##### Table of Contents



As filed with the Securities and Exchange Commission on July 11, 2006
   UNITED STATES SECURITIES AND EXCHANGE COMMISSION
 WASHINGTON, DC 20549
 FORM 20-F
 (Mark One)
 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, 2006
 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
 (Exact Name of Registrant as Specified in Its Charter)
 Internet Initiative Japan Inc.
  Japan
 Jinbocho Mitsui Bldg.
1-105 Kanda Jinbo-cho
Chiyoda-ku, Tokyo 101-0051, Japan
  Title of Each Class
    
    Name of Each Exchange On Which RegisteredNone
    
    None
 Common Stock, no par value
 None
  As of March 31, 2006, 204,300 shares of common stock were outstanding, including 40,786 shares
represented by an aggregate of 16,314,400 American Depositary Shares.
  þ o
  o þ
   þ o
  þ o o
  o þ
  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
    
    
    13Item 4A. Unresolved Staff Comments
    
    
    40Item 5. Operating and Financial Review and Prospects
    
    
    40Item 6. Directors, Senior Management and Employees
    
    
    66Item 7. Major Shareholders and Related Party Transactions
    
    
    71Item 8. Financial Information
    
    
    73Item 9. The Offer and Listing
    
    
    74Item 10. Additional Information
    
    
    75Item 11. Quantitative and Qualitative Disclosures about Market Risk
    
    
    86Item 12. Description of Securities Other than Equity Securities
    
    
    88PART II
    
    
    88Item 13. Defaults, Dividend Arrearages and Delinquencies
    
    
    88Item 14. Material Modifications to the Rights of Security Holders and Use of Proceeds
    
    
    88Item 15. Controls and Procedures
    
    
    88Item 16A. Audit Committee Financial Expert
    
    
    89Item 16B. Code of Ethics
    
    
    90Item 16C. Principal Accountant Fees and Services
    
    
    90Item 16D. Exemptions from the Listing Standards for Audit Committees
    
    
    91Item 16E. Purchases of Equity Securities by the Issuer and Affiliated Purchasers
    
    
    92PART III
    
    
    92Item 17. Financial Statements
    
    
    92Item 18. Financial Statements
    
    
    92Item 19. Exhibits
    
    
    92EX-1.1 ARTICLES OF INCORPORATIONEX-1.2 SHARE HANDLING REGULATIONSEX-4.7 JOINT VENTURE AGREEMENTEX-4.24 AGREEMENT ON LIMITED LIABILITYEX-11.1 INTERNET INITIATIVE JAPAN INC., CODE OF CONDUCTEX-12.1 CERTIFICATIONSEX-12.2 CERTIFICATIONSEX-13.1 CERTIFICATIONSEX-13.2 CERTIFICATIONS
  i




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##### Table of Contents



Cautionary Note Regarding Forward-Looking Statements
   
    
    that we may not be able to achieve or sustain profitability in the near future,
    
    that we may not be able to compete effectively against competitors which have
greater financial, marketing and other resources, and
    
    that we may not be able to attract and retain qualified personnel.
 1




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##### Table of Contents



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 31,2002
    
    
    2003
    
    
    2004
    
    
    2005
    
    
    2006
    
    
    2006(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 revenues:Dedicated access
    
    ¥
    14,303
    
    
    ¥
    13,815
    
    
    ¥
    12,862
    
    
    ¥
    11,373
    
    
    ¥
    10,625
    
    
    $
    90,443Dial-up access
    
    
    3,644
    
    
    
    3,155
    
    
    
    3,088
    
    
    
    2,937
    
    
    
    2,674
    
    
    
    22,760Value-added
    
    
    3,100
    
    
    
    3,603
    
    
    
    4,296
    
    
    
    5,005
    
    
    
    6,250
    
    
    
    53,200Other
    
    
    1,668
    
    
    
    1,726
    
    
    
    2,118
    
    
    
    3,169
    
    
    
    3,674
    
    
    
    31,272Total connectivity and
value-added services
revenues
    
    
    22,715
    
    
    
    22,299
    
    
    
    22,364
    
    
    
    22,484
    
    
    
    23,223
    
    
    
    197,675Systems integration revenues,
including related equipment sales
    
    
    14,356
    
    
    
    15,013
    
    
    
    11,848
    
    
    
    15,854
    
    
    
    23,505
    
    
    
    200,072Equipment sales
    
    
    2,834
    
    
    
    6,706
    
    
    
    4,567
    
    
    
    3,365
    
    
    
    3,085
    
    
    
    26,262Total revenues
    
    
    39,905
    
    
    
    44,018
    
    
    
    38,779
    
    
    
    41,703
    
    
    
    49,813
    
    
    
    424,009COST AND EXPENSES:Cost of connectivity and
value-added services revenues
    
    
    19,800
    
    
    
    20,387
    
    
    
    20,047
    
    
    
    19,484
    
    
    
    20,078
    
    
    
    170,906Cost of systems integration
revenues, including related
equipment sales
    
    
    12,314
    
    
    
    13,090
    
    
    
    9,852
    
    
    
    12,200
    
    
    
    18,120
    
    
    
    154,243Cost of equipment sales
    
    
    2,540
    
    
    
    6,417
    
    
    
    4,346
    
    
    
    3,111
    
    
    
    2,818
    
    
    
    23,987Total cost of revenues
    
    
    34,654
    
    
    
    39,894
    
    
    
    34,245
    
    
    
    34,795
    
    
    
    41,016
    
    
    
    349,136Sales and marketing expenses
    
    
    3,038
    
    
    
    3,176
    
    
    
    3,528
    
    
    
    2,795
    
    
    
    3,080
    
    
    
    26,213General and administrative
expenses
    
    
    1,840
    
    
    
    2,205
    
    
    
    2,098
    
    
    
    2,666
    
    
    
    3,147
    
    
    
    26,790Research and development expenses
    
    
    319
    
    
    
    414
    
    
    
    358
    
    
    
    199
    
    
    
    159
    
    
    
    1,346Total cost and expenses
    
    
    39,851
    
    
    
    45,689
    
    
    
    40,229
    
    
    
    40,455
    
    
    
    47,402
    
    
    
    403,485OPERATING INCOME (LOSS)
    
    
    54
    
    
    
    (1,671
    )
    
    
    (1,450
    )
    
    
    1,248
    
    
    
    2,411
    
    
    
    20,524OTHER INCOME (EXPENSES):Interest income
    
    
    122
    
    
    
    67
    
    
    
    38
    
    
    
    13
    
    
    
    13
    
    
    
    111Interest expense
    
    
    (659
    )
    
    
    (733
    )
    
    
    (702
    )
    
    
    (686
    )
    
    
    (437
    )
    
    
    (3,723
    )Other  net
    
    
    (406
    )
    
    
    (603
    )
    
    
    1,646
    
    
    
    2,573
    
    
    
    3,392
    
    
    
    28,871Other income
(expenses)  net
    
    
    (943
    )
    
    
    (1,269
    )
    
    
    982
    
    
    
    1,900
    
    
    
    2,968
    
    
    
    25,259INCOME (LOSS) FROM OPERATIONS BEFORE
INCOME TAX EXPENSE, MINORITY
INTERESTS AND EQUITY IN NET LOSS OF
EQUITY METHOD INVESTEES
    
    
    (889
    )
    
    
    (2,940
    )
    
    
    (468
    )
    
    
    3,148
    
    
    
    5,379
    
    
    
    45,783INCOME TAX EXPENSE
    
    
    18
    
    
    
    23
    
    
    
    33
    
    
    
    100
    
    
    
    257
    
    
    
    2,191MINORITY INTERESTS IN (EARNINGS)
LOSSES OF SUBSIDIARIES
    
    
    24
    
    
    
    153
    
    
    
    236
    
    
    
    (109
    )
    
    
    (354
    )
    
    
    (3,012
    )
 3




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##### Table of Contents



As of and for the fiscal year ended March 31,2002
    
    
    2003
    
    
    2004
    
    
    2005
    
    
    2006
    
    
    2006(millions of yen, except per share and ADS data)
    
    
    (thousands ofU.S. dollars,except pershare and ADSdata(1))EQUITY IN NET LOSS OF EQUITY METHOD
INVESTEES:(2)Equity method net loss
    
    ¥
    (5,482
    )
    
    ¥
    (5,625
    )
    
    ¥
    (286
    )
    
    ¥
    (33
    )
    
    ¥
    (14
    )
    
    $
    (117
    )Impairment loss on
investment, advance and
deposits for Crosswave
    
    
    
    
    
    
    (7,153
    )
    
    
    (1,720
    )
    
    
    
    
    
    
    
    
    
    
    Total equity in net
loss of equity method
investees
    
    
    (5,482
    )
    
    
    (12,778
    )
    
    
    (2,006
    )
    
    
    (33
    )
    
    
    (14
    )
    
    
    (117
    )NET INCOME (LOSS)
    
    ¥
    (6,365
    )
    
    ¥
    (15,588
    )
    
    ¥
    (2,271
    )
    
    ¥
    2,906
    
    
    ¥
    4,754
    
    
    $
    40,463Per Share and ADS Data(3):Basic net income (loss) per share
    
    ¥
    (56,627
    )
    
    ¥
    (138,689
    )
    
    ¥
    (14,321
    )
    
    ¥
    15,172
    
    
    ¥
    24,301
    
    
    $
    207Diluted net income (loss) per share
    
    
    (56,627
    )
    
    
    (138,689
    )
    
    
    (14,321
    )
    
    
    15,172
    
    
    
    24,258
    
    
    
    206Basic net income (loss) per ADS
equivalent
    
    
    (141.57
    )
    
    
    (346.72
    )
    
    
    (35.80
    )
    
    
    37.93
    
    
    
    60.75
    
    
    
    0.52Diluted net income (loss) per ADS
equivalent
    
    
    (141.57
    )
    
    
    (346.72
    )
    
    
    (35.80
    )
    
    
    37.93
    
    
    
    60.65
    
    
    
    0.52Basic weighted average number of
shares
    
    
    112,400
    
    
    
    112,400
    
    
    
    158,554
    
    
    
    191,559
    
    
    
    195,613Diluted weighted average number of
shares
    
    
    112,400
    
    
    
    112,400
    
    
    
    158,554
    
    
    
    191,559
    
    
    
    195,955Basic weighted average number of ADS
equivalents (thousands)
    
    
    44,960
    
    
    
    44,960
    
    
    
    63,422
    
    
    
    76,624
    
    
    
    78,245Diluted weighted average number of
ADS equivalents (thousands)
    
    
    44,960
    
    
    
    44,960
    
    
    
    63,422
    
    
    
    76,624
    
    
    
    78,382Balance Sheet Data:Cash and cash equivalent
    
    ¥
    11,046
    
    
    ¥
    3,588
    
    
    ¥
    12,284
    
    
    ¥
    5,286
    
    
    ¥
    13,727
    
    
    $
    116,846Total assets
    
    
    45,263
    
    
    
    32,064
    
    
    
    42,737
    
    
    
    37,116
    
    
    
    50,705
    
    
    
    431,605Short-term borrowings
    
    
    3,820
    
    
    
    4,824
    
    
    
    6,564
    
    
    
    4,725
    
    
    
    4,555
    
    
    
    38,772Current portion of long-term
borrowings, including capital lease
obligations
    
    
    3,374
    
    
    
    4,660
    
    
    
    3,936
    
    
    
    5,511
    
    
    
    4,994
    
    
    
    42,508Long-term borrowings, including
capital lease obligations
    
    
    6,262
    
    
    
    7,092
    
    
    
    5,188
    
    
    
    5,869
    
    
    
    5,271
    
    
    
    44,865Convertible notes (4)
    
    
    15,000
    
    
    
    15,000
    
    
    
    11,832
    
    
    
    
    
    
    
    
    
    
    
    Shareholders equity (capital
deficiency)
    
    
    7,725
    
    
    
    (10,004
    )
    
    
    6,214
    
    
    
    11,615
    
    
    
    20,222
    
    
    
    172,131Operating Data:Capital expenditures, including
capitalized leases (5)
    
    ¥
    3,773
    
    
    ¥
    4,893
    
    
    ¥
    3,523
    
    
    ¥
    5,011
    
    
    ¥
    4,762
    
    
    $
    40,537Operating margin (6)
    
    
    0.1
    %
    
    
    (3.8
    )%
    
    
    (3.7
    )%
    
    
    3.0
    %
    
    
    4.8
    %Net cash provided by (used in):Operating activities
    
    ¥
    1,161
    
    
    ¥
    1,582
    
    
    ¥
    1,923
    
    
    ¥
    5,238
    
    
    ¥
    6,559
    
    
    $
    55,830Investing activities
    
    
    (2,457
    )
    
    
    (7,878
    )
    
    
    (852
    )
    
    
    1,974
    
    
    
    1,805
    
    
    
    15,363Financing activities
    
    
    (1,462
    )
    
    
    (872
    )
    
    
    7,669
    
    
    
    (14,213
    )
    
    
    39
    
    
    
    331
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(1)
    
    The U.S. dollar amounts represent translations of yen amounts at the rate of ¥117.48 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, 2006.(2)
    
    Of total equity method net loss of ¥5,625 million for the fiscal year ended March 31, 2003,
¥5,514 million was based on unaudited financial information made publicly available by
Crosswave Communications Inc. (Crosswave) and the impairment loss on investment and deposits
for Crosswave was determined to be the amount required to reduce the carrying amount of
investment in and deposits for Crosswave at March 31, 2003 to zero. The audit report of
Deloitte Touche Tohmatsu in respect of our financial statements as of and for the fiscal year
ended March 31, 2003 was qualified as to the effects of such adjustments, if any, as might
have been determined to be necessary if sufficient evidence regarding the equity method loss,
the impairment loss on investment, advance to and deposits for Crosswave and the related
summary information of Crosswave for the year ended March 31, 2003 was available. As described
elsewhere in this annual report, Crosswave filed a voluntary petition for corporate
reorganization proceedings in Japan in August 2003 and has not prepared audited financial
statements for the year ended March 31, 2003 or other sufficient evidence of its results of
operations to permit the independent registered public accounting firm to issue an audit
report on our financial statements as of and for the year ended March 31, 2003 without such
qualification.(3)
    
    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, 2002.(4)
    
    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.(5)
    
    Further information regarding capital expenditures, including capitalized leases and a
reconciliation to the most directly comparable U.S. GAAP financial measure can be found below.(6)
    
    Operating income (loss) as a percentage of total revenues. Reconciliations of the Disclosed Non-GAAP Financial Measures to the Most Directly
Comparable GAAP Financial Measures
 Capital expenditures
   For the fiscal year ended March 31,2002
    
    
    2003
    
    
    2004
    
    
    2005
    
    
    2006(millions of yen)Capital expenditures:Acquisition of assets by entering into capital leases
    
    ¥
    2,536
    
    
    ¥
    3,578
    
    
    ¥
    1,866
    
    
    ¥
    4,434
    
    
    ¥
    3,843Purchases of property and equipment
    
    
    1,237
    
    
    
    1,315
    
    
    
    1,657
    
    
    
    577
    
    
    
    919Total capital expenditures
    
    ¥
    3,773
    
    
    ¥
    4,893
    
    
    ¥
    3,523
    
    
    ¥
    5,011
    
    
    ¥
    4,762
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Exchange Rates
   High
    
    Low
    
    Average(1)
    
    Period-endFiscal year ended March 31,2002
    
    ¥
    134.77
    
    
    ¥
    115.89
    
    
    ¥
    125.64
    
    
    ¥
    132.702003
    
    
    133.40
    
    
    
    115.71
    
    
    
    121.10
    
    
    
    118.072004
    
    
    120.55
    
    
    
    104.18
    
    
    
    112.75
    
    
    
    104.182005
    
    
    114.30
    
    
    
    102.26
    
    
    
    107.28
    
    
    
    107.222006
    
    
    120.93
    
    
    
    104.41
    
    
    
    113.67
    
    
    
    117.48Calendar year 2006January
    
    ¥
    117.55
    
    
    ¥
    113.96
    
    
    ¥
    115.48
    
    
    ¥
    116.88February
    
    
    118.95
    
    
    
    115.82
    
    
    
    117.86
    
    
    
    115.82March
    
    
    119.07
    
    
    
    115.89
    
    
    
    117.28
    
    
    
    117.48April
    
    
    118.66
    
    
    
    113.79
    
    
    
    117.07
    
    
    
    113.79May
    
    
    113.46
    
    
    
    110.07
    
    
    
    111.73
    
    
    
    112.26June
    
    
    116.42
    
    
    
    111.66
    
    
    
    114.63
    
    
    
    114.51July (through July 7, 2006)
    
    115.65
    
    113.98
    
    114.93
    
    113.98
 
 (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.  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.
 6




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We may not maintain our current level of revenues or achieve our expected revenues and profits
in the future.
    
    
    a continuous decrease in revenues from our Internet connectivity services because
of lower unit prices per bandwidth and cancellation of large accounts especially due
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 utilize 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 outsourcing costs, especially in our systems integration, if 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, in conjunction with our
expected or planned or continued business expansion, and
    
    a decline in the value and trading volume of our holding of available-for-sale
securities from which we expect gains on sale.
  7




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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 the 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.
 We depend on our ability to attract and retain qualified personnel.
  8




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Our business may be adversely affected if our network suffers interruptions, errors or delays.
  The confidential customer information that we keep and manage may be leaked.
  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,
    
    frequent new product and service introductions,
 9




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##### Table of Contents




    
    continually changing customer requirements, and
    
    evolving industry standards.
   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 the customers, major
shareholders of IIJ and other IIJ Group companies and our employees could suffer.
  Our investments in affiliated companies may not produce the returns we expect and may require
additional funding.
   10




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Fluctuations in the stock prices 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.
  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.
  11




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There are risks associated with our international business.
  
    
    the impact of economic conditions outside Japan,
    
    unexpected changes in or delays resulting from regulatory requirements,
    
    the rate of the development of the Internet industry in countries in Asia,
    
    political and economic instability, and
    
    potential unsatisfactory financial returns from our investments in Asia, including
the data center businesses in which we have invested in South Korea.
  If we fail to execute our systems integration projects in a timely or satisfactory manner or
if we fail to manage customer data in a professional manner, we could be sued and our reputation
could suffer.
  12




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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 sell additional shares of our common stock or
securities convertible into our common stock, which may cause shareholders to incur substantial
dilution.
  
 Item 4. Information on the Company.
 A.
    
    History and Development of the Company.
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14




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##### Table of Contents



B.
    
    Business Overview.
    For the fiscal year ended March 31,2004
    
    2005
    
    2006Connectivity services
    
    
    41.1
    %
    
    
    34.3
    %
    
    
    26.7
    %Value-added services
    
    
    11.1
    %
    
    
    12.0
    %
    
    
    12.5
    %Systems integration
    
    
    30.6
    %
    
    
    38.0
    %
    
    
    47.2
    %
   Total network solutions
  15




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##### Table of Contents




    
    our Internet connectivity services,
    
    our line-up of value-added services, including security, network and server-related
outsourcing,
    
    our Internet data center services,
    
    our systems integration, including ongoing consulting, systems design,
construction, operation and management, and
    
    other network and application services that our group companies provide.
  Internet Connectivity Services
   As of March 31,2002
    
    2003
    
    2004
    
    2005
    
    2006Dedicated access service contracts:IP service:Low
Bandwidth (64 kbps  768 kbps)
    
    
    184
    
    
    
    147
    
    
    
    93
    
    
    
    89
    
    
    
    85Medium
Bandwidth (1 Mbps  99 Mbps)
    
    
    413
    
    
    
    473
    
    
    
    565
    
    
    
    660
    
    
    
    654High
Bandwidth (100 Mbps )
    
    
    13
    
    
    
    43
    
    
    
    80
    
    
    
    114
    
    
    
    157Total IP Service
    
    
    610
    
    
    
    663
    
    
    
    738
    
    
    
    863
    
    
    
    896IIJ T1 Standard and IIJ Economy
    
    
    1,590
    
    
    
    939
    
    
    
    504
    
    
    
    276
    
    
    
    109IIJ Data Center Connectivity Service
    
    
    110
    
    
    
    156
    
    
    
    196
    
    
    
    231
    
    
    
    247IIJ FiberAccess/F and IIJ DSL/F
(Broadband Services)
    
    
    1,310
    
    
    
    3,550
    
    
    
    5,788
    
    
    
    9,873
    
    
    
    13,297Total dedicated access service contracts
    
    
    3,620
    
    
    
    5,308
    
    
    
    7,226
    
    
    
    11,243
    
    
    
    14,549Dial-up access service contracts:Under IIJ Brand
    
    
    95,169
    
    
    
    86,183
    
    
    
    75,136
    
    
    
    68,068
    
    
    
    62,176OEM
    
    
    165,407
    
    
    
    443,601
    
    
    
    620,731
    
    
    
    625,908
    
    
    
    568,307Total dial-up access service contracts
    
    
    260,576
    
    
    
    529,784
    
    
    
    695,867
    
    
    
    693,976
    
    
    
    630,483
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##### Table of Contents



PricingService Type
    
    Summary Description
    
    (excluding consumption tax)Dedicated access servicesIP Service
    
    Full-scale
dedicated line
service with
high-speed access
for businesses and
other network
operators with
demanding bandwidth
requirements.
    
    Setup and monthly fees
vary according to carrier,
line speed, line type and
distance involved.IIJ T1 Standard
    
    Packaged dedicated
line service
offering 1.5 Mbps
connection but not
including certain
features of
full-scale IP
Service such as
dynamic routing and
unlimited IP
addresses.
    
    Initial setup fee of
¥50,000. Monthly access
fee of ¥117,000 for up to
8 IP addresses and
¥167,000 for up to 16 IP
addresses.IIJ Economy
    
    Service for
dedicated line
access to the
Internet with
inexpensive monthly
fees primarily for
small- and
medium-sized
businesses and
local and regional
offices of
corporate groups.
    
    Initial setup fee of
¥40,000. Monthly access
fees of ¥38,000 for 64
kbps service and ¥45,000
for 128 kbps service.IIJ Data Center Connectivity Service
    
    Full-scale
dedicated line
service for
customers hosted in
IIJ Data Centers,
with asymmetrical
speeds of upstream
(from the Internet
to data center) and
downstream (from
the data center to
the Internet)
transmissions.
    
    Initial setup fee of
¥100,000. Monthly fees
range from ¥400,000 to
¥10,000,000, depending on
the speed of upstream
transmissions.IIJ FiberAccess/F
    
    Service for
dedicated line
Internet-access
using optical lines
at speeds of up to
10 Mbps or 100
Mbps, targeted
primarily at small-
and medium-sized
enterprises
requiring
high-capacity,
high-speed
transmissions.
Optical fiber
access is limited
to FLETS lines
provided by NTT
East and West.
    
    Initial setup fee of
¥50,000. Monthly fees
range from ¥14,000 to
¥190,000, depending on the
speed of connection and
the number of IP addresses
allocated. Monthly fees do
not include optical line
charges, which are paid
directly by the customer
to the optical line
provider.IIJ DSL/F
    
    Service for
dedicated line
Internet-access
using ADSL lines at
speeds of up to 47
Mbps, targeted
primarily at small-
and medium-sized
offices and home
offices. ADSL
access is limited
to FLETS lines
provided by NTT
East and West.
    
    Initial setup fee of
¥30,000. Monthly fees
range from ¥9,800 to
¥49,800, depending on the
number of allocated IP
addresses. Monthly charges
do not include ADSL
charges, which are paid
directly by the customer
to the ADSL service
provider.IIJ DSL/A
    
    Service for
dedicated line
Internet-access
using ADSL lines at
speeds of up to 47
Mbps, targeted
primarily at small-
and medium-sized
offices and home
offices. ADSL
access is limited
to ADSL services
provided by ACCA
Networks, Co., Ltd.
(ACCA Networks)
    
    Initial setup fee of
¥75,000. Monthly fees
range from ¥12,000 to
¥52,000, depending on the
number of allocated IP
addresses. Monthly charges
do not include ADSL
charges, which are paid
directly by the customer
to the ADSL service
provider.
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##### Table of Contents



PricingService Type
    
    Summary Description
    
    (excluding consumption tax)IIJ ISDN/F
    
    Service for
dedicated line
Internet-access
using ISDN lines at
speeds of up to 64
kbps, targeted
primarily at small-
and medium-sized
offices and home
offices 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 ISDN charges, which are paid directly by
customers to ISDN
providers.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 ¥43,400.
Monthly fees range from
¥2,300 to ¥44,700,
depending on the optional
services.Dial-up access servicesIIJ Dial-up Standard
    
    Service for
corporate users
permitting
simultaneous
Internet-access
from several
dial-up lines under
a single contract.
    
    Initial setup fee of
¥5,000. Monthly basic fee
of ¥2,000 plus access
charges of ¥10 per minute.Enterprise Dial-up IP Service
    
    Service for
corporate users
offering multiple
dial-up accounts at
a fixed monthly
fee.
    
    Initial setup fee of
¥20,000. Monthly basic
fees range from ¥3,000 to
¥4,900 per account
depending on the number of
accounts.IIJ Dial-up Advanced
    
    Service for
corporate users
offering bundled
low-cost dial-up
accounts.
    
    Initial setup fee of
¥5,000. Monthly basic fee
of ¥10,000 for the first
50 e-mail accounts
including the first two
hours access per account,
plus ¥5 per minute after
two hours.IIJ4U
    
    Service for
individual users,
which includes
Internet-access and
5 megabytes of disk
space for personal
Web pages and
e-mail account
options for
multiple users.
Various access
options such as
ISDN, ADSL and
optical fiber
access are
available.
    
    This service does not
charge an initial setup
fee. Monthly service fee
of ¥800 for the first
eight hours and a charge
of ¥5 per minute, with a
ceiling of ¥4,100.IIJmioDSL/DF Service
    
    Service for
individual users
offering Internet
connectivity over
ADSL at speeds of
up to 47 Mbps. ADSL access is limited
to FLETS lines
provided by NTT
East and West. The
IP address is
changed every time
a connection is
made.
    
    No initial setup fee.
Monthly charge is ¥1,400.
Monthly charges do not
include ADSL charges,
which are paid directly by the customer to NTT East and West.
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##### Table of Contents



PricingService Type
    
    Summary Description
    
    (excluding consumption tax)IIJmioFiberAccess/DF Service
    
    Service for
individual users
offering Internet
connectivity over
optical fiber
network at maximum
10 Mbps or 100
Mbps. Optical fiber
access is limited
to FLETS lines
provided by NTT
East and West. The
IP address is
changed every time
a connection is
made.
    
    No initial setup fee.
Monthly charges range from
¥2,000 to ¥7,000. Monthly
charges do not include
optical fiber access
charges, which are paid
directly by the customer
to NTT East and West.IIJmioDSL/SF Service
    
    Service for
individual users
offering Internet
connectivity over
ADSL at speeds of
up to 47 Mbps. ADSL
access is limited
to FLETS lines
provided by NTT
East and West. A
fixed IP address is
provided with this
service.
    
    No initial setup fee. The
monthly charge is ¥4,800.
Monthly charges do not
include ADSL charges,
which are paid directly by
the customer to NTT East
and West.IIJmioFiberAccess/DC Service
    
    Service for
individual users
offering Internet
connectivity over
optical fiber
network at speeds
of up to 50 Mbps or
100 Mbps. Optical
fiber access is
limited to Access
Commufa lines
provided by Chubu
Telecommunications
Co., Inc.
    
    No initial setup fee. The
monthly charge is
¥2,000. Monthly
charges do not include
optical fiber access
charges, which are paid
directly by the customer
to Chubu
Telecommunications Co.,
Inc.IIJmioFiberAccess/SF Service
    
    Service for
individual users
offering Internet
connectivity over
optical fiber
network at speeds
of up to 10 Mbps or
100 Mbps. Optical
fiber access is
limited to FLETS
lines provided by
NTT East and West.
A fixed IP address
is provided with
this service.
    
    No initial setup fee. The
monthly charges range from
¥8,000 to ¥12,000,
depending on the type of
access line. The monthly
charges do not include
optical fiber access
charges, which are paid
directly by the customer
to NTT East and West.IIJmioMobileAccess Service
    
    Service for
individual users
offering mobile
Internet
connectivity
through several
data communications
services provided
by mobile
telecommunication
companies.
    
    No initial setup fee. The
monthly charge is ¥300 and
does not include service
charges to IIJs access
points, which are paid
directly by the customer
to the mobile
telecommunication
companies.
 Dedicated Access Services
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##### Table of Contents



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.
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##### Table of Contents



IIJ T1 Standard.
 IIJ Economy.
 IIJ Data Center Connectivity Service.
 IIJ FiberAccess/F.
 IIJ DSL/F and IIJ DSL/A.
 IIJ ISDN/F.
 IIJ Line Management/F.
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##### Table of Contents



Dial-up Access Services
  mio mio mio mio mio mio
 Value-Added Services
    
    
    Security-related outsourcing services.As of July 7, 2006, we offered seven main
security-related outsourcing services that protect customers internal networks from
unauthorized access and secure remote connections to internal networks: IIJ DDoS
Solution Service, IIJ Security Premium, IIJ Security Standard, IIJ Security Lite, IIJ
Security Scan Service, IIJ Network Intrusion Detection Service and IIJ Secure Remote
Access. We were the first ISP in Japan to provide firewall services, which we first
offered in 1994.IIJ DDoS Solution Service. In October 2005, we began offering IIJ DDoS
Solution Service to protect customers internal networks from distributed denial of
service (DDoS) attacks, a type of unauthorized access from Internet. The fee depends
on the type of service that we provide and the initial fee starts at ¥650,000 and the
monthly fee starts at ¥498,000.IIJ Security Premium. In July 2000, we began offering IIJ Security
Premium, a high value-added firewall operation and management service based on
Firewall-1, a product which we license from Check Point Software Technologies Ltd. The
service combines and requires contracting for both Firewall Management Service and
Firewall Rental Service. For Firewall Management Service, the initial setup fee is
¥200,000 and the monthly fee ranges from ¥150,000, depending on the redundancy of
firewall equipment. For Firewall Rental Service, the initial setup fee ranges from
¥200,000 and the monthly fee ranges from ¥67,000
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##### Table of Contents



depending on a number of factors including the number of users and packet
filtering performance. The fees for Firewall Rental Service are multiplied by the
number of firewall equipment if the customer requires redundancy.IIJ Security Standard. In October 1999, we began offering Security
Standard Service pursuant to which we install and manage an around-the-clock operation
of firewall systems. The initial setup fee ranges from ¥100,000, to ¥300,000, and the
monthly fee ranges from ¥50,000,to ¥130,000 depending on a number of factors including
the number of users, packet filtering performance and 3DES (VPN) (an encryption
technology) performance. Since February 2001, a VPN option is available for this
service with an initial cost of ¥20,000 and a monthly fee of ¥10,000 per computer.IIJ Security Lite. In December 2002, we began offering IIJ Security Lite,
an economical version of a managed firewall service with limited features of operation
and maintenance targeting small- and medium-sized enterprises. The initial setup fee
ranges from ¥30,000 to ¥50,000, and the monthly fee ranges from ¥25,000 to ¥35,800.IIJ Security Scan Service. In March 2002, we began offering IIJ Security
Scan Service, a package of services targeting small- and medium-sized enterprises to
identify security weaknesses in order to prevent illicit access from external networks
and to avert virus infection of in-house servers. It is available in two forms: regular
monthly scans and one-time spot checks. The form of service can be selected to meet the
specific needs of the customer, such as checks for protocol and network configuration
or for vulnerability to specific illegal network intrusion. The service was developed
with NRI Secure Technologies Ltd., a Japanese security assessment and auditing
solutions provider. For the regular monthly scan service, the initial charge is ¥5,000.
The monthly charge for scanning is ¥25,000 for one IP address, and ¥24,000 will be
added for every additional IP address. For the spot scan service, the basic charge for
scanning one IP address is ¥30,000, and ¥29,000 will be added for every additional IP
address.IIJ Network Intrusion Detection Service. In April 2001, we began offering
IIJ Network Intrusion Detection Service, which offers around-the-clock, non-stop
network monitoring and intrusion-detection capabilities, as well as packet information
for analyzing detected illicit accesses. The initial cost for the service is ¥300,000,
and the monthly fee starts from ¥300,000, depending on the customers traffic volume.IIJ Secure Remote Access. IIJ Secure Remote Access is a packaged service
combining the IIJ Dial-up Advanced with ID Gateway, which controls remote access to
in-house servers protected by firewalls. In addition to the 50 dial-up accounts covered
by the base rate, the service ensures a secure remote environment by controlling
accessible servers and utilization protocols for each dial-up account. In May 2002, IIJ
Secure Remote Access was upgraded by adding a remote VPN function. The upgrade enables
remote users to transmit and receive data with encryption, offering a secure enterprise
network environment with a greater variety of access options, such as connections from
overseas via local ISPs. In June 2005, IIJ Secure Remote Access was upgraded by adding
an Authentication Service Link Option, which enables customers to use a greater variety
of authentication methods.
    
    Network-related outsourcing services.As of July 7, 2006, we offered six main
network-related outsourcing services, including provision, monitoring and maintenance
of network equipment and VPN to connect customers branch and remote offices: IIJ
Internet-LAN Service, IIJ SMF-VPN, IIJ Managed VPN Pro Service, IIJ VPN Standard, SEIL
Rental Service and IIJ NetLightning.
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##### Table of Contents



IIJ Internet-LAN Service. IIJ Internet-LAN Service is a service which
provides connectivity among a companys branch and remote offices. With this service,
customers can use functions provided by Wide-area Ethernet over the Internet.IIJ SMF-VPN. IIJ SMF-VPN is a service which uses IIJ SEIL Management
Framework (SMF) which provides remote configuration and monitoring features of SEIL
Series routers at customer remote sites from central management servers at IIJ and the
customers main office or data center. The technology is patent granted. When a
customer at a remote site connects the router to the circuit, the router is
automatically configured and connected to the network. System integrators utilizing
this technology can reduce configuration and maintenance costs at the remote site.IIJ Managed VPN Pro Service. IIJ Managed VPN Pro Service is a service
which provides connectivity among a companys branch and remote offices, utilizing SEIL
Series or other routers.IIJ VPN Standard. IIJ VPN Standard is a service which provides Internet
VPN connectivity among a companys branch and remote offices based on encryption
technology. IIJ rents out encryption equipment at customer sites, configures the
equipment for the customer and provides remote monitoring of the encrypted sessions.
Initial cost for the service starts from ¥30,000, and monthly fees start from ¥6,900
depending on the equipment features.SEIL Rental Service.We rent routers for connection to the Internet and
provide configuration, management and monitoring services. We provide SEIL Series or
CISCO routers depending on customer requirements.IIJ NetLightning. IIJ NetLightning is a service based on Netli, Inc.s
technology that improves web application performance. By utilizing this service, end
users can access customer websites faster, without any settings, and customers can
thereby reduce the cost of placing mirror sites.
    
    Server-related outsourcing services.As of July 7, 2006, we offered twelve main
server-related outsourcing services including provision of e-mail and web services and
operation and management of e-mails systems: IIJ Mail Gateway Service, IIJ Post Office
Service, IIJ Mail Box Service, e-mail distribution services, IIJ Web Standard, web
hosting services, IIJ Download Site Service, IIJ URL Filtering Service, IIJ Document
Exchange Service, DNS services, streaming services and IIJmioSafety Mail Service.IIJ Mail Gateway Service. In November 2002, we renovated IIJ Mail Gateway
Service to expand the service from large corporate customers to other corporate
segments. The service has three options. The first one is virus protection to check the
viruses on incoming and outgoing e-mails. The second one is audit to detect the keyword
set in advance on the outgoing e-mails. The third one is antispam to check spam for
incoming e-mails, which we started to provide in October 2004. Customers can take all
or a selection of the options. The initial cost is ¥10,000, and the monthly fee ranges
from ¥30,000 to ¥70,000 for the first 50 e-mail accounts and an additional fee per
account after the first 50 e-mail accounts ranges from ¥200 to ¥850.IIJ Post Office Service. IIJ Post Office Service is an e-mail operation
outsourcing service performed by our e-mail server, enabling a customer to allocate and
maintain a number of e-mail accounts under its own domain name for its employees,
members or other relevant users. The customer can administer e-mail accounts online
through our customer support Web interface. In December 2002, we added a virus checking
option for incoming and outgoing
 24




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##### Table of Contents



e-mails and an audit option to check the content of outgoing e-mails and suspend
the ones containing keywords specified in advance. In addition, we added a spam
checking option which we started to provide in October 2004 for no additional charge to
customers contracting the virus checking option or an audit option.IIJ Mail Box Service. IIJ Mail Box Service is also an e-mail operation
outsourcing service performed by our e-mail server. Unlike IIJ Post Office Service,
customers do not have to obtain their own domain names. A customer can administer
e-mail accounts online through our customer support Web interface.E-mail distribution services. We offer other e-mail outsourcing services,
such as services for e-mail distribution to large numbers of e-mail addresses and
mailing list functions.IIJ Web Standard. The IIJ Web Standard allows customers to use their own
domain names while providing them with up to 200 megabytes of web hosting space. By
limiting specifications, the pricing of the service is kept to a minimum ¥5,000 per
month. Additionally, careful traffic management of the storage space ensures a
high-performance web-server environment for users is ensured. This service mainly
targets small- and medium-sized enterprises.Web hosting services. We offer other web hosting services, such as
customized web hosting services and functions to distribute computer files using our
ftp servers.IIJ Download Site Service. IIJ Download Site Service is a hosting service
dedicated to high-volume content downloads from the Internet. The service started on a
trial basis in November 2001, and the full-fledged service was launched in February
2002. A dedicated hosting server and dedicated bandwidth are established for each
contract to ensure constant stable performance. With disk capacity of 500 megabytes per
contract on our hosting servers, access is provided at a maximum transmission bandwidth
per contract of up to 80 Mbps. The initial charge for the service is ¥50,000. The
monthly charge ranges between ¥60,000 and ¥340,000, depending upon the bandwidth. In
April 2003, we added the option of 1 Gbps maximum transmission speed for an additional
fee.IIJ URL Filtering Service. IIJ URL Filtering Service is a service enabled
by the use of IIJs proxy server which blocks access to websites deemed inappropriate.
The initial cost for the service is ¥30,000, and the monthly fee is ¥40,000 as a basic
fee plus an additional fee depending on the number of users in the customers internal
network.IIJ Document Exchange Service. This service is an online storage service
with which customers can upload files onto IIJs storage server and share them with
authorized users. The initial cost is ¥40,000 and the monthly fee is ¥20,000, which
includes 1GB of disk space and 50 accounts. The fee for each additional set of 10
accounts is ¥3,000, and each 1GB of additional disk space is ¥10,000 per month.DNS services. We offer domain name related services that consist of domain
name administration services and domain name server outsourcing services. Domain names
such as .jp, .com, .net and .org are available.Streaming services. We offer Internet streaming services for live
broadcasts over the Internet, as well as streaming server hosting services.
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##### Table of Contents



IIJmio Safety Mail Service. IIJmioSafety Mail Service, launched in
December 2001, is a standard e-mail service with an anti-virus function for individual
users. The service employs the InterScan VirusWall developed by Trend Micro
Incorporated, and features POP/SMTP over SSL which provides secure e-mail transmission
by encrypting the e-mail transmission between the users and our mail server, in
addition to SMTP authentication, which ensures a higher level of encryption and
authorization than what is currently available for general use. In February 2005, we
started to provide spam check function without an additional charge. There is no
initial charge for IIJmioSafety Mail Service and the monthly charge is ¥500.
    
    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 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.
    
    IIJ EPC Network Service.IIJ EPC Network Service is a service to provide network
and server systems for our customers to use Radio Frequency Identification Tag
(RFID). We offer three types of services. Premium is a service to provide
customized systems for our customers. Standard is a service to provide our systems
to provide our systems at our data centers and Trial is a service to provide RFID
functions to our customers for their trial usage.
 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,
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##### Table of Contents




    
    voice over IP systems to transmit voice among customer branch offices over
Internet,
    
    outsourcing of large scale e-mail servers or systems to detect or delete
e-mails with viruses or spam or record all of e-mails incoming to and outgoing
from customers,
    
    construction of wireless local area network (LAN),
    
    online brokerage systems for securities firms,
    
    outsourcing of websites for online businesses,
    
    re-construction of overall corporate network systems suited to increased
traffic data, and
    
    consultation on corporate network security.
      Equipment Sales
  SEIL Series.
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Network
    
    
    our backbone, which includes leased lines and network equipment, such as advanced
Internet routers,
    
    Points of Presence (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 31,2002
    
    2003
    
    2004
    
    2005
    
    2006Backbone cost (thousand yen)
    
    ¥
    5,656,116
    
    
    ¥
    5,235,517
    
    
    ¥
    4,719,638
    
    
    ¥
    3,550,885
    
    
    ¥
    3,516,322
 Network upgrades
  28




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##### Table of Contents



Network equipment
  Points of Presence .
  Internet Data Centers.
   Network operations center and technical and customer support.
 Our Group Companies
  29




---



##### Table of Contents



Proportion of ownershipCompany Name
    
    and voting interestIIJ Technology Inc.
    
    
    72.1
    %IIJ America Inc.
    
    
    97.6
    %Net Care, Inc.
    
    
    59.3
    %IIJ Financial Systems Inc.
    
    
    72.1
    %Internet Multifeed Co.
    
    
    29.4
    %atom Co., Ltd.
    
    
    40.0
    %Internet Revolution Inc.
    
    
    30.0
    %
 IIJ Technology Inc.
     IIJ America Inc.
   Net Care, Inc.
  30




---



##### Table of Contents



IIJ Financial Systems Inc.
   Internet Multifeed Co.
   atom Co., Ltd.
   Internet Revolution Inc.
   Capital Expenditures
  31




---



##### Table of Contents



For the fiscal year ended March 31,2004
    
    2005
    
    2006(millions of yen)Capital
expenditures,
including acquisition
of assets by entering
into capital leases
    
    ¥
    3,523
    
    
    ¥
    5,011
    
    
    ¥
    4,762
   Seasonality
  Sales and Marketing
    
    
    Three of Divisions focus on our total network solutions and work with large
corporate clients, including telecommunications carriers and ISPs, financial
institutions, manufacturers, government institutions, universities and other schools,
or focus on the expansion of sales agents for our services and network equipment. 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
important service providers.
    
    One Division focuses on total network solutions and works with governmental
institutions.
  32




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##### Table of Contents



Customers
  Research and Development
    Research and Development Organization
  IIJ Research Laboratory.
 Applied Research and Development Department.
 33




---



##### Table of Contents



Research and Development Strategy
  
    
    continued improvement of our SEIL router and SEIL Management Framework, systems
which we developed specifically to be integrated into IIJs network-related services,
    
    research relating to the methodology of configuration of routers and other servers,
    
    research relating to behavior of Internet routing systems,
    
    software development for management of border gateway protocol, or BGP, which is
protocol that allows routers to exchange routing information on the TCP/IP network,
    
    research for Internet traffic monitoring and management,
    
    development of software and evaluation of hardware relating to improving the
operations of routers located on our customers premises, and
    
    research and development of IPSec, which is a secure version of IP that provides
secure communication channels over the Internet.
  Proprietary Rights
  Licenses
   34




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##### Table of Contents



Trademarks
  Patents
  Legal Proceedings
     35




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##### Table of Contents



Regulation of the Telecommunications Industry in Japan
  The Telecommunications Business Law
  
    
    the elimination of the classification of Type I Carriers and Type II Carriers;
    
    deregulation of regulations on charges and terms and conditions for providing
services by Carriers; and
    
    the introduction of certain terminal-equipment-suppliers declaration system
regarding technical standard conformity.
   36




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##### Table of Contents



(Before Amendment)
 Type I Carriers
    
    Type II CarriersSpecial Type II
    
    General Type IIStart-up of services
    
    Permission from
MIC required
    
    Registration with
MIC required
    
    Notification to MIC
requiredRates and charges
    
    Notification* to
MIC required
    
    Notification to
MIC required
    
    UnregulatedShare acquisition
by foreign
investors
    
    Unregulated**
    
    Unregulated
    
    Unregulated
 
 *
    
    Type I Carriers which operate Category I Designated Telecommunications Facilities are
required to receive MIC approval for their Interconnection charges.**
    
    Prior notification is required under the Foreign Exchange and Foreign Trade Law. This is not
applicable to purchasers of ADSs. A one-third foreign ownership restriction is applicable only
to NTT (which was changed from a 20% foreign ownership restriction on November 30, 2001). (After Amendment)
 Telecommunications CarriersRegistration required
    
    Registration exemptedStart-up of services
    
    Registration with
MIC required*
    
    Notification to MIC required****Rates and charges
    
    Notification to MIC
required**
    
    UnregulatedShare acquisition
by foreign
investors
    
    Unregulated***
    
    Unregulated
  
 *
    
    Applicable to telecommunications carriers which install certain large scale circuit
facilities unless an exemption applies as designated by the applicable ministerial ordinance
of MIC from the viewpoint of the scale of the telecommunications circuit facilities and the
scope of areas where such telecommunications circuit facilities are installed.**
    
    Applicable to universal services and services which have the control power over the market
provided by the telecommunications carriers which install what is called the bottle-neck
facilities.Telecommunications carriers which operate Category I Designated Telecommunications Facilities
are required to receive MIC approval for their Interconnection terms and charges.***
    
    Prior notification is required under the Foreign Exchange and Foreign Trade Law for
acquisition of shares of telecommunications carriers to which registration for start-up
services is applicable. This is not applicable to purchasers of ADSs. A one-third foreign
ownership restriction is applicable only to NTT.****
    
    Currently, carriers which meet the following two requirements established by the ministerial
ordinance of MIC are exempted from registration with MIC: (i) areas of installation of
terminal-related transmission facilities are limited to only within a single municipal (city,
town or village) and (ii) areas of installation of relay-related transmission facilities are
limited to only within a single prefecture. 37




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##### Table of Contents



Regulations of telecommunications carriers
  Start-up of Services
 
    
    Carriers with registrationRegistration with the MIC required for telecommunications carriers which exceed
criteria established by MICs ordinance in relation to the scale of the
telecommunications circuit facilities and the scope of areas where such
telecommunications circuit facilities are installed.
    
    Other CarriersNotification to the MIC required for telecommunications carriers other than the above.
We do business under this category.
 Charges and Tariffs
 
    
    Unregulated, in general. The requirement that standard terms and conditions be
applied equally to all users was repealed.
    
    Prior notification to the MIC required for Basic Telecommunications Services
(universal services such as basic fee, local call and emergency telecommunication
service) and Designated Telecommunications Services (i.e., services which have the
controlling power over the market provided by the telecommunications carriers which
install what is called the bottle-neck facilities). Among the Designated
Telecommunications Services, the telecommunications services to be specified by MIC at
least once a year will be subject to price cap regulations, under which carriers will
be required to obtain approval from the MIC if a proposed change of charge exceeds the
price cap. Providing these telecommunications services other than pursuant to the
terms and conditions notified to the MIC is prohibited, unless minor exceptions apply.
 Articles of Interconnection Agreements
 
    
    Unregulated, in general.
    
    Approval from the MIC required for Category I Designated Telecommunications Facilities.
    
    Prior notification to the MIC required for Category II Designated
Telecommunications Facilities.
 Telecommunications Facilities of Carriers.
 
    
    A telecommunications carrier that owns telecommunications circuit facilities must
maintain its telecommunications facilities (except telecommunications facilities
stipulated in MICs ordinances 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 applicable MICs ordinances. Such Carriers shall confirm itself that
said telecommunications facilities are in compliance with such technical standards
specified in the applicable MICs ordinances.
 38




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##### Table of Contents




    
    A telecommunications carrier that provides Basic Telecommunications Services must
maintain their telecommunications facilities for provision of their Basic
Telecommunications Services in conformity with the technical standards provided in the
applicable MICs ordinances.
    
    Telecommunications Carriers that own telecommunications circuit facilities or
provide Basic Telecommunications Services must establish their own administrative
rules in accordance with MICs ordinances in order to secure the reliable and stable
provision of telecommunications services. These administrative rules must regulate the
operation and manipulation of telecommunications facilities and the safeguarding,
inspecting and testing regarding the construction, maintenance and administration of
telecommunications facilities, etc. as provided for by the ministerial ordinance of
MIC. Such administrative rules must be submitted to the MIC prior to the commencement
of operations, and changes must be submitted to the MIC after they are implemented
without delay.
 Order to Improve Business Activities
 
    
    The Minister for MIC may, if it is deemed that business activities of a
telecommunications carrier falls under the inappropriate items set forth in the
Telecommunications Business Law, insofar as necessary to ensure the users benefit or
the public interest, order said telecommunications carrier to take actions to improve
operations methods or other measures.
 Right of Way Privilege for Authorized Carriers
 
    
    Authorization on the entire or a part of a carriers telecommunications business by
MIC for the privileged use of land or other public utilities for circuit facilities
deployment is required. Right of Way privilege is available to carriers irrespective
of registration.
 Merger, Business Transfer or Divestiture of Carriers
 
    
    Post facto notification to MIC without delay is required.
 Business Suspension, Abolition or Dissolution of Carriers
 
    
    Post facto notification to MIC without delay is required. Prior announcement of
withdrawals to service users is required in accordance with MICs ordinance.
 Foreign Capital Participation
 
    
    Unregulated. Prior notification is required under the Foreign Exchange and Foreign
Trade Law for 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.
 C. Organizational Structure.
  D. Property, Plants and Equipment.
  39




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##### Table of Contents



Item 4A. Unresolved Staff Comments
  
 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
       40




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3⁄4
     41




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##### Table of Contents



Results of Operations
  Fiscal year ended March 31,2004
    
    
    2005
    
    
    2006(millions of yen except for percentage data)
    
    
    (thousands ofU.S.dollars)REVENUES:Connectivity and value-added services
revenues:Dedicated access
    
    ¥
    12,862
    
    
    
    33.2
    %
    
    ¥
    11,373
    
    
    
    27.3
    %
    
    ¥
    10,625
    
    
    
    21.3
    %
    
    $
    90,443Dial-up access
    
    
    3,088
    
    
    
    8.0
    
    
    
    2,937
    
    
    
    7.0
    
    
    
    2,674
    
    
    
    5.4
    
    
    
    22,760Value-added
    
    
    4,296
    
    
    
    11.1
    
    
    
    5,005
    
    
    
    12.0
    
    
    
    6,250
    
    
    
    12.5
    
    
    
    53,200Other
    
    
    2,118
    
    
    
    5.4
    
    
    
    3,169
    
    
    
    7.6
    
    
    
    3,674
    
    
    
    7.4
    
    
    
    31,272Total connectivity and
value-added services
    
    
    22,364
    
    
    
    57.7
    
    
    
    22,484
    
    
    
    53.9
    
    
    
    23,223
    
    
    
    46.6
    
    
    
    197,675Systems integration, including related
equipment sales
    
    
    11,848
    
    
    
    30.5
    
    
    
    15,854
    
    
    
    38.0
    
    
    
    23,505
    
    
    
    47.2
    
    
    
    200,072Equipment sales
    
    
    4,567
    
    
    
    11.8
    
    
    
    3,365
    
    
    
    8.1
    
    
    
    3,085
    
    
    
    6.2
    
    
    
    26,262Total revenues
    
    
    38,779
    
    
    
    100.0
    
    
    
    41,703
    
    
    
    100.0
    
    
    
    49,813
    
    
    
    100.0
    
    
    
    424,009COST AND EXPENSES:Cost of connectivity and value-added
services:Backbone cost
    
    
    4,720
    
    
    
    12.2
    
    
    
    3,551
    
    
    
    8.5
    
    
    
    3,516
    
    
    
    7.0
    
    
    
    29,931Local access line cost
    
    
    3,500
    
    
    
    9.0
    
    
    
    4,040
    
    
    
    9.7
    
    
    
    4,558
    
    
    
    9.2
    
    
    
    38,801Other connectivity cost
    
    
    1,422
    
    
    
    3.7
    
    
    
    1,361
    
    
    
    3.3
    
    
    
    815
    
    
    
    1.6
    
    
    
    6,941Depreciation and amortization
    
    
    3,135
    
    
    
    8.1
    
    
    
    2,938
    
    
    
    7.0
    
    
    
    2,721
    
    
    
    5.5
    
    
    
    23,160Other
    
    
    7,270
    
    
    
    18.7
    
    
    
    7,594
    
    
    
    18.2
    
    
    
    8,468
    
    
    
    17.0
    
    
    
    72,073Total cost of connectivity and
value-added services
    
    
    20,047
    
    
    
    51.7
    
    
    
    19,484
    
    
    
    46.7
    
    
    
    20,078
    
    
    
    40.3
    
    
    
    170,906Cost of systems integration, including
related equipment sales:Cost of equipment sales related to
systems integration
    
    
    1,546
    
    
    
    4.0
    
    
    
    1,759
    
    
    
    4.2
    
    
    
    3,591
    
    
    
    7.2
    
    
    
    30,568Other
    
    
    8,306
    
    
    
    21.4
    
    
    
    10,441
    
    
    
    25.0
    
    
    
    14,529
    
    
    
    29.2
    
    
    
    123,675Total cost of systems integration
    
    
    9,852
    
    
    
    25.4
    
    
    
    12,200
    
    
    
    29.2
    
    
    
    18,120
    
    
    
    36.4
    
    
    
    154,243Cost of equipment sales
    
    
    4,346
    
    
    
    11.2
    
    
    
    3,111
    
    
    
    7.5
    
    
    
    2,818
    
    
    
    5.7
    
    
    
    23,987Total cost of revenues
    
    
    34,245
    
    
    
    88.3
    
    
    
    34,795
    
    
    
    83.4
    
    
    
    41,016
    
    
    
    82.4
    
    
    
    349,136Sales and marketing
    
    
    3,528
    
    
    
    9.1
    
    
    
    2,795
    
    
    
    6.7
    
    
    
    3,080
    
    
    
    6.2
    
    
    
    26,213General and administrative
    
    
    2,098
    
    
    
    5.4
    
    
    
    2,666
    
    
    
    6.4
    
    
    
    3,147
    
    
    
    6.3
    
    
    
    26,790Research and development
    
    
    358
    
    
    
    0.9
    
    
    
    199
    
    
    
    0.5
    
    
    
    158
    
    
    
    0.3
    
    
    
    1,346Total cost and expenses
    
    
    40,229
    
    
    
    103.7
    
    
    
    40,455
    
    
    
    97.0
    
    
    
    47,401
    
    
    
    95.2
    
    
    
    403,485OPERATING INCOME (LOSS)
    
    
    (1,450
    )
    
    
    (3.7
    )
    
    
    1,248
    
    
    
    3.0
    
    
    
    2,411
    
    
    
    4.8
    
    
    
    20,524OTHER INCOME (EXPENSES):Interest income
    
    
    38
    
    
    
    0.1
    
    
    
    13
    
    
    
    0.0
    
    
    
    13
    
    
    
    0.0
    
    
    
    111Interest expense
    
    
    (702
    )
    
    
    (1.9
    )
    
    
    (686
    )
    
    
    (1.6
    )
    
    
    (437
    )
    
    
    (0.9
    )
    
    
    (3,723
    )Foreign exchange gains (losses)
    
    
    (7
    )
    
    
    (0.0
    )
    
    
    6
    
    
    
    0.0
    
    
    
    3
    
    
    
    0.0
    
    
    
    30Net gain on other investments
    
    
    1,413
    
    
    
    3.7
    
    
    
    2,439
    
    
    
    5.9
    
    
    
    3,198
    
    
    
    6.5
    
    
    
    27,219Other  net
    
    
    240
    
    
    
    0.6
    
    
    
    128
    
    
    
    0.3
    
    
    
    191
    
    
    
    0.4
    
    
    
    1,622Other income  net
    
    
    982
    
    
    
    2.5
    
    
    
    1,900
    
    
    
    4.6
    
    
    
    2,967
    
    
    
    6.0
    
    
    
    25,259INCOME (LOSS) FROM OPERATIONS BEFORE
INCOME TAX EXPENSE, MINORITY INTERESTS AND
EQUITY IN NET LOSS OF EQUITY METHOD
INVESTEES
    
    
    (468
    )
    
    
    (1.2
    )
    
    
    3,148
    
    
    
    7.6
    
    
    
    5,379
    
    
    
    10.8
    
    
    
    45,783
 42




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##### Table of Contents



Fiscal year ended March 31,2004
    
    
    2005
    
    
    2006(millions of yen except for percentage data)
    
    
    (thousands ofU.S.dollars)INCOME TAX EXPENSE
    
    ¥
    33
    
    
    
    0.1
    %
    
    ¥
    100
    
    
    
    0.2
    %
    
    ¥
    257
    
    
    
    0.5
    %
    
    $
    2,191MINORITY INTERESTS IN (EARNINGS) LOSSES OF
SUBSIDIARIES
    
    
    236
    
    
    
    0.6
    
    
    
    (109
    )
    
    
    (0.3
    )
    
    
    (354
    )
    
    
    (0.7
    )
    
    
    (3,012
    )EQUITY IN NET LOSS OF EQUITY METHOD
INVESTEES:Equity method net loss
    
    
    (286
    )
    
    
    (0.8
    )
    
    
    (33
    )
    
    
    (0.1
    )
    
    
    (14
    )
    
    
    (0.0
    )
    
    
    (117
    )Impairment loss on advance to Crosswave
    
    
    (1,720
    )
    
    
    (4.4
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Total equity in net loss of
equity method investees
    
    
    (2,006
    )
    
    
    (5.2
    )
    
    
    (33
    )
    
    
    (0.1
    )
    
    
    (14
    )
    
    
    (0.0
    )
    
    
    (117
    )NET INCOME (LOSS)
    
    ¥
    (2,271
    )
    
    
    (5.9
    )%
    
    ¥
    2,906
    
    
    
    7.0
    %
    
    ¥
    4,754
    
    
    
    9.6
    %
    
    $
    40,463
 Year Ended March 31, 2006 Compared to the Year Ended March 31, 2005
 Total revenues
  Connectivity and value-added services revenues.
 
    
    Dedicated access.Revenues from dedicated access services decreased 6.6% to ¥10.6
billion for the fiscal year ended March 31, 2006 from ¥11.4 billion for the previous
fiscal year. This decrease reflected a decrease of revenues of ¥468 million from the
interconnection of IIJs network with AIH, our former equity method investee, which
resulted from the consolidation of AIHs revenues following the merger of AIH into
IIJ. The decrease is also due to the decline in unit price per bandwidth.
    
    Dial-up access.Revenues from dial-up access services decreased 9.0% to ¥2.7
billion for the fiscal year ended March 31, 2006 from ¥2.9 billion for the previous
fiscal year. This decrease was primarily the result of declining revenues from
services for individuals such as IIJ4U Service. The revenues from IIJ4U decreased by
¥0.1 billion from the previous fiscal year.
    
    Value-added services.Our value-added services revenues increased 24.9% to ¥6.2
billion for the fiscal year ended March 31, 2006 from ¥5.0 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, 2006, a 15.9% increase from the previous fiscal year.
The increase was mainly
 43




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##### Table of Contents



due to a continuous increase in sales of Wide-area Ethernet services which increased by
43.8% compared to 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.
 Cost of equipment sales.
 Total costs and expenses
  Sales and marketing.
 44




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##### Table of Contents



General and administrative.
 Research and development.
 Operating income
  Other income (expenses), net
  Interest income.
 Interest expense.
 Foreign exchange gains (losses).
 Net gain on other investments.
 Other-net.
 Income from operations before income tax expense, minority interests and equity in net loss of
equity method investees
  Income tax expense
  45




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##### Table of Contents



Minority interests in earnings of subsidiaries
  Equity in net loss of equity method investees
  Net income
  Year Ended March 31, 2005 Compared to the Year Ended March 31, 2004
 Total revenues
  Connectivity and value-added services revenues.
 
    
    Dedicated access.Revenues from dedicated access services decreased 11.6% to ¥11.4
billion for the fiscal year ended March 31, 2005 from ¥12.9 billion for the previous
fiscal year. This decrease reflected decreasing unit prices as a result of both the
cancellation by a regional electric power companys telecom service arm and general
price competition. Decreased revenues from IP Service, IIJ T1 Standard and IIJ Economy
were partially offset by increased revenues from our IIJ FiberAccess/F Service mainly
due to the expansion of usage of broadband line for multi-site connectivity within
corporate customers.
    
    Dial-up access.Revenues from dial-up access services decreased 4.9% to ¥2.9
billion for the fiscal year ended March 31, 2005 from ¥3.1 billion for the previous
fiscal year. This decrease was primarily the result of declining revenues from IIJ4U
Service, offset partially by dial-up access services provided on an OEM basis mainly
due to the increased number of contracts within the individual customers as OEM brand.
    
    Value-added services.Our value-added services revenues increased 16.5% to ¥5.0
billion for the fiscal year ended March 31, 2005 from ¥4.3 billion for the previous
fiscal year. This increase reflected steady growth in Internet data center services,
virtual private network services, and security-related services, in part as a result of focusing sales efforts
on outsourcing services.
 46




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##### Table of Contents




    
    Other.Other revenues, which included rental fees for network equipment, customer
support service, and sale of Wide-area Ethernet services, amounted to ¥3.2 billion for
the fiscal year ended March 31, 2005, a 49.7% increase from the previous fiscal year.
This reflected increasing sales of Wide-area Ethernet services.
 Systems integration revenues.
 Equipment sales.
 Total cost of revenues
  Cost of connectivity and value-added services revenues
 Cost of systems integration revenues.
 Cost of equipment sales.
 47




---



##### Table of Contents



Total costs and expenses
  Sales and marketing.
 General and administrative.
 Research and development.
 Operating income (loss)
  Other income (expenses), net
  Interest income.
 Interest expense.
 Foreign exchange gains (losses).
 48




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##### Table of Contents



Gain (loss) on other investments.
 Other-net.
 Income (loss) from operations before income tax expense, minority interests and equity in net
loss of equity method investees
  Income tax expense
  Minority interests in (earnings) losses of subsidiaries
  Equity in net loss of equity method investees
    Net income (loss)
  49




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##### Table of Contents



Application of Critical Accounting Policies
    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
  50




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##### Table of Contents



Impairment of long-lived assets
  
    
    significant decline in the market value of an asset,
    
    current period operating cash flow loss,
    
    introduction of competing technologies or services,
    
    significant underperformance of expected or historical cash flows,
    
    significant or continuing decline in subscribers,
    
    changes in the manner or use of an asset,
    
    disruptions in the use of network equipment under capital lease arrangements, and
    
    other negative industry or economic trends.
  51




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##### Table of Contents



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.
   52




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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
    
    
    (115)/129
    
    
    
    (20)/24
    
    
    
    12/
    (14)50 basis point
increase/decrease in
expected return on
assets
    
    
    
    
    
    
    /5
    
    
    
    /
    (3)
 New Accounting Standards
  53




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##### Table of Contents



B. Liquidity and Capital Resources.
 Liquidity and Capital Requirements
  54




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##### Table of Contents



Capital expenditures.
 For the fiscal year ended March 31,2004
    
    2005
    
    2006(millions of yen)Capital
expenditures,
including acquisition
of assets by entering
into capital leases
    
    ¥
    3,523
    
    
    ¥
    5,011
    
    
    ¥
    4,762
   Lease payments.
    55




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##### Table of Contents



Payment due by period(millions of yen)Totalcontractual
    
    
    Less than
    
    
    
    
    
    
    
    
    
    
    More thanamount
    
    
    1 year
    
    
    1 to 3 years
    
    
    4 to 5 years
    
    
    5 yearsConnectivity lines operating leases
    
    ¥
    27
    
    
    ¥
    27
    
    
    ¥
    
    
    
    ¥
    
    
    
    ¥
    Other operating leases
    
    
    2,839
    
    
    
    1,377
    
    
    
    1,317
    
    
    
    90
    
    
    
    55Capital leases
    
    
    8,489
    
    
    
    3,262
    
    
    
    4,314
    
    
    
    877
    
    
    
    36Total minimum lease payments
    
    ¥
    11,355
    
    
    ¥
    4,666
    
    
    ¥
    5,631
    
    
    ¥
    967
    
    
    ¥
    91
 
 (1)
    
    See note 7 to the consolidated financial statements included in this annual report. Payments of principal and interest on outstanding borrowings.
    Fiscal year ending
    
    
    
    
    
    Thousands ofMarch 31
    
    Millions of yen
    
    
    U.S. dollars2007
    
    ¥
    1,990
    
    
    $
    16,9392008
    
    
    290
    
    
    
    2,469Total
    
    ¥
    2,280
    
    
    $
    19,408
   56




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##### Table of Contents



Investments in current and former group companies.
 Working capital needs.
 Capital Resources
  Short-term and long-term Borrowings.
 Cash flows from operating activities.
 Capital Leases.
 Issuances of Equity Securities.
 Cash Flows
   57




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##### Table of Contents



Fiscal year ended March 31,2004
    
    
    2005
    
    
    2006(millions of yen)Net cash provided by operating activities
    
    ¥
    1,923
    
    
    ¥
    5,238
    
    
    ¥
    6,559Net cash provided by (used in) investing activities
    
    
    (852
    )
    
    
    1,974
    
    
    
    1,805Net cash provided by (used in) financing activities
    
    
    7,669
    
    
    
    (14,212
    )
    
    
    39Effect of exchange rate changes on cash
    
    
    (44
    )
    
    
    2
    
    
    
    38Net increase (decrease) in cash and cash equivalent
    
    
    8,696
    
    
    
    (6,998
    )
    
    
    8,441Cash at beginning of the year
    
    
    3,588
    
    
    
    12,284
    
    
    
    5,286Cash at end of the year
    
    ¥
    12,284
    
    
    ¥
    5,286
    
    
    ¥
    13,727
 Year Ended March 31, 2006 as Compared to the Year Ended March 31, 2005
    Year Ended March 31, 2005 as Compared to the Year Ended March 31, 2004
  58




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Contingencies
  C. Research and Development, Patents and Licenses, etc.
  D. Trend Information.
 Factors Affecting Our Future Financial Results
  Revenues
  59




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##### Table of Contents



Connectivity and value-added services revenues
  Dedicated access services
  
    
    Increased contracted bandwidth.Total contracted bandwidth for dedicated access
services including Internet Data Center Connectivity Services increased to 194.9 Gbps
for the fiscal year ended March 31, 2006 from 121.2 Gbps for the previous fiscal year.
In addition, average contracted bandwidth for our IP Service jumped to approximately
112 Mbps for the fiscal year ended March 31, 2006 from 54 Mbps for the previous fiscal
year. The number of IP Service contracts for the bandwidth over 100Mbps increased to
157 for the fiscal year ended March 31, 2006 from 114 for the fiscal year ended March
31, 2005. This increase is mainly due to an increase in customers demand for higher
bandwidth for their Internet connectivity. The average revenues per contract for IP
Service was approximately ¥0.6 million at the end of March 2006, compared to the
revenues per contract of ¥0.8 million at the end of March 2005. Though we do not
expect that revenue per contract come to a growing trend for the fiscal year ending
March 31, 2007 due to the 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 and differentiate them from
those of our competitors.
    
    Increased demand for broadband services.Demand for broadband services, IIJ
FiberAccess/F and IIJ DSL/F are increasing rapidly as the services are coming to be
used to connect corporate branches and remote offices. The services uses ADSL lines at
maximum 47 Mbps speed or optical lines at maximum 10 Mbps or 100 Mbps as access lines.
The number of contracts for IIJ FiberAccess/F and IIJ DSL/F increased to 13,297 for
the fiscal year ended March 31, 2006 from 9,873 for the fiscal year ended March 31,
2005. 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.
 Dial-up access services
  60




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Value-added services revenues
   Other.
  Systems integration revenues, including related equipment sales revenues
   61




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Other 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.
 
    
    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
 62




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##### Table of Contents



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 decreased to ¥3.5 billion for the fiscal year ended
March 2006 from ¥3.6 billion for the fiscal year ended March 2005. 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
increased to ¥4.6 billion for the fiscal year ended March 2006 from ¥4.0 billion for
the fiscal year ended March 2005. Other connectivity costs were ¥0.8 billion for the
fiscal year ended March 2006 compared to ¥1.4 billion for the previous fiscal year.
  Costs of systems integration revenues and equipment sales
  63




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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.
    
    Impairment losses.We also hold other investments, including available-for-sale
securities. The book value of other investments are affected by the fluctuation in the
market price or the decrease in fair values of non-marketable investments. If a
decrease below cost in the market
 64




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price or fair value of an investment is judged to be other than temporary, we will have
impairment losses on other investments.
    
    Gain on sale of other investments.Gain on sales of other investment is mostly
raised from a sale of available-for-sale securities. We expect that we will continue a
sale of available-for-sale securities to raise the gain for the fiscal year ending
March 31, 2007.
 E. Off-Balance Sheet Arrangements.
  F. Tabular Disclosure of Contractual Obligations.
  Payments due by period (in million of yen)moreless than
    
    
    
    
    
    
    
    
    
    
    thanContractual Obligations
    
    Total
    
    
    1 year
    
    
    1-3 years
    
    
    3-5 years
    
    
    5 yearsLong-term debt obligations
    
    ¥
    2,280
    
    
    ¥
    1,990
    
    
    ¥
    290
    
    
    ¥
    
    
    
    ¥
    Capital lease obligations
    
    
    8,489
    
    
    
    3,262
    
    
    
    4,314
    
    
    
    877
    
    
    
    36Operating lease obligations
    
    
    2,866
    
    
    
    1,404
    
    
    
    1,317
    
    
    
    90
    
    
    
    55Purchase obligations (1)Other long-term liabilities
reflected on our balance sheetTotal (2) (3)
    
    ¥
    13,635
    
    
    ¥
    6,656
    
    
    ¥
    5,921
    
    
    ¥
    967
    
    
    ¥
    91
 
 (1)
    
    Represents agreements to purchase goods and services that are enforceable and legally binding
on us and that specify all significant terms including fixed or minimum quantities to be
purchased, fixed, minimum or variable price provisions, and the approximate timing of the
transactions.(2)
    
    In addition to the above, we plan to contribute ¥155 million to our pension plan for the
fiscal year ending March 31, 2007. In February 2006, we invested ¥750 million in Internet
Revolution Inc. (i-revo), a joint venture that we established with Konami Corporation and in
the joint venture agreement, we agreed that we will provide funding up to ¥90 million to
i-revo between November 2006 and the end of April 2007 for its capital investment and working
capital.(3)
    
    The table above does not include obligations for interest payments on debt. 65




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##### Table of Contents



Item 6. Directors, Senior Management and Employees.
 A. Directors and Senior Management.
  Initial date ofappointment asdirector,
    
    Number of IIJexecutive officer
    
    shares ownedCurrent term
    
    or statutory
    
    as of July 7,Name
    
    Position
    
    Date of birth
    
    expires
    
    auditor
    
    2006Koichi Suzuki
    
    President, Chief
Executive Officer and
Representative Director
    
    Sept. 3, 1946
    
    June 2007
    
    Dec. 1992
    
    
    12,515Toshiya Asaba
    
    Executive Vice President
    
    June 12, 1962
    
    June 2007
    
    June 1999
    
    
    *Yoshiaki Hisamoto
    
    Executive Vice President
    
    Dec. 14, 1954
    
    June 2008
    
    June 2006
    
    
    Hideshi Hojo
    
    Senior Managing Director
    
    Dec. 22, 1957
    
    June 2007
    
    June 2000
    
    
    *Takamichi Miyoshi
    
    Director
    
    May 5, 1963
    
    June 2008
    
    June 2002
    
    
    *Akihisa Watai
    
    Director, Chief Financial
Officer and Chief
Accounting Officer
    
    Sept. 30, 1965
    
    June 2008
    
    June 2004
    
    
    Hiroyuki Hisashima
    
    Director
    
    Oct. 11, 1959
    
    June 2007
    
    June 2005
    
    
    *Kazuhiro Tokita
    
    Director
    
    Apr. 25, 1969
    
    June 2007
    
    June 2005
    
    
    *Yasurou Tanahashi
    
    Director
    
    Jan. 4, 1941
    
    June 2008
    
    June 2004
    
    
    Takashi Hiroi
    
    Director
    
    Feb. 13, 1963
    
    June 2008
    
    June 2004
    
    
    Yoshifumi Nishikawa
    
    Director
    
    Aug. 3, 1938
    
    June 2007
    
    June 2005
    
    
    Junnosuke Furukawa
    
    Director
    
    Dec. 5, 1935
    
    June 2007
    
    June 2005
    
    
    Senji Yamamoto
    
    Director
    
    Apr. 14, 1946
    
    June 2008
    
    June 2006
    
    
    Junichi Tate
    
    Standing Statutory Auditor
    
    Nov. 6, 1949
    
    June 2008
    
    June 2006
    
    
    Masaki Okada
    
    Statutory Auditor
    
    Jan. 9, 1959
    
    June 2008
    
    June 2004
    
    
    Masaaki Koizumi
    
    Statutory Auditor
    
    Oct. 4, 1964
    
    June 2008
    
    June 2004
    
    
    Hirofumi Takahashi
    
    Statutory Auditor
    
    Sep. 1, 1939
    
    June 2009
    
    June 2005
    
    
    *
 
 *
    
    Owns less than 1% of outstanding shares of IIJs common stock. Koichi Suzuki
 Toshiya Asaba
 Yoshiaki Hisamoto
 66




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##### Table of Contents



Hideshi Hojo
 Takamichi Miyoshi
 Akihisa Watai
 Hiroyuki Hisashima
 Kazuhiro Tokita
 Yasurou Tanahashi
 Takashi Hiroi
 Yoshifumi Nishikawa
 Junnosuke Furukawa
 67




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##### Table of Contents



Senji Yamamoto
 Junichi Tate
 Masaki Okada
 Masaaki Koizumi
 Hirofumi Takahashi
 B. Compensation.
  C. Board Practices.
   68




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69




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##### Table of Contents



D. Employees.
    E. Share Ownership.
  70




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Stock Option Plan
 
    
    June 2001 Stock Option Plan. In June 2001, we implemented a stock option plan under
which 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 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.
  Employee Stock Purchase Plan
  
 Item 7. Major Shareholders and Related Party Transactions.
 A. Major Shareholders.
  71




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Shares of common stock outstanding,beneficially owned as of July 7, 2006Number
    
    PercentageNippon Telegraph and Telephone Corporation and affiliates (1)
    
    
    60,675
    
    
    
    29.7
    %Koichi Suzuki
    
    
    12,515
    
    
    
    6.1Itochu Corporation
    
    
    10,430
    
    
    
    5.1Directors and executive officers as a group (2)
    
    
    13,300
    
    
    
    6.5
 
 (1)
    
    Includes Nippon Telegraph and Telephone Corporation (NTT), which owns 50,475 shares, or
24.7%, and NTT Communications Corporation (NTT Communications), which owns 10,200 shares, or
5.0%. NTT acquired ownership of its shares, and NTT Communications acquired additional shares
on September 16, 2003.(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%.   B. Related Party Transactions.
 NTT-affiliated Companies.
 Transactions with equity method affiliates.
 millions of yenAccounts receivable
    
    ¥
    253Accounts payable
    
    
    17Revenues
    
    
    1,286Costs and expenses
    
    
    656
  72




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##### Table of Contents




    
    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, statutory 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.
 Crosswave.
 millions of yenRevenues
    
    ¥
    1,196Costs and expenses
    
    
    4,816
    C. Interests of Experts and Counsel.
  
 Item 8. Financial Information.
 A. Consolidated Statements and Other Financial Information.
 Financial Statements
  73




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##### Table of Contents



Legal or Arbitration Proceedings
  Dividend Policy
  B. Significant Changes.
  
 Item 9. The Offer and Listing.
 A. Offer and Listing Details.
   Nasdaq
    
    Mothers market of the TSE(per ADS)
    
    (per share of common stock)Fiscal year ended/ending March 31,
    
    High
    
    Low
    
    High
    
    Low2002
    
    $
    11.88
    
    
    $
    4.252003
    
    
    7.34
    
    
    
    1.802004
    
    
    14.10
    
    
    
    1.412005
    
    
    6.24
    
    
    
    2.11First Quarter
    
    
    6.24
    
    
    
    3.19Second Quarter
    
    
    3.87
    
    
    
    2.23Third Quarter
    
    
    6.02
    
    
    
    2.11Fourth Quarter
    
    
    5.26
    
    
    
    3.332006
    
    
    14.88
    
    
    
    3.04
    
    
    ¥
    584,000
    
    
    ¥
    409,000First Quarter
    
    
    13.93
    
    
    
    3.04Second Quarter
    
    
    11.12
    
    
    
    7.31Third Quarter
    
    
    14.88
    
    
    
    8.45
    
    
    
    548,000
    
    
    
    484,000Fourth Quarter
    
    
    12.99
    
    
    
    8.67
    
    
    
    584,000
    
    
    
    409,0002007First Quarter 2006
    
    
    10.65
    
    
    
    6.41
    
    
    
    517,000
    
    
    
    296,000MonthJanuary 2006
    
    
    12.71
    
    
    
    9.95
    
    
    
    584,000
    
    
    
    420,000February 2006
    
    
    12.99
    
    
    
    9.70
    
    
    
    544,000
    
    
    
    428,000March 2006
    
    
    9.98
    
    
    
    8.67
    
    
    
    458,000
    
    
    
    409,000April 2006
    
    
    10.65
    
    
    
    9.35
    
    
    
    517,000
    
    
    
    425,000May 2006
    
    
    10.40
    
    
    
    7.47
    
    
    
    456,000
    
    
    
    326,000June 2006
    
    
    8.18
    
    
    
    6.41
    
    
    
    385,000
    
    
    
    296,000
 74




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##### Table of Contents



(1)
    
    Price data are based on prices throughout the sessions for each corresponding period at each
stock exchange.(2)
    
    The high and low price of our shares of common stock on the Mothers market of the TSE for the
fiscal year ended March 31, 2006 and the third quarter of the fiscal year ended March 31, 2006
show the high and low price for the period on and after December 2, 2005, when we listed on
the Mothers market of the TSE. 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.
 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,
 75




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##### Table of Contents




    
    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.
 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 the Articles,
    
    the right to receive interim dividends as provided for in the Articles, with this
right lapsing three full years after the due date for payment according to a provision
in the Articles,
    
    the right to vote at a shareholders meeting (cumulative voting is not allowed
under the Articles),
    
    the right to receive surplus in the event of liquidation, and
    
    the right to require us to purchase shares when a shareholder opposes resolutions
including (i) the transfer of all or material part of the business, (ii) an amendment
of the Articles to establish a restriction on share transfer, (iii) a share exchange
or share transfer to establish a holding
 76




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company, (iv) split of the company or (v)
merger, all of which must be consummated by a two-thirds affirmative vote of the
voting rights of the shareholders at a shareholders meeting at which shareholders
having not less than one-third of the total number of voting rights held by all
shareholders who can exercise their voting rights are in attendance.
   
    
    a reduction of the stated capital,
    
    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.
   77




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
    
    short-form share transfer (only in respect of the shareholders of the company to be
a 100% parent company by the short-form share transfer),
    
    short-form company split into an existing company (only in respect of the
shareholders of the exiting company that takes over the target business of the split
company), and
    
    short-form absorption (only in respect of the shareholders of the exiting company
that absorbs the target company by the short-form absorption).
  
    
    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 statutory 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.
    
    
    us to institute an action to enforce the liability of one of our directors or
statutory auditors,
    
    us to institute an action to recover from a recipient the benefit of a proprietary
nature given in relation to exercising the right of a shareholder, and
 78




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##### Table of Contents




    
    a director on our behalf for the cessation of an illegal or ultra vires action.
    Restrictions on Holders of our Common Stock
      C. Material Contracts.
  Subscription Agreement, dated September 16, 2003, between Internet Initiative Japan Inc. and
Nippon Telegraph and Telephone Corporation.
 79




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##### Table of Contents



Service Agreement dated, March 25, 2004, between Internet Initiative Japan Inc. and IIJ
America Inc.
 Limitation of Liability Agreement dated, June 29, 2005 and June 28, 2006, between Internet
Initiative Japan Inc. and outside directors and outside statutory auditors.
 Joint Venture Agreement, dated, January 19, 2006, between Internet Initiative Japan Inc. and
Konami Corporation.
 D. Exchange Controls.
  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
 80




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##### Table of Contents




    
    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
    %
   81




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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 mark-to-market,
    
    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.
 82




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##### Table of Contents




    
    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.
    Taxation of Dividends
   83




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##### Table of Contents



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.
  84




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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.
     85




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##### Table of Contents



F. Dividends and Paying Agents.
  G. Statement by Experts.
  H. Documents on Display.
  I. Subsidiary Information.
  
 Item 11. Quantitative and Qualitative Disclosures about Market Risk.
  Interest Rate Risk
  Expected maturity dateFairvalue orGainMarch 31, 2006
    
    2007
    
    2008
    
    2009
    
    2010
    
    2011
    
    Total
    
    (loss)(millions of yen)Long-term debt obligations:Fixed rate long-term borrowings and
installment payable
    
    
    756
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    756
    
    
    
    756Average interest rate
    
    
    1.883
    %
    
    
    
    %
    
    
    
    %
    
    
    
    %
    
    
    
    %
    
    
    1.883
    %Variable rate long-term borrowings
    
    
    1,234
    
    
    
    290
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    1,524
    
    
    
    1,524Average interest rate
    
    
    1.413
    %
    
    
    1.440
    %
    
    
    
    %
    
    
    
    %
    
    
    
    %
    
    
    1.418
    %
 86




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##### Table of Contents



Expected maturity dateFairvalue orGainMarch 31, 2006
    
    2007
    
    2008
    
    2009
    
    2010
    
    2011
    
    Total
    
    (loss)Interest rate swap contracts Notional amount  variable to fixed:
    
    
    900
    
    
    
    250
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    1,150
    
    
    
    (4
    )Average pay rate
    
    
    1.812
    %
    
    
    1.670
    %
    
    
    
    %
    
    
    
    %
    
    
    
    %
    
    
    1.781
    %Average receive rate
    
    
    1.166
    %
    
    
    1.150
    %
    
    
    
    %
    
    
    
    %
    
    
    
    %
    
    
    1.162
    %
 Expected maturity dateFairvalueorGainMarch 31, 2005
    
    2006
    
    2007
    
    2008
    
    2009
    
    2010
    
    Total
    
    (loss)(millions of yen)Long-term debt obligations:Fixed rate long-term borrowings and
installment payable
    
    
    1,652
    
    
    
    1,006
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    2,658
    
    
    
    2,655Average interest rate
    
    
    1.913
    %
    
    
    1.819
    %
    
    
    
    %
    
    
    
    %
    
    
    
    %
    
    
    1.877
    %Variable rate long-term borrowings
    
    
    1,084
    
    
    
    484
    
    
    
    40
    
    
    
    
    
    
    
    
    
    
    
    1,608
    
    
    
    1,608Average interest rate
    
    
    1.284
    %
    
    
    1.544
    %
    
    
    3.255
    %
    
    
    
    %
    
    
    
    %
    
    
    1.411
    %Interest rate swap contracts Notional amount  variable to fixed:
    
    
    1,000
    
    
    
    400
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    1,400
    
    
    
    (9
    )Average pay rate
    
    
    1.900
    %
    
    
    1.990
    %
    
    
    
    %
    
    
    
    %
    
    
    
    %
    
    
    1.926
    %Average receive rate
    
    
    1.118
    %
    
    
    1.185
    %
    
    
    
    %
    
    
    
    %
    
    
    
    %
    
    
    1.137
    %
  Equity Price Risk
  Foreign Currency Exchange Rate Risk
  87




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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.
  
 Item 15. Controls and Procedures.
 Disclosure Controls and Procedures
    Changes in 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,
 88




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
    
    provide reasonable assurance that transactions are recorded as necessary to permit
preparation of our financial statements in accordance with generally accepted
accounting principles, 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.
  
 Item 16A. Audit Committee Financial Expert
             89




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##### Table of Contents



Item 16B. Code of Ethics.
   
 Item 16C. Principal Accountant Fees and Services.
 Independent Auditor Fees and Services
  Fiscal year ended March 31,2005
    
    2006(millions of yen)Audit fees (1)
    
    
    74
    
    
    
    80Audit-related fees (2)
    
    
    
    
    
    
    Tax fees (3)
    
    
    0
    
    
    
    All other fees (4)
    
    
    35
    
    
    
    4Total fees
    
    
    109
    
    
    
    84
 
 (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 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 assurance and related services by
Deloitte Touche Tohmatsu that are reasonably related to the performance of the audit or review
of our financial statements other than those reported under Audit Fees above. These services
include internal control reviews and consultation concerning financial accounting and
reporting standards.(3)
    
    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.(4)
    
    These are the aggregate fees for the fiscal year for all other products and services provided
by Deloitte Touche Tohmatsu including consultation services related to the Sarbanes Oxley Act
of 2002 and the Privacy Mark System being instituted by The Japan Information Processing
Development Center. 90




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##### Table of Contents



Board of Statutory Auditors Pre-Approval Policies and Procedures
   
 Item 16D. Exemptions from the Listing Standards for Audit Committees.
  
    
    The board of statutory 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 statutory auditors,
    
    Japanese law must and does require the board of statutory auditors to be separate
from the board of directors,
    
    None of the members of the board of statutory auditors may be elected by
management, and none of the listed companys executive officers may be a member of the
board of statutory auditors,
    
    Japanese law must and does set forth standards for the independence of the members
of the board of statutory auditors from the listed company or its management, and
    
    The board of statutory 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 statutory auditors must establish procedures for (i) the receipt,
retention and treatment of complaints received by us regarding accounting, internal
accounting controls, or
 91




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##### Table of Contents



auditing matters, and (ii) the confidential, anonymous
submission by our employees of concerns regarding questionable accounting or auditing
matters,
    
    The board of statutory 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 statutory 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 statutory auditors, and (iii) ordinary
administrative expenses of the board of statutory 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.
  
 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 Statutory Auditors, as amended (English translation)**2.1
    
    Specimen Common Stock Certificate***2.2
    
    Bylaws of the IIJ Employee Shareholders Association (with 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****4.1
    
    Basic Agreement to Delegate Services, dated April 1, 1997, between Internet Initiative
Japan Inc. and IIJ Technology Inc. (with 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
(with English translation)***4.3
    
    Basic Agreement to Delegate Services, dated April 1, 1998, between Internet Initiative
Japan Inc. and Net Care, Inc. (with English translation)***4.4
    
    Lease Agreement, dated March 14, 2003, between Internet Initiative Japan Inc. and Mitsui
Fudosan
 92




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##### Table of Contents



Co., Ltd. (English translation)*4.5
    
    Sublease Agreements, dated March 15, 2003, between Internet Initiative Japan Inc., IIJ
Technology Inc. and Net Care, Inc. (English translations)*4.6
    
    Pledge Agreement, dated March 14, 2003, among Internet Initiative Japan Inc., IBJ Leasing
Co., Ltd. and Nissay Leasing Company, Limited (English translation)*4.7
    
    Joint Venture Agreement, dated January 19, 2006, between Internet Initiative Japan Inc.
and Konami Corporation (English translation)4.20
    
    Subscription Agreement, dated September 16, 2003, between Internet Initiative Japan Inc.
and Nippon Telegraph and Telephone Corporation (English translation)*4.21
    
    Service Agreement, dated March 25, 2004, between Internet Initiative Japan Inc. and IIJ
America Inc.*****4.24
    
    Agreement on Limited Liability, dated June 29, 2005 and June 28, 2006, between Internet
Initiative Japan Inc. and outside directors and outside statutory 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 135014.1
    
    Selected unaudited financial statement data as of and for the year ended March 31, 2003 of
Crosswave Communications Inc.*
 
 (*)
    
    Incorporated by reference to the corresponding exhibit to our annual report on Form 20-F
(File No. 0-30204) filed on September 30, 2003.(**)
    
    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 and each of Mr. Yoshifumi Nishikawa and Mr. Junnosuke Furukawa as our outside directors
entered into an Agreement on Limited Liability, dated June 29, 2005. We and each of Mr.
Yasurou Tanahashi and Mr. Takashi Hiroi as our outside directors and each of Mr. Masaki Okada
and Mr. Masaaki Koizumi as our outside statutory auditors entered into an Agreement on Limited
Liability, dated June 28, 2006.  93




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SIGNATURE
  Internet Initiative Japan Inc.By:
    
    /s/ Koichi Suzuki

Name: Koichi SuzukiTitle:
 President, Chief Executive Officerand Representative Director
  94




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##### Table of Contents



Internet Initiative Japan Inc. and Subsidiaries
 Index to Consolidated Financial Statements
 PageReport of Independent Registered Public Accounting Firm
    
    
    F-2Consolidated Balance Sheets as of March 31, 2005 and 2006
    
    
    F-3Consolidated Statements of Operations for Each of the Three Years in the Period Ended March 31, 2006
    
    
    F-5Consolidated Statements of Shareholders Equity
for Each of the Three Years in the Period Ended March 31, 2006
    
    
    F-7Consolidated Statements of Cash Flows for Each of the Three Years in the Period Ended March 31, 2006
    
    
    F-8Notes to Consolidated Financial Statements
    
    
    F-11
 F-1




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Report of Independent Registered Public Accounting Firm
 
     
 F-2




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##### Table of Contents



Internet Initiative Japan Inc. and Subsidiaries
 
 Consolidated Balance Sheets
March 31, 2005 and 2006
 Thousands ofU.S. DollarsThousands of Yen
    
    
    (Note 1)2005
    
    
    2006
    
    
    2006ASSETSCURRENT ASSETS:Cash (Note 15)
    
    ¥
    5,286,477
    
    
    ¥
    13,727,021
    
    
    $
    116,846Accounts receivable, net of allowance for
doubtful accounts of ¥41,400 thousand
and ¥23,411 thousand ($199 thousand)
at March 31, 2005 and 2006, respectively
(Notes 3, 4 and 11)
    
    
    7,407,439
    
    
    
    11,962,304
    
    
    
    101,824Inventories
    
    
    140,096
    
    
    
    851,857
    
    
    
    7,251Prepaid expenses
    
    
    604,935
    
    
    
    1,031,325
    
    
    
    8,778Other current assets,
net of allowance for doubtful accounts of
¥33,250 thousand ($283 thousand) at March 31,
2006 (Notes 3 and 9)
    
    
    108,228
    
    
    
    214,121
    
    
    
    1,823Total current assets
    
    
    13,547,175
    
    
    
    27,786,628
    
    
    
    236,522INVESTMENTS IN AND ADVANCES TO
EQUITY METHOD INVESTEES, net of loan loss
valuation allowance of ¥31,378 thousand and ¥16,701
thousand ($142 thousand) at March 31, 2005 and 2006,
respectively (Notes 3 and 4)
    
    
    713,607
    
    
    
    1,162,971
    
    
    
    9,899OTHER INVESTMENTS (Notes 2, 8 and 15)
    
    
    9,930,781
    
    
    
    8,020,705
    
    
    
    68,273PROPERTY AND EQUIPMENTNet
(Notes 5 and 7)
    
    
    9,722,366
    
    
    
    10,299,496
    
    
    
    87,670INTANGIBLE ASSETSNet (Note 6)
    
    
    561,211
    
    
    
    632,594
    
    
    
    5,385GUARANTEE DEPOSITS (Notes 7 and 8)
    
    
    2,050,665
    
    
    
    1,549,653
    
    
    
    13,191OTHER ASSETS, net of allowance for doubtful
accounts of ¥376,092 thousand and ¥40,980
thousand ($349 thousand) at March 31, 2005
and 2006 respectively (Notes 3, 9, 10 and 15)
    
    
    590,666
    
    
    
    1,252,942
    
    
    
    10,665TOTAL
    
    ¥
    37,116,471
    
    
    ¥
    50,704,989
    
    
    $
    431,605
  F-3




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##### Table of Contents



Internet Initiative Japan Inc. and Subsidiaries
 Consolidated Balance Sheets
March 31, 2005 and 2006
 Thousands ofU.S. DollarsThousands of Yen
    
    
    (Note 1)2005
    
    
    2006
    
    
    2006LIABILITIES AND SHAREHOLDERS EQUITYCURRENT LIABILITIES:Short-term borrowings (Note 8)
    
    ¥
    4,724,633
    
    
    ¥
    4,555,000
    
    
    $
    38,772Long-term borrowingscurrent portion
(Notes 8 and 15)
    
    
    2,736,056
    
    
    
    1,989,963
    
    
    
    16,939Payable under securities loan agreement (Note 8)
    
    
    1,729,520
    
    
    
    999,600
    
    
    
    8,509Capital lease obligationscurrent portion (Note 7)
    
    
    2,774,974
    
    
    
    3,003,914
    
    
    
    25,569Accounts payable (Notes 4 and 11)
    
    
    4,860,733
    
    
    
    10,107,942
    
    
    
    86,040Accrued expenses
    
    
    541,118
    
    
    
    540,027
    
    
    
    4,597Other current liabilities
    
    
    817,517
    
    
    
    1,702,208
    
    
    
    14,489Total current liabilities
    
    
    18,184,551
    
    
    
    22,898,654
    
    
    
    194,915LONG-TERM BORROWINGS (Notes 8 and 15)
    
    
    1,529,963
    
    
    
    290,000
    
    
    
    2,469CAPITAL LEASE OBLIGATIONSNoncurrent (Note 7)
    
    
    4,339,028
    
    
    
    4,980,659
    
    
    
    42,396ACCRUED RETIREMENT AND PENSION COSTS (Note 10)
    
    
    143,346
    
    
    
    223,332
    
    
    
    1,901OTHER NONCURRENT LIABILITIES (Note 9)
    
    
    275,533
    
    
    
    827,086
    
    
    
    7,040Total liabilities
    
    
    24,472,421
    
    
    
    29,219,731
    
    
    
    248,721MINORITY INTEREST
    
    
    1,028,977
    
    
    
    1,263,320
    
    
    
    10,753COMMITMENTS AND CONTINGENCIES
(Note 14)SHAREHOLDERS EQUITY (Notes 11 and 12):Common stockauthorized, 377,600 shares;
issued and outstanding, 191,800 shares at March 31,
2005, authorized, 377,600 shares; issued and
outstanding, 204,300 shares at March 31, 2006
    
    
    13,765,372
    
    
    
    16,833,847
    
    
    
    143,291Additional paid-in capital
    
    
    23,637,628
    
    
    
    26,599,217
    
    
    
    226,415Accumulated deficit
    
    
    (34,434,052
    )
    
    
    (29,680,482
    )
    
    
    (252,643
    )Accumulated other comprehensive income
    
    
    8,690,125
    
    
    
    6,553,594
    
    
    
    55,785Treasury stock602 shares and 777 shares held by an equity
method investee at March 31, 2005 and 2006, respectively
    
    
    (44,000
    )
    
    
    (84,238
    )
    
    
    (717
    )Total shareholders equity
    
    
    11,615,073
    
    
    
    20,221,938
    
    
    
    172,131TOTAL
    
    ¥
    37,116,471
    
    
    ¥
    50,704,989
    
    
    $
    431,605
   F-4




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##### Table of Contents



Internet Initiative Japan Inc. and Subsidiaries
 
 Consolidated Statements of Operations
Three Years in the Period Ended March 31, 2006
 Thousands ofU.S. DollarsThousands of Yen
    
    
    (Note 1)2004
    
    
    2005
    
    
    2006
    
    
    2006REVENUES (Notes 4 and 11):Connectivity and value-added services:Dedicated access
    
    ¥
    12,862,132
    
    
    ¥
    11,372,701
    
    
    ¥
    10,625,268
    
    
    $
    90,443Dial-up access
    
    
    3,088,498
    
    
    
    2,936,973
    
    
    
    2,673,808
    
    
    
    22,760Value-added services
    
    
    4,296,228
    
    
    
    5,004,730
    
    
    
    6,249,891
    
    
    
    53,200Other
    
    
    2,117,794
    
    
    
    3,169,413
    
    
    
    3,673,872
    
    
    
    31,272Total
    
    
    22,364,652
    
    
    
    22,483,817
    
    
    
    23,222,839
    
    
    
    197,675Systems integration
    
    
    11,847,687
    
    
    
    15,853,824
    
    
    
    23,504,537
    
    
    
    200,072Equipment sales
    
    
    4,567,123
    
    
    
    3,364,926
    
    
    
    3,085,208
    
    
    
    26,262Total revenues
    
    
    38,779,462
    
    
    
    41,702,567
    
    
    
    49,812,584
    
    
    
    424,009COST AND EXPENSES (Notes 4, 7 and 11):Cost of connectivity and value-added
services
    
    
    20,047,438
    
    
    
    19,483,890
    
    
    
    20,077,990
    
    
    
    170,906Cost of systems integration
    
    
    9,851,726
    
    
    
    12,200,137
    
    
    
    18,120,418
    
    
    
    154,243Cost of equipment sales
    
    
    4,346,243
    
    
    
    3,111,369
    
    
    
    2,818,036
    
    
    
    23,987Total cost
    
    
    34,245,407
    
    
    
    34,795,396
    
    
    
    41,016,444
    
    
    
    349,136Sales and marketing (Note 16)
    
    
    3,527,490
    
    
    
    2,794,561
    
    
    
    3,079,526
    
    
    
    26,213General and administrative (Note 6)
    
    
    2,098,481
    
    
    
    2,665,980
    
    
    
    3,147,315
    
    
    
    26,790Research and development
    
    
    357,968
    
    
    
    198,979
    
    
    
    158,155
    
    
    
    1,346Total cost and expenses
    
    
    40,229,346
    
    
    
    40,454,916
    
    
    
    47,401,440
    
    
    
    403,485OPERATING INCOME (LOSS)
    
    
    (1,449,884
    )
    
    
    1,247,651
    
    
    
    2,411,144
    
    
    
    20,524OTHER INCOME (EXPENSES):Interest income
    
    
    37,516
    
    
    
    12,877
    
    
    
    13,099
    
    
    
    111Interest expense
    
    
    (702,036
    )
    
    
    (685,857
    )
    
    
    (437,364
    )
    
    
    (3,723
    )Foreign exchange gains (losses)
    
    
    (6,493
    )
    
    
    5,958
    
    
    
    3,470
    
    
    
    30Net gain on other investments (Note 2)
    
    
    1,412,858
    
    
    
    2,439,330
    
    
    
    3,197,690
    
    
    
    27,219Gain arising from issuance of equity method
investees share
    
    
    16,088
    
    
    
    25,933
    
    
    
    
    
    
    
    Othernet
    
    
    224,287
    
    
    
    102,616
    
    
    
    190,520
    
    
    
    1,622Other incomenet
    
    
    982,220
    
    
    
    1,900,857
    
    
    
    2,967,415
    
    
    
    25,259INCOME (LOSS) FROM OPERATIONS BEFORE INCOME
TAX EXPENSE, MINORITY INTERESTS AND EQUITY IN
NET LOSS OF EQUITY METHOD INVESTEES
    
    
    (467,664
    )
    
    
    3,148,508
    
    
    
    5,378,559
    
    
    
    45,783INCOME TAX EXPENSE (Note 9)
    
    
    32,536
    
    
    
    99,870
    
    
    
    257,360
    
    
    
    2,191MINORITY INTERESTS IN (EARNINGS)
LOSSES OF SUBSIDIARIES
    
    
    235,812
    
    
    
    (109,161
    )
    
    
    (353,883
    )
    
    
    (3,012
    )FORWARD
    
    ¥
    (264,388
    )
    
    ¥
    2,939,477
    
    
    ¥
    4,767,316
    
    
    $
    40,580
  F-5




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##### Table of Contents



Internet Initiative Japan Inc. and Subsidiaries
 Consolidated Statements of Operations
Three Years in the Period Ended March 31, 2006
 Thousands ofU.S. DollarsThousands of Yen
    
    
    (Note 1)2004
    
    
    2005
    
    
    2006
    
    
    2006FORWARD
    
    ¥
    (264,388
    )
    
    ¥
    2,939,477
    
    
    ¥
    4,767,316
    
    
    $
    40,580EQUITY IN
NET LOSS OF EQUITY METHOD INVESTEES (Note 4):Equity method net loss
    
    
    (286,317
    )
    
    
    (33,208
    )
    
    
    (13,746
    )
    
    
    (117
    )Impairment loss on advance to
Crosswave
    
    
    (1,719,981
    )
    
    
    
    
    
    
    
    
    
    
    Total equity in net loss of
equity method investees
    
    
    (2,006,298
    )
    
    
    (33,208
    )
    
    
    (13,746
    )
    
    
    (117
    )NET INCOME (LOSS)
    
    ¥
    (2,270,686
    )
    
    ¥
    2,906,269
    
    
    ¥
    4,753,570
    
    
    $
    40,463NET INCOME PER SHARE (Note 13):BASIC WEIGHTED-AVERAGE NUMBER
OF COMMON SHARES
OUTSTANDING
    
    
    158,554
    
    
    
    191,559
    
    
    
    195,613DILUTED WEIGHTED-AVERAGE NUMBER
OF COMMON SHARES
OUTSTANDING
    
    
    158,554
    
    
    
    191,559
    
    
    
    195,955
 Yen
    
    
    U.S. DollarsBASIC NET INCOME (LOSS) PER COMMON SHARE
    
    ¥
    (14,321
    )
    
    ¥
    15,172
    
    
    ¥
    24,301
    
    
    $
    207DILUTED NET INCOME (LOSS) PER COMMON SHARE
    
    ¥
    (14,321
    )
    
    ¥
    15,172
    
    
    ¥
    24,258
    
    
    $
    206
   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, 2006
 Thousands of YenShares of
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    AccumulatedCommon Stock
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    OtherOutstanding
    
    
    
    
    
    
    Additional
    
    
    
    
    
    
    Comprehensive(Including
    
    
    Common
    
    
    Paid-in
    
    
    Accumulated
    
    
    Income
    
    
    TreasuryTreasury Stock)
    
    
    Stock
    
    
    Capital
    
    
    Deficit
    
    
    (Note 12)
    
    
    Stock
    
    
    TotalBALANCE, APRIL 1, 2003
    
    
    112,400
    
    
    ¥
    7,082,336
    
    
    ¥
    17,068,353
    
    
    ¥
    (35,069,635
    )
    
    ¥
    914,610
    
    
    
    
    
    
    ¥
    (10,004,336
    )Net loss
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (2,270,686
    )
    
    
    
    
    
    
    
    
    
    
    (2,270,686
    )Other comprehensive income, net of tax
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    5,280,839
    
    
    
    
    
    
    
    5,280,839Total comprehensive income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    3,010,153Issuance of common stock, net of issuance cost
    
    
    79,400
    
    
    
    6,683,036
    
    
    
    6,569,275
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    13,252,311Purchase of common stock by an equity method investee
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    ¥
    (44,000
    )
    
    
    (44,000
    )BALANCE, MARCH 31, 2004
    
    
    191,800
    
    
    
    13,765,372
    
    
    
    23,637,628
    
    
    
    (37,340,321
    )
    
    
    6,195,449
    
    
    
    (44,000
    )
    
    
    6,214,128Net income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    2,906,269
    
    
    
    
    
    
    
    
    
    
    
    2,906,269Other comprehensive income, net of tax
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    2,494,676
    
    
    
    
    
    
    
    2,494,676Total comprehensive income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    5,400,945BALANCE, MARCH 31, 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
    
    
    ¥
    16,833,847
    
    
    ¥
    26,599,217
    
    
    ¥
    (29,680,482
    )
    
    ¥
    6,553,594
    
    
    ¥
    (84,238
    )
    
    ¥
    20,221,938
 Thousands of U.S. Dollars (Note 1)AccumulatedOtherAdditional
    
    
    
    
    
    
    ComprehensiveCommon
    
    
    Paid-in
    
    
    Accumulated
    
    
    Income
    
    
    TreasuryStock
    
    
    Capital
    
    
    Deficit
    
    
    (Note 12)
    
    
    Stock
    
    
    TotalBALANCE, MARCH 31, 2005
    
    $
    117,172
    
    
    $
    201,206
    
    
    $
    (293,106
    )
    
    $
    73,971
    
    
    $
    (375
    )
    
    $
    98,868Net income
    
    
    
    
    
    
    
    
    
    
    40,463
    
    
    
    
    
    
    
    
    
    
    
    40,463Other comprehensive loss, net of tax
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (18,186
    )
    
    
    
    
    
    
    (18,186
    )Total comprehensive income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    22,277Issuance of common stock, net of issuance cost
    
    
    26,119
    
    
    
    25,209
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    51,328Purchase of common stock by an equity method investee
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (342
    )
    
    
    (342
    )BALANCE, MARCH 31, 2006
    
    $
    143,291
    
    
    $
    226,415
    
    
    $
    (252,643
    )
    
    $
    55,785
    
    
    $
    (717
    )
    
    $
    172,131
  F-7




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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, 2006
 Thousands ofU.S. DollarsThousands of Yen
    
    
    (Note 1)2004
    
    
    2005
    
    
    2006
    
    
    2006OPERATING ACTIVITIES:Net income (loss)
    
    ¥
    (2,270,686
    )
    
    ¥
    2,906,269
    
    
    ¥
    4,753,570
    
    
    $
    40,463Adjustments to reconcile net income (loss)
to net cash provided by
operating activities:Depreciation and amortization
    
    
    4,008,324
    
    
    
    4,193,093
    
    
    
    4,209,037
    
    
    
    35,828Provision for retirement and
pension costs, less payments
    
    
    (16,960
    )
    
    
    70,659
    
    
    
    76,095
    
    
    
    648Provision for (reversal of) allowance for
doubtful accounts and advances
    
    
    449,164
    
    
    
    24,781
    
    
    
    (12,009
    )
    
    
    (102
    )Loss on disposal of property and
equipment
    
    
    109,588
    
    
    
    143,887
    
    
    
    118,855
    
    
    
    1,012Loss on disposal and impairment of
telephone rights
    
    
    48,201
    
    
    
    99,075
    
    
    
    2,040
    
    
    
    17Net gain on other investments
    
    
    (1,412,858
    )
    
    
    (2,439,330
    )
    
    
    (3,197,690
    )
    
    
    (27,219
    )Foreign exchange losses (gains)
    
    
    5,124
    
    
    
    (15,466
    )
    
    
    (7,825
    )
    
    
    (67
    )Gain arising from issuance of equity
method investees share
    
    
    (16,088
    )
    
    
    (25,933
    )
    
    
    
    
    
    
    Loss (gains) on retirement of convertible
notes
    
    
    (88,975
    )
    
    
    5,195
    
    
    
    
    
    
    
    Equity method net loss
    
    
    286,317
    
    
    
    33,208
    
    
    
    13,746
    
    
    
    117Impairment loss on advance
to Crosswave
    
    
    1,719,981
    
    
    
    
    
    
    
    
    
    
    
    Minority interests in earnings (losses)
of subsidiaries
    
    
    (235,812
    )
    
    
    109,161
    
    
    
    353,883
    
    
    
    3,012Deferred income tax expense (benefit)
    
    
    1,976
    
    
    
    (11,023
    )
    
    
    (230,841
    )
    
    
    (1,965
    )Others
    
    
    38,539
    
    
    
    79,247
    
    
    
    18,490
    
    
    
    157Changes in operating assets and
liabilities:Decrease (increase) in accounts
receivable
    
    
    784,728
    
    
    
    1,607,692
    
    
    
    (4,460,173
    )
    
    
    (37,965
    )Decrease (increase) in
inventories, prepaid expenses and
other current and noncurrent assets
    
    
    (275,103
    )
    
    
    228,358
    
    
    
    (1,390,398
    )
    
    
    (11,835
    )Increase (decrease) in accounts payable
    
    
    (1,132,209
    )
    
    
    (2,307,729
    )
    
    
    4,975,623
    
    
    
    42,353Increase in income taxes payable
    
    
    2,041
    
    
    
    97,913
    
    
    
    334,854
    
    
    
    2,850Increase (decrease) in accrued
expenses and other current
and noncurrent liabilities
    
    
    (81,926
    )
    
    
    439,440
    
    
    
    1,001,567
    
    
    
    8,526Net cash provided by
operating
activities(Forward)
    
    ¥
    1,923,366
    
    
    ¥
    5,238,497
    
    
    ¥
    6,558,824
    
    
    $
    55,830
  F-8




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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, 2006
 Thousands ofU.S. DollarsThousands of Yen
    
    
    (Note 1)2004
    
    
    2005
    
    
    2006
    
    
    2006Net cash provided by
operating activities(Forward)
    
    ¥
    1,923,366
    
    
    ¥
    5,238,497
    
    
    ¥
    6,558,824
    
    
    $
    55,830INVESTING ACTIVITIES:Purchases of property and equipment
    
    
    (1,657,302
    )
    
    
    (577,133
    )
    
    
    (919,366
    )
    
    
    (7,826
    )Purchase of short-term and other investments
    
    
    (325,665
    )
    
    
    (12,566
    )
    
    
    (674,569
    )
    
    
    (5,742
    )Investment in an equity method investee
    
    
    
    
    
    
    
    
    
    
    (750,000
    )
    
    
    (6,384
    )Purchase of subsidiary stock
from minority shareholders
    
    
    
    
    
    
    (61,680
    )
    
    
    (192,142
    )
    
    
    (1,635
    )Proceeds from sales and redemption of
short-term and other investments
    
    
    2,170,584
    
    
    
    2,976,017
    
    
    
    3,613,239
    
    
    
    30,756Advance to Crosswave
    
    
    (1,719,981
    )
    
    
    
    
    
    
    
    
    
    
    Payments of guarantee deposits
    
    
    (9,114
    )
    
    
    (48,683
    )
    
    
    (62,074
    )
    
    
    (528
    )Refund of guarantee deposits
    
    
    683,132
    
    
    
    71,850
    
    
    
    568,869
    
    
    
    4,842Payment for refundable insurance policies
    
    
    (21,007
    )
    
    
    (25,231
    )
    
    
    (25,917
    )
    
    
    (221
    )Refund from insurance policies
    
    
    7,432
    
    
    
    18,348
    
    
    
    6,301
    
    
    
    54Acquisition of a newly controlled company, net of cash
acquired
    
    
    
    
    
    
    
    
    
    
    229,457
    
    
    
    1,953Acquisition of business
    
    
    
    
    
    
    (375,123
    )
    
    
    
    
    
    
    Other
    
    
    19,458
    
    
    
    8,204
    
    
    
    11,052
    
    
    
    94Net cash provided by (used in)
investing activities
    
    
    (852,463
    )
    
    
    1,974,003
    
    
    
    1,804,850
    
    
    
    15,363FINANCING ACTIVITIES:Proceeds from issuance of long-term
borrowings
    
    
    400,000
    
    
    
    2,250,000
    
    
    
    1,000,000
    
    
    
    8,512Repayments of long-term borrowings
    
    
    (1,943,735
    )
    
    
    (1,840,246
    )
    
    
    (2,986,056
    )
    
    
    (25,418
    )Proceeds from securities loan agreement
    
    
    
    
    
    
    2,546,320
    
    
    
    4,897,040
    
    
    
    41,684Repayments of securities loan agreement
    
    
    
    
    
    
    (816,800
    )
    
    
    (5,626,960
    )
    
    
    (47,897
    )Principal payments under capital leases
    
    
    (2,733,012
    )
    
    
    (2,867,625
    )
    
    
    (3,105,519
    )
    
    
    (26,434
    )Net increase (decrease) in short-term
borrowings
    
    
    1,740,495
    
    
    
    (1,839,460
    )
    
    
    (169,633
    )
    
    
    (1,444
    )Repurchase of convertible notes
    
    
    (3,047,460
    )
    
    
    (745,488
    )
    
    
    
    
    
    
    Redemption of convertible notes
    
    
    
    
    
    
    (11,088,000
    )
    
    
    
    
    
    
    Proceeds from issuance of common stock,
net of issuance cost
    
    
    13,252,311
    
    
    
    
    
    
    
    6,030,064
    
    
    
    51,328Proceeds from issuance of subsidiary
stock to minority shareholders
    
    
    
    
    
    
    188,632
    
    
    
    
    
    
    
    Net cash provided by (used in)
financing activities
    
    
    7,668,599
    
    
    
    (14,212,667
    )
    
    
    38,936
    
    
    
    331EFFECT OF EXCHANGE RATE
CHANGES ON CASH
    
    
    (43,615
    )
    
    
    2,405
    
    
    
    37,934
    
    
    
    323NET INCREASE (DECREASE) IN CASH
AND CASH EQUIVALENTS
    
    
    8,695,887
    
    
    
    (6,997,762
    )
    
    
    8,440,544
    
    
    
    71,847CASH AND CASH EQUIVALENTS, BEGINNING OF YEAR
    
    
    3,588,352
    
    
    
    12,284,239
    
    
    
    5,286,477
    
    
    
    44,999CASH AND CASH EQUIVALENTS,
END OF YEAR
    
    ¥
    12,284,239
    
    
    ¥
    5,286,477
    
    
    ¥
    13,727,021
    
    
    $
    116,846
  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, 2006
 Thousands ofU.S. DollarsThousands of Yen
    
    
    (Note 1)2004
    
    
    2005
    
    
    2006
    
    
    2006ADDITIONAL CASH FLOW
INFORMATION:Interest paid
    
    ¥
    625,248
    
    
    ¥
    613,817
    
    
    ¥
    426,692
    
    
    $
    3,632Income taxes paid
    
    
    48,413
    
    
    
    29,227
    
    
    
    148,101
    
    
    
    1,261NONCASH INVESTING AND
FINANCING ACTIVITIES:Acquisition of assets by
entering into capital leases
    
    
    1,865,309
    
    
    
    4,433,906
    
    
    
    3,842,952
    
    
    
    32,712Exchange of common stock
investment due to merger:Market value of common
shares acquired
    
    
    
    
    
    
    37,950
    
    
    
    7,390
    
    
    
    63Cost of investment
    
    
    
    
    
    
    2,500
    
    
    
    2,584
    
    
    
    22Acquisition of business and a company:Assets acquired
    
    
    
    
    
    
    1,202,007
    
    
    
    843,485
    
    
    
    7,180Cash paid
    
    
    
    
    
    
    (375,123
    )
    
    
    (733,589
    )
    
    
    (6,244
    )Liabilities assumed
    
    
    
    
    
    
    826,884
    
    
    
    109,896
    
    
    
    936
   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 29.7 percent jointly owned by Nippon Telegraph and Telephone Corporation (NTT) and its
subsidiary as of March 31, 2006. 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.The accompanying consolidated financial statements have been prepared on a going-concern
basis, which contemplates the realization of assets and the satisfaction of liabilities in the
normal course of business. Although the Company has incurred operating losses and net losses
in each of the past six fiscal years ended March 31, 2004 (with the exception of operating
income for the year ended March 31, 2002), the Company has recorded operating income and net
income for the years ended March 31, 2005 and 2006. At March 31, 2006, the Company had
indebtedness of ¥15,819,136 thousand. As a result of increasing net income, liquidation of
certain available-for-sale securities and completion of a public offering of ¥6,030,064
thousand (after deducting stock issuance cost) on the Mothers market of the Tokyo Stock
Exchange, the negative working capital of ¥4,637,376 thousand at March 31, 2005 turned
positive in the amount of ¥4,887,974 thousand at March 31, 2006.Certain Significant Risks and UncertaintiesThe Company has available-for-sale securities of ¥6,775,388 thousand at March 31, 2006 and
believes that the fluctuations in stock price of available-for-sale securities could have a
material adverse effect on the Companys future financial position, results of operations or
cash flows.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 is the largest provider of network
infrastructure. The Company believes that its use of multiple carriers and suppliers
significantly mitigates concentrations of credit risk. 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.
 F-11




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##### Table of Contents



Summary of Significant Accounting Policies
 Basis of Presentation
  Translation into U.S. Dollars
 Consolidation
  Use of Estimates
 Revenue Recognition
  F-12




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##### Table of Contents



Cash and cash equivalents
 Allowance for Doubtful Accounts
 Other Investments
   Inventories
 Leases
 F-13




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##### Table of Contents



Property and Equipment
  Range ofUseful LivesData communications, office and other equipment
    
    
    2 to 15 yearsLeasehold improvements
    
    
    3 to 15 yearsPurchased software
    
    5 yearsCapitalized leases
    
    4 to 7 years
 Impairment of Long-lived Assets
 Goodwill and Intangible Assets
 Pension and severance indemnities plans
 Income Taxes
 Foreign Currency Transactions
 Derivative Financial Instruments
 Stock Splits
 F-14




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##### Table of Contents



Stock-based Compensation
  Thousands ofThousands of Yen
    
    
    U.S. Dollars2004
    
    
    2005
    
    
    2006
    
    
    2006Net income (loss):As reported
    
    ¥
    (2,270,686
    )
    
    ¥
    2,906,269
    
    
    ¥
    4,753,570
    
    
    $
    40,463Addition: Total
stock-based employee
compensation
determined under
fair value based
method for all awards,
net of tax
    
    
    (32,020
    )
    
    
    
    
    
    
    
    
    
    
    Pro forma
    
    ¥
    (2,302,706
    )
    
    ¥
    2,906,269
    
    
    ¥
    4,753,570
    
    
    $
    40,463
 Yen
    
    
    U.S. Dollars2004
    
    
    2005
    
    
    2006
    
    
    2006Basic net
income (loss) per common shares:As reported
    
    ¥
    (14,321
    )
    
    ¥
    15,172
    
    
    ¥
    24,301
    
    
    $
    207Pro forma
    
    
    (14,523
    )
    
    
    15,172
    
    
    
    24,301
    
    
    
    207
 Yen
    
    
    U.S. Dollars2004
    
    
    2005
    
    
    2006
    
    
    2006Diluted net
income (loss) per common shares:As reported
    
    ¥
    (14,321
    )
    
    ¥
    15,172
    
    
    ¥
    24,258
    
    
    $
    206Pro forma
    
    
    (14,523
    )
    
    
    15,172
    
    
    
    24,258
    
    
    
    206
 Research and developments
 Advertising
 Basic and Diluted Net Income (Loss) per Share
 Other Comprehensive Income (Loss)
 F-15




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##### Table of Contents



Segment Reporting 
  New Accounting Standards
      F-16




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##### Table of Contents



F-17




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##### Table of Contents



2.
    
    OTHER INVESTMENTS
  Thousands of YenUnrealized
    
    
    Unrealized
    
    
    FairCost
    
    
    Gains
    
    
    Losses
    
    
    ValueMarch 31, 2005Available-for-saleEquity
securities
    
    ¥
    215,258
    
    
    ¥
    8,738,792
    
    
    ¥
    5,882
    
    
    ¥
    8,948,168March 31, 2006Available-for-saleEquity
securities
    
    ¥
    222,807
    
    
    ¥
    6,552,623
    
    
    ¥
    42
    
    
    ¥
    6,775,388
 Thousands of U.S. DollarsUnrealized
    
    
    Unrealized
    
    
    FairCost
    
    
    Gains
    
    
    Losses
    
    
    ValueMarch 31, 2006Available-for-saleEquity
securities
    
    $
    1,897
    
    
    $
    55,776
    
    
    $
    0
    
    
    $
    57,673
  Thousands of YenLess than12 Months
    
    
    12 Months or More
    
    
    TotalFair
    
    
    Unrealized
    
    
    Fair
    
    
    Unrealized
    
    
    Fair
    
    
    UnrealizedValue
    
    
    Losses
    
    
    Value
    
    
    Losses
    
    
    Value
    
    
    LossesMarch 31, 2005Marketable equity
securities
    
    ¥
    68,742
    
    
    ¥
    5,882
    
    
    ¥
    
    
    
    ¥
    
    
    
    ¥
    68,742
    
    
    ¥
    5,882March 31, 2006Marketable equity
securities
    
    ¥
    1,338
    
    
    ¥
    42
    
    
    ¥
    
    
    
    ¥
    
    
    
    ¥
    1,338
    
    
    ¥
    42
 Thousands of U.S. DollarsLess than12 Months
    
    
    12 Months or More
    
    
    TotalFair
    
    
    Unrealized
    
    
    Fair
    
    
    Unrealized
    
    
    Fair
    
    
    UnrealizedValue
    
    
    Losses
    
    
    Value
    
    
    Losses
    
    
    Value
    
    
    LossesMarch 31, 2006Marketable equity securities
    
    $
    11
    
    
    $
    0
    
    
    $
    
    
    
    $
    
    
    
    $
    11
    
    
    $
    0
    F-18




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##### Table of Contents



3.
    
    ALLOWANCE FOR DOUBTFUL ACCOUNTS AND ADVANCES
  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, 2004
    
    ¥
    125,354
    
    
    ¥
    (81,913
    )
    
    ¥
    449,164
    
    
    
    
    
    
    ¥
    492,605Year ended March 31, 2005
    
    ¥
    492,605
    
    
    ¥
    (68,516
    )
    
    ¥
    24,781
    
    
    
    
    
    
    ¥
    448,870Year ended March 31, 2006
    
    ¥
    448,870
    
    
    ¥
    (357,519
    )
    
    ¥
    (12,009
    )
    
    ¥
    35,000
    
    
    ¥
    114,342
 Thousands
of U.S. DollarsReversal ofBalance at
    
    
    
    
    
    
    DoubtfulBeginning of
    
    
    Credits
    
    
    Accounts and
    
    
    
    
    
    
    Balance atYear
    
    
    Charged Off
    
    
    Advances
    
    
    Reclassification
    
    
    End of YearYear ended March 31, 2006
    
    $
    3,821
    
    
    $
    (3,043
    )
    
    $
    (102
    )
    
    $
    297
    
    
    $
    973
   F-19




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##### Table of Contents



4.
    
    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 dedicated high-speed data
communication services, data center services (Crosswave) through December 15, 2003,
connectivity services in Asian countries (Asia Internet Holding Co., Ltd., AIH) through
September 2005, multifeed technology services and location facilities for connecting high-speed
Internet backbones (Internet Multifeed Co., Multifeed), Web page design services (atom Co.,
Ltd.), and data center services in Asian countries ( i-Heart Inc., i-Heart and Ayalaport
Makati Inc., Ayalaport through June, 2004).Since July 2004, Ayalaport is no longer accounted for under equity method due to dilution
of the Companys ownership and loss of ability to exercise significant influence.AIH was no longer an equity method investee after October 1, 2005 since AIH was merged with
IIJ.On February 1, 2006, IIJ and Konami corporation established a joint venture company (Internet
Revolution Inc.,i-revo) to operate comprehensive portal sites. IIJ invested ¥750,000
thousand ($6,384 thousand) to i-revo and owned 30 percent ownership as of March 31, 2006. IIJ
accounted i-revo as an equity method investee.The aggregate amounts of balances and transactions of the Company with these equity method
investees other than Crosswave as of March 31, 2005 and 2006, and for each of the three years
in the period ended March 31, 2006 are summarized as follows:
 Thousands ofThousands of Yen
    
    
    U.S. Dollars2004
    
    
    2005
    
    
    2006
    
    
    2006Accounts receivable
    
    ¥
    
    
    
    ¥
    118,130
    
    
    ¥
    253,208
    
    
    $
    2,155Accounts payable
    
    
    
    
    
    
    96,727
    
    
    
    17,084
    
    
    
    145Revenues
    
    
    1,329,482
    
    
    
    1,245,361
    
    
    
    1,286,275
    
    
    
    10,949Costs and expenses
    
    
    1,245,607
    
    
    
    1,145,834
    
    
    
    656,184
    
    
    
    5,585
   Thousands ofThousands of Yen
    
    
    U.S. Dollars2005
    
    
    
    
    
    
    2006
    
    
    2006AIH
    
    
    26.69
    %
    
    ¥
    275,386
    
    
    
    
    %
    
    ¥
    
    
    
    $
    Multifeed
    
    
    28.58
    
    
    
    242,719
    
    
    
    29.44
    
    
    
    317,144
    
    
    
    2,700Atom
    
    
    40.00
    
    
    
    155,837
    
    
    
    40.00
    
    
    
    116,974
    
    
    
    995i-revo
    
    
    
    
    
    
    
    
    
    
    30.00
    
    
    
    676,795
    
    
    
    5,761Other
    
    
    
    
    
    
    39,665
    
    
    
    
    
    
    
    52,058
    
    
    
    443Total
    
    
    
    
    
    ¥
    713,607
    
    
    
    
    
    
    ¥
    1,162,971
    
    
    $
    9,899
   F-20




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##### Table of Contents



5.
    
    PROPERTY AND EQUIPMENT
  Thousands ofThousands of Yen
    
    
    U.S. Dollars2005
    
    
    2006
    
    
    2006Data communications equipment
    
    ¥
    543,365
    
    
    ¥
    781,605
    
    
    $
    6,653Office and other equipment
    
    
    904,532
    
    
    
    718,362
    
    
    
    6,115Leasehold improvements
    
    
    823,313
    
    
    
    780,143
    
    
    
    6,641Purchased software
    
    
    4,917,483
    
    
    
    5,425,819
    
    
    
    46,185Capitalized leases, primarily data
communications equipment
    
    
    13,251,657
    
    
    
    14,458,667
    
    
    
    123,073Total
    
    
    20,440,350
    
    
    
    22,164,596
    
    
    
    188,667Less accumulated depreciation
and amortization
    
    
    (10,717,984
    )
    
    
    (11,865,100
    )
    
    
    (100,997
    )Property and equipmentnet
    
    ¥
    9,722,366
    
    
    ¥
    10,299,496
    
    
    $
    87,670
 F-21




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##### Table of Contents



6.
    
    GOODWILL AND INTANGIBLE ASSETSThe components of intangible assets as of March 31, 2005 and 2006 are as follows:
 Thousands ofThousands of Yen
    
    
    U.S. Dollars2005
    
    
    2006
    
    
    2006Non-amortized intangible assets:Telephone rights
    
    ¥
    14,616
    
    
    ¥
    12,555
    
    
    $
    107Customer relationship
    
    
    113,360
    
    
    
    113,360
    
    
    
    965Goodwill
    
    
    433,235
    
    
    
    506,679
    
    
    
    4,313Total intangible assets
    
    ¥
    561,211
    
    
    ¥
    632,594
    
    
    $
    5,385
      7. LEASES
  Operating Leases
 F-22




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##### Table of Contents



Thousands ofThousands of Yen
    
    
    U.S. Dollars2005
    
    
    2006
    
    
    2006Head office
    
    ¥
    1,705,036
    
    
    ¥
    1,185,307
    
    
    $
    10,090Sales and subsidiaries offices
    
    
    296,971
    
    
    
    308,494
    
    
    
    2,626Others
    
    
    48,658
    
    
    
    55,852
    
    
    
    475Total refundable guarantee deposits
    
    ¥
    2,050,665
    
    
    ¥
    1,549,653
    
    
    $
    13,191
   F-23




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##### Table of Contents



Capital Leases
  Thousands of Yen
    
    
    Thousands of U.S. DollarsConnectivity
    
    
    
    
    
    
    
    
    
    
    ConnectivityLines
    
    
    Other
    
    
    
    
    
    
    Lines
    
    
    OtherOperating
    
    
    Operating
    
    
    Capital
    
    
    Operating
    
    
    Operating
    
    
    CapitalLeases
    
    
    Leases
    
    
    Leases
    
    
    Leases
    
    
    Leases
    
    
    LeasesYear ending March 31:2007
    
    ¥
    27,302
    
    
    ¥
    1,376,986
    
    
    ¥
    3,262,311
    
    
    $
    232
    
    
    $
    11,721
    
    
    $
    27,7692008
    
    
    
    
    
    
    1,174,192
    
    
    
    2,535,823
    
    
    
    
    
    
    
    9,995
    
    
    
    21,5852009
    
    
    
    
    
    
    142,566
    
    
    
    1,778,729
    
    
    
    
    
    
    
    1,214
    
    
    
    15,1412010
    
    
    
    
    
    
    70,354
    
    
    
    697,143
    
    
    
    
    
    
    
    599
    
    
    
    5,9342011
    
    
    
    
    
    
    19,623
    
    
    
    179,496
    
    
    
    
    
    
    
    167
    
    
    
    1,5282012 and thereafter
    
    
    
    
    
    
    55,154
    
    
    
    35,729
    
    
    
    
    
    
    
    469
    
    
    
    304Total minimum lease payments
    
    ¥
    27,302
    
    
    ¥
    2,838,875
    
    
    ¥
    8,489,231
    
    
    $
    232
    
    
    $
    24,165
    
    
    $
    72,261Less amounts representing interest
    
    
    
    
    
    
    
    
    
    
    504,658
    
    
    
    
    
    
    
    
    
    
    
    4,296Present value of net minimum capital
lease payments
    
    
    
    
    
    
    
    
    
    
    7,984,573
    
    
    
    
    
    
    
    
    
    
    
    67,965Less current portion
    
    
    
    
    
    
    
    
    
    
    3,003,914
    
    
    
    
    
    
    
    
    
    
    
    25,569Noncurrent portion
    
    
    
    
    
    
    
    
    
    ¥
    4,980,659
    
    
    
    
    
    
    
    
    
    
    $
    42,396
 8.
    
    BORROWINGS AND CONVERTIBLE NOTESShort-term borrowings at March 31, 2005 and 2006 consist of bank overdrafts. Short-term
borrowings bear fixed-rate interest and their weighted average rates at March 31, 2005 and 2006
were 1.375 percent.
 F-24




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##### Table of Contents



Thousands ofThousands of Yen
    
    
    U.S. Dollars2005
    
    
    2006
    
    
    2006Unsecured long-term loans payable to
banks, maturing at various dates
through calendar 2007 (see Note 15).
Interest is payable at a variable rate.
Weighted average interest rates were 3.255
percent,
and 2.206 percent at March 31, 2005 and 2006,
respectively.
    
    ¥
    208,000
    
    
    ¥
    374,000
    
    
    $
    3,184Unsecured long-term loans payable to
banks (secured in 2005), maturing in calendar 2006
(see Note 15). Weighted average interest rates
were 1.789 percent and 1.710 percent at March 31,
2005 and 2006, respectively.
    
    
    2,350,000
    
    
    
    600,000
    
    
    
    5,107Unsecured long-term loans payable to
banks (secured in 2005), maturing at various dates
through calendar 2007 (see Note 15). Interest is
payable at a variable rate based on TIBOR which
was 0.1 percent and 0.133 percent as of March 31,
2005 and 2006, respectively.
Weighted average interest rates were
1.137 percent and 1.130 percent at March
31, 2005
and 2006, respectively.
    
    
    1,400,000
    
    
    
    1,150,000
    
    
    
    9,789Long-term installment loans payable at
various dates through calendar 2007 (see Note 15).
Interest rates were 2.55 percent
at March 31, 2005 and 2006.
    
    
    308,019
    
    
    
    155,963
    
    
    
    1,328Total
    
    
    4,266,019
    
    
    
    2,279,963
    
    
    
    19,408Less current portion
    
    
    (2,736,056
    )
    
    
    (1,989,963
    )
    
    
    (16,939
    )Long-term borrowings, less current
portion
    
    ¥
    1,529,963
    
    
    ¥
    290,000
    
    
    $
    2,469
    F-25




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##### Table of Contents



Year Ending
    
    
    
    
    
    Thousands ofMarch 31
    
    Thousands of Yen
    
    
    U.S. Dollars2007
    
    ¥
    1,989,963
    
    
    $
    16,9392008
    
    
    290,000
    
    
    
    2,469Total
    
    ¥
    2,279,963
    
    
    $
    19,408
       9.
    
    INCOME TAXESAmendments to Japanese tax regulations were enacted into law on March 31, 2003 and became
effective from the fiscal year beginning April 1, 2004. Income taxes imposed by the national,
prefectural and municipal governments of Japan resulted in a normal statutory rate of
approximately 42 percent for the year ended March 31, 2004 and 41 percent for the years ended
March 31, 2005 and 2006.
The reserve for tax contingencies related to the denial of the usage of tax operating loss
carryforwards by IIJ America, a U.S. subsidiary, was ¥197,753 thousand ($1,683 thousand) as of
March 31, 2006. This is managements best estimate of the potential liability for tax
contingencies.
 F-26




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##### Table of Contents



Thousands ofThousands of Yen
    
    
    U.S. Dollars2004
    
    
    2005
    
    
    2006
    
    
    2006Income (loss) from operations before income tax
expense, minority interests and equity in net loss
of equity method investees:Domestic
    
    ¥
    (535,648
    )
    
    ¥
    3,168,974
    
    
    ¥
    5,316,535
    
    
    $
    45,255Foreign
    
    
    67,984
    
    
    
    (20,466
    )
    
    
    62,024
    
    
    
    528Total
    
    ¥
    (467,664
    )
    
    ¥
    3,148,508
    
    
    ¥
    5,378,559
    
    
    $
    45,783Income
taxescurrent:Domestic
    
    ¥
    30,560
    
    
    ¥
    118,893
    
    
    ¥
    289,376
    
    
    $
    2,463Foreign
    
    
    
    
    
    
    0
    
    
    
    198,825
    
    
    
    1,693Total
    
    ¥
    30,560
    
    
    ¥
    110,893
    
    
    ¥
    488,201
    
    
    $
    4,156Income
taxesdeferred:Domestic
    
    ¥
    1,976
    
    
    ¥
    (11,023
    )
    
    ¥
    (230,841
    )
    
    $
    (1,965
    )Foreign
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Total
    
    ¥
    1,976
    
    
    ¥
    (11,023
    )
    
    ¥
    (230,841
    )
    
    $
    (1,965
    )
  Thousands ofThousands of Yen
    
    
    U.S. Dollars2005
    
    
    2006
    
    
    2006Current
AssetsOther current assets
    
    ¥
    26,399
    
    
    ¥
    138,938
    
    
    $
    1,183Noncurrent
AssetsOther assets
    
    
    
    
    
    
    193,681
    
    
    
    1,649Noncurrent
liabilitiesOther noncurrent liabilities
    
    
    (7,748
    )
    
    
    (83,127
    )
    
    
    (708
    )Total
    
    ¥
    18,651
    
    
    ¥
    249,492
    
    
    $
    2,124
  Thousands ofThousands of Yen
    
    
    U.S. Dollars2005
    
    
    2006
    
    
    2006Deferred
    
    
    Deferred
    
    
    Deferred
    
    
    Deferred
    
    
    Deferred
    
    
    DeferredTax
    
    
    Tax
    
    
    Tax
    
    
    Tax
    
    
    Tax
    
    
    TaxAssets
    
    
    Liabilities
    
    
    Assets
    
    
    Liabilities
    
    
    Assets
    
    
    LiabilitiesUnrealized gains on
available-for-sale securities
    
    ¥
    
    
    
    ¥
    3,580,494
    
    
    ¥
    
    
    
    ¥
    2,686,560
    
    
    $
    
    
    
    $
    22,868Valuation of limited partnership
investments for tax purpose
    
    
    
    
    
    
    35,014
    
    
    
    
    
    
    
    81,020
    
    
    
    
    
    
    
    690Capitalized leases
    
    
    74,621
    
    
    
    
    
    
    
    84,345
    
    
    
    
    
    
    
    718
    
    
    
    Accrued expenses
    
    
    185,732
    
    
    
    
    
    
    
    161,902
    
    
    
    
    
    
    
    1,378
    
    
    
    Retirement and pension cost
    
    
    58,885
    
    
    
    
    
    
    
    89,705
    
    
    
    
    
    
    
    764
    
    
    
    Stock issuance cost
    
    
    15,548
    
    
    
    
    
    
    
    29,212
    
    
    
    
    
    
    
    249
    
    
    
    Allowance for doubtful accounts
    
    
    1,461,058
    
    
    
    
    
    
    
    16,333
    
    
    
    
    
    
    
    139
    
    
    
    Depreciation
    
    
    25,699
    
    
    
    
    
    
    
    25,070
    
    
    
    
    
    
    
    213
    
    
    
    Net loss on other investment
    
    
    92,080
    
    
    
    
    
    
    
    127,115
    
    
    
    
    
    
    
    1,082
    
    
    
    Operating loss carryforward
    
    
    9,902,013
    
    
    
    
    
    
    
    9,602,271
    
    
    
    
    
    
    
    81,735
    
    
    
    Other
    
    
    261,843
    
    
    
    27,563
    
    
    
    121,659
    
    
    
    69,109
    
    
    
    1,036
    
    
    
    588Total
    
    
    12,077,479
    
    
    
    3,643,071
    
    
    
    10,257,612
    
    
    
    2,836,689
    
    
    
    87,314
    
    
    
    24,146Valuation allowance
    
    
    (8,415,757
    )
    
    
    
    
    
    
    (7,171,431
    )
    
    
    
    
    
    
    (61,044
    )
    
    
    Total
    
    ¥
    3,661,722
    
    
    ¥
    3,643,071
    
    
    ¥
    3,086,181
    
    
    ¥
    2,836,689
    
    
    $
    26,270
    
    
    $
    24,146
 F-27




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##### Table of Contents



F-28




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##### Table of Contents



Year Ending
    
    
    
    
    
    Thousands ofMarch 31
    
    Thousands of Yen
    
    
    U.S. Dollars2007
    
    ¥
    
    
    
    $
    2008
    
    
    
    
    
    
    2009
    
    
    915,435
    
    
    
    7,7922010
    
    
    13,675,603
    
    
    
    116,4082011 and thereafter
    
    
    8,772,948
    
    
    
    74,677Total
    
    ¥
    23,363,986
    
    
    $
    198,877
  Thousands ofThousands of Yen
    
    
    U.S. Dollars2004
    
    
    2005
    
    
    2006
    
    
    2006Amount computed by using
normal Japanese statutory
tax rate
    
    ¥
    (196,419
    )
    
    ¥
    1,290,888
    
    
    ¥
    2,205,209
    
    
    $
    18,771Increase (decrease) in taxes
resulting from:Expenses not deductible for
tax purpose
    
    
    11,080
    
    
    
    34,820
    
    
    
    38,653
    
    
    
    329Reserve for tax contingencies
    
    
    
    
    
    
    
    
    
    
    197,753
    
    
    
    1,683Inhabitant tax-per capital
    
    
    30,560
    
    
    
    23,410
    
    
    
    25,085
    
    
    
    213Realization of tax benefit of
operating loss carryforwards
    
    
    (51,994
    )
    
    
    (1,426,755
    )
    
    
    (439,256
    )
    
    
    (3,739
    )Other change in valuation allowance
    
    
    454,009
    
    
    
    261,380
    
    
    
    (1,933,379
    )
    
    
    (16,457
    )Tax benefit on losses of equity
method investee
    
    
    (80,355
    )
    
    
    
    
    
    
    
    
    
    
    Expiration of operating loss
carryforwards
    
    
    611,498
    
    
    
    
    
    
    
    149,750
    
    
    
    1,275Effect of change in tax rate
    
    
    (42,034
    )
    
    
    
    
    
    
    
    
    
    
    Tax benefit on losses of
Crosswave
    
    
    (722,098
    )
    
    
    
    
    
    
    
    
    
    
    Othernet
    
    
    18,289
    
    
    
    (83,873
    )
    
    
    13,545
    
    
    
    116Income tax expense as reported
    
    ¥
    32,536
    
    
    ¥
    99,870
    
    
    ¥
    257,360
    
    
    $
    2,191
 F-29




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##### Table of Contents



10.
    
    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 are not segregated
in a separate account or restricted to provide benefits only to employees of that employer,
including IIJ. The net pension cost under the Multi-Employer Plan is recognized when
contributions become due.
  Thousands ofThousands of Yen
    
    
    U.S. Dollars2004
    
    
    2005
    
    
    2006
    
    
    2006Service cost
    
    ¥
    150,149
    
    
    ¥
    221,132
    
    
    ¥
    240,765
    
    
    $
    2,049Interest cost
    
    
    8,809
    
    
    
    14,944
    
    
    
    20,524
    
    
    
    175Expected return on plan assets
    
    
    (11,722
    )
    
    
    (13,129
    )
    
    
    (16,736
    )
    
    
    (142
    )Amortization of transition
obligation
    
    
    402
    
    
    
    402
    
    
    
    402
    
    
    
    3Recognized net actuarial loss
    
    
    575
    
    
    
    8,262
    
    
    
    1,904
    
    
    
    16Net periodic pension cost
    
    ¥
    148,213
    
    
    ¥
    231,611
    
    
    ¥
    246,859
    
    
    $
    2,101
 F-30




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##### Table of Contents



Thousands ofThousands of Yen
    
    
    U.S. Dollars2005
    
    
    2006
    
    
    2006Change in benefit obligation:Benefit obligation at beginning of year
    
    ¥
    933,969
    
    
    ¥
    1,140,240
    
    
    $
    9,706Service cost
    
    
    221,132
    
    
    
    240,765
    
    
    
    2,049Interest cost
    
    
    14,944
    
    
    
    20,524
    
    
    
    175Actuarial loss (gain)
    
    
    (558
    )
    
    
    (31,171
    )
    
    
    (266
    )Benefit paid
    
    
    (29,247
    )
    
    
    (40,906
    )
    
    
    (348
    )Benefit obligation at end of year
    
    ¥
    1,140,240
    
    
    ¥
    1,329,452
    
    
    $
    11,316Change in plan assets:Fair value of plan assets at beginning
of year
    
    ¥
    656,443
    
    
    ¥
    796,946
    
    
    $
    6,784Actual return on plan assets
    
    
    17,844
    
    
    
    68,185
    
    
    
    580Employer contribution
    
    
    143,471
    
    
    
    155,191
    
    
    
    1,321Benefits paid
    
    
    (20,812
    )
    
    
    (22,466
    )
    
    
    (191
    )Fair value of plan assets at end of year
    
    ¥
    796,946
    
    
    ¥
    997,856
    
    
    $
    8,494Funded status
    
    
    (343,294
    )
    
    
    (331,596
    )
    
    
    (2,822
    )Unrecognized actuarial loss
    
    
    195,530
    
    
    
    111,009
    
    
    
    945Unrecognized transition obligation
    
    
    4,418
    
    
    
    4,016
    
    
    
    34Net amount recognized
    
    ¥
    (143,346
    )
    
    ¥
    (216,571
    )
    
    $
    (1,843
    )Accumulated benefit obligation
    
    ¥
    635,122
    
    
    ¥
    750,900
    
    
    $
    6,392
    BenefitObligations
    
    Net Periodic Costs2005
    
    2006
    
    2004
    
    2005
    
    2006Discount rate
    
    
    1.8
    %
    
    
    2.0
    %
    
    
    1.5
    %
    
    
    1.6
    %
    
    
    1.8
    %Expected long-term rate of return
on plan assets
    
    
    
    
    
    
    
    
    
    
    2.5
    
    
    
    2.0
    
    
    
    2.1Rate of increase in compensation
    
    
    3.4
    
    
    
    3.4
    
    
    
    2.0
    
    
    
    3.25
    
    
    
    3.4
    F-31




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##### Table of Contents



2005
    
    
    2006Asset category:Equity securities
    
    
    21.3
    %
    
    
    (34.8
    )%
    
    
    22.4
    %
    
    
    (35.9
    )%Debt securities
    
    
    38.8
    
    
    
    (63.2
    )
    
    
    38.8
    
    
    
    (62.1
    )Life insurance pooled investment portfolios
    
    
    38.7
    
    
    
    ( 
    )
    
    
    37.6
    
    
    
    ( 
    )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 position plan asset allocation
excluding life insurance pooled investment portfolios.     Year Ending
    
    
    
    
    
    Thousands ofMarch 31
    
    Thousands of yen
    
    
    U.S. Dollars2007
    
    ¥
    30,823
    
    
    $
    2622008
    
    
    45,551
    
    
    
    3882009
    
    
    41,747
    
    
    
    3552010
    
    
    45,766
    
    
    
    3902011
    
    
    50,970
    
    
    
    4342012 2016
    
    
    294,075
    
    
    
    2,503Total
    
    ¥
    508,932
    
    
    $
    4,332
  
 F-32




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##### Table of Contents



11.
    
    SHAREHOLDERS EQUITYThrough May 1, 2006, IIJ is subject to the Code.The Code requires that at least 50% of the issue price of new shares be recorded as common
stock and that the rest of the issue price be recorded as additional paid-in capital, which is
a component of capital surplus. The Code permits Japanese companies, in accordance with an
approval of the Board of Directors, to issue shares to existing shareholders without
consideration as a stock split. Such issuance of shares generally does not give rise to
changes within the shareholders accounts.The Code also provides that an amount equal to at least 10% of the aggregate amount available
for dividends and certain other appropriations of retained earnings associated with cash
outlays applicable to each period shall be appropriated as legal reserve (a component of
retained earnings) until such reserve and additional paid-in capital equals 25% of common
stock. The amount of total legal reserve and additional paid-in capital that exceeds 25% of
common stock may be made available for payment of dividends in accordance with an approval of
a shareholders meeting. In addition, the Code permits the transfer of a portion of
additional paid-in capital and legal reserve to the common stock in accordance with an
approval of the Board of Directors.The Code allows IIJ to purchase treasury stock and dispose of such treasury stock in
accordance with an approval of the Board of Directors. The amount of treasury stock purchased
cannot exceed the amount available for dividends to shareholders.In addition to the provision that requires an appropriation for legal reserve in connection
with the cash outlays, the Code also imposes certain limitations on the amount of capital
surplus and retained earnings available for dividends. No amount was available for dividends
under the Code as of March 31, 2006, based on the amount recorded in IIJs general books of
account.Dividends are paid in accordance with an approval of a shareholders meeting held subsequent
to the end of the fiscal year to which the dividends are applicable. Semiannual interim
dividends may also be paid in accordance with an approval of the Board of Directors, subject
to certain limitations imposed by the Code.On May 1, 2006, a new corporation law (the Corporation Law) became effective. The
Corporation Law reformed and replaced the Code with various revisions that, for the most part,
are applicable to events or transactions occurring on or after May 1, 2006 and for the fiscal
years ending on or after May 1, 2006. The significant changes brought about by the Corporation
Law that affect financial matters are summarized below:(a) DividendsUnder the Corporation Law, companies can pay dividends at any time during the fiscal year in
addition to the year-end dividend in accordance with an approval of a shareholders meeting.
For companies that meet certain criteria such as: (1) having a Board of Directors, (2) having
independent auditors, (3) having a Board of Statutory Auditors, and (4) having a term of
service for directors prescribed as one year rather than two years as the normal term by its
articles of incorporation, the Board of Directors may declare dividends (except for dividends
in kind) if the company has prescribed so in its articles of incorporation.
Semiannual interim dividends may also be paid once a year in accordance with an approval of
the Board of Directors. Under the Code, certain limitations were imposed on the amount of
capital surplus and retained earnings available for dividends. The Corporation Law also
provides certain limitations on the amounts available for dividends or the purchase of
treasury stock. The limitation is defined as the amount available for dividends to the
shareholders, but the amount of net assets after dividends must be maintained as at least ¥3
million.(b) Increases / decreases and transfer of common stock, reserve and surplusThe Corporation Law requires that an amount equal to 10% of dividends must be appropriated as
legal reserve (a component of retained earnings) or as additional paid-in capital (a component
of capital surplus) depending on the capital account charged at the payment of such dividends
up to the aggregate amount of legal reserve and additional paid-in capital equal to 25% of
common stock. Under the Code, the aggregate amount of additional paid-in capital and legal
reserve that exceeds 25% of the common stock may be made available for dividends in accordance
with an approval of a shareholders meeting. Under the Corporation Law, the total amount of
additional paid-in capital and legal reserve may be reversed without limitation of such
threshold. The Corporation Law also provides that common stock, legal reserve, additional
paid-in capital, and other capital surplus and retained earnings can be transferred among
these accounts under certain
 F-33




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##### Table of Contents



conditions in accordance with an approval of a shareholders meeting.(c) Treasury stock and treasury stock acquisition
rightsThe Corporation Law also allows companies to purchase treasury stock and dispose of such
treasury stock in accordance with an approval of the Board of Directors if the company has
prescribed so in its articles of incorporation. The amount of treasury stock purchased cannot
exceed the amount available for dividends to the shareholders which is determined by specific
formula.The Corporation Law also provides that companies can purchase both treasury stock acquisition
rights and treasury stock.On June 27, 2003, IIJ issued 16,325 new shares of common stock at ¥83,640 per share for
¥1,365,423 thousand by a private placement to third parties in Japan. The proceeds from the
private placement were used as working capital of the Company.On September 17, 2003, primarily to provide for the redemption of the convertible notes due
March 2005, IIJ issued 63,075 new shares of common stock at ¥190,260 per share for ¥12,000,650
thousand in a private placement in Japan to NTT for ¥9,603,374 thousand, NTT Communications
for ¥749,624 thousand,a wholly owned subsidiary of NTT, ITOCHU Corporation and Sumitomo Corporation for ¥499,432
thousand each and three other companies for ¥648,787 thousand. As a result of the
transaction, the total number of IIJs outstanding common shares increased to 191,800 shares,
and NTT and its subsidiary owned 31.6 percent of IIJs outstanding common shares.
Concurrently, IIJ entered into a Subscription Agreement with NTT under which IIJ allows NTT to
nominate up to three persons as directors or statutory auditors, subject to approval by IIJs
shareholders. The agreement also provides NTT with preemptive rights to subscribe to any
additional future issuances by IIJ in order to maintain its shareholding. In addition, IIJ
and NTT agreed to undertake efforts to jointly engage in the development of broadband and
information technology and other related business, to expand the business relationship between
the two parties in connection with new business opportunities of IIJ and discuss secondment of
employees to each other.Upon completion of this transaction, NTT and its subsidiaries are related parties of the
Company. The Company entered into a number of different types of transactions with NTT and
its subsidiaries including purchases of wireline telecommunication services for Companys
offices. For the Companys connectivity and value added services, the Company purchases
international and domestic backbone services, local access lines and rental rack space in data
centers from NTT and its subsidiaries. The Company sells to NTT and its subsidiaries its
services including OEM services, system integration services and monitoring services for their
data centers.The amounts of balances as of March 31, 2005 and 2006 and transactions of the Company with NTT
and its subsidiaries for the each of the three years in the period ended March 31, 2006, are
summarized as follows.
 Thousands ofThousands of Yen
    
    U.S. Dollars2004
    
    2005
    
    2006
    
    2006Accounts receivable
    
    ¥
    
    
    
    ¥
    286,389
    
    
    ¥
    366,648
    
    
    $
    3,121Accounts payable
    
    
    
    
    
    
    687,757
    
    
    
    710,322
    
    
    
    6,046Revenues
    
    
    954,341
    
    
    
    1,413,379
    
    
    
    1,394,791
    
    
    
    11,873Costs and expenses
    
    
    4,531,189
    
    
    
    7,672,480
    
    
    
    8,075,542
    
    
    
    68,740
 In December, 2005, IIJ completed a public offering 12,500 new shares (equivalent to 5,000,000
ADSs) of common stock by a firm-commitment basis underwriting at an offering price of ¥534,022
(an issue value of ¥490,955) per share on the Mothers market of the Tokyo Stock Exchange. The
net proceeds to IIJ from the public offering, after deducting stock issuance costs, were
¥6,030,064 thousand. Stock issuance costs of ¥106,873 thousand were deducted from additional
paid-in capital.Stock Option PlansIn May 2000, IIJ granted 295 options to 34 directors and employees. The
options vested fully on April 8, 2002 and are exercisable for eight years from that date. In
August 2001, IIJ granted 395 options to 44 directors and employees. The options became fully
vested on June 28, 2003 and are exercisable for eight years from that date. No options are
available for additional grant as of March 31, 2006. No compensation expense has been
recognized in the consolidated statements of operations pursuant to APB No. 25, because the
exercise price was greater than the market price on the dates of grant. In March 2000, IIJ
Technology issued bonds with 2,000 detachable warrants in the amount of ¥600,000 thousand.
The bonds were repurchased in April 2000 and warrants to
purchase the subsidiarys 775 common shares at an exercise
 F-34




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##### Table of Contents



Thousands of YenWeighted AverageNumber of
    
    
    Number of
    
    
    Exercise Price perOptions
    
    
    Shares
    
    
    Common SharesUnexercised options outstandingApril 1, 2003
    
    
    675
    
    
    
    3,375
    
    
    ¥
    1,336Options granted
    
    
    
    
    
    
    
    
    
    
    Options exercised
    
    
    
    
    
    
    
    
    
    
    Options forfeited
    
    
    60
    
    
    
    300
    
    
    
    1,873Unexercised options outstandingMarch 31, 2004
    
    
    615
    
    
    
    3,075
    
    
    ¥
    1,063Options granted
    
    
    
    
    
    
    
    
    
    
    Options exercised
    
    
    
    
    
    
    
    
    
    
    Options forfeited
    
    
    70
    
    
    
    350
    
    
    
    1,510Unexercised options outstandingMarch 31, 2005
    
    
    545
    
    
    
    2,725
    
    
    ¥
    1,006Options granted
    
    
    
    
    
    
    
    
    
    
    Options exercised
    
    
    
    
    
    
    
    
    
    
    Options forfeited
    
    
    15
    
    
    
    75
    
    
    
    944Unexercised options outstandingMarch 31, 2006
    
    
    530
    
    
    
    2,650
    
    
    ¥
    1,007
  F-35




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##### Table of Contents



Outstanding
    
    ExercisableExercise Price
    
    Number of Shares
    
    Remaining Life
    
    Number of Shares(Thousands of Yen)
    
    Underlying Options
    
    (in Years)
    
    Underlying Options¥  2,163
    
    975
    
    4.0
    
    975334
    
    1,675
    
    5.3
    
    1,675
 12. OTHER COMPREHENSIVE INCOME
  Thousands of YenBefore Tax
    
    
    Tax (Expense)
    
    
    Net of TaxAmount
    
    
    or Benefit
    
    
    AmountYear ended March 31, 2004:Foreign currency translation adjustments
    
    ¥
    (45,582
    )
    
    ¥
    
    
    
    ¥
    (45,582
    )Unrealized holding gain (loss) on
securities:Amount arising during the period
    
    
    5,354,719
    
    
    
    (2,184,739
    )
    
    
    3,169,980Less: Reclassification adjustments for
losses included in net loss
    
    
    (47,040
    )
    
    
    19,192
    
    
    
    (27,848
    )Release in deferred tax asset valuation
allowance*
    
    
    
    
    
    
    2,165,547
    
    
    
    2,165,547Net unrealized holding gain (loss) during
the period
    
    
    5,307,679
    
    
    
    
    
    
    
    5,307,679Gain on cash flow hedging derivative
instruments:Amount arising during the period
    
    
    (7,561
    )
    
    
    
    
    
    
    (7,561
    )Less: Reclassification adjustments for
losses included in net loss
    
    
    26,303
    
    
    
    
    
    
    
    26,303Net gain on cash flow hedging derivative
instruments
    
    
    18,742
    
    
    
    
    
    
    
    18,742Other comprehensive income (loss)
    
    ¥
    5,280,839
    
    
    ¥
    
    
    
    ¥
    5,280,839Year ended March 31, 2005:Foreign currency translation adjustments
    
    ¥
    (25,858
    )
    
    ¥
    
    
    
    ¥
    (25,858
    )Unrealized holding gain (loss) on
securities:Amount arising during the period
    
    
    4,989,951
    
    
    
    (2,045,880
    )
    
    
    2,944,071Less: Reclassification adjustments for
gains included in net income
    
    
    (2,478,906
    )
    
    
    1,016,351
    
    
    
    (1,462,555
    )Release in deferred tax asset valuation allowance*
    
    
    
    
    
    
    1,029,529
    
    
    
    1,029,529Net unrealized holding gain (loss) during
the period
    
    
    2,511,045
    
    
    
    
    
    
    
    2,511,045Gain on cash flow hedging derivative
instruments:Amount arising during the period
    
    
    (3,521
    )
    
    
    
    
    
    
    (3,521
    )Less: Reclassification adjustments for
losses included in net income
    
    
    13,010
    
    
    
    
    
    
    
    13,010Net gain on cash flow hedging derivative
instruments
    
    
    9,489
    
    
    
    
    
    
    
    9,489Other comprehensive income (loss)
    
    ¥
    2,494,676
    
    
    ¥
    
    
    
    ¥
    2,494,676
 F-36




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##### Table of Contents



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
    )
 Thousands of U.S. DollarsBefore Tax
    
    
    Tax (Expense)
    
    
    Net of TaxAmount
    
    
    or Benefit
    
    
    AmountYear ended March 31, 2006:Foreign currency translation adjustments
    
    $
    326
    
    
    $
    
    
    
    $
    326Unrealized holding gain (loss) on
securities:Amount arising during the period
    
    
    8,911
    
    
    
    (3,654
    )
    
    
    5,257Less: Reclassification adjustments for
gains included in net income
    
    
    (27,470
    )
    
    
    11,263
    
    
    
    (16,207
    )Increase in deferred tax asset
valuation allowance*
    
    
    
    
    
    
    (7,609
    )
    
    
    (7,609
    )Net unrealized holding gain (loss) during
the period
    
    
    (18,559
    )
    
    
    
    
    
    
    (18,559
    )Gain on cash flow hedging derivative
instruments:Amount arising during the period
    
    
    (38
    )
    
    
    
    
    
    
    (38
    )Less: Reclassification adjustments for
losses included in net income
    
    
    85
    
    
    
    
    
    
    
    85Net gain on cash flow hedging derivative
instruments
    
    
    47
    
    
    
    
    
    
    
    47Other comprehensive income (loss)
    
    $
    (18,186
    )
    
    $
    
    
    
    $
    (18,186
    )
 
 *  The release (increase) in the deferred tax asset valuation allowance has resulted from
unrealized gains and (losses) on available-for-sale securities,
respectively. F-37




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##### Table of Contents



The components of accumulated other comprehensive income (loss) at March 31, 2005 and 2006 are
as follows:
 Thousands ofThousands of Yen
    
    
    U.S. Dollars2005
    
    
    2006
    
    
    2006Foreign currency translation adjustments
    
    ¥
    (33,295
    )
    
    ¥
    5,036
    
    
    $
    43Unrealized holding gain on securities
    
    
    8,732,910
    
    
    
    6,552,581
    
    
    
    55,776Loss on cash flow hedging derivative instruments
    
    
    (9,490
    )
    
    
    (4,023
    )
    
    
    (34
    )¥
    8,690,125
    
    
    ¥
    6,553,594
    
    
    $
    55,785
 13.
    
    BASIC AND DILUTED NET INCOME (LOSS) PER SHAREBasic and diluted net income (loss) per share computation for three years ended March 31,
2004, 2005 and 2006 is as follows.
 Thousands ofThousands of Yen
    
    
    U.S. Dollars2004
    
    

2005
    
    

2006
    
    
    2006Numerator:Net income (loss)
    
    ¥
    (2,270,686
    )
    
    ¥
    2,906,269
    
    
    ¥
    4,753,570
    
    
    $
    40,463Effect of dilution
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Net income (loss)-diluted
    
    ¥
    (2,270,686
    )
    
    ¥
    2,906,269
    
    
    ¥
    4,753,570
    
    
    $
    40,463Number of shares2004
    
    
    2005
    
    
    2006Denominator:Weighted-average common shares outstanding
    
    
    158,554
    
    
    
    191,559
    
    
    
    195,613Effect of Stock options
    
    
    
    
    
    
    
    
    
    
    342Diluted common shares outstanding
    
    
    158,554
    
    
    
    191,559
    
    
    
    195,955Yen
    
    
    U.S. Dollars2004
    
    
    2005
    
    
    2006
    
    
    2006Basic net income (loss) per common share
    
    ¥
    (14,321
    )
    
    ¥
    15,172
    
    
    ¥
    24,301
    
    
    $
    207Diluted net income (loss) per common share
    
    ¥
    (14,321
    )
    
    ¥
    15,172
    
    
    ¥
    24,258
    
    
    $
    206
 For the year ended March 31, 2004, all potential common shares, shares issuable upon
exercise of stock options or conversion of convertible notes, have been excluded from the
computation of diluted net loss per share because the effect would be antidilutive.For the year ended March 31, 2005, potentially dilutive shares have been excluded from
the computation of diluted net income because the exercise prices of the options were greater
than the average market price of the common shares and the effect of conversion of the
convertible notes would be antidilutive.For the year ended March 31, 2006, the following potentially dilutive shares have been
excluded from the computation of diluted net income because the exercise prices of the options
were greater than the average market price of the common shares.Diluted net income (loss) per share does not include the effects of the following
potential common shares:
 F-38




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##### Table of Contents



Year ended March 312004
    
    
    2005
    
    
    2006Shares issuable under stock options
    
    
    3,075
    
    
    
    2,725
    
    
    
    975Shares issuable related to convertible
notes on an as-if-converted basis
    
    
    2,975
    
    
    
    
    
    
    
    
 14.
    
    COMMITMENTS AND CONTINGENT LIABILITIESIn December 2001, a class action complaint alleging violations of the federal securities laws
was filed against the Company, naming IIJ, certain of its officers and directors as
defendants, and underwriters of IIJs initial public offering. Similar complaints have been
filed against over 300 other issuers that have had initial public offerings since 1998 and
such actions have been included in a single coordinate proceeding in the Southern District of
New York. An amended complaint was filed on April 24, 2002 alleging, among other things, that
the underwriters of IIJs initial public offering violated the securities laws (i) by failing
to disclose in the offerings registration statement certain alleged compensation arrangements
entered into with the underwriters clients, such as undisclosed commissions or tie-in
agreements to purchase stock in the after-market, and (ii) by engaging in manipulative
practices to artificially inflate the price of IIJs stock in the after-market subsequent to
the initial public offering. On July 15, 2002, the Company joined in an omnibus motion to
dismiss the amended complaint filed by the issuers and individuals named in the various
coordinated cases. In June 2003, the Company approved a settlement with the plaintiffs in
this matter. IIJ, along with the settling issuer defendants, filed a motion seeking the
courts preliminary approval of the settlement. The court granted preliminary approval of the
settlement on February 15, 2005, subject to certain modifications. On August 31, 2005, the
court issued a preliminary order further approving the modifications to the settlement and
certifying the settlement classes. The court also appointed the Notice Administrator for the
settlement and ordered that notice of the settlement be distributed to all settlement class
members beginning on November 15, 2005. The settlement fairness hearing has been set for April
24, 2006. Following the hearing, if the court determines that the settlement is fair to the
class members, the settlement will be approved. The settlement releases IIJ and the individual
defendants for liability for the conduct alleged in the action. Under the settlement, the
Company agreed to assign away, not assert, or release certain potential claims the Company may
have against IIJs underwriters. Approximately 260 defendant issuers participated in this
settlement. As to financial impact on the Company, the settlement provides that the class
members will be guaranteed $1 billion in recoveries by the insurers of the issuers. In
addition to IIJs portion of the proposed settlement, some of the continuing legal expenses
incurred in connection with the partial settlement would be borne by IIJs insurer based on
the settlement agreement and an individual agreement between IIJ and IIJs insurer.
Consequently, the Company believes that there will be no significant financial impact on the
Company as a result of this matter.In addition to the foregoing, the Company is a party to other suits and claims that arise in
the normal course of business. The negative adverse outcome of such suits and claims would
not have a significant impact on the financial statements.In January 19, 2006, IIJ entered into a joint venture agreement regarding the establishment
and management
of i-revo with Konami corporation. In the agreement, IIJ committed an additional contribution
for capital investment or working capital to i-revo of up to ¥90,000 thousand ($766 thousand)
for the period from November 2006 to April 2007.15.
    
    DERIVATIVE AND OTHER FINANCIAL INSTRUMENTSInterest Rate Swap AgreementThe Company is exposed to changes in interest rates that are
associated with long-term bank borrowings. The Companys policy on managing the interest rate
risk is to hedge the exposure to variability in future cash flows of floating rate interest
payments on the long-term bank borrowings. In order to reduce cash flow risk exposures on
floating rate borrowings, the Company utilizes interest rate swap agreements to convert a
floating rate borrowing to a fixed rate borrowing.The Company is also exposed to credit-related losses in the event of non-performance by
counterparties to interest rate swaps, but it is not expected that any counterparties will
fail to meet their obligations, because counterparties are internationally recognized
financial institutions.
 F-39




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##### Table of Contents



Fair Value
 Thousands ofThousands of Yen
    
    U.S. Dollars2005
    
    2006
    
    2006Carrying
    
    Fair
    
    Carrying
    
    Fair
    
    Carrying
    
    FairAmount or
    
    Value
    
    Amount or
    
    Value
    
    Amount or
    
    ValueNotional
    
    or Gain
    
    Notional
    
    or Gain
    
    Notional
    
    or GainAmount
    
    (Loss)
    
    Amount
    
    (Loss)
    
    Amount
    
    (Loss)Other
investments
for which it is:Practicable to
estimate
fair value
    
    ¥
    8,948,168
    
    
    ¥
    8,948,168
    
    
    ¥
    6,775,388
    
    
    ¥
    6,775,388
    
    
    $
    57,673
    
    
    $
    57,673Not practicable
    
    
    982,613
    
    
    
    
    
    
    
    1,245,317
    
    
    
    
    
    
    
    10,600
    
    
    
    Noncurrent
refundable
insurance
policies
(other assets)
    
    
    62,636
    
    
    
    62,636
    
    
    
    82,252
    
    
    
    82,252
    
    
    
    700
    
    
    
    700Long-term
borrowings and
installment
payable,
including
current
portion
    
    
    4,266,019
    
    
    
    4,262,908
    
    
    
    2,279,963
    
    
    
    2,279,963
    
    
    
    19,407
    
    
    
    19,407Interest rate
swap contracts
    
    
    1,400,000
    
    
    
    (9,490
    )
    
    
    1,150,000
    
    
    
    (4,023
    )
    
    
    9,789
    
    
    
    (34
    )
 F-40




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##### Table of Contents



Cash at March 31, 2005 and 2006 includes U.S. dollar denominated current bank deposits of
¥705,940 thousand and ¥442,169 thousand ($3,764 thousand), respectively.16.
    
    ADVERTISING EXPENSESAdvertising expenses incurred during the years ended March 31, 2004, 2005 and 2006 related
primarily to advertisements in magazines, journals and newspapers and amounted to ¥106,525
thousand, ¥151,226 thousand and ¥223,696 thousand ($1,904 thousand), respectively.17.
    
    SUBSEQUENT EVENTSAt the 14th Ordinary General Shareholders Meeting held on June 28, 2006, IIJs
shareholders approved the reductions of additional paid-in capital of ¥21,980,395 thousand
($187,099 thousand) and common stock of ¥2,539,222 thousand ($21,624 thousand) to eliminate
accumulated deficit for purposes of reporting under the Corporation Law in its
non-consolidated financial statements. The reductions are pursuant to Article 447.1 and 448.1
of the Corporation Law. The effective date is August 4, 2006.
  F-41