As filed with the Securities and Exchange Commission on July 6, 2007

 

 

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

FORM 20-F

(Mark One)
o		REGISTRATION STATEMENT PURSUANT TO SECTION 12(b) OR (g) OF THE SECURITIES EXCHANGE ACT OF 1934

þ		ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the fiscal year ended March 31, 2007

o		TRANSITION REPORT PURSUANT TO SECTION 13 or 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

o		SHELL COMPANY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

Date of event requiring this shell company report                    

Commission file number: 0-30204

Kabushiki Kaisha Internet Initiative

(Exact Name of Registrant as Specified in Its Charter)

Internet Initiative Japan Inc.

(Translation of Registrant’s Name Into English)

Japan
(Jurisdiction of Incorporation or Organization)

Jinbocho Mitsui Bldg.
1-105 Kanda Jinbo-cho
Chiyoda-ku, Tokyo 101-0051, Japan
(Address of Principal Executive Offices)

Securities registered or to be registered pursuant to Section 12(b) of the Act:

	Title of Each Class		Name of Each Exchange On Which Registered
	Common Stock		The NASDAQ Stock Market

Securities registered or to be registered pursuant to Section 12(g) of the Act:
Common Stock, no par value
(Title of Class)

Securities for which there is a reporting obligation pursuant to Section 15(d) of the Act:
None
(Title of Class)

Indicate the number of outstanding shares of each of the issuer’s classes of capital or common stock as of the close of the period covered by the annual report.

As of March 31, 2007, 204,300 shares of common stock were outstanding, including 27,409 shares represented by an aggregate of 10,963,600 American Depositary Shares.

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.

Yes  o          No  þ

If this report is an annual or transition report, indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934.

Yes  o          No  þ

Note—Checking the box above will not relieve any registrant required to file reports pursuant to Section 13 or 15(d) of
the Securities Exchange Act of 1934 from their obligations under those Sections.

Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.

Yes  þ          No  o

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer. See definition of “accelerated filer and large accelerated filer” in Rule 12b-2 of the Exchange Act. (Check one):

Large Accelerated Filer  o     Accelerated Filer  þ     Non-Accelerated Filer  o

Indicate by check mark which financial statement item the registrant has elected to follow:

Item 17  o          Item 18  þ

If this is an annual report, indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).

Yes  o          No  þ

 

 

TABLE OF CONTENTS

PART I			2
Item 1. Identity of Directors, Senior Management and Advisers.			2
Item 2. Offer Statistics and Expected Timetable.			2
Item 3. Key Information.			2
Item 4. Information on the Company.			14
Item 4A. Unresolved Staff Comments.			41
Item 5. Operating and Financial Review and Prospects.			41
Item 6. Directors, Senior Management and Employees.			66
Item 7. Major Shareholders and Related Party Transactions.			72
Item 8. Financial Information.			74
Item 9. The Offer and Listing.			75
Item 10. Additional Information.			76
Item 11. Quantitative and Qualitative Disclosures about Market Risk.			87
Item 12. Description of Securities Other than Equity Securities.			88
PART II			88
Item 13. Defaults, Dividend Arrearages and Delinquencies.			88
Item 14. Material Modifications to the Rights of Security Holders and Use of Proceeds.			89
Item 15T. Controls and Procedures.			89
Item 16A. Audit Committee Financial Expert.			90
Item 16B. Code of Ethics.			91
Item 16C. Principal Accountant Fees and Services.			91
Item 16D. Exemptions from the Listing Standards for Audit Committees.			92
Item 16E. Purchases of Equity Securities by the Issuer and Affiliated Purchasers.			93
PART III			93
Item 17. Financial Statements.			93
Item 18. Financial Statements.			93
Item 19. Exhibits.			93
EX-1.1 ARTICLES OF INCORPORATION, AS AMENDED
EX-4.24 AGREEMENT ON LIMITED LIABILITY, DATED JUNE 28, 2006 AND JUNE 26, 2007, BETWEEN INTERNET INITIATIVE JAPAN INC. AND OUTSIDE DIRECTORS AND OUTSIDE COMPANY AUDITORS
EX-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 1350
EX-13.2 CERTIFICATION OF THE CHIEF FINANCIAL OFFICER REQUIRED BY 18 U.S.C. SECTION 1350

Cautionary Note Regarding Forward-Looking Statements

     This annual report contains forward-looking statements about us and our industry that are based on our current expectations, assumptions, estimates and projections. These forward-looking statements are subject to various risks and uncertainties. These statements discuss future expectations, identify strategies, discuss market trends, contain projections of results of our operations and our financial condition, and state other forward-looking information. Known and unknown risks, uncertainties and other factors could cause our actual results to differ materially from those contained in or suggested by any forward-looking statement. We cannot provide any assurance that our expectations, projections, anticipated estimates or other information expressed in these forward-looking statements will turn out to be correct. We do not undertake any obligation to update or revise any forward-looking statements, whether as a result of new information, future events or otherwise.

     Important risks and factors that could cause our actual results to differ materially from our forward-looking statements are generally provided in Item 3.D. and elsewhere in this annual report on Form 20-F and include, without limitation:

	•		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.

     As used in this annual report, references to “IIJ”, “the Company”, “we”, “our”, “our group” and “us” are to Internet Initiative Japan Inc. and its subsidiaries except as the context otherwise requires.

PART I

Item 1.		Identity of Directors, Senior Management and Advisers.

Not required.

Item 2.		Offer Statistics and Expected Timetable.

Not applicable.

Item 3.		Key Information.

A.

Selected Financial Data.

     You should read the selected consolidated financial data below together with Item 5. “Operating and Financial Review and Prospects”, of this annual report on Form 20-F and our consolidated financial statements and the notes to our consolidated financial statements beginning on page F-1. The consolidated statement of operations data and per share and American Depositary Shares (“ADS”) data below for the fiscal years ended March 31, 2003, 2004, 2005, 2006 and 2007, the consolidated balance sheet data below as of March 31, 2003, 2004, 2005, 2006 and 2007 and consolidated statements of cash flows for the fiscal years ended March 31, 2003, 2004, 2005, 2006 and 2007 under operating data below are derived from our audited financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States (“U.S. GAAP”), and audited by Deloitte Touche Tohmatsu, an independent registered public accounting firm.

		As of and for the fiscal year ended March 31,
		2003				2004				2005				2006				2007				2007
		(millions of yen, except per share and ADS data)																				(thousands of
																						U.S. dollars,
																						except per
																						share and ADS
																						data(1))
Statement of Operations Data:
REVENUES:
Connectivity and value-added services:
Dedicated access		¥	13,815			¥	12,862			¥	11,373			¥	10,625			¥	10,792			$	91,797
Dial-up access			3,155				3,088				2,937				2,674				2,416				20,554
Value-added services			3,603				4,296				5,005				6,250				7,416				63,079
Other			1,726				2,118				3,169				3,674				3,729				31,725
Total			22,299				22,364				22,484				23,223				24,353				207,155
Systems integration			15,013				11,848				15,854				23,505				30,527				259,672
Equipment sales			6,706				4,567				3,365				3,085				2,175				18,496
Total revenues			44,018				38,779				41,703				49,813				57,055				485,323
COST AND EXPENSES:
Cost of connectivity and value-added services			20,387				20,047				19,484				20,078				20,545				174,765
Cost of systems integration			13,090				9,852				12,200				18,120				23,529				200,145
Cost of equipment sales			6,417				4,346				3,111				2,818				1,894				16,104
Total cost			39,894				34,245				34,795				41,016				45,968				391,014
Sales and marketing			3,176				3,528				2,795				3,080				3,439				29,251
General and administrative			2,205				2,098				2,666				3,147				3,971				33,776
Research and development			414				358				199				159				177				1,508
Total cost and expenses			45,689				40,229				40,455				47,402				53,555				455,549
OPERATING INCOME (LOSS)			(1,671	)			(1,450	)			1,248				2,411				3,500				29,774
OTHER INCOME (EXPENSES):
Interest income			67				38				13				13				23				196
Interest expense			(733	)			(702	)			(686	)			(437	)			(397	)			(3,381	)
Other — net			(603	)			1,646				2,573				3,392				1,923				16,356
Other income (expenses) — net			(1,269	)			982				1,900				2,968				1,549				13,171
INCOME (LOSS) FROM OPERATIONS BEFORE INCOME TAX EXPENSE (BENEFIT), MINORITY INTERESTS AND EQUITY IN NET LOSS OF EQUITY METHOD INVESTEES			(2,940	)			(468	)			3,148				5,379				5,049				42,945
INCOME TAX EXPENSE (BENEFIT)			23				33				100				257				(804	)			(6,839	)
MINORITY INTERESTS IN (EARNINGS) LOSSES OF SUBSIDIARIES			153				236				(109	)			(354	)			(233	)			(1,979	)
EQUITY IN NET LOSS OF EQUITY METHOD INVESTEES:(2)
Equity method net loss			(5,625	)			(286	)			(33	)			(14	)			(210	)			(1,788	)
Impairment loss on investment, advance and deposits for Crosswave			(7,153	)			(1,720	)			—				—				—				—

		As of and for the fiscal year ended March 31,
		2003				2004				2005				2006				2007				2007
		(millions of yen, except per share and ADS data)																				(thousands of
																						U.S. dollars,
																						except per
																						share and ADS
																						data(1))
Total equity in net loss of equity method investees		¥	(12,778	)		¥	(2,006	)		¥	(33	)		¥	(14	)		¥	(210	)		$	(1,788	)
NET INCOME (LOSS)		¥	(15,588	)		¥	(2,271	)		¥	2,906			¥	4,754			¥	5,410			$	46,017
Per Share and ADS Data(3):
Basic net income (loss) per share		¥	(138,689	)		¥	(14,321	)		¥	15,172			¥	24,301			¥	26,519			$	226
Diluted net income (loss) per share			(138,689	)			(14,321	)			15,172				24,258				26,487				225
Basic net income (loss) per ADS equivalent			(346.72	)			(35.80	)			37.93				60.75				66.30				0.57
Diluted net income (loss) per ADS equivalent			(346.72	)			(35.80	)			37.93				60.65				66.22				0.56
Basic weighted average number of shares			112,400				158,554				191,559				195,613				203,992
Diluted weighted average number of shares			112,400				158,554				191,559				195,955				204,244
Basic weighted average number of ADS equivalents (thousands)			44,960				63,422				76,624				78,245				81,597
Diluted weighted average number of ADS equivalents (thousands)			44,960				63,422				76,624				78,382				81,698
Balance Sheet Data:
Cash and cash equivalent		¥	3,588			¥	12,284			¥	5,286			¥	13,727			¥	13,555			$	115,299
Total assets			32,064				42,737				37,116				50,705				47,693				405,691
Short-term borrowings			4,824				6,564				4,725				4,555				6,050				51,463
Current portion of long-term borrowings, including capital lease obligations			4,660				3,936				5,511				4,994				3,243				27,588
Long-term borrowings, including capital lease obligations			7,092				5,188				5,869				5,271				4,318				36,733
Convertible notes(4)			15,000				11,832				—				—				—				—
Common stock			7,082				13,765				13,765				16,834				16,834				143,194
Total shareholders’ equity (capital deficiency)			(10,004	)			6,214				11,615				20,222				20,112				171,079
Operating Data:
Capital expenditures, including capitalized leases(5)		¥	4,893			¥	3,523			¥	5,011			¥	4,762			¥	3,953			$	33,622
Operating margin ratio(6)			(3.8	)%			(3.7	)%			3.0	%			4.8	%			6.1	%
Net cash provided by (used in):
Operating activities		¥	1,582			¥	1,923			¥	5,238			¥	6,559			¥	7,402			$	62,959
Investing activities			(7,878	)			(852	)			1,974				1,805				(3,014	)			(25,635	)
Financing activities			(872	)			7,669				(14,213	)			39				(4,560	)			(38,786	)

Reconciliations of the Disclosed Non-GAAP Financial Measures to the Most Directly Comparable GAAP Financial Measures

Capital expenditures

     We define capital expenditures as purchases of property and equipment plus acquisition of assets by entering into capital leases. We have included the information concerning capital expenditures because our management monitors our capital expenditure budgets and believes that it is useful to investors to know the trends of our capital expenditures and analyze and compare companies on the basis of such investments. Capital expenditures, as we have defined it, may not be comparable to similarly titled measures used by other companies.

     The following table summarizes the reconciliation of capital expenditures to purchases of property and equipment and acquisition of assets by entering into capital leases as reported in our consolidated statements of cash flows prepared and presented in accordance with U.S. GAAP.

		For the fiscal year ended March 31,
		2003				2004				2005				2006				2007
		(millions of yen)
Capital expenditures:
Acquisition of assets by entering into capital leases		¥	3,578			¥	1,866			¥	4,434			¥	3,843			¥	2,665
Purchases of property and equipment			1,315				1,657				577				919				1,288
Total capital expenditures		¥	4,893			¥	3,523			¥	5,011			¥	4,762			¥	3,953

Exchange Rates

     Fluctuations in exchange rates between the Japanese yen and the U.S. dollar and other currencies will affect the U.S. dollar and other currency equivalent of the yen price of our shares and the U.S. dollar amounts received on conversion of any cash dividends, which in turn will affect the U.S. dollar price of our ADSs. We

have translated some Japanese yen amounts presented in this annual report into U.S. dollars solely for your convenience. Unless otherwise noted, the rate used for the translations was ¥117.56 per U.S. $1.00, 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, 2007, the date of our most recent consolidated balance sheet contained in this annual report. Translations do not imply that the yen amounts actually represent, or have been or could be converted into, equivalent amounts in U.S. dollars.

     The following table presents the noon buying rates for Japanese yen per U.S. $1.00 in New York City for cable transfers in foreign currencies as certified for customs purposes by the Federal Reserve Bank of New York:

		High				Low				Average(1)				Period-end
Fiscal year ended March 31,
2003		¥	133.40			¥	115.71			¥	121.10			¥	118.07
2004			120.55				104.18				112.75				104.18
2005			114.30				102.26				107.28				107.22
2006			120.93				104.41				113.67				117.48
2007			121.81				110.07				116.55				117.56
Calendar year 2007
January		¥	121.81			¥	118.49			¥	120.45			¥	121.02
February			121.77				118.33				120.50				118.33
March			118.15				116.01				117.26				117.56
April			119.84				117.69				118.93				119.44
May			121.79				119.77				120.77				121.76
June			124.09				121.08				122.69				123.39
July (through July 3, 2007)			122.40				122.32				122.36				122.40

     The noon buying rate on July 3, 2007 was ¥122.40 per $1.00.

B.

Capitalization and Indebtedness.

     Not required.

C.

Reasons for the Offer and Use of Proceeds.

     Not applicable.

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.

     Although we recorded operating income and net income in and after the fiscal year ended March 31, 2005, we incurred operating losses and net losses in each of the prior six fiscal years, with the exception of

positive operating income for the fiscal year ended March 31, 2002, and our accumulated deficit as of March 31, 2007 amounted to ¥24.3 billion.

     If the Japanese economy deteriorates or does not improve, and it results in significantly lower levels of network-related investment or corporate customers respond to conditions by putting a priority on low price rather than quality, it may make it difficult to maintain our current level of revenues or achieve our expected revenues and profits.

     In addition to factors related to general economic conditions in Japan, we may not be able to maintain our current level of revenues and profits or achieve our expected levels of revenues and profits due to several other factors, including, but not limited to:

	•		a decrease in revenues from our Internet connectivity services because of lower unit prices per bandwidth and cancellation of large accounts especially due to severe price competition,
	•		lower revenue growth and lower margins in our growing value-added services and systems integration, if we fail to successfully differentiate our services from those of our competitors, or experience a significant decrease in systems integration revenues from period to period due to the cancellation of one or more large projects or changes in the number of projects resulting from a seasonal fluctuation in the systems integration business in Japan,
	•		an increase in backbone costs due to increased volume of Internet traffic and demand for leasing backbone lines, or a decline in the profitability of connectivity services if we contract for more capacity than we actually utilize to serve our customers,
	•		an increase in expenses for network infrastructure, research and development and other similar investments which we may be forced to make in the future in order to remain competitive, or increased expenses relating to the leasing of additional equipment,
	•		an increase in outsourcing costs, especially in our systems integration, if outsourcing costs increase, or we fail to manage outsourcing projects effectively or fail to cover outsourcing costs by raising enough revenues from outsourced projects,
	•		an increase in SG&A costs, such as personnel expenses and advertising expenses, in conjunction with our expected or planned or continued business expansion,
	•		the recording of an impairment loss as a result of an impairment test on the non-amortized intangible assets such as goodwill that is recorded related to any mergers and acquisitions,
	•		a decline in the value and trading volume of our holding of available-for-sale securities from which we expect gains on sale or impairment losses on stocks of companies,
	•		an increase of equity in net loss of equity method investees affected by an increase of net loss of our equity method investees, and
	•		an amount and timing of recognition of deferred tax benefits or expenses resulting from a release or an increase of valuation allowance against deferred income tax assets related to tax operating loss carryforwards and others.

     Please see Item 5, “Operating and Financial Review and Prospects” for more detailed information concerning our operations and other results.

We may not be able to compete effectively, especially against competitors with greater financial, marketing and other resources.

     The major competitors of our connectivity and value-added services are major telecommunications carriers like NTT Communications Corporation (“NTT Communications”) and KDDI Corporation (“KDDI”). Price competition for Internet connectivity services is still severe and may increase. For value-added services, price competition may also increase. This competition may adversely affect our revenues and profitability and may make it difficult for us to retain existing customers or attract new customers. The major competitors of our systems integration business are systems integrators like IBM Japan, NEC Corporation, Fujitsu Limited, NTT Data Corporation and their affiliates. Our major competitors have the financial resources to reduce prices in an effort to gain market share. There is strong competition among systems integrators that may adversely affect our revenues and profitability. Even though Nippon Telegraph and Telephone Corporation (“NTT”) and NTT Communications purchased shares of our company in September 2003, which resulted in the NTT Group becoming our largest shareholder, we plan to continue to operate our company separately and independently from the NTT Group, and will therefore continue to compete with the NTT Group.

     Our competitors have advantages over us, including, but not limited to:

	•		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.

     With these advantages, our competitors may be better able to:

	•		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.

If we fail to attract and retain qualified personnel, we may not be able to achieve our expected business growth.

     Our network, services, products and technologies are complex, and as a result, we depend heavily on the continued service of our engineering, research and development, and other personnel. As our business grows, we need to hire additional engineering, research and development, and other personnel. In particular, in order to continue to increase our revenues from value-added services and systems integration, we require more sales and engineering personnel to achieve our expectations. We are not sure that we will be able to

keep or attract these human resources and control human resources cost adequately. Competition for qualified engineers, research and development personnel and employees in the telecommunications service industry in Japan is intense, and there is a limited number of persons with the necessary knowledge and experience. None of our employees are bound by any employment or noncompetition agreement. The realization of any or all of these risks may result in a failure to achieve our expected business growth.

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

     Interruptions, errors or delays with respect to our network may be caused by a number of man made or natural factors, many of which are beyond our control, including, but not limited to, damage from fire, earthquakes or other natural disasters, power loss, sabotage, computer hackers, human error, computer viruses and other similar events. Much of our computer and networking equipment and the lines that make up our network backbones are concentrated in a few locations that are in earthquake-prone areas. Any disruption, outages, or delays or other difficulties experienced by any of our technological and information systems and networks could result in a decrease in new or existing accounts, loss or exposure of confidential information, reduction in revenues and profits, costly repairs or upgrades, reputational damage and decreased consumer confidence in our business, any or all of which could have a material adverse effect on our business, financial condition and results of operations.

If we fail to keep and manage our confidential customer information, we could be subject to lawsuits, incur expenses associated with our security systems or suffer damage to our reputation.

     We keep and manage confidential information and trade secrets obtained from our customers. We exercise care in protecting the confidentiality of such information and take steps to ensure the security of our network, in accordance with the law protecting personal information that came into effect in April 2005 and the requirements set by the Ministry of Internal Affairs and Communications (“MIC”), and the Ministry of Economy, Trade and Industry. However, our network, like all Information Technology systems, is vulnerable to external attack from computer viruses, hackers or other such sources. In addition, despite internal controls, misconduct by an employee could result in the improper use or disclosure of confidential information. If any material leak of such information were to occur, we could be subject to lawsuits for damages from our customers, incur expenses associated with repairing or upgrading our security systems and suffer damages to our reputation that could result in a severe decline in new customers as well as an increase in service cancellations. The realization of these or similar risks may have a material adverse effect on our business, financial condition and result of operations.

Business growth and a rapidly changing operating environment may strain our limited resources.

     We have limited operational, administrative and financial resources, which could be inadequate to sustain the growth we want to achieve. As the number of our customers and their Internet usage increases, as traffic patterns change and as the volume of information transferred increases, we will need to increase expenditures for our network and other facilities in order to adapt our services and to maintain and improve the quality of our services. If we are unable to manage our growth and expansion, the quality of our services could deteriorate and our business may suffer.

If we fail to keep up with the rapid technological changes in our industry, our services may become obsolete and we may lose customers.

     Our markets are characterized by:

	•		rapid technological change,
	•		frequent new product and service introductions,

	•		continually changing customer requirements, and
	•		evolving industry standards.

     If we fail to obtain access to new or important technologies or to develop and introduce new services and enhancements that are compatible with changing industry technologies and standards and customer requirements, we may lose customers.

     Our pursuit of necessary technological advances may require substantial time and expense. Many of our competitors have greater financial and other resources than we do and, therefore, may be better able to meet the time and expense demands of achieving technological advances. Additionally, this may allow our competitors to respond more quickly to new and emerging technologies and standards or invest more heavily in upgrading or replacing equipment to take advantage of new technologies and standards.

We depend on our executive officers, and if we lose the service of our executive officers, particularly Mr. Koichi Suzuki, our business and our relationships with the customers, major shareholders of IIJ and other IIJ Group companies and our employees could suffer.

     Our future success depends on the continued service of our executive officers, particularly Mr. Koichi Suzuki, who is our president, chief executive officer and representative director, as well as the president and chief executive officer and representative director of our major subsidiaries. We rely in particular on his expertise in the operation of our businesses and on his relationships with our shareholders, the shareholders of the IIJ Group companies, our business partners and our employees. None of our executive officers, including Mr. Suzuki, is bound by an employment or noncompetition agreement.

Our investments in our subsidiaries and affiliated companies may not produce the returns we expect and may require additional funding.

     As part of our business strategy and for the purpose of maintaining various strategic business relations, we have, in the past, invested in a number of companies. There can be no assurance that we will be able to maintain or enhance the value or performance of such companies in which we have invested or may invest in the future, or that we will achieve the returns or benefits sought from these investments. Our substantial investment in Crosswave, our former equity method investee, for example, became worthless due to Crosswave’s commencement of corporate reorganization proceedings. In August 2003, Crosswave filed a voluntary petition for the commencement of corporate reorganization proceedings in Japan, and as a result of our equity method net loss and an impairment loss taken in respect of our investment in Crosswave, our net loss for the fiscal year ended March 31, 2003 was ¥15.6 billion, the highest net loss that we have ever experienced. We also wrote off ¥2.1 billion of loans and accounts receivable outstanding from Crosswave for the fiscal year ended March 31, 2004. We also had an impairment loss relating to our investment in Asia Internet Holding Co., Ltd. (“AIH”) for the fiscal year ended March 2004. To the extent that these investments are accounted for by the equity-method and to the extent that the investee companies have net losses, our financial results will be adversely affected to the extent of our pro rata portion of these losses. Furthermore, we may lose all or part of our investment in these companies if their value decreases as a result of their financial performance or if these companies go bankrupt. If our interests differ from those of other investors in entities over which we do not exercise control, we may not be able to enjoy synergies with the investees and it may adversely affect our financial results or financial condition.

     We have invested in new subsidiaries and affiliated companies to expand our business and service offerings available to our customers. In February 2006, we invested ¥750 million in Internet Revolution Inc. (“i-revo”), a joint venture that we established with Konami Corporation, and i-revo is our equity method investee. In August 2006, we invested ¥110 million and established Net Chart Japan Inc. (“NCJ”) as our wholly owned subsidiary and NCJ succeeded the network construction business of Net Chart Japan

Corporation for ¥75 million. In April 2007, we invested ¥300 million in GDX Japan, K.K. (“GDX”) to acquire 51% of the equity of GDX and GDX became our consolidated subsidiary. GDX is a joint venture established with GDX Network, Inc. which is a company in the United States, to provide a message exchange network service in Japan. In June 2007, we acquired 100% of the equity of hi-ho, Inc. (“hi-ho”) from Panasonic Network Services Inc. (“PNS”) to take over PNS’s Internet service business for personal users and its solution business for its corporate customers for ¥1,200 million. In July 2007, we invested ¥235 million in Taihei Computer Co., Ltd (“TCC”) to acquire 45% of the equity of TCC, which manages customer loyalty reward program systems. TCC became our equity method investee. We may provide additional financial support in the form of loans to or additional equity investments in these subsidiaries and affiliated companies to enhance or maintain our business synergies with these subsidiaries and affiliated companies.

     We have reorganized our subsidiaries. In October 2005, IIJ Media Communications Inc. (“IIJ-MC”), our former subsidiary, was merged into us after a portion of IIJ-MC’s business was transferred to IIJ Technology Inc. (“IIJ-Tech”) and we have acquired AIH, our former equity method investee, after AIH became our wholly owned consolidated subsidiary. In May 2007, we made our two subsidiaries, IIJ-Tech and Net Care, Inc., wholly owned through share exchanges to increase synergies among our group companies and allocate group resources more efficiently to provide our total network solutions to our customers. However, there is no guarantee that we will be able to achieve the benefit of the transactions as expected.

We may have an impairment loss as a result of an impairment test on the non-amortized intangible assets that is recorded related to mergers and acquisitions.

     As of March 31, 2007, our intangible assets such as goodwill were approximately ¥2.8 billion. If the business operations of our subsidiaries and others are adversely affected by factors such as a significant adverse change in their business climate, we may have an impairment loss as a result of an impairment test on the non-amortized intangible assets such as goodwill. The realization of any impairment losses on the non-amortized intangible assets may result in material adverse effects on our financial condition and results of operations.

The amounts and timing of recognition of deferred tax benefits or expenses related to tax operating loss carryforwards may adversely affect our financial results.

     As of March 31, 2007, the Company had tax operating loss carryforwards of ¥17.1 billion. The loss carryforwards are available to offset future taxable income and will expire as shown in Note 9 to our consolidated financial statements. We recorded ¥1.5 billion of deferred tax benefit resulting from a release of valuation allowance against deferred income tax assets related to tax operating loss carryforwards for the fiscal year ended March 31, 2007. The amounts and timing of recognition of the deferred tax benefits or expenses may adversely affect our financial condition and results of operations.

Fluctuations in the stock prices of companies or impairment losses on stocks of companies in which we have invested may significantly influence our financial condition.

     We have invested in non-affiliated companies in order to further our business relationships with these companies. We recorded gross realized gains from the sale of available-for-sale securities of ¥3.2 billion for the fiscal year ended March 31, 2007 and the book value of our remaining available-for-sale securities was ¥1.3 billion at March 31, 2007. We may acquire additional securities of non-affiliated companies. However, the book value can change significantly due to changes in the financial condition of non-affiliated companies, general economic conditions in Japan or fluctuations in the Japanese stock markets. Fluctuations in the stock prices of companies in which we have invested may have a significant effect on our financial results. As a result, we may not be able to achieve our expected gains on the sale of available-for-sale securities. In addition, should we choose to sell all or a portion of these shares, it is

not certain that we will be able to do so on favorable terms. Furthermore, we may have an impairment loss on stocks of companies in which we have invested. For the fiscal year ended March 31, 2007, we recorded an impairment loss of ¥ 1.4 billion on unlisted securities, including an impairment loss of ¥1.0 billion on the securities of IPMobile Incorporated.

NTT, our largest shareholder, could exercise substantial influence over us in a manner which may not necessarily be in our interest or that of our other shareholders.

     NTT and its affiliates currently own 29.7% of our outstanding shares as of March 31, 2007. In September 2003, we entered into a subscription agreement with NTT. Under this subscription agreement, we have agreed to allow NTT to nominate up to three persons as either directors or company auditors, subject to approval by our shareholders at our first general shareholders’ meeting after NTT’s investment. At our general shareholders’ meeting on June 24, 2004, two directors nominated from NTT Group were appointed, one of whom was nominated as an executive vice president. At our general shareholders’ meeting on June 28, 2006, our executive vice president, Mr. Fukuzo Inoue, completed his term and retired, and an other director, Mr. Takashi Hiroi was reapproved to be an outside director. As our largest shareholder, NTT may be able to exercise substantial influence over us. In addition, as part of this subscription agreement, we have agreed to collaborate with NTT in various businesses. While we intend to conduct our day-to-day operations independently of NTT and its group companies and believe that NTT also plans for us to operate independently, NTT may decide to exercise substantial influence over us in a manner which could impair our ability to operate independently. Furthermore, NTT may take actions that are in its best interests, which may not be in our interest or that of other shareholders.

We rely greatly on other telecommunications carriers and other suppliers, and could be affected by disruptions in service or delays in the delivery of their products and services.

     We rely on telecommunications carriers such as NTT Communications and KDDI for a significant portion of our network backbone and Nippon Telegraph and Telephone East Corporation and Nippon Telegraph Telephone West Corporation and electric power companies and their affiliates for local access lines for our customers. After the transfer of operating lease agreements from Crosswave, our former equity method investee, following its filing for corporate reorganization, we now procure significant portions of our network backbone and data center facilities pursuant to operating lease agreements with NTT Communications, our largest provider of network infrastructure. For the fiscal year ended March 31, 2007, 66.2% in costs for our domestic network backbone was for NTT Communications. We are subject to potential disruptions in these telecommunications services and, in the event of such disruption, we may have no means of replacing these services, on a timely basis or at all.

     In the Asia-Pacific region, we depend on telecommunications carriers in various countries including less-developed countries whose quality of service may not be stable or who are more susceptible to economic or political instability.

     We also depend on third-party suppliers of hardware components like routers that are used in our network. We acquire certain components from limited sources, typically from Cisco Systems, Inc. A failure by one of our suppliers to deliver quality products on a timely basis, or the inability to develop alternative sources if and as required, may delay our ability to expand the capacity and scope of our network.

     Any problems experienced by our telecommunications carriers and other suppliers could have a material adverse effect on our business, financial condition and results of operations.

The risks inherent in international markets and other risks associated with our international business may adversely affect our future international expansion and our financial results.

     By operating our network internationally, we expose ourselves to the risks of international markets and to other risks that do not exist or are less significant in Japan. One of the components of our strategy is to continue to expand our network reach through our network between the United States and Japan to maintain our network quality. In addition, we have invested in the data center businesses in South Korea. Our international business operations continue to require management attention and financial resources, both of which are in limited supply. We face significant exposure to risks in connection with our international operations, including:

	•		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.

     These factors could adversely affect our future international expansion and, consequently, our business, financial condition and results of operations.

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.

     A significant portion of our future revenue depends on systems integration projects which we, in cooperation with IIJ-Tech and Net Care, have been contracted to perform. We may not be able to perform our responsibilities under these contracts to the satisfaction of our customers, or at all, if we lack a sufficient number of qualified engineers, lack sufficient task-management capabilities for software-development vendors or fail to manage customer data adequately. If we do not execute these services and projects as contracted or fail to manage customer data in a professional manner, our receipt of revenues may be delayed or lost altogether and we could be sued by our counterparties, which could in turn have an adverse impact on our reputation, results of operation and financial condition.

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

     The licensing, construction and operation of telecommunications systems and services in Japan are subject to regulation and supervision by the MIC. We operate pursuant to licenses and approvals that have been granted by the MIC.

     Our licenses have an unlimited duration, but are subject to revocation by the MIC if we violate any telecommunications laws and regulations in a manner that is deemed to harm the public interest, if we or any of our directors are sentenced to a fine or any more severe penalty under the telecommunications laws, if we employ a director who was previously sentenced to a fine or more severe penalty thereunder or if we have had a license revoked in the past.

     Existing and future governmental regulation may substantially affect the way in which we conduct business. These regulations may increase the cost of doing business or may restrict the way in which we offer products and services. As a result of the amendment in April 2004 of the Telecommunication Business Law

and deregulation including elimination of the regulatory distinction between carriers providing telecommunications services through networks owned by other telecommunication carriers and carriers which own or have long-term leases for the networks through which they offer telecommunication services, competition may increase. Furthermore, we cannot predict future regulatory changes which may affect our business. Any changes in laws, such as those described above, or regulations or MIC policy affecting our business activities and those of our competitors could adversely affect our financial condition or results of operations. For more information, see Item 4., “Business Overview — Regulation of the Telecommunications Industry in Japan”.

We may be named as defendants in litigation, which could have an adverse impact on our business, financial condition and results of operations.

     We are involved in normal claims and other legal proceedings in the ordinary course of our business. We believe that there are no cases currently pending which would have a significant financial impact on us, but we cannot be certain that we will not be named in a future lawsuit. Any judgment against us in such a lawsuit, or in any future legal proceeding, could have an adverse effect 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.

     We may raise additional funds in the future to raise additional working capital and for other financial needs. We completed private placements in June and September 2003 of an aggregate of 15,880 shares of our common stock to investors in Japan in order to raise funds for working capital and repayment of convertible notes. We issued 12,500 new shares of our common stock along with our listing on the Mothers market of the Tokyo Stock Exchange in December 2005, after conducting a 1 to 5 split of our shares of common stock in October 2005. On May 11, 2007, we issued 2,178 shares of common stock to make our two consolidated subsidiaries wholly owned through share exchanges. If we choose to raise such funds from the issuance of equity shares of our common stock or securities convertible into our common stock, existing shareholders may incur substantial dilution.

Item 4. Information on the Company.

A.

History and Development of the Company.

     We are incorporated in Japan as a joint stock corporation under the name Internet Initiative Japan Inc. (“IIJ”). We were incorporated in December 1992 and operate under the laws of Japan. We began operations in July 1993, making us one of the first commercial providers in Japan to offer Internet connectivity services. In February 1994, we acquired a Type II Telecommunications license, which enables us to operate our own international backbone networks. We became a public company in August 1999 with our initial public offering of American Depositary Shares (“ADSs”) on the Nasdaq National Market.

     On August 20, 2003, Crosswave Communications Inc. (“Crosswave”), our former equity method investee and primary provider of data communication services, and two of its subsidiaries filed voluntary petitions with the Tokyo District Court for the commencement of corporate reorganization proceedings, which are proceedings to rehabilitate an insolvent company similar in some respects to Chapter 11 bankruptcy proceedings in the United States. As a result, we wrote-off our investment in Crosswave and no longer consider Crosswave to be an IIJ Group company. On December 15, 2003, the business operations of Crosswave, including its network on which we relied to provide our network services, were transferred to NTT Communications Corporation (“NTT Communications”). We have contracted with NTT Communications for the continued use of the network it acquired from Crosswave.

     On June 26 and September 16, 2003, we completed private placements of a total of 15,880 shares of our common stock to investors in Japan for an aggregate amount of ¥13.3 billion for working capital and repayment of our outstanding 1.75% convertible notes due on March 31, 2005. As a result of these transactions, the total number of our issued shares of common stock increased to 38,360 and shareholding of the Nippon Telegraph and Telephone Corporation (“NTT”) Group increased to 31.6%. We have also agreed with NTT that it has the right to nominate three persons to serve as either our directors or company auditors, subject to shareholder approval of any nomination at our first general shareholders’ meeting after NTT’s investment. In addition, we 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 us and NTT in connection with new business opportunities and to discuss secondment of employees to each other.

     On October 1, 2005, IIJ Media Communications Inc. (“IIJ-MC”), our former consolidated subsidiary, was merged into us after a portion of IIJ-MC’s business was transferred to IIJ Technology Inc. (“IIJ-Tech”), our consolidated subsidiary. Asia Internet Holding Co., Ltd., our former equity method investee, became our wholly owned consolidated subsidiary, and was merged into us on October 1, 2005. In each of the mergers, we became the surviving company. On May 11, 2007, we made our two subsidiaries, IIJ-Tech and Net Care, Inc. (“Net Care”) wholly owned through share exchanges to increase synergies among our group companies and allocate group resources more efficiently to provide our total network solutions to our customers.

     On December 2, 2005, we listed on the Mothers market of the Tokyo Stock Exchange (“TSE”). In connection with the listing, we issued 12,500 new shares of common stock for an amount of ¥6.0 billion. As we conducted a 1 to 5 split of our shares of common stock on October 11, 2005, the total number of our issued shares of common stock increased to 204,300. On December 14, 2006, we moved to the First Section of the TSE for our listing in Japan, without the issuance of new shares.

     On February 1, 2006, we established a joint venture company, Internet Revolution Inc. (“i-revo”) with Konami Corporation, with the purpose of operating comprehensive portals sites. We invested ¥750 million and hold 30.0% of the company. i-revo is our equity method investee. On August 10, 2006, we invested ¥110 million and established Net Chart Japan Inc. (“NCJ”) as our wholly owned subsidiary to provide network construction that is mainly related to Local Area Networks. In April 2007, we invested ¥300 million in GDX Japan, K.K. (“GDX”) to acquire 51% of the equity of GDX and GDX became our consolidated subsidiary to provide a message exchange network service in Japan. On June 1, 2007, we acquired 100% of the equity of hi-ho, Inc. (“hi-ho”) for ¥1,200 million from Panasonic Network Services Inc. (“PNS”) to take over PNS’s Internet service business for personal users and its solution business for its corporate customers. In July 2007, we invested ¥235 million in Taihei Computer Co., Ltd (“TCC”) to acquire 45% of the equity of TCC, which manages customer loyalty reward program systems. TCC became our equity method investee.

     Our head office is located at Jinbo-cho Mitsui Bldg., 1-105 Kanda Jinbo-cho, Chiyoda-ku, Tokyo 101-0051, Japan, and our telephone number at that location is (813) 5259-6500. Our agent in the United States is IIJ America Inc., 1211 Avenue of the Americas, Suite 2900, New York, New York 10036 and the telephone number at that location is (212) 440-8080. We have a web site that you may access at http://www.iij.ad.jp/. Information contained on our web site does not constitute part of this annual report on Form 20-F.

     For a discussion of capital expenditures and divestitures currently in progress and those for the past three years, see “Capital Expenditures” in Item 4.B.

B.

Business Overview.

     We offer a comprehensive range of Internet connectivity services and network solutions to our customers in Japan. We offer our services on one of the most advanced and reliable Internet networks

available in Japan. Our services are based upon high-quality networking technology tailored to meet the specific needs and demands of our customers.

     We offer, together with other companies or independently, a variety of services to our customers as part of our total network solutions. Our primary services are our Internet connectivity services, value-added services and systems integration. Our Internet connectivity services range from low-cost dial-up access to high-speed access through dedicated lines for individual and corporate customers. Our value-added services include security-related outsourcing services that protect customers’ internal networks from unauthorized access and secure remote connections to internal networks, network-related outsourcing services such as provision, monitoring and maintenance of network equipment and Virtual Private Network (“VPN”), and server-related outsourcing services such as provision of e-mail and web servers and operation and management of e-mail systems, in addition to Internet data center services. Our systems integration are tailored to our customers’ requirements, which include consulting, project planning, systems design, construction of network systems and systems outsourcing. We also sell a significant amount of network-related equipment to our systems integration customers as part of our provision of total network solutions.

     Most of our revenues are generated in Japan and are denominated in Japanese yen. The table below provides a breakdown of the percentage of total revenues among our primary services over the past three fiscal years.

		For the fiscal year ended March 31,
		2005				2006				2007
Connectivity services			34.3	%			26.7	%			23.1	%
Value-added services			12.0	%			12.5	%			13.0	%
Systems integration			38.0	%			47.2	%			53.5	%

     The variety of Internet connectivity services, value-added services and systems integration we offer enables our customers to purchase all of their Internet-related services and products through a single source. To support our services and for the convenience of our customers, we also offer a variety of hardware, software and other products, such as network equipment, which are sourced mostly from third-party vendors. We aim to be the leading supplier of total network solutions in Japan.

     We have created an Internet network that extends throughout Japan by leasing lines from telecommunications carriers. Our backbone is one of the highest capacity Internet backbones in Japan. As of July 3, 2007, we operated 12 points of presence (“POPs”) for dedicated access, 17 POPs for dial-up access and 13 Internet data centers. POPs are the main points at which our customers connect to our backbone, throughout Japan. Our policy on the management of our backbone is that we upgrade the bandwidth depending on demand and with maximum cost effectiveness. Our backbone network also extends to the United States, with a total capacity of 7.2 Gbps (3 STM-16 trunk lines) as of July 3, 2007.

Total network solutions

     We are a provider of total network solutions. We provide our customers with tailored, end-to-end Internet and private network solutions. The diversity of services we offer permits each customer to purchase individual services or a bundle of services that we believe provide the most efficient, reliable and cost-effective solution for that customer’s particular needs.

     The primary resources that we use to provide total network solutions to our customers include:

•

our Internet connectivity services,

	•		our line-up of value-added services, including security, network and server-related outsourcing,
	•		our Internet data center services,
	•		our systems integration, including ongoing consulting, systems design, construction, operation and management, and
	•		other network and application services that our group companies provide.

     Our total network solutions for business users are a primary focus of our business. We consult with businesses and other customers to identify their particular needs. We then draw upon our extensive resources to address those needs.

Internet Connectivity Services

     We offer two categories of Internet connectivity services: dedicated access services and dial-up access services. Dedicated access services are based mainly on dedicated local-line connections provided by carriers between our backbone and customers. Dial-up access services mainly require customers to connect to our POPs through the publicly-switched telephone network. The Internet connectivity part of our total network solutions ranges from low-cost, entry-level dial-up connections from home personal computers to customized wide-area network solutions deploying a range of the dedicated and dial-up services listed below to connect headquarters, data centers, branch offices and mobile personnel. Currently, large telecommunications carriers such as Nippon Telegraph and Telephone East Corporation (“NTT East”) and Nippon Telegraph and Telephone West Corporation (“NTT West”) and other providers are rapidly increasing the variety of last-mile access with ADSL, fiber optic and Ethernet-based lines. Such new lines provide inexpensive high-speed, high-capacity last mile access, and we continue to introduce new variations to our Internet connectivity service to accommodate such developments.

     The following table shows the number of our Internet connectivity service subscribers as of the dates indicated:

		As of March 31,
		2003				2004				2005				2006				2007
Dedicated access service contracts:
IP service:
Low Bandwidth (64 kbps — 768 kbps)			147				93				89				85				64
Medium Bandwidth (1 Mbps — 99 Mbps)			473				565				660				654				687
High Bandwidth (100 Mbps —)			43				80				114				157				224
Total IP Service			663				738				863				896				975
IIJ T1 Standard and IIJ Economy			939				504				276				109				45
IIJ Data Center Connectivity Service			156				196				231				247				282
IIJ FiberAccess/F and IIJ DSL/F (Broadband Services)			3,550				5,788				9,873				13,297				16,418
Total dedicated access service contracts			5,308				7,226				11,243				14,549				17,720
Dial-up access service contracts:
Under IIJ Brand			86,183				75,136				68,068				62,176				57,480
OEM			443,601				620,731				625,908				568,307				476,483
Total dial-up access service contracts			529,784				695,867				693,976				630,483				533,963

     As of July 3, 2007, we mainly offer the following Internet connectivity services.

				Pricing
Service Type		Summary Description		(excluding consumption tax)
Dedicated access services
IP 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 (no longer promoted).		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 (no longer promoted).		Initial setup fee of ¥40,000. Monthly access fees of ¥38,000 for 64 kbps service and ¥45,000 for 128 kbps service.
IIJ Data Center Connectivity Service		Full-scale dedicated line service for customers hosted in IIJ Data Centers, with asymmetrical speeds of upstream (from the Internet to data center) and downstream (from the data center to the Internet) transmissions.		Initial setup fee of ¥100,000. Monthly fees range from ¥400,000 to ¥10,000,000, depending on the speed of upstream transmissions.
IIJ FiberAccess/F		Service for dedicated line Internet-access using optical lines at speeds of up to 10 Mbps or 100 Mbps, targeted primarily at small- and medium-sized enterprises requiring high-capacity, high-speed transmissions. Optical fiber access is limited to “FLET’S” lines provided by NTT East and West.		Initial setup fee of ¥50,000. Monthly fees range from ¥14,000 to ¥190,000, depending on the speed of connection and the number of IP addresses allocated. Monthly fees do not include optical line charges, which are paid directly by the customer to the optical line provider.
IIJ DSL/F		Service for dedicated line Internet-access using ADSL lines at speeds of up to 47 Mbps, targeted primarily at small- and medium-sized offices and home offices. ADSL access is limited to “FLET’S” lines provided by NTT East and West.		Initial setup fee of ¥30,000. Monthly fees range from ¥9,800 to ¥49,800, depending on the number of allocated IP addresses. Monthly charges do not include ADSL charges, which are paid directly by the customer to the ADSL service provider.
IIJ DSL/A		Service for dedicated line Internet-access using ADSL lines at speeds of up to 47 Mbps, targeted primarily at small- and medium-sized offices and home offices. ADSL access is limited to ADSL services provided by ACCA Networks, Co., Ltd.		Initial setup fee of ¥75,000. Monthly fees range from ¥12,000 to ¥52,000, depending on the number of allocated IP addresses. Monthly charges do not include ADSL charges, which are paid directly by the customer to the ADSL service provider.

				Pricing
Service Type		Summary Description		(excluding consumption tax)
		(“ACCA Networks”)
IIJ ISDN/F		Service for dedicated line Internet-access using ISDN lines at speeds of up to 64 kbps, targeted primarily at small- and medium-sized offices and home offices where ADSL lines are not available. ISDN access is limited to “FLET’S” lines provided by NTT East and West.		Initial setup fee of ¥5,000. Monthly fees range from ¥4,800 to ¥6,800, depending on the number of allocated IP addresses. Monthly charges do not include ISDN charges, which are paid directly by customers to ISDN providers.
IIJ Line Management/F		Service for us to prepare optical fiber or ADSL access provided by NTT East and West for IIJ FiberAccess/F, IIJ DSL/F and IIJ ISDN/F on behalf of customers. We provide customer support functions for the access lines.		Initial setup fee range from ¥5,000 to ¥43,400. Monthly fees range from ¥2,300 to ¥44,700, depending on the optional services.
Dial-up access services
IIJ Dial-up Standard		Service for corporate users permitting simultaneous Internet-access from several dial-up lines under a single contract.		Initial setup fee of ¥5,000. Monthly basic fee of ¥2,000 plus access charges of ¥10 per minute.
Enterprise Dial-up IP Service		Service for corporate users offering multiple dial-up accounts at a fixed monthly fee.		Initial setup fee of ¥20,000. Monthly basic fees range from ¥3,000 to ¥4,900 per account depending on the number of accounts.
IIJ Dial-up Advanced		Service for corporate users offering bundled low-cost dial-up accounts.		Initial setup fee of ¥5,000. Monthly basic fee of ¥10,000 for the first 50 e-mail accounts including the first two hours access per account, plus ¥5 per minute after two hours.
IIJ4U		Service for individual users, which includes Internet-access and 5 megabytes of disk space for personal Web pages and e-mail account options for multiple users. Various access options such as ISDN, ADSL and optical fiber access are available.		This service does not charge an initial setup fee. Monthly service fee of ¥800 for the first eight hours and a charge of ¥5 per minute, with a ceiling of ¥4,100.
IIJmio DSL/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		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.

				Pricing
Service Type		Summary Description		(excluding consumption tax)
		is made.
IIJmio FiberAccess/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.
IIJmio DSL/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.
IIJmio FiberAccess/DC Service		Service for individual users offering Internet connectivity over optical fiber network at speeds of up to 50 Mbps or 100 Mbps. Optical fiber access is limited to “Access Commufa” lines provided by Chubu Telecommunications Co., Inc.		No initial setup fee. The monthly charge is ¥2,000. Monthly charges do not include optical fiber access charges, which are paid directly by the customer to Chubu Telecommunications Co., Inc.
IIJmio FiberAccess/SF Service		Service for individual users offering Internet connectivity over optical fiber network at speeds of up to 10 Mbps or 100 Mbps. Optical fiber access is limited to “FLET’S” lines provided by NTT East and West. A fixed IP address is provided with this service.		No initial setup fee. The monthly charges range from ¥8,000 to ¥12,000, depending on the type of access line. The monthly charges do not include optical fiber access charges, which are paid directly by the customer to NTT East and West.
IIJmio MobileAccess 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

     Our lineup of dedicated line access services includes: IP Service, IIJ T1 Standard, IIJ Economy, IIJ Data Center Connectivity Service, IIJ FiberAccess/F, IIJ DSL/F, IIJ DSL/A, IIJ ISDN/F and IIJ Line Management/F. The total bandwidth allocated to our dedicated access services has increased 66.0% to 323.5 Gbps as of March 31, 2007, up from 194.9 Gbps a year earlier.

     IP Service. Our IP Service is a full-scale, high-speed access service that connects a customer’s network to our network and the Internet. The service is used by corporate customers mainly for critical purposes, such as Internet connectivity for corporate headquarters or data centers. As of March 31, 2007, we had 975

contracts for our IP Service compared to 896 for our IP Service as of March 31, 2006. The customer chooses the level of service it needs based upon its bandwidth requirements. As of July 3, 2007, we offered service at speeds ranging from 64 kbps to 10 Gbps.

     Our IP Service revenues, including revenues of IIJ Data Center Connectivity Service, represented 14.8% of our total revenues for the fiscal year ended March 31, 2007 and 16.6% for the fiscal year ended March 31, 2006. We believe that as businesses continue to develop Internet capabilities, this service will continue to be the foundation of our total network solutions offerings.

     Subscribers pay a monthly fee for the leased local access line from the customer’s location to one of our POPs. The amount of this fee varies depending on the carrier used and the distance between the customer’s site and our POPs. Customers subscribing to greater bandwidths use ATM (Asynchronous Transfer Mode) or an Ethernet local access line, which supports over 2 Mbps. We collect the usage fee from the customer and pay this amount to the carrier.

     Although fees are charged on a monthly basis, the minimum contract length is one year. For contracts of at least three years, a 10% per month discount is given.

     We also offer various IPv6-capable Internet connectivity services, namely IPv6 Tunnel, IPv6 Native and IPv6/IPv4 Dual Stack Services. In addition to corporate users, IPv6 Tunnel Service has been available to individual users. IPv6 is the next generation Internet Protocol, which allows IPv6 technology to overcome the problems, such as limited IP address availability, of IPv4, the protocol generally used. IPv6 Tunnel Service is a service to enable customers to use IPv6 technology via IPv4 access network, by encapsulating IPv6 data with IPv4 data. IPv6 Native and IPv6/IPv4 Dual Stack Services are services which provide IPv6 environment to customers without encapsulating it with IPv4 data. IPv6 technology enables customers to connect a vast range of electronic appliances and equipment, including cellular phones, AV equipment, car navigation devices and home electronics. We are the first commercial Internet Service Provider, or ISP in Japan to offer IPv6 service and our management believes that we will reap “first-mover” benefits from our initiative. In an effort to promote the dissemination and use of IPv6, we are not currently charging service fees for IPv6 Tunnel Service.

     For our IP Service, we offer Service Level Agreements to our customers to better define the quality of services our customers receive. We were the first ISP in Japan to introduce this type of agreement.

     We guarantee the performance of the following elements under our Service Level Agreements:

	•		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.

     We are able to offer these Service Level Agreements because of the high quality and reliability of our network. Our Service Level Agreements provide customers with credit against the amount invoiced for the services if our service quality fails to meet the prescribed standards.

     Subscribers to our IP Service receive technical support 24 hours a day and seven days a week.

     IIJ T1 Standard. Our IIJ T1 Standard is a connectivity service at 1.5 Mbps that we introduced in October 1999. It is a packaged dedicated line service limited to static routing and allocations of 8 or 16 IP addresses. As of March 31, 2007, we had 45 customers for IIJ T1 Standard and IIJ Economy. We are no

longer promoting the service since customers demand for a higher speed than the one that the service provides.

     IIJ Economy. IIJ Economy is a packaged Internet connectivity service via a dedicated line at 64 kbps or 128 kbps, targeting small- and medium-sized businesses. We are no longer promoting the service since customers demand for a higher speed than the one that the service provides.

     IIJ Data Center Connectivity Service. We also provide connectivity services with respect to our data centers. Our data center connectivity services are an important part of being able to provide high-quality, high-speed, seamless service to our customers. Our connectivity services are asymmetric, meaning that transmission speeds are not the same in both directions— with the downstream transmission being faster to accommodate greater amounts of information being accessed from the Internet versus being sent to the Internet. The fee structure depends on the transmission capacity required for upstream and downstream transmissions. For downstream transmissions, we offer either 10BASE-T connectivity (10 Mbps) or 100BASE-T connectivity (100 Mbps). For upstream transmissions, we offer bandwidths from 1 Mbps to 4 Mbps for 10BASE-T connectivity, and 6 Mbps to 48 Mbps for 100BASE-T connectivity. In addition to the above, we offer IPv6-capable data center services, which offer the same services using IPv6. As of March 31, 2007, we had 282 Internet data center connectivity contracts, compared with 247 as of March 31, 2006. We support this service by providing the same three guarantee elements, availability, maximum average latency and prompt notification of outage or disruption, as the IP Service above under Service Level Agreements.

     IIJ FiberAccess/F. IIJ FiberAccess/F Service is a dedicated Internet-access service that uses “BFLET’S” fiber optic access lines provided by NTT East and West allowing service at maximum 10 Mbps or 100 Mbps on a best-efforts basis. The service is available in several variations (Business, Basic, Family, Mansion and others), optimizing each customer’s needs in speed and connection interface. Customers can also choose the number of allocated IP addresses from: 1, 4, 8, 16, 32 and 64. We support this service by providing guarantees of latency rates under Service Level Agreements. As of March 31, 2007, we had 16,418 customers for IIJ FiberAccess/F, IIJ DSL/F, IIJ DSL/A, IIJ ISDN/F and IIJ Line Management/F.

     IIJ DSL/F and IIJ DSL/A. IIJ DSL/F Service provides dedicated line Internet connectivity via ADSL with speeds of up to 47 Mbps. IIJ DSL/F Service is primarily targeted at small- and medium-sized offices and home offices that have access to ADSL lines provided by NTT East and West under the name of “FLET’S ADSL”. We support this service by providing guarantees of latency rates under Service Level Agreements. In May 2006, we began offering IIJ DSL/A, using ADSL lines provided by ACCA Networks.

     IIJ ISDN/F. IIJ ISDN/F Service provides dedicated line Internet-access via ISDN lines with speeds of up to 64 kbps. IIJ ISDN/F Service is primarily targeted at small-and medium-sized offices and home offices where ADSL lines are not available but have access to ISDN lines provided by NTT East and West under the name of “FLET’S ISDN”.

     IIJ Line Management/F. IIJ Line Management/F Service is a service for us to prepare optical fiber or ADSL lines provided by NTT East and West for IIJ FiberAccess/F, IIJ DSL/F and IIJ ISDN/F on behalf of customers. We provide customer support functions for the access lines.

Dial-up Access Services

     We offer a variety of dial-up access services. Our dial-up access services are an important resource in offering total Internet solutions to corporate customers. Our dial-up services allow employees out of the office or frequent travelers to access our network or their own corporate networks through one of our POPs or through our roaming access points. The dial-up services are usually provided with VPN function, that is provided by our value-added services or systems integration to access customers’ own corporate network securely. We also offer dial-up access service for individuals and an OEM service (where we provide

services for other companies which sell those services under their own name) for other network operators.

     Our main dial-up access services are our IIJ Dial-up Standard, Enterprise Dial-up IP Service, IIJ Dial-up Advanced, IIJ4U, IIJmio DSL/DF Service, IIJmio FiberAccess/DF Service, IIJmio DSL/SF Service, IIJmio FiberAccess/DC Service, IIJmio FiberAccess/SF Service and IIJmio MobileAccess Service, all as described in the table above. We also provide Terminal-type Dial-up IP Service to customers, but we are no longer promoting this service.

Value-Added Services

     Our customers are increasingly seeking additional network-related services, in addition to Internet connectivity. We provide our customers with a broad range of value-added services and products such as security, network, server-related outsourcing services in addition to Internet data center services. Generally, the service period is for one year and customers are billed monthly. We recognize revenues for these services on a straight-line basis during the service period. Any initial set-up fees received in connection with our value-added services are deferred and recognized over the contract period or estimated average period of estimated to customers.

     We believe that business customers will continue to increase their use of the Internet as a business tool and will increasingly rely on an expanding range of value-added services to enhance productivity, reduce costs and improve service reliability.

     Our value-added services include:

	•		Security-related outsourcing services. As of July 3, 2007, we offer six main security-related outsourcing services (described below) that protect customers’ internal networks from unauthorized access and secure remote connections to internal networks. We were the first ISP in Japan to provide firewall services, which we introduced in 1994.
			IIJ DDoS Solution Service. In October 2005, we began offering IIJ DDoS Solution Service to protect customers’ internal networks from distributed denial of service (“DDoS”) attacks, a type of unauthorized access from Internet. The fee depends on the type of service that we provide and the initial fee starts at ¥650,000 and the monthly fee starts at ¥498,000.
			IIJ Security Scan Service. In March 2002, we began offering IIJ Security Scan Service, a package of services targeting small- and medium-sized enterprises to identify security weaknesses in order to prevent illicit access from external networks and to avert virus infection of in-house servers. It is available in two forms: regular monthly scans and one-time spot checks. The form of service can be selected to meet the specific needs of the customer, such as checks for protocol and network configuration or for vulnerability to specific illegal network intrusion. The service was developed with NRI Secure Technologies Ltd., a Japanese security assessment and auditing solutions provider. For the regular monthly scan service, the initial charge is ¥5,000. The monthly charge for scanning is ¥25,000 for one IP address, and ¥24,000 will be added for every additional IP address. For the spot scan service, the basic charge for scanning one IP address is ¥30,000, and ¥29,000 will be added for every additional IP address.
			IIJ Network Intrusion Detection Service. In April 2001, we began offering IIJ Network Intrusion Detection Service, which offers around-the-clock, non-stop network monitoring and intrusion-detection capabilities, as well as packet information for analyzing detected illicit accesses. The initial cost for the service is ¥300,000, and the monthly fee starts from ¥300,000, depending on the customer’s traffic volume.

			IIJ Managed IPS Service. In July 2006, we began offering IIJ Managed IPS Service, which offers around-the-clock, non-stop monitoring of a company’s network using an intrusion prevention system (“IPS”) to detect unauthorized access on such company’s network in real time and terminate such authorized access. The initial cost for the service is ¥900,000 and the minimum monthly fee starts from ¥380,000.
			IIJ Managed Firewall Service. In October 2006, we began offering IIJ Managed Firewall Service, which offers around-the-clock, non-stop monitoring of firewalls with Service Level Agreements, real-time reporting and an anomaly detection system. The initial cost for the service is ¥100,000 and the minimum monthly fee starts from ¥50,000. The service replaced our previous firewall services, such as IIJ Security Premium, IIJ Security Standard and IIJ Security Lite.
			IIJ Secure Remote Access. IIJ Secure Remote Access is a packaged service combining the IIJ Dial-up Advanced with ID Gateway, which controls remote access to in-house servers protected by firewalls. In addition to the 50 dial-up accounts covered by the base rate, the service ensures a secure remote environment by controlling accessible servers and utilization protocols for each dial-up account. In May 2002, IIJ Secure Remote Access was upgraded by adding a remote VPN function. The upgrade enables remote users to transmit and receive data with encryption, offering a secure enterprise network environment with a greater variety of access options, such as connections from overseas via local ISPs. In June 2005, IIJ Secure Remote Access was upgraded by adding an Authentication Service Link Option, which enables customers to use a greater variety of authentication methods.
	•		Network-related outsourcing services. As of July 3, 2007, we offer seven main network-related outsourcing services (described below), including provision, monitoring and maintenance of network equipment and VPN to connect customers’ branch and remote offices.
			IIJ Internet-LAN Service. IIJ Internet-LAN Service is a service which provides connectivity among a company’s branch and remote offices. With this service, customers can use functions provided by Wide-area Ethernet over the Internet.
			IIJ SMF sx Service. IIJ SMF sx Service is a centralized network management system developed by IIJ based on the SEIL Management Framework (“SMF”). This system enables centralized management of network configuration, administration, and maintenance. We received patent approval in March 2006 for SMF. When a customer at a remote site connects a router to the circuit, the router is automatically configured and connected to the network. System integrators utilizing this technology can reduce configuration and maintenance costs at the remote site.
			IIJ Managed VPN PRO Service. IIJ Managed VPN PRO Service is a service which provides connectivity among a company’s branch and remote offices, utilizing SEIL Series or other routers.
			IIJ VPN Standard. IIJ VPN Standard is a service which provides Internet VPN connectivity among a company’s branch and remote offices based on encryption technology. We no longer promote this service because we provide similar functions with other services.
			SEIL Rental Service. SEIL Rental Service is a service through which we rent the SEIL Series, a product developed by IIJ. There are several products depending on the Wide Area Network (“WAN”) Interface. Optional services such as fixed format configuration and on-site maintenance are provided.

			Managed Router Service. Managed Router Service provides customers with router equipment together with maintenance, operation and administration of routers. We provide SEIL Series routers or CISCO routers depending on customer requirements.
			IIJ NetLightning. IIJ NetLightning is a service based on Netli, Inc.’s technology that improves web application performance. By utilizing this service, end users can access customer websites faster, without any settings, and customers can thereby reduce the cost of placing mirror sites. We no longer promote this service.
	•		Server-related outsourcing services. As of July 3, 2007, we offer 14 main server-related outsourcing services (described below), including provision of e-mail and web services and operation and management of e-mail systems.
			IIJ Mail Gateway Service. In November 2002, we renovated IIJ Mail Gateway Service to expand the service from large corporate customers to other corporate segments. The service has three options. The first one is virus protection to check the viruses on incoming and outgoing e-mails. The second one is audit to detect the keyword set in advance on the outgoing e-mails. The third one is antispam to check spam for incoming e-mails, which we started to provide in October 2004. Customers can take all or a selection of the options. The initial cost is ¥10,000, and the monthly fee ranges from ¥30,000 to ¥70,000 for the first 50 e-mail accounts and an additional fee per account after the first 50 e-mail accounts ranges from ¥200 to ¥850.
			IIJ Post Office Service. IIJ Post Office Service is an e-mail operation outsourcing service performed by our e-mail server, enabling a customer to allocate and maintain a number of e-mail accounts under its own domain name for its employees, members or other relevant users. The customer can administer e-mail accounts online through our customer support Web interface. In December 2002, we added a virus checking option for incoming and outgoing e-mails and an “audit option” to check the content of outgoing e-mails and suspend the ones containing keywords specified in advance. In addition, we added a spam checking option which we started to provide in October 2004 for no additional charge to customers contracting the virus checking option or an “audit option”.
			IIJ Mail Box Service. IIJ Mail Box Service is also an e-mail operation outsourcing service performed by our e-mail server. Unlike IIJ Post Office Service, customers do not have to obtain their own domain names. A customer can administer e-mail accounts online through our customer support Web interface.
			E-mail distribution services. We offer other e-mail outsourcing services, such as services for e-mail distribution to large numbers of e-mail addresses and mailing list functions.
			IIJ Secure MX Service. In September 2006, we started offering IIJ Secure MX Service which is an Application Service Provider type of service that operates through an IIJ gateway server established between a customer’s e-mail system and the Internet. The service offers comprehensive e-mail security functions including anti-spam, sender authentication, e-mail transmission route encryption, and full-text e-mail storage. IIJ support engineers provide 24- hour, 365-day monitoring of redundant gateway servers located at the data center, ensuring a safe and stable e-mail environment.
			IIJ Web Standard Service. The IIJ Web Standard allows customers to use their own domain names while providing them with up to 200 megabytes of web hosting space. By limiting specifications, the pricing of the service is kept to a minimum ¥5,000 per month. Additionally, careful traffic management of the storage space ensures a high-performance web-server

			environment for users is ensured. This service mainly targets small- and medium-sized enterprises.
			Web hosting services. We offer other web hosting services, such as customized web hosting services and functions to distribute computer files using our ftp servers.
			IIJ Download Site Service. IIJ Download Site Service is a hosting service dedicated to high-volume content downloads from the Internet. The service started on a trial basis in November 2001, and the full-fledged service was launched in February 2002. A dedicated hosting server and dedicated bandwidth are established for each contract to ensure constant stable performance. With disk capacity of 500 megabytes per contract on our hosting servers, access is provided at a maximum transmission bandwidth per contract of up to 80 Mbps. The initial charge for the service is ¥50,000. The monthly charge ranges between ¥60,000 and ¥340,000, depending upon the bandwidth. In April 2003, we added the option of 1 Gbps maximum transmission speed for an additional fee.
			IIJ URL Filtering Service. IIJ URL Filtering Service is a service enabled by the use of IIJ’s proxy server which blocks access to websites deemed inappropriate. The initial cost for the service is ¥30,000, and the monthly fee is ¥40,000 as a basic fee plus an additional fee depending on the number of users in the customer’s internal network.
			IIJ SSL Certificate Management Service. In April 2007, we began offering IIJ SSL Certificate Management Service which offers a proxy registration service that performs all actions necessary to acquire and use Secure Socket Layer certificates. The initial cost for the service is ¥50,000, and the additional fee to acquire the certificate ranges from ¥75,000 to ¥240,000 depending on which certificate is acquired and the length of the period for which the certificate is valid.
			IIJ Document Exchange Service. This service is an online storage service with which customers can upload files onto IIJ’s storage server and share them with authorized users. The initial cost is ¥40,000 and the monthly fee is ¥20,000, which includes 1GB of disk space and 50 accounts. The fee for each additional set of 10 accounts is ¥3,000, and each 1GB of additional disk space is ¥10,000 per month.
			IIJ DNS Service. We offer domain name related services that consist of domain name administration services and domain name server outsourcing services. Domain names such as “.jp”, “.com”, “.net” and “.org” are available.
			Streaming services. We offer Internet streaming services for live broadcasts over the Internet, as well as streaming server hosting services.
			IIJmio Safety Mail Service. IIJmio Safety Mail Service, launched in December 2001, is a standard e-mail service with an anti-virus function for individual users. The service employs the InterScan VirusWall developed by Trend Micro Incorporated, and features POP/SMTP over SSL which provides secure e-mail transmission by encrypting the e-mail transmission between the users and our mail server, in addition to SMTP authentication, which ensures a higher level of encryption and authorization than what is currently available for general use. In February 2005, we started to provide spam check function without an additional charge. There is no initial charge for IIJmio Safety Mail Service and the monthly charge is ¥500.
	•		Internet data center services. Our Internet data center services include three primary services which are typically bundled together for our customers: IIJ data

			center facility services, IIJ data center connectivity services and management and monitoring services. Our Internet data center facility services are co-location services which allow companies to house their servers and routers off-site on our premises. Our Internet data center facilities are leased from third parties such as NTT Communications and are equipped with robust security systems, 24-hours-a-day non-stop power supplies and fire extinguishing systems, and have earthquake-resistant construction and high-speed Internet connectivity with IIJ backbones. We also offer basic monitoring and maintenance services for the equipment. This service enhances reliability because we provide 24-hours-a-day monitoring and have specialized maintenance personnel and facilities. We offer management and monitoring services tailored to our customers’ requirements.
	•		Customer support and help desk solutions. We provide comprehensive customer support and help desk solutions that include network monitoring and trouble-shooting services. Most of our customer support services are provided as an integral part of other services we sell.
	•		IP Phone. We began IP Phone service for individual users of IIJ4U and IIJmio in May 2003, and for corporate users who are using IIJ’s Internet connectivity services through NTT FLET’S network in December 2003. The telephone service is provided via NTT FLET’S network and customers can make telephone calls with other users connected to NTT FLET’S network or legacy telephones by interconnection with the Publicly Switched Telephone Network, the legacy telephone network.

Systems Integration

     We offer systems integration tailored to our customers’ requirements, which include consulting, project planning, systems design, construction of network systems and systems and operations outsourcing. Our systems integration mainly focus on Internet business systems and Intranet and Extranet corporate information systems. We have built a strong record in various business fields.

     Examples of systems integration are:

	•		connecting over a hundred locations such as gas stations, bank branches and retail shops via Internet-VPN, transmission of data over the Internet with an encryption feature and our proprietary SEIL Series routers and SMF,
	•		outsourcing of large scale e-mail servers or systems to detect or delete e-mails with viruses or spam or record all of e-mails incoming to and outgoing from customers,
	•		online brokerage systems for securities firms,
	•		outsourcing of websites for online businesses,
	•		re-construction of overall corporate network systems suited to increased traffic data,
	•		voice over IP systems to transmit voice among customer branch offices over Internet,
	•		construction of wireless local area network (“LAN”), and
	•		consultation on corporate network security.

     The fee structure of our systems integration is based upon the complexity and scale of the project. We bill our customers for these services on a fixed-fee basis and recognize the revenue when the network systems and equipment are delivered and accepted by the customer. Maintenance, monitoring and operating service revenues are recognized ratably over the separate contract period, which is generally for one year.

     In the planning phase of a systems integration project, we form special project management teams formulated for every new assignment from the customer. We analyze and design the customer’s network and systems with three engineering focuses: reliability, flexibility and extendibility.

     In the network systems construction phase, we procure equipment such as servers and manage application development and software programming tasks which are outsourced to third parties. Network systems construction usually incorporates many of our other connectivity and value-added services.

     In the operation phase, by utilizing data center facilities directly linked to our network, we provide a range of outsourcing services, which take maximum advantage of the Internet system, network operation and management know-how of the IIJ Group companies. Rather than simply looking after the customer’s content, we take care of the customer’s entire computing environment and provide around-the-clock operation and management services, as well as custom-designed monitoring systems. These outsourcing services enable customers to free themselves from the burden of operating the network systems, which demands professional operation and maintenance to ensure prompt and flexible responses to unexpected system problems.

     We also provide our customers with basic, easy-to-order systems integration, which we refer to as IBPS, including provision of network resources such as network equipment, data storage systems, network monitoring and systems operation management, on demand and on a monthly basis, therefore enabling our customers to launch their internal network system securely and cost effectively.

Equipment Sales

     In addition to the Internet connectivity and value-added services and systems integration, we sell our network equipment for connection to the Internet and usage of additional features, which was developed in-house.

     SEIL Series. We started to sell our high-end routers SEIL Series, which was developed in-house, in October 2001 through sales agents. The series includes four types, SEIL/Turbo, SEIL/plus, SEIL/neu 128 and SEIL DOCK 2. SEIL/Turbo has a high throughput and enhanced VPN features and is placed in customer’s main office or data center when a customer connects its branch and remote offices. SEIL/plus is suitable for broadband connection and is placed mainly in customer’s branch and remote offices. SEIL/neu 128 is suitable for ISDN or 64 k/128 kbps leased line based Internet connection. SEIL DOCK 2 is equipment to provide a back-up feature to customers. By combining SEIL/Turbo and other SEIL Series routers, we are able to provide Internet-VPN solutions connecting corporate branches and remote offices of medium and small enterprises. In addition, we provide rental services for these routers directly to customers.

     We also sell third-party equipment to meet the one-stop needs of our customers.

Network

     Our network is one of our most important assets. We have developed and currently operate a high-capacity network that has been designed to provide reliable, high-speed, high-quality Internet connectivity services.

     We are able to achieve and maintain high speeds through our advanced network architecture, routing technology and load balancing that optimize traffic on our multiple Internet connections.

     The primary components of our network are:

	•		our backbone, which includes leased lines and network equipment, such as advanced Internet routers,
	•		Points of Presence (“POPs”) in major metropolitan areas in Japan,
	•		Internet data centers, and
	•		a network operations center (“NOC”).

Backbone

Leased lines

     Our network is anchored by our extensive Internet backbone in Japan and between Japan and the United States. As of July 3, 2007, we had a total capacity of 7.2 Gbps between Japan and the United States. We use our expertise in developing and operating our network to organize and connect these leased lines to form a backbone that has substantial transmission capacity.

     We lease high-capacity, high-speed digital transmission lines in Japan from various carriers. The table below shows our backbone cost.

Backbone Cost

		For the fiscal year ended March 31,
		2003				2004				2005				2006				2007
Backbone cost (thousand yen)		¥	5,235,517			¥	4,719,638			¥	3,550,885			¥	3,516,322			¥	3,515,934

Network upgrades

     As a policy, we put a high priority to maintain the quality of our networks and continuously examine the necessity of upgrades of our networks.

Network equipment

     We use advanced equipment in our network. Our primary routers in our network are Cisco routers. The size of our routers varies depending on the number of customers and volume of traffic served by our POPs. At each POP we connect our dedicated line and dial-up access routers to Cisco backbone routers which then transmit and receive information throughout our network. We primarily lease our network equipment under capital lease arrangements.

     Points of Presence. POPs are the main points at which our customers connect to our backbone. We provide Internet connectivity from our POPs to commercial and residential customers through leased lines and dial-up connections over local exchange facilities. As of July 3, 2007, we had 12 primary POPs which allow for dedicated access and include the main Internet backbone routers that form our network. As of the same date, we also had 17 POPs for dial-up access. The number of POPs for dial-up access include one POP that can be accessed from anywhere in Japan with the minimum local telephone charge.

     Many of our POPs are located in, or in close physical proximity to, “carrier hotels”. Carrier hotels are facilities where we and other major carriers and ISPs have POPs. These are mainly located at facilities of various carriers in Japan like NTT Communications and KDDI Corporation (“KDDI”). We lease the physical

space from these carriers or use such space under other arrangements with terms ranging from one to two years and terminable by either party on three to six months’ notice. We maintain our routers and other networking equipment at these POPs. Our POPs are in, or in close proximity to, the same buildings in which the switches and routers of these carriers and ISPs are located enabling quick and easy interconnection of our equipment with theirs.

     Internet Data Centers. We operate 13 Internet data centers which we use to offer our value-added data center services, four in Tokyo, two in Yokohama, and one each in Osaka, Sapporo, Sendai, Kawaguchi, Nagoya, Kyoto and Fukuoka. These data centers are specifically designed for application hosting, co-location services and high capacity access to our networks. These data centers are mainly leased from NTT Communications, ITOCHU Techno-Solutions Corporation, and KDDI.

     These data centers have 24-hours-a-day, seven-days-a-week operations and security and are equipped with uninterruptible power supplies and backup generators, anti-seismic damage precautions, fire suppression equipment and other features to optimize our ability to offer high-quality services through these data centers.

     In addition, we have invested in data center development outside Japan. We have entered into the “i-Heart” joint venture with Samsung Corp., which operates in Korea with a total investment by us of ¥89 million in May 2000.

     Network operations center and technical and customer support. Our NOC in Tokyo operates 24 hours a day and seven days a week. From our NOC, we monitor the status of our network, the traffic on the network, the network equipment and components and many other aspects of our network including our customers’ dedicated access lines leased from carriers. From our NOC, we monitor our networks to ensure that we meet our commitments under our Service Level Agreements.

Our Group Companies

     We offer our services directly and together with our group companies. Our group companies work closely together in providing total network solutions to our customers. We collaborate on the development of various services and products and market our services and products together as a group. However, our group companies specialize in different aspects of the Internet and networking. Our customers’ main point of contact is IIJ itself. We then draw upon the resources and special capabilities of the group companies to offer total Internet solutions.

     The table below sets out our group companies, including our subsidiaries and principal equity method investees and our direct and indirect ownership of each of them as of July 6, 2007:

		Proportion of ownership
Company Name		and voting interest
IIJ Technology Inc.			100.0	%
IIJ America Inc.			100.0	%
Net Care, Inc.			100.0	%
IIJ Financial Systems Inc.			100.0	%
Net Chart Japan Inc.			100.0	%
hi-ho, Inc.			100.0	%
GDX Japan, K.K			51.0	%
Internet Multifeed Co.			30.0	%
Internet Revolution Inc.			30.0	%
Taihei Computer Co., Ltd.			45.0	%

IIJ Technology Inc.

     IIJ-Tech is an important element in our provision of total network solutions to our customers. IIJ-Tech is incorporated under the laws of Japan. IIJ-Tech provides comprehensive network systems integration and consulting services, focusing on design, operation, and consulting for corporate networks and their security systems. IIJ-Tech assists customers in creating private IP networks, such as Intranets or virtual private networks, that securely isolate internal network traffic from public Internet traffic and provide each site on the private IP network access to other sites as well as to the Internet. IIJ-Tech can integrate an organization’s multiple sites in different locations in Japan.

     In October 2005, IIJ-Tech issued 1,235 new shares of common stock to IIJ-MC, our former consolidated subsidiary, when a portion of IIJ-MC’s business was transferred to IIJ-Tech. As IIJ-MC was merged into us, the new shares of IIJ-Tech were succeeded to us and our ownership increased from 69.0% to 72.1%.

     On May 11, 2007, we made IIJ-Tech wholly owned through a share exchange. Before the share exchange, our ownership in IIJ-Tech increased to 95.2% as of April 5, 2007 through our purchase of IIJ-Tech shares from IIJ-Tech’s minority shareholders.

     IIJ-Tech had revenues of approximately ¥22,515 million for the fiscal year ended March 31, 2007. As of March 31, 2007, IIJ-Tech had 297 full-time employees, and 25 were seconded from us.

IIJ America Inc.

     IIJ America Inc. (“IIJ-A”) is a U.S.-based ISP, catering mostly to U.S.-based operations of Japanese companies. IIJ-A is incorporated under the laws of the state of California.

     Reflecting the fact that IIJ-Tech, IIJ-A’s minority shareholder, became wholly owned by us on May 11, 2007, IIJ-A became our wholly owned consolidated subsidiary in indirect ownership.

     IIJ-A had revenues of $10,089 thousand for the fiscal year ended December 31, 2006. As of March 31, 2007, IIJ-A had 16 employees, 5 of whom were seconded from us.

Net Care, Inc.

     Net Care provides a broad array of support services, from monitoring and troubleshooting to network operations and an end-user help desk.

     On April 27, 2006, our Board of Directors approved purchase of 450 shares of Net Care from its minority shareholders. We purchased the shares on April 28, 2006. As a result, our ownership increased from 57.0% to 59.3%.

     On May 11, 2007, we made Net Care a wholly owned subsidiary through a share exchange. Before the share exchange, our ownership in Net Care increased to 92.5% as of April 5, 2007 through our purchase of Net Care shares from Net Care’s minority shareholders.

     Net Care had revenues of approximately ¥2,762 million for the fiscal year ended March 31, 2007. As of March 31, 2007, Net Care had 173 employees, 12 of whom were seconded from us.

IIJ Financial Systems Inc.

     IIJ Financial Systems Inc. (“IIJ-FS”) is a company wholly owned by IIJ-Tech, whose business was acquired from Yamatane Co., Ltd. in October 2004. IIJ-FS provides integration and operation of security systems.

     IIJ-FS became our wholly owned consolidated subsidiary through indirect ownership due to the fact that it is wholly owned by IIJ-Tech and IIJ-Tech became our wholly owned subsidiary on May 11, 2007.

     IIJ-FS had revenues of ¥3,429 million for the fiscal year ended March 31, 2007. As of March 31, 2007, IIJ-FS had 77 employees.

Net Chart Japan Inc.

     NCJ was established on August 10, 2006 as a company wholly owned by us for ¥110 million. NCJ commenced its business operations after it succeeded the business operations of Net Chart Japan Corporation on October 1, 2006 for ¥75 million. NCJ provides network construction services that are mainly related to Local Area Networks, such as installation and configuration of equipment, wiring following network installation, and installation and operation support for applications.

     NCJ had revenues of ¥775 million for the fiscal year ended March 31, 2007 since its establishment in August 2007. As of March 31, 2007, NCJ had 32 employees.

hi-ho Inc.

     hi-ho is a company wholly owned by us. In June 2007, we acquired 100% of the equity of hi-ho from PNS to take over PNS’s Internet service business for personal users and its solution business for its corporate customers. We acquired the equity of hi-ho for ¥1,200 million.

GDX Japan, K.K.

     In April 2007, we and GDX Network, Inc., a company incorporated in the United States, established a joint venture company, GDX, to provide a message exchange network service in Japan. We invested ¥300 million in GDX and GDX became our consolidated subsidiary.

Internet Multifeed Co.

     Internet Multifeed Co. (“Multifeed”) provides location and facilities for directly connecting high-speed Internet backbones with content servers to make distribution on the Internet more efficient. Multifeed is incorporated under the laws of Japan. Its technology was developed jointly with the NTT Group. Multifeed launched new IX (Internet eXchange — where major ISPs exchange network traffic) services named JPNAP in Tokyo in May 2001 and expanded the service to Osaka in December 2001.

     Multifeed had revenues of ¥2,839 million for the fiscal year ended March 31, 2007. As of March 2007, Multifeed had 24 full-time employees, and 4 employees were seconded from us.

Internet Revolution Inc.

     On February 1, 2006, we and Konami Corporation established a joint venture company, i-revo, to operate comprehensive sites. We invested ¥750 million in i-revo. We account i-revo as an equity method investee in our consolidated financial statements.

     i-revo had revenues of approximately ¥1,211 million for the fiscal year ended March 31, 2007. As of March 31, 2007, i-revo had 43 employees, 12 of whom was seconded from us.

Taihei Computer Co., Ltd.

     In July 2007, we invested ¥235 million in TCC, a subsidiary of one of the subsidiaries of Hirata Corporation, which manages customer loyalty reward program systems. As a result of this investment, TCC became our equity method investee.

Capital Expenditures

     The table below shows our capital expenditures, which we define as amounts paid for purchases of property and equipment plus acquisition of assets by entering into capital leases, for the last three years.

		For the fiscal year ended March 31,
		2005				2006				2007
		(millions of yen)
Capital expenditures, including capitalized leases (1)		¥	5,011			¥	4,762			¥	3,953

     Our future capital expenditures are difficult to predict given the rapid changes and uncertainties in our business environment. Most of our capital expenditures relate to the expansion and improvement of our existing network, including the installation of the routers and servers necessary to offer services on our network.

     We have not made any material divestitures in the current or past three fiscal years. We recorded losses on disposal of property and equipment of ¥144 million, ¥119 million and ¥151 million for the fiscal years ended March 31, 2005, 2006 and 2007, respectively. The loss for the fiscal year ended March 31, 2005 was mainly due to disposal of back-office systems and telephone rights. The loss for the fiscal year ended March 31, 2006 was mainly due to disposal of software, such as for back-office systems. The loss for the fiscal year ended March 31, 2007 was mainly due to the disposal of software, such as back-office systems and network equipment related to the closing of a network operation center.

Seasonality

     See Item 5.D., “Trend Information — Factors Affecting Our Future Financial Results — Systems integration revenues, including related equipment sales revenues”.

Sales and Marketing

     Our sales headquarters are in Tokyo. In addition, we have ten branch offices in Osaka, Nagoya, Fukuoka, Sapporo, Sendai, Toyama, Hiroshima, Yokohama, Toyota and Okinawa in order to cover the major metropolitan areas in which the majority of large Japanese companies operate. As of March 31, 2007, we had approximately 130 people working in sales and marketing.

     We organize our sales personnel into four distinct, separate departments: the Sales Department, the Product Marketing Department, the Operation Management and Coordination Division, and Strategic Sales.

     Also, our Sales Department is divided into four divisions:

	•		Three divisions focus on our total network solutions and work with large corporate clients, including telecommunications carriers and ISPs, financial institutions, manufacturers, government institutions, universities and other schools, or focus on the expansion of sales agents for our services and network equipment. In order to provide total network solutions, personnel in our sales divisions work closely with other IIJ Group companies such as IIJ-Tech as well as with other important service providers.
	•		One division focuses on total network solutions and works with governmental institutions.

     Our Product Marketing Department mainly makes and conducts promotion plans on our products and services. Our Operation Management and Coordination Division handles administrative issues. Strategic Sales is responsible for the planning and management on the sales figures, processes and other information.

Customers

     We have approximately 6,500 business and other institutional customers and approximately 530,000 individual subscribers, which includes individuals subscribing to OEM services, as of March 31, 2007. Our main customers continue to be major corporations, including ISPs.

Research and Development

     We have always focused on advancing the use of networking technologies, including the Internet, in Japan. Many of our engineers are regularly engaged in the research and development activities related to Internet Protocol Version 6 (IPv6), e-mail related technologies and network traffic analysis. These engineers have continued to develop innovative services, applications and products, many of which have set the standard for the Internet industry in Japan. In addition to our efforts to develop innovative services, we have engaged in the research and development of new basic technology since the establishment of IIJ Research Laboratory in 1998.

     Our research and development expenses averaged less than 1.0% of total revenues for the past three consecutive years. For the fiscal years ended March 31, 2005, 2006 and 2007, our research and development expenses were ¥199 million, ¥158 million and ¥177 million, respectively, most of which was personnel expense. The level of research and development expenditures is low in relation to our total costs primarily because we do not engage in extensive research and development of new technologies and products that require large investments. Rather, as noted above and as set forth in more detail below, we are intensively engaged in research and development related to our ongoing business. We focus on monitoring developments in the industry and in developing new and innovative services and applications by using and modifying existing technologies and products.

     As of March 31, 2007, we had 8 people in IIJ Research Laboratory. Our research and development staff works very closely with our sales and marketing personnel and technical engineers to ensure that our research and development efforts are closely aligned with the demands of our customers.

Research and Development Organization

     We have organized our research and development staff to promptly and effectively address the rapidly changing technological environment of the Internet. Research and development on practical applications of new and developing technologies is the responsibility of the Applied Research and Development Department.

     IIJ Research Laboratory. We established the IIJ Research Laboratory in April 1998 to engage in the research and development of new basic network technologies. Through the IIJ Research Laboratory, we participate in various research and development activities in cooperation with organizations from the private and academic sectors to promote the deployment and implementation of IPv6. IIJ Research Laboratory is also engaged in the research and development activities related to e-mail technologies and network traffic analysis.

     Applied Research and Development Department. Applied Research and Development Department engages in the research and development of technologies to be applied to our services and solutions, collects information on, evaluates on the new technology and conducts business expansion based on the technology IIJ Research Laboratory developed.

Research and Development Strategy

     Our primary research and development objective is to continue to develop innovative services, applications and products that will meet the current and future demands of our customers and that will continue to be at the forefront of the Internet industry in Japan. In furtherance of this objective, our research and development efforts currently are focused on a variety of projects, including:

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

     A second research and development objective is to continue participating in or otherwise closely monitoring the new products, developments and initiatives of manufacturers and standards-setting and research groups. Through these efforts, we seek to ensure that we have timely and effective access to new technologies and that we implement these technologies effectively. Because the rate of change in technology relevant to our business is so rapid, we believe that the sophistication and experience of our research and development personnel is an important part of our success.

Proprietary Rights

     Although we believe that our success is more dependent upon our technical, marketing and customer service expertise than our proprietary rights, we rely on a combination of trademark and contractual restrictions to establish and protect our technology.

Licenses

     For us to provide certain services to our customers, we have been a licensee under agreements with other suppliers, such as Check Point Software Technologies Ltd., WatchGuard Technologies, Inc., Trend Micro Incorporated, RSA Security Inc., NRI Secure Technologies, Ltd. and MX Logic, Inc.

     We have purchased licenses from the companies in accordance with customer demands for our services.

Trademarks

     We have applied for trademark registrations of our corporate name, “Internet Initiative Japan Inc.” and certain other corporate and product names in Japan, the United States and certain European countries. As of July 3, 2007, 46 registrations have been granted, with 6 pending applications.

Patents

     We have applied for patent registrations in relation to our technology in Japan and the United States. As of July 3, 2007, 4 registrations have been granted, with 8 pending applications. The latest acquired patent is for centralized network management system originally developed by us and is implemented in one of our competitive services, SMF (SEIL Management Framework).

Legal Proceedings

     We are involved in normal claims and other legal proceedings in the ordinary course of business. Except as noted below, we are not involved in any litigation or other legal proceedings that, if determined adversely to us, we believe would individually or in the aggregate have a material adverse effect on us or our operations.

     In December 2001, a class action complaint alleging violations of the federal securities laws was filed against the Company, naming the Company, certain of its officers and directors as defendants, and underwriters of the Company’s initial public offering. Similar complaints have been filed against over 300 other issuers that have had initial public offerings since 1998 and such actions have been included in a single coordinate proceeding in the Southern District of New York. An amended complaint was filed on April 24, 2002 alleging, among other things, that the underwriters of the Company’s initial public offering violated the securities laws (i) by failing to disclose in the offering’s registration statement certain alleged compensation arrangements entered into with the underwriters’ clients, such as undisclosed commissions or tie in agreements to purchase stock in the after market, and (ii) by engaging in manipulative practices to artificially inflate the price of the Company’s stock in the after market subsequent to the initial public offering. On July 15, 2002, the Company joined in an ‘omnibus’ motion to dismiss the amended complaint filed by the issuers and individuals named in the various coordinated cases. On February 19, 2003, the Court ruled on the motions to dismiss. The Court granted the Company’s motion to dismiss the claims against it under Rule 10b-5 promulgated under the Exchange Act due to the insufficiency of the allegations against the Company. The motions to dismiss the claims under Section 11 of the Securities Act were denied for virtually all of the defendants in the consolidated cases, including the Company. In June 2003, the Company conditionally approved a proposed partial settlement with the plaintiffs in this matter. The Company, along with the settling issuer defendants, filed a motion seeking the court’s preliminary approval of the settlement. The settlement would have provided, among other things, a release of the Company and of the individual officer and director defendants for the alleged wrongful conduct in the Amended Complaint in exchange for a guarantee from the Company’s insurers regarding recovery from the underwriter defendants and other non-monetary consideration from the Company. The plaintiffs have continued to litigate against the underwriter defendants. The District Court directed that the litigation proceed with a number of “focus cases” rather than all of the

310 cases that have been consolidated. The Company’s case is not one of these focus cases. On October 13, 2004, the district court certified the focus cases as class actions in the ongoing litigation. The underwriter defendants appealed that ruling, and on December 5, 2006, the Court of Appeals for the Second Circuit reversed the district court’s class certification decision. On April 6, 2007, the Second Circuit denied plaintiffs’ petition for rehearing, and on May 18, 2007, the Second Circuit denied the plaintiffs’ petition for rehearing en banc. In light of the Second Circuit opinion, liaison counsel for all issuer defendants, including the Company, informed the District Court that this settlement cannot be approved, because the defined settlement class, like the litigation class, cannot be certified. We cannot predict whether we will be able to renegotiate a settlement that complies with the Second Circuit’s mandate. Due to the inherent uncertainties of litigation, we cannot accurately predict the ultimate outcome of the matter.

Regulation of the Telecommunications Industry in Japan

     The Ministry of Internal Affairs and Communications (“MIC”) regulates the Japanese telecommunications industry. Carriers, including us, are regulated by the MIC primarily under the Telecommunications Business Law.

The Telecommunications Business Law

     The Telecommunications Business Law, which became effective in 1985, was established for the purpose of privatization and deregulation in telecommunications business. After several amendments, the Telecommunications Business Law was considerably amended in July 2003. The amendments to the Telecommunications Business Law, which came into force on April 1, 2004, include, among other things:

	•		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.

     The Prior Telecommunications Business Law stipulated that the Carriers shall be classified as either Type I Carrier or Type II Carrier, and imposed regulations in accordance with such classification of Carriers. Prior Type I Carriers, such as NTT East, NTT West, provided telecommunications services by establishing their own telecommunications circuit facilities. Prior Type II Carriers, including us, engaged in the businesses of telecommunications circuit resale and the provision of Internet services by using the telecommunications facilities of Type I Carriers.

     However, from the viewpoint of encouraging telecommunications carriers to carry out diverse business, etc, the Telecommunications Business Law was amended so as to abolish the classification of Type I Carriers and Type II Carriers, and thereupon the rules pertaining to services (i.e., start-up, abolition, charges and tariffs, etc.) were deregulated in principle while establishing rules to protect the users, and the rules pertaining to infrastructure were reviewed as necessary while maintaining the basic framework stipulated under the prior Telecommunications Business Law. For example, (i) the approval system for business entries and withdrawals was replaced by a registration/notification system, (ii) regulations pertaining to service offerings, tariff setting and interconnection between carriers were liberalized, (iii) regulations to protect service users such as announcement of withdrawal, explanation of important matters on services and swift processing of complaints were introduced, and (iv) an authorization system allowing priority usage of public utilities conducive to facilitation of circuit facilities deployment was introduced.

     The following table summarizes changes by the amendment above in some of the major regulatory requirements applicable to telecommunications carriers:

(Before Amendment)

		Type I Carriers		Type II Carriers
				Special Type II		General Type II
Start-up of services		Permission from MIC required		Registration with MIC required		Notification to MIC required
Rates and charges		Notification* to MIC required		Notification to MIC required		Unregulated
Share acquisition by foreign investors		Unregulated**		Unregulated		Unregulated

(After Amendment)

		Telecommunications Carriers
		Registration required		Registration exempted
Start-up of services		Registration with MIC required*		Notification to MIC required****
Rates and charges		Notification to MIC required**		Unregulated
Share acquisition by foreign investors		Unregulated***		Unregulated

     Before the amendments to the Telecommunications Business Law, we were classified as a Special Type II Carrier. After the amendments, we are deemed by the effect of Supplementary Provisions to the amended Telecommunications Business Law to have filed the notification to MIC under the amended Telecommunications Business Law. In practice, we filed an actual notification to MIC in April 2004 according to the request of MIC.

Regulations of telecommunications carriers

     The following regulations apply to telecommunications carriers defined in the Telecommunication Business Law.

     Start-up of Services

	•		Carriers with registration
			Registration 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 Carriers
			Notification to the MIC required for telecommunications carriers other than the above. We do business under this category.

     Charges and Tariffs

	•		Unregulated, in general. The requirement that standard terms and conditions be applied equally to all users was repealed.
	•		Prior notification to the MIC required for Basic Telecommunications Services (universal services such as basic fee, local call and emergency telecommunication service) and Designated Telecommunications Services (i.e., services which have the controlling power over the market provided by the telecommunications carriers which install what is called the “bottle-neck facilities”). Among the Designated Telecommunications Services, the telecommunications services to be specified by MIC at least once a year will be subject to price cap regulations, under which carriers will be required to obtain approval from the MIC if a proposed change of charge exceeds the price cap. Providing these telecommunications services other than pursuant to the terms and conditions notified to the MIC is prohibited, unless minor exceptions apply.

     Articles of Interconnection Agreements

	•		Unregulated, in general.
	•		Approval from the MIC required for Category I Designated Telecommunications Facilities.
	•		Prior notification to the MIC required for Category II Designated Telecommunications Facilities.

     Telecommunications Facilities of Carriers.

•

A telecommunications carrier that owns telecommunications circuit facilities must maintain its telecommunications facilities (except telecommunications facilities stipulated in MIC’s ordinances as those having a minor influence on the users’ benefit in the cases of damage or

			failure thereof) in conformity with the technical standards provided in the applicable MIC’s ordinances. Such Carriers shall confirm itself that said telecommunications facilities are in compliance with such technical standards specified in the applicable MIC’s ordinances.
	•		A telecommunications carrier that provides Basic Telecommunications Services must maintain their telecommunications facilities for provision of their Basic Telecommunications Services in conformity with the technical standards provided in the applicable MIC’s ordinances.
	•		Telecommunications Carriers that own telecommunications circuit facilities or provide Basic Telecommunications Services must establish their own administrative rules in accordance with MIC’s ordinances in order to secure the reliable and stable provision of telecommunications services. These administrative rules must regulate the operation and manipulation of telecommunications facilities and the safeguarding, inspecting and testing regarding the construction, maintenance and administration of telecommunications facilities, etc. as provided for by the ministerial ordinance of MIC. Such administrative rules must be submitted to the MIC prior to the commencement of operations, and changes must be submitted to the MIC after they are implemented without delay.

     Order to Improve Business Activities

•

The Minister for MIC may, if it is deemed that business activities of a telecommunications carrier falls under the inappropriate items set forth in the Telecommunications Business Law, insofar as necessary to ensure the users’ benefit or the public interest, order said telecommunications carrier to take actions to improve operations methods or other measures.

     Right of Way Privilege for Authorized Carriers

•

Authorization on the entire or a part of a carrier’s telecommunications business by MIC for the privileged use of land or other public utilities for circuit facilities deployment is required. Right of Way privilege is available to carriers irrespective of registration.

     Merger, Business Transfer or Divestiture of Carriers

•

Post facto notification to MIC without delay is required.

     Business Suspension, Abolition or Dissolution of Carriers

•

Post facto notification to MIC without delay is required. Prior announcement of withdrawals to service users is required in accordance with MIC’s ordinance.

     Foreign Capital Participation

•

Unregulated. Prior notification is required under the Foreign Exchange and Foreign Trade Law for acquisition of shares of telecommunications carriers to which registration for start-up services is applicable. This is not applicable to purchasers of ADSs. The one-third foreign ownership restriction is applicable only to NTT.

C. Organizational Structure.

     The information required by this item is in “ — Our Group Companies” above.

D. Property, Plants and Equipment.

     The information required by this item is in “ — Network” above.

Item 4A. Unresolved Staff Comments

     None.

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

     We are a provider of a comprehensive range of Internet connectivity services and network solution services in Japan. We were founded in December 1992 and began offering Internet connectivity services commercially in July 1993. We were one of the first commercial ISPs in Japan.

     Our primary sources of revenues are connectivity services, value-added services, systems integration and equipment sales. Connectivity services consist of dedicated Internet-access services and dial-up Internet-access services. For value-added services, we provide services such as network security services, mail and web server hosting services, managed router services and Internet data center services. For systems integration, we provide systems development and integration for business-to-business and business-to-consumer-networks, and outsourcing projects. For equipment sales, we provide equipment as part of our provision of total network. Substantially all of our revenues are from our customers in Japan, and we are the main point of contact for customers for these various services.

     Total revenues were ¥41.7 billion, ¥49.8 billion and ¥57.1 billion for the fiscal years ended March 31, 2005, 2006 and 2007, respectively. The increases in revenues for each of the two years ended March 31, 2007 as compared to the previous fiscal years mainly reflect an increase in value-added services and systems integration revenues.

     Operating income for the fiscal year ended March 31, 2007 was ¥3.5 billion, an improvement from operating income of ¥2.4 billion for the fiscal year ended March 31, 2006 and ¥1.2 billion in the fiscal year ended March 31, 2005. The improvement compared to the previous year is mainly due to an increase in relatively higher-margin value-added services and systems integration.

     Net income for the fiscal year ended March 31, 2007 was ¥5.4 billion, an improvement from net income of ¥4.8 billion for the fiscal year ended March 31, 2006 and ¥2.9 billion for the year ended March 31, 2005. The improvement in net income is mainly due to an increase in operating income and a release of valuation allowance against deferred income tax assets related to tax operating loss carryforwards and others.

     We have generated cash in the last three fiscal years from sales of equity. On December 2, 2005, we listed on the Mothers market of the Tokyo Stock Exchange (“TSE”). In connection with the listing, we issued 12,500 new shares of common stock for an amount of ¥6.0 billion. As we conducted a 1 to 5 stock split on

October 11, 2005, the total number of our issued shares of common stock increased to 204,300. On December 14, 2006, we moved to the First Section of the TSE for our listing in Japan, without the issuance of new shares.

     In order to provide our customers with total network solutions, we provide our services directly or by working together with the subsidiaries and affiliates of IIJ Group. We refer to our subsidiaries and certain affiliates as our group companies, and we have invested heavily in and exercise significant influence over these companies. For the fiscal year ended March 31, 2007, we consolidated the results of operations of five subsidiaries included among our group companies — IIJ Technology Inc. (“IIJ-Tech”), IIJ Financial Systems Inc., Net Care, Inc. (“Net Care”), Net Chart Japan Inc. (“NCJ”) and IIJ America Inc. (“IIJ-A”). We account for our investments in the affiliated companies by the equity method.

     On October 1, 2005, IIJ Media Communications Inc. (“IIJ-MC”), our former consolidated subsidiary, was merged into us after a portion of IIJ-MC’s business was transferred to IIJ-Tech, our consolidated subsidiary. Asia Internet Holding Co., Ltd. (“AIH”), our former equity method investee, became our wholly owned consolidated subsidiary, and was merged into us on October 1, 2005. In each of the mergers, we were the surviving company.

     On February 1, 2006, we established a joint venture company, Internet Revolution Inc. (“i-revo”), with Konami Corporation, with the purpose of operating comprehensive portal sites. We invested ¥750 million and hold 30.0% of the company. i-revo is an equity method investee.

     On August 10, 2006, we invested ¥110 million and established a new consolidated subsidiary, NCJ. NCJ is fully owned by the Company. NCJ commenced its business operations after it succeeded to the business operations of Net Chart Japan Corporation on October 1, 2006 for ¥75 million. NCJ provides network construction that is mainly related to Local Area Networks.

     On March 30, 2007, we purchased additional shares of IIJ-Tech from its minority shareholders for ¥2.7 billion in cash, in order to acquire additional interest in IIJ-Tech.

     For a discussion of factors affecting our future financial results, see “Item. 5.D. Trend Information”.

Results of Operations

     As an aid to understanding our operating results, the following tables show items from our statement of income for the periods indicated in millions of yen amounts (or thousands of U.S. dollars) and as a percentage of total revenues.

		Fiscal year ended March 31,
		2005								2006								2007
		(millions of yen except for percentage data)																								(thousands
																										of U.S.
																										dollars)
REVENUES:
Connectivity and value-added services:
Dedicated access		¥	11,373				27.3	%		¥	10,625				21.3	%		¥	10,792				18.9	%		$	91,797
Dial-up access			2,937				7.0				2,674				5.4				2,416				4.2				20,554
Value-added services			5,005				12.0				6,250				12.5				7,416				13.0				63,079
Other			3,169				7.6				3,674				7.4				3,729				6.6				31,725
Total			22,484				53.9				23,223				46.6				24,353				42.7				207,155
Systems integration			15,854				38.0				23,505				47.2				30,527				53.5				259,672
Equipment sales			3,365				8.1				3,085				6.2				2,175				3.8				18,496
Total revenues			41,703				100.0				49,813				100.0				57,055				100.0				485,323
COST AND EXPENSES:
Cost of connectivity and value-added services:
Backbone cost			3,551				8.5				3,516				7.0				3,516				6.2				29,908
Local access line cost			4,040				9.7				4,558				9.2				4,616				8.1				39,269
Other connectivity cost			1,361				3.3				815				1.6				331				0.6				2,813
Depreciation and amortization			2,938				7.0				2,721				5.5				2,639				4.6				22.450
Other			7,594				18.2				8,468				17.0				9,443				16.5				80,325
Total cost of connectivity and value-added services			19,484				46.7				20,078				40.3				20,545				36.0				174,765
Cost of systems integration:
Cost of equipment sales related to systems integration			1,759				4.2				3,591				7.2				4,206				7.3				35,774
Other			10,441				25.0				14,529				29.2				19,323				33.9				164,371
Total cost of systems integration			12,200				29.2				18,120				36.4				23,529				41.2				200,145
Cost of equipment sales			3,111				7.5				2,818				5.7				1,894				3.4				16,104
Total cost			34,795				83.4				41,016				82.4				45,968				80.6				391,014
Sales and marketing			2,795				6.7				3,080				6.2				3,439				6.0				29,251
General and administrative			2,666				6.4				3,147				6.3				3,971				7.0				33,776
Research and development			199				0.5				159				0.3				177				0.3				1,508
Total cost and expenses			40,455				97.0				47,402				95.2				53,555				93.9				455,549
OPERATING INCOME			1,248				3.0				2,411				4.8				3,500				6.1				29,774
OTHER INCOME (EXPENSES):
Interest income			13				0.0				13				0.0				23				0.0				196
Interest expense			(686	)			(1.6	)			(437	)			(0.9	)			(397	)			(0.7	)			(3,381	)
Foreign exchange gains (losses)			6				0.0				3				0.0				0				(0.0	)			(3	)
Net gain on other investments			2,439				5.9				3,198				6.5				1,867				3.3				15,877
Other — net			128				0.3				191				0.4				56				0.1				482
Other income — net			1,900				4.6				2,968				6.0				1,549				2.7				13,171
INCOME FROM OPERATIONS BEFORE INCOME TAX EXPENSE (BENEFIT), MINORITY INTERESTS AND EQUITY IN NET LOSS OF EQUITY METHOD INVESTEES		¥	3,148				7.6	%		¥	5,379				10.8	%		¥	5,049				8.8	%		$	42,945
INCOME TAX EXPENSE (BENEFIT)		¥	100				0.2	%		¥	257				0.5	%		¥	(804	)			(1.4	)%		$	(6,839	)
MINORITY INTERESTS IN EARNINGS OF SUBSIDIARIES			(109	)			(0.3	)			(354	)			(0.7	)			(233	)			(0.4	)			(1,979	)
EQUITY IN NET LOSS OF EQUITY METHOD INVESTEES			(33	)			(0.1	)			(14	)			(0.0	)			(210	)			(0.3	)			(1,788	)