    
    
    14.3
    
    
    
    95,606Other
    
    
    3,674
    
    
    
    7.4
    
    
    
    3,729
    
    
    
    6.5
    
    
    
    4,178
    
    
    
    6.2
    
    
    
    41,842Total
    
    
    23,223
    
    
    
    46.6
    
    
    
    24,353
    
    
    
    42.7
    
    
    
    31,302
    
    
    
    46.8
    
    
    
    313,497Systems integration
    
    
    23,505
    
    
    
    47.2
    
    
    
    30,527
    
    
    
    53.5
    
    
    
    34,018
    
    
    
    50.9
    
    
    
    340,692Equipment sales
    
    
    3,085
    
    
    
    6.2
    
    
    
    2,175
    
    
    
    3.8
    
    
    
    1,515
    
    
    
    2.3
    
    
    
    15,168Total revenues
    
    
    49,813
    
    
    
    100.0
    
    
    
    57,055
    
    
    
    100.0
    
    
    
    66,835
    
    
    
    100.0
    
    
    
    669,357COST AND EXPENSES:Cost of connectivity and value-added services:Backbone cost
    
    
    3,516
    
    
    
    7.0
    
    
    
    3,516
    
    
    
    6.2
    
    
    
    3,470
    
    
    
    5.2
    
    
    
    34,749Local access line cost(2)
    
    
    4,558
    
    
    
    9.2
    
    
    
    4,616
    
    
    
    8.1
    
    
    
    7,102
    
    
    
    10.6
    
    
    
    71,126Other connectivity cost
    
    
    815
    
    
    
    1.6
    
    
    
    331
    
    
    
    0.6
    
    
    
    370
    
    
    
    0.6
    
    
    
    3,710Depreciation and amortization
    
    
    2,721
    
    
    
    5.5
    
    
    
    2,639
    
    
    
    4.6
    
    
    
    2,928
    
    
    
    4.4
    
    
    
    29,319Other
    
    
    8,468
    
    
    
    17.0
    
    
    
    9,443
    
    
    
    16.5
    
    
    
    12,170
    
    
    
    18.2
    
    
    
    121,884Total cost of connectivity and value-added
services
    
    
    20,078
    
    
    
    40.3
    
    
    
    20,545
    
    
    
    36.0
    
    
    
    26,040
    
    
    
    39.0
    
    
    
    260,788Cost of systems integration:Cost of equipment sales related to systems
integration
    
    
    3,591
    
    
    
    7.2
    
    
    
    4,206
    
    
    
    7.3
    
    
    
    4,409
    
    
    
    6.6
    
    
    
    44,152Other
    
    
    14,529
    
    
    
    29.2
    
    
    
    19,323
    
    
    
    33.9
    
    
    
    21,134
    
    
    
    31.6
    
    
    
    211,663Total cost of systems integration
    
    
    18,120
    
    
    
    36.4
    
    
    
    23,529
    
    
    
    41.2
    
    
    
    25,543
    
    
    
    38.2
    
    
    
    255,815Cost of equipment sales
    
    
    2,818
    
    
    
    5.7
    
    
    
    1,894
    
    
    
    3.4
    
    
    
    1,300
    
    
    
    1.9
    
    
    
    13,018Total cost
    
    
    41,016
    
    
    
    82.4
    
    
    
    45,968
    
    
    
    80.6
    
    
    
    52,883
    
    
    
    79.1
    
    
    
    529,621Sales and marketing
    
    
    3,080
    
    
    
    6.2
    
    
    
    3,439
    
    
    
    6.0
    
    
    
    4,329
    
    
    
    6.5
    
    
    
    43,351General and administrative
    
    
    3,147
    
    
    
    6.3
    
    
    
    3,971
    
    
    
    7.0
    
    
    
    4,624
    
    
    
    6.9
    
    
    
    46,312Research and development
    
    
    159
    
    
    
    0.3
    
    
    
    177
    
    
    
    0.3
    
    
    
    240
    
    
    
    0.4
    
    
    
    2,408Total cost and expenses
    
    
    47,402
    
    
    
    95.2
    
    
    
    53,555
    
    
    
    93.9
    
    
    
    62,076
    
    
    
    92.9
    
    
    
    621,692OPERATING INCOME
    
    
    2,411
    
    
    
    4.8
    
    
    
    3,500
    
    
    
    6.1
    
    
    
    4,759
    
    
    
    7.1
    
    
    
    47,665OTHER INCOME (EXPENSES):Interest income
    
    
    13
    
    
    
    0.0
    
    
    
    23
    
    
    
    0.0
    
    
    
    63
    
    
    
    0.1
    
    
    
    631Interest expense
    
    
    (437
    )
    
    
    (0.9
    )
    
    
    (397
    )
    
    
    (0.7
    )
    
    
    (438
    )
    
    
    (0.6
    )
    
    
    (4,388
    )Foreign exchange gains (losses)
    
    
    3
    
    
    
    0.0
    
    
    
    (0
    )
    
    
    (0.0
    )
    
    
    2
    
    
    
    0.0
    
    
    
    14Net gains on sales and exchange of other
investments
    
    
    3,227
    
    
    
    6.5
    
    
    
    3,230
    
    
    
    5.7
    
    
    
    218
    
    
    
    0.3
    
    
    
    2,183Losses on write-down of other investments
    
    
    (29
    )
    
    
    (0.1
    )
    
    
    (1,363
    )
    
    
    (2.4
    )
    
    
    (289
    )
    
    
    (0.4
    )
    
    
    (2,891
    )Other  net
    
    
    191
    
    
    
    0.4
    
    
    
    56
    
    
    
    0.1
    
    
    
    47
    
    
    
    0.0
    
    
    
    468Other income (expenses)  net
    
    
    2,968
    
    
    
    6.0
    
    
    
    1,549
    
    
    
    2.7
    
    
    
    (397
    )
    
    
    (0.6
    )
    
    
    (3,983
    )INCOME FROM OPERATIONS BEFORE INCOME TAX EXPENSE
(BENEFIT), MINORITY INTERESTS AND EQUITY IN NET LOSS OF
EQUITY METHOD INVESTEES
    
    ¥
    5,379
    
    
    
    10.8
    %
    
    ¥
    5,049
    
    
    
    8.8
    %
    
    ¥
    4,362
    
    
    
    6.5
    %
    
    $
    43,682INCOME TAX EXPENSE (BENEFIT)
    
    ¥
    257
    
    
    
    0.5
    %
    
    ¥
    (804
    )
    
    
    (1.4
    )%
    
    ¥
    (861
    )
    
    
    (1.3
    )%
    
    $
    (8,627
    )MINORITY INTERESTS IN (EARNINGS) LOSSES OF SUBSIDIARIES
    
    
    (354
    )
    
    
    (0.7
    )
    
    
    (233
    )
    
    
    (0.4
    )
    
    
    97
    
    
    
    0.1
    
    
    
    969EQUITY IN NET LOSS OF EQUITY METHOD INVESTEES
    
    
    (14
    )
    
    
    (0.0
    )
    
    
    (210
    )
    
    
    (0.3
    )
    
    
    (143
    )
    
    
    (0.2
    )
    
    
    (1,434
    )NET INCOME
    
    ¥
    4,754
    
    
    
    9.6
    %
    
    ¥
    5,410
    
    
    
    9.5
    %
    
    ¥
    5,177
    
    
    
    7.7
    %
    
    $
    51,844
 
 (1)
    
    The classifications for the revenues from connectivity services were changed in the fiscal
year ended March 31, 2008. Dedicated access and Dial-up access in the former presentation
were reclassified to Connectivity services (corporate use) and Connectivity services (home
use) reflecting the acquisition of hi-ho, a company mainly engaged in the Internet business
for home
users. In addition, reclassifications have been made to prior periods to conform to the current
year presentation. For further information, please refer to Note 1 to our consolidated financial
statements.(2)
    
    Telecommunications circuit cost of ¥2,104 million for the fiscal year ended March 31, 2008
mainly related to hi-ho are included in local access line cost. 34




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##### Table of Contents



Year Ended March 31, 2008 Compared to the Year Ended March 31, 2007
 Total revenues
  Connectivity and value-added 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.
    
    Value-added services.Our value-added services revenues increased by 28.7% to ¥9.5
billion for the fiscal year ended March 31, 2008 from ¥7.4 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 outsourcing services for anti-spam
protection, data center services and network related solutions. The steady increase in
value-added services revenues is affected by an increase in demand for outsourcing
services by corporate customers.
    
    Other.Other revenues, which included rental fees for network equipment, customer
support service and sale of Wide-area Ethernet services, amounted to ¥4.2 billion for
the fiscal year ended March 31, 2008, a 12.0% increase from the previous fiscal year.
 Systems integration revenues.
 Equipment sales.
 Total cost of revenues
  35




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##### Table of Contents



Cost of connectivity and value-added services revenues
 Cost of systems integration revenues.
 Cost of equipment sales.
 Total costs and expenses
  Sales and marketing.
 General and administrative.
 Research and development.
 Operating income
  Other income (expenses) net
  Interest income.
 Interest expense.
 36




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##### Table of Contents



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 expense (benefit), minority interests and equity in
net loss of equity method investees
  Income tax expense (benefit)
  Minority interests in losses (earnings) of subsidiaries
  Equity in net loss of equity method investees
  Net income
  37




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##### Table of Contents



Year Ended March 31, 2007 Compared to the Year Ended March 31, 2006
 Total revenues
  Connectivity and value-added services revenues.
 
    
    Connectivity services for corporate use.Revenues from connectivity services for
corporate use slightly increased by 0.5% to ¥11.2 billion for the fiscal year ended
March 31, 2007 from ¥11.2 billion for the previous fiscal year. The increase was mainly
due to an increase in revenues from broadband services along with the expansion of
broadband utilization in the corporate internal network and an increase in revenues
from IP Services, the services mainly used for corporate headquarters and data centers,
along with customers shift to higher speeds.
    
    Connectivity services for home use.Revenues from connectivity users for home use
decreased by 7.1% to ¥2.0 billion for the fiscal year ended March 31, 2007 from ¥2.1
billion for the previous fiscal year. This decrease was primarily the result of
declining revenues from services for individuals such as IIJ4U Service, as well as the
discontinuance of services of certain large customers to which we provided our services
as OEM.
    
    Value-added services.Our value-added services revenues increased 18.7% to ¥7.4
billion for the fiscal year ended March 31, 2007 from ¥6.2 billion for the previous
fiscal year. This increase was mainly due to a steady increase in revenues from
solutions such as data center services, security and e-mail related outsourcing
services and network related solutions such as SEIL and SEIL Management Framework,
along with projects to connect customers multiple operational sites. The steady
increase is affected by an increase in demand for outsourcing services by corporate
customers.
    
    Other.Other revenues, which included rental fees for network equipment, customer
support service, and sale of Wide-area Ethernet services, amounted to ¥3.7 billion for
the fiscal year ended March 31, 2007, a 1.5% increase from the previous fiscal year.
 Systems integration revenues.
 Equipment sales.
 Total cost of revenues
  Cost of connectivity and value-added services revenues
 Cost of systems integration revenues.
 38




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##### Table of Contents



Cost of equipment sales.
 Total costs and expenses
  Sales and marketing.
 General and administrative.
 Research and development.
 Operating income
  Other income (expenses) net
  Interest income.
 Interest expense.
 Foreign exchange gains (losses).
 Net gain on sales and exchange of other investments.
 Losses on write-down of other investments.
 Other-net.
 Income from operations before income tax expense (benefit), minority interests and equity in
net loss of equity method investees
  39




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##### Table of Contents



Income tax expense (benefit)
  Minority interests in earnings of subsidiaries
  Equity in net loss of equity method investees
  Net income
  40




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##### Table of Contents



Application of Critical Accounting Policies
    Revenue recognition
     
    
    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.
   41




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##### Table of Contents



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
  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,
 42




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##### Table of Contents




    
    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
  
    
    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.
  43




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##### Table of Contents



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
    
    
    (164)/184
    
    
    
    (29)/37
    
    
    
    17/
    (22)50 basis point
increase/decrease
in expected return
on assets
    
    
    
    
    
    
    (6)/6
    
    
    
    /
    (3)
 New Accounting Standards
   44




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##### Table of Contents



B. Liquidity and Capital Resources.
 Liquidity and Capital Requirements
  Capital expenditures.
 For the fiscal year ended March 31,2006
    
    2007
    
    2008(millions of yen)Capital expenditures,
including capitalized
leases(1)
    
    ¥
    4,762
    
    
    ¥
    3,953
    
    
    ¥
    6,078
 
 (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.
   45




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##### 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
    
    ¥
    1,429
    
    
    ¥
    593
    
    
    ¥
    807
    
    
    ¥
    29
    
    
    ¥
    Other operating leases
    
    
    3,287
    
    
    
    1,832
    
    
    
    1,450
    
    
    
    5
    
    
    
    Capital leases
    
    
    8,613
    
    
    
    3,700
    
    
    
    4,270
    
    
    
    638
    
    
    
    5Total minimum lease
payments(1)
    
    ¥
    13,329
    
    
    ¥
    6,125
    
    
    ¥
    6,527
    
    
    ¥
    672
    
    
    ¥
    5
 
 (1)
    
    See Note 8 to our consolidated financial statements included in this annual report. Payments of principal and interest on outstanding borrowings.
     Investments in current and former group companies.
 Working capital needs.
 Capital Resources
  46




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##### Table of Contents



Short-term and long-term Borrowings.
 Cash flows from operating activities.
 Capital Leases.
 Issuances of Equity Securities.
 Cash Flows
   Fiscal year ended March 31,2006
    
    
    2007
    
    
    2008(millions of yen)Net cash provided by operating activities
    
    ¥
    6,559
    
    
    ¥
    7,402
    
    
    ¥
    4,538Net cash provided by (used in) investing activities
    
    
    1,805
    
    
    
    (3,014
    )
    
    
    (5,444
    )Net cash provided by (used in) financing activities
    
    
    39
    
    
    
    (4,560
    )
    
    
    (1,152
    )Effect of exchange rate changes on cash and cash
equivalents
    
    
    38
    
    
    
    (0
    )
    
    
    (26
    )Net increase (decrease) in cash and cash equivalents
    
    
    8,441
    
    
    
    (172
    )
    
    
    (2,084
    )Cash and cash equivalents at beginning of the year
    
    
    5,286
    
    
    
    13,727
    
    
    
    13,555Cash and cash equivalents at end of the year
    
    ¥
    13,727
    
    
    ¥
    13,555
    
    
    ¥
    11,471
 Year Ended March 31, 2008 as Compared to the Year Ended March 31, 2007
    47




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Year Ended March 31, 2007 as Compared to the Year Ended March 31, 2006
    Contingencies
  C. Research and Development, Patents and Licenses, etc.
  D. Trend Information.
 Factors Affecting Our Future Financial Results
  Revenues
  48




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Connectivity and value-added services revenues
  Connectivity services for corporate use
  
    
    Increased contracted bandwidth.Total contracted bandwidth for connectivity services
for corporate user increased to 392.4 Gbps for the fiscal year ended March 31, 2008
from 323.5 Gbps for the previous fiscal year. The number of IP Service contracts for
the bandwidth over 100Mbps increased to 271 for the fiscal year ended March 31, 2008
from 224 for the fiscal year ended March 31, 2007. This increase is mainly due to an
increase in customers demand for higher bandwidth for their Internet connectivity.
The average monthly revenues per contract for IP Services were approximately ¥0.6
million at the end of March 2008, compared to the revenues per contract of ¥0.6 million
at the end of March 2007. Though we do not expect revenue per contract to grow in the
fiscal year ending March 31, 2009 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 demand for broadband services.Demand for broadband services, IIJ
FiberAccess/F, IIJ DSL/F and IIJ DSL/A are increasing rapidly 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 23,539 as of the end of the fiscal year ended March 31, 2008 from 16,418 as of the
end of the previous fiscal year. We also expect that it will also contribute to the
increase of value-added services and systems integration revenues as usage and
implementation of these connectivity services will increase the demand for value-added
services such as security services and network systems integration.
 Connectivity services for home use
   Value-added services
  49




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##### Table of Contents



Other
  Systems integration revenues, including related equipment sales revenues
   Equipment sales revenues
  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 value-added
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 increase
their Internet usage, particularly the financial, manufacturing and retail segments,
and
    
    corporate budgets for expenditures for information technologies, including
Internet-related items.
 50




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##### Table of Contents




    
    Range of service offerings.To increase our revenues from business users, we have
increased the access and connectivity options to include fiber optic lines and ADSL
lines. We have also completed our multi-site Internet data centers and expanded our
service offerings to include systems management and monitoring. 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 increasing acceptance of our services by large Japanese companies
and by increases in their Information Technology budgets. 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, value-added 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
and the network service operating system SMF, wireless LAN, is an important competitive
factor.
 Costs and expenses
  Cost of connectivity and value-added services revenues
   
    
    Backbone cost.Backbone cost for the fiscal year ended March 31, 2008 was ¥3.5
billion, almost the same as the fiscal year ended March 31, 2007. 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, 2008 were ¥7.1 billion, increased by 53.8%,
compared to the cost for the fiscal year ended March 31, 2007. This increase was mainly
resulted from the additional cost of ¥2.1 billion related to hi-ho, which we acquired
in June 2007. Other connectivity costs were ¥0.4 billion for the fiscal year ended
March 31, 2008 compared to ¥0.3 billion for the previous fiscal year.
  Costs of systems integration revenues and equipment sales
  51




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Sales and marketing
  General and administrative
  Research and development
  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.
    
    Gains on sales of other investments.Gains on sales of other investments are mostly
raised from sales of available-for-sale securities. We do not expect that we will have
large capital gains from sales of available-for-sale securities for the fiscal year
ending March 31, 2009.
    
    Losses on write-down of other investments.We hold other investments, including
available-for-sale securities. The book values of other investments are affected by the
fluctuation in the market price or the decrease in fair values of nonmarketable
investments. 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)
  52




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E. Off-Balance Sheet Arrangements.
  F. Tabular Disclosure of Contractual Obligations.
  Payments due by period (in million of yen)less than
    
    
    
    
    
    
    
    
    
    
    more thanContractual Obligations
    
    Total
    
    
    1 year
    
    
    1-3 years
    
    
    3-5 years
    
    
    5 yearsCapital lease obligations
    
    
    8,613
    
    
    
    3,700
    
    
    
    4,270
    
    
    
    638
    
    
    
    5Operating lease obligations
    
    
    4,717
    
    
    
    2,425
    
    
    
    2,258
    
    
    
    34
    
    
    
    Total (1) (2)
    
    ¥
    13,330
    
    
    ¥
    6,125
    
    
    ¥
    6,528
    
    
    ¥
    672
    
    
    ¥
    5
 
 (1)
    
    In addition to the above; 
    
    We plan to contribute ¥165 million to our 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 ¥400,000
thousand ($4,006 thousand) to them as of March 31, 2008. (Please refer to Note 15 to our
consolidated financial statements).
    
    On April 1, 2008, we made an agreement with NTT Communications to take over the lease
of the facility for our data center services. We will pay ¥3,466 million in the aggregate
for the lease in ten years from the date when NTT Communications commences to provide the
lease and related operating services to us.
 
 (2)
    
    The table above does not include obligations for interest payments on debt. 
 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
    
    June 27, 2008Koichi Suzuki
    
    President, Chief
Executive Officer and
Representative Director
    
    Sep. 3, 1946
    
    June 2009
    
    Dec. 1992
    
    
    12,791Toshiya Asaba
    
    Executive Vice President
    
    June 12, 1962
    
    June 2009
    
    June 1999
    
    
    *Yoshiaki Hisamoto
    
    Executive Vice President
    
    Dec. 14, 1954
    
    June 2010
    
    June 2006
    
    Hideshi Hojo
    
    Senior Managing Director
    
    Dec. 22, 1957
    
    June 2009
    
    June 2000
    
    
    *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 2009
    
    June 2005
    
    
    *Junichi Shimagami
    
    Director
    
    Apr. 17, 1967
    
    June 2009
    
    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 2009
    
    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 2009
    
    June 2005
    
    
    *
 
 *
    
    Owns less than 1% of outstanding shares of IIJs common stock. 53




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Koichi Suzuki
 Toshiya Asaba
 Yoshiaki Hisamoto
 Hideshi Hojo
 Takamichi Miyoshi
 Akihisa Watai
 Kazuhiro Tokita
 Junichi Shimagami
 Kiyoshi Ishida
 Yasurou Tanahashi
 54




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##### Table of Contents



Takashi Hiroi
 Junnosuke Furukawa
 Senji Yamamoto
 Shingo Oda
 Junichi Tate
 Masaki Okada
 Masaaki Koizumi
 Hirofumi Takahashi
 B. Compensation.
  C. Board Practices.
   55




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56




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D. Employees.
  For the fiscal year ended March 31,2006
    
    2007
    
    2008(number of employees)Engineering
    
    
    674
    
    
    
    792
    
    
    
    941Sales
    
    
    207
    
    
    
    204
    
    
    
    245Administration
    
    
    106
    
    
    
    159
    
    
    
    187
   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 at various times from two years to ten years from the date of
grant.
    
    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 at various times
from two years to ten years from the date of grant.
    
    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.
 57




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##### Table of Contents



Employee Stock Purchase Plan
  Director Stock Purchase Plan
  
 Item 7. Major Shareholders and Related Party Transactions.
 A. Major Shareholders.
  Shares of common stock outstanding,beneficially owned as of March 31, 2008Number
    
    PercentageNippon Telegraph and Telephone Corporation and affiliates (1)
    
    
    60,675
    
    
    
    29.4
    %Koichi Suzuki
    
    
    12,787
    
    
    
    6.2Itochu Corporation
    
    
    10,430
    
    
    
    5.1Directors and executive officers as a group (2)
    
    
    13,758
    
    
    
    6.7
 
 (1)
    
    Includes NTT, which owns 50,475 shares, or 24.4%, and NTT Communications, which owns 10,200
shares, or 4.9%.(2)
    
    Includes Koichi Suzukis holding which is also separately set forth above. No other director
or executive officer is a beneficial owner of more than 5%.   58




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##### Table of Contents



B. Related Party Transactions.
 NTT-affiliated Companies.
 Transactions with equity method affiliates.
 millions of yenAccounts receivable
    
    ¥
    60Accounts payable
    
    
    20Revenues
    
    
    582Costs and expenses
    
    
    208
   
    
    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
  59




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Dividend Policy
  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
    
    Low2004
    
    $
    14.10
    
    
    $
    1.412005
    
    
    6.24
    
    
    
    2.112006
    
    
    14.88
    
    
    
    3.04
    
    
    ¥
    584,000
    
    
    ¥
    409,0002007
    
    
    10.65
    
    
    
    6.41
    
    
    
    517,000
    
    
    
    296,000First Quarter
    
    
    10.65
    
    
    
    6.41
    
    
    
    517,000
    
    
    
    296,000Second Quarter
    
    
    8.85
    
    
    
    6.83
    
    
    
    425,000
    
    
    
    315,000Third Quarter
    
    
    9.63
    
    
    
    7.33
    
    
    
    431,000
    
    
    
    358,000Fourth Quarter
    
    
    10.38
    
    
    
    8.33
    
    
    
    516,000
    
    
    
    402,0002008
    
    
    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
    
    
    
    270,0002009MonthJanuary 2008
    
    
    10.59
    
    
    
    7.21
    
    
    
    447,000
    
    
    
    308,000February 2008
    
    
    9.41
    
    
    
    8.14
    
    
    
    429,000
    
    
    
    353,000March 2008
    
    
    8.74
    
    
    
    6.98
    
    
    
    359,000
    
    
    
    270,000April 2008
    
    
    8.88
    
    
    
    8.01
    
    
    
    370,000
    
    
    
    315,000May 2008
    
    
    9.09
    
    
    
    7.80
    
    
    
    384,000
    
    
    
    315,000June 2008 (3)
    
    
    9.72
    
    
    
    8.33
    
    
    
    428,000
    
    
    
    352,000
 
 (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 June 1, 2008 to June 25, 2008. 60




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##### Table of Contents



B. Plan of Distribution.
  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.
 61




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##### 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.
     62




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##### 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.
 63




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##### Table of Contents



Acquisition of Own Share
  (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
     64




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##### Table of Contents



C. Material Contracts.
  Limitation of Liability Agreements, dated June 26, 2007 and June 27, 2008, between Internet
Initiative Japan Inc. and outside directors and outside company auditors.
 D. Exchange Controls.
  
    
    Non-residents of Japan is defined as individuals who are not resident in Japan and
corporations whose principal offices are located outside of Japan. Generally, branches and other
offices of Japanese corporations which are located outside of Japan are regarded as Non-residents
of Japan, but branches and other offices of non-resident corporations which are located within
Japan are regarded as residents of Japan.
  
    
    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.
    65




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##### 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
    %
 66




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##### 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.
    68




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##### 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.
  69




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##### 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.
  H. Documents on Display.
  70




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##### Table of Contents



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.
  
 PART II
 
 Item 13.
    
    Defaults, Dividend Arrearages and Delinquencies.
  
 Item 14.
    
    Material Modifications to the Rights of Security Holders and Use of Proceeds.
  71




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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.
    72




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(c) Attestation Report of the Registered Public Accounting Firm
 Report of Independent Registered Public Accounting Firm
         
 73




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##### Table of Contents



(d) Changes in Internal Control Over Financial Reporting
  
 Item 16A.
    
    Audit Committee Financial Expert
   (1)
    
    An understanding of generally accepted accounting principles and
financial statements,(2)
    
    The ability to assess the general application of such principles in
connection with the accounting for estimates, accruals and reserves,(3)
    
    Experience preparing, auditing, analyzing or evaluating financial
statements that present a breadth and level of complexity of accounting issues that
are generally comparable to the breadth and complexity of issues that can reasonably
be expected to be raised by the registrants financial statements, or experience
actively supervising one or more persons engaged in such activities,(4)
    
    An understanding of internal controls over financial reporting,(5)
    
    An understanding of audit committee functions.
  (1)
    
    Education and experience as a principal financial officer, principal
accounting officer, controller, public accountant or auditor or experience in one
or more positions that involve the performance of similar functions,(2)
    
    Experience actively supervising a principal financial officer,
principal accounting officer, controller, public accountant, auditor or person
performing similar functions,(3)
    
    Experience overseeing or assessing the performance of companies or
public accountants with respect to the preparation, auditing or evaluation of
financial statements, or(4)
    
    Other relevant experience.
  74




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Item 16B.
    
    Code of Ethics.
  
 Item 16C.
    
    Principal Accountant Fees and Services.
 Independent Auditor Fees and Services
  Fiscal year ended March 31,2007
    
    2008(millions of yen)Audit fees (1)
    
    
    85
    
    
    
    105Audit-related fees
    
    
    -
    
    
    
    -Tax fees (2)
    
    
    15
    
    
    
    26All other fees
    
    
    -
    
    
    
    -Total fees
    
    
    100
    
    
    
    131
 (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
Deloitte Touche Tohmatsu for tax compliance, tax advice and tax planning. Board of Company Auditors Pre-Approval Policies and Procedures
   
 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,
 75




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
    
    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.
  
 Item 16E.
    
    Purchases of Equity Securities by the Issuer and Affiliated Purchasers.
  
 PART III
 
 Item 17.
    
    Financial Statements.
  
 Item 18.
    
    Financial Statements.
  76




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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
    
    Specimen Common Stock Certificate***2.2
    
    Bylaws of the IIJ Group Employee Shareholders Association (English translation)2.3
    
    Form of Deposit Agreement among IIJ, The Bank of New York as depositary and all owners and
holders from time to time of American Depositary Receipts, including the form of American
Depositary Receipt****2.4
    
    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 26, 2007 and June 27, 2008, between Internet
Initiative Japan Inc. and outside directors and outside company auditors******8.1
    
    List of Significant Subsidiaries (See Our Group Companies in Item 4.B. of this Form 20-F)11.1
    
    Internet Initiative Japan Code of Conduct12.1
    
    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 an Agreement on Limited Liability, dated June 26, 2007, with Mr. Junnosuke
Furukawa as our outside director. We and each of Mr. Yasurou Tanahashi, Mr. Takashi Hiroi and
Mr. Shingo Oda as our outside directors and each of Mr. Masaki Okada and Mr. Masaaki Koizumi
as our outside company auditors entered into an Agreement on Limited Liability, dated June 27,
2008.  77




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SIGNATURE
  Internet Initiative Japan Inc.By:
    /s/ Koichi SuzukiName:
    Koichi SuzukiTitle:
    President, Chief Executive Officer
and Representative Director  78




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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, 2007 and 2008
    
    F-3Consolidated Statements of Income for Each of the Three Years in the Period Ended March 31, 2008
    
    F-5Consolidated Statements of Shareholders Equity for Each of the Three Years in the Period Ended March 31, 2008
    
    F-7Consolidated Statements of Cash Flows for Each of the Three Years in the Period Ended March 31, 2008
    
    F-8Notes to Consolidated Financial Statements
    
    F-11
 F-1




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Report of Independent Registered Public Accounting Firm
       /s/ DELOITTE TOUCHE TOHMATSUTokyo, JapanJune 27, 2008
 F-2




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Internet Initiative Japan Inc. and Subsidiaries
 Consolidated Balance Sheets
March 31, 2007 and 2008
 Thousands ofU.S. DollarsThousands of Yen
    
    
    (Note 1)2007
    
    
    2008
    
    
    2008ASSETSCURRENT ASSETS:Cash and cash equivalents (Note 16)
    
    ¥
    13,554,544
    
    
    ¥
    11,470,980
    
    
    $
    114,882Short-term investment
    
    
    12,093
    
    
    
    12,181
    
    
    
    122Accounts receivable, net of allowance for
doubtful accounts of ¥32,489 thousand
and ¥24,677 thousand ($247 thousand)
at March 31, 2007 and 2008, respectively
(Notes 4, 5 and 18)
    
    
    9,675,725
    
    
    
    12,255,163
    
    
    
    122,736Inventories (Note 2)
    
    
    1,111,086
    
    
    
    1,184,160
    
    
    
    11,859Prepaid expenses
    
    
    1,053,270
    
    
    
    2,005,274
    
    
    
    20,083Other current assets, net of allowance for doubtful
accounts
of ¥4,570 thousand and ¥7,470 thousand ($75
thousand)
at March 31, 2007 and 2008, respectively (Notes 4,
8 and
10)
    
    
    930,571
    
    
    
    1,557,869
    
    
    
    15,602Total current assets
    
    
    26,337,289
    
    
    
    28,485,627
    
    
    
    285,284INVESTMENTS IN AND ADVANCES TO
EQUITY METHOD INVESTEES, net of loan loss
valuation allowance of ¥16,701 thousand ($167
thousand) at
March 31, 2007 and 2008 (Notes 4 and 5)
    
    
    858,490
    
    
    
    991,237
    
    
    
    9,927OTHER INVESTMENTS (Notes 3, 15 and 16)
    
    
    2,841,741
    
    
    
    2,363,770
    
    
    
    23,673PROPERTY AND EQUIPMENTNet (Notes 6 and 8)
    
    
    9,832,396
    
    
    
    11,740,210
    
    
    
    117,579GOODWILL (Note 7)
    
    
    1,386,252
    
    
    
    2,507,258
    
    
    
    25,110OTHER INTANGIBLE ASSETSNet (Note 7)
    
    
    1,490,642
    
    
    
    3,400,117
    
    
    
    34,053GUARANTEE DEPOSITS (Notes 8, 16)
    
    
    1,686,141
    
    
    
    2,037,165
    
    
    
    20,402OTHER ASSETS, net of allowance for doubtful
accounts of ¥69,050 thousand and ¥64,796 thousand
($649 thousand) at March 31, 2007 and 2008 respectively
(Notes 4, 8, 10 and 16)
    
    
    3,260,053
    
    
    
    4,177,162
    
    
    
    41,834TOTAL
    
    ¥
    47,693,004
    
    
    ¥
    55,702,546
    
    
    $
    557,862
  F-3




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Internet Initiative Japan Inc. and Subsidiaries
 Consolidated Balance Sheets
March 31, 2007 and 2008
 Thousands ofU.S. DollarsThousands of Yen
    
    
    (Note 1)2007
    
    
    2008
    
    
    2008LIABILITIES AND SHAREHOLDERS EQUITYCURRENT LIABILITIES:Short-term borrowings (Note 9)
    
    ¥
    6,050,000
    
    
    ¥
    9,150,000
    
    
    $
    91,637Long-term borrowingscurrent portion
(Notes 9 and 16)
    
    
    290,000
    
    
    
    
    
    
    
    Capital lease obligationscurrent portion (Note 8)
    
    
    2,953,173
    
    
    
    3,455,948
    
    
    
    34,611Accounts payable (Notes 5 and 18)
    
    
    8,464,835
    
    
    
    7,895,238
    
    
    
    79,071Accrued expenses
    
    
    897,355
    
    
    
    994,138
    
    
    
    9,956Accrued retirement and pension costs-current (Note 11)
    
    
    8,428
    
    
    
    11,436
    
    
    
    115Deferred income
    
    
    1,355,689
    
    
    
    1,552,896
    
    
    
    15,552Other current liabilities
    
    
    1,113,369
    
    
    
    864,366
    
    
    
    8,657Total current liabilities
    
    
    21,132,849
    
    
    
    23,924,022
    
    
    
    239,599CAPITAL LEASE OBLIGATIONSNoncurrent (Note 8)
    
    
    4,318,309
    
    
    
    4,738,359
    
    
    
    47,455ACCRUED RETIREMENT AND PENSION COSTS
Noncurrent (Note 11)
    
    
    750,042
    
    
    
    1,101,951
    
    
    
    11,036OTHER NONCURRENT LIABILITIES (Note 10)
    
    
    564,618
    
    
    
    663,399
    
    
    
    6,644Total liabilities
    
    
    26,765,818
    
    
    
    30,427,731
    
    
    
    304,734MINORITY INTEREST
    
    
    815,182
    
    
    
    294,102
    
    
    
    2,946COMMITMENTS AND CONTINGENCIES (Note 15)SHAREHOLDERS EQUITY (Notes 11, 12 and 13):Common stockauthorized, 377,600 shares;
issued and outstanding, 204,300 shares at March 31, 2007,
authorized, 377,600 shares; issued and outstanding,
206,478 shares at March 31, 2008
    
    
    16,833,847
    
    
    
    16,833,847
    
    
    
    168,591Additional paid-in capital
    
    
    26,599,217
    
    
    
    27,611,737
    
    
    
    276,532Accumulated deficit
    
    
    (24,270,769
    )
    
    
    (19,555,489
    )
    
    
    (195,849
    )Accumulated other comprehensive income
    
    
    949,709
    
    
    
    90,618
    
    
    
    908Total shareholders equity
    
    
    20,112,004
    
    
    
    24,980,713
    
    
    
    250,182TOTAL
    
    ¥
    47,693,004
    
    
    ¥
    55,702,546
    
    
    $
    557,862
   F-4




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Internet Initiative Japan Inc. and Subsidiaries
 Consolidated Statements of Income
Three Years in the Period Ended March 31, 2008
 Thousands ofU.S. DollarsThousands of Yen
    
    
    (Note 1)2006
    
    
    2007
    
    
    2008
    
    
    2008REVENUES (Notes 5 and 18):Connectivity and value-added services:Connectivity services (corporate use)
    
    ¥
    11,179,318
    
    
    ¥
    11,239,062
    
    
    ¥
    12,148,490
    
    
    $
    121,668Connectivity services (home use)
    
    
    2,119,758
    
    
    
    1,968,948
    
    
    
    5,429,955
    
    
    
    54,381Value-added services
    
    
    6,249,891
    
    
    
    7,415,533
    
    
    
    9,546,254
    
    
    
    95,606Other
    
    
    3,673,872
    
    
    
    3,729,633
    
    
    
    4,177,964
    
    
    
    41,842Total
    
    
    23,222,839
    
    
    
    24,353,176
    
    
    
    31,302,663
    
    
    
    313,497Systems integration
    
    
    23,504,537
    
    
    
    30,527,081
    
    
    
    34,018,093
    
    
    
    340,692Equipment sales
    
    
    3,085,208
    
    
    
    2,174,324
    
    
    
    1,514,543
    
    
    
    15,168Total revenues
    
    
    49,812,584
    
    
    
    57,054,581
    
    
    
    66,835,299
    
    
    
    669,357COST AND EXPENSES (Notes 5, 8, 11 and 18):Cost of connectivity and value-added
services
    
    
    20,077,990
    
    
    
    20,545,358
    
    
    
    26,039,660
    
    
    
    260,788Cost of systems integration
    
    
    18,120,418
    
    
    
    23,529,045
    
    
    
    25,543,168
    
    
    
    255,815Cost of equipment sales
    
    
    2,818,036
    
    
    
    1,893,216
    
    
    
    1,299,793
    
    
    
    13,018Total cost
    
    
    41,016,444
    
    
    
    45,967,619
    
    
    
    52,882,621
    
    
    
    529,621Sales and marketing (Note 17)
    
    
    3,079,526
    
    
    
    3,438,725
    
    
    
    4,328,598
    
    
    
    43,351General and administrative
    
    
    3,147,315
    
    
    
    3,970,692
    
    
    
    4,624,293
    
    
    
    46,312Research and development
    
    
    158,155
    
    
    
    177,273
    
    
    
    240,423
    
    
    
    2,408Total cost and expenses
    
    
    47,401,440
    
    
    
    53,554,309
    
    
    
    62,075,935
    
    
    
    621,692OPERATING INCOME
    
    
    2,411,144
    
    
    
    3,500,272
    
    
    
    4,759,364
    
    
    
    47,665OTHER INCOME (EXPENSES):Interest income
    
    
    13,099
    
    
    
    23,037
    
    
    
    63,030
    
    
    
    631Interest expense
    
    
    (437,364
    )
    
    
    (397,439
    )
    
    
    (438,163
    )
    
    
    (4,388
    )Foreign exchange gains (losses)
    
    
    3,470
    
    
    
    (297
    )
    
    
    1,409
    
    
    
    14Net gains on sales and exchange of other
investments (Note 3)
    
    
    3,227,203
    
    
    
    3,229,899
    
    
    
    217,957
    
    
    
    2,183Losses on write-down of other investments
(Note 3)
    
    
    (29,513
    )
    
    
    (1,363,389
    )
    
    
    (288,643
    )
    
    
    (2,891
    )Othernet
    
    
    190,520
    
    
    
    56,605
    
    
    
    46,715
    
    
    
    468Other income (expenses)net
    
    
    2,967,415
    
    
    
    1,548,416
    
    
    
    (397,695
    )
    
    
    (3,983
    )INCOME FROM OPERATIONS BEFORE INCOME TAX
EXPENSE (BENEFIT), MINORITY INTERESTS AND
EQUITY IN NET LOSS OF EQUITY METHOD
INVESTEES
    
    
    5,378,559
    
    
    
    5,048,688
    
    
    
    4,361,669
    
    
    
    43,682INCOME TAX EXPENSE (BENEFIT)(Note10)
    
    
    257,360
    
    
    
    (803,943
    )
    
    
    (861,414
    )
    
    
    (8,627
    )MINORITY INTERESTS IN (EARNINGS) LOSSES OF
SUBSIDIARIES
    
    
    (353,883
    )
    
    
    (232,719
    )
    
    
    96,706
    
    
    
    969FORWARD
    
    ¥
    4,767,316
    
    
    ¥
    5,619,912
    
    
    ¥
    5,319,789
    
    
    $
    53,278
  F-5




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Internet Initiative Japan Inc. and Subsidiaries
 Consolidated Statements of Income  Three Years in the Period Ended March 31, 2008
  Thousands ofU.S. DollarsThousands of Yen
    
    
    (Note 1)2006
    
    
    2007
    
    
    2008
    
    
    2008FORWARD
    
    ¥
    4,767,316
    
    
    ¥
    5,619,912
    
    
    ¥
    5,319,789
    
    
    $
    53,278EQUITY IN NET LOSS OF EQUITY
METHOD INVESTEES (Note 5):
    
    
    (13,746
    )
    
    
    (210,199
    )
    
    
    (143,200
    )
    
    
    (1,434
    )NET INCOME
    
    ¥
    4,753,570
    
    
    ¥
    5,409,713
    
    
    ¥
    5,176,589
    
    
    $
    51,844NET INCOME PER SHARE (Note 14):BASIC WEIGHTED-AVERAGE NUMBER
OF COMMON SHARES
OUTSTANDING
    
    
    195,613
    
    
    
    203,992
    
    
    
    206,240DILUTED WEIGHTED-AVERAGE NUMBER
OF COMMON SHARES
OUTSTANDING
    
    
    195,955
    
    
    
    204,244
    
    
    
    206,465Yen
    
    U.S. DollarsBASIC NET INCOME PER
COMMON SHARE
    
    ¥
    24,301
    
    
    ¥
    26,519
    
    
    ¥
    25,100
    
    
    $
    251.38DILUTED NET INCOME
PER COMMON SHARE
    
    ¥
    24,258
    
    
    ¥
    26,487
    
    
    ¥
    25,072
    
    
    $
    251.1
   F-6




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##### Table of Contents



Internet Initiative Japan Inc. and Subsidiaries
 Consolidated Statements of Shareholders Equity  Three Years in the Period Ended March 31, 2008
  Thousands of YenShares of
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    AccumulatedCommon Stock
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    OtherOutstanding
    
    
    
    
    
    
    Additional
    
    
    
    
    
    
    Comprehensive(Including
    
    
    Common
    
    
    Paid-in
    
    
    Accumulated
    
    
    Income
    
    
    TreasuryTreasury Stock)
    
    
    Stock
    
    
    Capital
    
    
    Deficit
    
    
    (Notes 11 and 13)
    
    
    Stock
    
    
    TotalBALANCE, APRIL 1, 2005
    
    
    191,800
    
    
    ¥
    13,765,372
    
    
    ¥
    23,637,628
    
    
    ¥
    (34,434,052
    )
    
    ¥
    8,690,125
    
    
    ¥
    (44,000
    )
    
    ¥
    11,615,073Net income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    4,753,570
    
    
    
    
    
    
    
    
    
    
    
    4,753,570Other comprehensive loss, net of tax
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (2,136,531
    )
    
    
    
    
    
    
    (2,136,531
    )Total comprehensive income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    2,617,039Issuance of common stock, net of issuance cost
    
    
    12,500
    
    
    
    3,068,475
    
    
    
    2,961,589
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    6,030,064Purchase of common stock by an equity method investee
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (40,238
    )
    
    
    (40,238
    )BALANCE, MARCH 31, 2006
    
    
    204,300
    
    
    
    16,883,847
    
    
    
    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
    
    
    ¥
    
    
    
    ¥
    24,980,713
 Thousands of U.S. Dollars (Note 1)AccumulatedOtherAdditional
    
    
    
    
    
    
    ComprehensiveCommon
    
    
    Paid-in
    
    
    Accumulated
    
    
    Income
    
    
    TreasuryStock
    
    
    Capital
    
    
    Deficit
    
    
    (Notes 11 and 13)
    
    
    Stock
    
    
    TotalBALANCE, MARCH 31, 2007
    
    $
    168,591
    
    
    $
    266,392
    
    
    $
    (243,073
    )
    
    $
    9,511
    
    
    $
    
    
    
    $
    201,421Net income
    
    
    
    
    
    
    
    
    
    
    51,844
    
    
    
    
    
    
    
    
    
    
    
    51,844Other comprehensive loss, net of tax
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (8,603
    )
    
    
    
    
    
    
    (8,603
    )Total comprehensive income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    43,241Dividends paid
    
    
    
    
    
    
    
    
    
    
    (4,620
    )
    
    
    
    
    
    
    
    
    
    
    (4,620
    )Issuance of common stock for the purchase of minority
interests of consolidated subsidiaries,
net of issuance cost
    
    
    
    
    
    
    10,140
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    10,140BALANCE, MARCH 31, 2008
    
    $
    168,591
    
    
    $
    276,532
    
    
    $
    (195,849
    )
    
    $
    908
    
    
    $
    
    
    
    $
    250,182
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##### Table of Contents



Internet Initiative Japan Inc. and Subsidiaries
 Consolidated Statements of Cash Flows  Three Years in the Period Ended March 31, 2008
  Thousands ofU.S. DollarsThousands of Yen
    
    
    (Note 1)2006
    
    
    2007
    
    
    2008
    
    
    2008OPERATING ACTIVITIES:Net income
    
    ¥
    4,753,570
    
    
    ¥
    5,409,713
    
    
    ¥
    5,176,589
    
    
    $
    51,844Adjustments to reconcile net income
to net cash provided by
operating activities:Depreciation and amortization
    
    
    4,209,037
    
    
    
    4,228,048
    
    
    
    4,774,804
    
    
    
    47,820Provision for retirement and
pension costs, less payments
    
    
    76,095
    
    
    
    382,682
    
    
    
    191,057
    
    
    
    1,914Provision for (reversal of) allowance for
doubtful accounts and advances
    
    
    (12,009
    )
    
    
    12,232
    
    
    
    (416
    )
    
    
    (4
    )Loss on disposal of property and
equipment
    
    
    118,855
    
    
    
    150,731
    
    
    
    72,086
    
    
    
    722Loss on disposal of telephone rights
    
    
    2,040
    
    
    
    
    
    
    
    
    
    
    
    Net gains on sales and exchange of other
investments
    
    
    (3,227,203
    )
    
    
    (3,229,899
    )
    
    
    (217,957
    )
    
    
    (2,183
    )Losses on write-down of other
investments
    
    
    29,513
    
    
    
    1,363,389
    
    
    
    288,643
    
    
    
    2,891Foreign exchange losses (gains)
    
    
    (7,825
    )
    
    
    2,226
    
    
    
    10,415
    
    
    
    104Equity in net loss of equity method
investees
    
    
    13,746
    
    
    
    210,199
    
    
    
    143,200
    
    
    
    1,434Minority interests in earnings (losses) of
subsidiaries
    
    
    353,883
    
    
    
    232,719
    
    
    
    (96,706
    )
    
    
    (969
    )Deferred income tax benefit
    
    
    (230,841
    )
    
    
    (1,494,685
    )
    
    
    (1,653,275
    )
    
    
    (16,558
    )Others
    
    
    18,490
    
    
    
    622
    
    
    
    
    
    
    
    Changes in operating assets and
liabilities net of effects from
acquisition of business and a company:Decrease (increase) in accounts
receivable
    
    
    (4,460,173
    )
    
    
    2,376,126
    
    
    
    (2,584,327
    )
    
    
    (25,882
    )Increase in inventories, prepaid
expenses and other current and
noncurrent assets
    
    
    (1,390,398
    )
    
    
    (1,235,003
    )
    
    
    (995,434
    )
    
    
    (9,969
    )Increase (decrease) in accounts payable
    
    
    4,975,623
    
    
    
    (1,872,969
    )
    
    
    (668,481
    )
    
    
    (6,695
    )Increase (decrease) in income taxes
payable
    
    
    334,854
    
    
    
    312,292
    
    
    
    (274,475
    )
    
    
    (2.749
    )Increase in accrued
expenses and other current
and noncurrent liabilities
    
    
    1,001,567
    
    
    
    553,084
    
    
    
    372,023
    
    
    
    3,726Net cash provided by
operating
activities(Forward)
    
    ¥
    6,558,824
    
    
    ¥
    7,401,507
    
    
    ¥
    4,537,746
    
    
    $
    45,446
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##### Table of Contents



Internet Initiative Japan Inc. and Subsidiaries
 Consolidated Statements of Cash Flows  Three Years in the Period Ended March 31, 2008
  Thousands ofU.S. DollarsThousands of Yen
    
    
    (Note 1)2006
    
    
    2007
    
    
    2008
    
    
    2008Net cash provided by
operating activities(Forward)
    
    ¥
    6,558,824
    
    
    ¥
    7,401,507
    
    
    ¥
    4,537,746
    
    
    $
    45,446INVESTING ACTIVITIES:Purchases of property and equipment
    
    
    (919,366
    )
    
    
    (1,287,906
    )
    
    
    (1,856,249
    )
    
    
    (18,590
    )Purchases of available-for-sale securities
    
    
    
    
    
    
    (802,662
    )
    
    
    (609,787
    )
    
    
    (6,107
    )Purchases of short-term and other investments
    
    
    (674,569
    )
    
    
    (1,794,358
    )
    
    
    (232,122
    )
    
    
    (2,325
    )Investment in an equity method investee
    
    
    (750,000
    )
    
    
    
    
    
    
    (273,909
    )
    
    
    (2,743
    )Purchases of subsidiary stock
from minority shareholders
    
    
    (192,142
    )
    
    
    (3,077,764
    )
    
    
    (1,975,123
    )
    
    
    (19,781
    )Proceeds from sales of available-for-sale securities
    
    
    3,240,805
    
    
    
    3,883,915
    
    
    
    616,920
    
    
    
    6,179Proceeds from sales and redemption of
short-term and other investments
    
    
    372,434
    
    
    
    110,446
    
    
    
    69,722
    
    
    
    698Proceeds from sales of investment in an equity
method investee
    
    
    
    
    
    
    185,900
    
    
    
    
    
    
    
    Payments of guarantee deposits
    
    
    (62,074
    )
    
    
    (146,172
    )
    
    
    (353,911
    )
    
    
    (3,544
    )Refund of guarantee deposits
    
    
    568,869
    
    
    
    27,761
    
    
    
    11,847
    
    
    
    118Payments for refundable insurance policies
    
    
    (25,917
    )
    
    
    (38,273
    )
    
    
    (49,753
    )
    
    
    (498
    )Refund from insurance policies
    
    
    6,301
    
    
    
    4,969
    
    
    
    3,905
    
    
    
    39Acquisition of a newly controlled company, net of cash
acquired
    
    
    229,457
    
    
    
    
    
    
    
    (788,608
    )
    
    
    (7,898
    )Acquisition of business
    
    
    
    
    
    
    (74,751
    )
    
    
    
    
    
    
    Other
    
    
    11,052
    
    
    
    (4,716
    )
    
    
    (6,698
    )
    
    
    (67
    )Net cash provided by (used in)
investing activities
    
    
    1,804,850
    
    
    
    (3,013,611
    )
    
    
    (5,443,766
    )
    
    
    (54,519
    )FINANCING ACTIVITIES:Proceeds from issuance of short-term
borrowings with initial maturities over three
months and long-term borrowings
    
    
    1,000,000
    
    
    
    10,500,000
    
    
    
    17,525,000
    
    
    
    175,513Repayments of short-term borrowings with
initial maturities over three months and
long-term borrowings
    
    
    (2,986,056
    )
    
    
    (7,639,963
    )
    
    
    (15,940,000
    )
    
    
    (159,639
    )Proceeds from securities loan agreement
    
    
    4,897,040
    
    
    
    1,057,680
    
    
    
    
    
    
    
    Repayments of securities loan agreement
    
    
    (5,626,960
    )
    
    
    (2,057,280
    )
    
    
    
    
    
    
    Principal payments under capital leases
    
    
    (3,105,519
    )
    
    
    (3,259,875
    )
    
    
    (3,506,842
    )
    
    
    (35,121
    )Net increase (decrease) in short-term
borrowings
    
    
    (169,633
    )
    
    
    (3,355,000
    )
    
    
    1,225,000
    
    
    
    12,268Proceeds from issuance of common stock,
net of issuance cost
    
    
    6,030,064
    
    
    
    
    
    
    
    
    
    
    
    Proceeds from issuance of subsidiary
stock to minority shareholders
    
    
    
    
    
    
    194,679
    
    
    
    6,000
    
    
    
    60Dividends paid
    
    
    
    
    
    
    
    
    
    
    (461,309
    )
    
    
    (4,620
    )Net cash provided by (used in)
financing activities(Forward)
    
    ¥
    38,936
    
    
    ¥
    (4,559,759
    )
    
    ¥
    (1,152,151
    )
    
    $
    (11,539
    )
  F-9




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##### Table of Contents



Internet Initiative Japan Inc. and Subsidiaries
 Consolidated Statements of Cash Flows
Three Years in the Period Ended March 31, 2008
 Thousands ofU.S. DollarsThousands of Yen
    
    
    (Note 1)2006
    
    
    2007
    
    
    2008
    
    
    2008Net cash provided by (used in)
financing activities(Forward)
    
    ¥
    38,936
    
    
    ¥
    (4,559,759
    )
    
    ¥
    (1,152,151
    )
    
    $
    (11,539
    )EFFECT OF EXCHANGE RATE
CHANGES ON CASH AND CASH
EQUIVALENTS
    
    
    37,934
    
    
    
    (614
    )
    
    
    (25,393
    )
    
    
    (255
    )NET INCREASE (DECREASE) IN CASH AND
CASH EQUIVALENTS
    
    
    8,440,544
    
    
    
    (172,477
    )
    
    
    (2,083,564
    )
    
    
    (20,867
    )CASH AND CASH EQUIVALENTS, BEGINNING OF YEAR
    
    
    5,286,477
    
    
    
    13,727,021
    
    
    
    13,554,544
    
    
    
    135,749CASH AND CASH EQUIVALENTS,
END OF YEAR
    
    ¥
    13,727,021
    
    
    ¥
    13,554,544
    
    
    ¥
    11,470,980
    
    
    $
    114,882Thousands ofU.S. DollarsThousands of Yen
    
    (Note 1)2006
    
    2007
    
    2008
    
    2008ADDITIONAL CASH FLOW
INFORMATION:Interest paid
    
    ¥
    426,692
    
    
    ¥
    383,461
    
    
    ¥
    438,850
    
    
    $
    4,395Income taxes paid
    
    
    148,101
    
    
    
    347,826
    
    
    
    1,083,341
    
    
    
    10,850NONCASH INVESTING AND
FINANCING ACTIVITIES:Acquisition of assets by
entering into capital leases
    
    
    3,842,952
    
    
    
    2,664,706
    
    
    
    4,221,807
    
    
    
    42,281Exchange of common stock
investment due to merger:Market value of common
shares acquired
    
    
    7,390
    
    
    
    
    
    
    
    
    
    
    
    Cost of investment
    
    
    2,584
    
    
    
    
    
    
    
    
    
    
    
    Purchase of minority interests of
consolidated subsidiaries through
share exchanges
    
    
    
    
    
    
    
    
    
    
    1,012,520
    
    
    
    10,140Acquisition of business and a company:Assets acquired
    
    
    843,485
    
    
    
    236,307
    
    
    
    2,319,277
    
    
    
    23,228Cash paid
    
    
    (733,589
    )
    
    
    (74,751
    )
    
    
    (1,715,450
    )
    
    
    (17,180
    )Liabilities assumed
    
    
    109,896
    
    
    
    161,556
    
    
    
    367,989
    
    
    
    3,686Minority interests assumed
    
    
    
    
    
    
    
    
    
    
    235,838
    
    
    
    2,362
   F-10




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##### 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 and
is 29.4 percent jointly owned by Nippon Telegraph and Telephone Corporation (NTT) and its
subsidiary as of March 31, 2008. 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 Internet systems design and integration representing
principally sales of Internet network systems and equipment and miscellaneous Internet
access-related services.The Company manages its business and measures results based on a single Internet-related
services industry segment. Substantially all revenues are from customers operating in Japan.Certain Significant Risks and UncertaintiesThe Company relies on telecommunications carriers for significant portion of network backbone,
and 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 by 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 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) Dedicated access and Dial-up access in the former
presentation were reclassified to Connectivity services (corporate use) and Connectivity
services (home use) reflecting the Companys acquisition of hi-ho, a company engaged primarily
in the internet business for home use, and the Companys strategy for increasing individual
users by providing safe and high-quality services. (2) The Company separately disclosed
Deferred income, which had previously been included in Other current liabilities, as it is
deemed material. (3) The Company separately disclosed Goodwill, which had been previously
included in Intangible assets-net. (4) The Company separately
disclosed Net gains on sales and exchange of other investments and Losses on write-down of
other investments, which had been previously disclosed as Net gains on other investments, to
clarify the contents.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, 2008 of ¥99.85 = $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.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 Media
Communications Inc. (MC), which was merged with IIJ on October 1, 2005, IIJ America, Inc.
(IIJ-A), IIJ Financial Systems Inc. (IIJ-FS),
 F-11




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##### Table of Contents



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.(hiho), which was purchased from Panasonic
network services Inc. on June 1, 2007 and Trust network services Inc.(Trust), which was
established on July 11, 2007, 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
Internet connectivity services for corporate use and for home use. Internet 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. Internet connectivity services for home use are provided under IIJ
brand such as IIJ4U and IIJmio, hi-ho brand and others, and consist mainly of dial-up type
services. The term of these contracts is one year for Internet connectivity services for
corporate use and generally one month for Internet connectivity services for home use. All
these services are billed and recognized monthly on a straight-line basis.Value-added service revenues consist principally of sales of various Internet access-related
services such as firewalls services. Value-added services also include monthly fees from data
center services such as housing, monitoring and security services. Other revenues under
connectivity and value-added services consist principally of Wide-area Ethernet services and
call-center customer support. 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 value-added services
are deferred and recognized over the contract period.Systems integration revenues consist principally of the development of Internet network
systems and related maintenance, monitoring and other operating services. The development of
the Internet network systems includes planning, systems design, and construction services, and
equipment and software purchased from third parties. 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 seperability and allocation. A multiple-element arrangement is separated into more
than one unit of accounting if all of the following criteria are met:
 
    
    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.
 If these criteria are not met, the arrangement is accounted for as one unit of
accounting which would result in
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##### Table of Contents



revenue being recognized on a straight-line basis or being deferred until the earlier of when
such criteria are
met or when the last undelivered element is delivered. If these criteria are met for
each element and there is
objective and reliable evidence of fair value for all units of accounting in an arrangement,
the arrangement consideration is allocated to the separate units of accounting based on each
units relative fair value.The period for the development of the systems is less than one year and revenues are
recognized when network systems and equipment are delivered and accepted by the customer. When
the equipment or system is delivered prior to other elements of the arrangement, revenue is
deferred until other service elements are completed and accepted by the customer because the
customer may return all of the equipment or system in the event that the Company does not
complete other service elements. Maintenance, monitoring and operating service revenues are
recognized ratably over the separate contract period, 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.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.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
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the liability. Operating lease payments are recognized as an expense on a straight-line basis
over the lease term.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. There were no impairment losses for long-lived assets for the three years in the
period ended March 31, 2008.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 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. The adoption of SFAS No. 158 had no
effect on the consolidated statement of income for the year ended March 31, 2007, or for any
prior period presented, and it will not affect the Companys operating results in future
periods.Income TaxesThe provision for income taxes is based on earnings before income taxes and
includes the effects of temporary differences between assets and liabilities recognized for
financial reporting purposes and income tax purposes and operating loss carryforwards.
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.
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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.Derivative Financial InstrumentsAll derivatives are recorded at fair value as either asset
or liabilities in the balance sheet in accordance with SFAS No. 133, Accounting for
Derivative Instruments and Hedging Activities, as amended by SFAS No. 138 and No. 149
(collectively, SFAS No. 133). In accordance with SFAS No. 133, the Company designated
interest swap contracts as a hedge of the variability of cash flows to be paid related to
interest on floating rate borrowings (cash flow hedge) and the effective portion of the
derivatives gain or loss is initially reported as a component of other comprehensive income
and subsequently reclassified into earnings when the underlying transaction affects earnings.
The ineffective portion of the gain or loss is reported in earning immediately. The Company
enters into contracts to hedge interest rate risks and does not enter into contracts or
utilize derivatives for trading purposes.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.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, value-added
services, systems
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integration and sales of network-related equipment. The Companys chief operating decision
maker, who is the Companys Chief Executive Officer, regularly reviews the revenue and cost of
sales on a consolidated basis and makes decisions regarding how to allocate resources and
assess performance based on a single operating unit.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. SFAS No. 157 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. In February 2008, the FASB issued Staff
Positions No. FAS 157-1, Application of FASB Statement No. 157 to FASB Statement No.13 and
Other Accounting Pronouncements That Address Fair Value Measurements for Purposes of Lease
Classification or Measurement under Statement 13 and 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 adoption of SFAS No. 157 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. The adoption of SFAS No. 159 will not have a material effect upon the
Companys financial position or results of operations.In December 2007, the FASB issued SFAS No. 141R, 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. 141R also establishes disclosure requirements to enable the
evaluation of the
nature and financial effects of the business combination. SFAS No. 141R is effective for
fiscal years beginning on or after December 15, 2008. The Company is currently evaluating the
impact of adopting the 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 Company is currently evaluating the impact of adopting the Statement.
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2.
    
    INVENTORYThe components of inventories as of March 31, 2007 and 2008 are as follows:
 Thousands ofThousands of Yen
    
    
    U.S. Dollars2007
    
    
    2008
    
    
    2008Network equipment purchased for resale
    
    ¥
    19,309
    
    
    ¥
    4,785
    
    
    $
    48Work in process
    
    
    1,047,621
    
    
    
    1,109,538
    
    
    
    11,112Supplies
    
    
    44,156
    
    
    
    69,837
    
    
    
    699Total inventories
    
    ¥
    1,111,086
    
    
    ¥
    1,184,160
    
    
    $
    11,859
 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, 2007 and 2008 is as follows:
 Thousands of YenUnrealized
    
    
    Unrealized
    
    
    FairCost
    
    
    Gains
    
    
    Losses
    
    
    ValueMarch 31, 2007Available-for-saleEquity
securities
    
    ¥
    252,988
    
    
    ¥
    1,057,288
    
    
    ¥
    12,582
    
    
    ¥
    1,297,694March 31, 2008Available-for-saleEquity
securities
    
    ¥
    489,172
    
    
    ¥
    423,362
    
    
    ¥
    68,053
    
    
    ¥
    844,481
 Thousands of U.S. DollarsUnrealized
    
    
    Unrealized
    
    
    FairCost
    
    
    Gains
    
    
    Losses
    
    
    ValueMarch 31, 2008Available-for-saleEquity
securities
    
    $
    4,899
    
    
    $
    4,240
    
    
    $
    682
    
    
    $
    8,457
  Thousands of YenLess than12 Months
    
    12 Months or More
    
    TotalFair
    
    Unrealized
    
    Fair
    
    Unrealized
    
    Fair
    
    UnrealizedValue
    
    Losses
    
    Value
    
    Losses
    
    Value
    
    LossesMarch 31, 2007Available-for-saleEquity
securities
    
    ¥
    37,398
    
    
    ¥
    12,582
    
    
    ¥
    
    
    
    ¥
    
    
    
    ¥
    37,398
    
    
    ¥
    12,582March 31, 2008Available-for-saleEquity
securities
    
    ¥
    219,962
    
    
    ¥
    68,053
    
    
    ¥
    
    
    
    ¥
    
    
    
    ¥
    219,962
    
    
    ¥
    68,053
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Thousands of U. S. DollarsLess than12 Months
    
    
    12 Months or More
    
    
    TotalFair
    
    
    Unrealized
    
    
    Fair
    
    
    Unrealized
    
    
    Fair
    
    
    UnrealizedValue
    
    
    Losses
    
    
    Value
    
    
    Losses
    
    
    Value
    
    
    LossesMarch 31, 2008Available-for-saleEquity
securities
    
    $
    2,203
    
    
    $
    682
    
    
    $
    
    
    
    $
    
    
    
    $
    2,203
    
    
    $
    682
        4.
    
    ALLOWANCE FOR DOUBTFUL ACCOUNTS AND ADVANCESAn analysis of the allowance for doubtful accounts and advances for the years ended March 31,
2006, 2007 and 2008 is as follows:
 Thousands of YenProvision for(Reversal of)Balance at
    
    
    
    
    
    DoubtfulBeginning of
    
    
    Credits
    
    
    Accounts and
    
    
    
    
    
    
    Balance atYear
    
    
    Charged Off
    
    
    Advances
    
    
    Reclassification
    
    
    End of YearYear ended March 31, 2006
    
    ¥
    448,870
    
    
    ¥
    (357,519
    )
    
    ¥
    (12,009
    )
    
    ¥
    35,000
    
    
    ¥
    114,342
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Thousands of YenProvision for(Reversal of)Balance at
    
    
    
    
    
    DoubtfulBeginning of
    
    
    Credits
    
    
    Accounts and
    
    
    
    
    
    
    Balance atYear
    
    
    Charged Off
    
    
    Advances
    
    
    Reclassification
    
    
    End of YearYear ended March 31, 2007
    
    ¥
    114,342
    
    
    ¥
    (3,764
    )
    
    ¥
    12,232
    
    
    ¥
    
    
    
    ¥
    122,810Year ended March 31, 2008
    
    ¥
    122,810
    
    
    ¥
    (8,750
    )
    
    ¥
    (416
    )
    
    ¥
    
    
    
    ¥
    113,644
 Thousands of U.S.dollarsReversal ofBalance at
    
    
    
    
    
    
    DoubtfulBeginning of
    
    
    Credits
    
    
    Accounts and
    
    
    
    
    
    
    Balance atYear
    
    
    Charged Off
    
    
    Advances
    
    
    Reclassification
    
    
    End of YearYear ended March 31, 2008
    
    $
    1,230
    
    
    $
    (88
    )
    
    $
    (4
    )
    
    $
    
    
    
    $
    1,138
  5.
    
    INVESTMENTS IN AND ADVANCES TO 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 ($2,357 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, 2007 and 2008, and for each of the three years in the period ended
March 31, 2008 are summarized as follows:
 Thousands ofThousands of Yen
    
    
    U.S. Dollars2006
    
    
    2007
    
    
    2008
    
    
    2008Accounts receivable
    
    ¥
    
    
    
    ¥
    43,628
    
    
    ¥
    60,420
    
    
    $
    605Accounts payable
    
    
    
    
    
    
    15,808
    
    
    
    20,197
    
    
    
    202Revenues
    
    
    1,286,275
    
    
    
    481,850
    
    
    
    582,290
    
    
    
    5,832Costs and expenses
    
    
    656,184
    
    
    
    172,971
    
    
    
    207,670
    
    
    
    2,080
   Thousands ofThousands of Yen
    
    
    
    U.S. Dollars2007
    
    
    
    
    
    
    2008
    
    
    2008Multifeed
    
    
    29.72
    %
    
    ¥
    461,750
    
    
    
    31.00
    %
    
    ¥
    621,906
    
    
    $
    6,228i-revo
    
    
    30.00
    
    
    
    328,435
    
    
    
    30.00
    
    
    
    80,567
    
    
    
    807TCC
    
    
    
    
    
    
    
    
    
    
    45.00
    
    
    
    218,176
    
    
    
    2,185Other
    
    
    
    
    
    
    68,305
    
    
    
    
    
    
    
    70,588
    
    
    
    707Total
    
    
    
    
    
    ¥
    858,490
    
    
    
    
    
    
    ¥
    991,237
    
    
    $
    9,927
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6. PROPERTY AND EQUIPMENT
  Thousands ofThousands of Yen
    
    
    U.S. Dollars2007
    
    
    2008
    
    
    2008Data communications equipment
    
    ¥
    807,528
    
    
    ¥
    646,592
    
    
    $
    6,476Office and other equipment
    
    
    782,666
    
    
    
    1,037,273
    
    
    
    10,388Leasehold improvements
    
    
    802,220
    
    
    
    919,851
    
    
    
    9,212Purchased software
    
    
    6,202,794
    
    
    
    7,600,204
    
    
    
    76,116Assets under capital leases, primarily data
communications equipment
    
    
    13,000,872
    
    
    
    15,566,075
    
    
    
    155,895Total
    
    
    21,596,080
    
    
    
    25,769,995
    
    
    
    258,087Less accumulated depreciation
and amortization
    
    
    (11,763,684
    )
    
    
    (14,029,785
    )
    
    
    (140,508
    )Property and equipmentnet
    
    ¥
    9,832,396
    
    
    ¥
    11,740,210
    
    
    $
    117,579
 7. GOODWILL AND OTHER INTANGIBLE ASSETS
  Thousands ofThousands of Yen
    
    
    U.S. Dollars2007
    
    
    2008
    
    
    2008Amortized intangible assets:Licenses
    
    
    
    
    
    ¥
    143,110
    
    
    $
    1,433Customer relationship
    
    
    
    
    
    
    289,000
    
    
    
    2,894Backlog
    
    
    1,570
    
    
    
    2,270
    
    
    
    23Total
    
    
    1,570
    
    
    
    434,380
    
    
    
    4,350Less accumulated amortizationCustomer relationship
    
    
    
    
    
    
    (53,083
    )
    
    
    (532
    )Backlog
    
    
    (874
    )
    
    
    (2,270
    )
    
    
    (22
    )Total
    
    
    (874
    )
    
    
    (55,353
    )
    
    
    (554
    )Amortized intangible assetnet
    
    
    696
    
    
    
    379,027
    
    
    
    3,796Non-amortized intangible assets:Telephone rights
    
    ¥
    12,534
    
    
    ¥
    12,513
    
    
    $
    126Trademark
    
    
    
    
    
    
    192,000
    
    
    
    1,923Customer relationship
    
    
    1,477,412
    
    
    
    2,816,577
    
    
    
    28,208Goodwill
    
    
    1,386,252
    
    
    
    2,507,258
    
    
    
    25,110Total
    
    
    2,876,198
    
    
    
    5,528,348
    
    
    
    55,367Total intangible assets
    
    ¥
    2,876,894
    
    
    ¥
    5,907,375
    
    
    $
    59,163
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Thousands ofYear Ending March 31
    
    Thousands of yen
    
    U.S. Dollars2009
    
    ¥
    92,322
    
    
    $
    9252010
    
    
    92,322
    
    
    
    9252011
    
    
    61,211
    
    
    
    6132012
    
    
    54,989
    
    
    
    5512013
    
    
    54,989
    
    
    
    551
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8. LEASES
   Operating Leases
  Thousands ofThousands of Yen
    
    
    U.S. Dollars2007
    
    
    2008
    
    
    2008Head office
    
    ¥
    1,185,307
    
    
    ¥
    1,262,508
    
    
    $
    12,644Sales and subsidiaries offices
    
    
    438,211
    
    
    
    713,383
    
    
    
    7,145Others
    
    
    62,623
    
    
    
    61,274
    
    
    
    613Total refundable guarantee deposits
    
    ¥
    1,686,141
    
    
    ¥
    2,037,165
    
    
    $
    20,402
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Capital LeasesThe Company conducts its connectivity and other services by using data
communications and other equipment leased under capital lease arrangements. The fair values of
the assets upon execution of the capital lease agreements and accumulated depreciation amounted
to ¥13,000,872 thousand and ¥6,101,574 thousand at March 31, 2007 and ¥15,566,075 thousand
($155,895 thousand) and ¥7,673,873 thousand ($76,854 thousand) at March 31, 2008, respectively.Lessee Future Minimum Lease PaymentsAs of March 31, 2008, future lease payments under
non-cancelable operating leases, including the aforementioned non-cancelable connectivity lease
agreements (but excluding dedicated access lines which the Company charges outright to
customers), and capital leases were as follows:
 Thousands of Yen
    
    
    Thousands of U.S. DollarsConnectivity
    
    
    
    
    
    
    
    
    
    
    ConnectivityLines
    
    
    Other
    
    
    
    
    
    
    Lines
    
    
    OtherOperating
    
    
    Operating
    
    
    Capital
    
    
    Operating
    
    
    Operating
    
    
    CapitalLeases
    
    
    Leases
    
    
    Leases
    
    
    Leases
    
    
    Leases
    
    
    LeasesYear ending March 31:2009
    
    ¥
    593,320
    
    
    ¥
    1,831,947
    
    
    ¥
    3,699,873
    
    
    $
    5,942
    
    
    $
    18,347
    
    
    $
    37,0542010
    
    
    525,820
    
    
    
    1,350,472
    
    
    
    2,556,349
    
    
    
    5,266
    
    
    
    13,525
    
    
    
    25,6022011
    
    
    281,326
    
    
    
    99,704
    
    
    
    1,713,874
    
    
    
    2,818
    
    
    
    999
    
    
    
    17,1642012
    
    
    29,000
    
    
    
    5,111
    
    
    
    596,320
    
    
    
    290
    
    
    
    51
    
    
    
    5,9722013
    
    
    
    
    
    
    
    
    
    
    41,978
    
    
    
    
    
    
    
    
    
    
    
    4202014 and thereafter
    
    
    
    
    
    
    
    
    
    
    4,980
    
    
    
    
    
    
    
    
    
    
    
    50Total minimum lease payments
    
    ¥
    1,429,466
    
    
    ¥
    3,287,234
    
    
    
    8,613,374
    
    
    $
    14,316
    
    
    $
    32,922
    
    
    
    86,263Less amounts representing interest
    
    
    
    
    
    
    
    
    
    
    419,067
    
    
    
    
    
    
    
    
    
    
    
    4,197Present value of net minimum capital
lease payments
    
    
    
    
    
    
    
    
    
    
    8,194,307
    
    
    
    
    
    
    
    
    
    
    
    82,066Less current portion
    
    
    
    
    
    
    
    
    
    
    3,455,948
    
    
    
    
    
    
    
    
    
    
    
    34,611Noncurrent portion
    
    
    
    
    
    
    
    
    
    ¥
    4,738,359
    
    
    
    
    
    
    
    
    
    
    $
    47,455
 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 payment amounts. Interest income in sales-type leases is recognized in other income using
the interest method.The components of the net investment in sales-type leases as of March 31, 2007 and 2008 were as
follows:
 Thousands ofThousands of Yen
    
    
    U.S. Dollars2007
    
    
    2008
    
    
    2008Year ending March 31:2009
    
    
    
    
    
    ¥
    405,094
    
    
    $
    4,0572010
    
    
    
    
    
    
    285,095
    
    
    
    2,8552011
    
    
    
    
    
    
    285,095
    
    
    
    2,8552012
    
    
    
    
    
    
    19,982
    
    
    
    200Total minimum lease payments to be received*
    
    ¥
    1,207,512
    
    
    
    995,266
    
    
    
    9,968Estimated residual value of leased property (unguaranteed)
    
    
    215,917
    
    
    
    215,917
    
    
    
    2,162Less unearned income
    
    
    68,599
    
    
    
    45,246
    
    
    
    453Net investment in sales-type leases
    
    
    1,354,830
    
    
    
    1,165,937
    
    
    
    11,677Less current portion
    
    
    320,530
    
    
    
    383,177
    
    
    
    3,838Non-current net investment in sales-type leases
    
    ¥
    1,034,300
    
    
    ¥
    782,760
    
    
    $
    7,839
 
 *
    
    Estimated executory costs, including profit thereon, of ¥263,245 thousand and ¥315,691
thousand ($3,162 thousand) were excluded from total minimum lease payments to be
received as of March 31, 2007 and 2008. 
 F-23




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##### Table of Contents



9.
    
    BORROWINGSShort-term borrowings at March 31, 2007 and 2008 consist of bank overdrafts. Short-term
borrowings bear fixed and variable-rate interest and their weighted average rates at March 31, 2007 and
2008 were 1.141 percent and 1.365 percent, respectively.Long-term borrowings as of March 31, 2007 consisted of the following:
 Thousands of Yen2007Unsecured long-term loans payable to
banks, maturing at various dates
through calendar 2007.
Interest is payable at a variable rate.
Weighted average interest rates were 3.815 percent
at March 31, 2007.
    
    ¥
    40,000Unsecured long-term loans payable to
banks, maturing at various dates through calendar
2007. Interest is payable at a variable
rate based on TIBOR which was 0.706 percent as of March 31, 2007.
Weighted average interest rates were 1.706 percent
at March 31, 2007.
    
    
    250,000Total
    
    
    290,000Less current portion
    
    
    (290,000
    )Long-term borrowings, less current
portion
    
    ¥
    
 The Company entered into interest rate swap contracts to manage its interest rate exposure
resulting in a fixed interest rate for a portion of its long-term debt. The effective weighted
average interest rates for ¥250,000 thousand of the long-term loan outstanding at March 31, 2007
after giving effect to such swap agreements were 1.670 percent per annum.Substantially all short-term and long-term bank borrowings are made under agreements which, as
is customary in Japan, provide that under certain conditions the bank may require the borrower
to provide collateral (or additional collateral) or guarantor with respect to the borrowings and
that the bank may treat any collateral, whether furnished as security for short-term or
long-term loans or otherwise, as collateral for all indebtedness to such bank. Also, provisions
of certain loan agreements grant certain rights of possession to the lenders in the event of
default. The Company did not provide banks with any collateral for outstanding loans as of
March 31, 2008.The Company entered into bank overdraft agreements with certain Japanese banks for which the
unused balance outstanding as of March 31, 2008 was ¥5,870,000 thousand ($58,788 thousand).10.
    
    INCOME TAXESIncome taxes imposed by the national, prefectural and municipal governments of Japan resulted in
a normal statutory rate of approximately 41 percent for the years ended March 31, 2006, 2007 and
2008.Income from operations before income tax expense (benefit), minority interests and equity in net
loss of equity method investees and income tax expense (benefit) for the years ended March 31,
2006, 2007, and 2008 consists of the following components:
 Thousands ofThousands of Yen
    
    
    U.S. Dollars2006
    
    
    2007
    
    
    2008
    
    
    2008Income from operations before income tax
expense (benefit), minority interests and
equity in net loss of equity method
investees:Domestic
    
    ¥
    5,316,535
    
    
    ¥
    5,055,155
    
    
    ¥
    4,382,741
    
    
    $
    43,893Foreign
    
    
    62,024
    
    
    
    (6,467
    )
    
    
    (21,072
    )
    
    
    (211
    )Total
    
    ¥
    5,378,559
    
    
    ¥
    5,048,688
    
    
    ¥
    4,361,669
    
    
    $
    43,682Income taxes-current:Domestic
    
    ¥
    289,376
    
    
    ¥
    798,922
    
    
    ¥
    778,152
    
    
    $
    7,793Foreign
    
    
    198,825
    
    
    
    (108,180
    )
    
    
    13,709
    
    
    
    138Total
    
    ¥
    488,201
    
    
    ¥
    690,742
    
    
    ¥
    791,861
    
    
    $
    7,931
 F-24




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##### Table of Contents



Thousands ofThousands of Yen
    
    
    U.S. Dollars2006
    
    
    2007
    
    
    2008
    
    
    2008Income taxes-deferred:Domestic
    
    ¥
    (230,841
    )
    
    ¥
    (1,494,685
    )
    
    ¥
    (1,653,275
    )
    
    $
    (16,558
    )Foreign
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Total
    
    ¥
    (230,841
    )
    
    ¥
    (1,494,685
    )
    
    ¥
    (1,653,275
    )
    
    $
    (16,558
    )
 In September 2007, the Company applied for the consolidated tax declaration and the
application was approved by the national tax agency. The company started the consolidated tax
declaration for the fiscal year ending March 31, 2009 and valuation allowance for deferred tax
assets were adjusted in consideration of the application and approval of the consolidated tax
declaration in the year ended March 31, 2008.Net deferred income tax assets and liabilities are reflected on the consolidated balance sheets
as of March 31, 2007 and 2008 as follows:
 Thousands ofThousands of Yen
    
    
    U.S. Dollars2007
    
    
    2008
    
    
    2008Current Assets-Other current assets
    
    ¥
    427,079
    
    
    ¥
    1,090,698
    
    
    $
    10,923Noncurrent Assets-Other assets
    
    
    1,392,144
    
    
    
    2,458,895
    
    
    
    24,626Noncurrent liabilities-Other noncurrent liabilities
    
    
    (40,652
    )
    
    
    (92,908
    )
    
    
    (930
    )Total
    
    ¥
    1,778,571
    
    
    ¥
    3,456,685
    
    
    $
    34,619
 The approximate effect of temporary differences and carryforwards giving rise to deferred tax
balances at March 31, 2007 and 2008 was as follows:
 Thousands ofThousands of Yen
    
    
    U.S. Dollars2007
    
    
    2008
    
    
    2008Deferred
    
    
    Deferred
    
    
    Deferred
    
    
    Deferred
    
    
    Deferred
    
    
    DeferredTax
    
    
    Tax
    
    
    Tax
    
    
    Tax
    
    
    Tax
    
    
    TaxAssets
    
    
    Liabilities
    
    
    Assets
    
    
    Liabilities
    
    
    Assets
    
    
    LiabilitiesUnrealized gains on
available-for-sale securities
    
    ¥
    
    
    
    ¥
    487,242
    
    
    ¥
    
    
    
    ¥
    146,201
    
    
    $
    
    
    
    $
    1,464Capital leases
    
    
    87,994
    
    
    
    
    
    
    
    93,409
    
    
    
    
    
    
    
    935
    
    
    
    Accrued expenses
    
    
    301,322
    
    
    
    
    
    
    
    325,448
    
    
    
    
    
    
    
    3,259
    
    
    
    Retirement and pension cost
    
    
    311,558
    
    
    
    
    
    
    
    456,073
    
    
    
    
    
    
    
    4,568
    
    
    
    Stock issuance cost
    
    
    14,606
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Allowance for doubtful accounts
    
    
    10,874
    
    
    
    
    
    
    
    10,918
    
    
    
    
    
    
    
    109
    
    
    
    Depreciation
    
    
    18,362
    
    
    
    
    
    
    
    25,996
    
    
    
    
    
    
    
    260
    
    
    
    Net loss on other investment
    
    
    632,365
    
    
    
    
    
    
    
    665,594
    
    
    
    
    
    
    
    6,666
    
    
    
    Operating loss carryforward
    
    
    7,461,360
    
    
    
    
    
    
    
    6,207,609
    
    
    
    
    
    
    
    62,169
    
    
    
    Other
    
    
    119,776
    
    
    
    128,890
    
    
    
    142,122
    
    
    
    216,409
    
    
    
    1,424
    
    
    
    2,167Total
    
    
    8,958,217
    
    
    
    616,132
    
    
    
    7,927,169
    
    
    
    362,610
    
    
    
    79,390
    
    
    
    3,631Valuation allowance
    
    
    (6,563,514
    )
    
    
    
    
    
    
    (4,107,874
    )
    
    
    
    
    
    
    (41,140
    )
    
    
    Total
    
    ¥
    2,394,703
    
    
    ¥
    616,132
    
    
    ¥
    3,819,295
    
    
    ¥
    362,610
    
    
    $
    38,250
    
    
    $
    3,631
 As of March 31, 2007 and 2008, the valuation allowance for deferred tax assets has been provided
at amounts which are not considered more likely than not to be realized. The net changes in the
valuation allowance for deferred tax assets were a decrease of ¥1,244,326 thousand, a decrease
of ¥607,917 thousand and a decrease of ¥2,462,785 thousand ($24,665 thousand) for the years
ended March 31, 2006, 2007 and 2008, respectively.
 F-25




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##### Table of Contents



As of March 31, 2008, IIJ and IIJ America had tax operating loss carryforwards of ¥13,879,690
thousand ($139,005 thousand) and ¥998,183 thousand ($9,997 thousand), respectively. These
loss carryforwards are available to offset future taxable income, and will expire in the
period ending March 31, 2012 in Japan and December 31, 2026 in the United States of America as
follows:
 Year Ending
    
    
    
    
    
    Thousands ofMarch 31
    
    Thousands of Yen
    
    
    U.S. Dollars2009
    
    ¥
    
    
    
    $
    2010
    
    
    6,111,170
    
    
    
    61,2032011
    
    
    7,353,136
    
    
    
    73,6422012
    
    
    415,384
    
    
    
    4,1602013 and thereafter
    
    
    998,183
    
    
    
    9,997Total
    
    ¥
    14,877,873
    
    
    $
    149,002
 A reconciliation between the amount of reported income taxes and the amount of income taxes
computed using the normal statutory rate for each of the three years in the period ended March
31, 2008 is as follows:
 Thousands ofThousands of Yen
    
    
    U.S. Dollars2006
    
    
    2007
    
    
    2008
    
    
    2008Amount computed by using
normal Japanese statutory
tax rate
    
    ¥
    2,205,209
    
    
    ¥
    2,069,962
    
    
    ¥
    1,788,284
    
    
    $
    17,910Increase (decrease) in taxes
resulting from:Expenses not deductible for
tax purpose
    
    
    38,653
    
    
    
    60,340
    
    
    
    81,117
    
    
    
    812Provision for (reversal of) reserve
for tax contingencies
    
    
    197,753
    
    
    
    (108,782
    )
    
    
    12,365
    
    
    
    124Inhabitant tax-per capita
    
    
    25,085
    
    
    
    25,141
    
    
    
    25,780
    
    
    
    258Realization of tax benefit of
operating loss carryforwards
    
    
    (439,256
    )
    
    
    (2,163,531
    )
    
    
    (769,583
    )
    
    
    (7,707
    )Other change in valuation allowance
    
    
    (1,933,379
    )
    
    
    (717,049
    )
    
    
    (1,980,018
    )
    
    
    (19,830
    )Expiration of operating loss
carryforwards
    
    
    149,750
    
    
    
    Othernet
    
    
    13,545
    
    
    
    29,976
    
    
    
    (19,359
    )
    
    
    (194
    )Income tax expense (benefit)
as reported
    
    ¥
    257,360
    
    
    ¥
    (803,943
    )
    
    ¥
    (861,414
    )
    
    $
    (8,627
    )
 In September 2006, IIJ America filed an application with the Internal Revenue Service (IRS)
for the
Bilateral Advance Pricing Agreement Request (BAPA), relating to the terms of transactions
with IIJ and
the use of tax operating loss carryforwards in its taxation. IIJ America reserved for tax
contingencies related
to the denial of the past use of tax operating loss carryforwards, which amounted to ¥102,310
thousand as of
March 31, 2007. IIJ America did not have the reserve for the potential penalty relating to the
past use of the
tax operating loss carryforwards. The Company believed that IRS would not impose tax penalty
in case that
the Company applied the BAPA.The Company adopted FIN No.48 effective April 1, 2007. As a result of implementation of FIN
No.48,
the Company identified liabilities for uncertain tax positions of ¥102,310 thousand which
included
unrecognized tax benefit of ¥77,417 thousand and related interest accrual of ¥24,893 thousand
as of April 1,
2007 and did not require a cumulative-effect adjustment to retained earnings.
 F-26




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##### Table of Contents



A reconciliation of the beginning and ending amount of unrecognized tax benefits is as
follows:
 Thousands ofThousands of Yen
    
    
    U.S. Dollars2008
    
    
    2008Balance at April 1
    
    ¥
    77,417
    
    
    $
    775Increases related to positions
taken on items from current year
    
    
    5,410
    
    
    
    54Translation adjustment
    
    
    (3,393
    )
    
    
    (34
    )Balance at March 31
    
    ¥
    79,434
    
    
    $
    795
 At March 31, 2008, the amount of unrecognized tax benefits was ¥79,434 thousand (¥77,417
thousand at
April 1, 2007), which would decrease the effective tax rate, if recognized.Interest associated with uncertain tax positions of ¥7,356 thousand ($74 thousand) were
recognized as
income tax expense for the year ended March 31, 2008 and accrued interest of ¥30,982 thousand
($310
thousand) was recognized as of March 31, 2008. Penalties associated with uncertain tax
position were not
recognized and not accrued as of March 31, 2008. The Company believed that IRS would not
impose tax
penalty in case that the Company applied the BAPA.The Company did not reasonably expect that the unrecognized tax benefit will change
significantly within
the next twelve months.The Company has open tax years subject to examination from the year ended March 31,
2001 in Japan
and from the year ended December 31, 1997 in the U.S.
 
 F-27




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##### Table of Contents



11.
    
    RETIREMENT AND PENSION PLANSIIJ and certain subsidiaries have unfunded retirement benefit and noncontributory defined
benefit pension plans which together cover substantially all of their employees who are not
directors and also participate in a contributory multi-employer pension plan, the Japan
Computer Information Service Employees Pension Fund (the Multi-Employer Plan), covering
substantially all of their employees.Approximately 70 percent of the employees benefits from IIJs severance indemnity plan was
transferred in May 1997 to its newly established noncontributory defined benefits pension
plan. The following information regarding net periodic pension cost and accrued pension cost
also includes the 30 percent of severance benefits not transferred to the noncontributory
plan. Under the severance and pension plans, all of IIJs employees are entitled, upon
voluntary retirement with 15 years or more service, or upon mandatory retirement at age 60, to
a 10-year period of annuity payments (or lump-sum severance indemnities) based on the rate of
pay at the time of retirement, length of service and certain other factors. IIJs employees
who do not meet these conditions are entitled to lump-sum severance indemnities.As stipulated by the Japanese Welfare Pension Insurance Law, the Multi-Employer Plan is
composed of a substitutional portion of Japanese Pension Insurance and a multi-employers
portion of a contributory defined benefit pension plan. The benefits for the substitutional
portion are based on a standard remuneration schedule under the Welfare Pension Insurance Law
and the length of participation. The multi-employers portion of the benefits is based on the
employees length of service. However, assets contributed by an employer including IIJ are
not segregated in a separate account or restricted to provide benefits only to employees of
that employer. The net pension cost under the Multi-Employer Plan is recognized when
contributions become due.The Company adopted SFAS No.158 effective March 31, 2007. The following table provides a
breakdown of the incremental effect of applying this statement on individual line items in the
consolidated balance sheet at March 31, 2007:
 Thousands of YenBefore
    
    
    
    
    
    
    AfterApplication of
    
    
    
    
    
    
    Application ofSFAS 158
    
    
    Adjustments
    
    
    SFAS 158Other assets
    
    ¥
    3,224,576
    
    
    ¥
    35,477
    
    
    ¥
    3,260,053Total Assets
    
    ¥
    47,657,527
    
    
    ¥
    35,477
    
    
    ¥
    47,693,004Other noncurrent liabilities
    
    ¥
    563,062
    
    
    ¥
    1,556
    
    
    ¥
    564,618Accrued retirement
and pension costs-current
    
    
    
    
    
    
    8,428
    
    
    
    8,428Accrued retirement
and pension costs-noncurrent
    
    
    606,014
    
    
    
    144,028
    
    
    
    750,042Minority interest
    
    
    821,986
    
    
    
    (6,804
    )
    
    
    815,182Accumulated other
comprehensive income
    
    
    1,061,440
    
    
    
    (111,731
    )
    
    
    949,709Total Liabilities and
Shareholders Equity
    
    ¥
    47,657,527
    
    
    ¥
    35,477
    
    
    ¥
    47,693,004
 F-28




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##### Table of Contents



Net periodic pension cost for the years ended March 31, 2006, 2007 and 2008 included the
following components:
 Thousands ofThousands of Yen
    
    
    U.S. Dollars2006
    
    
    2007
    
    
    2008
    
    
    2008Service cost
    
    ¥
    240,765
    
    
    ¥
    257,960
    
    
    ¥
    325,065
    
    
    $
    3,256Interest cost
    
    
    20,524
    
    
    
    26,589
    
    
    
    31,076
    
    
    
    311Expected return on plan assets
    
    
    (16,736
    )
    
    
    (26,942
    )
    
    
    (29,098
    )
    
    
    (292
    )Amortization of transition
obligation
    
    
    402
    
    
    
    402
    
    
    
    402
    
    
    
    4Amortization of net actuarial loss
    
    
    1,904
    
    
    
    2,505
    
    
    
    3,699
    
    
    
    37Net periodic pension cost
    
    ¥
    246,859
    
    
    ¥
    260,514
    
    
    ¥
    331,144
    
    
    $
    3,316
 Other changes in plan assets and benefit obligations recognized in other comprehensive
income for the year ended March 31, 2008 follows:
 Thousands ofThousands of Yen
    
    
    U.S. Dollars2008
    
    
    2008Net loss
    
    ¥
    167,746
    
    
    $
    1,680Amortization of net actuarial loss
in net periodic pension cost
    
    
    (3,699
    )
    
    
    (37
    )Amortization of transition
obligation in net periodic
pension cost
    
    
    (402
    )
    
    
    (4
    )Amounts recognized in other
comprehensive income
    
    
    163,645
    
    
    
    1,639Total net periodic pension cost
and amounts recognized in other
comprehensive income
    
    ¥
    494,789
    
    
    $
    4,955
 The change in benefit obligation and plan assets for the years ended March 31, 2007 and 2008
and the amounts recognized in the consolidated balance sheets as of March 31, 2007 and 2008
are as follows:
 Thousands ofThousands of Yen
    
    
    U.S. Dollars2007
    
    
    2008
    
    
    2008Change in benefit obligation:Benefit obligation at beginning of year
    
    ¥
    1,329,452
    
    
    ¥
    1,635,586
    
    
    $
    16,380Service cost
    
    
    257,960
    
    
    
    325,065
    
    
    
    3,256Interest cost
    
    
    26,589
    
    
    
    31,076
    
    
    
    311Actuarial loss
    
    
    45,597
    
    
    
    89,636
    
    
    
    898Benefit paid
    
    
    (24,012
    )
    
    
    (37,062
    )
    
    
    (371
    )Benefit obligation at end of year
    
    ¥
    1,635,586
    
    
    ¥
    2,044,301
    
    
    $
    20,474Change in plan assets:Fair value of plan assets at beginning
of year
    
    ¥
    997,856
    
    
    ¥
    1,077,696
    
    
    $
    10,794Actual return on plan assets
    
    
    32,233
    
    
    
    (49,012
    )
    
    
    (490
    )Employer contribution
    
    
    173,160
    
    
    
    164,873
    
    
    
    1,651
 F-29




---



##### Table of Contents



Thousands ofThousands of Yen
    
    
    U.S. Dollars2007
    
    
    2008
    
    
    2008Benefits paid
    
    
    (14,691
    )
    
    
    (21,753
    )
    
    
    (219
    )Refund of surplus in plan assets
    
    
    (110,862
    )
    
    
    
    
    
    
    Fair value of plan assets at end of year
    
    ¥
    1,077,696
    
    
    ¥
    1,171,804
    
    
    $
    11,736Funded status at end of year
    
    
    (557,890
    )
    
    
    (872,497
    )
    
    
    (8,738
    )
 On October 25, 2006, the surplus amount of ¥110,862 thousand in plan assets was refunded
as a result of the
excess of actual return on plan assets compared with the expected return.Amounts recognized in the consolidated balance sheets as of March 31, 2007 and 2008 consist
of:
 Thousands ofThousands of Yen
    
    
    U.S. Dollars2007
    
    
    2008
    
    
    2008Accrued retirement and pension costs-current
    
    ¥
    (8,428
    )
    
    ¥
    (11,436
    )
    
    $
    (115
    )Accrued retirement and pension costs-non current
    
    
    (549,462
    )
    
    
    (861,061
    )
    
    
    (8,623
    )Net amount recognized
    
    ¥
    (557,890
    )
    
    ¥
    (872,497
    )
    
    $
    (8,738
    )
 The accumulated benefit obligation for the Companys defined benefit pension plans as of March
31, 2007 and
2008 was ¥937,733 thousand and ¥1,144,901 thousand ($11,466 thousand), respectively.The aggregate projected benefit obligation and aggregate fair value of plan assets for plans
with projected benefit obligations in excess of plan assets were ¥1,635,586 thousand and
¥1,077,696 thousand at March 31, 2007 and ¥2,044,301 thousand ($20,474 thousand) and ¥1,171,804
thousand ($11,736 thousand) at March 31, 2008. The aggregate accumulated benefit obligations of
plans with no plan assets were ¥220,779 thousand and ¥314,253 thousand ($3,147 thousand) at
March 31, 2007 and 2008, respectively.Amounts recognized in accumulated other comprehensive income at March 31, 2007 and 2008 consist
of:
 Thousands ofThousands of Yen
    
    
    U.S. Dollars2007
    
    
    2008
    
    
    2008Net actuarial loss
    
    ¥
    148,842
    
    
    ¥
    312,889
    
    
    $
    3,134Obligation at transition
    
    
    3,614
    
    
    
    3,212
    
    
    
    32¥
    152,456
    
    
    ¥
    316,101
    
    
    $
    3,166
 The estimated net actuarial loss and obligation at transition for the defined benefit pension
plans that will be amortized from accumulated other comprehensive income into net periodic
pension cost in the fiscal year ending March 31, 2009 are ¥8,098 thousand ($81 thousand) and
¥402 thousand ($4 thousand), respectively.The Company uses a March 31 measurement date for all its plans.Actuarial assumptions as of March 31:
 BenefitObligations
    
    Net Periodic Costs2007
    
    2008
    
    2006
    
    2007
    
    2008Discount rate
    
    
    1.9
    %
    
    
    1.8
    %
    
    
    1.8
    %
    
    
    2.0
    %
    
    
    1.9
    %Expected long-term rate of return
on plan assets
    
    
    
    
    
    
    
    
    
    
    2.1
    
    
    
    2.7
    
    
    
    2.7Rate of increase in compensation
    
    
    3.5
    
    
    
    3.6
    
    
    
    3.4
    
    
    
    3.4
    
    
    
    3.5
 The Company sets the discount rate assumption annually at March 31 to reflect the market yield
of Japanese
 F-30




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##### Table of Contents



Government Bonds matched against the average remaining service period of employees.The basis for determining the long-term rate of returns is a combination of historical returns
and prospective return assumptions derived from pension trust funds managing company.IIJs funding policies with respect to the noncontributory plan are generally to contribute
amounts considered tax deductible under applicable income tax regulations. Plan assets
including life insurance pooled investment portfolios consist of Japanese Government bonds,
other debt securities and marketable equity securities.
Life insurance pooled investment portfolios are managed by an insurance company and guarantee a
minimum rate of return.The Companys investment strategy for the plan assets is to manage the assets in order to pay
retirement benefits to plan participants while minimizing cash contributions from the Company
over the life of the plans. This is accomplished by preserving capital through diversification
in equity and debt securities based on portfolio determined by the insurance company
forecasting macroeconomics in order to maximize long-term rate of return, while considering the
liquidity need of the plans.The projected allocation of the plan assets managed by the insurance company is developed in
consideration of the expected long-term investment returns for each category of the plan
assets. Approximately 63.0%, 35.0%, and 2.0% of the plan assets excluding pooled investment
portfolios will be allocated to debt securities, equity securities and other financial
instruments, respectively, to moderate the level of volatility in pension plan asset returns
and reduce risks. 50% of the employers contribution to the plan during the year ending March
31, 2009 will be allocated to life insurance pooled investment portfolios and other 50% will be
allocated to the aforementioned investments.The Companys pension plan asset allocations as of March 31, 2007 and 2008 by asset category
are as follows:
 2007
    
    2008Asset category:Equity securities
    
    
    21.9
    %
    
    
    (35.7)
    %
    
    
    20.2
    %
    
    
    (35.1)
    %Debt securities
    
    
    38.1
    
    
    
    (62.3
    )
    
    
    36.2
    
    
    
    (62.9
    )Life insurance pooled investment portfolios
    
    
    38.8
    
    
    
    (
    )
    
    
    42.4
    
    
    
    (
    )Other
    
    
    1.2
    
    
    
    (2.0
    )
    
    
    1.2
    
    
    
    (2.0
    )Total
    
    
    100.0
    %
    
    
    (100.0)
    %*
    
    
    100.0
    %
    
    
    (100.0)
    %*
 
 *
    
    The percentages in parentheses represent the Companys plan asset allocation excluding
life
insurance pooled investment portfolios. The unrecognized net loss and the unrecognized net obligation at the date of initial
application are being amortized over 14 years and 21 years, respectively.Contributions due and paid during the years ended March 31, 2006, 2007 and 2008 under the
Multi-Employer Plan, including its substitutional portion, amounted to ¥451,312 thousand,
¥522,269 thousand and ¥621,786
thousand ($6,227 thousand), respectively.IIJ expects to contribute ¥164,873 thousand ($1,651 thousand) to its pension plan in the year
ending March 31, 2009.The following benefit payments, which reflect expected future service, as appropriate,
are expected to be paid.
 Year Ending
    
    
    
    
    
    Thousands ofMarch 31
    
    Thousands of yen
    
    
    U.S. Dollars2009
    
    ¥
    43,677
    
    
    $
    4372010
    
    
    51,470
    
    
    
    5162011
    
    
    61,925
    
    
    
    6202012
    
    
    70,043
    
    
    
    7022013
    
    
    82,420
    
    
    
    8252014  2018
    
    
    516,936
    
    
    
    5,177Total
    
    ¥
    826,471
    
    
    $
    8,277
 F-31




---



##### Table of Contents



The amount of retirement benefits for retiring directors and company auditors must be approved
by the shareholders. The Company has retirement plans for full-time company auditors and
retirement plans for full-time directors. The Company recorded a liability for retirement
benefit for full-time directors and company auditors of ¥200,580 thousand and ¥240,890 thousand
($2,413 thousand), which would be required if they retire at March 31, 2007 and 2008,
respectively.The retirement benefits paid to retired directors and company auditors were ¥4,010 thousand,
¥3,000 thousand and ¥6,480 thousand ($65 thousand) for the year ended March 31, 2006, 2007 and
2008, respectively.
 F-32




---



##### Table of Contents



12. SHAREHOLDERS EQUITY
  
 
 
 th
     F-33




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##### Table of Contents



Stock Option Plans
 
   Thousands of YenWeighted AverageNumber of
    
    
    Number of
    
    
    Exercise Price perOptions
    
    
    Shares
    
    
    Common SharesUnexercised options outstandingMarch 31, 2007
    
    
    515
    
    
    
    2,575
    
    
    ¥
    1,009Options granted
    
    
    
    
    
    
    
    
    
    
    Options exercised
    
    
    
    
    
    
    
    
    
    
    Options forfeited
    
    
    
    
    
    
    
    
    
    
    Unexercised options outstandingMarch 31, 2008
    
    
    515
    
    
    
    2,575
    
    
    ¥
    1,009
  
 F-34




---



##### Table of Contents



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
    
    
    
    2.0
    
    
    
    950
    
    
    334
    
    
    1,625
    
    
    
    3.3
    
    
    
    1,625
    
    
    
 13. OTHER COMPREHENSIVE INCOME
  Thousands of YenBefore Tax
    
    
    Tax (Expense)
    
    
    Net of TaxAmount
    
    
    or Benefit
    
    
    AmountYear ended March 31, 2006:Foreign currency translation adjustments
    
    ¥
    38,331
    
    
    ¥
    
    
    
    ¥
    38,331Unrealized holding gain (loss) on
securities:Amount arising during the period
    
    
    1,046,874
    
    
    
    (429,218
    )
    
    
    617,656Less: Reclassification adjustments for
gains included in net income
    
    
    (3,227,203
    )
    
    
    1,323,153
    
    
    
    (1,904,050
    )Increase in deferred tax asset
valuation allowance*
    
    
    
    
    
    
    (893,935
    )
    
    
    (893,935
    )Net unrealized holding gain (loss) during
the period
    
    
    (2,180,329
    )
    
    
    
    
    
    
    (2,180,329
    )Gain on cash flow hedging derivative
instruments:Amount arising during the period
    
    
    (4,541
    )
    
    
    
    
    
    
    (4,541
    )Less: Reclassification adjustments for
losses included in net income
    
    
    10,008
    
    
    
    
    
    
    
    10,008Net gain on cash flow hedging derivative
instruments
    
    
    5,467
    
    
    
    
    
    
    
    5,467Other comprehensive income (loss)
    
    ¥
    (2,136,531
    )
    
    ¥
    
    
    
    ¥
    (2,136,531
    )Year 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
    )
 F-35




---



##### Table of Contents



Thousands of
YenBefore Tax
    
    
    Tax (Expense)
    
    
    Net of TaxAmount
    
    
    or Benefit
    
    
    AmountYear 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-36




---



##### Table of Contents



Thousands of U.S. DollarsBefore Tax
    
    
    Tax (Expense)
    
    
    Net of TaxAmount
    
    
    or Benefit
    
    
    AmountYear ended March 31, 2008:Foreign currency translation adjustments
    
    $
    (201
    )
    
    $
    
    
    
    $
    (201
    )Unrealized holding gain (loss) on
securities:Amount arising during the period
    
    
    (5,756
    )
    
    
    2,360
    
    
    
    (3,396
    )Less: Reclassification adjustments for
gains included in net income
    
    
    (1,149
    )
    
    
    471
    
    
    
    (678
    )Increase in deferred tax asset valuation
allowance*
    
    
    
    
    
    
    (2,831
    )
    
    
    (2,831
    )Net unrealized holding gain (loss) during
the period
    
    
    (6,905
    )
    
    
    
    
    
    
    (6,905
    )Loss on cash flow hedging derivative
instruments:Amount arising during the period
    
    
    
    
    
    
    
    
    
    
    Less: Reclassification adjustments for
losses included in net income
    
    
    (0
    )
    
    
    
    
    
    
    (0
    )Loss on cash flow hedging derivative
instruments
    
    
    (0
    )
    
    
    
    
    
    
    (0
    )Defined benefit pension plans:Amount arising during the period
    
    
    (1,680
    )
    
    
    223
    
    
    
    (1,457
    )Less: Reclassification adjustments for losses
included in net income
    
    
    41
    
    
    
    (14
    )
    
    
    27Less: Other reclassification
    
    
    (115
    )
    
    
    48
    
    
    
    (67
    )Net defined benefit pension plans
    
    
    (1,754
    )
    
    
    257
    
    
    
    (1,497
    )Other comprehensive income (loss)
    
    $
    (8,860
    )
    
    $
    257
    
    
    $
    (8,603
    )
 
 *
    
    The increase in the deferred tax asset valuation allowance has resulted from unrealized
gains and (losses) on available-for-sale securities, respectively.  Thousands ofThousands of Yen
    
    
    U.S. Dollars2007
    
    
    2008
    
    
    2008Foreign currency translation adjustments
    
    ¥
    16,689
    
    
    ¥
    (3,340
    )
    
    $
    (33
    )Unrealized holding gain on securities
    
    
    1,044,706
    
    
    
    355,309
    
    
    
    3,558Gain on cash flow hedging derivative instruments
    
    
    45
    
    
    
    
    
    
    
    Defined benefit pension plans
    
    
    (111,731
    )
    
    
    (261,351
    )
    
    
    (2,617
    )¥
    949,709
    
    
    ¥
    90,618
    
    
    $
    908
 F-37




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##### Table of Contents



14. BASIC AND DILUTED NET INCOME PER COMMON SHARE
  Thousands ofThousands of Yen
    
    
    U.S. Dollars2006
    
    
    2007
    
    
    2008
    
    
    2008Numerator:Net income-basic and diluted
    
    ¥
    4,753,570
    
    
    ¥
    5,409,713
    
    
    ¥
    5,176,589
    
    
    $
    51,844
 Number of shares2006
    
    2007
    
    2008Denominator:Weighted-average common shares
outstanding-basic
    
    
    195,613
    
    
    
    203,992
    
    
    
    206,240Dilutive effect of stock options
    
    
    342
    
    
    
    252
    
    
    
    225Weighted-average common shares
outstanding-diluted
    
    
    195,955
    
    
    
    204,244
    
    
    
    206,465
 Yen
    
    
    U.S. Dollars2006
    
    
    2007
    
    
    2008
    
    
    2008Basic net income per common share
    
    ¥
    24,301
    
    
    ¥
    26,519
    
    
    ¥
    25,100
    
    
    $
    251.38Diluted net income per common
share
    
    ¥
    24,258
    
    
    ¥
    26,487
    
    
    ¥
    25,072
    
    
    $
    251.1
   Year ended March 312006
    
    2007
    
    2008Shares issuable under stock options
    
    
    975
    
    
    
    950
    
    
    
    950
 15. COMMITMENTS AND CONTINGENT LIABILITIES
   F-38




---



##### Table of Contents



16. DERIVATIVE AND OTHER FINANCIAL INSTRUMENTS
 Interest Rate Swap Agreement
   F-39




---



##### Table of Contents



Fair Value
 Thousands ofThousands of Yen
    
    
    U.S. Dollars2007
    
    
    2008
    
    
    2008Carrying
    
    
    Fair
    
    
    Carrying
    
    
    Fair
    
    
    Carrying
    
    
    FairAmount
    
    
    Value
    
    
    Amount
    
    
    Value
    
    
    Amount
    
    
    ValueOther
investments
for which it is:Practicable to
estimate
fair value
    
    ¥
    1,297,694
    
    
    ¥
    1,297,694
    
    
    ¥
    844,481
    
    
    ¥
    844,481
    
    
    $
    8,457
    
    
    $
    8,457Not practicable
    
    
    1,544,047
    
    
    
    
    
    
    
    1,519,289
    
    
    
    
    
    
    
    15,216
    
    
    
    Noncurrent
refundable
insurance
policies
(other assets)
    
    
    115,555
    
    
    
    115,555
    
    
    
    161,404
    
    
    
    161,404
    
    
    
    1,616
    
    
    
    1,616Long-term
borrowings and
installment
payable,
including
current
portion
    
    
    290,000
    
    
    
    290,000
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Interest rate
swap contracts*
    
    
    45
    
    
    
    45
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
 
 *
    
    Notional amount was ¥250,000 thousand as of March 31, 2007. F-40




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##### Table of Contents



17. ADVERTISING EXPENSES
  18. RELATED PARTY TRANSACTIONS
    Thousands ofThousands of Yen
    
    U.S. Dollars2006
    
    2007
    
    2008
    
    2008Accounts receivable
    
    ¥
    
    
    
    ¥
    318,069
    
    
    ¥
    283,238
    
    
    $
    2,837Accounts payable
    
    
    
    
    
    
    664,938
    
    
    
    685,018
    
    
    
    6,860Revenues
    
    
    1,394,791
    
    
    
    1,308,843
    
    
    
    1,186,771
    
    
    
    11,886Costs and expenses
    
    
    8,075,542
    
    
    
    7,725,572
    
    
    
    9,437,253
    
    
    
    94,514
  19. SUBSEQUENT EVENTS
   F-41