##### Table of Contents



As filed with the Securities and Exchange Commission on August 3, 2005
   UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
 WASHINGTON, D.C. 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, 2005
 OR
 o
    
    TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 For
the transition period from to
 Commission file number: 0-30204
 Kabushiki Kaisha Internet Initiative
 Internet Initiative Japan Inc.
  Japan
 Jinbocho Mitsui Bldg.
1-105 Kanda Jinbo-cho
Chiyoda-ku, Tokyo 101-0051, Japan
  Title of each class
    
    Name of each exchange on which registeredNone
    
    None
  Common Stock, no par value
 None
  As of March 31, 2005, 38,360 shares of common stock were outstanding, including 7,285 shares
represented by an aggregate of 14,570,000 American Depositary Shares.
  þ o
  o þ




---



TABLE OF CONTENTS
 PART I
    
    
    2Item 1. Identity of Directors, Senior Management and Advisers.
    
    
    2Item 2. Offer Statistics and Expected Timetable.
    
    
    2Item 3. Key Information.
    
    
    2Item 4. Information on the Company.
    
    
    13Item 5. Operating and Financial Review and Prospects.
    
    
    40Item 6. Directors, Senior Management and Employees.
    
    
    67Item 7. Major Shareholders and Related Party Transactions.
    
    
    73Item 8. Financial Information.
    
    
    75Item 9. The Offer and Listing.
    
    
    75Item 10. Additional Information.
    
    
    77Item 11. Quantitative and Qualitative Disclosures about Market Risk.
    
    
    88Item 12. Description of Securities Other than Equity Securities.
    
    
    90PART II
    
    
    90Item 13. Defaults, Dividend Arrearages and Delinquencies.
    
    
    90Item 14. Material Modifications to the Rights of Security Holders and Use of Proceeds.
    
    
    90Item 15. Controls and Procedures.
    
    
    90Item 16A. Audit Committee Financial Expert.
    
    
    91Item 16B. Code of Ethics.
    
    
    92Item 16C. Principal Accountant Fees and Services.
    
    
    92Item 16D. Exemptions from the Listing Standards for Audit Committees.
    
    
    93Item 16E. Purchases of Equity Securities by the Issuer and Affiliated Purchasers.
    
    
    93PART III
    
    
    93Item 17. Financial Statements.
    
    
    93Item 18. Financial Statements.
    
    
    93Item 19. Exhibits.
    
    
    93EX-1.1 ARTICLES OF INCORPORATION, AS AMENDED (ENGLISH TRANSLATION)EX-1.4 REGULATIONS OF THE BOARD OF STATUTORY AUDITORS, AS AMENDED (ENGLISH TRANSLATION)EX-11.1 INTERNET INITIATIVE JAPAN CODE OF CONDUCTEX-12.1 CERTIFICATION OF THE PRINCIPAL EXECUTIVE OFFICER REQUIRED BY 17 C.F.R.240.13A-14(A)EX-12.2 CERTIFICATION OF THE PRINCIPAL FINANCIAL OFFICER REQUIRED BY 17 C.F.R.240.13A-14(A)EX-13.1 CERTIFICATION OF THE CHIEF EXECUTIVE OFFICER REQUIRED BY 18 U.S.C.SECTION 1350EX-13.2 CERTIFICATION OF THE CHIEF FINANCIAL OFFICER REQUIRED BY 18 U.S.C.SECTION 1350
  i




---



##### 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




---



##### 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




---



##### Table of Contents



As of and for the fiscal year ended March 31,2001
    
    
    2002
    
    
    2003
    
    
    2004
    
    
    2005
    
    
    2005(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
    ¥
    

    12,953

    
    ¥
    

    14,303
    
    ¥
    

    13,815
    
    ¥
    

    12,862
    
    ¥
    

    11,373
    
    $
    

    106,069Dial-up access
    
    
    4,423
    
    
    
    3,644
    
    
    
    3,155
    
    
    
    3,088
    
    
    
    2,937
    
    
    
    27,392Value-added
    
    
    1,962
    
    
    
    3,100
    
    
    
    3,603
    
    
    
    4,296
    
    
    
    5,005
    
    
    
    46,677Other
    
    
    592
    
    
    
    1,668
    
    
    
    1,726
    
    
    
    2,118
    
    
    
    3,169
    
    
    
    29,560Total connectivity and
value-added services
revenues
    
    
    19,930
    
    
    
    22,715
    
    
    
    22,299
    
    
    
    22,364
    
    
    
    22,484
    
    
    
    209,698Systems integration revenues,
including related equipment sales
    
    
    10,556
    
    
    
    14,356
    
    
    
    15,013
    
    
    
    11,848
    
    
    
    15,854
    
    
    
    147,863Equipment sales
    
    
    1,390
    
    
    
    2,834
    
    
    
    6,706
    
    
    
    4,567
    
    
    
    3,365
    
    
    
    31,383Total revenues
    
    
    31,876
    
    
    
    39,905
    
    
    
    44,018
    
    
    
    38,779
    
    
    
    41,703
    
    
    
    388,944COST AND EXPENSES:Cost of connectivity and
value-added services revenues
    
    
    18,983
    
    
    
    19,800
    
    
    
    20,387
    
    
    
    20,047
    
    
    
    19,484
    
    
    
    181,719Cost of systems integration
revenues, including related
equipment sales
    
    
    9,117
    
    
    
    12,314
    
    
    
    13,090
    
    
    
    9,852
    
    
    
    12,200
    
    
    
    113,786Cost of equipment sales
    
    
    1,289
    
    
    
    2,540
    
    
    
    6,417
    
    
    
    4,346
    
    
    
    3,111
    
    
    
    29,018Total cost of revenues
    
    
    29,389
    
    
    
    34,654
    
    
    
    39,894
    
    
    
    34,245
    
    
    
    34,795
    
    
    
    324,523Sales and marketing expenses
    
    
    3,252
    
    
    
    3,038
    
    
    
    3,176
    
    
    
    3,528
    
    
    
    2,795
    
    
    
    26,064General and administrative
expenses
    
    
    1,618
    
    
    
    1,840
    
    
    
    2,205
    
    
    
    2,098
    
    
    
    2,666
    
    
    
    24,865Research and development expenses
    
    
    287
    
    
    
    319
    
    
    
    414
    
    
    
    358
    
    
    
    199
    
    
    
    1,856Total cost and expenses
    
    
    34,546
    
    
    
    39,851
    
    
    
    45,689
    
    
    
    40,229
    
    
    
    40,455
    
    
    
    377,308OPERATING INCOME (LOSS)
    
    
    (2,670
    )
    
    
    54
    
    
    
    (1,671
    )
    
    
    (1,450
    )
    
    
    1,248
    
    
    
    11,636OTHER INCOME (EXPENSES):Interest income
    
    
    454
    
    
    
    122
    
    
    
    67
    
    
    
    38
    
    
    
    13
    
    
    
    120Interest expense
    
    
    (643
    )
    
    
    (659
    )
    
    
    (733
    )
    
    
    (702
    )
    
    
    (686
    )
    
    
    (6,397
    )Other  net
    
    
    1,088
    
    
    
    (406
    )
    
    
    (603
    )
    
    
    1,646
    
    
    
    2,573
    
    
    
    24,006Other income
(expenses)  net
    
    
    899
    
    
    
    (943
    )
    
    
    (1,269
    )
    
    
    982
    
    
    
    1,900
    
    
    
    17,729INCOME (LOSS) FROM OPERATIONS BEFORE
INCOME TAX EXPENSE, MINORITY
INTERESTS AND EQUITY IN NET LOSS OF
EQUITY METHOD INVESTEES
    
    
    (1,771
    )
    
    
    (889
    )
    
    
    (2,940
    )
    
    
    (468
    )
    
    
    3,148
    
    
    
    29,365INCOME TAX EXPENSE(2)
    
    
    39
    
    
    
    18
    
    
    
    23
    
    
    
    33
    
    
    
    100
    
    
    
    931MINORITY INTERESTS IN
(EARNINGS) LOSSES OF SUBSIDIARIES
    
    
    160
    
    
    
    24
    
    
    
    153
    
    
    
    236
    
    
    
    (109
    )
    
    
    (1,018
    )EQUITY IN NET LOSS OF EQUITY
 3




---



##### Table of Contents



As of and for the fiscal year ended March 31,2001
    
    
    2002
    
    
    2003
    
    
    2004
    
    
    2005
    
    
    2005(millions of yen, except per share and ADS data)
    
    
    (thousands ofU.S. dollars,except pershare and ADSdata(1))METHOD INVESTEES:(3)Equity method net loss
    ¥
    

    (4,015
    )
    ¥
    

    (5,482
    )
    ¥
    

    (5,625
    )
    ¥
    

    (286
    )
    ¥
    

    (33
    )
    $
    

    (310
    )Impairment loss on
investment, advance and
deposits for Crosswave
    
    
    
    
    
    
    
    
    
    
    (7,153
    )
    
    
    (1,720
    )
    
    
    
    
    
    
    Total equity in net
loss of equity method
investees
    
    
    (4,015
    )
    
    
    (5,482
    )
    
    
    (12,778
    )
    
    
    (2,006
    )
    
    
    (33
    )
    
    
    (310
    )NET INCOME (LOSS)(2)
    ¥
    

    (5,665
    )
    ¥
    

    (6,365
    )
    ¥
    

    (15,589
    )
    ¥
    

    (2,271
    )
    ¥
    

    2,906
    
    $
    

    27,106Per Share and ADS Data:Basic and diluted net income (loss)
per share
    ¥
    

    (251,984
    )
    ¥
    

    (283,136
    )
    ¥
    

    (693,443
    )
    ¥
    

    (71,606
    )
    ¥
    

    75,858
    
    $
    

    707Basis and diluted net income (loss)
per ADS equivalent
    
    
    (125.99
    )
    
    
    (141.57
    )
    
    
    (346.72
    )
    
    
    (35.80
    )
    
    
    37.93
    
    
    
    0Weighted average number of shares
    
    
    22,480
    
    
    
    22,480
    
    
    
    22,480
    
    
    
    31,711
    
    
    
    38,312Weighted average number of ADS
equivalents (thousands)
    
    
    44,960
    
    
    
    44,960
    
    
    
    44,960
    
    
    
    63,422
    
    
    
    76,624Balance Sheet Data:Cash and cash equivalent
    ¥
    

    13,571
    
    ¥
    

    11,046
    
    ¥
    

    3,588
    
    ¥
    

    12,284
    
    ¥
    

    5,286
    
    $
    

    49,305Total assets
    
    
    50,641
    
    
    
    45,263
    
    
    
    32,064
    
    
    
    42,737
    
    
    
    37,116
    
    
    
    346,171Short-term borrowings
    
    
    5,620
    
    
    
    3,820
    
    
    
    4,824
    
    
    
    6,564
    
    
    
    4,725
    
    
    
    44,065Current portion of long-term
borrowings, including capital
lease obligations
    
    
    1,644
    
    
    
    3,374
    
    
    
    4,660
    
    
    
    3,936
    
    
    
    5,511
    
    
    
    51,399Long-term borrowings, including
capital lease obligations
    
    
    5,479
    
    
    
    6,262
    
    
    
    7,092
    
    
    
    5,188
    
    
    
    5,869
    
    
    
    54,738Convertible notes (4)
    
    
    15,000
    
    
    
    15,000
    
    
    
    15,000
    
    
    
    11,832
    
    
    
    
    
    
    
    Shareholders equity (capital
deficiency)
    
    
    16,928
    
    
    
    7,725
    
    
    
    (10,004
    )
    
    
    6,214
    
    
    
    11,615
    
    
    
    108,329Operating Data:Capital expenditures, including
capitalized leases
(5)
    ¥
    

    3,963
    
    ¥
    

    3,773
    
    ¥
    

    4,893
    
    ¥
    

    3,523
    
    ¥
    

    5,011
    
    $
    

    46,736Operating margin (6)

    
    
    (8.4
    )%
    
    
    0.1
    %
    
    
    (3.8
    )%
    
    
    (3.7
    )%
    
    
    3.0
    %Net cash provided by (used in):Operating activities
    ¥
    

    (271
    )
    ¥
    

    1,161
    
    ¥
    

    1,582
    
    ¥
    

    1,923
    
    ¥
    

    5,238
    
    $
    

    48,857Investing activities
    
    
    (9,544
    )
    
    
    (2,457
    )
    
    
    (7,878
    )
    
    
    (852
    )
    
    
    1,974
    
    
    
    18,411Financing activities
    
    
    6,428
    
    
    
    (1,462
    )
    
    
    (872
    )
    
    
    7,669
    
    
    
    (14,213
    )
    
    
    (132,556
    )
 
 (1)
    
    The U.S. dollar amounts represent translations of yen amounts at the rate of ¥107.22 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, 2005.(2)
    
    In April 2005, we restated certain items in our financial statements after concluding that
changes in the deferred income tax asset valuation allowance attributable to the income tax
effect of the change in unrealized gains on certain available-for-sale securities should not
be recorded in income tax expense (benefit) in continuing operation and should instead be
recorded as a separate component of other comprehensive income. This change resulted in a
restatement of income tax expense (benefit) and net income (loss) for the fiscal years ended
March 31, 2001, 2002, 4




---



##### Table of Contents



2003 and 2004. The figures for those line items in the table above are the amounts as restated
and are different from the amounts reported for those line items in our annual reports on Form
20-F for the fiscal years ended March 31, 2001, 2002, 2003 and 2004.(3)
    
    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., or 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 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.(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 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 31,2001
    
    
    2002
    
    
    2003
    
    
    2004
    
    
    2005(millions of yen)Capital expenditures:Acquisition of assets by entering into capital leases
    ¥
    

    2,596
    
    ¥
    

    2,536
    
    ¥
    

    3,578
    
    ¥
    

    1,866
    
    ¥
    

    4,434Purchases of property and equipment
    
    
    1,367
    
    
    
    1,237
    
    
    
    1,315
    
    
    
    1,657
    
    
    
    577Total capital expenditures
    ¥
    

    3,963
    
    ¥
    

    3,773
    
    ¥
    

    4,893
    
    ¥
    

    3,523
    
    ¥
    

    5,011
 Exchange Rates
  5




---



##### Table of Contents



High
    
    
    Low
    
    
    Average(1)
    
    
    Period-endFiscal year ended March 31,2001
    
    ¥
    125.54
    
    
    ¥
    104.19
    
    
    ¥
    111.65
    
    
    ¥
    125.542002
    
    
    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
    
    
    
    107.22Calendar year 2005January
    
    ¥
    104.93
    
    
    ¥
    102.26
    
    
    ¥
    103.34
    
    
    ¥
    103.55February
    
    
    105.84
    
    
    
    103.70
    
    
    
    104.94
    
    
    
    104.25March
    
    
    107.49
    
    
    
    103.87
    
    
    
    105.25
    
    
    
    107.22April
    
    
    108.67
    
    
    
    104.64
    
    
    
    107.19
    
    
    
    104.64May
    
    
    108.17
    
    
    
    104.41
    
    
    
    106.60
    
    
    
    107.97June
    
    
    110.91
    
    
    
    106.64
    
    
    
    108.75
    
    
    
    110.91July (through July 29, 2005)
    
    
    113.42
    
    

    
    110.47
    
    
    
    111.95
    
    
    
    112.25
 
 (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.
 We may not maintain our current level of revenues or achieve our expected revenues and profits
in the future.
  6




---



##### Table of Contents




    
    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;
    
    less revenue growth and lower margins in our growing value-added services and
systems integration, due to our failure to successfully differentiate our services
from competitors services. We may have 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;
    
    failure to achieve expected reductions in backbone costs due to increased cost of
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, due to our
failure 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
further business expansion, and;
    
    a decline in the value of and trading volume for our holding of available-for-sale
securities from which we expect gains on sale in the future.
  We may not be able to compete effectively, especially against competitors with greater
financial, marketing and other resources.
  7




---



##### Table of Contents




    
    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.
  Our business may be adversely affected if our network suffers interruptions, errors or delays.
  8




---



##### Table of Contents



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,
    
    continually changing customer requirements, and
    
    evolving industry standards.
  9




---



##### Table of Contents



We depend on our executive officers, and if we lose the service of our executive officers,
particularly Mr. Koichi Suzuki, our business and our relationships with 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




---



##### Table of Contents



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 other standards.
  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




---



##### Table of Contents



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.
  Regulatory matters and new legislation could impact our ability to conduct our business.
   12




---



##### Table of Contents



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.
    13




---



##### Table of Contents



B. Business Overview.
    For the fiscal year ended March 31,2003
    
    
    2004
    
    
    2005Connectivity services
    
    
    38.6
    %
    
    
    41.1
    %
    
    
    34.3
    %Value-added services
    
    
    8.2
    %
    
    
    11.1
    %
    
    
    12.0
    %Systems integration
    
    
    34.1
    %
    
    
    30.6
    %
    
    
    38.0
    %
  
    
    security services, such as managed firewalls with VPN (virtual private networks,
which provide private capacity transmission services) function, network intrusion
detection and comprehensive network security services,
 14




---



##### Table of Contents




    
    mail server outsourcing services,
    
    web server hosting services, and
    
    content development, distribution and Internet broadcasting services.
   Total network solutions
   
    
    our Internet connectivity services,
    
    our line-up of value-added services, including security and server 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
  15




---



##### Table of Contents



As of March 31,2001
    
    
    2002
    
    
    2003
    
    
    2004
    
    
    2005Dedicated access service contracts:IP service:Low Bandwidth (64 kbps  768 kbps)
    
    
    375
    
    
    
    184
    
    
    
    147
    
    
    
    93
    
    
    
    89Medium Bandwidth (1 Mbps  99 Mbps)
    
    
    346
    
    
    
    413
    
    
    
    473
    
    
    
    565
    
    
    
    660High Bandwidth (100 Mbps -)
    
    
    5
    
    
    
    13
    
    
    
    43
    
    
    
    80
    
    
    
    114Total IP Service
    
    
    726
    
    
    
    610
    
    
    
    663
    
    
    
    738
    
    
    
    863IIJ T1 Standard and IIJ Economy
    
    
    1,870
    
    
    
    1,590
    
    
    
    939
    
    
    
    504
    
    
    
    276IIJ Data Center Connectivity Service
    
    
    56
    
    
    
    110
    
    
    
    156
    
    
    
    196
    
    
    
    231IIJ FiberAccess/F and IIJ DSL/F
(Broadband Services)
    
    
    0
    
    
    
    1,310
    
    
    
    3,550
    
    
    
    5,788
    
    
    
    9,873Total dedicated access service contracts
    
    
    2,652
    
    
    
    3,620
    
    
    
    5,308
    
    
    
    7,226
    
    
    
    11,243Dial-up access service contracts:Under IIJ Brand
    
    
    102,308
    
    
    
    95,169
    
    
    
    86,183
    
    
    
    75,136
    
    
    
    68,068OEM
    
    
    59,822
    
    
    
    165,407
    
    
    
    443,601
    
    
    
    620,731
    
    
    
    625,908Total dial-up access service contracts
    
    
    162,130
    
    
    
    260,576
    
    
    
    529,784
    
    
    
    695,867
    
    
    
    693,976
  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.
 16




---



##### Table of Contents



PricingService Type
    
    Summary Description
    
    (excluding consumption tax)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.
Upstream speed of 1
Mbps to 4 Mbps is
provided with 10
BASE-T interface
(downstream 10
Mbps) and 6 Mbps to
48 Mbps with 100
BASE-T interface
(downstream 100
Mbps).
    
    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.
    
    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.
    
    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 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.
    
    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.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
    
    Initial setup
fee of ¥5,000.
Monthly basic fee of
¥10,000 for the first
 17




---



##### Table of Contents



PricingService Type
    
    Summary Description
    
    (excluding consumption tax)accounts.
    
    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.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
Electric Power
Company.
    
    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 Electric Power
Company.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
    
    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
 18




---



##### Table of Contents



PricingService Type
    
    Summary Description
    
    (excluding consumption tax)is provided with
this service.
    
    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
  IP Service.
     19




---



##### Table of Contents




    
    100% availability of our network,
    
    the maximum average latency, or time necessary to transmit a signal, between
designated POPs, and
    
    prompt notification of outage or disruption.
   IIJ T1 Standard.
 IIJ Economy.
 IIJ Data Center Connectivity Service.
 IIJ FiberAccess/F.
 20




---



##### Table of Contents



IIJ DSL/F.
 IIJ ISDN/F.
 Dial-up Access Services
  mio mio mio mio mio mio
 Value-Added Services
    
    
    Security solutions.As of March 31, 2005, we offered nine main security services
that protect customers internal networks from unauthorized access and secure remote
connections to internal networks: IIJ Security Standard, IIJ Security Premium, IIJ
Security Lite, IIJ Security Scan Service, Network Intrusion Detection Service, IIJ Web Gateway Service, IIJ URL
Filtering Service, IIJ VPN Standard and IIJ Secure Remote Access. We were the first ISP
in Japan to provide firewall services, which we first offered in 1994.
 21




---



##### Table of Contents



IIJ Security Standard.
 IIJ Security Premium.
 IIJ Security Lite.
 IIJ Security Scan Service.
 Network Intrusion Detection Service.
 IIJ Web Gateway Service.
 IIJ URL Filtering Service.
 22




---



##### Table of Contents



IIJ VPN Standard.
 IIJ Secure Remote Access.
 
    
    E-mail related solutions.As of March 31, 2005, we offered eight main e-mail
related services enabling customers to outsource administrative tasks for e-mail
server related functions: IIJ Post Office Service, IIJ Mail Box Service, IIJ Mail
Gateway Service, Mail Operator Service, Mass Mail Distribution Service, Mailing List
Server Service, IIJmioPrime Mail Service and IIJmioSafety Mail Service.
 IIJ Post Office Service.
 IIJ Mail Box Service.
 IIJ Mail Gateway Service.
 23




---



##### Table of Contents



Mail Operator Service.
 Mass Mail Distribution Service.
 Mailing List Server Service.
 IIJmio Prime Mail Service. mio
 IIJmio Safety Mail Service. mio mio
 
    
    Value-added hosting solutions.As of March 31, 2005, we offered four value-added
hosting solutions that enable our customers to manage their web content: IIJ Web
Standard, IIJ Document Exchange Service, IIJ Download Site Service, and IIJmio
Personal Domain Name Service.
 IIJ Web Standard.
 IIJ Document Exchange Service.
 24




---



##### Table of Contents



IIJ Download Site Service.
 IIJmio Personal Domain Name Service. mio
 
    
    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. The initial charge of our Internet data center
facility service is ¥250,000, and the basic monthly charge for the service is ¥300,000
per rack. We offer management and monitoring services tailored to our customers
requirements.
    
    Streaming Solutions.We provide Internet streaming services for live broadcasts
over the Internet, as well as streaming server hosting services with our
Streaming-On-Demand Channel.
    
    Network Management Solutions (Omnibus).Omnibus, launched in February 2002, was
developed specifically to enable corporate customers to integrate their various
network systems by interconnecting them at our Internet data centers. The Omnibus
service also integrates customers security systems, including firewalls and intrusion
detective systems. The initial charge is ¥300,000 plus ¥50,000 for usage of a rack in
the data center. Monthly charges depend on the number of ports to be used for the
service and the space in the rack to be used, ranging from ¥180,000 (six ports) to
¥330,000 (12 ports) plus ¥25,000 per one unit of space in the rack.
    
    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.
    
    IIJ 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.
    
    IIJmio Simple DNS Service.IIJmioSimple DNS Service is a service for individuals
that provides domain name registration and DNS primary and secondary servers. By
enabling
 25




---



##### Table of Contents



customers to edit the DNS records for themselves, customers can build web and
mail servers at their own sites more easily.
    
    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.
    
    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 SMF.IIJ SMF (SEIL Management Framework) is a service which provides remote
configuration and monitoring features of SEIL/neu Series routers at customer remote
sites from central management servers at IIJ and the customers main office/data
center. The technology is patent pending. 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.
    
    Managed router services. 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.
 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 operating the network system on behalf of a customer,
    
    virtual campus systems including both Internet connectivity and Intranet
information services,
    
    outsourcing of broadband Internet connectivity services and large-scale portal
sites for PDA users,
    
    online brokerage systems for securities firms,
    
    outsourcing of websites for online businesses
    
    outsourcing of large-scale e-mail servers,
    
    systems for Internet CATV (Cable TV) infrastructure,
 26




---



##### Table of Contents




    
    re-construction of overall corporate network systems suited to increased
traffic data, and
    
    consultation on corporate network security.
      Equipment Sales
  SEIL/neu Series.
  27




---



##### Table of Contents



Network
    
    
    our backbone, which includes leased lines and network equipment, such as advanced
Internet routers;
    
    POPs in major metropolitan areas in Japan;
    
    Internet data centers; and
    
    a network operations center, or NOC.
 Backbone
 Leased lines
   Backbone Cost
 For the fiscal year ended March 31,2001
    
    
    2002
    
    
    2003
    
    
    2004
    
    
    2005Backbone cost (thousand yen)
    
    ¥
    8,122,256
    
    
    ¥
    5,656,116
    
    
    ¥
    5,235,517
    
    
    ¥
    4,719,638
    
    
    ¥
    3,550,885
 Network upgrades
  Network equipment
 28




---



##### Table of Contents



POPs .
  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
    
    
    69.0
    %IIJ Media Communications
    
    
    60.1
    %IIJ America
    
    
    97.3
    %Net Care
    
    
    52.5
    %IIJ Financial Systems
    
    
    69.0
    %Asia Internet Holding
    
    
    26.7
    %Internet Multifeed
    
    
    28.6
    %atom
    
    
    40.0
    %
 IIJ Technology Inc.
    IIJ Media Communications Inc.
   30




---



##### Table of Contents



Net Care, Inc.
   IIJ America Inc.
   IIJ Financial Systems Inc.
   Asia Internet Holding Co., Ltd.
    Internet Multifeed Co.
  31




---



##### Table of Contents



atom Co., Ltd.
   Capital Expenditures
  For the fiscal year ended March 31,2003
    
    
    2004
    
    
    2005(millions of yen)Capital
expenditures,
including acquisition
of assets by entering
into capital leases
    
    ¥
    4,893
    
    
    ¥
    3,523
    
    
    ¥
    5,011
   Seasonality
  Sales and Marketing
    32




---



##### Table of Contents




    
    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 IIJ 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 Technology as well as with other
important service providers.
 
    
    One Division focuses on total network solutions and works with governmental
institutions.
  Customers
  Research and Development
    Research and Development Organization
  33




---



##### Table of Contents



IIJ Research Lab
 Technology Department.
 
    
    System Design and Development Division, which researches, designs, develops
andmaintains the systems and software related to our services, mainly in the security
field;
    
    System Engineering and Operation Division, which designs, implements and operates
the server systems related to our service and researches, evaluates and develops
related technologies;
    
    Network Engineering and Operation Division, which designs, implements and operates
the network related to our services, or provides assistance to individual projects;
    
    Product Development Division, which makes the promotion plan and conducts the
implementation, development and quality control of SEIL, our original development
routers, and also plans, develops and implements software for SMF.
 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
 34




---



##### Table of Contents




    
    research and development of IPsec, which is a secure version of IP that provides
secure communication channels over the Internet.
  Proprietary Rights
  Licenses
   Trademarks
  Legal Proceedings
   35




---



##### 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




---



##### Table of Contents



(Before Amendment)
 Type I Carriers
    
    Type II CarriersSpecial Type II
    
    General Type IIStart-up of services
    
    Permission fromMIC 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. 37




---



##### Table of Contents



**
    
    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. 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.
 38




---



##### Table of Contents




    
    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.
    
    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
 39




---



##### Table of Contents




    
    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.
  
 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




---



##### Table of Contents



3⁄4
   41




---



##### Table of Contents



Results of Operations
  Fiscal year ended March 31,2003
    
    
    2004
    
    
    2005(millions of yen except for percentage data)
    
    
    
    
    
    
    (Thousandsof U.S.dollars)REVENUES:Connectivity and value-added services
revenues:Dedicated access
    ¥
    

    13,815
    
    
    
    31.4
    %
    ¥
    

    12,862
    
    
    
    33.2
    %
    ¥
    

    11,373
    
    
    
    27.3
    %
    $
    

    106,069Dial-up access
    
    
    3,155
    
    
    
    7.2
    
    
    
    3,088
    
    
    
    8.0
    
    
    
    2,937
    
    
    
    7.0
    
    
    
    27,392Value-added
    
    
    3,603
    
    
    
    8.2
    
    
    
    4,296
    
    
    
    11.1
    
    
    
    5,005
    
    
    
    12.0
    
    
    
    46,677Other
    
    
    1,726
    
    
    
    3.9
    
    
    
    2,118
    
    
    
    5.4
    
    
    
    3,169
    
    
    
    7.6
    
    
    
    29,560Total connectivity and
value-added services
    
    
    22,299
    
    
    
    50.7
    
    
    
    22,364
    
    
    
    57.7
    
    
    
    22,484
    
    
    
    53.9
    
    
    
    209,698Systems integration, including related
equipment sales
    
    
    15,013
    
    
    
    34.1
    
    
    
    11,848
    
    
    
    30.5
    
    
    
    15,854
    
    
    
    38.0
    
    
    
    147,863Equipment sales
    
    
    6,706
    
    
    
    15.2
    
    
    
    4,567
    
    
    
    11.8
    
    
    
    3,365
    
    
    
    8.1
    
    
    
    31,383Total revenues
    
    
    44,018
    
    
    
    100.0
    
    
    
    38,779
    
    
    
    100.0
    
    
    
    41,703
    
    
    
    100.0
    
    
    
    388,944COST AND EXPENSES:Cost of connectivity and value-added
services:Backbone cost
    
    
    5,236
    
    
    
    11.9
    
    
    
    4,720
    
    
    
    12.2
    
    
    
    3,551
    
    
    
    8.5
    
    
    
    33,119Local access line cost
    
    
    3,862
    
    
    
    8.8
    
    
    
    3,500
    
    
    
    9.0
    
    
    
    4,040
    
    
    
    9.7
    
    
    
    37,680Other connectivity cost
    
    
    1,532
    
    
    
    3.5
    
    
    
    1,422
    
    
    
    3.7
    
    
    
    1,361
    
    
    
    3.3
    
    
    
    12,693Depreciation and amortization
    
    
    2,957
    
    
    
    6.7
    
    
    
    3,135
    
    
    
    8.1
    
    
    
    2,938
    
    
    
    7.0
    
    
    
    27,401Other
    
    
    6,801
    
    
    
    15.4
    
    
    
    7,270
    
    
    
    18.8
    
    
    
    7,594
    
    
    
    18.2
    
    
    
    70,826Total cost of connectivity and
value-added services
    
    
    20,387
    
    
    
    46.3
    
    
    
    20,047
    
    
    
    51.7
    
    
    
    19,484
    
    
    
    46.7
    
    
    
    181,719Cost of systems integration, including
related equipment sales:Cost of equipment sales related to
systems integration
    
    
    3,377
    
    
    
    7.7
    
    
    
    1,546
    
    
    
    4.0
    
    
    
    1,759
    
    
    
    4.2
    
    
    
    16,406Other
    
    
    9,713
    
    
    
    22.0
    
    
    
    8,306
    
    
    
    21.4
    
    
    
    10,441
    
    
    
    25.0
    
    
    
    97,380Total cost of systems integration
    
    
    13,090
    
    
    
    29.7
    
    
    
    9,852
    
    
    
    25.4
    
    
    
    12,200
    
    
    
    29.2
    
    
    
    113,786Cost of equipment sales
    
    
    6,417
    
    
    
    14.6
    
    
    
    4,346
    
    
    
    11.2
    
    
    
    3,111
    
    
    
    7.5
    
    
    
    29,018Total cost of revenues
    
    
    39,894
    
    
    
    90.6
    
    
    
    34,245
    
    
    
    88.3
    
    
    
    34,795
    
    
    
    83.4
    
    
    
    324,523Sales and marketing
    
    
    3,176
    
    
    
    7.2
    
    
    
    3,528
    
    
    
    9.1
    
    
    
    2,795
    
    
    
    6.7
    
    
    
    26,064General and administrative
    
    
    2,205
    
    
    
    5.0
    
    
    
    2,098
    
    
    
    5.4
    
    
    
    2,666
    
    
    
    6.4
    
    
    
    24,865Research and development
    
    
    414
    
    
    
    1.0
    
    
    
    358
    
    
    
    0.9
    
    
    
    199
    
    
    
    0.5
    
    
    
    1,856Total cost and expenses
    
    
    45,689
    
    
    
    103.8
    
    
    
    40,229
    
    
    
    103.7
    
    
    
    40,455
    
    
    
    97.0
    
    
    
    377,308OPERATING INCOME (LOSS)
    
    
    (1,671
    )
    
    
    (3.8
    )
    
    
    (1,450
    )
    
    
    (3.7
    )
    
    
    1,248
    
    
    
    3.0
    
    
    
    11,636OTHER INCOME (EXPENSES):Interest income
    
    
    68
    
    
    
    0.1
    
    
    
    38
    
    
    
    0.1
    
    
    
    13
    
    
    
    0.0
    
    
    
    120Interest expense
    
    
    (733
    )
    
    
    (1.7
    )
    
    
    (702
    )
    
    
    (1.9
    )
    
    
    (686
    )
    
    
    (1.6
    )
    
    
    (6,397
    )Foreign exchange gains (losses)
    
    
    (280
    )
    
    
    (0.6
    )
    
    
    (7
    )
    
    
    (0.0
    )
    
    
    6
    
    
    
    0.0
    
    
    
    56Gain (loss) on other investments
    
    
    (277
    )
    
    
    (0.6
    )
    
    
    1,413
    
    
    
    3.7
    
    
    
    2,439
    
    
    
    5.9
    
    
    
    22,751Other  net
    
    
    (47
    )
    
    
    (0.1
    )
    
    
    240
    
    
    
    0.6
    
    
    
    129
    
    
    
    0.3
    
    
    
    1,199Other income (expenses)  net
    
    
    (1,269
    )
    
    
    (2.9
    )
    
    
    982
    
    
    
    2.5
    
    
    
    1,901
    
    
    
    4.6
    
    
    
    17,729INCOME (LOSS) FROM OPERATIONS BEFORE
INCOME TAX EXPENSE, MINORITY INTERESTS AND
EQUITY IN NET LOSS OF EQUITY METHOD
INVESTEES
    
    
    (2,940
    )
    
    
    (6.7
    )
    
    
    (468
    )
    
    
    (1.2
    )
    
    
    3,149
    
    
    
    7.6
    
    
    
    29,365
 42




---



##### Table of Contents



Fiscal year ended March 31,2003
    
    
    2004
    
    
    2005(millions of yen except for percentage data)
    
    
    
    
    
    
    (Thousandsof U.S.dollars)INCOME TAX EXPENSE (1)
    ¥
    

    23
    
    
    
    0.1
    %
    ¥
    

    33
    
    
    
    0.1
    %
    ¥
    

    100
    
    
    
    0.2
    %
    $
    

    931MINORITY INTERESTS IN (EARNINGS) LOSSES OF
SUBSIDIARIES
    
    
    153
    
    
    
    0.4
    
    
    
    236
    
    
    
    0.6
    
    
    
    (109
    )
    
    
    (0.3
    )
    
    
    (1,018
    )EQUITY IN NET LOSS OF EQUITY METHOD
INVESTEES:(2)Equity method net loss
    
    
    (5,625
    )
    
    
    (12.8
    )
    
    
    (286
    )
    
    
    (0.8
    )
    
    
    (33
    )
    
    
    (0.1
    )
    
    
    (310
    )Impairment loss on investment, advance
and deposits for Crosswave
    
    
    (7,153
    )
    
    
    (16.2
    )
    
    
    (1,720
    )
    
    
    (4.4
    )
    
    
    
    
    
    
    
    
    
    
    Total equity in net loss of
equity method investees
    
    
    (12,778
    )
    
    
    (29.0
    )
    
    
    (2,006
    )
    
    
    (5.2
    )
    
    
    (33
    )
    
    
    (0.1
    )
    
    
    (310
    )NET INCOME (LOSS) (1)
    ¥
    

    (15,588
    )
    
    
    (35.4
    )%
    ¥
    

    (2,271
    )
    
    
    (5.9
    )%
    ¥
    

    2,906
    
    
    
    7.0
    %
    $
    

    27,106
 
 (1)
    
    In April 2005, we restated certain items in our financial statements after concluding that
changes in the deferred income tax asset valuation allowance attributable to the income tax
effect of the change in unrealized gains on certain available-for-sale securities should not
be recorded in income tax expense (benefit) in continuing operation and should instead be
recorded as a separate component of other comprehensive income. This change resulted in a
restatement of income tax expense (benefit) and net income (loss) for the fiscal years ended
March 31, 2003 and 2004. The figures for those line items in the table above are
the amounts as restated and are different from the amounts reported for those line items in
our annual reports on Form 20-F for the fiscal years ended March 31, 2003 and
2004.(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 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 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 is undergoing corporate reorganization proceedings in Japan 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 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. 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
 43




---



##### Table of Contents



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.
    
    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
 44




---



##### Table of Contents



Cost of systems integration revenues.
 Cost of equipment sales.
 Total costs and expenses
  Sales and marketing.
 General and administrative.
 Research and development.
 Operating income (loss)
  Other income (expenses), net
  Interest income.
 45




---



##### Table of Contents



Interest expense.
 Foreign exchange gains (losses).
 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
   46




---



##### Table of Contents







Net income (loss)




Year Ended March 31, 2004 Compared to the Year Ended March 31, 2003


Total revenues
  Connectivity and value-added services revenues.
 
    
    Dedicated access.Revenues from dedicated access services decreased 6.9% to ¥12.9
billion for the fiscal year ended March 31, 2004 from ¥13.8 billion for the previous
fiscal year. This decrease reflected decreasing unit prices as a result of increased
competition. Decreased revenues from IP Service, IIJ T1 Standard and IIJ Economy were
partially offset by increased revenue from our IIJ FiberAccess/F Service and IIJ DSL/F
Service.
    
    Dial-up access.Revenues from dial-up access services decreased 2.1% to ¥3.1
billion for the fiscal year ended March 31, 2004 from ¥3.2 billion for the previous
fiscal year. This decrease was the result of declining revenues from our dial-up
access services for corporate and individual customers. For corporate users, the
revenue decreased primarily due to an increase in demand for lower-cost broadband
services, and for individual customers the revenue decreased primarily due to the
declining revenues from IIJ4U Service. The decrease in individual customer revenue was
offset partially by growing demand for dial-up access services provided on an OEM
basis.
    
    Value-added services.Our value-added services revenues increased 19.2% to ¥4.3
billion for the fiscal year ended March 31, 2004 from ¥3.6 billion for the previous
fiscal year. This increase reflected growth in security-related services, mail support
services and virtual private network services, in part as a result of focusing sales
efforts more on these higher margin services. Internet data center services amounted
to ¥1.4 billion for the fiscal year ended March 31, 2004, a decrease of 2.5% from the
previous fiscal year.
    
    Other.Other revenues, which included rental fees for network equipment, customer
support service, and sale of Wide-area Ethernet services, amounted to ¥2.1 billion for
the fiscal year ended March 31, 2004, a 22.7% increase from the previous fiscal year.
The increase reflected improved performance by Net Care and increased sales of
Wide-area Ethernet services.
 
 47




---



##### Table of Contents



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.
 48




---



##### Table of Contents



General and administrative.
 Research and development.
 Operating loss
  Other income (expenses), net
  Interest income.
 Interest expense.
 Foreign exchange gains (losses).
 Gain (loss) on other investments.
 Other-net.
 Loss from operations before income tax expense, minority interests and equity in net loss of
equity method investees
  49




---



##### Table of Contents



Income tax expense
  Minority interests in losses of subsidiaries
  Equity in net loss of equity method investees
    Net loss
  Application of Critical Accounting Policies
    50




---



##### Table of Contents



Useful lives of property and equipment
   Item
    
    Useful LivesData communications, office and other equipment
    
    
    2 to 15 yearsLeasehold improvements
    
    
    3 to 15 yearsPurchased software
    
    5 yearsCapitalized leases
    
    
    4 to 7 years
     Impairment of long-lived assets
  
    
    significant decline in the market value of an asset;
 51




---



##### Table of Contents




    
    current period operating cash flow loss;
    
    introduction of competing technologies or services;
    
    significant underperformance of expected or historical cash flows;
    
    significant or continuing decline in subscribers;
    
    changes in the manner or use of an asset;
    
    disruptions in the use of network equipment under capital lease arrangements; and
    
    other negative industry or economic trends.
  Allowance for doubtful accounts and uncollectible contractual prepayments
  Deferred tax assets
  52




---



##### Table of Contents



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.
     53




---



##### Table of Contents



Pension benefits costs
     Change in Assumption
    
    Pre-Tax PBO
    
    
    Pension Expense
    
    
    Equity (Net of Tax)(millions of yen)50 basis point
increase/decrease in
discount rate
    
    
    (101)/114
    
    
    
    (22)/27
    
    
    
    13/
    (16)50 basis point
increase/decrease in
expected return on
assets
    
    
    
    
    
    
     /4
    
    
    
    2/
    (2)
 New Accounting Standards
   54




---



##### Table of Contents











B. Liquidity and Capital Resources.


Liquidity and Capital Requirements
  Capital expenditures.
 For the fiscal year ended March 31,2003
    
    2004
    
    2005(millions of yen)Capital
expenditures,
including acquisition
of assets by entering
into capital leases
    
    ¥
    4,893
    
    
    ¥
    3,523
    
    
    ¥
    5,011
   Lease payments.
 55




---



##### 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 line operating leases
    
    ¥
    116
    
    
    ¥
    87
    
    
    ¥
    29
    
    
    ¥
    
    
    
    ¥
    Other operating leases (1)
    
    
    885
    
    
    
    317
    
    
    
    360
    
    
    
    124
    
    
    
    84Capital leases
    
    
    7,698
    
    
    
    3,004
    
    
    
    3,668
    
    
    
    1,011
    
    
    
    15Total minimum lease payments
    
    ¥
    8,699
    
    
    ¥
    3,408
    
    
    ¥
    4,057
    
    
    ¥
    1,135
    
    
    ¥
    99
 
 (1)
    
    See note 7 to the consolidated financial statements included in this annual report. Payments of principal and interest on outstanding borrowings.
   56




---



##### Table of Contents



Fiscal year ending
    
    
    
    
    
    Thousands ofMarch 31
    
    Thousands of yen
    
    U.S. dollars2006
    
    ¥
    2,736,056
    
    
    $
    25,5182007
    
    
    1,489,963
    
    
    
    13,8962008
    
    
    40,000
    
    
    
    373Total
    
    ¥
    4,266,019
    
    
    $
    39,787
    Investments in current and former group companies.
 Working capital needs.
 Capital Resources
  57




---



##### Table of Contents



Short-term and long-term Borrowings.
 Cash flows from operating activities.
 Capital Leases.
 Issuances of Equity Securities.
 Cash Flows
   Fiscal year ended March 31,2003
    
    2004
    
    2005(Thousands of yen)Net cash provided by operating activities
    
    ¥
    1,581,692
    
    
    ¥
    1,923,366
    
    
    ¥
    5,238,497Net cash provided by (used in) investing activities
    
    
    (7,877,921
    )
    
    
    (852,463
    )
    
    
    1,974,003Net cash provided by (used in) financing activities
    
    
    (872,066
    )
    
    
    7,668,599
    
    
    
    (14,212,667
    )Effect of exchange rate changes on cash
    
    
    (289,272
    )
    
    
    (43,615
    )
    
    
    2,405Net increase (decrease) in cash and cash equivalent
    
    
    (7,457,567
    )
    
    
    8,695,887
    
    
    
    (6,997,762
    )Cash at beginning of the year
    
    
    11,045,919
    
    
    
    3,588,352
    
    
    
    12,284,239Cash at end of the year
    
    ¥
    3,588,352
    
    
    ¥
    12,284,239
    
    
    ¥
    5,286,477
 Year Ended March 31, 2005 as Compared to the Year Ended March 31, 2004
  58




---



##### Table of Contents



Year Ended March 31, 2004 as Compared to the Year Ended March 31, 2003
    59




---



##### Table of Contents







Contingencies




C. Research and Development, Patents and Licenses, etc.




D. Trend Information.


Factors Affecting Our Future Financial Results
  Revenues
  Connectivity and value-added services revenues
  Dedicated access services
  
    
    Average contracted bandwidth and the demand for higher bandwidth services.Demand
for higher bandwidth services continues to increase, in the situation that corporate
customers are moving to higher bandwidth in the proceeding corporate broadband. Total
contracted
 60




---



##### Table of Contents



bandwidth for dedicated access services including Internet Data Center Connectivity
Services increased to 121.2 Gbps for the fiscal year ended March 31, 2005 from 80.1
Gbps for the previous fiscal year. In addition, average contracted bandwidth for our IP
Service jumped to approximately 54 Mbps for the fiscal year ended March 31, 2005 from
45 Mbps for the previous fiscal year. The number of IP Service contracts for the
bandwidth over 100Mbps increased to 114 for the fiscal year ended March 31, 2005 from
80 for the fiscal year ended March 31, 2004. The average revenues per contract for IP
Service was approximately ¥1.0 million, almost flat compared to the revenues per
contract at the end of March 2004. Though we do not expect that revenue per contract
come to a growing trend for the fiscal year ending March 31, 2006, 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.
    
    Shift to lower-priced services by lower-bandwidth customers.Lower-bandwidth
subscribers have opted to shift to lower-cost services such as our second-tier
connectivity services and the service offerings of other ISPs because these
subscribers prefer lower-priced services. To increase the number of subscribers to our
other dedicated access services, we continue to provide second-tier, lower-priced new
Internet-access services in order to remain competitive, though these lower-priced
services generate lower total revenues due to lower unit prices resulting from fierce
price competition. As a result, the number of dedicated access service contracts
increased to 11,243 for the fiscal year ended March 31, 2005 from 7,226 for the fiscal
year ended March 31, 2004. We had a rapid increase in the number of subscribers to our
second-tier service that we refer to as IIJ DSL/F, an access service over ADSL lines
at maximum 47 Mbps speed, and IIJ FiberAccess/F, and access services over optical
lines at maximum 10Mbps or 100 Mbps. In this second-tier category, IIJ Economy and IIJ
T1 Standard used to be the growth driver, but due to the advent of inexpensive ADSL
and optical access lines subscribers have been switching from IIJ Economy to IIJ DSL/F
and IIJ FiberAccess/F, which is faster and more inexpensive. In addition, inexpensive
second-tier services have started to be used as connectivity lines for Internet VPN
solutions connecting multiple location of corporate customers and we have received
orders from customers with several thousand customer locations to connect. Though
these services are inexpensive compared to IIJ Economy and IIJ T1 Standard, we expect
that the numbers of contracts for these services will continue to increase and
contribute to connectivity services revenues. 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
   61




---



##### Table of Contents



Value-added services revenues
  e-mail
 Other.
  Systems integration revenues, including related equipment sales revenues
   Other equipment sales revenues.
  62




---



##### Table of Contents



Additional factors affecting revenues
  
    
    Increase in business usage.Our revenues will be affected by the extent and speed
with which businesses in Japan exploit the Internet and network solutions to their
full potential, including, for example, electronic transactions between businesses and
expanding the range of devices that access the Internet. Such services require
high-quality and high-capacity connectivity services for both businesses and
individuals. Such services also require provision of total network solutions including
various Internet connectivity services, systems integration and other 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 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
  63




---



##### Table of Contents



Cost of connectivity and value-added services revenues
   
    
    Backbone cost.Backbone cost decreased to ¥3.6 billion for the fiscal year ended
March 2005 from ¥4.7 billion for the fiscal year ended March 2004. 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 ¥4.0 billion for the fiscal year ended March 2005 from ¥3.5 billion for
the fiscal year ended March 2004. Other connectivity costs were ¥1.4 billion for the
fiscal year ended March 2005 compared to ¥1.4 billion for the previous fiscal year.
  Costs of systems integration revenues and equipment sales
    64




---



##### Table of Contents



Sales and marketing
  General and administrative
  Research and development
  Other income (expenses)
  
    
    Interest expense.Most of our interest expense is from bank borrowing, capital
leases and unsecured convertible notes issued on April 11, 2000. 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. The interest expense
from the convertible notes for the fiscal year ended March 31, 2005 was ¥270 million.
Due to the redemption of the remainder of unsecured convertible notes at March 2005,
any interest expense from that convertible notes will not be recorded after April
2005.
    
    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 price or fair value of an investment is judged to be
other than temporary, we will have impairment losses on other investments.
 65




---



##### Table of Contents




    
    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, 2006.
 Equity in net loss of equity method investees
  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
    
    ¥
    4,266
    
    
    ¥
    2,736
    
    
    ¥
    1,530
    
    
    ¥
    
    
    
    ¥
    Capital (finance) lease obligations
    
    
    7,698
    
    
    
    3,004
    
    
    
    3,668
    
    
    
    1,011
    
    
    
    15Operating lease obligations
    
    
    1,001
    
    
    
    404
    
    
    
    389
    
    
    
    124
    
    
    
    84Purchase obligations (1)Other long-term liabilities reflected
on our balance sheetTotal (2) (3)
    
    ¥
    12,965
    
    
    ¥
    6,144
    
    
    ¥
    5,587
    
    
    ¥
    1,135
    
    
    ¥
    99
 
 (1)
    
    Comprises of 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 ¥143 million to our pension plan for the
fiscal year ending March 31, 2006.(3)
    
    The table above does not include obligations for interest payments on debt. 66




---



##### 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 June 30,Name
    
    Position
    
    Date of birth
    
    expires
    
    auditor
    
    2005Koichi Suzuki
    
    President, Chief
Executive Officer and
Representative Director
    
    Sept. 3, 1946
    
    June 2007
    
    Dec. 1992
    
    
    2,403Toshiya Asaba
    
    Executive Vice President
    
    June 12, 1962
    
    June 2007
    
    June 1999
    
    
    *Fukuzo Inoue
    
    Executive Vice President
    
    July 6, 1955
    
    June 2006
    
    June 2004
    
    
    Hideshi Hojo
    
    Managing Director
    
    Dec. 22, 1957
    
    June 2007
    
    June 2000
    
    
    *Takamichi Miyoshi
    
    Director
    
    May 5, 1963
    
    June 2006
    
    June 2002
    
    
    *Akihisa Watai
    
    Director, Chief Financial
Officer and Chief
Accounting Officer
    
    Sept. 30, 1965
    
    June 2006
    
    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 2006
    
    June 2004
    
    
    Takashi Hiroi
    
    Director
    
    Feb. 13, 1963
    
    June 2006
    
    June 2004
    
    
    Yoshifumi Nishikawa
    
    Director
    
    Aug. 3, 1938
    
    June 2007
    
    June 2005
    
    
    Junnosuke Furukawa
    
    Director
    
    Dec. 5, 1935
    
    June 2007
    
    June 2005
    
    
    Hideki Matsushita
    
    Standing Statutory Auditor
    
    Sept. 20, 1942
    
    June 2008
    
    June 1998
    
    
    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
 Fukuzo Inoue
 67




---



##### Table of Contents



Hideshi Hojo
 Takamichi Miyoshi
 Akihisa Watai
 Hiroyuki Hisashima
 Kazuhiro Tokita
 Yasurou Tanahashi
 Takashi Hiroi
 Yoshifumi Nishikawa
 Junnosuke Furukawa
 68




---



##### Table of Contents



Hideki Matsushita
 Masaki Okada
 Masaaki Koizumi
 Hirofumi Takahashi
 B. Compensation.
  C. Board Practices.
  Board resolutions.
     69




---



##### Table of Contents



70




---



##### Table of Contents



71




---



##### Table of Contents



D. Employees.
    E. Share Ownership.
  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 395 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 ¥2,018,306 per share
and has been adjusted to ¥1,672,239 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 295
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 ¥13,055,664 per share and has been subsequently adjusted to ¥10,817,086 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 Technology.
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
  72




---



##### Table of Contents



Item 7. Major Shareholders and Related Party Transactions.
 A. Major Shareholders.
  Shares of common stock outstanding,beneficially owned as of June 30, 2005Number
    
    PercentageNippon Telegraph and Telephone Corporation and affiliates (1)
    
    
    12,135
    
    
    
    31.6
    %Koichi Suzuki
    
    
    2,403
    
    
    
    6.3Sumitomo Corporation
    
    
    2,107
    
    
    
    5.5Itochu Corporation
    
    
    2,086
    
    
    
    5.4Directors and executive officers as a group (2)
    
    
    2,560
    
    
    
    6.7
 
 (1)
    
    Includes Nippon Telegraph and Telephone Corporation, which owns 10,095 shares, or 26.3%, and
NTT Communications Corporation, which owns 2,040 shares, or 5.3%. Nippon Telegraph and
Telephone Corporation acquired ownership of its shares, and NTT Communications Corporation
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.
 73




---



##### Table of Contents



Transactions with equity method affiliates.
 millions of yenAccounts receivable
    
    ¥
    118Accounts payable
    
    
    97Revenues
    
    
    1,245Costs and expenses
    
    
    1,146
   
    
    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 yenAccounts receivable
    
    ¥
    19Revenues
    
    
    1,196Costs and expenses
    
    
    4,816
   74




---



##### Table of Contents



C. Interests of Experts and Counsel.
  
 Item 8. Financial Information.
 A. Consolidated Statements and Other Financial Information.
 Financial Statements
  Legal or Arbitration Proceedings
  Dividend Policy
  B. Significant Changes.
  
 Item 9. The Offer and Listing.
 A. Offer and Listing Details.
   75




---



##### Table of Contents



NasdaqFiscal year ended/ending March 31,
    
    High
    
    Low2001
    
    $
    73.00
    
    
    $
    6.752002
    
    
    11.88
    
    
    
    4.252003
    
    
    7.34
    
    
    
    1.802004
    
    
    14.10
    
    
    
    1.41First Quarter
    
    
    5.35
    
    
    
    1.41Second Quarter
    
    
    14.10
    
    
    
    3.58Third Quarter
    
    
    8.24
    
    
    
    4.00Fourth Quarter
    
    
    7.19
    
    
    
    4.012005
    
    
    6.24
    
    
    
    2.11First Quarter
    
    
    6.24
    
    
    
    3.19Second Quarter
    
    
    3.87
    
    
    
    2.23Third Quarter
    
    
    6.02
    
    
    
    2.11Fourth Quarter
    
    
    5.26
    
    
    
    3.332006First Quarter 2006
    
    
    13.93
    
    
    
    3.04MonthJanuary 2005
    
    
    4.90
    
    
    
    3.36February 2005
    
    
    5.26
    
    
    
    4.01March 2005
    
    
    4.50
    
    
    
    3.33April 2005
    
    
    4.20
    
    
    
    3.13May 2005
    
    
    7.37
    
    
    
    3.04June 2005
    
    
    13.93
    
    
    
    6.31July 2005
    
    
    10.74
    
    
    
    7.31
 B. Plan of Distribution.
  C. Markets.
  D. Selling Shareholders.
  E. Dilution.
  F. Expenses of the issue.
  76




---



##### Table of Contents



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;
    
    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
    77




---



##### Table of Contents



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 (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 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 are in
attendance.
   
    
    a reduction of the stated capital,
 78




---



##### Table of Contents




    
    amendment of our Articles of Incorporation (except amendments that the board of
directors are authorized to make under the Commercial Code of Japan),
    
    the removal of a director or statutory auditor,
    
    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.
   
    
    short-form share transfer (Kan-i Kabushiki Kokan),
    
    short-form company split into an existing company (Kan-i Kyushu Bunkatsu) (only in
respect of the shareholders of the exiting company that takes over the target business
of the split company), and
    
    short-form merger (Kan-i Gappei).
  
    
    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,
 79




---



##### Table of Contents




    
    apply to a competent court for reorganization of the company, 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,
    
    apply to a competent court for permission to examine accounting books and documents
of a subsidiary 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
    
    a director on our behalf for the cessation of an illegal or ultra vires action.
    80




---



##### Table of Contents



Rights of Holders of Fractional Shares of our Common Stock
  
    
    to inspect and copy the register of fractional shares,
    
    to receive additional shares or money in the event of cancellation, consolidation
or split of shares, stock transfer, exchange of shares, company split or merger, and
to receive residual properties,
    
    to require a company to purchase their fractional shares,
    
    to request a company to convert the shares if they are the fractional shares of
convertible shares, unless otherwise provided for in Articles of Incorporation. Our
Articles of Incorporation do not contain a provision against such conversion, and
    
    to receive dividend, interim dividend or preemptive rights, unless otherwise
provided for in Articles of Incorporation. Our Articles of Incorporation do not
contain a provision against such receipt.
  Restrictions on Holders of our Common Stock
     81




---



##### Table of Contents



C. Material Contracts.
  Subscription Agreement, dated September 16, 2003, between Internet Initiative Japan and Nippon
Telegraph and Telephone Corporation.
 Service Agreement dated, March 25, 2004, between Internet Initiative Japan and IIJ America
Inc.
 Limitation of Liability Agreement dated, June 24, 2004 and June 29, 2005, between Internet
Initiative Japan and outside directors.
 D. Exchange Controls.
  E. Taxation.
 Japanese Taxation
  82




---



##### Table of Contents




    
    the overall tax consequences of the ownership and disposition of shares or ADSs,
including specifically the tax consequences under Japanese law,
    
    the laws of the jurisdiction of which they are resident, and
    
    any tax treaty between Japan and their country of residence, by consulting their
own tax advisers.
    
    
    a corporation that has owned, directly or indirectly through one or more residents
of either Japan or the U.S., more than 50% of the voting shares of the paying
corporation for the period of twelve months ending on the date on which entitlement to
the dividends is determined and which meets additional requirements, or
    
    a pension fund , provided that such dividends are not derived from the carrying on
of a business, directly or indirectly, by such pension fund.
  The Prior Treaty
    
    
    
    
    
    The Treaty10% or more of the voting shares
    
    
    10
    %
    
    More than 50% of the voting shares
    
    
    0
    %10% to 50% of the voting shares
    
    
    5
    %Others
    
    
    15
    %
    
    Others
    
    
    10
    %
   83




---



##### 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,
 84




---



##### Table of Contents




    
    investors that hold shares or ADSs as part of a straddle or a hedging or
conversion transaction, or
    
    investors whose functional currency is not the U.S. dollar.
   
    
    a citizen or resident of the United States,
    
    a domestic corporation,
    
    an estate whose income is subject to United States federal income tax regardless of
its source, or
    
    a trust if a United States court can exercise primary supervision over the trusts
administration and one or more United States persons are authorized to control all
substantial decisions of the trust.
    Taxation of Dividends
   85




---



##### 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.
 86




---



##### 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.
    87




---



##### 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 date
    
    
    
    
    Fairvalue orGainMarch 31, 2005
    
    2006
    
    2007
    
    2008
    
    2009
    
    2010
    
    Total
    
    (loss)(millions of yen)Long-term debt obligations:Fixed rate long-term borrowings,
installment payable
    
    
    1,652
    
    
    
    1,006
    
    
    
    
    %
    
    
    
    
    
    
    
    
    
    
    2,658
    
    
    
    2,655Average interest rate
    
    
    1.913
    %
    
    
    1.819
    %
    
    
    
    %
    
    
    
    %
    
    
    
    %
    
    
    1.877
    %
 88




---



##### Table of Contents



Expected maturity date
    
    
    
    
    
    Fairvalue orGainMarch 31, 2005
    
    2006
    
    2007
    
    2008
    
    2009
    
    2010
    
    Total
    
    (loss)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
    %
 Expected maturity date

    
    
    
    
    
    
    Fairvalue orGainMarch 31, 2004
    
    2005
    
    2006
    
    2007
    
    2008
    
    2009
    
    Total
    
    (loss)(millions of yen)Long-term debt obligations:Fixed rate long-term borrowings,
installment payable and convertible
notes
    
    
    12,380
    
    
    
    152
    
    
    
    756
    
    
    
    
    
    
    
    
    
    
    
    13,288
    
    
    
    13,170Average interest rate
    
    
    1.755
    %
    
    
    2.550
    %
    
    
    1.883
    %
    
    
    
    %
    
    
    
    %
    
    
    1.773
    %Variable rate long-term borrowings
    
    
    1,000
    
    
    
    1,000
    
    
    
    400
    
    
    
    
    
    
    
    
    
    
    
    2,400
    
    
    
    2,400Average interest rate
    
    
    0.789
    %
    
    
    1.110
    %
    
    
    1.173
    %
    
    
    
    %
    
    
    
    %
    
    
    0.987
    %Interest rate swap contracts Notional
amount  variable to fixed:
    
    
    1,000
    
    
    
    1,000
    
    
    
    400
    
    
    
    
    
    
    
    
    
    
    
    2,400
    
    
    
    (19
    )Average pay rate
    
    
    1.500
    %
    
    
    1.900
    %
    
    
    1.990
    %
    
    
    
    %
    
    
    
    %
    
    
    1.748
    %Average receive rate
    
    
    0.789
    %
    
    
    1.110
    %
    
    
    1.173
    %
    
    
    
    %
    
    
    
    %
    
    
    0.987
    %
  Equity Price Risk
  Foreign Currency Exchange Rate Risk
  89




---



##### Table of Contents



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
   90




---



##### Table of Contents




    
    pertain to the maintenance of records that in reasonable detail accurately and
fairly reflect the transactions and dispositions of our assets;
    
    provide reasonable assurance that transactions are recorded as necessary to permit
preparation of our financial statements in accordance with 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.
            91




---



##### Table of Contents



Item 16B. Code of Ethics.
  
  Item 16C. Principal Accountant Fees and Services.
 Independent Auditor Fees and Services
  Fiscal year ended March 31,2004
    
    2005(millions of yen)Audit fees (1)
    
    
    72
    
    
    
    74Audit-related fees (2)
    
    
    5
    
    
    
    Tax fees (3)
    
    
    
    
    
    
    0All other fees (4)
    
    
    
    
    
    
    35Total fees
    
    
    77
    
    
    
    109
 (1)
    
    These are the aggregate fees billed for the fiscal year for professional services rendered by
Deloitte Touche Tohmatsu for the audit of our annual financial statements 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.
 92




---



##### Table of Contents



Board of Statutory Auditors Pre-Approval Policies and Procedures
   
 Item 16D. Exemptions from the Listing Standards for Audit Committees.
  
 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)***
 93




---



##### Table of Contents



4.3
    
    Basic Agreement to Delegate Services, dated January 30, 1995, between Internet Initiative
Japan Inc. and IIJ Media Communications Inc. (with English translation)***4.4
    
    Basic Agreement to Delegate Services, dated April 1, 1998, between Internet Initiative
Japan Inc. and Net Care, Inc. (with English translation)***4.5
    
    Individual Agreement on Entrustment of Business between Internet Initiative Japan Inc. and
Asia Internet Holding Co., Ltd., dated July 1, 2004 (with English translation)*4.6
    
    Lease Agreement, dated March 14, 2003, between Internet Initiative Japan and Mitsui
Fudosan Co., Ltd. (English translation)**4.7
    
    Sublease Agreements, dated March 15, 2003, between Internet Initiative Japan Inc. and
Crosswave Communications Inc., Crosswave Facilities Inc., IIJ Technology Inc., Net Care,
Inc. and IIJ Media Communications, Inc. (English translations)**4.8
    
    Pledge Agreement, dated March 14, 2003, among Internet Initiative Japan Inc., IBJ Leasing
Co., Ltd. and Nissay Leasing Company, Limited (English translation)**4.20
    
    Subscription Agreement, dated September 16, 2003, between Internet Initiative Japan 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 24, 2004, between Internet Initiative Japan
Inc. and outside directors*****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 July 23, 2004.(**)
    
    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 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. IIJ and each of Yasurou Tanahashi and Takashi Hiroi entered into an Agreement on Limited Liability, dated June 24, 2004, and each of Yoshifumi Nishikawa and Junnosuke Furukawa entered into Agreement on Limited Liability, dated June 29, 2005 between Internet Initiative Japan Inc. and outside director.  94




---



##### Table of Contents



SIGNATURE
  Internet Initiative Japan Inc.By:
    
    /s/ Koichi SuzukiName:
    
    Koichi SuzukiTitle:
    
    President, Chief Executive Officerand Representative DirectorDate: August 3, 2005
 95




---



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, 2004 and 2005
    
    F-4Consolidated Statements of Operations
for Each of the Three Years in the Period Ended March 31, 2005
    
    F-6Consolidated Statements of Shareholders Equity (Capital Deficiency)
for Each of the Three Years in the Period Ended March 31, 2005
    
    F-8Consolidated Statements of Cash Flows
for Each of the Three Years in the Period Ended March 31, 2005
    
    F-9Notes to Consolidated Financial Statements
    
    F-12
  F-1




---



##### Table of Contents



Report of Independent Registered Public Accounting Firm
 
    F-2




---



##### Table of Contents



F-3




---



##### Table of Contents



Internet Initiative Japan Inc. and Subsidiaries
 
 Consolidated Balance Sheets  March 31, 2004 and 2005
 Thousands ofU.S. DollarsThousands of Yen
    
    (Note 1)2004
    
    2005
    
    2005ASSETSCURRENT ASSETS:Cash and cash equivalents (Note 14)
    
    ¥
    12,284,239
    
    
    ¥
    5,286,477
    
    
    $
    49,305Accounts receivable, net of allowance for
doubtful accounts of ¥41,979 thousand
and ¥41,400 thousand ($386 thousand)
at March 31, 2004 and 2005, respectively
(Notes 3, 4 and 11)
    
    
    9,025,534
    
    
    
    7,407,439
    
    
    
    69,086Inventories
    
    
    438,435
    
    
    
    140,096
    
    
    
    1,307Prepaid expenses
    
    
    557,703
    
    
    
    604,935
    
    
    
    5,642Other current assets (Note 9)
    
    
    325,422
    
    
    
    108,228
    
    
    
    1,009Total current assets
    
    
    22,631,333
    
    
    
    13,547,175
    
    
    
    126,349INVESTMENTS IN AND ADVANCES TO
EQUITY METHOD INVESTEES, net of loan loss
valuation allowance of ¥31,378 thousand and ¥31,378
thousand ($292 thousand) at March 31, 2004 and 2005,
respectively (Notes 3 and 4)
    
    
    746,774
    
    
    
    713,607
    
    
    
    6,656OTHER INVESTMENTS (Notes 2, 8 and 14)
    
    
    7,931,893
    
    
    
    9,930,781
    
    
    
    92,620PROPERTY AND EQUIPMENTNet
(Notes 5 and 7)
    
    
    8,601,905
    
    
    
    9,722,366
    
    
    
    90,677INTANGIBLE ASSETSNet (Note 6)
    
    
    141,341
    
    
    
    561,211
    
    
    
    5,234GUARANTEE DEPOSITS (Notes 7 and 8)
    
    
    2,075,123
    
    
    
    2,050,665
    
    
    
    19,126OTHER ASSETS, net of allowance for doubtful
accounts of ¥419,248 thousand and ¥376,092
thousand ($3,508 thousand) at March 31, 2004
and 2005 respectively
(Notes 3, 10 and 14)
    
    
    608,556
    
    
    
    590,666
    
    
    
    5,509TOTAL
    
    ¥
    42,736,925
    
    
    ¥
    37,116,471
    
    
    $
    346,171
 F-4




---



##### Table of Contents



Internet Initiative Japan Inc. and Subsidiaries
 Consolidated Balance Sheets  March 31, 2004 and 2005
 Thousands ofU.S. DollarsThousands of Yen
    
    (Note 1)2004
    
    2005
    
    2005LIABILITIES AND SHAREHOLDERS EQUITYCURRENT LIABILITIES:Short-term borrowings (Note 8)
    
    ¥
    6,564,093
    
    
    ¥
    4,724,633
    
    
    $
    44,065Long-term borrowingscurrent portion
(Notes 8 and 14)
    
    
    1,548,246
    
    
    
    2,736,056
    
    
    
    25,518Payable under securities loan agreement (Note 8)
    
    
    
    
    
    
    1,729,520
    
    
    
    16,130Convertible notes (Notes 8 and 14)
    
    
    11,832,000
    
    
    
    
    
    
    
    Capital lease obligationscurrent portion (Note 7)
    
    
    2,387,754
    
    
    
    2,774,974
    
    
    
    25,881Accounts payable (Notes 4 and 11)
    
    
    7,187,976
    
    
    
    4,860,733
    
    
    
    45,334Accrued expenses
    
    
    454,366
    
    
    
    541,118
    
    
    
    5,047Other current liabilities
    
    
    483,925
    
    
    
    817,517
    
    
    
    7,625Total current liabilities
    
    
    30,458,360
    
    
    
    18,184,551
    
    
    
    169,600LONG-TERM BORROWINGS (Notes 8 and 14)
    
    
    2,308,019
    
    
    
    1,529,963
    
    
    
    14,269CAPITAL LEASE OBLIGATIONSNoncurrent (Note 7)
    
    
    2,880,298
    
    
    
    4,339,028
    
    
    
    40,469ACCRUED RETIREMENT AND PENSION COSTS
(Note 10)
    
    
    72,687
    
    
    
    143,346
    
    
    
    1,337OTHER NONCURRENT LIABILITIES (Note 9)
    
    
    161,122
    
    
    
    275,533
    
    
    
    2,570Total liabilities
    
    
    35,880,486
    
    
    
    24,472,421
    
    
    
    228,245MINORITY INTEREST
    
    
    642,311
    
    
    
    1,028,977
    
    
    
    9,597COMMITMENTS AND CONTINGENCIES
(Notes 4 and 13)SHAREHOLDERS EQUITY (Notes 11 and 12):Common stockauthorized, 75,520 shares;
issued and outstanding,
38,360 shares at March 31, 2004 and 2005
    
    
    13,765,372
    
    
    
    13,765,372
    
    
    
    128,384Additional paid-in capital
    
    
    23,637,628
    
    
    
    23,637,628
    
    
    
    220,459Accumulated deficit
    
    
    (37,340,321
    )
    
    
    (34,434,052
    )
    
    
    (321,153
    )Accumulated other comprehensive income
    
    
    6,195,449
    
    
    
    8,690,125
    
    
    
    81,049Treasury stock120 shares held by an equity
method investee
    
    
    (44,000
    )
    
    
    (44,000
    )
    
    
    (410
    )Total shareholders equity
    
    
    6,214,128
    
    
    
    11,615,073
    
    
    
    108,329TOTAL
    
    ¥
    42,736,925
    
    
    ¥
    37,116,471
    
    
    $
    346,171
  F-5

    (Concluded)




---



##### Table of Contents



Internet Initiative Japan Inc. and Subsidiaries
 
 Consolidated Statements of Operations  Three Years in the Period Ended March 31, 2005
  Thousands ofU.S. DollarsThousands of Yen
    
    (Note 1)2003
    
    2004
    
    2005
    
    2005REVENUES (Notes 4 and 11):Connectivity and value-added services:Dedicated access
    
    ¥
    13,814,977
    
    
    ¥
    12,862,132
    
    
    ¥
    11,372,701
    
    
    $
    106,069Dial-up access
    
    
    3,155,137
    
    
    
    3,088,498
    
    
    
    2,936,973
    
    
    
    27,392Value-added services
    
    
    3,602,847
    
    
    
    4,296,228
    
    
    
    5,004,730
    
    
    
    46,677Other
    
    
    1,725,736
    
    
    
    2,117,794
    
    
    
    3,169,413
    
    
    
    29,560Total
    
    
    22,298,697
    
    
    
    22,364,652
    
    
    
    22,483,817
    
    
    
    209,698Systems integration
    
    
    15,012,633
    
    
    
    11,847,687
    
    
    
    15,853,824
    
    
    
    147,863Equipment sales
    
    
    6,706,231
    
    
    
    4,567,123
    
    
    
    3,364,926
    
    
    
    31,383Total revenues
    
    
    44,017,561
    
    
    
    38,779,462
    
    
    
    41,702,567
    
    
    
    388,944COST AND EXPENSES:Cost of connectivity and value-added
services
(Notes 4, 7 and 11)
    
    
    20,386,887
    
    
    
    20,047,438
    
    
    
    19,483,890
    
    
    
    181,719Cost of systems integration
    
    
    13,090,220
    
    
    
    9,851,726
    
    
    
    12,200,137
    
    
    
    113,786Cost of equipment sales
    
    
    6,416,525
    
    
    
    4,346,243
    
    
    
    3,111,369
    
    
    
    29,018Total cost
    
    
    39,893,632
    
    
    
    34,245,407
    
    
    
    34,795,396
    
    
    
    324,523Sales and marketing (Note 15)
    
    
    3,176,165
    
    
    
    3,527,490
    
    
    
    2,794,561
    
    
    
    26,064General and administrative (Note 6)
    
    
    2,204,504
    
    
    
    2,098,481
    
    
    
    2,665,980
    
    
    
    24,865Research and development
    
    
    414,149
    
    
    
    357,968
    
    
    
    198,979
    
    
    
    1,856Total cost and expenses
    
    
    45,688,450
    
    
    
    40,229,346
    
    
    
    40,454,916
    
    
    
    377,308OPERATING INCOME (LOSS)
    
    
    (1,670,889
    )
    
    
    (1,449,884
    )
    
    
    1,247,651
    
    
    
    11,636OTHER INCOME (EXPENSES):Interest income
    
    
    67,446
    
    
    
    37,516
    
    
    
    12,877
    
    
    
    120Interest expense
    
    
    (732,831
    )
    
    
    (702,036
    )
    
    
    (685,857
    )
    
    
    (6,397
    )Foreign exchange gains (losses)
    
    
    (279,703
    )
    
    
    (6,493
    )
    
    
    5,958
    
    
    
    56Gain (loss) on other investments (Note 2)
    
    
    (277,162
    )
    
    
    1,412,858
    
    
    
    2,439,330
    
    
    
    22,751Gain arising from issuance of equity method
investees share
    
    
    
    
    
    
    16,088
    
    
    
    25,933
    
    
    
    242Othernet
    
    
    (47,183
    )
    
    
    224,287
    
    
    
    102,616
    
    
    
    957Other income (expenses)net
    
    
    (1,269,433
    )
    
    
    982,220
    
    
    
    1,900,857
    
    
    
    17,729INCOME (LOSS) FROM OPERATIONS BEFORE INCOME
TAX EXPENSE, MINORITY INTERESTS AND EQUITY IN
NET LOSS OF EQUITY METHOD INVESTEES
    
    
    (2,940,322
    )
    
    
    (467,664
    )
    
    
    3,148,508
    
    
    
    29,365INCOME TAX EXPENSE (Note 9)
    
    
    23,152
    
    
    
    32,536
    
    
    
    99,870
    
    
    
    931MINORITY INTERESTS IN (EARNINGS)
LOSSES OF SUBSIDIARIES
    
    
    153,251
    
    
    
    235,812
    
    
    
    (109,161
    )
    
    
    (1,018
    )FORWARD
    
    ¥
    (2,810,223
    )
    
    ¥
    (264,388
    )
    
    ¥
    2,939,477
    
    
    $
    27,416
 F-6

    (Continued)




---



##### Table of Contents



Internet Initiative Japan Inc. and Subsidiaries
 Consolidated Statements of Operations  Three Years in the Period Ended March 31, 2005
 Thousands ofU.S. DollarsThousands of Yen
    
    (Note 1)2003
    
    2004
    
    2005
    
    2005FORWARD
    
    ¥
    (2,810,223
    )
    
    ¥
    (264,388
    )
    
    ¥
    2,939,477
    
    
    $
    27,416EQUITY IN NET LOSS OF EQUITY
METHOD INVESTEES (Note 4):Equity method net loss
    
    
    (5,625,299
    )
    
    
    (286,317
    )
    
    
    (33,208
    )
    
    
    (310
    )Impairment loss on investment,
advance and deposits for Crosswave
    
    
    (7,153,087
    )
    
    
    (1,719,981
    )
    
    
    
    
    
    
    Total equity in net loss of
equity method investees
    
    
    (12,778,386
    )
    
    
    (2,006,298
    )
    
    
    (33,208
    )
    
    
    (310
    )NET INCOME (LOSS)
    
    ¥
    (15,588,609
    )
    
    ¥
    (2,270,686
    )
    
    ¥
    2,906,269
    
    
    $
    27,106WEIGHTED-AVERAGE NUMBER
OF COMMON SHARES
OUTSTANDING
    
    
    22,480
    
    
    
    31,711
    
    
    
    38,312
 Yen
    
    U.S. DollarsBASIC AND DILUTED
NET INCOME (LOSS)
PER COMMON SHARE
    
    ¥
    (693,443
    )
    
    ¥
    (71,606
    )
    
    ¥
    75,858
    
    
    $
    707
  F-7

    (Concluded)




---



##### Table of Contents



Internet Initiative Japan Inc. and Subsidiaries
 
 Consolidated Statements of Shareholders Equity (Capital Deficiency)  Three Years in the Period Ended March 31, 2005
 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, 2002
    
    
    22,480
    
    
    ¥
    7,082,336
    
    
    ¥
    17,068,353
    
    
    ¥
    (19,481,026
    )
    
    ¥
    3,055,618
    
    
    
    
    
    
    ¥
    7,725,281Net loss
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (15,588,609
    )
    
    
    
    
    
    
    
    
    
    
    (15,588,609
    )Other comprehensive loss, net of tax
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (2,141,008
    )
    
    
    
    
    
    
    (2,141,008
    )Total comprehensive loss
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (17,729,617
    )BALANCE, MARCH 31, 2003
    
    
    22,480
    
    
    
    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
    
    
    15,880
    
    
    
    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
    
    
    38,360
    
    
    
    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
    
    
    38,360
    
    
    ¥
    13,765,372
    
    
    ¥
    23,637,628
    
    
    ¥
    (34,434,052
    )
    
    ¥
    8,690,125
    
    
    ¥
    (44,000
    )
    
    ¥
    11,615,073
 Thousands of U.S. Dollars (Note 1)AccumulatedOtherAdditional
    
    
    
    
    
    ComprehensiveCommon
    
    Paid-in
    
    Accumulated
    
    Income
    
    TreasuryStock
    
    Capital
    
    Deficit
    
    (Note 12)
    
    Stock
    
    TotalBALANCE, MARCH 31, 2004
    
    $
    128,384
    
    
    $
    220,459
    
    
    $
    (348,259
    )
    
    $
    57,782
    
    
    $
    (410
    )
    
    $
    57,956Net income
    
    
    
    
    
    
    
    
    
    
    27,106
    
    
    
    
    
    
    
    
    
    
    
    27,106Other comprehensive income, net of tax
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    23,267
    
    
    
    
    
    
    
    23,267Total comprehensive income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    50,373BALANCE, MARCH 31, 2005
    
    $
    128,384
    
    
    $
    220,459
    
    
    $
    (321,153
    )
    
    $
    81,049
    
    
    $
    (410
    )
    
    $
    108,329
  F-8




---



##### Table of Contents



Internet Initiative Japan Inc. and Subsidiaries
 
 Consolidated Statements of Cash Flows  Three Years in the Period Ended March 31, 2005
 Thousands ofU.S. DollarsThousands of Yen
    
    (Note 1)2003
    
    2004
    
    2005
    
    2005OPERATING ACTIVITIES:Net income (loss)
    
    ¥
    (15,588,609
    )
    
    ¥
    (2,270,686
    )
    
    ¥
    2,906,269
    
    
    $
    27,106Adjustments to reconcile net income (loss)
to net cash provided by
operating activities:Depreciation and amortization
    
    
    3,580,212
    
    
    
    4,008,324
    
    
    
    4,193,093
    
    
    
    39,107Provision for retirement and
pension costs, less payments
    
    
    (20,240
    )
    
    
    (16,960
    )
    
    
    70,659
    
    
    
    659Provision for doubtful accounts and
advances
    
    
    84,339
    
    
    
    449,164
    
    
    
    24,781
    
    
    
    231Loss on disposal of property and
equipment
    
    
    112,052
    
    
    
    109,588
    
    
    
    143,887
    
    
    
    1,342Loss on disposal and impairment of
telephone rights
    
    
    
    
    
    
    48,201
    
    
    
    99,075
    
    
    
    924Losses (gains) on other investments
    
    
    277,162
    
    
    
    (1,412,858
    )
    
    
    (2,439,330
    )
    
    
    (22,751
    )Foreign exchange losses (gains)
    
    
    277,856
    
    
    
    5,124
    
    
    
    (15,466
    )
    
    
    (144
    )Gain arising from issuance of equiy
method investees share
    
    
    
    
    
    
    (16,088
    )
    
    
    (25,933
    )
    
    
    (242
    )Loss (gains) on retirement of convertible
notes
    
    
    
    
    
    
    (88,975
    )
    
    
    5,195
    
    
    
    48Equity method net loss
    
    
    5,625,299
    
    
    
    286,317
    
    
    
    33,208
    
    
    
    310Impairment loss on investment, advance
and deposits for Crosswave
    
    
    7,153,087
    
    
    
    1,719,981
    
    
    
    
    
    
    
    Minority interests in earnings (losses)
of subsidiaries
    
    
    (153,251
    )
    
    
    (235,812
    )
    
    
    109,161
    
    
    
    1,018Deferred income tax expense (benefit)
    
    
    (2,429
    )
    
    
    1,976
    
    
    
    (11,023
    )
    
    
    (103
    )Others
    
    
    5,256
    
    
    
    38,539
    
    
    
    79,247
    
    
    
    739Changes in operating assets and
liabilities:Decrease (increase) in accounts
receivable
    
    
    (1,351,380
    )
    
    
    784,728
    
    
    
    1,607,692
    
    
    
    14,994Decrease (increase) in
inventories, prepaid expenses and
other current and noncurrent assets
    
    
    3,944
    
    
    
    (275,103
    )
    
    
    228,358
    
    
    
    2,130Increase (decrease) in accounts payable
    
    
    1,245,431
    
    
    
    (1,132,209
    )
    
    
    (2,307,729
    )
    
    
    (21,523
    )Increase in income taxes payable
    
    
    2,711
    
    
    
    2,041
    
    
    
    97,913
    
    
    
    913Increase (decrease) in accrued
expenses and other current
and noncurrent liabilities
    
    
    330,252
    
    
    
    (81,926
    )
    
    
    439,440
    
    
    
    4,099Net cash provided by
operating
activities(Forward)
    
    ¥
    1,581,692
    
    
    ¥
    1,923,366
    
    
    ¥
    5,238,497
    
    
    $
    48,857
 F-9

    (Continued)




---



##### Table of Contents



Internet Initiative Japan Inc. and Subsidiaries
 Consolidated Statements of Cash Flows  Three Years in the Period Ended March 31, 2005
 Thousands ofU.S. DollarsThousands of Yen
    
    (Note 1)2003
    
    2004
    
    2005
    
    2005Net cash provided by
operating activities(Forward)
    
    ¥
    1,581,692
    
    
    ¥
    1,923,366
    
    
    ¥
    5,238,497
    
    
    $
    48,857INVESTING ACTIVITIES:Purchases of property and equipment
    
    
    (1,315,390
    )
    
    
    (1,657,302
    )
    
    
    (577,133
    )
    
    
    (5,383
    )Proceeds from sale-leaseback
    
    
    66,940
    
    
    
    
    
    
    
    
    
    
    
    Purchase of other investments
    
    
    (51,671
    )
    
    
    (325,665
    )
    
    
    (12,566
    )
    
    
    (117
    )Purchase of subsidiary stock
from minority shareholders
    
    
    
    
    
    
    
    
    
    
    (61,680
    )
    
    
    (575
    )Proceeds from sales of other investments
    
    
    26,078
    
    
    
    2,170,584
    
    
    
    2,976,017
    
    
    

    27,756Deposit of restricted cash for, purchase of
stock right of and advance to Crosswave
    
    
    (5,056,250
    )
    
    
    (1,719,981
    )
    
    
    
    
    
    
    Payments of guarantee deposits
    
    
    (1,519,264
    )
    
    
    (9,114
    )
    
    
    (48,683
    )
    
    
    (454
    )Refund of guarantee deposits
    
    
    31,353
    
    
    
    683,132
    
    
    
    71,850
    
    
    
    670Payment for refundable insurance policies
    
    
    (19,096
    )
    
    
    (21,007
    )
    
    
    (25,231
    )
    
    
    (235
    )Refund from insurance policies
    
    
    8,392
    
    
    
    7,432
    
    
    
    18,348
    
    
    
    171Acquisition of business
    
    
    
    
    
    
    
    
    
    
    (375,123
    )
    
    
    (3,499
    )Other
    
    
    (49,013
    )
    
    
    19,458
    
    
    
    8,204
    
    
    
    77Net cash provided by (used in)
investing activities
    
    
    (7,877,921
    )
    
    
    (852,463
    )
    
    
    1,974,003
    
    
    
    18,411FINANCING ACTIVITIES:Proceeds from issuance of long-term
borrowings
    
    
    2,000,000
    
    
    
    400,000
    
    
    
    2,250,000
    
    
    
    20,985Repayments of long-term borrowings
    
    
    (1,400,000
    )
    
    
    (1,943,735
    )
    
    
    (1,840,246
    )
    
    
    (17,163
    )Proceeds from securities loan agreement
    
    
    
    
    
    
    
    
    
    
    2,546,320
    
    
    
    23,749Repayments of securities loan agreement
    
    
    
    
    
    
    
    
    
    
    (816,800
    )
    
    
    (7,618
    )Principal payments under capital leases
    
    
    (2,475,433
    )
    
    
    (2,733,012
    )
    
    
    (2,867,625
    )
    
    
    (26,745
    )Net increase (decrease) in short-term
borrowings
    
    
    1,003,367
    
    
    
    1,740,495
    
    
    
    (1,839,460
    )
    
    
    (17,156
    )Repurchase of convertible notes
    
    
    
    
    
    
    (3,047,460
    )
    
    
    (745,488
    )
    
    
    (6,953
    )Redemption of convertible notes
    
    
    
    
    
    
    
    
    
    
    (11,088,000
    )
    
    
    (103,414
    )Proceeds from issuance of common stock,
net of issuance cost
    
    
    
    
    
    
    13,252,311
    
    
    
    
    
    
    
    Proceeds from issuance of subsidiary
stock to minority shareholders
    
    
    
    
    
    
    
    
    
    
    188,632
    
    
    
    1,759Net cash provided by (used in)
financing activities
    
    
    (872,066
    )
    
    
    7,668,599
    
    
    
    (14,212,667
    )
    
    
    (132,556
    )EFFECT OF EXCHANGE RATE
CHANGES ON CASH
    
    
    (289,272
    )
    
    
    (43,615
    )
    
    
    2,405
    
    
    
    23NET INCREASE (DECREASE) IN CASH
AND CASH EQUIVALENTS
    
    
    (7,457,567
    )
    
    
    8,695,887
    
    
    
    (6,997,762
    )
    
    
    (65,265
    )CASH AND CASH EQUIVALENTS, BEGINNING OF YEAR
    
    
    11,045,919
    
    
    
    3,588,352
    
    
    
    12,284,239
    
    
    
    114,570CASH AND CASH EQUIVALENTS,
END OF YEAR
    
    ¥
    3,588,352
    
    
    ¥
    12,284,239
    
    
    ¥
    5,286,477
    
    
    $
    49,305
 F-10

    (Continued)




---



##### Table of Contents



Internet Initiative Japan Inc. and Subsidiaries
 Consolidated Statements of Cash Flows
Three Years in the Period Ended March 31, 2005
 Thousands ofU.S. DollarsThousands of Yen
    
    (Note 1)2003
    
    2004
    
    2005
    
    2005ADDITIONAL CASH FLOW
INFORMATION:Interest paid
    
    ¥
    633,649
    
    
    ¥
    625,248
    
    
    ¥
    613,817
    
    
    $
    5,725Income taxes paid
    
    
    22,650
    
    
    
    48,413
    
    
    
    29,227
    
    
    
    273NONCASH INVESTING AND
FINANCING ACTIVITIES:Acquisition of assets by
entering into capital leases
    
    
    3,578,084
    
    
    
    1,865,309
    
    
    
    4,433,906
    
    
    
    41,353Exchange of common stock
investment due to merger:Market value of common
shares acquired
    
    
    55,448
    
    
    
    
    
    
    
    37,950
    
    
    
    354Cost of investment
    
    
    132,372
    
    
    
    
    
    
    
    2,500
    
    
    
    23Acquisition of business:Assets acquired:Capital lease assets
    
    
    
    
    
    
    
    
    
    
    808,719
    
    
    
    7,543Goodwill and intangible assets
    
    
    
    
    
    
    
    
    
    
    370,741
    
    
    
    3,458Other assets
    
    
    
    
    
    
    
    
    
    
    22,547
    
    
    
    210Liabilities assumed:Capital lease obligations
    
    
    
    
    
    
    
    
    
    
    826,884
    
    
    
    7,712
  F-11

    (Concluded)




---



##### Table of Contents





Internet Initiative Japan Inc. and Subsidiaries





Notes to Consolidated Financial Statements


1. DESCRIPTION OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
    
 F-12




---



##### Table of Contents



Certain Significant Risks and Uncertainties
    F-13




---



##### Table of Contents



Summary of Significant Accounting Policies
 Basis of Presentation
  Translation into U.S. Dollars
 Consolidation
  Use of Estimates
 Revenue Recognition
  
 F-14




---



##### Table of Contents



Cash and cash equivalents
 Allowance for Doubtful Accounts
 Other Investments
   Inventories
 
 F-15




---



##### 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
 Income Taxes
 Foreign Currency Transactions
 
 F-16




---



##### Table of Contents



Derivative Financial Instruments
 Stock-based Compensation
  Thousands ofThousands of Yen
    
    U.S. Dollars2003
    
    2004
    
    2005
    
    2005Net income (loss):As reported
    
    ¥
    (15,588,609
    )
    
    ¥
    (2,270,686
    )
    
    ¥
    2,906,269
    
    
    $
    27,106Addition: Total
stock-based employee
compensation
determined under
fair value based
method for all awards,
net of tax
    
    
    (267,387
    )
    
    
    (32,020
    )
    
    
    
    
    
    
    Pro forma
    
    ¥
    (15,855,996
    )
    
    ¥
    (2,302,706
    )
    
    ¥
    2,906,269
    
    
    $
    27,106
 Yen
    
    U.S. Dollars2003
    
    2004
    
    2005
    
    2005Basic and diluted net income (loss)
per common shares:As reported
    
    ¥
    (693,443
    )
    
    ¥
    (71,606
    )
    
    ¥
    75,858
    
    
    $
    707Pro forma
    
    
    (705,338
    )
    
    
    (72,615
    )
    
    
    75,858
    
    
    
    707
 Advertising
 Basic and Diluted Net Income (Loss) per Share
 F-17




---



##### Table of Contents



Year Ended March 312003
    
    2004
    
    2005Shares issuable under stock options
    
    
    675
    
    
    
    615
    
    
    
    545Shares issuable related to convertible
notes on an as-if-converted basis
    
    
    625
    
    
    
    595
    
    
    
    
 Other Comprehensive Income (Loss)
 Segment Reporting 
  New Accounting Standards
    F-18




---



##### Table of Contents



F-19




---



##### Table of Contents



2. OTHER INVESTMENTS
  Thousands of YenUnrealized
    
    Unrealized
    
    FairCost
    
    Gains
    
    Losses
    
    ValueMarch 31, 2004Available-for-saleEquity
securities
    
    ¥
    351,120
    
    
    ¥
    6,225,560
    
    
    ¥
    3,695
    
    
    ¥
    6,572,985March 31, 2005Available-for-saleEquity
securities
    
    ¥
    215,258
    
    
    ¥
    8,738,792
    
    
    ¥
    5,882
    
    
    ¥
    8,948,168
 Thousands of U.S. DollarsUnrealized
    
    Unrealized
    
    FairCost
    
    Gains
    
    Losses
    
    ValueMarch 31, 2005Available-for-saleEquity
securities
    
    $
    2,008
    
    
    $
    81,503
    
    
    $
    55
    
    
    $
    83,456
  Thousands of YenLess than12 Months
    
    12 Months or More
    
    TotalFair
    
    Unrealized
    
    Fair
    
    Unrealized
    
    Fair
    
    UnrealizedValue
    
    Losses
    
    Value
    
    Losses
    
    Value
    
    LossesMarch 31, 2004Marketable equity
securities
    
    ¥
    
    
    
    ¥
    
    
    
    ¥
    10,300
    
    
    ¥
    3,695
    
    
    ¥
    10,300
    
    
    ¥
    3,695March 31, 2005Marketable equity
securities
    
    ¥
    68,742
    
    
    ¥
    5,882
    
    
    ¥
    
    
    
    ¥
    
    
    
    ¥
    68,742
    
    
    ¥
    5,882
 Thousands of U.S. DollarsLess than12 Months
    
    12 Months or More
    
    TotalFair
    
    Unrealized
    
    Fair
    
    Unrealized
    
    Fair
    
    UnrealizedValue
    
    Losses
    
    Value
    
    Losses
    
    Value
    
    LossesMarch 31, 2005Marketable equity securities
    
    $
    641

    
    
    $
    55
    
    
    $
    
    
    
    $
    
    
    
    $
    641
    
    
    $
    55
   F-20




---



##### Table of Contents



3.
    
    ALLOWANCE FOR DOUBTFUL ACCOUNTS AND ADVANCES
  Thousands of YenProvision forBalance at
    
    
    
    DoubtfulBeginning of
    
    Credits
    
    Accounts and
    
    Balance atYear
    
    Charged Off
    
    Advances
    
    End of YearYear ended March 31, 2003
    
    ¥
    147,874
    
    
    ¥
    (106,859
    )
    
    ¥
    84,339
    
    
    ¥
    125,354Year ended March 31, 2004
    
    ¥
    125,354
    
    
    ¥
    (81,913
    )
    
    ¥
    449,164
    
    
    ¥
    492,605Year ended March 31, 2005
    
    ¥
    492,605
    
    
    ¥
    (68,516
    )
    
    ¥
    24,781
    
    
    ¥
    448,870
 Thousands of U.S. DollarsProvision forBalance at
    
    
    
    
    
    DoubtfulBeginning of
    
    Credits
    
    Accounts and
    
    Balance atYear
    
    Charged Off
    
    Advances
    
    End of YearYear ended March 31, 2005
    
    $
    4,594
    
    
    $
    (639
    )
    
    $
    231
    
    
    $
    4,186
  F-21




---



##### 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),
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).As of March 31, 2005, AyalaPort was no longer an equity method investee due to dilution
of the Companys ownership and loss of ability to exercise significant influence.The Company had no guarantees or commitments to equity method investees as of March 31,
2005.The aggregate amounts of balances and transactions of the Company with these equity method
investees other than Crosswave as of March 31, 2004 and 2005 and for each of the three years
in the period ended March 31, 2005 are summarized as follows:
 Thousands ofThousands of Yen
    
    U.S. Dollars2003
    
    2004
    
    2005
    
    2005Accounts receivable
    
    ¥
    
    
    
    ¥
    95,555
    
    
    ¥
    118,130
    
    
    $
    1,102Accounts payable
    
    
    
    
    
    
    14,152
    
    
    
    96,727
    
    
    
    902Revenues
    
    
    1,460,123
    
    
    
    1,329,482
    
    
    
    1,245,361
    
    
    
    11,615Costs and expenses
    
    
    1,402,293
    
    
    
    1,245,607
    
    
    
    1,145,834
    
    
    
    10,687
   Thousands ofThousands of Yen
    
    U.S. Dollars2004
    
    
    
    
    
    2005
    
    2005AIH
    
    
    26.69
    %
    
    ¥
    362,134
    
    
    
    26.69
    %
    
    ¥
    275,386
    
    
    $
    2,568Multifeed
    
    
    28.30
    
    
    
    197,927
    
    
    
    28.58
    
    
    
    242,719
    
    
    
    2,264Atom
    
    
    40.00
    
    
    
    148,409
    

    
    
    40.00
    
    
    
    155,837
    
    
    
    1,454Other
    
    
    
    
    
    
    38,304
    
    
    
    
    
    
    
    39,665
    
    
    
    370Total
    
    
    
    
    
    ¥
    746,774
    
    
    
    
    
    
    ¥
    713,607
    
    
    $
    6,656
    F-22




---



##### Table of Contents



F-23




---



##### Table of Contents



Thousands of Yen2003
    
    2004Accounts receivable
    
    ¥
    
    
    
    ¥
    19,095Revenues
    
    
    2,641,438
    
    
    
    1,196,080Costs and expenses
    
    
    6,199,229
    
    
    
    4,816,146
     Thousand of Yen2003(Unaudited)Revenues
    
    ¥
    18,449,852Costs and expenses
    
    
    31,083,502Operating loss
    
    
    (12,633,650
    )Other income (expense)net
    
    
    (2,030,892
    )Loss before minority interests
    
    
    (14,664,542
    )Minority interests in consolidated subsidiaries
    
    
    13,666Net loss
    
    ¥
    (14,650,876
    )
 5.
    
    PROPERTY AND EQUIPMENTProperty and equipment as of March 31, 2004 and 2005 consisted of the following:
 Thousands ofThousands of Yen
    
    U.S. Dollars2004
    
    2005
    
    2005Data communications equipment
    
    ¥
    945,006
    
    
    ¥
    543,365
    
    
    $
    5,068Office and other equipment
    
    
    659,307
    
    
    
    904,532
    
    
    
    8,436Leasehold improvements
    
    
    838,592
    
    
    
    823,313
    
    
    
    7,679Purchased software
    
    
    4,890,797
    
    
    
    4,917,483
    
    
    
    45,863Capitalized leases, primarily data
communications equipment
    
    
    10,420,774
    
    
    
    13,251,657
    
    
    
    123,593Total
    
    
    17,754,476
    
    
    
    20,440,350
    
    
    
    190,639Less accumulated depreciation
and amortization
    
    
    (9,152,571
    )
    
    
    (10,717,984
    )
    
    
    (99,962
    )Property and equipmentnet
    
    ¥
    8,601,905
    
    
    ¥
    9,722,366
    
    
    $
    90,677
 F-24




---



##### Table of Contents



6.
    
    GOODWILL AND INTANGIBLE ASSETS
  Thousands ofThousands of Yen
    
    U.S. Dollars2004
    
    2005
    
    2005Non-amortized intangible assets:Telephone rights
    
    ¥
    113,813
    
    
    ¥
    14,616
    
    
    $
    136Customer relationship
    
    
    
    
    
    
    113,360
    
    
    

    1,057Goodwill
    
    
    27,528
    
    
    
    433,235
    
    
    
    4,041Total intangible assets
    
    ¥
    141,341
    
    
    ¥
    561,211
    
    
    $
    5,234
      F-25




---



##### Table of Contents



7.
    
    LEASES
  Operating Leases
  Thousands ofThousands of Yen
    
    U.S. Dollars2004
    
    2005
    
    2005Head office
    
    ¥
    1,705,036
    
    
    ¥
    1,705,036
    
    
    $
    15,902Sales and subsidiaries offices
    
    
    324,003
    
    
    
    296,971
    
    
    
    2,770Others
    
    
    46,084
    
    
    
    48,658
    
    
    
    454Total refundable guarantee deposits
    
    ¥
    2,075,123
    
    
    ¥
    2,050,665
    
    
    $
    19,126




---



##### 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 31:2006
    
    ¥
    86,804
    
    
    ¥
    317,116
    
    
    ¥
    3,003,672
    
    
    $
    810
    
    
    $
    2,957
    
    
    $
    28,0142007
    
    
    29,491
    
    
    
    243,457
    
    
    
    2,199,181
    
    
    
    275
    
    
    
    2,271
    
    
    
    20,5112008
    
    
    
    
    
    
    116,283
    
    
    
    1,468,852
    
    
    
    
    
    
    
    1,084
    
    
    
    13,6992009
    
    
    
    
    
    
    62,179
    
    
    
    860,403
    
    
    
    
    
    
    
    580
    
    
    
    8,0252010
    
    
    
    
    
    
    62,178
    
    
    
    151,110
    
    
    
    
    
    
    
    580
    
    
    
    1,4092011 and thereafter
    
    
    
    
    
    
    83,398
    
    
    
    15,061
    
    
    
    
    
    
    
    778
    
    
    
    141Total minimum lease payments
    
    ¥
    116,295
    
    
    ¥
    884,611
    
    
    ¥
    7,698,279
    
    
    $
    1,085
    
    
    $
    8,250
    
    
    $
    71,799Less amounts representing interest
    
    
    
    
    
    
    
    
    
    
    584,277
    
    
    
    
    
    
    
    
    
    
    
    5,449Present value of net minimum capital
lease payments
    
    
    
    
    
    
    
    
    
    
    7,114,002
    
    
    
    
    
    
    
    
    
    
    
    66,350Less current portion
    
    
    
    
    
    
    
    
    
    
    2,774,974
    
    
    
    
    
    
    
    
    
    
    
    25,881Noncurrent portion
    
    ¥
    
    
    
    ¥
    
    
    
    ¥
    4,339,028
    
    
    $
    
    
    
    $
    
    
    
    $
    40,469
 8.
    
    BORROWINGS AND CONVERTIBLE NOTES




---



##### Table of Contents



Long-term borrowings as of March 31, 2004 and 2005 consisted of the following:
 Thousands ofThousands of Yen
    
    U.S. Dollars2004
    
    2005
    
    2005Unsecured long-term loans payable to
banks, maturing at various dates
through 2007 (see Note 14). Weighted
average interest rates were 3.255 percent
at March 31, 2005.
    
    ¥
    
    
    
    ¥
    208,000
    
    
    $
    1,940Secured long-term loans payable to
banks, maturing at various dates
through 2006 (see Note 14). Weighted
average interest rates were 1.686 percent
and 1.789 percent at March 31, 2004
and 2005, respectively.
    
    
    1,000,000
    
    
    
    2,350,000
    
    
    
    21,917Secured long-term loans payable to
banks, maturing at various dates through
2007 (see Note 14). Interest is payable
at a variable rate based on TIBOR which
was 0.09 percent and 0.1 percent as of
March 31, 2004 and 2005, respectively.
Weighted average interest rates were
0.987 percent and 1.137 percent
at March 31, 2004 and 2005, respectively.
    
    
    2,400,000
    
    
    
    1,400,000
    
    
    
    13,057Long-term installments loan payable at
various dates through 2007 (see Note 14).
Weighted average interest rates were 2.55 percent
and 2.55 percent at March 31, 2004
and 2005, respectively.
    
    
    456,265
    
    
    
    308,019
    
    
    
    2,873Total
    
    
    3,856,265
    
    
    
    4,266,019
    
    
    
    39,787Less current portion
    
    
    (1,548,246
    )
    
    
    (2,736,056
    )
    
    
    (25,518
    )Long-term borrowings, less current
portion
    
    ¥
    2,308,019
    
    
    ¥
    1,529,963
    
    
    $
    14,269
 The Company entered into interest rate swap contracts to manage its interest rate exposure
resulting in a fixed interest rate for a portion of its long-term debt. The effective
weighted average interest rates for ¥2,400,000 thousand and ¥ 1,400,000 thousand ($ 13,057
thousand) of the long-term loan outstanding at March 31, 2004 and 2005 after giving effect to
such swap agreements were 1.748 percent and 1.926 percent per annum, respectively (see Note
14).On March 14, 2003, the Company entered into a long-term installment loan agreement with a
leasing company to finance the payment for rental deposits given to other lessor for its new
head office. The principal of the loan is ¥308,019 thousand ($2,873 thousand) and the loan is
secured by a first priority pledge against a claim for the guarantee deposits of ¥1,705,036
thousand ($15,902 thousand) at March 31, 2005.Substantially all short-term and long-term bank borrowings are made under agreements which, as
is customary in Japan, provide that under certain conditions the bank may require the borrower
to provide collateral or guarantees with respect to the borrowings and that the bank may treat
any collateral, whether furnished as security for short-term or long-term loans or otherwise,
as collateral for all indebtedness to such bank. Also, provisions of certain loan agreements
grant certain rights of possession to the lenders in the event of default. The Company
provided banks with collateral for outstanding loans by means of establishing a second
priority pledge against the refundable guarantee deposits of ¥1,705,036 thousand ($15,902
thousand) at March 31, 2005.
 F-28




---



##### Table of Contents



Annual maturities of long-term borrowings outstanding as of March 31, 2005 are as
follows:
 Year Ending
    
    
    
    
    
    Thousands ofMarch 31
    
    Thousands of Yen
    
    U.S. Dollars2006
    
    ¥
    2,736,056
    
    
    $
    25,5182007
    
    
    1,489,963
    
    
    
    13,8962008
    
    
    40,000
    
    
    
    373Total
    
    ¥
    4,266,019
    
    
    $
    39,787
 The Company entered into bank overdraft agreements with certain Japanese banks for which the
unused balance outstanding as of March 31, 2005 was ¥1,890,367 thousand ($17,631 thousand).The 1.750 percent unsecured yen convertible notes due March 2005 in the aggregate principal
amount of ¥15,000,000 thousand were issued in April 11, 2000. The notes were convertible at
the option of the holders at ¥19,875 thousand per share at any time on or before March 15,
2005. The notes were redeemable at the Companys option at any time before March 15, 2005,
in whole or in part, at par with unpaid and accrued interest; provided that the closing
trading price for the Companys shares for a certain period prior to giving notice of
redemption is of at least 140 percent of the conversion price.In October and November 2003, IIJ repurchased a portion of its 1.750 percent unsecured yen
convertible notes, with an aggregate face value of ¥3,168,000 thousand, for ¥3,047,460
thousand in the open market, resulting in realized gain of ¥120,540 thousand. A portion of
deferred issuance cost, amounting to ¥31,565 thousand, corresponding to the repurchased
convertible notes was charged to income and was offset against the gain. The net realized
gain on retirement of these convertible notes was presented as other income.In June 2004, IIJ repurchased a portion of its 1.750 percent unsecured yen convertible notes,
with an aggregate face value of ¥744,000 thousand ($6,939 thousand), for ¥745,488 thousand
($6,953 thousand) in the open market, resulting in realized loss of ¥1,488 thousand ($14
thousand). A portion of deferred issuance cost, amounting to ¥3,707 thousand ($35 thousand),
corresponding to the repurchased convertible notes was charged to loss upon redemption. The
net realized loss on retirement of these convertible notes was presented as other expense.In March 2005, IIJ redeemed the remainder of unsecured yen convertible notes amounting
to ¥11,088,000 thousand ($103,414 thousand).The Company entered into a securities loan agreement with a certain Japanese financial
institution in August 2004. The Company lent ¥2,189,600 thousand ($20,422 thousand) of
available-for-sale securities to the financial institution as of March 31, 2005, and the
Company received ¥1,729,520 thousand ($16,130 thousand) of cash in return. The agreement
requires the Company to provide certain marketable securities as collateral at the
commencement of the transaction. The Company is required to make a partial repayment or
obtain additional borrowings depending on the market value of securities pledged. These
transactions were accounted for as secured borrowings and the cash received was recorded as
payables under securities loan agreement and securities lent were recorded as other
investments. The Company paid the interest on the payables with a variable rate of LIBOR plus
0.56 percent. The interest rate was 0.6349 percent as of March 31, 2005.
 F-29




---



##### Table of Contents



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 years ended March 31, 2003 and 2004 and 41 percent for the
year ended March 31, 2005. Total income tax recognized for the years ended March 31, 2003,
2004 and 2005 are applicable to the following:
 Thousands ofThousands of Yen
    
    U.S. Dollars2003
    
    2004
    
    2005
    
    2005Income tax expense (benefit):Current
    
    ¥
    25,581
    
    
    ¥
    30,560
    
    
    ¥
    110,893
    
    
    $
    1,034Deferred (benefit)
    
    
    (2,429
    )
    
    
    1,976
    
    
    
    (11,023
    )
    
    
    (103
    )Total income tax expense
    
    ¥
    23,152
    
    
    ¥
    32,536
    
    
    ¥
    99,870
    
    
    $
    931
 F-30




---



##### Table of Contents



Income (loss) from operations before income tax expense, minority interests and equity in net
loss of equity method investees consists of the following components:
 Thousands ofThousands of Yen
    
    U.S. Dollars2003
    
    2004
    
    2005
    
    2005Domestic
    
    ¥
    (2,824,286
    )
    
    ¥
    (535,648
    )
    
    ¥
    3,168,974
    
    
    $
    29,556Foreign
    
    
    (116,036
    )
    
    
    67,984
    
    
    
    (20,466
    )
    
    
    (191
    )Total
    
    ¥
    (2,940,322
    )
    
    ¥
    (467,664
    )
    
    ¥
    3,148,508
    
    
    $
    29,365
 Net deferred income tax assets and liabilities are reflected on the consolidated balance sheets
under captions of other current assets in the amount of ¥26,399 thousand ($246 thousand) and
other noncurrent liabilities in the amount of ¥7,748 thousand ($72 thousand) at March 31, 2005.The approximate effect of temporary differences and carryforwards giving rise to deferred tax
balances at March 31, 2004 and 2005 was as follows:
 Thousands ofThousands of Yen
    
    U.S. Dollars2004
    
    2005
    
    2005Deferred
    
    Deferred
    
    Deferred
    
    Deferred
    
    Deferred
    
    DeferredTax
    
    Tax
    
    Tax
    
    Tax
    
    Tax
    
    TaxAssets
    
    Liabilities
    
    Assets
    
    Liabilities
    
    Assets
    
    LiabilitiesUnrealized gains on
available-for-sale securities
    
    ¥
    
    
    
    ¥
    2,553,894
    
    
    ¥
    
    
    
    ¥
    3,580,494
    
    
    $
    
    
    
    $
    33,394Valuation of limited partnership
investments for tax purpose
    
    
    
    
    
    
    39,374
    
    
    
    
    
    
    
    35,014
    
    
    
    
    
    
    
    326Capitalized leases
    
    
    46,666
    
    
    
    
    
    
    
    74,621
    
    
    
    
    
    
    
    696
    
    
    
    Accrued expenses
    
    
    206,437
    
    
    
    
    
    
    
    185,732
    
    
    
    
    
    
    
    1,732
    
    
    
    Retirement and pension cost
    
    
    26,093
    
    
    
    
    
    
    
    58,885
    
    
    
    
    
    
    
    549
    
    
    
    Convertible notes issue cost
    
    
    
    
    
    
    32,223
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Stock issue cost
    
    
    31,095
    
    
    
    
    
    
    
    15,548
    
    
    
    
    
    
    
    145
    
    
    
    Allowance for doubtful accounts
    
    
    1,476,628
    
    
    
    
    
    
    
    1,461,058
    
    
    
    
    
    
    
    13,627
    
    
    
    Depreciation
    
    
    32,147
    
    
    
    
    
    
    
    25,699
    

    
    
    
    
    
    
    240
    
    
    
    Net loss on other investment
    
    
    81,178
    
    
    
    
    
    
    
    92,080
    
    
    
    
    
    
    
    859
    
    
    
    Operating loss carryforward
    
    
    11,331,442
    
    
    
    
    
    
    
    9,902,013
    
    
    
    
    
    
    
    92,352
    
    
    
    Other
    
    
    38,255
    
    
    
    4,523
    
    
    
    261,843
    
    
    
    27,563
    
    
    
    2,442
    
    
    
    257Total
    
    
    13,269,941
    
    
    
    2,630,014
    
    
    
    12,077,479
    
    
    
    3,643,071
    
    
    
    112,642
    
    
    
    33,977Valuation allowance
    
    
    (10,639,927
    )
    
    
    
    
    
    
    (8,415,757
    )
    
    
    
    
    
    
    (78,491
    )
    
    
    Total
    
    ¥
    2,630,014
    
    
    ¥
    2,630,014
    
    
    ¥
    3,661,722
    
    
    ¥
    3,643,071
    
    
    $
    34,151
    
    
    $
    33,977
 As of March 31, 2004 and 2005, the valuation allowance for deferred tax assets has been provided
at amounts which are not considered more likely than not to be realized. The net changes in the
valuation allowance for deferred tax assets were an increase of ¥10,252,616 thousand, a decrease
of ¥1,864,583 thousand and a decrease of ¥2,224,170 thousand ($20,744 thousand) for the years
ended March 31, 2003, 2004 and 2005, respectively.
 F-31




---



##### Table of Contents



Year Ending
    
    
    
    
    
    Thousands ofMarch 31
    
    Thousands of Yen
    
    U.S. Dollars2006
    
    ¥
    817,864
    
    
    $
    7,6282007
    
    
    
    
    
    
    2008
    
    
    
    
    
    
    2009
    
    
    951,335
    
    
    
    8,8732010 and thereafter
    
    
    22,363,499
    
    
    
    208,576Total
    
    ¥
    24,132,698
    
    
    $
    225,077
  Thousands ofThousands of Yen
    
    U.S. Dollars2003
    
    2004
    
    2005
    
    2005Amount computed by using
normal Japanese statutory
tax rate
    
    ¥
    (1,234,935
    )
    
    ¥
    (196,419
    )
    
    ¥
    1,290,888
    
    
    $
    12,040Increase (decrease) in taxes
resulting from:Expenses not deductible for
tax purpose
    
    
    37,324
    
    
    
    11,080
    
    
    
    34,820
    
    
    
    325Inhabitant tax-per capital
    
    
    25,581
    
    
    
    30,560
    
    
    
    23,410
    
    
    
    218Increase in valuation allowance
against current year
operating loss
    
    
    9,416,442
    
    
    
    454,009
    
    
    
    261,380
    
    
    
    2,438Realization of tax benefit of
operating loss carryforwards
    
    
    (28,091
    )
    
    
    (51,994
    )
    
    
    (1,426,755
    )
    
    
    (13,309
    )Tax benefit on losses of
equity method investee
    
    
    
    
    
    
    (80,355
    )
    
    
    
    
    
    
    Expiration of operating loss
carryforwards
    
    
    
    
    
    
    611,498
    
    
    
    
    
    
    
    Effect of change in tax rate
    
    
    327,811
    
    
    
    (42,034
    )
    
    
    
    
    
    
    Tax benefit on losses of
Crosswave
    
    
    (8,550,718
    )
    
    
    (722,098
    )
    
    
    
    
    
    
    Othernet
    
    
    29,738
    
    
    
    18,289
    
    
    
    (83,873
    )
    
    
    (781
    )Income tax expense as reported
    
    ¥
    23,152
    
    
    ¥
    32,536
    
    
    ¥
    99,870
    
    
    $
    931




---



##### Table of Contents



10. RETIREMENT AND PENSION PLANS
      Thousands ofThousands of Yen
    
    U.S. Dollars2003
    
    2004
    
    2005
    
    2005Service cost
    
    ¥
    142,432
    
    
    ¥
    150,149
    
    
    ¥
    221,132
    
    
    $
    2,062Interest cost
    
    
    9,433
    
    
    
    8,809
    
    
    
    14,944
    
    
    
    139Expected return on plan assets
    
    
    (8,499
    )
    
    
    (11,722
    )
    
    
    (13,129
    )
    
    
    (122
    )Amortization of transition
obligation
    
    
    402
    
    
    
    402
    
    
    
    402
    
    
    
    4Recognized net actuarial loss
    
    
    509
    
    
    
    575
    
    
    
    8,262
    
    
    
    77Net periodic pension cost
    
    ¥
    144,277
    
    
    ¥
    148,213
    
    
    ¥
    231,611
    
    
    $
    2,160




---



##### Table of Contents



Thousands ofThousands of Yen
    
    
    U.S. Dollars2004
    
    
    2005
    
    
    2005Change in benefit obligation:Benefit obligation at beginning of year
    ¥
    
    587,217
    
    ¥
    
    933,969
    
    $
    
    8,711Service cost
    
    
    150,149
    
    
    
    221,132
    
    
    
    2,062Interest cost
    
    
    8,809
    
    
    
    14,944
    
    
    
    139Actuarial loss (gain)
    
    
    207,133
    
    
    
    (558
    )
    
    
    (4
    )Benefit paid
    
    
    (19,339
    )
    
    
    (29,247
    )
    
    
    (273
    )Benefit obligation at end of year
    ¥
    
    933,969
    
    ¥
    
    1,140,240
    
    $
    
    10,635Change in plan assets:Fair value of plan assets at beginning
of year
    ¥
    
    468,896
    
    ¥
    
    656,443
    
    $
    
    6,122Actual return on plan assets
    
    
    41,713
    
    
    
    17,844
    
    
    
    167Employer contribution
    
    
    158,446
    
    
    
    143,471
    
    
    
    1,338Benefits paid
    
    
    (12,612
    )
    
    
    (20,812
    )
    
    
    (194
    )Fair value of plan assets at end of year
    ¥
    
    656,443
    
    ¥
    
    796,946
    
    $
    
    7,433Funded status
    
    
    (277,526
    )
    
    
    (343,294
    )
    
    
    (3,202
    )Unrecognized actuarial loss
    
    
    209,065
    
    
    
    195,530
    
    
    
    1,824Unrecognized transition obligation
    
    
    4,820
    
    
    
    4,418
    
    
    
    41Net amount recognized
    ¥
    
    (63,641
    )
    ¥
    
    (143,346
    )
    $
    
    (1,337
    )Accumulated benefit obligation
    ¥
    
    529,360
    
    ¥
    
    635,122
    
    $
    
    5,924
    BenefitObligations
    
    
    Net Periodic Costs2004
    
    
    2005
    
    
    2003
    
    
    2004
    
    
    2005Discount rate
    
    
    1.6
    %
    
    
    1.8
    %
    
    
    2.0
    %
    
    
    1.5
    %
    
    
    1.6
    %Expected long-term rate of return
on plan assets
    
    
    
    
    
    
    
    
    
    
    2.5
    
    
    
    2.5
    
    
    
    2.0Rate of increase in compensation
    
    
    3.2
    5
    
    
    3.4
    
    
    
    3.0
    
    
    
    2.0
    
    
    
    3.2
    5
    F-34




---



##### Table of Contents



2004
    
    
    2005Asset category:Equity securities
    
    
    23.6
    %
    
    
    21.3
    %Debt securities
    
    
    18.6
    
    
    
    38.8Life insurance pooled investment portfolios
    
    
    53.0
    
    
    
    38.7Other
    
    
    4.8
    
    
    
    1.2Total
    
    
    100.0
    %
    
    
    100.0
    %
     Year Ending
    
    
    
    
    
    Thousands ofMarch 31
    
    Thousands of Yen
    
    U.S. Dollars2006
    ¥
    
    26,026
    
    $
    
    2432007
    
    
    30,541
    
    
    
    2852008
    
    
    44,981
    
    
    
    4202009
    
    
    39,145
    
    
    
    3652010 and thereafter
    
    
    288,886
    
    
    
    2,694Total
    ¥
    
    429,579
    
    $
    
    4,007
  F-35




---



##### Table of Contents



11.
    
    SHAREHOLDERS EQUITY (CAPITAL DEFICIENCY)IIJ is subject to the Code.The Code requires that all shares of common stock are recorded with no par value and at least
50% of the issue price of new shares is required to be recorded as common stock and the
remaining net proceeds as additional paid-in capital, which is included in capital surplus.
The Code permits IIJ, upon 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 at least equal to 10% of the aggregate amount of cash
dividends and certain other appropriations of retained earnings associated with cash outlays
applicable to each period shall be appropriated as a legal reserve (a component of retained
earnings) until such reserve and additional paid-in capital equals 25% of common stock. The
amount of total additional paid-in capital and legal reserve that exceeds 25% of the common
stock may be available for dividends by resolution of the shareholders. In addition, the Code
permits the transfer of a portion of additional paid-in capital and legal reserve to the
common stock by resolution of the Board of Directors.The Code allows IIJ to repurchase treasury stock and dispose of such treasury stock by
resolution of the Board of Directors. The repurchased amount of treasury stock cannot exceed
the amount available for future dividend plus amount of common stock, additional paid-in
capital or legal reserve to be reduced in the case where such reduction was resolved at the
shareholders meeting.In addition to the provision that requires an appropriation for a legal reserve in connection
with the cash payment, the Code imposes certain limitations on the amount of retained earnings
available for dividends. No amount was available for dividends under the Code as of March 31,
2005, based on the amount recorded in IIJs general books of account.Dividends are approved by the shareholders at a meeting held subsequent to the fiscal year to
which the dividends are applicable. Semiannual interim dividends may also be paid upon
resolution of the Board of Directors, subject to certain limitations imposed by the Code.On June 27, 2003, IIJ issued 3,265 new shares of common stock at ¥418,200 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, mainly in order to provide for the redemption of the convertible notes
due March 2005, IIJ issued 12,615 new shares of common stock at ¥951,300 per share for
¥12,000,650 thousand by 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 each
¥499,432 thousand 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 38,360 shares,
and NTT and its subsidiary own 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 significant 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 sold to NTT and its subsidiaries its
services including OEM services, system integration services and monitoring services for their
data centers.The amounts of balances and major transactions of the Company with NTT and subsidiaries as of
March 31, 2004 and 2005 and for the each of the three years in the period ended March 31,2005,
are summarized as follows.
 F-36




---



##### Table of Contents



Thousands ofThousands of Yen
    
    
    U.S. Dollars2003
    
    
    2004
    
    
    2005
    
    
    2005Accounts receivable
    
    ¥
    
    
    
    ¥
    409,459
    
    
    ¥
    286,389
    
    
    $
    2,671Accounts payable
    
    
    
    
    
    
    721,930
    
    
    
    687,757
    
    
    
    6,414Revenues
    
    
    335,620
    
    
    
    954,341
    
    
    
    1,413,379
    
    
    
    13,182Costs and expenses
    
    
    2,992,477
    
    
    
    4,531,189
    
    
    
    7,672,480
    
    
    
    71,558
 Stock Option Plans 
  Thousands of YenWeighted AverageNumber
    
    
    Exercise Price perof Shares
    
    
    Common SharesUnexercised options outstanding  April 1, 2002
    
    
    685
    
    ¥
    
    6,691Options granted
    
    
    
    
    
    
    Options exercised
    
    
    
    
    
    
    Options forfeited
    
    
    10
    
    
    
    7,537Unexercised options outstanding  March 31, 2003
    
    
    675
    
    ¥
    
    6,678Options granted
    
    
    
    
    
    
    Options exercised
    
    
    
    
    
    
    Options forfeited
    
    
    60
    
    
    
    9,364Unexercised options outstanding  March 31, 2004
    
    
    615
    
    ¥
    
    5,315Options granted
    
    
    
    
    
    
    Options exercised
    
    
    
    
    
    
    Options forfeited
    
    
    70
    
    
    
    7,551Unexercised options outstanding  March 31, 2005
    
    
    545
    
    ¥
    
    5,028
 F-37




---



##### Table of Contents



Outstanding
    
    ExercisableExercise Price
    
    Number of
    
    Remaining Life
    
    Number of(Thousands of Yen)
    
    Options
    
    (in Years)
    
    Options¥ 10,817
    
    
    200
    
    
    
    5.0
    
    
    2001,672
    
    
    345
    
    
    
    6.3
    
    
    345
 12. OTHER COMPREHENSIVE INCOME
  Thousands of YenBefore Tax
    
    Tax (Expense)
    
    Net of TaxAmount
    
    or Benefit
    
    AmountYear ended March 31, 2003:Foreign currency translation adjustments
    
    ¥
    (22,423
    )
    
    ¥
    
    
    
    ¥
    (22,423
    )Unrealized holding gain (loss) on
securities:Amount arising during the period
    
    
    (2,207,010
    )
    
    
    927,041
    
    
    
    (1,279,969
    )Less: Reclassification adjustments for
losses included in net loss
    
    
    92,439
    
    
    
    (38,828
    )
    
    
    53,611Increase in deferred tax asset
valuation allowance*
    
    
    
    
    
    
    (888,213
    )
    
    
    (888,213
    )Net unrealized holding gain (loss) during
the period
    
    
    (2,114,571
    )
    
    
    
    
    
    
    (2,114,571
    )Loss on cash flow hedging derivative
instruments:Amount arising during the period
    
    
    (30,452
    )
    
    
    
    
    
    
    (30,452
    )Less: Reclassification adjustments for
losses included in net loss
    
    
    26,438
    
    
    
    
    
    
    
    26,438Net loss on cash flow hedging derivative
instruments
    
    
    (4,014
    )
    
    
    
    
    
    
    (4,014
    )Other comprehensive income (loss)
    
    ¥
    (2,141,008
    )
    
    ¥
    
    
    
    ¥
    (2,141,008
    )Year 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
    
    
    ¥
    
    
    
    ¥
    5,280,839
 F-38




---



##### Table of Contents



Thousands of YenBefore Tax
    
    Tax (Expense)
    
    Net of TaxAmount
    
    or Benefit
    
    AmountYear 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
 Thousands of U.S. DollarsBefore Tax
    
    Tax (Expense)
    
    Net of TaxAmount
    
    or Benefit
    
    AmountYear ended March 31, 2005:Foreign currency translation adjustments
    
    $
    (241
    )
    
    $
    
    
    
    $
    (241
    )Unrealized holding gain (loss) on
securities:Amount arising during the period
    
    
    46,539
    
    
    
    (19,081
    )
    
    
    27,458Less: Reclassification adjustments for
gains included in net income
    
    
    (23,119
    )
    
    
    9,479
    
    
    
    (13,640
    )Release in deferred tax asset valuation
allowance*
    
    
    
    
    
    
    9,602
    
    
    
    9,602Net unrealized holding gain (loss) during
the period
    
    
    23,420
    
    
    
    
    
    
    
    23,420Gain on cash flow hedging derivative
instruments:Amount arising during the period
    
    
    (33
    )
    
    
    
    
    
    
    (33
    )Less: Reclassification adjustments for
losses included in net income
    
    
    121
    
    
    
    
    
    
    
    121Net gain on cash flow hedging derivative
instruments
    
    
    88
    
    
    
    
    
    
    
    88Other comprehensive income (loss)
    
    $
    23,267
    
    
    $
    
    
    
    $
    23,267
 
 *
    
    The release (increase) in the deferred tax asset valuation allowance has resulted from
unrealized gains and (losses) on available-for-sale securities, respectively. F-39




---



##### Table of Contents



Thousands ofThousands of Yen
    
    U.S. Dollars2004
    
    2005
    
    2005Foreign currency translation adjustments
    
    ¥
    (7,437
    )
    
    ¥
    (33,295
    )
    
    $
    (311
    )Unrealized holding gain on securities
    
    
    6,221,865
    
    
    
    8,732,910
    
    
    
    81,448Loss on cash flow hedging derivative instruments
    
    
    (18,979
    )
    
    
    (9,490
    )
    
    
    (88
    )¥
    6,195,449
    
    
    ¥
    8,690,125
    
    
    $
    81,049
 13. COMMITMENTS AND CONTINGENT LIABILITIES
    14. DERIVATIVE AND OTHER FINANCIAL INSTRUMENTS
 Interest Rate Swap Agreement
 F-40




---



##### Table of Contents



Fair Value
 Thousands ofThousands of Yen
    
    U.S. Dollars2004
    
    2005
    
    2005Carrying
    
    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
    
    ¥
    6,572,985
    
    
    ¥
    6,572,985
    
    
    ¥
    8,948,168
    
    
    ¥
    8,948,168
    
    
    $
    83,456
    
    
    $
    83,456Not practicable
    
    
    1,358,908
    
    
    
    
    
    
    
    982,613
    
    
    
    
    
    
    
    9,164
    
    
    
    Noncurrent
refundable
insurance
policies
(other assets)
    
    
    55,753
    
    
    
    55,753
    
    
    
    62,636
    
    
    
    62,636
    
    
    
    584
    
    
    
    584Long-term
borrowings,
installment
payable and
convertible
notes,
including
current
portion
    
    
    15,688,265
    
    
    
    15,570,181
    
    
    
    4,266,019
    
    
    
    4,262,908
    
    
    
    39,788
    
    
    
    39,759Interest rate
swap contracts
    
    
    2,400,000
    
    
    
    (18,979
    )
    
    
    1,400,000
    
    
    
    (9,490
    )
    
    
    13,057
    
    
    
    (89
    )
 
 F-41




---



##### Table of Contents



15. ADVERTISING EXPENSES
  16. SUBSEQUENT EVENTS
   F-42