As filed with the Securities and Exchange Commission on June 30, 2008

 

 

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, DC 20549

FORM 20-F

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

OR

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

For the fiscal year ended March 31, 2008

OR

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

For the transition period from _____ to _____

OR

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

Date of event requiring this shell company report _____

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)

Yuko Kazama, +81-3-5259-6500, +81-3-5205-6395,
Jinbocho Mitsui Bldg., 1-105 Kanda Jinbo-cho, Chiyoda-ku, Tokyo 101-0051, Japan
(Name, Telephone, Facsimile number and Address of Company Contact Person)
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:
None
(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, 2008, 206,478 shares of common stock were outstanding, including 21,585 shares represented by an aggregate of 8,634,000 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 basis of accounting the registrant has used to prepare the financial statements included in this filing:

          þ U.S. GAAP

          o International Financial Reporting Standards as issued by the International Accounting Standards Board

          o Other

     If “Other” has been checked in response to the previous question, indicate by check mark which financial statement item the registrant has elected to follow.

Item 17 o   Item 18 o

     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			12
Item 4A. Unresolved Staff Comments			31
Item 5. Operating and Financial Review and Prospects			32
Item 6. Directors, Senior Management and Employees			53
Item 7. Major Shareholders and Related Party Transactions			58
Item 8. Financial Information			59
Item 9. The Offer and Listing			60
Item 10. Additional Information			61
Item 11. Quantitative and Qualitative Disclosures about Market Risk			71
Item 12. Description of Securities Other than Equity Securities			71
PART II			71
Item 13. Defaults, Dividend Arrearages and Delinquencies			71
Item 14. Material Modifications to the Rights of Security Holders and Use of Proceeds			71
Item 15. Controls and Procedures			72
Item 16A.Audit Committee Financial Expert			74
Item 16B.Code of Ethics			75
Item 16C.Principal Accountant Fees and Services			75
Item 16D.Exemptions from the Listing Standards for Audit Committees			75
Item 16E.Purchases of Equity Securities by the Issuer and Affiliated Purchasers			76
PART III			76
Item 17. Financial Statements			76
Item 18. Financial Statements			76
Item 19. Exhibits			77
EX-1.1 Articles of Incorporation, as amended ( English Translation )
EX-1.3 Regulations of the Board of Directors, as amended ( English Tranlsation )
EX-2.2 Bylaws of the IIJ Group Employee Shareholders' Association ( English Translation )
EX-2.4 Bylaws of the IIJ Group Director Stock Purchase Plan ( English Translation )
EX-4.6 Agreement on Limited Liability, dated June 26, 2007 and June 27, 2008, between Internet Initiative Japan Inc. and outside directors and outside comapny auditors
EX-11.1 Internet Initiative Japan Code of Conduct
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 our investments in our subsidiaries and affiliated companies may not produce the returns that we expect or may adversely affect our results of operations and financial condition.

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

		As of and for the fiscal year ended March 31,
		2004				2005				2006				2007				2008				2008
						(millions of yen, except per share and ADS data)																(thousands of
																						U.S. dollars,
																						except per
																						share and ADS
																						data(1))
Diluted net income (loss) per share			(14,321	)			15,172				24,258				26,487				25,072				251.10
Basic net income (loss) per ADS equivalent			(35.80	)			37.93				60.75				66.30				62.75				0.63
Diluted net income (loss) per ADS equivalent			(35.80	)			37.93				60.65				66.22				62.68				0.63
Cash dividends declared per share			—				—				—			¥	1,500			¥	1,750			$	17.53
Basic weighted average number of shares			158,554				191,559				195,613				203,992				206,240
Diluted weighted average number of shares			158,554				191,559				195,955				204,244				206,465
Basic weighted average number of ADS equivalents (thousands)			63,422				76,624				78,245				81,597				82,496
Diluted weighted average number of ADS equivalents (thousands)			63,422				76,624				78,382				81,698				82,586
Balance Sheet Data:
Cash and cash equivalents		¥	12,284			¥	5,286			¥	13,727			¥	13,555			¥	11,471			$	114,882
Total assets			42,737				37,116				50,705				47,693				55,703				557,862
Short-term borrowings			6,564				4,725				4,555				6,050				9,150				91,637
Current portion of long-term borrowings, including capital lease obligations			3,936				5,511				4,994				3,243				3,456				34,611
Long-term borrowings, including capital lease obligations			5,188				5,869				5,271				4,318				4,738				47,455
Convertible notes (5)			11,832				—				—				—				—				—
Common stock			13,765				13,765				16,834				16,834				16,834				168,591
Total shareholders’ equity (capital deficiency)			6,214				11,615				20,222				20,112				24,981				250,182
Operating Data:
Capital expenditures, including capitalized leases (6)		¥	3,523			¥	5,011			¥	4,762			¥	3,953			¥	6,078			$	60,872
Operating margin ratio (7)			(3.7	)%			3.0	%			4.8	%			6.1	%			7.1	%
Net cash provided by (used in):
Operating activities		¥	1,923			¥	5,238			¥	6,559			¥	7,402			¥	4,538			$	45,446
Investing activities			(852	)			1,974				1,805				(3,014	)			(5,444	)			(54,519	)
Financing activities			7,669				(14,213	)			39				(4,560	)			(1,152	)			(11,539	)

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,
		2004				2005				2006				2007				2008
										(millions of yen)
Capital expenditures:
Acquisition of assets by entering into capital leases		¥	1,866			¥	4,434			¥	3,843			¥	2,665			¥	4,222
Purchases of property and equipment			1,657				577				919				1,288				1,856
Total capital expenditures		¥	3,523			¥	5,011			¥	4,762			¥	3,953			¥	6,078

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 ¥99.85 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, 2008, 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,
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
2008			124.09				96.88				113.61				99.85
Calendar year 2008
January		¥	109.70			¥	105.42			¥	107.82			¥	106.74
February			108.15				104.19				107.03				104.19
March			103.99				96.88				100.76				99.85
April			104.56				100.87				102.68				104.53
May			105.52				103.01				104.36				105.46
June (through June 25, 2008)			108.29				104.41				106.97				108.29

     The noon buying rate on June 25, 2008 was ¥108.29 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.

     Our business is principally conducted in Japan and most of our revenues are from customers operating in Japan. If the Japanese economy deteriorates or does not improve, and it results in significantly lower levels of network-related investment, especially in network systems construction which may have significant influence on our corporate customers’ investment, or if corporate customers respond to conditions by prioritizing low price over quality, it may become 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, due, for example, to severe price competition,
	•		lower revenue growth and lower margins in our growing value-added services and systems integration, if we fail to successfully differentiate our services from those of our competitors, or experience a significant decrease in systems integration revenues from period to period due to the cancellation of one or more large projects or changes in the number of projects resulting from a seasonal fluctuation in the systems integration business in Japan,
	•		an increase in backbone costs due to increased volume of Internet traffic and demand for leasing backbone lines, or a decline in the profitability of connectivity services if we contract for more capacity than we actually require to serve our customers,
	•		an increase in expenses for network infrastructure, research and development and other similar investments which we may be forced to make in the future in order to remain competitive, or increased expenses relating to the leasing of additional equipment,
	•		an increase in personnel and outsourcing costs, especially in our systems integration, if personnel and outsourcing costs increase, or we fail to manage outsourcing projects effectively or fail to cover outsourcing costs by raising enough revenues from outsourced projects,
	•		an increase in SG&A costs, such as personnel expenses, advertising expenses and office rent expenses, in conjunction with our expected or planned or continued business expansion,
	•		the recording of an impairment loss as a result of an impairment test on the non-amortized intangible assets such as goodwill that are recorded related to any mergers and acquisitions,
	•		a decline in the value and trading volume of our holding of available-for-sale securities from which we expect gains on sale or impairment losses on stocks of companies,
	•		an increase of equity in net loss of equity method investees affected by an increase in net losses of our equity method investees,
	•		the amount and timing of the recognition of deferred tax benefits or expenses resulting from a release or an increase of valuation allowance against deferred income tax assets related to tax operating loss carryforwards and other factors, and
	•		a negative effect on our revenues and profits if newly established consolidated subsidiaries cannot achieve our expected levels of revenues or manage costs and expenses in a timely and adequate manner.

     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. 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 the NTT Group, which is comprised of Nippon Telegraph and Telephone Corporation (“NTT”) and NTT Communications, is 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 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.

Our investments in our subsidiaries and affiliated companies may not produce the returns we expect or may affect our results of operations and financial condition adversely.

     In the past, we have invested in our group companies to expand our businesses and generate new businesses. As of June 25, 2008, we have ten consolidated subsidiaries and four equity method investees. The financial performance of our consolidated subsidiaries affects our financial condition and results of operations directly and the financial performance of our equity method investees affects our financial condition and results of operations to the extent of our pro rata portion of our equity-method investments. 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 from these investments. We may consider further reorganization of our group companies and there is no guarantee that we will be able to achieve the benefits that we expect from such reorganization. We may provide additional financial support in the form of loans, guarantees or additional equity investments in such companies. We may lose all or part of our investment in such companies if their value decreases as a result of their financial performance or if they 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 condition and results of operations.

     In May 2007, we made our two subsidiaries, IIJ Technology Inc. (“IIJ-Tech”) and Net Care, Inc. (“Net Care”), wholly-owned by purchasing shares from their minority shareholders, which cost us ¥5,025 million in cash and share exchanges with the issuance of 2,178 new shares. In June 2007, we acquired 100% of the equity of hi-ho for ¥1,230 million in cash from Panasonic Network Services Inc. (“PNS”) to take over PNS’s Internet service business for home users and its solution business for corporate customers.

     It is possible that the new subsidiaries and affiliated companies could adversely affect our results of operations and financial condition, because they may record losses in their early stages of business. In April 2007, we invested ¥300 million in GDX Japan Inc. (“GDX”) to acquire 51% of its equity 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 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. From July 2007 through October 2007, we invested ¥500 million in Trust Networks Inc. (“Trust Networks”), which plans to provide operations of networks for automated teller machines (“ATMs”). We owned 60.2% of the equity of Trust Networks as of June 25, 2008 and Trust Networks is our consolidated subsidiary. In April 2008, we invested ¥130 million in and established On-Demand Solutions Incorporated (“On-Demand Solutions”) as our wholly-owned subsidiary to provide print-on-demand and related services. In June 2008, we invested ¥100 million in and established “IIJ Innovation Institute Inc.” (“IIJ-II”) as our wholly-owned subsidiary, which plans to start a business incubation center for technology development and commercialization of the Internet.

     Our substantial investment in Crosswave Communications Inc. (“Crosswave”), our former equity method investee, 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. 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. After the investment through the fiscal year ended March 31, 2008, we recorded total equity in net loss of i-revo of ¥669 million.

If our systems integration revenues fluctuate or if we fail to execute our systems integration projects in a timely or satisfactory manner, our results of operations and financial condition may be adversely affected.

     A large portion of our future revenue depends on systems integration projects which we, in cooperation with IIJ-Tech, IIJ Financial Systems Inc. (“IIJ-FS”) and Net Care, have been contracted to perform. Compared to monthly recurring revenues from connectivity and value-added services and systems operation and maintenance, one-time revenues from systems construction tend to fluctuate from time to time. If corporate customers put off or quit placing orders because of the deterioration of the Japanese economy and a decrease in corporate investment, we may not be able to record systems construction revenues and operating profit as expected, or we may need to defer recording of such revenues or operating profit.

     Along with the recent growth of our systems integration business, some of our systems integration projects have been larger in scale and need more time until they are completed. Generally, systems integration projects are more difficult to be effectively controlled as they become larger in scale. If we fail to control costs such as personnel and outsourcing costs or to retain adequate personnel for the projects, or if we need more personnel than expected to handle problems and we cannot collect this cost from our customers, our results of operations and financial condition related to systems integration may be adversely affected.

     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 operations and financial condition.

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

     As of March 31, 2008, the total balance of our intangible assets was approximately ¥5.9 billion, including non-amortized intangible assets of ¥4.3 billion related to IIJ-Tech, non-amortized intangible assets of ¥0.4 billion and amortized intangible assets of ¥0.2 billion related to hi-ho, non-amortized intangible assets of ¥0.3 billion related to Net Care and ¥0.3 billion related to IIJ-FS. If the business operations of our subsidiaries are adversely affected by factors such as a significant adverse change in their business climate and others, we may have an impairment loss as a result of an impairment test on non-amortized intangible assets such as goodwill. The realization of any impairment losses on non-amortized intangible assets may result in material adverse effects on our financial condition and results of operations.

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 retain or attract such personnel and control human resources costs 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, including data center 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 adequately, the quality of our services could deteriorate and our business may suffer. We may also need to increase office rent expenditures along with our business expansion. If we are unable to prepare our network and other facilities in a timely manner to meet our customers’ demand or our business expansion, we may miss growth opportunities or may be obliged to bear higher costs to prepare our network and other facilities.

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, including the shift to new technology-based networks such as IPv6,
	•		frequent new product and service introductions,
	•		continually changing customer requirements, and
	•		evolving industry standards.

     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 our 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 chairman, president 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.

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, 2008, IIJ had tax operating loss carryforwards of ¥13.9 billion. The loss carryforwards are available to offset future taxable income and will expire as shown in Note 10 to our consolidated financial statements. We recorded ¥1.7 billion of deferred tax benefits resulting from a release of valuation allowances against deferred income tax assets related to tax operating loss carryforwards for the fiscal year ended March 31, 2008. A large portion of tax operating loss carryforwards will expire in the period ending March 31, 2011. Along with the realization of deferred income tax assets as a result of recording taxable income, we expect to record more deferred tax expenses than deferred tax benefits. 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 and for trading purposes. 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 ¥0.2 billion for the fiscal year ended March 31, 2008, and the book value of our remaining available-for-sale securities was ¥1.3 billion on March 31, 2007 and ¥0.8 billion on March 31, 2008. 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. We recorded an impairment loss of ¥0.3 billion on available-for-sale and nonmarketable equity securities for the fiscal year ended March 31, 2008 and ¥1.4 billion for the fiscal year ended March 31, 2007.

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 owned 29.4% of our outstanding shares as of March 31, 2008. As our largest shareholder, NTT may be able to exercise substantial influence over us. As of June 30, 2008, we had one outside director, Mr. Takashi Hiroi, from NTT among our 14 directors. 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 (“NTT East”) and Nippon Telegraph Telephone West Corporation (“NTT West”) and KDDI for local access lines for our customers. We 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, 2008, 69.6% in costs for our domestic network backbone was for NTT Communications. For us to provide broadband mobile data communications as a Mobile Virtual Network Operator (“MVNO”), we depend on mobile network operators. 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. (“Cisco”) and Juniper Networks, Inc. (“Juniper Networks”). 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.

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 our 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. Recently, the MIC has been considering adapting laws and regulations to control actions that hurt public order over the Internet. 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 issue 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 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 ADSs on the Nasdaq National Market.

     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.

     We offer our services and solutions directly and with our group companies. We have invested in our group companies to expand our business and generate new business in the past. We work closely together with our group companies in providing total network solutions to our customers. For descriptions and the history of our group companies, see “Our Group Companies” in Item 4.B and “Overview” in Item 5.A.

     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. (“IIJ-A”), 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 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 or ADSL and optical lines for individual and corporate customers. Our value-added services include security-related outsourcing services that protect our customer network systems from unauthorized access and secure remote connections to internal networks, network-related outsourcing services such as router rental and Virtual Private Network (“VPN”), and server-related outsourcing services such as web server hosting, e-mail security service, operation and management of e-mail systems and Internet data center services. Our systems integration is tailored to our customers’ requirements, which include consulting, project planning, systems design, construction of network systems and systems operation. We also sell 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,
		2006				2007				2008
Connectivity services			26.7%				23.1%				26.3%
Value-added services			12.5%				13.0%				14.3%
Systems integration			47.2%				53.5%				50.9%

     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 June 25, 2008, we operated, in Japan, 12 points of presence (“POPs”) for dedicated access, 13 Internet data centers and a universal POP for nationwide dial-up access. POPs are the main points at which our customers connect to our backbone throughout Japan. Our policy on the management of our backbone is to upgrade the bandwidth based on demand to maximize cost effectiveness. Our backbone network also extends to the United States. The total capacity between Japan and the United States is 40.8 Gbps (4 STM-64 trunk lines and 1 STM-16 trunk lines) as of June 25, 2008.

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 enables 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 such as security, network and server-related outsourcing,
	•		our Internet data center services,
	•		our systems integration, including consulting, project planning, systems design, construction of network systems and systems operation and management, and
	•		other network and application services that our group companies provide.

     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: connectivity services for corporate use and connectivity services for home use. Connectivity services for corporate use are based mainly on dedicated local-line connections provided by telecommunications carriers between our backbone and customers. Connectivity services for home use mainly require customers to connect to our POPs through the publicly-switched telephone network or variety of broadband access services, such as ADSL and optical lines. The Internet connectivity part of our total network solutions ranges from low-cost, entry-level dial-up connections from personal computers to customized wide-area network solutions deploying a range of the dedicated services listed below to connect headquarters, data centers, branch offices and mobile personnel. Currently, large telecommunications carriers such as NTT East, NTT West and others provide a variety of last-mile access with dedicated access, ADSL, fiber optic and Ethernet-based lines. Recently, we have started a broadband mobile data communication service as a mobile virtual network operator. Such new service provides 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,
		2004				2005				2006				2007				2008
Connectivity services (corporate use) (1):
IP Service (-99 Mbps)			656				749				739				751				855
IP Service (100 Mbps — 999 Mbps)			66				90				117				161				201
IP Service (1 Gbps —)			16				24				40				63				70
IIJ Data Center Connectivity Service			196				231				247				282				288
IIJ FiberAccess/F and IIJ DSL/F (Broadband Services)			5,788				9,873				13,297				16,418				23,539
Others			2,905				2,423				1,760				1,618				3,002
Total connectivity service (corporate use) contracts			9,627				13,390				16,200				19,293				27,955
Connectivity services (home use) (1):
Under IIJ Brand			72,735				65,921				60,525				55,907				51,051
hi-ho			—				—				—				—				189,700
OEM			620,731				625,908				568,307				476,483				232,515
Total connectivity service (home use) contracts			693,466				691,829				628,832				532,390				473,266

(1)

The classifications for the number of our Internet connectivity service subscribers were changed in the fiscal year ended March 31, 2008. “Dedicated access service contracts” and “Dial-up access service contracts” in the former presentation were reclassified to “Connectivity services (corporate use)” and “Connectivity services (home use)” reflecting the acquisition of hi-ho.

     As of June 25, 2008, we mainly offered the following Internet connectivity services. The term of contracts is one year for Internet connectivity services for corporate use and generally one month for Internet connectivity services for home use.

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

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

Connectivity Services for Corporate Use

     Our lineup of connectivity services for corporate use includes: IP Service, IIJ Data Center Connectivity Service, IIJ FiberAccess/F, IIJ DSL/F, IIJ DSL/A, IIJ ISDN/F, IIJ Line Management/F, IIJ Dial-up Advanced, Enterprise Dial-up IP Service and IIJ Dial-up Standard.

     IP Service. Our IP Service is a full-scale, high-speed access service that connects the customer’s network to our network and the Internet. The service is used by corporate customers mainly for their headquarters or data centers, where reliable network service is indispensable. As of March 31, 2008, we had 1,126 contracts for our IP Service compared to 975 for our IP Service as of March 31, 2007. The customer chooses the level of service it needs based upon its bandwidth requirements. As of June 25, 2008, we offered service at speeds ranging from 64 kbps to 10 Gbps. The total bandwidth allocated to our dedicated access services, which include IP Service, IIJ Data Center Connectivity Service, IIJ FiberAccess/F, IIJ DSL/F, IIJ DSL/A, IIJ ISDN/F and others, has increased 21.3% to 392.4 Gbps as of March 31, 2008 compared to 323.5 Gbps as of March 31, 2007.

     Our IP Service revenues, including revenues of IIJ Data Center Connectivity Service, represented 13.5% of our total revenues for the fiscal year ended March 31, 2008 and 14.8% for the fiscal year ended March 31, 2007. We believe that as business customers continue to increase their use of the Internet network as a business tool and increasingly rely on the Internet network, 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. We collect the usage fee from the customer and pay this amount to the carrier. While we prepare and arrange the leased access lines on behalf of customers under our name, the usage fee collected from the corporate customers for internet connectivity services and paid to the carriers is recorded gross in our consolidated financial statements.

     Although fees are charged on a monthly basis, the minimum contract length is one year.

     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 home 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 that enables customers to use IPv6 technology via the IPv4 access network, by encapsulating IPv6 data with IPv4 data. IPv6 Native and IPv6/IPv4 Dual Stack Services are services which provide an IPv6 environment to customers without encapsulating it with IPv4 data. We are one of the first commercial Internet Service Providers, 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 (“SLA”) to our customers to better define the quality of services our customers receive. We were the first ISP in Japan to introduce this type of agreement.

     We 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 due to our high quality and reliable 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 Data Center Connectivity Service. We also provide data center connectivity services. Our data center connectivity services are an important service which enables us to provide high-quality, high-speed, seamless service to our customers. The bandwidths we offer for our data center connectivity services range from 64 kbps up to 10Gbps. The service fee mainly depends on the contracted bandwidth. We also offer IPv6-capable data center services, which offer the same services using IPv6. As of March 31, 2008, we had 288 Internet data center connectivity contracts, compared to 282 as of March 31, 2007. We offer full SLA to our data center connectivity service customers.

     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 a maximum of 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, 2008, we had 23,539 contracts 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. IIJ also provides IIJ DSL/A Service, a similar service to IIJ DSL/F 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 where access to ISDN lines is available, 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 to corporate users. 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 a VPN function that is provided by our value-added services or systems integration to access the customer’s own corporate network securely. Optical lines, ADSL lines and others can be used for a local access option. Our main dial-up access services are our IIJ Dial-up Advanced, Enterprise Dial-up IP Service and IIJ Dial-up Standard.

     IIJ Mobile. This service, launched in January 2008, provides wireless broadband internet connectivity exclusively for corporate customers as a MVNO. We use the wireless networks of NTT DoCoMo and EMOBILE for mobile access network.

Connectivity Services for Home Use

     We offer connectivity services for home use such as IIJ4U, IIJmio, and hi-ho. IIJmio has a variety of Internet connectivity services, such as IIJmio DSL/DF Service, IIJmio FiberAccess/DF Service, IIJmio DSL/SF Service, IIJmio FiberAccess/DC Service, IIJmio FiberAccess/SF Service and IIJmio MobileAccess Service, depending on the type of local access. Connectivity services for home use under the hi-ho brand, which we acquired on June 1, 2007, are similar to IIJ4U.

     We also offer OEM services (where we provide services for other companies which sell those services under their own name) for other network operators.

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 and 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.

     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 June 25, 2008, we offered five main security-related outsourcing services (described below) that protect customers’ internal networks from unauthorized access and secure remote connections to internal networks. We were the first ISP in Japan to provide firewall services, which we introduced in 1994.

     IIJ DDoS Solution Service. Released in October 2005, this service protects customers’ internal networks from distributed denial of service (“DDoS”) attacks, a type of unauthorized access from the Internet. The fee depends on the type of service that we provide, with the initial fee starting at ¥650,000 and the monthly fee starting at ¥498,000.

     IIJ Security Scan Service. Released in March 2002, this package of services targets 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 for each 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 each additional IP address.

     IIJ Managed IPS Service. Released in July 2006, this service offers around-the-clock, non-stop monitoring of a company’s network using an intrusion prevention system (“IPS”) to detect unauthorized access on the company’s network in real time and terminate such unauthorized access. The initial cost for the service is ¥900,000 and the minimum monthly fee starts at ¥380,000.

     IIJ Managed Firewall Service. Released in October 2006, this service 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 at ¥50,000. This 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. This service ensures a secure remote environment by controlling accessible servers and utilization protocols for each dial-up account combined with remote VPN function and Authentication Service Link Option. With this service, customers may connect to their office networks from overseas via local ISPs.

•

Network-related outsourcing services. As of June 25, 2008, we offered six main network-related outsourcing services (described below), including provision, monitoring and maintenance of network equipment and VPN to connect customers’ branch and remote offices.

     IIJ Internet-LAN Service. IIJ Internet-LAN Service provides easy Ethernet connectivity supported by the SMF technology.

     IIJ SMFsx Service. IIJ SMF sx Service is a centralized network management system based on the SEIL Management Framework (“SMF”), a patented technology of IIJ. This system enables centralized management of network configuration, administration, and maintenance, reducing both configuration and maintenance time and costs for large-scale network construction such as VPN..

     Ultra Send-back Service. Ultra Send-back service provides on-site maintenance by service drivers for SEIL routers which are used as service adaptors for IIJ Internet-LAN Service and IIJ SMFsx Service.

     IIJ Managed VPN PRO Service. IIJ Managed VPN PRO Service provides connectivity among a company’s branch and remote offices, utilizing SEIL Series or other routers.

     SEIL Rental Service. SEIL Rental Service is a rental service for the SEIL Series, a product developed by IIJ. There are several models for various WAN Interfaces. Optional services such as fixed format configuration and on-site maintenance are also provided.

     Managed Router Service. Managed Router Service provides customers with router equipment and maintenance, operation and administration of routers. We provide SEIL Series routers or CISCO routers depending on customer requirements.

•

Server-related outsourcing services. As of June 25, 2008, we offered fourteen main server-related outsourcing services (described below), including provision of e-mail and web services and operation and management of e-mail systems.

     IIJ Secure MX Service. IIJ Secure MX Service 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 Post Office Service. This is an e-mail operation outsourcing service with virus check and audit options. It allows customers to use its own domain name. The customer may administer e-mail accounts online through our customer support Web interface.

     IIJ Mail Box Service. This is an e-mail outsourcing service provided under a certain domain name provided by IIJ. A customer can administer e-mail accounts online through our customer support Web interface.

     E-mail distribution services. These services allow customers to distribute hundreds of e-mails at one time with mailing list functions.

     IIJ Web High-grade service. This service offers disk area to create web sites with customized CGI, database, access log analysis and other features.

     IIJ Secure Web Platform service. This service mainly targets medium- to-large sized enterprises and enables customers to create full customized web-site related platform.

     IIJ Web Standard Service. This service mainly targets small- and medium-sized enterprises and allows customers to use their own domain names, and provides them with web hosting space. By limiting specifications, the pricing of the service is kept to a minimum ¥5,000 per month. Careful traffic management of the storage space ensures a high-performance web-server environment for users.

     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.

     IIJ Download Site Service. This is a hosting service dedicated to high-volume content downloads from the Internet. 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 of up to 1Gbps depending on the contract.

     IIJ URL Filtering Service. This service blocks access to websites deemed inappropriate. The initial cost for the service is ¥30,000, and the monthly basic fee is ¥40,000 plus an additional fee based on the number of users in the customer’s internal network.

     IIJ SSL Certificate Management Service. This service 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 DNS Services. We offer domain name related services that consist of domain name administration services and domain name server outsourcing services. Domain names such as “.jp”, “.com”, “.net” and “.org” are available.

     Streaming services. We offer Internet streaming services for live broadcasts over the Internet, as well as streaming server hosting services.

     IIJmio Safety Mail Service. This is an e-mail service with anti-virus functions for individual users. The service employs the InterScan VirusWall developed by Trend Micro Incorporated, and features POP(Post Office Protocol)/SMTP over SSL which provides secure e-mail transmission in addition to SMTP authentication. 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 focuses 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 e-mails incoming to and outgoing from customers,
	•		online brokerage systems for securities firms,
	•		outsourcing of websites for online businesses,
	•		re-construction of overall corporate network systems suited to increased traffic data,
	•		voice over IP systems to transmit voice among customer branch offices over the Internet,
	•		construction of wireless local area networks (“LAN”), and
	•		consultation on corporate network security.

     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 third-party equipment to meet the one-stop needs of our customers together with our in-house developed router, the “SEIL Series”.

     SEIL Series. Our high-end in-house developed router, the “SEIL Series” was first released in October 2001. Currently there are 5 different models; SEIL/X1, SEIL/X2, SEIL/Turbo, SEIL/Plus, SEIL/128. SEIL/X1 and SEIL/X2 are the latest models with high throughput and functions indispensable for high-end corporate use. SEIL/X1, SEIL/X2, SEIL/Turbo and SEIL/Plus carries Ethernet interface and SEIL/128 carries BRI interface. With the SMF feature, which provides auto-configuration features, it enables customers to create a VPN network by simply connecting the Ethernet into SEIL’s WAN interface.

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,
	•		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 June 25, 2008, we had a total capacity of 40.8 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,
		2004				2005				2006				2007				2008
Backbone cost (thousand yen)		¥	4,719,638			¥	3,550,885			¥	3,516,322			¥	3,515,934			¥	3,469,717

Network upgrades

     As a policy, we put a high priority on maintaining 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 and Juniper Networks 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 June 25, 2008, we had, in Japan, 12 primary POPs which provided dedicated access and included the main Internet backbone routers that form our network. As of the same date, we also had a universal POP for nationwide dial-up access. The POP for nationwide dial-up access is the POP that can be accessed from anywhere in Japan with the minimum local telephone charge.

     Many of our POPs are located in the same facilities where other major carriers and ISPs have their POPs, in facilities of various carriers in Japan like NTT Communications and KDDI. We lease the physical space 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 in Japan 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 Inc.” (“i-Heart”) joint venture with companies in Republic of Korea with a total investment by us of ¥89 million in May 2000. We had advances of ¥34,545 thousand, net of loan loss valuation allowance, to i-Heart, which were included in the “Other” balances as of March 31, 2008.

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 with our group companies. As of June 25, 2008, we had ten consolidated subsidiaries, two of which were established in the fiscal year beginning April 1, 2008, and four equity method investees, which all, except for IIJ-A and i-Heart, are incorporated under the laws of Japan. IIJ-A is incorporated under the laws of the state of California, the United States of America and i-Heart is incorporated under the laws of Republic of Korea. The financial results of our consolidated subsidiaries shown in this section are prepared under generally accepted accounting principles in Japan, except for IIJ-A. 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 equity method investees and our direct and indirect ownership of each of them as of June 25, 2008:

		Jurisdiction of				Proportion of ownership
Company Name		Incorporation				and voting interest
Consolidated Subsidiaries:
IIJ Technology Inc.		Japan					100.0	%
Net Care, Inc.		Japan					100.0	%
IIJ Financial Systems Inc.		Japan					100.0	%
Net Chart Japan Inc.		Japan					100.0	%
hi-ho, Inc.		Japan					100.0	%
On-Demand Solutions Incorporated		Japan					100.0	%
IIJ Innovation Institute Inc.		Japan					100.0	%
Trust Networks Inc.		Japan					60.2	%
GDX Japan Inc.		Japan					51.0	%
IIJ America Inc.			U.S.A.				100.0	%
Equity method investees:
Taihei Computer Co., Ltd.		Japan					45.0	%
Internet Multifeed Co.		Japan					31.0	%
Internet Revolution Inc.		Japan					30.0	%
i-Heart Inc.		Republic of Korea					28.6	%

IIJ Technology Inc.

     IIJ-Tech is an important element in our provision of total network solutions to our customers. 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 consultation, network and system design, project management and implementation of network systems such as web systems, e-mail systems for ISP’s and large-scale VPN networks. 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 ¥25,408 million and operating income of ¥834 million for the fiscal year ended March 31, 2008. As of March 31, 2008, IIJ-Tech had 378 full-time employees, and 21 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 the 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 ¥3,487 million and operating income of ¥216 million for the fiscal year ended March 31, 2008. As of March 31, 2008, Net Care had 203 employees, 14 of whom were seconded from us.

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 securities trading 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 ¥4,546 million and operating income of ¥569 million for the fiscal year ended March 31, 2008. As of March 31, 2008, IIJ-FS had 80 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 ¥1,309 million and operating income of ¥15 million for the fiscal year ended March 31, 2008. As of March 31, 2008, NCJ had 41 employees.

hi-ho Inc.

     hi-ho is a company wholly-owned by us. On June 1, 2007, we acquired 100% of the equity of hi-ho for ¥1,230 million from PNS to take over PNS’s Internet service business for home users and its solution business for corporate customers.

     hi-ho had revenues of ¥4,604 million and operating income of ¥123 million for the fiscal year ended March 31, 2008. As of March 31, 2008, hi-ho had 15 employees, 7 of whom were seconded from us.

     hi-ho transferred a portion of its solution business for corporate customers to IIJ-Tech on April 1, 2008.

On-Demand Solutions Incorporated

     In April 2008, we invested ¥130 million in and established On-Demand Solutions as our wholly-owned consolidated subsidiary to provide print-on-demand and related services.

IIJ Innovation Institute Inc.

     In June 2008, we invested ¥100 million in and established “IIJ Innovation Institute Inc.” (“IIJ-II”) , which plans to start a business incubation center for technology development and commercialization of the Internet.

Trust Networks Inc.

     In July 2007, we invested ¥15 million in Trust Networks, which plans to operate networks for ATMs. As a result of our additional investment of ¥485 million in to Trust Networks in October 2007, Trust Networks became our consolidated subsidiary.

     Trust Networks recorded operating loss of ¥132 million for the fiscal year ended March 31, 2008.

GDX Japan Inc.

     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.

     GDX recorded operating loss of ¥122 million for the fiscal year ended March 31, 2008.

IIJ America Inc.

     IIJ-A is a U.S.-based ISP, catering mostly to U.S.-based operations of Japanese companies.

     Reflecting the fact that IIJ-Tech, IIJ-A’s minority shareholder with 8.7% ownership, became wholly-owned by us on May 11, 2007, IIJ-A became our wholly-owned consolidated subsidiary.

     IIJ-A had revenues of $11 million and operating income of $0.04 million for the fiscal year ended December 31, 2007. As of March 31, 2008, IIJ-A had 29 employees, 4 of whom were seconded from us.

Taihei Computer Co., Ltd.

     In July 2007, we invested ¥235 million in TCC, 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.

Internet Multifeed Co.

     Internet Multifeed Co. (“Multifeed”) provides the location and facilities for directly connecting high-speed Internet backbones with content servers to make distribution on the Internet more efficient. Its technology was developed jointly with the NTT Group. Multifeed launched a new IX (Internet eXchange — where major ISPs exchange network traffic) service named JPNAP Tokyo 1 in Tokyo in May 2001 and expanded the service to Osaka in December 2001. Multifeed launched a new IX service named JPNAP Tokyo II in Tokyo in April 2008. In January 2008, we purchased 98 shares of Multifeed from their minority shareholders and our ownership in Multifeed increased to 31.0%.

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.

i-Heart Inc.

     In May 2000, we entered into the i-Heart joint venture with South Korean companies with a total investment by us of ¥89 million. i-Heart is 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,
		2006				2007				2008
		(millions of yen)
Capital expenditures, including capitalized leases (1)		¥	4,762			¥	3,953			¥	6,078

     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 ¥119 million, ¥151 million and ¥72 million for the fiscal years ended March 31, 2006, 2007 and 2008, respectively. The losses for the fiscal year ended March 31, 2006, 2007 and 2008 were mainly due to disposal of software such as for 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 or sales 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, 2008, we had 245 people working in sales and marketing.

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

     Also, our Sales Department is divided into seven divisions:

	•		Five divisions focus on our total network solutions and work with large corporate clients, including financial institutions, manufacturers, retail companies and others. In order to provide total network solutions, personnel in our sales divisions work closely with other IIJ Group companies such as IIJ-Tech as well as with other non-IIJ Group companies.
	•		One division focuses on total network solutions and works with governmental institutions, and universities and other schools.
	•		One division focuses on developing and strengthening partnerships with sales agents, including large telecommunications carriers and systems integrators to expand our marketing reach.

     In addition, we have sales personnel in the branch or sales offices indicated above.

     Our Marketing Planning and Development Division 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 had approximately 6,500 business and other institutional customers and approximately 470,000 individuals, which includes individuals subscribing to OEM services, as of March 31, 2008. 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 new basic network technologies and development of new services, applications and products. 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, 2006, 2007 and 2008, our research and development expenses were ¥158 million, ¥177 million and ¥240 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 utilizing and enhancing existing technologies and products.

     As of March 31, 2008, we had 8 employees 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 co-operated by IIJ Research Laboratory and other departments.

     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.

     Other Departments. Other departments, such as the Service Business Department, Network Service Department and Solution Service Department in our Engineering Division play an important role in the research and development of technologies to be applied to our services and solutions, collect information, evaluate new technology and conduct business expansion based on the technology IIJ Research Laboratory developed. In addition to the above, the SEIL Business Unit engages in the development of our SEIL router and SMF.

Research and Development Strategy

     Our primary research and development objective is to continue to develop innovative services, applications and products that meet the current and future demands of our customers and that will continue to be at the forefront of the Internet industry in Japan.

     A second research and development objective is to continue participating in or otherwise closely monitor 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.

     In furtherance of these objectives, 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 and development of the latest e-mail implementation technologies and spam countermeasures,
	•		research and development of IPv6-based mobile communications technology,
	•		research relating to the methodology of configuration of routers and other servers,
	•		research relating to the technology for next generation IP networks,
	•		research relating to the behavior of Internet routing systems, and
	•		research of the Internet traffic monitoring and management.

Proprietary Rights

     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, as a licensee, entered into license 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 June 25, 2008, 36 registrations had been granted, with 1 pending application.

Patents

     We have applied for patent registrations in relation to our technology in Japan and the United States. As of June 25, 2008, 5 registrations had been granted, with 5 pending applications. The latest acquired patent is for a centralized network management system developed by us and is implemented in one of our competitive services, SMF.

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 coordinated 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. While the partial settlement was pending approval, the plaintiffs 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 had 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 the 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 the settlement could not be approved, because the defined settlement class, like the litigation class, could not be certified. On June 25, 2007, the District Court entered an order terminating the proposed settlement. On August 14, 2007, the plaintiffs filed their second consolidated amended complaints against the six focus cases and on September 27, 2007, again moved for class certification. On November 12, 2007, certain of the defendants in the focus cases moved to dismiss the second consolidated amended class action complaints. On March 26, 2008, the District Court denied the motions to dismiss except as to Section 11 claims raised by those plaintiffs who sold their securities for a price in excess of the initial offering price and those who purchased outside the previously certified class period. Briefing on the class certification motion was completed in May 2008. 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 MIC regulates the Japanese telecommunications industry. Telecommunications 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 the telecommunications business. After several amendments, the Telecommunications Business Law was considerably amended in July 2003, and the amended Telecommunications Business Law became effective as of April 1, 2004. The summary of the regulations under the current Telecommunications Business Law is as follows:

     The Telecommunications Business Law applies to the telecommunications business, except for the telecommunications business exempt under the Telecommunications Business Law (“Exempted Business”)⁽¹⁾. The term “telecommunications business” is defined under the Telecommunications Business Law as the business providing telecommunications services in order to meet the demand of others ⁽²⁾. The term “telecommunications services” is defined under the Telecommunications Business Law as intermediating communications of others through the use of telecommunications facilities, or any other acts of providing telecommunications facilities for the use of communications of others. Our business falls within the definition of telecommunications business, not Exempted Business, and therefore is subject to the Telecommunications Business Law.

	(i)		the telecommunications business which exclusively provides telecommunications services to a single person (except one being a telecommunications carrier);
	(ii)		the telecommunications business which provides telecommunications services with telecommunications facilities, a part of which is to be established on the same premises (including the areas regarded as the same premises) or in the same building where any other part there of is also to be established, or with telecommunications facilities which are below the standards stipulated in the ministerial ordinance of the MIC; and
	(iii)		the telecommunications business installing no telecommunications circuit facilities which provides telecommunications services other than the telecommunications services which intermediate communications of others by using telecommunications facilities;

Provided that the provisions of Article 3 and Article 4 of the Telecommunications Business Law apply to communications being handled by a person who operates the telecommunications business listed above.

Start-up of Services

	•		Registration
			Registration with the Minister of the MIC is required for a telecommunications business which meets the following two requirements established by the ministerial ordinance of the MIC: (i) areas of installation of terminal-related transmission facilities are limited to a single municipality (city, town or village) and (ii) areas of installation of relay-related transmission facilities are limited to a single prefecture.
	•		Notification

Notification to the MIC is required for a telecommunications business for which the requirement of the registration does not apply. Our business is subject to this notification requirement ⁽¹⁾.

Terms and Conditions of Provision of Services and Charge

	•		Our business is unregulated, in general, as IIJ does not fall under either Basic Telecommunications Services or Designated Telecommunications Services described below.
	•		Prior notification to the Minister of the MIC is required for Basic Telecommunications Services (universal services specified by the ministerial ordinance of the MIC, i.e., analog or public fixed telephone services, analog or public remote island telephone services, and analog or public emergency call telephone services). Providing these telecommunications services other than pursuant to the terms and conditions and charges notified to the Minister of the MIC is prohibited. Provided that the charges may be discounted or waived pursuant to the exception criteria provided under the ministerial ordinance of the MIC (i.e., an emergency call for the safety of ships and airplanes, an emergency call for the safety of personal life and property in case of natural disaster, calls to police agencies regarding crimes, and calls to the fire brigade (“Emergency Exception”)
	•		Prior notification to the Minister of the MIC is required for Designated Telecommunications Services (i.e., services provided through Category I Designated Telecommunications Facilities and which meet the criteria provided by the ministerial ordinance of the MIC as the services for which the guarantee of the terms and conditions and charges are necessary for the protection of users, such as the basic fee). “Category I Designated Telecommunications Facilities” are the facilities which meet the criteria specified by the ministerial ordinance of the MIC as being the fixed telecommunications facilities used for the services which are offered to a substantial percentage of users in a given area, and which are currently only the facilities of NTT East and NTT West. Providing these telecommunications services other than pursuant to the terms and conditions and charges notified to the Minister of the MIC is prohibited, unless the telecommunications carrier and the user agree otherwise, provided that the charges may be discounted or waived in Emergency Cases, for emergency calls for injured persons in a ship, and for use by a police agency, fire brigade and broadcasting companies.
	•		The Minister of the MIC at least once a year notifies the telecommunications carrier providing the Specific Designated Telecommunications Services specified by the ministerial ordinance of the MIC (i.e., Designated Telecommunications Services other than voice services, except for telephone and general digital services and data transmission services) the price cap regarding such services. The telecommunications carriers will be required to obtain approval from the Minister of the MIC if a proposed change in charges exceeds the price cap.

Articles of Interconnection Agreements

	•		Our business is unregulated, in general, as IIJ does not fall under either Category I Designated Telecommunications Facilities or Category II Designated Telecommunications Facilities described below.
	•		Approval from the Minister of the MIC required for Category I Designated Telecommunications Facilities.
	•		Prior notification to the Minister of the MIC required for Category II Designated Telecommunications Facilities (i.e., the facilities which meet the criteria provided by the ministerial ordinance of the MIC as being the mobile telecommunications facilities used for the services which are offered to a substantial percentage of users in a given area, and which are currently NTT DoCoMo, Okinawa Cellular and KDDI).

           Telecommunications Facilities of Carriers

	•		A telecommunications carrier that installs telecommunications circuit facilities must maintain its telecommunications facilities (except telecommunications facilities stipulated in the ministerial ordinance of the MIC as those having a minor influence on the users’ benefit in the cases of damage or failure thereof) in conformity with the technical standards provided in the ministerial ordinance of the MIC. Such telecommunications carriers shall confirm that its telecommunications facilities are in compliance with the technical standards specified in the ministerial ordinance of the MIC.
	•		A telecommunications carrier that provides Basic Telecommunications Services must maintain its telecommunications facilities for provision of Basic Telecommunications Services in conformity with the technical standards provided in the ministerial ordinance of the MIC.
	•		Telecommunications carriers that install telecommunications circuit facilities or provide Basic Telecommunications Services must establish their own administrative rules in accordance with the ministerial ordinance of the MIC in order to secure the reliable and stable provision of telecommunications services. These

administrative rules must regulate the operation and manipulation of telecommunications facilities and the safeguarding, inspecting and testing regarding the construction, maintenance and administration of telecommunications facilities, etc. as provided for by the ministerial ordinance of the MIC. Such administrative rules must be submitted to the Minister of the MIC prior to the commencement of operations, and changes must be submitted to the Minister of the MIC once after they are implemented without delay.

           Order to Improve Business Activities

•

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

           Right of Way Privilege for Authorized Carriers

•

A telecommunications carrier which is engaged, or intends to engage, in the telecommunications business by installing telecommunications circuit facilities and which wishes to have the privileged use of land or other public utilities for circuit facilities deployment, must obtain the authorization on the entire or a part of the relevant telecommunications business by the Minister of the MIC.

           Merger, Business Transfer or Divestiture of Carriers

•

Post facto notification to the Minister of the MIC without delay is required.

           Business Suspension, Abolition or Dissolution of Carriers

•

Post facto notification to the Minister of the MIC without delay is required. Prior announcement of withdrawals to service users is required in accordance with ministerial ordinances of the MIC.

           Foreign Capital Participation

•

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

C. Organizational Structure.

     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 and in Note 8 to our consolidated financial statements included in this annual report on Form-20F.

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 and have expanded our business to value-added services and systems integration along with the expansion of usage of the Internet by customers.

     Our primary sources of revenue are connectivity services, value-added services, systems integration and equipment sales. Connectivity services consist of connectivity services for corporate use and connectivity services for home use. 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 ¥49.8 billion, ¥57.1 billion and ¥66.8 billion for the fiscal years ended March 31, 2006, 2007 and 2008, respectively. The increases in revenue for each of the two years ended March 31, 2007 and 2008 mainly reflect an increase in recurring revenues from connectivity and value-added services and systems operation and maintenance from systems integration compared to the previous fiscal years.

     Operating income for the fiscal year ended March 31, 2008 was ¥4.8 billion, an improvement from operating income of ¥3.5 billion for the fiscal year ended March 31, 2007 and ¥2.4 billion in the fiscal year ended March 31, 2006. The improvement compared to the previous fiscal year is mainly due to an increase in gross margin for connectivity and value-added services and systems integration.

     Net income for the fiscal year ended March 31, 2008 was ¥5.2 billion, compared to net income of ¥5.4 billion for the fiscal year ended March 31, 2007 and ¥4.8 billion for the year ended March 31, 2006, respectively. The decrease in net income compared to the previous fiscal year is mainly due to a decrease in net gains from the sale of available-for-sale securities.

     On December 2, 2005, we listed on the Mothers market of the 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 with our subsidiaries and affiliates of the 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, 2008, we consolidated the results of operations of eight subsidiaries included among our group companies — IIJ-Tech, IIJ-A, Net Care, IIJ-FS, NCJ, hi-ho, Trust Networks and GDX. We account for our investments in the affiliated companies by the equity method.

     On October 1, 2005, 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, 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 and April 4, 2007, we purchased additional shares of IIJ-Tech from its minority shareholders for the aggregate amount of ¥4.4 billion in cash, in order to acquire additional interest in IIJ-Tech. On March 30 and April 4, 2007, we purchased additional shares of Net Care from its minority shareholders for the aggregate amount of ¥0.7 billion in cash, in order to acquire additional interest in Net Care. On May 11, 2007, we issued 2,178 new shares of common stock to make two of our consolidated subsidiaries, IIJ-Tech and Net Care wholly-owned through share exchanges, and the total number of our issued shares of common stock increased to 206,478.

     In April 2007, we invested ¥300 million in GDX to acquire 51% of its equity and GDX became our consolidated subsidiary to provide a message exchange network service in Japan.

     In June 2007, we acquired 100% of the equity of hi-ho for ¥1,230 million from PNS to take over PNS’s Internet service business for home users and its solution business for its corporate customers.

     In July 2007, we invested ¥235 million in TCC to acquire 45% of the equity of TCC, which manages customer loyalty reward program systems. TCC became our equity method investee.

     In July 2007, we invested ¥15 million in Trust Networks, which plans to operate networks for ATMs. As a result of our additional investment in Trust Networks of ¥485 million in October 2007, Trust Networks became our consolidated subsidiary.

     In the fiscal year beginning April 1, 2008, we established two consolidated subsidiaries.

     In April 2008, we invested ¥130 million in and established On-Demand Solutions as our wholly-owned subsidiary to provide print-on-demand and related services.

     In June 2008, we invested ¥100 million in and established IIJ-II as our wholly-owned subsidiary. IIJ-II plans to start a business incubation center for technology development and commercialization of the Internet.

     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 (or thousands of U.S. dollars) and as a percentage of total revenues.

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

Year Ended March 31, 2008 Compared to the Year Ended March 31, 2007

Total revenues

     Our total revenues increased 17.1% to ¥66.8 billion for the fiscal year ended March 31, 2008 from ¥57.1 billion for the previous fiscal year. These increases were primarily due to an increase in monthly recurring revenues from connectivity and value-added services and systems operation and maintenance of systems integration revenues.

     Connectivity and value-added services revenues. Revenues from connectivity services and value-added services, which comprise our connectivity services for corporate use, connectivity services for home use, value-added services and other services, increased by 28.5% to ¥31.3 billion for the fiscal year ended March 31, 2008 from ¥24.4 billion for the previous fiscal year.

	•		Connectivity services for corporate use. Revenues from connectivity services for corporate use increased by 8.1% to ¥12.1 billion for the fiscal year ended March 31, 2008 from ¥11.2 billion for the previous fiscal year. The increase was mainly due to an increase in revenues from IP services, the service mainly used for corporate headquarters and data centers, along with the shift to higher bandwidth, and an increase in revenues from broadband services along with the expansion of broadband utilization in the corporate internal network.
	•		Connectivity services for home use. Despite the decrease in revenues from IIJ4U and OEM, revenues from connectivity services for home use increased by 175.8% to ¥5.4 billion for the fiscal year ended March 31, 2008 from ¥2.0 billion for the previous fiscal year. This significant increase was mainly due to additional revenues for the fiscal year ended March 31, 2008 of ¥3.8 billion from hi-ho, which we acquired in June 2007.
	•		Value-added services. Our value-added services revenues increased by 28.7% to ¥9.5 billion for the fiscal year ended March 31, 2008 from ¥7.4 billion for the previous fiscal year. This increase was mainly due to a steady increase in revenues from services such as security and e-mail related outsourcing services for anti-spam protection, data center services and network related solutions. The steady increase in value-added services revenues is affected by an increase in demand for outsourcing services by corporate customers.
	•		Other. Other revenues, which included rental fees for network equipment, customer support service and sale of Wide-area Ethernet services, amounted to ¥4.2 billion for the fiscal year ended March 31, 2008, a 12.0% increase from the previous fiscal year.